===============================================================================
As filed with the Securities and Exchange Commission on February 16, 1999
Securities Act Registration No. 333-69523
Securities Exchange Act Registration No. 0-20760
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2 to
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.
Ballard Spahr Andrews & Ingersoll, LLP Saba Petroleum Company
1225 Seventeenth Street, Suite 2300 3201 Airpark Drive, Suite 201
Denver, CO 80202-5595 Santa Maria, CA 93455
(303) 292-2400 (805) 347-8700
(303) 296-3956 (FAX) (805) 739-0743 (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
by 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 by 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.[ ]
Calculation of Registration Fee
===============================================================================
Title of each class of Amount to be Proposed maximum Proposed maximum
securities to be Registered offering price Aggregate Amount of
registered share(1) Offering price Fee
===============================================================================
Common stock, no par value 1,300,000 (1) N/A $7,800,000(2) $2,169(3)
===============================================================================
(1) Represents the estimated number of shares of Horizontal Ventures common
stock issuable upon consummation of the merger of Saba Petroleum Company
with and into a subsidiary of the Horizontal Ventures. Horizontal
Ventures 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 and computed
pursuant to Rules 457(f)(1) and 457(c) under the Securities Act of 1933 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 February 5, 1999)
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 by outstanding stock options and warrants).
(3) $2,169 previously paid.
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 BY SAID SECTION 8(A), MAY DETERMINE.
JOINT PROXY STATEMENT
FOR SPECIAL MEETINGS OF SHAREHOLDERS
TO BE HELD ON MARCH 19, 1999
PROSPECTUS OF HORIZONTAL VENTURES, INC.
The Boards of Directors of Horizontal Ventures, Inc. and Saba Petroleum
Company have approved a merger that would result in Horizontal Ventures buying
Saba and Saba becoming a wholly owned subsidiary of Horizontal Ventures.
The merger provides that approximately 1,240,000 shares of Horizontal
Ventures common stock will be issued for all of the shares of Saba common stock
outstanding as of the closing of the merger.
The merger cannot be completed unless the Horizontal Ventures shareholders
approve the issuance of up to 1,300,000 shares of Horizontal Ventures common
stock by the merger and the Saba shareholders approve the merger. We have each
scheduled special meetings for our shareholders to vote on the Horizontal
Ventures share issuance and the merger. Horizontal Ventures 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 Horizontal Ventures shareholders: For Saba shareholders:
Friday, March 19, 1999, 10:00 a.m. Friday, March 19, 1999, 2:00 p.m.
3201 Airpark Drive, Suite 201 3201 Airpark Drive, Suite 201
Santa Maria, California Santa Maria, California
Whether or not you plan to attend your 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 Horizontal Ventures
Board of directors recommends voting "FOR" the Horizontal Ventures 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.
This document gives you detailed information about the proposed merger. In
addition, please see "Where You Can Find More Information" for additional
information about Horizontal Ventures and Saba which is on file with the SEC.
Randeep S. Grewal, C.E.O. of Horizontal Ventures and C.E.O. and President of
Saba
See "RISK FACTORS" beginning on page __ for a discussion of risk factors that
should be considered by the Horizontal Ventures shareholders and the Saba
shareholders.
Neither the Securities and Exchange Commission nor any state securities
regulators have approved the merger described in this joint proxy
statement/prospectus or the Horizontal Ventures 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 February 10, 1999 and is
first being mailed to the shareholders of Horizontal Ventures and Saba on or
about February 17, 1999.
PAGE
<PAGE>
HORIZONTAL VENTURES, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 19, 1999
Date: Friday, March 19, 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 1,300,000 shares of
Horizontal Ventures common stock by the Agreement and Plan of Merger dated
December 18, 1998 among Horizontal Ventures, Horizontal Ventures Acquisition
Corporation, and Saba Petroleum Company. Under the merger, Saba will become a
wholly owned subsidiary of Horizontal Ventures and each shareholder of Saba
other than Horizontal Ventures will receive a pro rata proportion of
approximately 1,240,000 shares of Horizontal Ventures issued in exchange for
all of the outstanding Saba shares. Additionally, shareholders will be asked to
approve a name change to GREKA Energy Corporation and for further 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 at
5:00 p.m. New York City time on January 22, 1999 are entitled to one vote for
each share held. A list of these shareholders is available for inspection at
Horizontal Ventures' offices at 630 Fifth Avenue, Suite 1501, New York, New
York.
The board of directors of Horizontal Ventures has determined that the
issuance of Horizontal Ventures common stock for the merger is in the best
interests of the Horizontal Ventures shareholders, has approved the merger, and
recommends that shareholders vote "FOR" approval of the Horizontal Ventures
share issuance for the merger, 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.
By Order of the board of directors,
Randeep S. Grewal
Chairman and Chief Executive Officer
New York, New York
February 10, 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.
- -----------------------------------------------------------------------------
SABA PETROLEUM COMPANY
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 19, 1999
Date: Friday, March 19, 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., Horizontal Ventures Acquisition
Corporation, and Saba. Under the merger, Saba will become a wholly owned
subsidiary of Horizontal Ventures and each shareholder of Saba other than
Horizontal Ventures will receive a pro rata proportion of approximately
1,240,000 shares of Horizontal Ventures issued in exchange for all of the
outstanding Saba shares.
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 at
5:00 p.m. New York City time on January 22, 1999 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 is in the
best interests of the Saba shareholders, has approved the merger, and
recommends that shareholders vote "FOR" approval of the merger.
By Order of the Board of Directors,
Susan M. Whalen
Secretary
Santa Maria, California
February 10, 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 OF CONTENTS
Page
SUMMARY OF JOINT PROXY STATEMENT/PROSPECTUS
Questions and Answers . . . . . . . . . . . . . . . . . . . . . . . . .
The Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Merger agreement . . . . . . . . . . . . . . . . . . . . . . . . .
Comparative Per Share Data . . . . . . . . . . . . . . . . . . . . . .
Selected Historical Financial Data of Saba . . . . . . . . . . . . . .
Selected Pro Forma Combined Financial Data . . . . . . . . . . . . . .
RISK FACTORS
The Number of Horizontal Ventures Shares to be Issued
Will Not Change . . . . . . . . . . . . . . . . . . .. . . . . . . . .
We Did Not Obtain Fairness Opinions From Independent
Financial Advisors. . . . . . . . . . . . . . . . . . . . . . . . . .
Horizontal Ventures Acquired A Control Of Saba Stock
From A Saba Insider At A Premium . . . . . . . . . . . . . . . . . . .
We May Not Be Able To Successfully Integrate Our
Business Operations . . . . . .. . . . . . . . . . . . . . .. . . ...
Horizontal Ventures May Not be Able To Obtain A
Nasdaq Listing For The Merger Stock . . . . . . . . . . . . . . . . .
Horizontal Ventures Has Recently Incurred
Significant Operating Losses . . . . . . . . . . . . . . . . .. . . .
The Price of Horizontal Ventures Common Stock
Could Be Highly Volatile . . . . . . . . . . . . . .. . . . .. .... ..
Horizontal Ventures Acquisition Strategy Has Risks . . . . . .. . . . .
Horizontal Ventures Can Issue Significant Amounts
Of Stock Without Shareholder Approval . . . . . . . . . . .. .. . . .
There Is Substantial Doubt That Saba Can Continue
As A Going Concern . . . . . . . . . . . . . . . . .. . . . . . . . .
Saba's Bank Credit Facility Is In Default . . . . . . . . . . . . . ..
Recent Oil Price Declines Have Adversely Affected
Saba's Properties . . . . . . . . . . . . . . . . . . . . . . .. . . .
Saba Depends On A Few Key Customers . . . . . . . . . . . . . . . . . .
Saba Does Not Have Complete Control Of Wells
Operated Under Joint Operating Agreements And
Other Properties . . . . . . . . . . . . . . . . . . .. . . . . . . ..
Some Of Saba's Properties Have Other Particular Risks . . . . . . . . .
Saba's Foreign Operations Have Economic And Political Risks . . . . . .
Saba's Colombian Operations Have Particular Risks . . . . . . .. . . ..
Saba's Convertible Securities/ Increasing Dilution
Caused By Falling Stock Prices . . . . . . . . . . . . . . . . . . . .
Saba Has A Substantial Number Of Options, warrants
And Debentures Outstanding With A Potentially
Dilutive Effect . . . . . . . . . . . . . . . . . . . . . . . . . .. .
Our Quarterly results May Fluctuate Due To Volatility
Of Oil And Gas Prices And Markets
Replacement Of our Oil And Gas Reserves Is Uncertain
Our Estimates Of Oil And Gas Reserves And Future Net
Revenues Are Uncertain
We Face Substantial Operating Hazards And Uninsured Risks
We Have Substantial capital Requirements
We Face Substantial Governmental regulation And
Environmental Risks
THE MERGER
General
Background of the Merger
Horizontal Ventures' Reasons for the Transactions;
Recommendation of the Horizontal Ventures Board
Saba's Reasons for the Acquisition; Recommendation of
the Saba Board
Composition of the Horizontal Ventures Board
Interests of Certain Persons in the Transactions
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
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
HORIZONTAL VENTURES REASONS FOR NAME CHANGE AND FUTURE
SHARE ISSUANCE; RECOMMENDATIONS OF THE HORIZONTAL
VENTURES BOARD
HORIZONTAL VENTURES 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 HORIZONTAL VENTURES SECURITIES
Horizontal Ventures Common stock
Shares Eligible for Future Sale
COMPARISON OF THE RIGHTS OF HOLDERS OF HORIZONTAL
VENTURES COMMON STOCK AND SABA COMMON STOCK
MARKET PRICE OF HORIZONTAL VENTURES COMMON STOCK AND DIVIDENDS
BUSINESS OF HORIZONTAL VENTURES
HORIZONTAL VENTURES PROPERTIES
HORIZONTAL VENTURES LEGAL PROCEEDINGS
HORIZONTAL VENTURES MANAGEMENT'S DISCUSSION AND ANALYSIS
HORIZONTAL VENTURES CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
HORIZONTAL VENTURES MANAGEMENT
HORIZONTAL VENTURES EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF HORIZONTAL VENTURES 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
The terms below are used in this document and have specific SEC definitions as
follows:
Proved oil and gas reserves. Proved oil and gas reserves are the estimated
quantities of crude oil, natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be recoverable
in future years from known reservoirs under existing economic and operating
conditions, i.e., prices and costs as of the date the estimate is made.
Prices include consideration of changes in existing prices provided only by
contractual arrangements, but not on escalations based upon future
conditions.
Proved developed oil and gas reserves. Proved oil and gas reserves are
reserves that can be expected to be recovered through existing wells with
existing equipment and operating methods. Additional oil and gas expected
to be obtained through the application of fluid injection or other improved
recovery techniques for implementing the natural forces and mechanisms of
primary recovery should be included as "proved developed reserves" only
after testing by a pilot project or after the operation of an installed
program has confirmed through production response that increased recovery
will be achieved.
Proved undeveloped reserves. Proved undeveloped oil and gas reserves are
reserves that are 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.
PAGE
<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 related issuance of Horizontal Ventures
common stock, you should read this entire document carefully, as well as
additional documents we refer you to.
QUESTIONS AND ANSWERS
Q. What am I being asked to vote on?
A. Horizontal Ventures shareholders: You are being asked to approve the
issuance of up to 1,240,000 shares of Horizontal Ventures common stock to Saba
shareholders for the merger plus an additional 60,000 shares which may be issued
to persons who hold Saba options or warrants. You are also being asked to
approve the change in Horizontal Ventures' 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.
A. Saba shareholders: You are being asked to approve the merger which
provides that Horizontal Ventures will buy Saba and Saba common shareholders
other than Horizontal Ventures will receive a pro rata proportion of
approximately 1,240,000 shares of Horizontal Ventures.
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.
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 Horizontal Ventures or Saba shares only if you
provide instructions on how to vote by returning your proxy card.
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 Horizontal Ventures common stock certificates. If you are a
Horizontal Ventures common shareholder, you should retain your stock
certificates as the merger will not require surrender of Horizontal Ventures
stock certificates at any time.
SUMMARY
THE COMPANIES
Horizontal Ventures
630 Fifth Avenue, Suite 1501
New York, New York 10111
(212) 218-4680
Horizontal Ventures 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.
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.
THE MERGER
By the merger, Horizontal Ventures will buy Saba and Saba will become a
wholly owned subsidiary of Horizontal Ventures.
NUMBER OF SHARES TO BE RECEIVED IN THE MERGER
As of this date, there are approximately 11,600,000 shares of Saba
outstanding. There are also 8,000 shares of Saba Series A preferred stock
outstanding that could convert to common stock based on the market price of the
Saba common stock.
Because the conversion price of the Series A preferred stock is based on the
market price of Saba common stock, the conversion of the Series A preferred
stock could be extremely dilutive to the Saba shareholders by dramatically
reducing the number of Horizontal Ventures shares you received in the merger.
The following table sets forth the variable exchange ratios that result from
the dilution if the Saba Series A preferred stock is converted. Column A
reflects the conversion price of Saba stock, Column B sets forth the total
number of shares of Saba stock that would be outstanding if all of the Series
A preferred were converted at the price and Column C sets forth the number of
shares of Horizontal Venture's stock you will receive if all of the Series A
preferred were converted at that price prior to the date of closing of the
merger. The first set of numbers in the column assume no conversions and is
based on a total of approximately 11.6 million shares of Saba common stock
currently outstanding.
<TABLE>
<CAPTION>
TABLE OF EXCHANGE RATIOS
A B C
Saba Series A Preferred Approximate Resulting No. Approximate Resulting
Exchange Price of Saba Shares of Horizontal Shares
per 100 Shares of Saba
<S> <C> <C>
(No Conversions) 11,600,000 16.7
$1.00 18,650,000 8.9
.75 21,000,000 7.7
.50 25,700,000 6.1
.25 39,800,000 3.4
.15 50,480,000 2.2
</TABLE>
The price of Saba stock on the date of the Prospectus-Joint Proxy was
$1.0625 per share. For information regarding the present price of Saba stock
and the exchange ratio at any time up to the date of the meeting call
Horizontal Ventures at 1-800-685-0108.
FRACTIONAL SHARES
You will not receive fractional shares. Horizontal Ventures will issue you a
check for any fractional shares. The amount of your check will be based on the
closing bid price of the Horizontal Ventures shares on the closing date of the
merger.
DISSENTERS RIGHTS
Neither the shareholders of Saba nor Horizontal Ventures have the right under
the law to object to the terms of the merger or to seek an appraisal of the
value of their shares in court.
TAX CONSEQUENCES
We have received an opinion of our attorneys that if we conclude the merger
the way it is set up, it should be treated as a tax free exchange. However, you
may be taxed on the money you received for your fractional share, if it
results in a capital gain.
INTEREST OF INSIDERS IN THE MERGER
Ilyas Chaudhary, Saba's former chairman sold about 29% of Saba to Horizontal
Ventures for a greater number of shares of Horizontal Ventures than the current
Saba shareholders will receive in the merger. Mr. Chaudhary had resigned as an
officer and a director prior to either the offer by Horizontal Ventures or the
acceptance of that offer. Horizontal Ventures was willing to pay a greater price
because this "control block" was important to its efforts to acquire Saba.
Additionally, Mr. Grewal, Horizontal Venture's Chairman and CEO, will receive a
bonus from Horizontal's board if the merger closes by way of the early
vesting of a 30,000 share stock grant.
ACCOUNTING TREATMENT
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 consummation of the merger.
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents selected comparative per share data for
Horizontal Ventures and for Saba on both an historical and unaudited pro forma
combined basis giving effect to the acquisition by Horizontal Ventures of all of
the issued and outstanding shares of common stock of Saba, including the shares
to be acquired by 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 Horizontal Ventures 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
together with the historical financial statements of Horizontal Ventures 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.
<TABLE>
At September 30,
1998
----------------
<S> <C>
Book value per common share
Horizontal Ventures historical $5.60
Saba historical $0.00
Horizontal Ventures/Saba pro forma combined $1.74
At December 31,
1997
-----------------
Saba historical book value per common share $2.17
</TABLE>
<TABLE>
For the nine For the
months ended year ended
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Net earnings (loss) per share
Horizontal Ventures historical $ (0.76) $ (1.44)
Saba historical
Basic $ (2.17) $ 0.23
Diluted $ (2.17) $ 0.22
Horizontal Ventures/Saba pro forma combined $ (12.54) $ 0.23
</TABLE>
PAGE
<PAGE>
<TABLE>
<CAPTION>
SELECTED HISTORICAL FINANCIAL DATA OF SABA
In thousands, except for per share data
Nine Months Ended
Years ended December 31, September 30,
---------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- ------- ------ ------ ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA
Revenues:
Oil and
gas sales $ 10,130 $12,170 $16,941 $ 31,521 $ 33,969 $ 25,282 $ 15,769
Other 400 784 753 1,681 2,027 1,496 2,914
-------- ------- ------- -------- -------- -------- ------
Total
revenues 10,530 12,954 17,694 33,202 35,996 26,778 18,683
-------- ------- ------- -------- -------- -------- ------
Expenses:
Production
costs 5,857 7,547 10,561 14,604 16,607 12,250 10,140
General and
Adminis-
trative 2,503 1,882 2,005 3,920 5,125 3,468 4,974
Depletion,
Depreciation
and Amorti-
zation 1,853 2,041 2,827 5,527 7,265 5,011 5,500
Writedown of
oil and
gas
properties --- --- --- --- --- 17,852
======= ======== ======== ======== ======== ======== =======
Total
expenses 10,213 11,470 15,393 24,051 28,997 20,729 38,466
======= ======== ======== ======== ======== ======== =======
Operating
income (loss) 317 1,484 2,301 9,151 6,999 6,049 (19,783)
======= ======== ======== ======== ======== ======== =======
Other income (expense):
Interest
expense (443) (634) (1,364) (2,402) (2,305) (1,421) (2,519)
Gain on
issuance
of shares of
subsidiary 1 1 125 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 $(0.01) $0.06 $ 0.07 $ 0.43 $ 0.23 $ 0.24 $(2.17)
Diluted $(0.01) $0.06 $ 0.06 $ 0.37 $ 0.22 $ 0.23 $(2.17)
Weighted average common
shares outstanding:
Basic 7,065 7,996 8,327 8,804 10,650 10,596 10,994
Diluted 7,065 7,996 8,699 11,825 12,001 12,012 10,994
<PAGE>
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
Capital
expenditures $ 2,372 $6,573 $ 17,015 $12,776 $ 35,270 $ 29,080 $ 9,216
</TABLE>
<TABLE>
December 31, September 30,
----------------------------------------- -------------
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit) $ (860) $(2,422) $ 2,471 $2,418 $(11,724)$(29,752)
Total assets 13,261 18,108 39,751 49,117 77,657 53,921
Current portion of
long-term debt 1,440 2,357 505 1,806 13,442 25,173
Long-term debt, net 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>
<PAGE>
The following selected pro forma combined financial data is derived from the
historical financial statements of Horizontal Ventures and Saba and gives effect
to the acquisition of Saba by Horizontal Ventures. In other words the data is
what a shareholder would have today if the merger had already happened. See "Pro
Forma Condensed Combined Financial Information."
<TABLE>
<CAPTION>
SELECTED PRO FORMA COMBINED FINANCIAL DATA
Horizontal Ventures and SABA
For the For the
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
Total Revenues $18,766,014 $34,180,847
Total Operating Expense $68,875,072 $32,592,381
Net Income (Loss) ($52,210,621) ($ 999,882)
Net Income (Loss) Per Share $ (12.54) ($ 0.23)
As of
September 30,
1998
-------------
Total Assets $65,278,840
Total Liabilities $58,038,710
Stockholders' Equity $ 7,240,130
</TABLE>
<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", the factors described below should be considered
carefully by shareholders of Horizontal Ventures and Saba in determining whether
to approve the Horizontal Ventures share issuance or merger.
The Number of Shares To Be Issued in the Merger by Horizontal Ventures Will Not
Change Even if the Prices of Either Company's Stock Change
The merger provides that approximately 1,240,000 shares of Horizontal
Ventures common stock will be issued for all of the shares Saba common stock
outstanding as of the closing of the merger. The number of Horizontal Ventures
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 Horizontal Ventures and therefore each voting
shareholder must independently assess the reasonableness of Horizontal Ventures'
offer to Saba. The shareholders of Horizontal Ventures and Saba are urged to
obtain current market quotations when making this decision.
In addition, you should note that Saba has outstanding 8,000 shares of
Series A preferred stock which is convertible into
Saba's Convertible Securities/Increasing Dilution Caused By Falling Stock Prices
As of December 17, 1998, 8,000 shares of Saba's Series A preferred stock
were issued and outstanding all but 691 of these Series A preferred shares are
owned by RGC International. Each share of the Series A preferred stock is
convertible into such number of shares of Saba common stock as is determined by
dividing the per share stated value 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.
Because the conversion price of the Series A preferred stock is determined based
on the market price of Saba common stock, the conversion of the Series A
Preferred Stock could be extremely dilutive to the holders of Saba common
stock.
The following table sets forth the variable exchange ratios that result from
the dilution if the Saba Series A preferred stock is converted. Column A
reflects the conversion price of Saba stock, Column B sets forth the total
number of shares of Saba stock that would be outstanding if all of the Series A
preferred were converted at that price and Column C sets forth the number of
shares of Horizontal Venture's stock you will receive if all of the Series A
Preferred were converted at that price prior to the date of closing of the
merger. The first set of numbers in the column assume no conversions and is
based on a total of approximately 11.6 million shares of Saba common stock
currently outstanding.
<TABLE>
<CAPTION>
TABLE OF EXCHANGE RATIOS
A B C
Saba Exchange Price Approximate Resulting No. Approximate Resulting No.
for Series A Preferred of Saba Shares of Horizontal Shares per 100
Shares of Saba
<S> <C> <C>
(No Conversions) 11,600,000 16.7
$1.00 18,650,000 8.9
.75 21,000,000 7.7
.50 25,700,000 6.1
.25 39,800,000 3.4
.15 50,480,000 2.2
</TABLE>
The price of Saba stock on the date of the Prospectus/Join Proxy Statement was
$1.0625 per share. For information regarding the present price of Saba stock and
the exchange ratio at any time up to the date of the meeting call Horizontal
Ventures at 1-800-685-0108.
Horizontal Ventures is required to provide for the conversion of the
Series A preferred either by way of conversion into Horizontal Ventures shares
or by agreement, by redemption. The merger provides for a set number of
Horizontal Venture shares to be issued based on the number of Saba shares
outstanding at the time of the original contract. Additionally, the merger
allows Horizontal Ventures to terminate the contract if the Series A Preferred
convert without its approval.
We Did Not Obtain Fairness Opinions From Independent Financial Advisors
Neither Horizontal Ventures nor Saba engaged an independent financial
advisor to formally evaluate the financial fairness of the number of shares of
Horizontal Ventures common stock to be issued for all shares of Saba common
stock
outstanding on the closing date. 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. The decision of the relative
value of the two parties was based on arm's length negotiations related to the
market value of each of the parties shares during the negotiations.
Horizontal Ventures Acquired a Control Block of Saba Stock From a Saba Insider
at a Premium
Saba's former Chairman, Ilyas Chaudhary, through companies owned by him
owned approximately 29% of Saba prior to Horizontal Ventures' introduction to
Saba. This block of voting interest was considered a "control block" by
Horizontal Ventures and Horizontal Ventures deemed it imperative to acquire that
control block prior to the commencement of the shareholder voting process. As a
result, Horizontal Ventures paid a greater number of shares to Mr. Chaudhary
than it has agreed to pay to the shareholders of Saba in general.
Horizontal Ventures ownership of the
control block together with other relevant factors, were considered by the Saba
Board of directors in approving the merger.
We May Not Be Able To Successfully Integrate Our Business Operations
In determining that the merger is in the best interests of Horizontal
Ventures or Saba, as the case may be, each of the Horizontal Ventures and Saba
boards of directors addressed the complimentary strategic fit between Horizontal
Ventures' proprietary horizontal drilling technology and Saba's oil and gas
properties which are particularly suited to exploitation by such technology, as
well as 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. We cannot assure you 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.
Horizontal Ventures May Not Be Able To Obtain a Nasdaq Listing For The Merger
Stock
Horizontal Ventures cannot assure you that it will be able to list the
common stock issued in the merger for trading on the Nasdaq SmallCap or Nasdaq
National Market. If the stock cannot be traded on the Nasdaq market, its
liquidity may be impaired.
Horizontal Ventures Has Recently Incurred Significant Operating Losses
During most of 1997, Horizontal Ventures and its subsidiaries were
essentially dormant pending reorganization and emergence from bankruptcy.
Horizontal Ventures' plan of reorganization was approved by the bankruptcy
court on August 28, 1997 and the case was closed on March 26, 1998. Horizontal
Ventures has continued to incur operating losses during 1998. Horizontal
Ventures had a net loss of $1,188,449 for the nine months ended September 30,
1998 and a net loss of $851,116 for the year ended December 31, 1997. Horizontal
Ventures had an accumulated deficit of $2,872,349 as of September 30, 1998.
The Price Of Horizontal Ventures Common Stock Could Be Highly Volatile
The market value of Horizontal Ventures common stock could be subject to
wide fluctuations in response to:
* quarterly variations in actual or anticipated results of operations of
Horizontal Ventures,
* changes in securities analysts' earnings estimates,
* announcements of technological innovations by Horizontal Ventures
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 fluctuations 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 Horizontal Ventures common stock.
Further, the trading volume of our stock is relatively small, and the
market for our stock may not be able to efficiently accommodate significant
trades on any given day. Consequently, sizable trades of our stock have in the
past, and may in the future, cause volatility in the market price to a
greater extent than in more actively traded securities. These broad
fluctuations may adversely affect the market price of our stock.
Horizontal Ventures May Inadvertently Acquire Properties with Problems
Environmental or Structural Contamination
Horizontal Ventures intends to acquire oil and gas properties such as
those which are owned by Saba. Although Horizontal Ventures 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, Horizontal Ventures 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. Horizontal Ventures may be required to
assume preclosing liabilities, including environmental liabilities, and may
acquire interests in properties on an "as is" basis. We cannot assure you
that Horizontal Ventures' acquisitions will be successful.
Horizontal Ventures Can Issue Significant Amounts Of Stock Without Shareholder
Approval
Under the Nasdaq SmallCap Market listing requirements, Horizontal
Ventures 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 Horizontal Ventures or could significantly dilute the public
ownership of Horizontal Ventures, which could adversely affect the market
value of Horizontal Ventures common stock. There can be no assurance that
Horizontal Ventures 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 Horizontal Ventures common stock have the
opportunity
to profit from a rise in the market price of the Horizontal Ventures common
stock, if any, without assuming the risk of ownership, with a resulting
dilution in the interest of other shareholders of Horizontal Ventures. The
existence of options and warrants granted by Horizontal Ventures may prove
to be a hindrance to future equity financing by Horizontal Ventures. Further,
the holders of such warrants and options may exercise them at a time when
Horizontal Ventures would otherwise be able to obtain additional equity
capital on terms more favorable to Horizontal Ventures.
There Is Substantial Doubt That Saba Can Continue As A Going Concern
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. 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 Colombia. The
proceeds of such sales, if any, will be applied to reduction of its bank debt.
We cannot assure you that Saba will be successful in obtaining capital on
favorable terms, if at all. Additionally, we cannot assure you 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.
Saba Cannot Pay its Debts Now Due
On February 2, 1999, Bank One, Texas accelerated and declared immediately
due and payable the total amount of $20 million outstanding under Saba's
principal credit facilities. Saba does not presently have the funds to repay
the amount due and may be forced into bankruptcy.
Recent Oil Price Declines Have Adversely Affected Saba's Properties Because
Their Heavy Oil Costs More to Produce
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.
Saba Depends On a Few Key Customers The Loss of Which Could Adversely Affect
Saba
Empresa Colombiana de Petroles, 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.
Saba Does Not Have Complete Control Of Wells Operated Under Joint Operating
Agreements And Other Properties and the Other Parties Who are Involved May Not
Act in Saba's Best Interests
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
Many of Saba's properties are operated by others and Saba 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 Saba.
Some Of Saba's Oil and Gas Properties Have Significant Environmental
Contamination Risks
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. Under the terms of the acquisition
of the Concession, Saba and the operator were required to perform various
environmental remedial operations. Colombian officials claim that Saba and the
operator were obligated to treat the water for disposal on the Concession with a
water treatment plant. Colombian officials are requiring that the plant be
built.
There can be no assurance as to the amount of future expenditures of Saba
associated with the environmental requirements for the Cocorna Concession. The
property in Colombia in which Saba has an interest may be subject to additional
environmental remedial operations as reported to Saba by a third party who had
performed a due diligence review of the property.
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
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 also found a second area of diluent contamination and
is investigating to determine the source of that contamination. Should
Saba be required to remediate the area itself, the cost to Saba could be
significant. 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, an oil and gas interest in California on
which a number of out of production oil wells had been drilled by the seller.
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. 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. 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.
Saba owns an asphalt refinery in Santa Maria, California, with which
significant environmental remediation obligations are associated. Although the
party who sold the asphalt refinery to Saba agreed to remediate portions of the
refinery property, the extent of such agreement and ultimate responsibility
for a complete clean-up is uncertain.
Saba's Foreign Operations Have Currently Exchange and Asset Repatriation Risks
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.
Saba's Colombian Operations Have Personnel Safety, Labor Continuity, Asset
Repatriation and Electronic Sanction
Colombia, which has a history of political instability, is currently
experiencing such instability due to, among other factors: insurgent guerrilla
activity, 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
By the Foreign Assistance Act of 1961, the President of the United States
is required to determine whether to certify that certain countries have
cooperated with the United States, or taken adequate steps on their own, to
achieve the goals of the United Nations Convention Against Illicit Traffic in
Narcotic Drugs and Psychotropic Substances. In 1995, 1996, 1997 and 1998, the
President did not certify Colombia. The 1995 and 1998 decertifications were
subject to a so-called "national interest" waiver, effectively nullifying its
statutory effects. Based on the 1996 and 1997 Presidential decertification, the
United States imposed substantial economic sanctions on Colombia, including the
withholding of bilateral economic assistance, the blocking of Export-Import Bank
and Overseas Private Investment Corporation loans and political risk insurance,
and the entry of the United States votes against multilateral assistance to
Colombia in the World Bank and the InterAmerican Development Bank.
The consequences of continued and successive United States decertifications
of Colombian activities are not fully known, but may include the imposition of
additional economic sanctions on Colombia in 1999 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. 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 Saba's crude oil produced at Saba's properties in Colombia has
been sold exclusively to Ecopetrol at negotiated prices. The contract
price for the oil in which Saba has an interest may be reduced significantly as
of January 1, 1999.
Saba Has a Substantial Number Of Options, Warrants And Debentures Outstanding
With a Potentially Dilutive Effect
At November 30, 1998, Saba had granted outstanding options to employees and
consultants to purchase up to 1,028,000 shares of Saba 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 Saba common
stock to be registered under the Securities Act of 1933 and listed on the
American Stock Exchange. Saba has not entered into agreements with some or all
of Saba'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 Saba
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 Saba common stock at an amended exercise price. 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 Saba
common stock at an exercise price determined based on the price of the common
stock at the time of such redemption. The shares of Saba common stock
issuable upon exercise of the Redemption Warrants are being registered pursuant
to a Registration Statement filed by Saba.
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 Saba 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.
Our Quarterly Results May Fluctuate Due To Volatility Of Oil And Gas Prices And
Markets
Horizontal Ventures' 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. Horizontal Ventures' 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 Horizontal Ventures. 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 Horizontal Ventures' 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 Horizontal Ventures' revenues, operating income and
borrowing capacity and may require a reduction in the carrying value of
Horizontal Ventures' oil and gas properties.
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.
Replacement Of Our Oil And Gas Reserves Is Uncertain
Our 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 we conduct successful exploitation and production activities or
acquire properties containing proved reserves, our estimated net proved
reserves will generally decline as reserves are produced. We cannot assure you
that our planned exploitation and production projects and acquisition
activities will result in significant additional reserves or that we will have
continuing success drilling productive wells economically. If prevailing oil
and gas prices were to increase significantly, our 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, Horizontal Ventures' 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.
Our Estimates Of Oil And Gas Reserves And Future Net Revenues Are Uncertain
Included in this joint proxy statement/prospectus are estimates of net
proved oil and gas reserves and the future net revenues from those reserves
which have been prepared by us and our independent petroleum engineers. There
are numerous uncertainties inherent in estimating quantities of proved oil and
gas reserves, including many factors beyond our control. 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 included in this
joint proxy statement/prospectus are based on various assumptions required by
the SEC:
* including constant oil and gas prices,
* operating expenses and,
* capital expenditures;
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 indicated
in this joint proxy statement/prospectus.
In addition, our 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 SEC
is not necessarily the most appropriate discount factor based on
interest rates in effect from time to time and risks associated
with our reserves or the oil and gas industry in general.
It is also possible that independent petroleum engineers may make estimates
of reserves and future net revenues from the same available data that are
different than our estimates or the estimates of different independent petroleum
engineers. Should this occur, management would adopt the estimates of its
independent engineers. 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 us on the sale of
its oil and gas production.
The estimated future net revenues attributable to net proved reserves are
prepared in accordance with SEC guidelines, and are not intended to reflect the
fair market value of reserves. In accordance with the rules of the SEC,
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 reserves being reduced.
We Face Substantial 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 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, and
* regulatory investigation and penalties and suspension of operations
We maintain general liability insurance coverage for our operations but
have 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 our financial condition and results of
operations. Furthermore, we cannot predict whether insurance will continue to
be available at a reasonable cost or at all.
We Have Substantial Capital Requirements
Horizontal Ventures makes, and will continue to make, substantial capital
expenditures for the exploitation, production and acquisition of oil and gas
reserves. Horizontal Ventures has financed these expenditures primarily from
private placements of Horizontal Ventures common stock in 1997. If revenues or
Horizontal Ventures' ability to borrow decreases as a result of lower oil and
gas prices, operating difficulties or declines in reserves, Horizontal
Ventures
may have limited ability to fund the capital requirements to undertake or
complete future exploitation, production and acquisition programs. Horizontal
Ventures cannot assure you that additional debt or equity financing or cash
generated by operations will be available to meet these requirements.
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 1999, 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.
We Face Substantial Governmental Regulation And Environmental Risks
Our business is subject to various laws and 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.
Horizontal Ventures could incur substantial costs to comply with
environmental laws and regulations.
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 number of areas in
which contamination exists on properties acquired by it.
Saba has agreed to indemnify some 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. 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.
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 and 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 of Horizontal Ventures, Inc., a
Colorado corporation in connection with the solicitation of proxies by the
Board of Directors of Horizontal Ventures for use at a Special Meeting of
Shareholders of Horizontal Ventures to be held on March 19, 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 Horizontal Ventures Special Meeting
has been called to consider and vote upon a proposal to approve the issuance by
Horizontal Ventures of up to an aggregate of 1,300,000 shares of Horizontal
Ventures Common stock by the agreement and plan of merger dated December 18,
1998
among Horizontal Ventures, Horizontal Ventures Acquisition Corporation, a
Delaware corporation and wholly owned subsidiary of Horizontal Ventures, and
Saba Petroleum Company, a Delaware corporation. Of this number of shares,
1,240,000 are for the merger and the balance are to provide for the possible
exercise of Saba warrants or options. Horizontal Ventures currently owns
34.7% of
the issued and outstanding shares of Saba common stock, $.001 par value per
share. By the Merger agreement, all shares of Saba Common stock other than
shares
owned by Horizontal Ventures which remain issued and outstanding immediately
before the closing of the merger agreement will be exchanged for 1,240,000
shares
of Horizontal Ventures Common Stock and Saba will merge with and into Horizontal
Ventures Acquisition Corporation with Saba thereby becoming a wholly owned
subsidiary of Horizontal Ventures. At the Horizontal Ventures Special Meeting,
Horizontal Ventures shareholders will also be asked to approve a change in
the name of Horizontal Ventures 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.
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 March 19, 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 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,
* the approval of the Horizontal Ventures Share Issuance by an
majority of the total votes cast at the Horizontal Ventures Special
Meeting, and
* the approval of the merger agreement by the approved of a majority
of the outstanding shares of Saba common stock entitled to vote
thereon.
Horizontal Ventures owns 34.7% of the issued and outstanding shares of Saba
common stock as of the record date for the Saba Special Meeting and
Horizontal Ventures will vote its shares of Saba common stock in favor of the
merger agreement.
This joint proxy statement/prospectus also constitutes the Prospectus of
Horizontal Ventures filed as part of a Registration Statement on Form S-4 with
the SEC under the Securities Act of 1933, as amended, relating to the shares
of Horizontal Ventures common stock to be issued by 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 Horizontal Ventures
common stock will be issued pursuant to the Merger Agreement, representing
approximately 30 percent of the shares of Horizontal Ventures common stock
expected to be issued and outstanding after giving effect to the
consummation of the merger agreement. Approximately 60,000 shares are being
reserved to provide for the exchange of outstanding Saba stock options and
warrants.
BACKGROUND OF THE MERGER
In early 1998, the board of directors of Saba engaged an investment banking
firm, CIBC-Oppenheimer, Inc., to explore ways to enhance shareholder values.
This engagement was prompted by several factors, predominately the declining
price of common stock and the lack of working capital available to Saba. In
March 1998, Oppenheimer presented the board with its recommendations, which
included exploring a possible business combination of Saba with another oil and
gas company.
In March 1998, the Saba achieved a preliminary agreement with Omimex
Resources, Inc., a privately held Forth Worth, Texas oil and gas company
("Omimex") which was operating a substantial portion of the company's producing
properties, to enter into a business combination. In June 1998, the company
entered into a merger agreement with Omimex pursuant to which Omimex would
acquire the company in a reverse acquisition. During August 1998, Omimex
requested an extension of the October 31, 1998, termination date of the merger
agreement. At that time, both the company and Omimex were of the view that it
was highly unlikely that a proxy statement could be prepared, filed with the
Securities and Exchange Commission and circulated to shareholders in time to
meet
the termination date. The delay in filing the proxy materials was occasioned by
the unavailability to Saba in a timely manner of required Omimex information
required for preparation of the proxy materials. This same issue had
resulted in
the delay of Saba's ability to refile its registration statement to register RGC
International common stock required by registration rights granted RGC which in
turn placed Saba in default of that agreement. The company declined to extend
the termination date, and in September 1998, announced that the proposed merger
was terminated by mutual consent. During August 1998, the engagement of
Oppenheimer was terminated by Saba.
In the interim between the execution of the preliminary agreement and the
definitive agreement with Omimex, 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 preferred stock as had been Saba's intention. The preferred stock
presented a significant risk of dilution to Saba's shareholders.
Approximately $8.8 million in principal amount of bank debt matured for
payment on April 30, 1998. The company and its bank were in discussions to
restructure the terms of the loan agreement and extend the maturities of the
short-term loans to a time which would accommodate the proposed business
combination with Omimex; provided, however, that a $2.0 million payment was made
on April 30, 1998 and a definitive agreement with Omimex was executed. The
definitive agreement with Omimex was not yet concluded on April 30, 1998 and
Saba
was unable to make the $2.0 million payment until June 1998.
As part of the Omimex agreement, in June 1998 Omimex lent to Saba
approximately $4.15 million, the proceeds of which were used to redeem $2
million of stated value of the preferred stock (for approximately $2.15 million)
and to pay $2 million on Saba's outstanding bank indebtedness. As a result of
that payment and the payment of $300,000 which was made in May 1998 by Saba, the
bank and Saba entered into a written amendment to the loan agreement providing
that the maturities of all three short-term facilities would be extended to July
31, 1998, conditioned upon Saba making minimum $300,000 monthly payments of
principal on its bank credit facilities. The last $300,000 minimum monthly
payment of principal on its bank credit facilities was paid by Saba in
September 1998.
Approximately $4.5 million in principal amount of bank debt that matured for
payment on July 31, 1998, had not been paid nor extended at September 30, 1998,
and the borrowing base deficit of $2.2 million on the revolving loan at
September
30, 1998, had not been satisfied, either by providing addition collateral to the
bank or reducing the principal balance that was outstanding at September 30,
1998. Additionally, the company was not in compliance with other loan agreement
financial covenants at September 30, 1998.
In September 1998, Saba's loan portfolio was assigned to the bank's managed
assets for a workout.
Saba's auditors included an explanatory paragraph in their opinion on
Saba's 1997 yearly 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 was the apparent lack of Saba's
current ability to service its bank debt as it came due. Reference to this
going concern opinion was made in Saba's 1998 quarterly financial statements
up to the period ending September 30, 1998.
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.
General and administrative expenses increased 42.9% to $5.0 million for the
nine month period ended September 30, 1998, from $3.5 million for the same
period
of 1997. 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.
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 calling amounts at each quarter end by approximately $10.7 million
and $6.5 million, respectively, resulting in charges against operations in the
respective periods.
In September 1997, Horizontal Ventures acquired a 200-acre lease adjacent
to Saba's in the Cat Canyon Field in California with ten producing wells and ten
additional abandoned wellbores. Horizontal Ventures 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
Horizontal Ventures' test wells and the decline curves experienced were steeper
because Saba's longer laterals experience more sand intrusion.
In April 1998, Randeep S. Grewal, Chairman and CEO of Horizontal Ventures,
contacted Ilyas Chaudhary, then the Chairman and CEO of Saba, regarding any
possible business opportunities that could be shared by Horizontal Ventures
and Saba. Almost immediately the discussions turned to the possibility of
engaging in a joint venture whereby Horizontal Ventures 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 Richfield East
Dome Unit field located in Orange County, California ("REDU") also was
discussed. After examining the REDU field, Horizontal Ventures entered into a
confidentiality agreement with Saba and Horizontal Ventures commenced a due
diligence investigation that was intended to lead to the possible acquisition of
the REDU field. Through its due diligence efforts, Horizontal Ventures'
management learned of the Omimex transaction and that Omimex apparently was not
interested in Saba's California assets. In furtherance of the REDU purchase
proposal Horizontal Ventures 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 Horizontal Ventures' special technology to enhance
production. After examining Saba's data on the Cat Canyon field, Horizontal
Ventures identified a significant number of sites where Horizontal Ventures'
Amoco short radius horizontal drilling technology could be used. Since
Horizontal Ventures' technical staff was already familiar with the structure of
Saba's reservoirs, Horizontal Ventures believed that an overall combination of
Saba's assets with Horizontal Ventures' technology and expertise could enhance
the cost effective 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 Horizontal
Ventures. A revised confidentiality agreement was signed regarding an overall
transaction which was structured so as to coordinate the Omimex merger
transaction with a complementary plan for the California properties.
Horizontal Ventures 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., then Horizontal Ventures' largest shareholder. While
in the Netherlands, terms of a proposed transaction that would allow
Horizontal Ventures to gain a controlling interest in Saba were discussed.
During August 1998, Horizontal Ventures management met with the principals of
RGC International Investors LDC, 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,
Horizontal Ventures 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.
While Horizontal Ventures was examining Saba, from May through September
1998, Saba had pursued, unsuccessfully, the sale of certain producing oil and
gas assets in Louisiana. 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. It was intended that the proceeds from the sale of such properties
would be used to reduce bank indebtedness and provide working capital.
Saba's common stock price continued to decline over 1998. The highest sale
price of the common stock during the fourth quarter of 1997 was $14.88 per
share.
During the subsequent first, second, third, and fourth (though November 30,
1998)
quarters of 1988, the lowest sale price was $3.38, $1.44, $0.81 and $0.69,
respectively, per share.
In August 1998, Saba was contracted by the American Stock Exchange to
discuss and determine Saba's continued listing eligibility of its common stock
on the Exchange in consideration of Saba's reported losses, bank default, the
going concern opinion of the auditors, and, overall, the financial condition of
Saba with respect to the decrease in stockholders' equity. Again, in September
1998, Saba was contracted by the American Stock Exchange to discuss and
determine
Saba's continued listing eligibility with respect to Saba's compliance of the
AMEX requirement to maintain two disinterested directors in the board.
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 Horizontal Ventures
acquiring Capco's interest in Saba but they stalled.
As part of Horizontal Ventures' 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 Horizontal
Ventures securities to finance the acquisition of Saba. In September 1998,
Horizontal Ventures negotiated with Jefferies & Company, Inc., a New York-based
investment banking firm specializing in the oil and gas industry, to provide
for the framework of a possible private placement by Horizontal Ventures to
raise
funds to acquire Saba in a cash or partial cash transaction. Jeffries & Company
was not given any instructions regarding seeking alternative instructions or
parties.
On October 6, 1998, Horizontal Ventures entered into a Preferred Stock
Transfer Agreement with RGC, by which Horizontal Ventures acquired 691 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. Horizontal Ventures executed a Promissory Note to repay
the $500,000 to IPH without interest on or before December 31, 1998, which
maturity date subsequently was extended to January 31, 1999, and further to ten
days following the merger, in the form of cash or shares of Saba Series A
Preferred Stock held by Horizontal Ventures. The Promissory Note is secured
by a pledge of two-thirds of the Saba Series A Preferred Stock held by
Horizontal Ventures.
Under the Preferred Stock Transfer Agreement, Horizontal Ventures 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 Horizontal Ventures' payment of
$500,000, which nonrefundable but if the option is exercised within the
extended period is applied to the acquisition price. In addition, Horizontal
Ventures 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. The 690 shares of Series A Preferred
Stock acquired by Horizontal Ventures and the minimum of 6,310 shares of
Series A Preferred Stock which Horizontal Ventures 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. HVI intends to conclude its transaction with RGC following the
effectiveness of this registration statement.
During this same relative time period, Horizontal Ventures conducted
negotiations with Saba for an equity investment directly into Saba totaling
$7,500,000 at $3 per share. As result, on October 8, 1998 Horizontal Ventures
and Saba entered into a Common stock Purchase Agreement by which Saba's Board of
directors agreed to issue to Horizontal Ventures 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 Horizontal Ventures was be appointed to the Saba Board of
directors. In addition, the letter agreement dated October 8, 1998 between
Saba and Horizontal Ventures provided that upon the closing thereof a third
director designated by Horizontal Ventures would be appointed to the Saba Board
of directors.
Also during the same relative time period, IPH in conjunction with
Horizontal Ventures made open market purchases of just around 5% of the issued
and outstanding shares of Saba common stock. By an Option Agreement dated July
22, 1998 between Horizontal Ventures and IPH, Horizontal Ventures 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. Horizontal Ventures has the option of paying such exercise price
to IPH in the form of cash or shares of Horizontal Ventures common stock.
On October 14, 1998, Horizontal Ventures 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 Horizontal
Ventures was acquiring the securities of Saba for the purpose of gaining
control of Saba. Subsequently, Horizontal Ventures 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, Horizontal Ventures executed a letter of intent with
Jefferies & Company, Inc. which contemplated Jefferies & Company acting as
Horizontal Ventures' placement agent in an $18 million private placement of
Horizontal Ventures' convertible preferred stock to finance the pending
closings of the Preferred Stock Transfer Agreement and the Common stock
Purchase Agreement.
On October 22 and 26, 1998, the Saba Board of directors met to discuss the
transactions and a proposed tender offer by Horizontal Ventures for the
balance of the outstanding shares of Saba common stock. At the October 22
meeting of the Saba
Board of directors, an ad hoc committee made up of Randeep S. Grewal, William M.
Hagler and Susan Whalen was appointed to assist with the consummation of the
transaction with Horizontal Ventures that have been entered into with Saba. On
October 26, the Saba Board of Directors met specifically to vote whether to
support Horizontal Ventures' 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.
On November 6, 1998, Horizontal Ventures paid Saba $1,000,000 for 333,333
shares of Saba common stock under the Common Stock Purchase Agreement and
$500,000 to RGC to extend the term until December 6, 1998 of Horizontal
Ventures' exclusive right to acquire the Saba Series A Preferred Stock from
RGC pursuant to the Preferred Stock Transfer Agreement. These payments were
financed by Horizontal Ventures' 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 was extended to January 31, 1999 and further to 10
days following the merger. The Promissory Note is secured by Horizontal
Ventures' pledge of all of the issued and outstanding shares of Horizontal
Ventures Cat Canyon, Inc., a wholly owned subsidiary of Horizontal Ventures.
After a Saba Board of Directors meeting on November 12, 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. As a result, the decline in oil price coupled with significant pending
due diligence items, neither Horizontal Ventures nor Jefferies and Company,
Inc.,
was able to conclude its proposed private offering to raise the funds necessary
to timely complete the Preferred Stock Transfer Agreement. On December 4,
1998, the Board of Directors of Saba met and agreed to extend the Common Stock
Purchase Agreement to January 31, 1999. At the same meeting the board was
advised that Horizontal Ventures had acquired the control block from its former
chairman raising its stake to 34.7%. Additionally, negotiations commenced
immediately with RGC to extend the Preferred Stock Transfer Agreement, which
negotiations are ongoing.
To acquire the control block, on November 23,1998, Horizontal Ventures
entered into a Stock Exchange Agreement with Saba Acquisub, Inc., which owned
2,976,765 shares of Saba Common Stock and increased HVI's ownership to 34.7%.
SAI was controlled by Capco Resources Ltd. which is controlled by Ilyas
Chaudhary. Prior to the time of the negotiations to acquire the control block,
Mr. Chaudhary had resigned as Chairman of Saba. Under the Stock Exchange
Agreement, Horizontal Ventures would acquire the Saba common stock owned by SAI
in exchange for the issuance by Horizontal Ventures to the shareholder of SAI an
aggregate of 1,340,000 shares of Horizontal Ventures common stock and SAI would
merge with and into Horizontal Ventures. The Stock Exchange Agreement also
contains the following provisions:
* By February 18, 1999, Horizontal Ventures shall file a registration
statement to register for resale up to 1,000,000 of the 1,340,000
shares Horizontal Ventures common stock issued to Capco Resources
Ltd.;
* Horizontal Ventures 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 Randeep S. Grewal its proxy to vote the shares of
Horizontal Ventures Common stock acquired by it under the Stock
Exchange Agreement; and
* Until December 31, 2001 Horizontal Ventures shall have a right of
first refusal with respect to any proposed disposition by Capco
Resources, Ltd. of the Horizontal Ventures Common stock acquired by
it under the Stock Exchange Agreement.
Based on this state of affairs, Horizontal Ventures proposed the terms of
the acquisition of Saba on December 3, 1998.
On December 4, 1998, Saba had a board meeting to evaluate the company's
status and alternatives. At that time the board discussed its current financial
status which was:
* At September 30, 1998; Saba's current ratio was 0.24, book value of
$30,090, debt of $30.5 million with $20 million being current debt
and in default. Horizontal Ventures current ratio was 13.24, book
value of $8.8 million with debt of $68,054. On a merged basis the
company would have a current ratio of 0.26 and a book value of
8,830,260. This was considered to be a significant improvement for
the Saba shareholders.
* Saba's assets at September 30, 1998 had been written down to $54
million compared to liabilities of $47 million providing a net
value of $7 million. The continued decline of oil prices may have
actually turned the reserve values in some circumstances to plugging
liabilities. It is expected that Saba's net book value at year-end
will be negative.
* Saba's board was expecting to receive a letter of default from Bank
One which would cause the $20,000,0000 of debt to be accelerated.
Horizontal Ventures original proposal to Saba's board was based upon terms
that included a 20% premium over the average closing price of Saba's common
stock from November 2, 1998 through December 2, 1998 in order to calculate the
number of shares of Horizontal Ventures to be acquired by Saba shareholders in
exchange for Saba common stock. A 20% premium, at the time, resulted in an
exchange ratio of 1 share of Horizontal Ventures for 7.4 shares of Saba common
stock. Through negotiations, Horizontal Ventures agreed to improve on its offer
by increasing the premium from 20% to 55%, resulting in an exchange of 1
share of
Horizontal Ventures for 6 shares of Saba common stock. This ratio was based on
exchanging 1,240,000 shares of Horizontal Ventures shares for the then number of
Saba shares outstanding of approximately 11,300,000 less those owned by
Horizontal Ventures being cancelled and resulted in establishing 1,240,000
shares
as the fixed consideration. Based on the fact there were no alternatives
available to the board and the fact that the market for its stock continued to
drop, management felt the offer as amended was the only one it would receive and
it was unanimously accepted by the Saba board with other than one abstention.
On December 7, 1998, Horizontal Ventures and Saba announced that the Saba
Board of directors had approved the proposed acquisition. The exchange ratio is
based on the following calculation:
* 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 ($1.30 per share) as compared to the average
closing quotation for Horizontal Ventures Common Stock over the
same period with no premium ($12.14 per share); and
* 11,385,726 shares of Saba Common Stock issued and outstanding,
including the 333,333 shares issued to Horizontal Ventures on November
6, 1998.
Horizontal Ventures' 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 Horizontal Ventures' efforts.
Horizontal Ventures' offer was based not only on market variations but also on
the realization that Saba would be required to sell assets in order to pay
down its substantial and pressing current obligations of which it is
supportive.
Horizontal Ventures 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 Colombia; and
* The sale of the assets of Saba's wholly owned subsidiary Saba Energy
of Texas, Inc.
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, or 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 by Chapter 11 of the U.S. Bankruptcy Code to
protect against the loss of one of its key assets. This loan is secured by
SabaCol's interest in an oil pipeline in Colombia. 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, Horizontal Ventures as has determined to continue with
the proposed acquisition of Saba.
On January 11, 1999, an interim management committee for Saba was
established, consisting of Randeep S. Grewal and William N. Hagler. In addition,
Jan F. Holtrop, a director of Horizontal Ventures, was appointed to the Saba
Board of directors.
On January 15, 1999, Saba announced the appointment of Randeep Grewal as
Saba's Chief Executive Officer and President. As a result of Mr. Grewal's
appointment, Saba's interim management committee was dissolved. Saba also
announced that it paid within the cure period the semi-annual interest payment
of $162,000 that was due December 15, 1998 on its 9% Convertible Senior
Subordinated Debentures.
HORIZONTAL VENTURE'S REASONS FOR THE MERGER; RECOMMENDATION OF THE HORIZONTAL
VENTURES BOARD
The Horizontal Ventures Board has unanimously determined that the Merger
agreement and the transactions by, including the Horizontal Ventures Share
Issuance, are in the best interests of Horizontal Ventures and its shareholders
and has approved the Horizontal Ventures Share issuance. The Horizontal Ventures
Board unanimously recommends that the shareholders of Horizontal Ventures vote
"FOR" approval of the Horizontal Ventures Share Issuance at the Horizontal
Ventures Special Meeting.
The Horizontal Ventures Board believes that the Horizontal Ventures Share
Issuance represents a unique opportunity to acquire a company with oil and gas
properties particularly suited to exploitation by Horizontal Ventures'
horizontal drilling technology. Horizontal Ventures believes that Saba's Cat
Canyon Field in California 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
Horizontal Ventures' Cat Canyon properties thus greatly reducing oil
price risk from Horizontal Ventures' Cat Canyon development strategy.
Since 1996, asphalt sales prices from the Asphalt Refinery have varied
between $16.09 and $18.41 per ton, -- while oil prices have varied
between $7.17 and $17.38 during the same period. The primary
objective will be to apply the property cost effective horizontal
drilling technology to create additional feedstock for the refinery
and capitalize on the $5 pricing per barrel.
* 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 Horizontal
Ventures; 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 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 Horizontal Ventures' 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
barrels of oil per day 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 Horizontal Ventures
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, Horizontal Ventures intends to increase the throughput to 10,000
Bopd by 2001. Horizontal Ventures estimates that a 1,000 Bopd increase in
throughput could yield approximately $2.0 million in additional EBITDA annually.
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 April 30, 1999.
Horizontal Ventures' Strategy for Saba after the Merger:
* Exploit and Produce Reserves in California. Horizontal Ventures
intends to apply Amoco's patented short radius horizontal drilling
technology to exploit and produce reserves to maximize cash flow
with minimal capital expenditures. Horizontal Ventures intends to
first apply the technology on the Cat Canyon field in California;
* Capitalize on the Asphalt Refinery to Increase Margins. Horizontal
Ventures 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. Horizontal Ventures 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 Colombia, Indonesia, Great
Britain, Louisiana and New Mexico. Horizontal Ventures intends to sell
or farm-out exploration concessions and properties where short radius
drilling would not add significant value; and
* Penetrate New Niche Markets. Horizontal Ventures 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.
The following are the material factors considered by the Horizontal
Ventures board in reaching its conclusions, certain of which factors contained
both positive and negative elements:
* The key factor in Horizontal Ventures decision to acquire Saba was the
perceived business strategy surrounding the asphalt refinery in
conjunction with the heavy oil production of both companies.
* The judgment, advice and analyses of the Horizontal Ventures 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. Some of
these issues weighed both for and against the merger. Those weighing
against effected the pricing of the exchange. But again the refinery
and heavy oil assets weighed in favor of the transaction.
* Information concerning the financial condition, results of operations,
prospects, business and past performance of Saba. Other than the value
of the assets to Horizontal Ventures this aspect weighed heavily in
Horizontal Ventures low valuation of Saba.
* Current industry, economic and market conditions management felt 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
Horizontal Ventures and Saba including properties, expertise and
personnel. This had the most positive impact on Horizontal Ventures
desire to complete the merger.
* The express terms and conditions of the Merger Agreement, which are
viewed as providing an equitable basis for the transactions from the
standpoint of Horizontal Ventures.
The foregoing discussion of the information and factors considered and
given weight by the Horizontal Ventures board is not intended to be exhaustive.
In view of the variety of factors considered in connection with its
evaluation of the transactions, the Horizontal Ventures 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 Horizontal Ventures 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 terms of the Merger are in the best
interests of Saba and its shareholders and has approved the terms of the Merger.
The Saba Board recommends that the shareholders of Saba vote "FOR" approval of
the Merger agreement at the Saba special meeting. Approval of the merger by the
Saba board was unanimous, other than one abstention.
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:
* Horizontal ventures business plan based around the asphalt refinery
was the key factor for management in light of Saba's dire financial
condition.
* The opportunities for constructive sharing of resources between Saba
and Horizontal Ventures including properties, technology, expertise
and personnel. This was a strong positive as Horizontal Ventures
proposed business plan was perceived as well founded.
* The perceived ability of Horizontal Ventures to raise debt and equity
capital and engage in "work out" arrangements with Saba's creditors.
This was deemed imperative to Saba's continued existence.
* 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
Horizontal Ventures. Once again this was perceived as a positive due
to the Amoco technology.
* Horizontal Ventures financial statements. This was deemed a neutral
due to Horizontal Ventures limited operations of recent periods,
however, their asset base and limited debt was a positive.
* Current industry, economic and market conditions which make the
combination of the two companies much more viable. While oil prices
are at historic lows management believes Horizontal Ventures can raise
capital to Purchase production at these historically low prices.
* 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.
* 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 based on the market value at the time the merger
was announced.
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.
No independent opinion of fairness was sought due to Saba's recent attempt
to market itself including the failure of the Omimex transaction. Additionally
time was a factor along with the expense which Saba did not want to bear.
MERGER CONSIDERATION
At the Effective Time all of the shares of Saba Common Stock issued and
outstanding immediately before the closing of the Merger agreement, other than
shares owned by Horizontal Ventures, will be converted into the right to receive
a total of 1,240,000 shares of Horizontal Ventures Common (except that cash will
be paid in lieu of any resulting fractional shares as described under " The
exchange ratio is not fixed and Conversion of Shares; Procedures for Exchange of
Certificates; Fractional Shares). Of course is subject to significant dilution
should the Saba Series A Preferred convert as set forth in the following table:
The following table sets forth the variable exchange ratios that result from the
dilution if the Saba Series A Preferred Stock is converted. Column A reflects
the conversion price of Saba stock, Column B sets forth the total number of
shares of Saba stock that would be outstanding if all of the Series A Preferred
were converted at that price and Column C sets forth the number of shares of
Horizontal Venture's stock you will receive if all of the Series A Preferred
were
converted at that price prior to the date of closing of the merger. The first
set of numbers in the column assume no conversions and is based on a total of
approximately 11.6 million shares of Saba common stock currently outstanding.
<TABLE>
<CAPTION>
TABLE OF EXCHANGE RATIOS
A B C
Saba Exchange Price Approximate Resulting No. Approximate Resulting No.
for Series A Preferred of Saba Shares of Horizontal Shares per 100
Shares of Saba
<S> <C> <C>
(No Conversions) 11,600,000 16.7
$1.00 18,650,000 8.9
.75 21,000,000 7.7
.50 25,700,000 6.1
</TABLE>
Shares of Saba common stock owned by Horizontal Ventures or Saba
immediately prior to the Effective Time shall be canceled and retired, and no
Horizontal Ventures Common stock will be delivered in exchange for those shares.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
The conversion of Saba Common Stock into the right to receive Horizontal
Ventures Common Stock will occur automatically at the Effective Time. Prior
to the Effective Time, Horizontal Ventures 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 Horizontal Ventures Common stock in exchange
for share of Saba common stock.
Saba shareholders should NOT return stock certificates with the enclosed
proxy card.
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:
* one or more shares of Horizontal Ventures Common Stock representing,
in the aggregate, the whole number of shares that such holder has
the right to receive by the Merger agreement; and
* a check in the amount equal to the cash that such holder has the right
to receive by the Merger Agreement with respect to cash in lieu of
fractional shares of Horizontal Ventures common stock.
No interest will be paid or will accrue on any cash payable by 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, three or more shares of
Horizontal Ventures Common stock representing, in the aggregate, the proper
number of shares of Horizontal Ventures 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 Horizontal Ventures Common stock
that
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 Horizontal Ventures 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 Horizontal Ventures. For each fractional share
of Horizontal Ventures 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 Horizontal Ventures Common Stock
multiplied by (b) the closing bid price per share of Horizontal Ventures Common
Stock reported on the Nasdaq SmallCap Market in The Wall Street Journal, Eastern
edition, as of the Closing Date.
NASDAQ SMALLCAP MARKET LISTING FOR HORIZONTAL VENTURES COMMON STOCK
Application for listing of the Horizontal Ventures Common Stock to be
issued by the Merger Agreement in exchange for Saba Common Stock will be made
with the Nasdaq SmallCap Market.
DELISTING AND DEREGISTRATION OF SABA COMMON STOCK
Once the Merger is consummated, Saba Common stock will be delisted from the
American Stock Exchange and will be deregistered under the Securities Exchange
Act of 1934. As a result, Saba shareholders will no longer be able to trade
Saba Common stock on any exchange.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is the opinion of Ballard Spahr Andrews and
Ingersoll, LLP, counsel to Horizontal Ventures, as to the material expected
federal income tax consequences of the merger to:
* Horizontal Ventures,
* Horizontal Ventures 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.
In rendering such opinion, counsel is relying upon representations and covenants
of Horizontal Ventures and Saba as to factual matters only. The opinion of
counsel
is not binding on the Internal Revenue Service or any court. 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. This discussion assumes
that Saba shareholders hold their Saba common stock as capital assets within the
meaning of Section 1221 of the Code. Each shareholder should consult his or her
own tax advisor as to the particular tax consequences to him or her of the
merger, including the applicability and effect of foreign, state, local and
other tax laws.
Under currently applicable law, the completion of the merger in accordance
with the contract is expected to constitute a tax-free reorganization within the
meaning of Code Section 368(a) and Horizontal Ventures, Horizontal Ventures
Acquisition Corporation and Saba will each be a party to the reorganization
within the meaning of Code Section 368(b). If the merger qualifies as a tax-free
reorganization, the federal income tax consequences with respect to Horizontal
Ventures, Horizontal Ventures Acquisition Corporation, Saba and holders of Saba
common stock will include the following:
* No gain or loss will be recognized by Horizontal Ventures, Horizontal
Ventures 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 Horizontal Ventures common
stock by the merger. Any cash received by a shareholder of Saba in lieu
of a fractional share of Horizontal Ventures will be treated as having
been redeemed by Horizontal Ventures. In that case, either:
* gain or loss will be recognized based on the shareholder's basis in the
Saba common stock allocable to the fractional share interest if the
distribution is not essentially equivalent to a dividend or
* will be a distribution by Horizontal Ventures, taxable as a dividend to
the extent of Horizontal Ventures current or accumulated earnings and
profits.
In either case, the amount of income or gain, if any, will be less than
the fair market value of a full share of Horizontal Ventures common stock as of
the closing.
* The aggregate tax basis of the shares of Horizontal Ventures common
stock received by a holder of Saba common stock solely in exchange for
shares of Saba common stock by the merger, including any fractional
share of Horizontal Ventures 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.
No ruling has been requested from the IRS concerning the federal income tax
treatment of the merger. Therefore, we cannot assure you that the tax treatment
of the merger by Horizontal Ventures, Saba and the Saba Shareholders will not be
challenged by the IRS or that any such challenge would not be sustained. If the
IRS successfully challenges the qualification of the merger as a tax-free
reorganization, the federal income tax consequences would be significantly
different from the ones described above. A holder of Saba common stock would
recognize 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 closing, of the Horizontal Ventures common
stock received in exchange therefor. In such event, a stockholder's aggregate
basis in the shares of Horizontal Ventures common stock so received, including
any fractional share of Horizontal Ventures common stock for which cash is
received, would equal the fair market value of such shares.
FORM OF MERGER
Subject to the terms and conditions of the Merger agreement, at the
Effective Time Saba will merge with and into Horizontal Ventures Acquisition
Corporation. The separate corporate existence of Saba will then cease and
Horizontal Ventures Acquisition Corporation will continue as the surviving
corporation under the name "Saba Petroleum Company."
EFFECTIVE TIME
The Effective Time will be the time of filing of the Certificate of Merger
with the Delaware Secretary of State. By 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 agreement.
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 Horizontal Ventures 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 Horizontal Ventures by 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.
OTHER TERMS OF THE MERGER AGREEMENT
REPRESENTATIONS AND WARRANTIES
The merger agreement contains certain customary mutual representations and
warranties by each of Horizontal Ventures 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;
* 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
Horizontal Ventures and Saba since September 30, 1998; and
* no brokers or finders fees and expenses.
All representations and warranties of Horizontal Ventures 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 Horizontal Ventures, 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 Horizontal
Ventures;
* 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 or obligate itself to redeem any shares of common
stock or other securities except with respect to Saba's Series A
Preferred Stock and except as may be required by the terms of Saba's
Convertible Debentures;
* encumber any of its assets;
* sell any material assets or cancel any material debt or claim;
* waive any substantially valuable rights; or
* enter into any other material transaction other than in the ordinary
course of business.
CONDITIONS PRECEDENT TO THE MERGER
The respective obligations of Horizontal Ventures, Horizontal Ventures
Acquisition Corporation and Saba to effect the merger are subject to, among
other things, 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 Horizontal Ventures shareholders of the Horizontal Ventures
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 Horizontal
Ventures common stock to be issued in the merger;
* No conversion of Saba Series A Preferred Stock into Saba Common stock
without the consent of Horizontal Ventures; 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 Horizontal Ventures 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 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 Horizontal Ventures and Saba;
* By either Horizontal Ventures 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 Horizontal Ventures or Saba if the shareholders of Saba do
not approve the Merger Agreement or the shareholders of Horizontal
Ventures do not approve the Horizontal Ventures Share Issuance.
If the Merger Agreement is terminated as a result of a party's failure to
fulfill any of its obligations under the Merger Agreement, the defaulting
party must pay to the nondefaulting party a termination fee in the amount of
$1,000,000 plus in the case of Saba being the defaulting party all amounts
invested into Saba by Horizontal Ventures plus all amounts advanced to Saba by
Horizontal Ventures.
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 Horizontal Ventures 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 Horizontal Ventures.
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 Horizontal Ventures and Saba.
WAIVER
The merger agreement permits Horizontal Ventures 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.
If a material condition is waived, we will amend this document and
recirculate it and resolicit shareholders.
INTERESTS OF INSIDERS IN THE MERGER
In considering the recommendation of the Horizontal Ventures Board of
Directors with respect to the Horizontal Ventures Share Issuance pursuant to
the Merger Agreement, the Horizontal Ventures shareholders should be aware that
the Horizontal Ventures Board of directors has agreed to accelerate the vesting
of a stock grant of 30,000 shares of Horizontal Ventures Common stock to Randeep
S. Grewal, a member of the Horizontal Ventures 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 Horizontal Ventures'
introduction to Saba. This block of voting interest is considered a control
block by Horizontal Ventures and Horizontal Ventures deemed it imperative to
acquire that control block prior to the commencement of the shareholder voting
process. As a result, Horizontal Ventures agreed to pay a greater number of
shares to Mr. Chaudhary through his corporate entities than it has agreed to
pay to the shareholders of Saba in general.
Mr. Chaudhary had resigned all positions with Saba before
either the offer by Horizontal Ventures or the acceptance of that offer. 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 Horizontal Ventures 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
Horizontal Ventures immediately prior to the Effective Time. If the 1,240,000
shares of Horizontal Ventures Common stock are issued to holders of Saba Common
Stock, the shares of Horizontal Ventures Common Stock owned by Saba
shareholders other than Horizontal Ventures immediately after the Effective
Time
will represent approximately 30% of the total shares of Horizontal Ventures
Common stock then outstanding. Assuming no further dilution caused by
conversions of the Preferred shares.
NASDAQ LISTING
It is a condition to the consummation of the Merger that the shares of
Horizontal Ventures Common stock to be issued by the Merger agreement shall be
registered under the Securities Act and be authorized for listing on The Nasdaq
SmallCap Market, subject only to official notice of issuance. Horizontal
Ventures
intends to apply for listing of post-Merger Horizontal Ventures 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.
RESALES OF HORIZONTAL VENTURES COMMON STOCK
The shares of Horizontal Ventures Common Stock to be issued to shareholders
of Saba by the Merger Agreement have been registered under 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 Horizontal Ventures 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 Horizontal Ventures 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 Horizontal Ventures) or as otherwise permitted under the
Securities Act. Persons who may be deemed affiliates of Saba or Horizontal
Ventures 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. 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 Horizontal Ventures 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 Closing Date, Saba will use all
reasonable efforts to cause each affiliate of Saba to deliver a written
agreement to the effect that such person will not offer, sell, pledge, transfer
or otherwise dispose of any shares of Horizontal Ventures Common stock issued
to such person in connection with the Merger in violation of the
Securities Act or the rules and regulations thereunder.
This Joint Proxy Statement/Prospectus does not cover resales of Horizontal
Ventures Common Stock received by any person who may be deemed to be an
affiliate of Horizontal Ventures or Saba.
HORIZONTAL VENTURES' REASONS FOR THE NAME CHANGE AND AUTHORIZATION OF THE
POSSIBLE FUTURE SHARE ISSUANCE; RECOMMENDATION OF THE HORIZONTAL VENTURES BOARD
The Horizontal Ventures 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 Horizontal Ventures Common stock for
possible future acquisitions are in the best interests of Horizontal Ventures
and its shareholders and has approved these proposals. The Horizontal
Ventures Board unanimously recommends that the shareholders of Horizontal
Ventures vote "FOR" approval of those proposals of the Horizontal Ventures
Special Meeting.
Management of Horizontal Ventures 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 Horizontal
Ventures' 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 Horizontal Ventures 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.
INFORMATION ABOUT 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:
* statements by Horizontal Ventures or Saba as the case may be,
concerning:
* 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 Horizontal Ventures and Saba
after the closing of the Merger Agreement, and
* the complementary nature of Horizontal Ventures' horizontal
drilling technology and certain Saba oil reserves, and
* other statements by Horizontal Ventures 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
Horizontal Ventures 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 Horizontal Ventures or Saba, as the case
may be, believes are appropriate in the circumstances.
The managements of Horizontal Ventures 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 Horizontal Ventures
Board; Horizontal Ventures' Reasons for the Merger,"
* "MERGER AGREEMENT - Recommendation of the Saba Board;
Saba's Reasons for the Merger,"
* "Horizontal Ventures 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 that could prevent Horizontal Ventures or Saba, as the case
may be, from achieving its stated goals include, but are not limited to:
* failure by Horizontal Ventures and Saba to consummate the Merger
agreement on a timely basis or at all,
* if the Merger agreement is consummated, failure by Horizontal
Ventures to integrate the respective operations of Horizontal
Ventures and Saba or to achieve the synergies expected from
the Merger,
* declines in the market prices for oil and gas, and
* adverse changes in the regulatory environment affecting
Horizontal Ventures 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 Horizontal Ventures or Saba or persons acting
on its or their behalf. Neither Horizontal Ventures 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.
HORIZONTAL VENTURES SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE
The Horizontal Ventures Special Meeting will be held on Friday, March 19,
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 Horizontal Ventures Share Issuance, the change in
the name of Horizontal Ventures to GREKA Energy Corporation and the
authorization of the issuance of up to an additional 2,000,000 shares of
Horizontal Ventures Common stock for possible future acquisitions.
The Horizontal Ventures board of directors has unanimously determined that
the merger agreement is in the best interests of Horizontal Ventures and its
shareholders, and has unanimously approved the merger agreement and the
Horizontal Ventures share issuance. The Horizontal Ventures board of directors
unanimously recommends that the shareholders of Horizontal Ventures vote for
approval of the Horizontal Ventures 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 Horizontal Ventures common stock. See "The Merger -
Background of the merger," "-- Horizontal Ventures' Reasons for the merger;
Recommendation of the Horizontal Ventures board " and "-- Horizontal Ventures'
reasons for the name change and authorization of the possible future share
issuance; Recommendation of the Horizontal Ventures board."
The approval of the Horizontal Ventures Share Issuance by the Horizontal
Ventures shareholders is required by the rules of the Nasdaq SmallCap Market
because the number of shares of Horizontal Ventures Common Stock to be issued
pursuant to the Merger Agreement exceeds twenty percent of the number of
shares of Horizontal Ventures Common Stock that would be outstanding
immediately before the closing of the Merger agreement. The approval of the
Horizontal Ventures Share Issuance is a condition to the obligation of
Horizontal Ventures and Horizontal Ventures Acquisition Corporation to close
the Merger agreement.
Horizontal Ventures shareholders are not required by the Colorado Business
Corporation Act, Nasdaq SmallCap Market rules or otherwise to approve the
Merger
Agreement, and Horizontal Ventures 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 Horizontal Ventures Common Stock at the close of
business on January 22, 1999 are entitled to receive notice of and to vote at
the Horizontal Ventures Special Meeting. At the close of business on the
Horizontal Ventures Record Date, there were 2,910,981 shares of Horizontal
Ventures 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 the holders of one-third of the
shares of Horizontal Ventures Common stock entitled to vote is necessary to
constitute a quorum for the transaction of business at the Horizontal Ventures
Special Meeting. Once a quorum has been established, an affirmative vote of
a majority votes cast at the Horizontal Ventures Special Meeting will be
required for approval of the Horizontal Ventures Share Issuance, the name change
and the authorization of the additional share issuance.
Shares of Horizontal Ventures 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 not
be included in determining the number of votes cast for such proposal. Brokers
who hold shares of Horizontal Ventures 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 included in
determining the number of votes cast for such proposal and will have no effect
on the vote.
In the event that a quorum is not present at the Horizontal Ventures Special
Meeting, it is expected that the meeting will be adjourned or postponed to
solicit additional
proxies.
SHARE OWNERSHIP OF HORIZONTAL VENTURES AFFILIATES
As of the date hereof, the executive officers and directors of Horizontal
Ventures have voting power with respect to approximately 51% of the total
issued and outstanding shares of Horizontal Ventures Common stock. See
"Horizontal Ventures SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT." The executive officer and directors of Horizontal Ventures have
indicated that they will vote in favor of the Horizontal Ventures Share
Issuance, the name change and the authorization of the additional share
issuance.
PROXIES
All shares of Horizontal Ventures Common stock which are represented by
properly executed proxies received in time for the Horizontal Ventures 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 Horizontal Ventures 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 Horizontal Ventures 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 Chairman
and Chief Executive Officer of Horizontal Ventures, by signing and returning a
later-dated proxy or by voting in person at the Horizontal Ventures Special
Meeting. Attendance at the Horizontal Ventures Special Meeting will not in
and of itself constitute the revocation of a proxy.
The Horizontal Ventures Board of Directors is not currently aware of any
business to be brought before the Horizontal Ventures Special Meeting other than
described herein. If, however, other matters are properly brought before the
Horizontal Ventures 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 Horizontal Ventures
Board of directors. The entire cost of proxy solicitation for the Horizontal
Ventures Special Meeting, including the reasonable expenses of brokers,
fiduciaries and other nominees in forwarding solicitation material to beneficial
owners, will be borne by Horizontal Ventures. In addition to solicitation by
mail, officers and regular employees of Horizontal Ventures 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 Horizontal Ventures Common stock are requested to complete, date
and sign the accompanying Horizontal Ventures proxy care and return it promptly
in the enclosed postage-prepaid envelope.
DISSENTERS' RIGHTS
Under the Colorado Business Corporation Act, Horizontal Ventures
shareholders are not entitled to assert dissenters' rights in connection with
the Merger agreement or the transactions by.
SABA SPECIAL MEETING
DATE, TIME AND PLACE
The Saba Special Meeting will be held on Friday, March 19, 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 interests 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.
Record date; VOTE REQUIRED
Only holders of record of Saba Common Stock at the close of business on
January 22, 1999 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 approved 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 have the effect of a vote cast against the
Merger agreement.
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
Horizontal Ventures, 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 Horizontal Ventures 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 her 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
Merger agreement does not require the holders of Saba Common stock to accept
anything other than shares of Horizontal Ventures Common Stock, which will have
more than 2,000 record holders, and cash in lieu of fractional shares.
DESCRIPTION OF HORIZONTAL VENTURES SECURITIES
Horizontal Ventures is authorized to issue 50 million shares of Horizontal
Ventures common stock and 50 million shares of preferred stock of which
2,910,981 shares of Horizontal Ventures Common stock and no shares of
Horizontal Ventures Preferred Stock are issued and outstanding as of the date
hereof. All shares of Horizontal Ventures Common stock have equal rights and
privileges with respect to voting, liquidation and dividend rights. Each share
of Horizontal Ventures Common stock entitles the holder thereof to:
* one non-cumulative vote for each share held of record on all
matters submitted to a vote of the shareholders,
* participate equally and to receive any and all such dividends as
may be declared by the Horizontal Ventures Board of directors out
of funds legally available therefor, and
* to participate pro rata in any distribution of assets available for
distribution upon liquidation of Horizontal Ventures.
Shareholders of Horizontal Ventures have no preemptive rights to acquire
additional shares of Common Stock or any other securities. Horizontal
Ventures Common Stock is not subject to redemption and carries no
subscription or conversion rights. All outstanding shares of Horizontal
Ventures Common stock are fully paid and non-assessable. Additional shares of
Horizontal Ventures Common Stock may be issued without shareholder approval,
except as limited by the Nasdaq SmallCap Market rules.
SHARES ELIGIBLE FOR FUTURE SALES
The up to 1,300,000 shares of Horizontal Ventures Common Stock that may be
issued pursuant to the Merger will be freely tradeable without restriction or
further registration under the Securities Act, except for any Horizontal
Ventures Common Stock held by an "affiliate", as defined under the Securities
Act) of Horizontal Ventures.
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 Horizontal Ventures Common stock that
does not exceed the greater of:
* 1% of the then outstanding shares, or
* 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 Horizontal Ventures 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 Horizontal Ventures Common stock.
There can be no predictions of the effect, if any, that sales of Horizontal
Ventures Common Stock under Rule 144 will have on the market price prevailing
from time to time. Sales of substantial amounts of Horizontal Ventures Common
Stock pursuant to Rule 144 could subsequently adversely affect the market
price of Horizontal Ventures Common stock.
CERTAIN CHARTER PROVISIONS
The Horizontal Ventures Articles of Incorporation provide for a staggered
Board of directors consisting of three classes of Directors. Each class must
contain one-third of the total number of Directors, or as near thereto as
possible. Class A consists of one Director designated as Chairman of the Board,
Class B consists of two Directors and Class C consists of two Directors. There
currently is one vacancy with respect to Class C. The term of the Class C
director will expire at the next annual meeting of shareholders. The terms of
the Class B directors will expire at the second annual meeting following
adoption
of the Staggered Board in July 1998 and the term of the Class A director will
expire at the third annual meeting following adoption of the Staggered Board.
Following the expiration of their initial terms, Horizontal Ventures Directors
will be elected for terms of three years to succeed those whose terms expire.
The Horizontal Ventures Staggered Board provisions could have the effect of
deterring certain third parties from initiating proxy contests or from acquiring
substantial blocks of shares of Horizontal Ventures Common stock. Such proxy
contests and acquisitions of substantial blocks of shares tend to increase, at
least temporarily, market prices for a company's stock. Consequently, the
Staggered Board provisions could deprive Horizontal Ventures shareholders of
temporary opportunities to sell their shares at higher market prices. Moreover,
by possibly deterring proxy contests or acquisitions of substantial blocks of
Horizontal Ventures Common stock, the Staggered Board provisions might have the
incidental effect of inhibiting certain changes in incumbent management, some or
all of whom may be replaced in the course of a change in control.
The transfer agent and registrar for Horizontal Ventures Common Stock is
American Securities Transfer & Trust, Inc., 1825 Lawrence Street, Suite 444,
Denver, Colorado 80202.
COMPARISON OF THE RIGHTS OF HOLDERS OF HORIZONTAL VENTURES COMMON
STOCK AND SABA COMMON STOCK
Horizontal Ventures is a Colorado corporation and the rights of its
shareholders are governed by the Colorado Business Corporation Act
("CBCA") and the Articles of Incorporation and Bylaws of Horizontal Ventures.
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. By the Merger agreement, the Saba shareholders will become
Horizontal Ventures shareholders and as such their rights will be governed by
the CBCA and the Horizontal Ventures Articles of Incorporation and Bylaws.
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, 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.
Colorado Delaware
A director of a corporation that does A director of a corporation that
not have a staggered board of does not have a classified board
directors or cumulative voting may be or cumulative voting may be
removed with or without cause with the removed with or without cause with
approval of a majority of the outstanding approval of the majority of the out-
shares entitled to vote at an election of standing shares entitled to vote at
directors. In the case of a Colorado an election of directors. In the
Colorado corporation having cumulative In the case of a Delaware
voting, if less than the entire board is corporation having cumulative voting,
to be removed, a director may not be if less than the entire board is to
removed if less than the entire board be removed, a director may not be
without cause if the number of shares voted removed without cause if the number
against such removal would be sufficient of shares voted against such removal
to elect the director under cumulative would be sufficient to elect the
voting. Horizontal Ventures has a staggered director under cumulative voting.
A director of a corporation with
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 (the 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.
Colorado Delaware
The Horizontal Ventures Articles of Delaware law permits, but does not
Incorporation and Bylaws provide for require, a classified board of
a staggered board. Colorado law permits, directors, by which the directors
but does not require, a staggered board can be divided into as many as three
of directors, by which the directors classes with staggered terms of
can be divided into as many as three office with, only one class of
classes with staggered terms of office, directors standing for election each
with only one class of directors The Saba Certificate of
standing for election each year. 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.
Colorado Delaware
The Articles of Incorporation of The Certificate of Incorporation of
Horizontal Ventures eliminate the Saba also eliminates the liability
liability of directors to the of directors to the corporation or
corporation to the fullest extent its stockholders for monetary
permissible under Colorado law. damages for breach of fiduciary duty
Colorado law does not permit the as a director to the fullest extent
elimination of monetary liability permissable under Delaware law, as
where such liability is based on: 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:
* intentional misconduct or knowing * breaches of the director's duty of
and culpable violation of law, loyalty to the corporation or its
stockholders,
* acts or omissions that a director
believes to be contrary to the best * acts or omissions not in good faith
interests of the corporation or its or involving intentional misconduct
shareholders, or that involve the or knowing violations of law,
absence of good faith on the part
of the director, * the payment of unlawful dividends
or unlawful stock repurchases or
* receipt of an improper personal benefit, redemptions, or
* acts or omissions that show reckless * transactions in which the director
disregard for the director's duty to the received an improper personal
corporation or its shareholders, where benefit.
the director in the ordinary course of
performing a director's duties should Such also may not limit a director's
be aware of a risk of serious injury liability for violation of or
to the corporation or its shareholders, otherwise relieve Delaware of its
directors from the necessity of
complying with federal or state
* acts or omissions that constitute an securities laws, or affect the
unexcused pattern of inattention that availability of non-monetary
amounts to an abdication of the remedies such as injunctive
director's duty to the corporation and relief or recission.
its shareholders,
* interested transactions between the
corporation and a director in which a
director has a material financial interest,
and
* liability for improper distributions,
loans or guarantees.
Colorado law generally permits Delaware law generally permits
indemnification of director expenses, indemnification of expenses,
including attorney's fees, actually and including attorney's fees, actually
reasonably incurred in the defense or and reasonably incurred in the
settlement of a derivative or third-party defense or settlement of a
action, provided there is a determination derivative or third-party action,
by a majority vote of a disinterested provided there is a determination
quorum of the directors, by independent by a majority vote of disinterested
legal counsel or by a majority vote of a quorum of directors, by independent
quorum of the stockholders that the person legal counsel or by a majority vote
seeking indemnification acted in good faith by a quorum of the stockholders
and in a manner reasonably believed to be that the person seeking indemni-
in the best interests of the corporation. fication acted in good faith and in
Colorado law requires indemnification a manner reasonably believed to be
of director expenses when the individual in or not opposed to the best
being indemnified has successfully interest of the corporation.
defended any action, claim, issue or Delaware law requires indemni-
on the merits or otherwise. fication, of expenses when the
individual being indemnified
Except with regard to directors, the has successfully, defended any
indemnifications provided by statute action, claim, issue, or matter
shall not be deemed exclusive of any other therein, on the merits or
right under any bylaw, agreement, vote otherwise.
of stockholders or directors or otherwise.
Horizontal Ventures has no additional Delaware law also permits a
rights of indemnification in place except Delaware corporation to provide
as provided by Colorado law. indemnification in excess of that
provided by statute. By contract
to Colorado law, Delaware law does
not require authorizing pro-
visions 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.
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.
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 Delaware
Colorado law dispenses with the concepts of Delaware law permits a corporation
par value of shares as well as statutory to declare and pay dividends out of
definitions of capital, surplus and the surplus or if there is no surplus,
like. The concepts of par value, capital out of net profits for the fiscal
and surplus are retained under Delaware law. year as long as the amount of
Colorado law permits a corporation to capital of the corporation following
declare and pay dividends unless, after the declaration and payment of the
giving it effect: dividend is not less than the
aggregate amount of the capital
represented by the issued and out-
* the corporation would not be able to pay standing stock of all classes having
its debts as they become due in the usual a preference upon the distribution of
course of business, or assets. In addition, Delaware law
generally provides that a corporation
* the corporation's total assets would be may redeem or repurchase its shares
less than the sum of its total only if the capital of the
liabilities plus (unless the articles corporation is not impaired and
of incorporation permit otherwise) the such redemption or repurchase would
amount that would be needed, if the not impair the capital of the
corporation were to be dissolved at the corporation.
time of the distribution, to satisfy the
preferential rights upon dissolution of
shareholders whose preferential
rights are superior to those receiving the
distribution.
Shareholder Voting
Colorado Delaware
Generally requires that a majority Delaware law contains a similar
of the shareholders of both acquiring exception to its voting requirements
and target corporations approve for reorganizations where
statutory mergers. shareholders of the corporation
itself, or both immediately prior to
Does not require a stockholder vote of the reorganization will own
the surviving corporation in a merger immediately prior to the
(unless the corporation provides reorganization will own immediately
otherwise in its certificate of after the reorganization equity
incorporation) if securities constituting more than
parent 80 percent of the voting power of
the surviving or acquiring
corporation or its parent entity.
* the merger agreement does not amend
the existing certificate of incorporation,
* 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
* 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.
Generally requires that a majority of the
shareholders of both acquiring and target
corporations approve statutory mergers.
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 Under Delaware Law
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 of the Delaware General Corporation Law, 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:
* 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,
* 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
* 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:
* listed on a national securities exchange,
* quoted on an interdealer quotation system of a registered national
securities association, or
* 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.
Section 203 will encourage any potential acquirer to negotiate with
Saba'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 Delaware
Provides that the corporation or Does not have a similar bonding
the defendant in a derivative suit requirement.
may make a motion to the court for
an order requiring the plaintiff
shareholder to furnish a security bond.
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 by 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.
Colorado Delaware
Dissenters' rights are not available Appraisal rights are not available
to stockholders of a corporation (a) with respect to the sale, lease
surviving a merger if no vote of the or substantially all of the assets of
stockholders of the surviving corporation a corporation, (b) with respect to a
is required to approve the merger or merger or consolidation by a corpo-
share exchange under certain provisions ration the shares of which are either
of Colorado law. 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.
Dissolution
Colorado Delaware
If the dissolution is initially approved Unless, the board of directors
by the board of directors, it may be approves the proposal to dissolve,
approved by a simple majority of the the dissolution must be approved by
outstanding shares of the corporation's all of the stockholders entitled to
stock entitled to vote. In the event of vote theron. Only if the dissolution
such a board-initiated dissolution, is initially approved by the board
Colorado law allows a Colorado corporation of directors may it be approved by a
to include in its certificate of simple majority of the outstanding
incorporation a supermajority (greater shares of the corporation's stock
than a simple majority) voting requirement entitled to vote. In the event of
in connection with dissolutions. Under such a board-initiated dissolution,
Colorado law, shareholders may only initiate Delaware law allows a Delaware
dissolution by way of a judicial proceeding. 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 HORIZONTAL VENTURES AND SABA COMMON STOCK AND DIVIDENDS
Horizontal Ventures Common stock is listed for trading on the Nasdaq
SmallCap Market under the symbol "HVNV". Except for a period from August to
December of 1997, Horizontal Ventures' common stock has been quoted on NASDAQ
since February 19, 1993. Saba Common stock trades on the American Stock Exchange
under the symbol "SAB." The following table sets forth, for the periods
indicated, the high and low closing bid quotations per share of Horizontal
Ventures Common stock as reported on the Nasdaq SmallCap Market and the high and
low quarterly closing sales prices of Saba Common stock as reported on the
American Stock Exchange. The table also presents trading information for
Horizontal Ventures and Saba on December 4, 1998 and February 5, 1999. December
4, 1998 was the last trading day immediately preceding the public
announcement of
the exchange ratio terms of the merger agreement. February 5, 1999 was the last
practicable trading day for which information was available prior to the date of
this joint proxy statement/prospectus. The Horizontal Ventures Common stock
quotations represent the Company's post 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 Horizontal
Ventures' common stock will be sustained in the future. The prices of Saba
Common stock 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>
Horizontal Ventures 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
December 31, 1998........ 8.813 14.938 .625 1.75
Trading Day
December 4, 1998 ........ 11.00 11.00 1.25 1.375
February 5, 1999 ........ 10.50 10.50 1.00 1.125
*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.
On January 22,1998, there were approximately _____ registered holders of
Horizontal Ventures' Common stock. Based on a broker count, Horizontal Ventures
believes at least an additional 1,200 persons are shareholders with street name
positions.
Holders of Horizontal Ventures Common stock are entitled to receive such
dividends as may be declared by Horizontal Ventures' Board of directors.
Horizontal Ventures has not yet paid any dividends, and the Board of directors
of Horizontal Ventures presently intends to pursue a policy of retaining
earnings, if any, for use in Horizontal Ventures' operations and to finance
expansion of its business. With respect to the Horizontal Ventures Common
Stock, the declaration and payment of dividends in the future, of which there
can be no assurance, will be determined by the Horizontal Ventures Board of
directors in light of conditions then existing, including Horizontal Ventures'
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.
BUSINESS OF HORIZONTAL VENTURES
Company Overview
During 1997, Horizontal Ventures, 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.
Horizontal Ventures' 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 Horizontal
Ventures'
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
Horizontal Ventures' 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.
Horizontal Ventures 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. Horizontal Ventures 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, Horizontal Ventures 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.
Horizontal Ventures 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. Horizontal Ventures 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 Horizontal Ventures.
Contract Services: In the last three years that the technology has been
commercialized in the industry, Horizontal Ventures 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
Horizontal Ventures' 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, Horizontal Ventures 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 Horizontal Ventures' primary focus. Horizontal
Ventures' existing prospects have multiple pay objectives and are commonly
located in association with existing producing fields where the management has
expertise or previous experience. Horizontal Ventures 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
method of reentering a well and horizontal drilling patented by Amoco and
licensed to Horizontal Ventures, 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.
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 Horizontal Ventures 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 Horizontal Ventures 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 (Horizontal Ventures) which was the first licensee of the Amoco technology.
Horizontal Ventures 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.
Horizontal Ventures had the license from Amoco to perform services in Europe in
addition to the U.S.
June: As part of Horizontal Ventures' 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: Horizontal Ventures 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 Horizontal Ventures. $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.
November: Regulation S offering successfully completed for the continued
capitalization of Horizontal Ventures. $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 Horizontal Ventures.
$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, Horizontal Ventures executed an agreement and plan of
reorganization to acquire all of the issued and outstanding shares of
Beat the House Enterprises, Inc., a closely-held Delaware corporation, in
exchange for 151,000,000 shares of Horizontal Ventures' Common Stock. BTHE's
plans never successfully materialized and until July 28, 1992 Horizontal
Ventures had no operations.
On July 28, 1992, Horizontal Ventures executed an agreement and plan of
reorganization to acquire Petro Union, Inc., an Indiana corporation, whereby
Horizontal Ventures acquired 100% of the outstanding shares of Petro Union,
Inc., in exchange for the issuance of 7,240,000 shares (90.5%) of Horizontal
Ventures' 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, Horizontal Ventures acquired all of the issued and
outstanding shares of Green Coal Company, Inc. 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 Horizontal Ventures' 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 Horizontal Ventures. On July 11, 1994, Horizontal
Ventures 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 issued an order
confirming the Company's First Amended Plan of Reorganization. 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
cancelled.
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 and International Publishing Holding
s.a. 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.
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
("Horizontal Ventures"), acquired 590,000 shares of New Common Stock in
exchange for all of the issued and outstanding capital stock of Horizontal
Ventures. Randeep S. Grewal was the President of Horizontal Ventures. 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. Horizontal Ventures 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:
* 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,
* to fix the number of directors at five, and
* 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.
Recent Developments
As a part of the decision to acquire Saba, management recently decided not
to continue to pursue the Illinois properties. This effectively eliminates
94,080
bbls of Proven Developed Non-Producing oil and 1,732,305 bbls of Proven
Undeveloped oil from the 1997 reserves set forth below. This has the additional
effect of reducing future net reserves in all categories except Proven Developed
Producing by approximately two-thirds.
Exploitation and Production
California Cat Canyon Field
Horizontal Ventures 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.
Following in-depth evaluations, Horizontal Ventures 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 Horizontal Ventures' financial
resources has been activated that will result in the drilling of six
horizontals and other related re-work programs. Horizontal Ventures 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
Horizontal Ventures.
Horizontal Ventures 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, Horizontal Ventures acquired from Amoco Production Company 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.
Horizontal Ventures 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 Horizontal Ventures in October of 1997 it
acquired
three additional sets of horizontal drilling and other related equipment.
Horizontal Ventures 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.
In the last three years that the technology has been commercialized in the
industry, Horizontal Ventures 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. Horizontal Ventures intends to continue providing
its services to the industry on a contract basis. Such contract services are
to be scheduled with coordination to Horizontal Ventures' 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
Horizontal Ventures' oil and gas properties are primarily based in
California and Illinois though the area of focus since the acquisitions had been
primarily California. Horizontal Ventures 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
Horizontal Ventures.
As a part of the decision to acquire Saba, management recently decided not to
continue to pursue the Illinois properties. This effectively eliminates 94,080
bbls of Proven Developed Non-Producing oil and 1,732,305 bbls of Proven
Undeveloped oil from the 1997 reserves set forth below. This has the additional
effect of reducing future net reserves in all categories except Proven Developed
Producing by approximately two-thirds.
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 Horizontal Ventures. For
further information concerning the present value of future net revenue from
these proved reserves, see the Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
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, Horizontal Ventures 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 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 Horizontal
Ventures' 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 Horizontal Ventures 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;):
<TABLE>
Illinois
-----------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
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
Horizontal Ventures:
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
Horizontal Ventures:
Oil - - 1,832
Gas - - --
*There was no activity in California prior to 1997.
</TABLE>
Acreage
The following table sets forth the gross and net acres of developed and
undeveloped oil and gas leases held by Horizontal Ventures 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.
<TABLE>
Developed Acreage(1) Undeveloped Acreage
-------------------- -------------------
Gross Net Gross Net
<S> <C> <C> <C> <C>
California 190 150 - -
Illinois 115 80 754 377
Total 305 230 754 377
</TABLE>
Drilling Activity
The following table sets forth the wells drilled and completed by
Horizontal Ventures during the periods indicated:
<TABLE>
Years ended December 31
1995 1996 1997
---- ---- ----
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
Development:
Oil 1 .125 3 .375 2 1.67
Gas - - - - - -
Non-Productive - - - - - -
Total 1 .125 3 .375 2 1.67
</TABLE>
(1) Developed acreage is acreage assigned to producing wells for the spacing
unit of the producing formation. Developed acreage in certain of Horizontal
Ventures' 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.
The following table sets forth information relating to the number of oil
wells in which Horizontal ventures owned a working interest:
<TABLE>
Gross Net
<S> <C> <C>
Proven Developed Producing 6 6
Proven Developed Non-Producing 2 2
Proven Undeveloped - Re-Entries
of Existing Wells 7 7
Proven Undeveloped - New Wells 2 2
Horizontal Ventures has a 100% working interest in all of the above wells.
Development Exploitation Acquisition Expenditures
The following table sets forth certain information regarding the costs
incurred by Horizontal Ventures in its development, exploration and acquisition
activities during the periods indicated:
</TABLE>
<TABLE>
Years Ended December 31,
1995 1996 1997
----- ---- ----
<S> <C> <C> <C>
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
</TABLE>
Marketing
Exploitation, Development and Production. Significant and lucrative markets
exist for the application of the niche technology for Horizontal Ventures'
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 Horizontal Ventures 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,
Horizontal Ventures has found that California is a unique opportunity due to
its stringent new drilling regulations. Horizontal Ventures' 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. Horizontal Ventures intends to pursue such opportunities.
Service Marketing. As experienced by Horizontal Ventures, there exists a
substantial market for cost-effective horizontal drilling. Horizontal Ventures
intends to concentrate its services to drilling for majors and larger
independents on a multi-well program basis 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 largerindependents
value immensely. Horizontal Ventures has successfully performed services for
Texaco, Chevron, OXY, Exxon to name a few and intends to focus on similar
activities. Additionally, Horizontal Ventures 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
Horizontal Ventures 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,
Horizontal Ventures 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 Horizontal Ventures may be subject.
Price Controls on Liquid Hydrocarbons
Oil sold by Horizontal Ventures is no longer subject to the Crude Oil
Windfall Profits Tax Act of 1980, as amended, which was repealed in 1988. As a
result, Horizontal Ventures 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 Horizontal Ventures may be subject to regulation under various federal
and state laws including, but not limited to, the Natural Gas Act and the
Natural Gas Policy Act, both of which are administered by the Federal Energy
Regulatory Commission. 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 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 Horizontal
Ventures, 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 Horizontal Ventures' 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
Horizontal
Ventures' 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 Horizontal Ventures 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 Horizontal Ventures 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.
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. Horizontal Ventures 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 Horizontal Ventures.
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 Horizontal Ventures 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 Properties
Indiana - Monroe Field. Horizontal Ventures owns through its wholly owned
subsidiary, Calox Inc, a 355 acre limestone property located in Monroe County,
Indiana. Horizontal Ventures owns the land, timber and all the mineral rights
associated with the property. The limestone deposits 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.
As Horizontal Ventures is focused on its oil and gas activities, this
property has been identified as a non-core unit and thus optioned out.
International Publishing Holding s.a., Horizontal Ventures' 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, Horizontal Ventures
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, Horizontal Ventures is confident that it
will be able to divest this lucrative property for at least the same value to
another company.
Environmental Regulations
Operations of Horizontal Ventures 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 Horizontal Ventures' 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 Horizontal Ventures, 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 Horizontal Ventures
has operations, and these various initiative could have a similar impact on
Horizontal Ventures.
Horizontal Ventures 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 Horizontal Ventures' property interests are held by
leases from third parties. A title opinion is typically obtained prior
to the commencement of drilling operations on properties. Horizontal Ventures
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. Horizontal Ventures'
properties are subject to customary royalty interests, liens for current taxes
and other burdens which Horizontal Ventures believes do not materially
interfere
with the use of or affect the value of such properties. Horizontal
Ventures performs only a minimal title investigation before acquiring
undeveloped properties.
Operational Hazards and Insurance
Horizontal Ventures' 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.
Horizontal Ventures has $2,000,000 of general liability insurance.
Horizontal Ventures' 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 Horizontal Ventures'
financial condition and results of operations. Moreover, no assurance can be
given that Horizontal Ventures will be able to maintain adequate insurance in
the future at rates it considers reasonable.
Employees
As of November 30, 1998, Horizontal Ventures had 15 employees, consisting
of 12 full-time employees and 3 are part-time employees. None of Horizontal
Ventures' employees is subject to a collective bargaining agreement. Horizontal
Ventures considers its relations with its employees to be good.
Offices
Horizontal Ventures 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. Horizontal Ventures' operational headquarters is
located in Tulsa, Oklahoma, where Horizontal Ventures leases 1,500 square feet
on a month to month basis. If it were to require added space, Horizontal
Ventures believes that additional space is readily available for lease.
Horizontal Ventures 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
Horizontal Ventures' property interests are held by leases from third parties. A
title opinion is typically obtained prior to the commencement of drilling
operations on properties. Horizontal Ventures 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. Horizontal Ventures' properties are
subject
to customary royalty interests, liens for current taxes and other burdens which
Horizontal Ventures believes do not materially interfere with the use of or
affect the value of such properties. Horizontal Ventures performs only a
minimal title investigation before acquiring undeveloped properties.
HORIZONTAL VENTURES LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Horizontal
Ventures is a party or to which any of its property is subject except as set
forth below.
On March 11, 1997, Horizontal Ventures commenced a lawsuit in the District
Court for Tulsa County, Oklahoma against David J. LaPrade, a former officer and
director of an Horizontal Ventures predecessor entity, and Mr. LaPrade's current
employer. Horizontal Ventures seeks to recover losses from the alleged breach of
fiduciary duty, misappropriating confidential information and property of
Horizontal Ventures, using it in unfair competition with Horizontal Ventures,
interfering with Horizontal Ventures' existing and prospective relationships
with its customers, interfering with Horizontal Ventures' relationships with its
employees, and conversion of Horizontal Ventures property. Mr. LaPrade has made
counterclaims against Horizontal Ventures 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. Horizontal Ventures believes that the ultimate outcome of
this litigation will not have a material adverse effect on Horizontal
Ventures' financial condition or results of operations.
HORIZONTAL VENTURES 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.
Overview
In view of significant material changes to Horizontal Ventures 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 Horizontal Ventures. 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 Horizontal Ventures or on a service
basis for major oil and gas companies.
Since August of 1997 Horizontal Ventures, 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.
Horizontal Ventures' 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 Horizontal Ventures. Management spent a considerable amount of its time in
this process and intends to now focus on implementing its business strategy
hereon.
Horizontal Ventures' 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 Horizontal Ventures' 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 Horizontal Ventures.
Since 1997, Horizontal Ventures 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, Horizontal Ventures drilled three horizontal wells in the Cat Canyon
field, namely UCB-09, UCB-38 and UCB-28. Each well was drilled utilizing
Horizontal Ventures' 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 Horizontal Ventures' long-term strategy and the known sand problem in
the Cat Canyon basin, Horizontal Ventures 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 Horizontal Ventures 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
Horizontal Ventures' lease in the Cat Canyon basin. Following this drilling
operation and completion technique definition, Horizontal Ventures proceeded
with its discussions with Saba with the intent of applying this technique on
Saba's reserves.
Horizontal Ventures 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 Horizontal Ventures of the Saba transactions,
Horizontal Ventures' 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, Horizontal Ventures 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 Horizontal Ventures' 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
Horizontal Ventures' results of operations for those periods are considered
by management not to be representative of the Company's long-term potential.
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 Horizontal Ventures through its
re-structuring process. Minimum operations were maintained with only long-term
service contracts completed. As during these years Horizontal Ventures 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 Horizontal Ventures' 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 Horizontal Ventures 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 Horizontal Ventures' 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
Horizontal Ventures' 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, Horizontal
Ventures incurred significant repair expenses resulting from the El Nino
storms in California during February 1998.
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 Horizontal Ventures' acquisition and financing efforts
related to the Saba transactions, the completion of Horizontal Ventures'
bankruptcy reorganization, and related SEC reporting requirements.
Liquidity and Capital Resources
Working capital increased approximately $3.4 million from a negative $275,880 at
December 31, 1996 to $3,132,934 at December 31, 1997. 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
Horizontal Ventures' 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, Horizontal Ventures 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. Horizontal Ventures 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 Horizontal Ventures' liquid assets totaled $3,932,647 which
includes cash and cash equivalents, time deposits and funds held in escrow.
Horizontal Ventures' 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, Horizontal Ventures 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 Horizontal Ventures' final payment on the Cat Canyon field and
the drilling program expenditures related thereto, and legal and consulting
fees resulting from Horizontal Ventures' acquisition and financing efforts
during 1998. Long-term liabilities as of September 30, 1998 amounted to
$52,283.
In connection with the proposed merger with Saba, Horizontal Ventures is
endeavoring to obtain bridge financing in the form of a $2 million 15% debenture
secured by its limestone reserves.
Horizontal Ventures' 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 Horizontal Ventures' acquisition and
financing efforts during 1998.
Horizontal Ventures' 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.
Horizontal Ventures' 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.
Generally the Company has few problems with accounts receivable. Occasionally
disputes over results of contract drilling arise which result in
reclassification
of accounts receivable to "doubtful." Since service drilling is no longer a
principal objective of the Company we expect these problems to have only a
limited impact on future operations and liquidity.
LIQUIDITY
Under the direction of Horizontal Ventures' management and strategy, the
merged company will have a high liquidity and low capital requirements.
Specifically, Horizontal Ventures' intends to achieve the following:
* Sell non-core assets to offset approximately $25,000,000 in Saba debt.
* Recapitalize the merged company with $20,000,000 through a financing.
HVI has concluded discussions with a financial institution that could
provide such finances to the merged company. The finances are subject
to customary due diligence.
* The utilization of the in-house proprietary and cost effective
horizontal drilling technology, self operated fields, wholly-owned
asphalt refinery collectively provide for a low copex and high cash
flow. The merged company expects to have an annual copex of
$5,000,000 funded by its cash flow.
The Horizontal Ventures board also believes that the acquisition of Saba
through the Horizontal Ventures 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 Horizontal Ventures and of shareholder
value. Further, the acquisition of Saba will give Horizontal Ventures 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 Horizontal Ventures will be able to secure future
financings. For the foregoing reasons, the Horizontal Ventures Board believes
that the Horizontal Ventures Share Issuance is in the best interest of
Horizontal Ventures and its shareholders.
RECENT ACCOUNTING PRONOUNCEMENTS:
The following new accounting pronouncements have been issued which may
affect the Company upon their adoption in future accounting periods.
Statement Of Position Number 98 - 5, issued by the Accounting Standards
Executive
Committee of the American Institute of CPAs, entitled Reporting On The Cost Of
Start-Up Activities, became effective January 1, 1999. This pronouncement
requires that costs of start-up activities, including organization costs, be
expensed as incurred. Initial application of this SOP will be reported by the
Company as the cumulative effect of a change in accounting principle, as
described in Accounting Principles Board Opinion No. 20, Accounting Changes.
When
adopting this SOP, entities are not required to report the pro forma effects of
retroactive application. The Company will expense approximately $25,000 in 1999
as a result of the implementation of this pronouncement.
FASB Statement Number 132, Employers Disclosures about Pensions and Other
Postretirement Benefits, becomes effective in 1999 and revises employers'
disclosures about pension and other postretirement benefit plans, but does not
change the measurement or recognition of those plans. Because the Company does
not currently have in effect any pension or postretirement plans, this
pronouncement is not expected to affect the Company.
FASB Statement Number 133, Accounting for Derivative Instruments and Hedging
Activities, becomes effective for all fiscal quarters beginning after June 15,
1999, and prescribes accounting and disclosure requirements for derivative
instruments and hedging activities. This pronouncement is not expected to
affect
the Company because it has no such investments.
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. Horizontal ventures'
drilling and other equipment does not make use of embedded chips, and Horizontal
Ventures believes that its equipment will not be affected by the Year 2000.
Horizontal Ventures does not utilize any proprietary computer software, but uses
commercially available accounting and drilling plan software programs such as
Excel from vendors such as Microsoft Corporation and Peachtree. Horizontal
Ventures has been advised that the software it uses is Year 2000 compliant.
Horizontal Ventures has not completed its assessment of Year 2000 issues, in
particular the process of verification of whether vendors, suppliers and
significant customers with which Horizontal Ventures has material relationships
are Year 2000 compliant. Under a worst-case scenario, if Horizontal Ventures and
such third parties are unable to address Year 2000 issues in a timely manner, it
could result in material financial risk to Horizontal Ventures, including
supplier and service customer delays resulting in short-term delay of revenue
and
substantial unanticipated costs. Accordingly, Horizontal Ventures plans to
devote all resources necessary to resolve significant Year 2000 issues in a
timely manner. Horizontal Ventures does not expect that costs of remediating its
Year 2000 issues will be material. Horizontal Ventures does not currently have a
Year 2000 contingency plan. Horizontal Ventures is currently not able to
determine whether the Year 2000 will have a material effect on Horizontal
Ventures' financial condition, results of operations or cash flows.
INFLATION
Horizontal Ventures does not believe that inflation will have a material
impact on Horizontal Ventures' future operations.
HORIZONTAL VENTURES CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During Horizontal Ventures' two most recent fiscal years and through the
date of this Joint Proxy Statement/Prospectus, Horizontal Ventures has not had
any changes in or disagreements with its independent accountants on matters
of accounting and financial disclosure.
DIRECTORS AND EXECUTIVE OFFICER OF HORIZONTAL VENTURES
The directors and executive officer of Horizontal Ventures are as follows:
<TABLE>
Name Age Positions
---- --- ---------
<S> <C> <C>
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. In January 1999,
Mr. Grewal was appointed as Saba's Chief Executive Officer and President. 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. In January 1999, Mr. Holtrop was
appointed to the Board of directors of Saba. Mr. Holtrop has a Ph.D. and a MSC
in Mining Engineering from the Delft University of Technology.
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
by 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 Horizontal Ventures' 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 Horizontal
Ventures 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 Horizontal Ventures' last two completed
fiscal years by Horizontal Ventures' Executive Officers.
(a) Summary Compensation Table
--------------------------
</TABLE>
<TABLE>
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>
- -------------
(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, Horizontal Ventures did not pay
its executive officers any bonuses or other compensation.
(3) Stock grants approved as part of Horizontal Ventures' bankruptcy
reorganization plan.
No other officer, director or employee of Horizontal Ventures or its
subsidiaries received total compensation in excess of $100,000 during the last
two fiscal years. The Company has an employment agreement with Randeep S.
Grewal. No other form of compensation was paid during 1997.
(b) Option and Long-Term Compensation Tables
<TABLE>
Long Term Compensation
Awards Payouts
------ -------
Restricted Securities LTIP
Stock award(s) Underlying Payouts
($) Options/SAYS (#) ($)
------------- ---------------- ------
Name/Position
- -------------
<S> <C> <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>
Randeep S.
Grewal 150,000 100% $5.00 9/7/07
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
<TABLE>
Value of
Number of unexercised in-the-
unexercised options money options/SAYS
Shares SAYS at FY-end (#) at FY-end (4)
acquired on Value exercisable/ exercisable/
Name exercise (#) realized ($) un-exercisable un-exercisable
- ---- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Randeep S.
Grewal --- --- 0/150,000 0/$975,000
</TABLE>
Horizontal Ventures 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, Horizontal Ventures 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
Horizontal Ventures' benefit plans and is entitled to bonuses and incentive
compensation as determined by the Board of directors of Horizontal Ventures. 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
Horizontal Ventures.
On March 12, 1998, Horizontal Ventures entered into a Confidential
Termination and Settlement Agreement and Complete Release with Mr. Wedel
relating to his resignation as an executive of Horizontal Ventures and as a
member of the Board of Directors. Mr. Wedel will receive a $50,000 one-time
severance payment. Additionally, Horizontal Ventures 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
Horizontal Ventures' common stock. Horizontal Ventures 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 Horizontal Ventures and specifically with Horizontal Ventures' 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 Horizontal Ventures which he acquired as a result of his
employment. Horizontal Ventures and Mr. Wedel agreed to mutually release the
other from any claim or action arising from Mr. Wedel's Executive Employment
Agreement with Horizontal Ventures.
(e) Director Compensation
---------------------
Each director who is not an employee of Horizontal Ventures (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, Horizontal Ventures has three Outside
Directors. No compensation was paid to any Outside Director during fiscal
1997 and is none is planned for the immediate future.
Horizontal Ventures has no knowledge of any arrangement or understanding
in existence between any executive officer named above and any other person by
which any such executive officer was or is to be elected to such office or
offices. All officers of Horizontal Ventures serve at the pleasure of the Board
of Directors. No family relationship exists among the directors or
executive officers of Horizontal Ventures. All Officers of Horizontal
Ventures will hold office until the next Annual Meeting of the
shareholders of Horizontal Ventures. There is no person who is not a
designated
Officer who is expected to make any significant contribution to the business
of Horizontal Ventures. The executive officers of Horizontal Ventures 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 Horizontal Ventures
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 Horizontal Ventures
receives a working interest in Horizontal Ventures' oil and gas properties.
Overriding Royalty Income
- -------------------------
Horizontal Ventures has historically assigned overriding royalty interests
to certain of its employees. Employees own overriding royalty interests on oil
and gas wells invested in by Horizontal Ventures. Conflicts of interest may
arise between employees owning overriding royalty interests in Horizontal
Ventures-operated locations and Horizontal Ventures.
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
Horizontal Ventures. 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 Horizontal Ventures and an officer, director,
principal stockholder or affiliate of Horizontal Ventures will be approved by a
majority of the uninterested directors, only if they have determined that the
transaction is fair to Horizontal Ventures and its stockholders and that the
terms of such transaction are no less favorable to Horizontal Ventures than
could be obtained from unaffiliated parties.
HORIZONTAL VENTURES SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of January 22, 1999, the Common stock
ownership of each person known by Horizontal Ventures to be the beneficial
owner of 5% or more of Horizontal Ventures Common Stock, all directors and
the executive officer individually and all directors and the executive officer
of Horizontal Ventures 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 Horizontal
Ventures, which may at a subsequent date result in a change of control of
Horizontal Ventures. As of January 22, 1999, there were 2,910,981 shares of
Horizontal Ventures Common stock issued and outstanding.
<TABLE>
<CAPTION>
Amount of Beneficial
Ownership
---------
Name and Address Common Percent of
of Beneficial Owner Stock(1) Class
------------------- -------- --------
<S> <C> <C>
International Publishing 276,093 9.5%
Holding s.a.
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 -0-%
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)
</TABLE>
- ---------------
(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. By a Stock Exchange
Agreement dated November 23, 1998, among Horizontal Ventures and the former
shareholders of Saba Aquisub, Inc., including Capco, Capco has delivered a
proxy to Randeep S. Grewal conferring on Mr. Grewal voting power with
respect to the Horizontal Ventures Common stock owned by Capco.
(3) Includes presently exercisable options to acquire 150,000 shares of
Horizontal Ventures Common stock and 1,340,000 shares as to which Mr.
Grewal has voting power under a proxy from Capco.
RELATED PARTY TRANSACTIONS
During the last two fiscal years, there have been no transactions between
Horizontal Ventures and any officer, director, nominee for election as
director, or any shareholder owning greater than five percent (5%) of
Horizontal Ventures' outstanding shares, nor any member of the above referenced
individuals' immediate family, except as set forth below.
Randeep S. Grewal, Horizontal Ventures' Chairman and Chief Executive
Officer, also receives an overriding royalty of 2 percent of all oil and
gas production received by Horizontal Ventures during the term of his
employment. The Horizontal Ventures Board of directors has authorized the
issuance of 30,000 shares of Horizontal Ventures Common stock to Mr. Grewal upon
the Effective Date of the Merger.
On March 12, 1998, Richard Wedel, then an executive officer and director of
Horizontal Ventures, resigned and entered into an agreement providing for
certain severance benefits and mutual covenants. Horizontal Ventures 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 Horizontal
Ventures Common stock held by Mr. Wedel.
It is Horizontal Ventures' 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. 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 Britain. (See Note 16 to the Consolidated
Financial Statements for a description of operating results by geographic
region)
Saba depends on three material customers. These customers are Ecopetrol,
Petrosource Refining Corp. and Omimex Resources, Inc.
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
standardized measure 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 with the
standardized measure value of such reserves. See "Properties - Reserve
Estimates."
Saba also owns an asphalt refinery in Santa Maria, California, 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".
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. 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,
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., 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 of its Series A Convertible Preferred
Stock. In the interim between the execution of the preliminary agreement and
the definitive Plan and Agreement of Reorganization, 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,
entered into the Merger Agreement. As part of the Merger Agreement, Omimex
lent to Saba approximately $4.2 million, 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.
The Parties agreed by mutual consent to terminate and release each other
from the Merger agreement effective September 15, 1998 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, by 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,
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 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 connection with various borrowings from
the bank, Mr. Chaudhary has guaranteed payment of approximately $3,000,000 of
Saba's debt to such bank.
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.,
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. entered into certain transactions
that relate to the acquisition of securities of Saba, which have been reported
in a Schedule 13# filed by Horizontal Ventures. Horizontal Ventures 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, Horizontal Ventures entered into a Preferred Stock
Transfer Agreement with RGC International Investors, LDC, by which Horizontal
Ventures 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., the largest shareholder of Horizontal Ventures.
Under the Preferred Stock Transfer Agreement, Horizontal Ventures 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 Horizontal Ventures' payment of
$500,000 to RGC. Horizontal Ventures 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 Horizontal Ventures, 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 Horizontal Ventures
and Saba. See "Preferred Stock." Horizontal Ventures currently is negotiating
with RGC to extend and amend the Preferred Stock Transfer Agreement to enable
Horizontal Ventures to acquire the additional 6,310 shares of Series A Preferred
Stock held by RGC.
On October 8, 1998, Horizontal Ventures entered into a Common stock Purchase
Agreement by which Saba agreed to sell and issue to Horizontal Ventures 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. Horizontal Ventures
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 Horizontal Ventures 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, between Horizontal
Ventures and IPH, Horizontal Ventures 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. Horizontal Ventures has the option of paying such
exercise price to IPH in the form of cash or shares of Horizontal Ventures
common stock.
Horizontal Ventures also has 3,080,000 shares of Saba's Common Stock
in open market purchases and other negotiated transactions.
Upon the execution of the Common Stock Purchase Agreement, Randeep S.
Grewal, a director and executive officer of Horizontal Ventures, was appointed
to Saba's Board of Directors. Upon the closing of the Common stock Purchase
Agreement, a second director designated by Horizontal Ventures is to be
appointed
to Saba's Board of directors. In addition, a letter agreement between
Horizontal Ventures and Saba dated October 8, 1998, provided that upon
Horizontal Ventures' conversion of the 7,000 shares of Series A Preferred Stock
purchased from RGC a third director designated by Horizontal Ventures was to be
appointed to Saba's Board of directors. In connection with the foregoing, Saba
agreed to obtain the resignations of three of its directors, resulting in the
three designees of Horizontal Ventures representing a majority of seats on
Saba's five member Board of directors.
On December 7, 1998, Horizontal Ventures 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 Horizontal Ventures common stock for
each six shares of Saba's common stock outstanding. That exchange ratio is
based upon:
* 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 Horizontal Ventures on December 7, 1998),
* 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
* the average closing price of Horizontal Ventures' common stock of
$12.14 during the same period.
Proforma financial statements of Horizontal Ventures and Saba as a combined
company have been included with this document. See "Unaudited Pro Forma
Combined 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, by 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. 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:
* 115% of the stated value plus accrued dividends, and
* 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 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 by this Prospectus, Saba will obtain
stockholder approval of the issuance of those shares or a waiver from AMEX Rule
13.
BANKRUPTCY OF SABACOL, INC.
On December 15, 1998, Saba disclosed that Sabacol, Inc., a
wholly-owned subsidiary of the Company, filed a voluntary petition under Chapter
11 of the United States Bankruptcy Code in the Central District of California on
December 11, 1998. Sabacol's assets, located solely in Colombia, consist of a
50% interest in a 118-mile pipeline and varying interests in heavy oil
producing
properties. At the time of filing, Sabacol had a net book value of
approximately
$5.3 million with liabilities of $4.6 million. For the nine months ended
September 30, 1998, the average daily production of Sabacol's interest in the
Colombian properties was 2300 Bopd and gross revenues were approximately
$5.9
million with a negative cash flow. Sabacol had filed the bankruptcy
petition to protect its asset base and to provide adequate time to develop a
re-organization plan. Sabacol intends to file a reorganization plan that may
include the disposition of its Colombian assets. A new management team has been
appointed for Sabacol to protect its assets and develop an effective
re-organization plan. There is no assurance, however, that a reorganization plan
beneficial to Sabacol will be consummated. Saba is not involved the bankruptcy
proceedings, has not guaranteed any of the Sabacol debt, and Sabacol's creditors
do not have any right to proceed against Saba. Therefore, 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, and again in December of 1998 the American Stock Exchange
contacted Saba to inquire about Saba's continued listing eligibility
following its report of losses, bank indebtedness, going concern, to inquire
about the independent status of Saba's outside directors and in December
relative
to the Sabacol bankruptcy. To date the listing has been consented to until the
merger is completed.
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.
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."
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 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. 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.
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. Saba is
pursuing the sale of certain producing oil and gas assets in these areas. (See
"Saba - Recent Developments - Sale of Certain Assets").
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.
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. by 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:
* Coalinga exploration project in California,
* other California projects, where Saba is actively seeking a farmout
for some of its properties and where development work has been
delayed,
* Indonesia, where spending has been significantly reduced, and
* 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.
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.
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 liabilities 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 and Saba's predecessor in
interest, a subsidiary of Texaco, Inc. 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
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 standardized measure
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.
PROPERTY
At December 31, 1997, on a standardized measure 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.
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 its independent petroleum
engineers Netherland, Sewell & Associates and in Canada, Sproule Associates Ltd.
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.
<TABLE>
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.
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 standardized
measure 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.
In addition to the Cat Canyon Field, Saba has interests in a number of
fields in California, none of which had a standardized measure value equal to
five percent or more of the standardized measure 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 standardized measure 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 standardized measure 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 standardized measure 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.
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
standardized measure 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 standardized measure
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
standardized measure 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:
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."
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 standardized
measure 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 standardized measure value at that date. The
following table provides information concerning Saba's interest in the
commercial areas and fee minerals in Colombia.
<TABLE>
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.
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 Colombian properties in which it has an
interest and has notified the operator of Sabacol's intent to audit all relevant
operating documents and all financial transactions for 1996, 1997 and 1998. Any
potential future action would be based on results of the audit. In December
1998, a new management team was appointed for Sabacol to protect its assets and
develop an effective re-organization plan.
In the event Sabacol's interest in the Colombian pipeline is transferred
to a third party while Sabacol maintains its interest in the Colombian
production, Sabacol may be subject to a tariff in excess of the current rate
charged to Sabacol by the current owner of the remaining 50% interest in the
pipeline. In or about July 1998, the pipeline was affected by guerrilla
activity.
Crude Oil Sales and Pipeline Ownership
All of 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 standardized measure 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."
OIL AND GAS RESERVES
Saba's proved reserves and standardized measure 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. prepared reports on Saba's reserves in
the United States and Colombia and Sproule Associates Limited 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 standardized measure
value thereof. As used herein, the term "proved undeveloped reserves" are
those which can be expected to be recovered from new wells on undrilled acreage,
or from existing wells where a relatively major expenditure is required for
recompletion. Reserves on undrilled acreage shall be limited to those drilling
units offsetting productive units that are reasonably certain of production
when drilled. Proved reserves for other undrilled units can be claimed only
where it can be demonstrated with certainty that there is continuity of
production from the existing productive formation. Under no circumstances
should estimates for proved undeveloped reserves be attributable to any
acreage for which an application of fluid injection or other improved
recovery technique is contemplated, unless such techniques have been proved
effective by actual tests in the area and in the same reservoir. There can be
no assurance that these estimates are accurate predictions of reserves or
of future net revenues from oil and gas reserves or their present value. As
indicated elsewhere, the prices received for oil and gas have declined since the
preparation of the 1997 year end engineering estimates.
<TABLE>
<CAPTION>
ESTIMATED PROVED OIL AND GAS RESERVES
At December 31,
---------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net oil reserves (MBbl)
Proved developed producing........ 10,278 12,029 13,977
Proved developed non-producing.... 590 1,367 2,639
Proved undeveloped................ 1,664 13,283 7,309
------ ------ ------
Total proved oil reserves (MBbl).. 12,532 26,679 23,925
====== ====== ======
Net natural gas reserves (MMcf)
Proved developed producing......... 9,371 12,659 11,995
Proved developed non-producing..... 871 1,516 5,407
Proved undeveloped................. 9,237 9,490 13,894
------ ------ ------
Total proved natural gas
reserves (MMcf) ................ 19,479 23,665 31,296
====== ====== ======
Total proved reserves (MBOE).......... 15,778 30,623 29,141
====== ====== ======
</TABLE>
Estimates of proved reserves may vary from year to year reflecting changes
in the price of oil and gas and results of drilling activities during the
intervening period. Reserves previously classified as proved undeveloped may be
completely removed from the proved reserves classification in a subsequent year
as a consequence of negative results from additional drilling or product price
declines which make such undeveloped reserves non-economic to develop.
Conversely, successful development and/or increases in product prices may result
in additions to proved undeveloped reserves.
<TABLE>
<CAPTION>
ESTIMATED PRESENT VALUE OF PROVED RESERVES
At December 31,
-------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
As used herein, the term has the meaning defined by the SEC as set forth in the
Table of Contents to this document. 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 Company - Recent
Developments - Terminated Business Combination."
The formula for determining the price paid for oil produced at the
Teca-Nare Fields is based upon the average of two price baskets of fuel: (A) a
crude fuel oil basket (1% sulphur United States Gulf Coast and Ecopetrol fuel
oil for exportation) and (B) an international crude basket (Maya, Mandji and
Isthmus) adjusted for gravity API and sulphur content. 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>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------------- ----------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Production Data:
Oil (MBbls) 1,227 1,968 2,107 1,581 1,431
Gas (MMcf) 1,337 1,651 2,408 1,767 1,831
Total (MBOE) 1,450 2,243 2,508 1,875 1,736
Average Sales
Price Data
(Per Unit):
Oil (Bbls) $ 12.22 $ 14.43 $ 13.73 $ 13.81 $ 8.80
Gas (Mcf) 1.45 1.88 2.09 1.95 1.73
BOE 11.69 14.05 13.54 13.48 9.08
Selected Data
per BOE:
Production
costs (1) $ 7.29 $ 6.51 $ 6.62 $ 6.53 $ 5.84
General and
adminis-
trative 1.27 1.72 1.93 1.77 2.67
Depletion,
depreciation
and
amortization 1.92 2.43 2.84 2.63 3.05
</TABLE>
- --------------------
(1) Production costs include production taxes.
DRILLING ACTIVITY
The following tables sets forth certain information for each of the years
in the three-year period ended December 31, 1997 and the nine months ended
September 30, 1998, relating to Saba's participation in the drilling of
exploratory and development wells in:
United States
<TABLE>
Year Ended December 31,
------------------------------------------- Nine Months Ended
1995 1996 1997 September 30, 1998
-------------- -------------- ------------ ----------------
Gross(1) Net(2) Gross(1) Net(2)Gross(1) Net(2) Gross (1) Net (2)
--------- ------- ----- --- --- ------- ------ --- ----- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory
Wells
Oil - - - - 2 - 1 0.5
Gas - - 3- 1.35 - - - -
Dry (3) 3 .46 3 1.28 - - 1 0.2
Development
Wells
Oil 4 1.51 10 6.59 10 10.00 - -
Gas 1 .10 3 .64 - - - -
Dry (3) 1 .04 1 .35 1 1.00 - -
Total Wells
Oil 4 1.51 10 6.59 12 11.00 1 0.5
Gas 1 .10 6 1.99 - - - -
Dry (3) 4 .50 4 1.63 1 1.00 1 0.2
</TABLE>
- ----------------------
(1) A gross well is a well in which a working interest is owned. The number of
gross wells is the total number of wells in which a working interest is
owned.
(2) A net well is deemed to exist when the sum of fractional ownership working
interest in gross wells equals one. The number of net wells is the sum of
fractional working interests owned in gross wells expressed as whole numbers
and fractions
thereof.
(3) A dry hole is an exploratory or development well that is not a producing
well.
Colombia and Great Britain
<TABLE>
Year Ended December 31,
------------------------------------------- Nine Months Ended
1995 1996 1997 September 30, 1998
-------------- -------------- ------------ ------------------
Gross(1) Net(2) Gross(1) Net(2)Gross(1) Net(2) Gross (1) Net (2)
--------- ------- ----- --- --- ------- ------ --- ----- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory
Wells
Oil - - - - - - - -
Gas - - - - - - - -
Dry (3) - - - - - - 1 0.38
Development
Wells
Oil - - - - 13 3.25- 7 1.75
Gas - - - - - - - -
Dry (3) - - - - - - - -
Total Wells
Oil - - - - 13 3.25- 7 1.75
Gas - - - - - - - -
Dry (3) - - - - - - 1 0.38
</TABLE>
- ------------
(1) A gross well is a well in which a working interest is owned. The number of
gross wells is the total number of wells in which a working interest is
owned.
(2) A net well is deemed to exist when the sum of fractional ownership working
interest in gross wells equals one. The number of net wells is the sum of
fractional working interests owned in gross wells expressed as whole
numbers and fractions thereof.
(3) A dry hole is an exploratory or development well that is not a producing
well.
Canada
<TABLE>
Year Ended December 31,
------------------------------------------- Nine Months Ended
1995 1996 1997 September 30, 1998
-------------- -------------- ------------ ------------------
Gross(1) Net(2) Gross(1) Net(2)Gross(1) Net(2) Gross (1) Net (2)
--------- ------- ----- --- --- ------- ------ --- ----- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory
Wells
Oil - - - - - - - -
Gas - - - - - - - -
Dry (3) - - 1 .01 1 1.00 - -
Development
Wells
Oil - - - - - - - -
Gas 1 .09 - - - - - -
Dry (3) - - - - - - - -
Total Wells
Oil - - - - - - - -
Gas 1 .09 1 .01 - - - -
Dry (3) - - - - 1 1.00 - -
</TABLE>
- ------------
(1) A gross well is a well in which a working interest is owned. The number of
gross wells is the total number of wells in which a working interest is
owned.
(2) A net well is deemed to exist when the sum of fractional ownership working
interest in gross wells equals one. The number of net wells is the sum of
fractional working interests owned in gross wells expressed as whole
numbers and fractions thereof. No reduction is made for the minority
interest in Beaver Lake.
(3) A dry hole is an exploratory or development well that is not a producing
well.
PRODUCTIVE OIL AND GAS WELLS
The following table sets forth 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>
Oil Gas Total
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
United States 257 161.7 37 22.3 294 184
Canada (1) 27 9.6 43 10.9 70 20.5
Colombia 397 99.3 - - 397 99.3
--------- --------- -------- ------- ------ -------
681 270.6 80 33.2 761 303.8
========= ========== ======== ======= ====== =======
</TABLE>
- ------------
(1) No reduction is made for the minority interest in Beaver Lake.
In addition to its working interests, 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>
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 interest to and/or from the Company may not
be publicly recorded.
Substantially all of the Company's properties, including its stock in its
subsidiaries are hypothecated to secure the Company's current and future
indebtedness to its bank. The Company's working interest in properties may be
subject to lienholders by non-payment. The Company expects liens to be filed
against its assets and to be subject to lawsuits arising out of the
Company's non-payment or untimely payment of its obligations. The Santa Maria
Refinery and the associated real property owned by the Company is encumbered by
a first trust deed in the amount of $1.0 million in favor of the seller of the
refinery and is in place to secure the Company's performance of obligations as
provided under the terms of the purchase and sale agreement. Oil and gas leases
in which Company has an interest may be deficient and subject to action by the
Company.
The Company may require ratifications for various leases for Vacca Tar Sand
in California. Maintenance of the Company's interest is subject to fulfillment
of drilling and other obligations contained in its agreements with the operator
of the property. Maintenance of the leases is dependent upon fulfillment of
various drilling and producing operations over which the Company has little if
any control. Consequently, it is possible for the Company to lose its interests
in such leases through action or inaction of the operator. The Company
understands that the leases have been essentially non-productive for various
periods of time, which fact may result in termination of the leases. The company
does not follow operations on the leases and consequently is not aware of
whether the leases are in good standing or may be subject to termination.
AVERAGE SALES PRICE AND PRODUCTION COST
The following table sets forth information concerning average per unit
sales price and production cost for Saba's oil and gas production for the
periods indicated:
<TABLE>
Nine Months Ended
Year Ended December 31, September 30,
- ------------------------------------------------------------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average sales
price per BOE
California $ 12.55 $ 15.10 $ 13.49 $ 13.21 $ 7.94
Colombia 9.44 12.49 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. 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.
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. Should the seller not complete the work during
the five-year period because of uncertainties in the language of the purchase
agreement, there is a risk that a court could interpret the agreement to shift
the burden of remediation to Saba.
During June 1998, Saba was advised by the seller's consulting engineers that
groundwater monitoring conducted in May 1998 had revealed levels of benzene
in all four monitoring wells which exceeds allowable limits. Prior to that
time, groundwater monitoring wells have not shown evidence of groundwater
contamination. 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, 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 post refinery operations. In its
notification, the RWQCB stated that its perspective of the site has changed and
its water quality concerns are increased since the groundwater table elevation
has risen to be proximate to the base of the hydrocarbon contaminated soil.
Ultimate responsibility for remediation of the foregoing condition depends
upon an interpretation of the contract of purchase and factual matters. 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 consent
prior to entering into any agreement with respect to hazardous materials on the
adjoining property.
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.
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 truck
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.
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 by 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. 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 discovery.
Orleans Levee Board v. Saba Energy of Texas, Inc., et al. (Docket No.
98-14233 Civil District Court, Parish of Orleans, State of Louisiana, August
1998). With respect to its interest in the Potash Field, Louisiana, 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 by 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 by
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.
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 by 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.
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.
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."
PAGE
<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>
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
General
and
adminis-
trative 2,503 1,882 2,005 3,920 5,125 3,468 4,974
Depletion,
depreciation
and
amortization 1,853 2,041 2,827 5,527 7,265 5,011 5,500
Writedown
of oil and
gas - - - - - - 17,852
properties
-------- ---------- -------- -------- -------- ------ -------
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)
========== ========= ======== ======== =======================
Net earnings
(loss) per
share
Basic $ (0.01) $ 0.06 $ 0.07 $ 0.43 $ 0.23 $ 0.24 $ (2.17)
Diluted $ (0.01) $ 0.06 $ 0.06 $ 0.37 $ 0.22 $ 0.23 $ (2.17)
Weighted average
common shares
outstanding:
Basic 7,065 7,996 8,327 8,804 10,650 10,596 10,994
Diluted 7.065 7,996 8,699 11,825 12,001 12,012 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
Capital
expenditures
$ 2,372 $ 6,573 $ 17,015 $ 12,776 $ 35,270 $ 29,080 $ 9,216
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
Redeemable -- -- -- 8,511 7,169
preferred stock
Stockholders' 4,407 6,283 7,848 17,715 23,640 30
equity
- --------------
</TABLE>
PAGE
<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)
QUARTERS ENDED
- ----------------------------------------------------------------------
1996 1997 1998
----------------- ------------------ -----------------
Mar31 June 30Sept 30 Dec 31 Mar 31June 30Sept30 Dec 31 Mar 31June 30Sept30
------ ---- ------ ------ ------ ------ ------ ------------ ----- -------
Revenues
[S] [C] [C] [C] [C] [C] [C] [C] [C] [C] [C] [C]
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
revenues
$7,387$8,003$7,763$10,049 $9,563 $8,272 $8,943 $9,218 $6,473$6,406 $5,804
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
of oil
and gas
properties
-- -- -- -- -- -- -- -- $10,700$7,095 $57
Net income
(loss)
$755 $734 $731 $1,544 $1,442 $507$599(150)$(12,016)$(9,577)$(1,905)
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)
PAGE
<PAGE>
SABA 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.
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.
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.
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.
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.
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.
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.
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 outstanding 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 Horizontal Ventures will result in an aggregate 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.
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 Horizontal Ventures
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.
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.
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.
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 since its drilling equipment does not contain embedded chips and
its other operating equipment is not heavily automated the 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's contingency
plan is essentially to manually perform all necessary tasks. Saba believes, as
part of the 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. Under a worst-case scenario, 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 delays, 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
After approximately a month of interviews and discussions, Saba's board of
directors approved the engagement of Arthur Andersen LLP as Saba's independent
accountants, which agreement was finalized on February 10, 1999.
By a letter delivered to Saba Petroleum Company on February 3, 1999,
PricewaterhouseCoopers LLP resigned as the independent accountants for Saba.
Such letter did not indicate any reason for the resignation.
The reports of PricewaterhouseCoopers on the Saba financial statements for
the years ended December 31, 1997 and 1996 did not contain an adverse opinion
or a disclaimer of opinion, and were not qualified as to uncertainty, audit
scope, or accounting principles. The report of PricewaterhouseCoopers dated
April
15, 1998 contained an explanatory paragraph regarding Saba's ability to continue
as a going concern.
During Saba's two most recent fiscal years and through the date of the
resignation of PricewaterhouseCoopers as Saba's independent accountants,
Saba did
not have any disagreements with PricewaterhouseCoopers on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
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>
Name Age Position
- ---- --- --------
<S> <C> <C>
Randeep S. Grewal....... 33 Director, Chief Executive Officer and
President of Horizontal Ventures, Inc.;
Chief Executive Officer Sabacol, Inc.,
Saba Petroleum, Inc., Santa Maria
Refining Company and Saba Energy of
Texas, Inc.
William N. Hagler......... 66 Director and Chairman of the Board
Dr. Charles A. Kohlhaas... 63 Director, President of Sabacol, Inc.
Alex S. Cathcart.......... 64 Director
Dr. Jan F. Holtrop....... 62 Director
Burt M. Cormany......... 70 President and Chief Operating Officer of
Santa Maria Refining Company; President
Of Saba Petroleum, Inc.
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
Randeep S. Grewal became a director of Saba on October 8, 1998, the
Chairman/Chief Executive Officer of Sabacol, Inc. in December 1998, and the
Chief Executive Officer and President of Saba on January 15, 1999. Mr. Grewal
is a director and Chairman and Chief Executive Officer of Horizontal Ventures,
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. 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.
Dr. Charles A. Kohlhaas a director since August, 1998 and interim CEO from
June to August of 1998 of Saba and has been President of Sabacol, Inc. since
December 1998. Dr. Kohlhaas 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.
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.
Mr. Holtrop has been a director of Saba since January 11, 1999. Mr.
Holtrop
is a director of Horizontal Ventures, which is a publicly reporting company. Mr.
Holtrop has been a senior Production Technology professor at 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.
Burt M. Cormany has been President of Santa Maria Refining Company since
July 1994 and was appointed President of Saba Petroleum, Inc. on January 29,
1999. 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.
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.
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>
Long Term
Compensation
Name and Annual Compensation Other Securities
principal Annual Underlying All Other
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 1996 153,000 20,000 (3) --- 4,750
Board, 1995 150,000(2) 1,731 (3) 200,000 ---
Chief
Executive Officer
Walton C.
Vance 1997 $120,700 $2,254 (3) --- $4,009
Vice 1996 101,633 20,000 (3) --- 2,259
President, 1995 --- --- --- --- ---
Chief
Financial
Officer, and
Secretary(6)
Burt
Cormany 1997 $110,040 $9,170 (3) 20,000 $1,351
President 1996 113,386 8,330 (3) --- 5,549
and Chief 1995 --- --- --- --- ---
Operating
Officer of
Santa Maria
Refining
Company
Bradley T.
Katzung 1997 $77,655 $70,200 (3) --- $1,097
Executive 1996 --- --- --- --- ---
Vice 1995 --- --- --- --- ---
President
& General
Manager - USA (7)
Rodney C.
Hill 1997 $121,636 --- --- 125,000 ---
Vice 1996 --- --- --- --- ---
President- 1995 --- --- --- --- ---
Legal
Affairs(8)
</TABLE>
- ------------------
(1) Resigned from all offices including Chief Executive Officer and President
and as a director and Chairman of the Board on November 12, 1998.
(2) Includes amounts reimbursed by 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 $50,000 or 10%
of such officer's annual salary and bonus for such year.
(4) Represents the contributions made by Saba on behalf of these individuals
to Saba's 401(k) Plan.
(5) Consists of options covering 200,000 shares granted by Saba's 1996
Incentive Equity Plan; 200,000 shares of deferred Common stock; and 100,000
performance shares issuable if Saba meets 1998 earnings test.
(6) Resigned from all offices including Chief Financial Officer and Secretary
on July 21, 1998 and as a director on August 28, 1998.
(7) Employment Agreement expired November 8, 1998.
(8) Resigned as Vice President - Legal Affairs on December 31, 1997 and as a
director on June 6, 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following stock options were granted during 1997 by Saba to the named
executives.
<TABLE>
Potential Realized
Value At
Assumed annual
Rates of Stock Alternative
Price to (f) and
Individual Grants Appreciation For (g); Grant
Option Term Date Value
- ---------------------------------------------- ------------------- -----------
(a) (b) (c) (d) (e) (f) (g) (h)
Number of
Securities % of Total
Underlying Options/
Options/ SARs
SARs Granted to
Granted (f) Employees Exercise or Grant Date
Name (in in Fiscal Base Expiration Present
thousands) Year Price($/Sh.) Date 5%($) 10%($)Value $
- --------------------------------------------------------- ------------- ------
<S> <C> <C> <C> <C> <C> <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.
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>
Securities Underlying
Number of Unexercised Value of Unexercised,
Shares Options SARs at In-the Money Options at
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.
Burt Cormany Employment Agreement. Saba and Burt Cormany have agreed to
extend an employment agreement for a another two-year term expiring on December
31, 2000, by which Mr. Cormany will serve as President and Chief Operating
Officer of Santa Maria Refining Company and as President of Saba Petroleum, Inc.
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 $140,000 in
the first year of the agreement and $150,000 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, by 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 by 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.
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.
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 benefitted 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
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
by a retainer agreement, which may be canceled by Saba at any time, and by 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
expenses and to extend the exercisable term of options granted to acquire 30,000
shares of Common Stock and at the exercise price of $1.50 per share. At
September 30, 1998, 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, and through August 1999, CIBC shall be
entitled to a fee if a sale of the Saba, or any part, is consummated with any of
thirty-four parties identified by CIBC and Saba as having been contacted during
the engagement by CIBC on behalf 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 Horizontal Ventures. Horizontal
Ventures 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.
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, by 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 "Saba - 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.
Saba is in discussions with Mr. Chaudhary, Capco, and their affiliates for a
global settlement of all related party transactions.
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 January 22, 1999, 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, Horizontal
Ventures 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-Convertible Securities/Increasing Dilution
Caused By Falling Stock Price". 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.
<TABLE>
Ownership as a Percent of
Shares Beneficially Common stock Assuming Full
Owned (1) Common stock
Conversion and Exercise
--------- ------------
- -----------------------
Principal Stockholders:
- -----------------------
<S> <C> <C>
Horizontal Ventures, Inc. (2)(3) 6,419,622 41.18%
630 Fifth Avenue, Suite 1501
New York, New York
Directors and Named
Executive Officers:
- -------------------
Dr. Charles A. Kohlhaas 0 *
*
William N. Hagler 14,000 *
*
Randeep S. Grewal (4) 0 *
*
Alex S. Cathcart 0 *
*
Dr, Jan F. Holtrop 0 *
Herb Miller 0 *
*
Burt Cormany 0 *
*
Susan M. Whalen 0 *
*
All Directors and Named Executive
Officers as a Group 25,500 *
*
</TABLE>
- -------------
Rule 13d-3 under the Securities Exchange Act of 1934, involving the
determination of beneficial owners of securities, includes as beneficial
owners of securities, among others, any person who directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise
has, or shares, voting power and/or investment power with respect to such
securities; and, any person who has the right to acquire beneficial
ownership of such security within sixty days through means, including,
but not limited to, the exercise of any option, warrant or conversion of
a security. In making this calculation, options and warrants which are
significantly "out-of-the-money" and therefore unlikely to be exercised
within sixty days are not included in the calculation of beneficial
ownership. For this purpose, 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) By a Stock Exchange Agreement dated November 23, 1998, among Horizontal
Ventures and the former shareholders of Saba Acquisub, Inc. ("SAI"),
Horizontal Ventures acquired the 2,971,766 shares of Saba Common stock held
by SAI and SAI was merged with and into Horizontal Ventures. Prior to the
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%). 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
Horizontal Ventures 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 Horizontal Ventures under the Common stock
Purchase Agreement (of which 333,333 shares have been issued to
Horizontal Ventures as part of an interim closing), (iii) 568,200 shares
of Common stock held by International Publishing Holding s.a. ("IPH")
and subject to a presently exercisable call option by Horizontal
Ventures under the option agreement between Horizontal Ventures and IPH,
with the dispositive and voting power for such 568,200 shares being
effectively shared between Horizontal Ventures and IPH, (iv) 80,000 shares
of Common stock held directly by Horizontal Ventures and (v) 2,971,766
shares of Common stock acquired by the Stock Exchange Agreement and held
directly by Horizontal Ventures.
(4) Mr. Grewal is an affiliate of, but does not control the Board of directors
for, Horizontal Ventures.
SHAREHOLDER PROPOSALS
It is anticipated that Horizontal Ventures' 1999 Annual Meeting of
Shareholders will be held in July 1999. Shareholders of Horizontal Ventures who
intend to present proposals at such Annual Meeting must have submitted their
proposals to Horizontal Ventures on or before December 31, 1998, for inclusion,
if appropriate, in Horizontal Ventures' proxy statement and form of proxy
relating to the 1999 Annual Meeting.
EXPERTS
The consolidated financial statements of Horizontal Ventures 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 Horizontal Ventures 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.
LEGAL MATTERS
Certain legal matters relating to the validity of the shares of Horizontal
Ventures common stock to be issued upon consummation of the merger and the
federal tax consequences of the merger have been passed upon by Ballard Spahr
Andrews & Ingersoll, LLP.
WHERE YOU CAN FIND MORE INFORMATION
Horizontal Ventures 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. Horizontal Ventures 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 Horizontal
Ventures 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.
Horizontal Ventures has filed the Registration Statement to register
with the SEC the shares of Horizontal Ventures 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 Horizontal Ventures,
a proxy statement for the Horizontal Ventures 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.
Horizontal Ventures has supplied all information contained in this Joint
Proxy Statement/Prospectus relating to Horizontal Ventures, 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 Horizontal Ventures Special
Meeting or Saba Special Meeting. Horizontal Ventures and Saba have not
authorized anyone to provide you with information that is different from
what is
contained in this Joint Proxy Statement/Prospectus. This Joint Proxy
Statement/Prospectus is dated February 16, 1999.
GENERAL
The costs of soliciting proxies of Horizontal Ventures and Saba will be
paid by Horizontal Ventures and Saba. In addition to the use of the mails,
proxies may be personally solicited by directors, officers or regular
employees of Horizontal Ventures or Saba (who will not be compensated separately
for their services) by mail, telephone, telegraph, cable or personal discussion.
Horizontal Ventures 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. Horizontal Ventures or Saba will reimburse such
entities for reasonable out-of-pocket expenses incurred in handling proxy
materials for the beneficial owners of Horizontal Ventures' and Saba's Common
stock.
Any proxy given by 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 Horizontal Ventures 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 Horizontal Ventures, 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 Horizontal Ventures 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 quorum,
however, such proxies will not be counted for the vote on that particular
proposal. Once a quorum has been established, an approved of a majority of the
total votes cast at the Horizontal Ventures Special Meeting will be required for
approval of the Horizontal Ventures proposals. The approval of the Merger
agreement of the Saba Special Meeting will require the approved of a majority of
the outstanding shares of Saba Common stock. Therefore, an abstention or broker
non-vote with respect to the Merger agreement will have the effect of a vote
cast
against the Merger agreement. If no instructions are marked with respect to the
matters to be acted upon, each duly executed 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.
PAGE
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial statements presented
below are derived from the historical consolidated financial statements of
Horizontal Ventures and Saba. The unaudited pro forma condensed combined
balance
sheet as of September 30, 1998 gives pro forma effect to the proposed
acquisition
by Horizontal Ventures of all the issued and outstanding shares of capital stock
of Saba as if the acquisition had occurred on September 30, 1998. The unaudited
pro forma condensed combined statements of operations for the nine months ended
September 30, 1998 and for the year ended December 31, 1997 give pro forma
effect
to the acquisition of Saba as if such acquisition had occurred on January 1,
1997.
The acquisition of Saba constitutes a change in control of Saba, which is an
event of default under the Saba credit facilities and debentures. Saba's
principal credit facilities with Bank one are currently in default due to, among
other things, violation of financial covenants, and in February 1999 Bank One
accelerated and declared immediately due the $20 million then outstanding under
such facilities. There has been no adjustment for the effect of the defaults or
other features of the aforementioned Saba financing arrangements reflected in
the
pro forma condensed combined financial statements since the amounts outstanding
as of September 30, 1998 were already classified as current liabilities
Horizontal Ventures intends to renegotiate the terms and conditions of these
arrangements.
The unaudited pro forma condensed combined financial statements give effect
to the acquisition described above under the purchase method of accounting and
are based on the assumptions and adjustments described in the accompanying notes
to the unaudited pro forma condensed combined financial statements presented on
the following pages. The fair value of the consideration will be allocated to
the assets and liabilities acquired based upon the fair values of such assets
and
liabilities at the date of the acquisition and may be revised for a period of up
to one year from the date of the acquisition. The preliminary estimates and
assumptions as to the value of the assets and liabilities of Saba to the
combined
company is based upon information available at the date of preparation of these
unaudited pro form condensed combined financial statements, and will be adjusted
upon the final determination of such fair values. A final allocation of the
purchase price to the Saba assets acquired and liabilities assumed is dependent
upon analysis which has not progressed to a stage at which there is sufficient
information to make such an allocation in these pro forma condensed combined
financial statements. Horizontal Ventures has undertaken a study to determine
the allocation of the purchase price to the various assets acquired and the
liabilities assumed.
The unaudited pro forma condensed combined financial statements do not
purport to represent what Horizontal Ventures' results of operations or
financial
condition would have actually been or what operations would be if the
transactions that give rise to the pro forma adjustments had occurred on the
dates assumed and are not indicative of future results. The unaudited pro forma
condensed combined financial statements below should be read in conjunction with
the historical consolidated financial statements and related notes thereto of
Horizontal Ventures and Saba.
PAGE
<PAGE>
HORIZONTAL VENTURES, INC.
CONDENSED COMBINED PROFORMA BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
UNAUDITED
- ------------------------------------------------------------------------------
SABA HORIZONTAL VENTURES ADJUSTMENTS REF COMBINED
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH $1,186,671 $ 838,547 1,679,870 A $1,705,088
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 11,857,560
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
HVI INVEST
IN 690 PREFERRED
SHARES 750,000 A,B 750,000
HVI INVEST
IN 333,333
SABA COMMON 1,000,000 B,D 1,000,000
HVI INVEST IN
80,000 SABA
COMMON 70,130 B,D 70,130
HVI INVEST
IN 500,000
SABA COMMON 1,020,000 B,C 1,020,000
HVI INVEST
IN 2,960,445
SABA COMMON 14,070,000 B,E 14,070,000
SABA SHARES
ACQUIRED IN
MERGER 11,893,915 B 11,893,915
ELIMINATION
OF INVEST IN
CONS. SUB (28,054,045) B,F (28,054,045)
---------------------------------- -----------------
TOTAL
ASSETS 53,921,074 8,927,896 65,278,840
=================================== =================
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 LOAN
FINANCING
FOR W/C 2,000,000 G 2,000,000
N/P-IPH FOR
SABA PREFERRED
SHARES 500,000 A 500,000
N/P-IPH 500K
SABA COMMON
SHARES 1,020,000 C 1,020,000
N/P-IPH DEPOSIT
ON OPTION 500,000 2 500,000
----------------------------------- ----------------
TOTAL
CURRENT
LIABILITIES 39,075,063 75,443 43,170,506
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 7,169,170
------------------------------------ ---------------
TOTAL
LIABILITIES 53,890,984 127,726 58,038,710
SABA:
- -------------------------------
Common stock 11,052 (11,052) F -
APIC 16,971,131 (16,971,131) F -
ACCUM
DEFICIT (16,709,302) 16,709,302 F -
CTA (242,791) - 242,791 F -
--------------------
Horizontal Ventures:
- -------------------------------
Common
stock 11,672,519 25,963,915 3 37,636,434
APIC -
- -
ACCUM DEFICIT (2,872,349) (27,523,955) 1,2 (30,396,304)
----------------- ---------------
TOTAL
EQUITY 30,090 8,800,170 7,240,130
===================================== ===============
TOTAL
EQUITY
& LIAB $53,921,074 $8,927,896 65,278,840
===================================== ================
OUTSTANDING
SHARES:
SABA
COMMON 11,052,393 (11,052,393) F -
SABA
PREFERRED 8,000 (8,000) F -
HORIZONTAL
VENTURES
COMMON 1,570,981 2,591,991 F 4,162,972
================
</TABLE>
HORIZONTAL VENTURES, INC.
CONDENSED COMBINED PROFORMA STATEMENT OF OPERATIONS
DECEMBER 31, 1997
<TABLE>
UNAUDITED
- ------------------------------------------------------------------------------
SABA HORIZONTAL VENTURES ADJUSTMENTS REF COMBINED
- ------------------------------------------------------------------------------
<S> <C> <C> <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 - 2,567,275 4 9,832,231
WRITE-DOWN OF
PROPERTIES - - -
----------------------------------------------------------------
TOTAL
EXPENSES 28,996,754 1,028,352 2,567,275 32,592,381
-----------------------------------------------------------------
OPERATING INCOME
(LOSS) 6,999,008 (816,656) (2,567,275) 3,615,077
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) (2,683,356)
--------------------------------------------------------------
LOSS BEFORE
TAXES 4,329,050 (851,116) (2,567,275) 931,721
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) (2,567,725) $999,882
===============================================================
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) $ 0.23
=================================================================
</TABLE>
PAGE
<PAGE>
HORIZONTAL VENTURES, INC.
CONDENSED COMBINED PROFORMA STATEMENT OF OPERATIONS
SEPTEMBER 30, 1998
<TABLE>
UNAUDITED
- -----------------------------------------------------------------------------
SABA HORIZONTAL VENTURES ADJUSTMENTS REF COMBINED
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
O&G SALES $15,768,650 $ -- $15,768,650
OTHER 2,914,512 82,852 2,997,364
--------------------------------------------------------------------
TOTAL
REVENUES 18,683,162 82,852 18,766,014
PRODUCTION
COSTS 10,139,965 315,252 10,455,217
G&A 4,973,828 1,069,366 6,043,194
DD&A 5,500,339 - 5,500,339
WRITE-DOWN
OF
PROPERTIES 17,852,367 - 27,023,955 I 44,876,322
--------------------------------------------------------------------
TOTAL
EXPENSES 38,466,499 1,384,618 27,023,955 68,875,072
--------------------------------------------------------------------
OPERATING
LOSS (19,783,337) (1,301,766) (27,023,955) (48,109,058)
INTEREST
INCOME 126,047 - 126,047
OTHER (1,250,884) 119,011 (500,000) 2 (1,631,873)
INTEREST
EXPENSE (2,518,573) (5,694) (2,524,267)
--------------------------------------------------------------------
TOTAL
OTHER (3,643,410) 113,317 (500,000) (4,030,093)
--------------------------------------------------------------------
LOSS
BEFORE
TAXES (23,426,747) (1,188,449) (52,139,151)
INCOME
TAX
PROVISION 149,356 - 149,356
MINORITY
INTEREST
IN LOSS (77,886) - (77,886)
=====================================================================
NET LOSS $(23,498,217) $(1,188,449) (27,523,955) (52,210,621)
=====================================================================
COMPREHENSIVE
LOSS (23,651,276) - (27,523,955) (52,363,680)
=====================================================================
WTD SHARES
BASIS 10,993,524 1,570,981 2,591,991 3 4,162,972
WTD SHARES
DILUTED 10,993,524 - -
LOSS PER
SHARE $ (2.14) $ (0.76) $ (12.54)
====================================================================
</TABLE>
PAGE
<PAGE>
Notes to Pro Forma Condensed Combined Financial Statements
- ----------------------------------------------------------
Statements of Operations
- ------------------------
Notes to Pro Forma Condensed Combined Financial Statements
No pro forma adjustments have been made to give effect to the combined income
tax
expense and/or benefit or any increase or decrease in operating and general and
administrative costs that may occur as a result of the merger.
1. As discussed in Note B to the pro forma condensed combined balance sheet,
HVI allocated the excess ($27,023,955) of the purchase price ($28,054,045) over
the fair value of the net assets ($1,030,090) to the oil and gas properties
acquired from SABA. At September 30, 1998 the properties were written down to
their net realizable value, resulting in a pro forma charge to operations of
$27,023,955.
2. HVI entered into an agreement to purchase from a third party, 6,310 shares
of SABA Series A convertible preferred stock. The agreement called for a non-
refundable $500,000 deposit which would be applied to the total purchase price
upon HVI consummating the transaction. HVI issued to IPH, a non-interest
bearing promissory note, secured by the Cat Canyon assets to fund the deposit.
The agreement was not closed within the agreed-upon closing date, therefore HVI
recorded a loss of $500,000.
3. HVI issued 1,340,000 common shares, valued at $14,070,000 to SABA Acquisub,
Inc. in exchange for 100% of SABA Acquisub's outstanding common stock. HVI also
issued 1,252,991, valued at $11,893,915 to the shareholders of SABA as part of
the merger agreement whereby HVI would issue to each shareholder of six
shares of
SABA, one share of HVI. Total increase in HVI common shares outstanding is
2,592,991 valued at $25,963,915. See also Notes B and E.
4. The allocation of $27,023,955 representing the excess acquisition price over
the fair value of the net assets acquired to the oil and gas properties as
described in Note B resulted in an increased cost basis to the oil and gas
properties and subsequently a pro forma increase in depletion. Using the
depletion rate for 1997 of approximately 9.5%, the pro forma increase in
depletion is $2,567,275. As of January 1, 1997, the standardized measure under
Statement of Financial Accounting Standards No. 69 of discounted future net cash
flows from Saba's oil and gas properties was approximately $116.5 million
and the
net book value of Saba's oil and gas properties was approximately $29.7 million.
Once the excess acquisition price over the fair value of the net assets acquired
was allocated to the properties, the increased net book value before pro forma
depletion on a pro forma basis is $82,280,762, which is less than the
standardized measure under SFAS 69 of $116.5 million. Therefore, no impairment
was recorded on a pro forma basis for 1997.
Balance Sheet
A. HVI purchased 690 shares of SABA Series A convertible preferred stock from
RGC for $750,000, $250,000 cash and a $500,000 promissory note to IPH. HVI
purchased 80,000 common shares of SABA in the open market for $70,130. This
statement also reflects the proceeds of proposed bridge financing in the amount
of $2,000,000. Cash transactions that net to $-0- effect on pro forma
consolidated cash are the decrease in Horizontal Ventures cash balance of
$1,000,000 transferred to Saba's cash account, resulting in an increase in
Saba's cash balance for payment of 333,333 newly-issued, Saba common shares.
Total pro forma cash transactions are an increase of $1,679,870.
B. The pro forma net book value of SABA, at time of merger, was $1,030,090,
$30,090 adjusted for the $1,000,000 of common shares issued to HVI subsequent to
September 30, 1998. HVI did not utilize independent sources to value any assets
acquired and liabilities assumed. However the most significant assets are
the oil
and gas properties which management intends to fully evaluate and make any
adjustments to the allocation described within this note as deemed necessary.
HVI's total investment in SABA prior to the merger was $16,160,130 for 3,873,778
common shares, as described below:
<TABLE>
Number of
Date acquired Common Shares Cost
<S> <C> <C>
November 4, 1998 333,333 1,000,000
Subsequent to 9/30/98 80,000 70,130
** 500,000 1,020,000
November 23, 1998 2,960,445 14,070,000
TOTAL 3,873,778 $16,160,130
</TABLE>
** Exercise of option to purchase shares
Total pro forma outstanding SABA shares prior to merger 11,385,726 (11,052,393
adjusted for the 333,333 issued to HVI prior to merger) of which 7,511,948 are
not owned by SABA, either directly or beneficially. Per terms of merger
agreement, HVI will issue one share of its common stock for six shares of
outstanding SABA common shares, resulting in the issuance of 1,251,991 HVI
common
shares. Market price of HVI shares at September 30, 1998 was $9.00 and at
February 9, 1999 was $9.50. As the merger was not consummated at February 9,
1999, this pro forma uses the most recent market price of $9.50 per share
resulting in a valuation of the 1,251,991 shares of $11,893,915. As
substantially all of HVI's acquisitions of SABA common shares occurred after
September 30, 1998 the pro forma statement treats the cost paid for each
transaction as the total purchase price of 100% of the outstanding common shares
of SABA. Therefore, $16,130,130 paid in transactions prior to the merger and
the
$11,893,915 paid as part of the merger results in a total pro forma purchase
price of $28,054,045. The pro forma purchase price results in an excess over
SABA's pro forma net assets, valued at $1,030,090 of $27,023,955 which was fully
allocated to the oil and gas properties.
The Saba obligation to preferred shareholders', $7,169,170 was treated as a
libility when determining Saba's net equity book value. This pro forma reflects
Horizontal Ventures acquisition of 690 Saba preferred share, obtained from a
third party, for $750,000.
C. HVI entered into a non-interest bearing promissory note payable to IPH for
$1,020,000 to finance the purchase of a third party option to purchase 500,000
shares of SABA common stock. 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. HVI paid $1,000,000 for 333,333 shares of newly-issued SABA common shares.
HVI also paid $70,130 for 80,000 shares of SABA common stock in the open market.
Both transactions were funded by Horizontal Ventures current cash on hand.
E. HVI issued 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. This exchange was a one HVI share for every 2.2 shares of SABA.
F. Adjustments to eliminate HVI's investment in SABA and SABA's pro forma
shareholder equity at September 30, 1998 to present pro forma statements on a
100% consolidated basis.
G. Horizontal Ventures has entered into negotiations to obtain short-term
bridge financing in the amount of $2,000,000 for working capital purposes. The
terms of the financing include 15% interest due annually on April 1 of each year
with unpaid principal and interest due April 1, 2001. The pro forma statement
reflects this transaction as though it was closed on September 30, 1998,
therefore, no provision for interest has been made.
PAGE
<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
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
PETRO UNION, INC., d/b/a HORIZONTAL VENTURES, INC.(Note 1)
Consolidated Balance Sheet
December 31, 1997
<TABLE>
ASSETS
<S> <C>
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 stockholders' equity (deficit) 9,905,209
------------
Total liabilities and stockholders' equity
$ 10,802,622
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
PETRO UNION, INC., dba HORIZONTAL VENTURES, INC. (Note 1)
Consolidated Statements of Operations
For The Years Ended December 31, 1997 and 1996
<TABLE>
Years Ended December 31,
1997 1996
---- ----
<S> <C> <C>
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 ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
PETRO UNION, INC., dba HORIZONTAL VENTURES, INC. (Note 1)
Consolidated Statements of Owners' Equity (Deficit)
For The Years Ended December 31, 1997 and 1996
<TABLE>
Common Series A Capital Capital
stock Preferred Stock In Accum- Contributed by
Excess of lated 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 $.01
per share -- (1,188) -- -- 1,188 -- -- --
Stock issued
for
services 2,490 25 -- -- 2,257 -- -- 2,282
Partner's
capital
interest
issued for
services -- -- -- -- -- 58,000 58,000
Net loss (377,133) (377,133)
------- ------- ------- -------- -------- -------- ------ -------
Balance,
December
31, 1996 3,690 37 -- 3,445 (831,748) 818,000 (10,266)
Stock issued
for
services 30,000 300 -- -- -- -- -- 300
Stock issued
in exchange for
subordinated
convertible
debentures,
and net
assets of
limited
partner-
ship 725,770 7,258 -- 1,398,831 -- (818,000) 588,089
Stock
issued
for cash -- -- 3,000,000 30,000 570,000 -- -- 600,000
------- ----- --------- ------- ------- -------- -------- -------
</TABLE>
F-5
PETRO UNION, INC., dba HORIZONTAL VENTURES, INC. (Note 1)
Consolidated Statements of Owners' Equity (Deficit)
For The Years Ended December 31, 1997 and 1996
(Continued)
<TABLE>
Common Series A Capital Capital
stock Preferred Stock In Accum- Contributed by
Excess of lated Limited
Shares Amount Shares Amount Par Value Deficit Partners Total
------ ------ ------ ------ --------- ------- -------- -----
<S> <C. <C> <C> <C> <C> <C> <C> <C>
Balance
prior to
reverse
merger
with
Petro
Union,
Inc. 759,460 7,595 3,000,000 30,000 1,972,276 (831,748) -- 1,178,123
Effect of
reverse
merger with
Petro,
Inc. 240,805 6,174,675(3,000,000)(30,000)(1,972,276) -- -- 4,172,399
Stock issued
for cash
in Reg "S"
offerings
552,470 5,801,518 -- -- -- -- -- 5,801,518
Less,
Related
offering
costs -- (454,837) -- -- -- -- -- (454,837)
Issuance of
stock to
retire note
payable
to related
party 6,108 59,122 -- -- -- -- -- 59,122
Net loss -- -- -- -- -- (851,116) -- (851,116)
------- -------- ------- ------- ------- -------- ------ -------
Balance
December
31, 1997
1,558,843$ 11,588,073 -- $ -- $ -- $(1,682,864) $ -- $9,905,209
========= =========== ======= ======== ====== ========= ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
PETRO UNION, INC., dba HORIZONTAL VENTURES, INC. (Note 1)
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1997 and 1996
<TABLE>
Years Ended December 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) ($ 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 (1,502,462) (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 (3,059,690) (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 --
Change in customer payments received
in advance (30,000) 30,000
Proceeds from subordinated convertible
debentures -- 433,231
</TABLE>
F-7
PETRO UNION, INC., dba HORIZONTAL VENTURES, INC. (Note 1)
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1997 and 1996
(Continued)
<TABLE>
<S> <C> <C>
Proceeds from sale of stock,
net of expenses 5,946,681 --
Other 51,517 --
----------- -----------
Net cash provided by financing activities 5,821,236 437,816
----------- -----------
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 --
Stock issued in satisfaction of note payable 59,122 --
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 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
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.
("Horizontal Ventures"). The acquisition of Horizontal Ventures was completed
on September 9, 1997, and after the acquisition, Horizontal Ventures
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
Horizontal Ventures (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 - By 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
Horizontal Ventures 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
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. Internal costs capitalized as Intangible
development costs in 1997 include direct wages paid to drilling crews, related
payroll taxes, and travel expenses while on drilling sites; such costs
approximated $10,900. Such costs can be directly identified with acquisition,
exploration and development activities and do not include any costs related to
production, general corporate overhead, or similar activities
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
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 Horizontal Ventures 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 Horizontal Ventures 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.
* 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:
<TABLE>
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
----------- -------------- -----------
<S> <C> <C> <C>
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
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)
============ ============ ============
</TABLE>
F-13
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:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
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)
========= =========
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT:
A summary of the Company's property and equipment is as follows:
F-14
<TABLE>
Accumulation
Depreciation
Cost & Depletion
---- ----
<S> <C> <C>
December 31, 1997
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 58,136
Nonproducing limestone reserves 3,500,000 --
---------- ----------
Total mineral interests 5,863,337 58,136
Land and buildings 135,826 10,252
Drilling equipment 1,183,546 429,637
Transportation equipment 162,111 66,890
Office and computer equipment 47,953 33,011
---------- ----------
7,392,773 597,926
=========== ===========
December 31, 1996
Land and buildings $85,814 $3,705
Drilling equipment 638,382 98,727
Transportation equipment 135,442 34,982
Office and computer equipment 17,434 5,004
____________ _________
Subtotal $877,072 $142,418
============= =========
</TABLE>
Depreciation charged against income was $160,833 (1997), and $105,198
(1996).
Useful lives were as follows:
Land and buildings 20 to 40 years
Drilling equipment 5 to 10 years
Transportation equipment 5 to 6 years
Office and computer equipment 3 to 10 years
In the fourth quarter of 1997, Horizontal Ventures 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:
<TABLE>
Year ending December 31: Amount
----------------------- ------
<S> <C>
1998 $13,272
1999 13,272
2000 4,424
-------
Total $30,968
</TABLE>
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 $19,900 for
1996. Quarterly settlements are required under the license, and Amoco has the
right to terminate the license for non-payment. If Amoco were to terminate the
Company's license, it could have an adverse affect on the Company's operations.
NOTE 6 - FEDERAL INCOME TAXES:
The Limited Partnership filed a U.S. Partnership Income Tax Return for the
years ended December 31, 1996 and 1995. Accordingly, its income (loss) was
taxable to (deductible by) the limited partners. Petro Union and Horizontal
Ventures will file a consolidated U.S. Corporation Income Tax Return for
calendar year 1997, as a result of their merger.
A summary of the principal differences between book and taxable income is as
follows:
<TABLE>
Taxed To
-----------------------
Limited The
Partners Company Total
-------- ------- -----
Year ended December 31, 1997:
<S> <C> <C> <C>
Net (loss) of Horizontal Ventures -- ($ 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. By the requirements of SFAS No.
109, the Company has recorded deferred tax assets and liabilities, using an
expected tax rate of 35%, as follows:
<TABLE>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
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 $ -- $ --
============ ============
</TABLE>
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:
<TABLE>
Expires in: Amount
----------- ------
<S> <C>
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
===========
</TABLE>
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
<TABLE>
December 31, December 31,
1997 1996
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
NOTE 8 - NOTES PAYABLE:
Details of long term notes payable are as follows:
<TABLE>
December 31, December 31,
1997 1996
------------ -------------
<S> <C> <C>
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
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
======== ========
</TABLE>
Maturities of long term notes are as follows:
<TABLE>
December December
Due during year 31, 31,
ending December 31: 1997 1996
-------- --------
<S> <C> <C>
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
======= ====-===
</TABLE>
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.
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:
<TABLE>
December
31, 1997
--------
<S> <C>
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.
By 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.
On September 9, 1997, the Company entered into an employment agreement with
Randeep S. Grewal for a five-year term. Mr. Grewal is the Chairman and Chief
Executive Officer and a director of the Company. His current salary is $120,000
per year. Compensation is reviewed annually. Mr. Grewal participates in the
Company's benefit plans and is entitled to bonuses and incentive compensation as
determined by the Board of Directors of the Company. 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 the Company.
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.
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:
</TABLE>
<TABLE>
Weighted
Average
Exercise
Shares Price
------ -----
<S> <C> <C>
Options outstanding, January 1, 1997 - -
Options granted 300,000 $5.00
Options terminated - -
Options exercised - -
-------
Options outstanding, December 31, 1997 300,000 $5.00
=======
</TABLE>
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:
<TABLE>
December 31,
1997
----------
<S> <C>
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
</TABLE>
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 by 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
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.
NOTE 16 - RECENT ACCOUNTING PRONOUNCEMENTS:
The Financial Accounting Standards Board has issued several new accounting
pronouncements which may affect the Company in future years. FASB Statement
Number 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition
and Disclosures, became effective in 1996 and amended FASB Statement Number 114,
also dealing with impaired loans. Generally, they require certain disclosures
regarding loans deemed to be impaired. FASB Statement Number 119, Disclosure
about Derivative Financial Instruments and Fair Value of Financial Instruments,
became effective in 1997 and prescribes disclosure requirements for fair
values of
financial instruments and information about derative financial instruments,
among
other things; for entities with less than $100 million in total assets need not
disclose the fair values of financial instruments. Basic and diluted net income
per common share have been computed in accordance with FASB Statement Number
128,
Earnings per Share, which the Company adopted at year-end 1997. Net income per
share amounts for prior periods have been restated to conform with the
provisions
of the new standard. Basic net income per common share is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted net income per common share reflects
the potential dilution that could occur if securities or other contracts to
issue
common stock were exercised or converted into common stock. FASB Statement
Number
130, Reporting Comprehensive Income, becomes effective in 1998, and requires
that
"comprehensive income" be reported in addition to Net Income. Comprehensive
income includes changes in stockholders' equity that are not reported in the
income statement, such as changes in the fair values of investments held for
sale. The Company has not determined what effect, if any, these pronouncements
might have on its financial statements in the future.
NOTE 17 - SEGMENT INFORMATION:
At December 31, 1997, the Company had two reportable segments - mineral
exploration and production, and contract drilling of oil and gas wells for
outside customers. The mineral segment consisted primarily of the Company's oil
and gas properties in California and Illinois, and its limestone reserves; the
Company intends to utilize its horizontal drilling technology to exploit
existing
reserves on the oil and gas properties. The contract drilling activity was
conducted throughout 1996 and during the first few months of 1997; thereafter,
those activities were substantially idle while the merger between Petro Union,
Inc. and Horizontal Ventures, Inc. was being effected.
For 1996, the Company had only the contract drilling segment.
The segments' accounting policies are the same as those described in the summary
of significant accounting policies, except that interest expense is not
allocated
to the individual operating segments when determining segment profit or loss.
The Company evaluates performance based on profit or loss from operations before
interest and income taxes, not including nonrecurring gains and losses. There
were no intersegment sales in 1997.
The Company's reportable business segments are strategic business units that
offer different products and services. Each segment is managed separately
because they require different technologies and market to distinct classes of
customers.
Segment information is as follows:
<TABLE>
Mineral
Exploration
Contract And
Drilling Production Total
<S> <C> <C> <C>
1997:
Segment profit, and
reconciliation to total profit:
Sales to external customers $188,074 $23,622 $211,696
___________ _____________ _____________
Direct costs and expenses:
Depreciation, depletion, and
amortization 151,304 2,106 153,410
Lease operating expenses - 35,094 35,094
Other direct costs 59,475 - 59,475
____________ _______________ _____________
Total 210,779 37,200 247,979
____________ _______________ ______________
Segment profit ($22,705) ($13,578) (36,283)
============ ===============
Items not allocable to
segments:
General and administrative
expense 780,373
Other expense 34,460
_______________
Consolidated (loss) before
taxes on income ($851,116)
===============
Segment assets $1,029,158 $5,822,381 $6,851,539
============= ===========
Assets not allocable to
segments 3,951,083
________________
Consolidated total assets $10,802,622
================
Expenditures for segment
assets $135,566 $5,822,381 $5,957,947
============== =========== ===============
</TABLE>
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."
<TABLE>
1997 1996
----------- -----------
<S> <C> <C>
Oil and gas:
Capitalized costs:
Proved reserves $ 1,963,337 $ --
Unproved reserves 400,000 --
----------- -----------
2,363,337 --
Less, Accumulated depreciation,
depletion and amortization (57,598) --
----------- -----------
Balance, December 31, 1997 $ 2,305,739 $ --
=========== ===========
1997 1996
------------ ----------
Costs incurred in oil and gas
property acquisition, exploration,
and development activities:
Acquisition of properties:
Proved $1,679,131 --
Unproved 400,000 --
Exploration costs -- --
Development costs 284,206 --
Oil and gas reserves (bbls): 1997 1996
___________________________________
Acquisition of reserves in Petro
Union merger 1,826,385 --
Purchases of minerals in place 728,734 --
Production (2,112) --
---------- ----------
Proved reserves,
December 31, 2,553,007 --
========== ==========
The accompanying table reflects the standardized measure of discounted future
net cash flows relating to the Company's interests in proved reserves:
1997 1996
------------- -------------
Future cash inflows $ 40,103,600 $ --
Future costs:
Development (5,281,800) --
Production (23,805,600) --
------------- -------------
Future net cash flows before income taxes 11,016,200 --
Future income taxes (3,304,800) --
------------- -------------
Future net cash flows after income taxes 7,711,400 --
Discount at 10% per annum (2,400,000) --
------------- -------------
Standard measure of discounted future net
cash flows $ 4,610,300 $ --
============= =============
Principal sources of change in the
standardized measure of discounted
future net cash flow were as follows:
Oil and gas: 1997 1996
------------- -------------
Sales and transfers of oil and gas
produced, net of production costs ($13,578) $ --
Net changes in prices and production costs -- --
Extensions and discoveries, less related costs -- --
Purchases of minerals in place 4,623,878 --
Sales of minerals in place -- --
Changes in estimated future development costs -- --
Revisions of previous quantity estimates -- --
Accretion of discount -- --
Net change in income taxes -- --
Change in production rates (timing) and other -- --
</TABLE>
Future cash inflows are computed by applying year-end prices of oil and gas
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 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.
HORIZONTAL VENTURES, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
ASSETS
<S> <C>
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
============
</TABLE>
The accompanying notes are an integral part of this statement.
HORIZONTAL VENTURES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Mineral
Exploration and
Production 9,704 -- $ 82,852 $ --
Contract drilling -- 31,659 -- 160,824
____________ ____________ ____________ __________
Total
Revenues 9,704 31,659 82,852 160,824
Less, Costs
and expenses:
Production expenses,
mineral exploration
and production (26,951) -- 97,792 --
Direct costs,
contract
drilling -- 19,165 -- 133,029
Depreciation,
depletion and
amoritization:
Mineral exploration
and
production 112,894 -- 217,460 --
Contract
drilling -- 39,460 -- 49,237
Other
administrative
expenses 285,064 84,963 1,069,366 247,272
------------ ---------- -------- ---------
Total costs
and expenses 424,909 143,588 1,384,618 429,538
----------- ----------- ----------- -----------
Loss from
operations (415,205) (111,929) (1,301,765) (268,714)
----------- ----------- ----------- ----------
Other income (expenses):
Gain (loss)
on sale of
assets -- -- -- --
Sale of timber -- -- 47,000 --
Other expenses -- (8,660) -- (29,722)
Interest income 22,408 -- 72,011 5,776
Interest expenses -- -- (5,694) (21,079)
---------- ----------- -------- ----------
Net other
income
(expenses) 22,408 (8,660) 113,316 (45,025)
----------- ------------ ---------- ----------
Loss before
taxes on
income (392,797) (120,589) (1,188,449) (313,739)
Provision for
taxes on income -- -- -- --
----------- ------------- ------- ---------
Net loss (392,797) (120,589) (1,188,449) (313,739)
=========== ============== ========== ==========
Loss per share
of common stock (0.25) (0.34) (0.76) (0.89)
Average shares
outstanding
used for
computation of
loss per share 1,570,981 354,313 1,570,981 354,313
</TABLE>
The accompanying notes are an integral part of these statements
HORIZONTAL VENTURES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
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) (30,219)
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) (138,312)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF PROPERTY AND EQUIPMENT (1,180,560) --
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) (46,011)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
NET PROCEEDS FROM SALE OF Common stock 84,446 600,000
INCREASE IN DUE TO RELATED PARTIES -- 60,478
CHANGE IN CUSTOMER PAYMENTS
RECEIVED IN ADVANCE -- (30,000)
REPAYMENT OF NOTES PAYABLE (24,802) (182,614)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 59,644 447,864
----------- -----------
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 $ -- $ 300
STOCK ISSUED FOR SUBORDINATED
CONVERTIBLE DEBENTURES -- 433,231
STOCK ISSUED FOR NET ASSETS OF
PARTNERSHIP -- 972,858
PROPERTY AND EQUIPMENT ACQUIRED
IN REVERSE MERGER WITH PETRO
UNION, INC. NET OF DEBT ASSUMED -- 4,120,882
SUPPLEMENTARY CASH FLOW DATA:
INTEREST PAID $[5,694] $ 23,601
INCOME TAXES PAID -- --
</TABLE>
The accompanying notes are an integral part of these statements.
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, Horizontal Ventures
Cat Canyon, Inc., a Colorado corporation ("Horizontal Ventures Cat Canyon"),
and Calox, Inc., an Indiana corporation, and Horizontal Ventures
Acquisition Corporation, a Delaware corporation. All significant
intercompany accounts and transactions have been eliminated.
The interim period financial statements presented herein have been prepared
by 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 elsewhere herein.
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.
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 ("Horizontal
Ventures-Oklahoma"). The acquisition of Horizontal Ventures-Oklahoma was
completed on September 9, 1997, and after the acquisition, Horizontal
Ventures-Oklahoma shareholders owned more than 50% of the outstanding
shares of
PUI. By 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 Horizontal Ventures-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, Horizontal
Ventures-Oklahoma was merged with and into the Company.
FASB Statement Number 130, Reporting Comprehensive Income, became effective for
1998, and requires that "comprehensive income" be reported in addition to Net
Income. Comprehensive income includes changes in stockholders' equity that are
not reported in the income statement, such as changes in the fair values of
investments held for sale. The pronouncement has not had any material effect on
the Company, because it does not currently incur any comprehensive income items
other than net income.
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 Horizontal
Ventures-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:
On October 6, 1998, the Company entered into a Preferred Stock Transfer
Agreement (the "Preferred Stock Transfer Agreement") with RGC International
Investors, LDC ("RGC"), by 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 date 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. The 690 shares of Series A Preferred Stock acquired by
Horizontal Ventures and the minimum of 6,310 shares of Series A Preferred
Stock
which Horizontal Ventures 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.
On October 8, 1998 Horizontal Ventures and Saba entered into a Common
Stock Purchase Agreement (the "Common stock Purchase Agreement") by which
Saba's
Board of Directors agreed to issue to Horizontal Ventures 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 Horizontal Ventures has made open market purchases
of just around 5% of the issued and outstanding shares of Saba common stock.
By an Option Agreement dated July 22, 1998 between Horizontal Ventures and
IPH, Horizontal Ventures 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. Horizontal Ventures has the option of
paying such exercise price to IPH in the form of cash or shares of Horizontal
Ventures common stock.
On October 14, 1998, Horizontal Ventures 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 Horizontal
Ventures was acquiring the securities of Saba for the purpose of gaining control
of Saba. Subsequently, Horizontal Ventures 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 November 6, 1998, Horizontal Ventures paid Saba $1,000,000 for 333,333
shares of Saba common stock by the Common stock Purchase Agreement and $500,000
to RGC to extend the term until December 6, 1998 of Horizontal Ventures'
exclusive right to acquire the Saba Series A Preferred Stock from RGC pursuant
to the Preferred Stock Transfer Agreement. These payments were financed by
Horizontal Ventures' 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 Horizontal Ventures' pledge of all of the issued and outstanding
shares of Horizontal Ventures Cat Canyon, Inc., a wholly owned subsidiary of
Horizontal Ventures.
On November 23, 1998, as amended at closing on December 18, 1998
Horizontal Ventures 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, Horizontal Ventures would acquire the Saba common
stock owned by SAI in exchange for the issuance by Horizontal Ventures to the
shareholder of SAI an aggregate of 1,340,000 shares of Horizontal Ventures
common stock and SAI would merge with and into Horizontal Ventures. The Stock
Exchange Agreement also contains the following provisions:
* By February 18, 1999, Horizontal Ventures shall register for resale
up to 1,000,00 of the 1,340,000 shares Horizontal Ventures common
stock issued to Capco Resources Ltd.;
* Horizontal Ventures 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 Horizontal
Ventures common stock acquired by it under the Stock Exchange
Agreement; and
* Until December 31, 2001 Horizontal Ventures shall have a right of
first refusal with respect to any proposed disposition by Capco
Resources, Ltd. of the Horizontal Ventures common stock acquired by
it under the Stock Exchange Agreement.
On December 7, 1998, Horizontal Ventures 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 Horizontal Ventures
based on an exchange ratio of one share of Horizontal Ventures 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
Horizontal Ventures 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 Horizontal Ventures on
November 6, 1998.
Horizontal Ventures 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 Horizontal Ventures closed the Stock Exchange Agreement
with SAI dated November 23, 1998, thereby raising Horizontal Ventures' ownership
stake in Saba to approximately 35%.
Subsequent to September 30, 1998, management determined not to continue
development of the Company's Illinois properties. As a result, the Company's
proved developed reserves will decrease by approximately 94,000 barrels, and
proved undeveloped reserves will decrease by approximately 1,732,000 barrels.
Total developed reserves will decrease by approximately $32,870,000, and the
standard measure of discounted future net cash flows will decline by
approximately $2,700,000. The impact on the carrying value of property and
equipment has not been determined, but is estimated that the carrying value
may be reduced as much as 75%.
PAGE
<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
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31, September 30,
------------ -------------
1996 1997 1998
---- ---- ----
ASSETS (unaudited)
- ------
<S> <C> <C> <C>
Current assets:
Cash and cash
equivalents $734,036 $1,507,641 $1,186,671
Accounts receivable,
net of allowance for
doubtful accounts of
$65,000 (1996),
$69,000 (1997) and
$78,000 (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
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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
<TABLE>
Nine months ended
Years ended December 31, September 30,
-------------------------------------- ---------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and
gas sales $16,941,247 $31,520,757 $33,969,151 $25,282,361 $15,768,650
Other 753,008 1,681,587 2,026,611 1,495,839 2,914,512
------------ ------------ ----------- ------------ -----------
Total
revenues 17,694,255 33,202,344 35,995,762 26,778,200 18,683,162
------------ ------------ ------------ ------------ -----------
Expenses:
Production
costs 10,561,552 14,604,291 16,607,027 12,249,901 10,139,965
General and
adminis-
trative 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
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
Common stock Capital In Cumulative Unearned Total Stock-
----------------- Excess Translation Compen- Retained holders'
Shares Amount Of Par Value Adjustment sation 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
conver-
sions 1,419,846 1,420 5,414,423 5,415,843
Net income 3,764,716 3,764,716
----------------------------------------------------------------------
Balance at
December
31, 1996 10,081,026 10,081 12,891,002 11,282 -- 4,802,845 17,715,210
Issuance
and exercise of
options 154,000 154 1,409,842 (803,000) 606,996
Issuance of
warrants 622,000 622,000
Cumulative
translation
adjustments (101,014) (101,014)
Debenture
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
========================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
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 amor-
tization 2,826,684 5,527,418 7,264,956 5,011,562 5,500,339
Writedown
of oil and
gas
properties -- -- 254,937 -- 17,852,367
Amortization
of unearned
compensation 17,000 8,500 -- -- --
Deferred tax
provision
(benefit) (39,000) 366,389 248,645 654,000 (616,263)
Compensation
expense
attributable
to non-employee
option -- 91,600 106,000 -- 349,227
Minority
interest in
earnings
(loss) of
consolidated
subsidiary 55,632 241,403 55,883 89,994 (77,886)
Gain on
issuance of
shares of
subsidiary (124,773) (8,305) (4,036) (5,533) --
Changes in:
Accounts
receivable (1,999,984) (2,919,287) 859,286 (3,260,779) 510,358
Other
assets (2,452,503) (572,233) (24,304) 5,204 723,463
Accounts
payable and
accrued
liabili-
ties 2,396,976 (237,328) 4,768,747 8,216,016 2,498,446
Income
taxes
payable
and other
liabilities 509,343 650,644 (973,681) (1,281,441) 1,441,524
---------------------------------------------------------------
Net cash
provided
by
operating
activities 1,735,907 6,913,517 14,953,880 11,976,523 4,683,358
-------------------------------------------------------------------
Cash flows
from investing
activities:
Deposit
(purchase) of
restricted
certificate
of deposit (1,750,000) 1,750,000 -- -- --
Expenditures
for oil and
gas
properties(12,807,412) (12,171,392) (32,874,800) (26,729,697)(5,677,036)
Expenditures
for land and
equipment,
net (2,660,120) (585,893) (2,039,234) (2,344,326) (542,232)
Proceeds
from sale
of oil
and gas
properties 157,933 256,646 234,141 -- 5,254,066
(Increase)
decrease in
notes
receivable -- (1,172,639) (2,114,953) (2,141,992) --
Proceeds from
notes
receivable 302,968 67,384 629,109 403,479 366,146
--------------------------------------------------------------------
Net cash
used in
investing
activities(16,756,631) (11,855,894) (36,165,737) (30,812,536) (599,056)
-------------------------------------------------------------------
Cash flows
from
financing
activities:
Proceeds
from notes
payable and
long-term
debt 34,814,900 17,085,315 28,725,454 28,649,983 4,241,925
Principal
payments on
notes payable
and long-term
debt (19,136,299) (12,296,839) (15,972,780) (10,546,557)(6,968,048)
Redemption
of preferred
stock -- -- -- -- (1,702,280)
Preferred
stock
dividends
paid -- -- -- -- (51,288)
Increase in
deferred
financing
costs (1,854,421) (165,777) -- -- --
Net change
in accounts
with
affiliated
companies (47,120) (21,251) (131,562) -- --
Net proceeds
from exercise
of options
and issuance
of common
stock 789,583 422,500 227,500 227,500 82,500
Proceeds from
issuance of
preferred
stock, net -- -- 8,511,450 -- --
Issuance of
warrants -- -- 622,000 -- --
Increase in
contributed
surplus 208,600 -- -- -- --
Capital
subscription of
minority
interest 74,778 12,805 8,535 -- --
----------------------------------------------------------------
Net cash
provided by
(used in)
financing
activities 14,850,021 5,036,753 21,990,597 18,330,926 (4,397,191)
-----------------------------------------------------------------
Effect of
exchange rate
changes on
cash and cash
equivalents 12,006 (627) (5,135) (1,553) (8,081)
------------------------------------------------------------------
Net increase
(decrease)
in cash
and cash
equivalents (158,697) 93,749 773,605 (506,640) (320,970)
Cash and cash
equivalents
at beginning
of year 798,984 640,287 734,036 734,036 1,507,641
Cash and cash
equivalents
at end of year $640,287 $734,036 $1,507,641 $227,396 $1,186,671
=================================================================
</TABLE>
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.
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>
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.
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.
In connection with its efforts to increase proved oil and gas reserves
through acquisition, exploration and development activities, Saba charges to its
full costs pools certain costs related to those activities, including allocated
payroll attributable to personnel directly involved in efforts to increase
proved
reserves. Such charges do not include costs related to production, general
corporate overhead, or similar activities.
The total amounts of capitalized changes for internal expenses are as
follows for the listed periods:
31-Dec-96 1,005,950
31-Dec-97 1,652,200
30-Sep-98 1,650,800
The amounts are gross changes to the property accounts and do not reflect
adjustments for abandoned projects, dispositions or calling last writedowns,
that
are reported in the accumulated depletion account.
* 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.
* Income Taxes
Saba accounts for income taxes by 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.
* Comprehensive Income (Loss)
Comprehensive income (loss) represents net income loss adjusted for foreign
currency translation gains (losses) incurred during the period. Such gains
(losses) in 1995, 1996 and 1997 were $22,480, ($11,198) and $101,014)
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.
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.
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.
<TABLE>
Year Ended
December 31,
1995
------------
(unaudited)
<S> <C>
Total revenues $27,677,526
Total operating expenses, including general and
administrative and depletion, depreciation and
amortization (20,036,052)
Interest expense (1,984,594)
Other income (expense) (9,690)
----------------------
Income before income taxes 5,647,190
Provision for taxes on income 2,767,123
----------------------
Net income $ 2,880,067
======================
Net earnings per common share (basic) $ 0.33
======================
</TABLE>
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.
<TABLE>
Nine Months
Ended
September 30,
1995
-------------------
(unaudited)
<S> <C>
Gross Revenues:
Sales of oil $ 8,871,288
Pipeline revenues 1,516,876
--------------------
Total gross revenues 10,388,164
--------------------
Direct operating expenses:
Operating expenses (1) 2,537,423
Pipeline operating expenses (1) 990,054
Production and other taxes (2) 474,211
--------------------
--------------------
Total direct operating expenses 4,001,688
--------------------
Excess of gross revenues over
direct operating expenses $ 6,386,476
====================
--------------------------
</TABLE>
(1) Excludes depreciation, depletion and amortization expenses.
(2) Includes war and pipeline transportation taxes; does not include provision
for income taxes.
In October 1995, all of the issued shares of Capco Resource Properties Ltd.
("CRPL"), 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.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
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:
<TABLE>
1996 1997
------------ ------------
<S> <C> <C>
Canadian prime plus 0.75% (6.75% at
December 31, 1997) production notes
receivable, with interest paid
currently, collateralized by
producing oil and gas properties $ 120,385 $ 65,012
Prime plus 0.75% (9.25% at December
31, 1997) promissory note from an
officer of 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
============ ============
</TABLE>
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>
_____ 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 $6,505,25 $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
================ ============== ========== ==========
At December 31, 1997, plant and equipment and accumulated depreciation included
$620,248 and $ 73,972, respectively, for assets acquired under capital leases.
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:
United
States Canada Colombia Total
- ---------------------- ------ ------ -------- -----
December 31, 1996
-----------------
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>
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.
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.
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:
<TABLE>
1996 1997
------------ -------------
<S> <C> <C>
Trade accounts payable $ 3,545,599 $ 6,705,897
Undistributed revenue payable 341,614 780,475
Insurance and tax assessments payable 618,032 760,177
Other accrued expenses 871,892 1,857,970
============ =============
Total $ 5,377,137 $ 10,104,519
============ =============
</TABLE>
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:
<TABLE>
1995 1996 1997
------------ ------------- ------------
<S> <C> <C> <C>
United States $ (523,572) $ 383,453 $ 457,166
Canada 134,138 693,439 262,852
Colombia 1,385,602 5,645,807 3,553,149
----------- ---------------- ------------
Total $ 996,168 $ 6,722,699 $ 4,273,167
=========== =============== =============
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%
======= ======= =======
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)
============== ==============
</TABLE>
At December 31, 1996 and 1997, $123,000 and $69,000 of current deferred
taxes are included in other current assets, respectively.
At December 31, 1997, 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.
The Company is in receipt of a notice of default from the Colombian tax
authorities for the outstanding payment of income taxes for the year 1997 in the
approximate amount of $1.1 million and for prepayment of income taxes for the
year 1998 in the approximate amount of $572,000. The outstanding amounts may
accrue interest until paid at the current rate of approximately 33% and
increasing to 55% on April 1, 1999.
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.
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:
<TABLE>
September 30,
1996 1997 1998
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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 by 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.
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.
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.
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.
On October 6, 1998, Horizontal Ventures, Inc. ("HVI") acquired 690 shares of
Preferred Stock from the holders of the 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 still outstanding.
The exclusive right was extended for 30 days pursuant to Horizontal Ventures
payment to the Preferred Stock holders of an additional $500,000.
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 penalty of $20,000 per month for each $1 million of Preferred Stock
that remained outstanding. At September 30, 1998, a registration statement
covering the shares of Common stock underlying the Preferred Stock had not been
declared effective; accordingly, 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. ("Horizontal Ventures")
11. Common stock and Stock Options
In January 1995, Saba awarded 24,000 shares of Common stock to an employee by
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.
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 by 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>
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>
The fair value of each option granted during 1995, 1996 and 1997 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: (a) risk-free interest rates ranging from 4.9% to
7.9%, (b) expected volatility ranging from 43.2% to 58.4%, (c) average time to
exercise ranging from six months to five years, and (d) expected dividend yield
of 0.0%.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
Options Outstanding Options Exercisable
----------------------------- -----------------------------
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise prices December 31, Contractual Exercise December 31, Exercise
1997 Life Price 1997 Price
- ---------------- ------------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
$1.25 - $1.38 308,000 (1) $1.29 240,000 $1.29
$1.50 220,000 (2) $1.50 100,000 $1.50
$4.38 20,000 not stated $4.38 4,000 $4.38
$15.50 625,000 9.4 years $15.50 - $ -
-------------- ----------------
$1.25 - $15.50 1,173,000 344,000
============== ================
</TABLE>
- -----------------
(1) No contractual expiration date for 163,000 options; balance of 145,000
options, to the extent they are vested, expire one year following
termination of option holder's employment.
(2) No contractual expiration date for 180,000 options; remaining contractual
life for 40,000 options is ten months.
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>
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.
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
optiongrant.
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>
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>
Net Basic Net Diluted Net
Total Gross Income Income (Loss) Income (Loss)
Revenues Profit (Loss) Per Share Per Share
----------- ------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
1996
First Quarter $7,387,290 $2,506,692 $755,488 $0.09 $0.08
Second Quarter 8,002,828 2,717,416 734,375 0.09 0.08
Third Quarter 7,762,922 2,530,891 730,869 0.08 0.07
Fourth Quarter 10,049,304 3,970,582 1,543,984 0.17 0.14
----------- ----------- ----------
$33,202,344 $11,725,581 $3,764,716
=========== =========== ==========
1997
- ----
First Quarter $9,563,474 $3,912,379 $1,441,582 $0.14 $ 0.12
Second Quarter 8,271,953 1,945,168 507,300 0.05 0.05
Third Quarter 8,942,773 2,424,537 598,618 0.06 0.05
Fourth Quarter 9,217,562 2,200,062 (150,053) (0.01) (0.01)
------------ ----------- -----------
$35,995,762 $10,482,146 $2,397,447
============ ========= ===========
1998
First Quarter $6,473,469 $749,183 $(12,016,500) $(1.12) $(1.12)
Second Quarter 6,405,776 1,277,308 (9,577,165) (0.88) (0.88)
Third Quarter 5,803,917 1,016,367 (1,904,552) (0.18) (0.18)
------------ ----------- --------------
$18,683,162 $3,042,858 $(23,498,217)
============ =========== ==============
</TABLE>
14. Retirement Plan
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):
<TABLE>
1996 1997
---- ----
<S> <C> <C>
Customer A $ 2,566,700 $ 1,482,600
==================== ===============
Customer B $ 1,267,100 $ 931,965
==================== ===============
Customer C $ 899,600 $ 745,567
==================== ===============
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 $ - $ -
============= ============= ============
</TABLE>
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
By 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.
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.
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>
(Dollars in thousands) United Corporate &
States Canada Colombia Other Total
Year ended December 31, 1995
<S> <C> <C> <C> <C> <C>
Total revenues $11,538 $1,577 $4,505 $74 $17,694
Production costs 7,431 901 2,229 -- 10,561
Other operating expenses 398 243 51 -- 692
Depreciation, depletion and
amortization 1,735 156 823 113 2,827
Income tax expense (benefit) 849 147 645 (1,191) 450
-------- -------- --------
Results of operations from
oil and gas producing
activities $1,125 $130 $757
======== ======== ========
Interest and other
expenses (net) 2,617 2,617
-------- -------
Net income (loss) $ (1,465) $ 547
======== =======
Identifiable assets at
December 31, 1995 $19,525 $3,963 $13,514 $2,749 $39,751
======== ======== ======== ======== ========
Year ended December 31, 1996
- ----------------------------
Total revenues $15,907 $3,105 $13,594 $596 $33,202
Production costs 8,160 1,172 5,272 -- 14,604
Other operating expenses 759 536 213 -- 1,508
Depreciation, depletion and
Amortization 2,565 353 2,275 334 5,527
Income tax expense
(benefit) 1,561 -- 2,917 (1,520) 2,958
-------- ------- --------
Results of operations from
oil and gas producing
activities $2,862 $1,044 $2,917
======== ======= ========
Interest and other expenses (net) 4,840 4,840
====== ========
Net income (loss) (3,058) 3,765
======== ========
Identifiable assets at
December 31, 1996 $28,730 $5,346 $12,473 $2,568 $49,117
======== ======== ======== ======== ========
Year ended December 31, 1997
- ----------------------------
Total revenues $21,359 $2,582 $10,769 $1,286 $35,996
Production costs 10,461 1,080 5,066 -- 16,607
Other operating expenses 4,112 472 246 295 5,125
Depreciation, depletion and
amortization 4,541 543 1,797 384 7,265
Income tax expense (benefit)
752 158 1,495 (529) 1,876
-------- -------- --------
Results of operations
from oil and gas
producing activities $1,493 $329 $2,165
======== ======== ========
Interest and other
expenses (net) 2,726 2,726
======= =======
Net income (loss) $(1,590) $2,397
======== =======
Identifiable assets at
December 31, 1997 $46,886 $7,460 $11,047 $12,263 $77,656
======== ======== ======== ======== =======
</TABLE>
17. Subsequent Events (unaudited)
Approximately $4.5 million in principal amount of bank debt that matured for
payment on July 31, 1998, has not been paid nor extended, and the borrowing base
deficit of $2.2 million on the revolving loan at September 30, 1998, has not
been satisfied either by providing additional collateral to 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, Horizontal Ventures 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 Horizontal Ventures. On
October 8, 1998, Saba and Horizontal Ventures entered into a Common stock
Purchase Agreement by which Horizontal Ventures 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 Horizontal
Ventures 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 Horizontal Ventures and
RGC, by which Horizontal Ventures 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 by Horizontal Ventures' payment to
RGC of
an additional $500,000. Horizontal Ventures 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. Horizontal Ventures currently is
negotiating
with RGC to extend and amend the Preferred Stock Transfer Agreement to enable
Horizontal Ventures to acquire the additional 6,310 shares of Series A
Preferred
Stock held by RGC. Horizontal Ventures had agreed to convert the Preferred Stock
and accrued dividends to Common stock at the rate of $2.50 per share of Common
stock. On October 23, 1998, Saba filed a report on Form 8-K describing the
pending transactions with Horizontal Ventures.
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 Horizontal Ventures 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 Horizontal Ventures under the Common stock Purchase Agreement.
On December 7, 1998, Horizontal Ventures and the Company disclosed that the
Board of directors of the Company approved Horizontal Ventures' proposal to
merge with the Company. Under the proposed merger, the Company's stockholders
will receive one share of Horizontal Ventures 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
Horizontal Ventures 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 Horizontal Ventures' common
stock of 412.14 during the same period.
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.
In February 1999, Bank One, Texas notified the Company that as a result of
continuing defaults under the Company's principal credit facilities with Bank
One
the entire amount of $20.1 million then outstanding under the facilities was
accelerated and declared immediately due and payable. All amounts due to Bank
One as of September 30, 1998 were previously classified as current liabilities.
(See Note 8.)
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>
United
States Canada (1) Colombia Total
------ ---------- -------- -----
Year ended
December 31, 1995
- ----------------------------
<S> <C> <C> <C> <C>
Oil (Barrels)
Proved reserves:
- ----------------
Beginning of year 6,671,341 464,390 -- 7,135,731
Acquisition, exploration
and Development of
minerals in place 1,295,876 289,113 5,473,310 7,058,299
Revisions of previous
estimates (2) (691,553) 264,497 -- (427,056)
Production (710,271) (85,800) (430,808) (1,226,879)
Sales of minerals
in place (2,798) (6,000) -- (8,798)
----------- ----------- --------- ----------
End of year 6,562,595 926,200 5,042,502 12,531,297
=========== =========== ========= ===========
Proved developed reserves,
end of year 5,385,856 750,500 4,731,369 10,867,725
=========== =========== ========= ===========
Gas (Thousands of cubic feet)
Proved reserves:
- ----------------
Beginning of year 7,225,973 2,565,800 -- 9,791,773
Acquisition, exploration
and Development of
minerals in place 1,333,669 464,028 -- 1,797,697
Revisions of previous
estimates (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-[ ]
SABA PETROLEUM COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
Year ended December 31, 1996
- ----------------------------
Oil (Barrels)
Proved reserves:
- ----------------
Beginning of year 6,562,595 926,200 5,042,502 12,531,297
Acquisition, exploration
and development of
minerals in place 4,501,828 103,837 -- 4,605,665
Revisions of previous
estimates (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
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.
<TABLE>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Oil (Bbls) 237,237 236,911 208,417
Gas (Mcf) 2,657,709 2,714,646 2,837,793
Barrels of Oil Equivalent (BOE) 680,189 689,352 681,382
Standardized measure of
discounted future net cash flows $1,893,643 $2,840,628 $2,351,565
</TABLE>
(2) Revisions of previous estimates are primarily the result of product prices
changes during the respective year-ends presented above.
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>
December 31, 1995
-----------------
United
States Canada (1) Colombia Total
------ ---------- -------- -----
<S> <C> <C> <C> <C>
Future cash inflows $ 100,559 $ 25,411 $ 52,335 $ 178,305
Future production costs (56,871) (8,979) (30,193) (96,043)
Future development costs (3,997) (3,064) (1,675) (8,736)
Future income tax expenses (10,872) (3,204) (5,623) (19,699)
--------- --------- --------- ---------
Future net cash flows 28,819 10,164 14,844 53,827
10 percent annual discount for
Estimated timing of cash flows (9,585) (2,771) (2,406) (14,762)
--------- --------- --------- ---------
Standardized measure of discounted
future net cash flows $ 19,234 $ 7,393 $ 12,438 $ 39,065
========= ========= ========= =========
December 31, 1996
-----------------
Future cash inflows $ 324,206 $ 39,985 $ 157,552 $ 521,743
Future production costs (143,964) (13,247) (63,458) (220,669)
Future development costs (24,432) (587) (22,153) (47,172)
Future income tax expenses (36,539) (9,529) (22,172) (68,240)
--------- --------- --------- --------
Future net cash flows 119,271 16,622 49,769 185,662
10 percent annual discount for
estimated timing of cash flows (45,942) (5,581) (17,650) (69,173)
--------- --------- --------- --------
Standardized measure of discounted
future net cash flows $ 73,329 $ 11,041 $ 32,119 $ 116,489
========= ========= ========= ========
December 31, 1997
-----------------
Future cash inflows $ 184,240 $ 30,826 $ 167,418 $382,484
Future production costs (87,803) (11,639) (71,327) (170,769)
Future development costs (18,263) (1,604) (8,269) (28,136)
Future income tax expenses (15,773) (4,307) (36,022) (56,102)
--------- --------- --------- --------
Future net cash flows 62,401 13,276 51,800 127,477
10 percent annual discount for
estimated timing of cash flows (16,572) (4,174) (16,878) (37,624)
--------- --------- --------- -------
Standardized measure of discounted
future net cash flows $ 45,829 $ 9,102 $ 34,922 $ 89,853
========= ========= ========= =======
</TABLE>
(1) See reference (1) on page F-[ ]
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).
<TABLE>
1995
----
United
States Canada (1) Colombia Total
------ ---------- -------- -----
<S> <C> <C> <C> <C>
Balance at beginning of year $18,779 $2,348 $ -- $21,127
- ----------------------------
Acquisitions, discoveries and extensions 6,561 2,123 17,848 26,532
Sales and transfers of oil and gas
produced, net of production costs (3,873) (670) (1,837) (6,380)
Changes in estimated future
development costs 2,329 (2,716) -- (387)
Net changes in prices, net of
production costs (1,682) 1,614 -- (68)
Sales of reserves in place (11) (115) -- (126)
Development costs incurred during
the period 126 -- -- 126
Changes in production rates and other (3,358) (2,757) -- (6,115)
Revisions of previous quantity estimate (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
SABA PETROLEUM COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
1997
----
United
States Canada (1) Colombia Total
Balance at beginning of year $73,329 $11,041 $32,119 $116,489
- ----------------------------
Acquisitions, discoveries and
extensions 31,593 726 8,368 40,687
Sales and transfers of oil
and gas produced, net of
production costs (10,497) (1,254) (5,611) (17,362)
Changes in estimated future
development costs 9,920 (1,108) 9,231 18,043
Net changes in prices, net of
production costs (51,463) (4,739) (15,151) (71,353)
Sales of reserves in place (4,314) -- -- (4,314)
Development costs incurred during
the period 1,601 70 (719) 952
Changes in production rates and
other (9,298) (927) 2,076 (8,149)
Revisions of previous quantity
estimates (20,764) (126) 9,761 (11,129)
Accretion of discount 9,515 1,540 4,471 15,526
Net change in income taxes 16,207 3,879 (9,622) 10,464
--------- --------- --------- --------
Balance at end of year $45,829 $9,102 $34,923 $89,854
========= ========= ========= =========
</TABLE>
(1) See reference (1) on page F-[ ]
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
<TABLE>
Additions
---------------------------------
Balance at Charged Charged Deductions Balance at
beginning to to other from close of
of period income accounts reserves period
--------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C>
1995
Amounts deducted from
applicable assets:
Accounts receivable $62 $12 $(17) $ -- $ -- 57
Deferred income taxes -- 155 -- -- 155
Other non current
assets 85 18 17 78 42
Reserves included in other
non current liabilities:
Restoration and
reclamation 64 26 -- -- 90
1996
Amounts deducted from
applicable assets:
Accounts receivable $57 $12 $ -- $4 $65
Deferred income taxes 155 897 -- -- 1,052
Other non current
assets 42 12 -- 19 35
Reserves included in
other non current liabilities:
Restoration and
reclamation 90 28 -- 30 88
1997
Amounts deducted from
applicable assets:
Accounts receivable $65 $12 $ -- $8 $69
Deferred income
taxes 1,052 818 -- -- 1,870
Other non current
assets 35 -- -- -- 35
Reserves included in other
non current liabilities:
Restoration and
reclamation 88 34 -- 44 78
</TABLE>
Annex I
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is entered into this
18th day of December, 1998 among Horizontal Ventures, Inc., a Colorado
corporation ("Horizontal Ventures"), Horizontal Ventures Acquisition
Corporation,
a Delaware corporation and wholly owned subsidiary of Horizontal Ventures
("Merger Sub"), and Saba Petroleum Company, a Delaware corporation ("Saba").
RECITALS
WHEREAS, Horizontal Ventures has entered into certain transactions to
acquire an aggregate of 3,953,298 shares of the common stock, $.001 par
value per
share, of Saba ("Saba Common stock"), which will represent approximately 35% of
the issued and outstanding shares of Saba Common stock immediately after
consummation of such transactions;
WHEREAS, Merger Sub has been formed for the sole purpose of enabling
Horizontal Ventures to acquire the remaining issued and outstanding shares of
Saba Common stock and Merger Sub has not conducted any operations that were not
related to, and for the purpose of, such acquisition;
WHEREAS, in furtherance of the acquisition by Horizontal Ventures of the
remaining issued and outstanding shares of Saba Common stock, the respective
Boards of Directors of Horizontal Ventures, Merger Sub and Saba have
approved the
merger of Saba with and into Merger Sub, as set forth below (the "Merger"), on
the terms and subject to the conditions set forth in this Agreement, whereby
each
issued and outstanding share of Saba Common stock, other than shares of Saba
Common stock owned directly or indirectly by Horizontal Ventures, will be
converted into the right to receive shares of common stock, no par value per
share, of Horizontal Ventures ("Horizontal Ventures Common stock") as set forth
in Section 2.1; and
WHEREAS, Horizontal Ventures, Merger Sub and Saba desire to make certain
representations, warranties, covenants and agreements in connection with the
transactions contemplated hereby and also to set forth various conditions to the
transactions contemplated hereby.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth herein, and intending to be legally bound
hereby, the parties hereto agree as follows:
[Remainder of Page Intentionally Left Blank]
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions set forth
in this Agreement, and in accordance with the Delaware General Corporation Law
(the "DGCL"), Saba shall be merged with and into Merger Sub at the Effective
Time
(as defined in Section 1.3). Following the Merger, the separate corporate
existence of Saba shall cease and Merger Sub shall continue as the surviving
corporation (the "Surviving Corporation") under the name "Saba Petroleum
Company"
and shall succeed to and assume all the rights and obligations of Merger Sub in
accordance with the DGCL.
Section 1.2 Closing. The closing of the Merger (the "Closing") will take place
at 10:00 a.m. Santa Maria, California time on the second business day after the
satisfaction or waiver (subject to applicable law) of the conditions set
forth in
Article V of this Agreement (the "Closing Date"), at the offices of Saba
Petroleum Company at 3201 Airpark Drive, Suite 201, Santa Maria, California,
unless another date or place is agreed to in writing by the parties hereto. The
parties agree to use all reasonable efforts to close the Merger as soon as
practicable, subject to Article V hereof.
Section 1.3 Effective Time. As soon as practicable following the Closing, the
parties shall execute and file a certificate of merger or other appropriate
documents (in any such case, the "Certificate of Merger") in accordance with the
relevant provisions of the DGCL and shall make all other filings or recordings
required under the DGCL. The Merger shall become effective at such time as the
Certificate of Merger is duly filed with the Delaware Secretary of State, or at
such subsequent time as the parties shall agree, which subsequent time shall be
specified in the Certificate of Merger (the time the Merger becomes effective
being hereinafter referred to as the "Effective Time").
Section 1.4 Effects of the Merger. At and after the Effective Time, the Merger
shall have the effects set forth in the DGCL. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time all the property,
rights, privileges, powers and franchises of Saba and Merger Sub shall be vested
in the Surviving Corporation, and all debts, liabilities and duties of Saba and
Merger Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
Section 1.5 Certificate of Incorporation. At the Effective Time, the
certificate of incorporation of the Surviving Corporation shall be amended in
accordance with the DGCL such that the certificate of incorporation of the
Surviving Corporation shall consist of the provisions of the certificate of
incorporation of Merger Sub, except that Article I of the certificate of
incorporation of the Surviving Corporation shall be amended to read in its
entirety as follows: "The name of the corporation shall be Saba Petroleum
Company."
Section 1.6 Bylaws. The bylaws of Merger Sub as in effect at the Effective Time
shall be the bylaws of the Surviving Corporation until thereafter changed or
amended as provided therein or by applicable law.
Section 1.7 Directors. The directors of Merger Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.
Section 1.8 Officers. The officers of Merger Sub immediately prior to the
Effective Time shall be the officers of the Surviving Corporation, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF
CERTIFICATES
Section 2.1 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder thereof:
(a) Conversion of Saba Common stock. Each share of Saba Common stock issued
and outstanding immediately prior to the Effective Time (other than shares of
Saba Common stock owned by Horizontal Ventures, Merger Sub, Saba, or any
subsidiary of Saba, all of which shall be canceled as provided in Section
2.1(b))
shall be converted into the right to receive that number of shares of Horizontal
Ventures Common stock equal to the Exchange Ratio (as defined below) (the
"Merger
Consideration"). "Exchange Ratio" means the quotient represented by the
ratio of
one share of Horizontal Ventures Common stock for each six shares of Saba Common
stock. At the Effective Time, all such shares of Saba Common stock shall cease
to be outstanding and shall automatically be canceled and retired and shall
cease
to exist, and each holder of a certificate which immediately prior to the
Effective Time represented any such shares of Saba Common stock ("Certificate")
(other than Horizontal Ventures, Merger Sub and Saba) shall thereafter cease to
have any rights with respect to such shares of Saba Common stock, except the
right to receive the applicable Merger Consideration in accordance with Section
2.2 upon the surrender of such Certificate.
(b) Cancellation of Treasury Stock and Horizontal Ventures Owned Stock.
Each share of Saba Common stock issued and outstanding immediately prior to the
Effective Time that is owned by Saba or by any subsidiary of Saba and each share
of Saba Common stock that is owned by Horizontal Ventures, Merger Sub or any
other subsidiary of Horizontal Ventures shall cease to be outstanding and shall
automatically be canceled and retired and shall cease to exist, and no
Horizontal
Ventures Common stock or other consideration shall be delivered in exchange
therefor.
(c) Capital Stock of Merger Sub. Each share of common stock, par value
$.001 per share, of Merger Sub issued and outstanding immediately prior to the
Effective Time shall be automatically converted into and become one fully paid
and nonassessable share of common stock, par value $.001 per share, of the
Surviving Corporation.
(d) Treatment of Options and Warrants to Acquire Saba Common stock. At or
prior to the Effective Time all outstanding warrants to Aberfoyle Capital
Limited
and RGC International Investors LDC and those other options and warrants
exercisable at $2.00 or below to acquire Saba Common stock will be addressed.
Saba shall give written notice to each holder of an option or warrant as soon as
practicable (and in any event within ten business days after the execution of
this Agreement) advising such option or warrant holder how its warrants or
options will be handled, and permitting the exercise of such option or warrant
(to the extent exercisable by the terms of such option or warrant) during the
remaining period of time preceding the Effective Time.
(e) Treatment of Convertible Debt Securities. Horizontal Ventures shall
enter into an agreement with each holder of a 9% Convertible Senior Subordinated
Debenture issued by Saba under the Amended and Restated Debenture Agreement,
dated as of February 7, 1996 between Saba and the debenture holders (all such
securities, collectively, the "Convertible Debentures") to provide that the
Surviving Corporation shall be entitled to redeem the Convertible Debentures
before any conversion of the then outstanding Convertible Debentures in their
original principal amount and accrued interest without premium or penalty.
(f) Provisions for the Series A Convertible Preferred Stock. Prior to the
Effective Time, Horizontal Ventures shall have notified each Holder of the
Series
A Convertible shares of Saba ("Saba Preferred Shares") of the provisions it has
made for the conversion of said Saba Preferred Shares into Common of Horizontal
Ventures in accordance with the Saba Preferred Shares designation.
(g) Notice to Bank One. Upon execution of this Agreement, the parties
shall
give notice of the proposed merger to Bank One by providing it with a copy of
this Agreement.
Section 2.2 Exchange of Certificates.
(a) Exchange Fund. Prior to the Effective Time, Horizontal Ventures shall
appoint a commercial bank or trust company, or a subsidiary thereof, to act as
exchange agent hereunder for the purpose of exchanging Certificates for the
Merger Consideration (the "Exchange Agent"). At or prior to the Effective Time,
Horizontal Ventures shall deposit with the Exchange Agent, in trust for the
benefit of holders of shares of Saba Common stock, certificates representing the
Horizontal Ventures Common stock issuable by Section 2.1 in exchange for
outstanding shares of Saba Common stock. Horizontal Ventures agrees to make
available to the Exchange Agent from time to time as needed, cash sufficient to
pay cash in lieu of fractional shares by Section 2.2(d). Any cash and
certificates of Horizontal Ventures Common stock deposited with the Exchange
Agent
shall hereinafter be referred to as the "Exchange Fund."
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Surviving Corporation shall cause the Exchange Agent to mail
to each holder of record of a Certificate whose shares were converted into the
right to receive the Merger Consideration by Section 2.1, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and which letter shall be in customary form
and have such other provisions as Horizontal Ventures may reasonably specify)
and
(ii) instructions for effecting the surrender of such Certificates in exchange
for the applicable Merger Consideration. Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with such letter of transmittal,
duly
executed and completed in accordance with the instructions thereto, and such
other
documents as may reasonably be required by the Exchange Agent, the holder of
such
Certificate shall be entitled to promptly receive in exchange therefor (A)
one or
more shares of Horizontal Ventures Common stock representing, in the aggregate,
the whole number of shares that such holder has the right to receive by Section
2.1 (after taking into account all shares of Saba Common stock then held by such
holder) and (B) a check in the amount equal to the cash that such holder has the
right to receive by the provisions of this Article II, including cash in lieu of
any fractional shares of Horizontal Ventures Common stock by Section 2.2(d). No
interest will be paid or will accrue on any cash payable by Section 2.2(d). The
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Saba Common stock which is not registered in the
transfer
records of Saba, one or more shares of Horizontal Ventures Common stock
evidencing, in the aggregate, the proper number of shares of Horizontal Ventures
Common stock and a check in the proper amount of cash in lieu of any fractional
shares of Horizontal Ventures Common stock by Section 2.2(d) may be issued
promptly with respect to such Saba Common stock to such a transferee if the
Certificate representing such shares of Saba Common stock is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
such
transfer and to evidence that any applicable stock transfer taxes have been
paid.
(c) No Further Ownership Rights in Saba Capital Stock. All shares of
Horizontal Ventures Common stock issued and cash paid upon the surrender of
Certificates in accordance with the terms of this Article II shall be deemed to
have been issued and paid in full satisfaction of all rights pertaining to the
shares of Saba Common stock theretofore represented by such Certificates.
(d) No Fractional Shares of Horizontal Ventures Common stock/Provision for
Small Shareholders.
(1) No certificates or scrip or shares of Horizontal Ventures Common
stock representing fractional shares of Horizontal Ventures Common stock
shall be
issued upon the surrender for exchange of Certificates and such fractional share
interests will not entitle the owner thereof to vote or to have any rights of a
shareholder of Horizontal Ventures or a holder of shares of Horizontal Ventures
Common stock.
(2) Notwithstanding any other provision of this Agreement, each holder
of shares of Saba Common stock exchanged by the Merger who would otherwise have
been entitled to receive a fraction of a share of Horizontal Ventures Common
stock (after taking into account all Certificates delivered by such holder)
shall
receive, in lieu thereof, cash (without interest) in an amount equal to the
product of (i) such fractional part of a share of Horizontal Ventures Common
stock multiplied by (ii) the closing bid price per share of Horizontal Ventures
Common stock reported on Nasdaq SmallCap Market in The Wall Street Journal,
Eastern edition, as of the Closing Date. As promptly as practicable after the
determination of the amount of cash, if any, to be paid to holders of fractional
interests, the Exchange Agent shall so notify Horizontal Ventures, and
Horizontal
Ventures shall cause the Surviving Corporation to promptly deposit such amount
with the Exchange Agent and shall cause the Exchange Agent to forward
payments to
such holders of fractional interests subject to and in accordance with the terms
hereof.
(3) Horizontal Ventures shall offer to pay cash in lieu of Common stock
to all Saba shareholders who will be issued two(2) shares or less of Horizontal
Ventures Common stock as a result of the merger. The cash offer shall be at the
closing bid price per share of Horizontal Ventures on Nasdaq on the Closing Date
as determined by subsection (2) above.
(e) Termination of Exchange Fund; No Liability. Following the date that is
six months after the Effective Time, the Exchange Agent shall return to the
Surviving Corporation all remaining undistributed Merger Consideration and other
cash, property and instruments in its possession relating to the transactions
described in this Agreement, and the Exchange Agent's duties shall terminate.
Thereafter, each holder of a Certificate may surrender such Certificate directly
to the Surviving Corporation by the provisions of this Section 2.2 and
(subject to
applicable abandoned property, escheat and similar laws) receive in exchange
therefor the Merger Consideration (without interest thereon). Notwithstanding
the foregoing, the Surviving Corporation shall be entitled to receive from
time to
time all interest or other amounts earned with respect to any cash deposited
with
the Exchange Agent as such amounts accrue or become available. If any
Certificates shall not have been surrendered prior to such date on which any
payment by this Article II would otherwise escheat to or become the property of
any governmental entity, the cash payment in respect of such Certificate
shall, to
the extent permitted by applicable law, become the property of the Surviving
Corporation, free and clear of all claims or interests of any person previously
entitled thereto. None of Horizontal Ventures, Merger Sub, Saba, the Surviving
Corporation or the Exchange Agent shall be liable to any person in respect
of any
cash delivered to a public official by any applicable abandoned property,
escheat or similar law.
(f) Investment of the Exchange Fund. The Exchange Agent shall invest any
cash included in the Exchange Fund as directed by the Surviving Corporation on a
daily basis. Any interest or other income resulting from such investments shall
promptly be paid to the Surviving Corporation.
(g) Withholding Rights. Each of the Surviving Corporation and Horizontal
Ventures shall be entitled to deduct and withhold from the consideration
otherwise
payable by this Agreement to any holder of shares of Saba Common stock such
amounts as it is required to deduct and withhold with respect to the making of
such payment under the Internal Revenue Code of 1986, as amended
(the "Code"), and
the rules and regulations promulgated thereunder, or any provision of state,
local
or foreign tax law. To the extent that amounts are so withheld by the Surviving
Corporation or Horizontal Ventures, as the case may be, such withheld amounts
shall be treated for all purposes of this Agreement as having been paid to the
holder of the shares of Saba Common stock in respect of which such deduction and
withholding was made by the Surviving Corporation or Horizontal Ventures, as the
case may be.
(h) Lost, Stolen or Destroyed Certificates. In the event any Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that
fact by the person claiming such Certificate to be lost, stolen or destroyed
and,
if required by the Surviving Corporation, the posting of a bond by such
person in
such reasonable amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such Certificate,
the Exchange Agent will deliver in exchange for such lost, stolen or destroyed
Certificate the applicable Merger Consideration with respect to the shares
of Saba
Common stock formerly represented thereby and any cash in lieu of fractional
shares of Horizontal Ventures Common stock by this Agreement.
(i) Further Assurances. If at any time after the Effective Time, any further
assignments or assurances in law or any other things are necessary or
desirable to
vest or to perfect or confirm of record in the Surviving Corporation the
title to
any property or rights of either Saba or Merger Sub, or otherwise to carry
out the
provision of this Agreement, the officers and directors of the Surviving
Corporation are hereby authorized and empowered, in the name of and on behalf of
Saba and Merger Sub, to execute and deliver any and all things necessary or
proper
to vest or perfect or confirm title to such property or rights in the Surviving
Corporation, and otherwise to carry out the purposes and provisions of this
Agreement.
(j) Stock Transfer Books. At the close of business, New York City time, on
the day the Effective Time occurs, the stock transfer books of Saba shall be
closed and there shall be no further registration of transfers of shares of Saba
Common stock thereafter on the records of Saba. From and after the Effective
Time, the holders of Certificates shall cease to have any rights with respect to
such shares of Saba Common stock formerly represented thereby, except as
otherwise
provided herein or by law. On or after the Effective Time, any Certificates
presented to the Exchange Agent or Horizontal Ventures for any reason shall be
converted into the Merger Consideration with respect to the shares of Saba
Common
stock formerly represented thereby and any cash in lieu of fractional shares of
Horizontal Ventures Common stock to which the holders thereof are entitled by
Section 2.2(d).
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of Saba. Saba hereby represents and
warrants to Horizontal Ventures that, except as set forth on Schedule 3.1
attached
hereto, Schedules 3.1 and 3.1(2)(a) to the Common stock Purchase Agreement dated
October 8, 1998 and the disclosures contained in Saba's S-1 Registration
Statement
filed on December 23, 1998 or as described in filings heretofore made by Saba by
the informational reporting requirements of the Securities Exchange Act of 1934
(the "Exchange Act"):
(1) Organization and Standing of Saba. Saba is a corporation duly organized
and validly existing and in good standing under the laws of the State of
Delaware.
It has all requisite corporate power and authority to carry on its business as
now
being conducted, to enter into this Agreement and to carry out and perform the
terms and provisions of this Agreement. Saba is duly qualified to do
business and
is in good standing in each jurisdiction in which the failure to be so qualified
would have a material adverse effect on the condition (financial or otherwise),
business, net worth, assets (including intangible assets), properties or
operations ("Material Adverse Effect") of Saba. Saba has no direct or indirect
interest, either by way of stock ownership or otherwise, in any other firm,
corporation, association, or business except for partnerships, operating
agreements, farmout agreements, unitization, pooling agreements and other
customary oil and gas industry arrangements.
(2) Capitalization and Indebtedness for Borrowed Moneys. Saba is duly and
lawfully authorized by its Certificate of Incorporation, as amended, to issue
150
million shares of Saba Common stock and 50 million shares of preferred stock,
$.001 par value per share ("Saba Preferred Stock"), of which as of the date
hereof
there are issued and outstanding 11,385,726 shares of Saba Common stock and
8,000
shares of Series A Convertible Preferred Stock ("Preferred Stock"). Saba has no
treasury stock and no other authorized series or class of stock. All the
outstanding shares of Saba Common stock and Saba Preferred Stock have been duly
authorized and validly issued and are fully paid and nonassessable and free of
preemptive rights. Saba is not obligated to issue any additional common or
preferred stock as a result of any options, warrants, rights, conversion rights,
obligations upon default, subscription agreement or other obligation of any
kind.
Saba is not presently liable on account of any indebtedness for borrowed moneys,
except as reflected in the Saba Financial Statements (as hereinafter defined).
(3) Saba's Authority. The execution, delivery, and performance of this
Agreement have been duly authorized by all requisite corporate action,
subject to
the approval of this Agreement by the shareholders of Saba. This Agreement has
been executed and delivered by Saba and constitutes a valid and binding
obligation
of Saba enforceable in accordance with its terms (except as limited by
bankruptcy,
insolvency, or other laws affecting the enforcement of creditors' rights). The
execution, delivery and performance of this Agreement will not conflict with any
provision of Saba's Certificate of Incorporation or Bylaws, as amended, or with
any contract to which Saba is a party or otherwise bound.
(4) Saba Financial Statements. Saba has furnished to Horizontal
Ventures its
audited balance sheets as of December 31, 1997 and 1996, its audited statements
of income and retained earnings and cash flows for each of the three years ended
December 31, 1997, its unaudited balance sheet as of September 30, 1998, and its
unaudited statements of income and cash flows for the nine months ended
September
30, 1998 (collectively, the "Saba Financial Statements"). All of the Saba
Financial Statements present fairly the financial position of Saba as of the
respective balance sheet dates, and the results of its operations and cash flows
for the respective periods therein specified. The Saba Financial Statements
were
prepared in accordance with generally accepted accounting principles applied
upon
a basis consistent with prior accounting periods.
(5) Present Status. Subject to the provisions of Section 3.3, Saba has not,
since September 30, 1998 and will not prior to the Closing Date without the
prior
written consent of Horizontal Ventures, which consent shall not be unreasonably
withheld or delayed, and shall be based on the best interests of Saba's
stockholders as a whole.
(a) Incurred any obligations or liabilities, absolute, accrued,
contingent, or otherwise and whether due or to become due, except liabilities
incurred in the ordinary course of business;
(b) Entered into any agreement obligating it to issue any equity
securities except as required by the Common stock Purchase Agreement dated
October 8, 1998 (the "Common stock Purchase Agreement") as extended between Saba
and Horizontal Ventures;
(c) Discharged or satisfied any liens or encumbrances, or paid any
obligation or liability, absolute, accrued, contingent, or otherwise and whether
due or to become due, other than current liabilities reflected on the Saba
Financial Statements and current liabilities incurred since the close of
business
on the date of the Saba Financial Statements, in each case, in the ordinary
course of business;
(d) Declared or made any payment or distribution to its stockholders or
purchased or redeemed, or obligated itself to purchase or redeem, any of its
shares of Common stock or other securities except with respect to its Series A
Preferred Stock and except as may be required by its Convertible Debentures;
(e) Voluntarily mortgaged, pledged, or subjected to lien, or any other
encumbrances or charges, any of its assets, tangible or intangible;
(f) Sold or transferred any of its material assets, or canceled any
material debt or claim;
(g) Suffered any material damage, destruction, or loss (whether or not
covered by insurance) affecting the properties of Saba, or waived any rights of
substantial value; or
(h) Except with respect to this Agreement and the Common stock Purchase
Agreement, entered into any transaction regarding the sale, lease or encumbrance
of any asset or the settlement of any obligation, or entered into any other
material transaction other than in the ordinary course of business.
(6) Litigation. Except as disclosed in the Saba Financial Statements, there
are no legal actions, suits, arbitrations, or other legal or administrative
proceedings pending or threatened against Saba which would reasonably be
expected
to have a material adverse effect upon it, its properties, assets, or business;
and Saba is not aware of any facts which to its knowledge would reasonably be
expected to result in any action, suit, arbitration, or other proceeding
which in
turn would reasonably be expected to result in any material adverse change
in the
business or condition (financial or otherwise) of Saba or its properties or
assets. Saba is not in default of any judgment, order, or decree of any court
or, in any material respect of, any requirements of a government agency or
instrumentality, except as set forth in the Saba Financial Statements.
(7) Compliance With the Law and Other Instruments. To the best of Saba's
knowledge, the business operations of Saba have been and are being conducted in
substantial compliance with all applicable laws, rules, and regulations of all
authorities. Saba is not in violation of, or in default under, any term or
provision of its Certificate of Incorporation, as amended, or its Bylaws, as
amended, or in any material respect of any lien, mortgage, lease, agreement,
instrument, order, judgment, or decree, or subject to any restriction
contained in
any of the foregoing of any kind or character which materially adversely affects
the business, properties, assets, or prospects of Saba, or which would prohibit
Saba from entering into this Agreement.
(8) Title to Properties and Assets. Saba has good and marketable title to
all of its material properties and assets, including without limitation those
reflected in the Saba Financial Statements and those used or located on property
controlled by Saba in its business (except assets leased or sold in the ordinary
course of business), subject to no mortgage, pledge, lien, charge, security
interest, encumbrance, or restriction except those which (a) are disclosed
in the
Saba Financial Statements as securing specified liabilities; or (b) do not
materially adversely affect the use thereof.
(9) Contracts and Other Obligations. Saba is not a party to or otherwise
bound by any material written or oral:
(a) Contract or agreement not made in the ordinary course of business;
(b) Employment or consultant contract which is not terminable at will
without cost or other liability to Saba or any successor;
(c) Contract with any labor union;
(d) Bonus, pension, profit-sharing, retirement, share purchase, stock
option, hospitalization, group insurance, or similar plan providing employee
benefits;
(e) Advertising contract or contract for public relations services;
(f) Purchase, supply, or service contracts in excess of $100,000
each, or
in the aggregate of $500,000 for all such contracts whether below or above
$100,000;
(g) Deed of trust, mortgage, conditional sales contract, security
agreement, pledge agreement, trust receipt, or any other agreement or
arrangement
whereby any of the assets or properties of Saba are subjected to a lien,
encumbrance, charge, or other restriction;
(h) Material contract or other material commitment continuing for a
period of more than thirty days and which is not terminable without cost
or other
liability to Saba or its successor; or
(i) Any material contract, agreement, lease or other binding arrangement
with which Saba is not in substantial compliance therewith.
(j) Nothing herein shall prohibit or restrict Saba from making
expenditures required under operating agreements, joint venture agreements,
unit,
pooling, farmout agreements or expenditures necessitated by emergency conditions
to protect or preserve life or property or expenditures required by law or
administrative authority or to perform its existing commitments.
(10) Records. To the best of Saba's knowledge, the books of account, minute
books, stock certificate books, and stock transfer ledgers of Saba are complete
and correct, and there have been no transactions involving the business of Saba
which properly should have been set forth in said respective books, other than
those set forth therein.
(11) Vote Required. The approved of the holders of a majority of the
outstanding shares of Saba Common stock to approve this Agreement (the "Required
Saba Vote") is the only vote of the holders of any class or series of Saba
capital
stock necessary to adopt this Agreement and approve the transactions
contemplated
hereby.
(12) Brokers or Finders. All negotiations on the part of Saba relative to
this Agreement and the transactions contemplated hereby have been carried on by
Saba without the intervention of any person or as the result of any act of
Saba in
such manner as to give rise to any valid claim for a brokerage commission,
finder's fee, or other like payment.
(13) Absence of Certain Changes or Events. Since September 30, 1998, there
has not been any material adverse change in, or event or condition materially
and
adversely affecting the, condition (financial or otherwise), properties, assets,
liabilities or, to the knowledge of Saba, the business or prospects of Saba,
except for conditions generally affecting the segments of the oil and gas
industry
in the locales in which Saba conducts its business.
(14) Taxes. Saba has duly filed all federal, state, county and local income,
franchise, excise, real and personal property and other tax returns and reports
(including, but not limited to, those relating to social security, withholding,
unemployment insurance, and occupation (sales) and use taxes) required to have
been filed by Saba up to the date hereof. All of the foregoing returns are true
and correct in all material respects and Saba has paid or provided for all
taxes,
interest and penalties shown on such returns or reports as being due. Saba
has no
liability for any material amount of taxes, interest or penalties of any nature
whatsoever, except for those taxes which may have arisen up to the Closing
Date in
the ordinary course of business and are properly accrued on the books of Saba as
of the Closing Date.
(15) Environmental Matters. Saba is aware of no actions, proceedings or
investigations pending or, to the actual knowledge of Saba, threatened before
any
federal or state environmental regulatory body, or before any federal or state
court, alleging noncompliance by Saba with CERCLA or any other laws or
regulations
regulating the discharge of materials into the environment
("Environmental Laws").
To the actual knowledge of Saba: (i) there is no reasonable basis for the
institution of any action, proceeding or investigation against Saba under any
Environmental Law; (ii) Saba is not responsible under any Environmental Law for
any release by any person at or in the vicinity of real property of any
hazardous
substance (as defined by CERCLA), caused by the spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping
or disposing of any such hazardous substance into the environment; (iii) Saba is
not responsible for any costs of any remedial action required by virtue of any
release of any toxic or hazardous substance, pollutant or contaminant into the
environment including, without limitation, costs arising from security fencing,
alternative water supplies, temporary evacuation and housing and other emergency
assistance undertaken by any environmental regulatory body; (iv) Saba is in
substantial compliance with all applicable Environmental Laws; and (v) no real
property used, owned, managed or controlled by Saba contains any toxic or
hazardous substance including, without limitation, any asbestos, PCBs or
petroleum
products or byproducts in any form, the presence, location or condition of which
(a) violates any Environmental Law, or (b) otherwise would pose any significant
health or safety risk unless remedial measures were taken.
(16) Full Disclosure. To Saba's knowledge and belief, this Agreement, Saba's
periodic public reports filed with the SEC by the requirements of the Exchange
Act, and any schedules and certificates delivered by Saba in connection herewith
or with the transactions contemplated hereby, taken as a whole, neither contain
any untrue statement of a material fact nor omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
To Saba's knowledge and belief, there are no facts which (individually or in the
aggregate) materially adversely affect the business, assets, liabilities,
financial condition or operations of Saba that have not been set forth in this
Agreement, the Schedules hereto, the periodic public reports of Saba or in other
documents delivered by Saba in connection herewith or disclosed orally by an
executive officer of Saba.
(17) State Takeover Statutes. Prior to the time that Horizontal Ventures
became an "interested stockholder" of Saba within the meaning of Section 203 of
the DGCL, the Board of directors of Saba approved the transactions which
resulted
in Horizontal Ventures becoming an interested stockholder and such approval is
sufficient to render the provisions of Section 203 of the DGCL inapplicable
to the
Merger and the transactions contemplated by this Agreement. To Saba's
knowledge,
no other state takeover statute or similar statute or regulation applies or
purports to apply to this Agreement or the Merger, or any of the transactions
contemplated by this Agreement. The Company is not subject to any provision of
the California General Corporation Law by operation of Section 2115 thereof.
Section 3.2 Representations and Warranties by Horizontal Ventures. Horizontal
Ventures hereby represents and warrants to Saba that, except as set forth on
Schedule 3.2 attached hereto or as described in filings heretofore made by
Horizontal Ventures by the informational reporting requirements of the Exchange
Act:
(1) Organization and Standing of Horizontal Ventures. Horizontal Ventures is
a corporation duly organized and validly existing and in good standing under the
laws of the State of Colorado. It has all requisite corporate power and
authority
to carry on its business as now being conducted, to enter into this
Agreement and
to carry out and perform the terms and provisions of this Agreement. Horizontal
Ventures is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified would have a material
adverse
effect on the condition (financial or otherwise), business, net worth, assets
(including intangible assets), properties or operations ("Material Adverse
Effect") of Horizontal Ventures. Except with respect to Calox, Inc. and
Horizontal Ventures Cat Canyon, Inc., both of which are wholly owned
subsidiaries
of Horizontal Ventures, Horizontal Ventures has no direct or indirect interest,
either by way of stock ownership or otherwise, in any other firm, corporation,
association, or business excepting partnerships, operating agreements, farmout
agreements, unitization, pooling agreements and other customary oil and gas
industry arrangements.
(2) Capitalization. Horizontal Ventures is duly and lawfully authorized by
its Articles of Incorporation, as amended, to issue 50 million shares of
Horizontal Ventures Common stock and 50 million shares of preferred stock,
no par
value per share ("Horizontal Ventures Preferred Stock"), of which as of the date
hereof there are issued and outstanding 2,910,981 shares of Horizontal Ventures
Common stock and no shares of Horizontal Ventures Preferred Stock. Horizontal
Ventures has no treasury stock and no other authorized series or class of
stock.
All the outstanding shares of Horizontal Ventures Common stock have been duly
authorized and validly issued and are fully paid and nonassessable and free of
preemptive rights. Except as may be required to convert the Saba Preferred
shares
and as listed on Schedule 3.2(2)(a) attached hereto, Horizontal Ventures is not
obligated to issue any additional common or preferred stock as a result of any
options, warrants, rights, conversion rights, obligations upon default,
subscription agreement or other obligation of any kind. Horizontal Ventures is
not presently liable on account of any indebtedness for borrowed moneys,
except as
reflected in the Horizontal Ventures Financial Statements (as hereinafter
defined).
(3) Horizontal Ventures' Authority. The execution, delivery, and performance
of this Agreement have been duly authorized by all requisite corporate action,
subject to the approval of the Horizontal Ventures Share Issuance (as defined
below) by the shareholders of Horizontal Ventures. This Agreement has been
executed and delivered by Horizontal Ventures and constitutes a valid and
binding
obligation of Horizontal Ventures enforceable in accordance with its terms
(except
as limited by bankruptcy, insolvency, or other laws affecting the enforcement of
creditors' rights). The execution, delivery and performance of this Agreement
will not conflict with any provision of Horizontal Ventures' Articles of
Incorporation and any amendments thereto, Bylaws and any amendments thereto,
or of
any contract to which Horizontal Ventures is a party or otherwise bound.
(4) Horizontal Ventures Financial Statements. Horizontal Ventures has
furnished to Saba its audited balance sheet as of December 31, 1997,
its audited
statements of operations and cash flows for each of the two years ended
December 31, 1997, its unaudited balance sheet as of September 30, 1998, and its
unaudited statements of operations and cash flows for the nine months ended
September 30, 1998 (collectively, the "Horizontal Ventures Financial
Statements").
All of the Horizontal Ventures Financial Statements present fairly the financial
position of Horizontal Ventures as of the respective balance sheet dates,
and the
results of its operations and cash flows for the respective periods therein
specified. The Horizontal Ventures Financial Statements were prepared in
accordance with generally accepted accounting principles applied upon a basis
consistent with prior accounting periods.
(5) Vote Required. The approved of the holders of shares of Horizontal
Ventures Common stock representing a majority of the total votes cast at a duly
held meeting of the holders of outstanding shares of Horizontal Ventures Common
stock (the "Required Horizontal Ventures Vote"), to approve the issuance by
Horizontal Ventures of shares of Horizontal Ventures Common stock (the
"Horizontal
Ventures Share Issuance") by the terms of this Agreement, is the only vote
of the
holders of any class or series of Horizontal Ventures capital stock necessary to
approve the Horizontal Ventures Share Issuance contemplated by this Agreement.
(6) Present Status. Subject to the provisions of Section 3.3, Horizontal
Ventures has not, since September 30, 1998 and will not prior to the Closing
Date
without the prior written consent of Saba, which consent shall not be
unreasonably
withheld or delayed, and shall be based on the best interests of Horizontal
Ventures' stockholders as a whole.
(a) Incurred any obligations or liabilities, absolute, accrued,
contingent, or otherwise and whether due or to become due, except liabilities
incurred in the ordinary course of business;
(b) Entered into any agreement obligating it to issue any equity
securities except as required by the Common stock Purchase Agreement dated
October
8, 1998 (the "Common stock Purchase Agreement") as extended between Saba and
Horizontal Ventures;
(c) Discharged or satisfied any liens or encumbrances, or paid any
obligation or liability, absolute, accrued, contingent, or otherwise and whether
due or to become due, other than current liabilities reflected on the Horizontal
Ventures Financial Statements and current liabilities incurred since the
close of
business on the date of the Horizontal Ventures Financial Statements, in each
case, in the ordinary course of business;
(d) Declared or made any payment or distribution to its stockholders or
purchased or redeemed, or obligated itself to purchase or redeem, any of its
shares of Common stock or other securities except with respect to its Series A
Preferred Stock and except as may be required by its Convertible Debentures;
(e) Voluntarily mortgaged, pledged, or subjected to lien, or any other
encumbrances or charges, any of its assets, tangible or intangible;
(f) Sold or transferred any of its material assets, or canceled any
material debt or claim;
(g) Suffered any material damage, destruction, or loss (whether or not
covered by insurance) affecting the properties of Horizontal Ventures, or waived
any rights of substantial value; or
(h) Except with respect to this Agreement and the Common stock Purchase
Agreement, entered into any transaction regarding the sale, lease or encumbrance
of any asset or the settlement of any obligation, or entered into any other
material transaction other than in the ordinary course of business.
(7) Litigation. Except as disclosed in the Horizontal Ventures Financial
Statements, there are no legal actions, suits, arbitrations, or other legal or
administrative proceedings pending or threatened against Horizontal Ventures
which
would reasonably be expected to have a material adverse effect upon it, its
properties, assets, or business; and Horizontal Ventures is not aware of any
facts
which to its knowledge would reasonably be expected to result in any action,
suit,
arbitration, or other proceeding which in turn would reasonably be expected to
result in any material adverse change in the business or condition (financial or
otherwise) of Horizontal Ventures or its properties or assets. Horizontal
Ventures is not in default of any judgment, order, or decree of any court or, in
any material respect of, any requirements of a government agency or
instrumentality, except as set forth in the Horizontal Ventures Financial
Statements.
(8) Compliance With the Law and Other Instruments. To the best of Horizontal
Ventures' knowledge, the business operations of Horizontal Ventures have
been and
are being conducted in substantial compliance with all applicable laws,
rules, and
regulations of all authorities. Horizontal Ventures is not in violation of,
or in
default under, any term or provision of its Certificate of Incorporation, as
amended, or its Bylaws, as amended, or in any material respect of any lien,
mortgage, lease, agreement, instrument, order, judgment, or decree, or
subject to
any restriction contained in any of the foregoing of any kind or character which
materially adversely affects the business, properties, assets, or prospects of
Horizontal Ventures, or which would prohibit Horizontal Ventures from entering
into this Agreement.
(9) Title to Properties and Assets. Horizontal Ventures has good and
marketable title to all of its material properties and assets, including without
limitation those reflected in the Horizontal Ventures Financial Statements and
those used or located on property controlled by Horizontal Ventures in its
business (except assets leased or sold in the ordinary course of business),
subject to no mortgage, pledge, lien, charge, security interest, encumbrance, or
restriction except those which (a) are disclosed in the Horizontal Ventures
Financial Statements as securing specified liabilities; or (b) do not materially
adversely affect the use thereof.
(10) Records. To the best of Horizontal Ventures' knowledge, the books of
account, minute books, stock certificate books, and stock transfer ledgers of
Horizontal Ventures are complete and correct, and there have been no
transactions
involving the business of Horizontal Ventures which properly should have
been set
forth in said respective books, other than those set forth therein.
(11) Taxes. Horizontal Ventures has duly filed all federal, state, county and
local income, franchise, excise, real and personal property and other tax
returns
and reports (including, but not limited to, those relating to social security,
withholding, unemployment insurance, and occupation (sales) and use taxes)
required to have been filed by Horizontal Ventures up to the date hereof.
All of
the foregoing returns are true and correct in all material respects and
Horizontal
Ventures has paid or provided for all taxes, interest and penalties shown
on such
returns or reports as being due. Horizontal Ventures has no liability for any
material amount of taxes, interest or penalties of any nature whatsoever, except
for those taxes which may have arisen up to the Closing Date in the ordinary
course of business and are properly accrued on the books of Horizontal
Ventures as of the Closing Date.
(12) Environmental Matters. Horizontal Ventures is aware of no actions,
proceedings or investigations pending or, to the actual knowledge of Horizontal
Ventures, threatened before any federal or state environmental regulatory
body, or
before any federal or state court, alleging noncompliance by Horizontal Ventures
with CERCLA or any other laws or regulations regulating the discharge of
materials
into the environment ("Environmental Laws"). To the actual knowledge of
Horizontal Ventures: (i) there is no reasonable basis for the institution of any
action, proceeding or investigation against Horizontal Ventures under any
Environmental Law; (ii) Horizontal Ventures is not responsible under any
Environmental Law for any release by any person at or in the vicinity of real
property of any hazardous substance (as defined by CERCLA), caused by the
spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, dumping or disposing of any such hazardous substance
into the
environment; (iii) Horizontal Ventures is not responsible for any costs of any
remedial action required by virtue of any release of any toxic or hazardous
substance, pollutant or contaminant into the environment including, without
limitation, costs arising from security fencing, alternative water supplies,
temporary evacuation and housing and other emergency assistance undertaken
by any
environmental regulatory body; (iv) Saba is in substantial compliance with all
applicable Environmental Laws; and (v) no real property used, owned, managed or
controlled by Horizontal Ventures contains any toxic or hazardous substance
including, without limitation, any asbestos, PCBs or petroleum products or
byproducts in any form, the presence, location or condition of which (a)
violates
any Environmental Law, or (b) otherwise would pose any significant health or
safety risk unless remedial measures were taken.
(13) Brokers or Finders. All negotiations on the part of Horizontal Ventures
relative to this Agreement and the transactions contemplated hereby have been
carried on by Horizontal Ventures without the intervention of any person or
as the
result of any act of Horizontal Ventures in such manner as to give rise to any
valid claim for a brokerage commission, finder's fee, or other like payment.
(14) Absence of Certain Changes or Events. Since September 30, 1998, there
has not been any material adverse change in, or event or condition materially
and
adversely affecting the, condition (financial or otherwise), properties, assets,
liabilities or, to the knowledge of Horizontal Ventures, the business or
prospects
of Horizontal Ventures, except for conditions generally affecting the oil
and gas industry.
(15) Full Disclosure. To Horizontal Ventures' knowledge and belief, this
Agreement, Horizontal Ventures' periodic public reports filed with the SEC
by the
requirements of the Exchange Act, and any schedules and certificates
delivered by
Horizontal Ventures in connection herewith or with the transactions contemplated
hereby, taken as a whole, neither contain any untrue statement of a material
fact
nor omit to state any material fact required to be stated therein or
necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. To Horizontal Ventures' knowledge and belief,
there are no facts which (individually or in the aggregate) materially adversely
affect the business, assets, liabilities, financial condition or operations of
Horizontal Ventures that have not been set forth in this Agreement, the
Schedules
hereto, the periodic public reports of Horizontal Ventures or in other documents
delivered by Horizontal Ventures in connection herewith.
(16) No Business Activities by Merger Sub. Merger Sub has not conducted any
activities other than in connection with the organization of Merger Sub, the
negotiation and execution of this Agreement and the consummation of the
transactions contemplated hereby. Merger Sub has no subsidiaries.
Section 3.3 Certain Restrictions on Dispositions. Without the prior written
consent of Horizontal Ventures, which consent shall not be unreasonably withheld
or delayed, until the Closing Date Saba shall not enter into a processing
agreement covering its Santa Maria Refinery as presently proposed in invitations
for tenders, copies of which have been supplied to Horizontal Ventures, nor sell
or otherwise voluntarily dispose of the Santa Maria Refinery or any interest
therein, nor sell or otherwise voluntarily dispose of any of the material assets
of Saba Energy Company of Texas, Inc.
ARTICLE IV
ADDITIONAL AGREEMENTS
Section 4.1 Preparation of Joint proxy statement/prospectus; Meetings of Saba
and Horizontal Ventures Shareholders.
(a) As promptly as practicable following the date hereof, Horizontal Ventures
shall, in cooperation with Saba, prepare and file with the SEC preliminary proxy
materials which shall constitute the Joint proxy statement/prospectus (such
Joint
proxy statement/prospectus, and any amendments or supplements thereto, the
"Joint
proxy statement/prospectus") and a registration statement on Form S-4 with
respect
to the issuance of Horizontal Ventures Common stock in the Merger (the "Form S-
4"). The Joint proxy statement/prospectus will be included in the Form S-4 as
Horizontal Ventures' prospectus. The Form S-4 and the Joint proxy
statement/prospectus shall comply as to form in all material respects with the
applicable provisions of the Securities Act of 1933 (the "Securities Act")
and the
Exchange Act and the rules and regulations thereunder. Each of Horizontal
Ventures and Saba shall use all reasonable efforts to have the Form S-4 declared
effective by the SEC as promptly as practicable after filing with the SEC and to
keep the Form S-4 effective as long as is necessary to consummate the Merger.
Horizontal Ventures shall, as promptly as practicable after receipt thereof,
provide copies to Saba of any written comments received from the SEC with
respect
to the Joint proxy statement/prospectus and advise Saba of any oral comments
with
respect to the Joint proxy statement/prospectus received from the SEC.
Horizontal
Ventures agrees that none of the information supplied or to be supplied by
Horizontal Ventures for inclusion or incorporation by reference in the Joint
proxy
statement/prospectus and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the Saba Shareholders Meeting (as defined
below) or the Horizontal Ventures Shareholders Meeting (as defined below), will
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Saba
agrees that none of the information supplied or to be supplied by Saba for
inclusion or incorporation by reference in the Joint proxy statement/prospectus
and each amendment or supplement thereto, at the time of mailing thereof and at
the time of the Saba Shareholders Meeting or the Horizontal Ventures
Shareholders
Meeting, will contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
For purposes of the foregoing, it is understood and agreed that information
concerning or related to Horizontal Ventures and the Horizontal Ventures
Shareholders Meeting will be deemed to have been supplied by Horizontal Ventures
and information concerning or related to Saba and the Saba Shareholders Meeting
shall be deemed to have been supplied by Saba. Horizontal Ventures will provide
Saba with a reasonable opportunity to review and comment on any amendment or
supplement to the Joint proxy statement/prospectus prior to filing such with the
SEC, and will provide Saba with a copy of all such filings made with the SEC.
No
amendment or supplement to the information supplied by Saba for inclusion in the
Joint proxy statement/prospectus shall be made without the approval of Saba,
which
approval shall not be unreasonably withheld or delayed.
(b) Saba shall, as promptly as practicable following the execution of this
Agreement, duly call, give notice of, convene and hold a meeting of its
shareholders (the "Saba Shareholders Meeting") for the purpose of obtaining the
Required Saba Vote with respect to this Agreement, shall take all lawful
action to
solicit the approval of this Agreement by the Required Saba Vote, and the
Board of
directors of Saba shall recommend approval of this Agreement by the shareholders
of Saba. Horizontal Ventures agrees that at the Saba Shareholders Meeting
Horizontal Ventures shall vote all of its shares of Saba Common stock in
favor of
this Agreement, and thus the Merger agreement will receive the Required
Saba Vote
as result of such vote by Horizontal Ventures.
(c) Horizontal Ventures shall, as promptly as practicable following the
execution of this Agreement, duly call, give notice of, convene and hold a
meeting
of its shareholders (the "Horizontal Ventures Shareholders Meeting") for the
purpose of obtaining the Required Horizontal Ventures Vote, shall take all
lawful
action to solicit the approval of the Horizontal Ventures Share Issuance by the
Required Horizontal Ventures Vote and the Board of directors of Horizontal
Ventures shall recommend approval of the Horizontal Ventures Share Issuance
contemplated by this Agreement by the shareholders of Horizontal Ventures.
(d) On or prior to the date of the Saba Shareholders Meeting, Saba will
deliver to Horizontal Ventures a letter (the "Saba Affiliate Letter")
identifying
all persons who are "affiliates" of Saba for purposes of Rule 145 under the
Securities Act ("Rule 145"). On or prior to the Closing Date, Saba will use all
reasonable efforts to cause each person identified as an "affiliate" in the Saba
Affiliate Letter to deliver a written agreement (an "Affiliate Agreement") in
connection with restrictions on affiliates under Rule 145.
Section 4.2 Access to Information. Upon reasonable notice, each party shall
(and shall cause its subsidiaries to) afford to the officers, employees,
accountants, counsel, financial advisors and other representatives of the other
party reasonable access during normal business hours, during the period prior to
the Effective Time, to all its properties, books, contracts, commitments and
records and, during such period, such party shall (and shall cause its
subsidiaries to) furnish promptly to the other party (a) a copy of each report,
schedule, registration statement and other document filed, published,
announced or
received by it during such period by the requirements of federal or state
securities laws, as applicable (other than documents which such party is not
permitted to disclose under applicable law), and (b) consistent with its legal
obligations, all other information concerning its business, properties and
personnel as such other party may reasonably request; provided, however, that
either party may restrict the foregoing access to the extent that (i) a
governmental entity requires such party or any of its subsidiaries to restrict
access to any properties or information reasonably related to any such
contract on
the basis of applicable laws and regulations with respect to national security
matters or (ii) any law, treaty, rule or regulation of any governmental entity
applicable to such party requires such party or its subsidiaries to restrict
access to any properties or information. The parties will hold any such
information which is non-public in confidence. Any investigation by Horizontal
Ventures or Saba shall not affect the representations and warranties of Saba or
Horizontal Ventures, as the case may be.
Section 4.3 Best Efforts.
(a) Subject to the terms and conditions of this Agreement, each party
will use its best efforts to take, or cause to be taken, all actions and to
do, or
cause to be done, all things necessary, proper or advisable under applicable
laws
and regulations to consummate the Merger and the other transactions contemplated
by this Agreement as soon as practicable after the date hereof. Nothing in this
Section 4.3(a) shall require any of Horizontal Ventures and its subsidiaries to
sell or otherwise dispose of, or permit the sale or other disposition of, any
assets of Horizontal Ventures, Saba or their respective subsidiaries, whether
as a
condition to obtaining any approval from a governmental entity or any other
person
or for any other reason, if Horizontal Ventures reasonably determines that such
sale or other disposition would have or is likely to have a Material Adverse
Effect on Horizontal Ventures and its subsidiaries (including the Surviving
Corporation and its Subsidiaries), taken together, after giving effect to the
Merger.
(b) In furtherance and not in limitation of the covenants of the
parties
contained in Section 4.4(a), if any administrative or judicial action or
proceeding, including any proceeding by a private party, is instituted (or
threatened to be instituted) challenging any transaction contemplated by this
Agreement, each of Horizontal Ventures and Saba shall cooperate in all respects
with each other and use its respective best efforts to contest and resist any
such
action or proceeding and to have vacated, lifted, reversed or overturned any
decree, judgment, injunction or other order, whether temporary, preliminary or
permanent, that is in effect and that prohibits, prevents or restricts
consummation of the transactions contemplated by this Agreement.
ARTICLE V
CONDITIONS TO CLOSING
Section 5.1 Conditions to Each Party's Obligation to Effect the Merger. Except
as may be waived in writing by the Parties, all of the obligations of the
Parties
under this Agreement are subject to the fulfillment, prior to or at the
Closing on
the Closing Date, of each of the following conditions:
(a) Shareholder Approval. Saba shall have obtained the Required Saba
Vote in connection with the adoption of this Agreement by the shareholders of
Saba
and Horizontal Ventures shall have obtained the Required Horizontal Ventures
Vote
in connection with the approval of the Horizontal Ventures Share Issuance by the
shareholders of Horizontal Ventures.
(b) No Injunctions, Restraints or Illegality. No laws shall have been
adopted or promulgated, and no temporary restraining order, preliminary or
permanent injunction or other order issued by a court or other governmental
entity
of competent jurisdiction shall be in effect, having the effect of making the
Merger illegal or otherwise prohibiting consummation of the Merger, provided
however, that the provisions of this Section 5.1(b) shall not be available
to any
party whose failure to fulfill its obligations by Section 4.3 shall have been
the
cause of, or shall have resulted in, such order or injunction.
(c) Effectiveness of the Form S-4. The Form S-4 shall have been declared
effective by the SEC under the Securities Act. No stop order suspending the
effectiveness of the Form S-4 shall have been issued by the SEC and no
proceedings
for that purpose shall have been initiated or threatened by the SEC.
(d) Nasdaq Listing. The shares of Horizontal Ventures Common
stock to be
issued in the Merger and such other shares to be reserved for issuance in
connection with the Merger shall have been approved upon official notice of
issuance for quotation on the Nasdaq SmallCap Market.
Section 5.2 Additional Conditions to Obligations of Horizontal Ventures and
Merger Sub. The obligations of Horizontal Ventures and Merger Sub to effect the
Merger are subject to the satisfaction of, or waiver by Horizontal Ventures,
on or
prior to the Closing Date of the following conditions:
(a) Representations and Warranties. The representations and warranties
of Saba set forth in Section 3.1 shall be true and correct in all material
respects as of the Closing Date, subject to any changes contemplated by this
Agreement.
(b) Performance of Obligations of Saba. Saba shall have performed or
complied in all material respects with all agreements and covenants required
to be
performed by it under this Agreement at or prior to the Closing Date.
(c) No Conversion or Redemption of the Saba Preferred Shares. At or
prior to the Effective Time, none of the Saba Preferred Shares presently issued
and outstanding shall have converted to Saba Common stock unless said conversion
was completed with the written consent of Horizontal Ventures or otherwise
waived
in writing by Horizontal Ventures. Additionally, Saba shall not have received a
notice of redemption relative to the Saba Preferred Shares unless Saba shall
have
redeemed said Preferred Shares or provided for their redemption out of its
available cash.
(d) No Adverse Change. In accordance with Section 3.1(13) Saba
shall not
have suffered any material adverse change, materially adversely affecting the
condition (financial or otherwise) including the inability to meet a redemption
notice, call notice or any other form of obligation outstanding at the time of
entering into this Agreement that cannot be satisfied through legally available
funds of Saba.
(e) Opinion of Saba's Counsel. Saba shall have delivered to Horizontal
Ventures the opinion, dated as of the Closing Date, of Susan M. Whalen, Esq.,
counsel to Saba, in the form attached hereto as Schedule 5.2(c).
(f) Certificate of Officers. Saba shall have delivered to Horizontal
Ventures a certificate dated as of the Closing Date, executed in its corporate
name by, and verified by, the oath of the Chairman of its management committee
certifying to the fulfillment of the conditions specified in this Section 5.2.
Section 5.3 Additional Conditions to Obligations of Saba. The obligations of
Saba to effect the Merger are subject to the satisfaction of, or waiver by Saba,
on or prior to the Closing Date of the following conditions:
(a) Representations and Warranties. The representations and warranties
of Horizontal Ventures and Merger Sub set forth in Section 3.2 shall be true and
correct in all material respects as of the Closing Date, subject to any changes
contemplated by this Agreement.
(b) Performance of Obligations of Horizontal Ventures and Merger Sub.
Horizontal Ventures and Merger Sub shall have performed or complied in all
material respects with all agreements and covenants required to be performed by
them under this Agreement at or prior to the Closing Date.
(c) Certificate of Officer. Horizontal Ventures shall have delivered to
Saba a certificate dated as of the Closing Date, executed in its corporate name
by, and verified by, the oath of its chairman and chief executive officer
certifying to the fulfillment of the conditions specified in this Section 5.3.
ARTICLE VI
NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES
All statements of fact contained herein, any certificate or schedule
delivered by or on behalf of Saba, Horizontal Ventures or Merger Sub by the
terms
hereof, shall be deemed representations and warranties made by Saba, Horizontal
Ventures and Merger Sub, respectively, to each other under this Agreement. The
representations and warranties of the parties shall survive the Closing for a
period of one year.
ARTICLE VII
TERMINATION AND AMENDMENT
Section 7.1 Termination. This 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, whether before or after approval of the matters
presented in connection with the Merger by the shareholders of Saba or
Horizontal
Ventures:
(a) By mutual written consent of Horizontal Ventures and Saba, by action
of their respective Boards of Directors;
(b) By either Saba or Horizontal Ventures if the Effective Time shall not
have occurred on or before the elapse of three months from the date of this
Agreement (the "Termination Date"); provided, however, that the right to
terminate
this Agreement under this Section 7.1(b) shall not be available to any party
whose
failure to fulfill any obligation under this Agreement (including without
limitation Section 4.3) has to any extent been the cause of, or resulted in, the
failure of the Effective Time to occur on or before the Termination Date; or
(c) By either Saba or Horizontal Ventures if (i) the approval by the
shareholders of Saba required for the consummation of the Merger shall not have
been obtained by reason of the failure to obtain the Required Saba Vote or (ii)
the approval by the shareholders of Horizontal Ventures required for the
Horizontal Ventures Share Issuance to consummate the Merger shall not have been
obtained by reason of the failure to obtain the Required Horizontal
Ventures Vote,
in each case upon the taking of such vote at a duly held meeting of the
shareholders of Saba or Horizontal Ventures, as the case may be, or at any
reconvened meeting after any adjournment or postponement thereof.
(d) By either Saba or Horizontal Ventures if any condition precedent
contained in Article V has not occurred and has not been waived by the other
party
or cured in time to comply with Section 7.1(b).
Section 7.2 Effect of Termination.
(a) A termination as a result of Section 7.1(b) resulting from the
failure of any party to fulfill an obligation under this Agreement in a timely
manner (including without limitation Section 4.3) or a termination that results
from Section 7.1(d) with respect only to conditions precedent contained in
Sections 5.2 and 5.3 of Article V shall be deemed a "Default" on the part of the
party responsible for the Termination and the party who is in Default shall be
deemed a "Defaulting Party."
(b) In the event of termination of this Agreement by either Saba or
Horizontal Ventures as provided in Section 7. 1, this Agreement shall forthwith
become void and there shall be no liability or obligation on the part of
Horizontal Ventures or Saba or their respective officers, directors or counsel
except with respect to this Section 7.2.
(c) Horizontal Ventures and Saba agree that should this Agreement be
terminated as a result of a default by a Defaulting Party, the Defaulting Party
shall pay the sum of $1 million plus in the case of Saba being the Defaulting
Party, all sums invested into Saba by Horizontal Ventures or its affiliates and
all sums advanced by Horizontal Ventures on behalf of Saba up to the Termination
Date (the "Termination Fee") in the event that either party shall terminate this
Agreement by Sections 7.1(b) or (d) with respect only to conditions precedent
contained in Sections 5.2 and 5.3 of Article V as a result of the failure of
either party to fulfill its obligations under this Agreement (including without
limitation Section 4.3).
(d) The Termination Fee required to be paid by Section 7.2(b) shall be
made to non defaulting party upon termination of this Agreement by wire transfer
of immediately available funds to an account designated by non defaulting party.
Section 7.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the
Merger by
the shareholders of Saba and Horizontal Ventures, but, after any such
approval, no
amendment shall be made which by law or in accordance with the rules of any
relevant stock exchange or of Nasdaq requires further approval by such
shareholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
Section 7.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein
or in any document delivered pursuant hereto and (iii) waive compliance with any
of the agreements or conditions contained herein. Any agreement on the part
of a
party hereto to any such extension or waiver shall be valid only if set forth
in a
written instrument signed on behalf of such party. The failure of any party to
this Agreement to assert any of its rights under this Agreement or otherwise
shall
not constitute a waiver of those rights.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Announcement. Unless otherwise previously announced, the parties
agree to draft an announcement relating to this Agreement within 24 hours of the
execution hereof, which announcement shall be released as a joint announcement
through the business new wire services.
Section 8.2 Counterparts and Facsimile Signatures. In order to facilitate the
execution of this Agreement, the same may be executed in any number of
counterparts and signature pages may be delivered by telefax.
Section 8.3 Assignment. Neither this Agreement nor any right created hereby
shall be assignable by Saba or Horizontal Ventures without the prior written
consent of the other parties. Nothing in this Agreement, express or implied, is
intended to confer upon any person, other than the parties hereby and their
respective successors, assigns, heirs, executors, administrators, or personal
representatives, any rights or remedies under or by reason of this Agreement.
Section 8.4 Entire Agreement. This Agreement, the schedules hereto, and the
other documents delivered pursuant hereby constitute the full and entire
understanding and agreement between the parties with regard to the subject
hereof
and no party shall be liable or bound to any other in any manner by any
representations, warranties, covenants or agreements except as specifically set
forth herein. All prior agreements and understandings are superseded by this
Agreement and the schedules hereto.
Section 8.5 Knowledge. When used in this Agreement, the term "knowledge" and
words of similar import means knowledge actually possessed by an officer or
director of a party, whether by personal discovery or communication received
from
a subordinate, but does not include imputed or vicarious knowledge.
Section 8.6 Governing Law. This Agreement shall be governed by the laws of the
State of Colorado, except that the DGCL shall govern as to matters of corporate
law pertaining to Saba and Merger Sub. Any action brought to enforce this
Agreement or any term thereof shall be brought in a court of competent
jurisdiction in Denver, Colorado and each party hereto affirmatively agrees to
submit to the jurisdiction in that city and state.
Section 8.7 Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 8.8 Notices. Any notice, communication, request, reply, or advice,
hereinafter severally and collectively called "notice," in this Agreement
provided
or permitted to be given, made or accepted by either party to the other must
be in
writing and may be given by personal delivery or U.S. mail, or confirmed
telefax.
If given by mail, such notice must be sent by registered or certified mail,
postage prepaid, mailed to the party at the respective address set forth below,
and shall be effective only if and when received by the party to be notified.
For
purposes of notice, the addresses of the parties shall, until changed as
hereinafter provided, be as follows:
(1) If to Horizontal Ventures and/or Merger Sub:
Horizontal Ventures, Inc.
Attn: Mr. Randeep S. Grewal
Chairman and Chief Executive Officer
630 Fifth Avenue, Suite 1501
New York, NY 10111
Telefax: (212) 218-4679
With a copy to:
Cohen Brame & Smith Professional Corporation
Attn: Roger V. Davidson, Esq.
1700 Lincoln Street, Suite 1800
Denver, CO 80203
Telefax: (303) 894-0475
(2) If to Saba:
Saba Petroleum Company
Attn: Susan M. Whalen, Esq.
3201 Airpark Drive, Suite 201
Santa Maria, CA 93455
Telefax: (805) 347-1072
or at such other address or telefax number as any party may have advised the
others in writing.
Section 8.9 Attorney Fees. If any action at law or in equity, including an
action for declaratory relief, is brought to enforce or interpret the provisions
of this Agreement, the prevailing party shall be entitled to recover reasonable
attorney fees from the other party or parties, which fees shall be in
addition to
any other relief which may be awarded.
[Remainder of Page Intentionally Left Blank.]
IN WITNESS WHEREOF, this Agreement is hereby duly executed by each party
hereto as of the date first written above.
Horizontal Ventures:
HORIZONTAL VENTURES, INC.,
a Colorado corporation
By:/s/ RANDEEP S. GREWAL
Randeep S. Grewal, Chairman
and Chief Executive Officer
MERGER SUB:
Horizontal Ventures ACQUISITION CORPORATION,
a Delaware corporation
By:/s/ RANDEEP S. GREWAL
Randeep S. Grewal, Chairman
and Chief Executive Officer
SABA:
SABA PETROLEUM COMPANY,
a Delaware corporation
By: /S/WILLIAM HAGLER
William Hagler, Chairman
of the Executive Committee
AMENDMENT NO. 1
TO THE AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 to the Agreement and Plan of Merger (the "Agreement")
is entered into this 16th day of February, 1999 by and among Horizontal
Ventures,
Inc., a Colorado corporation ("Horizontal"), Horizontal Ventures Acquisition
Corporation, a Delaware corporation and wholly owned subsidiary of Horizontal
("Merger Sub") and Saba Petroleum Company, a Delaware corporation ("Saba").
RECITALS
WITNESSETH:
WHEREAS, on December 18, 1998 all of the parties hereto entered into the
Agreement; and
WHEREAS, since that time two new matters have arisen regarding the
terms of
the Agreement which require the attention of the parties; and
WHEREAS, the parties have determined that it is in the mutual best
interests of the parties and their respective shareholders to adopt the
following
amendments.
NOW THEREFORE, in consideration of representations, covenants and
agreements set forth herein and intending to be legally bound hereby, the
parties
hereby agree as follows:
1. Amendment of the Exchange Ratio. Section 2.1(a) of the Agreement
shall be amended such that the exchange ratio shall be defined as follows:
"Exchange Ratio" means the quotient of a fraction whereby the numerator is the
number of issued and outstanding shares of Saba Petroleum Corporation not owned
directly, indirectly or beneficially by Horizontal Ventures, Inc. on the Closing
Date and the denominator is 1,240,000 (the number of shares estimated by
Horizontal to be due to the shareholders of Saba on the date of the Agreement,
December 18, 1998).
2. Section 2.2(d) shall be amended to eliminate subsection (3) relating
to the offer to pay cash in lieu of stock to Saba shareholders who would
result in
receipt of less than 2 whole shares of Horizontal.
3. Miscellaneous. All other matters and sections contained in the
Agreement shall remain the same as amended hereby. All defined terms herein
shall
have the meanings as set forth in the Agreement. Any interpretation of this
Amendment shall take into consideration the Agreement as a whole and the
intent of
this Amendment with respect thereto.
IN WITNESS WHEREOF, this Amendment to the Agreement and Plan of Merger is
hereby duly executed by each party hereto as of the date first written above.
HORIZONTAL VENTURES, INC.,
a Colorado corporation
/s/ Randeep S. Grewal
By__________________________
Randeep S. Grewal,
Chairman and Chief Executive Officer
HORIZONTAL VENTURES ACQUISITION CORPORATION,
a Delaware corporation
/s/ Randeep S. Grewal
By___________________________
Randeep S. Grewal,
Chairman and Chief Executive Officer
SABA PETROLEUM COMPANY,
a Delaware corporation
/s/ Randeep S. Grewa;
By____________________________
Randeep S. Grewal, President
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"), Horizontal Ventures 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 Horizontal Ventures,
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 Horizontal Ventures
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 Horizontal Ventures,
and, in any criminal action or proceeding, they had no reasonable cause to
believe their conduct was unlawful.
Horizontal Ventures must indemnify a director, officer, employee or agent
of Horizontal Ventures 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 Horizontal Ventures, against expenses
actually and reasonably incurred by them in connection with the defense.
Horizontal Ventures 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
Horizontal
Ventures.
As permitted by Section 7-108-402 of the CBCA, the Horizontal Ventures
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 Horizontal Ventures 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 Horizontal Ventures Articles of Incorporation provide for
indemnification of Horizontal Ventures' 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 Horizontal Ventures, 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 Horizontal Ventures has the authority to
indemnify them against such liability and expenses. Horizontal Ventures
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)*
2.2 Amendment to Agreement and Plan of Merger dated February 8, 1999 (See
Annex I)*
3.1 Restated Articles of Incorporation of Horizontal Ventures (filed as
Exhibit 3A to Horizontal Ventures' 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 Horizontal Ventures (incorporated by reference to Exhibit
No. 3 to the Horizontal Ventures' Registration Statement (#33-24265-LA)
4.1 Specimen Common stock Certificates of Horizontal Ventures (incorporated
by reference to Exhibit Nos. 1A and 1B of Horizontal Ventures'
Form 8-A/A registration Statement (File #0.20760)
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP
8.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP
10.1 Post-Petition Loan Agreement (incorporated by reference to Exhibit 10E
to Horizontal Ventures' 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 Horizontal Ventures' 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 Horizontal Ventures' Annual Report on
Form 10-KSB for the year ended December 31, 1996).
10.4 Agreement and Plan of Acquisition (incorporated by reference to
Exhibit 10.1 to Horizontal Ventures' 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 Horizontal Ventures' 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 Horizontal Ventures' Current Report on Form 8-K for event dated
August 28, 1997.
10.7 Cat Canyon Lease Purchase Agreement (filed as Exhibit 10K to
Horizontal Ventures' 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)
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)
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)
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 Horizontal Ventures
and RGC (filed as Exhibit 10.1 to Horizontal Ventures' 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
Horizontal Ventures and Saba (filed as Exhibit 10.2 to Horizontal
Ventures' 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 Horizontal Ventures and
IPH (filed as Exhibit 10.3 to Horizontal Ventures' 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 Horizontal Ventures
to IPH (filed as Exhibit 10.4 to Horizontal Ventures' 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 Horizontal Ventures
and IPH (filed as Exhibit 10.5 to Horizontal Ventures' 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 Horizontal Ventures
to IPH (filed as Exhibit 10.6 to Horizontal Ventures' 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 Horizontal Ventures
and IPH (filed as Exhibit 10.7 to Horizontal Ventures' 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 Current 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 to First Amended and Restated Loan Agreement dated September
23, 1996, as amended among Saba et al. And Bank One, Texas, NA dated
June 9,(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).
10.81 Letter Agreement dated October 8, 1998 between Saba and Horizontal
Ventures (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 Horizontal
Ventures and the Shareholders of Saba Acquisub, Inc.*
10.84 Agreement to Amend Common stock Purchase Agreement dated December 3,
1998 between Saba and Horizontal Ventures (filed as Exhibit
10.85 Amendment No. 1 dated December 15, 1998 to Stock Exchange Agreement
dated November 23, 1998 among Horizontal Ventures and the shareholders
of Saba Acquisub, Inc.* 10.1 to Saba's Current Report on Form 8-K
dated December 18, 1998 File No. 001-13880) and incorporated herein by
reference).
10.86 Amendment to $1,500,000 Promissory Note*
16.1 Letter by PricewaterhouseCoopers, LLP dated February 15, 1999 regarding
change in accountants*
21.1 Subsidiaries of Horizontal Ventures Acquisition Corporation (filed as
Exhibit 21.1 to Horizontal Ventures' Registration Statement on Form
S-4 dated December 22, 1998 and incorporated herein by reference).
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.*
23.2 Consent of PricewaterhouseCoopers,LLP, Independent Certified Public
Accountants, related to the financial statements for Saba Petroleum
Company*
23.3 Consent of Netherland, Sewell & Associates, Inc. (filed as Exhibit
23.3 to Horizontal Venture's Registration Statement on Form S-4
dated December 22, 1998 and incorporated by reference)
23.4 Consent of Sproule Associates Limited (filed as Exhibit 23.4 to
Horizontal Venture's Registration Statement on Form S-4 dated
December 22, 1998 and incorporated by reference)
23.5 Consent of Ballard Spahr Andrews & Ingersoll, LLP (contained in
Exhibit 5.1 and Exhibit 8.1)
99.1 Form of Horizontal Ventures Proxy*
99.2 Form of Saba Proxy*
* Filed herewith.
(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 reoffering 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.
(2) That every prospectus (I) that is filed by 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 by 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 by 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.
(d) The undersigned registrant hereby also undertakes: (1) To file, during
any period in which offers or sales are being made, a post-effective
amendment to
this registration statement: (i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth
in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with he Commission pursuant to Rule 424(b) (section 230.424(b)
of this chapter) if, in the aggregate, the changes in volume and price represent
no more than 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement; (2) That, for
the purpose of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at
that time shall be deemed to be the initial bona fide offering thereof. (3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
SIGNATURES
By 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
February 16, 1999.
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: February 16, 1999 /s/ Randeep S. Grewal
-----------------------------------------------
Randeep S. Grewal, Chairman and Chief
Executive Officer and a Director
Date: February 16, 1999 /s/ Jan F. Holtrop
-----------------------------------------------
Dr. Jan F. Holtrop, a Director
Date: February 16, 1999
--------------------------------------------
Dirk Van Keulen, a Director
Date: February 16, 1999 /s/ George Andrews
-----------------------------------------------
George Andrews, a Director
EXHIBIT 5.1
February 8, 1999
Horizontal Ventures, Inc.
630 Fifth Street, Suite 1501
New York, New York 10111
Re: Common stock to be Issued By the Agreement and Plan of
Merger with Saba Petroleum Company
Gentlemen:
We have acted as your counsel in connection with the proposed issuance
of shares of common stock by the Agreement and Plan of Merger dated December
18, 1998 (the "Merger agreement") whereby Saba Petroleum Company, a Delaware
corporation, will be merged with and into a wholly owned subsidiary of
Horizontal Ventures, Inc., as more fully described in the Registration
Statement on Form S-4, as amended (Registration No. 333-69523) (the
"Registration Statement"), filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended.
In that connection, we have examined originals and copies, certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments as we have deemed necessary for the purposes of the
opinion expressed below, including but not limited to the Merger agreement and
the Registration Statement.
Based upon the foregoing, we are of the opinion that the shares of
common stock to be issued by you by the Merger agreement have been duly
authorized and, when duly executed, delivered and when issued in accordance
with the terms of the Merger agreement, and upon satisfaction of all
applicable conditions, will be duly and validly issued, fully paid and
nonassessable.
We express no opinion concerning the laws of any jurisdiction other
than the laws of the United States and the laws of the State of Colorado.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Joint proxy statement/prospectus forming a part of the
Registration Statement.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll LLP
EXHIBIT 8.1
Horizontal Ventures, Inc.
630 Fifth Avenue, Suite 1501
New York, NY 10111
Re: Horizontal Ventures, Inc.
Registration Statement on Form S-4
Gentlemen:
We have acted as counsel to Horizontal Ventures, Inc., a Colorado
corporation ("Horizontal Ventures"), in connection with the proposed merger
(the "Merger") of Saba Petroleum Company, a Delaware corporation ("Saba") with
and into Horizontal Ventures Acquisition Corporation, a Delaware corporation
and wholly owned subsidiary of Horizontal Ventures, pursuant to the terms of
the Agreement and Plan of Merger dated December 18, 1998 (the "Merger
Agreement") by and among Horizontal Ventures, Horizontal Ventures Acquisition
Corporation and Saba as described in the Registration Statement on Form S-4
to be filed by the Horizontal Ventures with the Securities and Exchange
Commission today (the "Registration Statement"). This opinion is being
rendered pursuant to the requirements of Item 21(a) of Form S-4 under the
Securities Act of 1933, as amended.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Merger Agreement, (ii) the Registration Statement and (iii) such other
documents as we have deemed necessary or appropriate in order to enable us to
render the opinions below. In our examination, we have assumed the genuineness
of all signatures, the legal capacity of all natural persons, the authenticity
of all documents submitted to us as originals, the conformity to the original
documents of all documents submitted to us as certified, confirmed or
photostatic copies and the authenticity of the originals of such copies. This
opinion is subject to the receipt by counsel prior to the effective date of
the Merger of certain representations and covenants of Horizontal Ventures and
Saba.
Based on and subject to the foregoing, the discussion contained in the
prospectus included as part of the Registration Statement (the "Prospectus")
under the caption "Federal Income Tax Consequences," except as otherwise
indicated, constitutes our opinion regarding the material Federal income tax
consequences applicable to holders of Saba Common Stock, including (i) that
there can be no assurance that the tax treatment of the Merger by Horizontal
Ventures, Saba and the Saba Shareholders will not be challenged by the
Internal Revenue Service, or that any such challenge would not be sustained;
and (ii) that no ruling has been requested from the Internal Revenue Service.
You should also be aware that the discussion under the caption "Certain
Federal Income Tax Consequences" in the Prospectus is based upon the
application of existing legal authorities to the instant transaction and that
such authorities are subject to change, either prospectively or retroactively.
We are not undertaking hereby any obligation to advise you of any such changes
in the applicable law subsequent to the date hereof, even if such changes
materially affect the tax consequences of the Merger that are set forth above.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Ballard Spahr
Andrews & Ingersoll, LLP under the heading "Federal Income Tax Consequences"
in the Registration Statement and the Prospectus. In giving such consent, we
do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder.
Sincerely,
/s/ Ballard Spahr Andrews & Ingersoll, LLP
EXHIBIT 10.83
STOCK EXCHANGE AGREEMENT
This Stock Exchange Agreement ("Agreement") dated this 23rd day of
November, 1998 is by and among all of the undersigned shareholders
("Shareholders") who own 100% of the shares of Saba Acquisub, Inc., a Colorado
corporation ("SAI"), SAI whose principal offices are located at 3201 Airport
Drive, Suite 201, Santa Maria, California, 93455, and Horizontal Ventures,
Inc., a Colorado corporation ("HVNV") whose address is 630 Fifth Avenue, Suite
1501, New York, New York, 10111:
W I T N E S S E T H :
WHEREAS, the Shareholders own 100% of the issued and outstanding common
stock of SAI; and
WHEREAS, SAI is the owner of 3,000,000 shares of the issued and
outstanding common stock of Saba Petroleum Company ("Saba") which is its sole
asset; and
WHEREAS, HVNV is interested in acquiring SAI by exchanging its shares for
the Shareholders' shares of SAI to be followed by the merger of SAI with and
into HVNV.
NOW THEREFOR, the parties hereto enter into this Stock Exchange
Agreement on the terms, conditions and based on the consideration hereinafter
set forth:
1. The Share Exchange. At closing as hereinafter defined (the
"Closing"), the Shareholders shall exchange all of the issued and outstanding
shares of SAI free and clear of any liens, encumbrances or rights of any third
persons of any type or kind whatsoever for 1,300,000 shares of newly issued
HVNV no par value common stock. The shares of HVNV shall be issued to the
Shareholders on a pro rata basis as hereinafter set forth on Exhibit A. The
transaction is intended as a tax free exchange by Section 368(a)(1)(A) of the
Internal Revenue Code of 1986 as amended, however HVNV is not representing
that the exchange will be treated as such by the Internal Revenue Service and
no request has been made to the U.S. Department of Treasury for a ruling
accordingly.
2. The Shareholders acknowledge and understand that the HVNV securities
being issued to it have not been registered and are being issued by an
exemption from registration available by Section 4.2 of the Securities Act of
1933 as amended, that SAI is acquiring these securities for an investment and
not with a view to further distribution and that SAI may not transfer or
resell the securities except for as an in-kind distribution to its
shareholders on a pro rata basis in accordance with the Colorado Business
Corporation Act, without the prior written permission of the company except or
in accordance with Rule 144 or upon the effective date of a registration
statement registering the resale of these restricted securities.
3. Effective Date. This transaction shall deemed to have been closed
effective on the 23rd of November, 1998.
4. Merger. At Closing SAI and HVNV shall execute a merger agreement in
the form attached hereto as Exhibit B whereby SAI will be merged with and into
HVNV and the separate corporate existence of SAI shall be extinguished. The
certificate of merger shall not be filed except subject to Section 7 hereof.
5. Registration Rights. Within 60 days of Closing HVNV shall file a
registration statement on Form S-3 or such other form which may be available
to it if Form S-3 is not available for any reason to register the resale up to
1,000,000 shares of the 1,300,000 shares being issued in the exchange. HVNV
shall use its best efforts to have said registration statement declared
effective at the earliest practicable date after filing and to maintain the
effectiveness of the registration statement until a period of two years has
passed from the date of the actual Closing. The names of the selling
Shareholders in the S-3 registration statement shall be as designated by said
Shareholders at Closing including the number of shares of each selling
Shareholder to be registered. HVNV shall pay all of the expenses of said
registration statement except for any selling expenses or commissions of the
Shareholders.
6. The Closing. The Closing of the exchange of the shares shall occur
at the offices of Cohen Brame & Smith Professional Corporation, 1700 Lincoln
Street, Suite 1800, Denver, Colorado 80203 on or before 10:00 a.m. on or
before December 3, 1998. At such place and time the parties to this Agreement
shall exchange certificates and any other documents required for assignment
thereof and execute the Merger agreement. Should the Shareholders, pending
Closing, elect to pay down the margin debt as defined in Section 11(a) of this
Agreement, the Shareholders shall be entitled to a prorata increase of the
number of shares of HVNV received, up to a maximum of 40,000 additional HVNV
shares if the entire debt of SAI is paid off prior to Closing. If additional
shares are to be issued, Exhibit A shall be adjusted and initialed at Closing.
7. Termination Clause. At the option of the Shareholders upon a
unanimous election thereby or HVNV, either the Shareholders or HVNV may
terminate this Agreement and the Merger agreement on or before December 31,
1998 if and only if HVNV fails to close the Common stock Purchase Agreement
dated October 8, 1998 by and between HVNV and Saba Petroleum Company or the
Preferred Stock Purchase Agreement by and between HVNV and RGC dated October
6, 1998 in accordance with the terms of those Agreements as they may be
extended or amended by the parties thereto. In furtherance of the rights
granted by this clause, Cohen Brame & Smith Professional Corporation, counsel
to HVNV, shall, at Closing, upon receipt of all the closing documents
including the certificates and any required stock powers, maintain possession
of all of the documents and stock certificates and not distribute same to the
rightful owners or file the certificate of merger with the Secretary of State
of the State of Colorado until such time as the Parties hereto have waived
their rights by this clause or on or after December 31, 1998, whichever shall
first occur. Should HVNV or the Shareholders unanimously elect to terminate
this Agreement and the Merger agreement in accordance with the terms of this
clause, Cohen Brame & Smith Professional Corporation shall return the
documents and certificates in its possession to the Parties to this Agreement
in accordance with their jointly executed instructions. Should the
termination clause be waived or should Cohen Brame & Smith Professional
Corporation not receive properly executed instructions on or before December
31, 1998, it shall automatically deliver the documents executed at Closing and
the certificates to the appropriate party and file the certificate of merger
with the Colorado Secretary of State's Office as per the terms of this
Agreement.
8. Indemnification. HVNV and when and if HVNV is entitled to control
Saba, Saba do and shall agree to indemnify the Shareholders, individually,
jointly and severally to the fullest extent permitted by the Articles of
Incorporation, Bylaws and the state statutory law relating thereto with
respect to any claim or action arising as a result of the terms and conditions
of this Stock Exchange Agreement. Any rights to indemnification are subject
to the Shareholders notifying HVNV and/or Saba of any threatened claim or
claim in a timely fashion thereby permitting HVNV and/or Saba to defend the
threatened claim or claim effectively in accordance with the terms of this
indemnification.
9. Voting Agreement. From Closing and until December 31, 1999 or such
shorter period as the Shareholders own the shares of HVNV received in this
exchange transaction, the Shareholders agree that they will execute upon the
reasonable request of HVNV proxies in the form set forth as Exhibit C attached
hereto. The Shareholders acknowledge that they will be required to execute
more than one proxy during the term of this voting agreement and they shall
cooperate in delivering said proxies to HVNV immediately upon receipt of the
request for a new proxy. The parties hereto acknowledge that this voting
agreement was separately bargained for and is a material term to and forms a
substantial part of the basis for the consideration being paid by HVNV for the
acquisition of SAI. The parties further acknowledge that a revocation or
attempted revocation of the proxy being granted hereby would cause
substantial, immediate and irreparable damage to HVNV. The parties further
acknowledge that it would be difficult in light of the anticipated or actual
harm caused by a breach of this voting agreement to determine and/or prove the
losses suffered by HVNV and impossible for HVNV to obtain an adequate, timely
remedy. Therefore, in addition to the right of HVNV to immediate equitable
relief in the form of temporary, preliminary and permanent injunctive relief
HVNV shall be entitled to liquidated damages. The parties have agreed that
upon breach of this voting agreement by the Shareholders or any one thereof,
the breaching Shareholder(s) shall forfeit up to one million shares in the
aggregate of the HVNV Common stock issued as consideration herein. If one or
more but not all of the Shareholders breach the voting agreement, then only
that Shareholder shall be required to pay liquidated damages. The number of
shares to be forfeited by the breaching Shareholder shall be calculated based
on a formula whereby the numerator is the number of shares received by the
breaching Shareholder in the exchange transaction as set forth in Exhibit A
and the denominator shall be 1.3 million with the resulting fraction being
multiplied times one million or such lessor number of HVNV shares then owned
by the breaching Shareholder.
The parties hereto acknowledge that they have negotiated the amount and
reasonableness of the liquidated damages at arms length and with the
assistance of independent counsel and agree that the liquidated damage clause
established herein is fair and reasonable is not be construed as a penalty and
that their individual signatures on this Agreement shall be construed as
conclusive evidence thereof.
10. Matters Pending Closing. neither party will make any public
announcement with respect to the matters contained herein without the prior
written consent of the other except as may be required upon the advise of
counsel to comply with reporting requirements of the Securities and Exchange
Commission, AMEX or the Nasdaq stock market. Pending Closing HVNV shall
conduct its business in its ordinary course except that the parties
acknowledge that HVNV is attempting to obtain control through acquisition or
otherwise a controlling interest in Saba which is outside its ordinary course.
Relative to any matter that requires a vote of shareholders of Saba between
the date of this Agreement and Closing, SAI agrees to vote in accordance with
the direction of the Board of directors of HVNV. The parties to this
Agreement will obtain any and all necessary authority to conclude the terms of
this Agreement at or before Closing and/or any regulatory or self-regulatory
organizational approvals. Further pending Closing, the parties to this
Agreement will use good faith in commercial dealings related to the Stock
Exchange Agreement, acknowledge that each party will spend a substantial
effort and expense based on the commitments made herein.
11. Representations and Warranties.
a. Representations and Warranties of SAI and the Shareholders.
SAI and the Shareholders represent and warrant that with the exception of
margin account loan balances of an amount not to exceed a total of $300,000 at
the Global Hanna Trading ($211,436.00) and Farris Baker ($89,727.00) brokerage
firms which margin loans are secured by 660,000 and 305,200 shares of the Saba
Petroleum Company common stock respectively owned by SAI, the Saba shares
being exchanged by the terms of this agreement are owned by them free and
clear of any liens, encumbrances and free from any rights of any third party
whatsoever including spousal rights. Additionally, SAI and the Shareholders
represent and warrant that the margin loan balance not to exceed $300,000 with
the brokerage firms above set forth are not presently subject to a margin
call, is current in principal and interest payments and in no other way in
default, and that all documentation relative to said account shall be
delivered to HVNV and there are no undisclosed material issues related to that
account. SAI and the Shareholders further represent and warrant that all
corporate authority required of them has been obtained and that they may close
this Agreement without any further authority or consent of any third party.
SAI and the Shareholders further represent and warrant that they are obtaining
the HVNV securities for an investment and not with a view towards further
distribution and acknowledges that the securities of HVNV acquired as a result
of this Agreement will have a restrictive legend placed on the certificates
representing the shares acquired.
b. Representations and Warranties of HVNV. HVNV acknowledges
that it is a corporation in good standing with full power and authority to
enter into this transaction and that at or before Closing it shall have
received any and all necessary approvals for entering into and Closing this
transaction in accordance with its terms. HVNV represents and warrants that
it is a publicly traded company listed on the Nasdaq Small Cap Market, that
its securities trade under the symbol HVNV and that it is current in all of
its reports with the Securities and Exchange Commission. HVNV further
represents that the information and financial statements contained in its
reports including the recently filed 10-QSB for the period ended September 30,
1998 are true and accurate in all material respects. HVNV further represents
and warrants that it is acquiring the shares of Saba for investment and not
with a view to further distribution but with a view of obtaining control of
Saba in accordance with documents filed with the Securities and Exchange
Commission and further documents to be filed.
12. First Right of Refusal. For a period of three years from the date
of Closing the Shareholders agree that should they desire to dispose of the
shares of HVNV received by the terms of this Agreement, they must first offer
to HVNV the right to repurchase these shares on the same terms and conditions
as they are to be offered to any third party. At such time as a Shareholder
desires to dispose of its HVNV shares, it must notify HVNV in writing of its
intent and the terms of the proposed sale. HVNV shall have a period of seven
days from the date of the receipt of notice to accept the terms of the sale on
the terms and conditions set forth in the notice or, in the alternative to
elect not to participate. If HVNV elects not to participate, the Shareholder
may complete the sale as proposed in the notice on the same terms and
conditions as proposed or in its sole discretion not complete the sale.
Should the Shareholder not complete the sale, it may not complete any further
sales during the term of HVNV's first right of refusal without subsequent
notices being issued to HVNV relative to those subsequent proposed
transactions.
[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
Dated the year and date first above set forth.
Shareholders:
CAPCO RESOURCES LTD. HORIZONTAL VENTURES, INC.
By:_________________________________
By: /S/ RANDEEP S. GREWAL
Randeep Grewal,
Chairman and CEO
CAPCO ACQUISUB, INC. SABA ACQUISUB, INC.
By: ________________________________ By: ___________________________
SEDCO, INC.
By: ________________________________
PARKFIELD MANAGEMENT LIMITED
By: /S/ WILLIAM J. HICKEY
As attorney-in-fact for Kanti Shah, President
Authority
EXHIBIT A
Name of Exchange Shareholder No. of SAI Shares Exchanged No. of HVNV Shares
to be Received
Capco Resources Ltd. 2,667 346,667
Capco Acquisub, Inc. 6,362 827,094
Sedco, Inc. 554 72,072
Parkfield Management Limited 417 54,167
EXHIBIT B
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (hereinafter called the "Merger
agreement") is made effective as of _______________, 1998, by and between Saba
Acquisub, Inc., a Colorado corporation ("SAI"), and Horizontal Ventures, Inc.,
a Colorado corporation ("HVNV"). SAI and HVNV are sometimes referred to as
the "Constituent Corporations," with reference to the following facts:
A. The authorized capital stock of HVNV consists of fifty million
(50,000,000) shares of no par value common stock and fifty million
(50,000,000) shares of preferred stock. The authorized capital stock of SAI
consists of _____________ (___________) shares of common stock, $____ par
value.
B. There are currently _________ shares of stock of HVNV outstanding.
C. SAI has no subsidiaries, and has a total of _________ shares of $___
par value common stock issued and outstanding, and there are no options or
other rights to acquire any newly issued shares available to any person.
D. The directors of the Constituent Corporations deem it advisable and
to the advantage of such corporations that SAI merge into HVNV upon the terms
and conditions herein provided.
NOW, THEREFORE, the parties do hereby adopt the plan of merger
encompassed by this Merger agreement and do hereby agree that SAI shall merge
with and into HVNV on the following terms, conditions, and other provisions:
1. TERMS AND CONDITIONS
1.1 Merger. SAI shall be merged with and into HVNV(the "Merger"), and
HVNV shall be the surviving corporation (the "Surviving Corporation")
effective upon the date when this Merger agreement or a Certificate of Merger
is filed with the Secretary of State of Colorado (the "Effective Date").
1.2 Succession. On the Effective Date, HVNV shall continue its
corporate existence under the laws of the State of Colorado, and the separate
existence and corporate organization of SAI, except insofar as it may be
continued by operation of law, shall be terminated and cease.
1.3 Transfer of Assets and Liabilities. On the Effective Date, the
rights, privileges, powers and franchises, both of a public as well as of a
private nature, of each of the Constituent Corporations shall be vested in and
possessed by the Surviving Corporation, subject to all of the disabilities,
duties and restrictions of or upon each of the Constituent Corporations; and
all singular rights, privileges, powers and franchises of each of the
Constituent Corporations, and all property, real, personal and mixed, of each
of the Constituent Corporations, and all debts due to each of the Constituent
Corporations on whatever account, and all things in action or belonging to
each of the Constituent Corporations shall be transferred to and vested in the
Surviving Corporation; and all property, rights, privileges, powers and
franchises, and all and every other interest, shall be thereafter the property
of the Surviving Corporation as they were of the Constituent Corporations, and
the title to any real estate vested by deed or otherwise in either of the
Constituent Corporations shall not revert or be in any way impaired by reason
of the Merger; provided, however, that the liabilities of the Constituent
Corporations and of their stockholders, directors and officers shall not be
affected and all rights of creditors and all liens upon any property of either
of the Constituent Corporations shall be preserved unimpaired, and any claim
existing or action or proceeding pending by or against either of the
Constituent Corporations may be prosecuted to judgments as if the Merger had
not taken place except as they may be modified with the consent of such
creditors and all debts, liabilities and duties of or upon each of the
Constituent Corporations shall attach to the Surviving Corporation, and may be
enforced against it to the same extent as if such debts, liabilities and
duties had been incurred or contracted by it.
1.4 Manner of Accomplishing Merger. The Merger shall be accomplished
by way of the exchange of 100% (____________ shares) of the issued and
outstanding shares of SAI for 1,300,000 shares of the common stock of HVNV.
The transfer agent will automatically be instructed to issue new certificates
of HVNV to each of the shareholders of SAI in accordance with Exhibit A
attached hereto, at the address listed in the register of SAI shareholders.
No fractional shares will be issued, but each fractional share will be rounded
up to the next share and a certificate for HVNV will be issued to each record
holder of SAI accordingly. The exchange will be accomplished by an exemption
from registration provided by Section 4(2) of the Securities Act of 1933.
1.5 Rights of Appraisal. This Merger shall be subject to the unanimous
approval by the stockholders and there shall be no outstanding appraisal
rights.
1.6 Obligations of SAI Not to Issue its Securities. As of the date of
this Merger agreement and until the date of closing, SAI shall not issue any
additional shares of its common stock to any person or entity whatsoever,
including as a result of having previously issued any warrants to acquire
common stock, any options to acquire its securities as a result of any
employee stock option plan or otherwise, or by any employee benefit plan. SAI
further represents that the capitalization, as set forth in paragraph C of the
preamble to this Agreement, is true and accurate in all respects.
2. CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
2.1 Certificate of Incorporation and Bylaws. The Articles of
Incorporation of HVNV in effect on the Effective Date shall continue to be the
Articles of Incorporation of the Surviving Corporation. The Bylaws of HVNV
shall be the Bylaws of the Surviving Corporation, as they may be amended from
time to time.
2.2 Directors. The directors of HVNV immediately preceding the
Effective Date shall become the directors of the Surviving Corporation on and
after the Effective Date to serve until the expiration of their terms and
until their successors are elected and qualified.
2.3 Officers. The officers of HVNV immediately preceding the Effective
Date shall become the officers of the Surviving Corporation on and after the
Effective Date to serve at the pleasure of its Board of directors.
3. MISCELLANEOUS
3.1 Further Assurances. From time to time, and when required by the
Surviving Corporation or by its successors and assigns, there shall be
executed and delivered on behalf of SAI such deeds and other instruments, and
there shall be taken or caused to be taken by it such further and other action
as shall be appropriate or necessary in order to vest or perfect in or to
conform of record or otherwise, in the Surviving Corporation the title to and
possession of all the property, interests, assets, rights, privileges,
immunities, powers, franchises and authority of SAI and otherwise to carry out
the purposes of this Merger agreement, and the officers and directors of the
Surviving Corporation are fully authorized in the name and on behalf of SAI or
otherwise to take any and all such action and to execute and deliver any and
all such deeds and other instruments.
3.2 Amendment. At any time before or after approval by the
stockholders of SAI, this Merger agreement may be amended in any manner
(except that, after the approval of the Merger agreement by the stockholders
of SAI, the principal terms may not be amended without the further approval of
the stockholders of SAI) as may be determined in the judgment of the
respective Board of directors of Phone and SAI to be necessary, desirable, or
expedient in order to clarify the intention of the parties hereto or to effect
or facilitate the purpose and intent of this Merger agreement.
3.3 Conditions to Merger. The obligation of the Constituent
Corporations to effect the transactions contemplated hereby is subject to
satisfaction of the following conditions (any or all of which may be waived by
either of the Constituent Corporations in its sole discretion to the extent
permitted by law):
(a) the Merger shall have been approved by all of the stockholders
of SAI in accordance with applicable provisions of the Colorado Revised
Statutes; and
(b) any and all consents, permits, authorizations, approvals, and
orders deemed in the sole discretion of SAI to be material to consummation of
the Merger shall have been obtained; and
(c) the securities issued by HVNV shall be issued by an exemption
from registration by the Securities Act of 1933 (as amended); and
(d) any other requirements under applicable Colorado law shall
have been satisfied in connection with the Merger.
3.4 Abandonment or Deferral. At any time before the Effective Date,
this Merger agreement may be terminated and the Merger may be abandoned by the
Board of directors of HVNV, notwithstanding the approval of the Merger by the
stockholders of SAI or HVNV, or the consummation of the Merger may be deferred
for a reasonable period of time if, in the opinion of the Boards of Directors
of HVNV, such action would be in the best interest of such corporations. In
the event of termination of this Merger agreement, this Merger agreement shall
become void and of no effect and there shall be no liability on the part of
either Constituent Corporation or its Board of directors or stockholders with
respect thereto.
3.5 Counterparts. In order to facilitate the filing and recording of
this Merger agreement, the same may be executed in any number of counterparts,
each of which shall be deemed to be an original.
IN WITNESS WHEREOF, this Merger agreement, having first been duly
approved by the Board of directors of SAI and HVNV, is hereby executed on
behalf of each said corporation and attested by their respective officers
thereunto duly authorized.
SABA ACQUISUB, INC.
a Colorado corporation
By:_____________________________
ATTEST:
______________________________
______________________________
Secretary
HORIZONTAL VENTURES, INC.
a Colorado corporation
By:_______________________________
ATTEST: Randeep S. Grewal, President
______________________________
______________________________
Secretary
EXHIBIT C
PROXY
SHAREHOLDERS MEETINGS OF HORIZONTAL VENTURES, INC.
The undersigned shareholder of Horizontal Ventures, Inc., a Colorado
corporation, hereby appoints Randeep S. Grewal my proxy to attend and
represent me at any annual or special meeting of the shareholders of
Horizontal Ventures, Inc. or at any adjournment of that meeting called in the
normal course and to vote my shares on any matter or resolution which may come
before the meeting and to take any other action which I could personally take
if present at the meeting. Randeep S. Grewal has my full authority to vote
this proxy in his sole discretion. This proxy gives authority to Mr. Grewal
to vote for me on any matters as may properly come before any meeting during
the term of my proxy which under no circumstances shall exceed the later of
eleven months from the date of the execution of my proxy or December 31, 1999.
Number of shares owned: ___________________
Dated: __________________________________
_______________________________________
Signature
(Signed exactly as name appears on certificate)
_______________________________________
Print name of shareholder
EXHIBIT 10.85
AMENDMENT NO. 1
TO
STOCK EXCHANGE AGREEMENT
This Amendment No. 1 To Stock Exchange Agreement (the "Amendment") is
entered into as of the 15th day of December 1998 between the shareholder (the
"Shareholder") who owns 100% of Saba Acquisub, Inc. ("SAI"), a Colorado
corporation, and Horizontal Ventures, Inc. ("HVNV").
WITNESSETH:
WHEREAS, HVNV, SAI, Shareholder and the then-shareholders of SAI are
parties to the Stock exchange Agreement dated November 23, 1998 (the "Exchange
Agreement"); and
WHEREAS, Shareholder has acquired all the interests of the other
shareholders in SAI so that Shareholder now owns 100% of SAI; and
WHEREAS, HVNV, SAI and Shareholder desire to amend the Exchange Agreement
in the manner set forth in this Amendment;
NOW THEREFOR, the parties hereto enter into this Amendment on the terms,
conditions and based on the consideration hereinafter set forth and as set
forth in the Exchange Agreement and amended by this Amendment:
1. The second paragraph of the Exchange Agreement following the
word "WITNESSETH" shall be amended by replacing the number
"3,000,000" with the number "2,971,755."
2. Section 5 of the Exchange Agreement shall be amended by
replacing the number "1,300,000" with the number "1,340,000."
3. Section 6 of the Exchange Agreement shall be amended by
replacing the date "December 3, 1998" with the date "December 18,
1998."
4. Section 9 of the Exchange Agreement shall be amended by
replacing the number "1.3 million" with the number "1,340,000."
5. Section 11.a of the Exchange Agreement shall be amended by
replacing the number "$300,000" with the number "$306,578.73" in two
places, by replacing the number "($211,436.00)" with the number
"($214,615.16)", and by replacing the number "($89,727.00)" with the
number "($91,963.57)".
6. Section 12 of the Exchange Agreement shall be amended by adding
the following sentence at the end of Section 12: "Notwithstanding
the foregoing, Horizontal Ventures agrees that Shareholder may
transfer up to 75,000 shares without complying with the notice
provisions of this Section 12 and that Horizontal Ventures shall not
have a right to purchase those shares prior to the transfer by
Shareholder; provided however, that the recipient of those shares
shall agree to take those shares subject to Horizontal Ventures's
right of first refusal by this Section 12 and the recipient shall
agree to be bound by the provisions of Section 9 concerning the
voting of the transferred shares."
7. Exhibit A to the Exchange Agreement is amended to read in its
entirety as Exhibit A attached to and made a part of this Amendment.
8. Except as specifically amended in this Amendment, the terms of
the Exchange Agreement shall remain in full force and effect.
Dated the year and date first above set forth.
Shareholder:
CAPCO RESOURCES LTD.
By: /s/ KANTI SHAH_____________
Kanti Shah, President
HORIZONTAL VENTURES, INC.
By: /s/ RANDEEP S. GREWAL
Randeep S. Grewal, Chairman and CEO
SABA ACQUISUB, INC.
By:_____________________________
Signature
________________________________
Printed Name and Title
EXHIBIT A
Name of Exchange Shareholder No. of SAI Shares Exchanged No. of HVNV Shares
to be Received
Capco Resources Ltd. 10,000 1,340,000
EXHIBIT 16.1
February 15, 1999
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Commissioners:
We have read the statements made by Saba Petroleum Company (copy attached),
which we understand has been filed with the Commission, pursuant to Item 4 of
Form 8-K, as part of the Company's Form 8-K report for the month of February
1999. We agree with the statements concerning our Firm in such Form 8-K.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP <PAGE>
Item 4. Changes in Registrant's Certifying Accountant.
After approximately a month of interviews and discussions, Saba's board
of directors approved the engagement of Arthur Andersen LLP as Saba's
independent accountants, which agreement was finalized on February 10, 1999.
By a letter delivered to Saba Petroleum Company on February 3, 1999,
PricewaterhouseCoopers LLP resigned as the independent accountants for Saba.
Such letter did not indicate any reason for the resignation.
The reports of PricewaterhouseCoopers on the Saba financial statements
for the years ended December 31, 1997 and 1996 did not contain an adverse
opinion or a disclaimer of opinion, and were not qualified as to uncertainty,
audit scope, or accounting principles. The report of PricewaterhouseCoopers
dated April 15, 1998 contained an explanatory paragraph regarding Saba's
ability to continue as a going concern.
During Saba's two most recent fiscal years and through the date of the
resignation of PricewaterhouseCoopers as Saba's independent accountants, Saba
did not have any disagreements with PricewaterhouseCoopers on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of
Horizontal Ventures, Inc. on Amendment No. 2 to Form S-4 (File No.
333-69523), and any amendment thereto by 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 by Rule 462 promulgated
under the Securities Act.
------------------------------
Bateman & Co., Inc., P.C.
Houston, Texas
February 12, 1999
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4
(File No. 333-69523) 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
and consolidated financial statement schedule of Saba Petroleum Company. We
also consent to the reference to our firm under the caption "Experts".
/s/ PricewaterhouseCoopers, LLP
------------------------------
PricewaterhouseCoopers, LLP
Los Angeles, California
February 15, 1999
EXHIBIT 99.1
- ----------------------------------------------------------------------------
Horizontal Ventures, Inc.
630 Fifth Avenue, Suite 1501
New York, New York 10111
- ----------------------------------------------------------------------------
PROXY
FOR THE SPECIAL MEETING OF SHAREHOLDERS - MARCH 19, 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
("Horizontal Ventures"), with full power of substitution, the proxy of the
undersigned to represent and vote, as designated below, all shares of
Horizontal Ventures common stock, no par value ("Horizontal Ventures
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 Horizontal Ventures to be held on March 19, 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 Horizontal Ventures of up to an
aggregate of 1,300,000 shares of Horizontal Ventures Common stock shares
(the "Horizontal Ventures Share Issuance") pursuant to the Agreement and Plan
of Merger dated December 18, 1998 among Horizontal Ventures, Horizontal
Ventures Acquisition Corporation (a wholly owned subsidiary of Horizontal
Ventures), and Saba.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. To approve a change in the name of Horizontal Ventures 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 Horizontal Ventures 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 MARCH 19, 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 March 19, 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 ("Horizontal Ventures"), Horizontal Ventures Acquisition
Corporation (a wholly owned subsidiary of Horizontal Ventures), and Saba, by
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 Horizontal Ventures, will be exchanged for shares
of Horizontal Ventures common stock to be issued based on an exchange ratio
of one share of Horizontal Ventures 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 OF 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.
