FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-20760
GREKA Energy Corporation
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(Exact name of registrant as specified in its charter)
Colorado 84-1091986
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation of organization) Identification No.)
630 Fifth Avenue, Suite 1501, New York, NY 10111
------------------------------------------------
(Address of principal executive office)
(212) 218-4680
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(Registrant's telephone number, including area code)
Not applicable
------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of August 9, 1999, GREKA Energy had 4,247,724 shares of Common Stock, no par
value per share, outstanding.
<PAGE>
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION ............................................ 1
Item 1. Financial Statements ............................................. 1
Condensed Consolidated Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998 .................................... 1
Condensed Consolidated Statements of Operations for the Six and
Three Month Periods Ended June 30, 1999 and 1998 (Unaudited) ....... 3
Condensed Consolidated Statements of Cash Flows for the Six
Month Periods Ended June 30, 1999 and 1998 (Unaudited) .............. 4
Notes to Condensed Consolidated Financial Statements (Unaudited) ....... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 29
Item 2. Changes in Securities and Use of Proceeds......................... 30
Item 3. Defaults Upon Senior Securities................................... 30
Item 4. Submission of Matters to a Vote of Security Holders............... 30
Item 5. Other Information................................................. 30
Item 6. Exhibits and Reports on Form 8-K.................................. 31
SIGNATURE.................................................................. 32
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
GREKA ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
1999 December 31,
(Unaudited) 1998
------------ -------------
Current Assets
Cash and cash equivalents ............... $ 2,168,619 $ 250,212
Accounts receivable, net of
allowance for doubtful accounts
of $161,500(1999)and $74,000 (1998) .... 4,723,300 171,595
Inventories ............................. 6,472,288 --
Other current assets .................... 823,033 --
------------ -------------
Total Current Assets ............. 14,187,240 421,807
------------ -------------
Property and Equipment
Investment in limestone property,
at cost ................................ 3,699,304 3,500,000
Oil and gas properties (full
cost method) ........................... 25,673,937 3,445,816
Land, plant and equipment ............... 42,085,814 1,561,475
------------ -------------
71,459,055 8,507,291
Less accumulated depletion,
depreciation and impairment ............ (5,229,574) (4,081,340)
------------ -------------
Total Property and Equipment ..... 66,229,481 4,425,951
------------ -------------
Other Assets
Investment in Saba Petroleum Company .... -- 15,804,110
Other ................................... 1,903,325 154,937
------------ -------------
Total Other Assets ............... 1,903,325 15,959,047
------------ -------------
$ 82,320,046 $ 20,806,805
============ =============
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
GREKA ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
1999 December 31,
(Unaudited) 1998
------------ -------------
Current Liabilities
Accounts payable and accrued
liabilities .............................. $ 12,566,259 $ 236,323
Income taxes payable ...................... 398,931 --
Current portion of long-term debt ......... 23,626,353 2,013,338
------------ -------------
Total Current Liabilities .......... 36,591,543 2,249,661
------------ -------------
Long-term Debt, net of current portion ......... 8,582,296 52,634
Other Liabilities .............................. 112,164 --
Minority Interest in Consolidated Subsidiary ... 585,554 --
Preferred Stock of Subsidiary .................. 7,304,356 --
------------ -------------
16,584,370 52,634
------------ -------------
Commitments and contingencies
Stockholders' Equity
Common Stock, no par value, authorized
50,000,000 shares; issued and
outstanding 4,247,724 (1999) and
2,910,988 (1998) shares ................... 36,305,019 25,735,019
Accumulated comprehensive income .......... 63,982 --
Accumulated deficit ....................... (7,224,868) (7,230,509)
------------ -------------
Total Stockholders' Equity ................ 29,144,133 18,504,510
------------ -------------
$ 82,320,046 $ 20,806,805
============ =============
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
GREKA ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues
<S> <C> <C> <C> <C>
Oil and gas sales ......................... $ 4,695,414 $ 74,659 $ 4,412,526 $ 39,970
Refinery product sales .................... 3,533,088 -- 3,533,088 --
Other ..................................... 820,056 47,000 749,842 47,000
----------- ----------- ----------- -----------
Total Revenues ................... 9,048,558 121,659 8,695,456 86,970
----------- ----------- ----------- -----------
Expenses
Production costs .......................... 2,582,749 64,553 2,369,763 30,381
Refinery product cost of sales ............ 2,065,651 -- 2,065,651 --
General and administrative ................ 1,587,003 720,531 1,162,267 365,984
Depletion, depreciation & amortization .... 1,719,186 109,366 1,500,811 70,498
----------- ----------- ----------- -----------
Total Expenses ............................ 7,954,589 894,450 7,098,492 466,863
----------- ----------- ----------- -----------
Operating income (loss) ................... 1,093,969 (772,791) 1,596,964 (379,893)
Other Income (Expenses)
Equity in pre-acquisition loss of Saba .... (553,483) -- -- --
Other, net ................................ 679,265 49,603 652,948 15,009
Interest expense .......................... (646,271) -- (542,851) --
----------- ----------- ----------- -----------
Other Income (Expense), Net ............... (520,489) 49,603 110,097 15,009
----------- ----------- ----------- -----------
Income (loss) before income taxes ......... 573,480 (723,188) 1,707,061 (364,884)
Provision for Colombia taxes .............. 472,100 -- 472,100 --
Minority interest in (Loss) of
Consolidated Subsidiary ................... (20,617) -- (19,579) --
----------- ----------- ----------- -----------
Net Income (Loss) ......................... 121,997 (723,188) 1,254,540 (364,884)
Other Comprehensive Income - net of tax
Foreign currency translation
adjustments ...................... 63,982 -- 63,982 --
----------- ----------- ----------- -----------
Comprehensive Income (Loss) ............... $ 185,979 $ (723,188) $ 1,318,522 $ (364,884)
=========== =========== =========== ===========
New Earnings (Loss) per common share
Basic and Diluted ......................... $ -0- $ (0.46) $ 0.27 $ (0.23)
Weighted Average Common Shares Outstanding,
Basic and Diluted ......................... 3,626,639 1,570,981 4,221,018 1,570,981
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
GREKA ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
Cash Flows from Operating Activities
<S> <C> <C>
Net income (loss) ......................... $ 121,997 $ (723,188)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depletion, depreciation and
amortization ............................... 1,719,186 109,366
Equity in pre-acquisition loss of Saba ....... 553,483 --
Minority interest in (loss) of
consolidated subsidiary .................... (20,617) --
Compensation expense attributable to the
issuance of Common Stock ................ 150,000 --
Changes in:
Accounts receivable ....................... (3,054,506) 3,173
Inventories ............................... (1,267,571) --
Other assets ................................. (116,128) (5,236)
Accounts payable and accrued
liabilities ................................ 1,095,747 (831,590)
------------ ------------
Net Cash Used In Operating
Activities ................................. (818,409) (1,447,475)
------------ ------------
Cash Flows from Investing Activities
Acquisition of inventory ...................... (1,000,000) --
Expenditures for property and equipment ....... (474,403) (1,135,462)
Expenditures for
acquisition of Saba,
net of cash acquired ......................... 234,850 --
------------ ------------
Net Cash Used In
Investing Activities ........................ (1,239,553) (1,135,462)
------------ ------------
Cash Flows from Financing Activities
Increase in deferred financing costs .......... (330,348) --
Proceeds from notes payable and
long-term debt:
BNY Financial Corporation .................... 10,526,450 --
15% Debenture ................................ 1,000,000 --
Principal payments on notes
payable and long-term debt:
Bank One, Texas .............................. (6,000,000) --
BNY Financial Corporation .................... (1,121,838) --
Other ..................................... (97,895) (18,768)
Net proceeds from issuance of Common
Stock ..................................... -- 84,446
------------ ------------
Net Cash Provided By Financing
Activities ................................... 3,976,369 65,678
------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents .......................... 1,918,407 (2,517,259)
Cash and Cash Equivalents at Beginning
of Period ................................. 250,212 3,932,647
------------ ------------
Cash and Cash Equivalents at End
of Period ......................................... $ 2,168,619 $ 1,415,388
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
GREKA ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
General
The accompanying unaudited condensed consolidated financial statements have been
prepared on a basis consistent with the accounting principles and policies
reflected in the financial statements for the year ended December 31, 1998, and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 1998 Form 10-KSB/A. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (which, except as otherwise disclosed herein,
consist of normal recurring accruals only) necessary to present fairly the
Company's consolidated financial position as of June 30, 1999, and the
consolidated results of operations for the six and three month periods ended
June 30, 1999 and 1998, and the consolidated cash flows for the six month
periods ended June 30, 1999 and 1998.
Acquisition of Saba Petroleum Company
On October 8, 1998, the Company disclosed that it had acquired over five percent
of the outstanding common stock of Saba Petroleum Company ("Saba"), with the
intent to gain control of Saba.
In December, 1998, the Boards of Directors of both companies approved Greka's
proposal to acquire Saba. Under the acquisition agreement, Saba's stockholders
would receive one share of the Company's Common Stock for each six shares of
Saba's common stock outstanding.
In addition to the shares owned directly by the Company, 568,200 Saba shares
were owned by IPH, a Company shareholder. Such shares were subject to a call
agreement by the Company at an exercise price equal to 120% of the cost of such
shares to IPH, payable in cash or common shares of the Company. IPH had a put
agreement that became effective April 1, 1999, and was exercised on such date.
The Company has authorized the issuance of 140,886 shares to IPH in exchange for
the shares of Saba owned directly by IPH.
During 1998, Greka acquired for cash and Greka Common Stock approximately 3.4
million common and 690 preferred shares of Saba at a total cost of approximately
$16.4 million. The acquisitions resulted in Greka owning 29.9% of the total
outstanding common shares of Saba. This investment was accounted for under the
equity method through March 24, 1999. Effective March 24, 1999, the Company,
through a wholly-owned subsidiary, acquired Saba in a transaction accounted for
as a purchase with an additional cost of approximately $10.5 million based upon
the issuance of 1,290,000 shares of GREKA Common Stock ($10.3 million) and other
expenditures ($0.2 million). The results of operations for Saba are included in
the Company's consolidated results of operations as of the acquisition date.
During 1998 and through March 24, 1999, the Company recorded cumulative equity
losses from Saba of approximately $1.1 million.
5
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Saba's principal assets at March 24, 1999, consisted of an asphalt refinery,
proved oil and gas reserves of 20,990 MBOE with estimated future net revenues,
discounted at 10% of $34.3 million (using prices as of April 1, 1999), unproven
oil and gas properties and various real estate holdings in California.
The Company's net acquisition cost of $25.8 million was allocated using the fair
value of each of Saba's assets and liabilities at the date of acquisition.
Acquisition
cost
Refinery $25,400
Oil and Gas Properties 28,628
Land 16,600
Other Assets 8,460
Liabilities and minority
interest (46,145)
Preferred Stock (7,188)
-------
Total $25,755
=======
The Company revised the allocation of the Saba acquisition cost during the
second quarter of 1999 based on new information and analyses performed during
the quarter. With additional information which may arise in the future, the
Company may further revise the allocation during the remainder of 1999.
Management's Plans
The Company's financial statements have been prepared on a going-concern basis
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business.
During 1998, due to decreased prices for natural gas and crude oil in all
locations in which the Company does business, the Company incurred significant
losses, due primarily to reduced production and related oil and gas sales and a
$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 had also not made payments on
two loans from one of its primary stockholders, but had received extensions in
the due dates for repayments to May 31, 1999. In addition, the Company made a
substantial investment in, and subsequently acquired, Saba in March 1999. At the
time of the acquisition, Saba was not in compliance with certain requirements,
restrictions and other covenants in its 9% 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 Preferred Stock (with a stated value of $7.2
million). As a consequence, it could not borrow under its revolving bank loan
agreement. Saba also received a notice of default from
6
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
the Colombian tax authorities for the payment of income taxes for 1997 and 1998.
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 was classified as currently payable by the Company and Saba,
respectively, and as a result, the Company and Saba had working capital
deficiencies of approximately $1.8 million and $35.4 million, respectively, at
December 31, 1998. The independent public accountants for the Company and Saba
issued modified reports at December 31, 1998, with respect to the ability of the
Company and Saba to each continue as a going concern. During the first quarter
of 1999, operating losses continued, and a net loss of approximately $1.1
million was incurred. At March 31, 1999, the Company's working capital deficit
was approximately $38.0 million.
The entire working capital deficit of Saba that existed on the effective date of
the acquisition, March 24, 1999, was inherited by
the Company. The Company has
entered into, and concluded, material transactions that conform to the Company's
strategy to capitalize on its asset base, including the following events:
* At May 1, 1999, the Company assumed full operation of its asphalt
refinery in California which is expected to significantly increase
operating cash flows,
* The Company acquired financing with a new bank, BNY Financial
Corporation, of up to $11.0 million in May 1999,
* The payment of $6.0 million to Bank One, Texas to reduce existing debt
owed by Saba,
* The Company negotiated terms and conditions with a financial
institution, providing for refinancing of the remaining Bank One, Texas
indebtedness (See Note 8- Subsequent Events), * The Company entered
into a term sheet providing for restructure of Saba's Preferred Stock
(See Note 5 - Preferred Stock of Subsidiary),
* The Company entered into a term sheet providing for restructure of
Saba's 9% senior subordinated debentures (See Note 4 - Notes Payable
and Long- Term Debt),
* The Company closed the sale of non-core assets of the Company,
including its oil and gas assets in Colombia (See Note 2 - Sale of
Assets).
Management believes that the results of operations for the second quarter of
1999 and the completion of the transactions referenced immediately above should
remove any uncertainty as to its ability to continue as a going concern. In view
of the significant changes which result from the events described above,
management believes that the results of operations and cash flows of the Company
reported herein are more indicative of the expected future results of operations
of the Company. Comparisons of the Company's results of operations for the six
and three month periods ended June 30, 1999 and 1998, and cash flows for the six
month periods ended June 30, 1999 and 1998, reflect significant improvement in
the Company's operations resulting from assuming full operating and financial
responsibility for its Santa Maria refinery at May 1, 1999. Results of
operations for the six month period ended June 30, 1999, and more particularly
the three month period ended June 30, 1999, are more representative of the
Company's long-term potential. See Management's Discussion and Analysis of
Financial Condition and Results of Operations and Liquidity and Capital
Resources.
7
<PAGE>
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Inventories
Inventories are principally stated at the lower of cost (first-in, first-out
method) or market, and consist of the following at June 30, 1999:
Crude Oil $ 960,463
Asphalt and
related by-products 4,548,888
Oilfield materials
and supplies 962,937
----------
$6,472,288
==========
Oil and Gas Property
The Company periodically reviews the carrying value of its oil and gas
properties in accordance with requirements of the full cost method of
accounting. Under these rules, capitalized costs of oil and gas properties may
not exceed the present value of estimated future net revenues from proved
reserves, discounted at 10%, plus the lower of cost or fair market value of
unproved properties ("ceiling"). Application of this ceiling test generally
requires pricing future revenue at the prices in effect as of the end of each
reporting period and requires a writedown for accounting purposes if the ceiling
is exceeded.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
broadens the definition of a derivative instrument and establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair market
value. Derivatives that are not hedges must be adjusted to fair value currently
in earnings. If a derivative is a hedge, depending on the nature of the hedge,
special accounting allows changes in fair value of the derivative to be either
offset against the change in fair value of the hedged asset or liability in the
income statement or to be recognized as comprehensive income (a component of
stockholders' equity) until the hedged item is recognized in earnings. The
Company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company adopted SFAS 133 in fiscal year 1999, but since it does not use
derivatives currently, there was no impact resulting from such adoption.
8
<PAGE>
NOTE 2 - SALE OF ASSETS
In June 1999, the Company closed the agreement entered into in April 1999 to
sell substantially all of the assets of Sabacol, Inc. ("Sabacol"), a
wholly-owned subsidiary of the Company, in exchange for consideration of at
least $10.0 million consisting of cash, interests in oil and gas producing
properties in California, and full release of the related debts. The agreement
provides for the payment of additional consideration to Sabacol if the
difference between the January 1, 2000 reserve value (using the average wellhead
prices received for production during fourth quarter 1999) for Sabacol's oil and
gas properties and the California properties acquired by Sabacol is greater than
the difference between the January 1, 1999 reserve value for the same
properties. If the differential is $5 million or less, by March 31, 2000 Omimex
will pay such amount to Sabacol in cash or, upon non-payment, reassign to
Sabacol the 50% interest in the Velasquez-Galan pipeline in Colombia sold by
Sabacol to Omimex . If the differential is greater than $5 million, Sabacol will
have the option through May 31, 2000 of repurchasing for approximately $12
million the assets sold to Omimex and reassigning to Omimex the California
assets purchased from Omimex. If this option is not exercised, Omimex will be
obligated to pay Sabacol $5 million in cash or, upon non-payment reassign to
Sabacol the Velasquez-Galan pipeline. On April 26, 1999, following the Company's
motion, it was announced that Sabacol had successfully obtained the Bankruptcy
Court's approval of the sales transaction and the authorized dismissal of its
bankruptcy case, upon consummation of the sale. In July 1999, Sabacol filed with
the bankruptcy court a request to enter the order dismissing the bankruptcy
case.
In connection with the closing of this transaction, the Company removed from its
accounts approximately $9.0 million of indebtedness, consisting of trade
payables, a promissory note, accrued interest and Colombia income taxes. In
addition, the Company recorded the acquisition of interests in two producing oil
and gas properties in California at a cost of approximately $790,000.
In April 1999, the Company and IPH closed an agreement with Pembrooke Calox,
Inc. for the sale of the Company's and IPH's interests in a 355-acre limestone
property located in Indiana in exchange for a non-recourse promissory note,
secured by the limestone property. The buyer had the option to pay either $3.85
million by July 31, 1999 followed by four annual payments of $200,000 each
beginning in 2001, or $5.7 million by November 1, 1999. The buyer had not paid
any funds to the Company or IPH on or before July 31, 1999. As part of this
transaction, the Company paid Pembrooke $50,000 and issued 16,736 shares of
Common Stock following the filing of a registration statement on May 17,
1999.The Company has not recorded the sales transaction due to the terms of the
sale and pending realization of the note receivable on November 1, 1999.
9
<PAGE>
NOTE 3 - STATEMENT OF CASH FLOWS
Following is certain supplemental information regarding cash flows for the six
month periods ended June 30, 1999 and 1998:
1999 1998
Interest paid $521,325 $ -
Income taxes paid $ 43,296 $ -
NOTE 3 - STATEMENT OF CASH FLOWS (continued)
Non-cash investing and financing transactions are as follows:
Dividend obligations on Saba's Preferred Stock for the periods March 24 to
31, 1999, and April 1 to June 30, 1999, that were due and payable on March 31,
1999, and June 30, 1999, of $9,000 and $107,400, respectively, were accrued by
increasing that issue's reported carrying amount.
In March 1999, the Company issued 1,290,000 shares of Common Stock at a cost of
$10.3 million to acquire 7.7 million shares of common stock of Saba (See Note
1-Acquisition of Saba Petroleum Company).
In May 1999, the Company issued 16,736 shares of Common Stock at a cost of
$100,000 in connection with the sale of the limestone property.
In May 1999, the Company acquired $2,627,493 of crude oil, asphalt and related
products by assuming credits against outstanding receivables and the assumption
of accounts payable.
In June 1999, the Company realized credits against a promissory note, accounts
payable and Colombia income taxes in the total amount of $9 million as
consideration for the sale of oil and gas property, and settlement of additional
accounts payable and accounts receivable were utilized to fund the acquisition
of producing oil and gas property at a recorded cost of $789,500.
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following at June 30, 1999:
Saba 9% senior subordinated Debentures
due 2005 (a) $ 3,299,660
Loan agreement-Bank One (b) 14,101,769
Demand loan agreement with a bank (c) 1,223,513
Capital lease obligations (d) 418,047
Promissory note (e) 345,290
Term loan with a bank (f) 360,218
Notes payable (g) 2,000,000
15% convertible senior subordinated
Debenture due 2001 (h) 1,000,000
Loan agreement-BNY Financial
Corporation (i) 9,404,612
Other 55,540
-----------
32,208,649
Less current portion 23,626,353
-----------
$ 8,582,296
===========
As discussed in Note 1, the Company completed the acquisition of Saba on March
24, 1999. The following notes discuss the debt obligations outstanding as of
June 30, 1999. With respect to certain of these instruments, the Company is in
the process of renegotiating the terms and conditions of the obligations (See
Note 8 - Subsequent Events).
10
<PAGE>
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT (continued)
(a) In December 1995, and February 1996, Saba issued a total of $12.65 million
of 9% convertible senior subordinated debentures ("Debentures") due December 15,
2005. The Debentures were convertible into common stock of Saba, at the option
of the holders of the Debentures, at any time prior to maturity at a conversion
price of $4.38 per share, subject to adjustment in certain events.
Debentures in the amount of $9,075,000 were converted into 2,074,213 shares of
Saba's common stock prior to the acquisition of Saba by the Company on March24,
1999.
The Company is currently in discussions with the majority holder of the
outstanding Debentures to amend the terms of the obligation (See Note 8 -
Subsequent Events).
Saba is not in compliance with certain of the Debentures' restrictions and
covenants, and accordingly, such debt is classified as currently payable at June
30, 1999.
(b) Amounts outstanding under the loan agreement with Bank One, Texas aggregate
$14.1 million at June 30, 1999. A portion of the indebtedness was advanced under
a reducing, revolving borrowing base loan. The balance of the indebtedness
consists of term loans that matured on July 31, 1998, and were not paid nor
extended.
In February 1999, Bank One, Texas notified Saba that as a result of continuing
defaults under Saba's principal credit facilities with Bank One the entire
amount of $20.1 million then outstanding under the facilities was accelerated
and declared immediately due and payable. In May 1999, the Company borrowed $6.0
million under the terms of a new credit facility with BNY Financial Corporation
and applied such proceeds to the Bank One, Texas indebtedness, reducing the
outstanding balance to $14.1 million.
In July 1999, the Company, Saba and Bank One entered into an Amended and
Restated Forbearance Agreement, under which Bank One agreed that it would
forbear from exercising its remedies under the credit facilities through
September 15, 1999, provided that Saba maintain compliance with certain
conditions regarding Events of Default, making timely interest payments and
securing alternative financing to retire the Bank One, Texas indebtedness.
In July 1999, the Company entered into a commitment letter with a financial
institution to lend the Company a minimum of $14.0 million, secured by the
Company's interest in certain oil and gas properties and certain California real
estate. Proceeds from this financing will be used to pay off the Company's
indebtedness to Bank One, Texas in the amount of $14.1 million that is reflected
as a current liability in the accompanying balance sheet.
11
<PAGE>
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT(continued)
(c) The Company's Canadian subsidiary has a demand revolving reducing loan with
a borrowing base of $1.2 million. Interest is payable at a variable rate equal
to the Canadian prime rate plus 0.75% per annum (7.0% at June 30, 1999). The
loan is collateralized by the subsidiary's oil and gas producing properties and
a first and fixed floating charge debenture in the principal amount of $3.6
million over all assets of the subsidiary. The borrowing base reduces at the
rate of $34,175 per month. In accordance with the terms of the loan agreement,
$410,100 of the total loan balance of $1.2 million is classified as currently
payable at June 30, 1999. Although the bank can demand payment in full of the
loan at any time, it has provided a written commitment not to do so except in
the event of default. Management believes that there has not been an event of
default under this agreement.
(d) A subsidiary of the Company leases certain equipment under agreements that
are classified as capital leases. Lease payments vary from three to five years.
The effective interest rate on the total amount of capitalized leases at June
30, 1999, was 8.21%.
(e) The promissory note ($345,290) is due to the seller of an oil and gas
property, which was acquired by Saba in December 1997. The note bears interest
at the rate of 13.5%, and is classified as a current liability.
(f) The term loan with a bank ($360,218) is due to the seller of a fee interest
in property in which the Company owns mineral interests. The note bears interest
at the prime rate plus 1% (8.75% at June 30, 1999), is scheduled for repayment
in monthly installments to a maturity date of February 2001, and is
collateralized by the fee interest acquired by the Company.
(g) In October 1998 and November 1998, the Company borrowed $500,000 and
$1,500,000, respectively, from International Publishing Holding, S. A., a
significant shareholder of the Company. The initial borrowing does not bear
interest; the second note bears interest at the rate of 6%, and is
collateralized by all of the issued and outstanding shares of capital stock of
Greka SMV Inc., a wholly owned subsidiary of the Company. Both loans have been
amended and mature for payment on September 30, 1999.
(h) In February, 1999, the Company issued $1,000,000 of 15% convertible senior
subordinated debentures due February 1, 2001. The debentures are secured by the
Company's limestone deposits to the extent of the outstanding debenture balance.
The debentures are convertible into Common Stock of the Company, at the option
of the holders of the debentures, at any time from August 1, 1999, to January
31, 2000, at a conversion price of $15.00 per share, and at any time from
February 1, 2000, until January 31, 2001, at a conversion price of $20.00.
Interest will accrue on the debentures to the maturity date. The Company may
call the entire amount outstanding, or a portion thereof, at any time during the
term of the debenture by paying the principal amount owing plus any accrued
interest. The principal use of proceeds from the sale of the debentures was to
provide working capital.
12
<PAGE>
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT(continued)
(i) In May 1999, the Company entered into a loan agreement with BNY Financial
Corporation that provides for financing of up to $11.0 million, consisting of a
term note in the amount of $6.0 million and a revolving credit facility in the
face amount of $5.0 million. The term loan was fully advanced at closing and the
proceeds were used to reduce indebtedness with Bank One, Texas. Advances under
the revolving loan are based upon eligible accounts receivable and inventory of
the Company's asphalt refinery operation. Amounts outstanding under the credit
facility bear interest at the rate of prime plus 1% (8.75% at June 30, 1999) and
are collateralized by real estate interests located in Santa Maria, California,
all assets owned by Santa Maria Refining Company, and the common stock
certificates of Santa Maria Refining Company and Saba Realty, Inc., wholly-owned
subsidiaries of the Company. Amortization of the term loan is scheduled to begin
in August 1999, and accordingly, $3.2 million of the loan amount is classified
as currently payable at June 30, 1999.
NOTE 5 - PREFERRED STOCK OF SUBSIDIARY
In December 1997, Saba sold 10,000 shares of Series A 6% Convertible Preferred
Stock for $10.0 million to RGC International Investor LDC. ("RGC"). Since that
date, a portion of the issued shares had either been redeemed or converted,
including 150 shares of Preferred Stock converted into 305,868 shares of Saba
common stock in January 1999, such that at June 30, 1999, there remained 7,160
shares of preferred stock outstanding. On March 15, 1999, the Company and RGC
entered into a term sheet that provided for the conversion of the preferred
stock to a subordinated convertible note obligation of the Company. Negotiations
relating to the final documentation of the agreement are ongoing.
NOTE 6 - BUSINESS SEGMENTS
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company considers that its operations are principally in three industry
segments: Central Coast of California production and asphalt refining
("Integrated Operations"), exploration and production ("E & P") domestic and
exploration and production ("E & P") international.
Earnings of industry segments exclude interest expense on corporate borrowings
and unallocated corporate expenses.
Foreign income and other taxes and certain state taxes are included in segment
earnings on the basis of operating results.
Identifiable assets are those assets used in the operations of the segments.
Corporate assets consist of cash, short-term investments, certain corporate
receivables, and other assets.
13
<PAGE>
NOTE 6 - BUSINESS SEGMENTS (continued)
Summaries of the Company's operations by segments for the six and three month
periods ended June 30, 1999 and 1998, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Six months ended Integrated E & P E & P Corporate
June 30, 1999: Operations domestic international and other Total
- ------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenues ......... $ 5,470 $ 1,564 $ 2,015 $ -- $ 9,049
Production costs ....... 2,787 751 1,111 -- 4,649
Other expenses ......... 181 423 127 856 1,587
Depreciation,
depletion and
amortization .......... 921 442 299 57 1,719
-------- -------- -------- -------- --------
Results of operations
from segment
activities ............ 1,581 (52) 478 (913) 1,094
Interest expense, income
taxes and other (income) 72 62 (76) 914 972
-------- -------- -------- -------- --------
Net Income (Loss) ...... $ 1,509 $ (114) $ 554 $ (1,827) $ 122
======== ======== ======== ======== ========
Identifiable assets at
June 30, 1999 .......... $ 48,002 $ 12,332 $ 2,216 $ 19,770 $ 82,320
======== ======== ======== ======== ========
</TABLE>
Six months ended Integrated E & P E & P Corporate
June 30, 1998: Operations domestic international and other Total
- ------------------------ -------- -------- -------- -------- ------
Total revenues ......... $ 122 $ 122
Production costs ....... 65 65
Other operating expenses $ 721 $721
Depreciation, depletion
and amortization ...... 109 109
Results of operations
from segment activities (52)
Interest expense and
other (income) (net) ... -- (50) (50)
Net loss ............... $ (52) $(671) $(723)
14
<PAGE>
NOTE 6 - BUSINESS SEGMENTS (continued)
Three months ended Integrated E & P E & P Corporate
June 30, 1999: Operations domestic international and other Total
- ------------------ ------- ------- ------- --------- -------
Total revenues ......... $ 5,314 $ 1,510 $ 1,872 $ -- $ 8,696
Production costs ....... 2,698 715 1,023 -- 4,436
Other expenses ......... 163 416 100 483 1,162
Depreciation,
depletion and
amortization .......... 800 401 267 33 1,501
------- ------- ------- --------- -------
Results of operations
from segment
activities ............ 1,653 (22) 482 (516) 1,597
Interest expense, income
tax and other (income) . 72 62 (76) 284 342
------- ------- ------- --------- -------
Net Income (Loss) ...... $ 1,581 $ (84) $ 558 $ (800) $ 1,255
======= ======= ======= ========= =======
Three months ended Integrated E & P E & P Corporate
June 30, 1998: Operations domestic international and other Total
- ------------------ ------- ------- ------- --------- -----
Total revenues ........... $ 87 87
Production costs ......... 31 31
Other operating expenses . 366 366
Depreciation, depletion
and amortization ........ 70 70
-------
Results of operations
from segment activities (14)
Interest expense and
other (income) (net) ..... -- (15) (15)
------- --------- -----
Net loss ................. $ (14) $(351) $(365)
======= ========= =====
Total assets at June 30, 1999, increased by $61.5 million from the amount
reported at December 31, 1998, due principally to the acquisition of Saba by the
Company on March 24, 1999.
Revenues and expenses reflect Saba's operations on a consolidated basis from the
effective date of the acquisition, March 24, 1999.
In view of the significant changes to the Company during 1998 and the
acquisition of Saba completed in March 1999, and the changes resulting from the
sale of certain assets (See Note 2 - Sale of Assets), the change in refinery
operations, and debt restructuring (See Note 4 - Notes Payable and Long-Term
Debt and Note 8 - Subsequent Events), management believes that the results of
operations for the three months ended June 30, 1999, of the Company reported
herein are more indicative of the expected future results of operations of the
Company.
15
<PAGE>
NOTE 7 - CONTINGENCIES
In 1993, Saba acquired a producing mineral interest in California from a major
oil company. At the time of acquisition, Saba's investigation revealed that a
discharge of diluent, a light, oil-based fluid which is often mixed with heavier
grades of crude had occurred on the acquired property. The purchase agreement
required the seller to remediate the area of the diluent spill. After Saba
assumed operation of the property, it became aware of additional diluent
contamination and believes the major oil company is responsible to remediate
these areas as well. Saba has notified the seller of its obligation to
remediate. The Company expects ongoing discussions with the seller in order that
the seller comply with the required remediation.
In 1995, Saba agreed to acquire an oil and gas interest in California on which a
number of out of production oil wells had been drilled by the seller. The
acquisition agreement required that Saba assume the obligation to abandon any
wells that Saba did not return to production, irrespective of whether certain
consents of third parties necessary to transfer the property to Saba were
obtained.
Management believes Saba has no obligation to remediate this property because it
believes the seller did not give Saba any consideration to enter into the
contract for the property. The Company anticipates ongoing discussions with the
seller in order that the seller comply with the required obligations of the
property.
The Company owns an asphalt refinery in Santa Maria, California, with which
significant environmental remediation obligations are associated. The party who
sold the asphalt refinery to Saba performs all environmental obligations that
arose during and as a result of its operations of the refinery prior to the
acquisition by Saba. The extent of such remediation is ongoing.
The Company, as is customary in the industry, is required to plug and abandon
wells and remediate facility sites on its properties after production operations
are completed. The cost of such operation will be significant and will occur,
from time to time, as properties are abandoned.
There can be no assurance that material costs for remediation or other
environmental compliance will not be incurred in the future. The occurrence of
such environmental compliance costs could be materially adverse to the Company.
No assurance can be given that the costs of closure of any of the Company's
other oil and gas properties would not have a material adverse effect on the
Company.
16
<PAGE>
NOTE 8 - SUBSEQUENT EVENTS
Bank One Indebtedness
In July 1999, the Company, Saba and Bank One, Texas entered into an amended and
restated forbearance agreement under which Bank One has agreed to forbear from
exercising its remedies to collect the indebtedness owed by Saba through
September 15, 1999 on the condition that the Company shall have entered into on
or before July 15, 1999 a term sheet with a reputable financial institution or
other lender acceptable to Bank One pursuant to which such lender has stated its
willingness to fund a loan to Saba on or before September 15, 1999, all or part
of the proceeds of which would be used to pay off in full the outstanding
principal balance and accrued, unpaid interest owed by Saba to Bank One.
Additional Financing
In July 1999, the Company entered into a commitment letter with a financial
institution to lend the Company a minimum of $14.0 million, secured by the
Company's interest in certain oil and gas properties and certain California real
estate. Proceeds from this financing will be used to pay off the Company's
indebtedness to Bank One, Texas in the amount of $14.1 million that is reflected
as a current liability in the accompanying balance sheet.
Beaver Lake Resources Corporation
In July 1999, the Company acquired the remaining common stock of Beaver Lake
Resources Corporation ("BLRC") that it did not hold effective July 31, 1999
whereby the Company will issue a total of approximately 68,000 shares resulting
in each BLRC shareholder receiving 1 share of the Company's common stock in
exchange for 74.4 shares of BLRC's common stock. Beaver Lake Resources
Corporation is now a wholly-owned subsidiary of the Company.
Saba Debentures
In July 1999, the Company entered into a term sheet with the majority holder of
the outstanding Saba debentures to exchange the debentures of Saba for new
debentures of the Company with interest at the rate of 9%, maturing on December
31, 2005 with a right of the Company to redeem at any time for an amount equal
to 102% of the principal amount plus any accrued but unpaid interest, subject to
the right of holders to first convert. The conversion price offered by the
Company is 95% of the average closing bid price of the Company's common stock
for the 30 consecutive trading days of the Company's common stock ending one day
prior to the date notice of conversion is received by the Company, but in no
event less than $8.50 nor greater than $12.50 per share. The terms further offer
that, commencing April 1, 2000, each holder of the Company's debentures shall
have the right upon written notice to the Company to require that it redeem its
debentures at an amount equal to the principal amount plus any accrued but
unpaid interest. The Company expects most of the Saba debenture holders to
accept the term sheet and further expects the Saba debentures to be delisted
from the American Stock Exchange.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
GREKA Energy is an independent integrated energy company committed to
create shareholder value by capitalizing on consistent cash flow hedged from oil
price fluctuations within integrated operations, exploiting E&P opportunities
and penetrating new niche markets utilizing proprietary technology with an
emphasis on low cost short radius horizontal drilling technology patented by BP
Amoco and licensed to GREKA Energy. GREKA Energy has oil and gas production,
exploration and development activities in North America and the Far East, with
primary areas of activity in Alberta, California, Louisiana, Texas, New Mexico,
Indonesia and China. In addition, GREKA Energy owns and operates an asphalt
refinery in California.
GREKA Energy has a three-prong strategy that capitalizes on its asset
base to enhance shareholder value as follows:
Integrated Hedged Operations
Hedged operations of GREKA Energy focus on the integration of its Santa Maria
(California) assets, including an asphalt refinery and interests in heavy oil
fields. To date, GREKA Energy has only been able to supply to the asphalt
refinery 20-35% 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 (100% owned) with the interests in the heavy oil producing fields
(100% working interest) should provide a stable hedge to GREKA Energy on each
equity barrel. GREKA Energy's strategy in these integrated assets is two-fold:
1. GREKA Energy intends to proceed with acquisitions that enhance the
long-term feedstock supply to the refinery.
2. GREKA Energy intends to implement the proprietary Amoco Horizontal
Drilling Technology to cost-efficiently boost production rates from the
the Company's 150 potential drilling locations identified in the Santa
Maria Valley area of central California.
The two actions are targeted to increase throughput into the refinery from the
rate at June 30, 1999 of approximately 3,500 barrels per day to 10,000 barrels
per day by yearend 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 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.
18
<PAGE>
Exploitation & Production
The Company is currently focusing on return to production ("RTP") work that had
been ignored by Saba for over eighteen months. Such RTP is expected to enhance
the current production levels and capitalize on current oil prices. GREKA Energy
plans to capitalize on its existing portfolio of domestic and international
exploration projects that are synergistic with GREKA Energy's Amoco Horizontal
Drilling Technology. The Company plans to specifically focus on its existing
concessions in locations such as China where the Company believes there is a
significant demand for energy.
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.
Recent History
During the first part of 1998, management of GREKA Energy focused
substantially all of its efforts on corporate restructuring, recapitalization
and acquisition efforts and an investment in a horizontal drilling pilot program
in the Cat Canyon field in California that all were part of its strategy to
capitalize on its experience with horizontal drilling technology. During the
latter part of 1998 and early 1999, management was primarily focused on the
acquisition of Saba, which had substantial reserves suited to exploitation by
GREKA Energy's horizontal drilling technology, and considerable expenses were
incurred in connection with the Saba transactions in the first quarter of 1999.
Due to the significance to GREKA Energy of the Saba acquisition, which was
completed effective March 24, 1999, GREKA Energy's management and staff devoted
a substantial amount of time and effort to the acquisition. Greka Energy has
already executed, and continues to execute, an aggressive rework program to
return to production existing wells on all properties that had wells shut-in
over eighteen months. Subsequent to the reworks, Greka Energy intends during the
third quarter of 1999 to implement its horizontal drilling program using its
proprietary technology on the Santa Maria Valley area assets.
Acquisition of Saba
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 effective March 24, 1999:
19
<PAGE>
On October 6, 1998, GREKA Energy entered into an 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 Preferred Stock of Saba
held by RGC in exchange for cash in the amount of $750,000, of which $500,000
was borrowed from International Publishing Holding s.a. ("IPH"), a shareholder
of GREKA Energy. GREKA Energy executed a promissory note to repay the $500,000
to IPH without interest, which note is now due September 30, 1999.
Under this 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 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. GREKA Energy paid $500,000 to
RGC on November 6, 1998 to extend the term of the exclusive right, but did not
exercise the right.
On October 8, 1998 GREKA Energy and Saba entered into an agreement under
which on November 6, 1998 Saba issued to GREKA Energy 333,333 shares of Saba
common stock in exchange for cash of $1,000,000.
The November 6, 1998 payments to RGC and Saba 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, bearing 6% interest, which note is now due September
30, 1999. The promissory note is secured by GREKA Energy's pledge of all of the
issued and outstanding shares of capital stock of Greka SMV, Inc., a wholly
owned subsidiary of GREKA Energy.
IPH in conjunction with GREKA Energy made open market purchases of
approximately 5% of the issued and outstanding shares of Saba common stock.
Under an option agreement between GREKA Energy and IPH, GREKA Energy had the
right to purchase the approximate 568,200 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. IPH had a put agreement that became effective April 1, 1999
and was exercised on such date. The Company will issue 140,886 shares to IPH in
exchange for the shares of Saba owned directly by IPH, following the
effectiveness of a registration statement. 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 December 18, 1998 GREKA Energy entered into an agreement to acquire the
2,976,765 shares of Saba common stock held by Saba Acquisub, Inc. in exchange
for the issuance by GREKA Energy of 1,340,000 shares of GREKA Energy common
stock to the shareholder of Saba Acquisub.
Also on December 18, 1998, GREKA Energy and Saba entered into an
acquisition agreement 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. The acquisition was completed effective March 24, 1999 and
GREKA Energy issued approximately 1,290,000 shares of its common stock and Saba
became a wholly owned subsidiary of GREKA Energy.
20
<PAGE>
Sale of Non-Core Assets
Colombia Assets
In June 1999, the Company closed the agreement entered into in April 1999
to sell substantially all of the assets of Sabacol, Inc. ("Sabacol"), a
wholly-owned subsidiary of the Company, in exchange for consideration of at
least $10.0 million consisting of cash, interests in oil and gas producing
properties in California, and full release of the related debts. The agreement
provides for the payment of additional consideration to Sabacol if the
difference between the January 1, 2000 reserve value (using the average wellhead
prices received for production during fourth quarter 1999) for Sabacol's oil and
gas properties and the California properties acquired by Sabacol is greater than
the difference between the January 1, 1999 reserve value for the same
properties. If the differential is $5 million or less, by March 31, 2000 Omimex
will pay such amount to Sabacol in cash or, upon non-payment, reassign to
Sabacol the 50% interest in the Velasquez-Galan pipeline in Colombia sold by
Sabacol to Omimex . If the differential is greater than $5 million, Sabacol will
have the option through May 31, 2000 of repurchasing for approximately $12
million the assets sold to Omimex and reassigning to Omimex the California
assets purchased from Omimex. If this option is not exercised, Omimex will be
obligated to pay Sabacol $5 million in cash or, upon non-payment reassign to
Sabacol the Velasquez-Galan pipeline. On April 26, 1999, following the Company's
motion, it was announced that Sabacol had successfully obtained the Bankruptcy
Court's approval of the sales transaction and the authorized dismissal of its
bankruptcy case, upon consummation of the sale. In July 1999, Sabacol filed with
the bankruptcy court a request to enter the order dismissing the bankruptcy
case.
Limestone Property
In April 1999, the Company and IPH closed an agreement with Pembrooke
Calox, Inc. for the sale of the Company's and IPH's interests in a 355-acre
limestone property located in Indiana in exchange for a non-recourse promissory
note, secured by the limestone property. The buyer had the option to pay either
$3.85 million by July 31, 1999 followed by four annual payments of $200,000 each
beginning in 2001, or $5.7 million by November 1, 1999. The buyer had not paid
any funds to the Company or IPH on or before July 31, 1999. As part of this
transaction, the Company paid Pembrooke $50,000 and issued 16,736 shares of
Common Stock following the filing of a registration statement on May 17, 1999.
Refinery Operations
In May 1999, GREKA Energy assumed all marketing and distribution operations
at its refinery in Santa Maria, California that were previously performed by
Crown Asphalt Distribution LLC under a processing agreement terminated by GREKA
Energy. Under the terms of this agreement, each party had been receiving
approximately fifty percent of the net income from the refinery. During 1998,
the refinery processed on average 3,850 barrels per day of throughput and
generated revenues of approximately $22 million with a net income of
approximately $4.7 million. During the term of the processing agreement with
Crown, Saba had only recognized and reported its fifty percent share of the
profits from the refinery operations. GREKA Energy expects to recognize and
report refinery revenues at a similar level, as well as increased operating cash
flows, as a result of assuming such operations.
21
<PAGE>
Cautionary Information About Forward-Looking Statements
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 that include, among others, statements concerning:
* the benefits expected to result from GREKA Energy's recent
acquisition of Saba 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,
* the state of GREKA Energy's Year 2000 readiness,
* 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 below.
22
<PAGE>
Cautionary Information About Forward-Looking Statements (continued)
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,
* the failure of GREKA Energy's technology systems or the technology
systems of third parties with whom GREKA Energy has material
relationships to be Year 2000 compliant, and
* adverse changes in the regulatory environment affecting GREKA Energy.
The cautionary statements contained or referred to in this report 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.
Long-Term Potential
Management believes that the results of operations and cash flows of GREKA
Energy reported herein are more indicative of the expected future results of
operations and cash flows of GREKA Energy, most particularly, the results of
operations achieved during the three month period ended June 30, 1999.
Management further believes that the results of operations of GREKA Energy
reported herein are representative of the Company's long term potential in
consideration that the Statement of Operations for the three month period ended
June 30, 1999 reflects only two, not three, complete months of the Company's
refinery operations since taking over the sales and marketing of its refined
products at May 1, 1999.
Results of Operations
Comparison of Three Month Periods Ended June 30, 1999 and 1998
Revenues increased from $86,970 for the second quarter of 1998 to$8,695,456
for the second quarter of 1999. This increase was primarily attributable to the
acquisition of Saba, followed by the cancellation of the processing agreement
with Crown Asphalt Distribution on April 30, 1999 and the subsequent recognition
of refinery revenues bythe Company.
Other revenues of $749,842 in the second quarter of 1999 were primarily
attributable to pipeline tariff income and processing fees from the Crown
agreement.
Production costs increased from $30,381 for the second quarter of 1998 to
$4,435,414 for the second quarter of 1999. This increase was primarily
attributable to the cancellation of the Crown agreement and the related
recognition of refinery expenses by the Company and lease operating expenses on
properties included in the Saba acquisition.
General and administrative expenses increased from $365,984 for the second
quarter of 1998 to $1,162,267 for the second quarter of 1999. The increase was
primarily attributable to expenses related to the acquisition of Saba.
23
<PAGE>
Results of Operations (continued)
Depletion, depreciation and amortization increased from $70,498 for the
second quarter of 1998 to $1,500,811 for the second quarter of 1999. The
increase was primarily attributable to the acquisition of Saba.
Interest expense of $542,851 was attributable to borrowings by the Company
from IPH and BNY Financial Corporation, the issuance of 15% debentures and
assumption of debt related to the acquisition of Saba.
Comparison of Six Month Periods Ended June 30, 1999 and 1998
Revenues increased from $121,659 in the first half of 1998 to
$9,048,558 in the first half of 1999. The substantial increase in revenue is due
to acquisition of Saba and cancellation of the marketing agreement with Crown
Asphalt Distribution.
Production costs increased from $64,553 in the first half of 1998 to
$4,648,400 in the first half of 1999. This increase is consistent with the
increase in revenues related to the cancellation of the Crown agreement and
lease operating expenses on properties included in the Saba acquisition.
General and administrative expenses increased from $720,531 in the first
half of 1998 to $1,587,003 in the first half of 1999. General and administrative
expenses have increased due to the acquisition of Saba.
Depreciation, depletion and amortization increased from $109,366 in the
first half of 1998 to $1,719,186 in the first half of 1999. The increase was
attributable to the acquisition of Saba.
Interest expense of $646,271 was attributable to borrowings by the Company
from IPH and BNY Financial Corporation, the issuance of 15% debentures and
assumption of debt included in the acquisition of Saba.
Liquidity and Capital Resources
Working capital increased $15,572,588 from a deficit of $37,976,891 at
March 31, 1999 to a deficit of $22,404,303 at June 30, 1999. Working capital
deficit at June 30, 1999 of $22,404,303 increased from a working capital deficit
of $1,827,854 at December 31, 1998. Current assets increased $13,765,433 from
$421,807 at December 31, 1998 to $14,187,240 at June 30, 1999 as a result of the
acquisition of Saba and the Company assuming the operations of its Santa Maria
refinery. Approximately $7.7 million of refinery raw material and finished
product inventory and refinery accounts receivable result from refinery
operations. Current liabilities increased from $2,249,661 at December 31, 1998
to $36,591,543 at June 30, 1999, an increase of $34,341,882. Accounts payable
increased as a result of the acquisition of Saba and the assumption of
operations of the Santa Maria refinery. The current portion of long term debt
increased $21,613,015 during the period.
Cash and cash equivalents increased $1,918,407 from $250,212 at
December 31, 1998 to $2,168,619 at June 30, 1999. Of this increase, $444,800 was
due to the cash and cash equivalents of Saba; the remainder of the increase was
due to $1.0 million of debentures issued by the Company during the first quarter
reduced by expenditures for quarterly operations. The Santa Maria refinery
operations produced substantial cash flow during the second quarter of 1999.
24
<PAGE>
Cash Flows
The Company's net cash used in operating activities decreased from an
outflow of $1,447,475 for the six month period ended June 30, 1998 to an outflow
of $818,409 for the six month period ended June 30,1999. Net income for the
period, adjusted for non-cash charges, provided $2,524,049 of cash inflow.
Changes in other assets and liabilities were responsible for cash outflows of
$3,342,458.
The Company's net cash flows from investing activities decreased from a net
outflow of $1,135,462 from the six month period ended June 30, 1998 to a net
outflow of $1,239,553 for the six month period ended June 30, 1999. This change
was primarily attributable to a $1 million investment in inventory for the
asphalt refinery.
The Company's net cash provided by financing activities increased from an
inflow of $65,678 for the six month period ended June 30, 1998 to an inflow of
$3,976,369 in the six months ended June 30, 1999. Cash was provided during the
six months ended June 30, 1999 from proceeds of the Company's financing facility
with BNY Financial Corporation in the amount of $10,526,450 and proceeds from
the Company's 15% Debenture in the amount of $1 million. Cash was used during
the six month period ended June 30, 1999 to reduce its obligation to Bank One,
Texas by $6 million and make payments on its BNY Financial Corporation note
payable in the amount of $1,121,838.
Liquidity
Under the direction of GREKA Energy's management and strategy, GREKA Energy
has significantly improved its liquidity and expects to have low capital
requirements. Specifically, GREKA Energy expects to have an annual capex of $5
million funded by its cash flow. The Company is current on all its interest
payments, and has sufficient cash flow for all its operating and foreseen
capital requirements. Further, GREKA Energy intends to achieve the following:
* Obtain financing of at least $14 million to pay currently due Bank One
debt, reducing current liabilities from $36,591,543 to $22,591,543 as
of June 30, 1999.
* Utilize the in-house proprietary and cost effective horizontal
drilling technology to enhance production in the Santa Maria Valley
area.
* Continue integration of GREKA Energy-operated oil and gas properties
and the wholly-owned and operated asphalt refinery that collectively
provide for low cost operating expenses and high cash flow.
GREKA Energy's management also believes that the disposition of the
Colombia properties 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, these dispositions and
acquisition give 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.
25
<PAGE>
Capital Expenditures
The Company's growth is focused on acquisitions that are synergistic with
its technology. It is intended that such acquisitions will be achieved
concurrent with the closing of adequate financing. Operationally on the current
asset base, the Company expects to fund its annual capex of $5.0 million by its
cash flow.
Debt Financing and Restructuring
Outstanding debt and the Company's plans for payment or restructuring:
* The Bank One debt that was reduced from $20.1 million to $14.1
million following the payment of $6.0 million in May 1999 is expected
to be eliminated in August 1999 as a result of additional financing
that the Company plans to acquire.
* The Company entered into a term sheet with the majority holder of
Saba's 9% senior subordinated debentures ($3.6 million) to exchange
the debentures of Saba for new debentures of the Company.
* The Company entered into a term sheet in March 1999 with the Saba
Preferred Stockholder holding Saba's Preferred Stock (with a stated
value of $7.3 million) that provided for the conversion of Saba's
Preferred Stock to a subordinated convertible note obligation of the
Company.
In April 1999, GREKA Energy's wholly-owned subsidiaries, Greka Integrated,
Inc., Santa Maria Refining Company, and Saba Realty, Inc., procured a loan from
BNY Financial Corporation that provides funds of up to $11 million under two
credit facilities. A term loan in the amount of $6,000,000 was funded upon
closing, the proceeds of which were used to reduce the indebtedness owed by Saba
to Bank One. In addition, a revolving credit facility provides advances for
working capital of up to $5,000,000 against eligible receivables and inventory
of the Santa Maria asphalt refinery. It is intended that a portion of this
working capital will be applied to expenditures incurred in assuming the
marketing and sale of refined products at the asphalt refinery following the
termination of the processing agreement with Crown Asphalt Distribution LLC
effective April 30, 1999. The loans are secured by real estate interests located
in Santa Maria, California, all assets owned by Santa Maria Refining Company,
and the common stock certificates of Santa Maria Refining Company and Saba
Realty, Inc.
In July 1999, the Company, Saba and Bank One, Texas entered into an amended
and restated forbearance agreement under which Bank One has agreed to forbear
from exercising its remedies to collect the indebtedness owed by Saba through
September 15, 1999 on the condition that the Company shall have entered into on
or before July 15, 1999 a term sheet with a reputable financial institution or
other lender acceptable to Bank One pursuant to which such lender has stated its
willingness to fund a loan to Saba on or before September 15, 1999, all or part
of the proceeds of which would be used to pay off in full the outstanding
principal balance and accrued, unpaid interest owed by Saba to Bank One.
In July 1999, the Company negotiated terms and conditions with a financial
institution to fund during August 1999 at least $14 million secured by the
Company's interest in certain oil and gas properties and certain California real
estate.
26
<PAGE>
Debt Financing and Restructuring (continued)
In July 1999, the Company entered into a term sheet with the majority
holder of the outstanding Saba debentures to exchange the debentures of Saba for
new debentures of the Company with interest at the rate of 9%, maturing on
December 31, 2005 with a right of the Company to redeem at any time for an
amount equal to 102% of the principal amount plus any accrued but unpaid
interest, subject to the right of holders to first convert. The conversion price
offered by the Company is 95% of the average closing bid price of the Company's
common stock for the 30 consecutive trading days of the Company's common stock
ending one day prior to the date notice of conversion is received by the
Company, but in no event less than $8.50 nor greater than $12.50 per share. The
terms further offer that, commencing April 1, 2000, each holder of the Company's
debentures shall have the right upon written notice to the Company to require
that it redeem its debentures at an amount equal to the principal amount plus
any accrued but unpaid interest. The Company expects most of the Saba debenture
holders to accept the term sheet and further expects the Saba debentures to be
delisted from the American Stock Exchange.
Year 2000 Readiness Disclosure
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 systems and non-information technology
systems using embedded technology may be affected by the Year 2000. GREKA Energy
has not completed an assessment of Year 2000 compliance issues, but management
currently believes that since GREKA Energy's drilling equipment does not make
use of embedded computer chips and its other operating equipment is not heavily
automated with technology systems, the costs of becoming ready for the Year 2000
will not have a material adverse effect on GREKA Energy's financial condition,
results of operations or cash flows.
GREKA Energy currently believes that its existing technology systems and
software will not need to be upgraded to become Year 2000 compliant, except that
GREKA Energy must replace its current integrated accounting software in order to
accurately process Year 2000 data. Should it not do so, GREKA Energy would be
unable to properly process and report upon its own operating data, as well as
information provided to it by outside sources that are Year 2000 compliant.
GREKA Energy's third-party accounting software vendor has modified the current
operating system utilized by GREKA Energy and provided the modified system to
GREKA Energy in the first quarter of 1999. The cost of this modification was
included in the vendor's system support contract and did not result in a
significant additional expense for GREKA Energy.
27
<PAGE>
GREKA Energy is in the process of verifying whether vendors, suppliers and
significant customers with which GREKA Energy has material relationships are
Year 2000 compliant. GREKA Energy believes that some of these third parties will
not be materially affected by the Year 2000 since those third parties are
relatively small entities which do not rely heavily on technology systems for
their operations. GREKA Energy does not know whether the other third parties
will be Year 2000 complaint. Under a worst-case scenario, if GREKA Energy and
such third parties are not Year 2000 compliant on a timely basis, there could be
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's current Year
2000 contingency plan is essentially to have all necessary tasks performed
manually in the event of material Year 2000 problems affecting GREKA Energy.
Management of GREKA Energy believes that GREKA Energy has adequate personnel to
perform those functions manually until any Year 2000 problems are resolved.
Inflation
GREKA Energy does not believe that inflation will have a material impact on
GREKA Energy's future operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As discussed in the explanatory note preceding the table of contents for
this report, GREKA Energy filed its SEC reports for periods through December 31,
1998 under SEC Regulation S-B. Regulation S-B does not contain the disclosure
requirements under this item. In addition, the information under this item is
not required for interim period reports until after the first fiscal year end in
which this item is applicable. Therefore, GREKA Energy expects to begin
presenting the information required by this item in its Annual Report on Form
10-K for the fiscal year ending December 31, 1999.
28
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The following material developments occurred during the quarter ended June
30, 1999 with respect to the legal proceedings reported in the GREKA Energy
Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 1998:
As reported in the GREKA Energy 1998 Annual Report on Form 10-KSB/A, on
December 11, 1998, Sabacol filed a voluntary petition under Chapter 11 of the
U.S. Bankruptcy Code in U.S. Bankruptcy Court for the Central District of
California (BK Case No. ND98-15858-RR). On April 26, 1999, following the
Company's motion, it was announced that Sabacol had successfully obtained the
Bankruptcy Court's approval of the sale of substantially all its assets and the
authorized dismissal of its bankruptcy case, upon consummation of the sale. In
July 1999, Sabacol filed with the bankruptcy court a request to enter the order
dismissing the bankruptcy case.
In July 1999 in Gitte-Ten, Inc. v. Saba Petroleum Company (Case No. CV
980202 Superior and Municipal Courts of the State of California, County of San
Luis Obispo, March 1998), the court vacated its summary judgment previously
granted to Gitte-Ten, Inc. The matter is scheduled for trial in October 1999.
In July 1999 the matter of Chase v. Saba Petroleum, Inc. (Case no.
SM108977, Superior Court of the State of California, County of Santa
Barbara-Cook Division, July 1998) was settled by Saba's insurance carrier, which
included a release of all claims and dismissal with prejudice as to Saba.
Wellspring Partners, LLC v. Saba Energy of Texas, Inc., et al. (Case No.
1999-24729, 125th Judicial District Court of Harris County, Texas, May 1999)
Wellspring brought suit for damages alleging breach of contract and conspiracy
for Saba's non-payment of fees claimed pursuant to a brokerage agreement between
Wellspring and Saba. Wellspring moved for a Temporary Restraining Order and
Temporary Injunction to restrain Saba from allegedly breaching the brokerage
agreement and from closing the pending sale of Saba's properties to Enervest
Energy LP without first providing Wellspring with certain information regarding
the sale and depositing with the court the alleged broker fee due Wellspring.
The court denied Wellspring's motion, and in June 1999 Saba filed a counterclaim
against Wellspring for damages incurred as a result of Wellspring's tortious
interference with Saba's contractual and prospective business relationships with
Enervest Energy LP. Enervest Energy LP v. Saba Energy of Texas, Inc. (Case No.
1999-30673, 152nd Judicial District Court of Harris County, Texas, June 1999)
Enervest filed an action claiming that Saba breached the agreement between the
parties for failing to close the sale of Saba's interests in certain oil and gas
properties for $12.5 million. In accordance with the agreement, Enervest
deposited earnest money in the amount of $1.25 million to a jointly controlled
account to assure Enervest's performance of the agreement. Enervest further
seeks the court's declaration that it is entitled to the deposit. In July 1999,
Saba filed a counterclaim against Enervest for damages incurred as a result of
Enervest's breach of the agreement by failing to close the sale.
Crown Asphalt Distribution LLC, et al. v. Santa Maria Refining Company, et
al. (Case No. CV99-895 DOC (Anx), United States District Court, Central District
of California, Southern Division, July 1999) Crown brought suit for damages
alleging breach of contract, breach of covenant of good faith and fair dealing,
conversion, fraud, claim and delivery, unjust enrichment and constructive trust,
unfair competition, declaratory relief, and specific performance pursuant to
Santa Maria's termination of the processing agreement with Crown. Crown moved
for a Preliminary Injunction or Writ of Possession to compel Santa Maria,
amongst other things, to continue doing business with Crown beyond the
termination date of the processing agreement. The court denied Crown's motion.
From time to time, GREKA Energy and its subsidiaries are named in legal
proceedings arising in the normal course of business. In the opinion of
management, such legal proceedings are not expected to have a material adverse
effect on GREKA Energy's financial condition, results of operations or cash
flows.
29
<PAGE>
Item 2. Changes in Securities and Use of Proceeds.
During the three months ended June 30, 1999, the Company issued 30,000
shares of its Common Stock to Randeep S. Grewal under the terms of his
employment agreement and 16,736 shares of its Common Stock to Pembrooke Calox,
Inc. in connection with the sales transaction of the Company's interests in the
Indiana property (see Overview-Sale of Non-Core Assets).
Item 3. Defaults Upon Senior Securities.
The information required by this Item is incorporated herein by reference
to the discussion in Part I Item 2 of this report under the caption "Debt
Financing and Restructuring."
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
In June 1999, the Company issued a warrant to Internet Associates, Inc. to
purchase 50,000 shares of the Company's common stock that vests monthly at the
rate of 10,000 shares per month for five months and at an exercise price of
$8.25 per share which may be exercised in increments of not less than 10,000
shares. The warrant expires on June 1, 2000. Vesting is contingent upon holder's
performance under an agreement between the Company and holder for investor and
public relation services.
30
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following exhibits are furnished as part of this report:
Exhibit No. Description
10.1 Arrangement Agreement dated June 16, 1999 among GREKA Energy
Corporation and Beaver Lake Resources Corporation*
10.2 Forbearance Agreement dated April 19, 1999, First Amendment
To Forbearance Agreement dated April 30, 1999, and Amended
And Restated Forbearance Agreement dated July 15, 1999 among
Bank One, Texas, Saba Petroleum Company and Greka Energy
Corporation*
10.3 Agreement For Purchase and Sale of Real Estate dated April
28, 1999 among Pembrooke Calox, Inc. and Greka Energy
Corporation (filed as Exhibit 10.4 to the GREKA Energy
Report on Form 10-Q for the quarter ended March 31, 1999 SEC
file #0-207670 and incorporated by reference herein)
10.4 Loan and Security Agreement dated April 30, 1999 among BNY
Financial Corporation, Greka Integrated, Inc., Saba Realty,
Inc. and Santa Maria Refining Company (filed as Exhibit 10.1
to the GREKA Energy Report on Form 10-Q for the quarter
ended March 31, 1999 SEC file #0-207670 and incorporated by
reference herein)
10.5 Closing Agreement dated June 30, 1999 among Sabacol, Inc.
and Omimex Resources, Inc. et al. (filed as Exhibit 4.2 to
the GREKA Energy Report on Form 8-K filed July 14, 1999 SEC
File #0-20760 and incorporated by reference herein)
11.1 Computation of Earnings per Common Share*
27.1 Financial Data Schedule*
* Filed herewith
(b) During the quarter for which this report is filed, GREKA Energy filed
the following Reports on Form 8-K:
Current Report on Form 8-K dated April 6, 1999 which reported events under Item
2, Acquisition or Disposition of Assets.
Current Reports on Form 8-K/A dated June 8, 1999 which reported events under
Item 2, Acquisition or Disposition of Assets, and Item 7, Financial Statements
and Exhibits.
Current Report on Form 8-K dated July 14, 1999 which reported events under Item
2, Acquisition or Disposition of Assets.
31
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREKA ENERGY CORPORATION
Date August 9, 1999 By:/s/ Randeep S. Grewal
-------------------------------
Randeep S. Grewal, Chairman and
Chief Executive Officer
32
ARRANGEMENT AGREEMENT
THIS ARRANGEMENT AGREEMENT dated as of June 16, 1999 (this
"Agreement"), is made and entered into by and between Greka Energy Corporation,
a Colorado corporation ("Greka"),and Beaver Lake Resources Corporation, an
Alberta corporation ("Beaver Lake").
WHEREAS, in furtherance of the Arrangement, the Board of Directors of
Beaver Lake has agreed to submit the Plan of Arrangement in the form of Exhibit
1 hereto and the other transactions contemplated by this Agreement to its
shareholders for approval;
WHEREAS, in furtherance of the Arrangement, following approval by the
shareholders of Beaver Lake of the transactions contemplated by this Agreement,
Beaver Lake will submit the Plan of Arrangement to the Court for approval; and
WHEREAS, the parties hereto desire to set forth certain
representations, warranties and covenants made by each to the other as an
inducement to the consummation of the Arrangement;
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants herein contained, the parties hereto
hereby agree as follows:
ARTICLE 1
INTERPRETATION
1.1 Definitions
In this Agreement, unless the context otherwise requires, the following
terms shall have the respective meanings set forth below:
"ABCA" means the Business Corporations Act (Alberta), S.A. 1981, C. B-15, as
amended from time to time, including the regulations promulgated thereunder;
"ASE" means The Alberta Stock Exchange.
"Affiliate" with respect to any Person, means any Person that directly or
indirectly controls, is controlled by or is under common control with such
Person;
"Acquisition Proposal" has the meaning set forth in Section 5.5;
"Arrangement" means the arrangement under section 186 of the ABCA on the terms
and subject to the conditions set forth in the Plan of Arrangement;
"Articles of Arrangement" means the articles of arrangement in respect of the
Arrangement required by the ABCA to be sent to the Registrar after the Final
Order is made;
"Beaver Lake Articles" means Beaver Lake's Articles of Amalgamation, as amended;
"Beaver Lake Assets" means all of the assets and properties of Beaver Lake;
B-1
<PAGE>
"Beaver Lake Certificate" means a certificate that immediately prior to the
Effective Date represented outstanding Beaver Lake Common Shares;
"Beaver Lake Commission Filings" means all reports and other filings (including
all notes, exhibits and schedules thereto and documents incorporated by
reference therein) filed by Beaver Lake with the ASE or the Commissions, through
the date of this Agreement, together with any amendments thereto;
"Beaver Lake Affiliates" has the meaning set forth in Section 6.2(h);
"Beaver Lake Common Shareholders" means the holders of the Beaver Lake Common
Shares;
"Beaver Lake Common Shares" means the common shares in the capital of Beaver
Lake;
"Beaver Lake Disclosure Letter" means the disclosure letter delivered by Beaver
Lake to Greka on the date hereof;
"Beaver Lake MAE" means (i) a single event, occurrence or fact that (together
with all other events, occurrences and facts) would have, or might reasonably be
expected to have, a material adverse effect on the assets, business, operations,
prospects or financial condition of Beaver Lake or (ii) an item that prevents or
adversely affects the ability of Beaver Lake to perform and comply with its
obligations under this Agreement or any other agreement to be executed and
delivered in connection with the transactions contemplated hereby or thereby;
"Beaver Lake Non-Voting Shares" means the convertible non-voting shares in the
capital of Beaver Lake;
"Beaver Lake Options" means the outstanding options to purchase an aggregate of
o Beaver Lake Common Shares under the Beaver Lake Option Plan and Beaver Lake
Share Option Agreements;
"Beaver Lake Option Plan" means the Beaver Lake Resources Corporation Stock
Option Plan;
"Beaver Lake Permits" has the meaning set forth in Section 3.2(o);
"Beaver Lake Shareholders Meeting" means the annual and special meeting of the
shareholders of Beaver Lake (including any adjournment thereof) that is to be
convened as provided by the Interim Order to consider, and if deemed advisable,
approve the Arrangement;
"Benefit Program or Agreement" means any stock option plan, collective
bargaining agreement, bonus plan or arrangement, incentive award plan or
arrangement, pension plan, vacation policy, severance pay plan, policy or
agreement, deferred compensation agreement or arrangement, executive
compensation or supplemental income arrangement, consulting agreement,
employment agreement and each other employee benefit plan, agreement,
arrangement, program, practice or understanding to which Beaver Lake is a party
or has any obligation;
B-2
<PAGE>
"Business Day" means, with respect to any action to be taken, any day other than
Saturday, Sunday or a statutory holiday in the place where such action is to be
taken;
"Closing" means the closing of the transactions contemplated by this Agreement
on the Effective Date;
"Commissions" means the Securities Commissions in Ontario, Alberta and British
Columbia;
"Court" means the Court of Queen's Bench of Alberta;
"Demands" means any claims, actions, suits, investigations, inquiries or
proceedings;
"Depositary" means Montreal Trust Company of Canada at its offices located at
600, 530 - 8th Avenue S.W., Calgary, Alberta T2P 3S8;
"Effective Date" means the date the Articles of Arrangement are accepted for
filing by the Registrar;
"Environmental Laws" means any and all laws, statutes, ordinances, rules,
regulations, orders or determinations of any Governmental Entity pertaining to
health or the environment currently in effect in any and all jurisdictions in
which the party in question and its subsidiaries own property or conduct
business;
"Final Order" means the final order of the Court approving the Arrangement to be
applied for following the Beaver Lake Shareholders Meeting pursuant to section
186(9) of the ABCA;
"Greka Common Stock" means the common stock of Greka;
"Greka MAE" means (i) a single event, occurrence or fact that (together with all
other events, occurrences and facts) would have, or might reasonably be expected
to have, a material adverse effect on the assets, business, operations,
prospects or financial condition of Greka and its subsidiaries on a consolidated
basis or (ii) an item that prevents or adversely affects the ability of Greka to
perform and comply with its obligations under this Agreement or any other
agreement to be executed and delivered in connection with the transactions
contemplated hereby or thereby;
"Governmental Entity" means any court, administrative agency or commission or
other governmental authority or agency, domestic or foreign, including local
authorities, and any arbitration board or panel;
"GST" means any and all taxes payable under Part IX of the Excise Tax Act
(Canada) as amended from time to time and any regulations promulgated
thereunder;
"Interim Order" means the interim order of the Court made in connection with the
approval of the Arrangement;
B-3
<PAGE>
"Lien" means any lien, mortgage, pledge, security interest, restriction on
transfer, option, charge, right of any third Person or any other encumbrance of
any nature;
"NASDAQ" means the NASDAQ stock listing and exchange systems.
"Other Agreements" means, other than this Agreement, the agreements and
instruments contemplated to be executed and delivered in connection with the
Arrangement;
"Permitted Liens" means (A) Liens for taxes not due and payable and (B) inchoate
mechanics', warehousemen's and other statutory Liens incurred in the ordinary
course of business;
"Person" means an individual, corporation, limited liability company,
partnership, Governmental Entity or any other entity;
"Plan of Arrangement" means the plan of arrangement, which is attached as
Exhibit 1 and any amendment or supplement thereto made in accordance with
Section 7.3;
"Policy 9.1" means Policy Statement 9.1 of the Ontario Securities Commission;
"Proprietary Rights" means all patents, inventions, shop rights, know how, trade
secrets, designs, plans, manuals, computer software, specifications,
confidentiality agreements, confidential information and other proprietary
technology and similar information; all registered and unregistered trademarks,
service marks, logos, names, trade names and all other trademark rights; all
registered and unregistered copyrights; and all registrations for, and
applications for registration of, any of the foregoing, in each case that are
used in the conduct of the business of Beaver Lake or any Beaver Lake
Subsidiary;
"Proxy Circular" means the proxy circular, as amended or supplemented from time
to time, relating to the approval by the Beaver Lake Common Shareholders at the
Beaver Lake Shareholders Meeting of the Arrangement;
"Recommendation" has the meaning set forth in Section 5.1(c);
"Registrar" means the Registrar of Corporations appointed pursuant to section
253 of the ABCA;
"SEC" means the United States Securities and Exchange Commission;
"SEC Documents" means Greka's Annual Report or Form 10-KSB dated December 31,
1998, and Form 10-Q dated March 31, 1999, its Current Reports on Form 8-K and
its proxy statement with respect to the Special Meeting of Stockholders of Greka
held on March 24, 1999;
"Securities Act" means the United States Securities Act of 1933, as amended;
"Sproule" means Sproule Associates Limited;
B-4
<PAGE>
"Sproule Report" means the report dated December 31, 199 prepared by Sproule
evaluating Beaver Lake's reserves of oil, natural gas liquids and natural gas as
at December 31, 1998;
1.2 Exhibit
The following Exhibit is annexed to and incorporated into this
Agreement by reference and is deemed to be a part hereof:
Exhibit 1 -- Plan of Arrangement
ARTICLE 2
THE ARRANGEMENT
2.1 Court Approval
As soon as reasonably practicable, Beaver Lake shall apply to the Court
pursuant to section 186 of the ABCA for an order approving the Arrangement and
in connection with such application shall:
(a) forthwith file, proceed with and diligently prosecute an application
for an Interim Order under section 186(4) of the ABCA providing for,
among other things, the calling and holding of the Beaver Lake
Shareholders Meeting as provided for in Section 5.1(a) for the purpose
of considering and, if deemed advisable, approving the Arrangement; and
(b) subject to obtaining such approval of the Beaver Lake Common
Shareholders as may be directed by the Court in the Interim Order, take
the steps necessary to submit the Arrangement to the Court and apply
for the Final Order, and, subject to the fulfilment of the conditions
set forth in Article 6, shall deliver to the Registrar Articles of
Arrangement and such other documents as may be required to give effect
to the Arrangement.
2.2 Closing
The Closing shall take place at the offices of McCaffery Goss Mudry,
2200 736 6th Avenue S.W. Calgary,Alberta, Canada, as soon as practicable after
the satisfaction or waiver of the conditions set forth in Article 6 but not
later than three Business Days after the Final Order is granted or at such other
time and place and on such other date as Greka and Beaver Lake shall agree;
provided that the closing conditions set forth in Article 6 shall have been
satisfied or waived at or prior to such time.
2.3 Consummation of the Arrangement
At the Closing, the parties hereto will cause the Arrangement to be
consummated by filing with the Registrar the Articles of Arrangement in such
form as required by, and executed in accordance with, the relevant provisions of
the ABCA and the Final Order.
2.4 Effects of the Arrangement
The Arrangement shall have the effects set forth in the applicable
provisions of the ABCA and the Final Order.
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2.5 Conversion of Securities
Subject to the terms and conditions of this Agreement, at the Effective
Date, by virtue of the Arrangement and without any further action on the part of
any of the parties hereto or their shareholders, each Beaver Lake Common Share
issued and outstanding immediately prior to the Effective Date and held other
than by Greka shall be exchanged for Greka Common Stock on the basis of one
share of Greka Common Stock for every 74.40 Beaver Lake Common Shares. If the
application of the foregoing exchange ratio to the aggregate number of Beaver
Lake Common Shares beneficially owned by a Beaver Lake Common Shareholder would
result in such holder being entitled to receive a fraction of a share of Greka
Common Stock, then in respect of such fraction the holder shall receive a cash
payment from Greka for an amount equal to such fractional interest multiplied by
$9.15(U.S.).
2.6 Taking of Necessary Action; Further Action
The parties hereto shall take all such reasonable and lawful action as
may be necessary or appropriate in order to effectuate the Arrangement as
promptly as possible.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Greka
Greka hereby represents and warrants to Beaver Lake that:
(a) Organization and Compliance with Law Greka is a corporation duly
incorporated, validly existing and in good standing under the laws of
its jurisdiction of incorporation. Greka has all requisite corporate
power and corporate authority and all necessary governmental
authorizations to own, lease and operate all of its properties and
assets and to carry on its business as now being conducted, except
where the failure to have such authorization would not have a Greka
MAE. Greka is duly qualified as a foreign corporation to do business,
and is in good standing, in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted
by it makes such qualification necessary, except in such jurisdictions
where the failure to be duly qualified does not and would not have a
Greka MAE. Greka is in compliance with all applicable laws, judgments,
orders, rules and regulations, domestic and foreign, except where
failure to be in such compliance would not have a Greka MAE.
(b) Capitalization The authorized capital stock of Greka consists of
50,000,000 shares of Greka Common Stock, of which 4,352,589 shares were
issued and outstanding as of the date hereof.
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(c) Authorization and Validity of Agreement The execution and delivery by
Greka of this Agreement and the Other Agreements and the consummation
by them of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate action. This Agreement has
been duly executed and delivered by Greka and is a valid and binding
obligation of Greka, enforceable against Greka in accordance with its
terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws from
time to time in effect that affect creditors' rights generally and by
legal and equitable limitations on the availability of specific
remedies. The Other Agreements, when executed and delivered by Greka,
as applicable, will constitute valid and binding obligations of Greka ,
enforceable against them in accordance with their respective terms,
except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws from time to
time in effect that affect creditors' rights generally and by legal and
equitable limitations on the availability of specific remedies.
(d) No Approvals or Notices Required; No Conflict Neither the execution and
delivery of this Agreement nor the performance by Greka of its
obligations hereunder, nor the consummation of the transactions
contemplated hereby by Greka, will (i) conflict with the articles or
bylaws of Greka; (ii) assuming satisfaction of the requirements set
forth in clause (iii) below, violate any provision of law applicable to
Greka; (iii) except for (A) issuance of the Interim Order and the Final
Order by the Court, (B) requirements of Canadian, United States,
provincial or state securities laws, (C) requirements of notice filings
in such foreign jurisdictions as may be applicable and (D) the filing
of Articles of Arrangement in accordance with the ABCA, require any
consent or approval of, or filing with or notice to, any public body or
authority, domestic or foreign, under any provision of law applicable
to Greka .; or (iv) require any consent, approval or notice under, or
violate, breach, be in conflict with or constitute a default (or an
event that, with notice or lapse of time or both, would constitute a
default) under, or permit the termination of any provision of, or
result in the creation or imposition of any Lien upon any properties,
assets or business of Greka under, any note, bond, indenture, mortgage,
deed of trust, lease, franchise, permit, authorization, license,
contract, instrument or other agreement or commitment or any order,
judgment or decree to which Greka is a party or by which it or any of
its assets or properties is bound or encumbered, except (A) those that
have already been given, obtained or filed and (B) those that, in the
aggregate, would not have a Greka MAE.
(e) Voting Requirements No vote of the holders of shares of the capital
stock of Greka is necessary to approve this Agreement and the
Arrangement.
(f) Information Supplied The information supplied or to be supplied by
Greka for inclusion or incorporation by reference in the Proxy Circular
shall, at the date the Proxy Circular is first mailed to Beaver Lake
Common Shareholders and at the time of the Beaver Lake Shareholders
Meeting, be true and complete in all material respects and shall not
contain any misrepresentation (as defined in the Securities Act
(Alberta)).
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(g) Authorization for Greka Common Stock Greka has taken all necessary
action to permit it to issue the number of shares of Greka Common Stock
required to be issued pursuant to the terms of the Plan of Arrangement
and this Agreement. The shares of Greka Common Stock issued pursuant to
the terms of the Plan of Arrangement and this Agreement will, when
issued, be validly issued, fully paid and nonassessable and not subject
to preemptive rights.
(h) SEC Documents Greka has provided to Beaver Lake the SEC Documents. As
of their respective dates, the SEC Documents complied in all material
respects with the requirements of the United States Securities Exchange
Act of 1934, as amended, and the rules and regulations of the SEC
promulgated thereunder applicable to such SEC Documents, and none of
the SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The
consolidated financial statements of Greka included in the SEC
Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the
SEC with respect thereto, have been prepared in accordance with United
States generally accepted accounting principles applied on a consistent
basis during the periods involved (except as may be indicated in the
notes thereto) and fairly present the consolidated financial position
of Greka and its consolidated subsidiaries as of the dates thereof and
the consolidated results of their operations and cash flows for the
periods then ended. Except as set forth in the SEC Documents, no event
has occurred since the date of filing of such documents that would
constitute a Greka MAE.
(i) Conduct of Business in the Ordinary Course; Absence of Certain Changes
and Events Since December 31, 1998, except as contemplated by this
Agreement or as disclosed in the SEC Documents, there has not been: (i)
a Greka MAE or (ii) any other condition, event or development that
reasonably may be expected to result in a Greka MAE.
(j) Litigation Except as disclosed in writing to Beaver Lake, there are no
Demands pending or, to the knowledge of Greka, threatened against or
affecting (i) Greka or any of its properties at law or in equity, or
any of their employee benefit plans or fiduciaries of such plans or
(ii) any Greka Subsidiary or any of their respective properties at law
or in equity, or any of their respective employee benefit plans or
fiduciaries of such plans, before or by any Governmental Entity
wherever located that (x) could prevent or hinder the consummation of
the transactions contemplated by this Agreement or the Plan of
Arrangement; or (y) would otherwise, if adversely determined, have a
Greka MAE.
(k) Environmental Matters To Greka's knowledge, the properties, operations
and activities of Greka comply in all material respects with all
applicable Environmental Laws, except for failures to comply that would
not have a Greka MAE; and (ii) Greka is not subject to any existing,
pending or, to its knowledge, threatened action, suit, investigation,
inquiry or proceeding by or before any Governmental Entity under any
Environmental Law which, if adversely determined, would have a Greka
MAE. Except as may be disclosed in SEC Documents filed by Saba or
otherwise made in writing.
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(l) Compliance with Laws Greka holds all required, necessary or applicable
permits, licenses, variances, exemptions, orders, franchises and
approvals of all Governmental Entities, except where the failure to so
hold could not reasonably be expected to have a Greka MAE (the "Greka
Permits"). To Greka's knowledge, all applications with respect to the
Greka Permits (excluding applications for such Greka Permits where the
failure to so hold could not reasonably be expected to have a Greka
MAE) were complete and correct in all material respects when made and
Greka does not know of any reason why any of the Greka Permits would be
subject to cancellation, excluding such Greka Permits where the
cancellation of the same could not reasonably be expected to have a
Greka MAE. Greka is in compliance with the terms of the Greka Permits
except where the failure to so comply could not reasonably be expected
to have a Greka MAE. Greka has not violated or failed to comply with
any statute, law, ordinance, regulation, rule, permit or order of any
federal, state or local government, domestic or foreign, or any
Governmental Entity, any arbitration award or any judgment, decree or
order of any court or other Governmental Entity, applicable to Greka or
its business, assets or operations, except for violations and failures
to comply that would not have a Greka MAE.
(m) Title to Property To Greka's knowledge, it has complied in all material
respects with the terms of all material leases to which it is a party
and under which it is in occupancy, and all such leases are in full
force and effect, except where such failure to comply or to be in full
force and effect could not reasonably be expected to have a Greka MAE.
3.2 Representations and Warranties of Beaver Lake.
Beaver Lake hereby represents and warrants to Greka that:
(a) Organization Beaver Lake is a corporation duly incorporated, validly
existing and in good standing under the laws of the Province of
Alberta. Beaver Lake has all requisite corporate power and corporate
authority and all necessary governmental authorizations to own, lease
and operate all of its properties and assets and to carry on its
business as now being conducted, except where the failure to have such
governmental authority would not have a Beaver Lake MAE. Beaver Lake is
duly qualified as a foreign corporation to do business, and is in good
standing, in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except in such jurisdictions where the failure
to be duly qualified does not and would not have a Beaver Lake MAE.
Beaver Lake is in compliance with all applicable laws, judgments,
orders, rules and regulations, domestic and foreign, except where
failure to be in such compliance would not have a Beaver Lake MAE.
(b) Capitalization
(i) The authorized share capital of Beaver Lake consists of an
unlimited number of Beaver Lake Common Shares, there are
19,466,666 Beaver Lake Common Shares issued and outstanding.
No other shares in the capital of Beaver Lake are outstanding.
All issued and outstanding Beaver Lake Common Shares are
validly issued, fully paid and nonassessable and no holder
thereof is entitled to preemptive rights. Beaver Lake is not a
party to, and is not aware of, any voting agreement, voting
trust or similar agreement or arrangement relating to any
class or series of its shares, or any agreement or arrangement
providing for registration rights with respect to any shares
or other securities of Beaver Lake.
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(ii) Other than the Beaver Lake Options (all of which Beaver Lake
Options shall be cancelled prior to the filing of the Articles
of Arrangement), there are not now, and at the Effective Date
there will not be, any (A) shares of capital or other equity
securities of Beaver Lake outstanding, other than the
19,466,666 Beaver Lake Common Shares currently issued and
outstanding and any additional Beaver Lake Common Shares
issued after the date hereof and prior to the Effective Date
pursuant to the exercise of Beaver Lake Options, or (B)
outstanding options, warrants, scrip, rights to subscribe for,
calls or commitments of any character whatsoever relating to,
or securities or rights convertible into or exchangeable for,
shares of any class of share capital of Beaver Lake, or
contracts, understandings or arrangements to which Beaver Lake
is a party, or by which it is or may be bound, to issue
additional shares of its capital or options, warrants, scrip
or rights to subscribe for, or securities or rights
convertible into or exchangeable for, any additional shares of
its capital.
(c) Authorization and Validity of Agreement Beaver Lake has all requisite
corporate power and authority to enter into this Agreement and the
Other Agreements and to perform its obligations hereunder and
thereunder. The execution and delivery by Beaver Lake of this Agreement
and the Other Agreements to which it is a party and the consummation by
it of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action (subject only, with
respect to the Arrangement, to approval of this Agreement by the Beaver
Lake Common Shareholders as provided for in Section 5.1). On or prior
to the date hereof the Board of Directors of Beaver Lake has determined
to recommend approval of the Arrangement to the Beaver Lake Common
Shareholders, and such determination is in effect as of the date
hereof. This Agreement has been duly executed and delivered by Beaver
Lake and is the valid and binding obligation of Beaver Lake enforceable
against it in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws from time to time in effect that affect
creditors' rights generally and by legal and equitable limitations on
the availability of specific remedies. The Other Agreements, when
executed and delivered by Beaver Lake, as applicable, will constitute
valid and binding obligations of Beaver Lake, enforceable against it in
accordance with their respective terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws from time to time in effect that affect
creditors' rights generally and by legal and equitable limitations on
the availability of specific remedies.
(d) No Approvals or Notices Required; No Conflict with Instruments to which
Beaver Lake is a Party The execution and delivery of this Agreement and
the Other Agreements do not, and the consummation of the transactions
contemplated hereby and thereby and compliance with the provisions
hereof and thereof will not, conflict with, or result in any violation
of, or default (with or without notice or lapse of time, or both)
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under, or give rise to a right of termination, cancellation or
acceleration of or "put" right with respect to any obligation or to
loss of a material benefit under, or result in the creation of any Lien
upon any of the properties or assets of Beaver Lake or any of the
Beaver Lake Subsidiaries under, any provision of (i) the Beaver Lake
Articles or bylaws of Beaver Lake, (ii) any loan or credit agreement,
note, bond, mortgage, indenture, lease, guaranty or other financial
assurance agreement or other agreement, instrument, permit, concession,
franchise or license applicable to Beaver Lake or its properties or
assets, (iii) any loan or credit agreement, note, bond, mortgage,
indenture, lease, guaranty or other financial assurance agreement or
other agreement, instrument, permit, concession, franchise or license
applicable to any Beaver Lake Subsidiary, or it's properties or assets
and (iv) subject to governmental filing and other matters referred to
in the following sentence, any judgment, order, decree, statute, law,
ordinance, rule or regulation or arbitration award applicable to Beaver
Lake or its properties or assets, other than, in the case of clauses
(ii) and (iii), any such conflicts, violations, defaults, rights or
Liens that individually or in the aggregate would not have a Beaver
Lake MAE. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by or with respect to Beaver Lake in connection with the
execution and delivery of this Agreement by Beaver Lake or the
consummation by Beaver Lake of the transactions contemplated hereby,
except for (i) issuance of the Interim Order and the Final Order, (ii)
the filing with the ASE and Commissions of the Proxy Circular, (iii)
the filing of the Articles of Arrangement with the Registrar with
respect to the Arrangement as provided in the ABCA and the Final Order
and appropriate documents with the relevant authorities of other
jurisdictions in which Beaver Lake is qualified to do business and (iv)
such other consents, approvals, orders, authorizations, registrations,
declarations, filings and notices as are set forth in Section 2 of the
Beaver Lake Disclosure Letter.
(e) Commission Filings; Financial Statements Beaver Lake is a reporting
issuer under the securities laws of Ontario, Alberta and British
Columbia and is not in default of any requirement of such securities
laws and it is in compliance with the bylaws, rules and regulations of
the ASE, being the only exchange upon which the Beaver Lake Common
Shares are listed. Beaver Lake has filed all reports and other filings,
together with any amendments required to be made with respect thereto,
that they have been required to file with the ASE and the Commissions.
Beaver Lake has heretofore delivered to Greka copies of the Beaver Lake
Commission Filings. As of the dates of it's filing with the ASE or the
Commissions, the Beaver Lake Commission Filings complied in all
material respects with the applicable securities laws, the rules and
regulations of the Commissions thereunder and the bylaws, rules and
regulations of the ASE, and were true and complete in all material
respects and did not contain any misrepresentation (as defined in the
Securities Act (Alberta)).
Each of the financial statements (including any related notes or
schedules) included in the Beaver Lake Commission Filings was prepared in
accordance with Canadian generally accepted accounting principles applied on a
consistent basis (except as may be noted therein or in the notes or schedules
thereto) and complied with the rules and regulations of the ASE and the
Commissions. Such consolidated financial statements fairly present the
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consolidated financial position of Beaver Lake as of the dates thereof and the
results of operations, cash flows and changes in shareholders' equity for the
periods then ended (subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments on a basis comparable with past
periods). As of the date hereof, Beaver Lake has no liabilities, absolute or
contingent, that may reasonably be expected to have a Beaver Lake MAE, that are
not reflected in the Beaver Lake Commission Filings, except those incurred in
the ordinary course of business consistent with past operations and not relating
to the borrowing of money.
(f) Conduct of Business in the Ordinary Course; Absence of Certain Changes
and Events Since December 31, 1998, except as contemplated by this
Agreement or as disclosed in the Beaver Lake Commission Filings, Beaver
Lake has conducted its business only in the ordinary and usual course
in accordance with past practice, and there has not been: (i) a Beaver
Lake MAE or any other material adverse change in the financial
condition, results of operations, prospects, assets or business of
Beaver Lake, taken as a whole, or (ii) any other condition, event or
development that reasonably may be expected to result in any such
material adverse change or a Beaver Lake MAE; (iii) any change by
Beaver Lake in its accounting methods, principles or practices; (iv)
any amendment to the Beaver Lake Articles, bylaws or other governing
documents or any resolutions or proceedings pending for any amendment
thereto, except as may be contemplated therein; (v) except as disclosed
in Section 3 of the Beaver Lake Disclosure Letter, any revaluation by
Beaver Lake of any of its assets, including, without limitation,
writing down the value of or writing off notes or accounts receivable
other than in the ordinary course of business and consistent with past
practice; (vi) any entry by Beaver Lake into any commitment or
transaction that would be material to Beaver Lake and not in the
ordinary course of business; (vii) any declaration, setting aside or
payment of any dividends or distributions in respect of the Beaver Lake
Common Shares or any redemption, purchase or other acquisition of any
of its securities; (viii) any damage, destruction or loss (whether or
not covered by insurance) materially adversely affecting the properties
or business of Beaver Lake; (ix) any increase in indebtedness of
borrowed money other than borrowing under existing credit facilities as
disclosed in Section 3 of the Beaver Lake Disclosure Letter; (x) any
granting of a security interest or Lien on any property or assets of
Beaver Lake, other than Permitted Liens; or (xi) any increase in or
establishment of any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing, stock option
(including, without limitation, the granting of stock options, stock
appreciation rights, performance awards or restricted stock awards),
stock purchase or other employee benefit plan or any other increase in
the compensation payable or to become payable to any directors,
officers or key employees of Beaver Lake or for which Beaver Lake would
be responsible.
(g) Litigation Except as disclosed in writing to Greka, there are no
Demands pending or, to the knowledge of Beaver Lake, threatened against
or affecting (i) Beaver Lake or any of its properties at law or in
equity, or any of it's employee benefit plans or fiduciaries of such
plans or (ii) any of its properties at law or in equity, or any of it's
employee benefit plans or fiduciaries of such plans, before or by any
Governmental Entity, wherever located that (x) could prevent or hinder
the consummation of the transactions contemplated by this Agreement or
the Plan of Arrangement; or (y) would otherwise, if adversely
determined, have a Beaver Lake MAE. Except as disclosed in writing to
Greka, Beaver Lake is not subject to any material judicial,
governmental or administrative order, writ, judgment, injunction or
decree.
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(h) Disclosure Beaver Lake has made disclosure of all material facts (as
defined in the Securities Act (Alberta)) relating to its business and
financial affairs to Greka and acknowledges that Greka is relying upon
such disclosure in determining whether to proceed with the Plan of
Arrangement.
(i) Employee Benefit Plans
(i) None of the employees of Beaver Lake are subject to union or
collective bargaining agreements.
(ii) To the best knowledge of Beaver Lake, no officer or director
of Beaver Lake or Benefit Plans, or trusts created thereunder,
or trustee or administrator thereof, has engaged in any
prohibited transaction or act or any other breach of fiduciary
responsibility that could subject Beaver Lake to any tax or
penalty or to any liability under any applicable law or
regulation.
(j) Taxes
(i) Beaver Lake has duly and timely filed, in all material
respects, in proper form, returns in respect of taxes under
the Income Tax Act (Canada), the Alberta Corporate Tax Act,
the income tax legislation of any other province of Canada or
any foreign country having jurisdiction over its affairs, and
similar legislation of other provinces having jurisdiction
over its affairs, for all prior periods in respect of which
such filings have heretofore been required. All taxes shown on
such returns and all taxes now owing, including interest and
penalties, have been paid or accrued on Beaver Lake's books.
There are no outstanding agreements or waivers extending the
statutory period of limitations applicable to any federal,
provincial or other income tax return for any period. There is
no material claim against Beaver Lake with respect to any
taxes, and no material assessment, deficiency or adjustment
has been asserted or proposed with respect to any tax return
of or with respect to Beaver Lake that has not been adequately
provided for in reserves established by Beaver Lake. All
income tax returns of or with respect to Beaver Lake up to and
including December 31, 1998, have been assessed by the
applicable Governmental Entity. The time period for
reassessment under the Income Tax Act (Canada) and the Alberta
Corporate Tax Act in the absence of misrepresentation
attributable to negligence, carelessness, wilful default or
fraud has expired for all periods up to and including the tax
year ended 1993. The total amounts set up as liabilities for
current and deferred taxes in the consolidated financial
statements included in the Beaver Lake Commission Filings have
been prepared in accordance with Canadian generally accepted
accounting principles and are sufficient to cover the payment
of all material taxes, including any penalties or interest
thereon and whether or not assessed or disputed, that are, or
are hereafter found to be, or to have been, due with respect
to the operations of Beaver Lake through the periods covered
thereby. Except for statutory Liens for current taxes not yet
due, no Liens for taxes exist upon the assets of Beaver Lake.
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(ii) Beaver Lake and each Beaver Lake Subsidiary has remitted to
the proper tax authority when required by law to do so, all
amounts payable by it on account of GST and is a "taxable
Canadian corporation" for the Income Tax Act (Canada).
(iii) As of the Effective Date, Beaver Lake shall have fully accrued
for all taxes that may be required to be paid as a result of
the transactions contemplated hereby.
(k) Environmental Matters Except as set forth in Section 5 of the Beaver
Lake Disclosure Letter, (i) the properties, operations and activities
of Beaver Lake comply in all material respects with all applicable
Environmental Laws; (ii) none of Beaver Lake is subject to any
existing, pending or, to the knowledge of Beaver Lake, threatened
action, suit, investigation, inquiry or proceeding by or before any
Governmental Entity under any Environmental Law; (iii) except where the
failure would not have a Beaver Lake MAE, all notices,
permits,licenses, or similar authorizations, if any, required to be
obtained or filed by Beaver Lake under any Environmental Law in
connection with any aspect of the business of Beaver Lake or any Beaver
Lake Subsidiary, including without limitation those relating to the
treatment, storage, disposal or release of a hazardous substance or
solid waste, have been duly obtained or filed and will remain valid and
in effect after the Arrangement and Beaver Lake and each Beaver Lake
Subsidiary is in compliance with the terms and conditions of all such
notices, permits, licenses and similar authorizations; (iv) Beaver Lake
and each Beaver Lake Subsidiary has satisfied and is currently in
compliance in all material respects with all financial responsibility
requirements applicable to its operations and imposed by any
Governmental Entity under any Environmental Law, and none of such
parties has received any notice of noncompliance with any such
requirements; (v) to Beaver Lake's knowledge, there are no physical or
environmental conditions existing on any property currently owned or
leased or presently owned or leased by Beaver Lake or any entity in
which it has or had ownership interest that could reasonably be
expected to give rise to any on-site or off-site remedial obligations
under any Environmental Laws; and (vi) to Beaver Lake's knowledge,
since the effective date of the relevant requirements of applicable
Environmental Laws, all hazardous substances or solid wastes generated
by Beaver Lake or used in connection with their properties or
operations have been transported only by carriers authorized under
Environmental Laws to transport such substances and wastes, and
disposed of only at treatment, storage, and disposal facilities
authorized under Environmental Laws to treat, store or dispose of such
substances and wastes, and, to the knowledge of Beaver Lake, such
carriers and facilities have been and are operating in compliance in
all material respects with such authorizations and are not the subject
of any existing, pending, or overtly threatened action, investigation,
or inquiry by any Governmental Entity in connection with any
Environmental Laws.
(l) Severance Payments Except as set forth in Section 6 of the Beaver Lake
Disclosure Letter, Beaver Lake will not have any liability or
obligation to pay a severance payment or similar obligation to any of
its employees, officers, or directors as a result of the Arrangement or
the transactions contemplated by this Agreement, nor will any of such
persons be entitled to an increase in severance payments or other
benefits as a result of the Arrangement or the transactions
contemplated by this Agreement or the Other Agreements in the event of
the subsequent termination of their employment.
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(m) Compliance with Laws Beaver Lake holds all required, necessary or
applicable permits, licenses, variances, exemptions, orders, franchises
and approvals of all Governmental Entities, except where the failure to
so hold could not reasonably be expected to have a Beaver Lake MAE (the
"Beaver Lake Permits"). All applications with respect to the Beaver
Lake Permits were complete and correct in all material respects when
made and Beaver Lake does not know of any reason why any of the Beaver
Lake Permits would be subject to cancellation. Beaver Lake is in
compliance with the terms of the Beaver Lake Permits except where the
failure to so comply could not reasonably be expected to have a Beaver
Lake MAE. Beaver Lake has not violated or failed to comply with any
statute, law, ordinance, regulation, rule, permit or order of any
federal, provincial or local government, domestic or foreign, or any
Governmental Entity, any arbitration award or any judgment, decree or
order of any court or other Governmental Entity, applicable to Beaver
Lake's business, assets or operations, except for violations and
failures to comply that would not have a Beaver Lake MAE.
(n) Contracts Section 7 to the Beaver Lake Disclosure Letter contains a
complete list of the following contracts, agreements, arrangements,
ownership interests and commitments: (i) all employment or consulting
contracts or agreements to which Beaver Lake is contractually
obligated; (ii) current leases, sales contracts and other agreements
with respect to any property, real or personal, of Beaver Lake or to
which Beaver Lake is contractually obligated; (iii) contracts or
commitments for capital expenditures or acquisitions in excess of
$50,000 to which Beaver Lake is obligated; (iv) agreements, contracts,
indentures or other instruments relating to the borrowing of money, or
the guarantee of any obligation for the borrowing of money, to which
Beaver Lake is a party or any of their respective properties is bound;
(v) all corporations, partnerships, limited liability companies and
other entities in which Beaver Lake owns or has owned, directly or
indirectly, a material equity interest, (vi) all material
indemnification and guaranty or other similar obligations to which
Beaver Lake is bound and which the officers of Beaver Lake or any
Beaver Lake Subsidiary, after reasonable investigation, are aware,
(vii) any outstanding bonds, letters of credit posted or guaranteed by
Beaver Lake with respect to any Person, (viii) any covenants not to
compete or other obligations affecting Beaver Lake that would restrict
Greka or its Affiliates from engaging in any business or activity of
which the officers of Beaver Lake are aware, after reasonable
investigation (ix) any agreement, lease, contract or commitment or
series of related agreements, leases, contracts or commitments not
entered into in the ordinary course of business or, except for
agreements to purchase or sell goods and services entered into in the
ordinary course of business, not cancellable by Beaver Lake within 30
calendar days, (x) contracts, agreements, arrangements or commitments,
other than the foregoing, that could reasonably be considered to be
material to Beaver Lake or any Beaver Lake Subsidiary, taken as a
whole.
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(o) Title to Property
(i) Other than as disclosed in the Beaver Lake Disclosure Letter,
the Beaver Lake Assets are free and clear of any liens,
royalties, production payments, charges, adverse claims,
demands or encumbrances created by, through or under Beaver
Lake or of which Beaver Lake has knowledge.
(ii) Beaver Lake and each of the Beaver Lake Subsidiaries has
complied in all material respects with the terms of all leases
to which they are a party and under which they are in
occupancy, and all such leases are in full force and effect.
Beaver Lake and each of the Beaver Lake Subsidiaries enjoy
peaceful and undisturbed possession under all such leases.
(p) Beaver Lake Assets
(i) Beaver Lake has made available to Sproule prior to the
issuance of the Sproule Report, all information material to an
adequate determination of the oil and gas reserves of Beaver
Lake, none of such information contained a misrepresentation
and there has been no material adverse change to the oil and
gas reserves of Beaver Lake since the Sproule Report.
(ii) Beaver Lake has not received any notices of material violation
or alleged material violation of the provisions of any
agreement in respect of the Beaver Lake Assets and to the best
of the knowledge, information and belief of Beaver Lake, the
properties and lands comprising the Beaver Lake Assets have
been drilled, developed and operated in accordance with all
material agreements that relate to them except as disclosed in
the Disclosure Letter.
(iii) Beaver Lake has performed, observed and satisfied all of its
material duties, liabilities, obligations and covenants
required to be satisfied, performed and observed by it under,
and is not in material default under or in material breach of,
the terms of any material leases or agreements pertaining to
the Beaver Lake Assets.
(iv) All ad valorem, property, production, severance and similar
taxes and assessments based on or measured by the ownership of
the Beaver Lake Assets or the production of petroleum and
natural gas or the receipt of proceeds therefrom payable in
respect of or in relation to substantially all of the Beaver
Lake Assets have been properly and fully paid and discharged.
(v) There is no material circumstance, matter or thing known to
Beaver Lake which indicates in any manner that it may not hold
good and marketable title to any material portion of the
Beaver Lake Assets.
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(vi) All material documents and agreements of whatsoever nature and
kind affecting the title to the Beaver Lake Assets which are
in the possession of Beaver Lake or of which Beaver Lake is
otherwise aware have been disclosed to Greka.
(vii) There is no fact or circumstance known to Beaver Lake which
materially adversely affects the aggregate production of
petroleum and natural gas from the properties and lands
comprising the Beaver Lake Assets except as disclosed in the
Disclosure Letter.
(viii) To the best of its knowledge, Beaver Lake has done no act or
thing, nor has Beaver Lake suffered or permitted any act or
omission, whereby its title to the Beaver Lake Assets may be
cancelled or terminated.
(ix) All producing wells and facilities operated by Beaver Lake or,
where such wells or facilities are operated by operators
acting on its behalf, to the best of Beaver Lake's knowledge,
are in good and operable condition, and are not subject to any
production or other penalties imposed by applicable leases or
legislation which would materially impair the value of the
Beaver Lake Assets.
(x) All wells operated by Beaver Lake or where such wells are
operated by operators acting on its behalf, to the best of
Beaver Lake's knowledge, have been drilled, completed,
shut-in, abandoned, suspended and operated, as the case may
be, in accordance with applicable laws, rules, regulations,
orders and lawful directions of governmental or other
competent authorities.
(xi) Beaver Lake is receiving substantially all of its revenue from
the production of petroleum and natural gas from the Beaver
Lake Assets on what it considers to be a timely basis and,
except as security for its revolving operating line, it has
not assigned or otherwise encumbered same.
(q) Insurance Policies Beaver Lake will retain insurance policies, in
accordance with industry standards. Each such policy is in full force
and effect, is with responsible insurance carriers and is substantially
equivalent in coverage and amount to policies covering companies of the
size of Beaver Lake and in the business in which Beaver Lake is
engaged, in light of the risk to which such companies and their
employees, businesses, properties and other assets may be exposed. All
retroactive premium adjustments under any worker's compensation policy
of Beaver Lake has been recorded in Beaver Lake's financial statements
in accordance with Canadian generally accepted accounting principles
and are reflected in the financial statements contained in the Beaver
Lake Commission Filings.
(r) Information Supplied The information included or incorporated by
reference in the Proxy Circular (except for any information supplied or
to be supplied by Greka) shall, at the date the Proxy Circular is first
mailed to Beaver Lake Common Shareholders and at the time of the Beaver
Lake Shareholders Meeting, be true and complete in all material
respects and shall not contain any misrepresentation (as defined in the
Securities Act (Alberta)). The Proxy Circular will comply as to form in
all material respects with the requirements of the Securities Act
(Alberta) and the rules and regulations thereunder.
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(s) Sales into the United States Revenues from sales of goods and services
attributable to the business of Beaver Lake into and for use in the
United States have, for each of the three years preceding the date
hereof, been less than an aggregate total of US$25 million. The
aggregate total book value of the assets in the United States of Beaver
Lake is less than US$15 million.
(v) Beaver Lake Options Beaver Lake has terminated the granting of options
under the Beaver Lake Stock Option Plan and has negotiated the
cancellation and termination of all unexercised Beaver Lake Options
effective on or before the Effective Date and prior to the filing of
the Articles of Arrangement at a cost to Beaver Lake per share not
exceeding the difference between 45(cent) and the exercise price of the
options.
ARTICLE 4
COVENANTS OF Beaver Lake
4.1 Conduct of Business by Beaver Lake Pending the Arrangement
Beaver Lake covenants and agrees that, from the date of this Agreement
until the earlier of the Effective Date or the date of termination of this
Agreement, unless Greka shall otherwise agree in writing or as otherwise
expressly contemplated by this Agreement:
(a) The business of Beaver Lake shall be conducted and shall not take any
action except in, the ordinary course of business and consistent with
past practice.
(b) Beaver Lake shall not directly or indirectly do any of the following:
(i) issue, sell, pledge, dispose of or encumber any share capital of
Beaver Lake except for the issuance of Beaver Lake Common Shares upon
the exercise of outstanding Beaver Lake Options; (ii) split, combine,
or reclassify any outstanding share capital, or declare, set aside, or
pay any dividend payable in cash, shares, property, or otherwise with
respect to its share capital whether now or hereafter outstanding;
(iii) redeem, purchase or acquire or offer to acquire any of its share
capital; (iv) grant any options to purchase any shares of Beaver Lake
or any Beaver Lake Subsidiary; (v) acquire, agree to acquire or make
any offer to acquire for cash or other consideration, any equity
interest in or all or substantially all of the assets of any
corporation, partnership, joint venture, or other entity; (vi) enter
into any contract, agreement, commitment, or arrangement with respect
to any of the matters set forth in this Section 4.1(b); (vii) amend its
articles or bylaws; or (viii) reorganize, amalgamate or merge with any
other Person.
(c) Beaver Lake shall allow Greka and its representatives and agents full
access during normal business hours, to all of the assets, properties,
books, records, agreements and commitments of each of Beaver Lake and
its subsidiaries and provide all such information concerning Beaver
Lake and its subsidiaries as Greka may reasonably request.
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(d) Until the Effective Date, Beaver Lake shall:
(i) conduct its operations in the ordinary and normal course of
business and in accordance with applicable laws, generally
accepted industry practice, any operating and other agreements
applicable to the Beaver Lake Assets and within its usual
areas of exploration except as otherwise contemplated by this
Agreement or as otherwise agreed to in writing by Greka;
(ii) in all material respects, conduct itself so as to keep Greka
fully informed as to the decisions required with respect to
the most advantageous methods in Beaver Lake's opinion of
exploring, operating and producing from the Beaver Lake Assets
and promptly disclose in writing to Greka all material adverse
changes, if any, in the Beaver Lake Assets or in its interest
therein;
(iii) except in respect of existing commitments, not make or
authorize, without prior written consent of Greka, any single
capital expenditure in respect of any of its properties or
assets which exceeds $50,000, otherwise than in the event of a
catastrophe or other event endangering life, property or the
environment;
(iv) take no action which would be outside the ordinary course of
business or which may result in a Beaver Lake MAE;
(v) not enter into any employment, consulting or severance
agreement or other similar arrangement with any director or
senior officer of Beaver Lake or any other Person; and
(vi) maintain insurance on and in respect of all of its properties
and assets in like kind to, and in an amount not less than the
amount of, insurance in respect of its properties and assets
in effect on the date hereof.
(e) Beaver Lake shall not sell, lease, mortgage, pledge, grant a Lien on or
otherwise encumber or otherwise dispose of any of Beaver Lake's
properties or assets in an amount in excess of $50,000 in the
aggregate.
(f) Beaver Lake shall not, directly or indirectly, incur any indebtedness
for borrowed money or guarantee any such indebtedness of another
Person, issue or sell any debt securities or warrants or other rights
to acquire any debt securities of Beaver Lake or the guarantee of any
debt securities of another Person or enter into any arrangement having
the economic effect of any of the foregoing, except for short-term
borrowings incurred in the ordinary course of business consistent with
past practice, or make or permit to remain outstanding any loans,
advances or capital contributions to, or investments in, any other
Person, other than to Beaver Lake.
(g) Beaver Lake shall not make any election relating to taxes.
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(h) Beaver Lake shall not change any accounting principle used by it.
(i) Beaver Lake shall use its reasonable efforts (i) to preserve intact the
business organization of Beaver Lake, (ii) to maintain in effect any
material authorizations or similar rights of Beaver Lake, (iii) to
preserve the goodwill of those having material business relationships
with it, (iv) to maintain and keep each of Beaver Lake's properties in
the same repair and condition as presently exists, except for
deterioration due to ordinary wear and tear and damage due to casualty
and (v) to maintain in full force and effect insurance comparable in
amount and scope of coverage to that currently maintained by it.
(j) Beaver Lake shall not authorize any of, or commit or agree to take any
of, or permit any Beaver Lake Subsidiary to take any of, the foregoing
actions to the extent prohibited by the foregoing and shall not, take
any action that would, or that reasonably could be expected to, result
in any of the representations and warranties set forth in this
Agreement becoming untrue or any of the conditions to the Arrangement
set forth in Article 6 not being satisfied. Beaver Lake promptly shall
advise Greka orally and in writing of any change or event having, or
which, insofar as reasonably can be foreseen, would have, a material
adverse effect on Beaver Lake taken as a whole, or cause a Beaver Lake
MAE.
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 Cooperation; Consents and Approvals
(a) Beaver Lake shall use all reasonable efforts to, as soon as
practicable, complete the preparation of the Proxy Circular as agreed
with Greka and, subject to the grant of the Interim Order, to mail to
the Beaver Lake Common Shareholders and file in all jurisdictions where
required the Proxy Circular and other documentation required in
connection with the Beaver Lake Shareholders Meeting, all in accordance
with National Policy No. 41 of the Canadian Securities Administrators,
the Interim Order and applicable law, and Beaver Lake shall use all
reasonable efforts, subject to the grant of the Interim Order, to as
soon as practicable and in any event on the date specified in the
Interim Order, to convene the Beaver Lake Shareholders Meeting for the
purpose of approving the Arrangement and this Agreement in accordance
with the Interim Order.
(b) Beaver Lake shall ensure that the Proxy Circular complies with all
applicable disclosure laws as they relate to the disclosure of
information regarding Beaver Lake and, without limiting the generality
of the foregoing, provides the Beaver Lake Common Shareholders to which
such circular is sent with information in sufficient detail to permit
them to form a reasoned judgment concerning the matters before them.
(c) Subject to the terms and conditions set forth in Section 5.5 and the
fiduciary obligations of the Board of Directors of Beaver Lake with
respect to such matters, the Board of Directors of Beaver Lake (i)
shall recommend at such meeting that the Beaver Lake Common
Shareholders vote to adopt and approve the Arrangement and this
Agreement (the "Recommendation"), (ii) shall use its reasonable efforts
to solicit from the Beaver Lake Common Shareholders proxies in favour
of such adoption and approval and (iii) shall take all other action
reasonably necessary to secure a vote of its shareholders in favour of
the adoption and approval of the Arrangement and this Agreement.
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5.2 Filings; Consents; Reasonable Efforts
Subject to the terms and conditions set forth in Section 5.5 and the
fiduciary obligations of the Board of Directors of Beaver Lake with respect to
such matters, Beaver Lake and Greka shall (i) make all necessary filings with
respect to the Arrangement and this Agreement under applicable securities laws
and shall use all reasonable efforts to obtain required approvals and clearances
with respect thereto; (ii) use reasonable efforts to obtain all consents,
waivers, approvals, authorizations, and orders required in connection with the
authorization, execution, and delivery of this Agreement and the consummation of
the Arrangement; (iii) use reasonable efforts to take, or cause to be taken, all
appropriate action, and do, or cause to be done, all things necessary, proper,
or advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement; and (iv) will permit the review by
each other of all documents to be filed with the Court or to be sent to the
Beaver Lake Common Shareholders with respect to the Beaver Lake Shareholders
Meeting.
5.3 Notification of Certain Matters
Beaver Lake shall give prompt notice to Greka, and Greka shall give
prompt notice to Beaver Lake, orally and in writing, of (i) the occurrence, or
failure to occur, of any event which occurrence or failure would be likely to
cause any representation or warranty contained in this Agreement to be untrue or
inaccurate at any time from the date hereof to the Effective Date; and (ii) any
material failure of Beaver Lake, or Greka, as the case may be, or any officer,
director, employee or agent thereof, to comply with or satisfy any covenant,
condition or agreement to be compiled with or satisfied by it hereunder.
5.4 Expenses
All costs and expenses incurred in connection with this Agreement and
the transactions contemplated hereby shall be paid by the party incurring such
expenses, whether or not the Arrangement is consummated.
5.5 Better Offers
(a) Nothing herein is intended to restrict Greka or the Board of Directors
of Beaver Lake from soliciting or considering alternative bona fide
proposals or offers from any Person other than Greka relating to the
acquisition, merger, amalgamation, arrangement, or purchase of Beaver
Lake or of material assets or any ownership interest of or in Beaver
Lake or any similar business combination transaction (any of the
foregoing proposals or offers being referred to herein as an
"Acquisition Proposal"). In such event, the party receiving the
Acquisition Proposal shall promptly advise the other parties hereto
orally and in writing of the material terms and conditions of such
Acquisition Proposal and the identity of the Person making such
Acquisition Proposal. Prior to Beaver Lake providing any information
concerning Beaver Lake to such Person, such Person shall sign a
confidentiality agreement substantially similar to the confidentiality
agreement signed by Greka. Beaver Lake shall keep Greka fully informed
of the status and details of any such Acquisition Proposal.
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(b) If a competing bona fide Acquisition Proposal is made which, having
regard to all of the terms and conditions thereof (including any
conditions in respect of financing), is more favourable from a
financial point of view to the Beaver Lake Common Shareholders, then
the board of directors of Beaver Lake may amend or withdraw the
Recommendation provided that, in the opinion of the directors, acting
in good faith and upon the advice of their financial and legal
advisors, the directors' fiduciary duties under applicable law would
require amendment or withdrawal of the Recommendation. In such event,
Beaver Lake shall be relieved of its obligations under Section 5.1(c)
and 5.2(iii); provided however, that nothing herein shall relieve
Beaver Lake of its obligation to convene the Beaver Lake Shareholders
Meeting on August 7, 1998 to allow shareholders to consider the
Arrangement and, if the Arrangement is approved by the requisite vote
of the Beaver Lake Common Shareholders, to perform its obligations
hereunder (including, without limitation, its obligations pursuant to
Section 5.2 and Section 5.6(c) and (d)).
5.6 Mutual Agreements
Each of Greka, Beaver Lake covenants and agrees that, until the
Effective Date or the day upon which this Agreement is terminated, whichever is
earlier, it:
(a) in the case of Beaver Lake, will in a timely and expeditious manner,
but in any event not later than June 30, 1998, file, proceed with and
diligently prosecute an application to the Court under the ABCA for an
Interim Order with respect to the Arrangement;
(b) will, in a timely and expeditious manner, carry out the terms of the
Interim Order, provided that nothing shall require a party to consent
to any modification of this Agreement, the Arrangement or such party's
obligations hereunder;
(c) will, subject to the approval of the Arrangement at the Beaver Lake
Shareholders Meeting in accordance with the provisions on the Interim
Order, forthwith, but in any event not later than September 15, 1998,
file, proceed with and diligently prosecute together with the other
parties hereto an application for the Final Order; and
(d) will forthwith carry out the terms of the Final Order and will,
together with the other parties, file Articles of Arrangement and the
Final Order with the Registrar in order for the Arrangement to become
effective on or before September 15, 1998, provided that nothing shall
require a party to consent to any modification of this Agreement, the
Arrangement or such party's obligations hereunder.
5.7 Deposit of Greka Stock
Greka shall deposit with the Depositary the shares of Greka Common
Stock required for the exchange of Beaver Lake Common Shares held by Beaver Lake
Common Shareholders other than Greka pursuant to this Agreement and the Plan of
Arrangement and Greka shall irrevocably direct the Depositary to exchange the
Beaver Lake Common Shares held by such holders with the shares of Greka Common
Stock deposited.
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ARTICLE 6
CONDITIONS
6.1 Conditions to Obligation of Each Party to Effect the Arrangement
The respective obligations of each party to effect the Arrangement
shall be subject to the fulfilment at or prior to the Effective Date of the
following conditions.
(a) This Agreement and the Arrangement shall have been approved and adopted
by the requisite vote of the Beaver Lake Common Shareholders as may be
required by law, by the Court, by the rules of the ASE, by Policy 9.1
and by any applicable provisions of the Beaver Lake Articles or its
bylaws;
(b) No order shall have been entered and remain in effect in any action or
proceeding before any foreign, federal, provincial or state court or
governmental agency or other foreign, federal or provincial regulatory
or administrative agency or commission that would prevent or make
illegal the consummation of the Arrangement;
(c) There shall have been obtained any and all material permits, approvals
and consents of securities commissions of any jurisdiction, and of any
other governmental body or agency, that reasonably may be deemed
necessary so that the consummation of the Arrangement and the
transactions contemplated thereby will be in compliance with applicable
laws, the failure to comply with which would have a Beaver Lake MAE or
Greka MAE; and
(d) There shall have been obtained all approvals and consents of third
Persons (i) the granting of which is necessary for the consummation of
the Arrangement or the transactions contemplated in connection
therewith and (ii) the non-receipt of which would have a Beaver Lake
MAE or a Greka MAE, including the receipt of the Interim Order and the
Final Order.
6.2 Additional Conditions to Obligation of Greka
The obligation of Greka to effect the Arrangement is, at the option of
Greka , also subject to the fulfilment at or prior to the Effective Date of the
following conditions:
(a) The representations and warranties of Beaver Lake contained in Section
3.2 shall be accurate as of the date of this Agreement and (except to
the extent such representations and warranties speak specifically as of
an earlier date) as of the Effective Date as though such
representations and warranties had been made at and as of that time;
all of the terms, covenants and conditions of this Agreement to be
complied with and performed by Beaver Lake on or before the Effective
Date shall have been duly complied with and performed in all material
respects; and a certificate to the foregoing effect dated the Effective
Date and signed by the president of Beaver Lake shall have been
delivered to Greka and Greka shall have no knowledge to the contrary;
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(b) There shall not have occurred or exist any fact or condition that would
reasonably result in a Beaver Lake MAE or would constitute a material
fixed or contingent liability to Beaver Lake, and Greka shall have
received a certificate signed by the president of Beaver Lake dated the
Effective Date to such effect;
(c) The Recommendation shall have been made and not withdrawn or altered in
any manner detrimental to the Arrangement;
(d) There shall be no more than 5% of the total issued and outstanding
Beaver Lake Common Shares having exercised rights of dissent in
relation to the Arrangement approved at the Beaver Lake Shareholders
Meeting;
(e) Greka shall have received from McCaffery Goss Mudry, counsel to Beaver
Lake, an opinion dated the Effective Date covering customary matters
relating to this Agreement and the Arrangement;
(f) Greka shall be reasonably satisfied that immediately prior to the
Effective Date no Person has any agreement or option or any right or
privilege (whether by law, preemptive right, contract or otherwise)
capable of becoming an agreement, option, right or privilege for the
purchase, subscription, allotment or issuance of any unissued
securities of Beaver Lake;
(g) All Beaver Lake options shall have been or terminated and cancelled
effective on or before the Effective Date; and
(h) Greka shall have received from Beaver Lake a list of such Persons, if
any, that Greka, after discussions with counsel for Beaver Lake,
believes may be "affiliates" of Beaver Lake (the "Beaver Lake
Affiliates"), within the meaning of Rule 145 promulgated under the
Securities Act. Beaver Lake shall deliver or cause to be delivered to
Greka an undertaking by each Beaver Lake Affiliate in form satisfactory
to Greka that no Greka Common Stock received or to be received by such
Beaver Lake Affiliate pursuant to the Arrangement will be sold or
disposed of except pursuant to an effective registration statement
under the Securities Act or in accordance with the provisions of Rule
144 or Rule 145(d) promulgated under the Securities Act or another
exemption from registration under the Securities Act.
6.3 Additional Conditions to Obligations of Beaver Lake
The obligation of Beaver Lake to effect the Arrangement is, at the
option of Beaver Lake, also subject to the fulfilment at or prior to the
Effective Date of the following conditions:
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(a) The representations and warranties of Greka contained in Section 3.1
shall be accurate as of the date of this Agreement and (except to the
extent such representations and warranties speak specifically as of an
earlier date) as of the Effective Date as though such representations
and warranties had been made at and as of that time; all the terms,
covenants and conditions of this Agreement to be complied with and
performed by Greka on or before the Effective Date shall have been duly
complied with and performed in all material respects; and a certificate
to the foregoing effect dated the Effective Date and signed by the
chief executive officer of Greka shall have been delivered to Beaver
Lake and Beaver Lake shall have no knowledge to the contrary;
(b) There shall not have occurred or exist any fact or condition that would
reasonably result in a Greka MAE and Beaver Lake shall have received a
certificate signed by the chief executive officer of Greka dated the
Effective Date to such effect;
(c) Beaver Lake shall have received from o, Canadian counsel to Greka , an
opinion dated the Effective Date covering customary matters relating to
this Agreement and the Arrangement and an opinion from o, United States
counsel to Greka dated the Effective Date covering customary matters
relating to the laws of the United States, with respect to this
Agreement and the Arrangement; and
(d) Greka shall have deposited with the Depositary the shares of Greka
Common Stock required for the exchange of the Beaver Lake Common Shares
held by Beaver Lake Common Shareholders other than Greka pursuant to
this Agreement and the Plan of Arrangement and Greka shall have
irrevocably directed the Depositary to exchange the Beaver Lake Common
Shares held by such holders with the shares of Greka Common Stock
deposited.
ARTICLE 7
MISCELLANEOUS
7.1 Termination
This Agreement may be terminated and the Arrangement and the other
transactions contemplated herein may be abandoned at any time prior to the
Effective Date, whether prior to or after approval by the Beaver Lake Common
Shareholders:
(a) by mutual written consent of Greka, and Beaver Lake;
(b) by Greka or Beaver Lake if (i) the Arrangement has not been consummated
on or before August 15, 1999 (provided that the right to terminate this
Agreement under this clause (i) shall not be available to any party
whose breach of any representation or warranty or failure to fulfil any
covenant or agreement under this Agreement has been the cause of or
resulted in the failure of the Arrangement to occur on or before such
date); (ii) any court of competent jurisdiction, or some other
governmental body or regulatory authority shall have issued a permanent
order, decree or ruling or taken any other action restraining,
enjoining or otherwise prohibiting the Arrangement; or (iii) the Beaver
Lake Common Shareholders shall not approve the Arrangement at the
Beaver Lake Shareholders Meeting or at any adjournment thereof; (c) by
Beaver Lake if (i) Greka shall have failed to comply in any material
respect with any of the covenants or agreements contained in this
Agreement to be complied with or performed by it at or prior to such
date of termination (provided such breach has not been cured within 30
days following receipt by Greka of written notice from Beaver Lake of
such breach and is existing at the time of termination of this
Agreement); or (ii) any representation or warranty of Greka contained
in this Agreement shall not be true in all respects when made (provided
such breach has not been cured within 30 days following receipt by
Greka of written notice from Beaver Lake of such breach and is existing
at the time of termination of this Agreement) or on and as of the
Effective Date as if made on and as of the Effective Date (except to
the extent it relates to a particular date), except for such failures
to be so true and correct which would not individually or in the
aggregate, reasonably be expected to have a Greka MAE, assuming the
effectiveness of the Arrangement;
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(d) by Greka if (i) Beaver Lake shall have failed to comply in any material
respect with any of the covenants or agreements contained in this
Agreement to be complied with or performed by Beaver Lake at or prior
to such date of termination (provided such breach has not been cured
within 30 days following receipt by Beaver Lake of written notice from
Greka of such breach and is existing at the time of termination of this
Agreement); (ii) any representation or warranty of Beaver Lake
contained in this Agreement shall not be true in all respects when made
(provided such breach has not been cured within 30 days following
receipt by Beaver Lake of written notice from Greka of such breach and
is existing at the time of termination of this Agreement) or on and as
of the Effective Date as if made on and as of the Effective Date
(except to the extent it relates to a particular date), except for such
failures to be so true and correct which would not individually or in
the aggregate, reasonably be expected to have a Beaver Lake MAE
assuming the effectiveness of the Arrangement; or (iii) the Board of
Directors of Beaver Lake withdraws, modifies or changes the
Recommendation in a manner adverse to Greka or shall have resolved to
do any of the foregoing.
7.2 Effect of Termination
In the event of termination of this Agreement as provided in Section
7.1, this Agreement shall forthwith become void and there shall be no liability
or obligation on the part of Greka, or Beaver Lake, except such termination
shall not relieve any party hereto for any intentional breach prior to such
termination by a party hereto of any of its representations or warranties or of
any of its covenants or agreements set forth in this Agreement.
7.3 Waiver and Amendment
Any provision of this Agreement may be waived at any time by the party
that is, or whose shareholders are, entitled to the benefits thereof. This
Agreement may not be amended or supplemented at any time, except by an
instrument in writing signed on behalf of each party hereto, provided that after
this Agreement has been approved and adopted by the Beaver Lake Common
Shareholders, this Agreement may only be amended without further authorization
if such amendment is not prejudicial to the Beaver Lake Common Shareholders and
is not otherwise prohibited by law. The waiver by any party hereto of any
condition or of a breach of another provision of this Agreement shall not
operate or be construed as a waiver of any other condition or subsequent breach.
The waiver by any party hereto of any of the conditions precedent to its
obligations under this Agreement shall not preclude it from seeking redress for
breach of this Agreement other than with respect to the condition so waived.
B-26
<PAGE>
7.4 Nonsurvival of Representations and Warranties
The representations and warranties in this Agreement shall remain in
effect only until the Effective Date, at which time they will expire.
7.5 Public Statements
Beaver Lake and Greka agree to consult with each other prior to issuing
any press release or otherwise making any public statement with respect to the
transactions contemplated hereby.
7.6 Assignment
This Agreement shall enure to the benefit of and will be binding upon
the parties hereto and their respective legal representatives, successors and
permitted assigns.
7.7 Notices
All notices, requests, demands, claims and other communications which
are required to be or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given if (i) delivered in person or by
courier, (ii) sent by facsimile transmission, answer back requested, or (iii)
mailed, certified first class mail, postage prepaid, return receipt requested,
to the parties hereto at the following addresses:
if to Beaver Lake: Beaver Lake Resources Corporation
1204 Dome Tower - Toronto Dominion Square
333 - 7th Avenue S.W.
Calgary, Alberta, Canada T2P 2Z1
Attn: President
Facsimile: 403 269-5585
with a copy to: McCaffery Goss Mudry
3200, 421 - 7th Avenue S.W.
Calgary, Alberta, Canada T2P 4K9
Attn: J. Prescott Pritchard
Facsimile: 403 260-1418
if to Greka: Ballard, Spahr, Andres & Ingersoll
1225 - 17th Street, Suite 2300
Denver, Colorado, U.S.A. 80202
Attn: Mr. Brian Davidson
Facsimile: 303-812-1510
B-27
<PAGE>
with a copy to: May Jensen Gruber Shawa
#1220, 407 - 2nd Street S.W.
Calgary, Alberta, Canada T2P 4K7
Attn: Mr. Glen Solomon
Facsimile: 403
or to such other address as any party shall have furnished to the other by
notice given in accordance with this Section 7.7. Such notices shall be
effective, (i) if delivered in person or by courier, upon actual receipt by the
intended recipient, (ii) if sent by facsimile transmission, when the answer back
is received, or (iii) if mailed, upon the earlier of five days after deposit in
the mail and the date of delivery as shown by the return receipt therefor.
7.8 Governing Law
All questions arising out of this Agreement and the rights and
obligations created herein, or its validity, existence, interpretation,
performance or breach shall be governed by the laws of the Province of Alberta
and the laws of Canada applicable therein.
7.9 Severability
If any term, provision, covenant or restriction of this Agreement is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall continue in full force and effect and shall in no way be
affected, impaired or invalidated.
7.10 Counterparts
This Agreement may be executed in counterparts, each of which shall be
an original, but all of which together shall constitute one and the same
agreement.
7.11 Entire Agreement: Third Party Beneficiaries
This Agreement, the Plan of Arrangement and the Other Agreements
constitute the entire agreement and supersede all other prior agreements and
understandings, both oral and written, among the parties or any of them, with
respect to the subject matter hereof and neither this nor any document delivered
in connection with this Agreement confers upon any Person not a party hereto any
rights or remedies hereunder.
B-28
<PAGE>
7.12 Beaver Lake Disclosure Letter
The Beaver Lake Disclosure Letter, executed by Beaver Lake as of the
date hereof, and delivered to Greka on the date hereof, contains all disclosure
required to be made by Beaver Lake under the various terms and provisions of
this Agreement. Each item of disclosure set forth in the Beaver Lake Disclosure
Letter specifically refers to the Article and Section of the Agreement to which
such disclosure responds, and shall not be deemed to be disclosed with respect
to any other Article or Section of the Agreement. 7.13 Currency
References to "$" or "dollars" in this Agreement are to the lawful
currency of Canada unless otherwise specified.
7.14 Number and Gender
In this Agreement, words importing the singular number only shall
include the plural and vice versa, and words importing any gender shall include
all genders.
7.15 Divisions, Headings, etc.
Division of this Agreement into articles, sections, subsections and
paragraphs and the insertion of headings are for convenience of reference only
and shall not affect the construction or interpretation hereof. The terms
"herein", "hereof", "hereunder" and similar expressions refer to this Agreement
and not to any particular article, section, subsection, paragraph or other
portion hereof and include any exhibits or appendices hereto and any agreement
or instruments supplementary or ancillary hereto.
7.16 Date of Any Action
In the event that any date on which an action is required or permitted
to be taken hereunder is not a Business Day, such action shall be required or
permitted to be taken on or by the next succeeding day that is a Business Day.
IN WITNESS WHEREOF, each of the parties caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
GREKA ENERGY CORPORATION
By:
------------------------------
RANDEEP GREWAL
BEAVER LAKE RESOURCES CORPORATION
By:
------------------------------
HERBERT R. MILLER
B-29
<PAGE>
Exhibit 1
PLAN OF ARRANGEMENT
MADE PURSUANT TO SECTION 186
OF THE BUSINESS CORPORATIONS ACT (ALBERTA)
ARTICLE 1
INTERPRETATION
1.1 Definitions
In this Plan of Arrangement, the following terms shall have the
following meanings respectively:
"ABCA" means the Business Corporations Act (Alberta), S.A. 1981, C. B-15, as
amended from time to time, including the regulations promulgated thereunder;
"Arrangement" means the arrangement under section 186 of the ABCA on the terms
and subject to the conditions set out in this Plan of Arrangement, subject to
any amendments thereto made in accordance with this Plan of Arrangement or at
the direction of the Court in the Final Order;
"Arrangement Agreement" means the agreement by and between Greka, and Beaver
Lake dated June o, 1999 relating to the Arrangement;
"Articles of Arrangement" means the articles of arrangement in respect of the
Arrangement required by the ABCA to be sent to the Registrar after the Final
Order is made;
"Business Day" means, with respect to any action to be taken, any day other than
Saturday, Sunday or a statutory holiday in the place where such action is to be
taken;
"Court" means the Court of Queen's Bench of Alberta;
"Depositary" means Montreal Trust Company of Canada at its offices located at
600, 530 - 8th Avenue S.W., Calgary, Alberta T2P 3S8;
"Effective Date" means the date the Articles of Arrangement are accepted for
filing by the Registrar;
"Greka" means Greka Energy Corporation, a corporation incorporated under the
laws of the State of Colorado;
"Greka Common Stock" means the common stock of Greka;
B-30
<PAGE>
"Final Order" means the final order of the Court made in connection with the
approval of the Arrangement, providing, among other things, for the coming into
effect of the Arrangement;
"Interim Order" means the interim order of the Court made in connection with the
approval of the Arrangement;
"Plan of Arrangement" means this plan of arrangement, as amended or supplemented
from time to time;
"Registrar" means the Registrar of Corporations appointed pursuant to section
253 of the ABCA;
"Beaver Lake" means Beaver Lake Resources Corporation, a corporation
incorporated pursuant to the ABCA;
"Beaver Lake Common Shares" means the common shares in the capital of Beaver
Lake;
"Beaver Lake Common Shareholders" means the holders of the Beaver Lake Common
Shares;
"Beaver Lake Shareholders Meeting" means the special meeting of the shareholders
of Beaver Lake (including any adjournment thereof) that is to be convened as
provided by the Interim Order to consider, and if deemed advisable, approve the
Arrangement;
"Share Exchange Ratio" means 74.40 Beaver Lake Common Shares for each share of
Greka Common Stock.
1.2 Currency
References to "$" or "dollars" in this Plan of Arrangement are to the
lawful currency of Canada unless otherwise specified.
1.3 Number and Gender
In this Plan of Arrangement, words importing the singular number only
shall include the plural and vice versa, and words importing any gender shall
include all genders.
1.4 Divisions, Headings, etc.
Division of this Plan of Arrangement into articles, sections,
subsections and paragraphs and the insertion of headings are for convenience of
reference only and shall not affect the construction or interpretation hereof.
The terms "herein", "hereof", "hereunder" and similar expressions refer to this
Plan of Arrangement and not to any particular article, section, subsection,
paragraph or other portion hereof and include any exhibits or appendices hereto
and any agreement or instruments supplementary or ancillary hereto.
1.5 Date of Any Action
In the event that any date on which an action is required or permitted
to be taken hereunder is not a Business Day, such action shall be required or
permitted to be taken on or by the next succeeding day that is a Business Day.
B-31
<PAGE>
ARTICLE 2
EFFECT OF PLAN OF ARRANGEMENT
2.1 Arrangement Agreement
This Plan of Arrangement is made pursuant to, is subject to the
provisions of, and forms part of the Arrangement Agreement.
2.2 Effectiveness of the Arrangement
The steps of the Arrangement set forth in Article 3 hereof shall occur
on the Effective Date effective upon the acceptance for filing of the Articles
of Arrangement by the Registrar in the order in which such steps appear in this
Plan of Arrangement and without any further act or formality.
2.3 Binding Effect
This Plan of Arrangement shall be binding on all Beaver Lake Common
Shareholders, Greka and Beaver Lake upon the acceptance for filing of the
Articles of Arrangement by the Registrar.
2.4 Effectiveness of Provisions
The Articles of Arrangement shall be filed with the Registrar with the
purpose and intent that none of the provisions of this Plan of Arrangement shall
become effective unless all of the provisions of this Plan of Arrangement shall
have become effective.
ARTICLE 3
THE ARRANGEMENT
3.1 Steps of the Arrangement
On the Effective Date, each of the events set out below shall occur and
be deemed to occur in the sequence set out therein without further act or
formality:
(a) each issued and outstanding Beaver Lake Common Share held other than by
Greka (other than Beaver Lake Common Shares which are deemed to have
been cancelled pursuant to Section 5.1(a)) shall be, and be deemed to
be, exchanged for Greka Common Stock on the basis of one share of Greka
Common Stock for every 74.40 Beaver Lake Common Shares. If the
application of the foregoing exchange ratio to the aggregate number of
Beaver Lake Common Shares beneficially owned by a Beaver Lake Common
Shareholder would result in such holder being entitled to receive a
fraction of a share of Greka Common Stock, then in respect of such
fraction the holder shall receive a cash payment from Greka for an
amount equal to the fractional interest multiplied by the simple
average closing price of the Greka Common Stock on the NASDAQ on the
last three Business Days immediately preceding the Effective Date;
B-32
<PAGE>
3.2 Effect of the Arrangement
(a) No notice to the holders of the Beaver Lake Common Shares shall be
required to effect the exchange of Beaver Lake Common Shares for shares
of Greka Common Stock pursuant to Section 3.1(a) and upon the deposit
of a sufficient number of shares of Greka Common Stock to effect the
exchange being deposited with the Depositary, the Beaver Lake Common
Shares are, and shall for all purposes be deemed to be, exchanged as of
the Effective Date for shares of Greka Common Stock and thereafter a
holder of Beaver Lake Common Shares whose shares are to be exchanged
shall not, as such, have any rights against Beaver Lake.
(b) Upon surrendering the certificate for Beaver Lake Common Shares, each
former holder of Beaver Lake Common Shares (other than Greka) shall be
entitled to receive shares of Greka Common Stock in exchange for the
Beaver Lake Common Shares held by that holder, plus any declared and
unpaid dividends on such shares.
(c) With respect to each Beaver Lake Common Share to which Section 3.1(a)
or Section 3.1(c) applies, the holder thereof shall cease to be a
holder of such shares and such holder's name shall be removed from the
register of Beaver Lake Common Shares with respect to such shares shall
be registered as the holder of such shares.
ARTICLE 4
OUTSTANDING CERTIFICATES AND PAYMENTS
4.1 Beaver Lake Outstanding Certificates
Subject to Section 5.1, after the Effective Date, certificates formerly
representing Beaver Lake Common Shares held by Beaver Lake Common Shareholders
other than Greka shall represent only the right to receive certificates
representing shares of Greka Common Stock that the former holder of such Beaver
Lake Common Shares is entitled to receive pursuant to Article 3, subject to
compliance with the requirements set forth in this Article 4.
4.2 Letter of Transmittal
As soon as practicable after the Effective Date, Beaver Lake shall
forward or cause to be forwarded to each Beaver Lake Common Shareholder (other
than those Beaver Lake Common Shareholders who have exercised their dissent
rights) at the address of such holder as it appears in the share register of
Beaver Lake and to Greka, a letter of transmittal containing, among other
things, instructions for obtaining delivery of the shares of Greka Common Stock
pursuant to this Plan of Arrangement. Such shareholders shall be entitled to
receive certificates representing the shares of Greka Common Stock upon
delivering the certificate formerly representing such holder's Beaver Lake
Common Shares to the Depositary or as the Depositary may otherwise direct and in
accordance with the instructions contained in the letter of transmittal. Such
certificate shall be accompanied by the letter of transmittal, duly completed,
and such other documents as the Depositary may reasonably require.
B-33
<PAGE>
4.3 Registration
In respect of Beaver Lake Common Shareholders other than Greka, the
Depositary shall register shares of Greka Common Stock in the name of each such
shareholder or as otherwise instructed in the letter of transmittal, and shall
deliver such shares of Greka Common Stock as each such holder may direct in such
letter of transmittal, as soon as practicable after receipt by the Depositary of
such documents.
4.4 Rights Extinguished
After the Effective Date, the Beaver Lake Common Shareholders (other
than Greka) shall not be entitled to any interest, dividend, premium or other
payment on or with respect to Beaver Lake Common Shares other than the shares of
Greka Common Stock that they are entitled to receive pursuant to this Plan of
Arrangement. After the Effective Date, Greka shall not be entitled to any
interest, dividend, premium or other payment on or with respect to the Beaver
Lake Common Shares that Greka is entitled to receive pursuant to this Plan of
Arrangement.
ARTICLE 5
SHAREHOLDER DISSENT RIGHTS
5.1 Dissent Rights
Beaver Lake Common Shareholders who have given a demand for payment
that remains outstanding on the Effective Date in accordance with the rights of
dissent in respect of the Plan of Arrangement granted by the Interim Order and
who:
(a) are ultimately entitled to be paid for the Beaver Lake Common Shares in
respect of which they dissent in accordance with the provisions of such
Interim Order whether by order of a Court (as defined in the ABCA) or
by acceptance of an offer made pursuant to such Interim Order, shall be
deemed to have transferred such Beaver Lake Common Shares to Beaver
Lake for cancellation immediately prior to the implementation of the
Arrangement on the Effective Date and such shares shall be deemed to no
longer be issued and outstanding as of the Effective Date; or
(b) are ultimately not so entitled to be paid for the Beaver Lake Common
Shares in respect of which they dissent for any reason, shall not be,
or be reinstated as, shareholders of Beaver Lake but for purposes of
receipt of consideration shall be treated as if they had participated
in this Plan of Arrangement on the same basis as a non-dissenting
holder of Beaver Lake Common Shares and such holders shall accordingly
be entitled to receive shares of Greka Common Stock as such
non-dissenting holders are entitled to receive on the basis determined
in accordance with Article 3 and shall be deemed to have transferred
Beaver Lake Common Shares as of the Effective Date.
B-34
<PAGE>
ARTICLE 6
AMENDMENTS
6.1 Amendments
(a) This Plan of Arrangement may be amended, modified and/or supplemented
at any time and from time to time provided that any such amendment,
modification, or supplement must be contained in a written document
that is (a) agreed to by each of the parties to the Arrangement
Agreement, (b) filed with the Court, and, if made following the Beaver
Lake Shareholders Meeting, approved by the Court, and (c) communicated
to holders of Beaver Lake Common Shares in the manner required by the
Court (if so required).
(b) Any amendment, modification or supplement to this Plan of Arrangement
may be proposed by Beaver Lake at any time prior to or at the Beaver
Lake Shareholders Meeting (provided that each of the parties to the
Arrangement Agreement shall have consented thereto) with or without any
other prior notice or communication, and if so proposed and accepted by
the persons voting at the Beaver Lake Shareholders Meeting (other than
as may be required under the Court's interim order), shall become part
of this Plan of Arrangement for all purposes.
(c) Any amendment, modification or supplement to this Plan of Arrangement
that is approved by the Court following the Beaver Lake Shareholders
Meeting shall be effective only (i) if it is consented to by each of
the parties to the Arrangement Agreement, and (ii) if required by the
Court or Applicable law, it is consented to by the holders of the
Beaver Lake Common Shares.
B-35
FORBEARANCE AGREEMENT
THIS AGREEMENT is made and entered into this 19th day of April 1999, by
and between BANK ONE, TEXAS, N.A. ("Bank One") and SABA PETROLEUM COMPANY
("Saba"), on behalf of itself and certain of its Subsidiaries and GREKA ENERGY
CORPORATION ("GREKA").
R E C I T A T I O N S :
A. Saba and Bank One are parties to that certain First Amended and
Restated Loan Agreement dated as of September 23, 1996, as heretofore amended
(the "Loan Agreement").
B. Events of Default and Unmatured Events of Default have occurred and
are continuing under the Loan Agreement.
C. Bank One has notified Saba of such Events of Default and Unmatured
Events of Default, and has notified Saba that Bank One has accelerated and
declared immediately due and payable the outstanding principal balance of the
Loans, plus all accrued, unpaid interest thereon.
D. Bank One has also sent written notice to each of Saba's Subsidiaries
that are Guarantors (other than Sabacol Corporation ("Sabacol")) demanding that
each such Guarantor repay the Loan, in accordance with the terms of its
Guaranty.
E. Bank One has filed a Proof of Claim in the Sabacol Bankruptcy
asserting its right to receive payment on the Loan from Sabacol pursuant to the
terms of Sabacol's Guaranty.
F. GREKA has notified Bank One of the pendency of certain transactions
involving Saba and/or certain of its Subsidiaries, and has requested that Bank
One forebear from exercising its remedies under the Loan Agreement, at law or in
equity (collectively, the "Remedies") in order to afford GREKA the opportunity
to close certain of such pending transactions and make certain partial payments
to Bank One to be credited to the Loan, and Bank One is willing to agree to such
forbearance on the terms set forth herein:
NOW, THEREFORE, for and in consideration of the premises, for the
mutual benefits to be derived herefrom, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged by each party, the
parties hereto agree as follows:
1. The terms "Bank of New York Transaction," "EnerVest Transaction,"
"Motion to Sell," "Omimex Transaction," "Sabacol Bankruptcy," "SETI Properties"
and "Transactions" shall have the meanings set forth on Exhibit "A" to this
Agreement. All other capitalized terms used in this Agreement, without being
defined herein, shall have the meanings set forth in the Loan Agreement.
1
<PAGE>
2. Saba and GREKA hereby represent and warrant to Bank One that the
matters stated in the Compliance Certificate dated March 11, 1999, delivered by
Saba to Bank One, and the matters stated in the letter dated March 11, 1999,
from Mr. Randeep S. Grewal on behalf of Saba to Mr. Randy Durant of Bank One and
in the enclosures referred to in that letter, were true and correct as of the
date thereof and continue to be true and correct as of the date of this
Agreement.
3. Bank One hereby agrees that it shall forebear from the exercise of
its Remedies through and including May 30, 1999, subject to each of the
following conditions being timely met:
a. Prior to the hearing on the Motion to Sell, which is
currently scheduled to be heard on April 23, 1999, Bank One and the
parties to the Omimex Transaction shall have entered into an agreement
in substantially the same form as that attached hereto as Exhibit "B,"
and incorporated herein.
b. On or before April 30, 1999, an order shall be entered by
the court in which the Sabacol Bankruptcy is pending, following its
hearing on the Motion, approving the closing of the Omimex Transaction
on or before May 30, 1999.
c. The Bank of New York Transaction shall close on or before
April 30, 1999, and contemporaneously with such closing, the cash sum
of $7,000,000.00 will be wire transferred directly to Bank One, Texas,
N.A., Dallas, Texas 201, A.B.A. Number 111000614, BENF-Commercial Loan
Serving Center- South Region, for credit to Account Number 1065151010,
Borrower: Saba Petroleum Company, Obligor No. 7417315869, Obligation
No. 91, Attn: Special Servicing, Commercial Loan Servicing Center-South
Region, to be applied against the outstanding balance of the Loan.
d. On or before May 14, 1999, Sabacol shall have duly executed
and delivered to Bank One a recordable Mortgage or Deed of Trust, and
corresponding Financing Statement ("Security Instruments") in form
acceptable to Bank One, pursuant to which the properties to be assigned
to Sabacol or its affiliates in connection with the Omimex Transaction
shall be subjected to liens and security interests in favor of Bank
One, securing all of the Obligations under the Loan Agreement. Such
Security Instruments shall be held by Bank One, and shall not be
recorded, unless and until Bank One gives its consent to the final
Closing of the Omimex Transaction (as such term is defined in Section
9.1 of the Asset Purchase Agreement attached as Exhibit "B" to the
Motion to Sell), and contemporaneously executes and delivers to the
Omimex Group a release of the liens that have been granted by Omimex
Resources, Inc. in favor of Bank One with respect to the properties
being conveyed from the Omimex Group to Sabacol pursuant to the Omimex
Transaction.
e. The EnerVest Transaction shall close on or before May 29,
1999, and contemporaneously with such closing of the EnerVest
Transaction, the cash sum of $10,000,000.00 shall be wire transferred
to Bank One in accordance with the wire transfer instructions set forth
in paragraph 3c., to be applied to the outstanding balance of the Loan.
2
<PAGE>
f. Each of the Transactions shall be closed substantially in
accordance with the terms of the documentation made available to Bank
One as of the date of this Agreement, as described in the definition of
each such Transaction on Exhibit "A" attached hereto.
g. Neither Saba nor any of the Guarantors, subsequent to April
13, 1999, shall have caused or permitted any act or event to occur that
gives rise to a new Event of Default or Unmatured Event of Default
under the Loan Agreement, which did not already exist on April 13,
1999.
4. Upon the failure of any of the foregoing conditions, Bank One's
agreement to forebear from the pursuit of its Remedies shall thereupon be
terminated, and Bank One thereafter shall be free to pursue any and all of its
Remedies; provided, however, that no such termination of Bank One's agreement to
forbear from the exercise of its Remedies shall be retroactive with respect to
any of the Transactions closed with Bank One's consent prior to any such
termination.
5. To the extent that all of the conditions set forth in paragraphs 3a.
through g. have been satisfied, if any Event of Default or Unmatured Event of
Default exists and is continuing subsequent to May 30, 1999, Bank One shall
thereafter be free to pursue any and all of its Remedies.
6. Time is of the essence in the satisfaction in each of the conditions
set forth in paragraph 3 of this Agreement, and no such condition shall be
deemed to have been satisfied unless it is fully and completely satisfied by the
time stated in paragraph 3 hereof.
7. Nothing in this Agreement is intended to amend nor shall be
construed to amend the Loan Agreement or any of the Loan Documents, except as
expressly set forth herein.
8. This Agreement may be executed in multiple counterparts, and each
party agrees that the counterpart signature page executed on its behalf may be
collated with the counterpart signature pages executed on behalf of the other
parties hereto to form a fully executed agreement. The parties hereto agree that
delivery of executed counterparts of this instrument may be made by facsimile,
and each party hereto agrees to be bound by an executed counterpart hereof
bearing the facsimile signature of such party's representative.
Executed as of the date first set forth above.
BANK ONE, TEXAS, N.A. SABA PETROLEUM COMPANY
By: / s / Randall B. Durant By: / s / Randeep S. Grewal
--------------------------------- -----------------------------
Randall B. Durant, Vice President Randeep S. Grewal
CEO
GREKA ENERGY CORPORATION
By: / s / Randeep S. Grewal
-----------------------------
Randeep S. Grewal
CEO
3
<PAGE>
EXHIBIT "A"
"Bank of New York Transaction" means that certain Loan Transaction as
described in Letter of Intent dated March 9, 1999, between BNY Financial
Corporation, Santa Maria Refining Company and Saba.
"EnerVest Transaction" means that certain Purchase and Sale Transaction
pursuant to which the SETI Properties will be sold to EnerVest Energy, L.P.
pursuant to the form Purchase and Sale Agreement transmitted to counsel for Bank
One by e-mail on April 14, 1999, at e-mail address "[email protected]."
"Motion to Sell" means that certain Motion for Order Authorizing Debtor
and Debtor-in-Possession to Sell all of its Real and Personal Property Assets
pursuant to an Asset Purchase Agreement with the Omimex Group Free and Clear of
all Liens and Encumbrances and upon Consummation of the Sale, to Dismiss this
Bankruptcy Case and Set Bar Date filed by Sabacol, Inc. in the Sabacol
Bankruptcy.
"Omimex Transaction" means that certain Transaction as identified in
the [Motion to Sell] filed on behalf of Sabacol in the Sabacol Bankruptcy on
March 29, 1999.
"Sabacol Bankruptcy" means that certain voluntary Chapter 11 proceeding
styled In re Sabacol, Inc. initiated by Sabacol, Inc. pursuant to its Petition
filed on or about December 11, 1998 in the United States Bankruptcy Court for
the Central District of California, Santa Barbara Division, as Case No. ND
98-15855RR.
"SETI Properties" means the Oil and Gas Properties owned by Saba Energy
of Texas, Inc., expressly excluding any and all of such properties (if any) that
were previously owned by other Subsidiaries of Saba and are subject to a lien or
security interest in favor of Bank One.
"Transactions" means the Omimex Transaction, the Bank of New York
Transaction and the EnerVest Transaction.
4
FIRST AMENDMENT TO
FORBEARANCE AGREEMENT
THIS FIRST AMENDMENT ("Amendment") is made and entered into this 30th
day of April, 1999, by and between BANK ONE, TEXAS, N.A. ("Bank One") and SABA
PETROLEUM COMPANY ("Saba"), on behalf of itself and certain of its Subsidiaries
and GREKA ENERGY CORPORATION ("GREKA") who are sometimes referred to herein
colelctively as the Parties.
R E C I T A T I O N S :
A. The Parties entered into that certain Forbearance Agreement
dated April 19, 1999 ("Agreement);
B. The Parties desire to amend the Agreement; and
C. All capitalized terms used in this Amendment, without being
defined herein, shall have the meanings set forth in the
Agreement.
NOW, THEREFORE, for and in consideration of the premises, for the
mutual benefits to be derived herefrom, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged by each party, the
parties hereto agree as follows:
1. Bank One' agreement that it shall forbear from the exercise of
its Remedies through and including May 30, 1999 as provided in
Section 3 of the Agreement shall be extended to June 11, 1999.
2. The amount of the cash sum that will be contemporaneously wire
transferred directly to Bank One upon closing the Bank of New
York Transaction as provided in Section 3(c) of the Agreement
shall be reduced from $7,000,000.00 to $6,000,000.00
3. The closing date of May 29, 1999 as provided in Section 3(e)
of the Agreement for the EnerVest Transaction shall be
extended to June 11, 1999.
4. The date of May 30, 1999 as provided in Section 5 of the
Agreement shall be amended to June 11, 1999.
5. All other terms and conditions of the Agreement remain
unchanged and in full force and effect.
Executed as of the date first set forth above.
BANK ONE, TEXAS, N.A. SABA PETROLEUM COMPANY
By: / s / Randall B. Durant By: / s / Randeep S. Grewal
--------------------------------- -------------------------
Randall B. Durant, Vice President Randeep S. Grewal
Chairman, CEO & President
GREKA ENERGY CORPORATION
By: / s / Randeep S. Grewal
-------------------------
Randeep S. Grewal
Chairman, CEO & President
5
<PAGE>
AMENDED AND RESTATED FORBEARANCE AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into this 15th day
of July 1999, by and between BANK ONE, TEXAS, N.A. ("Bank One"), SABA PETROLEUM
COMPANY ("Saba"), on behalf of itself and certain of its Subsidiaries, and GREKA
ENERGY CORPORATION ("GREKA").
R E C I T A T I O N S :
A. Saba and Bank One are parties to that certain First Amended and
Restated Loan Agreement dated as of September 23, 1996, as heretofore amended
(the "Loan Agreement").
B. Events of Default and Unmatured Events of Default have occurred and
are continuing under the Loan Agreement.
C. Bank One has notified Saba of such Events of Default and Unmatured
Events of Default, and has notified Saba that Bank One has accelerated and
declared immediately due and payable the outstanding principal balance of the
Loans, plus all accrued, unpaid interest thereon.
D. Bank One has also sent written notice to each of Saba's Subsidiaries
that are Guarantors (other than Sabacol Corporation ("Sabacol")) demanding that
each such Guarantor repay the Loan, in accordance with the terms of its
Guaranty.
E. Bank One, Saba and GREKA have heretofore executed that certain
Forbearance Agreement dated April 19, 1999, as amended by First Amendment
thereto dated April 30, 1999 (collectively, the "Original Forbearance
Agreement").
F. Certain of the events on which Bank One had based its agreement to
forbear from the pursuit of its remedies under the Loan Agreement, as set forth
in the Original Forbearance Agreement, have not occurred, but GREKA has notified
Bank One of the pendency of certain pending transactions involving Saba and/or
certain of its Subsidiaries, and has requested that Bank One continue to
forebear from exercising its remedies under the Loan Agreement, at law or in
equity (collectively, the "Remedies") in order to afford GREKA the opportunity
to close such pending transactions and make certain payments to Bank One to be
credited to the Loan, and Bank One is willing to agree to such continued
forbearance on the terms set forth herein:
7
<PAGE>
NOW, THEREFORE, for and in consideration of the premises, for the
mutual benefits to be derived herefrom, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged by each party, the
parties hereto agree as follows:
1. All capitalized terms used in this Agreement, without being defined
herein, shall have the meanings set forth in the Loan Agreement, unless
otherwise provided herein.
2. Saba and GREKA hereby represent and warrant to Bank One; and Randeep
S. Grewal, after having first been duly sworn, hereby recertifies to Bank One to
the best of his knowledge in his capacity as an officer of Saba and GREKA; that
the matters he certified in the Compliance Certificate dated March 11, 1999,
delivered by Saba to Bank One, and the matters stated in the letter dated March
11, 1999, from Mr. Grewal on behalf of Saba to Mr. Randy Durant of Bank One and
in the enclosures referred to in that letter, were true and correct as of the
date thereof and continue to be true and correct as of the date of this
Agreement, except for such changes or additions as are noted on Exhibit "A"
attached hereto.
3. As a material part of the consideration for this Agreement, Saba and
GREKA hereby specifically represent and warrant to Bank One that Saba and its
Subsidiaries are in compliance with the covenants set forth in sections 6.03,
6.06, 6.09, 6.10, 6.11 and 6.12 of the Loan Agreement; and Saba and its
Subsidiaries shall, and GREKA shall cause Saba and its Subsidiaries to, continue
to comply with all such sections of the Loan Agreement. The specific enumeration
in this section of certain representations, warranties and covenants in the Loan
Agreement with which Saba and its Subsidiaries are in compliance and will
continue to comply is not intended, and shall be construed in any way, to amend
any other representation, warranty or covenant in the Loan Agreement or other
Loan Documents, or constitute a waiver by the Bank of Saba's and its
Subsidiaries' compliance therewith.
4. Bank One hereby agrees that it shall forebear from the exercise of
its Remedies through and including September 15, 1999, subject to each of the
following conditions being timely met:
a. The representations and warranties set forth in paragraphs
2 and 3 hereof shall continue to be true and accurate at all times, and
neither Saba nor any of the Guarantors, subsequent to April 13, 1999,
shall have caused or permitted any act or event to occur that gives
rise to a new Event of Default or Unmatured Event of Default that did
not already exist on April 13, 1999.
b. On or before the twenty-fifth (25th) day of each calendar
month, Saba shall have paid to Bank One all accrued, unpaid interest
then due on the Loans.
c. On or before July 15, 1999, Saba shall have entered into a
term sheet with a reputable financial institution or other lender
acceptable to Bank One, in its discretion, pursuant to which such
lender has stated its willingness to fund a loan or loans to Saba on or
before September 15, 1999, all or part of the proceeds of which would
be used to pay off in full the outstanding principal balance and
accrued, unpaid interest owed by Saba to Bank One under the Loan
Agreement and related Loan Documents.
d. Contemporaneously with its execution of this Agreement,
Saba shall have delivered to Bank One true and complete copies of all
documents executed by Saba, Sabacol, Inc., or any of their Affiliates
relating to the "Omimex Transaction," as defined in the Original
Forbearance Agreement; and Bank One shall be satisfied that the Omimex
Transaction was closed substantially in accordance with the terms of
the documentation made available to Bank One in connection with the
Original Forbearance Agreement.
8
<PAGE>
5. Upon the failure of any of the foregoing conditions, Bank One's
agreement to forebear from the pursuit of its Remedies shall thereupon be
terminated, and Bank One thereafter shall be free to pursue any and all of its
Remedies; provided, however, that no such termination of Bank One's agreement to
forbear from the exercise of its remedies shall be retroactive with respect to
any transactions closed with Bank One's consent prior to such termination.
6. If any Event of Default or Unmatured Event of Default exists and is
continuing subsequent to September 15, 1999, Bank One shall thereafter be free
to pursue any and all of its Remedies.
7. Time is of the essence in the satisfaction in each of the conditions
set forth in paragraph 4 of this Agreement, and no such condition shall be
deemed to have been satisfied unless it is fully and completely satisfied by the
time stated in paragraph 4 hereof.
8. Nothing in this Agreement is intended to amend nor shall be
construed to amend the Loan Agreement or any of the Loan Documents, except as
expressly set forth herein.
9. This Agreement may be executed in multiple counterparts, and each
party agrees that the counterpart signature page executed on its behalf may be
collated with the counterpart signature pages executed on behalf of the other
parties hereto to form a fully executed agreement. The parties hereto agree that
delivery of executed counterparts of this instrument may be made by facsimile,
and each party hereto agrees to be bound by an executed counterpart hereof
bearing the facsimile signature of such party's representative.
9
<PAGE>
Executed as of the date first set forth above.
BANK ONE, TEXAS, N.A. SABA PETROLEUM COMPANY
By: / s / Randall B. Durant By: / s / Randeep S. Grewal
--------------------------------- -------------------------
Randall B. Durant, Vice President Randeep S. Grewal
Chairman, CEO & President
GREKA ENERGY CORPORATION
By: / s / Randeep S. Grewal
-------------------------
Randeep S. Grewal
Chairman, CEO & President
The undersigned, Randeep S. Grewal, in his capacity as an officer of GREKA and
Saba, after having first been duly sworn, on oath disposes and says that the
certification given by him in paragraph 2 of the foregoing instrument is true
and correct to the best of his knowledge:
/ s / Randeep S. Grewal
-----------------------
Randeep S. Grewal
Subscribed and sworn to before me, the undersigned Notary Public, by
the said Randeep S. Grewal on this 16th day of July, 1999.
/ s / Ann Miller
-----------------------------------
Notary Public in and for the State
of New York
[Affix Notarial Seal]
10
GREKA ENERGY CORPORATION
Exhibit 11.1
Computation of Earnings (Loss) Per Common Share
For the Three and Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Six Months Three months
Ended June 30, Ended June 30,
1999 1998 1999 1998
----------- ---------- ---------- -----------
Basic Earnings
Net income (loss) before minority interest
in earnings (loss) of consolidated
<S> <C> <C> <C> <C>
subsidiary ............................. 101,380 (723,188) 1,234,961 (364,884)
Minority interest in earnings (loss) of
consolidated subsidiary ................ (20,617) 0 (19,579) 0
Preferred Stock dividends ................ (116,000) 0 (107,000) 0
----------- ---------- ---------- -----------
Net income (loss) available to Commo ..... 5,997 (723,188) 1,147,540 1,570,981
=========== ========== ========== ===========
Basic Shares
Weighted average number of Common ----------- ---------- ---------- -----------
Shares outstanding ..................... 3,626,639 1,570,981 4,221,018 1,570,981
=========== ========== ========== ===========
Basic Earnings per Common Share ----------- ---------- ---------- -----------
Net income (loss) available to Commo ..... $ 0.00 $ (0.46) $ 0.27 $ (0.23)
=========== ========== ========== ===========
Diluted Earnings
Net income (loss) before minority interest
in earnings (loss) of consolidated
subsidiary ............................. 101,380 (723,188) 1,234,961 (364,884)
Minority interest in earnings (loss) of
consolidated subsidiary ................ (20,617) 0 (19,579) 0
Preferred stock dividends ................ (116,000) 0 (107,000) 0
Plus interest expense attributable
to Debentures, net of related income
taxes .................................. - - - 0
----------- ---------- ---------- -----------
Net income (loss) available to Commo ..... 5,997 (723,188) 1,147,540 (364,884)
=========== ========== ========== ===========
Diluted Shares
Weighted average number of Common
Shares outstanding ..................... 3,626,639 1,570,981 4,221,018 1,570,981
Effect of dilutive securities:
Of shares underlying options
Of shares underlying convertible
Debentures ----------- ---------- ---------- -----------
Diluted Shares ........................... 3,626,639 1,570,981 4,221,018 1,570,981
=========== ========== ========== ===========
Diluted Earnings per Common Share ----------- ---------- ---------- -----------
Net income (loss) ........................ $ ($ 0.46) $ $
=========== ========== ========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 000840402
<NAME> GREKA Energy Corporation
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 2,168,619
<SECURITIES> 0
<RECEIVABLES> 4,884,800
<ALLOWANCES> (161,500)
<INVENTORY> 6,472,288
<CURRENT-ASSETS> 14,187,240
<PP&E> 71,459,055
<DEPRECIATION> (5,229,574)
<TOTAL-ASSETS> 82,320,046
<CURRENT-LIABILITIES> 36,591,643
<BONDS> 8,582,296
0
7,304,356
<COMMON> 36,305,019
<OTHER-SE> (7,160,886)
<TOTAL-LIABILITY-AND-EQUITY> 82,320,046
<SALES> 8,228,502
<TOTAL-REVENUES> 9,048,558
<CGS> 2,065,651
<TOTAL-COSTS> 7,954,589
<OTHER-EXPENSES> 553,483
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 646,271
<INCOME-PRETAX> 594,097
<INCOME-TAX> 472,100
<INCOME-CONTINUING> 121,997
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121,997
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
