SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: (Date of earliest event reported) June 16, 1998
SABA PETROLEUM COMPANY (Exact name of registrant as specified in charter)
Delaware 1-12322 47-0617589
========================================================
(State or (Commission (IRS Employer
other File Number) Identification No.)
jurisdiction
of incorporation)
3201 Airpark Drive Suite 201, Santa Maria, CA 93455
(Address of principal executiove offices) (Zip Code)
Registrant's telephone number, including area code: (805) 347-8700
(Former name or former address, if changed since last report) Not Applicable
Item 1 Changes in Control of Registrant
Not Applicable
Item 2 Acquisition or Disposition of Assets
Not Applicable
Item 3 Bankruptcy or Receivership
Not Applicable
Item 4 Changes in Registrant's Certifying Accountant
Not Applicable
Item 5 Other Material Events
The Omimex Merger Agreement
In early 1998, the Board of Directors of the Company engaged
CIBC-Oppenheimer, Inc. ("Oppenheimer"), an investment banking firm, to explore
ways to enhance shareholder values. This engagement was prompted by several
factors, predominately the declining price of common stock of the Company
("Common Stock") and the lack of working capital available to the Company. In
March 1998, Oppenheimer presented the Board with its recommendations, which
included exploring a possible business combination of the Company with another
oil and gas company. In March 1998, the Company achieved a preliminary agreement
with Omimex Resources, Inc., a privately held Fort Worth, Texas oil and gas
company ("Omimex") which operates a substantial portion of the Company's
producing properties, to enter into a business combination. The economic terms
of the transaction contemplated issuing Common Stock to the shareholders of
Omimex on a basis proportionate to the respective net asset values of the two
companies, determined by replacing the property accounts on the respective
balance sheets with the present value, calculated at a ten percent discount, of
the proved reserves of the apposite company and adjusting that number for other
assets and liabilities. Credit was to be given for oil and gas properties deemed
to have exploration or development potential. Initial discussions indicated that
the shareholders of Omimex would be issued roughly fifty per cent of the Common
Stock outstanding after the completion of the transaction. Management of Omimex
would become management of the Company, which would be headquartered in Fort
Worth, Texas. The Company's California and Indonesia operations would be
excluded from the transaction and would be combined into an existing subsidiary
(Saba Petroleum, Inc.), the shares of which would be distributed proportionately
to the Company's pre-merger shareholders. Subsequent to the execution of the
preliminary agreement, the Company negotiated a required consent from the
holders ("Holders") of its Series A Convertible Preferred Stock ("Preferred
Stock"), the terms of which consent are described below. In the interim between
the execution of the preliminary agreement and the definitive Plan and Agreement
of Reorganization (the "Merger Agreement"), the price of oil continued to
deteriorate as did the Company's financial condition and the price of the Common
Stock. The Company's deteriorating financial condition precluded the Company
from raising funds with which to redeem the Preferred Stock as had been the
Company's intention. The Preferred Stock presented a significant risk of
dilution to the Company's shareholders. These factors precipitated a change in
the percentage of stock ultimately issuable to the shareholders of Omimex in the
Merger.
In June 1998, the Company, Omimex, the shareholders of Omimex and, for
limited purposes, Mr. Ilyas Chaudhary entered into the Merger Agreement.
Essentially, the Merger Agreement provides that the Company will acquire all of
the outstanding stock of Omimex in exchange for approximately 65% of the Common
Stock outstanding after the Merger, with existing shareholders of the Company
retaining approximately 35% of the outstanding shares. All of the outstanding
shares will be subject to the terms of the Preferred Stock, which is discussed
below. The actual number of shares to be issued will be subject to adjustment
for the results of operations (excluding certain non-cash items, such as
depletion, depreciation and amortization) from January 1, 1998 to the closing
date, which is expected to be late in the third quarter 1998. As part of the
Merger Agreement, Omimex lent to the Company approximately $4.15 million, the
proceeds of which were used to redeem $2 million of Stated Value of the
Preferred Stock (for approximately $2.15 million) and to pay $2 million on the
Company's outstanding bank indebtedness. The loan by Omimex bears interest at
prime plus two percent and is due 90 days after termination of the Merger
Agreement in the event that the merger is not consummated. Under terms of the
Merger Agreement, each company is restricted in cash expenditures (other than
for pre-existing commitments and entering into commitments above stated dollar
levels). Should another party acquire control of the Company and as a result
thereof the Merger be cancelled, the Company would be required to pay a break-up
fee of $1 million to Omimex. As a consequence of the Merger, if consummated, the
Company will redeem its existing 9% Convertible Subordinated Debentures within
thirty days of the closing. The Merger Agreement requires that on closing the
funds for the redemption be escrowed. The Merger is subject to customary
conditions and the additional requirement that approval be obtained from the
Holders of the Preferred Stock, the Company's Bank and that the merged company
receive a credit facility of no less than $50 million and that Saba Petroleum,
Inc. receive a credit facility of no less than $6 million. Further, the closing
is conditioned upon receipt by the Company of a fairness opinion from
Oppenheimer and a tax opinion, to the effect that the distribution of the stock
of Saba Petroleum, Inc. will not be treated as a taxable distribution to the
shareholders of the Company.
The Merger Agreement provides that the Company's California assets and
its Indonesian concession be consolidated in an existing subsidiary and that the
shares of such subsidiary (Saba Petroleum, Inc.) be distributed to the
shareholders of the Company, determined on the record date for the meeting of
shareholders at which the Merger Agreement will be submitted for approval. It is
expected that Saba Petroleum, Inc. will trade in the over the counter market.
Because of the limited interests held by Saba Petroleum, Inc., it is not
expected that the initial trading market for its stock will be significant.
While a precise management structure has not been determined, it is expected
that the existing management personnel of the Company will be employed by Saba
Petroleum, Inc. Saba Petroleum, Inc. will be substantially smaller in terms of
revenues and assets than is the Company and will have significantly less
diversification, since all of its income producing properties will be located in
the State of California.
Bank Indebtedness
As indicated above, as part of the Merger Agreement, Omimex lent to the
Company $2 million which was applied to the Company's existing bank
indebtedness. The Bank consented to the borrowing from Omimex described in the
preceding section and the application of the proceeds of the loan, including the
redemption of $2 million Stated Value of the Preferred Stock. As a result of
that payment and the payment of $300,000 which was made in May 1998 by the
Company, the Bank and the Company have entered into a written amendment to the
existing loan agreement providing that the maturities of all three short term
facilities will be extended to July 31, 1998, conditioned upon the Company
making minimum $300,000 monthly payments of principal on its bank credit
facilities. The amendment further provides a waiver by the Bank of the Company's
violation of certain loan covenants of which the Company may have been in
default. These covenants are the following: failure to make certain scheduled
loan payments, consent of indebtedness, and violation of working capital
requirements at March 31, 1998. The Company is in discussions with the Bank to
further amend the existing loan agreement in order to restructure the Company's
existing bank indebtedness whereby the maturities of all three short term
facilities will be further extended to a date which will accommodate the
completion of the Merger, provided that the Company continues to make minimum
$300,000 monthly payments of principal on its bank credit facilities.
Preferred Stock
The Company has outstanding Preferred Stock which is convertible into
Common Stock at essentially the lowest closing price for the Common Stock
averaged over three days during a rolling thirty day period. The Preferred Stock
agreements effectively prohibit the Company from performing the Merger Agreement
without the consent of the Holders of the Preferred Stock. Concurrently with the
execution of the Merger Agreement, the Company and the Holders executed a letter
agreement, which was approved by Omimex, pursuant to which the Company redeemed
one-fifth of the outstanding Preferred Stock, acquired the option to redeem up
to an additional two-fifths at a redemption price of 108.5% plus accrued
interest and modified the terms of the conversion rights of the Holders. Under
the letter agreement, $4 million of the Preferred Stock may not be converted
until September 30, 1998 and is subject to the option discussed above; the
remaining $4 million of Preferred Stock may be immediately converted by the
Holders and remains subject to redemption by the Company on the basis of 115% of
the Stated Value plus accrued dividends and issuance of a five-year warrant to
purchase 200,000 shares of Common Stock at 115% of the average closing bid price
for a ten day period succeeding the redemption.
As part of the consideration, the Holders will share in the
distribution of the stock of Saba Petroleum, Inc. as if the Holders had
converted 60% of the Preferred Stock then owned by the Holders at the record
date for such distribution. For example, if the conversion price were $2 and $6
million of the Preferred Stock had been redeemed, the Holders would be treated
for purposes of the distribution as if they owned $2.4 million ($4 million x
60%) of Common Stock or approximately 1.2 million shares. Assuming a 1 for 1
distribution of the stock of Saba Petroleum, Inc., the Holders would receive
approximately 1.2 million shares of Saba Petroleum, Inc. (or roughly 10%) and
the existing shareholders of the Company would receive approximately 11 million
shares (or roughly 90%). The foregoing numbers and percentages are rounded and
are not precise numbers.
Item 6 Resignation of Registrant's Directors
Not Applicable
Item 7 Financial Statements and Exhibits
Exhibit 10.1 Agreement and Plan of Reorganization dated as of June 1, 1998 by
and among the Company and Omimex Resources, Inc., et al.
Exhibit 10.2 Consent letter to the provisions of Section 1.7 of the Agreement
and Plan of Reorganization by Bank One, Texas, NA, dated June 2, 1998.
Exhibit 10.3 9th Amendment to First Amended and Restated loan Agreement dated
September 23, 1998, as amended, among the Company et al. and Bank One,
Texas, NA dated June 9, 1998.
Exhibit 10.4 Press Release announcing execution of merger agreement dated June
2, 1998.
Exhibit 10.5 Press Release announcing responses to inquiries of merger dated
June 3, 1998.
Item 8 Change in Fiscal Year
Not Applicable
Item 9 Sales of Equity Securities Pursuant to Regulation S
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SABA PETROLEUM COMPANY
Date: June 16, 1998 By: /s/Walton C. Vance
Chief Financial Officer