<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No.: 0-20760
GREKA Energy Corporation
(Name of small business issuer in its charter)
Colorado 84-1091986
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
630 Fifth Avenue, Suite 1501
New York, New York 10111
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 218-4680
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
No Par Value Common stock.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for 1998 were $145,813.
The aggregate market value of 2,472,768 shares of common stock held by
non-affiliates of the issuer, based on the closing bid price of the common stock
on April 14, 1999 of $8.00 as reported on the Nasdaq SmallCap Market Sytem, was
$19,782,144. The total number of shares of common stock outstanding as of April
14, 1999 was 4,194,969.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure format (check one). Yes [ ] No [X]
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
GREKA ENERGY CORPORATION
Dated: April 15, 1999 By: /s/
--------------------------------------------
Randeep S. Grewal, Chairman of the Board
and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/
- -------------------
Randeep S. Grewal Chairman of the Board of April 15, 1999
Directors and Chief
Executive Officer
(Principal Executive
Officer, Financial Officer
and Accounting Officer)
/s/
- -------------------
Dr. Jan F. Holtrop Director April 15, 1999
/s/
- -------------------
Dirk Van Keulen Director April 15, 1999
/s/
- -------------------
George C. Andrews Director April 15, 1999
/s/
- -------------------
David Vaughan Director April 15, 1999
/s/
- -------------------
[New Director] Director April 15, 1999
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement (File No. 333-60621).
ARTHUR ANDERSEN LLP
New York, N.Y.
April 15, 1999
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Horizontal Ventures, Inc. on Form S-3 (File No. 333-60621) of our report, which
contained an explanatory paragraph regarding the company's ability to continue
as a going concern, dated April 15, 1998, on our audits of the consolidated
financial statements of Saba Petroleum Company as of December 31, 1997 and for
the years ended December 31, 1997 and 1996, which report is included in this
Annual Report on Form 10-KSB.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
April 21, 1999
<PAGE>
Exhibit 99.1
Saba Petroleum Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Saba Petroleum Company:
We have audited the accompanying consolidated balance sheet of Saba Petroleum
Company and subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, stockholders' (deficit) equity and cash flows for the
year ended December 31, 1998. 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 audit.
We conducted our audit 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 audit provides 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, 1998, and the consolidated results of their
operations and cash flows for the year ended December 31, 1998, 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 incurred a significant noncash ceiling
writedown, has violated certain of its debt covenants and has negative
stockholders' equity all of which raise substantial doubt about its 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 relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
Arthur Andersen LLP
New York, New York
April 15, 1999
F-1
<PAGE>
To the Board of Directors and Stockholders
Saba Petroleum Company
We have audited the accompanying consolidated balance sheet 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 accounting
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 their 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
PricewaterhouseCoopers LLP
April 15, 1998
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 999,132 $ 1,507,641
Accounts receivable, net of allowance for doubtful
accounts of $81,000 (1998) and $69,000 (1997) 4,178,756 6,459,074
Other current assets 2,509,819 4,589,501
------------ ------------
Total Current Assets 7,687,707 12,556,216
------------ ------------
Property and Equipment
Oil and gas properties (full cost method) 79,077,124 76,562,279
Land 3,191,616 2,685,605
Plant and equipment 6,086,056 5,682,800
------------ ------------
88,354,796 84,930,684
Less accumulated depletion, depreciation and
impairment (47,781,369) (22,325,276)
------------ ------------
Total Property and Equipment 40,573,427 62,605,408
------------ ------------
Other Assets
Notes receivable, less current portion 522,888 1,385,092
Deferred financing costs 440,943 553,030
Due from related parties 31,919 235,608
Deposits and other 431,528 321,592
------------ ------------
Total Other Assets 1,427,278 2,495,322
------------ ------------
$ 49,688,412 $ 77,656,946
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------
F-3
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Current Liabilities
Accounts payable and accrued liabilities $ 12,671,215 $10,104,519
Income taxes payable 2,156,321 733,887
Current portion of long-term debt 28,750,743 13,441,542
------------ -----------
Total Current Liabilities 43,578,279 24,279,948
------------ -----------
Long-term Debt, net of current portion 1,627,835 19,609,855
Other Liabilities 98,923 78,069
Deferred Taxes - 784,930
Minority Interest in Consolidated Subsidiary 585,292 752,570
Convertible Preferred Stock, $.001 par value, authorized
50,000,000 shares; issued and outstanding
8,000 (1998) and 10,000 (1997) shares 7,289,170 8,511,450
Commitments and contingencies
Stockholders' (Deficit) Equity
Common Stock, $.001 par value, authorized
150,000,000 shares; issued and outstanding
11,385,726 (1998) and 10,883,908 (1997) shares 11,386 10,884
Capital in excess of par value 18,720,797 17,321,680
(Accumulated deficit)Retained earnings (21,981,818) 7,200,292
Deferred compensation - (803,000)
Accumulated other comprehensive loss (241,452) (89,732)
------------ -----------
Total Stockholders' (Deficit) Equity (3,491,087) 23,640,124
------------ -----------
$ 49,688,412 $77,656,946
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------
F-4
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Revenues
Oil and gas sales $ 19,706,232 $33,969,151 $31,520,757
Other 3,625,099 2,026,611 1,681,587
------------ ----------- -----------
Total Revenues 23,331,331 35,995,762 33,202,344
------------ ----------- -----------
Expenses
Production costs 13,608,466 16,607,027 14,604,291
General and administrative 6,529,961 5,124,771 3,919,435
Depletion, depreciation and amortization 7,124,269 7,264,956 5,527,418
Write down of oil and gas properties 20,092,850 254,937 -
------------ ----------- -----------
Total Expenses 47,355,546 29,251,691 24,051,144
------------ ----------- -----------
Operating (Loss) Income (24,024,215) 6,744,071 9,151,200
------------ ----------- -----------
Other Income (Expense)
Interest income 137,842 165,949 114,302
Other (402,495) (280,489) 92,149
Interest expense (3,589,332) (2,304,517) (2,401,856)
Gain on issuance of shares of subsidiary - 4,036 8,305
------------ ----------- -----------
Other Income (Expense), Net (3,853,985) (2,415,021) (2,187,100)
------------ ----------- -----------
(Loss) Income Before Income Taxes (27,878,200) 4,329,050 6,964,100
Provision for Taxes on Income (887,050) (1,875,720) (2,957,983)
Minority Interest in Loss (Earnings) of Consolidated Subsidiary 114,427 (55,883) (241,401)
------------ ----------- -----------
Net (Loss) Income (28,650,823) 2,397,447 3,764,716
Other Comprehensive Loss - net of tax
Foreign currency translation adjustments (151,720) (101,198) (11,198)
------------ ----------- -----------
Comprehensive (Loss) Income $(28,954,263) $ 2,296,249 $ 3,753,518
============ =========== ===========
Net (Loss) Earnings per Common Share
Basic $ (2.60) $0.23 $0.43
Diluted $ (2.60) $0.22 $0.37
Weighted Average Common Shares Outstanding
Basic 11,031,193 10,649,766 8,803,941
Diluted 11,031,193 12,000,940 11,825,453
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------
F-5
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accumulated Retained Total
Common Stock Capital in Other Earnings Stockholders'
----------------------- Excess of Comprehensive Unearned Accumulated Equity
Shares Amount Par Value Income (Loss) Compensation Deficit) (Deficit)
---------- --------- ----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Foreign currency
translation adjustment - - - (11,198) - - (11,198)
Unearned compensation - - - - 8,500 - 8,500
Debenture conversions 1,419,846 1,420 5,414,423 - - - 5,415,843
Net income - - - - - 3,764,716 3,764,716
---------- --------- ----------- ---------- ---------- ------------ ------------
Balance at December 31,
1996 10,081,026 10,081 12,891,002 11,282 - 4,802,845 17,715,210
Issuance and exercise of
options 154,000 154 1,409,842 - (803,000) - 606,996
Issuance of warrants - - 622,000 - - - 622,000
Foreign currency
translation adjustment - - - (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 58,000 58 105,042 - - - 105,100
Issuance of common stock 438,333 439 1,288,311 - - - 1,288,750
Foreign currency
translation adjustment - - - (151,720) - - (151,720
Debenture conversions 5,485 5 20,887 - - - 20,892
Amortization of deferred
compensation - - - - 37,877 - 37,877
Cancellation of stock
options - - (765,123) - 765,123 - -
Preferred Stock dividends - - - - - (531,287) (531,287)
Stockholder contribution - - 750,000 - - - 750,000
Net loss - - - - - (28,650,823) (28,650,823)
---------- --------- ----------- ---------- ---------- ------------ ------------
Balance at December 31,
1998 11,385,726 $ 11,386 $18,720,797 $ (241,452) $ - $(21,981,818) $( 3,491,087)
========== ========= =========== ========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------
F-6
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss) income $(28,650,823) $ 2,397,447 $ 3,764,716
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depletion, depreciation and amortization 7,124,269 7,264,956 5,527,418
Writedown of oil and gas properties 20,092,850 254,937 -
Amortization of unearned compensation 37,877 - 8,500
Deferred tax provision (784,930) 248,645 366,389
Compensation expense attributable to
the issuance of non-employee options 311,350 106,000 91,600
Minority interest in (losses) earnings of
consolidated subsidiary (114,427) 55,883 241,401
Gain on issuance of shares of subsidiary - (4,036) (8,305)
Changes in:
Accounts receivable 1,718,418 859,286 (2,919,285)
Other assets 519,578 (24,304) (572,233)
Accounts payable and accrued liabilities 2,679,787 4,768,747 (237,328)
Income taxes payable and other liabilities 1,523,953 (973,681) 650,644
------------ ------------ ------------
Net Cash Provided by Operating Activities 4,457,902 14,953,880 6,913,517
------------ ------------ ------------
Cash Flows from Investing Activities
Deposit of restricted certificate of deposit - - 1,750,000
Expenditures for oil and gas properties (6,571,573) (32,874,800) (12,171,392)
Expenditures for equipment, net (543,973) (2,039,234) (585,893)
Proceeds from sale of oil and gas properties 5,254,066 234,141 256,646
Increase in notes receivable (36,000) (2,114,953) (1,172,639)
Proceeds from notes receivable 366,111 629,109 67,384
------------ ------------ ------------
Net Cash Used in Investing Activities (1,531,369) (36,165,737) (11,855,894)
------------ ------------ ------------
Cash Flows from Financing Activities
Proceeds from notes payable and long-term debt 4,151,288 28,725,454 17,085,315
Principal payments on notes payable and long-term debt (7,110,941) (15,972,780) (12,296,839)
Preferred stock dividends paid (51,288) - -
Redemption of preferred stock (1,702,280) - -
Increase in deferred financing costs - - (165,777)
Net change in accounts with related parties 203,689 (131,562) (21,251)
Net proceeds from exercise of options and issuance of
common stock 1,082,500 227,500 422,500
Proceeds from issuance of preferred stock, net - 8,511,450 -
Issuance of warrants - 622,000 -
Capital subscription of minority interest - 8,535 12,805
------------ ------------ ------------
Net Cash (Used in) Provided by Financing Activities (3,427,032) 21,990,597 5,036,753
------------ ------------ ------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (8,010) (5,135) (627)
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (508,509) 773,605 93,749
Cash and Cash Equivalents at Beginning of Year 1,507,641 734,036 640,287
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 999,132 $ 1,507,641 $ 734,036
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------
F-7
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------------------
General
- -------
Saba Petroleum Company ("Saba" or "the Company") is a Delaware corporation
formed in 1979 as a natural resources company. Saba is an international oil and
gas producer with principal producing properties located in the continental
United States, Canada and Colombia. Until 1994, all of the Company's principal
assets were located in the United States. In 1994 and 1995, the Company acquired
interests in producing properties in Canada and Colombia. In March 1999, the
Company entered into an agreement to sell substantially all of its Colombian
assets (see Note 16). For the years ended December 31, 1998 and 1997,
approximately 40.6% and 38.3% of the Company's gross revenues from oil and gas
production were derived from its international operations. The Company's
principal United States oil and gas producing properties are located in
California, Louisiana, New Mexico and Wyoming.
Acquisition of Saba by Horizontal Ventures, Inc.
- ------------------------------------------------
On October 8, 1998, Horizontal Ventures, Inc. ("HVI") disclosed that, acting in
concert with International Publishing Holding, S.A., its largest shareholder, it
had acquired over five percent of the Company's outstanding Common Stock, with
the intent to gain control of Saba. On October 14, 1998, a Schedule 13D was
filed by HVI. On October 8, 1998, Saba and HVI entered into a Common Stock
Purchase Agreement by which HVI agreed to purchase by December 4, 1998, 2.5
million shares of Saba's Common Stock in exchange for cash in the amount of $7.5
million. On December 3, 1998, the Company and HVI agreed to extend the closing
date of the Common Stock Purchase Agreement to January 31, 1999.
In December 1998, the Company issued 333,333 shares of Common Stock to HVI in
exchange for $1.0 million paid by HVI in connection with an interim closing of
the Common Stock Purchase Agreement.
On December 7, 1998, HVI and the Company disclosed that the Board of Directors
of the Company approved HVI's proposal to merge with the Company. Under the
merger proposal, the Company's stockholders will receive one share of HVI's
common stock for each six shares of the Company's Common Stock outstanding. That
exchange ratio is based upon (i) a total of 11,385,726 shares of Saba Common
Stock outstanding (11,052,393 shares outstanding as of December 2, 1998 plus
333,333 shares issued to HVI on December 7, 1998), (ii) a price of $2.02 for the
Company's Common Stock based on a 55 percent premium over the average closing
price of the Company's Common Stock from November 2, 1998 through December 2,
1998, and (iii) the average closing price of HVI's common stock of $12.14 during
the same period.
As of December 31, 1998, approximately 35% of the Company's outstanding common
stock is owned directly, or indirectly, by Horizontal Ventures, Inc. ("HVI"). In
March 1999, the Company
F-8
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
-------------------------------------------------------------
POLICIES (Continued)
--------------------
was purchased by and merged into a subsidiary of HVI, which has subsequently
been renamed Greka Energy Corporation.
Management's Plans
- ------------------
The Company's financial statements 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.
During 1998, due to decreased prices for natural gas and crude oil in all
locations in which the Company does business, the Company incurred significant
losses, due primarily to reduced production and related oil and gas sales and a
total of $20.1 million of non-cash ceiling writedowns of its oil and gas assets,
without any reduction for tax benefits. As a result of these factors, the
reported net loss was $28.7 million, or $2.60 per share. Also as a result of
these adjustments, the Company has negative stockholders' equity of
approximately $3.5 million as of December 31, 1998. In addition, the Company is
not in compliance with certain requirements, restrictions and other covenants in
its 9% convertible senior subordinated debentures ($3.6 million), its revolving
($15.6 million) and term ($4.5 million) bank loan agreements, its loan from the
operator of properties owned by the Company in Colombia ($4.2 million) and its
Series A Convertible Preferred Stock (with a stated value of $8.0 million). As a
consequence, the Company cannot borrow under its revolving bank loan agreement.
In addition, the Company's exploratory prospect in Indonesia requires a multi-
year work commitment of $17.0 million, which period began October , 1997. The
Company has also received a notice of default from the Colombian tax authorities
for the payment of income taxes for 1997. Due to the Company not being in
compliance with the above mentioned requirements, restrictions and other
covenants, combined with other normal maturities of long term debt, $28.8
million of such long term debt is classified as currently payable and, as a
result, the Company has a working capital deficit of $35.9 million.
In March 1999, the Company was acquired by Horizontal Ventures, Inc. (HVI), a
publicly traded company in the oil and gas industry, through the issuance of
HVI common shares for Saba common shares (see Note 16). Prior to and after the
merger, HVI and Saba management have been pursuing steps to improve the
financial condition of the Company. The Company is in the process of
renegotiating the terms of its 9% convertible senior subordinated debentures and
its Series A Convertible Preferred Stock and is negotiating a term and revolving
credit agreement with a new bank. In addition, the Company is negotiating to
sell certain non-core assets, including its Colombian assets. In addition, the
Company will begin operating its refinery in California on a 100% basis
beginning May 1, 1999, which is expected to significantly improve its operating
cash flows. The above mentioned transactions are in various stages of
completion
F-9
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
-------------------------------------------------------------
POLICIES (Continued)
--------
and management believes that they will all be closed by June 30, 1999. As a
result of the above factors and the pending nature of negotiations, there is
substantial doubt about the Company's ability to continue as a going concern if
management is not successful on its recapitalization plan. Management believes
that the completion of the refinancing, and the sale transactions discussed
above will remove any uncertainty as to its ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of the asset carrying amounts
or the amounts and classifications of liabilities that might result should the
Company be unable to continue as a going concern.
Reclassifications and Use of Estimates
- --------------------------------------
The preparation of the consolidated 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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company's most significant financial estimates are based
on remaining proved natural gas and oil reserves. See Supplemental Information
About Oil and Gas Producing Activities. Because there are numerous uncertainties
inherent in the estimation process, actual results could differ from the
estimates.
Certain reclassifications for prior years have been made to conform with current
year presentation.
Consolidation
- -------------
The consolidated financial statements include the accounts of the Company and
its wholly and majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Fair Value of Financial Instruments
- -----------------------------------
Cash and Cash Equivalents - The Company considers all liquid investments with an
original maturity of three months or less to be cash equivalents. The carrying
amount approximates fair value because of the short maturity of those
instruments.
Other Financial Instruments - The Company does not hold or issue financial
instruments for trading purposes. The Company's financial instruments consist of
notes receivable and long-term debt. The fair value of the Company's notes
receivable and long-term debt, excluding the Debentures, is estimated based on
current rates offered to the Company for similar issues of the same remaining
maturities. The fair value of the Debentures is based on market prices.
Derivative Instruments - The Company does not utilize derivative instruments in
the management of its foreign exchange, commodity price or interest rate market
risks.
F-10
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
--------------------------------------------------
ACCOUNTING POLICIES (Continued)
-------------------
The fair value of the Company's notes receivable and long-term debt, excluding
the Debentures, at December 31, 1998 and 1997, approximates carrying value. The
carrying value and fair value of the Debentures at December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Carrying Carrying
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
9% convertible senior
subordinated Debentures,
due 2005 $3,575,000 $3,289,000 $3,599,000 $6,298,250
</TABLE>
No bid or ask price was available to determine the fair value of the Debentures
at March 31, 1999.
Oil and Gas Properties
- ----------------------
The Company's oil and gas producing activities are accounted for using the full
cost method of accounting. Accordingly, the Company capitalizes all costs, in
separate cost centers for each country, incurred in connection with the
acquisition of oil and gas properties and with the exploration for and
development of oil and gas reserves. Such costs include lease acquisition costs,
geological and geophysical expenditures, costs of drilling both productive and
non-productive wells, and overhead expenses directly related to land acquisition
and exploration and development activities. Proceeds from the disposition of oil
and gas properties are accounted for as a reduction in capitalized costs, with
no gain or loss recognized unless such disposition involves a significant change
in reserves in which case the gain or loss is recognized.
Depletion of the capitalized costs of oil and gas properties, including
estimated future development, site restoration, dismantlement and
abandonment costs, net of estimated salvage values, is provided using the
equivalent unit-production method based upon estimates of proved oil and gas
reserves and production which are converted to a common unit of measure based
upon their relative energy content. Unproved oil and gas properties and
associated costs 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. Such costs relate to projects which were undergoing
exploration or development activities, or in which the Company intends to
commence such activities in the future. The Company will begin to amortize
these costs when proved reserves are established or impairment is determined.
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.
F-11
<PAGE>
NOTE 1 - DESCRIPTON OF BUSINESS AND SUMMARY OF SIGNIFICANT
-------------------------------------------------
ACCOUNTING POLICIIES (Continued)
--------------------
A significant portion of the Company's exploration, development and production
activities are conducted jointly with others and, accordingly, the financial
statements reflect only the Company's proportionate interest in such activities.
In connection with its efforts to increase proved oil and gas reserves through
acquisition, exploration and development activities, the Company charges to its
full cost 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 cumulative capitalized charges for internal expenses are as
follows for the listed periods:
<TABLE>
<S> <C>
December 31, 1998 $1,909,850
December 31, 1997 $1,652,200
December 31, 1996 $1,005,950
</TABLE>
The amounts are gross charges to the property accounts and do not reflect
subsequent adjustments for abandoned projects, dispositions or ceiling test
writedowns.
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, 1998, 1997 and 1996, was
$607,840, $477,239 and $293,245, 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 assets estimated useful life.
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
December 31, 1998, the Company had unamortized costs in the amount of $440,943
net of accumulated amortization of $1,561,349 relating to its Debentures.
Amortization expense in 1998, 1997 and 1996 was $105,991, $134,598 and $241,827,
respectively.
Stock-Based Compensation
- ------------------------
In 1996, the Company implemented the disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation." This statement sets forth-alternative
standards for recognition of the cost of stock-based compensation and requires
that a company's financial statements
F-12
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
--------------------------------------------------
ACCOUNTING POLICIES (Continued)
-------------------
include certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. As allowed in this statement,
the Company continues to apply Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
recording compensation related to its plans.
Income Taxes
- ------------
The Company accounts for income taxes 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 the Company's assets and liabilities at enacted tax rates
expected to be in effect when such amounts are realized or settled. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
Foreign Currency Translation
- ----------------------------
Assets and liabilities of foreign subsidiaries are translated into United
States' dollars using the exchange rate at each balance sheet date; income and
expenses are translated at the weighted average rates of exchange during the
year. The resultant cumulative translation adjustments are included as a
component of other comprehensive income in stockholders' equity. Foreign
currency transaction gains and losses are included in net income (loss). Such
gains (losses) in 1998, 1997 and 1996 were $(112,000), $(230,000) and $41,000,
respectively.
Comprehensive (Loss) Income
- ----------------------------
Effective January 1, 1998, Saba adopted the provisions of SFAS 130, "Reporting
Comprehensive Income." This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of financial
statements.
The prior years' financial statements have been restated to conform to the new
presentation. Saba's comprehensive (loss) income represents net (loss) income
adjusted for after tax foreign currency translation gains (losses).
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Foreign Currency Translation Adjustments:
Before and after tax amount $(151,720) $(101,014) $(11,198)
The balance of accumulated foreign currency translation (loss) gain as of
December 31 of each year is as follows: 1998 1997 1996
------------ ------------ ------------
$(241,452) $ (89,732) $ 11,282
</TABLE>
F-13
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
--------------------------------------------------
ACCOUNTING POLICIES (Continued)
-------------------
Earnings per Common Share
- -------------------------
Basic earnings per common share are based on the weighted average number of
common shares outstanding during each year. SFAS 128, "Earnings per Share",
requires dual presentation of basic and diluted earnings per share for companies
with complex capital structures. The calculation of diluted earnings per common
share includes, when their effect is dilutive, the incremental shares that
would have been outstanding assuming the exercise of stock options and
conversion of the Debentures.
Sale of Subsidiary Stock
- ------------------------
The Company accounts for a change in its proportionate share of a subsidiary's
equity resulting from the issuance by the subsidiary of its stock in current
operations in the consolidated financial statements.
Two-For-One Forward Stock Split
- -------------------------------
On November 21, 1996, the Company's Board of Directors approved a two-for-one
forward stock split effected as a stock dividend on all outstanding shares of
Common Stock. The Company's outstanding stock option awards and Debentures were
also adjusted accordingly. All share and per share amounts have been adjusted
to give retroactive effect to this split for all periods presented.
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
broadens the definition of a derivative instrument and establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair market
value. Derivatives that are not hedges must be adjusted to fair value currently
in earnings. If a derivative is a hedge, depending on the nature of the hedge,
special accounting allows changes in fair value of the derivative to be either
offset against the change in fair value of the hedged asset or liability in the
income statement or to be recognized as comprehensive income (a component of
stockholders' equity) until the hedged item is recognized in earnings. The
Company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company will adopt SFAS 133 in fiscal year 1999, but since it does not have
derivatives currently, there will be no impact on the financial statements or
disclosures.
F-14
<PAGE>
NOTE 2 - NOTES RECEIVABLE
----------------
Notes receivable are comprised of the following at December 31, 1998 and 1997:
1998 1997
---- -----
Canadian prime plus 0.75% (6.75% at
December 31, 1997) production notes
receivable, with interest paid currently,
collateralized by producing oil and gas
properties. $ - $ 65,012
Prime plus 0.75% (8.5% at December 31,
1998) promissory note from the former
Chief Executive Officer of the Company with
quarterly interest only installments, due
October 31, 1998, collateralized by
vested, but unexercised, stock options to
purchase the Common Stock of the Company. 283,742 283,742
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. - 414,205
9% note receivable from a related party, with principal
and interest due in full on December 31, 1998,
collateralized by the former Chief Executive Officer's
vested, but unexercised, options to purchase the
Common Stock of the Company. 96,021 101,667
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% notes receivable from unaffiliated companies due
on demand and collateralized by personal guarantees
from the borrower's Chief Executive Officers. 75,000 175,000
12% unsecured note receivable from a related party
due on demand. 36,000 -
Other 44,228 43,940
---------- ----------
534,991 2,821,120
Less: current portion (included in other current assets) 12,103 1,436,028
---------- ----------
$522,888 $1,385,092
========== ==========
NOTE 3 - OIL AND GAS PROPERTIES, LAND, PLANT AND EQUIPMENT
-------------------------------------------------
Oil and gas properties, land, plant and equipment at December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
December 31, 1998 Other
- ----------------- Foreign
United States Canada Colombia Countries Total
------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Oil and Gas Properties
- ----------------------
Unevaluated oil and gas properties $ 2,319,548 $ - $ - $1,975,503 $ 4,295,051
Proved oil and gas properties 56,899,341 6,278,455 11,604,277 - 74,782,073
----------- ---------- ----------- ---------- -----------
Total capitalized costs 59,218,889 6,278,455 11,604,277 1,975,503 79,077,124
Less accumulated depletion,
depreciation and impairment 39,352,417 1,500,979 5,318,919 - 46,172,315
----------- ---------- ----------- ---------- -----------
Capitalized Costs, net $19,841,472 $4,802,476 $ 6,285,358 $1,975,503 $32,904,809
=========== ========== =========== ========== ===========
Other Property and Equipment
- ----------------------------
Land $ 2,886,382 $ - $ 305,234 $ - $ 3,191,616
Plant and equipment 4,166,591 71,353 1,835,876 12,236 6,086,056
----------- ---------- ----------- ---------- -----------
7,052,973 71,353 2,141,110 12,236 9,277,672
Less accumulated depreciation 1,048,207 44,958 511,586 4,303 1,609,054
----------- ---------- ----------- ---------- -----------
$ 6,004,766 $ 26,395 $ 1,629,524 $ 7,933 $ 7,668,618
=========== ========== =========== ========== ===========
</TABLE>
F-15
<PAGE>
NOTE 3 - OIL AND GAS PROPERTIES, LAND, PLANT AND EQUIPMENT (Continued)
-------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997 Other
- ----------------- Foreign
United States Canada Colombia Countries Total
------------- ------ -------- --------- -----
<S> <C> <C> <C> <C> <C>
Oil and Gas Properties
- ----------------------
Unevaluated oil and gas properties $ 3,453,408 $ - $ - $2,101,942 $ 5,555,350
Proved oil and gas properties 53,107,650 7,770,588 10,128,691 - 71,006,929
----------- ---------- ----------- ---------- -----------
Total capitalized costs 56,561,058 7,770,588 10,128,691 2,101,942 76,562,279
Less accumulated depletion,
depreciation and impairment 15,489,222 1,265,331 4,550,919 - 21,305,472
----------- ---------- ----------- ---------- -----------
Capitalized Costs, net $41,071,836 $6,505,257 $ 5,577,772 $2,101,942 $55,256,807
=========== ========== =========== ========== ===========
Other Property and Equipment
- ----------------------------
Land $ 2,380,371 $ - $ 305,234 $ - $ 2,685,605
Plant and equipment 3,769,138 81,200 1,802,085 30,377 5,682,800
----------- ---------- ----------- ---------- -----------
6,149,509 81,200 2,107,319 30,377 8,368,405
Less accumulated depreciation 631,742 43,416 342,163 2,483 1,019,804
----------- ---------- ----------- ---------- -----------
$ 5,517,767 $ 37,784 $1,765,156 $ 27,894 $ 7,348,601
=========== ========== ========== ========== ===========
</TABLE>
At December 31, 1998 and 1997, plant and equipment included $724,705 and
$620,248, respectively, for assets acquired under capital leases. Related
accumulated depreciation included $238,465 and $73,972 at December 31, 1998 and
1997, respectively.
Costs incurred in oil and gas property acquisition, exploration, and development
activities are as follows:
<TABLE>
<CAPTION>
Other
Foreign
United States Canada Colombia Countries Total
------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
December 31, 1998
- -----------------
Exploration $ 830,428 $ 103,201 $ - $1,172,581 $ 2,106,210
Development 2,631,620 48,115 1,386,480 - 4,066,215
Acquisition of proved properties 3,382,163 - 89,106 - 3,471,269
----------- ---------- ---------- ---------- -----------
Total Costs Incurred $ 6,844,211 $ 151,316 $1,475,586 $1,172,581 $ 9,643,694
=========== ========== ========== ========== ===========
December 31, 1997
- -----------------
Exploration $ 3,466,718 $2,082,419 $ - $2,114,919 $ 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 $26,182,100 $2,848,755 $1,411,198 $2,114,919 $32,556,972
=========== ========== ========== ========== ===========
</TABLE>
F-16
<PAGE>
NOTE 3 - OIL AND GAS PROPERTIES, LAND, PLANT AND EQUIPMENT (Continued)
-------------------------------------------------
Oil and gas depletion expense in the years ended December 31, 1998, 1997 and
1996 was $6,406,805, $6,610,554 and $4,979,361 or $2.88, $2.64 and $2.22 per
produced barrel of oil equivalent, respectively.
F-17
<PAGE>
NOTE 3 - OIL AND GAS PROPERTIES, LAND, PLANT AND EQUIPMENT (Continued)
-------------------------------------------------
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 prices in effect as of the end of each reporting period and requires a
writedown for accounting purposes if the ceiling is exceeded.
As of December 31, 1998, the Company estimated, using end-of-year prices for
natural gas and oil that, in the aggregate, actual capitalized costs of natural
gas and oil properties for the Company's three full cost pools exceeded the
ceiling limitations imposed under full cost accounting rules by approximately
$9.5 million. Subsequent to December 31, 1998, oil prices increased and natural
gas prices decreased, such that the Company estimated, using April 1, 1999,
prices that, in the aggregate, the ceiling limitation exceeded actual
capitalized costs of natural gas and oil properties by approximately $2.9
million. As a result, the Company was required to record a writedown
attributable to its United States full cost pool at December 31, 1998, in the
amount of $1.4 million. (see Note 16).
The weighted average prices for oil and natural gas based on actual prices in
effect for each of the Company's properties, actual capitalized costs and
ceiling limitation amounts for each full cost pools utilizing December 31, 1998,
and April 1, 1999, prices are as follows (in thousands, except for price
information):
<TABLE>
<CAPTION>
Weighted Avg. Price Excess/
------------------- Capitalized Ceiling (Deficit) of
Oil Natural Gas Costs Limitation Limitation
------ ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
December 31, 1998:
United States $ 8.33 $1.80 $20,931 $14,084 $(6,847)
Canada $10.92 $1.47 $ 4,802 $ 4,527 $ (257)
Colombia $ 7.05 - $ 6,066 $ 3,700 $(2,366)
------- ------- -------
$31,799 $22,311 $(9,488)
======= ======= =======
April 1, 1999:
United States $10.99 $1.55 $21,227 $19,845 $(1,382)
Canada $14.71 $1.44 $ 4,802 $ 4,816 $ 14
Colombia $ 8.55 - $ 6,285 $10,566 $ 4,281
------- ------- -------
$32,314 $35,227 $ 2,913
======= ======= =======
</TABLE>
Capitalized costs attributable to other foreign operations in the amount of $1.5
million were also charged to operations as ceiling writedowns during the year
ended December 31, 1998.
F-18
<PAGE>
NOTE 4 - STATEMENT OF CASH FLOWS
-----------------------
The following is certain supplemental information regarding cash flows for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest paid $2,790,840 $2,088,252 $2,309,475
Income taxes paid $ 253,863 $2,531,157 $1,150,029
</TABLE>
Non-cash investing and financing transactions:
In February 1996, the Company issued 14,000 shares of Common Stock to a director
of the Company in settlement of an obligation in the amount of $42,000.
Debentures in the principal amount of $6,212,000, less related costs of
$796,157, were converted into 1,419,846 shares of Common Stock during the year
ended December 31, 1996.
The Company credited Stockholders' Equity in the amount of $91,600 resulting
from the issuance of stock options to a consultant during the year ended
December 31, 1996.
The Company credited 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), before adjustment for
minority interest, of $(196,562), $(131,050) and $(15,655) were recorded during
the years ended December 31, 1998, 1997 and 1996, respectively.
The Company realized gains in 1997 and 1996 of $4,036 and $8,305, respectively,
as a result of the issuance of common stock by a subsidiary. No gains were
realized in 1998.
The Company incurred capital lease obligations in the amount of $598,827 to
acquire equipment during the year ended December 31, 1997.
Debentures in the principal amount of $2,839,000, less related costs of
$439,515, were converted into 648,882 shares of Common Stock during the year
ended December 31, 1997.
The Company credited 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.
The Company credited 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. Of this amount $106,000 was reported as compensation expense
during the year ended December 31, 1997. The options were canceled in March
1998, resulting in a reduction of deferred compensation expense in the amount of
$803,000 during the year ended December 31, 1998.
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 year ended December
31, 1998.
F-19
<PAGE>
NOTE 4 - STATEMENT OF CASH FLOWS (Continued)
-----------------------
The Company incurred credits to Stockholders' Equity in the amounts of $22,600
and $288,750 resulting from the issuance of fully vested stock options and
performance shares of Common Stock, respectively, during the year ended December
31, 1998.
Quarterly dividend obligations on the Series A Preferred Stock ("Preferred
Stock") that were due and payable on March 31, June 30, September 30, and
December 31, 1998, in the total amount of $480,000 were settled by an increase
to that issue's Conversion Amount.
The acquisition of two producing oil and gas properties in April 1998, at a
total cost of $3,239,835, was partially funded by the assumption of accounts and
notes receivable due to the Company in the amount of $2,390,354, and the
issuance of a stock subscription payable recorded at a cost of $750,000.
The Company incurred a capital lease obligation in the amount of $90,637 to
acquire equipment during the year ended December 31, 1998.
Fee interest in an oil property owned by the Company was acquired in February
1998 by seller-provided financing in the amount of $375,000.
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
----------------------------------------
Accounts payable and accrued liabilities at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Trade accounts payable $ 8,944,683 $ 6,705,897
Undistributed revenue payable 736,717 780,475
Insurance and tax assessments payable 657,792 760,177
Other accrued expenses 2,332,023 1,857,970
----------- -----------
$12,671,215 $10,104,519
=========== ===========
</TABLE>
NOTE 6 - INCOME TAXES
------------
The components of (loss) income before income taxes and after minority interest
in (losses) earnings of consolidated subsidiary for the years ended December 31,
1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
United States $ (28,972,142) $ 457,166 $ 383,453
Canada (310,977) 262,852 693,43
Colombia 1,519,346 3,553,149 5,645,807
-------------- -------------- --------------
Total $ (27,763,773) $ 4,273,167 $ 6,722,699
============== ============== ==============
</TABLE>
F-20
<PAGE>
NOTE 6 - INCOME TAXES (Continued)
------------
Components of income tax expense for the years ended December 31, 1998, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Current
Federal $ -0- $ 291,581 $ 149,600
State 40,000 21,201 259,994
Foreign 1,631,980 1,310,987 2,182,000
------------ ---------- ----------
1,671,980 1,623,769 2,591,594
------------ ---------- ----------
Deferred
Federal (784,930) 114,114 207,787
State -0- 35,265 158,602
Foreign -0- 102,572 -
------------ ---------- ----------
(784,930) 251,951 366,389
------------ ---------- ----------
$ 887,050 $1,875,720 $2,957,983
============ ========== ==========
</TABLE>
The provision for income taxes differs from the amount that would result from
applying the federal statutory rate for the years ended December 31, 1998, 1997
and 1996 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Expected tax provision (benefit) (34.0)% 34.0% 34.0%
State income taxes, net of federal benefit 0.1 1.3 4.1
Effect of foreign earnings 3.2 7.6 5.6
Other 0.9 1.0 .3
Valuation allowance 33.1
------------ ---------- ----------
Total 3.3% 43.9% 44.0%
============ ========== ==========
</TABLE>
F-21
<PAGE>
NOTE 6 - INCOME TAXES (Continued)
------------
The components of the tax effected deferred income tax asset (liability) as
of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Property and equipment $ 4,895,941 $(1,365,800)
Foreign tax credits 3,475,450 2,249,200
Alternative minimum tax credits 194,100 194,100
Other 230,978 73,500
----------- -----------
8,796,469 1,151,000
Valuation allowance (8,796,469) (1,870,200)
----------- -----------
Net Deferred Income Tax Liability $ -0- $ (719,200)
=========== ===========
</TABLE>
At December 31, 1998 and 1997, $-0- and $69,000 of current deferred taxes
are included in other current assets, respectively.
At December 31, 1998, the Company had approximately $3,475,450 of foreign tax
credit carryovers, which will begin to expire in the year 2000. A $3,475,450
valuation allowance has been provided for 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.
F-22
<PAGE>
NOTE 7 - LONG-TERM DEBT
--------------
Long-term debt at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
9% convertible senior subordinated Debentures
due 2005 (a) $ 3,575,000 $ 3,599,000
Revolving loan agreement with a bank (b) 15,600,000 17,410,000
Term loan agreements with a bank (c) 4,501,769 8,803,769
Demand loan agreement with a bank (d) 1,363,073 2,362,809
Capital lease obligations (e) 474,591 525,819
Promissory note (f) 345,290 350,000
Term loan with a bank (g) 367,567 -
Promissory note - Omimex (h) 4,151,288 -
----------- -----------
30,378,578 33,051,397
Less current portion 28,750,743 13,441,542
----------- -----------
$ 1,627,835 $19,609,855
=========== ===========
</TABLE>
(a) 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
have been redeemable by Saba since 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, and $2,839,000 of
Debentures were converted into 648,882 shares of Common Stock during the year
ended December 31, 1997. An additional $24,000 of Debentures were converted into
5,485 shares of Common Stock during the year ended December 31, 1998.
F-23
<PAGE>
NOTE 7 - LONG-TERM DEBT (Continued)
--------------
The Company is not in compliance with certain of the restrictions and
accordingly, such debt is classified as currently payable at December 31, 1998.
(b) The revolving loan ("Agreement") is subject to semi-annual redetermination
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
December 31, 1998, due July 31, 1998. At December 31, 1998, the borrowing base
for the revolving loan was $12.5 million. The borrowing base reduces at the rate
of $300,000 per month. Interest on the two loans is payable at the prime rate
plus 0.25%, or LIBOR rate pricing options plus 2.25%. The weighted average
interest rate for borrowings outstanding under the two loans at December 31,
1998, was 7.73%.
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 December 31, 1998.
(c) 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 (7.75% at December 31, 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 former 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 (7.75% at December 31,
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 former Chief Executive
Officer.
These two loans, plus the borrowing base term loan with an outstanding balance
of $814,000, discussed in (b) above, in the aggregate principal amount of $4.5
million matured on July 31, 1998, and were not paid nor extended, and the
borrowing base deficit of $3.1 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 December 31, 1998.
(d) Saba's Canadian subsidiary has a demand revolving reducing loan with a
borrowing base of $1.4
F-24
<PAGE>
NOTE 7 - LONG-TERM DEBT (Continued)
--------------
million. Interest is payable at variable rate equal to the Canadian prime rate
plus 0.75% per annum (7.5% at December 31, 1998). The loan is collateralized by
the subsidiary's oil and gas producing properties, and a first and fixed
floating charge debenture in the principal amount of $3.6 million over all
assets of the Company. The borrowing base reduces at the rate of $32,600 per
month. In accordance with the terms of the loan agreement, $391,000 of the total
loan balance of $1.4 million is classified as currently payable at December 31,
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.
(e) 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 December 31, 1998 was
8.21%.
(f) 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.
(g) The term loan with a bank ($367,567) 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 a portion of such indebtedness is classified as a current
liability.
(h) 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 (7.75% at
December 31, 1998) plus 3%. The loan is collateralized by Saba's 50% interest in
the Velasquez-Galan pipeline in Colombia, ownership of which is titled in the
name of Sabacol, Inc., a wholly-owned subsidiary of the Company. The loan was
due to be repaid no later than December 14, 1998. On December 11, 1998, Sabacol,
Inc. filed a voluntary petition under Chapter 11 of the United States Bankruptcy
Code in the Central District of California. Sabacol filed the bankruptcy
petition to protect its asset base and to provide adequate time to develop a
reorganization plan.
On March 30,1999, it was announced that Sabacol had entered into an agreement to
sell substantially all of its real and personal assets to Omimex. A portion of
the total consideration for the sale consists of cancellation of the note
payable to Omimex.
Maturities of long term debt at December 31, 1998, are as follows:
F-25
<PAGE>
NOTE 7 - LONG-TERM DEBT (Continued)
--------------
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
<S> <C>
1999 $28,750,743
2000 574,925
2001 832,643
2002 208,515
2003 11,752
Thereafter -
-----------
$30,378,578
===========
</TABLE>
NOTE 8 - RELATED PARTY TRANSACTIONS
--------------------------
Related party transactions are described as follows:
In 1998, 1997 and 1996, Saba charged related parties $12,190, $18,600 and
$26,300, respectively, for reimbursement of certain general and administrative
expenses.
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. Also see footnote 2.
In 1995, related parties 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 debt was repaid in
1997. 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 a related party in the amount of
$10,000.
In 1996, Saba received remittances in the amount of $120,200 from related
parties and made payments in the amount of $90,900 to related parties for
reimbursement of prior period account balances.
In 1996, Saba charged related parties $19,400 and was charged $152,300 by
related parties for interest on promissory notes.
In 1996, Saba loaned $30,000 to a former director of Saba, on an unsecured
basis, at an interest rate of 9% per annum. At December 31, 1998 the loan was
unpaid.
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.
Also see footnote 2.
In 1997, Saba charged interest in the amount of $45,343 to related parties and
was charged interest in the amount of $60,220 by related parties. Saba paid the
related parties a total of $142,000 for such interest charges, which included
amounts charged, but unpaid, at the end of the previous year.
F-26
<PAGE>
NOTE 8 - RELATED PARTY TRANSACTIONS (Continued)
--------------------------
In 1997, Saba received $10,000 in repayment of a short-term advance to a related
party, and $61,193 from the Chief Executive Officer for accrued interest and
principal on his loan from Saba.
In 1997, Saba charged a related party $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 related party.
During the year 1997, Saba billed a related party a total of $18,814 and
received payments of $91,983 which included amounts billed in the prior year, in
connection with the related party'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.
In 1998, Saba advanced $36,000 to a related party, evidenced by an unsecured
promissory note.
In 1998, Saba charged interest in the amount of $40,774 to a related party on
outstanding, interest-bearing, indebtedness to the Company. Saba received
$37,264 for accrued interest and $5,646 for principal repayment from related
parties during the year 1998.
In 1998, Saba provided short-term cash advances to related parties in the amount
of $38,932, and received reimbursements in the amount of $243,534 from related
parties for prior advances.
In 1998, Saba billed a related party a total of $141,978 and received payments
of $88,605 in connection with the related party's participation in drilling and
production activities on one of the Company's oil properties.
NOTE 9 - CONVERTIBLE 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 could not 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
F-27
<PAGE>
NOTE 9 - CONVERTIBLE PREFERRED STOCK (Continued)
---------------------------
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 May 15, 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 year ended December 31, 1998, in the amount of $480,000 on the
remaining outstanding issue were deemed settled by an increase to the Preferred
Stock's conversion amount.
On October 6, 1998, 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 HVI's payment to the Preferred Stock holders of
an additional $500,000. HVI did not exercise its right to acquire the additional
6,310 shares of Series A Preferred Stock prior to the expiration of the
extension period. The 690 shares of Series A Preferred Stock acquired by HVI,
along with the accrued but unpaid dividends thereon, is currently convertible
into an aggregate of 300,012 shares of Saba's Common Stock based on a conversion
price negotiated by HVI and Saba. HVI currently is negotiating with the holders
of the Preferred Stock to extend and amend the Preferred Stock Transfer
Agreement to enable HVI to acquire the additional 6,310 shares of Series A
Preferred Stock (see Subsequent Events).
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 December 31, 1998, a registration statement covering
the shares of Common Stock underlying the Preferred Stock had not been declared
effective. (HVI's current negotiations
F-28
<PAGE>
NOTE 9 - CONVERTIBLE PREFERRED STOCK (Continued)
---------------------------
with the holders of the Preferred Stock include provisions to waive the penalty
(see Subsequent Events).
NOTE 10 - COMMON STOCK AND STOCK OPTIONS
------------------------------
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; options to acquire 10,000 shares of Common Stock were
subsequently canceled.
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
202,000 shares of Common Stock granted to certain employees were subsequently
canceled. On August 28, 1998, Saba issued an option to acquire 15,000 shares of
Common Stock to an employee. The options have exercise prices 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 December 31, 1998. Options to acquire 104,000 shares of Common Stock were
exercisable at December 31, 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 year ended December 31, 1998. The option grant
was canceled in March 1998, and the unamortized portion of deferred compensation
expense was reversed from the applicable accounts.
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 year ended December 31, 1998, attributable to the option grant.
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
F-29
<PAGE>
NOTE 10 - COMMON STOCK AND STOCK OPTIONS (Continued)
------------------------------
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 December 31, 1998, options to acquire a total of 90,000
shares of Common Stock had been granted under the Directors Plan. Options to
acquire 42,000 shares of Common Stock were subsequently canceled due to the
resignations of directors. Options to acquire 6,000 shares of Common Stock were
exercisable at December 31, 1998.
As of December 31, 1998 and 1997, Saba had outstanding options to acquire
400,000 and 548,000 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
58,000 and 154,000 shares of Common Stock were exercised in 1998 and 1997,
respectively, and options to acquire 90,000 and 40,000 shares of Common Stock
were canceled in 1998 and 1997, respectively. Options to acquire 400,000 and
344,000 shares of Common Stock were exercisable at December 31, 1998 and 1997,
respectively.
Information regarding the shares under option and weighted average exercise
price for the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ------ ---------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 1,173,000 $ 8.95 742,000 $ 1.49 740,000 $ 1.40
Granted 90,000 $ 1.50 640,000 $15.50 120,000 $ 4.06
Exercised (58,000) $ 1.42 (154,000) $ 1.47 (118,000) $ 3.58
Canceled (444,000) $12.25 (55,000) $ 5.31 - $ 0.00
---------- ------ ---------- ------ --------- --------
End of Year 761,000 $ 6.72 1,173,000 $ 8.95 742,000 $ 1.49
========== ========== =========
Options exercisable
at end of year 540,000 $ 9.47 344,000 $ 1.38 306,000 $1.37
========== ====== ========== ====== ========= =====
Weighted average
fair value of options
</TABLE>
F-30
<PAGE>
NOTE 10 - COMMON STOCK AND STOCK OPTIONS (Continued)
------------------------------
<TABLE>
<S> <C> <C> <C>
granted during the
year $ 1.33 $ 6.99 $ 1.17
========== ========== =========
</TABLE>
The fair value of each option granted during 1998, 1997 and 1996 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, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ------------------------
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1998 Life Price 1998 Price
-------- -------------- ------------ -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 1.25 - $ 1.38 290,000 (1) $ 1.29 290,000 $ 1.29
$ 1.50 175,000 (2) $ 1.50 130,000 $ 1.50
$ 4.38 10,000 Not stated $ 4.38 10,000 $ 4.38
$15.50 286,000 8.4 years $15.50 110,000 $15.50
------- -------
$ 1.25 - $ 15.50 761,000 540,000
======= =======
</TABLE>
(1) No contractual expiration date for 145,000 options; balance of 145,000
options expire one year following termination of option holder's
employment.
(2) No contractual expiration date for 100,000 options; 30,000 options expire
in 2.75 years and 45,000 options expire in 9.67 years.
F-31
<PAGE>
NOTE 10 - COMMON STOCK AND STOCK OPTIONS (Continued)
------------------------------
The Company accounts for stock based compensation to employees under the rules
of Accounting Principles Board Opinion No 25. The compensation cost for
options granted in 1998, 1997 and 1996 was $60,308, $482,793 and $30,136,
respectively. If the compensation cost for the Company's 1998, 1997 and 1996
grants to employees had been determined consistent with SFAS No. 123, the
Company's net (loss) income and net (loss) earnings per common share (basic)
for 1998, 1997 and 1996 would approximate the proforma amounts set forth below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- ------------------------ -----------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
------------ ------------ ------------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income $(28,650,823) $(28,745,690) $ 2,397,447 $2,094,736 $ 3,764,716 $3,745,218
Net (loss) earnings
per common
share (basic) $ (2.60) $ (2.61) $ 0.23 $ 0.20 $ 0.43 $ 0.43
</TABLE>
On May 30, 1997, the Company's Board of Directors authorized, on a deferred
basis, the issuance of 200,000 shares of Common Stock to the Company's
President, the issuance of such shares being contingent upon the officer
remaining in the employ of the Company for a period of two years succeeding the
expiration of his existing employment contract at December 31, 1999, with such
shares to be issued in two equal installments at the end of each of the two
succeeding years. Additionally, the Board of Directors authorized the issuance
of 100,000 shares of performance shares to the Company's President, issuable at
the end of calendar year 1998 provided that certain operating results were
reported by the Company at the end of that year. In November 1998, due to the
resignation of the officer, both of the grants were canceled.
In March 1998, Saba issued 20,000 performance shares of Common Stock to a
consultant and recognized compensation expense of $61,250 in the year ended
December 31, 1998.
In May 1998, Saba issued 85,000 performance shares to employees and consultants
and recognized compensation expense of $227,500 in the year ended December 31,
1998.
NOTE 11 - EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------ -------------------------------- -------------------------------
Income Per Per Per
(Loss) Shares Share Income Shares Share Income Shares Share
----------- -------- ------ ------------ ------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income
(loss)
available to
common
stockholders -
basic EPS $ (28,650) 11,031 $(2.60) $ 2,397 10,650 $ 0.23 $ 3,765 8,804 $ 0.43
Effect of
dilutive
securities:
Contingently
issuable
shares - - - 350 - 371
Convertible
debentures - - 203 1,001 559 2,650
----------- -------- ------ ------------ ------- -------- -------- --------- ---------
Income available to
common stockholders
and assumed
conversions -
diluted EPS $ (28,650) 11,031 $(2.60) $ 2,600 12,001 $ 0.22 $ 4,324 11,825 $ 0.37
=========== ======== ====== ============ ======= ======== ======== ========= =========
</TABLE>
F-32
<PAGE>
NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)
------------------------------------
The following is a tabulation of unaudited quarterly operating results for 1998
and 1997:
<TABLE>
<CAPTION>
Basic Net Diluted Net
Total Operating Net Income Income (Loss) Income (Loss)
1997 Revenues Income (Loss) Per Share Per Share
- -------------- ----------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
First Quarter $ 6,473,469 $(11,573,619) $(12,016,500) $ (1.12) $ (1.12)
Second Quarter 6,405,776 (7,908,209) (9,577,165) (0.88) (0.88)
Third Quarter 5,803,917 (301,509) (1,904,552) (0.18) (0.18)
Fourth Quarter 4,648,169 (4,240,878) (5,152,606) (0.42) (0.42)
----------- ---------- ------------ ---------- ------------
$23,331,331 $(24,024,215) $(28,650,823) $ (2.60) $ (2.60)
=========== ========== ============ ========== ============
<CAPTION>
Basic Net Diluted Net
Total Operating Net Income Income (Loss) Income (Loss)
1997 Revenues Income (Loss) Per Share Per Share
- -------------- ----------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
First Quarter $ 9,563,474 $2,804,882 $ 1,441,582 $ 0.14 $ 0.12
Second Quarter 8,271,953 1,265,636 507,300 0.05 0.05
Third Quarter 8,942,773 1,978,235 598,618 0.06 0.05
Fourth Quarter 9,217,562 950,255 (150,053) (0.01) (0.01)
----------- ---------- ------------ ----------- ------------
$35,995,762 $6,999,008 $ 2,397,447 $ 0.23 $ 0.22
=========== ========== ============ =========== ============
</TABLE>
NOTE 13 - RETIREMENT PLAN
---------------
The Company sponsors a defined contribution retirement savings plan ( 401(k)
Plan") to assist all eligible U.S. employees in providing for retirement or
other future financial needs. The Company currently provides matching
contributions equal to 50% of each employee's contribution, subject to a maximum
of 4% of employee earnings. The Company's contributions to the 401(k) Plan were
$54,616, $41,762 and $44,014 in 1998, 1997 and 1996, respectively.
F-33
<PAGE>
NOTE 14 - COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is a defendant in various legal proceedings, which arise in the
normal course of business. Based on discussions with legal counsel, management
does not believe that the ultimate resolution of such actions will have a
significant effect on the Company's financial statements or results of
operations.
Leases
- ------
The Company leases office space, vehicles and office equipment under non-
cancelable operating leases expiring in the years 1999 through 2002. Future
minimum lease payments under all operating leases are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
- ----------------
<S> <C>
1999 $229,611
2000 141,711
2001 108,951
2002 8,133
2003 -
--------
$488,406
========
</TABLE>
Rent expense amounted to $206,003, $248,596 and $246,013 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Concentration of Credit Risk and Major Customers
- ------------------------------------------------
The Company invests its cash primarily in deposits with major banks. Certain
deposits may, at times, be in excess of federally insured limits ($975,828 and
$3,951,106 at December 31, 1998 and 1997, respectively, according to bank
records). Saba has not incurred losses related to such cash balances.
The Company's accounts receivable result from its activities in the oil and gas
industry. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of joint interest partners comprising the
Company's customer base. Ongoing credit evaluations of the financial condition
of joint interest partners are performed and generally, no collateral is
required. The Company maintains reserves for potential credit losses and such
losses have not exceeded management's expectations. Included in accounts
receivable at December 31, 1998 and 1997 are the following amounts due from
unaffiliated parties (each accounting for 10% or more of accounts receivable):
<TABLE>
<CAPTION>
1998 1997
-------- ----------
<S> <C> <C>
Customer A $583,879 $1,482,600
======== ==========
Customer B $791,571 $ 931,965
======== ==========
Customer C $ - $ 745,567
======== ==========
</TABLE>
F-34
<PAGE>
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
-----------------------------
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, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Geographic Area 1998 1997 1996
--------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Customer A Colombia $7,374,751 $10,769,000 $13,594,000
========== =========== ===========
Customer B United States $5,821,445 $ 7,738,280 $ 4,117,000
========== =========== ===========
</TABLE>
All sales to the geographic area of Colombia are to the government owned oil
company.
Contingencies
- -------------
The Company is subject to extensive Federal, state, and local environmental laws
and regulations. These requirements, which change frequently, regulate the
discharge of materials into the environment. The Company believes that it is in
compliance with existing laws and regulations.
Environmental Contingencies
- ---------------------------
Pursuant to the purchase and sale agreement of an asphalt refinery in Santa
Maria, California, the sellers agreed to perform certain remediation and other
environmental activities on portions of the refinery property through June 1999.
Because the purchase and sale agreement contemplates that the Company might also
incur remediation obligations with respect to the refinery, the Company engaged
an independent consultant to perform an environmental compliance survey for the
refinery. The survey did not disclose required remediation in areas other than
those where the seller is responsible for remediation, but did disclose that it
was possible that all of the required remediation may not be completed in the
five-year period. The Company, however, believes that all required remediation
will be completed by the seller within the five year period. Environmental
compliance surveys such as those the Company has had performed are limited in
their scope and may not disclose all environmental contamination as may exist.
In accordance with the Articles of Association for the Cocorna Concession, the
Concession expired in February 1997 and the property interest reverted to
Ecopetrol. The property is presently under operation by Ecopetrol. Under the
terms of the acquisition of the Concession, the Company and the operator were
required to perform various environmental remedial operations, which the
operator advises have been substantially, if not wholly, completed. The Company
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, the Company does not
anticipate any significant future expenditures associated with the environmental
requirements for the Cocorna Concession.
F-35
<PAGE>
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
-----------------------------
Environmental Contingencies (Continued)
- ---------------------------
In 1993, the Company acquired a producing mineral interest from a major oil
company ( Seller"). At the time of acquisition, the Company's investigation
revealed that the Seller had suffered a discharge of diluent (a light oil based
fluid which is often mixed with heavier grade crudes). The purchase agreement
required the Seller to remediate the area of the diluent spill. After the
Company assumed operation of the property, the Company became aware of the fact
that diluent was seeping into a drainage area, which traverses the property. The
Company took action to eliminate the fluvial contamination and requested that
the Seller 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 agreed to remediate.
The Company has commenced an investigation into the source of the contamination
to ascertain whether it is physically part of the area which the Seller agreed
to remediate or is a separate spill area. Investigation and discussions with the
Seller are ongoing. Should the Company be required to remediate the area itself,
the cost to the Company could be significant. The Company has spent
approximately $240,000 to date in remediation activities, and present estimates
are that the cost of complete remediation could approach $1 million. Since the
investigation is not complete, an accurate estimate of cost cannot be made.
In 1995, the Company agreed to acquire, for less than $50,000, an oil and gas
interest on which a number of oil wells had been drilled by the seller. None of
the wells were in production at the time of acquisition. The acquisition
agreement required that the Company assume the obligation to abandon any wells
that the Company did not return to production, irrespective of whether certain
consents of third parties necessary to transfer the property to the Company were
obtained. The Company has been unable to secure all of the requisite consents to
transfer the property but nevertheless may have the obligation to abandon the
wells. The leases have expired and the Company is presently considering whether
to attempt to secure new leases. A preliminary estimate of the cost of
abandoning the wells and restoring the well sites is approximately $800,000. The
Company is currently unable to assess its exposure to third parties if the
Company elects to plug such wells without first obtaining necessary consent.
The Company, as is customary in the industry, is required to plug and abandon
wells and remediate facility sites on its properties after production operations
are completed. The cost of such operation will be significant and will occur,
from time to time, as properties are abandoned.
There can be no assurance that material costs for remediation or other
environmental compliance will not be incurred in the future. The occurrence of
such environmental compliance costs could be materially adverse to the Company.
No assurance can be given that the costs of closure of any of the Company's
other oil and gas properties would not have a material adverse effect on the
Company.
F-36
<PAGE>
NOTE 15 - BUSINESS SEGMENTS
-----------------
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information." The
Company considers that its operations are principally in one industry segment
that of acquisition, exploration, development and production of oil and gas
reserves. The factors for determining reportable segments are based on the
distinct nature of their operations. Another criteria for determining reportable
segments is that they are managed as separate business units because each
requires and is responsible for executing a unique business strategy.
Earnings of industry segments and geographic areas exclude interest income,
interest expense and unallocated corporate expenses.
Foreign income and other taxes and certain state taxes are included in segment
earnings on the basis of operating results. U.S. Federal income taxes are
allocated to segments except for amounts in lieu thereof that represent the tax
effect of operating charges resulting from purchase accounting adjustments.
Identifiable assets are those assets used in the operations of the segments.
Corporate assets consist of cash, short-term investments, certain corporate
receivables, and other assets.
A summary of the Company's operations by geographic area for the years ended
December 31, 1998, 1997 and 1996 is as follows: (Dollars in thousands).
<TABLE>
<CAPTION>
Other
Year Ended Foreign Corporate
December 31, 1998 United States Canada Colombia Countries and Other Total
- ----------------- ------------- -------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 12,044 $ 1,546 $ 7,375 $ - $ 2,366 $ 23,331
Production costs 8,867 874 3,867 - - 13,608
Other operating expenses 1,177 604 253 130 4,366 6,530
Depreciation, depletion and
amortization 5,370 366 938 6 444 7,124
Writedown of oil and gas
properties 18,583 - - 1,510 - 20,093
Income tax expense (benefit) (182) (93) 1,226 (13) (51) 887
------------- -------- -------- ---------
Results of operations from oil
and gas producing activities $ (21,771) $ (205) $ 1,091 $ (1,633)
============= ======== ======== =========
Interest and other expenses
(net) 3,741 3,741
-------- --------
Net (loss) income $ (6,024) $(28,650)
======== ========
Identifiable assets at
December 31, 1998 $ 23,744 $ 5,225 $11,056 $ 2,068 $ 7,595 $ 49,688
============= ======== ======= ========= ======== ========
</TABLE>
F-37
<PAGE>
NOTE 15 - BUSINESS SEGMENTS (Continued)
-----------------
<TABLE>
<CAPTION>
Other
Year Ended Foreign Corporate
December 31, 1997 United States Canada Colombia Countries and Other Total
- ----------------- ------------- ------ -------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
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 1,130 472 246 63 3,214 5,125
Depreciation, depletion and
amortization 4,540 543 1,797 2 383 7,265
Income tax expense (benefit) 752 158 1,495 - (529) 1,876
------- ------ ------- ------
Results of operations from oil
and gas producing activities $ 4,476 $ 329 $ 2,165 $ (65)
======= ====== ======== =========
Interest and other expenses
(net) 2,726 2,726
------- ------
Net income (loss) $(4,508) $ 2,397
======= =======
Identifiable assets at
December 31, 1997 $44,713 $7,460 $11,047 $2,174 $12,263 $77,657
======= ====== ======== ========= ======= =======
<CAPTION>
Other
Year Ended Foreign Corporate
December 31, 1996 United States Canada Colombia Countries and Other Total
- ----------------- ------------- ------ -------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 15,907 $3,105 $13,594 $ - $ 596 $33,202
Production costs 8,160 1,172 5,272 - - 14,604
Other operating expenses 1,209 536 213 58 1,904 3,920
Depreciation, depletion and
amortization 2,564 353 2,275 1 334 5,527
Income tax expense (benefit) 1,561 - 2,917 - (1,520) 2,958
------- ------ ------- ------
Results of operations from oil
and gas producing activities $ 2,413 $1,044 $ 2,917 $ (59)
======= ====== ======== =========
Interest and other expenses
(net) 2,428 2,428
------- -------
Net income (loss) $(2,550) $ 3,765
======= =======
Identifiable assets at
December 31, 1996 $ 28,466 $5,346 $ 12,473 $ 264 $ 2,568 $49,117
======= ====== ======== ========= ======= =======
</TABLE>
F-38
<PAGE>
NOTE 16 - SUBSEQUENT EVENTS (UNAUDITED)
-----------------------------
Writedown of Natural Gas and Oil Properties
- -------------------------------------------
As of December 31, 1998, the Company estimated, using end-of-year prices for
natural gas and oil that, in the aggregate, actual capitalized costs of natural
gas and oil properties for the Company's three full cost pools exceeded the
ceiling limitations imposed under full cost accounting rules by approximately
$9.5 million. Subsequent to December 31, 1998, oil prices increased and natural
gas prices decreased, such that the Company estimated, using April 1, 1999,
prices that, in the aggregate, the ceiling limitation exceeded actual
capitalized costs of natural gas and oil properties by approximately $2.9
million. The Company was required to record a writedown attributable to its
United States full cost pool at December 31, 1998, in the amount of $1.4
million.
The weighted average prices for oil and natural gas based on actual prices in
effect for each of the Company's properties, actual capitalized costs and
ceiling limitation amounts for each full cost pool utilizing December 31, 1998,
and April 1, 1999, prices are as follows (in thousands, except for price
information):
<TABLE>
<CAPTION>
Excess/
Weighted Avg. Price (Deficit)
------------------- Capitalized Ceiling of
Oil Natural Gas Costs Limitation Limitation
------ ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
December 31, 1998:
United States $ 8.33 $1.80 $20,931 $14,084 $(6,847)
Canada $10.92 $1.47 $ 4,802 $ 4,527 $ (275)
Colombia $ 7.05 - $ 6,066 $ 3,700 $(2,366)
------- ------- -------
$31,779 $22,311 $(9,488)
======= ======= =======
April 1, 1999:
United States $10.99 $1.55 $21,227 $19,845 $(1,382)
Canada $14.71 $1.44 $ 4,802 $ 4,816 $ 14
Colombia $ 8.55 - $ 6,285 $10,566 $ 4,281
------- ------- -------
$32,314 $35,227 $ 2,913
======= ======= =======
</TABLE>
F-39
<PAGE>
NOTE 16 - SUBSEQUENT EVENTS (UNAUDITED) (Continued)
-----------------------------
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 $3.1 million on the revolving loan at December 31, 1998, has not been
satisfied either by providing additional collateral to The Company's bank or
reducing the principal balance that was outstanding at December 31, 1998.
Additionally, the Company was not in compliance with the loan agreements
financial covenants at December 31, 1998. 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. The Company and its bank are in discussions to address such
non-compliance.
The Company has negotiated, and continues to pursue, the sale of certain
producing oil and gas assets and real estate assets. In September 1998, 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 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 its 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. However, 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.
Sabacol had filed the bankruptcy petition to protect its asset base and to
provide adequate time to develop a re-organization plan. On March 30, 1999, it
was announced that Sabacol had entered into an agreement to sell substantially
all of its real and personal assets. A portion of the total consideration for
the sale consists of cancellation of the promissory note, including accrued
interest. Sabacol has filed a motion for an order authorizing the sale of the
assets and, upon consummation of the sale, dismissing the bankruptcy case.
F-40
<PAGE>
NOTE 16 - SUBSEQUENT EVENTS (UNAUDITED) (Continued)
-----------------------------
On March 22, 1999, the Company and HVI announced that the shareholders of both
companies approved the merger between the Company and HVI at a special meeting
of each company held in March 19,1999. Under the terms of the merger, HVI will
be the surviving entity following its acquisition of 100% of the issued and
outstanding Common Stock of Saba. At the HVI meeting, shareholders also approved
a name change to Greka Energy Corporation.
The Company deferred the semi-annual interest payment of $162,000 due in
December 1998 on the Debentures. The interest payment was made in January of
1999.
On March 15, 1999 HVI and RGC International Investors LDC entered into a term
sheet that provided for the conversion of Saba's Series A Convertible Preferred
Stock to a Secured Convertible Note obligation of HVI. Negotiations relating to
the final documentation of this agreement are ongoing.
F-41
<PAGE>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Estimated Proved Reserves
- -------------------------
Estimates of the Company's proved developed and undeveloped oil and gas reserves
for its working and royalty interest wells were prepared by independent
engineers. The estimates are based upon engineering principles generally
accepted in the petroleum industry and take into account the effect of past
performance and existing economic conditions. Reserve estimates vary from year
to year because they are based upon judgmental factors involved in interpreting
and analyzing production performance, geological and engineering data and
changes in prices, operating costs and other economic, regulatory, and operating
conditions. Changes in such factors can have a significant impact on the
estimated future recoverable reserves and estimated future net revenue by
changing the economic lives of the properties. Proved undeveloped oil and gas
reserves include only those reserves which are expected to be recovered on
undrilled acreage from new wells which are reasonably certain of production when
drilled, or from presently existing wells which could require relatively major
expenditures to effect recompletion. Presented below is a summary of proved
reserves of the Company's oil and gas properties:
<TABLE>
<CAPTION>
United States Canada (1) Colombia Total
- ---------------------------------------------- ------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
- ----------------------------
Oil (Barrels)
Proved Reserves:
- ----------------
Beginning of year 10,550,203 806,700 12,568,182 23,925,085
Acquisition, exploration and development of
minerals in place 278,429 - - 278,429
Revisions of previous estimates (3,825,390) (210,793) (3,685,077) (7,721,260)
Production (964,613) (67,007) (823,361) (1,854,981)
Sales of minerals in place (474,195) (248,300) - (722,495)
---------- ---------- ---------- ----------
End of year 5,564,434 280,600 8,059,744 13,904,778
========== ========== ========== ==========
Proved developed reserves, end of year 3,756,848 177,600 4,501,423 8,435,871
========== ========== ========== ==========
Gas (thousands of cubic feet)
Proved Reserves:
- ----------------
Beginning of year 20,310,456 10,984,000 - 31,294,456
Acquisition, exploration and development of
minerals in place 1,298,845 - - 1,298,845
Revisions of previous estimates 610,050 (4,132,701) - (3,522,651)
Production (1,628,495) (614,399) - (2,242,894)
Sales of minerals in place (3,673,391) (156,600) - (3,829,991)
---------- ---------- ---------- ----------
End of year 16,917,465 6,080,300 - 22,997,765
========== ========== ========== ==========
Proved developed reserves, end of year 8,863,795 2,254,500 - 11,118,295
========== ========== ========== ==========
</TABLE>
(1) see reference (1) on page F-43
F-42
<PAGE>
<TABLE>
<CAPTION>
United States Canada (1) Colombia Total
------------- ----------- ----------- -----------
Year Ended December 31, 1997
- ----------------------------
<S> <C> <C> <C> <C>
Oil (Barrels)
Proved Reserves:
- ----------------
Beginning of year 16,151,058 920,800 9,607,067 26,678,925
Acquisition, exploration and development of
minerals in place 4,200,193 9,640 1,600,225 5,810,058
Revisions of previous estimates (6,139,246) (24,055) 2,247,541 (3,915,760)
Production (1,120,645) (99,685) (886,651) (2,106,981)
Sales of minerals in place (2,541,157) - - (2,541,157)
---------- ---------- ---------- ----------
End of year 10,550,203 806,700 12,568,182 23,925,085
========== ========== ========== ==========
Proved developed reserves, end of year 8,048,356 603,600 7,964,016 16,615,972
========== ========== ========== ==========
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 (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
========== ========== ========== ==========
Year Ended December 31, 1996
- ----------------------------
Oil (Barrels)
Proved Reserves:
- ----------------
Beginning of year 6,562,595 926,200 5,042,502 12,531,297
Acquisition, exploration and development of
minerals in place 4,501,828 103,837 - 4,605,665
Revisions of previous estimates 5,950,525 24,771 5,595,772 11,571,068
Production (803,070) (134,008) (1,031,207) (1,968,285)
Sales of minerals in place (60,820) - - (60,820)
---------- ---------- ---------- ----------
End of year 16,151,058 920,800 9,607,067 26,678,925
========== ========== ========== ==========
Proved developed reserves, end of year 7,993,854 710,000 4,692,140 13,395,994
========== ========== ========== ==========
Gas (thousands of cubic feet)
Proved Reserves:
- ----------------
Beginning of year 9,103,049 10,376,000 - 19,479,049
Acquisition, exploration and development of
minerals in place 4,186,184 924,033 - 5,110,217
Revisions of previous estimates 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
========== ========== ========== ==========
</TABLE>
(1) see reference (1) on page F-42
F-43
<PAGE>
(1) The proved reserve information on December 31, 1998, 1997 and 1996 includes
the following proved reserve amounts attributable to the approximately 26%
minority interest ownership by unrelated parties in Beaver Lake Resources
Corporation.
1998 1997 1996
---------- ---------- ----------
Oil (Bbls) 72,495 208,417 236,911
Gas (Mcf) 1,570,888 2,837,793 2,714,646
Barrels of oil equivalent (BOE) 334,310 681,382 689,352
Standardized measure of
discounted future net cash flows $1,095,738 $2,351,565 $2,840,628
F-44
<PAGE>
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserve
The following information at December 31, 1998, 1997 and 1996 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 in effect at year-end, costs and statutory income tax
rates in effect at the time the projections are made and a 10 percent per year
discount rate. The projections should not be viewed as estimates of future cash
flows nor should the standardized measure" be interpreted as representing
current value to the Company (dollars in thousands).
<TABLE>
<CAPTION>
December 31, 1998 United States Canada (1) Colombia Total
- ----------------- ------------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Future cash inflows $ 76,773 $ 13,407 $ 56,853 $ 147,033
Future production costs (35,593) (5,144) (40,617) (81,354)
Future development costs (16,826) (1,307) (8,256) (26,389)
Future income tax expenses - (312) - (312)
-------- -------- -------- ---------
Future net cash flows 24,354 6,644 7,980 38,978
10 percent annual discount for
estimated timing of cash flows (9,143) (2,403) (4,307) (15,853)
-------- -------- -------- ---------
Standardized measure of discounted
future net cash flows $ 15,211 $ 4,241 $ 3,673 $ 23,125
======== ======== ======== =========
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) (16,877) (37,623)
-------- -------- -------- ---------
Standardized measure of discounted
future net cash flows $ 45,829 $ 9,102 $ 34,923 $ 89,854
======== ======== ======== =========
</TABLE>
(1) see reference (1) on page F-42
F-45
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996 United States Canada (1) Colombia Total
- ----------------- ------------- --------- --------- ----------
<S> <C> <C> <C> <C>
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
========= ======== ======== =========
</TABLE>
The following are the principal sources of changes in the standardized measure
of discounted future net cash flows during 1998, 1997 and 1996 (dollars in
thousands).
<TABLE>
<CAPTION>
December 31, 1998 United States Canada (1) Colombia Total
- ----------------- ------------- ---------- --------- --------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 45,829 $ 9,102 $ 34,923 $ 89,854
Acquisitions, discoveries
and extensions 1,263 - - 1,263
Sales and transfers of oil
and gas produced, net of
production costs (2,841) (479) (2,761) (6,081)
Changes in estimated future
development costs (5,805) 228 (412) (5,989)
Net changes in prices, net of
production costs (20,970) (2,077) (45,030) (68,077)
Sales of reserves in place (4,391) (1,540) - (5,931)
Development costs incurred
during the period 330 - 1,216 1,546
Changes in production rates
and other 4,586 (236) (7,360) (3,010)
Revisions of previous
quantity estimates (13,550) (3,280) (4,830) (21,660)
Accretion of discount 5,144 1,640 5,714 12,498
Net change in income taxes 5,616 883 22,213 28,712
------------- ---------- --------- --------
Balance at end of year $ 15,211 $ 4,241 $ 3,673 $ 23,125
============= ========== ========= ========
</TABLE>
(1) see reference (1) on page F-42
F-46
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997 United States Canada (1) Colombia Total
- ----------------- ------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 73,329 $11,041 $ 32,119 $116,489
Acquisitions, discoveries
and extensions 31,593 726 8,368 40,687
Sales and transfers of oil
and gas produced, net of
production costs (10,497) (1,254) (5,611) (17,362)
Changes in estimated future
development costs 9,920 (1,108) 9,231 18,043
Net changes in prices, net of
production costs (51,463) (4,739) (15,151) (71,353)
Sales of reserves in place (4,314) - - (4,314)
Development costs incurred
during the period 1,601 70 (719) 952
Changes in production rates
and other (9,298) (927) 2,076 (8,149)
Revisions of previous
quantity estimates (20,764) (126) 9,761 (11,129)
Accretion of discount 9,515 1,540 4,471 15,526
Net change in income taxes 16,207 3,879 (9,622) 10,464
-------- ------- -------- --------
Balance at end of year $ 45,829 $ 9,102 $ 34,923 $ 89,854
======== ======= ======== ========
December 31, 1996
- -----------------
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
======== ======= ======== ========
</TABLE>
(1) see reference (1) on page F-42
SIGNATURES
F-47
