U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(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 (I.R.S. Employer
incorporation or organization) Identification Number)
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 System,
was $19,782,144.
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of April 14, 1999, the issuer had 4,194,969 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one).
Yes [ ] No [X]
TABLE OF CONTENTS
Page
PART I
Item 1. Description of the Business . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . .
Item 3. Legal Proceedings .. . . . . . . . . . . . . . . . .
Item 4. Submission of Matters to a Vote of Security Holders .
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . ..
Item 6. Management's Discussion and Analysis . . . . . . . ..
Item 7. Financial Statements . . . . . . . . . . . . . . . ..
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure . . . . . .
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the
Exchange Act . . . . . .. . . . . . . . . . .
Item 10. Executive Compensation . . . . . . . . . . . . . . . .
Item 11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . .
Item 12. Certain Relationships and Related Transactions . . . .
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . .
Index to Consolidated Financial Statements and Schedules. . . . . F-1
SEC Definitions
The terms below are used in this document and have specific SEC
definitions as follows:
Proved oil and gas reserves. Proved oil and gas reserves are the
estimated quantities of crude oil, natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions, i.e., prices and costs as of the date the estimate is made.
Prices include consideration of changes in existing prices provided only by
contractual arrangements, but not on escalations based upon future conditions.
Proved developed oil and gas reserves. Proved oil and gas reserves are
reserves that can be expected to be recovered through existing wells with
existing equipment and operating methods. Additional oil and gas expected to
be obtained through the application of fluid injection or other improved
recovery techniques for implementing the natural forces and mechanisms of
primary recovery should be included as "proved developed reserves" only after
testing by a pilot project or after the operation of an installed program has
confirmed through production response that increased recovery will be
achieved.
Proved undeveloped reserves. Proved undeveloped oil and gas reserves are
reserves that are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major expenditure is
required for recompletion. Reserves on undrilled acreage shall be limited to
those drilling units offsetting productive units that are reasonably certain
of production when drilled. Proved reserves for other undrilled units can be
claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Under no
circumstances should estimates for proved undeveloped reserves be attributable
to any acreage for which an application of fluid injection or other improved
recovery technique is contemplated, unless such techniques have been proved
effective by actual tests in the area and in the same reservoir.
PART I
Cautionary Information About Forward-Looking Statements
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act that
include, among others, statements concerning:
* the benefits expected to result from GREKA Energy's recent
acquisition of Saba Petroleum Company discussed below, including
* synergies in the form of increased revenues,
* decreased expenses and avoided expenses and expenditures that are
expected to be realized by GREKA Energy and Saba as a result of the
transaction, and
* the complementary nature of GREKA Energy's horizontal drilling
technology and certain Saba oil reserves, and
* other statements of:
* expectations,
* anticipations,
* beliefs,
* estimations,
* projections, and
* other similar matters that are not historical facts, including such
matters as:
* future capital,
* development and exploration expenditures (including the amount and
nature thereof),
* drilling of wells, reserve estimates(including estimates of future
net revenues associated with such reserves and the present value of
such future net revenues),
* future production of oil and gas,
* repayment of debt,
* business strategies, and
* expansion and growth of business operations.
These statements are based on certain assumptions and analyses made by
the management of GREKA Energy in light of:
* past experience and perception of:
* historical trends,
* current conditions,
* expected future developments, and
* other factors that the management of GREKA Energy believes are
appropriate under the circumstances.
GREKA Energy cautions the reader that these forward-looking statements
are subject to risks and uncertainties, including those associated with:
* the financial environment,
* the regulatory environment, and
* trend projections,
that could cause actual events or results to differ materially from those
expressed or implied by the statements. Such risks and uncertainties include
those risks and uncertainties identified in the Description of the Business
and Management's Discussion and Analysis sections of this document.
Significant factors that could prevent GREKA Energy from achieving its
stated goals include:
* the failure by GREKA Energy to integrate the respective operations of
GREKA Energy and Saba or to achieve the synergies expected from the
acquisition of Saba,
* the failure by GREKA Energy to obtain refinancing agreements or
arrange for the payment of Saba obligations,
* declines in the market prices for oil and gas, and
* adverse changes in the regulatory environment affecting GREKA Energy.
In addition, as discussed in Note 1 of the Notes to Consolidated
Financial Statements of GREKA Energy contained elsewhere in this document,
there currently is substantial doubt about GREKA Energy's ability to continue
as a going concern.
The cautionary statements contained or referred to in this document
should be considered in connection with any subsequent written or oral
forward-looking statements that may be issued by GREKA Energy or persons
acting on its or their behalf. GREKA Energy undertakes no obligation to
release publicly any revisions to any forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Item 1. Description of Business.
Overview of GREKA Energy Corporation
GREKA Energy Corporation, a Colorado corporation formerly known as Petro
Union, Inc. and then Horizontal Ventures, Inc., is an independent energy
company engaged primarily in the business of exploiting proven producing oil
and gas reservoirs by utilizing a low cost proprietary short radius horizontal
drilling technology to increase production rates. The horizontal drilling
technology was developed and patented by Amoco and is licensed by Amoco to
GREKA Energy.
During 1997 and 1998, GREKA Energy was operationally dormant. During
this period management focused substantially all of its efforts on:
* the reorganization and emergence by Petro Union, Inc. from
bankruptcy, which was concluded on March 26 1998, and which involved
the 1997 acquisition of Horizontal Ventures, Inc., an Oklahoma
corporation and also a licensee of the Amoco horizontal drilling
technology,
* raising funds to position GREKA Energy to capitalize on its
horizontal drilling technology, which resulted in new equity
financing of approximately $6 million during 1997, and
* the acquisition of an operating oil and gas company with substantial
reserves suited to exploitation by GREKA Energy's horizontal drilling
technology, which culminated with the acquisition of Saba Petroleum
Company effective March 24, 1999.
Business Strategy
GREKA Energy is an integrated company committed to creating shareholder
value by capitalizing on consistent cash flow hedged from oil price
fluctuation within integrated operations, exploiting E&P opportunities and
penetrating new niche markets utilizing proprietary technology with emphasis
on short radius horizontal drilling technology patented by BP Amoco. GREKA
Energy has oil and gas production and development activities in North and
South America and the Far East, with primary areas of activity in Alberta,
California, Louisiana, Texas, New Mexico, Colombia, Indonesia and China.
Upon the closing of the acquisition of Saba, GREKA Energy commenced
focusing this strategy on the improvement of production from Saba-owned oil
properties in California. This production is intended to be used as feedstock
for the Saba asphalt refinery in Santa Maria, California in order to increase
the productivity of the refinery as part of GREKA Energy's hedge strategy
against the volatility of oil prices.
Integrated Hedged Operations
Hedged operations of GREKA Energy are planned to focus on the integration
of its California assets, including an asphalt refinery and interest in heavy
oil fields located in the Santa Maria Valley. To date, Saba has only been
able to supply to the asphalt refinery 20% of its heavy oil requirements. The
hedged operations are targeted to capitalize on the stable asphalt market in
California by providing the feedstock (heavy oil) into the refinery at cost.
The planned integration of the refinery with the interests in the heavy oil
producing fields should provide a stable hedge to GREKA Energy on each equity
barrel. GREKA Energy's strategy in these integrated assets is two-fold:
1. As the prices of heavy oil are at a historic low in the Santa
Maria Valley, GREKA Energy intends to aggressively proceed with
acquisitions that enhance the long-term feedstock supply to the
refinery. These low oil prices add direct value to GREKA Energy's
profitability.
2. GREKA Energy intends to implement the proprietary Amoco Horizontal
Drilling Technology to cost-efficiently boost production rates
from the 150 potential drilling locations identified in the Santa
Maria Valley.
The two actions are targeted to increase the equity barrel throughput
into the refinery from the current 1,750 barrels per day to 10,000 barrels per
day by the year 2001. It is anticipated that the profitability from these
integrated operations will not be affected by volatile oil prices. It is also
anticipated that, by using the equity barrels to supply the refinery, working
capital requirements should be lower and cash flow should be enhanced. The
continued stability of the price of asphalt, coupled with reduced costs for
processing and lifting, should create a substantial value for GREKA Energy's
shareholders.
Exploration & Production
GREKA Energy plans to pursue domestic and international exploration
projects that are synergistic with GREKA Energy's Amoco Horizontal Drilling
Technology.
Amoco Horizontal Drilling Technology
GREKA Energy plans to continuously pursue new, emerging opportunities in
the energy business to identify and evaluate niche markets for its proprietary
knowledge. Two specific niche targets are coal bed methane projects and gas
storage. These opportunities should provide significant upside from the use
of short horizontal laterals.
Acquisition of Saba Petroleum Company
During the fourth quarter of 1998 and the first quarter of 1999, GREKA
Energy entered into the following transactions culminating in the acquisition
of Saba Petroleum Company effective March 24, 1999:
On October 6, 1998, GREKA Energy entered into a Preferred Stock Transfer
Agreement with RGC International Investors, LDC, by which GREKA Energy
acquired on October 6, 1998 690 shares of the 8,000 shares of issued and
outstanding Series A Convertible Preferred Stock of Saba held by RGC in
exchange for cash in the amount of $750,000, of which $500,000 was borrowed
from International Publishing Holding s.a., then a significant shareholder
of GREKA Energy. GREKA Energy executed a Promissory Note to repay the
$500,000 to IPH without interest on or before December 31, 1998, which
maturity date subsequently was extended to May 31, 1999, in the form of cash
or shares of Saba Series A Preferred Stock held by GREKA Energy. The
Promissory Note is secured by a pledge of two-thirds of the Saba Series A
Preferred Stock held by GREKA Energy. Under the Preferred Stock Transfer
Agreement, GREKA Energy was granted the exclusive right until November 6, 1998
to acquire from RGC up to an additional 6,310 shares of Saba Series A
Preferred Stock held by RGC in exchange for cash in the amount of
approximately $6,859,000, with such exclusive right subject to an extension
for an additional thirty days by GREKA Energy's payment of $500,000, which is
nonrefundable. On November 6, 1998, GREKA Energy paid $500,000 to RGC to
extend the term of the exclusive right until December 6, 1998. GREKA Energy
did not exercise its right.
On October 8, 1998 GREKA Energy and Saba entered into a Common Stock
Purchase Agreement by which Saba agreed to issue to GREKA Energy an aggregate
of 2,500,000 shares of Saba common stock as follows:
* 333,333 shares of Saba common stock in exchange for $1,000,000 in
cash by November 6, 1998, and
* 2,166,667 shares of Saba common stock in exchange for $6,500,000 in
cash by December 4, 1998.
IPH in conjunction with GREKA Energy made open market purchases of just
around 5% of the issued and outstanding shares of Saba common stock. By an
Option Agreement dated July 22, 1998 between GREKA Energy and IPH, GREKA
Energy acquired a call option to purchase the approximately 518,200 shares of
Saba common stock purchased by IPH at an exercise price equal to the cost to
IPH of acquiring such shares plus twenty percent, which was approximately
$1,020,000. Subsequently, GREKA Energy during October and early November 1998
directly acquired 80,000 shares of Saba common stock in open market
purchases at an aggregate cost of approximately $70,130.
On November 6, 1998, GREKA Energy paid Saba $1,000,000 for 333,333 shares
of Saba common stock under the Common stock Purchase Agreement and $500,000 to
RGC to extend the term until December 6, 1998 of GREKA Energy's exclusive
right to acquire the Saba Series A Preferred Stock from RGC pursuant to the
Preferred Stock Transfer Agreement. These payments were financed by GREKA
Energy's issuance to IPH on November 4, 1998 of a Promissory Note payable in
the amount of $1,500,000, with 6% interest, by December 31, 1998. This note
has now been extended to May 31, 1999. The Promissory Note is secured by
GREKA Energy's pledge of all of the issued and outstanding shares of capital
stock of HVI Cat Canyon, Inc., a wholly owned subsidiary of GREKA Energy.
On November 23, 1998, as amended at closing on December 18, 1998 GREKA
Energy entered into a Stock Exchange Agreement with Saba Acquisub, Inc., which
owned 2,976,765 shares of Saba common stock. Saba Acquisub was controlled by
Capco Resources Ltd. which is controlled by Ilyas Chaudhary, a former director
and executive officer of Saba. Under the Stock Exchange Agreement, GREKA
Energy acquired the Saba common stock owned by Saba Acquisub in exchange for
the issuance by GREKA Energy to the shareholder of Saba Acquisub an aggregate
of 1,340,000 shares of GREKA Energy common stock and Saba Acquisub was merged
with and into GREKA Energy.
On December 18, 1998, GREKA Energy and Saba entered into an Agreement and
Plan of Merger, which was amended February 16, 1999, whereby GREKA Energy
would acquire all of the remaining shares of Saba common stock and the
shareholders of Saba other than GREKA Energy would receive shares of GREKA
Energy common stock based on a contemplated exchange ratio of one share of
GREKA Energy common stock for each six shares of Saba common stock. On March
19, 1999, the shareholders of GREKA Energy and Saba approved the acquisition
transactions and on March 24, 1999 Saba became a wholly owned subsidiary of
GREKA Energy.
GREKA Energy believes that the acquisition of Saba represents a unique
opportunity to capitalize on Saba's substantial oil and gas properties which
are particularly suited to exploitation by GREKA Energy's horizontal drilling
technology.
GREKA Energy believes that Saba's Cat Canyon Field in California is an
ideal field to apply horizontal drilling technology for the following reasons:
* Mature Fields/Extensive Data. Cat Canyon is a mature field,
discovered in 1908, that provides numerous abandoned or
semi-abandoned wells to re-enter, and extensive geological
information from which to develop an exploitation plan without much
additional cost;
* Hedge Against Oil Prices. Saba's Asphalt Refinery is fed by Saba's
and GREKA Energy's Cat Canyon properties thus greatly reducing oil
price risk from GREKA Energy's Cat Canyon development strategy.
Since 1996, asphalt sales prices from the Asphalt Refinery have
varied between $16.09 and $18.41 per barrel, -- while oil prices have
varied between $7.17 and $17.38 during the same period. The primary
objective will be to apply the proprietary cost effective horizontal
drilling technology to create additional feedstock for the refinery
and capitalize on the operational hedge per barrel.
* Heavy Oil. Heavy oil, which is common to California fields, is
typically more difficult to recover because much higher pressure
differentials are necessary to force the oil up the well. Horizontal
drilling allows more of the reservoir to be exposed and more oil to
be recovered. Furthermore, short radius horizontals allow the pump
mechanism to be placed much closer to the reservoir resulting in
substantial productivity;
* Abundance of Remaining Reserves. Because of the difficulty in
recovering heavy oil from reservoirs, only about 10% of the original
oil has been recovered. However, just a 1% increase in the oil
recovered from the field would yield large returns for GREKA Energy;
and
* California Land Use Laws. Amoco's technology does not require the
use of a full-size drilling rig and the building of a drilling site,
which can be made prohibitively expensive by California land use
laws. Amoco's technology can be applied on a workover rig with no new
drilling site, eliminating the requirement for a drilling permit.
The drilling permit process in California can take over six months
to complete while GREKA Energy's rework permits typically take four
days.
GREKA Energy owns an asphalt refinery in Santa Barbara County, California
that is fed by production from the central California region. Generally, the
crude oil produced in these areas is of low gravity and is ideally suited as
feedstock for asphalt. Furthermore, asphalt prices have historically been less
volatile than feedstock prices, providing GREKA Energy with a hedge against
oil price movements. This refinery was acquired from Conoco Inc. in 1994 and
Conoco agreed to perform certain remediation and other environmental
activities on portions of the refinery property through June, 1999.
Throughput at the asphalt refinery has ranged between 2,000 to 4,500
barrels of oil per day while production capacity is approximately 10,000 Bopd.
Only approximately 1,750 Bopd of the throughput has come from GREKA Energy's
production. GREKA Energy believes that the asphalt refinery's margins will
improve significantly as it increases production from the Cat Canyon field,
providing additional feedstock and spreading the fixed cost of the refinery
over more units produced. Furthermore, GREKA Energy intends to increase the
throughput to 10,000 Bopd by 2001. GREKA Energy estimates that each 1,000
Bopd increase in equity throughput could yield approximately $2 million in
additional earnings before interest, taxes, depreciation and amortization
("EBITDA") annually.
The asphalt refinery is currently operated through a processing
agreement with Crown Energy whereby Crown Energy markets the refined product
and maintains the inventory. The majority of the day-to-day operations of the
asphalt refinery are managed by GREKA Energy employees. Saba and Crown Energy
each receive approximately 50% of the net income from the asphalt refinery.
This processing agreement expires on April 30, 1999.
GREKA Energy's Strategy:
* Exploit and Produce Reserves in California. GREKA Energy intends to
apply the short radius horizontal drilling technology to exploit and
produce reserves to maximize cash flow with minimal capital
expenditures. GREKA Energy intends to first apply the technology on
the Cat Canyon field in California,
* Capitalize on the Asphalt Refinery to Increase Margins. GREKA Energy
intends to increase throughput at the asphalt refinery to take
advantage of the oil price hedge provided by the asphalt refinery and
the significant additional cash flow generated by utilizing its
excess capacity.
* Divest Properties Not Consistent with Focus. GREKA Energy owns
substantial acreage and exploration concessions in Colombia,
Indonesia, Louisiana and New Mexico. GREKA Energy intends to sell or
farm-out exploration concessions and properties where short radius
drilling would not add significant value, and
* Penetrate New Niche Markets. GREKA Energy intends to penetrate new
niche markets in gas storage and coal bed methane where there is
significant added value for its short radius drilling technology and
is currently in discussions with companies.
Business of Saba Petroleum Company
Saba Petroleum Company is an independent energy company engaged in the
acquisition, development and exploration of oil and gas properties in the
United States and internationally. Saba has grown primarily through the
acquisition and exploitation of producing properties in California, Louisiana
and Colombia. Saba has assembled a portfolio of over 200 potential development
drilling locations.
Saba currently depends on three material customers. These customers are
Ecopetrol, Crown Energy and Omimex Resources, Inc. See the discussion
elsewhere in this document of the pending sale of Sabacol's assets.
At December 31, 1998, Saba had estimated proved reserves of 17.7 MMBOE,
consisting of 13.9 MMBbls of oil and 22.99 Bcf of gas (3.8 MMBOE), with a PV-
10 value of $23.2 million.
Saba also owns an asphalt refinery in Santa Maria, California, where it
currently processes approximately 4,000 Bopd.
Recent Saba Developments
Substantial Doubt About Saba's Ability to Continue as a Going Concern
Saba's independent public accountants have included in their audit report
for Saba's 1998 financial statements an explanatory paragraph which indicates
that there is substantial doubt as to Saba's ability to continue as a going
concern. This is due to the fact that Saba's current assets may not be
sufficient to satisfy its current liabilities. Saba has violated certain of
its debt covenants and has negative shareholders equity. Management's plans
in this regard are discussed in Note 1 of the Notes to Consolidated Financial
Statements of Saba appearing elsewhere in this document. GREKA Energy cannot
assure you that these plans will be successfully implemented.
Bankruptcy of Sabacol, Inc. and Contract for Sale of Sabacol's Assets
On December 15, 1998, Saba announced that Sabacol, Inc., a wholly-owned
subsidiary of Saba, filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code in the Central District of California on December 11,
1998. Sabacol's assets, located solely in Colombia, consist of a 50% interest
in a 118-mile pipeline and varying interests in heavy oil producing
properties. At the time of filing, Sabacol had a net book value of
approximately $5.3 million with liabilities of $4.6 million. For the year
ended December 31, 1998, the average daily production of Sabacol's interest
in the Colombian properties was 2,256 Bopd and gross revenues were
approximately $7.4 million. Sabacol filed the bankruptcy petition to protect
its asset base and to provide adequate time to develop a reorganization plan.
A new management team was appointed for Sabacol to protect its assets and
develop an effective reorganization plan. However, GREKA Energy cannot assure
you that a reorganization plan beneficial to Sabacol will be consummated.
Neither GREKA Energy nor Saba were involved in the bankruptcy proceedings,
guaranteed any of the Sabacol debt, and Sabacol's creditors do not have any
right to proceed against GREKA Energy or Saba. Therefore, the bankruptcy of
Sabacol is not expected to have any material adverse effect on GREKA Energy.
On March 17, 1999, Sabacol entered into an agreement with Omimex, a
privately held oil and gas company which operates a substantial portion of
Saba's producing properties, whereby Sabacol is to sell to Omimex
substantially all of its assets in exchange for:
* the cancellation by Omimex of Saba Petroleum Company's $4.2 million
promissory note to Omimex, along with approximately $206,000 in
accrued interest, related to the loan under the terminated business
combination agreement discussed below,
* the cancellation by Omimex of Sabacol's net indebtedness to Omimex
of approximately $2 million,
* the assumption or payment by Omimex of Sabacol's Colombian tax
liability of approximately $2.3 million, and
* certain Omimex oil and gas properties and related assets located
in California which are valued at approximately $1 million.
The agreement provides that if the excess of the value of Sabacol oil and
gas reserves over the value of the Omimex reserves acquired by Sabacol is
greater as of January 1, 2000 than it was as of January 1, 1999, Sabacol will
be entitled to additional consideration. If the increased value is $5 million
or less, Omimex will have the option of paying such amount to Sabacol in cash
or reassigning to Sabacol the 50% interest in the Velasquez-Galan pipeline in
Colombia to be sold by Sabacol to Omimex. If the increase is greater than $5
million, Sabacol will have the option of repurchasing for approximately $12
million the assets sold to Omimex and reassigning to Omimex the California
assets to be purchased from Omimex. If this option is not exercised, Omimex
will be obligated to either pay Sabacol $5 million in cash or reassign to
Sabacol the Velasquez-Galan pipeline.
The sale is contingent upon approval by the bankruptcy court, and Sabacol
has filed a motion for an order by the court to approve the sale and upon
completion of the sale to dismiss Sabacol's bankruptcy proceeding. A
bankruptcy court hearing regarding the approval of the sale has been scheduled
for April 23, 1999.
Loan from Omimex Under Terminated Business Combination Agreement
As part of a terminated merger agreement between Omimex and Saba, Omimex
lent to Saba approximately $4.2 million. The proceeds of this loan were used
to redeem $2 million of stated value of Saba's Series A Preferred Stock (for
approximately $2.15 million) and to pay $2 million on Saba's outstanding bank
indebtedness. The loan by Omimex accrues interest at prime and was due 90
days after the termination of the merger agreement in August 1998.
In compliance with procedures for securing the loan from Omimex,
Sabacol's legal representative in Colombia executed, but did not present for
notarial inscription by a Colombian notary public, a public deed or deeds to
transfer to Omimex all of the right, title and interest of Sabacol in and to
the Velasquez-Galan pipeline and delivered the deed(s) to Bank One, Texas,
N.A., which is acting as the escrow agent. Sabacol also delivered to the
escrow agent an irrevocable letter of authority authorizing the completion of
the execution of the deed(s) before a Colombian notary public. The escrow
agent had been instructed, by terms of an escrow agreement entered into
between Sabacol, Omimex and Bank One, Texas, N.A., that in the event full
payment of the Loan was delivered by December 14, 1998, then the escrow agent
shall have immediately delivered to Omimex the payment and to Sabacol the
deeds and the irrevocable letter of authority relating thereto for
cancellation. In the event payment of the Loan in full was not delivered by
December 14, 1998, then the escrow agent shall have immediately delivered to
Omimex the deeds and the irrevocable letter of authority relating thereto.
Thereafter, Omimex shall deliver the deeds and the irrevocable letter of
authority to Omimex de Colombia, Ltd., a Delaware corporation and a wholly
owned subsidiary of Omimex, for completion of the execution of the deeds
before a Colombian notary public by Sabacol's legal representative. Full
payment of the Loan was not delivered by December 14, 1998 to the escrow
agent. On December 11, 1998, Sabacol filed for protection of its assets under
Chapter 11 of the United States Bankruptcy Code. The deeds and the
irrevocable letter of authority relating thereto were not delivered to Omimex
on December 14, 1998 under the escrow agreement and the requirement to do so
has been stayed pursuant to the Sabacol's petition for bankruptcy.
Bank Indebtedness
As indicated above, as part of the terminated merger agreement with
Omimex, Omimex lent to Saba $4.2 million, of which $2 million was applied
to Saba's existing bank indebtedness with Bank One, Texas, N.A. The Bank
consented to the borrowing from Omimex described in the preceding section and
the application of the proceeds of the loan, including the redemption of $2
million stated value of Saba's Series A Preferred Stock. As a result of
that payment and a payment of $300,000 which was made in May 1998 and
continued to be payable each month thereafter by Saba, the Bank and Saba
entered into a written amendment to the existing loan agreement extending the
maturities of all three short term facilities to July 31, 1998. Approximately
$4.5 million in principal amount of bank debt that matured for payment on July
31, 1998, has not been paid nor extended, and the borrowing base deficit of
$______ million on the revolving loan at December 31, 1998, has not been
satisfied, either by providing additional collateral to the Bank or reducing
the principal balance that was outstanding at December 31, 1998. Saba's
entire principal indebtedness to the Bank of $20.1 million was classified by
Saba as currently payable at December 31, 1998. Additionally, Saba was not in
compliance with the loan agreement's financial covenants at December 31, 1998.
Saba and the Bank are in discussions to address such non-compliance. There is
not any assurance that Saba will be successful in its discussions with the
Bank to address such non-compliance.
In connection with various borrowings from Bank One, Ilyas Chaudhary, a
former director and executive officer of Saba, has guaranteed payment of
approximately $3 million of Saba's debt to Bank One.
Sale of Certain Assets
Saba has negotiated, and continues to pursue, the sale of certain
producing oil and gas assets and real estate assets, the proceeds of which
have been and will continue to be applied to reduce bank indebtedness and
provide working capital. Saba sold its interest in over 150 producing wells
in Michigan in July 1998 for a contract price of $3.7 million and two
producing wells in Alabama in September 1998 for a contract price of $800,000.
In December 1998, Saba entered into a letter of intent with Capco Development,
Inc. to sell all of the outstanding stock of its wholly-owned subsidiary,
Saba Energy of Texas, Inc., for a contract price of $5 million and a closing
scheduled for December 31, 1999, subject to certain conditions and
adjustments. At the closing, those properties of SETI that will be part of
the sale shall include certain interests of SETI located in Michigan, New
Mexico, Oklahoma, Texas, Utah, and Wyoming and excludes interests located in
Louisiana.
Series A Convertible Preferred Stock
On March 15, 1999, GREKA Energy entered into a term sheet with RGC
International Investors LDC, the holder of Saba's Series A Convertible
Preferred Stock, for RGC to exchange the balance of the preferred stock for a
secured convertible note to be negotiated and thereafter issued by GREKA
Energy to RGC.
GREKA Energy's Horizontal Drilling Technology
Horizontal drilling has become widely accepted as a standard option for
exploiting oil & gas resources. The principle advantage of horizontal
drilling is that it results in a substantially greater surface area for
drainage, and thus extraction of the oil from the reservoir. In industry
terms this is referred to as communicating zones of permeability. The unique
method of reentering a well and horizontal drilling patented by Amoco and
licensed to GREKA Energy allows for turning while drilling, which can cause a
vertical well to be horizontal in as little as 25 feet. Thus this technology
provides considerable flexibility to the geologists and engineers in designing
their well plans around geological formation and reservoir constraints to
achieve maximum performance. Furthermore, this technique facilitates
multi-laterals off an existing well bore, which avoids costly drilling of new
wells, and has considerable advantages in shallow reservoirs where the
traditional horizontal tools cannot be utilized due to their larger radius
requirements and related economics.
Drilling horizontal laterals has the potential to:
* tap fresh oil by intersecting fractures, penetrating pay
discontinuities and drain up-dip traps,
* correct production problems such as:
* water coning,
* gas coning, and
* excessive water cuts from hydraulic fractures which extend below the
oil-water contact, and
* supplement enhanced secondary and tertiary oil recovery techniques.
The most common method of drilling a curved borehole utilizes a mud-motor
to rotate the drill bit. This is often too expensive to be economical for
re-entries in mature fields with well bore casings less than 5 1/2 inches. The
lack of a cost-effective method to increase production in mature wells led
Amoco to devote significant resources in research and development in this
area. The result was the development of its patented short radius horizontal
drilling system. The primary advantages of the Amoco drilling system are:
* its short radius of curvature,
* it costs approximately one-fifth of traditional mud motors,
* it takes only ten days to drill and yet provides all the benefits of
a horizontal well.
The Amoco short radius rotary steerable horizontal drilling system is
capable of drilling a 3.875" inch hole from inside 4.5" inch casing, or a 4.5"
hole from inside 5.5" casing and larger. The radius of curvature ranges from
30 feet and up, with lateral departures up to 1,000 feet. Multiple laterals
can be drilled in opposing directions or in the same direction, with kick-off
points spaced a minimum of eight feet apart. Compatibility with any
circulating medium including mud, foam or air mist allows for a variety of
applications.
The system consistently drills a predictable radius of curvature in the
desired direction, resulting in a smoother planar well bore, which facilitates
drilling the lateral and completing the well. Vertical target accuracy is
plus or minus two feet, and azimuth is plus or minus 20 degrees.
The system is rotary steerable, and there are no mud motors, steering
tools or MWD tools. The system is purely mechanical and very simple in
design.
The Amoco bit is an anti-whirl, bi-center, low-friction PDC bit.
Consistent and reliable angle build and improved directional control is a
result of stabilizing the PDC bit to continually point along a curved path.
The design of the bit enables it to cut only in the direction it is pointed.
The cutters are positioned so that they direct a lateral force toward a smooth
pad on the gauge of the bit, which contracts the bore hole and acts as a
bearing by transmitting a restoring force to the bit. This force rotates
with the bit, continually pushing a side of the bit that does not have gauge
cuter chips against the bore hole wall. This design minimizes the side
cutting action that is typically observed with PDC bits and results in
consistent well bore diameter.
The system drills a curved path by continually pointing the bit along a
tangent to the curved path. A contact point on the bit and smooth contact
ring at the flexible knuckle joint establishes two contact points and controls
the bit tilt. Tool design tilt allows the curve assembly to run smoothly,
drill a hole uniform in diameter, and negates the effects of varying lithology
changes. Various radii of curvatures are easily obtained by increasing or
decreasing the distance between the two contact points.
Azimuth or target direction is established by gyro orientation of
the eccentric deflection sleeve. Once oriented in the desired direction, the
gyro is released and orientation is monitored by pump pressures at the
surface. These signals are monitored throughout the curve drilling process,
as repositioning of the sleeve is required to maintain target direction.
Lateral drilling is strictly a rotary process. The lateral drilling
assemblies are not steerable, and there are no deflection sleeves or
orientation signals. At present, there are two lateral drilling assemblies,
and both use the anti-whirl PDC bit to achieve a smooth well bore and obtain
fairly consistent responses. Of the two lateral assemblies, one is engineered
for gentle rise wit angle build rates of 7 to 11 degrees per 100 feet. The
second is for maintaining inclination, and produces near-neutral responses of
- -2 to 2 degrees per 100 feet. The assemblies work on the same principle as
any directional drilling assembly. Both have been found to drill with minimal
walk, right or left, but inclination is somewhat sensitive to formation and
weight on the bit.
The predominate application of short-radius horizontal drilling is for
re-entries, a procedure that requires the sectional milling of at least 20
feet of casing. Following sectioning, a cement kick-off plug is set in the
vertical well bore just below the kick-off depth. Cement is brought up
through the sectioned interval, and 60 to 100 feet inside the casing. This
multi-purpose plug must provide zone isolation from the original completion
and mechanical strength for the curve assembly to side track. Open-hole
completions, either from existing wells or new wells, can be kicked off from
formation or a squeeze cement plug. Torque, weight of the bit, drill-off
rate, and cuttings are monitored during the kick-off procedure as the bit
makes the transition from drilling 100 percent cement to 100 percent
formation. This transition usually occurs after drilling a minimum of six
feet, and can be greater depending on the radius of curvature.
With regard to equipment requirements, many types of workover rigs have
been used in conjunction with the system, ranging from small pole units to
five and six axle carriers. Drilling rigs have been used in several
instances, but are not necessary. A top-drive power swivel, the most
predominate of which is the Bowen 2.5, is used to rotate the drill string and
bit. A single conductor wireline unit is used for gyro orientation and to run
all electronic and magnetic surveys. Circulating and solids control
equipment vary depending on formation conditions.
Management of GREKA Energy considers this proprietary technology a
leading edge and a ground floor opportunity as both a producer and service
provider to other producers. GREKA Energy management believes that through
the utilization of this system GREKA Energy has the ability to
cost-effectively drill lateral completions and re-entries in shallow oil and
gas producing zones where existing technology has not been available or
affordable. As drilling new wells from the surface is not a necessity and
current production infrastructures can be utilized, GREKA Energy anticipates
that the economics of this system will be improved. Management of GREKA
Energy believes that potential zones such as shale gas and coalbed methane
that contain trillions of cubic feet of untapped reserves in the United States
are candidates for short radius horizontal drilling technology.
Organizational History of GREKA Energy
GREKA Energy Corporation was formed in 1988 as a Colorado corporation
under the name of Kiwi III, Ltd. On May 13, 1996, GREKA Energy, then known as
Petro Union, Inc., filed a voluntary petition for relief pursuant to Chapter
11 of the United States Bankruptcy Code. On August 28, 1997, the Bankruptcy
Court for the Southern District of Indiana issued an order confirming Petro
Union's First Amended Plan of Reorganization. Under the Plan the unsecured
creditors of Petro Union received an aggregate of 100,000 shares of Petro
Union common stock (for clarity, the no par value common stock as is
currently authorized for GREKA Energy is sometimes referred to herein as the
"New Common Stock"). The holders of Petro Union's $.125 par value common
stock ("Old Common Stock") received one share of New Common Stock for each
220 shares of Old Common Stock held, and the Old Common Stock was canceled.
Accordingly, the 17,537,945 outstanding shares of Old Common stock were
converted into approximately 80,000 shares of New Common stock.
Petro Union satisfied the claims of its two debtor-in-possession
financiers, Pembrooke Holding Corporation and International Publishing
Holding s.a. as follows: Pembrooke received $100,000 in cash and 49,999 shares
of New Common Stock. IPH received 40,000 shares of New Common Stock and a
call option exercisable for a period of 36 months to acquire ninety percent of
Petro Union's wholly-owned subsidiary, Calox Corporation, which holds as its
only asset a limestone reserve in Monroe County, Indiana. The exercise price
to acquire such ninety percent interest is $3.5 million.
The Plan also provided for a share exchange transaction by which the
shareholders of Horizontal Ventures, Inc., an Oklahoma corporation of which
Randeep S. Grewal was President, acquired 590,000 shares of New Common Stock
in exchange for all of the issued and outstanding capital stock of Horizontal
Ventures. In addition, under the Plan 70,000 shares of New Common Stock were
issued to Mr. Grewal and 70,000 shares of New Common Stock were issued to
Richard D. Wedel, who was an executive officer of Petro Union, for services
performed by each of them during the bankruptcy proceedings. Petro Union
subsequently changed its name to Horizontal Ventures, Inc.
The bankruptcy court approved the final accounting and closed the
bankruptcy proceedings on March 26, 1998.
Effective March 22, 1999, Horizontal Ventures, Inc. changed its name to
GREKA Energy Corporation. Effective March 24, 1999, GREKA Energy acquired
Saba Petroleum as a wholly owned subsidiary.
Marketing
Marketing of Saba's Asphalt Refinery Production
GREKA Energy's asphalt refinery in Santa Maria, California produces light
naphtha, kerosene distillate, gas oils and numerous cut-back, paving and
emulsion asphalt products. Historically, marketing efforts have been focused
on the asphalt products which are sold to various users, primarily in the
Central and Northern California areas. Distillates are readily marketed to
wholesale purchasers.
GREKA Energy regards the refinery as a valuable adjunct to its production
of crude oil in the Santa Maria Basin and surrounding areas. Generally, the
crude oil produced in these areas is of low gravity and makes an excellent
asphalt. Recent prices for asphalt exceed market prices for crude and costs of
operating the refinery. GREKA Energy believes that as road building and
repair increase in California and surrounding western states, the market for
asphalt will expand significantly.
Marketing of GREKA Energy's Oil and Gas Production
The prices obtained for oil and gas are dependent on numerous factors
beyond the control of Saba, including domestic and foreign production rates of
oil and gas, market demand and the effect of governmental regulations and
incentives. Substantially all of Saba's North American crude oil production
is sold at the wellhead at posted prices under short term contracts, as is
customary in the industry. No one customer accounted for more than ten
percent of the sales of Saba's North American production during 1998 except
Crown Energy which accounted for 47% of such sales. Saba's Colombian oil
production, which is, and as a practical matter can only be, sold to
Ecopetrol, accounted for 37% of total oil and gas revenues in 1998.
The market for heavy crude oil produced by Saba from its Central Coast
Fields in California differs substantially from the remainder of the domestic
crude oil market, due principally to the transportation and refining
requirements associated with California heavy crude oil. The prices realized
for heavy crude oil are generally lower than those realized from the sale of
light crude oil. GREKA Energy's Santa Maria refinery uses essentially all of
its Central Coast Fields' crude oil, in addition to third party crude oil, to
produce asphalt, among other products. Ownership of the refinery gives GREKA
Energy a steady market for its local crude oil which is not enjoyed by
producers generally.
Marketing of GREKA Energy's Non-Saba Exploitation & Production
Significant and lucrative markets exist for the application of the
niche technology for GREKA Energy's short radius horizontal drilling
know-how. Mature fields are in abundance throughout the world where the
operators are faces with declining production, uncertain oil prices and
upcoming costs to abandon and plug the uneconomic wells at their
production rates. Such an environment creates a unique market for GREKA
Energy in being able to acquire through a conservative selection process.
Primary acquisitions candidates will have existing production, existing
operating infrastructure and facilities, geological formations conducive to
the technology, well bores and pay zones under ten thousand feet with
sufficient recoverable oil in place. As an example, GREKA Energy has found
that California is a unique opportunity due to its stringent new drilling
regulations. GREKA Energy's activities are essentially "re-work" negating
any lengthy approvals through the regulatory authorities. Such an
environment has created "pockets" of opportunity whereby significant
recoverable oil has been left in place by the majors and thereafter
operators rather than attempt a costly endeavor to drill new wells in urban
areas. GREKA Energy intends to pursue such opportunities.
Competition
Competition in the oil and gas business is intense, particularly with
respect to the acquisition of producing properties, proved undeveloped acreage
and leases. Major and independent oil and companies actively bid for
desirable oil and gas properties and for the equipment and labor required for
their operation and development. GREKA Energy believes that the locations of
its leasehold acreage, its exploration, drilling and production capabilities
and the experience of its management and that of its industry partners
generally enable GREKA Energy to compete effectively. Many of GREKA Energy's
competitors, however, have financial resources and exploration, development
and acquisition budgets that are substantially greater than those of GREKA
Energy, and these may adversely affect GREKA Energy's ability to compete,
particularly in regions outside of GREKA Energy's principal producing areas.
Because of this competition, GREKA Energy cannot assure you that GREKA Energy
will be successful in finding and acquiring producing properties and
development and exploration prospects.
Management of GREKA Energy believes it has an advantage over its
horizontal drilling due to its level of field expertise in applying the
patented Amoco Short Radius Horizontal Drilling technology and its
ability to provide these at a fraction of the cost of the competition.
Although, Amoco has provided licenses to others, GREKA Energy feels that its
experience and two prong global approach is sheltered from any of the
other licensees who are concentrating on services within their respective
geographical area. The acquisition criteria is also unique to the
application of the niche short radius horizontal technology and as to the best
of management's knowledge, none of the other licensees are drilling for their
own account, GREKA Energy has not felt any competitive pressure relative to
its acquisition strategy to date.
Governmental Regulation
The following discussion of regulation of the oil and gas industry
is necessarily brief and is not intended to constitute a complete discussion
of the various statutes, rules, regulations or governmental orders to which
operations of GREKA Energy may be subject.
Price Controls on Liquid Hydrocarbons
Oil sold by GREKA Energy is no longer subject to the Crude Oil Windfall
Profits Tax Act of 1980, as amended, which was repealed in 1988. As a result,
GREKA Energy sells oil produced from its properties at unregulated market
prices.
Federal Regulation of First Sales and Transportation of Natural Gas
The sale and transportation of natural gas production from properties
owned by GREKA Energy may be subject to regulation under various federal
and state laws including, but not limited to, the Natural Gas Act and the
Natural Gas Policy Act, both of which are administered by the Federal
Energy Regulatory Commission. The provisions of these acts and regulations are
complex. Under these acts, producers and marketers have been required to
obtain certificates from FERC to make sales, as well as obtaining abandonment
approval from FERC to discontinue sales. Additionally, first sales have been
subject to maximum lawful price regulation. However, the NGPA provided for
phased-in deregulation of most new gas production and, as a result of
the enactment on July 26, 1989 of the Natural Gas Wellhead Decontrol Act of
1989, the remaining regulations imposed by the NGA and the NGPA with respect
to "first sales" were terminated by not later than January 1, 1993. FERC
jurisdiction over transportation and sales other than "first sales" has not
been affected.
Because of current market conditions, many producers, including GREKA
Energy, are receiving contract prices substantially below most remaining
maximum lawful prices under the NGPA. Management believes that most of the
gas to be produced from GREKA Energy's properties is already
price-deregulated. The price at which such gas may be sold will continue to
be affected by a number of factors, including the price of alternate fuels
such as oil. At present, two factors affecting prices are gas-to-gas
competition among various gas marketers and storage of natural gas. Moreover,
the actual prices realized under GREKA Energy's current gas sales contracts
also may be affected by the nature of the decontrolled price
provisions included therein and whether any indefinite price escalation
clauses in such contracts have been triggered by federal decontrol.
The economic impact on GREKA Energy and gas producers generally of
price decontrol is uncertain, but it currently appears to be resulting in
lower gas prices. Currently, there is a surplus of deliverable gas in most
areas of the United States and, accordingly, it remains possible that gas
prices will continue to remain at relatively depressed levels or decrease
further. Moreover, many gas sales contracts provide for price
redetermination upon decontrol, and, as a result, it is possible that the
newly redetermined prices applicable under such contracts are likely to
reflect the lower prices prevalent in today's market. Producers such as
GREKA Energy or resellers may be required to reduce prices in order to assure
continued sales. It is also possible that gas production from certain
properties may be shut-in altogether for lack of an available market.
Commencing in the mid-1980's, FERC promulgated several orders designed
to correct market distortions and to make gas markets more competitive by
removing the transportation barriers to market access. These orders have had
a profound influence upon natural gas markets in the United States and have,
among other things, fostered the development of a large spot market for gas.
The following is a brief description of the most significant of those orders
and is not intended to constitute a complete description of those orders or
their impact.
On April 8, 1992, FERC issued Order 636, which is intended to
restructure both the sales and transportation services provided by
interstate natural gas pipelines. The purpose of Order 636 is to improve the
competitive structure of the pipeline industry and maximize consumer
benefits from the competitive wellhead gas market. The major function
of Order 636 is to assure that the services non-pipeline companies can
obtain from pipelines is comparable to the services pipeline companies offer
to their gas sales customers. One of the key features of the Order is the
"unbundling" of services that pipelines offer their customers. This means
that pipelines must offer transportation and other services separately
from the sale of gas. The Order is complex, and faces potential challenges
in court. GREKA Energy is not able to predict the effect the Order might have
on its business.
FERC regulates the rates and services of "natural-gas companies", which
the NGA defines as persons engaged in the transportation of gas in
interstate commerce for resale. As previously discussed, the regulation of
producers under the NGA is being gradually phased out. Interstate pipelines,
however, continue to be regulated by FERC under the NGA. Various state
commissions also regulate the rates and services of pipelines whose
operations are purely intrastate in nature, although generally sales to
and transportation on behalf of other pipelines or industrial end-users
are not subject to material state regulation.
There are many legislative proposals pending in Congress and in
the legislatures of various states that, if enacted, might significantly
affect the petroleum industry. It is impossible to predict what proposals
will be enacted and what effect, if any, such proposals would have on GREKA
Energy.
State and Local Regulation of Drilling and Production
State regulatory authorities have established rules and regulations
requiring permits for drilling, drilling bonds and reports concerning
operations. The states in which GREKA Energy operates also have statutes and
regulations governing a number of environmental and conservation matters,
including the unitization and pooling of oil and gas properties and
establishment of maximum rates of production from oil and gas wells. A few
states also pro-rate production to the market demand for oil and gas.
Environmental Regulations
Operations of GREKA Energy are subject to numerous laws and regulations
governing the discharge of materials into the environment or otherwise
relating to environmental protection. These laws and regulations may require
the acquisition of a permit before drilling commences, prohibit drilling
activities on certain lands lying within wilderness and other protected areas
and impose substantial liabilities for pollution resulting from drilling
operations. Such laws and regulations may also restrict air or other
pollution resulting from GREKA Energy's operations. Moreover, many
commentators believe that the state and federal environmental laws and
regulations will become more stringent in the future. For instance, proposed
legislation amending the federal Resource Conservation and Recovery Act
would reclassify oil and gas production wastes as "hazardous waste". If
such legislation were to pass, it could have a significant impact on the
operating costs of GREKA Energy, as well as the oil and gas industry in
general. State initiatives to further regulate the disposal of oil and gas
wastes are also pending in certain states, including states in which GREKA
Energy has operations, and these various initiative could have a similar
impact on GREKA Energy.
GREKA Energy has not filed any reports with estimates of its
reserves with any federal authority or agency, other than the Securities and
Exchange Commission and the Department of Energy.
Operational Hazards and Insurance
GREKA Energy's operations are subject to the usual hazards incident
to the drilling and production of oil and gas, such as blowouts,
cratering, explosions, uncontrollable flows of oil, gas or well fluids,
fires, pollution, releases of toxic gas and other environmental hazards and
risks. These hazards can cause personal injury and loss of life, severe
damage to and destruction of property and equipment, pollution or
environmental damage and suspension of operations.
GREKA Energy has $2,000,000 of general liability insurance. GREKA
Energy's insurance does not cover every potential risk associated with the
drilling and production of oil and gas. In particular, coverage is not
obtainable for certain types of environmental hazards. The occurrence of a
significant adverse event, the risks of which are not fully covered by
insurance, could have a material adverse effect on GREKA Energy's
financial condition and results of operations. Moreover, no assurance can
be given that GREKA Energy will be able to maintain adequate insurance in
the future at rates it considers reasonable.
Employees
As of March 31, 1999, GREKA Energy and its subsidiaries had 95
employees, consisting of 90 full-time employees and 5 part-time employees.
None of GREKA Energy's employees is subject to a collective bargaining
agreement. GREKA Energy considers its relations with its employees to be
satisfactory.
Item 2. Description of Property.
GREKA Energy's Properties as of December 31, 1998
California Cat Canyon Field
In October 1997, GREKA Energy acquired a 200 acre lease within the Santa
Maria basin in California. The purchase price was $1.65 million and included
all the formations along with all the infrastructures that includes two
separate gathering systems and 20 well bores of which ten are producing.
Following in-depth evaluations, GREKA Energy believes that significant
enhancements focused primarily on its niche short-radius horizontal drilling
know-how can result in sustained increase of oil production. Based on these
evaluations, a drilling program funded by GREKA Energy's financial
resources has been activated.
In view of the acquisition Saba's Cat Canyon properties where all the
gathering systems are already in place, management of GREKA Energy has decided
to focus its activities in California, and thus placed GREKA Energy's program
in Illinois on hold until preferable summer weather conditions exist to
facilitate the commencement of drilling and completion programs.
Limestone Properties
Indiana - Monroe Field. GREKA Energy owns through its wholly owned
subsidiary, Calox Inc, a 355 acre limestone property located in Monroe
County, Indiana. GREKA Energy owns the land, timber and all the mineral
rights associated with the property. The limestone deposits are made up of
Salem limestone, which produces a high industrial grade calcium oxide or
calcium carbonate used in scrubbing machinery that cleans the gaseous
emissions from coal burning generators.
As GREKA Energy is focused on its oil and gas activities, this property
has been identified as a non-core unit and thus optioned out. International
Publishing Holding s.a., a significant shareholder of GREKA Energy, holds a
three year option expiring on September 9, 2000 to acquire 90% of the
shares of Calox for $3.5 million. Thus, GREKA Energy will retain a 10%
interest in the reserve, divest itself from its non-oil and gas activity and
obtain $3.5 million of funds to invest in its core industry. In the event IPH
does not exercise its option, GREKA Energy is confident that it will be able
to divest this lucrative property for at least the same value to another
company.
Oil and Gas Reserves
GREKA Energy's oil and gas properties are primarily based in
California and Illinois though the area of focus since the acquisitions had
been primarily California. GREKA Energy engaged Netherland, Sewell &
Associates, Inc. to evaluate the California properties while the Illinois
properties were evaluated by independent engineers and geologists namely Mr.
John Combs and Joseph Wilderman. Estimates are based on a review of
production histories and geologic reports provided to the independent
engineers by GREKA Energy.
As a part of the decision to acquire Saba, management recently decided
not to continue to pursue the Illinois properties. This effectively eliminates
94,080 bbls of Proven Developed Non-Producing oil and 1,732,305 bbls of Proven
Undeveloped oil from the 1997 reserves set forth below. This has the
additional effect of reducing future net reserves in all categories except
Proven Developed Producing by approximately two-thirds.
The present values of estimated future net revenues as of December 31,
1998 (discounted at 10% per annum) set forth in the table below are not
intended to represent the current market value of the estimated oil and gas
reserves owned by GREKA Energy. For further information concerning the
present value of future net revenue from these proved reserves, see the Notes
to the Consolidated Financial Statements of GREKA Energy located elsewhere
herein.
<TABLE>
Future Net
Reserves Revenue $
______________ ___________________
Oil
(bbls) Total PV-10
<S> <C> <C> <C>
Proven Developed
Producing - $ - $ -
Proven Developed
Non-Producing 127,261 $105,700 $ 42,500
Proven
Undeveloped 122,960 $386,100 $218,200
Total Proven 250,221 $491,800 $260,700
Other - $ - $ -
Total Reserves 250,221 $491,800 $260,700
</TABLE>
There are numerous uncertainties inherent in estimating quantities
of proved reserves and in projecting future rates of production and
timing of development expenditures, including many factors beyond the
control of the producer. The reserve data set forth above represents only
estimates. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an
exact way, and the accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation
and judgment and the existence of development plans. As a result, estimates
of different engineers often vary. For example, GREKA Energy has
substantially increased its proved undeveloped reserves from initial reserve
estimates made at the time of certain acquisitions. In addition, results of
drilling, testing and production subsequent to the date of an estimate
may justify revision of such estimates. Accordingly, reserve estimates are
often different from the quantities of oil and gas that are ultimately
recovered. Further, the estimated future net revenues from proved reserves
and the present value thereof are based upon certain assumptions, including
geologic success, prices, future production levels and costs, that may not
prove correct over time. Predictions about prices and future production
levels are subject to great uncertainty, and the meaningfulness of such
estimates is highly dependent upon the accuracy of the assumptions upon
which they are based. Oil and gas prices have fluctuated widely in recent
years.
Production
The following table sets forth the average sale price, the
average production cost (lifting costs) and net production to GREKA Energy
for each of the last three fiscal years of oil and gas production in the
Illinois Basin (Illinois, Indiana, and Kentucky) per unit of production (oil
barrels, bbl; gas, mcf;):
<TABLE>
Illinois
-----------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Average Sales Price
Per Unit:
Oil $20.42 $19.21 $ -
Lifting Costs Per Unit:
Oil $10.94 $6.80 $ -
Net Production to
GREKA Energy:
Oil 1,252 450 -
California
----------
1996* 1997* 1998
Average Sales Price
Per Unit:
Oil - $10.55 $6.33
Lifting Costs Per Unit:
Oil - $5.31 $7.68
Net Production to
GREKA Energy:
Oil (Bbls) - 1,832 12,935
</TABLE>
*There was no activity in California prior to 1997.
Acreage
The following table sets forth the gross and net acres of developed and
undeveloped oil and gas leases held by GREKA Energy as of December 31, 1998,
and includes the 150 net acres owned as of year end. Undeveloped acreage
includes leasehold interests which may already have been classified as
containing proved undeveloped reserves.
<TABLE>
Developed Acreage(1) Undeveloped Acreage
-------------------- -------------------
Gross Net Gross Net
<S> <C> <C> <C> <C>
California 185 150 - -
Illinois - - - -
Total 185 150 - -
Drilling Activity
The following table sets forth the wells drilled or re-entered and
horizontally re-drilled and completed by GREKA Energy during the last three
fiscal years:
1996 1997 1998
---- ---- ----
Gross Net Gross Net Gross Net
Development:
Oil 3 .375 2 1.67 1 .795
Gas - - - - - -
Non-Productive - - - - 1 .795
Total 3 .375 2 1.67 2 1.59
</TABLE>
(1) Developed acreage is acreage assigned to producing wells for the
spacing unit of the producing formation. Developed acreage in certain of
GREKA Energy's properties that include multiple formations with different well
spacing requirements may be considered undeveloped for certain formations, but
have only been included as developed acreage in the presentation above.
The following table sets forth information relating to the number of oil wells
in which GREKA Energy owned a working interest:
<TABLE>
Gross Net
<S> <C> <C>
Proven Developed Producing - -
Proven Developed Non-Producing 3 2.39
Proven Undeveloped - Re-Entries
of Existing Wells - -
Proven Undeveloped - New Wells 1 .795
</TABLE>
GREKA Energy has a 100% working interest in all of the above wells.
Development Exploitation Acquisition Expenditures
The following table sets forth certain information regarding the costs
incurred by GREKA Energy in its development, exploration and acquisition
activities during the last three fiscal years:
<TABLE>
1996 1997 1998
----- ---- ----
<S> <C> <C> <C>
Development Costs $90,000 $132,564 $667,919
Exploration Costs - - -
Acquisition Costs:
a) Unproved Properties - - -
b) Proved Properties _______ 1,650,000 -
Total Capital Expenditures $90,000 $1,782,564 $667,919
</TABLE>
Title to Properties
Substantially all of GREKA Energy's property interests are held by
leases from third parties. A title opinion is typically obtained
prior to the commencement of drilling operations on properties. GREKA
Energy has obtained title opinions on substantially all of its producing
properties and believes that it has satisfactory title to such properties in
accordance with standards generally accepted in the oil and gas industry.
GREKA Energy's properties are subject to customary royalty interests, liens
for current taxes and other burdens which GREKA Energy believes do not
materially interfere with the use of or affect the value of such
properties. GREKA Energy performs only a minimal title investigation before
acquiring undeveloped properties.
Offices
GREKA Energy leases approximately 1,000 square feet of office space at
630 Fifth Avenue, Suite 1501, New York, New York, for its executive offices
on a one year lease. GREKA Energy's operational and field offices are located
in Santa Monica, California, Bogata, Colombia, Beijing, China, and Oklahoma
City and Tulsa, Oklahoma.
Saba Petroleum Company's Properties as of December 31, 1998
Saba owned interests in approximately _____ wells at December 31, 1998.
The majority of these wells are concentrated along the central cost of
California and in the Middle Magdalena Basin of Colombia. These regions,
which primarily produce a low gravity/high viscosity or "heavy" oil, will be
the focus of near-term development drilling activities. Saba also operates
wells and has exploration and development activities in several states
outside of California and, through a majority-owned subsidiary, in western
Canada. Saba's evaluation of international projects resulted in the
acquisition of exploration projects in Indonesia and China.
United States
California
Approximately 18% of Saba's proved reserves at December 31, 1998 (3.2
MMBOE) were located in four onshore fields in California's central coast
region. Daily production from the Central Coast Fields averaged _________
BOE for the year ended December 31, 1998, representing _____% of Saba's total
production. Saba operates all of its wells in the Central Coast Fields. Saba
also holds interests in other California areas, which represented 3% (0.7
MMBOE) of Saba's proved reserves at December 31, 1998. Daily production from
these other interests averaged _____ BOE for the year ended December 31,
1998, representing _____% of Saba's total production. Further, Saba has
interests in several high risk exploratory projects.
Louisiana
Approximately 20% of Saba's proved reserves at December 31, 1998 (3.6
MMBOE) were located in two fields in Louisiana. An interest in one of
these fields was first acquired during 1996, the other in 1997, with
additional interests in both fields acquired in April 1998. Saba's share
of daily production from the Louisiana fields averaged _____ BOE for the year
ended December 31, 1998, representing_________% of the Company's total
production.
Other States
In addition to its California and Louisiana properties, Saba owns
producing properties in a number of other states, primarily New Mexico and
Texas, which collectively represented 4% of Saba's proved reserves at
December 31, 1998 (0.8 MMBOE). Daily production from these properties
averaged _______ BOE for the year ended December 31, 1998, representing
______% of Saba's total production. However, GREKA Energy plans to sell some
of the non-core assets in some of those states. See "Recent Developments -
Sale of Certain Assets."
International
Colombia
Approximately 45% of Saba's proved reserves at December 31, 1998 (8.1
MMBOE) were located in several fields in Colombia's Middle Magdalena
Basin. Daily production from these fields averaged 6,500 Bopd for the year
ended December 31, 1998, representing ______% of Saba's total production.
Saba also holds a 50% interest in the 118-mile Velasquez-Galan Pipeline,
which connects the fields to a 250,000 Bopd government-owned refinery at
Barrancabermeja. See "Recent Developments - Terminated Business
Combination." Saba and Omimex, the operator of the fields, have
formulated a plan for drilling approximately 200 development wells.
During 1997, Saba and the operator participated in the drilling or
recompletion of thirteen wells in the Teca and South Nare Fields. All of
the wells drilled were productive and the operator is installing steaming
equipment. Saba and the operator also reentered a suspended well acquired
from Texaco and drilled to an are under the Magdelena River and
recompleted the well as productive of approximately 30 Bopd without artificial
stimulation. Both Saba and the operator believe that another two wells should
be drilled into the area in an effort to establish an additional commercial
area. During the year ended December 31, 1998, Saba and the operator
participated in the drilling and completion of seven wells in the Teca and
South Nare Fields. Three additional wells were recompleted during the year
ended December 31, 1998. Sabacol, a subsidiary of Saba and owner of Saba's
properties in Colombia, has filed a voluntary petition under Chapter 11 of the
United States Bankruptcy Code and has entered into an agreement to sell
substantially all of its assets. See "Business of Saba Petroleum Company -
Recent Saba Developments - Bankruptcy of Sabacol, Inc. and Contract for Sale
of Sabacol's Assets."
Canada
Approximately 7% of Saba's proved reserves at December 31, 1998 (1.3
MMBOE) were located in Canada. Daily production from these properties, which
are owned through an approximately 74%-owned subsidiary of Saba, averaged
_____ BOE for the year ended December 31, 1998, representing ____% of Saba's
total production.
Other International Properties
In September 1997, Saba and Pertamina, the Indonesian state-owned oil
company, signed a production sharing contract covering 1.7 million
unexplored acres on the Island of Java near a number of producing oil and gas
fields. This agreement will require Saba to spend approximately $17.0
million in a multi year project. In addition to the approximate $_____
million expended as of December 31, 1998. GREKA Energy is seeking a joint
venture partner to share the costs of this project; however, the recent
economic turmoil in Indonesia may affect the timing and terms of such
agreement.
In July 1997, Saba entered into an agreement to become the operator and
a 75% working interest holder of two exploration licenses which cover a
123,000 acre exploration area in southern Great Britain. On March 31,
1998, Saba assigned a 3.75% carried working interest in the first well to
be drilled on this concession as payment of a finder's fee. By agreement dated
April 14, 1998, Saba sold on behalf of its net interest in this concession
to Omimex at Saba's cost. A formal assignment has not been conveyed to Omimex
and Saba continues to hold Omimex's interest in the prospect in trust. Saba
has incurred costs of approximately $__________ as of December 31, 1998,
in connection with the concession acquisition and drilling of an
exploratory well on the concession. The well did not encounter hydrocarbons
and has been abandoned. Results from the initial well did not condemn the
entire prospect and data obtained from the test well is being evaluated for
further interpretation. Saba has not yet executed the joint operating
agreement for the prospect. While holding Omimex's interest in trust, Saba
may be liable to Omimex if it were to execute the joint operating agreement
that provides for foreclosure upon a working interest owner due to
non-payment.
From January 1, 1992 through December 31, 1998, Saba completed ____
property acquisitions with an aggregate purchase price of approximately
$____ million. These properties, as improved through Saba's development
efforts and including associated drilling activities, represented
approximately ______ MMBOE of proved reserves as of December 31, 1998.
Saba's all-in-finding costs for these acquisitions and related activities
have averaged $______ per BOE.
Exploration and Development Drilling Activities
Saba has identified a number of drilling locations on its properties
located in the United States, primarily in California, Louisiana and New
Mexico. Saba also pursues the acquisition of high potential exploration
prospects to enhance its inventory of drilling opportunities. Beginning
in 1997, Saba initiated exploration activities in Indonesia, Great Britain
and California. It has recently completed the analysis of a 3-D seismic
survey covering some 10,500 acres of land in which it has interests in the
area of the Coalinga oil field in Kern County, California, resulting in
defining a number of drillable prospects; has entered into an agreement with
a subsidiary of Chevron Corp. by which Saba will analyze Chevron 3-D seismic
data covering lands in Kern County, California, and if warranted, will
drill exploratory wells on Chevron fee lands. See "Property - California
Exploration Ventures" and "Exploration and Development Drilling
Activities - Other International Properties."
GREKA Energy's 1999 capital expenditure budget for the Saba properties is
dependent upon the price for which its oil is sold and upon the ability of
Saba to obtain external financing. Subject to these variables, GREKA Energy
has budgeted a minimum of $_____ million and a maximum of $______ million for
capital expenditures during 1999, consisting of only absolutely essential
capital expenditures. GREKA Energy currently is budgeting one year at a time
and has deferred any long term capital expenditure program. GREKA Energy has
deferred certain capital expenditures in the following areas:
* Coalinga exploration project in California,
* other California projects, where farmouts are actively being sought
for some properties and where development work has been delayed,
* Indonesia, where spending has been significantly reduced, and
* Louisiana, where a seismic study and other developmental work has
been delayed.
GREKA Energy may elect to make further deferrals of capital expenditures
if oil prices remain at current levels. Capital expenditures beyond 1999
will depend upon 1999 drilling results, oil price levels and the availability
of external financing.
Beginning in June 1997, Saba initiated use of another enhanced production
technique known as SAGD. This technique involves drilling two horizontal
wells in a parallel configuration, one above, and within a short distance
of, the other. After drilling is complete, steam is injected into the upper
wellbore, which creates a steam chamber and heats the oil so that it may
flow by gravity to the lower producing wellbore for extraction. The SAGD
process has been successfully employed by other companies in Canada
in thick reservoirs containing viscous oils, similar to those found in
areas of the Central Coast Fields. Although this technique is initially more
costly than employing a single horizontal well, Saba anticipates that it
will result in increased rates of production and recovery and lower per-unit
production costs. Saba has drilled one pair of SAGD wells on its Gato Ridge
Field and is awaiting local permits before initiating steaming operations,
but does not anticipate commencing such operations until oil prices improve.
California
Saba's drilling operations in California are focused on the Central
Coast Fields, which consist of four onshore fields that collectively
comprise approximately 4,525 gross (4,487 net) developed acres and 1,139
gross (1,138 net) undeveloped acres. Saba intends to capitalize on the
potential of these properties through a five year multiwell drilling
program. The Central Coast Fields consist of the Cat Canyon, Gato Ridge,
Santa Maria Valley and Casmalia fields. Saba also has producing properties in
Ventura, Solano, Kern and Orange Counties, California. Of these properties,
Saba regards the Cat Canyon and Gato Ridge fields, both heavy oil properties,
as the most significant and upon which it has focused its development
drilling efforts. Aggressive development activities during 1997, in
contemplation of significantly increased production, included the
installation of surface facilities for handling much more oil than Saba
presently produces from the properties. The recent decline in oil prices
coupled with the drilling results of the 1997 program render it doubtful
that GREKA Energy will realize its initially projected rates of return. In
addition to the producing properties, Saba has several exploratory projects
in California. See "Property-California Exploration Ventures."
Overall, Saba during 1998 experienced a ___% increase in annual
production from its California properties (from 904 MBOE in 1997 to ______
MBOE in 1998). The development costs incurred by Saba in California during
1998 were $_______ million. The economic benefits derived from the program
were substantially below Saba's expectations. Notwithstanding the 1998
results, GREKA Energy believes that the focus on the Central Coast Fields will
ultimately be justified. This belief is based in part on the established
synergy between production from the Central Coast Fields and the asphalt
refinery located in Santa Maria, in that Saba is able to sell its production
to the refinery at a price reflecting a premium to market. Generally, the
crude oil produced in the Santa Maria Basin is of low gravity and makes an
excellent asphalt. Recent prices for asphalt exceed market prices for
crude oil and costs of operating the refinery. Saba believes that as road
building and repair increase in California and surrounding western states, the
market for asphalt will expand significantly.
To date, Saba has drilled and completed 13 horizontal wells in the
Sisquoc sands of the Cat Canyon Field. Twelve of these wells are
currently producing at rates from 40 to 140 Bopd; the thirteenth well has
encountered a sand intrusion problem which Saba is attempting to rectify.
Saba also drilled one pair of SAGD wells in the Gato Ridge Field, which is
awaiting local permits and oil price increases before production will be
attempted. Two horizontal wells drilled to test a different zone in this
field have encountered severe sand production and are presently planned to
undergo recompletion operations during 1999. During 1998, Saba drilled ___
wells in the Casmalia Field.
Louisiana
Saba acquired an 80% working interest in the Potash Field in September
1997 and the remaining 20% working interest in April 1998. Proved reserves of
Saba's interest in the field were approximately 13.7 Bcf and approximately 1.1
MMBbl at December 31, 1998. Saba's share of daily production from the
Potash Field, including the 1998 acquired interest, averaged ____ Bopd and
_____ MMcfd for the year ended December 31, 1998. Increases in productivity
and possibly reserves are expected to be achieved through completion of a
number of potential zones presently behind pipe in existing wells. These
potential producing zones range in depth from 1,500 to 15,000 feet. Further
technical programs, including a possible 3-D seismic shoot, are planned to
evaluate the exploration potential of Saba lands associated with this field.
Saba owned a 40.5% working interest in the Manila Village Field and acquired
an additional 10.2% working interest in April 1998. Saba may be subject to
certain environmental liabilities with respect to its interest in the Manila
Village Field. Saba's net reserves at December 31, 1998, including the 1998
acquired interest, were approximately 187 MBbl and 73 MMcf. Saba's share
of daily production, including the 1998 acquired interest, averaged _______
BOEPD for the year ended December 31, 1998. A 3-D seismic program is
scheduled for 1999 or beyond to determine additional opportunities to further
develop this field.
Colombia
Saba owns interests in two Association Areas (Cocorna and Nare) and one
fee property (Velasquez) all of which are located in the Middle Magdalena
Basin, some 130 miles northwest of Bogota, Colombia. The Association Areas
encompass several fields, some of which are partially developed and some of
which await development. The Teca, Nare and Velasquez fields are
presently under development. The Association Areas, Nare and Cocorna, are
held under Articles of Association between Empresa Petroleos Colombiana
and Saba's predecessor in interest, a subsidiary of Texaco, Inc. Each
Association Area is large enough to encompass more than one commercial area
or field.
Saba and Omimex, the operator of the fields, have formulated a
development program which includes, pending regulatory approval, the drilling
of approximately 200 development wells through the year 2001 at an average
depth of 2,900 feet. During 1997, Saba and its operator successfully
completed or reworked fourteen wells of the development program, which
wells have met or exceeded initial production expectations. The 200 well
program is a refinement of an approximate 600 well program originally
designed by Texaco. The Texaco program was not implemented due to what Saba
believes was Ecopetrol's concern with refinery capacity and oil prices. The
ability of Omimex, as operator of the fields, to implement the development
program is dependent on the approval of Ecopetrol and the Colombian Ministry
of the Environment. Saba and Omimex have submitted an application for an
omnibus approval of the drilling of the remainder of the 200 well program;
failing receipt of the omnibus approval, the companies would continue to
seek approval for drilling such wells in segments. In 1997, approval was
obtained for the drilling of 21 development wells in the Teca and Nare
Fields, 13 of which were completed during the year. Also, a well under the
Magdalena River was recompleted and plans to drill two additional wells
which, if commercial, should establish a new commercial area for
development. In the Velasquez Field, the operator recompleted a behind pipe
zone in three gross (0.75 net) wells in 1997. Initial per well production
rates ranged from 142 Bopd to 223 Bopd. Studies to date indicate up to 23
wells with behind pipe zones suitable for recompletion. During the year
ended December 31, 1998, ________ wells were drilled and completed in the Teca
and Nare Fields and ________ wells were recompleted in the Velasquez Field.
Sabacol, a subsidiary of Saba and owner of Saba's properties in Colombia, has
filed a voluntary petition under Chapter 11 of the United States Bankruptcy
Code and has entered into an agreement to sell substantially all of its assets
to Omimex. See "Business of Saba Petroleum Company - Recent Saba Developments
- - Bankruptcy of Sabacol, Inc. and Contract for Sale of Sabacol's Assets."
Canada
Saba's Canadian properties, which are owned through Beaver Lake (Alberta
Stock Exchange), represented approximately 23% of Saba's standardized
measure value at December 31, 1998. The Canadian properties produced an
average of ______ BOEPD for the year ended December 31, 1998, from ______
wells covering _______ gross (_______ net) developed acres, most of which
are located in the province of Alberta. These properties had proved reserves
of 1.3 MMBOE at December 31, 1998. The information presented has not been
adjusted for the approximate 26% minority interest in Beaver Lake held by
others. See "Business -- Exploration and Development Drilling Activities
- -- Other United States and Canadian Properties."
Other International Properties
In September 1997, Saba and Pertamina, the Indonesian state-owned oil
company, signed a production sharing contract covering 1.7 million
unexplored acres on the Island of Java near a number of producing oil and gas
fields. Saba is required to spend approximately $17.0 million over a multi
year period on this project, in addition to the approximate $______ million
expended as of December 31, 1998 on bonus payments, data acquisition
and geophysical investigation. GREKA Energy expects to identify drilling
locations based on geologic trends identified through its review of existing
seismic data, satellite images and the results of a potential 3-D seismic
program to be performed in 1998 and 1999. Saba has held discussions with
several potential joint venture partners with a view to negotiate a
participation agreement. In view of this, Saba has slowed its pace of
activity. The recent civil and economic turmoil in Indonesia may affect the
timing and the terms of such agreement.
In July 1997, Saba entered into an agreement to participate in two
exploration licenses which cover a 123,000 acre exploration area in
southern Great Britain in which Saba had a right to acquire a 75% working
interest earned upon drilling and payment of its share of costs. On March
31, 1998, Saba assigned a 3.75% carried working interest in the first
well to be drilled on this concession as payment of a finder's fee. By
agreement dated April 14, 1998, Saba sold one half of its net interest in
this concession to Omimex at Saba's cost. A formal assignment has not
been conveyed to Omimex and the Company continues to hold Omimex's
interest in the prospect in trust. Saba had incurred costs of approximately
$__________ at December 31, 1998 in connection with the concession
acquisition and drilling of an exploratory well on the concession. The well
did not encounter hydrocarbons and has been abandoned. Results from the
initial well did not condemn the entire prospect and data obtained from the
test well is being evaluated for further interpretation. Saba has not yet
executed the joint operating agreement for the prospect. While holding
Omimex's interest in trust, Saba may be liable to Omimex if it were to execute
the joint operating agreement that provides for foreclosure upon a working
interest owner due to non-payment.
Other United States Properties
Other than its California and Louisiana properties, Saba had interests
in over ____ oil and gas wells at December 31, 1998, located principally in
Texas, Michigan, New Mexico and Oklahoma, with other interests located
in Utah, Wyoming, and Alabama. Saba seeks to acquire domestic and
international producing properties where it can significantly increase
reserves through development or exploitation activities and control costs by
serving as operator. Saba believes that its substantial experience and
established relationships in the oil and gas industry enable it to identify,
evaluate and acquire high potential properties
on favorable terms. As the market for acquisitions has become more
competitive in recent years, Saba has taken the initiative in creating
acquisition opportunities, particularly with respect to adjacent
properties, by directly soliciting fee owners, as well as working and royalty
interest holders, who have not placed their properties on the market. Saba
also plans to expand its existing reserve base by acquiring or
participating in high potential exploration prospects in known
productive regions. Saba believes these activities complement its
traditional development and exploitation activities. In pursuing these
exploration opportunities, Saba may use advanced technologies, including 3-D
seismic and satellite imaging. In addition, Saba may seek to limit its direct
financial exposure in exploration projects by entering into strategic
partnerships.
Oil and Gas Properties
At December 31, 1998, on a standardized measure value basis,
approximately 22% of Saba's proved reserves were in California, primarily
in the Central Coast Fields and approximately 45% were attributable to Saba's
Colombian properties.
The following table summarizes Saba's estimated proved oil and gas
reserves by geographic area as of December 31, 1998. The following table
includes both proved developed (producing and non-producing) and proved
undeveloped reserves. Approximately 42% of the total reserves reflected in
the following table are proved undeveloped. There can be no assurance that
the timing of drilling, reworking and other operations, volumes, prices and
costs employed by the independent petroleum engineers will prove
accurate. Since December 31, 1998, oil and gas prices have generally
increased. At such date, the price of WTI crude oil as quoted on the New York
Mercantile Exchange was $________ per Bbl and the comparable price at March
31, 1999 was $_______. Quotations for the comparable periods for natural gas
were $______ per Mcf and $_____ per Mcf, respectively.
The proved developed and proved undeveloped oil and gas reserve figures
are estimates based on reserve reports prepared by Saba's independent
petroleum engineers. The estimation of reserves requires substantial judgment
on the part of the petroleum engineers, resulting in imprecise determinations,
particularly with respect to new discoveries. Estimates of reserves and of
future net revenues prepared by different petroleum engineers may vary
substantially, depending, in part, on the assumptions made, and may be
subject to material adjustment. Estimates of proved undeveloped reserves
comprise a substantial portion of Saba's reserves and, by definition, had
not been developed at the time of the engineering estimate. The accuracy
of any reserve estimate depends on the quality of available data as well as
engineering and geological interpretation and judgment. Results of
drilling, testing and production or price changes subsequent to the date of
the estimate may result in changes to such estimates. The estimates of
future net revenues in this report reflect oil and gas prices and production
costs as of the date of estimation, without escalation, except where
changes in prices were fixed under existing contracts. There can be no
assurance that such prices will be realized or that the estimated production
volumes will be produced during the periods specified in such reports. The
estimated reserves and future net revenues may be subject to material
downward or upward revision based upon production history, results of future
development, prevailing oil and gas prices and other factors. A material
decrease in estimated reserves or future net revenues could have a
material adverse effect on Saba and its operations.
<TABLE>
December 31, 1998
Proved Reserves, net PV-10 Value
Gross Oil Gas
Property Wells (1) (MBbls) (MMcf) MBOE Dollar Value %
-------- --------- ------- ------ ---- ------------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
California:
Cat Canyon 2,339 356 2,398 3,712 16
REDU 158 - 158 67 -
Santa Maria 252 351 310 315 1
Bellridge 349 186 380 872 4
Other 629 250 671 705 3
Total
California 3,727 1,144 3,918 5,671 24
Louisiana
Potash Field 1,083 13,678 3,362 6,148 27
Manila Village 187 73 199 562 2
Total
Louisiana 1,269 13,751 3,561 6,710 29
Other United States
Texas 212 597 311 805 3
New Mexico 327 946 485 1,769 8
Other 29 480 109 255 1
Total Other
United States 568 2,023 905 2,829 12
Total United
States 5,564 16,918 8,384 15,210 66
Colombia 8,060 - 8,060 3,700 16
Canada 281 6,080 1,294 4,241 18
Total
International 8,341 6,080 9,354 7,941 34
Total 13,905 22,998 17,738 23,151 100
===== ====== ====== ====== ======== =====
</TABLE>
- --------------
(1) Includes locations attributed to proved undeveloped reserves and wells
in which Saba holds royalty interests.
California
Producing Properties
Saba operates most of its wells in the Central Coast Fields and maintains
an average working interest in these wells of ______% and an average net
revenue interest of ________%. These fields produced ________ net BOEPD
for the year ended December 31, 1998 and had proved reserves at December 31,
1998 of 3.9 MMBOE.
Cat Canyon Field. The Cat Canyon Field is Saba's principal California
producing property, representing approximately 16% of Saba's standardized
measure value at December 31, 1998. This field, which covers approximately
1,775 acres of land is located in northern Santa Barbara County and was
acquired by Saba in 1993. At the time of acquisition, there were 89 producing
wells and 74 suspended wells, all of which were vertically drilled to
either the Sisquoc or Monterey Formations (lying between approximately
2,400 feet and 3,400 feet and 4,000 feet and 6,600 feet, respectively). At
the time of acquisition, average production was 425 Bopd and for the year
ended December 31, 1998, average production was approximately _______ Bopd.
Daily production varies depending upon various factors, including normal
decline in production levels, the production of newly drilled wells and
whether remedial work is being done on wells in the field. The field
produces a heavy grade of viscous oil, which is in demand at Saba's Santa
Maria Refinery. The property is considered (as are many heavy oil
properties) a high production cost field and reductions in prices paid for
crude generally affect such properties more dramatically than higher
gravity lower production cost fields.
Saba owns a 100% working interest (99.7% net revenue interest) in
approximately 45 producing wells and a number of non-producing wells located
in this field which consists of two major producing horizons, the Sisquoc
and the Monterey. The Sisquoc formation, which consists of a number of
separate zones, is divided by two major north-south trending faults into
three separate and distinct areas. The area between the faults contains the
bulk of the productive reservoir volume and has the highest cumulative
production. A portion of that area was the subject of a waterflood
instituted in 1962 by a previous operator. The waterflood was not
economically successful. Saba believes that the two faults are sealing
faults, thus preventing communication with the portions of the field lying
outside of the fault block, which areas were not the subject of waterflood
operations.
In 1995, Saba drilled its first horizontal well into the Monterey
formation. The well developed mechanical problems and operations were
suspended. Saba has deferred attempts to correct the problem until such time
as oil prices increase sufficiently to justify further efforts. In 1996,
Saba initiated its present horizontal well drilling program in the Cat
Canyon Field by drilling five horizontal wells into the Sisquoc formation
S1b sand (which is one of the multiple separate sand bodies comprising the
Sisquoc formation). Of the five wells, three wells were drilled in the
central fault block, on which a waterflood operation was previously
conducted, and one in each of the eastern and western portions of the field.
The well in the western portion of the field initially produced at rates
approaching 400 Bopd and, as expected, has declined to a present rate of
approximately 130 Bopd. Wells drilled into the Sisquoc formation may be
expected to produce varying amounts of formation water as part of the
production process. The well drilled in the eastern portion of the field has
encountered mechanical problems and plans are to rework the well during
1998. The three wells drilled in the central portion, or waterflood area of
the field, developed initial production rates of approximately 150 Bopd per
well and have declined to approximately 40 Bopd per well. In 1997, Saba
continued its horizontal drilling program in the Cat Canyon Field by drilling
eight additional wells into the Sisquoc S1b sand. Of the eight wells, five
were drilled into the waterflood area and the remaining three were drilled
into other areas. Year end average production rates for the wells in the
waterflood area were 82 Bopd and 1,100 barrels of water per day per well.
Production rates for the other wells were 88 Bopd and 13 barrels of water per
day per well. The wells drilled into the central waterflood area, as
expected, are producing oil with high volumes of residual water from the prior
waterflood operations. Saba believes that by using high volume pumps and
lifting large volumes of fluid, the ratio of oil to total fluids produced will
gradually increase. Production declines have been in line with Saba's
expectations of roughly a 40-50% decline in production during the first 12
months of the wells' operation, followed by a more moderate 10% annual decline
in production. Results from the horizontal well drilling program have not
met Saba's expectations and continuing study is being given to the field to
determine how to maximize production. In addition, Saba has implemented
measures designed to ensure that operations are conducted with greater
efficiency.
In addition to the Cat Canyon Field, Saba has interests in a number
of fields in California, none of which had a standardized measure value
equal to five percent or more of the standardized measure value of Saba's
proven reserves at December 31, 1998. Among such fields are the following:
Richfield East Dome Unit (REDU). The REDU unit, which represented
approximately 0.2% of Saba's standardized measure value at December 31, 1998,
is located in Orange County, California and covers approximately 420
acres. Saba is the operator of this unit and owns a working interest of
50.6% and a net revenue interest of 40.8%. The unit is under waterflood in
the Kraemer and Chapman formations and contains approximately 68 producing
wells, 39 shut-in wells and 54 water injection wells. Saba conducted
remedial operations on this property during 1997 which resulted in increasing
production by approximately 100 Bopd. Saba owns fee interests in lands in
this unit which it believes will be developable for real estate purposes as
oil operations are curtailed.
Other. Saba also owns other producing properties located in Santa
Barbara, Ventura, Solano, Kern and Orange counties, California, which in the
aggregate represented approximately ______% of Saba's standardized measure
value at December 31, 1998.
California Exploration Ventures
Coalinga Exploratory Prospect, Kern County, California. Saba has
acquired leases covering approximately 3,600 acres of land and contractual
rights covering an additional approximate 7,000 acres of land in the region
of the prolific Coalinga oil field in the San Joaquin Valley of California.
Saba has participated in a 16 square mile 3-D seismic survey covering this
area and has partially interpreted the survey. Nineteen anomalies have been
identified in the prospect area, covering five potentially productive zones,
ranging in depth from 6,500 to 12,000 feet. Saba was obligated to drill a
test well by December 31, 1998. Because of low oil prices and the poor
economic conditions in the oil industry, GREKA Energy intends to seek an
extension of time to drill such a test well. Under the agreement, Saba would
bear 100% of the cost of the wells, which is estimated at approximately
$300,000 in the aggregate as a dry hole and $450,000 as a completed well.
Saba would have an 85% working (68% net revenue) interest
in the wells.
Northern California Exploratory Project. In late 1997, Saba entered into
a joint venture with a large independent company and a company in which Rodney
C. Hill, a former director, has a financial interest, to acquire a
multi-thousand acre block of oil and gas leases and drill an exploratory
well for gas on such block. Saba has a 30% initial interest in the
exploratory well to earn a 20% working interest in the well and in the block
and any additional wells that may be drilled by the venture thereon. Saba
regards the project as a high risk venture with possible commensurate
returns. The initial objective was the sands of the Cretaceous Age at a depth
of approximately 8,500 feet. Lease acquisition costs are estimated at
approximately $300,000 to the venture and the cost of the well is estimated at
approximately $1,250,000. An exploratory well was drilled on this prospect
during March and April 1998 and has been abandoned. A technical review of the
land block is being performed.
Louisiana
Manila Village is located in Jefferson Parish, Louisiana. Saba operates
this property and at year end 1998, owned a working interest of 50.7% (34.5%
net revenue interest). The property represented approximately 2% of Saba's
standardized measure value at December 31, 1998. The property covers
approximately 450 gross acres of land covered by shallow waters, and is
located approximately forty miles south of New Orleans. There are six
producing wells that produced an average of approximately ______ BOEPD for
the year ended December 31, 1998. Saba is participating in a 3-D seismic
program which includes the field and expects that the results of the survey
will assist Saba in its evaluation of additional drilling opportunities in the
field.
Potash Field, which is located in Plaquemines Parish, Louisiana, was
acquired by Saba in September 1997. Saba operates all of the wells in the
property that represented approximately 27% of Saba's standardized measure
value at December 31, 1998. The property is a salt dome feature originally
discovered by Humble Oil and Refining Company and covers approximately 3,600
acres. The property is located in a shallow marine environment southeast of
New Orleans. At year end 1998, Saba owned a 100% working interest and a
84.5% net revenue interest in this property, on which are located ten
active wells and a number of shut-in or suspended wells. Average production
from the property for the year ended December 31, 1998, was _______ BOEPD.
Saba believes that remedial work on several of the wells will result in
increased production levels. The salt dome feature in the field has not been
fully explored. Saba plans on conducting a 3-D seismic survey to delineate the
field. Production in this field is from multiplay zones, the deepest of which
is 15,000 feet.
The Louisiana properties in which Saba has producing oil and gas fields
were damaged by the 1998 Hurricane Georges. Although portions of the
properties were minimally damaged, others were considerably damaged. Initial
assessments did not indicate environmental problems; however, tanks, piping,
living quarters and other equipment have been heavily damaged, causing
delays in resuming operations. Saba's insurance carrier has been contacted to
process a claim.
Other United States Properties
In addition to its California and Louisiana properties, Saba owns
producing properties in a number of states, primarily New Mexico, Michigan,
Texas and Oklahoma, which collectively represented approximately 12% of Saba's
standardized measure value at December 31, 1998. At such date, these
properties had proved reserves of 0.9 MMBOE. Production from the properties
approximated ______ BOEPD for the year ended December 31, 1998. (see "Saba -
Recent Developments - Sale of Certain Assets") The principal producing
property is:
Southwest Tatum Field, which is located in Lea County, New Mexico was
acquired by Saba as an exploratory project in late 1996. Saba holds leases
covering approximately 2,000 gross acres of land, in which Saba has a
working interest of 50% (38.75% net revenue interest). During the last
part of 1996, Saba, as operator, commenced the drilling of a 14,000 foot
exploratory Devonian test well. In addition to the deepest zone, the
Devonian (which has been abandoned after having produced in excess of
20,000 barrels of high gravity oil), the well has three other potential
oil producing zones. Saba has recompleted the well in the shallower Cisco
zone. A second reentry well to test the shallower zones was completed in
September 1997. A gas sales line was completed in February 1998, allowing
for gas sales from the two wells. Two additional wells were drilled on this
property in 1998 at an approximate cost of $350,000 each to Saba's interest.
One well was completed in September 1998 in the Cisco zone, and the other was
drilled in August 1998 and is being tested. The property produced
approximately ______ BOEPD for the year ended December 31, 1998.
Colombian Properties
General
Saba's Colombian operations are conducted on two Association Areas and
one mineral fee property. These properties are located in the Middle Magdalena
Basin of Colombia, some 130 miles northwest of Bogota. Saba and Omimex
acquired their interests in the Middle Magdalena Basin properties from Texaco
in 1994 and 1995 transactions; each has a 25% working (20% net revenue)
interest in Nare and Cocorna Association properties, while Ecopetrol, the
Colombian state oil company owns the remaining 50% working interest. The
mineral fee property, Velasquez, is owned 75% by Omimex and 25% by Saba. The
three areas cover 52,894 gross acres of land. The Nare Association is the
northernmost area in which Saba has an interest and covers approximately
37,164 gross (approximately 9,300 net) acres of land. The exploitation and
development of the Teca and Nare Fields, and the adjacent Nare North,
Chicala and Morichi Fields are governed by the association contract
originally entered into between Ecopetrol and Texaco in 1980. Under these
contracts, the cost of exploratory wells is borne solely by Saba and its
partner, who are entitled to all revenues from such wells. Once an area
within an Association is declared to be a commercial area by Ecopetrol,
Saba and its partner each receives 20% of the crude oil produced at these
fields, while Ecopetrol receives 40% of production and the Colombian
government receives the remaining 20% of production in the form of
royalties. A commercial area is roughly equivalent to a field. Each of
Saba and its partner bears 25% of the production costs of commercial areas
and Ecopetrol is responsible for the remaining 50%. The exploitation
rights under these contracts expire in September 2008 and are not renewable by
Saba under their current terms. Saba understands that legislation is being
considered by the Colombian government which would permit such extensions
to be obtained. Saba intends to seek an extension of these contracts;
however, no assurance can be given that any extension will be granted or
that the terms on which any extension may be obtained will be
acceptable to Saba. Omimex anticipates that the costs associated with
preparing the necessary documentation for applying to extend the terms of the
exploitation rights on the North Nare Field through 2030 will cost
approximately $1 million. On October 2, 1998, Saba agreed with Omimex that it
will pay up to $500,000 to prepare such documentation if the contract for the
North Nare Field is extended. The $500,000 will be payable by Saba in January
1999.
Generally, as in the case of Saba's interests under the Nare and Cocorna
Associations, the Articles require that the contracting oil company
perform various work obligations (including the drilling of any exploratory
wells) at its cost on the lands covered by the Articles, and allow production
of hydrocarbons for a stated period of years. Upon discovery of a field
capable of commercial production and upon commencement of production from
that field, Ecopetrol reimburses the contracting party out of Ecopetrol's
share of production for 50% of the allowable costs. Thereafter, costs of
operations and working interest revenues are shared 50% by Ecopetrol and 50%
by the contracting oil company, which in this case is Omimex and Saba, as
successors to Texaco, the original contracting party. The working interest is
subject to a royalty of 20% which is paid to Ecopetrol on behalf of the
Colombian government. Several of the fields in the contract area owned by
Saba and Omimex have been declared to be commercial areas, but a number of
other areas have not yet been so designated. Approval of both Ecopetrol and
the Ministry of the Environment is required to implement a development
program. The Cocorna Concession area, located within the Cocorna
Association, which was acquired by Saba from Texaco, has reverted to Ecopetrol
because of the expiration of the term of the Articles governing that field.
Description of the Properties
As of the date of this report:
* three fields within the Cocorna Association have been declared
commercial by Ecopetrol:
* Teca (approximately 1938 acres),
* Toche (approximately 150 acres), and
* South Cocorna (approximately 700 acres), and
* four fields within the Nare Association have been declared
commercial:
* South Nare (approximately 660 acres),
* North Nare (approximately 1,700 acres),
* Chicala (approximately 830 acres), and
* Moriche (approximately 1085 acres).
Saba's Teca and Nare Fields, which represented approximately _____% of
Saba's standardized measure value at December 31, 1998, produced an average
of 1.87 MBopd for the year ended December 31, 1998 and ________MBOPD for the
year ended December 31, 1998, from 309 wells covering 2,598 gross (649 net)
developed acres and is the primary producing area. Saba owns a 25% mineral
fee interest in the Velasquez Field which covers approximately 3,800 gross
(950 net) acres of land, and produced an average of 505 Bopd for the year
ended December 31, 1997 and ______ Bopd for the year ended December 31,
1998.
Saba's Colombian properties in the aggregate represented 8.1 MMBOE at
December 31, 1998 or approximately 46% of Saba's total proved reserves and
approximately 16% of Saba's standardized measure value at that date. The
following table provides information concerning Saba's interest in the
commercial areas and fee minerals in Colombia.
<TABLE>
Average Daily Barrels of
Proved Reserves Number oil produced for the
at Dec. 31, 1998 of year ended
Field Name (MMBbls) Wells December 31, 1998
- ------------------- ---------------- ------ -----------------------
<S> <C> <C> <C>
Velasquez
North Nare
Magdalena/Cocorna
Teca & South Nare
============== ======= ===============
Total
============== ======= ===============
</TABLE>
Production from all of the fields comes from relatively shallow
reservoirs lying at approximate depths of from 1,200 to 3,000 feet. All of the
production (save that produced from the Velasquez field) is of a relatively
heavy grade of crude oil, generally in the area of 10(Degree) to 13(Degree)
gravity API. Wells generally produce small amounts of formation water in
conjunction with oil. Because of the viscosity of the oil, wells are
initially produced without artificial stimulation and thereafter stimulated
by cyclic steam injection. Wells cost approximately $250,000 to $300,000 to
the total working interest, depending upon depth.
During 1997, Saba and the operator participated in the drilling or
recompletion of thirteen wells in the Teca and South Nare Fields. All of
the wells drilled were productive and the operator is in the process of
installing steaming equipment. During 1998, Saba and the operator
participated in the drilling and completion of ____ wells in the Teca and
South Nare Fields.
Saba and Omimex reentered a suspended Texaco drilled well to an area
under the Magdalena River and recompleted the well as productive of
approximately 30 Bopd without artificial stimulation. Both Saba and the
operator believe that another two wells should be drilled into the area in an
effort to establish an additional commercial area. Should those efforts be
successful, it is believed that from 15 to 20 additional drilling locations
would be established. In the Velasquez field, Saba and Omimex recompleted
three wells in a behind-pipe zone. Initial per well production rates range
from 142 Bopd to 223 Bopd. Studies to date indicate up to 23 additional
wells with behind pipe reserves suitable for recompletion. ______ additional
wells were recompleted during 1998.
During 1997, the operator in conjunction with Saba formulated a plan for
the drilling of approximately 200 development wells in the Nare North,
Chicala and Moriche fields. This program, subject to regulatory approval,
would be implemented through the year 2001. Saba is also considering
joining in a development program at the Velasquez property.
Sabacol is not the operator of the Colombian properties in which it has
an interest and has notified the operator of Sabacol's intent to audit all
relevant operating documents and all financial transactions for 1996, 1997
and 1998. Any potential future action would be based on results of the audit.
In December 1998, a new management team was appointed for Sabacol to protect
its assets and develop an effective reorganization plan. Sabacol has filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code and
has entered into an agreement to sell substantially all of its assets. See
"Business of Saba Petroleum Company - Recent Saba Developments - Bankruptcy of
Sabacol, Inc. and Contract for Sale of Sabacol's Assets."
In the event Sabacol's interest in the Colombian pipeline is transferred
to a third party while Sabacol maintains its interest in the Colombian
production, Sabacol may be subject to a tariff in excess of the current rate
charged to Sabacol by the current owner of the remaining 50% interest in the
pipeline. In or about July 1998, the pipeline was affected by guerrilla
activity.
Crude Oil Sales and Pipeline Ownership
All of Saba's crude oil produced at Saba's properties in Colombia has
been sold exclusively to Ecopetrol at negotiated prices. See "Business -
Marketing of Production." The contract price for the oil in which Saba has an
interest may be reduced significantly as of January 1, 1999. In
conjunction with its purchase of interests in the Nare Association, Saba
also purchased a 50% interest in the 118-mile Velasquez-Galan Pipeline,
which connects the fields to the 250,000 Bopd Colombian government-owned
refinery at Barrancabermeja. See "Exploration and Development Drilling
Activities - Colombia." The pipeline transports oil from Saba's fields,
together with a lighter crude oil supplied by Ecopetrol which acts as a
diluent to Saba's heavier crude, and crude oil from other adjacent fields.
The pipeline generates revenues through collection of tariffs for the use
of the pipeline. Throughput on this pipeline in September 1998 averaged
28,900 Bopd of which Saba's share was approximately 2,100 Bopd. In addition to
the operator and Saba, three other companies transport their crude oil
through the pipeline at tariff rates established by Colombian authorities.
Saba and the operator have considered expansion of the pipeline system
if additional production is developed by operators in the area. See "Saba -
Recent Developments - Terminated Business Combination; Bankruptcy of
Sabacol, Inc."
Canadian Properties
Saba's Canadian properties, which are owned through Beaver Lake,
represented approximately 18% of Saba's standardized measure value at December
31, 1998. The Canadian properties produced an average of _____ BOEPD for the
year ended December 31, 1998, from wells covering ________ gross (_______ net)
developed acres, most of which are located in the province of Alberta. These
wells had proved reserves of 1.3 MMBOE at December 31, 1998. The information
presented has not been adjusted for the approximate 26% minority interest in
Beaver Lake held by others.
Other International Properties
Saba has oil and gas projects in Indonesia and Great Britain as
described in "Exploration and Development Drilling Activities."
Oil and Gas Reserves
Saba's proved reserves and standardized measure value from proved
developed and undeveloped oil and gas properties in this document have been
estimated by the following independent petroleum engineers. In 1996, 1997 and
1998, Netherland, Sewell & Associates, Inc. prepared reports on Saba's
reserves in the United States and Colombia and Sproule Associates Limited
prepared a report on Saba's Canadian reserves. The estimates of these
independent petroleum engineers were based upon review of production
histories and other geological, economic, ownership and engineering data
provided by Saba. In accordance with the SEC's guidelines, Saba's estimates of
future net revenues from Saba's proved reserves and the present value thereof
are made using oil and gas sales prices in effect as of the dates of such
estimates and are held constant throughout the life of the properties,
except where such guidelines permit alternate treatment, including, in the
case of gas contracts, the use of fixed and determinable contractual price
escalation. Future net revenues at December 31, 1998, reflect weighted
average prices of $8.29 per BOE compared to $13.13 per BOE and $17.05 per BOE
as of December 31, 1997 and 1996, respectively. There have been no reserve
estimates filed with any other United States federal authority or agency,
except that Saba participates in a Department of Energy annual survey, which
includes furnishing reserve estimates of certain of Saba's properties. The
estimates furnished are identical to those included herein with respect to
the properties covered by the survey.
The following tables present total estimated proved developed producing,
proved developed non-producing and proved undeveloped reserve volumes as of
December 31, 1996, 1997 and 1998, and the estimated present value of future
net revenues ("PV 10") (based on current prices and costs at the respective
years end, using a discount factor of 10 percent per annum). As used herein,
the term "proved undeveloped reserves" are those which can be expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on
undrilled acreage shall be limited to those drilling units offsetting
productive units that are reasonably certain of production when drilled.
Proved reserves for other undrilled units can be claimed only where it can be
demonstrated with certainty that there is continuity of production from the
existing productive formation. Under no circumstances should estimates for
proved undeveloped reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proved effective by actual
tests in the area and in the same reservoir. There can be no assurance
that these estimates are accurate predictions of reserves or of future net
revenues from oil and gas reserves or their present value. As indicated
elsewhere, the prices received for oil and gas have increased since the
preparation of the 1998 year end engineering estimates.
<TABLE>
Estimated Proved Oil and Gas Reserves
At December 31,
---------------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Net oil reserves (MBbl)
Proved developed producing........ 12,029 13,977 6,661
Proved developed non-producing.... 1,367 2,639 1,775
Proved undeveloped................ 13,283 7,309 5,469
------ ------ ------
Total proved oil reserves (MBbl).. 26,679 23,925 13,770
====== ====== ======
Net natural gas reserves (MMcf)
Proved developed producing......... 12,659 11,995 5,252
Proved developed non-producing..... 1,516 5,407 5,865
Proved undeveloped................. 9,490 13,894 11,880
------ ------ ------
Total proved natural gas
reserves (MMcf) ................ 23,665 31,296 22,997
====== ====== ======
Total proved reserves (MBOE).......... 30,623 29,141 17,738
====== ====== ======
</TABLE>
Estimates of proved reserves may vary from year to year reflecting
changes in the price of oil and gas and results of drilling activities
during the intervening period. Reserves previously classified as proved
undeveloped may be completely removed from the proved reserves classification
in a subsequent year as a consequence of negative results from additional
drilling or product price declines which make such undeveloped reserves
non-economic to develop. Conversely, successful development and/or increases
in product prices may result in additions to proved undeveloped reserves.
<TABLE>
Estimated Present Value of
Future Net Revenue
At December 31,
-------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
PV-10 Value (In thousands)
Proved developed producing.......... $ 84,916 $ 62,215 $ 9,406
Proved developed non-producing...... 9,227 16,097 7,369
Proved undeveloped.................. 61,796 40,317 6,376
-------- -------- --------
Total.......................... $155,939 $118,629 $23,125
======== ======== ========
</TABLE>
As used herein, the terms "proved oil and gas reserves," "proved developed oil
and gas reserves," and "proved undeveloped reserves" have the meanings defined
by the SEC as set forth in the Table of Contents to this document. Reservoir
engineering is a subjective process of estimating the sizes of underground
accumulations of oil and gas that cannot be measured in an exact way. The
accuracy of any reserve estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. Reserve
reports of other engineers might differ from the reports contained herein.
Results of drilling, testing and production subsequent to the date of the
estimate may justify revision of such estimate. Future prices received for
the sale of oil and gas may be different from those used in preparing these
reports. The amounts and timing of future operating and development costs may
also differ from those used. Accordingly, reserve estimates are often
different from the quantities of oil and gas that are ultimately recovered.
Colombia
Oil produced from Saba's Middle Magdelena Basin Fields, after being sold
to Ecopetrol, is processed in a 250,000 Bopd government owned
refinery in Barrancabermeja, Colombia. Saba believes that the refinery has
sufficient unused throughput capacity to satisfy any reasonably foreseeable
increase in production that might be achieved from Saba's Colombian
exploration and development program. The refinery is connected to Saba's
Colombian fields through the 118-mile Velasquez-Galan Pipeline owned by Saba
and its partner. The pipeline is currently operating at approximately 12,000
Bopd (together with 18,000 Bbls of diluent per day) and has the capacity to
carry approximately 20,000 Bopd (together with 30,000 Bbls of diluent per
day). Accordingly, significant capacity exists for additional throughput.
Saba owns a 50% interest in the Velasquez-Galan Pipeline and is working
with Omimex, the owner of the remaining 50% interest, to explore the
feasibility of extending it to an export terminal on the Colombian coast. The
pipeline currently generates tariff revenue from the transportation of oil
produced for Ecopetrol's interest and by other producers in the area. The
tariff revenue is sufficient to cover the direct expenses associated with
the operation of the pipeline. See "The Company - Recent Developments -
Terminated Business Combination." See also the discussion elsewhere herein of
the pending sale of assets by Sabacol.
The formula for determining the price paid for oil produced at
the Teca-Nare Fields is based upon the average of two price baskets of fuel:
(A) a crude fuel oil basket (1% sulphur United States Gulf Coast and
Ecopetrol fuel oil for exportation) and (B) an international crude basket
(Maya, Mandji and Isthmus) adjusted for gravity API and sulphur content. The
average of Baskets A and B is then discounted based on the price of West
Texas Intermediate ("WTI") crude oil, an industry posted price generally
indicative of prices for sweeter, lighter crude oil. If WTI is less than
$16.00 per Bbl, the average of Baskets A and B is discounted by $1.65 per
Bbl; if WTI is between $16.00 and $20.00 per Bbl, the average of Baskets A
and B is discounted by $2.05 per Bbl; and if WTI is greater than $20.00 per
Bbl, the average of Baskets A and B is discounted by $2.45 per Bbl. The
formula may be adjusted by Ecopetrol in February 1999. Ecopetrol is
required to pay for oil produced at the Teca-Nare Field in the following
denominations: 75% in United States dollars paid in the United States and 25%
in Colombian pesos paid in Colombia.
For production from its Velasquez Field, Saba receives a contracted
price of between $6.00 and $7.00 per Bbl for basic production of up to 34
MBbl per month. For incremental production above such amount, Saba receives a
price equal to the average of (a) the prior quarter average of the prices of
Baskets A and B and (b) the average international price of crude oil from
the Velasquez and Tisquirama Fields in Colombia, which average is then
discounted by approximately 47%.
The average sales price of Saba's Colombia production was $______ per Bbl
for the year ended December 31, 1998, and $12.04 per Bbl in 1997, representing
approximately _____% and 64.6%, respectively, of the average posted price per
Bbl for WTI crude oil during those periods.
The following table summarizes sales volume, sales price and
production cost information for Saba's net oil and gas production for each of
the years in the three-year period ended December 31, 1998.
<TABLE>
Year Ended December 31,
--------------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Production Data:
Oil (MBbls) 1,968 2,107
Gas (MMcf) 1,651 2,408
Total (MBOE) 2,243 2,508
Average Sales
Price Data
(Per Unit):
Oil (Bbls) 14.43 $ 13.73
Gas (Mcf) 1.88 2.09
BOE 14.05 13.54
Selected Data
per BOE:
Production costs (1)$ 6.51 $ 6.62
General and
administrative 1.72 1.93
Depletion,
depreciation and
amortization 2.43 2.84
</TABLE>
- --------------------
(1) Production costs include production taxes.
Drilling Activity
The following tables sets forth certain information for each of the years
in the three-year period ended December 31, 1998, relating to Saba's
participation in the drilling of exploratory and development wells in:
United States
<TABLE>
Year Ended December 31,
-------------------------------------------------
1996 1997 1998
--------------- -------------- ---------------
Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells
Oil - - 2 -
Gas 3 1.35 - -
Dry (3) 3 1.28 - -
Development Wells
Oil 10 6.59 10 10.00
Gas 3 .64 - -
Dry (3) 1 .35 1 1.00
Total Wells
Oil 10 6.59 12 11.00
Gas 6 1.99 - -
Dry (3) 4 1.63 1 1.00
</TABLE>
- ----------------------
(1) A gross well is a well in which a working interest is owned. The number
of gross wells is the total number of wells in which a working interest is
owned.
(2) A net well is deemed to exist when the sum of fractional ownership
working interest in gross wells equals one. The number of net wells is the
sum of fractional working interests owned in gross wells expressed as whole
numbers and fractions thereof.
(3) A dry hole is an exploratory or development well that is not a producing
well.
Colombia and Great Britain
<TABLE>
Year Ended December 31,
-------------------------------------------------
1996 1997 1998
--------------- -------------- ---------------
Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells
Oil - - - -
Gas - - - -
Dry (3) - - - -
Development Wells
Oil - - 13 3.25
Gas - - - -
Dry (3) - - - -
Total Wells
Oil - - 13 3.25
Gas - - - -
Dry (3) - - - -
</TABLE>
- ------------
(1) A gross well is a well in which a working interest is owned. The number
of gross wells is the total number of wells in which a working interest is
owned.
(2) A net well is deemed to exist when the sum of fractional ownership
working interest in gross wells equals one. The number of net wells is the
sum of fractional working interests owned in gross wells expressed as whole
numbers and fractions thereof.
(3) A dry hole is an exploratory or development well that is not a producing
well.
Canada
<TABLE>
Year Ended December 31,
-------------------------------------------------
1996 1997 1998
--------------- -------------- ---------------
Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells
Oil - - - -
Gas - - - -
Dry (3) 1 .01 1 1.00
Development Wells
Oil - - - -
Gas - - - -
Dry (3) - - - -
Total Wells
Oil - - - -
Gas 1 .01 - -
Dry (3) - - 1 1.00
</TABLE>
- ------------
(1) A gross well is a well in which a working interest is owned. The number
of gross wells is the total number of wells in which a working interest is
owned.
(2) A net well is deemed to exist when the sum of fractional ownership
working interest in gross wells equals one. The number of net wells is the sum
of fractional working interests owned in gross wells expressed as whole
numbers and fractions thereof. No reduction is made for the minority interest
in Beaver Lake.
(3) A dry hole is an exploratory or development well that is not a producing
well.
Productive Oil and Gas Wells
The following table sets forth information at December 31, 1998, relating
to the number of productive oil and gas wells (producing wells and wells
capable of production, including wells that are shut in) in which Saba owned a
working interest:
<TABLE>
Oil Gas Total
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
United States
Canada (1)
Colombia
--------- --------- -------- ------- ------ -------
========= ========== ======== ======= ====== =======
</TABLE>
- ------------
(1) No reduction is made for the minority interest in Beaver Lake.
In addition to its working interests, Saba held royalty interests in
approximately 82 productive wells in the United States and Canada at December
31, 1998. Saba does not own any royalty interests in Colombia.
Oil and Gas Acreage
The following table sets forth certain information at December 31, 1998
relating to oil and gas acreage in which Saba owned a working interest:
<TABLE>
Developed (1) Undeveloped
------------- -----------
Gross Net Gross Net
<S> <C> <C> <C> <C>
United States
Canada (2)
Colombia
------------ ----------- ---------- -----------
Total
============ =========== ============ =========
</TABLE>
- ---------------
(1) Developed acreage is acreage assigned to productive wells.
(2) No reduction is made for the minority interest in Beaver Lake.
Title to Properties
Many of Saba's oil and gas properties are held in the form of mineral
leases, licenses, reservations, concession agreements and similar agreements.
In general, these agreements do not convey a fee simple title to Saba, but
rather, depending upon the jurisdiction in which the apposite property is
situated, create lesser interests, varying from a profit a prendre to a
determinable interest in the minerals. In some jurisdictions, notably
non-U.S. jurisdictions, Saba's interest is only a contractual relationship
and bestows no interest in the oil or gas in place. As is customary in the
oil and gas industry, a preliminary investigation of title is made at the
time of acquisition of undeveloped properties. Title investigations are
generally completed, however, before commencement of drilling operations
or the acquisition of producing properties. Saba believes that its
methods of investigating title to, and acquisition of, its oil and gas
properties are consistent with practices customary in the industry and
that it has generally satisfactory title to the leases covering its proved
reserves. Because most of Saba's oil and gas leases require continuous
production beyond the primary term, it is always possible that a cessation of
producing or operating activities could result in the loss of a lease.
Assignments of interest to and/or from Saba may not be publicly recorded.
Substantially all of Saba's properties, including its stock in its
subsidiaries are hypothecated to secure Saba's current and future
indebtedness to its bank. Saba's working interest in properties may be
subject to lienholders by non-payment. Saba expects liens to be filed
against its assets and to be subject to lawsuits arising out of Saba's
non-payment or untimely payment of its obligations. The Santa Maria Refinery
and the associated real property owned by Saba is encumbered by a first trust
deed in the amount of $1.0 million in favor of the seller of the refinery and
is in place to secure Saba's performance of obligations as provided under the
terms of the purchase and sale agreement. Oil and gas leases in which Saba
has an interest may be deficient and subject to action by Saba.
Saba may require ratifications for various leases for Vacca Tar Sand in
California. Maintenance of Saba's interest is subject to fulfillment of
drilling and other obligations contained in its agreements with the operator
of the property. Maintenance of the leases is dependent upon fulfillment
of various drilling and producing operations over which Saba has little if any
control. Consequently, it is possible for Saba to lose its interests in such
leases through action or inaction of the operator. Saba understands that
the leases have been essentially non-productive for various periods of time,
which fact may result in termination of the leases. Saba does not follow
operations on the leases and consequently is not aware of whether the leases
are in good standing or may be subject to termination.
Average Sales Price and Production Cost
The following table sets forth information concerning average per unit
sales price and production cost for Saba's oil and gas production for the
periods indicated:
<TABLE>
Year Ended December 31,
--------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Average sales
price per BOE
California $ 15.10 $ 13.49
Colombia 12.49 11.96
Canada 13.26 10.52
Other 17.39 17.68
Combined 14.05 13.54
Average production
cost per BOE
California $ 8.50 $ 7.48
Colombia 5.11 5.71
Canada 5.15 4.87
Other 7.88 7.47
Combined 6.51 6.62
</TABLE>
Asphalt Refinery
In June 1994, in an effort to increase margins on the heavy crude
oil produced from Saba's oil and gas properties in Santa Barbara County,
California, Saba acquired from Conoco Inc. and Douglas Oil Company of
California an asphalt refinery in Santa Maria, California, which had been
inoperative since 1992. Saba refurbished the refinery and, in May 1995,
completed a re-permitting environmental impact review process with Santa
Barbara County, receiving a Conditional Use Permit to operate the refinery.
Pursuant to the refinery purchase agreement, Conoco is required to
perform certain remediation and other environmental activities on the refinery
property June 1999. Recently, evidence of current contamination of ground
water by hydrocarbons has been brought to the attention of Saba.
Prior to the acquisition of the refinery, Saba had an independent
consultant perform an environmental compliance survey for the refinery.
The survey did not disclose required remediation in areas other than those
where the seller is responsible for remediation, but did disclose that it was
possible that all of the required remediation may not be completed in the
five-year period. Saba has asked Conoco to provide their revised timeline to
complete the remediation.
During June 1998, Saba was advised by the seller's consulting engineers
that groundwater monitoring conducted in May 1998 had revealed levels of
benzene in all four monitoring wells which exceeds allowable limits. Prior
to that time, groundwater monitoring wells have not shown evidence of
groundwater contamination. In addition, detectable amounts of toluene,
ethylbenzene and xylenes were reported. Historically, BTEX compounds have
not been detected in groundwater samples obtained since 1992. At the
request of the Regional Water Quality Control Board, the wells were resampled
in July 1998. Consistent with the historical analytical results, petroleum
hydrocarbons were not detected in the July 1998 samples. The environmental
contractor, who has used the same sampling protocol since 1992, could not
identify any specific reason for the apparent inconsistency found in the May
1998 samples. The RWQCB has requested additional monitoring wells to be
placed on site and on property directly west of the refinery perimeter.
Four additional monitoring wells were installed in October 1998 within or
immediately downgradient of areas of known soil contamination on and adjacent
to the refinery. Preliminary sampling results indicate the presence of heavy
hydrocarbons in the groundwater samples from two of the wells, at
concentrations 2 to 4 times above typical regulatory action levels. Benzene
was also detected in these same wells at concentrations equal to or slightly
above drinking water limits. At the hydrocarbon concentrations detected in
the two groundwater samples, Saba expects that continued monitoring will be
required but that active groundwater remediation will not be necessary.
Additional groundwater sampling to confirm the preliminary results were
conducted in December 1998. Saba believes that the contamination is
attributable to the previous refinery owner's operations, since contaminates
at the refinery were produced by the previous owner of the refinery and were
identified prior to purchase. Appropriate authorities have been notified
of this condition. In November 1998, the RWQCB advised Saba that it is
preparing a Cleanup or Abandonment Order to establish soil and groundwater
investigation, cleanup, monitoring and a time schedule at the refinery
required to address pollution resulting from post refinery operations. In its
notification, the RWQCB stated that its perspective of the site has changed
and its water quality concerns are increased since the groundwater table
elevation has risen to be proximate to the base of the hydrocarbon
contaminated soil.
Further, the owner of land adjoining the refinery, and the seller in
August 1998 of said adjoining property to an affiliate of Saba, had advised
Saba that his adjoining property had been contaminated by underground
emissions from the refinery. Saba asserts remediation is the responsibility
of Conoco. Should the foregoing matters not be resolved satisfactorily, they
may result in litigation. It is also possible that a failure to resolve the
matters could result in significant liability to Saba. While the seller of
the adjoining property retains a mortgaged interest in the adjoining property,
Saba's subsidiary that operates the refinery has agreed to toll the statute
of limitations for any claims by the seller against the subsidiary and to
obtain the seller's consent prior to entering into any agreement with respect
to hazardous materials on the adjoining property.
Saba entered into a processing agreement with Crown Energy (formerly
PetroSource) in May 1995, and commenced operations of the refinery in
June 1995. Under the processing agreement, Crown Energy purchases crude
oil (including crude oil produced by Saba), delivers it to the refinery,
reimburses Saba's out-of-pocket refining costs, markets the asphalt and
other products and generally shares any profits equally with Saba. The
processing agreement was renewed for an additional year through December 31,
1999 with a ninety day termination provision. Saba terminated the agreement
in January 1999 and announced on February 9, 1999 that it will be taking over
the marketing and sale of its refinery products on April 30, 1999.
The refinery is a fully self-contained plant with steam generation,
mechanical shops, control rooms, office, laboratory, emulsion plant and
related facilities, and is staffed with a total of 23 operating, maintenance,
laboratory and administrative personnel. Crude oil is delivered to the
refinery by truck to crude oil storage consisting of one 27,000 Bbl tank and
two 40,000 Bbl tanks. Crude oil processing equipment consists of a
conventional pre-flash tower, an atmospheric distillation tower, strippers
and a vacuum fractionation tower. The refinery has truck and rail loading
facilities, including some capability of tank car unloading. Throughput at
the refinery has ranged between 2,000 to 6,000 Bopd, while production capacity
is approximately 8,000 Bopd. Permitted capacity for the refinery is 10,000
Bopd.
Real Estate Activities
Saba from time to time purchased real estate in conjunction with its
acquisition of oil and gas and refining properties in California and plans to
continue this practice. In connection with the acquisition of oil and gas
producing properties in Santa Maria, California in June 1993, Saba purchased
approximately 1,707 acres in Santa Barbara County for an aggregate purchase
price of $465,000. In addition, Saba acquired approximately 370 acres in
Santa Maria, California in June 1994 in connection with the acquisition of
its Santa Maria refinery. In addition, Saba entered into an agreement to
acquire approximately 385 acres in Santa Barbara County in connection with an
acquisition of producing oil and gas properties at a contract purchase price
of $400,000, the closing of which took place in June 1995. In addition, Saba
acquired approximately 1 acre in October 1997 for $50,000 and approximately 4
acres in February 1998, for $500,000 located in Yorba Linda, Orange County,
California. Saba has used a portion of its real estate holdings for
agricultural purposes. Saba plans to retain some of these real estate
holdings for asset appreciation which may include developmental activities at
a future date.
Item 3. Legal Proceedings.
In re Sabacol, Inc., Debtor (BK Case No. ND 98-15858-RR United States
Bankruptcy Court, Central District of California, Northern Division,
December 1998) On December 11, 1998, Sabacol, Inc., a wholly-owned
subsidiary of the Company ("Sabacol"), filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code in the Central District of
California. Sabacol has filed a motion with the bankruptcy court for an order
authorizing the sale of substantially all of its real and personal property to
Omimex pursuant to an asset purchase agreement entered into on March 17, 1999
and, upon completion of the sale, termination of Sabacol's bankruptcy
proceedings. A bankruptcy court hearing regarding the approval of the
contract has been scheduled for April 23, 1999.
Gitte-Ten v. Saba Petroleum Company (Case No. CV 980202 Superior and
Municipal Courts of the State of California, County of San Luis Obispo, March
1998). In December 1997, Saba contracted with Gitte-Ten, Inc. to purchase
from GTI all of its surface fee and leasehold interests in certain property
located in Santa Barbara County, California. A portion of the purchase price
was paid at closing on December 31, 1997, at which time GTI's interests were
conveyed to Saba. The remaining purchase price of $350,000 was to be paid
through overriding royalty payments of Saba's gross income from the leases
until the balance was retired but no later than January 1, 2003, on which date
any unpaid balance was to be immediately due and payable. To provide GTI with
an assurance of Saba's payment obligation, Saba executed a promissory note
in the principal amount of $350,000 which provided that said amount (less the
total amount of overriding royalties paid to GTI) was all due and payable on
February 27, 1998, unless Saba replaced the note by February 24, 1998, with an
irrevocable and non-cancelable surety bond or letter of credit in the amount
of the then unpaid balance. Saba was unable to procure either instrument and
the note became all due and payable on February 27, 1998. Notwithstanding
attempted settlement conferences by Saba with GTI, GTI filed a claim against
Saba in March 1998, for breach of contract, seeking damages of $350,000 plus
interest at the rate of 13.5% per annum and attorney fees. The court has
granted but not entered summary judgement in favor of GTI. Saba plans to
appeal.
Orleans Levee Board v. Saba Energy of Texas, Inc., et al. (Docket No.
98-14233 Civil District Court, Parish of Orleans, State of Louisiana,
August 1998). With respect to its interest in the Potash Field,
Louisiana, Saba's subsidiary had suspended approximately $380,000
through January 1998 of royalties for unknown royalty owners who have since
been identified. One of the parties, Orleans Levee Board, had instituted
legal proceedings against Saba for all of the royalties suspended and
double said amount for damages and for the dissolution of the subject
leases. The Levee Board has agreed to an extension for Saba to respond
pending a resolution with all identified royalty owners and/or their
geologists in an attempt to reach an agreement regarding their respective
allocations of said suspended royalties and to create a voluntary unit. The
approximate amount of the suspended royalties upon Saba's acquisition of the
subject property was approximately $372,000 which Saba had applied as an
adjustment to the purchase price. Saba and/or its subsidiary bears the
obligation to pay the royalties upon resolution. Failure to pay timely or
a judgement for the Levee Board may result in Saba losing its interest in
the leases and incurring a payment obligation for the royalties,
interest, attorney's fees, and damages sought at double the amount of
royalties.
Chase v. Saba Petroleum, Inc. (Case No. SM108977, Superior Court of
the State of California, County of Santa Barbara-Cook Division, July 1998). In
July, 1998, Saba was served with a lawsuit filed by an individual alleging
personal injury in the amount of $515,000 resulting from general
negligence premises liability on one of the oil leases that Saba
operates and which he claims occurred while supervising the installation
of a pump into a well operated by Saba and on a drilling rig owned by a
co-defendant. Saba is represented by counsel appointed by Saba's
insurance carrier by a claim submitted under Saba's general liability
policy. Trial is scheduled to commence May 25, 1999.
Saba Energy of Texas, Inc. v. Marks & Garner Production Ltd. Co., et al.
(Case No. CV-97-106 FR District Court Lea County, State of New Mexico,
March 1997). Saba instituted an action for declaratory judgment for the
validity of Saba's oil, gas and mineral lease as being superior to the prior
lease covering the subject lands, said prior lease, as Saba asserts, having
expired by cessation of production. If Saba prevails, it will be
obligated to pay consideration of approximately $55,000 to the lessors. Saba
moved for summary judgment on April 6, 1999 and the court has taken the matter
under advisement.
Statutory Liens. Statutory liens have been recorded against the
Louisiana and New Mexico properties owned by Saba for Saba's failure
to pay trade payables. Actions have been taken to proceed with foreclosure
on some of these liens. Further, lawsuits have been filed and served upon
Saba's subsidiaries for the payment of trade payables. Saba has contacted
certain of these claims with respect to Louisiana and New Mexico known by it
to propose and agree upon a payment plan with the vendors in exchange for
their forbearance on any further action. Saba has entered, is entering or
plans to enter into payment plans agreed upon with such vendors and any
additional vendors so required.
In March 1998, the Louisiana Department of Natural Resources claimed to
Saba an audit exception for royalties paid on lease use gas in the
approximate amount of $7,000 that was unpaid at September 30, 1998.
Saba may be subject to resolving property matters, including claims
related to mineral interests, working interests, and/or surface use
and rights, including without limitation relocations of gas transfer lines,
abandonment of wells or failure to abandon giving rise to claims of lost
profits from surface owners and/or a third parties in interest, and errors in
disclosure of location, production and/or rights may have occurred by Saba
with respect to its operating activities.
Internal Revenue Service. In its review of Saba's payroll tax and
information returns for the years ended 1993-1995, the Internal Revenue
Service proposed adjustments based upon the assertions that Saba
misclassified as independent contractors various persons who were employees of
Saba, that Saba did not withhold income taxes from payments made to such
persons, and that Saba failed to file its information returns timely. This
matter was settled in 1998 through payments and audits resulting in an
associated liability of $10,000 recorded by Saba at December 31, 1998.
From time to time, Saba is a party to certain litigation that has arisen
in the normal course of its business and that of its subsidiaries. In the
opinion of management, none of this litigation is likely to have a
material adverse effect on Saba's financial condition or results of
operations. Saba may be subject to legal actions that have been threatened
without Saba's knowledge.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders of GREKA Energy
during the quarter ended December 31, 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
GREKA Energy common stock is listed for trading on the Nasdaq
SmallCap Market under the symbol "GRKA". Prior to March 25, 1999, the trading
symbol was "HVNV". Except for a period from August to December of 1997, GREKA
Energy's common stock has been quoted on NASDAQ since February 19, 1993. The
following table sets forth, for the periods indicated, the high and low
closing bid quotations per share of GREKA Energy common stock as reported on
the Nasdaq SmallCap Market. GREKA Energy common stock quotations represent
inter-dealer quotations, without retail markup, markdown or commissions,
and may not represent actual transactions. There can be no assurance
that a public market for GREKA Energy's common stock will be sustained in the
future.
<TABLE>
Bid*
Quarter Ended Low High
<S> <C> <C>
March 31, 1996 . . . . . . . . . $ .19 $ .22
June 30, 1996 . . . . . . . . . . .13 .13
September 30, 1996 . . . . . . . . .25 .31
December 31, 1996 . . . . . . . . .19 .25
March 31, 1997 . . . . . . . . . . .19 .25
June 30, 1997 . . . . . . . . . . .03 .09
September 30, 1997 . . . . . . . . .03 .03
December 31, 1997 . . . . . . . . 6.82 19.00
March 31, 1998 . . . . . . . . . . 12.00 14.75
June 30, 1998 . . . . . . . . . . 8.0625 10.00
September 30, 1998 . . . . . . . . 7.25 9.25
December 31, 1998 . . . . . . . . 8.813 14.938
March 31, 1999 . . . . . . . . . 5.875 10.50
</TABLE>
*Effective November 8, 1997, a 1 share for 220 share reverse split approved by
the U.S. Bankruptcy court was effected thus dramatically affecting the per
share price of GREKA Energy's stock.
On March 31, 1999, there were approximately 3,275 registered holders of
GREKA Energy's common stock. Based on a broker count, GREKA Energy believes
at least an additional 5,861 persons are shareholders with street name
positions.
Holders of GREKA Energy common stock are entitled to receive such
dividends as may be declared by GREKA Energy board of directors. GREKA Energy
has not yet paid any dividends, and the board of directors of GREKA Energy
presently intends to pursue a policy of retaining earnings, if any, for use
in GREKA Energy's operations and to finance expansion of its business. With
respect to GREKA Energy common stock, the declaration and payment of dividends
in the future, of which there can be no assurance, will be determined by the
GREKA Energy board of directors in light of conditions then existing,
including GREKA Energy's earnings, financial condition, capital requirements
and other factors.
Item 6. Management's Discussion and Analysis.
The following information should be read in conjunction with the
consolidated financial statements of GREKA Energy and Saba appearing elsewhere
in this document. As discussed in Note 1 of the Notes to Consolidated
Financial Statements of GREKA Energy and Note 1 of the Notes to Consolidated
Financial Statements of Saba, there currently is substantial doubt about the
ability of GREKA Energy and Saba to continue as going concerns.
Overview
In view of significant material changes to GREKA Energy during 1998 and
the acquisition of Saba in March 1999, management believes that the financial
condition and results of operations of GREKA Energy reported herein are not
indicative of the future financial condition and results of operations of
GREKA Energy. Saba's 1998 financial statements, which appear separately in
this document, are not consolidated with GREKA Energy's 1998 financial
statements since the acquisition had not been consummated by December 31,
1998. Furthermore, in accordance with the accounting rules for reverse
mergers, the GREKA Energy statements of operations are not reflective of the
combined revenues from the September 1997 merger of Petro Union and Horizontal
Ventures on an annualized basis but rather reflect the combined income from
the merger date.
Current management was appointed during the latter part of the third
quarter of 1997 and spent the balance of the year re-structuring,
re-capitalizing, and completing mergers and acquisitions that all were part of
a specific and focused strategy. Management has established a clear
directive to focus on capitalizing on its experience with the low cost
horizontal drilling technology developed and patented by Amoco and thereafter
licensed to GREKA Energy. It is the intent of management to become a leader
in applying this horizontal drilling technology and exploiting declining
production wells on properties such as Saba's which have been acquired by
GREKA Energy or on a service basis for major oil and gas companies.
During 1998, GREKA Energy focused on its corporate restructuring and
acquisition efforts and its investment in a horizontal drilling pilot
program in the Cat Canyon field in California. During the first nine months
of 1998, GREKA Energy drilled three horizontal wells in the Cat Canyon
field, namely UCB-09, UCB-38 and UCB-28. Each well was drilled utilizing
GREKA Energy's Short Radius horizontal drilling technology, and resulted in a
47 foot radius with a 435 foot lateral on UCB-09, a 60 foot radius with a 414
foot lateral on UCB-38 and a 50 foot radius with a 252 foot lateral on
UCB-28. In view of GREKA Energy's long-term strategy and the known sand
problem in the Cat Canyon basin, GREKA Energy's completed each well with a
different technique to establish a standard. UCB-09 was completed with a
standard Ace down-hole pump and a KD system, UCB-38 was completed with a
KUDU pump, and UCB-28 was completed with a Ace Teflon-Luber Plunger
down-hole pump. The kick-off point for each well was at a depth of
2,940-3,000 feet.
The variances in the completions allowed GREKA Energy's to obtain direct
experience on the production capability from each of the techniques.
UCB-09 net production stabilized at 20 barrels of oil per day, UCB-38
sanded up following a few weeks of production, while UCB-28 has net
production of 65 barrels of oil per day. Each of these wells were re-entries
into an abandoned well bore in the Sisquoc formation, which is one of the
two pay zones within GREKA Energy's lease in the Cat Canyon basin.
Following this drilling operation and completion technique definition, GREKA
Energy's proceeded with its discussions with Saba with the intent of applying
this technique on Saba's reserves.
During the latter of part of 1998 and early 1999, GREKA Energy was
primarily focused on the acquisition of Saba and considerable expenses were
incurred in connection with the Saba transactions in the fourth quarter of
1998 and the first quarter of 1999. Due to the significance to GREKA Energy
of the Saba acquisition, GREKA Energy's management and staff devoted a
substantial amount of time and effort to the acquisition. Accordingly,
levels of other operational activities such as prior contract drilling
programs were suspended. In connection with the Saba transactions, GREKA
Energy plans to establish and develop an extensive drilling program on Saba's
properties in California and commence such program in the second quarter of
1999.
In view of the significant differences between GREKA Energy's corporate
structure before the March 1999 acquisition of Saba and during 1997 and 1998,
comparisons of GREKA Energy's results of operations for those periods are
considered by management not to be either relevant or representative of GREKA
Energy's long-term potential.
Results of Operations
Revenues decreased from $211,696 for 1997 to $145,813 for 1998. Revenues
for 1998 were from oil production at the Cat Canyon field. The decline in
oil prices of over 50% coupled with the El Nino storms in California that
essentially shut the field down during February 1998 caused revenues to be
lower than initially expected.
Operating costs decreased from $247,979 for 1997 to $121,016 for 1998.
Planned pilot program drilling operations in the Cat Canyon field account for
most of the expenses during 1998, and such expenses are not proportional to
revenues since the three wells drilled in the Cat Canyon field were not in
production during the entire period. In addition, GREKA Energy's incurred
significant repair expenses resulting from the El Nino storms in
California during February 1998.
Salaries and wages increased from $213,213 for 1997 to $455,510 for 1998.
The increase was primarily attributable to ___________________________.
Depreciation, depletion and amortization increased from $24,016 for 1997
to $333,468 for 1998. The increase was primarily attributable to __________.
The writedown of oil and gas properties of $3,171,485 in 1998 was
primarily attributable to the dramatic decrease in oil prices during the
fourth quarter of 1998.
Other administrative expenses increased from $495,823 for 1997 to
$933,244 for 1998. The increase was primarily attributable to legal and
consulting fees resulting from GREKA Energy's acquisition and financing
efforts related to the 1998 Saba transactions, the completion of GREKA
Energy's bankruptcy reorganization, and related SEC reporting requirements.
The equity in loss of Saba of $586,020 for 1998 was a result of the
application of a separate oil and gas reserve ceiling test with respect to
GREKA Energy's equity method investment in Saba as of December 31, 1998.
Interest income increased from $11,873 for 1997 to $83,242 for 1998. The
increase was primarily attributable to the significant amount of cash which
GREKA Energy had at the beginning of 1998 as a result of the private
placements of its common stock in the fourth quarter of 1997.
Liquidity and Capital Resources
Working capital decreased approximately $5.1 million from $3.1 million at
December 31, 1997 to a deficit of $2.0 million at December 31, 1998. Current
liabilities increased from $820,327 as of December 31, 1997 to $2,249,661 as
of December 31, 1998. The $1,429,334 increase in current liabilities was
primarily due to the issuance of a total of $2 million in short-term notes to
a shareholder in connection with the Saba acquisition, which was partially
offset by the decrease in accounts payable and accrued expenses from December
31, 1997 to December 31, 1998.
During the fourth quarter of 1997, GREKA Energy successfully concluded
three private placements to re-capitalize the reorganized company. The first
two placements were done at $10 per share while the third was concluded at
$13 7/8 per share. GREKA Energy issued a total of 552,470 shares with gross
proceeds of approximately $5,801,518 that resulted in net proceeds of
approximately $5,627,472.
On December 31, 1998 GREKA Energy's cash and cash equivalents totaled
$250,212. The decrease in cash and cash equivalents from December 31, 1997 to
December 31, 1998 was primarily attributable to GREKA Energy's final payment
on the Cat Canyon field and the drilling program expenditures related thereto,
and legal and consulting fees resulting from GREKA Energy's acquisition and
financing efforts during 1998. The $2 million in proceeds from the issuance
of short-term notes in 1998 were immediately used for the acquisition of Saba
capital stock.
GREKA Energy obtained bridge financing for the Saba business in the form
of a $1 million 15% debenture secured by GREKA Energy's limestone reserves.
GREKA Energy's net cash used in operating activities increased from
$449,052 for 1997 to $2,326,640 for 1998. This increase was primarily
attributable to the Saba acquisition, Cat Canyon drilling program
expenditures, and increased legal and consulting payments resulting from GREKA
Energy's acquisition and financing efforts during 1998.
GREKA Energy's net cash used in investing activities decreased from
$3,059,690 for 1997 to $1,819,046 for 1998. This decrease was primarily
attributable to the decrease in investments in time deposits and funds held in
escrow from 1997 to 1998, which was partially offset by the cash used to
invest in shares of Saba common and preferred stock during 1998.
GREKA Energy's net cash provided by financing activities decreased from
$6,476,094 for 1997 to $2,076,946 for 1998. Net cash provided by financing
activities for 1997 included the issuance of common stock for cash in the net
amount of $5.9 million, while the only significant financing activity during
1998 was the issuance of short-term notes in the amount of $2 million.
Liquidity
Under the direction of GREKA Energy's management and strategy, GREKA
Energy is expected to have improved liquidity and low capital requirements as
a result of the acquisition of Saba. Specifically, GREKA Energy intends to
achieve the following:
* Sell non-core assets to offset approximately $22,000,000 in Saba
debt.
* Recapitalize the merged company with $20,000,000 through financings.
GREKA Energy has concluded discussions with a financial institution
that could provide such finances. The finances are subject to
customary due diligence.
* Management expects to conclude its recapitalization plan by the end
of the second quarter of 1999.
* The utilization of the in-house proprietary and cost effective
horizontal drilling technology, self operated fields, wholly-owned
asphalt refinery collectively provide for low cost of operating
expenses and high cash flow. GREKA Energy expects to have an annual
copex of $5,000,000 funded by its cash flow.
GREKA Energy's management also believes that the acquisition of Saba
brings opportunities for cost savings, economies of scale and other synergies,
resulting in improved cash flow potential for the long-term growth of GREKA
Energy and of shareholder value. Further, the acquisition of Saba gives GREKA
Energy a stronger consolidated asset base upon which it can rely in securing
future financings, both equity and debt. However, there is no assurance that
any specific level of cost savings or other synergies will be achieved or that
such cost savings or other synergies will be achieved within the time periods
contemplated, or that GREKA Energy will be able to secure future financings.
Recent Accounting Pronouncements
The following new accounting pronouncements have been issued which may
affect GREKA Energy upon their adoption in future accounting periods.
Statement Of Position Number 98 - 5, issued by the Accounting Standards
Executive Committee of the American Institute of CPAs, entitled Reporting On
The Cost Of Start-Up Activities, became effective January 1, 1999. This
pronouncement requires that costs of start-up activities, including
organization costs, be expensed as incurred. Initial application of this SOP
will be reported by GREKA Energy as the cumulative effect of a change in
accounting principle, as described in Accounting Principles Board Opinion No.
20, Accounting Changes. When adopting this SOP, entities are not required to
report the pro forma effects of retroactive application. GREKA Energy will
expense approximately $25,000 in 1999 as a result of the implementation of
this pronouncement.
Statement of Financial Accounting Standards No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefits, becomes
effective in 1999 and revises employers' disclosures about pension and other
postretirement benefit plans, but does not change the measurement or
recognition of those plans. Because GREKA Energy does not currently have in
effect any pension or postretirement plans, this pronouncement is not expected
to affect GREKA Energy.
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, becomes effective for all fiscal quarters beginning after June 15,
1999, and prescribes accounting and disclosure requirements for derivative
instruments and hedging activities. This pronouncement is not expected to
affect GREKA Energy because it has no such investments.
Year 2000
Computer programs or other embedded technology that have been written
using two digits (rather than four) to define the applicable year and that
have time-sensitive logic may recognize a date using "00" as the Year 1900
rather than the Year 2000, which could result in widespread miscalculations
or system failures. Both information technology ("IT") systems and non-IT
systems using embedded technology may be affected by the Year 2000. GREKA
Energy's drilling and other equipment does not make use of embedded chips, and
GREKA Energy believes that its equipment will not be affected by the Year
2000. GREKA Energy does not utilize any proprietary computer software, but
uses commercially available accounting and drilling plan software programs
such as Excel from vendors such as Microsoft Corporation and Peachtree.
GREKA Energy has been advised that the software it uses is Year 2000
compliant.
GREKA Energy has not completed its assessment of Year 2000 issues, in
particular the process of verification of whether vendors, suppliers and
significant customers with which GREKA Energy has material relationships are
Year 2000 compliant. Under a worst-case scenario, if GREKA Energy and such
third parties are unable to address Year 2000 issues in a timely manner, it
could result in material financial risk to GREKA Energy, including supplier
and service customer delays resulting in short-term delay of revenue and
substantial unanticipated costs. Accordingly, GREKA Energy plans to
devote all resources necessary to resolve significant Year 2000 issues in a
timely manner. GREKA Energy does not expect that costs of remediating its
Year 2000 issues will be material. GREKA Energy does not currently have a Year
2000 contingency plan. GREKA Energy is currently not able to determine
whether the Year 2000 will have a material effect on GREKA Energy's financial
condition, results of operations or cash flows.
Inflation
GREKA Energy does not believe that inflation will have a material impact
on GREKA Energy's future operations.
Item 7. Financial Statements.
Please see accompanying Index to Financial Statements commencing on page
F-1.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
On February 18, 1999, GREKA Energy engaged Arthur Andersen LLP to replace
Bateman & Co., Inc., P.C. as GREKA Energy's independent accountant to audit
GREKA Energy's consolidated financial statements for the year ended December
31, 1998. Bateman & Co., Inc., P.C. was dismissed as GREKA Energy's
independent accountant on the same date. GREKA Energy's Board of Directors
approved the change in GREKA Energy's independent accountant.
The independent auditor's report of Bateman & Co., Inc., P.C. for GREKA
Energy's financial statements for the year ended December 31, 1997 did not
contain an adverse opinion or a disclaimer of opinion, and was not modified as
to uncertainty, audit scope, or accounting principles.
During GREKA Energy's two most recent fiscal years and through the date
of the dismissal of Bateman & Co., Inc., P.C., GREKA Energy did not have any
disagreements with Bateman & Co., Inc., P.C. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
The directors and executive officer of GREKA Energy are as follows:
<TABLE>
Name Age Positions
---- --- ---------
<S> <C> <C>
Randeep S. Grewal (A) 33 Chairman and President & Chief
Executive Officer and a Director(1)
Dr. Jan F. Holtrop (B) 62 Director(1)
George G. Andrews (B) 72 Director(1)
Dirk Van Keulen(C) 39 Director(1)
Dai Vaughan (C) 60 Director(1)
</TABLE>
(1) The directors are divided into three classes, Class A, Class B, and Class
C, with each director serving for three years and rotating the class up for
election at each annual meeting.
(A) Class A Director.
(B) Class B Director.
(C) Class C Director.
Randeep S. Grewal - Chairman, President & Chief Executive Officer and
Director. Mr. Grewal most recently served as Chairman and CEO for Horizontal
Ventures, Inc. He assumed this responsibility in April 1997 and established
the Company's strategies and business plan resulting in consistent growth year
after year. He has been involved in various joint ventures, acquisitions,
mergers and reorganizations since 1986 in the United States, Europe and
the Far East within diversified businesses. Mr. Grewal has a Bachelor of
Science degree in Mechanical Engineering from Northrop University.
Dr. Jan Fokke Holtrop - Director. Mr. Holtrop has been a senior
Production Technology professor at the Delft University of Technology within
the Faculty of Petroleum Engineering and Mining in The Hague, Netherlands
since 1989. Prior to the Delft University, he served in various positions
within the Shell Oil Company where he started his career in 1962. Mr.
Holtrop has almost forty (40) years of experience within the oil and gas
exploration, drilling and production industry with a global hands-on
background. In January 1999, Mr. Holtrop was appointed to the Board of
directors of Saba. Mr. Holtrop has a Ph.D. and a MSC in Mining Engineering
from the Delft University of Technology.
George G. Andrews - Director. Mr. Andrews has been a consultant and
private investor since his retirement from the oil and gas industry in 1987.
From 1982 until 1987 he was employed as corporate Vice President of
Intercontinental Energy Corporation of Englewood, Colorado directing the
company's land acquisition, lease and management operations. Between June
1981 and November 1982 Mr. Andrews was Vice President of Shelter
Hydrocarbons, Inc. of Denver, Colorado where he directed all land
management and operation procedures including contract systems and
negotiations of acquisition agreements. From 1979 to June of 1981 Mr. Andrews
was Senior Landman for the National Cooperative Refinery Association in
Denver, Colorado where he was responsible for negotiation and
acquisition of oil and gas leases, certifying title requirements and ongoing
daily operations in his office. Mr. Andrews obtained his B.S. degree from the
University of Tulsa, Tulsa, Oklahoma in 1947 where he majored in
Economics.
Dirk Van Keulen - Director. Mr. Van Keulen has served since January 1996
as a Director of Horizontal Ventures, Inc., which was one of the first
licensees of the Amoco technology and is currently GREKA Energy's core
business. He served as a tax official in the Dutch Ministry of Finance from
1979 through 1987 and then as a tax consultant with Koolman & Co., until
1989. Since 1984 Mr. Van Keulen has been actively involved in various
investment activities. He studied higher education in fiscal law and
accounting under the Dutch Ministry of Finance.
Dai Vaughan - Director. A director since March 1999, Mr. Vaughan has been
an independent airline consultant since he left Continental Airlines in 1984.
His last position with Continental Airlines was Manager of Aircraft
Acquisition. Mr. Vaughan has served in numerous positions in his 44 year
career in the airline industry with British Airlines, El Al and finally
Continental Airlines, including Systems Engineering, Aircraft Maintenance and
Aircraft Acquisition. Mr. Vaughan received a HNC degree (B.S. equivalent) in
Electrical Engineering at an El Al sponsored program.
There are no family relationships among the directors. There are no
arrangements or understandings between any director and any other person
by which that director was elected.
During the past five years, there have been no petitions under the
Bankruptcy Act or any state insolvency law filed by or against, nor have
there been any receivers, fiscal agents, or similar officers appointed by
any court for the business or property of any of GREKA Energy's directors or
executive officers, or any partnership in which any such person was a general
partner within two years before the time of such filing, or any corporation
or business association of which any such director or executive officer was
an executive officer within two years before the time of such filing. During
the past five years, no incumbent director or executive officer of GREKA
Energy has been convicted of any criminal proceeding (excluding traffic
violations and other minor offenses) and no such person is the subject of a
criminal prosecution which is presently pending.
Item 10. Executive Compensation
The following summary compensation table sets forth in summary form the
compensation received during each of GREKA Energy's last two completed
fiscal years by GREKA Energy's Executive Officers.
<TABLE>
<CAPTION>
(a) Summary Compensation Table
Annual Long Term
Compensation Compensation
------------ ------------
Year Salary Bonus(1) Awards
Stock Awards Options
Name/Position
<S> <C> <C> <C> <C> <C>
Randeep S. Grewal 1998 $_______ 0 __________ _______
Chairman and Chief 1997 $120,000 0 70,000(2) 150,000
Executive Officer 1996 - - - -
</TABLE>
- -------------
(1) During the period covered by the Table, GREKA Energy did not pay its
executive officers any bonuses or other compensation.
(2) Stock grants approved as part of GREKA Energy's bankruptcy
reorganization plan.
No other officer, director or employee of Horizontal Ventures or its
subsidiaries received total compensation in excess of $100,000 during the last
two fiscal years. The Company has an employment agreement with Randeep S.
Grewal. No other form of compensation was paid during 1998.
<TABLE>
<CAPTION>
(b) Option and Long-Term Compensation Tables
Long Term Compensation
Awards Payouts
------ -------
Restricted Securities LTIP
Stock award(s) Underlying Payouts
($) Options/SARS (#) ($)
------------- ---------------- ------
<S> <C> <C> <C>
Name/Position
- -------------
Randeep S. Grewal 1998 ________ _________ _________
Chairman and Chief
Executive Officer
</TABLE>
(c) Options and Stock Appreciation Rights
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
(Individual Grants)
Number of Securities Percent of total Exercise
Underlying options/SARS granted or base
Options/SARS granted(#) to employees price Expiration
Name granted # in fiscal year ($/Sh) date
- ---- --------- -------------- ------ ----
<S> <C> <C> <C> <C>
Randeep S. __________ _____________ ____ _____
Grewal
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
<TABLE>
Value of
Number of unexercised in-the-
unexercised options money options/SARS
Shares SARS at FY-end (#) at FY-end (4)
acquired on Value exercisable/ exercisable/
Name exercise (#) realized ($) un-exercisable un-exercisable
- ---- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Randeep S.
Grewal ____________ ___________ ___________ _____________
</TABLE>
GREKA Energy has not granted any other options or stock appreciation
rights to any of its directors or executive officers.
(d) Employment Contracts and Termination Agreements
On September 9, 1997, GREKA Energy entered into a five-year employment
agreement with Randeep S. Grewal. This agreement was amended on October 14,
1998 as discussed below. His salary under the original agreement was $120,000
per year. Compensation is reviewed annually. Mr. Grewal participates in
GREKA Energy's benefit plans and is entitled to bonuses and incentive
compensation as determined by the board of directors of GREKA Energy. The
agreement is terminable for cause or by the death or disability of Mr. Grewal.
In addition, the agreement may be terminated by Mr. Grewal in the event of any
diminution by the Company in Mr. Grewal's position, authority, duties or
responsibilities. Upon termination of the agreement by the Company for any
reason other than for cause, death or disability, or upon termination of the
agreement by Mr. Grewal in the event of any diminution by the Company in Mr.
Grewal's position, authority, duties or responsibilities, the Company is
obligated to pay within 30 days after the date of termination (1) Mr. Grewal's
Base Salary through the date of the Severance Period, (2) Mr. Grewal's base
salary for the balance of the term of the agreement if the Date of
Termination is within the first three years of the Employment Agreement (Base
Salary is the rate in effect at the Date of Termination), (3) the Annual
Bonus paid to Mr. Grewal for the last full fiscal year during the Employment
Period and (4) all amounts of deferred compensation, if any. The agreement
allows Mr. Grewal to receive an assignment of 2% overriding royalty of all oil
and gas production received by Horizontal Ventures.
On October 14, 1998, GREKA Energy amended Mr. Grewal's employment
agreement contingent upon the closing of the acquisition of Saba Petroleum
Company by GREKA Energy. Under the amendments, on March 24, 1999, the
effective date of the merger of Saba with and into a subsidiary of GREKA
Energy, (i) Mr. Grewal's annual salary was increased to $250,000, (ii) 30,000
shares of GREKA Energy common stock were issued to Mr. Grewal, (iii) Mr.
Grewal's fringe benefits were increased to included an automobile allowance of
$1,000 per month and (iv) the employment agreement was extended through the
fifth anniversary of March 24, 1999.
On March 12, 1998, GREKA Energy entered into a Confidential Termination
and Settlement Agreement and Complete Release with Richard Wedel relating to
his resignation as an executive of GREKA Energy and as a member of the Board
of Directors. Under the agreement, Mr. Wedel received a $50,000 severance
payment. In addition, GREKA Energy agreed to maintain Mr. Wedel's medical
insurance coverage as currently in effect through July 31, 1998. In exchange
for the above consideration, Mr. Wedel agreed not to compete with GREKA Energy
and specifically with GREKA Energy's horizontal drilling business for a period
of three years after his date of termination. Mr. Wedel also agreed not to
disclose any confidential information of GREKA Energy which he acquired as a
result of his employment. GREKA Energy and Mr. Wedel agreed to mutually
release the other from any claim or action arising from Mr. Wedel's Executive
Employment Agreement with GREKA Energy.
(e) Director Compensation
Each director who is not an employee of GREKA Energy (the "Outside
Directors") will be reimbursed for expenses incurred in attending
meetings of the board of directors and related committees. As of the
date of this report, GREKA Energy has three Outside Directors. No compensation
was paid to any Outside Director during fiscal 1998 and is none is
planned for the immediate future.
GREKA Energy has no knowledge of any arrangement or understanding in
existence between any executive officer named above and any other person by
which any such executive officer was or is to be elected to such office or
offices. All officers of GREKA Energy serve at the pleasure of the board of
directors. No family relationship exists among the directors or
executive officers of GREKA Energy. All officers of GREKA Energy will hold
office until the next annual meeting of the shareholders of GREKA Energy.
There is no person who is not a designated Officer who is expected to make
any significant contribution to the business of GREKA Energy. The
executive officers of GREKA Energy serve at the pleasure of the board of
directors and do not have fixed terms. Any officer or agent elected or
appointed by the board of directors may be removed by the board whenever
in its judgment the best interests of GREKA Energy will be served
thereby without prejudice, however, to contractual rights, if any, of the
person so removed.
Working Interests
There are no agreements in which any employee of Horizontal Ventures
receives a working interest in GREKA Energy's oil and gas properties.
Overriding Royalty Income
GREKA Energy has historically assigned overriding royalty interests
to certain of its employees. Employees own overriding royalty interests on
oil and gas wells invested in by GREKA Energy. Conflicts of interest may
arise between employees owning overriding royalty interests in GREKA
Energy-operated locations and GREKA Energy.
As part of Mr. Grewal's employment agreement, he is to receive a two
percent (2%) overriding royalty of all oil and gas production received by
GREKA Energy. Josh Stark, Vice President of Exploitation and Exploration
will receive 2% override on the Ohio and Reo oil prospects should they be
developed.
Future Transactions
All transactions between GREKA Energy and an officer, director, principal
stockholder or affiliate of GREKA Energy will be approved by a majority of the
uninterested directors, only if they have determined that the transaction
is fair to GREKA Energy and its stockholders and that the terms of such
transaction are no less favorable to GREKA Energy than could be obtained from
unaffiliated parties.
Section 16(a) Beneficial Ownership Reporting Compliance
Under U.S. securities laws, directors, certain executive officers and
persons holding more than 10% of GREKA Energy common stock must report their
initial ownership of the common stock and any changes in that ownership to the
SEC. The SEC has designated specific due dates for these reports and GREKA
Energy must identify in this document those persons who did not file these
reports when due. Based solely on its review of copies of the reports filed
with the SEC and written representations of its directors and executive
officers, GREKA Energy believes that all persons subject to reporting filed
the required reports on time in 1998.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of April __, 1999, the common stock
ownership of each person known by GREKA Energy to be the beneficial
owner of 5% or more of GREKA Energy common stock, all directors and
the executive officer individually and all directors and the executive officer
of GREKA Energy as a group. Except as noted, each person has sole voting and
investment power with respect to the shares shown. There are no contractual
arrangements or pledges of the Company's securities, known to GREKA Energy,
which may at a subsequent date result in a change of control of GREKA Energy.
As of April __, 1999, there were _________ shares of GREKA Energy common stock
issued and outstanding.
<TABLE>
Amount of Beneficial
Ownership
---------
Name and Address Common Percent of
of Beneficial Owner Stock(1) Class
------------------- -------- --------
<S> <C> <C>
International Publishing 276,093 _____%
Holding s.a.
Postbus 84019
2508 AA The Hague
The Netherlands
Capco Resources Ltd.(2) 1,340,000 ____%
3201 Airpark Drive, Suite 201
Santa Maria, CA 93455
Randeep S. Grewal 1,560,000 (3) ____%
Chairman and
Chief Executive Officer
10815 Briar Forest Drive
Houston, TX 77042/
630 Fifth Avenue, Suite 1501
New York, NY 10111
Dr. Jan F. Holtrop 6,108 < 1%
Director
Van Alkemadelaan
2596 AS The Hague
The Netherlands
Dirk Van Keulen -0- -0-%
Director
Heemraadslag 14
2805 DP Gauda
The Netherlands
George G. Andrews 0 -0-%
Director
7899 West Frost Drive
Littleton, CO 80123
Dai Vaughan _____ _____________
_____________________
_____________________
______________________
All directors and the
executive officer _______ ____%
as a group (5 persons)
</TABLE>
- ---------------
(1) Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
involving the determination of beneficial owners of securities, includes
as beneficial owners of securities, among others, any person who directly
or indirectly, through any contract, arrangement, understanding,
relationship or otherwise has, or shares, voting power and/or
investment power with respect to such securities; and, any person who
has the right to acquire beneficial ownership of such security within
sixty days through means, including but not limited to, the exercise
of any option, warrant or conversion of a security.
(2) Capco Resources Ltd. is controlled by Ilyas Chaudhary, a former executive
officer, director and principal shareholder of Saba. By a Stock Exchange
Agreement dated November 23, 1998, among Horizontal Ventures and the
former shareholders of Saba Aquisub, Inc., including Capco, Capco has
delivered a proxy to Randeep S. Grewal conferring on Mr. Grewal voting
power with respect to the GREKA Energy common stock owned by Capco.
(3) Includes presently exercisable options to acquire 150,000 shares of
GREKA Energy common stock and 1,340,000 shares as to which Mr. Grewal has
voting power under a proxy from Capco.
Item 12. Certain Relationships and Related Transactions
During the last two fiscal years, there have been no transactions between
GREKA Energy and any officer, director, nominee for election as director, or
any shareholder owning greater than five percent (5%) of GREKA Energy's
outstanding shares, nor any member of the above referenced individuals'
immediate family, except as set forth below.
Randeep S. Grewal, GREKA Energy's Chairman and Chief Executive Officer,
also receives an overriding royalty of 2 percent of all oil and gas
production received by GREKA Energy during the term of his employment. GREKA
Energy issued previously quoted 30,000 shares of GREKA Energy common stock to
Mr. Grewal upon the effective date of the acquisition of Saba.
On March 12, 1998, Richard Wedel, then an executive officer and director
of GREKA Energy, resigned and entered into an agreement providing for certain
severance benefits and mutual covenants.
It is GREKA Energy's policy that any future material transactions
between it and members of its management or their affiliates shall be on
terms no less favorable than those available from unaffiliated third parties.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following exhibits are furnished as part of this
report:
Exhibit No. Exhibit Description
3.1 Restated Articles of Incorporation of Horizontal
Ventures (filed as Exhibit 3A to Horizontal Ventures'
Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1998 (File No. 0-20760) and incorporated herein by
reference)
3.2 Articles of Amendment to Articles of Incorporation effective
March 22, 1999 (filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K dated March 15, 1999 and
incorporated herein by reference)
3.3 By-Laws of Horizontal Ventures (incorporated by reference to
Exhibit No. 3 to the Horizontal Ventures' Registration
Statement (#33-24265-LA)
10.1 Post-Petition Loan Agreement (incorporated by reference to
Exhibit 10E to Horizontal Ventures' Annual Report on Form
10-KSB for the year ended December 31, 1996).
10.2 Amended Post-Petition Loan Agreement (incorporated by
reference to Exhibit 10-F to Horizontal Ventures' Annual
Report on Form 10-KSB for the year ended December 31, 1996).
10.3 Horizontal Drilling Services Letter Agreement (incorporated
by reference to Exhibit 10-G to Horizontal Ventures'
Annual Report on Form 10-KSB for the year ended December
31, 1996).
10.4 Agreement and Plan of Acquisition (incorporated by
reference to Exhibit 10.1 to Horizontal Ventures' Current
Report on Form 8-K for event dated August 11, 1997).
10.5 Randeep S. Grewal Employment Agreement (incorporated by
reference to Exhibit 10.1 to Horizontal Ventures' Current
Report on Form 8-K for event dated August 28, 1997).
10.6 Post Petition Loan Agreement (incorporated by reference
to Exhibit 10.1 to Horizontal Ventures' Current Report on
Form 8-K for event dated August 28, 1997.
10.7 Cat Canyon Lease Purchase Agreement (filed as Exhibit 10K
to Horizontal Ventures' Annual Report on Form 10-KSB for the
year ended December 31, 1997 (File No. 0-20760) and
incorporated herein by reference).
10.8 Employment Agreement with Ilyas Chaudhary (filed as Exhibit
10.3 to Saba's Registration Statement on Form SB-2 (File
No. 33-94678) and incorporated herein by reference)
10.9 Employment Agreement with Walton C. Vance (filed as Exhibit
10.31 to Saba's annual report on Form 10-KSB for the year
ended December 31, 1996 (File No. 001-13880) and
incorporated herein by reference)
10.10 First Amendment, Letter Agreement with Bradley T. Katzung
(filed as Exhibit 10.33 to Saba's annual report on Form
10-KSB for the year ended December 31, 1996 (File No.
001-13880) and incorporated herein by reference)
10.11 Second Amendment to Employment Agreement with Bradley T.
Katzung (Filed as Exhibit 10.5 to Saba's annual report
on Form 10-K for the year ended December 31, 1997 (File No.
001-13880) and incorporated herein by reference)
10.12 Employment Agreement with Burt Cormany (filed as Exhibit
10.1 to Saba's quarterly report on Form 10-QSB for the
quarter ending March 31, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.13 Employment Agreement with Alex Cathcart, dated March 1,
1997, (filed as Exhibit 10.38 to Saba's Quarterly Report
Form 10-Q for the quarter ended June 30, 1997 (file
No.001-13880) and incorporated herein by reference)
10.14 Retainer Agreement with Rodney C. Hill, A Professional
Corporation, dated March 16, 1997 (filed as Exhibit 10.39 to
Saba's Quarterly Report Form 10-Q for the quarter ended June
30, 1997(File No. 001-13880) and incorporated herein by
reference)
10.15 Amendment to Retainer Agreement with Rodney C. Hill, A
Professional Corporation dated March 13, 1998 (Filed as
Exhibit 10.9 to Saba's annual report on Form 10-K for the
year ended December 31, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.16 Saba Petroleum Company 1996 Equity Incentive Plan (filed as
Exhibit 4.4 to Saba's Registration Statement on Form S-8,
dated August 21, 1997 (File No. 333-34035) and incorporated
herein by reference)
10.17 Saba Petroleum Company 1997 Stock Option Plan for
Non-Employee Directors (filed as Exhibit 4.5 to Saba's
Registration Statement on Form S-8, dated August 21, 1997
(File No. 333-34035) and incorporated herein by reference)
10.18 First Amended and Restated Loan Agreement between Saba and
Bank One, Texas, N.A. (filed as Exhibit 10.1 to Saba's
quarterly report on Form 10-QSB for the quarter ended
September 30, 1996 (File No. 001-13880) and incorporated
herein by reference)
10.19 Amendment Number One to First Amended and Restated Loan
Agreement between Saba and Bank One, Texas, N.A. (filed as
Exhibit 10.20 to Saba's annual report on Form 10-KSB for the
year ended December 31, 1996 (File No. 1-12322) and
incorporated herein by reference)
10.20 Amendment Number Two to First Amended and Restated Loan
Agreement between Saba and Bank One, Texas, N.A. (filed as
Exhibit 10.1 to Saba's quarterly report on Form 10-Q for the
quarter ended September 30, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.21 Amendment Number Three to First Amended and Restated Loan
Agreement between Saba and Bank One, Texas, N.A. (filed
as Exhibit 10.2 to Saba's quarterly report on Form 10-Q
for the quarter ended September 30, 1997 (File No.
001-13880) and incorporated herein by reference)
10.22 Amendment Number Four to First Amended and Restated Loan
Agreement between Saba and Bank One, Texas, N.A. (filed as
Exhibit 10 to Saba's Current Report on Form 8-K filed
September 24, 1997 (File No. 001-13880) and incorporated
herein by reference)
10.23 Corrections relating to Second Amendment dated August 28,
1997, and Fourth Amendment dated September 9, 1997 to the
First Amended and Restated Loan Agreement between Saba and
Bank One, Texas, N.A. (filed as Exhibit 10.4 to Saba's
quarterly report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 001-13880) and incorporated
herein by reference)
10.24 Amendment Number Five to First Amended and Restated Loan
Agreement between Saba and Bank One, Texas, N.A. (filed as
Exhibit 10.4 to Saba's Current Report on Form 8-K filed January
15, 1998 (File No. 001-13880) and incorporated herein by reference)
10.25 Consent Letter to Preferred Stock Transaction by Bank One, Texas,
N.A. dated December 31, 1997 (filed as Exhibit 10.2 to Saba's
Current Report on Form 8-K filed January 15, 1998 (File No.
001-13880) and incorporated herein by reference)
10.26 Amendment of the First Amended and Restated Loan Agreement
between Saba and Bank One, Texas, N.A., dated December 31, 1997 (filed as
Exhibit 10.3 to Saba's Report Form 8-K filed January 15, 1998 (File No.
001-13880) and incorporated herein by reference)
10.27 Amendment Number Seven to First Amended and Restated Loan Agreement
between Saba and Bank One, Texas, N.A. (Filed as Exhibit 10.21 to Saba's
annual report on Form 10-K for the year ended December 31, 1997 (File No.
001-13880) and incorporated herein by reference)
10.28 Stock Purchase Agreement (filed as an exhibit to Saba's Current
Report on Form 8-K dated January 10, 1995 (File No. 1-12322) and incorporated
herein by reference)
10.29 Processing Agreement between Santa Maria Refining Company and
Petro Source Refining Corporation (filed as Exhibit 10.6 to Saba's
Registration Statement on Form SB-2 (File No. 33-94678) and incorporated
herein by reference)
10.30 Agreement among Saba Petroleum Company, Omimex de Colombia, Ltd.
and Texas Petroleum Company to acquire Teca and Nare fields (filed as
Exhibit 10.7 to Saba's Registration Statement on Form SB-2 (File No.33-94678)
and incorporated herein by reference)
10.31 Agreement among Saba Petroleum Company, Omimex de Colombia, Ltd.
and Texas Petroleum Company to acquire Cocorna Field (filed as Exhibit 10.8
to Saba's Registration Statement on Form SB-2 (File No. 33-94678) and
incorporated herein by reference)
10.32 Agreement among Saba Petroleum Company and Cabot Oil and Gas
Corporation to acquire Cabot Properties (filed as Exhibit 10.9 to Saba's
Registration Statement on Form SB-2 (File No. 33-94678) and incorporated
herein by reference)
10.33 Agreement among Saba Petroleum Company, Beaver Lake Resources
Corporation and Capco Resource Properties Ltd. (filed as Exhibit 10.10 to
Saba's Registration Statement on Form SB-2 (File No. 33-94678) and
incorporated herein by reference)
10.34 Amendment to Agreement among Saba, Omimex de Colombia, Ltd. and
Texas Petroleum Company to acquire the Teca and Nare fields (filed as Exhibit
2.2 to Saba's Current Report on Form 8-K dated September 14, 1995 (File No.
1-12322) and incorporated herein by reference)
10.35 Promissory Notes of Saba (filed as Exhibit 10.13 to Saba's
Registration Statement on Form SB-2 (File No. 33-94678) and incorporated
herein by reference)
10.36 CRI Stock Purchase Termination Agreement (filed as Exhibit 10.14 to
Saba's Registration Statement on Form SB-2 (File No. 33-94678) and
incorporated herein by reference)
10.37 Form of Common Stock Conversion Agreement between Capco and Saba
(filed as Exhibit 10.15 to Saba's Registration Statement on Form SB-2 (File
No. 33-94678) and incorporated herein by reference)
10.38 Form of Agreement regarding exercise of preemptive rights between
Capco and Saba (filed as Exhibit 10.16 to Saba's Registration Statement
on Form SB-2 (File No. 33-94678) and incorporated herein by reference)
10.39 Letter Agreement, as amended, between Omimex de Colombia, Ltd.
and Saba (filed as Exhibit 10.17 to Saba's Registration Statement on Form SB-2
(File No. 33-94678) and incorporated herein by reference)
10.40 Promissory Note of Mr. Chaudhary (filed as Exhibit 10.2 to Saba's
quarterly report on Form 10-QSB for the quarter ended June 30, 1996 (File No.
001-13880) and incorporated herein by reference)
10.41 Form of Stock Option Agreements between Mr. Chaudhary and Messrs.
Hickey and Barker (filed as Exhibit 10.3 to Saba's quarterly report on Form
10-QSB for the quarter ended June 30, 1996 (File No. 001-13880) and
incorporated herein by reference)
10.42 Form of Stock Option Termination Agreements between Saba and
Messrs. Hagler and Richards (filed as Exhibit 10.4 to Saba's quarterly report
on Form 10-QSB for the quarter ended June 30, 1996 (File No.001-13880) and
incorporated by reference)
10.43 Agreement Minutes concerning Colombia oil sales contract between
Omimex as operator and Ecopetrol (filed as Exhibit 10.21 to Saba's annual
report on Form 10-KSB for the year ended December 31, 1996 (File No.
001-13880) and incorporated herein by reference)
10.44 Operating Agreement between Omimex and Sabacol-Velasquez property
(filed as Exhibit 10.22 to Saba's annual report on Form 10-KSB for the year
ended December 31, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.45 Operating Agreement between Omimex and Sabacol-Cocorna and Nare
properties (filed as Exhibit 10.23 to Saba's annual report on Form10-KSB
for the year ended December 31, 1996 (File No. 001-13880) and incorporated
herein by reference)
10.46 Operating Agreement between Omimex and Sabacol-Velasquez-Galan
Pipeline (filed as Exhibit 10.24 to Saba's annual report on Form 10-KSB for
the year ended December 31, 1996 (File No. 001-13880) and incorporated herein
by reference)
10.47 Operating Agreement between Omimex and Sabacol-Cocorna Concession
property (filed as Exhibit 10.25 to Saba's annual report on Form 10-KSB for
the year ended December 31, 1996 (File No. 001-13880) and incorporated herein
by reference)
10.48 Life insurance contract on life of Ilyas Chaudhary (filed as
Exhibit 10.26 to Saba's annual report on Form 10-KSB for the year ended
December 31, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.49 Life insurance contract on life of Ilyas Chaudhary (filed as
Exhibit 10.27 to Saba's annual report on Form 10-KSB for the year ended
December 31, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.50 Agreement for Assignment of Leases between Saba and Geo
Petroleum, Inc. (filed as an exhibit to Saba's amended annual report on
Form 10-KSB/A for the year ended December 31, 1996 (File No. 001-13880) and
incorporated herein by reference)
10.51 Amendment to Agreement for Assignment of Leases between Saba and
Geo Petroleum, Inc. (Filed as Exhibit 10.45 to Saba's annual report on Form
10-K for the year ended December 31, 1997 (File No. 001-13880) and
incorporated herein by reference)
10.52 Agreement to Provide Collateral between Capco and Saba Petroleum
Company (filed as Exhibit 10.29 to Saba's annual report on Form 10-KSB for the
year ended December 31, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.53 Purchase and Sale Agreement between DuBose Ventures, Inc.,
Rockbridge Oil & Gas, Inc., Saba Energy of Texas, Incorporated and Energy
Asset Management Corporation to acquire properties in Jefferson Parish, LA
(filed as Exhibit 10.30 to Saba's annual report on Form 10-KSB for the year
ended December 31, 1996 (File No. 001-13880) and incorporated herein by
reference)
10.54 Beaver Lake Resources Corporation March 1997 Re-Financing Agreement
(filed as Exhibit 10.3 to Saba's quarterly report on Form 10-QSB for the
quarter ending March 31, 1997 (File No. 001-13880) and incorporated herein by
reference)
10.55 Production Sharing Contract between Perusahaan Pertambangan Minyak
Dan Gas Bumi Nagara (Pertamina) and Saba Jatiluhur Limited (filed as Exhibit
10.5 to Saba's quarterly report on Form 10-Q for the quarter ended September
30, 1997 (File No. 001-13880) and incorporated herein by reference)
10.56 Agreements among Saba, Amerada Hess Corporation and Hamar
Associates II, LLC dated November 1, 1997 (Filed as Exhibit 10.50 to
Saba's annual report on Form 10-K for the year ended December 31,1997 (File
No. 001-13880) and incorporated herein by reference)
10.57 Agreements among Saba, Chevron U.S.A. Production Company and Nahama
Natural Gas (Filed as Exhibit 10.51 to Saba's annual report on Form 10-K for
the year ended December 31, 1997 (File No. 001-13880) and incorporated herein
by reference)
10.58 Exchange Agreement between Saba and Energy Asset Management
Company, L.L.C. dated March 6, 1998 (Filed as Exhibit 10.52 to Saba's annual
report on Form 10-K for the year ended December 31, 1997 (File No.
001-13880) and incorporated herein by reference)
10.59 Office Lease Agreement, 3201 Airpark Drive, Santa Maria, California
(filed as Exhibit 10.2 to Saba's quarterly report on Form 10-QSB for the
quarter ending March 31, 1997 (File No. 001-13880) and incorporated herein by
reference)
10.60 Office Lease Agreement, 17526 Von Karman Avenue, Irvine, California
(Filed as Exhibit 10.54 to Saba's annual report on Form 10-K for the year
ended December 31, 1997 (File No. 001-13880) and incorporated herein by
reference)
10.61 Purchase and Sale Agreement between Saba and Statoil Exploration
(US) Inc. dated August 19, 1997 (filed as an exhibit to Saba's Current
Report on Form 8-K dated September 24,1997 (File No. 001-13880) and
incorporated herein by reference)
10.62 Securities Purchase Agreement dated December 31, 1997 (filed as
Exhibit 10.1 to Saba's Report Form 8-K filed January 15, 1998 (File No.
001-13880) and incorporated herein by reference)
10.63 Registration Rights Agreement dated as of December 31, 1997(filed
as Exhibit 3(I).1(a) to Saba's Registration Statement on Form S-1, dated
January 27, 1998 (File No. 333-45023) and incorporated herein by reference)
10.64 Stock Purchase Warrant (Closing Warrant) dated December
31,1997(filed as Exhibit 3(I).1(a)to Saba's Registration Statement on Form
S-1, dated January 27, 1998 (File No. 333-45023) and incorporated herein by
reference)
10.65 Stock Purchase Warrant (Redemption Warrant) dated December 31,
1997 (filed as Exhibit 3(I).1(a) to Saba's Registration Statement on Form S-1,
dated January 27, 1998 (File No. 333-45023) and incorporated herein by
reference)
10.66 Finder Agreement dated as of December 31, 1997 (Filed as Exhibit
10.60 to Saba's annual report on Form 10-K for the year ended December 31,
1997 (File No. 001-13880) and incorporated herein by reference)
10.67 Stock Purchase Warrant (Finder Warrant) dated as of December 31,
1997 (Filed as Exhibit 10.61 to Saba's annual report on Form 10-K for the
year ended December 31, 1997 (File No. 001-13880) and incorporated herein by
reference)
10.68 Preliminary Agreement To Enter Into A Business Combination dated
March 18, 1998 by and among Saba and Omimex Resources, Inc. (filed as
Exhibit 10.1 to Saba's Current Report on Form 8-K dated March 30, 1998 (File
No. 001-13880) and incorporated herein by reference)
10.69 Press Release announcing the Proposed Combination between Saba
and Omimex Resources, Inc. dated March 18, 1998 (filed as Exhibit 10.2 to
Saba's Current Report on Form 8-K dated March 30, 1998 (File No. 001-13880)
and incorporated herein by reference) 10.70 Preferred Stock Transfer Agreement
dated October 7, 1998 between Horizontal Ventures and RGC (filed as Exhibit
10.1 to Horizontal Ventures' Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1998 and incorporated herein by reference).
10.71 Common stock Purchase Agreement dated October 8, 1998 between
Horizontal Ventures and Saba (filed as Exhibit 10.2 to Horizontal Ventures'
Quarterly Report on Form 10-QSB for the quarter ended September 30, 1998 and
incorporated herein by reference).
10.72 Option Agreement dated July 22, 1998 between Horizontal Ventures and
IPH (filed as Exhibit 10.3 to Horizontal Ventures' Quarterly Report on Form
10-QSB for the quarter ended September 30, 1998 and incorporated herein by
reference).
10.73 Promissory Note dated October 6, 1998 payable by Horizontal
Ventures to IPH (filed as Exhibit 10.4 to Horizontal Ventures' Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1998 and
incorporated herein by reference).
10.74 Pledge Agreement dated October 6, 1998 between Horizontal Ventures
and IPH (filed as Exhibit 10.5 to Horizontal Ventures' Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein
by reference).
10.75 Promissory Note dated November 4, 1998 payable by Horizontal
Ventures to IPH (filed as Exhibit 10.6 to Horizontal Ventures' Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1998 and
incorporated herein by reference).
10.76 Pledge Agreement dated November 4, 1998 between Horizontal Ventures
and IPH (filed as Exhibit 10.7 to Horizontal Ventures' Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein
by reference).
10.77 Agreement and Plan of Reorganization dated as of June 1, 1998 by
and among Saba and Ominex Resources, Inc. et al. (filed as Exhibit 10.1 to
Saba's Current Report on Form 8-K dated June 16, 1998 (File No. 001-13880)
and incorporated herein by reference).
10.78 Consent letter to provisions of Section 1.7 of the Agreement and
Plan of Reorganization by Bank One, Texas, NA, dated June 2, 1998 (filed as
Exhibit 10.2 to Saba's Current Report on Form 8-K dated June 16, 1998 (File
No. 001-13880) and incorporated herein by reference).
10.79 Amendment to First Amended and Restated Loan Agreement dated
September 23, 1996, as amended among Saba et al. And Bank One, Texas, NA
dated June 9,(filed as Exhibit 10.3 to Saba's Current Report on Form 8-K
dated June 16, 1998 (File No. 001-13880) and incorporated herein by
reference).
10.80 Mutual Termination and Release Agreement dated September 15, 1998 by
and among Saba, Saba Acquisition, Inc., Omimex Resources, Inc., the Omimex
Resources, Inc. stockholders and Ilyas Chaudhary (filed as Exhibit 10.67 to
Amendment No. 2 to Saba's Registration Statement on Form S-1 dated December
22, 1998 (File No. 333-45023) and incorporated herein by reference).
10.81 Letter Agreement dated October 8, 1998 between Saba and Horizontal
Ventures (filed as Exhibit 10.3 to Saba's Current Report on Form 8-K dated
October 6, 1998 (File No. 001-138807) and incorporated herein by reference).
10.82 Employment Agreement with Imran Jattala dated July 23, 1998 (filed
as Exhibit 10.71 to Amendment No. 2 to Saba's Registration Statement on Form
S-1 dated December 22, 1998 (File No. 333-45023) and incorporated herein by
reference).
10.83 Stock Exchange Agreement dated November 23, 1998 among
Horizontal Ventures and the Shareholders of Saba Acquisub, Inc.*
10.84 Agreement to Amend Common stock Purchase Agreement dated December
3, 1998 between Saba and Horizontal Ventures (filed as Exhibit 10.85 Amendment
No. 1 dated December 15, 1998 to Stock Exchange Agreement dated November 23,
1998 among Horizontal Ventures and the shareholders of Saba Acquisub, Inc.*
10.1 to Saba's Current Report on Form 8-K dated December 18, 1998 File No.
001-13880) and incorporated herein by reference).
10.86 Amendment to $1,500,000 Promissory Note (filed as Exhibit 10.86 to
the Amendment No. 2 to the Company's Registration Statement filed on Form S-4
dated February 19, 1999 and incorporated herein by reference)
10.87 Exchange Agreement between GREKA Energy and RGC International
Investors*
10.88 Secured Convertible Promissory Note*
10.89 Asset Purchase Agreement entered into March 17, 1999 among Sabacol,
Inc. and the Omimex Group*
10.90 First Amendment to Employment Agreement of Randeep S. Grewal
effective October 14, 1998*
16.1 Letter by PricewaterhouseCoopers, LLP dated February 15, 1999
regarding change in accountants (filed as Exhibit 16.1 to Amendment
No. 2 to the Company's Registration Statement on Form S-4 dated
February 16, 1999 and incorporated herein by reference)
16.2 Letter by Bateman & Co., Inc., P.C., dated February 19, 1999
regarding change in accountants.
21.1 Subsidiaries of Horizontal Ventures Acquisition Corporation (filed
as Exhibit 21.1 to Horizontal Ventures' Registration Statement on
Form S-4 dated December 22, 1998 and incorporated herein by
reference).
21.2 Subsidiaries of Saba (filed as Exhibit 21.1 to Saba's Registration
Statement on Form S-1 dated January 21, 1998 and incorporated
herein by reference).
23.1 Consent of Arthur Andersen LLP, Independent Certified Public
Accountants, related to the financial statements for GREKA Energy
Corporation*
23.2 Consent of Bateman & Co., Inc., P.C., Independent Certified Public
Accountants, related to the financial statements for GREKA Energy
Corporation*
23.3 Consent of Netherland, Sewell & Associates, Inc.*
23.4 Consent of Sproule Associates Limited *
27.1 Financial Data Schedule*
99.1 Consolidated Financial Statements of Saba Petroleum Company**
* Filed herewith.
** To be filed by amendment.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
fourth quarter of 1998.
GREKA ENERGY CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
REQUIRED BY ITEM 8 AND ITEM 14
Page
Financial Statements of GREKA Energy Corporation
Report of Independent Public Accountants . . . . . . . . . . . . . . . . F-2
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheet as of December 31, 1998 . . . . . . . . . . . F-4
Consolidated Statements of Operations for each of the
two years ended December 31, 1998 . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity for each
of the two years ended December 31, 1998 . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for each of the two
years ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . F-8
Financial Statements of Saba Petroleum Company
Reports of Independent Public Accountants . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 1998 and 1997 . . . . . .
Consolidated Statements of Operations for each of the
three years ended December 31, 1998 . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders' Equity (deficit) for each
of the three years ended December 31, 1998 . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1998 . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . .
Supplemental Information About Oil and Gas Producing Activities . . .
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Reports of Independent Public Accountants F-2
Consolidated Balance Sheet as of December 31, 1998 F-3
Consolidated Statements of Operations for the Two Years Ended
December 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the Two Years
Ended December 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Two Years Ended
December 31, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-9
Financial statement schedules have been omitted since they are either not
required, are not applicable or the required information is included in the
consolidated financial statements or the notes thereto.
Bateman & Co., Inc. P.C. 5 Briardale Court
Certified Public Accountants Houston, TX 77027-2904
(713) 552-9800
Fax (713) 552-9700
www.batemanhouston.com
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors
GREKA Energy Corporation, Inc.
We have audited the consolidated balance sheet of GREKA Energy
Corporation formerly known as Petro Union, Inc. (a Colorado corporation), dba
Horizontal Ventures, Inc., as of December 31, 1997, and the related
consolidated statements of operations, owners' equity, and cash flows for the
years ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of GREKA Energy
Corporation, as of December 31, 1997, and the results of its operations and
its cash flows for the years ended December 31, 1997 and 1996 in conformity
with generally accepted accounting principles.
/S/ BATEMAN & CO., INC., P.C.
Houston, Texas
April 14, 1998
Report of Independent Public Accountants
To the Shareholders of GREKA Energy Corporation:
We have audited the accompanying consolidated balance sheet of GREKA Energy
Corporation (a Colorado corporation) and subsidiaries as of December 31, 1998,
and the related consolidated statements of operations, owners' equity and cash
flows for the year then ended. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GREKA
Energy Corporation and subsidiaries as of December 31, 1998, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated 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 has suffered recurring losses from
operations and has a significant equity method investment that has also
experienced financial difficulties which raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans with
regard to these matters are also described in Note 1. The consolidated
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
<TABLE>
GREKA ENERGY CORPORATION (Note 2)
Consolidated Balance Sheet
December 31, 1998
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 250,212
Accounts Receivable
Trade, net of allowance for doubtful accounts of $74,092 20,807
Other 150,788
_______________
Total Current Assets 421,807
Investment in Saba Petroleum Company 15,804,110
Investment in limestone property, at cost 3,500,000
Properties and Equipment, at cost, net of accumulated
depreciation and depletion of $4,081,340 925,951
Deposits, prepayments and deferred charges 154,937
_______________
Total Assets $20,806,805
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long term notes and notes payable $ 2,013,338
Accounts payable and accrued expenses 236,323
_______________
Total Current Liabilities 2,249,661
Long term notes payable 52,634
Commitments and contingencies
Stockholders' equity
Common Stock, no par value, 50,000,000 shares authorized,
2,910,988 shares issued and outstanding 25,735,019
Accumulated deficit (7,230,509)
_______________
Total Stockholders' Equity 18,504,510
_______________
Total Liabilities And Stockholders' Equity $20,806,805
===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
GREKA ENERGY CORPORATION (Note 2)
Consolidated Statements of Operations
For The Years Ended December 31, 1998 and 1997
<TABLE>
1998 1997
<S> <C> <C>
Revenues $ 145,813 $ 211,696
__________________ __________________
Costs and Expenses
Operating costs 121,016 247,979
Salaries and wages 455,510 213,213
Depreciation, depletion and
amortization 333,468 24,016
Writedown of oil and gas properties 3,171,485 -
Rentals 94,828 31,262
Taxes, other than on income 58,207 16,059
Other administrative expenses 933,244 495,823
__________________ __________________
Total costs and expenses 5,167,758 1,028,352
__________________ __________________
Loss from operations (5,021,945) (816,656)
Other income (expense)
Equity in loss of Saba (586,020) -
Gain (loss) on sale of assets 9,223 (21,062)
Interest income 83,242 11,873
Interest expense (32,145) (25,271)
__________________ __________________
Net other income (expense) (525,700) (34,460)
__________________ __________________
Loss before income taxes (5,547,645) (851,116)
Provision for income tax - -
__________________ __________________
Net loss $ (5,547,645) $ (851,116)
================== ==================
Loss per share of common stock $ (3.42) $ (1.44)
================== ==================
Weighted average number of shares
outstanding 1,621,483 591,053
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
GREKA ENERGY CORPORATION (Note 2)
Consolidated Statements of Owners' Equity
For The Years Ended December 31, 1998 and 1997
<TABLE>
Common Stock Series A Preferred Stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 3,690 $ 37 - $ -
Stock issued for services 30,000 300 - -
Stock issued in exchange
for subordinated
convertible debentures,
and net assets of
limited partnership 725,770 7,258 - -
Stock issued for cash - - 3,000,000 30,000
__________ ____________ ___________ ____________
Balance prior to reverse
merger with Petro
Union, Inc. 759,460 7,595 3,000,000 30,000
Effect of reverse merger
with Petro Union, Inc. 240,805 6,174,675 (3,000,000) (30,000)
Stock issued for cash in
Reg "S" offerings 552,470 5,801,518 - -
Less, related offering
costs - (454,837) - -
Issuance of stock to
retire note payable to
related party 6,108 59,122 - -
Net loss - - - -
__________ ____________ ___________ ____________
Balance, December 31,
1997 1,558,843 11,588,073 - -
__________ ____________ ___________ ____________
Stock issued for cash
in Reg. "S" offering,
net 12,145 84,446 - -
Issuance of stock to
purchase shares of
Saba Petroleum
Company 1,340,000 14,062,500 - -
Net loss - - - -
__________ ____________ ___________ ____________
Balance, December 31,
1998 2,910,988 $25,735,019 - $ -
========== ============ =========== ============
</TABLE>
GREKA ENERGY CORPORATION (Note 2)
Consolidated Statements of Owners' Equity
For The Years Ended December 31, 1998 and 1997
(Continued)
<TABLE>
Capital
Capital In Contributed
Excess of Par Accumulated by Limited
Value Deficit Partners Total
<S> <C> <C> <C> <C>
Balance, December 31,
1996 $ 3,445 $ (831,748) $ 818,000 $ (10,266)
Stock issued for services - - - 300
Stock issued in exchange
for subordinated
convertible debentures,
and net assets of
limited partnership 1,398,831 - (818,000) 588,089
Stock issued for cash 570,000 - - 600,000
__________ ____________ ___________ ____________
Balance prior to reverse
merger with Petro
Union, Inc. 1,972,276 (831,748) - 1,178,123
Effect of reverse merger
with Petro Union, Inc. (1,972,276) - - 4,172,399
Stock issued for cash in
Reg "S" offerings - - - 5,801,518
Less, related offering
costs - - - (454,837)
Issuance of stock to
retire note payable to
related party - - - 59,122
Net loss - (851,116) - (851,116)
__________ ____________ ___________ ____________
Balance, December 31,
1997 - (1,682,864) - 9,905,209
__________ ____________ ___________ ____________
Stock issued for cash
in Reg. "S" offering,
net - - - 84,446
Issuance of stock to
purchase shares of
Saba Petroleum
Company - - - 14,062,500
Net loss - (5,547,645) - (5,547,645)
__________ ____________ ___________ ____________
Balance, December 31,
1998 $ - $(7,230,509) $ - $18,504,510
========== ============ =========== ============
</TABLE>
GREKA ENERGY CORPORATION (Note 2)
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1998 and 1997
<TABLE>
1998 1997
<S> <C> <C>
Cash flow operating activities:
Net loss $ (5,547,645) $ (851,116)
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation, depletion, and
amortization 333,468 177,426
Writedown of oil and gas properties 3,171,485 -
(Gain) loss on sale of assets (9,223) 21,062
Equity in net loss of Saba 586,020 -
Stock and partners' capital issued
for services - 300
(Increase) decrease in accounts
receivable (3,626) 66,040
(Increase) in accounts receivable,
other (147,355) 520
(Increase) in net other assets (114,646) -
Increase (decrease) in accounts
payable and accrued expenses (562,222) 136,716
__________________ __________________
Net cash used in operating activities (2,293,744) (449,052)
__________________ __________________
Cash flow from investing activities:
Decrease (increase) in time deposits
and funds held in escrow 1,613,695 (1,613,695)
Purchases of property and equipment (1,168,519) (1,502,462)
Proceeds from sale of property and
equipment 55,908 55,181
(Increase) decrease in deposits and
prepayments - 1,286
Acquisition of Saba common and
preferred shares (2,327,630) -
__________________ __________________
Net cash (used) in investing activities (1,826,546) (3,059,690)
Cash flows from financing activities:
Repayments of Notes Payable (32,896) (206,084)
Proceeds of loans from affiliates 2,000,000 59,122
Decrease in customer payments
received in advance - (30,000)
Proceeds from sale of stock, net of
expenses 84,446 5,946,681
Other - 51,517
__________________ __________________
Net cash provided by financing
activities 2,051,550 5,821,236
__________________ __________________
Net increase (decrease) in cash and
cash equivalents (2,068,740) 2,312,494
Cash and cash equivalents:
Beginning of period 2,318,952 6,458
__________________ __________________
End of period $ 250,212 $ 2,318,952
================== ==================
Non-cash financing and investing
activities:
Stock issued for services $ - $ 300
Stock issued for subordinated
convertible debentures - 433,231
Stock issued for net assets of
limited partnership - 972,858
Stock issued in satisfaction of
note payable - 59,122
Stock issued for investment in
Saba Petroleum Co. 14,062,500 -
Property and equipment acquired by
issuance of notes payable - 500,000
Property and equipment acquired in
reverse merger with Petro Union,
Inc., net of debt assumed - 4,120,882
Supplementary cash flow data:
Interest paid 20,562 26,324
Income taxes paid - -
</TABLE>
The accompanying notes are an integral part of these financial statements.
GREKA Energy Corporation (Note 2)
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 1 - FINANCIAL CONDITION AND MANAGMENT'S PLANS
The accompanying consolidated financial statements represent the financial
position and results of operations of Horizontal Ventures, Inc., which
subsequent to December 31, 1998 changed its name to GREKA Energy Corporation
(see Note 2). 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 (including the locations of its
equity method investment), the Company incurred significant losses, due
primarily to reduced production and related oil and gas sales and a $3.2
million non-cash ceiling writedown of its oil and gas assets without any
reduction for tax benefits. As a result of these factors, the reported net
loss was $5.5 million, or $3.42 per share. The Company has also not made
payments on two loans from one of its primary stockholders, but has requested
extensions in the due dates for such repayments. In addition, the Company
made a substantial investment in Saba Petroleum Company ("Saba") during the
year and subsequently merged with such company in March 1999. Saba 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, it cannot borrow under its revolving bank loan
agreement. In addition, Saba's exploratory prospect in Indonesia requires a
multi-year commitment of $17.0 million, which period began in October, 1997.
Saba also received a notice of default from the Colombian tax authorities for
the payment of income taxes for 1997 and 1998. In addition, the Company's
independent public accountants issued a modified report with respect to the
ability of the Company to continue as a going concern, which also constitutes
a default under the revolving bank credit agreements. Due to the Company and
Saba not being in compliance with the above mentioned requirements,
restrictions and other covenants, combined with other normal maturities of
long term debt, approximately $2.0 and $28.8 million, of such long term debt
is classified as currently payable by the Company and Saba, respectively, and,
as a result, the Company and Saba have working capital deficiencies of
approximately $1.8 million and $35.4 million, respectively.
To improve its financial situation, management is in the process of
renegotiating the terms of Saba's 9% convertible senior subordinated
debentures and Saba's 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 subsidiary. In addition, the Company will begin operating Saba's
refinery in California on a 100% basis beginning May 1, 1999, which is
expected to significantly increase operating cash flows from this asset. The
above mentioned transactions are in various stages of completion, 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 in its recapitalization plan. Management
believes that the completion of the refinancing and 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.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of business and organization - GREKA Energy Corporation ("GREKA"),
which was named Horizontal Ventures, Inc. prior to changing its name in March
1999, was engaged in contract drilling of oil and gas wells and in development
of oil and gas properties for its own account. All of the Company's
operations are in one industry segment. Its executive offices are located in
New York, New York, and a field office in Tulsa, Oklahoma. It offers its
services primarily in the western, Midwestern, and southwestern United States.
It has oil and gas properties in California and oil, gas, and limestone
properties in the Midwestern United States. As of December 31, 1998, GREKA
Energy Corporation also held an approximate 30% ownership interest in Saba
Petroleum Company ("Saba"). Subsequent to year end, the company acquired all
of the remaining common shares of Saba through the issuance of 1.3 million
shares of GREKA common stock. The merged company changed its name to GREKA
Energy Corporation. Saba is an international oil and gas producer with
principal producing properties in the continental United States, Canada, and
Columbia and an asphalt refinery in California.
Petro Union was a debtor in possession under Chapter 11 of the U.S.
Bankruptcy Code until August 28, 1997, at which time the Bankruptcy Court
approved its plan of reorganization. As a part of its plan of reorganization,
PUI agreed to acquire all the outstanding stock of Horizontal Ventures, Inc.
("HVI"). The acquisition of HVI was completed on September 9, 1997, and after
the acquisition, HVI shareholders owned more than 50% of the outstanding
shares of PUI. Therefore, pursuant to the rules of the Securities and
Exchange Commission, the transaction has been accounted for as a "reverse
merger." Accordingly, the accompanying consolidated statements of operations
and consolidated statements of cash flows reflect the historical operations
and cash flows HVI (including those of PUI after September 9, 1997, the
effective date of the merger), whereas previous reports filed by the Company
reflected operations and cash flows of PUI. HVI and Petro Union, Inc.
completed a statutory merger under the laws of the State of Colorado
effective December 31, 1997.
Basis of presentation - The consolidated financial statements include
the accounts of the company and wholly owned subsidiaries. The investment in
Saba was acquired through share purchases during the 1998 fourth quarter. As
of December 31, 1998, GREKA owns approximately 30% of Saba's common shares
and, accordingly, has accounted for this investment using the equity method
of accounting.
The consolidated financial statements also include the accounts and
transactions of Calox, Inc. a subsidiary of GREKA , whose principal asset is
nonproducing limestone reserves, and HVI Cat Canyon, Inc. All significant
intercompany accounts and transactions have been eliminated in the
accompanying consolidated financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Fair value of financial instruments - The carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable and accrued expenses,
other current liabilities and notes payable, approximate fair value because of
the short maturity of these items. These fair value estimates are subjective
in nature and involve uncertainties and matters of significant judgment, and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect these estimates.
Accounts receivable - The Company provides an allowance for
uncollectible receivables when it is determined that collection is doubtful.
Substantially all of the Company's trade receivables are from its directional
drilling services.
Concentrations of credit risk - Substantially all of the Company's
accounts receivable are from companies engaged in the oil and gas business,
and concentrated in the Southwestern United States. Generally, the Company
does not require collateral for its accounts receivable. The Company has
performed services for only a limited number of customers each period;
therefore, each customer may be considered a major customer.
Properties and equipment - Properties and equipment are stated at cost.
The Company follows the "full-cost" method of accounting for oil and gas
property and equipment costs. Under this method, all productive and
nonproductive costs incurred in the acquisition, exploration, and development
of oil and gas reserves are capitalized. Such costs include lease
acquisitions, geological and geophysical services, drilling, completion,
equipment, and certain general and administrative costs directly associated
with acquisition, exploration, and development activities. General and
administrative costs related to production and general overhead are expensed
as incurred. No gains or losses are recognized upon the sale or disposition of
oil and gas properties, except in transactions that involve a significant
amount of reserves. The proceeds from the sale of oil and gas properties are
generally treated as a reduction of oil and gas property costs. Fees from
associated oil and gas exploration and development partnerships, if any, will
be credited to oil and gas property costs to the extent they do not represent
reimbursement of general and administrative expenses currently charged to
expense. Internal costs capitalized as intangible development costs include
direct wages paid to drilling crews, related payroll taxes, and travel
expenses while on drilling sites; such costs approximated $0 and $10,900 in
1998 and 1997, respectively. Such costs can be directly identified with
acquisition, exploration and development activities and do not include any
costs related to production, general corporate overhead, or similar
activities.
Future development, site restoration, and dismantlement and abandonment
costs, net of salvage values, are estimated on a property-by-property basis
based on current economic conditions and are amortized to expense as the
Company's capitalized oil and gas property costs are amortized. The Company's
properties are all onshore, and the Company expects that the salvage value of
the tangible equipment offsets any site restoration and dismantlement and
abandonment costs.
The provision for depreciation, depletion, and amortization of oil and
gas properties is computed on the unit-of-production method. Under this
method, the Company computes the provision by multiplying the total
unamortized costs of oil and gas properties - including future development,
site restoration, and dismantlement and abandonment costs, but excluding costs
of unproved properties - by an overall rate determined by dividing the
physical units of oil and gas produced during the period by the total
estimated units of proved oil and gas reserves. This calculation is done on a
country by country basis for those countries with oil and gas production.
Excluding the operations of the company's equity investment in Saba, it
currently has production in the United States only. The cost of unevaluated
properties not being amortized, to the extent there is such a cost, is
assessed quarterly to determine whether the value has been impaired below the
capitalized cost. Any impairment assessed is added to the cost of proved
properties being amortized. The costs associated with unevaluated properties
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.
At the end of each quarterly reporting period, the unamortized cost of
oil and gas properties, net of related deferred income taxes, is limited to
the sum of the estimated future net revenues from proved properties using
current prices, discounted at 10%, and the lower of cost or fair value of
unproved properties, adjusted for related income tax effects ("Ceiling
Limitation").
The calculation of the ceiling limitation and provision for
depreciation, depletion, and amortization is based on estimates of proved
reserves. There are numerous uncertainties inherent in estimating quantities
of proved reserves and in projecting the future rates of production, timing,
and plan of development. The accuracy of any reserves estimate is a function
of the quality of available data and of engineering and geological
interpretation and judgment. Results of drilling, testing, and production
subsequent to the date of the estimate may justify revision of such estimate.
Accordingly, reserve estimates are often different from the quantities of oil
and gas that are ultimately recovered.
During the fourth quarter of 1998, the Company recorded a $3,059,119
non-cash ceiling writedown of its oil and gas properties.
Depreciation for all other property and equipment is provided over
estimated useful lives using the straight line method of depreciation for
financial reporting purposes and the accelerated cost recovery system for
income tax purposes. Renewals and betterments are capitalized when incurred.
Costs of maintenance and repairs that do not improve or extend asset lives are
charged to expense.
The Company's investment in limestone reserves will be amortized on a
unit-of-production basis as the reserves are mined and produced. Since the
acquisition of the limestone reserves in 1993, there has been no development
or production of these properties. Management has determined that there
is no impairment in value of the reserves at December 31, 1998.
License agreements and organization expenses - The Company has
acquired certain licenses for the use of horizontal drilling technology
developed by Amoco Corporation. License agreements and organization expenses
are amortized over a fifteen and five year life, respectively, using the
straight line method of amortization. Amortization charged to operations was
$16,593 and $16,510 in 1997 and 1998, respectively.
Environmental expenditures - If and when remediation of a property is
probable and the related costs can be reasonably estimated, the
environmentally-related remediation costs will be expensed and recorded as
liabilities. If recoveries of environmental costs from third parties
are probable, a receivable will be recorded. Management is not currently
aware of any required remediation.
Revenue recognition - For financial reporting purposes, revenues
from drilling operations are recognized in the accounting period which
corresponds with the performance of the service to the customer. Revenue
from oil and gas production is recognized in the period in which the product
is sold. The related costs and expenses are recognized when incurred.
Federal and State income taxes - The Company follows SFAS No. 109,
"Accounting for Income Taxes", which accounts for income taxes using the
liability method. Under SFAS No. 109, deferred tax liabilities and assets
are determined based on differences between the financial statement and
tax bases of assets and liabilities using enacted tax rates expected
to be in effect for the year in which the differences are expected to
reverse. The net change in deferred tax assets and liabilities is reflected
in the statement of operations. The primary differences between financial
reporting and tax reporting relate to the availability of net operating
loss carryforwards, and the use of accelerated methods of depreciation for
income tax purposes.
Earnings per share - Basic (loss) per share has been computed using the
weighted average number of common shares outstanding during the respective
periods. In computing average outstanding shares during 1997, the Company
has converted Horizontal Ventures shares outstanding prior to the merger
to equivalent Petro Union shares on a pro rata basis. Diluted earnings per
share is computed by considering the effect of outstanding options and
warrants. However, diluted earnings per share is the same as basic earnings
per share in instances where a loss has been incurred. Accordingly, diluted
earnings per share has not been presented.
Accounting Pronouncement Issued, but Not Yet Adopted - The Company has
not yet adopted AICPA Statement of Position 98-5 "Reporting on the Costs of
Start-Up Activities." Such pronouncement will require that the Company
expense the balance of its unamortized organization costs in the first quarter
of 1999. At December 31, 1998, the balance of unamortized organization costs
is $16,542.
NOTE 3 - MERGER OF PETRO UNION, INC. AND HORIZONTAL VENTURES, INC.:
On June 13, 1997, Horizontal Ventures, Inc. and Petro Union, Inc.
entered into an agreement under which all of the outstanding common and
preferred shares HVI would be acquired by Petro Union. Petro Union was also
engaged in performing contract drilling services using the licensed Amoco
technology. Petro Union was subject to supervision in the U.S. Bankruptcy
Court for the Southern District of Indiana under Chapter 11 of the U.S.
Bankruptcy Code, and the agreement with HVI was part of Petro Union's Plan
of Reorganization. On August 28, 1997, the Bankruptcy Court approved the Plan,
the principal points of which are as follows:
* The par value of Petro Union stock was converted from $.125 par value
to no par value.
* All secured debt was paid according to the terms previously contracted
for.
* Unsecured creditors in class C-1 received 20,000 shares of new Petro
Union no par value stock in satisfaction of their claims, and unsecured
creditors in class C-2 received 80,000 shares of new HVI no par
value stock in satisfaction of their claims.
* The priority post-petition promissory note of Pembrooke Holdings
Corporation (Pembrooke) in the amount of $150,000 was paid with
$100,000 in cash and the issuance of 49,999 shares of new HVI
no par value stock valued at $50,000.
* Existing shareholders of Petro Union received new HVI no par
value stock in the ratio of 1 new share for each 220 shares of old
stock.
* Randeep C. Grewal, CEO of HVI and Richard D. Wedel, President of Petro
Union received 70,000 shares each of new Petro Union no par value stock
valued at $20,000 each, or $40,000 in total.
* International Publishing Holding s.a. ("IPH"), a Luxembourg societe
anonyme, loaned $200,000 to Petro Union secured by 50% interest in its
nonproducing limestone reserves; the loan was then converted into
40,000 shares of new HVI no par value stock.
* Petro Union issued 590,000 shares of new HVI no par value stock for
all the outstanding common and preferred stock of HVI.
After the Plan was consummated on September 9, 1997, HVI shareholders
owned approximately 63% of the new HVI no par value stock.
Pro-forma summary statements of operations, combining Petro Union, Inc.,
and HVI, are as follows, assuming the merger had occurred January 1, 1997:
<TABLE>
Year Ended December 31, 1997
Petro Union, Inc. Petro Union, Inc.,
(January 1 through d/b/a
September 9, 1997) HVI Pro-Forma
<S> <C> <C> <C>
Revenues $ 311,798 $ 211,696 $ 523,494
Cost of revenues 237,801 247,979 485,780
_____________ _____________ _____________
Gross profit (loss) 73,997 (36,283) 37,714
General and administrative
expenses 264,550 780,373 1,044,923
_____________ _____________ _____________
(Loss) from operations (190,553) (816,656) (1,007,209)
Other income (expense) (7,933) (34,460) (42,393)
_____________ _____________ _____________
(Loss) before tax (198,486) (851,116) (1,049,602)
Provision for taxes - - -
_____________ _____________ _____________
Net (loss) $ (198,486) $ (851,116) $ (1,049,602)
============= ============= =============
</TABLE>
NOTE 4 - PURCHASE OF EQUITY INTEREST IN AND SUBSEQUENT MERGER WITH SABA
PETROLEUM COMPANY
During 1998, GREKA entered into the following transactions to purchase its
interests in Saba Petroleum Company (Saba).
<TABLE>
Date Consideration Common Stock Preferred Stock Cost
<S> <C> <C> <C> <C>
October Cash 80,000 $ 70,130
October Cash 690 750,000
November Cash 333,333 1,500,000
December 1.34 million
shares of
GREKA 2,976,765 14,070,000
__________ ___________ ____________
Total 3,390,098 690 $16,390,130
========== =========== ============
</TABLE>
In November, 1998, the Company paid $500,000 to the holder of Saba's Series A
Preferred Stock to extend the term of an option to purchase 6,910 shares of
Saba Series A Preferred Stock for an additional 30 days. The cash payment is
reflected in the above table as part of the November purchases of shares.
Such option expired unexercised. Therefore, as of December 31, 1998, GREKA
held 3,390,098 common shares (29.8% of total outstanding) and 690 shares of
convertible preferred stock of Saba. As of December 31 1998, GREKA accounts
for its investment using the equity method.
GREKA 's $16.4 million equity method investment has been allocated to the
fair value of each of Saba's assets and liabilities, as of December 31, 1998
in the following table. The amounts presented represent 29.8% of the
estimated fair value of Saba's assets and liabilities (dollars in thousands).
<TABLE>
<S> <C>
Refinery $12,218.0
Oil and Gas Properties 10,581.8
Land 3,580.5
Other Assets 5,994.2
Liabilities and minority interest (13,675.2)
Preferred stock (2,309.2)
__________
Total investment $16,390.1
==========
</TABLE>
The summarized audited financial information of Saba is shown below as of
December 31, 1998 and for the years ended December 31, 1998 and 1997:
<TABLE>
<S> <C> <C>
Balance Sheet Data 1998 1997
Oil and gas properties, net $ 32,904,810 $ 54,844,840
Other assets, net 16,783,602 22,812,106
Current liabilities 40,003,281 39,075,063
Other liabilities and
preferred stock 13,176,220 28,984,304
________________ ________________
Net assets $ (3,491,089) $ 9,597,579
================ ================
GREKA 's equity in net assets $ (1,040,344) $ N/A
================ ================
Earnings Data 1998 1997
Revenues $ 23,331,331 $ 35,995,762
Operating (loss) income (24,024,215) 6,744,071
Net (loss) earnings $ (28,650,823) $ 2,397,447
================ ================
GREKA's equity in loss $ (586,020) N/A
================ ================
</TABLE>
GREKA's equity in loss of Saba represents GREKA's share of Saba's losses since
the acquisition dates of Saba's shares during the fourth quarter of 1998.
In addition to the shares owned directly by GREKA, 568,000 Saba shares were
owned by IPH, an GREKA shareholder. Such shares were subject to a call
agreement by GREKA at an exercise price equal to 120% of the cost of such
shares to IPH, payable in cash or common shares of GREKA. IPH had a part
agreement that became effective April 1, 1999 and was exercised on such date.
GREKA will issue 140,886 shares following the filing of a registration
statement.
In December, 1998, GREKA's Board of Directors approved the acquisition of all
the remaining outstanding shares of Saba common stock through a proposed
merger with GREKA based on an exchange ratio of one share of GREKA common
stock for each six shares of Saba common stock. In March 1999, the Company,
through a wholly owned subsidiary, merged with Saba in a transaction accounted
for as a purchase with a cost of approximately $9.0 million based upon the
issuance of 1,332,500 shares of GREKA stock. The results of operations for
Saba will be included in the Company's consolidated results of operations as
of the acquisition date.
Saba's principal assets are an asphalt refinery, proved oil and gas reserves
of 17,603 MBOE, with a standardized measure value of $38.4 million (using
prices as of April 1, 1999) and various real estate holdings.
The following are the unaudited pro forma revenue, net loss and loss per share
of the Company giving effect to the acquisition of Saba, as if such
acquisition had occurred at the beginning of 1998. The unaudited pro forma
financial data do not purport to be indicative of the financial position or
results of operations that would actually have occurred if the acquisition had
occurred as presented or that may be obtained in the future.
<TABLE>
Year Ended
December 31,
1998
<S> <C>
Dollars in thousands, except share
amounts
Revenue $ 23,477
Net loss (34,273)
Loss per common share (8.08)
</TABLE>
NOTE 5 - NON PRODUCING LIMESTONE PROPERTY
The Company owns, through a wholly owned subsidiary, a limestone property,
including the land, timber and all the mineral rights associated with the
property. International Publishing Holding s.a. (IPH), the Company's largest
shareholder, holds an option that expires on September 9, 2000 to acquire 90%
of such company for $3.5 million.
Subsequent to year-end, the Company entered into an agreement with IPH and
Pembrooke Holdings Corporation (Pembrooke). Under the terms of such
agreement, Pembrooke has the following options to acquire 100% of the shares
of such subsidiary of GREKA :
- Pay $3.5 million by March 31, 1999 and four $200,000 annual installments
beginning March 31, 2001
- Pay $3.85 million by May 30, 1999 and four $200,000 annual installments
beginning March 31, 2001
- Issue a non-recourse note for $5.7 million due on or before November 1,
1999, the terms of which would require Pembrooke to pay $3.85 million to
GREKA by May 31, 1999 or to pay GREKA $5.7 million on November 1, 1999.
In connection with the above, GREKA shall pay Pembrooke $50,000 and issue
shares of GREKA common stock having a value equal to $150,000 based upon the
average of the closing prices for the last 30 days prior to February 16, 1999
and GREKA will file a registration statement to register such shares by April
15, 1999 or, if the filing of such registration statement is not done by May
15, 1999, due to the negligence of GREKA, then GREKA will pay Pembrooke
$150,000.
NOTE 6 - PROPERTY AND EQUIPMENT:
A summary of the Company's property and equipment as of December 31,
1998 is as follows:
<TABLE>
<S> <C>
Oil and gas properties:
Leasehold Costs $ 2,058,177
Intangible development
costs 910,270
Lease and well equipment 289,717
Storage facilities and
gathering systems 187,652
________________
Total 3,445,816
Land and buildings 85,814
Drilling equipment 1,242,189
Transportation equipment 163,632
Office computer equipment 69,840
________________
Total cost 5,007,291
Accumulated depletion and
depreciation 4,081,340
________________
$ 925,951
================
</TABLE>
Depreciation, depletion and amortization (including an impairment charge of
$3,171,485) charged against income was $3,504,953 and $160,833 in 1998 and
1997, respectively.
Useful lives are as follows:
Buildings 20 to 40 years
Drilling equipment 5 to 10 years
Transportation equipment 5 to 6 years
Office and computer equipment 3 to 10 years
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
The Company leases office space, automobiles, computers, and other
equipment under various operating leases. The Company has options to renew
these leases. Aggregate commitments under these leases at December 31, 1998
were as follows:
<TABLE>
Year Ending December 31: Amount
<S> <C>
1999 $ 29,418
2000 20,570
2001 16,146
2002 16,146
2003 16,146
</TABLE>
Rent expense included in the accompanying statements of operations was $
76,778 and $31,262 in 1998 and 1997, respectively.
In October 1994, the Company licensed certain directional drilling
technology from Amoco Corporation, a major oil corporation. The license
currently requires minimum annual payments of $15,000 per year or $1,639 per
well drilled under the license, whichever is greater, and the amounts are
adjusted periodically for inflation. The Company incurred license payments
approximating $15,000 and $20,000 for the year ended December 31, 1998 and
1997, respectively. Quarterly settlements are required under the license, and
Amoco has the right to terminate the license for non-payment. If Amoco were
to terminate the Company's license, it could have an adverse affect on the
Company's operations.
NOTE 8 - FEDERAL AND STATE INCOME TAXES:
Due to the losses incurred in 1998 and 1997, the Company has not recorded
any provision or benefit for Federal and State income taxes.
The Company follows SFAS No. 109, "Accounting for Income Taxes" in
accounting for deferred Federal income taxes. The Company has recorded
deferred tax assets and liabilities, using an expected tax rate of 35%, as
follows:
<TABLE>
December 31,
1998
<S> <C>
Deferred tax asset (liability) attributable to:
Net operating loss carryover 14,996,540
Accumulated depreciation 974,692
____________
Subtotal 15,971,232
Less, Valuation allowance (15,971,232)
____________
Net deferred tax asset $ -
============
</TABLE>
As indicated above, a significant net operating loss carryover has been
incurred in prior years, primarily by Petro Union. Management has not yet
determined the extent to which the net operating loss will be limited under
Section 382 of the Internal Revenue Code, if any, as a result of the merger
with HVI. The net operating loss expires, if unused, as follows:
<TABLE>
Expires in Amount
<S> <C>
2007 $ 214,000
2008 7,236,400
2009 4,551,900
2010 510,700
2011 24,437,600
2012 1,103,400
2013 4,847,300
_____________
Total $ 42,901,300
=============
</TABLE>
NOTE 9 - NOTES PAYABLE:
Details of long term notes payable are as follows:
<TABLE>
<S> <C>
Note payable to International Publishing
Holding, S.A. (IPH) dated November 2, 1998,
with interest at 6% $ 1,500,000
Note payable to IPH dated October 8, 1998,
without interest 500,000
Other Notes 65,972
________________
Total 2,065,972
Less, amount due within one year (2,013,338)
________________
Net long term portion $ 52,634
================
</TABLE>
Current maturities of long term notes are as follows:
<TABLE>
<S> <C>
1999 2,013,338
2000 18,660
2001 13,719
2002 12,072
2003 8,183
____________
Total $ 2,065,972
============
</TABLE>
The notes payable to IPH are due on May 31, 1999.
NOTE 10 - LITIGATION:
At December 31, 1998, the Company had trade accounts receivable
approximating $94,899 from several debtors, some of whom have refused to
pay. Although no lawsuits have been filed to collect these debts,
management is currently continuing to have discussions with the debtors
in an effort to resolve any disputes and collect the amounts due. In
one case, the Company has a lien against an oil and gas property, and in
another it has received a written promise to pay the amount due. If
continuing efforts are unsuccessful, the Company intends to pursue its
claims through other legal actions, and believes it will be successful. An
allowance for doubtful accounts of $74,092 has been provided for any
uncollectible amounts, and management believes it will be adequate to
absorb any losses.
NOTE 11 - RELATED PARTY TRANSACTIONS:
The Company has an agreement with Grupo de Creacion, Ltd. ("GDC"), a
Gibraltar corporation and a shareholder of the Company, for financial
consulting services. Under the agreement, GDC assisted the Company in
arranging three "Reg S" securities offerings during 1997, resulting in
proceeds of approximately $5,800,000 for the sale of Company stock. As
compensation, GDC receives a negotiated commission of not less than 7% of
any financing up to $10 million, and reduced percentages over that amount; in
addition, it receives an overriding royalty of 2% of all oil and gas
production received by the Company during the term of the agreement. The
agreement expires December 31, 2004. GDC was paid commissions of
approximately $337,400 for completed financings in 1997, and an overriding
royalty of approximately $500.
On September 9, 1997, the Company entered into an employment agreement with
Randeep S. Grewal for a five-year term. Mr. Grewal is the Chairman and Chief
Executive Officer and a director of the Company. His current salary is
$120,000 per year. Compensation is reviewed annually. Mr. Grewal
participates in the Company's benefit plans and is entitled to bonuses and
incentive compensation as determined by the Board of Directors of the Company.
The agreement is terminable for Cause or by the death or disability of Mr.
Grewal. Upon termination of the agreement by the Company for any reason other
than for Cause, death or disability, the Company is obligated to pay within 30
days after the date of termination (1) Mr. Grewal's Base Salary through the
date of the Severance Period, (2) Mr. Grewal's base salary for the balance of
the term of the agreement if the Date of Termination is within the first three
years of the Employment Agreement (Base Salary is the rate in effect at the
Date of Termination), (3) the Annual Bonus paid to Mr. Grewal for the last
full fiscal year during the Employment Period and (4) all amounts of deferred
compensation, if any. The agreement allows Mr. Grewal to receive an
assignment of 2% overriding royalty of all oil and gas production received by
the Company. Effective as of the Saba merger date of March 24, 1999, Mr.
Grewal's employment agreement has been amended. See Item 10 in Form 10-KSB.
On March 12, 1998, an officer of the Company resigned and entered into
an agreement providing for certain severance benefits and mutual covenants.
The Company agreed to pay the former officer a severance payment of
$50,000.
NOTE 12- STOCK OPTIONS AND WARRANTS:
On September 9, 1997, the Company's Chairman and CEO was granted options
to purchase an aggregate of 150,000 shares of the Company's no par value
common stock at an option price of $5 per share, exercisable at the rate
of 30,000 shares per year, with the first such installment becoming
exercisable September 9, 1998, and an additional 30,000 shares on each
succeeding September 9 thereafter. A similar option was granted to the
Company's President, but the option lapsed upon his resignation in 1998. No
compensation expense was recorded in connection with the granting of these
options as the option price equaled the market price on the date of grant.
On October 14, 1998, the Company's Chairman and CEO was granted options to
purchase an additional 150,000 shares of the Company's no par value common
stock at an option price of $8.25 per share (which equaled the market price on
this date). In addition, other employees were granted options to purchase an
additional 100,000 shares of the Company's no par value common stock at an
option price of $8.25 per share.
A summary of the outstanding options follows:
<TABLE>
1998 1997
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Options outstanding,
January 1 300,000 $ 5.00 - $ -
Options granted 250,000 8.25 300,000 5.00
Options terminated 150,000 5.00 - -
________ _______ ________ _____________
Options outstanding,
December 31 400,000 7.03 300,000 5.00
Exercisable at year end 30,000 5.00 - -
Weighted average fair
value of options granted 3.30 7.88
</TABLE>
The Company also granted warrants to purchase common stock to the purchasers
of shares from one of the 1997 "Reg S" offerings. A summary is as follows:
Number of
Date Granted Shares Option Price Effective Date Expiration Date
September 29,
1997 127,750 $15.00 January 1, December 31,
1998 1999
Such warrants expired unused on December 31, 1998.
As permitted under SFAS 123, the Company has elected to continue to account
for stock-based compensation under the provisions of APB Opinion No. 25. Had
compensation cost been determined consistent with SFAS No. 123, the Company's
net income and earnings per share would have been reduced to the following pro
forma amounts:
<TABLE>
December 31, December 31,
1998 1997
<S> <C> <C> <C>
Net loss: As reported $ (5,547,645) $ (851,116)
Pro forma $ (6,139,691) $(1,245,162)
Basic and diluted EPS As reported $ (3.42) $ (1.44)
Pro forma $ (3.78) $ (2.11)
</TABLE>
The fair value of each option granted in 1998 and 1997 is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions: (a) risk free interest rates ranging from 5.2% to 6.4% (b)
expected volatility of 59.2% (c) average time to exercise of 7 years and (d)
expected dividend yield of zero.
NOTE 13 - SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
The following data is presented pursuant to FASB Statement No. 69 with respect
to oil and gas acquisition, exploration, development and producing activities,
which is based on estimates of year-end oil and gas reserve quantities and
forecasts of future development costs and production schedules. These
estimates and forecasts are inherently imprecise and subject to substantial
revision as a result of changes in estimates of remaining volumes, prices,
costs and production rates.
Future cash inflows are estimated using year-end prices. Oil and gas prices
at December 31, 1998 are not necessarily reflective of the prices the Company
expects to receive in the future.
Production Revenues and Costs
<TABLE>
For the year ended December 31,
1998 1997
<S> <C> <C>
Revenue $ 145,813 $ 211,696
Production Costs 121,016 247,979
Depreciation, depletion,
amortization 333,468 24,016
Writedown of oil and gas properties 3,171,485 -
_____________ ______________
Pretax (loss) from producing
activities $ (3,480,156) $ (60,299)
1998 1997
Capitalized costs at year end:
Proved reserves $ 3,445,816 $ 1,963,337
Unproved reserves - 400,000
_____________ ______________
3,445,816 2,363,337
Less, Accumulated depreciation,
depletion and amortization (3,242,711) (57,598)
_____________ ______________
Net investment in oil and gas
properties $ 203,105 $ 2,305,739
============= ==============
1998 1997
Capitalized
Costs Incurred:
Acquisition of properties:
Proved $ - $ 1,679,131
Unproved - 400,000
Exploration costs - -
Development costs 1,082,479 284,206
_____________ ______________
Total Capitalized Cost, Incurred $ 1,082,479 $ 2,363,337
============= ==============
</TABLE>
Discounted Future Net Cash Flows (unaudited)
The following information relating to discounted future net cash flows has
been prepared on the basis of the Company's estimated net proved oil and gas
reserves in accordance with FASB Statement No. 69.
Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
<TABLE>
1998 1997
<S> <C> <C>
Future cash flows $ 1,725,500 $ 40,103,600
Future costs:
Development (440,000) (5,281,800)
Production (793,700) (23,805,600)
_____________ ______________
Future net cash flows before income
taxes 491,800 11,016,200
Future income taxes - (3,304,800)
_____________ ______________
Future net cash flow after income
taxes 491,800 7,711,400
Discount at 10% per annum (231,100) (3,101,100)
_____________ ______________
Standardized measure of discounted
future net cash flows $ 260,700 $ 4,610,300
============= ==============
Changes in Discounted Future Net Cash Flow, from Proved Reserve Quantities:
1998 1997
Balance, beginning of year
$ 4,610,300 $ -
Sales and transfers of oil and gas
produced, net of production costs (17,443) (13,578)
Net changes in prices and production
costs (3,721,007) -
Purchases of minerals in place - 4,623,878
Sales of minerals in place - -
Changes in estimated future
development costs 4,841,800 -
Revisions of previous quantity
estimates (4,771,053) -
Accretion of discounts 861,000 -
Net change in income taxes 1,751,000 -
Change in production rates (timing)
and other (3,293,897) -
_____________ ______________
Standardized measure of discounted
future net cash flows $ 260,700 $ 4,610,300
============= ==============
</TABLE>
Reserve Information (Unaudited):
The following information with respect to the Company's 1998 and 1997 net
proved oil and gas reserves are estimates based on reports prepared by
Netherland, Sewell & Associates, Inc. pursuant to principles set forth by the
Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve
Information promulgated by the Society of Petroleum Engineers. Proved
developed reserves represent only those reserves expected to be recovered
through existing wells using equipment currently in place. Proved undeveloped
reserves represent proved reserves expected to be recovered from new wells or
from existing well after material recompletion expenditures. All of the
Company's reserves, excluding those of its equity method investment are
located in the United States.
<TABLE>
1998 1997
Oil bbls Oil bbls
<S> <C> <C>
Proved developed and
undeveloped reserves
Balance, beginning of year 2,553,007 1,826,385
Production (12,935) (2,112)
Discoveries, extensions, etc.
Acquisition of reserves in
place 728,734
Revisions of estimates (2,289,851)
____________ ____________
Balance, end of year 250,221 2,553,007
============ ============
</TABLE>
Equity Share of Saba Oil and Gas Information:
As of December 31, 1998, the Company has a 30% equity interest in Saba
Petroleum Company (See Note 4). Accordingly, the following information
represents the Company's equity share of Saba's oil and gas reserves and
standardized measure of discounted future net cash flows as of December 31,
1998.
Gas Oil
MMcf Mbbl
Proved reserves 6,853,334 4,144
___________ _________
(Dollars in
Thousands)
Future cash inflows $ 43,815
Future costs
Production (24,243)
Development (7864)
Future income tax expense (93)
_____________
Net future cash flows 11,615
Discount - 10% (4,724)
Standardized measure of
discounted future net cash flows $ 6,891
========
Acquisition of Saba in March 1999:
As discussed in Note 4, subsequent to year end, the Company completed its
acquisition of Saba. The following information with respect to the Company's
estimated net proved oil and gas reserves are estimates based upon reports
prepared by independent petroleum engineers (Netherland, Sewell & Associates,
Inc.) If this acquisition had been recorded in 1998, it would have increased
the Company's proved reserves as of December 31, 1998 as follows:
Acquired Properties Company Pro Forma
Gas Oil Gas Oil
MMcf Mbbl MMcf Mbbl
Proved Reserves 22,997,765 13,905 22,997,765 14,155
=========== ========= =========== =========
Discounted future cash flows at December 31, 1998 related to Saba and on a
Company pro forma basis as if the acquisition had occurred in 1998 are as
follows (in thousands):
<TABLE>
Company Pro
Saba Forma
<S> <C> <C>
Future cash inflows $ 147,033 $ 148,758
Future costs
Production (81,354) (81,754)
Development (26,389) (27,183)
Future income tax expense (312) (312)
____________ ____________
Future net cash flows 38,978 39,509
Discount - - 10% annually (15,853) (16,084)
____________ ____________
Standardized measure of discounted future
net cash flows $ 23,125 $ 23,425
============ ============
</TABLE>
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
/s/ Randeep S. Grewal
Dated: April 15, 1999 By:_________________________________________
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
___________________
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/ Jan F. Holtrop
___________________
Dr. Jan F. Holtrop Director April 15, 1999
/s/Dirk Van Keulen
___________________
Dirk Van Keulen Director April 15, 1999
/s/ George C. Andrews
___________________
George C. Andrews Director April 15, 1999
/s/ Dai Vaughan
___________________
Dai Vaughan Director April 15, 1999
EXHIBIT 10.89
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of March 17, 1999, but effective as of 12:01 a.m., Central Standard Time,
on January 1, 1999 (the "Effective Time"), by and among Sabacol, Inc., a
Delaware corporation ("Sabacol"), Omimex Resources, Inc., a Delaware
corporation ("ORI"), Omimex de Colombia, Ltd., a Delaware corporation ("ODC"),
and Omimex International Corporation d/b/a Omimex Petroleum, Inc., a Colorado
corporation ("OPI"). ORI, ODC and OPI are collectively referred to herein as
the "Omimex Group".
1. ORI wholly owns ODC and OPI. The members of the Omimex Group are
mutually dependent on each other in the conduct of their respective businesses
as an integrated operation, with the financing needed from time to time by
each often being provided by another or by means of financing obtained by one
affiliate with the support of others for their mutual benefit, the ability of
each to obtain such financing being dependent on the successful operations of
the others.
2. ORI holds a certain promissory note dated June 5, 1998, in the
principal amount of $4,190,000, made by Saba Petroleum Company, a Delaware
corporation ("Saba"), and payable to the order of ORI (the "Note"). Sabacol
owns certain property in Colombia, and OPI owns certain property in
California.
3. On December 11, 1998 (the "Petition Date"), Sabacol filed a
petition seeking voluntary relief under Chapter 11, Title 11, United States
Code in the United States Bankruptcy Court for the Central District of
California, Northern Division (the "Bankruptcy Court"), under Case No.
98-15858 (the "Bankruptcy Case").
4. The Omimex Group wishes to purchase, and Sabacol wishes to sell,
such Colombia property in consideration for cancellation and full release of
the Note, such California property and a certain amount of cash, on the terms
and conditions set forth herein.
For and in consideration of the mutual representations, warranties,
covenants and agreements hereinafter set forth and other good and valuable
consideration, and upon the terms and subject to the conditions hereinafter
set forth, the parties do hereby agree as follows.
ARTICLE I
PURCHASE AND SALE
1.1 Sabacol Assets
1.1.1 Upon the terms and subject to the conditions of this
Agreement and in partial consideration for the OPI Assets, at the Closing,
effective as of the Effective Time, Sabacol will sell, convey, transfer,
assign and deliver to ODC, and ODC will acquire and accept from Sabacol, all
of Sabacol's right, title and interest in and to the following assets and
properties (collectively, the "Sabacol Assets"), free and clear of any and all
options, pledges, mortgages, security interests, liens, charges, adverse
claims, rights, restrictions, burdens and encumbrances whatsoever
(collectively and individually, "Encumbrances"), except as otherwise expressly
provided herein:
1. All of the real property of Sabacol listed on Schedule
1.1.1.1 (the "Sabacol Real Property") including, without limitation, all fee
estates, leasehold interests, buildings, improvements, rights-of-way,
easements, rights, liberties, privileges, hereditaments and appurtenances
thereto or located thereon; and
2. All of the personal property of Sabacol listed on
Schedule 1.1.1.2 (the "Sabacol Personal Property").
1.1.2 The Sabacol Assets shall not include the following property
(the "Sabacol Excluded Assets"):
1. Any cash, cash equivalents, bank accounts, certificates
of deposit and securities of Sabacol;
2. Any intangible properties and rights of Sabacol,
wherever located and whether or not described or referred to herein,
including, without limitation, all know-how, trade secrets, technology,
computer software, programs, tapes, discs and related data processing
software, all patents and patent applications and rights and licenses
thereunder, trade names, trademark registrations and applications, common law
trademarks, service marks, copyrights and copyright registrations and
applications;
3. Any rights under any retirement, profit sharing or other
employee benefit plans of Sabacol and any and all of the assets or liabilities
of such plans; and
4. Any property or right, tangible or intangible, of
Sabacol relating to or arising out of the operation of its business other than
the Sabacol Assets, except for Sabacol's right to audit under the Sabacol
Contracts for periods prior to the Effective Time.
1.1.3 Payments Received. ODC shall be entitled to receive all
revenue that accrues from the Sabacol Assets on or after the Effective Time
(the "Sabacol Assets Revenue").
1.2 OPI Assets
1.2.1 Upon the terms and subject to the conditions of this
Agreement and in partial consideration for the Sabacol Assets, at the Closing,
effective as of the Effective Time, OPI will sell, convey, transfer, assign
and deliver to Sabacol, and Sabacol will acquire and accept from OPI, all of
OPI's right, title and interest in and to the following assets and properties
(collectively, the "OPI Assets"), free and clear of any and all Encumbrances,
except as otherwise expressly provided herein:
1. All of the real property of OPI listed on Schedule
1.2.1.1 (the "OPI Real Property") including, without limitation, all fee
estates, leasehold interests, buildings, improvements, rights-of-way,
easements, rights, liberties, privileges, hereditaments and appurtenances
thereto or located thereon; and
2. All of the personal property of OPI listed on Schedule
1.2.1.2 (the "OPI Personal Property").
1.2.2 The OPI Assets shall not include the following property (the
"OPI Excluded Assets"):
1. Any cash, cash equivalents, bank accounts, certificates
of deposit and securities of OPI;
2. Any intangible properties and rights of OPI, wherever
located and whether or not described or referred to herein, including, without
limitation, all know-how, trade secrets, technology, computer software,
programs, tapes, discs and related data processing software, all patents and
patent applications and rights and licenses thereunder, trade names, trademark
registrations and applications, common law trademarks, service marks,
copyrights and copyright registrations and applications;
3. Any rights under any retirement, profit sharing or other
employee benefit plans of the Omimex Group and any and all of the assets or
liabilities of such plans; and
4. Any property or right, tangible or intangible, of OPI
relating to or arising out of the operation of its business other than the OPI
Assets, except for OPI's right to audit under the OPI Contracts for periods
prior to the Effective Time.
1.2.3 Payments Received. Sabacol shall be entitled to receive all
revenue that accrues from the OPI Assets on or after the Effective Time (the
"OPI Assets Revenue").
1.3 Assumption of Liabilities.
1.3.1 Assumed Sabacol Liabilities. ODC shall assume and be liable
for all of Sabacol's obligations that arise under the contracts, leases,
arrangements and commitments set forth on Schedule 1.3.1 from and after the
Effective Time (collectively, the "Assumed Sabacol Liabilities"). If ODC
makes an Assumption Election under Section 2.2.1, then ODC shall also assume
the Assumed Tax Liability. No member of the Omimex Group shall assume or be
liable for (i) any obligation to perform or any obligation or liability for
default or nonperformance by Sabacol under the Assumed Sabacol Liabilities
that arises prior to the Effective Time, (ii) any liability relating to the
condition of the OPI Assets, except as otherwise provided herein or (iii) any
other debts, contracts, leases, liabilities, arrangements, commitments,
obligations, restrictions, disabilities or duties of Sabacol, except the
Assumed Tax Liability, if assumed under Section 2.2.1. Sabacol shall pay all
amounts that first accrue under the Assumed Sabacol Liabilities on or after
the Effective Time and before the Closing Date (the "Assumed Sabacol
Liabilities Payments") from Sabacol's own funds or the Sabacol Assets Revenue,
and ODC shall reimburse Sabacol for the Assumed Sabacol Liabilities Payments
that Sabacol paid from its own funds. Sabacol shall maintain all invoices,
receipts and other evidence of the Assumed Sabacol Liabilities Payments and
the source of funds used for payment thereof.
1.3.2 Assumed OPI Liabilities. Sabacol shall assume and be liable
for all of OPI's obligations that arise under the contracts, leases,
arrangements and commitments set forth on Schedule 1.3.2 from and after the
Effective Time (collectively, the "Assumed OPI Liabilities"). Sabacol shall
not assume or be liable for (i) any obligation to perform or any obligation or
liability for default or nonperformance by OPI under the Assumed OPI
Liabilities that arises prior to the Effective Time, (ii) any liability
relating to the condition of the Sabacol Assets, except as otherwise provided
herein or (iii) any other debts, contracts, leases, liabilities, arrangements,
commitments, obligations, restrictions, disabilities or duties of OPI. OPI
shall pay all amounts that first accrue under the Assumed OPI Liabilities on
or after the Effective Time and before the Closing Date (the "Assumed OPI
Liabilities Payments") from OPI's own funds or the OPI Assets Revenue, and
Sabacol shall reimburse OPI for the Assumed OPI Liabilities Payments that OPI
paid from its own funds. OPI shall maintain all invoices, receipts and other
evidence of the Assumed OPI Liabilities Payments and the source of funds used
for payment thereof.
ARTICLE II
PURCHASE PRICE
2.1 Purchase Price. The purchase price for the Sabacol Assets (the
"Purchase Price") shall be comprised of the items set forth below, subject to
the Contingent Payment described in Section 2.6 below and adjustment under
Sections 2.2.2 and 2.7. The Omimex Group shall pay the Purchase Price as
follows:
2.1.1 ORI shall cancel and fully release the Note, under which the
parties stipulate that the sum of $4,151,287.67 of principal and $205,863.67
of interest is due and owing as of the December 31, 1998 (collectively, the
"Note Amount");
2.1.2 OPI shall transfer the OPI Assets to Sabacol;
2.1.3 ODC shall assign to and fully release Sabacol from ODC's
claims to the Sabacol Indebtedness. The "Sabacol Indebtedness" is an amount
equal to:
(i) the amount of debt that Sabacol owes to ODC as of
December 31, 1998 under those certain Joint Operating Agreements between ODC
and Sabacol (the "ODC Agreements"), which debt the parties estimate to be in
the amount of $2,265,411; plus
(ii) the fair market value of the oil in the production
storage tanks located on the OPI Assets as of December 31, 1998 (the "OPI
Oil"), which the parties estimate to be in the amount of $2,060.86; minus
(iii) The amount of debt that OPI owes to Saba Petroleum,
Inc. as of December 31, 1998 relating to expenses of the Richfield East Dome
Unit (the "Redu Debt"), which debt the parties estimate to be in the amount of
$246,839.87.
2.1.4 ODC shall either (i) assume the Assumed Tax Liability (as
defined in Section 2.2.1) or (ii) deposit cash into the Escrow Account (as
defined in Section 2.2.3) in an amount equal to the Assumed Tax Liability.
2.1.5 ODC shall deposit cash into the Escrow Account in an amount
equal to the Positive Initial Settlement Amount (as defined in Section
2.2.2.3), if any.
2.2 Election; Escrow Account
2.2.1 Election. ODC may satisfy the Assumed Tax Liability by
electing to either (i) assume the Assumed Tax Liability (the "Assumption
Election") or (ii) deposit into the Escrow Account an amount equal to the
Assumed Tax Liability (the "Cash Election"). The "Assumed Tax Liability" shall
mean $2,322,765, the amount of the tax liability, including penalties and
interest, of Sabacol to the Direccion de Impuestos y Aduanas Racionales and/or
any entity that collects or holds funds on the behalf thereof (collectively,
"DIAN") that has accrued through December 31, 1998. ODC shall notify Sabacol
in writing of ODC's election with regard to the Assumed Tax Liability within
fifteen (15) business days after the date hereof. If ODC has not made such
election by such time, ODC shall waive the right to make a Cash Election and
shall assume the Assumed Tax Liability at the Closing. The parties
acknowledge and agree that no member of the Omimex Group shall have any
liability for (i) any taxes, including penalties and interest, of Sabacol to
any taxing authority in Colombia in excess of the Assumed Tax Liability,
whether incurred or accruing before, on or after the Effective Time, or (ii)
any penalties or interest incurred or accruing on the Assumed Tax Liability on
or after the Effective Time (collectively, the "Unassumed Tax Liability").
The aggregate amount of the Unassumed Tax Liability that Sabacol knows or
reasonably knows has accrued as of the date hereof and the Closing Date is set
forth on Schedule 2.2.1. Notwithstanding anything herein to the contrary, the
parties acknowledge and agree that Randeep Grewal, on behalf of Sabacol, and
Naresh Vashisht, on behalf of the Omimex Group, intend to negotiate a
settlement of the Assumed Tax Liability and Unassumed Tax Liability with DIAN.
The parties agree that Sabacol shall receive all benefits of any reduction in
the amount of the Assumed Tax Liability and the Unassumed Tax Liability that
results from such a settlement. If, for example, DIAN agrees to settle the
Assumed Tax Liability for less than $2,322,765, then (i) the amount of the
Assumed Tax Liability shall be reduced to such lower settlement amount and
(ii) Sabacol shall receive an adjustment in its favor under Section 2.2.2.1 in
an amount equal to the difference between $2,322,765 and the amount of such
settlement amount.
2.2.2 Initial Settlement Amount. No less than two (2) days prior
to the Closing Date, Sabacol and the Omimex Group shall jointly and fully
cooperate with each other to prepare an initial statement (the "Initial
Settlement Statement"), which shall calculate the initial adjustment to the
Purchase Price in accordance with this Section 2.2.2 (the "Initial Settlement
Amount").
1. Sabacol Adjustments. The Initial Settlement Statement
shall incorporate the following adjustments in favor of Sabacol (the "Initial
Sabacol Adjustments"):
a. An amount equal to the difference between (i)
$9,000,000 and (ii) the sum of the Note Amount, the Sabacol Indebtedness and
the Assumed Tax Liability, if such difference results in a positive number;
b. Any amount of the OPI Assets Revenue that OPI has
received and not used to pay any Assumed OPI Liabilities Payments;
c. Any amount of the Assumed Sabacol Liabilities
Payments that Sabacol paid from its own funds;
d. An amount equal to all capital costs, expenses and
any taxes that Sabacol pays, and that are, in accordance with generally
accepted accounting principles ("GAAP"), attributable to the Sabacol Assets
from and after the Effective Time, including, without limitation:
1) royalties, rentals or other similar charges;
2) expenses paid on behalf of ODC under
applicable operating agreements and, in the absence of an operating agreement,
expenses of the sort customarily billed under such agreements; and
3) ad valorem, property and other taxes and
assessments (but not including income taxes) based upon or measured by the
ownership of the Sabacol Assets or the production of hydrocarbons or the
receipt of proceeds therefrom;
e. The fair market value of the merchantable oil in
the production storage tanks located on the Sabacol Real Property as of
December 31, 1998;
f. The fair market value of Sabacol's inventory which
(i) was purchased (except from Texaco) and (ii) remained unused in the
warehouses located on the Sabacol Assets as of December 31, 1998;
g. The amount by which the debt that Sabacol owes to
ODC as of December 31, 1998 under the ODC Agreements is less than $2,265,411;
h. The amount by which the fair market value of the
OPI Oil is less than $2,060.86;
i. The amount by which the Redu Debt as of December
31, 1998 exceeds $246,839.87; and
j. Any other amount that any member of the Omimex
Group owes to Sabacol that is not otherwise covered hereunder.
2. Omimex Group Adjustments. The Initial Settlement
Statement shall incorporate the following adjustments in favor of the Omimex
Group (the "Initial Omimex Adjustments"):
a. An amount equal to the difference between (i)
$9,000,000 and (ii) the sum of the Note Amount, the Sabacol Indebtedness and
the Assumed Tax Liability, if such difference results in a negative number;
b. Any amount of the Sabacol Assets Revenue that
Sabacol has received and not used to pay any Assumed Sabacol Liabilities
Payments;
c. Any amount of the Assumed OPI Liabilities Payments
that OPI paid from its own funds;
d. An amount equal to all capital costs, expenses and
any taxes that any member of the Omimex Group pays, and that are, in
accordance with GAAP, attributable to the OPI Assets from and after the
Effective Time, including, without limitation:
1) royalties, rentals or other similar charges;
2) expenses paid on behalf of Sabacol under
applicable operating agreements and, in the absence of an operating agreement,
expenses of the sort customarily billed under such agreements; and
3) ad valorem, property and other taxes and
assessments (but not including income taxes) based upon or measured by the
ownership of the OPI Assets or the production of hydrocarbons or the receipt
of proceeds therefrom;
e. The amount by which the debt that Sabacol owes to
ODC as of December 31, 1998 under the ODC Agreements exceeds $2,265,411;
f. The amount by which the fair market value of the
OPI Oil exceeds $2,060.86;
g. The amount by which the Redu Debt as of December
31, 1998 is less than $246,839.87; and
h. Any other amount that Sabacol owes to any member of
the Omimex Group that is not otherwise covered hereunder.
3. The parties shall calculate the Initial Settlement
Amount by subtracting the total amount of the Initial Omimex Adjustments from
the total amount of the Initial Sabacol Adjustments. If the difference
between such amounts is positive (i.e., the amount of the Initial Sabacol
Adjustment exceeds the amount of the Initial Omimex Adjustment), such
difference is the "Positive Initial Settlement Amount". If the difference
between such amounts is negative (i.e., the amount of the Initial Omimex
Adjustment exceeds the amount of the Initial Sabacol Adjustment), such
difference is the "Negative Initial Settlement Amount". If the initial
adjustment to the Purchase Price results in a Positive Initial Settlement
Amount, then ODC shall deposit cash into the Escrow Account in an amount equal
to the Positive Initial Settlement Amount. If the initial adjustment to the
Purchase Price results in a Negative Initial Settlement Amount, then Sabacol
shall pay to ODC at the Closing cash in an amount equal to the Negative
Initial Settlement Amount.
2.2.3 Escrow Account. At the Closing, each of the parties
specified below shall place cash in the designated amounts in an escrow
account (the "Escrow Account") with Bank One, Texas, National Association (the
"Escrow Agent"), who shall hold and deliver such amounts in accordance with
the terms and conditions of the Escrow Agreement substantially in the form of
Exhibit A attached hereto (the "Escrow Agreement"), including fully satisfying
the Assumed Tax Liability, the Unassumed Tax Liability and the Schedule 3.17
Debt:
1. If ODC makes a Cash Election, ODC shall deposit cash in
an amount equal to the Assumed Tax Liability into the Escrow Account;
2. If the initial adjustment to the Purchase Price results
in a Positive Initial Settlement Amount, then ODC shall deposit cash in an
amount equal to the Positive Initial Settlement Amount into the Escrow
Account; and
3. Sabacol shall deposit cash into the Escrow Account in an
amount equal to the sum of (i) of the Unassumed Tax Liability and (ii) the
amount necessary to fully pay and discharge the Schedule 3.17 Debt, less the
Positive Initial Settlement Amount, if any. The Escrow Agent shall hold the
amounts of the (i) Assumed Tax Liability, if any, and the Unassumed Tax
Liability in one escrow account and (ii) the Schedule 3.17 Debt in a second
escrow account, all in accordance with the terms of the Escrow Agreement. All
references in this Agreement to "Escrow Account" shall mean the "Tax Escrow
Account or the Schedule 3.17 Debt Escrow Account, as appropriate and as
defined in the Escrow Agreement. ODC and Sabacol shall share equally the cost
of the Escrow Account. No claim of any creditor of Sabacol or ODC shall be
maintained against the sums held in the Escrow Account. ODC, Sabacol and the
Escrow Agent shall execute and deliver the Escrow Agreement at the Closing.
2.3 Allocation of Purchase Price. The Purchase Price shall be allocated
among the Sabacol Assets as set forth on Schedule 2.3. Each of parties agrees
to provide each of the other parties with all documents, analysis, schedules
and other information reasonably requested in order for the parties to prepare
a complete and accurate allocation of the aggregate Purchase Price to be paid
for the Sabacol Assets in accordance with Section 1060 of the Internal Revenue
Code of 1986, as amended (the "Code"). In addition, each of the parties
hereby undertakes and agrees to file timely any information that may be
required to be filed pursuant to the Treasury regulations promulgated under
Section 1060(b) of the Code. No party hereto shall file any tax return or
other document or otherwise take any position which is inconsistent with the
allocations provided on Schedule 2.3.
2.4 Initial Reference Value. Attached hereto as Schedule 2.4 is a true,
correct and complete copy of that certain reserve report of certain (i)
Sabacol Assets, which was prepared by Netherland Sewell and Associates, Inc.
("NSAI"), dated as of January 12, 1999 and effective as of January 1, 1999 and
(ii) OPI Assets, which was NSAI, dated as of February 10, 1999 and effective
as of January 1, 1999 (collectively, the "Report"). The Report (i) was
prepared in accordance with standards adopted by the Society of Petroleum
Engineers, to establish an Initial Reference Value ("IRV") for such properties
and (ii) utilizes the following assumptions:
1. Reserve volumes will be projected based on NSAI's analysis of
recent production histories, plans for future operations (including
development schedules) and other relevant factors;
2. Operating expenses, including direct charges, COPAS,
production taxes, ad valorem taxes and other recurring costs will be projected
based on current estimates for 1999 and will be held constant throughout the
life of the properties;
3. Capital expenditures will be projected based on current
estimates of the dollars and timing involved to convert properties to a
producing status;
4. For purposes of this section only, (i) the value of the
Sabacol Assets will be determined by using $10 per barrel oil price at the
well head in Colombia (a reserve projection using this oil price and projected
production is attached as Schedule 2.4.1) and (ii) the value of the OPI Assets
will be determined by using $10.75 per barrel oil price and the average gas
price received by OPI in December 1998 (a reserve projection using these oil
and gas prices and projected production is attached as Schedule 2.4.2);
5. Economic projections of future performance will be summarized
by category into proved producing ("PDP"), proved nonproducing ("PDNP") and
proved undeveloped ("PUD") categories, according to SPE standards; and
6. The IRV will be calculated by applying a 15% discount rate to
the future income streams projected in the reserve report and by applying an
additional factor of 75%, 50% and 25% to PDP, PDNP and PUD reserves,
respectively. The "Net IRV" will be calculated as the difference between the
IRV of the Sabacol Assets and the IRV of the OPI Assets.
2.5 Final Reference Value. Sabacol and the Omimex Group will cause NSAI
to prepare a revised reserve report (the "Revised Report") to establish a
Final Reserve Value ("FRV"). The Revised Report will be completed by January
31, 2000. The FRV will be calculated using the Report, except that the
effective date of the Revised Report will be January 1, 2000 and the prices to
be used will be the average of the wellhead prices received for production
during the period October 1, 1999 December 31, 1999 for the respective
properties. The Net FRV will be calculated as the difference between the FRV
of the Sabacol Assets and the FRV of the OPI Assets. The parties shall share
equally the cost and expense of preparing the Report and the Revised Report.
2.6 Contingent Payment.If the Net FRV is greater than the Net IRV,
Sabacol will be entitled to additional consideration. If the difference
between the Net FRV and the Net IRV is $5,000,000 or less, then ODC, at its
option, will be entitled to pay such amount to Sabacol either in cash or by
reassigning the Velasquez-Galan pipeline and pipeline-related interests
formerly owned by Sabacol (the "Pipeline Interest") to Sabacol. Such payment
or reassignment would be made on or before March 31, 2000 and, if reassigned,
the reassignment would be effective April 1, 2000. If the difference between
the Net FRV and the Net IRV is greater than $5,000,000, then Sabacol will have
the option to repurchase the Sabacol Assets by (i) paying ODC $12,000,000 plus
(a) an amount equal to the capital investments on the Sabacol Assets by ODC,
minus (b) an amount equal to the capital investments on the OPI Assets by
Sabacol, and (ii) reassigning the OPI Assets to OPI. If Sabacol exercises
this option, it will give written notice to the Omimex Group by May 31, 2000
of its intent to exercise this option and will close the transaction
contemplated by the option exercise by June 15, 2000, effective as of April 1,
2000. If the option is not exercised or, if the option is exercised and the
transactions contemplated by the option exercise are not closed by June 15,
2000, then ODC will have fifteen (15) days to either (i) pay Sabacol
$5,000,000 in cash or (ii) reassign the Pipeline Interest to Sabacol. ODC
shall operate the Sabacol Assets in the ordinary course of business, and shall
not dispose of the Sabacol Assets, until June 15, 2000. Any assets reassigned
hereunder to a party under this Section shall be free of all liens and
encumbrances at the time of reassignment.
2.7 Adjustments.
2.7.1 Final Adjustments Statement. On or before ninety (90) days
after Closing (the "Final Settlement Date"), Sabacol and the Omimex Group
shall jointly prepare a final statement (the "Final Settlement Statement"),
which shall calculate the final adjustment to the Purchase Price in accordance
with this Section 2.7 (the "Final Settlement Amount").
1. Sabacol Adjustments. The Final Settlement Statement
shall incorporate the following adjustments in favor of Sabacol (the "Final
Sabacol Adjustments"):
a. Any amount of the OPI Assets Revenue that OPI has
received, not used to pay any Assumed OPI Liabilities Payments and that was
not included in determining the Initial Settlement Amount;
b. Any amount of the Assumed Sabacol Liabilities
Payments that Sabacol paid from its own funds and that was not included in
determining the Initial Settlement Amount;
c. An amount equal to all capital costs, expenses and
any taxes that (i) Sabacol pays, and that are, in accordance with GAAP,
attributable to the Sabacol Assets from and after the Effective Time and (ii)
are not included in determining the Initial Settlement Amount, including,
without limitation:
1) royalties, rentals or other similar charges;
2) expenses paid on behalf of ODC under
applicable operating agreements and, in the absence of an operating agreement,
expenses of the sort customarily billed under such agreements; and
3) ad valorem, property and other taxes and
assessments (but not including income taxes) based upon or measured by the
ownership of the Sabacol Assets or the production of hydrocarbons or the
receipt of proceeds therefrom;
d. The fair market value of the merchantable oil in
the production storage tanks which (i) was located on the Sabacol Real
Property as of December 31, 1998 and (ii) was not included in determining the
Initial Settlement Amount;
e. The fair market value of Sabacol's inventory which
(i) was purchased (except from Texaco), (ii) remained unused in the warehouses
located on the Sabacol Assets as of December 31, 1998 and (iii) was not
included in determining the Initial Settlement Amount;
f. The amount by which the debt that Sabacol owes to
ODC as of December 31, 1998 under the ODC Agreements (i) is less than
$2,265,411 and (ii) was not included in determining the Initial Settlement
Amount;
g. The amount by which the fair market value of the
OPI Oil (i) is less than $2,060.86 and (ii) was not included in determining
the Initial Settlement Amount;
h. The amount by which the Redu Debt as of December
31, 1998 (i) exceeds $246,839.87 and (ii) was not included in determining the
Initial Settlement Amount; and
i. Any other amount that any member of the Omimex
Group owes to Sabacol that is not otherwise covered hereunder and that was not
included in determing the Initial Settlement Amount.
2. Omimex Group Adjustments. The Final Settlement
Statement shall incorporate the following adjustments in favor of the Omimex
Group (the "Final Omimex Adjustments"):
a. Any amount of the Unassumed Tax Liability and the
Schedule 3.17 Debt that was not satisfied at the Closing, which amount the
Omimex Group shall promptly pay to DIAN and other appropriate creditors;
b. Any amount of the Sabacol Assets Revenue that
Sabacol has received, not used to pay any Assumed Sabacol Liabilities Payments
and that was not included in determining the Initial Settlement Amount;
c. Any amount of the Assumed OPI Liabilities Payments
that OPI paid from its own funds and that was not included in determining the
Initial Settlement Amount;
d. An amount equal to all capital costs, expenses and
any taxes that (i) any member of the Omimex Group pays, and that are, in
accordance with GAAP, attributable to the OPI Assets from and after the
Effective Time and (ii) are not included in determining the Initial Settlement
Amount, including, without limitation:
1) royalties, rentals or other similar charges;
2) expenses paid on behalf of Sabacol under
applicable operating agreements and, in the absence of an operating agreement,
expenses of the sort customarily billed under such agreements; and
3) ad valorem, property and other taxes and
assessments (but not including income taxes) based upon or measured by the
ownership of the OPI Assets or the production of hydrocarbons or the receipt
of proceeds therefrom;
e. The amount by which the debt that Sabacol owes to
ODC as of December 31, 1998 under the ODC Agreements (i) exceeds $2,265,411
and (ii) was not included in determining the Initial Settlement Amount;
f. The amount by which the fair market value of the
OPI Oil (i) exceeds $2,060.86 and (ii) was not included in determining the
Initial Settlement Amount;
g. The amount by which the Redu Debt as of December
31, 1998 (i) is less than $246,839.87 and (ii) was not included in determining
the Initial Settlement Amount; and
h. Any other amount that Sabacol owes to any member of
the Omimex Group that is not otherwise covered hereunder and that was not
included in determining the Initial Settlement Amount.
3. The parties shall calculate the Final Settlement Amount
by subtracting the total amount of the Final Omimex Adjustments from the total
amount of the Final Sabacol Adjustments. If the difference between such
amount is positive, such difference is the "Positive Final Settlement Amount".
If the difference between such amounts is negative, such difference is the
"Negative Final Settlement Amount."
4. If the parties are unable to agree on the preparation of
the Final Settlement Statement or either party objects to the Final Settlement
Statement with ten (10) days after the Final Settlement Date, then either
party shall have the right thereafter to submit the matter to the dispute
resolution procedure set forth in Schedule 2.7 (the "Dispute Resolution
Procedure") for determination of the Final Settlement Amount.
5. The Omimex Group shall pay the amount of the Positive
Final Settlement Amount, if any, to Sabacol, and Sabacol shall pay the amount
of the Negative Final Settlement Amount, if any, to the Omimex Group, on or
before the later of (i) thirty-five (35) days after the Final Settlement Date
or (ii) ten (10) days from the determination of the Final Settlement Amount
under the Dispute Resolution Procedure. Interest shall accrue on any unpaid
amount of the Final Settlement Amount at the rate of ten percent (10%) per
annum from the date the specific amount begins to accrue.
2.8 Belridge Property. Within fifteen (15) days after the date hereof,
Sabacol shall cause Dames & Moore, a professional limited partnership, to
conduct a Phase I investigation of the property described on Schedule 2.8
hereof (the "Belridge Property") and to prepare and deliver to the parties a
Phase I report thereof (the "Phase I Report"). Sabacol and OPI shall share
equally the costs and expenses of preparing the Phase I Report. OPI agrees to
pay fifty percent (50%) of the cost of any mandatory remediation of the
Belridge Property required under applicable law and identified in the Phase I
Report (the "Mandatory Remediation"), provided that (i) any Mandatory
Remediation is performed and completed within one (1) year after the Closing
Date and (ii) the Omimex Group, as a whole, shall not be responsible to pay
more than $100,000 in the aggregate for any Mandatory Remediation. If the
estimated cost of all of the Mandatory Remediation specified in the Phase I
Report exceeds $200,000, Sabacol may elect to cause OPI to retain title to the
Belridge Property and pay Sabacol the value of the Belridge Property as set
forth on Schedule 2.3 in twelve (12) equal monthly installments, the first
installment being due and payable on the Closing Date and subsequent
installments being due and payable each month thereafter on the calendar day
of the Closing Date until such value is paid in full. If Sabacol fails to
notify OPI of such election in writing within five (5) business days of
Sabacol's receipt of the Phase I Report, Sabacol shall waive and forfeit the
right to make such election and shall retain the Belridge Property.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SABACOL
Sabacol represents and warrants to the Omimex Group as follows:
3.1 Due Organization and Qualification. Sabacol is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to own, lease
or operate its properties and to carry on its business as it is presently
being operated and in the place where such properties are owned, leased or
operated and such business is conducted. Sabacol is duly qualified or
licensed as a foreign corporation and in good standing in each jurisdiction in
which the character or location of the property owned, leased or operated by
it or the nature of the business conducted by it makes such qualification
necessary, except where the failure to be so qualified or licensed would not
have a material adverse effect on the business, operations, properties, assets
or condition (financial or otherwise), results of operations or prospects of
Sabacol or the Sabacol Assets (a "Sabacol Material Adverse Effect").
3.2 Title. Sabacol has, and upon conveyance of the Sabacol Assets to
ODC by Sabacol at the Closing, ODC will acquire and hold, good and marketable
title to all of the Sabacol Assets, free and clear of any and all
Encumbrances, except as set forth on Schedule 3.2.
3.3 Compliance with Laws. To the best of its knowledge, Sabacol has
complied with all laws, regulations, licensing requirements and orders
applicable to the Sabacol Assets, its business and personnel, except as set
forth in Schedule 3.3.
3.4 Contracts. Set forth on Schedule 3.4 is a true, correct and
complete list of all contracts, leases, arrangements and commitments (whether
oral or written) (copies of which, to the extent written, have been provided
to ODC) by which any of the Sabacol Assets are directly affected or are bound,
except those to which ODC is a party (collectively, the "Sabacol Contracts").
3.5 Contract Defaults. Neither Sabacol nor, to the best of Sabacol's
knowledge, any other party is in default in any material respect under any
Sabacol Contracts, and such Sabacol Contracts are legal, valid and binding
obligations of the respective parties thereto in accordance with their terms
and, except to the extent reflected in Schedule 3.5, have not been amended;
and no defenses, offsets or counterclaims thereto have been asserted or to the
best knowledge of Sabacol, may be made which could have a Sabacol Material
Adverse Effect, by any party thereto other than Sabacol nor has Sabacol waived
any substantial rights thereunder.
3.6 Litigation. Except for the Bankruptcy Case, Schedule 3.6 sets forth
a true, correct and complete list of all actions, suits, proceedings,
investigations or grievances pending against Sabacol or, to the best knowledge
of Sabacol, threatened against Sabacol or the Sabacol Assets, at law or in
equity or before or by any court or federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign (collectively, the "Agencies"). Except for the Bankruptcy
Case, none of the actions, suits, proceedings or investigations listed on
Schedule 3.6 either (i) has or would have, if adversely determined, a Sabacol
Material Adverse Effect or (ii) affects or would affect, if adversely
determined, the right of ability of Sabacol to carry on its business
substantially as now conducted. Except for the Bankruptcy Case, Sabacol is not
subject to, or in default under, any continuing court or Agency order, writ,
injunction or decree, which could have a Sabacol Material Adverse Effect.
3.7 Corporate Power and Authority. The execution, delivery and
performance of this Agreement by Sabacol, and all other agreements by and
among the parties related herewith, and the consummation by them of the
transactions contemplated hereby and thereby, have been duly authorized by all
requisite corporate action and no further action or approval is required in
order to permit Sabacol to consummate the transactions contemplated hereby and
thereby. No approval by the stockholders of Saba is required for the
execution, delivery or performance of this Agreement by Sabacol. This
Agreement constitutes, and all other agreements by and among the parties
related herewith, when executed and delivered in accordance with the terms
thereof, will constitute the legal, valid and binding obligations of Sabacol,
enforceable in accordance with their terms, except that (i) such enforcement
may be subject to bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally and (ii) the remedy of
specific performance and injunctive relief are subject to certain equitable
defenses and to the discretion of the court before which any proceedings may
be brought (collectively, the "Equitable Exceptions"). Sabacol has full
power, authority and legal right to enter into this Agreement, and all other
agreements by and among the parties related herewith, and to consummate the
transactions contemplated hereby and thereby. The making and performance of
this Agreement, and all other agreements by and among the parties related
herewith, and the consummation of the transactions contemplated hereby and
thereby in accordance with the terms hereof and thereof will not (a) conflict
with the Certificate of Incorporation or the Bylaws of Sabacol, (b) result in
any breach or termination of, or constitute a default under, or constitute an
event that with notice or lapse of time, or both, would become a default
under, or result in the creation of any Encumbrance upon any of the Sabacol
Assets under, or create any rights of termination, cancellation or
acceleration in any person under, any Sabacol Contract, or violate any order,
writ, injunction or decree, to which Sabacol is a party, by which any of the
Sabacol Assets, may be bound or affected or under which any of the Sabacol
Assets receive benefits, (c) result in the loss or adverse modification of any
Sabacol material permits, licenses or concessions or (d) result in the
violation of any provisions of law applicable to Sabacol, the violation of
which could have a Sabacol Material Adverse Effect.
3.8 Consents. Except as set forth on Schedule 3.8, no consent,
approval, notice to, registration or filing with, authorization or order of,
any court or other Agency or any other person or under any Sabacol Contract is
required in order to permit Sabacol to consummate the transactions
contemplated by this Agreement.
3.9 Insurance. Sabacol is adequately insured with responsible insurers
in respect of its properties against business risks normally insured against
by companies in similar lines of business. Set forth on Schedule 3.9 attached
hereto is an accurate list description of all policies and contracts of fire,
casualty, liability and other forms of insurance and all fidelity bonds held
by Sabacol (including insurer, named insured, type of coverage, limits of
insurance, required deductibles or co-payments, annual premiums and expiration
dates). All such policies are in full force and effect and shall remain in
full force and effect through the Closing Date and are adequate for the
business of Sabacol. Except as disclosed on Schedule 3.9, no pending claims
made by or on behalf of Sabacol under such policies have been denied or are
being defended against third parties under a reservation of rights by an
insurer thereof. All premiums due prior to the date hereof for periods prior
to the date hereof with respect to such policies and contracts have been
timely paid.
3.10 Taxes. To the best of Sabacol's knowledge and except as set forth
in Schedule 3.3, Sabacol has duly filed all federal, state, county, local and
other excise, franchise, property, payroll, income, capital stock, sales and
use and other tax returns, domestic or foreign, that are required to be filed
by it, the absence of which has a Sabacol Material Adverse Effect, and all
such returns are true, correct and complete in all respects. Except as set
forth in Schedule 3.3, Sabacol has paid all taxes which have become due or
have been assessed against it or the Sabacol Assets and all taxes, penalties
and interest which any taxing authority has proposed or asserted to be owing.
Except as set forth in Schedule 3.3, all tax liabilities to which the
properties of Sabacol may have been subjected have been discharged except for
taxes assessed but not yet payable. Except as set forth in Schedule 3.3, there
are no tax claims presently being asserted against Sabacol or the Sabacol
Assets and Sabacol knows of no basis for any such claim. Sabacol has not
granted any extension to any taxing authority of the limitation period during
which any tax liability may be asserted thereby. Schedule 2.2.1 accurately
reflects the Unassumed Tax Liability that Sabacol knows or reasonably knows
has accrued as of the date hereof and the Closing Date.
3.11 Environmental Laws and Regulations. The Sabacol Assets shall be
delivered AS IS WHERE IS without any representation or warranty as to
environmental condition.
3.12 Absence of Certain Changes or Events. Since the Petition Date,
Sabacol has not (i) suffered any extraordinary losses or waived any rights of
substantial value or (ii) suffered any event or circumstance that could have a
Sabacol Material Adverse Effect.
3.13 True, Correct and Complete Information. To the best of Sabacol's
knowledge, all written agreements, lists, schedules, instruments, exhibits,
documents, certificates, reports, statement and other writings furnished to
the Omimex Group pursuant hereto or in connection with this Agreement or the
transactions contemplated hereby are and will be complete and accurate in all
material respects. No representation or warranty by Sabacol contained in this
Agreement, in the schedules attached hereto or in any certificate furnished or
to be furnished by Sabacol to the Omimex Group in connection herewith or
pursuant hereto contains or will contain any untrue statement of a material
fact or omits or will omit to state any material fact necessary in order to
make any statement contained herein or therein not misleading. There is no
fact known to Sabacol that has specific application to the Sabacol Assets
(other than general economic or industry conditions) and that could have a
Sabacol Material Adverse Effect that has not been set forth in this Agreement
or any schedule hereto. Sabacol has not entered into any letter of intent,
preliminary agreement or other contract with any other party that would be
inconsistent with the terms of this Agreement.
3.14 Availability of Documents. Sabacol has made available for
inspection by the Omimex Group at the offices of Sabacol true, correct and
complete copies of Sabacol's Certificate of Incorporation and Bylaws and all
Sabacol Contracts and documents referred to herein or in any Schedule referred
to herein, in each case, together with all amendments and supplements thereto.
3.15 Broker's and Finder's Fees. Sabacol has not made any agreement
with any person or entity, or taken any action which would cause any person or
entity, to become entitled to an agent's, broker's or finder's fee or
commission in connection with the transactions contemplated by this Agreement.
3.16 Solvency. On the Closing Date, the consummation of the sale of the
Sabacol Assets pursuant to the provisions of this Agreement will not render
Sabacol without sufficient assets to pay any and all liabilities and will not
adversely affect Sabacol's ability to pay debts as they become due and owning.
Immediately after the transfers contemplated by this Agreement, Sabacol will
have the ability to pay both its past due debts and its current debts as they
become due and owing. Further, the transfers contemplated by this Agreement
will not render the value of Sabacol's combined assets less than the value of
Sabacol's liabilities.
3.17 Debts.Schedule 3.17 accurately reflects all debts and liabilities
that (i) Sabacol has incurred in the ordinary course of its business and are
outstanding, (ii) individually, exceed $1,000 and (iii) arose (a) prior to the
Effective Time (except the Assumed Tax Liability, the Unassumed Tax Liability
and the Sabacol Indebtedness) or (b) on and after the Effective Time through
the Closing Date (except the Assumed Sabacol Liabilities) (collectively, the
"Schedule 3.17 Debt"). The Schedule 3.17 Debt shall (i) include, without
limitation, the amount of such debts, the persons or entities to whom these
debts are owed and the nature of these debts and (ii) not include the Assumed
Tax Liability, the Unassumed Tax Liability, the Sabacol Indebtedness and legal
and other professional fees and expenses that Sabacol incurs (a) in connection
with the Bankruptcy Case or (b) in the negotiation, execution and performance
of this Agreement.
3.18 Condition of OPI Assets. SUBJECT TO THE REPRESENTATIONS,
WARRANTIES AND COVENANTS HEREIN PROVIDED, SABACOL ACCEPTS THE OPI ASSETS AND
SABACOL INDEBTEDNESS AS IS, WHERE IS, IN THEIR PRESENT CONDITION AND STATE OF
REPAIR, AND WITHOUT ANY REPRESENATIONS, GUARANTIES OR WARRANTIES, EXPRESS OR
IMPLIED, AS TO VALUE, QUALILTY, MERCHANTABILITY, OR THEIR SUITABILITY OR
FITNESS FOR SABACOL'S INTENDED USE OR FOR ANY USES OR PURPOSES WHATSOEVER, OR
THAT SAID INTERESTS HAVE BEEN RENDERED FREE OF ANY DEFECTS, HAZARDS OR
DANGEROUS CONDITIONS.
3.19 Actual Knowledge. The parties acknowledge that the ODC has been
the operator of the Sabacol Assets. For purposes of this Article III,
"knowledge" shall be defined as the actual knowledge of Sabacol.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE OMIMEX GROUP
Each member of the Omimex Group, jointly and severally, represents and
warrants to Sabacol as follows:
4.1 Due Organization and Qualification. Each of the Omimex Group is a
corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation, and has all requisite corporate power
and authority to own, lease or operate its properties and to carry on its
business as it is presently being operated and in the place where such
properties are owned, leased or operated and such business is conducted. Each
of the Omimex Group is duly qualified or licensed as a foreign corporation and
in good standing in each jurisdiction in which the character or location of
the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure
to be so qualified or licensed would not have a material adverse effect on the
business, operations, properties, assets or condition (financial or
otherwise), results of operations or prospects of OPI or the OPI Assets (an
"OPI Material Adverse Effect") or any other member of Omimex Group or its
assets.
4.2 Title. OPI has, and upon conveyance of the OPI Assets to Sabacol by
OPI at the Closing, Sabacol will acquire and hold, good and marketable title
to all of the OPI Assets, free and clear of any and all Encumbrances, except
as set forth on Schedule 4.2.
4.3 Compliance with Laws. To the best of its knowledge, each of the
Omimex Group has complied with all laws, regulations, licensing requirements
and orders applicable to its business or personnel, except as set forth in
Schedule 4.3.
4.4 Contracts. Set forth on Schedule 4.4 is a true, correct and
complete list of all contracts, leases, arrangements and commitments (whether
oral or written) (copies of which, to the extent written, have been provided
to Sabacol) by which any of the OPI Assets are directly affected or are bound,
except those to which Sabacol is a party (the "OPI Contracts").
4.5 Contract Defaults. Neither any member of the Omimex Group nor, to
the best of the Omimex Group's knowledge, any other party is in default in any
material respect under any OPI Contract, and such OPI Contracts are legal,
valid and binding obligations of the respective parties thereto in accordance
with their terms and, except to the extent reflected in Schedule 4.5, have not
been amended; and no defenses, offsets or counterclaims thereto have been
asserted or to the best knowledge of OPI, may be made which could have an OPI
Material Adverse Effect, by any party thereto other than OPI nor has OPI
waived any substantial rights thereunder.
4.6 Litigation. Set forth on Schedule 4.6 is a true, correct and
complete list of all actions, suits, proceedings, investigations or grievances
pending against each of the Omimex Group or, to the best knowledge of each of
the Omimex Group, threatened against the Omimex Group or the OPI Assets, at
law or in equity or before or by any Agency. None of the actions, suits,
proceedings or investigations listed on Schedule 4.6 either (i) has or would
have, if adversely determined, an OPI Material Adverse Effect or (ii) affects
or would affect, if adversely determined, the right or ability of each of the
Omimex Group to carry on its business substantially as now conducted. No
member of the Omimex Group is subject to, or in default under, any continuing
court or Agency order, writ, injunction or decree, which could have an OPI
Material Adverse Effect.
4.7 Corporate Power and Authority. The execution, delivery and
performance of this Agreement by each of the Omimex Group, and all other
agreements by and among the parties related herewith, and the consummation by
it of the transactions contemplated hereby and thereby, have been duly
authorized by all requisite corporate action and no further action or approval
is required in order to permit each of the Omimex Group to consummate the
transactions contemplated hereby and thereby. This Agreement constitutes, and
all other agreements by and among the parties related herewith, when executed
and delivered in accordance with the terms thereof, will constitute the legal,
valid and binding obligations of each of the Omimex Group, enforceable in
accordance with their terms, except for the Equitable Exceptions. Each member
of the Omimex Group has full power, authority and legal right to enter into
this Agreement, and all other agreements by and among the parties related
herewith, and to consummate the transactions contemplated hereby and thereby.
The making and performance of this Agreement, and all other agreements by and
among the parties related herewith, and the consummation of the transactions
contemplated hereby and thereby in accordance with the terms hereof and
thereof will not (a) conflict with the Certificate of Incorporation or the
Bylaws of each of the Omimex Group, (b) result in any breach or termination
of, or constitute a default under, or constitute an event that with notice or
lapse of time, or both, would become a default under, or result in the
creation of any Encumbrance upon any of the OPI Assets under, or create any
rights of termination, cancellation or acceleration in any person under, any
OPI Contract, or violate any order, writ, injunction or decree, to which each
of the Omimex Group is a party, by which any of the OPI Assets, business or
operations of each of the Omimex Group may be bound or affected or under which
any of the OPI Assets receive benefits, (c) result in the loss or adverse
modification of any OPI material permits, licenses or concessions or (d)
result in the violation of any provisions of law applicable to OPI, the
violation of which could have an OPI Material Adverse Effect on any of the
Omimex Group.
4.8 Consents. Except as set forth on Schedule 4.8, no consent,
approval, notice to, registration or filing with, authorization or order of,
any court or other Agency or any other person or under any OPI Contract is
required in order to permit each of the Omimex Group to consummate the
transactions contemplated by this Agreement.
4.9 Insurance. OPI is adequately insured with responsible insurers in
respect of its properties against business risks normally insured against by
companies in similar lines of business. Set forth on Schedule 4.9 attached
hereto is an accurate list description of all policies and contracts of fire,
casualty, liability and other forms of insurance and all fidelity bonds held
by OPI (including insurer, named insured, type of coverage, limits of
insurance, required deductibles or co-payments, annual premiums and expiration
dates). All such policies are in full force and effect and shall remain in
full force and effect through the Closing Date and are adequate for the
business of OPI. Except as disclosed on Schedule 4.9, no pending claims made
by or on behalf of OPI under such policies have been denied or are being
defended against third parties under a reservation of rights by an insurer
thereof. All premiums due prior to the date hereof for periods prior to the
date hereof with respect to such policies and contracts have been timely paid.
4.10 Taxes. To the best of the knowledge of each of the Omimex Group,
each of the Omimex Group has duly filed all federal, state, county, local and
other excise, franchise, property, payroll, income, capital stock, sales and
use and other tax returns that are required to be filed by it, the absence of
which has an OPI Material Adverse Effect, and all such returns are true,
correct and complete in all respects. Each of the Omimex Group has paid all
taxes which have become due or have been assessed against it or the OPI Assets
and all taxes, penalties and interest which any taxing authority has proposed
or asserted to be owing. All tax liabilities to which the properties of each
of the Omimex Group may have been subjected have been discharged except for
taxes assessed but not yet payable. There are no tax claims presently being
asserted against each of the Omimex Group or the OPI Assets and each of the
Omimex Group knows of no basis for any such claim. No member of the Omimex
Group has granted any extension to any taxing authority of the limitation
period during which any tax liability may be asserted thereby.
4.11 Environmental Laws and Regulations. The OPI Assets shall be
delivered AS IS WHERE IS without any representation or warranty as to
environmental condition, except with respect to the Belridge Property as set
forth in Section 4.19.
4.12 Absence of Certain Changes or Events. Since December 31, 1998, OPI
has not (i) suffered any extraordinary losses or waived any rights of
substantial value or (ii) suffered any event or circumstance that could have
an OPI Material Adverse Effect.
4.13 True, Correct and Complete Information. To the best knowledge of
each of the Omimex Group, all written agreements, lists, schedules,
instruments, exhibits, documents, certificates, reports, statement and other
writings furnished to Sabacol pursuant hereto or in connection with this
Agreement or the transactions contemplated hereby are and will be complete and
accurate in all material respects. No representation or warranty by any of
the Omimex Group contained in this Agreement, in the schedules attached hereto
or in any certificate furnished or to be furnished by any of the Omimex Group
to Sabacol in connection herewith or pursuant hereto contains or will contain
any untrue statement of a material fact or omits or will omit to state any
material fact necessary in order to make any statement contained herein or
therein not misleading. There is no fact known to any of the Omimex Group
that has specific application to the OPI Assets (other than general economic
or industry conditions) and that could have an OPI Material Adverse Effect
that has not been set forth in this Agreement or any schedule hereto. Each of
the Omimex Group has not entered into any letter of intent, preliminary
agreement or other contract with any other party that would be inconsistent
with the terms of this Agreement.
4.14 Availability of Documents. Each of the Omimex Group has made
available for inspection by Sabacol at the offices of ORI true, correct and
complete copies of OPI's Certificate of Incorporation and Bylaws and all OPI
Contracts and documents referred to herein or in any Schedule referred to
herein, in each case, together with all amendments and supplements thereto.
4.15 Broker's and Finder's Fees. No member of the Omimex Group has made
any agreement with any person, or taken any action which would cause any
person, to become entitled to an agent's, broker's or finder's fee or
commission in connection with the transactions contemplated by this Agreement.
4.16 Solvency. On the Closing Date, the consummation of the sale of the
OPI Assets pursuant to the provisions of this Agreement will not render any
member of the Omimex Group without sufficient assets to pay any and all of its
liabilities and will not adversely affect its ability to pay debts as they
become due and owning. Immediately after the transfers contemplated by this
Agreement, each of the Omimex Group will have the ability to pay both its past
due debts and its current debts as they become due and owing. Further, the
transfers contemplated by this Agreement will not render the value of combined
assets of each of the Omimex Group less than the value of its liabilities.
4.17 Condition of Sabacol Assets. SUBJECT TO THE REPRESENTATIONS,
WARRANTIES AND COVENANTS HEREIN PROVIDED, ODC ACCEPTS THE SABACOL ASSETS AS
IS, WHERE IS, IN THEIR PRESENT CONDITION AND STATE OF REPAIR, AND WITHOUT ANY
REPRESENATIONS, GUARANTIES OR WARRANTIES, EXPRESS OR IMPLIED, AS TO VALUE,
QUALILTY, MERCHANTABILITY, OR THEIR SUITABILITY OR FITNESS FOR ODC'S INTENDED
USE OR FOR ANY USES OR PURPOSES WHATSOEVER, OR THAT SAID INTERESTS HAVE BEEN
RENDERED FREE OF ANY DEFECTS, HAZARDS OR DANGEROUS CONDITIONS.
4.18 Actual Knowledge. The parties acknowledge that the Saba Petroleum,
Inc. has been the operator of the OPI Assets, except for the Belridge
Property. For purposes of this Article IV, "knowledge" shall be defined as
the actual knowledge of the Omimex Group.
4.19 Additional Representations and Warranties with respect to the
Belridge Property. To the best of OPI's knowledge:
(a) All royalties, rentals and other payments due by OPI under
the OPI Contracts relating to the Belridge Property have been properly and
timely paid, and all conditions necessary to keep such OPI Contracts in force
have been fully performed by OPI.
(b) OPI is not obligated, by virtue of a prepayment arrangement,
a "take or pay" arrangement, a production payment or any other arrangement, to
deliver hydrocarbons produced from the Belridge Property at some future time
without then or thereafter receiving fully payment therefor.
(c) Except for the OPI Contracts under which the OPI is
presently selling production, no hydrocarbons produced from the Belridge
Property are subject to a sales contract or other agreement relating to the
production, gathering, transporting, processing, treating or marketing of
hydrocarbons, and no person has any call upon, option to purchase or similar
rights with respect to the Belridge Property or to the production therefrom.
(d) All ad valorem, property, production, severance, excise and
similar taxes and assessments based on or measured by the ownership of
property or the production of hydrocarbons or the receipt of proceeds
therefrom on the Belridge Property that have become due and payable by OPI
have been properly and timely paid.
(e) OPI is currently receiving from all purchasers of production
from the Belridge Property at least the net revenue interests set forth on
Schedule 1.2.1.1 without suspense or any indemnity other than standard
division order warranties.
(f) OPI is in material compliance with all laws, ordinances,
rules, regulations and orders applicable to the Belridge Property, including,
without limitation, environmental laws, except to the extent of any
non-compliance that is not reasonably expected to result in an OPI Material
Adverse Effect.
(g) No portion of the Belridge Property is either overproduced
or underproduced in natural gas under any gas balancing agreement or gas
storage agreement or in regard to any well, pooling unit or unitilized area
without such agreement.
(h) No portion of the Belridge property is subject to a consent
to assignment or preferential right to purchase, except as to Saba Petroleum,
Inc. pursuant to that certain Operating Agreement dated November 1, 1993
between OPI and Saba Petroleum, Inc..
ARTICLE V
COVENANTS OF SABACOL
Sabacol covenants and agrees with the Omimex Group as follows:
5.1 Affirmative Covenants. Prior to the Closing, Sabacol will operate
its business only in the usual, regular and ordinary course of business
consistent with good business practices, and will use its best efforts to:
(i) preserve intact its business organization and the Sabacol Assets; (ii)
maintain its properties, machinery and equipment in good operating condition
and repair; (iii) continue all existing policies of insurance (or comparable
insurance) in full force and effect up to and including the Closing (and will
not cancel any such insurance or take (or fail to take) any action that would
enable the insurers under such policies to avoid liability for claims arising
out of any occurrence prior to the Closing without the prior written consent
of the Omimex Group); (iv) use its best efforts to preserve its present
relationships with lending and other financial institutions, domestic and
foreign Agencies, suppliers and customers; and (v) maintain its books,
accounts and records in the usual, regular and ordinary manner on a basis
consistently applied. Sabacol will promptly notify the Omimex Group in
writing of learning of any fact, event or circumstance that is reasonably
likely to have a Sabacol Material Adverse Effect.
5.2 Negative Covenants. Prior to the Closing, Sabacol will operate its
business only in the usual, regular and ordinary course of business consistent
with good business practices, and will not, without the prior written consent
of the Omimex Group, take any action that, or omit to take any action, the
absence of which, would have a Sabacol Material Adverse Effect.
5.3 Access to Properties and Records. Sabacol will keep the Omimex
Group advised of all material developments relevant to the consummation of the
transactions contemplated hereby and will cooperate fully in permitting the
Omimex Group to make a full investigation of the business, properties,
financial condition and investments of Sabacol during regular business hours
and upon reasonable notice and in bringing about the consummation of the
transactions contemplated hereby. Sabacol will, during regular business hours
and upon reasonable notice, afford to the Omimex Group and its representatives
full access to the offices, buildings, real properties, machinery and
equipment, inventory and supplies, records, files, books of account, tax
returns, agreements and commitments, corporate record books and stock books
and personnel of Sabacol, and will permit the Omimex Group and its
representatives to contact and interview Sabacol's personnel, suppliers,
vendors, referral sources and any other persons that the Omimex Group shall
reasonably determine to be necessary for it to make a full investigation of
Sabacol's business. Sabacol will furnish to the Omimex Group all such further
information concerning the business and affairs of Sabacol as the Omimex Group
may reasonably request. Prior to the Closing Date, Sabacol will update by
amendment or supplement each of the Schedules referred to herein and any other
disclosure in writing from Sabacol required by this Agreement to be disclosed
in writing by Sabacol to the Omimex Group promptly upon any change in the
information set forth in such Schedules or other disclosures. No
investigation pursuant to this Section 5.3 shall affect any representations or
warranties or the conditions to the obligations of the Omimex Group to
consummate the transactions contemplated hereby. In the event of the
termination of this Agreement, the Omimex Group will deliver to Sabacol all
documents, work papers and other material (including copies thereof) obtained
by the Omimex Group or on its behalf from Sabacol as a result of this
Agreement or in connection herewith, whether so obtained before or after the
execution hereof and, if the transactions contemplated hereby are not
consummated, the Omimex Group will hold such information in confidence until
such time as such information is otherwise publicly available.
5.4 Employees of Sabacol. Sabacol shall be responsible for all claims
made by its employees for wages, salaries, bonuses, pension, workmen's
compensation, medical insurance, disability, vacation, severance, pay in lieu
of notice, sick benefits or other compensation or benefit arrangements in
respect of the service of such employees prior to the Closing Date and any
termination of such employees. If Sabacol terminates any such employees, ODC
may, but is not obligated to, hire such terminated employees on such terms and
conditions as ODC shall determine in its sole discretion.
5.5 Approvals of Third Parties. As soon as practicable after the date
hereof, Sabacol will use its best efforts to secure all necessary consents,
approvals and clearances of third parties that shall be required to consummate
the transactions contemplated hereby and will otherwise use its best efforts
to cause the consummation of such transactions in accordance with the terms
and conditions of this Agreement.
5.6 Notices. Sabacol will timely give all notices required to be given
relating to the transactions contemplated hereby, including without
limitation, (i) notices to employees, (ii) any notices required or requested
to be given to all creditors and claimants against Sabacol and (iii) any
notices required or requested to be given pursuant to applicable bulk sales
laws or similar laws.
5.7 Access to Books and Records. Sabacol agrees to provide the Omimex
Group, its accountants, counsel and other representatives, during normal
business hours and upon reasonable notice, for a period of seven (7) years
after the Closing Date, access to the books, records, income tax returns,
contracts and other underlying data and documentation of Sabacol relating to
the period prior to the Closing Date and to make available to the Omimex Group
personnel of Sabacol in the Omimex Group's review thereof for the purpose of
enabling them to determine and calculate any tax liabilities in connection
with the Sabacol Assets. Sabacol agrees that, for such seven (7) year period,
it will preserve and keep intact all such books and records.
5.8 No Solicitation of Offers. Until the earlier of the (i) termination
of this Agreement in accordance with its terms or (ii) the consummation of the
transactions contemplated hereby, except in the exercise of the good faith
judgement of the board of directors of Sabacol as to the fiduciary duties to
its stockholders imposed by law, on the basis of written advice given by
outside counsel, Sabacol shall not, directly or indirectly, through any
officer, director, stockholder, employee, representative, agent or affiliate,
solicit, entertain, encourage, assist (including by way of furnishing
nonpublic information) or take other action, either directly or indirectly, to
facilitate any inquiries or the making of any proposal that constitutes or may
reasonably be expected to lead to an Acquisition Proposal (as defined below)
from any person or entity, or engage in any discussions or negotiations
relating thereto or in furtherance thereof or accept any Acquisition Proposal.
For purposes of this Agreement, "Acquisition Proposal" means any inquiries or
proposals regarding (i) any merger, consolidation, sale of substantial assets
or similar transactions involving Sabacol or any of its subsidiaries (other
than sales of assets or inventory in the ordinary course of business), (ii)
purchase of 20% or more of the outstanding shares of capital stock of Sabacol
(including, without limitation, by way of a tender offer or an exchange offer)
or similar transactions involving Sabacol or any of its subsidiaries, (iii)
the acquisition by any person or entity of beneficial ownership or a right to
acquire beneficial ownership of, or the formation of any "group" (as defined
under Section 13(d) of the Securities Exchange Act of 1934 and the rules and
regulations thereunder) which beneficially owns, or has the right to acquire
beneficial ownership of 20% or more of the then outstanding shares of capital
stock of Sabacol or (iv) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing. The Omimex Group hereby acknowledges that Saba and Horizontal
Ventures, N.V. intend to enter into a business combination and such
combination shall not constitute an Acquisition Proposal or violate this
Section 5.8.
Sabacol shall immediately cease and cause to be terminated any existing
discussions or negotiations with any parties (other than the Omimex Group)
conducted currently or prior to the date of this Agreement with respect to an
Acquisition Proposal.
In the event that Sabacol receives or knows of an offer or proposal to
enter negotiations relating to an Acquisition Proposal, Sabacol shall
immediately notify the Omimex Group thereof, including information as to the
identity of the offeror or the party making any such offer or proposal and the
principal financial terms and conditions of such offer or proposal, as the
case may be.
5.9 Bankruptcy Matters
1. Motion for Approval. Within five (5) business days after the
date hereof, Sabacol shall file a written motion (the "Motion for Approval")
in a form reasonably acceptable to the Omimex Group requesting the Bankruptcy
Court to approve this Agreement and to enter a written order (the "Bankruptcy
Approval Order") that orders, among other things, that:
a. The terms and conditions of this Agreement, all
Exhibits, Schedules and ancillary agreements to this Agreement, including,
without limitation, the Escrow Agreement, Sections 5.8 and 11.3 and the
transactions contemplated hereby, are approved in accordance with the
Bankruptcy Code, including 11 U.S.C. section 363(b) and (f);
b. The Omimex Group is a good faith purchaser for value of
the Sabacol Assets under 11 U.S.C. section 363(m);
c. The Escrow Agent is authorized to make the transfers
required under the Escrow Agreement and any stay imposed upon the Escrow Agent
under 11 U.S.C. section 362(a) is terminated with respect to the obligations
imposed under the Escrow Agreement;
d. The Omimex Group's purchase of the Sabacol Assets be
free and clear of all Encumbrances whatsoever (except for those expressly
assumed herein) that pre-date the conveyance of the Sabacol Assets to ODC in
accordance with 11 U.S.C. section 363(f);
e. Any claim by the Omimex Group against Sabacol arising
under the terms of this Agreement, including, without limitation, the Omimex
Losses and any attorney and other fees recoverable with respect to such
claims, be accorded priority status as a Chapter 11 administrative expense in
the Bankruptcy Case, in accordance with 11 U.S.C. sections 503(b) and 507(a)(1);
f. ODC assume and undertake only the Assumed Sabacol
Liabilities and, if ODC makes an Assumption Election, the Assumed Tax
Liability. No member of the Omimex Group shall be liable or obligated to any
third party for the liabilities or obligations of Sabacol to such third party
by virtue of having purchased the Sabacol Assets other than the Assumed
Sabacol Liabilities and, if ODC makes on Assumption Election, the Assumed Tax
Liability;
g. Sabacol timely cure any and all defaults under the
Sabacol Contracts as of the Closing Date;
h. Sabacol assume and assign the Sabacol Contracts to the
Omimex Group under 11 U.S.C. section 365;
i. All stipulations of the parties herein are approved; and
j. This Agreement and the transactions contemplated hereby
shall remain in full force and effect and binding on the parties hereto upon
dismissal of the Bankruptcy Case.
Sabacol shall use its reasonable best efforts to obtain, and the Omimex
Group shall fully cooperate with Sabacol to obtain, (i) a hearing on the
Motion for Approval (the "Approval Hearing") as soon as possible after Sabacol
files the Motion for Approval or such other time to which the parties mutually
agree and (ii) entry of (a) the Bankruptcy Approval Order, including, without
limitation, providing notice to creditors and other parties in interest in
accordance with the Bankruptcy Code and (b) an order that Sabacol may not file
any voluntary petition seeking bankruptcy relief under Title 11 of the United
States Code within 91 days after the Closing Date. Sabacol shall oppose the
Bankruptcy Court's consideration of any Acquisition Proposal until the earlier
of (i) termination of this Agreement in accordance with its terms or (ii)
consummation of the transactions contemplated hereby.
2. Notice. Sabacol shall cause notice of the Motion for Approval
and any other motion or notice concerning this Agreement to be made in
accordance with the Bankruptcy Code and applicable case law. The Omimex Group
is permitted to cause any notice concerning this Agreement to be served upon
any person or entity.
5.10 Capital Commitments. Except with respect to the Assumed Sabacol
Liabilities, Sabacol covenants and agrees that it will be liable for and will
promptly pay for (i) all capital improvements to the Sabacol Assets completed
prior to or in progress but unpaid at the Effective Time and (ii) all assets
or properties delivered to Sabacol but unpaid at the Effective Time; provided,
however, that Sabacol shall not be liable for the cost of installing any such
assets or properties if they are installed after the Effective Time.
5.11 Release of Financing Statements. Sabacol shall obtain and file in
the appropriate jurisdictions termination statements properly executed by any
parties holding a security interest or other Encumbrance with respect to the
Sabacol Assets as identified by lien searches conducted with respect to
Sabacol and the Sabacol Assets.
5.12 Colombian Execution Procedure.
5.12.1 Within five (5) business days after the date of this
Agreement, Sabacol shall prepare, execute and deliver to Empresa Colombiana de
Petroleos ("Ecopetrol") a written request for approval in principle (the
"Ecopetrol Approval") of the assignment and transfer to ODC of all of
Sabacol's right, title and interest in the Cocorna Association Agreement and
the Nare Association Agreement, both dated on or about September 30, 1980
among Ecopetrol, Texas Petroleum Company, ODC and Sabacol, as amended
(collectively, the "Association Agreements").
5.12.2 Within five (5) business days after the later of the date of
the Bankruptcy Approval Order or receipt of the Ecopetrol Approval, Sabacol
and ODC shall prepare, execute and deliver to Ecopetrol assignment documents
(the "Ecopetrol Assignment Documents") in which Sabacol assigns its right,
title and interest in the Association Agreements to ODC.
5.12.3 At the Closing, Sabacol and ODC shall prepare, execute and
deliver to the appropriate Colombian notary public and Colombian governmental
authorities the public deeds and other documents and instruments necessary to
transfer all of Sabacol's right, title and interest in the Association
Agreements to ODC.
ARTICLE VI
COVENANTS OF THE OMIMEX GROUP
Each of the Omimex Group covenants and agrees with Sabacol as follows:
6.1 Affirmative Covenants. Prior to the Closing, OPI will operate its
business only in the usual, regular and ordinary course of business consistent
with good business practices, and will use its best efforts to: (i) preserve
intact its business organization and the OPI Assets; (ii) maintain its
properties, machinery and equipment in good operating condition and repair;
(iii) continue all existing policies of insurance (or comparable insurance) in
full force and effect up to and including the Closing Date (and will not
cancel any such insurance or take (or fail to take) any action that would
enable the insurers under such policies to avoid liability for claims arising
out of any occurrence prior to the Closing Date without the prior written
consent of Sabacol); (iv) use its best efforts to preserve its present
relationships with lending and other financial institutions, domestic and
foreign Agencies, suppliers and customers; and (v) maintain its books,
accounts and records in the usual, regular and ordinary manner on a basis
consistently applied. The Omimex Group will promptly notify Sabacol in
writing of learning of any fact, event or circumstance that is reasonably
likely to have an OPI Material Adverse Effect.
6.2 Negative Covenants. Prior to the Closing, OPI will operate its
business only in the usual, regular and ordinary course of business consistent
with good business practices, and will not, without the prior written consent
of Sabacol, take any action that, or omit to take any action, the absence of
which, would have an OPI Material Adverse Effect.
6.3 Access to Properties and Records. The Omimex Group will keep
Sabacol advised of all material developments relevant to the consummation of
the transactions contemplated hereby and will cooperate fully in permitting
Sabacol to make a full investigation of the business, properties, financial
condition and investments of each of the Omimex Group during regular business
hours and upon reasonable notice and in bringing about the consummation of the
transactions contemplated hereby. OPI will, during regular business hours and
upon reasonable notice, afford to Sabacol and its representatives full access
to the offices, buildings, real properties, machinery and equipment, inventory
and supplies, records, files, books of account, tax returns, agreements and
commitments, corporate record books and stock books and personnel of OPI, and
will permit Sabacol and its representatives to contact and interview OPI
personnel, suppliers, vendors, referral sources and any other persons that
Sabacol shall reasonably determine to be necessary for it to make a full
investigation of its business. OPI will furnish to Sabacol all such further
information concerning the business and affairs of OPI as Sabacol may
reasonably request. Prior to the Closing Date, the Omimex Group will update
by amendment or supplement each of the Schedules referred to herein and any
other disclosure in writing from Sabacol required by this Agreement to be
disclosed in writing by the Omimex Group to Sabacol promptly upon any change
in the information set forth in such Schedules or other disclosures. No
investigation pursuant to this Section 6.3 shall affect any representations or
warranties or the conditions to the obligations of Sabacol to consummate the
transactions contemplated hereby. In the event of the termination of this
Agreement, Sabacol will deliver to the Omimex Group all documents, work papers
and other material (including copies thereof) obtained by Sabacol or on their
behalf from the Omimex Group as a result of this Agreement or in connection
herewith, whether so obtained before or after the execution hereof and, if the
transactions contemplated hereby are not consummated, Sabacol will hold such
information in confidence until such time as such information is otherwise
publicly available.
6.4 Employees of Omimex Group. OPI shall be responsible for all claims
made by its employees for wages, salaries, bonuses, pension, workmen's
compensation, medical insurance, disability, vacation, severance, pay in lieu
of notice, sick benefits or other compensation or benefit arrangements in
respect of the service of such employees prior to the Closing Date and any
termination of such employees. If OPI terminates any such employee, Sabacol
may, but is not obligated to, hire such terminated employees on such terms and
conditions as Sabacol shall determine in its sole discretion.
6.5 Approvals of Third Parties. As soon as practicable after the date
hereof, each of the Omimex Group will use its best efforts to secure all
necessary consents, approvals and clearances of third parties that shall be
required to consummate the transactions contemplated hereby and will otherwise
use its best efforts to cause the consummation of such transactions in
accordance with the terms and conditions of this Agreement.
6.6 Notices. The Omimex Group will timely give all notices required to
be given relating to the transactions contemplated hereby, including without
limitation, (i) notices to employees, (ii) any notices required or requested
to be given to all creditors and claimants against the Omimex Group and (iii)
any notices required or requested to be given pursuant to applicable bulk
sales laws or similar laws.
6.7 Access to Books and Records. OPI agrees to provide Sabacol, its
accountants, counsel and other representatives, during normal business hours
and upon reasonable notice, for a period of seven (7) years after the Closing
Date, access to the books, records, income tax returns, contracts and other
underlying data and documentation of OPI relating to the period prior to the
Closing Date and to make available to Sabacol personnel of OPI in Sabacol's
review thereof for the purpose of enabling them to determine and calculate any
tax liabilities in connection with the OPI Assets. OPI agrees that, for such
seven-year period, it will preserve and keep intact all such books and
records.
6.8 Capital Commitments. Except with respect to Assumed OPI
Liabilities, the Omimex Group covenants and agrees that it will be liable for
and will promptly pay for (i) all capital improvements to the OPI Assets
completed prior to or in progress but unpaid at the Effective Time and (ii)
all assets or properties delivered to OPI but unpaid at the Effective Time
(except the Note); provided, however, that the Omimex Group shall not be
liable for the cost of installing any such assets or properties if they are
installed after the Effective Time.
6.9 Release of Financing Statements. The Omimex Group shall obtain and
file in the appropriate jurisdictions termination statements properly executed
by any parties holding a security interest or other Encumbrance with respect
to the OPI Assets as identified by lien searches conducted with respect to OPI
and the OPI Assets.
6.10 Colombian Execution Procedure.
6.10.1 Within five (5) business days after the later of the date of
the Bankruptcy Approval Order or receipt of the Ecopetrol Approval, Sabacol
and ODC shall prepare, execute and deliver to Ecopetrol the Ecopetrol
Assignment Documents in which Sabacol assigns its right, title and interest in
the Association Agreements to ODC.
6.10.2 At the Closing, Sabacol and ODC shall prepare, execute and
deliver to the appropriate Colombian notary public and Colombian governmental
authorities the public deeds and other documents and instruments necessary to
transfer all of Sabacol's right, title and interest in the Association
Agreements to ODC.
6.10.3 ODC shall fully cooperate with Sabacol in performing its
covenants under Section 5.12.1.
6.11 Dismissal of Bankruptcy Case. The Omimex Group shall not object to
the dismissal of the Bankruptcy Case, which shall be without prejudice to the
Omimex Group's standing or right to seek the dismissal of the Bankruptcy Case.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF THE OMIMEX GROUP
The obligations of the Omimex Group to cause the transactions
contemplated hereby to occur at Closing shall be subject to the satisfaction
on or prior to the Closing Date of all of the following conditions, except
such conditions as the Omimex Group may waive in writing:
7.1 Representations and Warranties. All of the representations and
warranties of Sabacol contained in this Agreement and in any schedule or
other disclosure in writing from Sabacol shall have been true and correct when
made, and shall be true and correct on and as of the Closing Date, with the
same force and effect as though such representations and warranties had been
made on and as of the Closing Date.
7.2 Covenants. All of the covenants and agreements herein on the part
of Sabacol to be complied with or performed on or before the Closing Date
shall have been fully complied with and performed.
7.3 Certificate. There shall be delivered to Omimex a certificate dated
as of the Closing Date and signed by the Chief Executive Officer of Sabacol to
the effect set forth in Sections 7.1 and 7.2, which certificate shall have the
effect of a representation and warranty made by Sabacol on and as of the
Closing Date.
7.4 Certificates of Authorities. Sabacol shall have furnished to Omimex
(i) certificates of the Secretary of State of Delaware dated as of a date not
more than twenty (20) days prior to the Closing Date, attesting to the
organization, existence and good standing of Sabacol, (ii) a copy, certified
by the Secretary of State of Delaware as of a date not more than twenty (20)
days prior to the Closing Date, of Sabacol's Certificate of Incorporation and
all amendments thereto, (iii) a copy, certified by the Secretary of Sabacol,
of the Bylaws of Sabacol, as amended and in effect at the Closing Date, (iv) a
copy, certified by an authorized officer of Sabacol, of resolutions duly
adopted by the Board of Directors of Sabacol duly authorizing the transactions
contemplated in this Agreement and (v) a copy, certified by an authorized
officer of Sabacol, of resolutions duly adopted by stockholders of Sabacol
duly authorizing the transactions contemplated in this Agreement.
7.5 Litigation. At the Closing Date, there shall not be pending or
threatened any litigation in any court or any proceeding before any Agency,
including, without limitation, the Bankruptcy Court, (i) in which it is sought
to restrain, invalidate, set aside or obtain damages in respect of the
consummation of the purchase and sale of the Sabacol Assets or the other
transactions contemplated hereby, (ii) that could, if adversely determined,
result in any Sabacol Material Adverse Effect or (iii) as a result of which,
in the reasonable judgment of the Omimex Group, the Omimex Group would be
deprived of the material benefits of its ownership of the Sabacol Assets.
7.6 Satisfactory to the Omimex Group's Counsel. All actions,
proceedings, instruments and documents required to carry out this Agreement or
incidental thereto and all other related matters shall have been satisfactory
to Locke Liddell & Sapp LLP, Dallas, Texas, counsel for the Omimex Group.
7.7 No Material Adverse Effect. There shall not be existing at the
Closing any Sabacol Material Adverse Effect. The Omimex Group shall receive a
certificate from the Chief Executive Officer of Sabacol, dated as of the
Closing Date and in form and substance satisfactory to the Omimex Group, as to
the fulfillment of the conditions set forth in this Section 7.7.
7.8 Consents. Sabacol shall have obtained all orders, approvals,
estoppel certificates, releases or consents of third parties, including,
without limitation, (i) any orders, approvals, certificates or consents deemed
necessary by counsel to the Omimex Group that shall be required to consummate
the transactions contemplated hereby and (ii) all required consents,
authorizations, approvals and releases of Ecopetrol and DIAN to the transfer
of the Sabacol Assets from Sabacol to ODC.
7.9 Further Assurances. Sabacol shall take all such further action as
may be reasonably requested by the Omimex Group in order to effectuate the
consummation of the transactions contemplated by this Agreement. If the
Omimex Group shall reasonably determine that any further conveyance,
assignment or other document or any further action (which does not involve
significant expense, except legal and notary fees) is necessary to vest in it
full title to the Sabacol Assets, Sabacol shall cause the appropriate officers
to execute and deliver all such instruments and take all such action as the
Omimex Group may reasonably determine to be necessary.
7.10 Bankruptcy Approval. The obligations of the parties to fulfill
their respective obligations under this Agreement is contingent upon entry of
the Bankruptcy Approval Order by the Bankruptcy Court.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF SABACOL
The obligations of Sabacol to cause the transactions contemplated hereby
to occur at Closing shall be subject to the satisfaction on or prior to the
Closing Date of all of the following conditions, except such conditions as
Sabacol may waive in writing:
8.1 Representations and Warranties of Omimex Group. All of the
representations and warranties of the Omimex Group contained in this Agreement
and in any schedule or other disclosure in writing from the Omimex Group shall
have been true and correct when made, and shall be true and correct on and as
of the Closing Date, with the same force and effect as though such
representations and warranties had been made on and as of the Closing Date.
8.2 Covenants of Omimex Group. All of the covenants and agreements
herein on the part of the Omimex Group to be complied with or performed on or
before the Closing Date shall have been fully complied with and performed.
8.3 Certificate. There shall be delivered to Sabacol a certificate
dated as of the Closing Date and signed by the President or a Vice President
of each of the Omimex Group to the effect set forth in Sections 8.1 and 8.2,
which certificate shall have the effect of a representation and warranty made
by each of the Omimex Group on and as of the Closing Date.
8.4 Certificates of Authorities. Each of the Omimex Group shall have
furnished to Sabacol (i) certificates of the Secretaries of State of Delaware
and Colorado, each dated as of a date not more than twenty (20) days prior to
the Closing Date, attesting to the organization, existence and good standing
of each of the Omimex Group, (ii) a copy, certified by the Secretaries of
State of Delaware and Colorado as of a date not more than twenty (20) days
prior to the Closing Date, of each of the Omimex Group's Certificate of
Incorporation and all amendments thereto, (iii) a copy, certified by the
Secretary of each of the Omimex Group, of the Bylaws of each of the Omimex
Group, as amended and in effect at the Closing Date and (iv) a copy, certified
by an authorized officer of each of the Omimex Group, of resolutions duly
adopted by the Board of Directors of each of the Omimex Group duly authorizing
the transactions contemplated in this Agreement.
8.5 Litigation. At the Closing Date, there shall not be pending or
threatened any litigation in any court or any proceeding before any Agency,
(i) in which it is sought to restrain, invalidate, set aside or obtain damages
in respect of the consummation of the purchase and sale of the OPI Assets or
the other transactions contemplated hereby, (ii) that could, if adversely
determined, result in any OPI Material Adverse Effect or (iii) as a result of
which, in the reasonable judgment of Sabacol, Sabacol would be deprived of the
material benefits of its ownership of the OPI Assets.
8.6 Satisfactory to Counsel. All actions, proceedings, instruments and
documents required to carry out this Agreement or incidental thereto and all
other related matters shall have been satisfactory to Ballard Spahr Andrews &
Ingersoll, LLP and Michaelson Susi & Michaelson, counsel for Sabacol.
8.7 No Material Adverse Effect. There shall not be existing at the
Closing any OPI Material Adverse Effect. Sabacol shall receive a certificate
from the Chief Executive Officer of OPI, dated as of the Closing Date and in
form and substance satisfactory to Sabacol, as to the fulfillment of the
conditions set forth in this Section 8.7.
8.8 Consents. The Omimex Group shall have obtained all orders,
approvals, estoppel certificates or consents of third parties, including,
without limitation, (i) the consent of Bank One, Texas, National Association
to the transfer of the OPI Assets to Sabacol and the release of any liens of
such bank on the OPI Assets and (ii) any orders, approvals, certificates or
consents deemed necessary by counsel to Sabacol that shall be required to
consummate the transactions contemplated hereby.
8.9 Further Assurances. The Omimex Group shall take all such further
action as may be reasonably requested by Sabacol in order to effectuate the
consummation of the transactions contemplated by this Agreement. If Sabacol
shall reasonably determine that any further conveyance, assignment or other
document or any further action (which does not involve significant expense,
except legal and notary fees) is necessary to vest in Sabacol full title to
the OPI Assets, each of the Omimex Group shall cause the appropriate officers
to execute and deliver all such instruments and take all such action as
Sabacol may reasonably determine to be necessary.
8.10 Bankruptcy Approval. The obligations of the parties to fulfill
their respective obligations under this Agreement is contingent upon entry of
the Bankruptcy Approval Order by the Bankruptcy Court .
ARTICLE IX
CLOSING
9.1 Date and Place of Closing. Subject to satisfaction or waiver of the
conditions to the obligations of the parties, the transactions contemplated by
this Agreement shall be consummated at a closing (the "Closing") to be held in
the offices of Locke Liddell & Sapp LLP, in Dallas, Texas, or such other place
as mutually agreed to by the parties, at 10:00 a.m., Dallas, Texas time, no
later than five (5) business days after Sabacol and ODC receive fully executed
copies of the Ecopetrol Assignment Documents, or such other date as the
parties may mutually agree upon (the "Closing Date").
9.2 Performance by Sabacol. At the Closing, concurrently with
performance by the Omimex Group of its obligations to be performed at the
Closing:
1. Conveyances. Sabacol shall execute and deliver to ODC, in
form and substance acceptable to the Omimex Group and its counsel (i) special
warranty deeds (or its equivalent in Colombia) conveying to ODC all of the
Sabacol Real Property and any improvements thereon (subject to the matters
listed in Schedule 3.2) and (ii) such bills of sale, motor vehicle titles,
assignments, endorsements, licenses and other good and sufficient instruments
and documents of conveyance and transfer as shall be necessary and effective
to transfer and assign to and vest in ODC all of Sabacol's right, title and
interest in and to the Sabacol Personal Property and to carry out the intent
of this Agreement, including, without limitation, all documents and
instruments necessary and effective to notarize, register and otherwise fully
effect the transfer of the Sabacol Assets to ODC, including, without
limitation, powers of attorney. If requested by the Omimex Group, such
documents shall be in a form suitable for recording.
2. Records. Sabacol shall deliver to the Omimex Group all
documents, agreements, reports, books, records and accounts pertaining
specifically to the Sabacol Assets that are in Saba's or Sabacol's possession.
3. Certificates. Sabacol shall execute and deliver to the
Omimex Group the certificates referred to in Sections 7.3 and 7.7.
4. Certificates of Authorities. Sabacol shall deliver to the
Omimex Group the certificates of authorities referred to in Section 7.4.
5. Consents. Sabacol shall deliver to the Omimex Group the
consents and approvals required by Section 7.8.
6. Assumption Agreement. Sabacol shall execute and deliver to
the Omimex Group such documents as shall be necessary and effective to assume
the Assumed OPI Liabilities.
7. Escrow Agreement. Sabacol shall execute and deliver the
Escrow Agreement to the Omimex Group.
8. Escrow Payments. Sabacol shall deliver to the Escrow Agent
for deposit into the Escrow Account cash in an amount equal to (i) the
Unassumed Tax Liability and (ii) the amount necessary to fully pay and
discharge the Schedule 3.17 Debt, less the Positive Initial Settlement Amount,
if any. If the Positive Initial Settlement Amount exceeds the aggregate
amount of the Unassumed Tax Liability and Schedule 3.17 Debt, then Sabacol
shall not make any deposit to the Escrow Account.
9. Negative Initial Settlement Amount. If the initial adjustment
to the Purchase Price results in a Negative Initial Settlement Amount, Sabacol
shall deliver to ODC cash in an amount equal to the Negative Initial
Settlement Amount.
9.3 Performance by Omimex Group. At the Closing, concurrently with the
performance by Sabacol of its obligations to be performed at the Closing::
1. Conveyances. Each of the Omimex Group shall execute and
deliver to Sabacol, in form and substance acceptable to Sabacol (i) special
warranty deeds and or assignments conveying to Sabacol all of the OPI Real
Property and any improvements thereon (subject to the matters listed in
Schedule 4.2) and (ii) such bills of sale, motor vehicle titles, assignments,
endorsements, licenses and other good and sufficient instruments and documents
of conveyance and transfer as shall be necessary and effective to transfer and
assign to and vest in Sabacol all of OPI's right, title and interests in and
to the OPI Personal Property and the Sabacol Indebtedness and to carry out the
intent of this Agreement. If requested by Sabacol, such documents shall be in
a form suitable for recording.
2. Records. Each of the Omimex Group shall deliver to Sabacol
all documents, agreements, reports, books, records and accounts pertaining
specifically to the OPI Assets that are its possession.
3. Certificates. Each of the Omimex Group shall execute and
deliver to Sabacol the certificates referred to in Sections 8.3 and 8.7.
4. Certificates of Authorities. Each of the Omimex Group shall
deliver to Sabacol the certificates of authorities referred to in Section 8.4.
5. Consents. The Omimex Group shall deliver to Sabacol the
consents and approvals required by Section 8.8.
6. Assumption Agreement. ODC shall execute and deliver to
Sabacol such documents as shall be necessary and effective to assume the
Assumed Sabacol Liabilities.
7. Escrow Agreement. The Omimex Group shall execute and deliver
the Escrow Agreement to Sabacol.
8. Escrow Payments. ODC shall deliver to the Escrow Agent for
deposit into the Escrow Account cash in an amount equal to (i) if ODC makes a
Cash Election, the Assumed Tax Liability and (ii) if the initial adjustment to
the Purchase Price results in a Positive Initial Settlement Amount, the
Positive Initial Settlement Amount.
9.4 Prorations; Other Instruments. In addition to the foregoing, the
Omimex Group and Sabacol agree as follows:
1. Taxes and Utilities. Real estate and personal property taxes
for the current year and utility charges for the billing periods shall be
apportioned pro rata among Omimex and Sabacol as of the Effective Time. If
the amount of real estate and personal property taxes for the current year and
the amount of utility charges for the billing periods are not ascertainable on
the Closing Date, such taxes and utility charges shall be apportioned based on
the immediately preceding tax year and billing periods; provided, however,
that such taxes and utility charges shall be reapportioned based on actual
taxes and charges promptly after such amounts are ascertained.
2. Further Action by Sabacol. At any time and from time to
time, at or after the Closing, upon request of the Omimex Group, Sabacol shall
do, execute, acknowledge and deliver or shall cause to be done, executed,
acknowledged and delivered all such further acts, deeds, assignments,
transfers, conveyances, powers of attorney and assurances as may reasonably be
required without unreasonable expense (except legal and notary fees) in order
to evidence, vest in and confirm to the Omimex Group the full and complete
title to, possession of, and the right to use and enjoy, the Sabacol Assets.
3. Further Action by the Omimex Group. At any time and from
time to time, at or after the Closing, upon request of Sabacol, the Omimex
Group shall do, execute, acknowledge and deliver or shall cause to be done,
executed, acknowledged and delivered all such further acts, deeds,
assignments, transfers, conveyances, powers of attorney and assurances as may
reasonably be required without unreasonable expense (except legal and notary
fees) in order to evidence, vest in and confirm to Sabacol the full and
complete title to, possession of, and the right to use and enjoy, the OPI
Assets.
ARTICLE X
SURVIVAL AND INDEMNIFICATION
10.1 Survival of Covenants, Agreements, Representations and Warranties.
1. Covenants and Agreements. All covenants and agreements made
hereunder or pursuant hereto or in connection with the transactions
contemplated hereby shall survive the Closing and shall continue in full force
and effect thereafter according to their terms.
2. Representations and Warranties. All representations and
warranties contained herein shall survive the Closing and shall continue in
full force and effect thereafter for a period beginning at the Effective Time
and ending on the later of May 31, 2000 or the first anniversary of the
Closing Date, except that (a) the representations and warranties contained in
Section 3.10 and Section 4.10 hereof shall survive until the earlier of (i)
the expiration of the applicable periods (including any extensions) of the
respective statutes of limitation applicable to the payment of the taxes to
which such representations and warranties relate without an assertion of a
deficiency in respect thereof by the applicable taxing authority or (ii) the
completion of the final audit and determinations by the applicable taxing
authority and final disposition of any deficiency resulting therefrom and (b)
the representations and warranties contained in Sections 3.1, 3.2, 4.1 and 4.2
shall survive indefinitely.
3. Claims Made Prior to Expiration. Notwithstanding the
foregoing survival periods set forth in this Section 10.1, the termination of
a survival period shall not affect the rights of an Indemnified Party in
respect of any claim made by such party with specificity, in good faith and in
writing to the Indemnifying Party, in accordance with Sections 10.6 and 12.9
hereof prior to the expiration of the applicable survival period.
10.2 Omimex Group's Losses. Sabacol agrees to indemnify and hold
harmless each of the Omimex Group and their respective directors, officers,
employees, representatives, agents and attorneys from, against, for and in
respect of any and all damages (including, without limitation, amounts paid in
settlement with Sabacol's consent, which may not be unreasonably withheld),
penalties, fines, interest and monetary sanctions, losses, obligations,
liabilities, claims, deficiencies, costs and expenses, including, without
limitation, reasonable attorneys' fees and other costs and expenses incident
to any suit, action, investigation, claim or proceeding (collectively, as
"Omimex's Losses") suffered, sustained, incurred or required to be paid by any
of them by reason of (i) any representation or warranty made by Sabacol in or
pursuant to this Agreement (including any schedule or exhibit to this
Agreement or any certificate delivered pursuant hereto) being untrue or
incorrect in any material respect; (ii) any liability arising from or with
respect to the Assumed OPI Liabilities; (iii) any failure by Sabacol to
observe or perform its covenants and agreements set forth in this Agreement;
(iv) any failure by Sabacol to satisfy and discharge any liability or
obligation not expressly assumed by the Omimex Group pursuant to this
Agreement; or (v) any derivative stockholder action or similar claim asserted
by a stockholder of Sabacol related to the transactions contemplated hereby.
10.3 Employee Compensation and Benefits. Sabacol agrees to indemnify and
hold each of the Omimex Group and their respective directors, officers,
employees, representatives, agents and attorneys harmless from and against any
and all claims made by employees of Sabacol, regardless of when made, for
wages, salaries, bonuses, pension, workmen's compensation, medical insurance,
disability, vacation, severance, pay in lieu of notice, sick benefits or other
compensation or benefit arrangements to the extent the same are based on
employment service rendered to Sabacol prior to the Closing Date or injury or
sickness occurring prior to the Closing Date (collectively, "Sabacol Employee
Claims").
10.4 Sabacol's Losses. Each of the Omimex Group, jointly and
severally, agrees to indemnify and hold harmless Sabacol and its directors,
officers, employees, representatives, agents and attorneys from, against, for
and in respect of any and all damages (including, without limitation, amounts
paid in settlement with the Omimex Group's consent, which may not be
unreasonably withheld), penalties, fines, interest and monetary sanctions,
losses, obligations, liabilities, claims, deficiencies, costs and expenses,
including, without limitation, reasonable attorneys' fees and other costs and
expenses incident to any suit, action, investigation, claim or proceeding
(collectively as "Sabacol's Losses") suffered, sustained, incurred or required
to be paid by Sabacol by reason of (i) any representation or warranty made by
any of the Omimex Group in or pursuant to this Agreement (including any
schedule or exhibit to this Agreement or any certificate delivered pursuant
hereto) being untrue or incorrect in any material respect (ii) any liability
arising from or with respect to the Assumed Sabacol Liabilities; (iii) any
failure by any of the Omimex Group to observe or perform its covenants and
agreements set forth in this Agreement; or (iv) any failure by OPI to satisfy
and discharge any other liability or obligation not expressly assumed by
Sabacol pursuant to this Agreement.
10.5 Employee Compensation and Benefits. Each of the Omimex Group,
jointly and severally, agrees to indemnify and hold Sabacol and its directors,
officers, employees, representatives, agents and attorneys harmless from and
against any and all claims made by employees of OPI, regardless of when made,
for wages, salaries, bonuses, pension, workmen's compensation, medical
insurance, disability, vacation, severance, pay in lieu of notice, sick
benefits or other compensation or benefit arrangements to the extent the same
are based on employment service rendered to OPI to the Closing Date or injury
or sickness occurring prior to the Closing Date (collectively, "Omimex
Employee Claims").
10.6 Notice of Loss. Except to the extent set forth in the next
sentence, a party to this Agreement shall not have any liability under the
indemnity provisions of this Agreement with respect to a particular matter
unless a notice setting forth in reasonable detail the claim for
indemnification which is asserted has been given to the Indemnifying Party (as
hereafter defined) and, in addition, if such matter arises out of a suit,
action, investigation or proceeding, such notice is given promptly, but in any
event within thirty (30) days after the Indemnified Party (as hereafter
defined) is given notice of the commencement of the suit, action,
investigation or proceeding. Notwithstanding the preceding sentence, failure
of the Indemnified Party to give notice hereunder shall not release the
Indemnifying Party from its obligations under this Article 10, except to the
extent the Indemnifying Party is actually prejudiced by such failure to give
notice. With respect to Omimex's Losses and Sabacol Employee Claims, Sabacol
shall be the Indemnifying Party and each of the Omimex Group shall be the
Indemnified Party. With respect to Sabacol's Losses and Omimex Employee
Claims, each of the Omimex Group shall be the Indemnifying Party and Sabacol
shall be the Indemnified Party.
10.7 Right to Defend. Upon receipt of notice of any suit, action,
investigation, claim or proceeding for which indemnification might be claimed
by an Indemnified Party, the Indemnifying Party shall be entitled to defend,
contest or otherwise protect against such suit, action, investigation, claim
or proceeding, at its own cost and expense, and the Indemnified Party must
cooperate in any such defense or other action. The Indemnified Party shall
have the right, but not the obligation, to participate at its own expense in a
defense thereof by counsel of its own choosing, but the Indemnifying Party
shall be entitled to control the defense unless the Indemnified Party has
relieved the Indemnifying Party from liability with respect to the particular
matter or the Indemnifying Party fails to assume defense of the matter. In
the event the Indemnifying Party shall fail to defend, contest or otherwise
protect in a timely manner against any such suit, action, investigation, claim
or proceeding, the Indemnified Party shall have the right, but not the
obligation, to defend, contest or otherwise protect against the same and make
any compromise or settlement thereof and recover the entire cost thereof from
the Indemnifying Party including reasonable attorneys' fees, disbursements and
all amounts paid as a result of such suit, action, investigation, claim or
proceeding or the compromise or settlement thereof; provided, however, that
the Indemnified Party must send a written notice to the Indemnifying Party of
any such proposed settlement or compromise, which settlement or compromise the
Indemnifying Party may reject, in its reasonable judgment, within thirty (30)
days of receipt of such notice. Failure to reject such notice within such
thirty (30) day period shall be deemed an acceptance of such settlement or
compromise. The Indemnified Party shall have the right to effect a settlement
or compromise over the objection of the Indemnifying Party; provided, that if
(i) the Indemnifying Party is contesting such claim in good faith or (ii) the
Indemnifying Party has assumed the defense from the Indemnified Party, the
Indemnified Party waives any right to indemnity therefor. If the Indemnifying
Party undertakes the defense of such matters, the Indemnified Party shall not,
so long as the Indemnifying Party does not abandon the defense thereof, be
entitled to recover from the Indemnifying Party any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the defense
thereof other than the reasonable costs of investigation undertaken by the
Indemnified Party with the prior written consent of the Indemnifying Party.
10.8 Cooperation.
1. Each of the Omimex Group and Sabacol and each of their
respective affiliates, successors and assigns shall cooperate with each other
in the defense of any suit, action, investigation, proceeding or claim by a
third party and, during normal business hours, shall afford each other access
to their books and records and employees relating to such suit, action,
investigation, proceeding or claim and shall furnish each other all such
further information that they have the right and power to furnish as may
reasonably be necessary to defend such suit, action, investigation, proceeding
or claim, including, without limitation, reports, studies, correspondence and
other documentation relating to Environmental Protection Agency, Occupational
Safety and Health Administration, and Equal Employment Opportunity Commission
matters.
2. All non-public information furnished pursuant to the
provisions of this Agreement, including without limitation this Section, will
be kept confidential and shall not, without the prior written consent of the
party disclosing such information, be disclosed by the other party in any
manner whatsoever, in whole or in part, and shall not be used for any
purposes, other than in connection with the transactions contemplated hereby.
In no event shall either party or any of its representatives use such
information to the detriment of the other party.
3. The confidentiality obligations of Section 10.8.2 shall not
apply to information:
(i) which is required to be disclosed by judicial or
administrative process or order, or by other requirements of law;
(ii) which is or becomes generally available to the public
other than as a result of a breach of this Section;
(iii) which is received from a party or parties
unaffiliated with either party, as the case may be, who obtained such
information other than under an obligation of confidentiality;
(iv) which either party discloses on a nonconfidential
basis or otherwise makes available to the general public or the trade;
(v) which Sabacol uses in connection with operating the OPI
Assets after the Effective Time; or
(vi) which any of the Omimex Group uses in connection with
operating the Sabacol Assets after the Effective Time.
4. Each of Sabacol and the Omimex Group will cooperate and use
its reasonable efforts to have the present officers, directors and employees
thereof cooperate with the other party on and after the Closing Date in (i)
effecting the transactions contemplated hereby and (ii) furnishing
information, evidence, testimony and other assistance in connection with any
tax return filing obligations, actions, proceedings, arrangements or disputes
of any nature with respect to matters pertaining to all periods prior to the
Effective Time.
ARTICLE XI
TERMINATION
11.1 Termination. This Agreement may be terminated and abandoned at any
time on or prior to the Closing Date:
1. By mutual written consent of the parties;
2. By any of the Omimex Group in writing if any of the material
conditions to the obligations of the Omimex Group contained herein shall not
have been satisfied or, if unsatisfied, waived by the Omimex Group as of the
Closing Date;
3. By Sabacol in writing if any of the material conditions to
the obligations of Sabacol contained herein shall not have been satisfied or,
if unsatisfied, waived by Sabacol as of the Closing Date; or
4. By either the Omimex Group or Sabacol in writing if the
Closing shall not have occurred by June 30, 1999 (provided that the right to
terminate this Agreement under this Section 11.1.4 shall not be available to
any party whose action or failure to act has been the cause of or resulted in
the failure of Closing to occur on or before such date and such action or
failure constitutes a breach of this Agreement.
11.2 No Further Force or Effect. In the event of termination and
abandonment of this Agreement pursuant to the provisions of Section 11.1, this
Agreement shall be of no further force or effect, except for Sections 5.4,
6.4, 10.8 and 12.1, which shall not be affected by termination of this
Agreement.
11.3 Topping Fee. In the event that the Board of Directors of Sabacol
approves an Acquisition Proposal or an Acquisition Proposal is consummated,
Sabacol shall pay to the Omimex Group (by wire transfer or cashier's check of
immediately available funds) within one business day, the amount of reasonable
costs and expenses of the Omimex Group, including, without limitation,
reasonable attorney fees, in negotiating, executing and performing this
Agreement.
ARTICLE XII
MISCELLANEOUS
12.1 Expenses. Except as otherwise expressly provided herein, Sabacol
and the Omimex Group shall each pay their own expenses in connection with the
preparation of this Agreement, and the consummation of the transactions
contemplated hereby, including, without limitation, fees of its own counsel,
auditors and other experts, whether or not such transactions be consummated.
Sabacol shall prepare the documents necessary to transfer of the OPI Assets to
Sabacol, ODC shall prepare the documents necessary to transfer of the Sabacol
Assets to ODC and the parties shall equally share the notary and registration
costs and expenses of transferring the OPI Assets and Sabacol Assets
hereunder.
12.2 Entire Agreement. This Agreement (including the exhibits and
schedules hereto) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, between the parties
hereto with respect to the subject matter hereof, and no party shall be liable
or bound to the other in any manner by any representations or warranties not
set forth herein.
12.3 Publicity. Except as otherwise required by law, no party hereto
shall issue any press release or make any public statement, in either case
relating to or in connection with or arising out of this Agreement or the
matters contained herein, without obtaining the prior written approval of the
other parties hereto to the content and manner of presentation and publication
thereof, which consent shall not be unreasonably withheld or delayed.
12.4 Successors and Assigns. This Agreement and the rights of the
parties hereunder may not be assigned without the prior written consent of all
of the parties hereto. For purposes of this Agreement, assignment shall
include the merger, consolidation or other consolidation of any of the parties
hereto or the sale or transfer of a majority of the equity or beneficial
ownership interests of a party hereto or more than thirty percent (30%) of the
assets of a party hereto. The terms and conditions of this Agreement shall
inure to the benefit of, and be binding upon, the respective permitted
successors and assigns of the parties hereto. Nothing in this Agreement,
express or implied, is intended to confer upon any party, other than the
parties and their respective permitted successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of such agreements.
12.5 Counterparts; Translation. This Agreement may be executed in one
or more counterparts by person or by facsimile, each of which shall for all
purposes be deemed to be an original and all of which shall constitute the
same instrument. This Agreement may be translated into the Spanish language,
but in the event of any conflict between the terms in the English and Spanish
versions, the terms in the English version shall govern.
12.6 Headings. The headings of the paragraphs and subparagraphs of this
Agreement are inserted for convenience of reference only and shall not be
deemed to constitute part of this Agreement or to affect the construction
hereof.
12.7 Use of Certain Terms. As used in this Agreement, the words
"herein," "hereof" and "hereunder" and other words of similar import refer to
this Agreement as a whole and not to any particular paragraph, subparagraph or
other subdivision.
12.8 Modification and Waiver. Any of the terms or conditions of this
Agreement may be waived in writing at any time by the party which is entitled
to the benefits thereof, and this Agreement may be modified or amended by a
written instrument executed by all of the parties hereto. No supplement,
modification or amendment of this Agreement shall be binding unless executed
in writing by all of the parties hereto. No waiver of any of the provisions
of this Agreement shall be deemed or shall constitute a waiver of any other
provision hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
12.9 Notices. All notices of communication required or permitted
hereunder shall be in writing and may be given by (a) depositing the same in
United States mail, addressed to the party to be notified, postage prepaid and
registered or certified with return receipt requested, (b) delivering the same
in person to an officer or agent of such party or (c) telecopying the same
with electronic confirmation of receipt:
(i) If to Sabacol: Sabacol, Inc.
3201 Airpark Drive, Suite 201
Santa Maria, California 93455
Attention:Randeep Grewal
Telecopy No. (805) 347-1072
With copies to: Ballard Spahr Andrews & Ingersoll, LLP
1225 17th Street, Suite 2300
Denver, Colorado 80202-5596
Attention:Andrew Pidcock, Esq.
Telecopy No. (303-296-3956
(ii) If to the: Omimex Resources, Inc.
Omimex Group 5608 Malvey, Penthouse Suite
Fort Worth, Texas 76107
Attention:Clark Storms, Esq.
Telecopy Number: (817) 735-8033
with copies to: Locke Liddell & Sapp LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201
Attention:Jim Hallmark, Esq.
Telecopy Number: (214) 740-8800
or at such other address or counsel as any party hereto shall specify pursuant
to this Section 12.9 from time to time.
12.10 GOVERNING LAW; CONSENT TO JURISDICTION. THIS AGREEMENT SHALL BE
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA EXCEPT THAT
THE LAW OF THE STATE OR COUNTRY IN WHICH ANY REAL PROPERTY TRANSFERRED
HEREUNDER IS LOCATED SHALL GOVERN WITH RESPECT TO TITLE THERETO. THE PARTIES
HERETO EXPRESSLY CONSENT AND AGREE THAT ANY DISPUTE, CONTROVERSY, LEGAL ACTION
OR OTHER PROCEEDING THAT ARISES UNDER, RESULTS FROM, CONCERNS OR RELATES TO
THIS AGREEMENT SHALL BE BROUGHT IN (I) THE BANKRUPTCY COURT, IF THE BANKRUPTCY
CASE IS STILL PENDING, OR (II) THE FEDERAL AND STATE COURTS IN AND OF THE
STATE OF CALIFORNIA, IF THE BANKRUPTCY CASE IS NO LONGER PENDING, AND
ACKNOWLEDGE THAT THEY WILL ACCEPT SERVICE OF PROCESS BY REGISTERED OR
CERTIFIED MAIL OR THE EQUIVALENT DIRECTED TO THEIR LAST KNOWN ADDRESS AS
DETERMINED BY THE OTHER PARTY IN ACCORDANCE WITH THIS AGREEMENT OR BY WHATEVER
OTHER MEANS ARE PERMITTED BY SUCH COURTS. THE PARTIES HERETO HEREBY
ACKNOWLEDGE THAT SAID COURTS HAVE EXCLUSIVE JURISDICTION OVER ANY SUCH DISPUTE
OR CONTROVERSY, AND THAT THEY HEREBY WAIVE ANY OBJECTION TO PERSONAL
JURISDICTION OR VENUE IN THESE COURTS OR THAT SUCH COURTS ARE AN INCONVENIENT
FORUM. ALL REMEDIES AT LAW, IN EQUITY, BY STATUTE OR OTHERWISE SHALL BE
CUMULATIVE AND MAY BE ENFORCED CONCURRENTLY OR FROM TIME TO TIME AND, SUBJECT
TO THE EXPRESS TERMS OF THIS AGREEMENT, THE ELECTION OF ANY REMEDY OR REMEDIES
SHALL NOT CONSTITUTE A WAIVER OF THE RIGHT TO PURSUE ANY OTHER AVAILABLE
REMEDIES.
12.11 Time. Time is of the essence with respect to this Agreement.
12.12 Reformation and Severability. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties, and if such
modification is not possible, such provision shall be severed from this
Agreement, and in either case the validity, legality and enforceability of the
remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
12.13 Remedies Cumulative. No right, remedy or election given by any
term of this Agreement shall be deemed exclusive but each shall be cumulative
with all other rights, remedies and elections available at law or in equity.
12.14 Specific Performance; Other Rights and Remedies. Each party
recognizes and agrees that in the event the other party or parties should
refuse to perform any of its or their obligations under this Agreement, the
remedy at law would be inadequate and agrees that for breach of such
provisions, each party shall, in addition to such other remedies as may be
available to it at law or in equity, be entitled to injunctive relief and to
enforce its rights by an action for specific performance to the extent
permitted by applicable law. Each party hereby waives any requirement for
security or the posting of any bond or other surety in connection with any
temporary or permanent award of injunctive, mandatory or other equitable
relief.
[The balance of this page is intentionally left blank.]
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be signed in counterparts by its duly authorized representative all as of
the date first above written.
SABACOL, INC.
By:
Randeep S. Grewal
Chief Executive Officer
OMIMEX RESOURCES, INC.
By:
Naresh Vashisht
President
OMIMEX INTERNATIONAL COPRORATION
By:
Naresh Vashisht
President
OMIMEX DE COLOMBIA, LTD.
By:
Naresh Vashisht
President
ASSET PURCHASE AGREEMENT
List of Schedules and Exhibits
SCHEDULES
1.1.1.1 Sabacol Real Property
1.1.1.2 Sabacol Personal Property
1.2.1.1 OPI Real Property
1.2.1.2 OPI Personal Property
1.3.1 Assumed Sabacol Liabilities
1.3.2 Assumed OPI Liabilities
2.2.1 Unassumed Tax Liability
2.3 Allocation of Purchase Price
2.4 Reserve Reports
2.4.1 Reserve Projection of Sabacol Assets
2.4.2 Reserve Projection of OPI Assets
2.7 Dispute Resolution Procedure
2.8 Belridge Property
3.2 Title
3.3 Compliance
3.4 Contracts
3.5 Contract Defaults
3.6 Litigation
3.8 Consents
3.9 Insurance
3.17 Sabacol Debt
4.2 Title
4.3 Compliance
4.4 Contracts
4.5 Contract Defaults
4.6 Litigation
4.8 Consents
4.9 Insurance
EXHIBITS
A Escrow Agreement
EXHIBIT 10.90
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT is made
effective as of October 14, 1998 by and between RANDEEP GREWAL
(the "Executive") and HORIZONTAL VENTURES, INC., a Colorado
corporation (formerly known as Petro Union, Inc.) (the
"Employer").
RECITALS
WHEREAS, the Employer and the Executive entered into that
certain Employment Agreement dated September 9, 1997 (the
"Agreement"), and
WHEREAS, the Employer and the Executive desire to amend
certain provisions of the Agreement as of the date hereof, and
WHEREAS, the Employer and the Executive desire to amend
certain additional provisions of the Agreement contingent upon,
and effective as of, the closing of a transaction between the
Employer and SABA Petroleum Company, whereby the Employer shall
gain effective control of SABA Petroleum Company (the "SABA
Petroleum Transaction"), presently scheduled to close in or about
December, 1998.
NOW, THEREFORE, the parties hereto, intending to be legally
bound, and for good and valuable consideration, agree as follows:
1. Effective as of the date hereof, the Agreement shall
be amended as follows:
a. The second and third sentences of Section 3(a)
of the Agreement are deleted in their entirety and the following
shall be inserted in place thereof:
In addition, at the option of the Executive's
Estate, the Employer shall either (i) pay to
the Executive's Estate, in a lump sum within
60 days of the end of the Employer's then-current
fiscal year, an amount (to the extent such amount
is a positive number) equal to the value of all
Employer stock and stock options held by the
Executive as of the date of his death, or (ii)
distribute to the Executive's Estate, within 60
days of the Executive's death, all Employer stock
and stock options held by the Executive as of
the date of his death, all in accordance with the
terms of any benefits to which the Executive would
be entitled in any plan in which he is a participant.
b. Section 3(b) of the Agreement is deleted in its
entirety and the following shall be inserted in place thereof:
(b) Disability. In the event that the
Executive in unable to substantially perform his
duties hereunder for a period of six months during
any continuous period of 12 months due to physical
or mental illness or disability, whether or not
connected to his employment hereunder, the
Employer shall have the right, by written notice
to the Executive, to place the Executive on
disability status. In such event, the Employer
shall pay to the Executive (or to his Estate if
the Executive is no longer alive) his base salary
and furnish to the Executive and his family all
benefits during the Severance Period. The
determination of the Executive's disability shall
be made by the Executive's regular treating
physician. If the Employer disagrees with the
conclusion of said physician, it may engage a
second physician to examine the Executive. If
these physicians disagree, then the parties shall
select a third physician to examine the Executive,
in which event their majority opinion shall be
conclusive.
c. Clause "(iv)" of Section 3(c) of the Agreement
is deleted in its entirety.
d. Clause "(iii)" of Section 3(d) of the Agreement
is deleted in its entirety and the following shall be inserted in
place thereof:
(iii) Employer's requirement of the Executive
that he be based at any office or location
other than New York, New York, except for travel
reasonably required in the performance of the
Executive's responsibilities;
e. Clause "(iii)" of Section 3(e) of the Agreement
is deleted in its entirety and the following shall be inserted in
place thereof:
(iii) specifies the effective date of the termination
(which date shall be not more than 15 days after the giving of
such notice) (the "Date of Termination").
f. Clause "(B)" of Section 4(d)(i) of the Agreement
is deleted in its entirety and the following shall be inserted in
place thereof:
B. the Executive's base salary for
the balance of the term of this Agreement at
the rate in effect as of the Date of
Termination; and
g. Clause "(F)" of Section 4(d)(i) of the Agreement
is deleted in its entirety and the following shall be inserted in
place thereof:
F. at the option of the Executive or
his legal representative, the Employer shall
either (i) pay to the Executive or his legal
representative, in a lump sum within 30 days
of the Date of Termination, an amount (to the
extent such amount is a positive number) equal
to the value of all Employer stock and stock
options held by the Executive as of the Date
of Termination, or (ii) distribute to the
Executive or his legal representative, within
30 days of the Date of Termination, all Employer
stock and stock options held by the Executive as
of the Date of Termination. Further, for the
remainder of the Severance Period, or such
longer period as any plan, program or policy
may provide, the Employer shall continue
benefits to the Executive and the Executive's
family at least equal to those which would
have been provided to them in accordance with
the plans, programs and policies described in
this Agreement as if the Executive's employment
had not been terminated, including health
insurance and life insurance, or, if more
favorable, in accordance with the plans, programs
or policies of the Employer in effect at any time
thereafter with respect to other key executives
and their families; for purposes of eligibility
for retiree benefits pursuant to such plans,
programs and policies, the Executive shall be
considered to have remained employed until the
end of the Severance Period and to have retired
on the last day of such period.
h. Section 8 of the Agreement is deleted in its
entirety and the following shall be inserted in place thereof:
8. Stock Grants. Upon the Effective
Date, the Executive shall be issued 30,000
shares of the Employer's Common Stock, no par
value per share. These shares shall be fully
vested and non-forfeitable as of the date of
their issuance.
i. Section 9(e) of the Agreement is deleted in its
entirety and the following shall be inserted in place thereof:
(e) Fringe Benefits. During the term,
the Executive shall be entitled to those fringe
benefits offered to other key employees of
Employer, as well as an automobile allowance
of $1,000 per month.
2. Effective immediately upon the close of the SABA
Petroleum Transaction, the Agreement shall be amended as follows:
a. The first paragraph of Section 3 of the
Agreement shall be deleted in its entirety and the following
shall be inserted in place thereof:
3. Term and Termination. The term of
this Agreement shall commence on the Effective
Date and shall continue uninterrupted through
and including the fifth anniversary of the
closing of SABA Petroleum Transaction unless
sooner terminated or extended by mutual written
agreement. The Executive's employment hereunder
may be terminated as follows:
b. The first sentence of Section 7 of the Agreement
shall be deleted in its entirety and the following shall be
inserted in place thereof:
In consideration for his services, Employer
shall pay the Executive a salary at the rate
of $250,000 per annum.
3. Miscellaneous.
a. All other provisions of the Agreement, to the
extent not amended or superseded by the terms of this First
Amendment to the Agreement, are hereby ratified and reaffirmed.
b. The parties acknowledge that the Agreement, as
amended or superseded by the terms of this First Amendment to the
Agreement, constitutes all of the terms of the Employer's
employment of the Executive during the term set forth in the
Agreement, as amended, and that such terms integrate all previous
oral and written communications and understandings between the
parties with respect to the terms of the Employer's employment of
the Executive. The parties also acknowledge that any
representations made or communications effected by them, in each
case relating to this First Amendment to the Agreement, as void
unless set forth in this writing.
c. This First Amendment to the Agreement shall be
binding upon and insure to the benefit of the parties hereto and
their respective successors and permitted assigns.
d. This First Amendment to the Agreement may be
executed in one or more counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
e. This First Amendment to the Agreement shall be
governed by and construed in accordance with the domestic laws
of, and enforced exclusively in, the State of New York, without
giving effect to any choice or conflict of law provision or rule
that would cause the application of the laws of any jurisdiction
other than the State of New York.
f. No amendment of any provision of this First
Amendment to the Agreement shall be valid unless the same shall
be in writing and signed by all of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this
First Amendment to the Agreement as of the date first above
written.
EMPLOYER:
HORIZONTAL VENTURES, INC.
By:__________________________
Name:
Title:
EXECUTIVE
/s/ Randeep S. Grewal
_____________________________
Randeep Grewal
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby further consent to the
incorporation of our report 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
EXHIBIT 23.2
Bateman & Co., Inc. P.C.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this Annual Report on Form 10-KSB for the
year ended December 31, 1998, which report will upon its filing be
incorporated by reference into Greka Energy's Registration Statement on Form
S-3 (registration No. 333-60621), of Greka Energy Corporation, formerly known
as Horizontal Ventures, Inc. of our report dated April 14, 1998, on our audits
of the consolidated financial statements of Greka Energy Corporation, formerly
known as Petro Union, Inc. dba Horizontal Ventures, Inc. as of December 31,
1997 and for each of the two years in the period ended December 31, 1997.
/s/ BATEMAN & CO., P.C.
Houston, Texas
April 15, 1999
EXHIBIT 23.3
Netherland, Sewell & Associates, Inc.
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to references to our firm in the form and context in
which they appear in the Annual Report on Form 10-KSB of GREKA Energy
Corporation for the year ended December 31, 1998. We hereby further consent to
the use of information contained in our reports, as of January 1, 1997, 1998,
and 1999 setting forth the Saba Petroleum Company oil and gas reserves and
revenue estimates and to the use of information from our report dated April 5,
1999, setting forth the Horizontal Ventures, Inc. oil and gas reserves and
revenue estimates, as of January 1, 1999. We further consent to the
incorporation by reference thereof into the Company's Registration Statement
on Form S-3 (33-60621).
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Frederic D. Sewell
___________________________________
Frederic D. Sewell
President
Dallas, Texas
April 14, 1999
EXHIBIT 23.4
Sproule Associates Limited
April 14, 1999
Greka Energy Corporation
630 Fifth Avenue, Suite 1501
New York, NY 10111
Re: Evaluation of the P&NG Reserves of Beaver Lake Reserves Corporation,
as of January 1, 1999
Dear Sirs:
Sproule Associates Limited hereby consents to being named in the annual
10-KSB report, which upon its filing will be incorporated by reference in the
Registration Statement on Form S-3, File No. 33-60621.
We confirm that we have read excerpts from the draft document and that we
have no reason to believe that there are any misrepresentations in the
information contained therein that is derived from our Report.
Sincerely,
/s/ R. K. MacLeod
___________________________________
R. K. MacLeod, Eng.
Vice-President, Engineering
U.S. and International
Dallas, Texas
April 14, 1999
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 250,212
<SECURITIES> 0
<RECEIVABLES> 94,899
<ALLOWANCES> 74,092
<INVENTORY> 0
<CURRENT-ASSETS> 421,807
<PP&E> 5,607,291
<DEPRECIATION> 4,081,340
<TOTAL-ASSETS> 20,806,805
<CURRENT-LIABILITIES> 2,249,661
<BONDS> 52,634
0
0
<COMMON> 25,735,019
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<TOTAL-LIABILITY-AND-EQUITY> 20,806,805
<SALES> 145,813
<TOTAL-REVENUES> 145,813
<CGS> 0
<TOTAL-COSTS> 5,167,758
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<INCOME-PRETAX> (5,547,645)
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