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 March 31, 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
(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
(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 May 19, 1999, GREKA Energy had 4,352,589 shares of common stock, no par
value per share, outstanding.
Explanatory Note:
For the fiscal periods through December 31, 1998, GREKA Energy
Corporation filed its periodic reports with the SEC under the disclosure
requirements of SEC Regulation S-B, which applies to "small business issuers."
Effective March 24, 1999, GREKA Energy completed its acquisition of Saba
Petroleum Company, which prior to the acquisition was an SEC reporting company
subject to the disclosure requirements of SEC Regulations S-K and S-X. As a
result of the acquisition, beginning with this Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, GREKA Energy will file its SEC reports
under Regulations S-K and S-X.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . 1
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Balance Sheets as of March 31, 1999
(Unaudited) and December 31, 1998 . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations for the Three
Month Periods Ended March 31, 1999 and 1998 (Unaudited) . . . . 3
Condensed Consolidated Statements of Cash Flows for the Three
Month Periods Ended March 31, 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 Operation. . . . . . . . . . . . . . . . 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk. .
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . .
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . .
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . .
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . .
Item 4. Submission of Matters to a Vote of Security Holders. . . . .
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . .
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . .
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
GREKA ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
March 31, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $1,015,325 $250,212
Accounts receivable, net of
allowance for doubtful accounts
of $158,535 (1999) and $74,000 (1998) 4,691,943 171,595
Other current assets 2,553,184 -
______________ ___________
Total Current Assets 8,260,452 421,807
______________ ___________
Property and Equipment
Investment in limestone property,
at cost 3,500,000 3,500,000
Oil and gas properties (full
cost method) 32,886,485 3,445,816
Land, plant and equipment 42,749,818 1,561,475
_____________ ____________
79,136,303 8,507,291
Less accumulated depletion,
depreciation and impairment (4,280,631) (4,081,340)
______________ ____________
Total Property and Equipment 74,855,672 4,425,951
_______________ ____________
Other Assets
Investment in Saba Petroleum Company - 15,804,110
Other 1,608,413 154,937
______________ ____________
Total Other Assets 1,608,413 15,959,047
______________ ____________
$84,724,537 $20,806,805
=============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
GREKA ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
March 31, December 31,
1999 1998
(Unaudited)
Current Liabilities
<S> <C> <C>
Accounts payable and accrued
liabilities $14,008,637 $236,323
Income taxes payable 1,729,095 -
Current portion of long-term debt 30,499,611 2,013,338
______________ ______________
Total Current Liabilities 46,237,343 2,249,661
_______________ ______________
Long-term Debt, net of current portion 2,536,178 52,634
Other Liabilities 487,480 -
Minority Interest in Consolidated Subsidiary 583,568
- -
Preferred Stock of Subsidiary 7,196,956 -
Commitments and contingencies
Stockholders' Equity
Common Stock, no par value, authorized
50,000,000 shares; issued and
outstanding 4,200,988 (1999) and
2,910,988 (1998) shares 36,055,019 25,735,019
Accumulated deficit (8,372,007) (7,230,509)
_____________ ______________
Total Stockholders' Equity 27,683,012 18,504,510
______________ ______________
$84,724,537 $20,806,805
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
GREKA ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
<TABLE>
1999 1998
<S> <C> <C>
Revenues
Oil and gas sales $282,888 $34,689
Other 70,214 -
_____________ ___________
Total Revenues 353,102 34,689
______________ ___________
Expenses
Production costs 212,985 34,172
General and administrative 424,736 354,547
Depletion, depreciation and
amortization 218,375 38,868
____________ ___________
Total Expenses 856,096 427,587
_____________ ____________
Operating Loss (502,994) (392,898)
_____________ ____________
Other Income (Expense)
Equity in pre-merger loss of Saba (553,483) -
Other 26,317 34,594
Interest expense (103,420) -
______________ _____________
Other Income (Expense), Net (630,586) 34,594
______________ _____________
Loss Before Income Taxes (1,133,580) (358,304)
Minority Interest in Loss (Earnings)
of Consolidated Subsidiary 1,038 -
_______________ ____________
Net Loss $(1,132,542) $(358,304)
================ ============
Net (Loss) Earnings per Common Share
Basic and Diluted $ (0.38) $ (0.23)
Weighted Average Common Shares Outstanding
Basic and Diluted 3,025,655 1,558,843
</TABLE>
The accompanying notes are an integral part of these financial statements.
GREKA ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
<TABLE>
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $(1,132,542) $(358,304)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depletion, depreciation and
amortization 218,375 38,868
Equity in pre-merger loss of Saba 553,483 -
Minority interest in (losses) of
consolidated subsidiary (1,038) -
Changes in:
Accounts receivable (181,034) 1,307
Other assets (349,054) -
Accounts payable and accrued
liabilities 404,522 (743,233)
_____________ _____________
Net Cash Used In Operating
Activities (487,288) (1,061,362)
Cash Flows from Investing Activities
Expenditures for property and equipment (1,146) (412,035)
Expenditures for acquisition of Saba,
Net of cash acquired 260,318 -
____________ ____________
Net Cash Provided by (Used In)
Investing Activities 259,172 (412,035)
____________ _____________
Cash Flows from Financing Activities
Proceeds from notes payable and
long-term debt 1,000,000 -
Principal payments on notes
payable and long-term debt (6,771) (23,934)
Net proceeds from issuance of common
stock - 84,446
______________ ____________
Net Cash Provided by Financing
Activities 993,229 60,512
______________ ____________
Net Increase (Decrease) in Cash and
Cash Equivalents 765,113 (1,412,885)
Cash and Cash Equivalents at Beginning
of Period 250,212 3,932,647
_______________ ____________
Cash and Cash Equivalents at End
of Period $1,015,325 $2,519,762
================ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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 March 31,
1999, and the consolidated results of operations for the three month periods
ended March 31, 1999 and 1998, and the consolidated cash flows for the three
month periods ended March 31, 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 merge with Saba. Under the merger 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 to120% 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 Petroleum Company 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, merged with
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.
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Saba's principal assets are 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 to the fair
value of each of Saba's assets and liabilities at the date of acquisition.
The amounts listed below represent 100% of the estimated fair value of Saba's
assets and liabilities, the excess of estimated net fair value over
acquisition cost ("Excess") and the net acquisition cost recorded by the
Company as of March 24, 1999 (dollars in thousands):
<TABLE>
Estimated Allocation Acquisition
fair value of Excess cost
<S> <C> <C> <C>
Refinery $41,000 $(9,881) $31,119
Oil and Gas Properties 38,793 (9,348) 29,445
Land 12,015 (2,897) 9,118
Other Assets 9,406 9,406
Liabilities and minority
interest (46,145) (46,145)
Preferred Stock (7,188) (7,188)
____________ ___________ ___________
Totals $47,881 $(22,126) $25,755
============ ============ ===========
</TABLE>
The purchase price allocation is preliminary and will be revised, if
necessary, in 1999.
Following are unaudited proforma revenue, net loss and loss per share data of
the Company for the three month periods ended March 31, 1999 and 1998, giving
effect to the acquisition of Saba, as if such acquisition had occurred at the
beginning of 1998. The unaudited pro forma financial data do not purport to
be indicative of the financial position or results of operations that would
actually have occurred if the acquisition had occurred as presented or that
may be obtained in the future (in thousands, except per share amounts).
1999 1998
Revenue $ 4,016 $ 6,508
Net loss $ (2,706) $ (1,647)
Loss per common share $ (0.64) $ (0.39)
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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 merged with, Saba
in March 1999. At March 31, 1999, 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 cannot borrow under its
revolving bank loan agreement. Saba also received a notice of default from
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 at March 24, 1999 on
the effective date of the merger 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:
* The Company's assumed full operation at May 1, 1999 of its asphalt
refinery in California which is expected to significantly increase
operating cash flows (See Note 8 - Subsequent Events),
* The Company acquired financing with new bank, BNY Financial
Corporation, of up to $11.0 million (See Note 8 - Subsequent Events),
* The payment of $6.0 million to Bank One, Texas to reduce existing debt
owed by Saba (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 is in negotiations to restructure the terms of Saba's 9%
senior subordinated debentures (See Note 4 - Notes Payable and Long-
Term Debt),
* The Company entered into agreements for the sale of non-core assets of
the Company, including its oil and gas assets in Colombia and mid-
continent (U.S.) and its non-producing limestone property (See Note 2
- Sale of Assets).
Other than the subsequent events mentioned above that have closed, the
remaining transactions are in various stages of completion, and management
believes that they will all be completed by June 30, 1999. Management
believes that the completion of the refinancing and sale transactions
discussed above will remove any
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
uncertainty as to its ability to continue as a going concern. Additionally,
in view of the significant changes to result from the events described above,
management believes that the financial condition, results of operations and
cash flows of the Company reported herein are not indicative of the expected
future financial condition, results of operations and cash flows of the
Company, and comparisons of the Company's results of operations and cash flows
for the quarters ended March 31, 1999 and 1998 are not considered by
management to be either relevant or representative of the Company's long-term
potential. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of the asset
carrying amounts or the amounts and classifications of liabilities that might
result should the Company be unable to continue as a going concern. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
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.
NOTE 2 SALE OF ASSETS
On March 30, 1999, it was announced that Sabacol, Inc. ("Sabacol"), a wholly-
owned subsidiary of the Company, had entered into an agreement to sell
substantially all of its assets 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 that if the excess of the value of Sabacol oil and gas reserves over
the value of the Omimex reserves acquired by Sabacol is greater as of January
1, 2000 than it was as of January 1, 1999, Sabacol will be entitled to
additional consideration. If the increased value is $5 million or less, 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 to be sold by Sabacol to Omimex . If the increase 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
NOTE 2 SALE OF ASSETS(continued)
the California assets to be 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 April 1999, a wholly-owned subsidiary of the Company entered into an
agreement to sell producing oil and gas properties located principally in
Louisiana, New Mexico, Texas and Wyoming at a contract price of $12.5 million.
Closing of the sale is anticipated to take place in June 1999, with the net
proceeds of such sale to be used to reduce bank indebtedness and provide
working capital.
The accompanying notes are an integral part of these financial statements.
In April 1999, the Company entered into an agreement with Pembrooke Calox,
Inc. for the sale of the Company's interests in a 355-acre limestone property
located in Indiana in exchange for a non-recourse promissory note, secured by
the limestone property, in the principal amount of $5.7 million due November
1, 1999. In the event that $3.85 million is paid by July 31, 1999, the
purchase price shall be reduced to $4.65 million and the $800,000 balance
shall be an unsecured obligation to the Company due in four annual installment
payments of $200,000 each beginning March 31, 2001. As part of this sales
transaction, the Company paid Pembrooke $50,000 and issued 16,736 shares of
Common Stock.
NOTE 3 - STATEMENT OF CASH FLOWS
Following is certain supplemental information regarding cash flows for the
three month periods ended March 31, 1999 and 1998:
1999 1998
Interest paid $ 56,953 $ -
Income taxes paid $ 4,035 $ -
Non-cash investing and financing transactions are as follows:
The dividend obligation on Saba's Preferred Stock for the period March 24 to
31, 1999, that was due and payable on March 31, 1999, of $9,000 was accrued by
increasing that issue's Conversion 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
Petroleum Company (See Note 1 Acquisition of Saba Petroleum Company).
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following at March 31, 1999:
Saba 9% senior subordinated Debentures
due 2005 (a) $3,289,000
Loan agreement Bank One (b) 20,101,769
Demand loan agreement with a bank (c) 1,285,875
Capital lease obligations (d) 443,148
Promissory note (e) 345,290
Term loan with a bank (f) 360,218
The accompanying notes are an integral part of these financial statements.
Promissory note Omimex (g) 4,151,288
Notes payable (h) 2,000,000
15% convertible senior subordinated
Debenture due 2001 (i) 1,000,000
Other 59,201
_______________
33,035,789
Less current portion 30,499,611
_______________
$2,536,178
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
March 31, 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).
(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 acquistion of Saba by the Company on March
24, 1999.
The Company is currently in discussions with the majority holder of the
outstanding Debentures to amend the terms of the obligation.
Saba is not in compliance with certain of the Debentures' restrictions and
covenants, and accordingly, such debt is classified as currently payable at
March 31, 1999.
(b) Amounts outstanding under the loan agreement with Bank One, Texas
aggregate $20.1 million at March 31, 1999. A portion of the indebtedness
($15.6 million) was advanced under a reducing, revolving borrowing base loan.
The balance of the indebtedness ($4.5 million) consists of term loans that
matured on July 31, 1998, and were not paid nor extended.
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT(continued)
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 (See Note 8 Subsequent Events).
The Company and Bank One are in discussions to address such non-compliance.
Based on the events described above, the entire principal indebtedness to the
bank ($20.1 million) has been classified as currently payable at March 31,
1999.
The accompanying notes are an integral part of these financial statements.
(c) The Company's Canadian subsidiary has a demand revolving reducing loan
with a borrowing base of $1.3 million. Interest is payable at variable rate
equal to the Canadian prime rate plus 0.75% per annum (7.5% at March 31,
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 company. The borrowing base
reduces at the rate of $33,100 per month. In accordance with the terms of the
loan agreement, $397,700 of the total loan balance of $1.3 million is
classified as currently payable at March 31, 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 March 31, 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 March 31, 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 June 1998, Saba borrowed $4.2 million from Omimex Resources, Inc.
(Omimex), of which $2.0 million was paid to Bank One, Texas to reduce
indebtedness under one of Saba's short-term loans, and the balance was used
for a partial redemption of Saba's Preferred Stock in the face amount of $2.0
million, plus accrued dividends. Interest is payable at the prime rate (7.75%
at March 31, 1999) plus 3%. The loan is collateralized by Sabacol's 50%
interest in the Velasquez-Galan pipeline in Colombia. The loan was due to be
repaid no later than December 14, 1998. On December 11, 1998, Sabacol filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code in
the Central District of California. Sabacol filed the bankruptcy petition to
protect its asset base and to provide adequate time to develop a
reorganization plan (See Note 2 Sale of Assets and Note 8 Subsequent
Events).
(h) 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
HVI Cat Canyon Inc., a wholly owned subsidiary of the Company. Both loans
mature for payment on May 31, 1999.
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT (Continued)
(i) 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.
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 March 31, 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.
NOTE 6 - BUSINESS SEGMENTS (continued)
A summary of the Company's operations by segments for the three month periods
ended March 31, 1999 and 1998, is as follows (dollars in thousands):
<TABLE>
Integrated E & P E & P Corporate
1999: Operations domestic international and other Total
<S> <C> <C> <C> <C> <C>
Total revenues $156 $54 $143 $ - $353
Production costs 89 36 88 - 213
Other expenses 18 7 27 373 425
Depreciation,
depletion and
Amortization 121 41 32 24 218
____ ____ _____ ____ _____
Results of operations
from segment
activities $ (72) $ (30) $ (4)
======= ========= ========
Interest and
Other expenses (net) 631 631
_____ ____
Net loss $(1,028) $(1,134)
======= =========
Identifiable assets at
March 31, 1999 $49,852 $10,465 $18,711 $ 5,697 $84,725
======== ======== ======== ========= =========
Note: Total revenues reflect only 7 days of Saba financials on a consolidated
basis from the effective date of the merger, March 24, 1999 to March 31, 1999.
Integrated E & P E & P Corporate
1998: Operations domestic international and other Total
Total revenues $35 35
Production costs 34 34
Other operating expenses 355 355
Depreciation, depletion
and Amortization 39 39
Results of operations from
segment activities $(38)
=======
Interest and
Other income (net) (35) (35)
_______ ______
Net loss $ (320) $ (358)
======== =======
</TABLE>
Total assets at March 31, 1999, increased by approximately $63.9 million from
the amount reported at December 31, 1998, due to the merger by the Company
with Saba Petroleum Company, that became effective on March 24, 1999.
NOTE 6 - BUSINESS SEGMENTS (continued)
In view of the significant changes to the Company during 1998 and the
acquisition of Saba completed in March 1999, and the changes to result from
the sale of certain assets (See Note 2 Sale of Assets), the change in
refinery operations (See Note 8 Subsequent Events), and debt restructuring
(See Note 8 Subsequent Events), management believes that the financial
condition, results of operations and cash flows of the Company reported herein
are not indicative of the expected future financial condition, results of
operations and cash flows of the Company, and comparisons of the Company's
results of operations and cash flows for the quarters ended March 31, 1999 and
1998 are not considered by management to be either relevant or representative
of the Company's long-term potential.
NOTE 7 - CONTINGENCIES
Sabacol plans to sell all of its Colombian properties and relieve itself of
any environmental liabilities associated with those properties. However, if
that sale is not consummated, Sabacol may be affected by environmental risks
associated with one of its Colombian properties. Sabacol's Cocorna Concession
in Colombia located in the Cocorna Association expired in February 1997 under
its governing documents, and the property interest reverted to Ecopetrol.
Under the terms of the acquisition of the Concession, Sabacol was required to
perform various environmental remedial operations. Colombian officials claim
that Sabacol and the operator were obligated to treat the water for disposal
on the Concession with a water treatment plant. Colombian officials are
requiring that the plant be built. There can be no assurance as to the amount
of future expenditures associated with the environmental requirements for the
Cocorna Concession. The property in Colombia in which Sabacol has an interest
may be affected by additional environmental remedial operations as reported to
Sabacol by a third party who had performed a due diligence review of the
property.
In 1993, Saba acquired a producing mineral interest in California from a major
oil company. At the time of acquisition, Saba's investigation revealed that a
discharge of diluent, a light, oil-based fluid which is often mixed with
heavier grades of crude had occurred on the acquired property. The purchase
agreement required the seller to remediate the area of the diluent spill.
After Saba assumed operation of the property, 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 the engagement on 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.
NOTE 7 - CONTINGENCIES(Continued)
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 perform 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.
NOTE 8 - SUBSEQUENT EVENTS
Asphalt Refining Operations
In May 1999, the Company assumed all marketing and distribution operations at
its refinery in Santa Maria, California that were previously performed by
Crown Energy under a processing agreement terminated by the Company. 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 net
income of approximately $4.7 million. During the term of the processing
agreement with Crown Energy, Saba had only recognized and reported its fifty
percent share of the profits from the refinery operations. Management
estimates that refinery revenues in 1998 were approximately $22 million.
Following the processing agreement's termination, the Company 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.
In April 1999, the Company'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 the Company's expenditures incurred
in assuming the marketing and sale of refined products at the asphalt refinery
following termination of the processing agreement with Crown Energy. The loans
are secured by Santa Maria refining Company, and the common stock certificates
of Santa Maria Refining Company and Saba Realty, Inc.
Bank One Indebtedness
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. The Company and Bank One are in
discussions to address such non-compliance. In May 1999, the Company used $6
million from a new credit facility with Bank of New York to reduce
indebtedness to Bank One. In addition, the Company, Saba and Bank One entered
into a forbearance agreement under which Bank One has agreed to forbear from
exercising its remedies to collect the indebtedness owed by Saba through June
11, 1999. It is expected that proceeds from the sale of non-core assets will
be used to further reduce the balance owed to Bank One. Further, the Comapny
believes that the payment of $6.0 million to Bank One mentioned above removes
any defaults with respect to the borrowing base, as the outstanding balance of
the indebtedness owed to Bank One would be adequately supported by Saba's
assets.
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
and South America and the Far East, with primary areas of activity in Alberta,
California, Louisiana, Texas, New Mexico, Colombia, 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 are planned to focus on the integration of
its California assets, including an asphalt refinery and interests in heavy
oil fields located in the Santa Maria Valley (SMV). To date, GREKA Energy has
only been able to supply to the asphalt refinery 20% of its heavy oil
requirements. The hedged operations are targeted to capitalize on the stable
asphalt market in California by providing the feedstock (heavy oil) into the
refinery at cost. The planned integration of the refinery (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 aggressively proceed with acquisitions that
enhance the long-term feedstock supply to the refinery. These low oil
prices add direct value to GREKA Energy's profitability.
2. GREKA Energy intends to implement the proprietary Amoco Horizontal
Drilling Technology to cost-efficiently boost production rates from the
the Company's 150 potential drilling locations identified in the SMV.
The two actions are targeted to increase the throughput into the refinery from
the current rate of 4,500 barrels per day to 10,000 barrels per day by the
year 2001. It is anticipated that the profitability from these integrated
operations will not be affected by volatile oil prices. It is also
anticipated that, by using equity barrels to supply the refinery, working
capital requirements should be lower and cash flow should be enhanced. The
continued stability of the price of asphalt, coupled with reduced costs for
processing and lifting, should create a substantial value for GREKA Energy's
shareholders.
Exploration & Production
GREKA Energy plans to 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 of part of 1998 and early 1999, management was primarily
focused on the acquisition of Saba Petroleum Company ("Saba"), which has
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. Accordingly, levels
of other operational activities such as prior contract drilling programs were
suspended. GREKA Energy plans to establish and develop an extensive drilling
program on its acquired properties in California and commence such program in
the second quarter of 1999.
Acquisition of Saba Petroleum Company
During the fourth quarter of 1998 and the first quarter of 1999, GREKA
Energy entered into the following transactions culminating in the acquisition
of Saba Petroleum Company effective March 24, 1999:
On October 6, 1998, GREKA Energy entered into 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 is now due May 31, 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 is now due May 31, 1999.
The promissory note is secured by GREKA Energy's pledge of all of the issued
and outstanding shares of capital stock of HVI Cat Canyon, Inc., a wholly
owned subsidiary of GREKA Energy.
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 approximately 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 filing 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 a merger
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 merger was completed effective March 24, 1999 and GREKA
Energy issued approximately 1,290,000 shares of its common stock
(approximately $10.3 million) and Saba became a wholly owned subsidiary of
GREKA Energy.
Sale of Non-Core Assets
Sale of Colombian Assets
On March 30, 1999, it was announced that Sabacol, Inc. ("Sabacol"), a
wholly-owned subsidiary of the Company, had entered into an agreement to sell
substantially all of its assets 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 that if the excess of the value of Sabacol oil and gas reserves over
the value of the Omimex reserves acquired by Sabacol is greater as of January
1, 2000 than it was as of January 1, 1999, Sabacol will be entitled to
additional consideration. If the increased value is $5 million or less, 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 to be sold by Sabacol to Omimex . If the increase 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 to be 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.
Sale of Mid-Continent Properties
In April 1999, a wholly-owned subsidiary of the Company entered into an
agreement to sell producing oil and gas properties located principally in
Louisiana, New Mexico, Texas and Wyoming at a contract price of $12.5 million.
Closing of the sale is anticipated to take place in June 1999, with the net
proceeds of such sale to be used to reduce bank indebtedness and provide
working capital.
Sale of Limestone Property
In April 1999, the Company entered into an agreement with Pembrooke
Calox, Inc. for the sale of the Company's interests in a 355-acre limestone
property located in Indiana in exchange for a non-recourse promissory note,
secured by the limestone property, in the principal amount of $5.7 million due
November 1, 1999. In the event that $3.85 million is paid by July 31, 1999,
the purchase price shall be reduced to $4.65 million and the $800,000 balance
shall be an unsecured obligation to the Company due in four annual installment
payments of $200,000 each beginning March 31, 2001. As part of this sales
transaction, the Company paid Pembrooke $50,000 and will issue 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 Energy 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 net income of approximately $4.7 million. During the term of the
processing agreement with Crown Energy, Saba had only recognized and reported
its fifty percent share of the profits from the refinery operations.
Management estimates that refinery revenues in 1998 were approximately $22
million. Following the processing agreement's termination, 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.
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 Petroleum Company discussed below, including
* synergies in the form of increased revenues,
* decreased expenses and avoided expenses and expenditures that are
expected to be realized by GREKA Energy and Saba as a result of the
transaction, and
* the complementary nature of GREKA Energy's horizontal drilling
technology and certain Saba oil reserves, and
* other statements of:
* expectations,
* anticipations,
* beliefs,
* estimations,
* projections, and
* other similar matters that are not historical facts, including such
matters as:
* future capital,
* development and exploration expenditures (including the amount
and nature thereof),
* drilling of wells, reserve estimates(including estimates of
future net revenues associated with such reserves and the
present value of such future net revenues),
* future production of oil and gas,
* repayment of debt,
* 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.
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.
In addition, as discussed in Note 1 of the Notes to Condensed
Consolidated Financial Statements of GREKA Energy contained elsewhere in this
report, there currently is substantial doubt about the ability of GREKA Energy
to continue as a going concern.
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 financial condition, results of operations
and cash flows of GREKA Energy reported herein are not indicative of the
expected future financial condition, results of operations and cash flows of
GREKA Energy, and comparisons of GREKA Energy=s results of operations and cash
flows for the quarters ended March 31, 1999 and 1998 are not considered by
management to be either relevant or representative of GREKA Energy=s long-term
potential in view of:
* the significant changes to GREKA Energy during 1998,
* the acquisition of Saba completed in March 1999,
* the recognition of all revenues and profits from the refinery
operations,
* the acquired financing by BNY Financial Corporation,
* the reduction of debt owed to Bank One, Texas,
* the plan to restructure existing indebtedness,
* the changes to result from the sale of Colombian assets,
* the changes to result from the sale of mid-continent properties,
* the changes to result from the sale of the limestone property, and
* the continued attempt of GREKA Energy to divest itself of non-core
assets.
Results of Operations
Oil and gas sales increased from $34,689 for the first quarter of 1998 to
$282,888 for the first quarter of 1999. This increase was primarily
attributable to Saba's sales in the amount of $258,000 from the effective date
of the merger which accounts for only 7 days from March 24, 1999 to March 31,
1999.
Other revenues of $70,214 in the first quarter of 1999 were primarily
attributable to operator fees of Saba of $47,000 from the effective date of
the merger which accounts for only 7 days from march 24, 1999 to March 31,
1999.
Production costs increased from $34,172 for the first quarter of 1998 to
$212,985 for the first quarter of 1999. This increase was primarily
attributable to Saba costs in the amount of $206,000 from the effective date
of the merger.
General and administrative expenses increased from $354,547 for the first
quarter of 1998 to $424,736 for the first quarter of 1999. The increase was
primarily attributable to Saba expenses of $98,000 from the effective date of
the merger.
Depletion, depreciation and amortization increased from $38,868 for the
first quarter of 1998 to $218,375 for the first quarter of 1999. The increase
was primarily attributable to Saba depletion, depreciation and amortization of
$131,000 from the effective date of the merger.
Interest expense of $103,420 was attributable to borrowings by GREKA
Energy of ($46,000) and Saba interest of $57,000 from the effective date of
the merger.
Liquidity and Capital Resources
Working capital decreased $36,149,037 from a deficit of $1,827,854 at
December 31, 1998 to a deficit of $37,976,891 at March 31, 1999. Current
liabilities increased from $2,249,661 as of December 31, 1998 to $46,237,343
at March 31, 1999. The $43,987,682 increase in current liabilities was
primarily due to the current liabilities of Saba acquired effective March 24,
1999, that included $28,772,000 of long-term debt classified as currently
payable.
Cash and cash equivalents increased $765,113 from $250,212 at December
31, 1998 to $1,015,325 at March 31, 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 GREKA Energy during the quarter,
reduced by expenditures for quarterly operations.
Cash Flows
GREKA Energy's net cash used in operating activities decreased from
$1,061,362 for the first quarter of 1998 to $487,288 for the first quarter of
1999. This decrease was primarily attributable to non-cash charges from Saba
in the amount of $684,833 included in the results of operations for the first
quarter of 1999.
GREKA Energy's net cash flows from investing activities increased from a
net outflow of $412,035 for the first quarter of 1998 to a net inflow of
$259,172 for the first quarter of 1999. This increase was primarily
attributable to the acquisition of Saba.
GREKA Energy's net cash provided by financing activities increased from
$60,512 for the first quarter of 1998 to $993,229 for the first quarter of
1999. This increase was primarily attributable to GREKA Energy's issuance of
a convertible debenture in the amount of $1,000,000 during the first quarter
of 1999.
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 intends to achieve the
following:
* Sell non-core assets to repay approximately $22 million in Saba
debt.
* Recapitalize the Company with additional financing.
* Utilize the in-house proprietary and cost effective horizontal
drilling technology, 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 expects to have an annual capex of $5 million funded by its
cash flow.
GREKA Energy's management also believes that the acquisition of Saba
brings opportunities for cost savings, economies of scale and other synergies,
resulting in improved cash flow potential for the long-term growth of GREKA
Energy and of shareholder value. Further, the acquisition of Saba gives GREKA
Energy a stronger consolidated asset base upon which it can rely in securing
future financings, both equity and debt. However, there is no assurance that
any specific level of cost savings or other synergies will be achieved or that
such cost savings or other synergies will be achieved within the time periods
contemplated, or that GREKA Energy will be able to secure future financings.
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:
* revolving ($15.6 million) and term ($4.5 million) bank loan agreements
with Bank One - The Bank One debt is expected to be reduced to $4.1
million following the payments of $6.0 million that occurred in May
1999 as a result of the Company's acquired financing from BNY
Financial Corporation and $10.0 million that is expected to occur in
June 1999 as a result of the Company's sale of the mid-continent
properties.
* loan from Omimex ($4.2 million) The Omimex debt is expected to be
entirely eliminated as a result of Sabacol's sale of the Colombian
assets that is anticipated to close in the second quarter.
* Saba's 9% senior subordinated debentures ($3.3 million) The Company
is in negotiations with the majority holder of the outstanding Saba
debentures to amend the obligation.
* Saba's Preferred Stock (with a stated value of $7.2 million) The
Company entered into a term sheet in March 1999 with the Saba
Preferred Stockholder that provided for the conversion of Saba's
Preferred Stock to a subordinated convertible note obligation of the
Company.
In April 1999, GREKA Energy and Bank One entered into a forbearance
agreement whereby Bank One agreed to forebear through June 11, 1999 from
exercising its various remedies for Saba=s defaults under the Bank One loan
agreements in order to afford GREKA Energy the opportunity to complete
contemplated transactions on the condition that, among other things, each of
the transactions is completed by June 11, 1999.
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 it's the termination of the processing
agreement with Crown Energy. 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 February 1999, GREKA Energy issued convertible senior subordinated
debentures in the principal amount of $1,000,000. The debentures bear
interest at 15%, are due February 1, 2001, and are secured by GREKA Energy=s
limestone deposits. The debentures may be converted by the holders into GREKA
Energy common stock 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 per share. Interest
will accrue on the debentures to the maturity date. GREKA Energy may call all
or a portion of the amount at any time during the term of the debenture by
paying the principal amount due plus any accrued interest. The principal use
of proceeds from the sale of the debentures was to provide working capital.
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.
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 material financial risk to GREKA Energy, including
supplier and service customer delays resulting in short-term delay of revenue
and substantial unanticipated costs. Accordingly, GREKA Energy plans to
devote all resources necessary to resolve significant Year 2000 issues in a
timely manner. GREKA Energy=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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The following material developments occurred during the quarter ended
March 31, 1999 with respect to the legal proceedings reported in the GREKA
Energy Annual Report on Form 10-K for the fiscal year ended December 31, 1998:
As reported in the GREKA Energy 1998 Annual Report on Form 10-KSB, on
December 11, 1998, Sabacol, Inc., a wholly-owned subsidiary of GREKA Energy,
filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in
U.S. Bankruptcy Court for the Central District of California. 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.
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.
Item 2. Changes in Securities and Use of Proceeds.
None.
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.
On March 19, 1999, GREKA Energy held a special meeting of shareholders.
At that meeting the following matters were voted upon as indicated below:
1. To approve the issuance of up to an aggregate of 1,300,000 shares of
common stock under the Agreement and Plan of Merger dated December 18, 1998
among Horizontal Ventures, Inc., Horizontal Ventures Acquisition Corporation
and Saba Petroleum Company.
For: 1,825,368
Against: 247
Abstain: 245
Broker non-votes: 290,925
2. To approve a change in the name of the Company from Horizontal
Ventures, Inc. to GREKA Energy Corporation.
For: 2,114,278
Against: 2,284
Abstain: 223
Broker non-votes: --
3. To approve the issuance of up to an additional 2,000,000 shares of
common stock for possible future acquisitions.
For: 1,824,123
Against: 1,546
Abstain: 191
Broker non-votes: 290,925
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following exhibits are furnished as part of this
report:
Exhibit No. Description
3.1 Articles of Amendment to the Articles of Incorporation
(filed as Exhibit 3.1 to the GREKA Energy Current Report
on Form 8-K dated March 15, 1999 and incorporated by
reference herein)
10.1 Loan and Security Agreement dated April 30, 1999 among
BNY Financial Corporation, GREKA Integrated, Inc., Saba
Realty, Inc. and Santa Maria Refining Company*
10.2 Asset Purchase Agreement dated March 17, 1999 among
Sabacol, Inc. and the Omimex Group (filed as Exhibit
10.89 to the GREKA Energy Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998 and
incorporated by reference herein).
10.3 Purchase and Sale Agreement Between Saba Energy of Texas,
Inc. and Enervest Energy, L.P. dated April 21, 1999*
10.4 Agreement for Purchase and Sale of Real Estate dated
April 28, 1999 among Pembrooke Calox, Inc., Calox
Corporation, and Greka Energy Corporation*
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 February 18, 1999, which reported events
under Item 4, Changes in the Registrant=s Certifying Accountant
Current Report on Form 8-K dated March 15, 1999, which reported events
under Item 2, Acquisition or Disposition of Assets, and Item 5, Other Events.
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
/s/ Randeep S. Grewal
Date May 20, 1999 By:___________________________________
Randeep S. Grewal, Chairman and
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GREKA
ENERGY CORPORATION FINANCIAL STATEMENTS FOR THE INTERIM YEAR TO DATE PERIOD
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,015,325
<SECURITIES> 0
<RECEIVABLES> 4,850,478
<ALLOWANCES> 158,535
<INVENTORY> 0
<CURRENT-ASSETS> 8,260,452
<PP&E> 79,136,303
<DEPRECIATION> 4,280,631
<TOTAL-ASSETS> 84,724,537
<CURRENT-LIABILITIES> 46,237,343
<BONDS> 2,536,178
0
0
<COMMON> 36,055,019
<OTHER-SE> (8,372,007)
<TOTAL-LIABILITY-AND-EQUITY> 84,724,537
<SALES> 282,888
<TOTAL-REVENUES> 353,102
<CGS> 0
<TOTAL-COSTS> 856,096
<OTHER-EXPENSES> (527,166)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 103,420
<INCOME-PRETAX> (1,132,542)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,132,542)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,132,542)
<EPS-BASIC> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
Exhibit 10.1
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement is made as of April 30, 1999 by and
between BNY FINANCIAL CORPORATION ("Lender"), having offices at 1290 Avenue of
the Americas, New York, New York 10104 and GREKA INTEGRATED, INC. ("Greka"),
SABA REALTY, INC. ("Saba"), and SANTA MARIA REFINING COMPANY ("Santa Maria"),
(each of Greka, Saba and Santa Maria is individually and collectively jointly
and severally hereinafter referred to as the "Borrower"), having their
principal place of business at 3201 Airpark Drive, Suite 201, Santa Maria, CA
93455. The liability of Greka, Saba and Santa Maria hereunder shall be joint
and several.
WHEREAS, the Borrower has requested that Lender make loans and advances
available to Borrower; and
WHEREAS, Lender has agreed to make such loans and advances to Borrower,
as Borrower's sole Lender, on the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
and the terms and conditions contained herein, the parties hereto agree as
follows:
1. (A) General Definitions. When used in this Agreement, the
following terms shall have the following meanings:
"Advance Rates" means the Inventory Advance Rate and the Receivables
Advance Rate.
"Affiliate" of any Person means (a) any Person which, directly or
indirectly, is in control of, is controlled by, or is under common control
with such Person, or (b) any Person who is a director or officer (i) of such
Person, (ii) of any Subsidiary of such Person or (iii) of any Person described
in clause (a) above. For purposes of this definition, control of a Person
shall mean the power, direct or indirect, (i) to vote 5% or more of the
securities having ordinary voting power for the election of directors of such
Person, or (ii) to direct or cause the direction of the management and
policies of such Person whether by contract or otherwise.
"Alternate Base Rate" means, for any day, a rate per annum equal to the
higher of (i) the Prime Rate in effect on such day and (ii) the Federal Funds
Rate in effect on such day plus 2 of 1% per annum.
"Ancillary Agreements" means all agreements, instruments, and documents
including, without limitation, mortgages, pledges, powers of attorney,
consents, assignments, contracts, notices, security agreements, trust
agreements whether heretofore, concurrently, or hereafter executed by or on
behalf of Borrower or delivered to Lender, relating to this Agreement or to
the transactions contemplated by this Agreement.
"Bank" means The Bank of New York.
"Borrowing Base Certificate" shall have the meaning set forth in
Section 9.
"Business Day" means any day other than a day on which commercial banks
in New York are authorized or required by law to close.
"Change of Ownership" means (a) any transfer (whether in one or more
transactions) of ownership of not less than 50% of the common stock of
Borrower held by the Original Owners (including for the purposes of the
calculation of percentage ownership, any shares of common stock into which any
capital stock of Borrower held by any of the Original Owners is convertible or
for which any such shares of the capital stock of Borrower or of any other
Person may be exchanged and any shares of common stock issuable to such
Original Owners upon exercise of any warrants, options or similar rights which
may at the time of calculation be held by such Original Owners) to a Person
who is neither an Original Owner nor an Affiliate of an Original Owner or
(b) any merger, consolidation or sale of substantially all of the property or
assets of Borrower.
"Closing Date" means April 30, 1999 or such other date as may be agreed
upon by the parties hereto.
"Collateral" means and includes:
I. With respect to Santa Maria:
(A) all of its Inventory;
(B) all of its Equipment;
(C) all of its General Intangibles;
(D) all of its Receivables;
(E) All of its Investment Property;
(F) all of its books, records, ledgercards, files,
correspondence, computer programs, tapes, disks and related data processing
software (owned by it or in which it has an interest) which at any time
evidence or contain information relating to (A), (B), (C), (D) and (E) above
or are otherwise necessary or helpful in the collection thereof or realization
thereupon;
(G) all of its documents of title, policies and
certificates of insurance, securities, chattel paper, other documents or
instruments evidencing or pertaining to (A), (B), (C), (D), (E) and (F) above;
(H) all of its guaranties, liens on real or personal
property, leases, and other agreements and property which in any way secure or
relate to (A), (B), (C), (D), (E), (F) and (G) above, or are acquired for the
purpose of securing and enforcing any item thereof;
(I) (i) all of its cash held as cash collateral to the
extent not otherwise constituting Collateral, all other cash or property at
any time on deposit with or held by Lender for the account of Santa Maria
(whether for safekeeping, custody, pledge, transmission or otherwise), (ii)
all of its present or future deposit accounts (whether time or demand or
interest or non-interest bearing) of Santa Maria with Lender or any other
Person including those to which any such cash may at any time and from time to
time be credited, (iii) all of its investments and reinvestments (however
evidenced) of amounts from time to time credited to such accounts, and (iv)
all interest, dividends, distributions and other proceeds payable on or with
respect to (x) such investments and reinvestments and (y) such accounts; and
(J) all products and proceeds of (A), (B), (C), (D), (E),
(F), (G), (H) and (I) above (including, but not limited to, all claims to
items referred to in (A), (B), (C), (D), (E), (F), (G), (H) and (I) above) and
all claims of Santa Maria against third parties for (x) (i) loss of, damage
to, or destruction of, and (ii) payments due or to become due under leases,
rentals and hires of, any or all of (A), (B), (C), (D), (E), (F), (G), (H) and
(I) above and (y) proceeds payable under, or unearned premiums with respect
to, policies of insurance in whatever form;
II. With respect to Greka: (A) All of the issued and
outstanding capital stock of Saba and Santa Maria owned by Greka as more
particularly described on Schedule 1(A) annexed hereto (the "Shares") and all
proceeds and products thereof, which shall include, without limitation, all
dividends and distributions thereon, whether in cash, securities or kind, all
securities, Investment Property and /or assets of any type to which the holder
of any of such Shares may now or hereafter be entitled as a result of splits,
reverse splits, mergers, consolidations, recapitalization and/or
reorganizations affecting any of the Shares and/or resulting from liquidations
and /or dissolutions, split-ups, spin-offs, reclassifications or the like
affecting any of the Shares; and (B) the Saba Note and all proceeds thereof
and all general intangibles, rights to payment and all other rights related
thereto;
III. With respect to Saba: (A) all fixtures, equipment,
buildings, structures, improvements, building materials, machinery, machines,
tools, parts, pumps, engines, motors, boilers, incinerators located at or used
in connection with or affixed to the real property more particularly described
on Schedule 1.1(B) annexed hereto and all substitution, accessories,
accessions, replacements, improvements and additions to any or all of the
foregoing and all of the collateral described in subsections (F), (G), (H),
(I) and (J) owned by Saba relating to any of the foregoing;and (B) the Saba
Note and all proceeds thereof and all general intangibles, rights to payment
and all other rights related thereto;
IV. Real Property: In addition to the foregoing, the real
property owned by Santa Maria and/or Saba more particularly described on
Schedule 1.1(B) attached hereto shall be deemed to be part of the Collateral
and subject to all of the provisions of this Agreement relating to the
Collateral.
"Conoco Indemnity Agreement" shall mean the environmental
indemnification contained in the Purchase and Exchange Agreement dated April
13, 1994 by and among Douglas Oil Company of California, Conoco, Inc. and
Borrower.
"Contract Rate" means an interest rate per annum equal to
(i) Alternate Base Rate plus (ii) one percent (1%); provided, however, the
Contract Rate shall not at any time be less than six percent (6%).
Notwithstanding the foregoing, provided no Event of Default shall have
occurred hereunder, the Contract Rate shall be reduced to an interest rate per
annum equal to (i) the Alternate Base Rate plus three quarters of one percent
(.75%) at the end of the first year of the Term and (ii) the Alternate Base
Rate plus one-half of one percent (.50%) at the end of the second year of the
Term, further provided, however, that upon the occurrence of an Event of
Default should there have been any reduction of the Contract Rate, then in
such event the Contract Rate shall revert to the Alternate Base Rate plus one
percent (1%).
"Credit Risk" means the risk of loss resulting solely and
exclusively from a Customer's financial inability to pay at maturity with
respect to any Receivable purchased hereunder.
"Current Assets" at a particular date, means all cash,
cash equivalents, accounts and inventory of Borrower and all other items which
would, in conformity with GAAP, be included under current assets on a balance
sheet of Borrower as at such date; provided, however, that such amounts shall
not include (a) any amounts for any indebtedness owing by an Affiliate of
Borrower, unless such indebtedness arose in connection with the sale of goods
or other property in the ordinary course of business and would otherwise
constitute current assets in conformity with GAAP, (b) any shares of stock
issued by an Affiliate of Borrower, (c) the cash surrender value of any life
insurance policy, (d) any assets which would be classified as intangible
assets under GAAP, or (e) any prepaid expenses.
"Current Liabilities" at a particular date, means all
amounts which would, in conformity with GAAP, be included under current
liabilities on a balance sheet of Borrower as at such date, but in any event
including, without limitation, the amounts of (a) all indebtedness payable on
demand, or, at the option of the Person to whom such indebtedness is owed, not
more than twelve (12) months after such date, (b) any payments in respect of
any indebtedness (whether installment, serial maturity, sinking fund payment
or otherwise) required to be made not more than twelve (12) months after such
date, (c) all reserves in respect of liabilities or indebtedness payable on
demand or, at the option of the Person to whom such indebtedness is owed, not
more than twelve (12) months after such date, the validity of which is
contested at such date, and (d) all accruals for federal or other taxes
measured by income payable within a twelve (12) month period.
"Customer" means and includes the account debtor with
respect to any Receivable, the prospective purchaser of goods, services or
both with respect to any contract or contract right, and/or any party who
enters into or proposes to enter into any contract or other arrangement with
Borrower, pursuant to which Borrower is to deliver any personal property or
perform any services.
"Default Rate" means a rate equal to two percent (2%) per
annum in excess of the Contract Rate or the Overadvance Rate, as the case may
be.
"Dispute" means any cause asserted for nonpayment of
Receivables, including, without limitation, any alleged defense, counterclaim,
offset, dispute or other claim (real or merely asserted) whether arising from
or relating to the sale of goods or rendition of services or arising from or
relating to any other transaction or occurrence.
"Eligible Inventory" means and includes finished goods
Inventory which Lender, in its sole and absolute discretion, determines: (a)
is subject to the security interest of Lender and is subject to no other liens
or encumbrances whatsoever (other than Permitted Liens); (b) is in good
condition and meets all standards imposed by any governmental agency, or
department or division thereof having regulatory authority over such
Inventory, its use or sale including but not limited to the Federal Fair Labor
Standards Act of 1938 as amended, and all rules, regulations and orders
thereunder; (c) is currently either usable or salable in the normal course of
business at prices not less than cost; (d) is located at Santa Maria's
premises in the United States ; and (e) is otherwise acceptable to Lender as
determined in good faith by Lender in the reasonable exercise of its
discretion.
"Eligible Receivables" means and includes each Receivable
which conforms to the following criteria: (a) shipment of the merchandise or
the rendition of services has been completed; (b) no return, rejection or
repossession of the merchandise has occurred; (c) merchandise or services
shall not have been rejected or disputed by the Customer and there shall not
have been asserted any offset, defense, counterclaim, or Dispute; (d)
continues to be in full conformity with the representations and warranties
made by Santa Maria to Lender with respect thereto; (e) Lender is, and
continues to be, satisfied with the credit standing of the Customer in
relation to the amount of credit extended; (f) is documented by an invoice in
a form approved by Lender and shall not be unpaid (i) more than 120 days from
invoice date; or (ii) more than 60 days past due date; (g) less than fifty
percent (50%) of the aggregate unpaid amount of invoices due from such
Customer remain unpaid more than sixty (60) days from due date; (h) is not
evidenced by chattel paper or an instrument of any kind with respect to or in
payment of the Receivable unless such instrument is duly endorsed to and in
possession of Lender or represents a check in payment of a Receivable; (i) the
Customer is not located outside of the United States; (j) is not subject to
any lien, other than Permitted Liens; (k) does not arise out of transactions
with any employee, officer, agent, director, stockholder or Affiliate of Santa
Maria; (l) is payable to Santa Maria; (m) does not arise out of a bill and
hold sale prior to shipment and, if the Receivable arises out of a sale to any
Person to which Santa Maria is indebted, the amount of such indebtedness, and
any anticipated indebtedness, is deducted in determining the face amount of
such Receivable; (n) is net of any returns, discounts, claims, credits and
allowances; (o) if the Receivable arises out of contracts between Santa Maria
and the United States, any state, or any department, agency or instrumentality
of any of them, Santa Maria has so notified Lender, in writing, prior to the
creation of such Receivable, and, if Lender so requests, there has been
compliance with any governmental notice or approval requirements, including,
without limitation, compliance with the Federal Assignment of Claims Act; (p)
is a good and valid account representing an undisputed bona fide indebtedness
incurred by the Customer therein named, for a fixed sum as set forth in the
invoice relating thereto with respect to an unconditional sale and delivery
upon the stated terms of goods sold by Santa Maria, or work, labor and/or
services rendered by Santa Maria; and (q) is otherwise satisfactory to Lender
as determined in good faith by Lender in the reasonable exercise of its
discretion.
"Equipment" means and includes all now owned or hereafter
acquired equipment, machinery and goods (excluding Inventory), whether or not
constituting fixtures, including, without limitation, plant and office
equipment, tools, dies, parts, data processing equipment, furniture and trade
fixtures, trucks, trailers, loaders and other vehicles and all replacements
and substitutions therefor and all accessions thereto.
"Event of Default" means the occurrence of any of the
events set forth in Section 18.
"Federal Funds Rate" means, for any day, the weighted
average of the rates on overnight Federal funds transactions with members of
the Federal Reserve System arranged by Federal funds brokers, as published for
such day (or if such day is not a Business Day, for the next Business Day) by
the Federal Reserve Bank of New York, or if such rate is not so published for
any day which is a Business Day, the average of quotations for such day on
such transactions received by The Bank of New York from three Federal funds
brokers of recognized standing selected by The Bank of New York.
"Formula Amount" shall have the meaning set forth in
Section 2(d).
"GAAP" means generally accepted accounting principles,
practices and procedures in effect from time to time.
"General Intangibles" means and includes all now owned or
hereafter acquired general intangibles as said term is defined in the Uniform
Commercial Code in effect in the State of New York including, without
limitation, trademarks, trade names, trade styles, trade secrets, equipment
formulation, manufacturing procedures, quality control procedures, product
specifications, patents, patent applications, copyrights, registrations,
contract rights, choses in action, causes of action, corporate or other
business records, inventions, designs, goodwill, claims under guarantees,
licenses, franchises, tax refunds, tax refund claims, computer programs,
computer data bases, computer program flow diagrams, source codes, object
codes and all other intangible property of every kind and nature.
"Hazardous Substance" means, without limitation, any
flammable explosives, radon, radioactive materials, asbestos, urea
formaldehyde foam insulation, polychlorinated byphenyls, petroleum and
petroleum products, methane, hazardous materials, hazardous wastes, hazardous
or toxic substances or related materials as defined in CERCLA, the Hazardous
Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.),
RCRA, Articles 15 and 27 of the New York State Environmental Conservation Law
or any other applicable environmental law and in the regulations adopted
pursuant thereto.
"Incipient Event of Default" means any act or event which,
with the giving of notice or passage of time or both, would constitute an
Event of Default.
"Inventory" means and includes all of Santa Maria=s now
owned or hereafter acquired goods, merchandise and other personal property,
wherever located, to be furnished under any contract of service or held for
sale or lease, all raw materials, work in process, finished goods and
materials and supplies of any kind, nature or description which are or might
be used or consumed in Santa Maria=s business or used in selling or furnishing
such goods, merchandise and other personal property, and all documents of
title or other documents representing them.
"Inventory Advance Rate" shall have the meaning set forth
in the definition of Inventory Availability.
"Inventory Availability" means the amount of Revolving
Credit Advances against Eligible Inventory of Santa Maria Lender may from time
to time during the Term make available to Borrower up to 65% ("Inventory
Advance Rate") of the value of Eligible Inventory (calculated on the basis of
the lower of cost or market, on a first-in first-out basis).
"Investment Property" shall have the meaning ascribed to
such term in the New York Uniform Commercial Code, as amended.
"Loans" means the Revolving Credit Advances, the Term Loan
and all other extensions of credit hereunder.
"Matured Funds Rate" means the rate of interest, announced
by Lender from time to time, as the rate applicable to matured funds, such
rate to be adjusted automatically on the effective date of any change in such
rate as announced by Lender.
"Maximum Loan Amount" means $11,000,000.
"Maximum Revolving Amount" means $5,000,000.
"Net Face Amount" of Receivables means the gross face
invoice amount thereof, less returns, discounts (the calculation of which
shall be determined by Lender where optional terms are given), anticipation or
any other unilateral deductions taken by Customers, and credits and allowances
to Customers of any nature.
"Obligations" means and includes all Loans, all advances,
debts, liabilities, obligations, covenants and duties owing by Borrower to
Lender (or any corporation that directly or indirectly controls or is
controlled by or is under common control with Lender) of every kind and
description (whether or not evidenced by any note or other instrument and
whether or not for the payment of money or the performance or non-performance
of any act), direct or indirect, absolute or contingent, due or to become due,
contractual or tortious, liquidated or unliquidated, whether existing by
operation of law or otherwise now existing or hereafter arising including,
without limitation, any debt, liability or obligation owing from Borrower to
others which Lender may have obtained by assignment or otherwise and further
including, without limitation, all interest, charges or any other payments
Borrower is required to make by law or otherwise arising under or as a result
of this Agreement and the Ancillary Agreements, together with all reasonable
expenses and reasonable attorneys' fees chargeable to Borrower's account or
incurred by Lender in connection with Borrower's account whether provided for
herein or in any Ancillary Agreement.
"Original Owners" means Greka Energy Corporation with
respect to Greka and Greka with respect to Santa Maria and Saba.
"Overadvance Rate" means a rate equal to one percent (1%)
per annum in excess of the Contract Rate.
"Permitted Liens" means (i) liens of carriers,
warehousemen, mechanics and materialmen incurred in the ordinary course of
business securing sums not overdue; (ii) liens incurred in the ordinary course
of business in connection with workers= compensation, unemployment insurance
or other forms of governmental insurance or benefits, relating to employees,
securing sums (a) not overdue or (b) being diligently contested in good faith
provided that adequate reserves with respect thereto are maintained on the
books of Borrower in conformity with GAAP, (iii) liens in favor of Lender,
(iv) liens for taxes (a) not yet due or (b) being diligently contested in good
faith, provided that adequate reserves with respect thereto are maintained on
the books of Borrower in conformity with GAAP, and (v) liens specified on
Schedule 1(C) hereto.
"Person" means an individual, partnership, corporation,
trust or unincorporated organization, or a government or agency or political
subdivision thereof.
"Prime Rate" means the prime commercial lending rate of
The Bank of New York as publicly announced in New York, New York to be in
effect from time to time, such rate to be adjusted automatically, without
notice, on the effective date of any change in such rate. This rate of
interest is determined from time to time and is neither tied to any external
rate of interest or index nor does it necessarily reflect the lowest rate of
interest actually charged to any particular class or category of customers.
"Receivables" means and includes all of Santa Maria's now
owned or hereafter acquired accounts and contract rights, instruments,
insurance proceeds, documents, chattel paper, letters of credit and Santa
Maria's rights to receive payment thereunder, any and all rights to the
payment or receipt of money or other forms of consideration of any kind at any
time now or hereafter owing or to be owing to Santa Maria, all proceeds
thereof and all files in which Santa Maria has any interest whatsoever
containing information identifying or pertaining to any of Santa Maria's
Receivables, together with all of Santa Maria's rights to any merchandise
which is represented thereby, and all Santa Maria's right, title, security and
guaranties with respect to each Receivable, including, without limitation, all
rights of stoppage in transit, replevin and reclamation and all rights as an
unpaid vendor.
"Receivables Advance Rate" shall have the meaning set
forth in the definition of Receivables Availability.
"Receivables Availability" means the amount of Revolving
Credit Advances against Eligible Receivables Lender may from time to time
during the term of this Agreement make available to Borrower up to 85%
("Receivables Advance Rate") of the net face amount of Eligible Receivables.
"Reports" shall have the meaning set forth in Section 14.
"Retained Goods" shall have the meaning set forth in
Section 8(h).
"Revolving Credit Advances" shall have the meaning set
forth in Section 2(d).
"Saba Note" shall have the meaning set forth in Section
12(m).
"Sanction/Embargo Programs" shall mean economic and other
sanctions and embargo program restrictions promulgated by the government of
the United States of America or any office or agency thereof including but not
limited to the President and the Office of Foreign Assets Control of the
Treasury Department, or either of them.
"Settlement Date" means two (2) Business Days after the
day on which the applicable Receivable is actually collected by Lender.
"Subordinated Debt" means any debt subordinated to Lender
upon terms and conditions satisfactory to Lender in its sole discretion.
"Subsidiary" of any Person means a corporation or other
entity of whose shares of stock or other ownership interests having ordinary
voting power (other than stock or other ownership interests having such power
only by reason of the happening of a contingency) to elect a majority of the
directors of such corporation, or other Persons performing similar functions
for such entity, are owned, directly or indirectly, by such Person.
"Tangible Net Worth" at a particular date means (a) the
aggregate amount of all assets of Borrower as may be properly classified as
such in accordance with GAAP consistently applied excluding such other assets
as are properly classified as intangible assets under GAAP, less (b) the
aggregate amount of all liabilities of the Borrower.
"Term" means the Closing Date through April 30, 2001,
subject to acceleration upon the occurrence of an Event of Default or other
termination hereunder.
"Term Loan" shall have the meaning set forth in paragraph
2(k).
"Term Loan Note" shall have the meaning set forth in
paragraph 2(k).
"Total Liabilities" at a particular date means all
Indebtedness of Borrower as at such date.
"Working Capital" at a particular date means the excess,
if any, of Current Assets over Current Liabilities at such date.
"Year 2000 Issue" means the inability of computer
software, hardware and firmware systems and/or equipment containing embedded
computer chips owned or operated by a Person or used or relied upon in the
conduct of a Person's business (including systems and equipment supplied by
others or with which such person=s computer systems interface) to properly
receive, transmit, process, manipulate, store, retrieve, re-transmit, without
errors or delays, or in any other way to accurately recognize or otherwise
utilize data and information in all respects in relation to the year 2000 or
the inclusion of dates on or after January 1, 2000.
(B) Accounting Terms. Any accounting terms used in this Agreement
which are not specifically defined shall have the meanings customarily given
them in accordance with GAAP.
(C) Other Terms. All other terms used in this Agreement and defined in
the Uniform Commercial Code as adopted in the State of New York, shall have
the meaning given therein unless otherwise defined herein.
2. Sale of Receivables; Purchase Price; Accounts Receivables
Management; Loans.
(a) Santa Maria hereby assigns and sells to Lender, as absolute owner,
and Lender hereby purchases from Santa Maria all Receivables created on and
after the date hereof, which arise from Santa Maria=s sale of merchandise or
rendition of services.
(b) Lender shall not assume the Credit Risk on any Receivables.
Accordingly, all Receivables shall be purchased by Lender with full recourse
to Santa Maria in the event of non-payment thereof for any reason whatsoever
and Lender may charge back to Borrower's account the amount of any Receivable
that is not paid on its due date. The procedure manual Lender has delivered
to Borrower describes Lender's current practices and procedures regarding its
accounts receivable management and record keeping services. Lender reserves
the right to vary such practices and procedures from time to time in its sole
discretion. Lender shall have no liability to Borrower for any alleged
failure on Lender's part to provide adequate accounts receivable management
and record keeping services by including, without limitation, any liability of
any kind whatsoever for consequential or other damages or penalties based upon
any such alleged failure on Lender's part.
(c) The purchase price of Receivables shall be the Net Face Amount
thereof. The purchase price will be credited to Borrower's account and
remitted to Borrower on the Settlement Date. Lender may deduct from the
amount payable to Borrower on any Settlement Date reserves for all Obligations
then chargeable to Borrower's account and Obligations which in Lender's sole
judgment may be chargeable to Borrower's account thereafter.
(d) Subject to the terms and conditions set forth herein and in the
Ancillary Agreements, Lender may, in its sole discretion, make revolving
credit advances (the "Revolving Credit Advances") to Borrower from time to
time during the Term which, in the aggregate at any time outstanding, will not
exceed the lesser of (x) the Maximum Revolving Amount or (y) an amount equal
to the sum of:
(i) Receivables Availability, plus
(ii) Inventory Availability, minus
(iii) such reserves as Lender may in its sole and absolute
discretion deem proper and necessary from time to time.
The sum of 2(d)(i) plus (ii) minus (iii) shall be referred to as the
"Formula Amount". In this regard, Borrower agrees that it shall submit a
Borrowing Base Certificate to Lender, in form and substance and with such
frequency, as more fully described in Section 9 below, to include such
calculations, in each instance that Lender may deem necessary or desirable in
order to verify whether Borrower is in compliance with the preceding
limitations pertaining to Revolving Credit Advances.
(e) Notwithstanding the limitations set forth above, Lender retains the
right to lend Borrower from time to time such amounts in excess of such
limitations as Lender may determine in its sole discretion.
(f) Borrower acknowledges that the exercise of Lender's discretionary
rights hereunder may result during the term of this Agreement in one or more
increases or decreases in the Advance Rates and Borrower hereby consents to
any such increases or decreases which may limit or restrict advances requested
by Borrower.
(g) If Borrower does not pay any interest, fees, costs, charges or
commissions to Lender when due, Borrower shall thereby be deemed to have
requested, and Lender is hereby authorized at its discretion to make and
charge to Borrower's account, a Revolving Credit Advance to Borrower as of
such date in an amount equal to such unpaid interest, fees, costs, charges or
commissions.
(h) Any sums expended by Lender due to Borrower's failure to perform or
comply with its obligations under this Agreement, including but not limited to
the payment of taxes, insurance premiums or leasehold obligations, shall be
charged to Borrower's account as a Revolving Credit Advance and added to the
Obligations.
(i) Lender will account to Borrower monthly with a statement of all
Loans and other advances, charges and payments made pursuant to this
Agreement, and such account rendered by Lender shall be deemed final, binding
and conclusive unless Lender is notified by Borrower in writing to the
contrary within thirty (30) days of the date each account was rendered and
received (receipt presumed seven (7) days after mailing) specifying the item
or items to which objection is made.
(j) During the Term, Borrower may borrow, prepay and reborrow Revolving
Credit Advances, all in accordance with the terms and conditions hereof.
(k) Subject to the terms and conditions set forth herein and in the
Ancillary Agreements, Lender will make a term loan to Borrower in the sum of
$6,000,000 ("Term Loan"). The Term Loan shall be advanced on the Closing Date
and shall be, with respect to principal, payable as follows: (i) during the
first year of the Term, the Term Loan shall be payable interest only for the
first two months, and thereafter in ten (10) consecutive equal monthly
payments of principal, each in the amount of $300,000, plus interest at the
Contract Rate; (ii) commencing on the second year of the Term, the Term Loan
shall be payable in twelve (12) consecutive monthly payments of principal,
each in the amount of $250,000, plus interest at the Contract Rate. All
remaining principal and accrued interest outstanding under the Term Loan
shall be due and payable in full on April 1, 2001. The Term Loan shall be
subject to acceleration upon the occurrence of an Event of Default hereunder
or termination of this Agreement and shall otherwise be evidenced by and
subject to the terms and conditions set forth in a secured promissory note in
substantially the form of the note attached hereto as Schedule 2(k) ("Term
Loan Note").
(l) The aggregate balance of Loans outstanding at any time shall not
exceed the Maximum Loan Amount. The aggregate balance of Revolving Credit
Advances outstanding at any time shall not exceed the Formula Amount.
3. Repayment of Loans.
(a) Borrower shall be required to (i) make a mandatory prepayment
hereunder at any time that the aggregate outstanding principal balance of the
Revolving Credit Advances made by Lender to Borrower hereunder is in excess of
the Formula Amount in an amount equal to such excess, and (ii) repay on the
expiration of the Term (x) the then aggregate outstanding principal balance of
Revolving Credit Advances made by Lender to Greka hereunder together with
accrued and unpaid interest, fees, charges and commissions and (y) all other
amounts owed Lender under this Agreement and the Ancillary Agreements.
(b) The Term Loan shall be due and payable as provided in paragraph
2(k) hereof and in the Term Loan Note.
4. Procedure for Revolving Credit Advances. Borrower may by written
notice request a borrowing of Revolving Credit Advances prior to 1:00 P.M. New
York time on the Business Day of its request to incur, on that day, a
Revolving Credit Advance. All Revolving Credit Advances shall be disbursed
from whichever office or other place Lender may designate from time to time
and, together with any and all other Obligations of Borrower to Lender, shall
be charged to the Borrower's account on Lender's books. The proceeds of each
Revolving Credit Advance made by the Lender shall be made available to
Borrower on the day so requested by way of credit to the Borrower's operating
account maintained with Borrower such bank as Borrower designated to Lender.
Any and all Obligations due and owing hereunder may be charged to Borrower's
account and shall constitute Revolving Credit Advances.
5. Interest; Fees; Commissions.
(a) Interest.
(i) Except as modified by Section 5(a)(iii) below, interest on
Loans shall be payable in arrears on the last day of each month. Interest
payments hereunder may, at Lender's option be charged by Lender to Borrower's
account. Interest charges shall be computed on the unpaid balance of the
Loans for each day they are outstanding at a rate per annum equal to the
Contract Rate. In the event the aggregate amount of Revolving Credit Advances
exceeds the Formula Amount for five (5) or more days in any month during the
Term, the average daily balance of Revolving Credit Advances in that month
shall bear interest at the Overadvance Rate.
(ii) Interest shall be computed on the basis of actual days
elapsed over a 360-day year.
(iii) Upon the occurrence and during the continuance of an Event
of Default, interest shall be payable at the Default Rate.
(iv) Notwithstanding the foregoing, in no event shall interest
exceed the maximum rate permitted under any applicable law or regulation, and
if any provision of this Agreement or an Ancillary Agreement is in
contravention of any such law or regulation, such provision shall be deemed
amended to provide for interest at said maximum rate and any excess amount
shall either be applied, at Lender's option, to the outstanding Loans in such
order as Lender shall determine or refunded by Lender to Borrower.
(v) Borrower shall pay principal, interest and all other amounts
payable hereunder, or under any Ancillary Agreement, without any deduction
whatsoever, including, but not limited to, any deduction for any set-off or
counterclaim.
(b) Fees.
(i) Closing Fee. Upon closing of this Agreement by Borrower and
Lender, Borrower shall pay to Lender a closing fee in an amount equal to
$225,000.
(ii) Collateral Monitoring Fee. Borrower shall pay to Lender a
monthly Collateral Monitoring Fee in the amount of $2,500.00. Additionally,
upon Lender's performance of any collateral monitoring, including but not
limited to any field examination, collateral analysis or other business
analysis, the need for which is to be determined by Lender and which
monitoring is undertaken by Lender or for Lender's benefit, a per diem amount
equal to Lender's then standard rate per person, for each person employed to
perform such monitoring, together with all out of pocket costs, disbursements
and expenses incurred by the Lender and the person performing such collateral
monitoring, shall be charged to Borrower's account.
(c) Increased Costs. In the event that any applicable law, treaty or
governmental regulation, or any change therein or in the interpretation or
application thereof, or compliance by Lender (for purposes of this Section
5(c), the term "Lender" shall include Lender and any corporation or bank
controlling Lender) with any request or directive (whether or not having the
force of law) from any central bank or other financial, monetary or other
authority, shall:
(i) subject Lender to any tax of any kind whatsoever with
respect to this Agreement or change the basis of taxation of payments to
Lender of principal, fees, interest or any other amount payable hereunder or
under any Ancillary Agreements (except for changes in the rate of tax on the
overall net income of Lender by the jurisdiction in which it maintains its
principal office);
(ii) impose, modify or hold applicable any reserve, special
deposit, assessment or similar requirement against assets held by, or deposits
in or for the account of, advances or loans by, or other credit extended by,
any office of Lender, including without limitation pursuant to Regulation D of
the Board of Governors of the Federal Reserve System; or
(iii) impose on Lender any other condition with respect to this
Agreement or any Ancillary Agreements; and the result of any of the foregoing
is to increase the cost to Lender of making, renewing or maintaining its Loans
hereunder by an amount that Lender deems to be material or to reduce the
amount of any payment (whether of principal, interest or otherwise) in respect
of any of the Loans by an amount that Lender deems to be material, then, in
any case Borrower shall promptly pay Lender, upon its demand, such additional
amount as will compensate Lender for such additional cost or such reduction,
as the case may be. Lender shall through an officer certify the amount of such
additional cost or reduction to Borrower, and such certification shall be
conclusive absent manifest error.
(d) Capital Adequacy.
(i) In the event that Lender shall have determined that any
applicable law, rule, regulation or guideline regarding capital adequacy, or
any change therein, or any change in the interpretation or administration
thereof by any governmental authority, central bank or comparable agency
charged with the interpretation or administration thereof, or compliance by
Lender (for purposes of this Section 5(d), the term "Lender" shall include
Lender and any corporation or bank controlling Lender) with any request or
directive regarding capital adequacy (whether or not having the force of law)
of any such authority, central bank or comparable agency, has or would have
the effect of reducing the rate of return on Lender's capital as a consequence
of its obligations hereunder to a level below that which Lender could have
achieved but for such adoption, change or compliance (taking into
consideration Lender's policies with respect to capital adequacy) by an amount
deemed by Lender to be material, then, from time to time, Borrower shall pay
upon demand to Lender such additional amount or amounts as will compensate
Lender for such reduction. In determining such amount or amounts, Lender may
use any reasonable averaging or attribution methods. The protection of this
Section shall be available to Lender regardless of any possible contention of
invalidity or inapplicability with respect to the applicable law, regulation
or condition.
(ii) A certificate of Lender by an officer setting forth such
amount or amounts as shall be necessary to compensate Lender with respect to
Section 5(d) hereof when delivered to Borrower shall be conclusive absent
manifest error.
(e) Matured Funds. On the last day of each month during the Term,
Lender shall credit Borrower's account with interest at the Matured Funds Rate
in effect during such month on the average daily balance during such month of
any amounts payable by Lender to Borrower hereunder which are not drawn by
Borrower on the Settlement Date.
6. Security Interest.
(a) To secure the prompt payment to Lender of the Obligations,
Borrower hereby assigns, pledges and grants to Lender a continuing security
interest in and to the Collateral, whether now owned or existing or hereafter
acquired or arising and wheresoever located (whether or not the same is
subject to Article 9 of the Uniform Commercial Code). All of the Borrower's
ledger sheets, files, records, books of account, business papers and documents
relating to the Collateral shall, until delivered to or removed by Lender, be
kept by Borrower in trust for Lender until all Obligations have been paid in
full. Each confirmatory assignment schedule or other form of assignment
hereafter executed by Borrower shall be deemed to include the foregoing grant,
whether or not the same appears therein.
(b) Lender may file one or more financing statements disclosing
Lender's security interest in the Collateral without Borrower's signature
appearing thereon or Lender may sign on Borrower's behalf as provided in
Section 13 hereof. The parties agree that a carbon, photographic or other
reproduction of this Agreement shall be sufficient as a financing statement.
If any Receivable becomes evidenced by a promissory note or any other
instrument for the payment of money, Borrower will immediately deliver such
instrument to Lender appropriately endorsed.
7. Representations Concerning the Collateral. Borrower represents and
warrants (each of which such representations and warranties shall be deemed
repeated upon the making of each request for a Revolving Credit Advance and
made as of the time of each and every Revolving Credit Advance hereunder):
(a) all the Collateral (i) is owned by Borrower free and clear of all
claims, liens, security interests and encumbrances (including without
limitation any claims of infringement) except (A) those in Lender's favor and
(B) Permitted Liens and (ii) is not subject to any agreement prohibiting the
granting of a security interest or requiring notice of or consent to the
granting of a security interest;
(b) all Receivables (i) represent complete bona fide transactions
which require no further act under any circumstances on Borrower's part to
make such Receivables payable by Customers, (ii) to the best of Borrower's
knowledge, are not subject to any present, future or contingent Disputes;
(iii) do not represent bill and hold sales, consignment sales, guaranteed
sales, sale or return or other similar understandings or obligations of any
Affiliate or Subsidiary of Borrower; (iv) included in any Borrowing Base
Certificate as an Eligible Receivable meets all criteria specified in the
definition of Eligible Receivables, except as may otherwise be specifically
disclosed in such Borrowing Base Certificate or as otherwise theretofore
disclosed in writing to Lender; and (v) Borrower has no knowledge of any fact
or circumstance not disclosed to Lender in the pertinent Borrowing Base
Certificate or otherwise in writing, which would impair the validity or
collectibility of any Receivable and that all documents in connection with
each Receivable are genuine.
(c) in the event any amounts due and owing from any account debtor to
Borrower on any Eligible Receivable shall become subject to any Dispute, or to
any other adjustment otherwise permitted to be made in accordance with the
terms and provisions hereof in the ordinary course of business and prior to
the occurrence of an Event of Default hereunder, Borrower agrees that it
shall, at the time of the submission of the next Borrowing Base Certificate
required to be delivered to Lender immediately following the date on which
Borrower learns thereof, provide Lender with notice thereof. Borrower further
agrees that it shall also notify Lender promptly of all returns and credits in
respect of any Receivables included within a Borrowing Base Certificate, which
notice shall specify the Receivables affected.
8. Covenants Concerning the Collateral. During the Term, Borrower
covenants that it shall:
(a) not dispose of any of the Collateral whether by sale, lease or
otherwise except for (i) the sale of Inventory in the ordinary course of
business, and (ii) the disposition or transfer of obsolete and wornout
Equipment in the ordinary course of business during any fiscal year having an
aggregate fair market value of not more than $10,000 and only to the extent
that (x) the proceeds of any such disposition are used to acquire replacement
Equipment which is subject to Lender's first priority security interest or (y)
the proceeds of which are remitted to Lender in reduction of the Obligations;
(b) not encumber, mortgage, pledge, assign or grant any security
interest in any Collateral or any of Borrower's other assets to anyone other
than Lender except as set forth on Schedule 1(C) attached hereto and made a
part hereof;
(c) place notations upon Borrower's books of account and any financial
statement prepared by Borrower to disclose Lender's security interest in the
Collateral;
(d) defend the Collateral against the claims and demands of all
parties.
(e) keep and maintain the Equipment in good operating condition, except
for ordinary wear and tear, and shall make all necessary repairs and
replacements thereof so that the value and operating efficiency shall at all
times be maintained and preserved. Borrower shall not permit any such items
to become a fixture to real estate or accessions to other personal property;
(f) not extend the payment terms of any Receivable without prompt
notice thereof to Lender;
(g) perform all other steps requested by Lender to create and maintain
in Lender's favor a valid perfected first security interest in all Collateral;
and
(h) promptly provide Lender with duplicate originals of all credits
which Borrower issues to its Customers and immediately notify Lender of any
merchandise returns or Disputes. Borrower shall settle all Disputes at no
cost or expense to Lender. Should Lender so elect, upon the occurrence of any
Event of Default, Lender may at any time in its discretion (i) withdraw
Borrower's authority to issue credits to its Customers without Lender's prior
written consent; (ii) litigate Disputes or settle them directly with Customers
on terms acceptable to Lender; or (iii) direct Borrower to set aside and
identify as Lender's property any returned or repossessed merchandise or other
goods which by sale resulted in Receivables theretofore assigned to Lender
("Retained Goods"). All Retained Goods (and the proceeds thereof) shall be
(A) held by Borrower in trust for Lender as Lender's property, (B) subject to
Lender's security interest hereunder, and (C) disposed of only in accordance
with Lender's express written instructions.
9. Collection and Maintenance of Collateral and Records. Lender may at
any time verify Borrower's Receivables utilizing an audit control company or
any other agent of Lender. Lender or Lender's designee may notify Customers,
at any time at Lender's sole discretion, of Lender's security interest in
Receivables, collect them directly and charge the collection costs and
expenses to Borrower's account, but, unless and until Lender does so or gives
Borrower other instructions, Borrower shall instruct all of its Customers to
make payments on account of Receivables to an account under Lender's dominion
and control at such bank as Lender may designate, as provided by the terms of
Section 23. To the extent Borrower receives any payments on account of
Receivables, it shall hold such payments for Lender's benefit in trust as
Lender's trustee and immediately deliver them to Lender in their original form
with all necessary endorsements or, as directed by Lender, deposit such
payments as directed by Lender pursuant to Section 22 hereof. Lender will
credit (conditional upon final collection) all such payments to Borrower's
account on the Settlement Date. Promptly after the creation of any
Receivables, Borrower shall provide Lender with schedules describing all
Receivables created or acquired by Borrower and shall execute and deliver
confirmatory written assignments of such Receivables to Lender, but Borrower's
failure to execute and deliver such schedules or written confirmatory
assignments of such Receivables shall not affect or limit Lender's security
interest or other rights in and to the Receivables. Borrower shall furnish,
at Lender's request, copies of contracts, invoices or the equivalent, and any
original shipping and delivery receipts for all merchandise sold or services
rendered and such other documents and information as Lender may require. All
of Borrower's invoices shall bear the terms stated on the applicable customer
order, and no change from the original terms of such customer order shall be
made without the prior written consent of Lender. Borrower shall provide
Lender on a monthly (within ten (10) days after the end of each month), or
more frequent basis, as requested by Lender, a summary report of Borrower's
current Inventory, certified as true and accurate by Borrower's President or
Chief Financial Officer, as well as an aged trial balance of Borrower's
existing accounts payable. Borrower shall provide Lender, as requested by
Lender, such other schedules, documents and/or information regarding the
Collateral as Lender may require. Without limiting the foregoing, Borrower
shall provide to Lender a borrowing base certificate upon Santa Maria=s
invoicing of customers, but no less frequently than weekly ("Borrowing Base
Certificate"), which must be in form and substance acceptable to Lender and
which Borrowing Base Certificate shall certify to Lender, and shall contain
sufficient information and calculations as Lender may deem necessary or
desirable, in order to verify any Receivables Availability, Inventory
Availability, the applicable Formula Amount and whether or not Receivables
and/or Inventory included therein are Eligible Receivables and/or Eligible
Inventory. Without limiting the foregoing, a Borrowing Base Certificate must
be executed and delivered by Borrower to Lender at the time of or prior to
each request for Revolving Credit Advances pursuant to Section 4. Each such
Borrowing Base Certificate shall be delivered to Lender at its office
described in Section 25 below, on each relevant Business Day.
10. Inspections. During normal business hours, and, so long as no Event
of Default or Incipient Event of Default shall have occurred hereunder, upon
twenty-four (24) hours prior notice to Borrower, Lender shall have the right
to (a) visit and inspect Borrower's properties and the Collateral, (b)
inspect, audit and make extracts from Borrower's relevant books and records,
including, but not limited to, management letters prepared by independent
accountants, and (c) discuss with Borrower's principal officers, and
independent accountants, Borrower's business, assets, liabilities, financial
condition, results of operations and business prospects. Borrower will
deliver to Lender any instrument necessary for Lender to obtain records from
any service bureau maintaining records for Borrower.
11. Financial Information. Borrower shall provide Lender (a) as soon
as available, but in any event within ninety (90) days after the end of each
of Borrower's fiscal years, Borrower's balance sheet as at the end of such
fiscal year and the related statements of income, retained earnings and
statement of cash flow for such fiscal year, setting forth in comparative form
the figures as at the end of and for the previous fiscal year, which shall
have been reported on by independent certified public accountants who shall be
satisfactory to Lender and shall be accompanied by an unqualified audit report
issued by such independent certified public accountants; (b) as soon as
available, drafts of Borrower's balance sheet as at the end of each of
Borrower's fiscal years and the related statements of income, retained
earnings and statement of cash flow for such fiscal year, which have been
internally prepared by Borrower; (c) as soon as available, but in any event
within thirty (30) days after the close of each month and quarter, the balance
sheet as at the end of such month and quarter and the related statements of
income, retained earnings and changes in statement of cash flow for such month
and quarter, which have been internally prepared by Borrower. All financial
statements required under (a), (b) and (c) above shall be prepared in
accordance with GAAP, subject to year end adjustments in the case of monthly
and quarterly statements. Together with the financial statements furnished
pursuant to (a) above, Borrower shall deliver a certificate of Borrower's
certified public accountants addressed to Lender stating that (i) they have
caused this Agreement and the Ancillary Agreements to be reviewed and (ii) in
making the examination necessary for the issuance of such financial
statements, nothing has come to their attention to lead them to believe that
any Event of Default or Incipient Event of Default exists and, in particular,
they have no knowledge of any Event of Default or Incipient Event of Default
or, if such is not the case, specifying such Event of Default or Incipient
Event of Default and its nature, when it occurred and whether it is
continuing. At the times the financial statements are furnished pursuant to
(a), (b) and (c) above, a certificate of Borrower's President or Chief
Financial Officer shall be delivered to Lender stating that, based on an
examination sufficient to enable him to make an informed statement, no Event
of Default or Incipient Event of Default exists, or, if such is not the case,
specifying such Event of Default or Incipient Event of Default and its nature,
when it occurred, whether it is continuing and the steps being taken by
Borrower with respect to such event. If any internally prepared financial
information, including that required under this section, is unsatisfactory in
any manner to Lender, Lender may request that Borrower's independent certified
public accountants review same.
In addition to the foregoing financial statements, Borrower shall furnish
Lender no less than thirty (30) days prior to the beginning of each fiscal
year commencing with fiscal year 2000, a month by month projected operating
budget and cash flow for such fiscal year (including an income statement for
each month and a balance sheet as at the end of the last month in each fiscal
quarter), such projections to be accompanied by a certificate signed by
Borrower's President or Chief Financial Officer to the effect that such
projections have been prepared on the basis of sound financial planning
practice consistent with past budgets and financial statements and that such
officer has no reason to question the reasonableness of any material
assumptions on which such projections were prepared.
12. Additional Representations, Warranties and Covenants. Borrower
represents and warrants (each of which such representations and warranties
shall be deemed repeated upon the making of a request for a Revolving Credit
Advance and made as of the time of each Revolving Credit Advance made
hereunder), and covenants that:
(a) Saba and Santa Maria is each a corporation duly organized and
validly existing under the laws of the State of California and Greka is a
corporation duly organized and validly existing under the laws of the State of
Colorado and each Borrower is duly qualified and in good standing in every
other state or jurisdiction in which the nature of Borrower's business
requires such qualification except where the failure to qualify would not have
a material adverse effect on the Borrower=s business.;
(b) the execution, delivery and performance of this Agreement and the
Ancillary Agreements (i) have been duly authorized, (ii) are not in
contravention of Borrower's certificate of incorporation, by-laws or of any
indenture, agreement or undertaking to which Borrower is a party or by which
Borrower is bound and (iii) are within Borrower's corporate powers;
(c) this Agreement and the Ancillary Agreements executed and
delivered by Borrower are Borrower's legal, valid and binding obligations,
enforceable in accordance with their terms;
(d) it keeps and will continue to keep all of its books and records
concerning the Collateral at Borrower's executive offices located at the
address set forth in the introductory paragraph of this Agreement and will not
move such books and records without giving Lender at least thirty (30) days
prior written notice;
(e) (i) the operation of Borrower's business is and will continue to
be in compliance in all material respects with all applicable federal, state
and local laws, including but not limited to all applicable environmental laws
and regulations and Sanction/Embargo Programs.
(ii) Borrower has established and maintained and will continue to
maintain a system to assure and monitor continued compliance with all
applicable environmental laws, and Sanction/Embargo Programs, which system
shall include periodic reviews of such compliance.
(iii) in the event the Borrower obtains, gives or receives notice
of any release or threat of release of a reportable quantity of any Hazardous
Substances on its property (any such event being hereinafter referred to as a
"Hazardous Discharge") or receives any notice of violation, request for
information or notification that it is potentially responsible for
investigation or cleanup of environmental conditions on its property, demand
letter or complaint, order, citation, or other written notice with regard to
any Hazardous Discharge or violation of any environmental laws affecting its
property or Borrower's interest therein (any of the foregoing is referred to
herein as an "Environmental Complaint") from any Person or entity, including
any state agency responsible in whole or in part for environmental matters in
the state in which such property is located or the United States Environmental
Protection Agency (any such person or entity hereinafter the "Authority"),
then the Borrower shall, within five (5) Business Days, give written notice of
same to the Lender detailing facts and circumstances of which the Borrower is
aware giving rise to the Hazardous Discharge or Environmental Complaint and
periodically inform Lender of the status of the matter. Such information is
to be provided to allow the Lender to protect its security interest in the
Collateral and is not intended to create nor shall it create any obligation
upon the Lender with respect thereto.
(iv) Borrower shall respond promptly to any Hazardous Discharge or
Environmental Complaint and take all necessary action in order to safeguard
the health of any Person and to avoid subjecting the Collateral to any lien,
charge, claim or encumbrance. If Borrower shall fail to respond promptly to
any Hazardous Discharge or Environmental Complaint or Borrower shall fail to
comply with any of the requirements of any environmental laws, the Lender may,
but without the obligation to do so, for the sole purpose of protecting the
Lender's interest in Collateral: (A) give such notices or (B) enter onto
Borrower's property (or authorize third parties to enter onto such property)
and take such actions as the Lender (or such third parties as directed by the
Lender) deem reasonably necessary or advisable, to clean up, remove, mitigate
or otherwise deal with any such Hazardous Discharge or Environmental
Complaint. All reasonable costs and expenses directly incurred by the Lender
(or such third parties) in the exercise of any such rights, including any sums
paid in connection with any judicial or administrative investigation or
proceedings, fines and penalties, together with interest thereon from the date
expended at the Default Rate for Revolving Credit Advances shall be paid upon
demand by the Borrower, and until paid shall be added to and become a part of
the Obligations secured by the liens created by the terms of this Agreement or
any other agreement between Lender and Borrower.
(v) Borrower shall defend and indemnify the Lender and hold the
Lender harmless from and against all loss, liability, damage and expense,
claims, costs, fines and penalties, including attorney's fees, directly
suffered or incurred by the Lender under or on account of A. any environmental
laws, including, without limitation, the assertion of any lien thereunder,
with respect to any Hazardous Discharge, the presence of any Hazardous
Substances affecting Borrower's property, whether or not the same originates
or emerges from Borrower's property or any contiguous real estate, including
any loss of value of the Collateral as a result of the foregoing except to the
extent such loss, liability, damage and expense is attributable to any
Hazardous Discharge resulting from actions on the part of the Lender, and B.
any Sanction/Embargo Program. The Borrower's obligations under Section
12(e)(v) A. shall arise upon the discovery of the presence of any Hazardous
Substances on the Borrower's property, whether or not any federal, state, or
local environmental agency has taken or threatened any action in connection
with the presence of any Hazardous Substances, and under Section 12(e)(v) B on
failure to comply with any Sanction/Embargo Program. The Borrower's
obligation and the indemnifications hereunder shall survive the termination of
this Agreement.
(vi) For purposes of Section 12(e) all references to Borrower's
property shall be deemed to include all of Borrower's right, title and
interest in and to all owned and/or leased premises;
(f) based upon the Employee Retirement Income Security Act of 1974
("ERISA"), as amended, and the regulations and published interpretations
thereunder: (i) Borrower has not engaged in any Prohibited Transactions as
defined in Section 406 of ERISA and Section 4975 of the Internal Revenue Code
of 1986, as amended, and the rules and regulations promulgated thereunder;
(ii) Borrower has met all applicable minimum funding requirements under
Section 302 of ERISA in respect of its plans, if any; (iii) Borrower has no
knowledge of any event or occurrence which would cause the Pension Benefit
Guaranty Corporation to institute proceedings under Title IV of ERISA to
terminate any employee benefit plan(s); (iv) Borrower has no fiduciary
responsibility for investments with respect to any plan existing for the
benefit of persons other than Borrower's employees; and (v) Borrower has not
withdrawn, completely or partially, from any multiemployer pension plan so as
to incur liability under the Multiemployer Pension Plan Amendments Act of
1980;
(g) it is solvent, able to pay its debts as they mature, has capital
sufficient to carry on its business and all businesses in which it is about to
engage and the fair saleable value of its assets (calculated on a going
concern basis) is in excess of the amount of its liabilities;
(h) there is no pending or threatened litigation, actions or
proceedings which involve the possibility of materially and adversely
affecting the Borrower's business, assets, operations, condition or prospects,
financial or otherwise, or the Collateral or the ability of Borrower to
perform this Agreement;
(i) all balance sheets and income statements which have been
delivered to Lender fairly, accurately and properly state Borrower's financial
condition on a basis consistent with that of previous financial statements,
and there has been no material adverse change in Borrower's financial
condition as reflected in such statements since the date thereof, and such
statements do not fail to disclose any fact or facts which might materially
and adversely affect Borrower's financial condition;
(j) (x) it possesses all of the licenses, patents, copyrights,
trademarks, trade names and permits necessary to conduct its business, (y)
there has been no assertion or claim of violation or infringement with respect
thereof, and (z) all such licenses, patents, copyrights, trademarks, trade
names and permits are listed on Schedule 12(j);
(k) it will pay or discharge when due all taxes, assessments and
governmental charges or levies imposed upon it;
(l) it will promptly inform Lender in writing of: (i) the
commencement of all proceedings and investigations by or before and/or the
receipt of any notices from, any governmental or nongovernmental body and all
actions and proceedings in any court or before any arbitrator against or in
any way concerning any of Borrower's properties, assets or business, involving
a possible liability in excess of $10,000 which might singly or in the
aggregate, have a materially adverse effect on Borrower; (ii) any amendment of
Borrower's certificate of incorporation or by-laws; (iii) any change in
Borrower's business, assets, liabilities, condition (financial or otherwise),
results of operations or business prospects which has had or might have a
materially adverse effect on Borrower; (iv) any Event of Default or Incipient
Event of Default; (v) any default or any event which with the passage of time
or giving of notice or both would constitute a default under any agreement for
the payment of money to which Borrower is a party or by which Borrower or any
of Borrower's properties may be bound which would have a material adverse
effect on Borrower's business, operations, property or condition (financial or
otherwise) or the Collateral; (vi) any change in the location of Borrower's
executive offices; (vii) any change in the location of Borrower's Inventory or
Equipment from the locations listed on Schedule 12(l) attached hereto, (viii)
any change in Borrower's corporate name; (ix) any material delay in Borrower's
performance of any of its obligations to any Customer and of any assertion of
any material claims, offsets, counterclaims or Disputes by any Customer and of
any allowances, credits and/or other monies granted by it to any Customer; (x)
furnish to and inform Lender of all material adverse information relating to
the financial condition of any account debtor; and (xi) any material return of
goods;
(m) it will not (i) create, incur, assume or suffer to exist any
indebtedness (exclusive of trade debt) whether secured or unsecured other than
Borrower's indebtedness to Lender and as set forth on Schedule 12(m) attached
hereto and made a part hereof; (ii) declare, pay or make any dividend or
distribution on any shares of the common stock or preferred stock of Borrower
or apply any of its funds, property or assets to the purchase, redemption or
other retirement of any common or preferred stock of Borrower; (iii) directly
or indirectly, prepay any indebtedness (other than to Lender), or repurchase,
redeem, retire or otherwise acquire any indebtedness of Borrower; (iv) makes
advances, loans or extensions of credit to any Person other than the extension
of a loan by Borrower to Saba Petrloeum Company from the proceeds of the Term
Loan provided that all of the proceeds of such loan shall be used to reduce
the indebtedness of Saba Petroleum Company to Bank One Texas, N.A. provided
Borrower is the beneficiary of a Promissory Note payable on demand from Saba
Petroleum Company (the "Saba Note"); (v) become either directly or
contingently liable upon the obligations of any Person by assumption,
endorsement or guaranty thereof or otherwise; (vi) enter into any merger,
consolidation or other reorganization with or into any other Person or acquire
all or a portion of the assets or stock of any Person or permit any other
Person to consolidate with or merge with it; (vii) form any Subsidiary or
enter into any partnership, joint venture or similar arrangement; (viii)
materially change the nature of the business in which it is presently engaged;
(ix) change its fiscal year or make any changes in accounting treatment and
reporting practices without prior written notice to Lender except as required
by GAAP or in the tax reporting treatment or except as required by law; (x)
enter into any transaction with any Affiliate, except in the ordinary course
of its business on arms= length terms; or (xi) bill Receivables under any name
except the present name of the Borrower; (xii) sell, transfer or lease or
otherwise dispose of any of its properties or assets, except in the ordinary
course of its business;
(n) all financial projections of Borrower's performance prepared by
Borrower or at Borrower's direction and delivered to Lender will represent, at
the time of delivery to Lender, Borrower's best estimate of Borrower's future
financial performance and will be based upon assumptions which are reasonable
in light of Borrower's past performance and then current business conditions;
(o) Borrower will not make capital expenditures in any fiscal year in
an amount in excess of $250,000 in the aggregate;
(p) Borrower shall maintain a fixed charge coverage ratio (calculated
by dividing the sum of: dividends, scheduled debt repayment, interest
payments, cash portion of taxes paid, and cash capital expenditures into
EBITDA, all as calculated in accordance with GAAP) of no less than 1.5 :1. For
purposes of this Section 12(p), the fixed charge coverage ratio shall be
measured at June 30, 1999 for the immediately preceding three (3) months,
September 30, 1999 for the immediately preceding six (6) months, December 31,
1999 for the immediately preceding nine (9) months and at March 31, 2000 and
for each June 30, September 30, December 31 and March 31 thereafter for the
immediately preceding twelve (12) month period;
(q) it shall cause to be maintained at all times a ratio of Total
Liabilities to Tangible Net Worth of not greater than the ratio of : 3.0 to 1
as of Borrower's fiscal quarter ending June 30, 1999, 2.25 to 1 as of
Borrower's fiscal quarter ending September 30, 1999 and 1.5 to 1 as of
Borrower's fiscal quarter ending December 31, 1999 and continuously
thereafter;
(r) none of the proceeds of the Loans hereunder will be used directly
or indirectly to "purchase" or "carry" "margin stock" or to repay indebtedness
incurred to "purchase" or "carry" "margin stock" within the respective
meanings of each of the quoted terms under Regulation G of the Board of
Governors of the Federal Reserve System as now and from time to time hereafter
in effect;
(s) it will bear the full risk of loss from any loss of any nature
whatsoever with respect to the Collateral. At its own cost and expense in
amounts and with carriers acceptable to Lender, it shall (i) keep all its
insurable properties and properties in which it has an interest insured
against the hazards of fire, flood, sprinkler leakage, those hazards covered
by extended coverage insurance and such other hazards, and for such amounts,
as is customary in the case of companies engaged in businesses similar to
Borrower's including, without limitation, business interruption insurance;
(ii) maintain a bond in such amounts as is customary in the case of companies
engaged in businesses similar to Borrower's insuring against larceny,
embezzlement or other criminal misappropriation of insured's officers and
employees who may either singly or jointly with others at any time have access
to the assets or funds of Borrower either directly or through authority to
draw upon such funds or to direct generally the disposition of such assets;
(iii) maintain public and product liability insurance against claims for
personal injury, death or property damage suffered by others; (iv) maintain
all such workers= compensation or similar insurance as may be required under
the laws of any state or jurisdiction in which Borrower is engaged in
business; (v) furnish Lender with (x) copies of all policies and evidence of
the maintenance of such policies at least thirty (30) days before any
expiration date, and (y) appropriate loss payable endorsements in form and
substance satisfactory to Lender, naming Lender as loss payee and providing
that as to Lender the insurance coverage shall not be impaired or invalidated
by any act or neglect of Borrower and the insurer will provide Lender with at
least thirty (30) days notice prior to cancellation. Borrower shall instruct
the insurance carriers that in the event of any loss thereunder, the carriers
shall make payment for such loss to Lender and not to Borrower and Lender
jointly. If any insurance losses are paid by check, draft or other instrument
payable to Borrower and Lender jointly, Lender may endorse Borrower's name
thereon and do such other things as Lender may deem advisable to reduce the
same to cash. Lender is hereby authorized to adjust and compromise claims.
All loss recoveries received by Lender upon any such insurance may be applied
to the Obligations, in such order as Lender in its sole discretion shall
determine. Notwithstanding the foregoing, to the extent that any insurance
proceeds received by Lender do not belong to Borrower or result from the loss
of property of Borrower which is not Collateral, Lender will return such
proceeds to Borrower. Any surplus shall be paid by Lender to Borrower or
applied as may be otherwise required by law. Any deficiency thereon shall be
paid by Borrower to Lender, on demand; and
(t) it shall not purchase or acquire obligations or stock of, or any
other interest in, or make any investment in any entity, except (A)
obligations issued or guaranteed by the United States of America or any agency
thereof, (B) commercial paper with maturities of not more than 180 days and a
published rating of not less than A-1 or P-1 (or the equivalent rating), (C)
certificates of time deposit and bankers' acceptances having maturities of not
more than 180 days and repurchase agreements backed by United States
government securities of a commercial bank if (x) such bank has a combined
capital and surplus of at least $500,000,000, or (y) its debt obligations, or
those of a holding company of which it is a subsidiary, are rated not less
than A (or the equivalent rating) by a nationally recognized investment rating
agency, (D) U.S. money market funds that invest solely in obligations issued
or guaranteed by the United States of America or an Agency thereof, and (E)
Eurodollar time deposits with financial institutions with a published rating
of not less than A-1 or P-1 (or the equivalent rating).
(u) (i) Borrower and its Subsidiaries have reviewed the effect that
the Year 2000 Issue would have on their respective businesses. The costs to
Borrower and its Subsidiaries of any reprogramming required to avoid the Year
2000 Issue to permit the proper functioning of Borrower=s and its
Subsidiaries= computer software, hardware and firmware systems and equipment
containing embedded microchips and the proper processing of data, and the
testing of such reprogramming, and of the reasonably foreseeable consequences
of the Year 2000 Issue to Borrower and its Subsidiaries (including
reprogramming errors and the failure of systems or equipment supplied by
others or with which Borrower's and its Subsidiaries' computer systems
interface) are not reasonably expected to result in an Event of Default or to
have a material adverse effect on Borrower=s or its Subsidiaries= businesses,
assets, operations, prospects or condition (financial or otherwise).
(ii) Borrower has evaluated and assessed the potential impact of
the Year 2000 Issue upon Borrower=s and its Subsidiaries' customers, key
suppliers and vendors and their efforts to manage the risks arising out of the
Year 2000 Issue, and Borrower has determined that Borrower's and its
Subsidiaries= businesses, assets, operations, prospects and condition
(financial and otherwise) shall not be materially adversely affected by any
such impact or risks.
(iii) Borrower shall take, and shall cause each of its Subsidiaries
to take, all necessary action to complete in all material respects, no later
than June 30, 1999, the reprogramming of computer software, hardware and
firmware systems and equipment containing embedded microchips owned or
operated by or for Borrower and its Subsidiaries or used or relied upon in the
conduct of their businesses (including systems and equipment supplied by
others or with which such systems of Borrower or any of its Subsidiaries
interface) required to avoid the Year 2000 Issue to permit the proper
functioning of such computer systems and other equipment and the proper
processing of data, and the testing of such systems and equipment, as so
reprogrammed. At the request of Lender, Borrower shall provide, and shall
cause each of its Subsidiaries to provide, to Lender reasonable assurance of
its compliance with the preceding sentence.
(v) Borrower will cause at least either of Randeep S. Grewal to
remain active in the management of Borrower as the Chairman, Chief Executive
Officer, President and sole director of Borrower or will cause Burt Cormany to
remain the Executive Vice-President of Borrower, in each case, for a period of
at least two (2) years following the Closing Date.
(w) In the event that any Borrower shall sell or dispose of any
real property or in the event Borrower shall sell any subsidiary, all proceeds
of such sale shall first be applied to repay amounts outstanding under the
Term Loan. Such payments will be applied by Lender in the inverse order of
maturity.
(x) Borrower will use the proceeds of Revolving Credit Advances
only its proper working capital purposes.
(y) Santa Maria shall not transfer any of its assets to any other
Borrower.
13. Power of Attorney. Borrower hereby appoints Lender or any other
Person whom Lender may designate as Borrower's attorney, with power to: (i)
endorse Borrower's name on any checks, notes, acceptances, money orders,
drafts or other forms of payment or security that may come into Lender's
possession; (ii) sign Borrower's name on any invoice or bill of lading
relating to any Receivables, drafts against Customers, schedules and
assignments of Receivables, notices of assignment, financing statements and
other public records, verifications of account and notices to or from
Customers; (iii) verify the validity, amount or any other matter relating to
any Receivable by mail, telephone, telegraph or otherwise with Customers; (iv)
execute customs declarations and such other documents as may be required to
clear Inventory through Customs; (v) do all things necessary to carry out this
Agreement, any Ancillary Agreement and all related documents; and (vi) on or
after the occurrence and continuation of an Event of Default, notify the post
office authorities to change the address for delivery of Borrower's mail to an
address designated by Lender, and to receive, open and dispose of all mail
addressed to Borrower. Borrower hereby ratifies and approves all acts of the
attorney. Neither Lender nor the attorney will be liable for any acts or
omissions or for any error of judgment or mistake of fact or law. This power,
being coupled with an interest, is irrevocable so long as any Receivable which
is assigned to Lender or in which Lender has a security interest remains
unpaid and until the Obligations have been fully satisfied.
14. Expenses. Borrower shall pay all of Lender's out-of-pocket costs
and expenses, including without limitation reasonable fees and disbursements
of counsel retained or employed by Lender and appraisers, in connection with
the preparation, execution and delivery of this Agreement and the Ancillary
Agreements, and in connection with the prosecution or defense of any action,
contest, dispute, suit or proceeding concerning any matter in any way arising
out of, related to or connected with this Agreement or any Ancillary
Agreement. Borrower shall also pay all of Lender's out-of-pocket costs and
expenses, including without limitation reasonable fees and disbursements of
counsel retained or employed by Lender, in connection with (a) the
preparation, execution and delivery of any waiver, any amendment thereto or
consent proposed or executed in connection with the transactions contemplated
by this Agreement or the Ancillary Agreements, (b) Lender's obtaining
performance of the Obligations under this Agreement and any Ancillary
Agreements, including, but not limited to, the enforcement or defense of
Lender's security interests, assignments of rights and liens hereunder as
valid perfected security interests, (c) any attempt to inspect, verify,
protect, collect, sell, liquidate or otherwise dispose of any Collateral, and
(d) any consultations in connection with any of the foregoing. Borrower shall
also pay Lender's then standard price for furnishing Borrower or its designees
copies of any statements, records, files or other data (collectively,
"Reports") requested by Borrower or its designees, other than reports of the
kind furnished to Borrower and Lender's other borrowers on a regular, periodic
basis in the ordinary course of Lender's business. Borrower shall also pay
Lender's customary bank charges, including, without limitation, all wire
transfer fees incurred by Lender, for all bank services performed or caused to
be performed by Lender for Borrower at Borrower's request. All such costs and
expenses together with all filing, recording and search fees, taxes and
interest payable by Borrower to Lender shall be payable on demand and shall be
secured by the Collateral. If any tax by any governmental authority is or may
be imposed on or as a result of any transaction between Borrower and Lender
which Lender is or may be required to withhold or pay, Borrower agrees to
indemnify and hold Lender harmless in respect of such taxes, and Borrower will
repay to Lender the amount of any such taxes which shall be charged to
Borrower's account; and until Borrower shall furnish Lender with indemnity
therefor (or supply Lender with evidence satisfactory to it that due provision
for the payment thereof has been made), Lender may hold without interest any
balance standing to Borrower's credit and Lender shall retain its security
interests in any and all Collateral. Borrower hereby acknowledges that Lender
shall not be liable in any manner whatsoever for any selling expenses, orders,
purchases or contracts of any kind resulting from any transaction between
Borrower and any other Person, and Borrower hereby indemnifies and holds
Lender harmless with respect thereto, which indemnity shall survive
termination of this Agreement.
15. Assignment. Lender may assign any or all of the Obligations
together with any or all of the security therefor and any transferee shall
succeed to all of Lender's rights with respect thereto. Borrower shall be
promptly notified of any such assignment. Upon such transfer, Lender shall be
released from all responsibility for the Collateral to the extent same is
assigned to any transferee. Lender may from time to time sell or otherwise
grant participations in any of the Obligations and the holder of any such
participation shall, subject to the terms of any agreement between Lender and
such holder, be entitled to the same benefits as Lender with respect to any
security for the Obligations in which such holder is a participant. Borrower
agrees that each such holder may exercise any and all rights of banker's lien,
set-off and counterclaim with respect to its participation in the Obligations
as fully as though Borrower were directly indebted to such holder in the
amount of such participation. Borrower may not assign or transfer any of its
rights or obligations under this Agreement without the prior written consent
of Lender, and no such assignment or transfer of any such obligation shall
relieve Borrower thereof unless Lender shall have consented to such release in
a writing specifically referring to the obligation from which Borrower is to
be released.
16. Waivers. Borrower waives presentment and protest of any
instrument and notice thereof, notice of default and all other notices to
which Borrower might otherwise be entitled.
17. Term of Agreement. Lender may terminate this Agreement at any
time upon sixty (60) days= prior written notice to Borrower. If not so
terminated, this Agreement shall continue in full force and effect until the
expiration of the Term. The Term shall be automatically extended for
successive periods of one (1) year each unless either party shall have
provided the other with a written notice of termination, at least ninety (90)
days prior to the expiration of the initial Term or any renewal Term. The
Borrower may terminate this Agreement at any time upon sixty (60) days' prior
written notice ("Termination Date") upon payment in full of the Obligations;
provided, that Borrower pays an early termination fee in an amount equal to
the sum of (x) the Required Percentage of the outstanding principal balance of
the Term Loan plus (y) the Required Percentage of the Maximum Revolving
Amount. For the purposes hereof, Required Percentage shall mean (a) 3% from
the Closing Date through April 30, 2000, (b) 2% from May 1, 2000 through April
30, 2001 and during any year of any renewal Term.
18. Events of Default. The occurrence of any of the following shall
constitute an Event of Default:
(a) failure to make payment of any of the Obligations when
required hereunder;
(b) failure to pay any taxes when due unless such taxes are
being contested in good faith by appropriate proceedings and with respect to
which adequate reserves have been provided on Borrower's books;
(c) failure to perform under and/or committing any breach of
this Agreement or any Ancillary Agreement or any other agreement between
Borrower and Lender or failure to perform any non-monetary obligation with
respect to which a cure is expressly permitted hereunder within ten (10) days
following the occurrence of such failure;
(d) occurrence of a default under any agreement to which
Borrower is a party with third parties which has a material adverse affect
upon Borrower's business, operations, property or condition (financial or
otherwise) including all leases for any premises where Inventory or Equipment
is located;
(e) any representation, warranty or statement made by Borrower
hereunder, in any Ancillary Agreement, any certificate, statement or document
delivered pursuant to the terms hereof, or in connection with the transactions
contemplated by this Agreement should at any time be false or misleading in
any material respect;
(f) an attachment or levy is made upon any of Borrower's assets
having an aggregate value in excess of $10,000,or a judgment is rendered
against Borrower or any of Borrower's property involving a liability of more
than $10,000, which shall not have been vacated, discharged, stayed or bonded
pending appeal or reconsideration within thirty (30) days from the entry
thereof;
(g) any change in Borrower's condition or affairs (financial or
otherwise) which in Lender's reasonable belief impairs the Collateral or the
ability of Borrower to perform its Obligations;
(h) any lien created hereunder or under any Ancillary Agreement
for any reason ceases to be or is not a valid and perfected lien having a
first priority interest other than as to assets which are subject to Permitted
Liens which are purchase money security interests, but only to the extent
Lender's lien is not a first priority security interest in such assets;
(i) Borrower shall (i) apply for or consent to the appointment
of, or the taking of possession by, a receiver, custodian, trustee or
liquidator of itself or of all or a substantial part of its property, (ii)
make a general assignment for the benefit of creditors, (iii) commence a
voluntary case under the federal bankruptcy laws (as now or hereafter in
effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition
seeking to take advantage of any other law providing for the relief of
debtors, (vi) acquiesce to, or fail to have dismissed, within thirty (30)
days, any petition filed against it in any involuntary case under such
bankruptcy laws, or (vii) take any action for the purpose of effecting any of
the foregoing;
(j) Borrower shall admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of
its present business;
(k) Greka Energy Corporation shall (i) apply for or consent to
the appointment of, or the taking possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its
property, (ii) admit in writing its inability, or be generally unable, to pay
its debts as they become due or cease operations of its present business,
(iii) make a general assignment for the benefit of creditors, (iv) commence a
voluntary case under the federal bankruptcy laws (as now or hereafter in
effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a petition
seeking to take advantage of any other law providing for the relief of
debtors, (vii) acquiesce to, or fail to have dismissed, within thirty (30)
days, any petition filed against it in any involuntary case under such
bankruptcy laws, or(viii) take any action for the purpose of effecting any of
the foregoing;
(l) Borrower directly or indirectly sells, assigns, transfers,
conveys, or suffers or permits to occur any sale, assignment, transfer or
conveyance of any assets of Borrower or any interest therein, except as
permitted herein;
(m) Borrower fails to operate in the ordinary course of
business;
(n) Lender shall in good faith deem itself insecure or unsafe or
shall have a reasonable belief that there is or will be a diminution in
value, removal or waste of the Collateral;
(o) a default by Borrower in the payment, when due, of any
principal of or interest on any indebtedness for money borrowed;
(p) any Change of Ownership; or
(q) The occurrence of any default under the Conoco
Indemnification Agreement which would have the effect of impairing the
enforceability or financial benefits to Borrower of such Agreement;
19. Remedies. (a) Upon the occurrence of an Event of Default
pursuant to Section 18 (i) herein, all Obligations shall be immediately due
and payable and this Agreement shall be deemed terminated; upon the occurrence
and continuation of any other of the Events of Default, Lender shall have the
right to demand repayment in full of all Obligations, whether or not otherwise
due and/or to terminate this Agreement without advance notice. Until all
Obligations have been fully satisfied, Lender shall retain its security
interest in all Collateral. Lender shall have, in addition to all other
rights and remedies provided herein, the rights and remedies of a secured
party under the Uniform Commercial Code, and under other applicable law, all
other legal and equitable rights to which Lender may be entitled, including
without limitation, the right to take immediate possession of the Collateral,
to require Borrower to assemble the Collateral, at Borrower's expense, and to
make it available to Lender at a place designated by Lender which is
reasonably convenient to both parties and to enter any of the premises of
Borrower or wherever the Collateral shall be located, with or without force or
process of law, and to keep and store the same on said premises until sold
(and if said premises shall be the property of Borrower, Borrower agrees not
to charge Lender for storage thereof for a period up to at least sixty (60)
days after sale or disposition of said Collateral). Further, Lender may, at
any time or times after default by Borrower, sell and deliver all Collateral
held by or for Lender at public or private sale for cash, upon credit or
otherwise, at such prices and upon such terms as Lender, in Lender's sole
discretion, deems advisable, or Lender may otherwise recover upon the
Collateral in any commercially reasonable manner as Lender, in its sole
discretion, deems advisable. Except as to that part of the Collateral which
is perishable or threatens to decline speedily in value or is of a type
customarily sold on a recognized market, the requirement of reasonable notice
shall be met if such notice is mailed postage prepaid to Borrower at
Borrower's address as shown in Lender's records, at least ten (10) days before
the time of the event of which notice is being given. Lender may be the
purchaser at any sale, if it is public. In connection with the exercise of
the foregoing remedies, Lender is granted permission to use all of Borrower's
trademarks, trade names, trade styles, patents, patent applications, licenses,
franchises and other proprietary rights which are used in connection with (a)
Inventory for the purpose of disposing of such Inventory and (b) Equipment for
the purpose of completing the manufacture of unfinished goods. The proceeds
of sale shall be applied first to all costs and expenses of sale, including
but not limited to attorneys' fees, and second to the payment (in whatever
order Lender elects) of all Obligations. Lender will return any excess to
Borrower and Borrower shall remain liable to Lender for any deficiency.
20. Waiver; Cumulative Remedies. Failure by Lender to exercise any
right, remedy or option under this Agreement or any supplement hereto or any
other agreement between Borrower and Lender or delay by Lender in exercising
the same, will not operate as a waiver; no waiver by Lender will be effective
unless it is in writing and then only to the extent specifically stated.
Lender's rights and remedies under this Agreement will be cumulative and not
exclusive of any other right or remedy which Lender may have.
21. Application of Payments. Borrower irrevocably waives the right
to direct the application of any and all payments at any time or times
hereafter received by Lender from or on Borrower's behalf, and Borrower hereby
irrevocably agrees that Lender shall have the continuing exclusive right to
apply and reapply any and all payments received at any time or times hereafter
against Borrower's Obligations hereunder in such manner as Lender may deem
advisable notwithstanding any entry by Lender upon any of Lender's books and
records. In the event that Lender shall elect to reapply any payments
hereunder, Lender will not perform such reapplication in a manner which would
result in a payment default under the Term Loan.
22. Depository Accounts. Any payment received by Borrower on account
of any Collateral shall be held by Borrower in trust for Lender, and Borrower
shall promptly deliver same in kind to Lender or deposit all such payments
into a cash collateral account at such bank as Lender may designate for
application to payment of the Obligations. Borrower shall also execute such
further documents as Lender may deem necessary to establish such an account
and all funds deposited in such account shall immediately be deemed Lender's
property.
23. Lock Box Accounts. Borrower shall, at Lender's request, instruct
all of its Customers to make such payments on account of Receivables to an
account under Lender's dominion and control at such bank as Lender may
designate. Borrower shall also execute such further documents as Lender may
deem necessary to establish such an account, and all funds deposited in such
account shall immediately be deemed Lender's property.
24. Revival. Borrower further agrees that to the extent Borrower
makes a payment or payments to Lender, which payment or payments or any part
thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to a trustee, receiver or
any other party under any bankruptcy act, state or federal law, common law or
equitable cause, then, to the extent of such payment or repayment, the
obligation or part thereof intended to be satisfied shall be revived and
continued in full force and effect as if said payment had not been made.
25. Notices. Any notice or request hereunder may be given to
Borrower or Lender at the respective addresses set forth below or as may
hereafter be specified in a notice designated as a change of address under
this paragraph. Any notice or request hereunder shall be given by registered
or certified mail, return receipt requested, or by overnight mail or by
telecopy (confirmed by mail). Notices and requests shall be, in the case of
those by mail or overnight mail, deemed to have been given when deposited in
the mail or with the overnight mail carrier, and, in the case of a telecopy,
when confirmed.
Notices shall be provided as follows:
If to the Lender:
BNY Financial Corporation
1290 Avenue of the Americas
New York, New York 10104
Attention: Frank Imperato
Telephone: (212) 408-7026
Telecopy: (212) 408-7126
If to the Borrower:
Greka Integrated, Inc.
3201 Air Park Avenue, Suite 201
Santa Maria, CA 93455
Attention: Randeep Grewal, Chairman and Chief Executive Officer
Telephone: (805)347-8700
Telecopy: (805) 347-1072
With a copy to:
Greka Integrated, Inc.
630 Fifth Avenue
New York, N.Y. 10111
Attention: Susan Whalen, Esq.
Telephone: (212) 218-4680
Telecopy: (212) 218-4679
26. Governing Law and Waiver of Jury Trial. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK. LENDER SHALL HAVE THE RIGHTS AND REMEDIES OF A SECURED
PARTY UNDER APPLICABLE LAW INCLUDING, BUT NOT LIMITED TO, THE UNIFORM
COMMERCIAL CODE OF NEW YORK. BORROWER AGREES THAT ALL ACTIONS AND PROCEEDINGS
RELATING DIRECTLY OR INDIRECTLY TO THIS AGREEMENT OR ANY ANCILLARY AGREEMENT
OR ANY OTHER OBLIGATIONS SHALL BE LITIGATED IN THE UNITED STATES DISTRICT
COURT FOR THE SOUTHERN DISTRICT OF NEW YORK OR, AT LENDER'S OPTION, IN ANY
OTHER COURTS LOCATED IN NEW YORK STATE OR ELSEWHERE AS LENDER MAY SELECT AND
THAT SUCH COURTS ARE CONVENIENT FORUMS AND BORROWER SUBMITS TO THE PERSONAL
JURISDICTION OF SUCH COURTS. BORROWER WAIVES PERSONAL SERVICE OF PROCESS AND
CONSENTS THAT SERVICE OF PROCESS UPON BORROWER MAY BE MADE BY CERTIFIED OR
REGISTERED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO BORROWER AT BORROWER'S
ADDRESS IN CALIFORNIA AND NEW YORK APPEARING ON LENDER'S RECORDS, AND SERVICE
SO MADE SHALL BE DEEMED COMPLETED UPON RECEIPT VIA NATIONALLY RECOGNIZED
OVERNIGHT COURIER SERVICE THE SECOND BUSINESS DAY FOLLOWING DEPOSIT WITH SUCH
COURIER SERVICE. BOTH PARTIES HERETO WAIVE THE RIGHT TO A TRIAL BY JURY IN
ANY ACTION OR PROCEEDING BETWEEN BORROWER AND LENDER, AND BORROWER WAIVES THE
RIGHT TO ASSERT IN ANY ACTION OR PROCEEDING INSTITUTED BY LENDER WITH REGARD
TO THIS AGREEMENT OR ANY OF THE OBLIGATIONS ANY OFFSETS OR COUNTERCLAIMS
(OTHER THAN COMPULSORY COUNTERCLAIMS) WHICH IT MAY HAVE.
27. Limitation of Liability. Borrower acknowledges and understands
that in order to assure repayment of the Obligations hereunder Lender may be
required to exercise any and all of Lender's rights and remedies hereunder and
agrees that neither Lender nor any of Lender's agents shall be liable for acts
taken or omissions made in connection herewith or therewith except for gross
negligence or actual bad faith.
28. Entire Understanding. This Agreement and the Ancillary
Agreements contain the entire understanding between Borrower and Lender and
constitute the complete agreement between the parties with respect to the
subject matter hereof and thereof, and any promises, representations,
warranties, understandings, or guarantees not contained in this Agreement or
the Ancillary Agreements shall have no force and effect.
29. Modification. Neither this Agreement, the Ancillary Agreements,
nor any portion or provisions thereof may be changed, modified, amended,
waived, supplemented, discharged, cancelled or terminated orally or by any
course of dealing, or in any manner other than by an agreement in writing,
signed by the parties hereto and thereto.
30. Severability. Wherever possible each provision of this Agreement
or the Ancillary Agreements shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this
Agreement or the Ancillary Agreements shall be prohibited by or invalid under
applicable law such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions thereof.
31. Captions. All captions are and shall be without substantive
meaning or content of any kind whatsoever.
32. Counterparts. This Agreement may be executed in one or more
counterparts, each of which taken together shall constitute one and the same
instrument.
33. Construction. The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of construction
to the effect that any ambiguities are to be resolved against the drafting
party shall not be employed in the interpretation of this Agreement or any
amendments, schedules or exhibits thereto.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day
and year first above written.
GREKA INTEGRATED, INC.
ATTEST:
By:__________________________
_____________________________ Randeep Grewal
SECRETARY Title: Chairman and Chief
Executive Officer
SABA REALTY, INC.
ATTEST:
By:__________________________
_____________________________ Title:
SECRETARY
SANTA MARIA REFINING COMPANY
ATTEST:
By:__________________________
_____________________________ Title:
SECRETARY
ATTEST:
BNY FINANCIAL CORPORATION
By:__________________________
____________________ Title:
SECRETARY
SCHEDULES
Schedule 1(A) - Description of Pledged Shares
1. Certificate No. 2 for one hundred (100) shares of common stock of Saba
Realty, Inc.
2. Certificate No. 2 for one hundred (100) shares of common stock of Santa
Maria Refining Company.
Schedule 1(B) - Description of Real Property - Attached
Schedule 1(C) - Permitted Liens
All encumbrances disclosed in Lender's UCC search of Borrowers and all
encumbrances disclosed in Lender's title policy. All purchase money security
interest for the purchase of equipment within the limitations for capital
expenditures in this Agreement.
Schedule 12(j) - Licenses, Patents, Trademarks and Copyrights - Attached
Schedule 12(l) - Inventory Locations
1660 Sinton Road, Santa Maria, California 93454
Schedule 12(m) - Permitted Indebtedness
None, other than indebtedness for purchase money security interests as set
forth above.
Exhibit 10.3
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this "Agreement"), dated as of April
21, 1999 is between SABA ENERGY OF TEXAS, INC., a Texas corporation
("Seller"), with offices at 1603 Southeast 19th Street, Suite 202, Edmond,
Oklahoma 73013, and ENERVEST ENERGY, L.P., a Delaware limited partnership
("Buyer") with offices at 1001 Fannin, Suite 1111, Houston, Texas 77002.
Seller and Buyer are sometimes hereinafter collectively called the "Parties"
and individually called a "Party."
WHEREAS, Seller desires to sell, and Buyer desires to purchase, upon and
subject to the terms, conditions, reservations and exceptions hereinafter set
forth, Seller's interest in and to certain oil and gas properties and other
assets related thereto as further described hereinafter;
NOW THEREFORE, for and in consideration of the covenants and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Seller and Buyer agree as
follows:
ARTICLE 1. PROPERTY DESCRIPTION
1.1 The Interests. Subject to the terms, conditions, reservations and
exceptions set forth in this Agreement, Seller shall sell, transfer, assign,
convey and deliver unto Buyer and Buyer shall purchase, receive, pay for and
accept, as of 7:00 a.m. local time where the properties are located, January
1, 1999 (the "Effective Date"), all of Seller's right, title and interest in
and to the following:
1.1.1 the undivided interest set forth in Exhibit A-1 attached hereto
and made a part hereof for all purposes, together with all of Seller's other
right, title and interest in and to the oil, gas and mineral leases and other
interests in oil and gas described in Exhibit A-2 including mineral, royalty
and overriding royalty interests, and all rights, privileges and obligations
appurtenant to those interests and leases (the "Leases");
1.1.2 all rights and interests in any unit or pooled area in which the
Leases are included, to the extent that these rights and interests arise from
and are associated with the Leases, including without limitation all rights
derived from any unitization, pooling, operating, communitization or other
agreement or from any declaration or order of any governmental authority;
1.1.3 all oil, gas and condensate wells (whether producing, not
producing or abandoned), water source, water injection and other injection or
disposal wells and systems located on the Leases or lands unitized or pooled
with the Leases;
1.1.4 all equipment, facilities, pipelines, pipeline laterals,
gathering systems, platforms, well pads, tank batteries, improvements,
fixtures, inventory, spare parts, tools, materials and other personal property
owned by Seller now or acquired by Seller as of the Effective Date on the
Leases or used in developing or operating the Leases or producing, treating,
storing, compressing, processing or transporting hydrocarbons on or from the
Leases, including, without limitation, those items listed in Exhibit B
attached hereto and made a part hereof for all purposes (the "Equipment");
1.1.5 to the extent assignable or transferable all easements, rights-
of-way, licenses, permits, servitudes, surface leases, and similar interests
applicable to or used solely in operating the Leases, the lands unitized or
pooled with the Leases, or the Equipment, including, but not limited to those
described in Exhibit C attached hereto and made a part hereof for all
purposes;
1.1.6 to the extent assignable or transferable, all contracts and
contractual rights, obligations and interests relating to the Leases or the
lands unitized or pooled with the Leases or the Equipment, including, without
limitation, unit agreements, farmout agreements, farm-in agreements, operating
agreements, and hydrocarbon sales, purchase, gathering, transportation,
treating, marketing, exchange, processing and fractionating agreements and
surface leases, whether of record or not, including, without limitation those
documents described in Exhibit D hereto (the "Contracts");
1.1.7 all other tangibles, miscellaneous interests or other assets on
or used in connection with the Leases, the Equipment and/or the Contracts,
including, without limitation, all lease files, land files, well files,
production records, division order files, abstracts, title opinions, and
contract files, insofar as they are directly related to the items described in
Sections 1.1.1 through 1.1.7 hereof.
Seller's interests in the assets described in Sections 1.1.1 through 1.1.7
above are hereinafter collectively called the "Interests".
1.2 Ownership of Production from the Interests Prior to the Effective Date.
(i) Seller will own all merchantable oil, gas, condensate and distillate
("Hydrocarbons") produced from the Interests before the Effective Date. If,
on the Effective Date, Hydrocarbons produced from the Interests before the
Effective Date are stored in the Leases or unit stock tanks (the "Stock Tank
Oil"), Buyer shall purchase from Seller the merchantable Stock Tank Oil above
pipeline connections in the stock tanks at the weighted average price received
for December 1998 production. Buyer shall pay Seller for the Stock Tank Oil
as an adjustment to the Sale Price at Closing, as provided in Section 2.2
hereof.
(ii) The Stock Tank Oil will be gauged and measured as of 7:00 a.m. local
time where the Interests are located on the Effective Date. Seller and Buyer
will accept the Lease or unit operator's tank gauge readings, meter tickets or
other inventory records of the Stock Tank Oil.
1.3 Ownership of Production from the Interests After the Effective Date.
Buyer will own all Hydrocarbons produced from the Interests on and after the
Effective Date. Seller will sell, on Buyer's behalf, all Hydrocarbons
produced from the Interests between the Effective Date and the Closing Date
(as hereinafter defined), and Seller will credit Buyer for the proceeds of
those sales as an adjustment at Closing, as provided in Section 2.2 hereof.
Subject to any continuing sales obligations under the Contracts, Buyer may
sell Hydrocarbons produced from the Interests on and after the Closing Date as
it deems appropriate.
ARTICLE 2. CONSIDERATION
2.1 Sale Price.
2.1.1 Amount Due at Closing.
(i) At Closing (as hereinafter defined), Buyer shall pay to or for
the benefit of Seller the cash sum of Twelve Million Five Hundred Thousand
UNITED STATES DOLLARS ($12,500,000 U.S.D.) for the Interests (the "Sale
Price"), as adjusted pursuant to the terms of this Agreement and as herein set
forth.
(ii) A portion of the Sale Price shall be paid, at the direction of
Seller, to Bank One Texas, N.A. in consideration for the contemporaneous
delivery of fully executed releases of the BankOne Texas, N.A. mortgage and
deed of trust together with the other related liens listed as item numbers 1
through 4 on Exhibit E hereto (the "Bank Releases"), each in form and content
satisfactory to Buyer; and
(iii) The remainder of the Sale Price, as adjusted, less the amounts set forth
in immediately preceding sub-part (ii) herein above shall be paid to Seller
by wire transfer to a bank account to be designated by Seller in accordance
with written instructions to be provided by Seller to Buyer no later than
three (3) business days prior to the Closing.
2.1.2 Allocated Values. The Sale Price shall be allocated among the
Interests as set forth in Exhibit F attached hereto and made a part hereof for
all purposes. Neither Party will take any position in preparing tax returns
that is inconsistent with the allocation of values set forth in Exhibit F,
unless the Parties otherwise agree in writing. The value assigned to each
portion of the Interests in Exhibit F is hereafter call the "Allocated Value"
of such Interest.
2.1.3 Earnest Money. Concurrently with the execution of this Agreement, Buyer
shall pay to Bank One Texas, N.A. into an interest bearing joint control
account to be established by the Parties an earnest money deposit (the
"Earnest Money") in the amount of One Million Two Hundred Fifty Thousand
UNITED STATES DOLLARS ($1,250,000.00 U.S.D.) to assure Buyer's performance
under this Agreement. If Seller and Buyer close the transaction contemplated
by this Agreement, the Earnest Money together with any interest accrued
thereon, will be applied to the Sale Price. If Buyer and Seller fail to close
the transaction contemplated by this Agreement, Seller and Buyer will have the
respective rights and obligations with respect to the Earnest Money set forth
in Article 6 hereof.
2.1.4 Identification of Acquisition Funds. On or before thirty (30) days
following the date of execution by all Parties of this Agreement, Buyer shall
deposit into an account in Buyer's sole control at Bank One, N.A. the Sale
Price less the Earnest Money.
2.2 Adjustments at Closing.
2.2.1 Preliminary Settlement Statement. At Closing, the Sale
Price
will be adjusted as set forth in Sections 2.2.2 and 2.2.3. No
later than five (5) business days prior to Closing, Seller will
provide to Buyer a preliminary settlement statement identifying
all adjustments to the Sale Price to be made at Closing (the
APreliminary Settlement Statement@). Seller and Buyer
acknowledge that some items in the Preliminary Settlement
Statement may be estimates or otherwise subject to change in the
Final Settlement Statement for the Interests to be prepared
pursuant to Section 2.3 hereof.
2.2.2 Upward Adjustments. The Sale Price will be increased by the
following
(i) all production expenses, operating expenses, overhead
expenses under applicable operating agreements and capital
expenditures paid by Seller or any affiliate of Seller in
connection with the Interests (including, without
limitation, royalties, minimum royalties, rentals and
prepaid charges), to the extent they are attributable to
operation of the Interests on and after the Effective Date;
(ii) all proceeds attributable to the sale of Hydrocarbons
from, and other income attributable to, the Interests on and
after the Effective Date received by Buyer, to the extent
they are attributable to the operation of the Interests
before the Effective Date;
(iii) the value of the Stock Tank Oil as provided in Section
1.2 hereof; and
(iv) any other increases in the Sale Price agreed upon by
Buyer and Seller as specified in this Agreement.
2.2.3 Downward Adjustments. The Sale Price will be decreased by the
following:
(i) all actual production expenses, operating expenses, overhead
expenses under applicable operating agreements and capital
expenditures paid or incurred by Buyer in connection with
the Interests (including, without limitation, royalties,
minimum royalties, rentals, and prepaid charges), to the
extent they are attributable to operation of the Interests
before the Effective Date;
(ii) all proceeds attributable to the sale of Hydrocarbons
from and other income attributable to the Interests on and
after the Effective Date received by Seller, to the extent
they are attributable to the operation of the Interests on
and after the Effective Date;
(iii) the value of any unresolved Environmental Conditions
and Title Defects as provided for in Article 5 hereof;
(iv) all amounts necessary to release in full all vendor
liens listed on Exhibit E hereto (other than amounts to be
paid at the Closing in connection with the Bank Releases
pursuant to Section 2.1.1(ii) hereof);
(v) all amounts necessary to pay in full all unpaid operating
and other expenses attributable to the Interests for all
periods prior to the Effective Date as determined by the
Parties prior to Closing; and
(vi) the amount of revenues attributable to the interests
of third parties in and to the Leases which interests are
currently in non-pay status pending resolution of title or
other problems affecting such interests, as set forth in
Exhibit G attached hereto and made a part hereof for all
purposes; and
(vii) any other decreases in the Sale Price agreed upon by
Buyer and Seller as specified in this Agreement.
2.3 Adjustments After Closing.
2.3.1 Final Settlement Statement. Within ninety (90) days after
Closing, Seller will prepare a final settlement statement for
the Interests containing a final reconciliation of the
adjustments to the Sale Price specified in Section 2.1 (the
AFinal Settlement Statement@). However, the failure of Seller
to complete the Final Settlement Statement within 90 days after
Closing will not constitute a waiver of any right to an
adjustment otherwise due. Buyer will have thirty (30) days
after receiving the Final Settlement Statement to provide Seller
with written exceptions to any items in the Final Settlement
Statement that Buyer believes in good faith to be questionable.
All items in the Final Settlement Statement to which Buyer does
not except within the 30 day review period will be deemed to be
correct.
2.3.2 Payment of Post-Closing Adjustments. Any post-Closing
adjustments to the Sale Price (including disputed items which
have ultimately been resolved) will be offset against each other
so that only one payment is required. The Party owing payment
will pay the other Party the net post-Closing adjustment to the
Sale Price within ten (10) days after the expiration of Buyer=s
30 day review period for the Final Settlement Statement.
However, the payment of any disputed items will be subject to
the further rights of the Parties under Section 2.3.3.
2.3.3 Resolution of Disputed Items. After the completion and delivery
of the Final Settlement Statement, the Parties agree to
negotiate in good faith to attempt to reach agreement on the
amount due with respect to any disputed items in the Final
Settlement Statement. If the Parties agree on the amount due
with respect to any disputed items, and a payment adjustment is
required, the Party owing payment will pay the other Party
within ten (10) days after the Parties reach agreement. If the
Parties are unable to agree on the amount due with respect to
any disputed items within sixty (60) days after Seller receives
Buyer=s written exceptions to the Final Settlement Statement,
then (i) the Parties will attempt to resolve their disagreement
with respect to the disputed items by mediation, as provided in
Section 11.14 hereof, and (ii) if the Parties are unable to
resolve their disagreement over the disputed items by mediation,
either Party may seek a judicial determination of the amount
actually due in connection with the disputed items.
2.4 Payment Method. Unless the Parties otherwise agree in writing, all
payments under this Agreement shall be made by wire transfer in
immediately available funds to an account designated by the Party
receiving payment.
2.5 Principles of Accounting. The Preliminary Settlement Statement and the
Final Settlement Statement will be prepared in accordance with generally
accepted accounting principles in the petroleum industry and with
reasonable supporting documentation for each item in those statements.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES
3.1 Seller's Representations. Seller represents and warrants to Buyer
that the following statements are true and accurate as of the execution
date of this Agreement, the Effective Date and the Closing Date.
3.1.1 Corporate Authority. Seller is a duly organized corporation
validly existing and in good standing under the laws of the
State of Texas and is duly qualified to carry on its business in
each of the states in which the Interests are located, and has
full power and authority to enter into and perform pursuant to
this Agreement according to its terms, except where the failure
to so qualify and be in good standing will not have a material
adverse effect. This Agreement has been duly executed and
delivered by Seller.
3.1.2 Requisite Approvals. Seller's execution, delivery and
performance of this Agreement has been duly authorized by all
necessary corporate action and will not violate or conflict with
any agreement, law, rule, regulation, charter or other
instrument governing either Seller's organization, management or
business affairs or any instrument to which Seller is a party or
is bound.
3.1.3 Validity of Obligation. This Agreement and all other
transaction documents executed and delivered on or before the
Closing Date (i) have been duly executed by Seller=s authorized
representatives; (ii) constitute the valid and legally binding
obligations of Seller, and (iii) are enforceable against it in
accordance with their respective terms.
3.1.4 No Violation of Contractual Restrictions. The execution,
delivery and performance of this Agreement does not conflict
with or violate any agreement or instrument to which Seller is a
party or by which it is or the Interests are bound, except any
provision contained in agreements customary in the oil and gas
industry relating to (i) preferential rights to purchase all or
any portion of an Interest; (ii) required consents to transfer
and related provisions; (iii) maintenance of uniform interest
provisions in joint operating agreements, and (iv) any other
third party approvals or consents contemplated in this
Agreement.
3.1.5 No Violation of Other Legal Restrictions. The execution,
delivery and performance of this Agreement does not violate any
law, rule, regulation, ordinance, judgment, decree or order to
which Seller is or the Interests are, or upon Closing will be,
subject.
3.1.6 Bankruptcy. There are no bankruptcy, reorganization or
receivership proceedings pending, being contemplated by or, to
Seller=s actual knowledge, threatened against Seller.
3.1.7 Broker=s Fees. Seller has not incurred any liability,
contingent or otherwise, for brokers= or finders= fees relating
to the transactions contemplated by this Agreement for which
Buyer shall have any responsibility whatsoever.
3.1.8 Lawsuits and Claims. There is no action, suit, proceeding,
claim or investigation by any person, entity, administrative
agency or governmental body pending or, to the best of its
knowledge, threatened, against Seller before any governmental
authority that impedes or is likely to impede Seller=s ability
to consummate the transactions contemplated by this Agreement
except as otherwise set forth in Exhibit H attached hereto and
made a part hereof for all purposes.
3.1.9 Permits. Seller holds all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities
which are material to the operation of the Interests
(collectively, the APermits@). Seller is in compliance with the
terms of the Permits, except where the failure to so comply
would not have a material adverse effect on the Interests or on
the ability of Seller to consummate the transactions
contemplated hereby.
3.1.10 Tax Partnerships. None of the Interests is subject to a tax
partnership.
3.1.11 Operations and Expenditures. With respect to the joint, unit or
other operating agreements affecting the Interests, there are no
outstanding calls or payments under authorities for expenditures
concerning any single expenditure to be made by Seller in excess
of $25,000 which are due or which Seller has committed to make
and which have not been made.
3.1.12 Prepayment Contracts. Seller is not contractually obligated by
virtue of any prepayment arrangement under any contract for the
sale of Hydrocarbons to deliver Hydrocarbons produced from the
Interests at some future time without then or thereafter
receiving full payment therefor.
3.1.13 Taxes. All production, severance or similar taxes and
assessments based on or measured by the production of
Hydrocarbons or the receipt of proceeds therefrom attributable
to the Interests have been properly paid.
3.1.14 Call on Production. At the Closing Date no party shall have any
call upon, option to purchase or similar rights under any
agreement with respect to the production of Hydrocarbons from or
attributable to the Interests.
3.1.15 Status and Operation of the Leases.
(i) The Leases are (i) in full force and effect in accordance
with their respective terms, (ii) Seller is in substantial
compliance with their respective terms regarding the payment
of royalties, and (iii) Seller is not in default in the
performance of any obligation on the part of Seller
thereunder which could reasonably be expected to result in
termination or cancellation thereof. To the best knowledge
of Seller, no party has threatened or taken action to
terminate or procure a judicial reformation of any Lease,
except as otherwise set forth in Exhibit H hereto.
(ii) To the best knowledge of Seller, except for funds
properly suspended for good cause in a separate account
maintained by Seller as set forth in Exhibit G hereto,
Seller has not received any proceeds from the sale of
Hydrocarbons from the Interests which are subject to
potential refund.
(iii) Seller is being paid, without bond or indemnity of any
kind except the usual warranties found in division orders
and Hydrocarbon sales contracts customarily used in the
petroleum industry, for its interest in the proceeds of the
sale of Hydrocarbons from the Leases.
(iv) With respect to all Leases operated by Seller or an
affiliate of Seller, and with respect to all Leases operated
by unaffiliated third parties, to the best knowledge of
Seller, all costs incurred in connection with the operation
of the Leases have been fully paid and discharged in
accordance with the terms of payment therefor except (i)
normal expenses incurred within the previous sixty (60) days
and as to which Seller has not yet been billed, (ii) costs
that are being contested in good faith by Seller, or (iii)
as otherwise set forth in Exhibit I attached hereto and made
a part hereof for all purposes.
(v) All material Contracts are in full force and effect, and
neither Seller nor, to the best knowledge of Seller, any
other party is in default thereunder in any material
respect.
(vi) To the best knowledge of Seller, no other party to any
joint operating agreement or other Contract binding on the
Interests is entitled to any adjustments of past accounts at
the expense of Seller.
(vii) Seller is not obligated, by virtue of a claim arising
from Seller having prior to the Effective Date taken gas in
excess of the volume to which Seller was entitled, to
deliver Hydrocarbons produced from the Interests at some
future time without then or thereafter receiving full
payment therefore.
3.1.16 Compliance with Laws. Seller has complied in all material
respect with all laws applicable to the Interests except as
otherwise set forth in Exhibit J attached hereto and made a part
hereof for all purposes.
3.1.17 Suitability of Equipment. To the best of Seller=s knowledge,
all of the Equipment has been maintained in a good and
workmanlike manner in accordance with normal industry standards,
excepting normal wear and tear and obsolescence. Nevertheless,
the Parties agree that all Equipment will be sold and conveyed
to Buyer AAS IS, WHERE IS WITH ALL FAULTS@, and SELLER HEREBY
DISCLAIMS, WITH RESPECT TO THE EQUIPMENT, ANY AND ALL WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
3.1.18 Accuracy of Information Furnished. The Contracts and Records
(as hereinafter defined) to which Buyer has been provided access
include all contracts, agreements and other legally binding
commitments in Seller=s possession that are related to the
Interests. To best knowledge of Seller, the information
contained in such Contracts and Records and all other
information furnished to Buyer in connection with the
transaction contemplated hereby is true.
3.2 Buyer's Representations. Buyer represents and warrants to Seller
that the following statements are true and accurate as of the execution
date of this Agreement, the Effective Date and the Closing Date.
3.2.1 Partnership Authority. Buyer is a duly organized limited
partnership validly existing and in good standing under the laws
of the State of Delaware, is duly qualified to carry on its
business in the state in which the Interests are located, and
has full power and authority to enter into and perform pursuant
to this Agreement according to its terms, except where the
failure to go qualify and be in good standing will not have a
material adverse effect. This Agreement has been duly executed
and delivered by Buyer.
3.2.2 Requisite Approvals. Buyer's execution, delivery and
performance of this Agreement has been duly authorized by all
necessary partnership action and will not conflict with or
violate any agreement, law, rule, regulation, ordinance, charter
or other instrument governing either Buyer's organization,
management or business affairs or any instrument to which Buyer
is a party or by which Buyer is bound.
3.2.3 Validity of Obligation. This Agreement and all other
transaction documents executed and delivered on or before the
Closing Date (i) have been duly executed by Buyer=s authorized
representatives; (ii) constitute the valid and legally binding
obligations of Buyer, and (iii) are enforceable against it in
accordance with their respective terms.
3.2.4 No Violation of Contractual Restrictions. The execution,
delivery and performance of this Agreement does not conflict
with or violate any agreement or instrument to which Buyer is a
party or by which it is bound, except any provision contained in
agreements customary in the oil and gas industry relating to:
(i) preferential rights to purchase all or any portion of an
Interest; (ii) required consents to transfer and related
provisions; (iii) maintenance of uniform interest provisions in
joint operating agreements, and (iv) any other third party
approvals or consents contemplated in this Agreement.
3.2.5 No Violation of Other Legal Restrictions. The execution,
delivery and performance of this Agreement does not violate any
law, rule, regulation, ordinance, judgment, decree or order to
which Buyer or the Interests is or, upon Closing, will be
subject.
3.2.6 Bankruptcy. There are no bankruptcy, reorganization or
receivership proceedings pending, being contemplated by, or to
Buyer=s actual knowledge, threatened against Buyer.
3.2.7 Broker's Fees. Buyer has not incurred any liability, contingent
or otherwise, for brokers' or finders' fees relating to the
transactions contemplated by this Agreement for which Seller
shall have any responsibility whatsoever.
3.2.8 Lawsuits and Claims. There is no action, suit, proceeding,
claim or investigation by any person, entity, administrative
agency or governmental body pending or, to the best of its
knowledge, threatened, against Buyer before any governmental
authority that impedes or is likely to impede Buyer=s ability to
consummate the transactions contemplated by this Agreement and
to assume the liabilities to be assumed by it under this
Agreement.
3.2.9 Securities Laws. Buyer has complied with all federal and state
securities laws applicable to the purchase and sale of the
Interests and will comply with such laws if it subsequently
disposes of all or any part of the Interests.
3.3 Notice of Changes. Seller and Buyer will each give the other prompt
written notice of any matter materially affecting any of their
representations or warranties under this Article 3 or rendering any such
warranty or representation materially untrue or inaccurate or if it is
reasonably anticipated that a party will be unable to perform or comply
with any covenant or agreement contained in this Agreement.
ARTICLE 4. TITLE WARRANTY; DISCLAIMER OF WARRANTIES
4.1 Special Warranty of Title; Encumbrances. SELLER CONVEYS THE INTERESTS
TO BUYER WITHOUT WARRANTY OF TITLE, EXPRESS, STATUTORY, OR IMPLIED,
EXCEPT THAT SELLER SPECIALLY WARRANTS AND AGREES TO DEFEND TITLE TO THE
INTERESTS IT CONVEYS TO BUYER AGAINST THE CLAIMS, ENCUMBRANCES AND
DEMANDS OF ALL PERSONS CLAIMING TITLE TO THE INTERESTS BY, THROUGH, OR
UNDER SELLER BUT NOT OTHERWISE.
4.2 Condition and Fitness of the Interests. Except as set forth in Article
3 and Section 4.1 of this Agreement, SELLER CONVEYS THE INTERESTS TO
BUYER WITHOUT ANY EXPRESS, STATUTORY OR IMPLIED WARRANTY OR
REPRESENTATION OF ANY KIND, INCLUDING WARRANTIES RELATING TO (i) THE
CONDITION OR MERCHANTABILITY OF THE INTERESTS, OR (ii) THE FITNESS OF
THE INTERESTS FOR A PARTICULAR PURPOSE. BUYER HAS INSPECTED, OR BEFORE
CLOSING WILL INSPECT OR WILL HAVE BEEN GIVEN THE OPPORTUNITY TO INSPECT,
THE INTERESTS FOR ALL PURPOSES, INCLUDING WITHOUT LIMITATION FOR THE
PURPOSE OF DETECTING THE PRESENCE OF NATURALLY OCCURRING RADIOACTIVE
MATERIALS (ANORM@) AND MAN MADE MATERIAL FIBERS ("MMMF") AND, EXCEPT
WITH RESPECT TO ANY ADVERSE ENVIRONMENTAL CONDITIONS RAISED BY BUYER
PURSUANT TO SECTION 5.3.2, SATISFIED ITSELF AS TO THEIR PHYSICAL AND
ENVIRONMENTAL CONDITION, INCLUDING BUT NOT LIMITED TO CONDITIONS RELATED
TO THE PRESENCE, RELEASE, OR DISPOSAL OF HAZARDOUS SUBSTANCES. BUYER IS
RELYING SOLELY UPON THE RESULTS OF SUCH INSPECTION OF THE INTERESTS AND
SHALL ACCEPT ALL OF THE SAME IN THEIR "AS IS, WHERE IS" CONDITION AND
AWITH ALL FAULTS@. SELLER DISCLAIMS ALL LIABILITY ARISING IN CONNECTION
WITH THE PRESENCE OF NORM OR MMMF ON THE INTERESTS AND IF TESTS HAVE
BEEN CONDUCTED BY SELLER FOR THE PRESENCE OF NORM OR MMMF, SELLER
DISCLAIMS ANY WARRANTY RESPECTING THE ACCURACY OF SUCH TESTS OR RESULTS.
4.3 Information About the Interests. SELLER MAKES NO WARRANTY OR
REPRESENTATION, EXPRESS, STATUTORY OR IMPLIED, AS TO (i) THE QUALITY AND
QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE INTERESTS;
(ii) THE ABILITY OF THE INTERESTS TO PRODUCE HYDROCARBONS, INCLUDING
WITHOUT LIMITATION PRODUCTION RATES, DECLINE RATES AND RECOMPLETION
OPPORTUNITIES; OR (iii) THE PRESENT OR FUTURE VALUE OF THE ANTICIPATED
INCOME, COSTS OR PROFITS, IF ANY, TO BE DERIVED FROM THE INTERESTS.
4.4 Subrogation of Warranties. To the extent transferable, Seller will give
and grant to Buyer, its successors and assigns full power and right of
substitution and subrogation in and to all covenants, indemnities and
warranties (including warranties of title) by preceding owners, vendors,
or others, given or made with respect to the Interests or any part
thereof prior to the Closing Date of this Agreement.
ARTICLE 5. DUE DILIGENCE REVIEW OF THE INTERESTS
5.1 Access to Records. After execution of this Agreement, Seller shall give
Buyer and its authorized representatives, during regular business hours,
at Buyer's sole risk, cost and expense, access, with copying privileges,
to all production, environmental, geological, engineering and other
technical data and records, and to all contract, land, accounting,
title, and lease records, to the extent such data and records are in
Seller's possession and relate to the Interests, and to such other
information relating to the Interests as Buyer may reasonably request.
However, Seller shall have no obligation to provide Buyer such access to
any data or information which Seller cannot legally provide Buyer
because of third-party restrictions on Seller. Buyer shall keep all
materials and data obtained confidential until the Closing Date. Any
confidentiality agreement previously executed by Seller and Buyer with
respect to the Interests will continue in force and effect until the
Closing Date and for as long thereafter as provided in the
confidentiality agreement. Buyer shall take all reasonable steps
necessary to ensure that Buyer=s authorized representatives comply with
the provisions of this Section 5.1 and any confidentiality agreement in
effect. Upon termination of this Agreement without Closing, Buyer shall
return to Seller any and all materials and data relating to any
properties not purchased at Closing and shall destroy any and all of
Buyer's notes and work papers derived therefrom in accordance with the
terms of said confidentiality agreement.
5.2 Physical and Environmental Inspection. Buyer may engage an environmental
consultant approved by Seller (the AEnvironmental Expert@) to perform a
physical inspection of the Leases and Equipment. Seller will permit
Buyer and the Environmental Expert reasonable physical access to the
Leases and Equipment at times approved by Seller and at Buyer's sole
cost, risk and expense for the purposes of inspecting the same,
conducting such tests, examinations, investigations and assessments as
may be reasonable and necessary or appropriate to evaluate the physical
and environmental condition of the Leases and Equipment. Buyer shall
repair any damage to the Interests resulting from the inspection of
Buyer and/or the Environmental Expert and shall defend and indemnify
Seller and Seller=s affiliates, partners, members, shareholders,
directors, officers, agents, representatives, consultants, advisers,
successors and assigns (collectively, the ASeller Indemnified Group@)
from any and all Claims (as hereinafter defined) arising from Buyer
and/or the Environmental Expert inspecting and observing the Interests,
including, without limitation, (i) Claims for personal injury to or
death of employees of Buyer or the Environmental Expert, their agents,
contractors, subcontractors or invitees and/or damage to the property of
Buyer or the Environmental Expert or others acting on behalf of Buyer or
Environmental Expert, REGARDLESS OF WHETHER SUCH CLAIMS ARE CAUSED BY
THE CONCURRENT NEGLIGENCE OF SELLER OR THE CONDITION OF THE INTERESTS,
and (ii) Claims for personal injury to or death of employees of Seller
or third parties and damage to the property of Seller or third parties,
to the extent caused by the negligence, gross negligence or willful
misconduct of Buyer or Environmental Expert. As used in this Agreement,
the term AClaims@ means any and all losses, liabilities, damages,
obligations, expenses, fines, penalties, costs, claims, causes of action
and judgments, including, without limitation, reasonable attorneys fees,
court costs, and other reasonable costs of litigation resulting from the
defense of any claim or cause of action within the scope of the
indemnities in this Agreement for (i) breaches of contract; (ii) loss or
damage to property, injury to or death of persons, and other tortious
injury; and (iii) violations of applicable laws, rules, regulations,
orders or any other legal right or duty actionable at law or equity.
5.3 Environmental Assessment.
5.3.1 Inspection and Test Results. Buyer agrees to provide to Seller
a copy of any and all environmental inspections and assessments
of Buyer or the Environmental Expert, including, without
limitation, all written reports, data and conclusions. Buyer
and Seller shall keep any and all data or information acquired
by all such examinations and results of all analysis of such
data and information strictly confidential and shall not
disclose same to any person or agency without the prior written
approval of the other Party, unless necessary in connection with
any pending litigation or required to do so by applicable law or
by the order of a Court or regulatory agency. Notwithstanding
the foregoing, Buyer may disclose the results of any such
environmental inspections and assessments to its employees,
agents and representatives that have a need to review same in
order to conclude the necessary environmental review and
assessment under this Agreement, provided that Buyer hereby
agrees to enter into agreements with such employees, agents and
representatives, including the Environmental Expert, binding
such persons to the same confidentiality obligations as are
contained herein. The foregoing obligation of confidentiality
shall survive for five (5) years after the Closing and will
survive for five (5) years after the termination of this
Agreement without closing.
5.3.2 Notice of Environmental Conditions. Prior to Closing, the Buyer
shall review the inspection and testing results for the
Interests and determine, based on those results, if any adverse
environmental conditions (the AEnvironmental Conditions@) exist
or may exist with respect to the Interests. No later than three
(3) business days before Closing, Buyer shall notify Seller in
writing of any Environmental Conditions, and the estimated
value of such Environmental Conditions. The value of the
Environmental Conditions for purposes of Section 5.3.3 shall be
the Buyer=s estimated amount of all costs and Claims associated
with the existence, remediation or correction of the
Environmental Conditions.
5.3.3 Rights and Remedies for Environmental Conditions.
(i) The rights and remedies of the Parties with respect to the
Environmental Conditions are as follows:
(a) Seller, at its sole option, may elect to remediate
some or all of the Environmental Conditions. If
Seller elects to remediate any of the Environmental
Conditions, the affected Interests shall be removed
from the transaction, the Sale Price shall be reduced
by the Allocated Value of the Interests removed from
the transaction, and the Parties shall proceed to
Closing as to the remaining Interests. If Seller
completes such remediation to the reasonable
satisfaction of Buyer prior to the expiration of three
(3) months after the Closing Date, (i) Seller shall
convey the affected Interests to Buyer, (ii) Buyer
shall pay to Seller the Allocated Value for such
remediated Interests, and (iii) Seller shall have no
further liability to Buyer for the remediated
Environmental Conditions, including, but not limited
to, any adjustment to the Sale Price. In the event
Seller is unable to cure the Environmental Conditions
to the reasonable satisfaction of Buyer within said
three month period, Seller shall retain the affected
Interests and Buyer shall have no further obligation
with respect to such retained Interests.
(b) If Seller elects not to remediate one or more
Environmental Conditions, the Sale Price shall be
reduced by the collective value of such non-remediated
Environmental Conditions, the Parties shall proceed to
Closing on all such Interests, and Seller shall have
no further liability to Buyer with respect to such
non-remediated Environmental Conditions.
(c) If an Environmental Condition which is significant in
nature has been identified pursuant to Section 5.3.1
and notice thereof has been timely provided pursuant
to Section 5.3.2 but for which the Parties, acting in
good faith, have been unable to assess a value in
whole or in part, Seller may elect to remediate such
Environmental Condition pursuant to subsection (a) of
this Section 5.3.3. If Seller elects not to attempt
remediation procedures, either Party may remove the
Interest effected by such Environmental Condition from
this transaction, the Sale Price shall be reduced by
the Allocated Value of the Interests removed from the
transaction, and the Parties shall proceed with
Closing as to the remaining Interests.
(ii) Except as otherwise set forth in this Section 5.3.3,
Buyer at Closing will assume all environmental obligations
with respect to the Interests, as provided in and subject to
Section 8.2.
5.4 Preferential Rights and Consents to Assign.
5.4.1 Notices to Holders.
(i) Attached hereto as Exhibit K and made a part hereof for all
purposes is a list of the Interests subject to third party
preferential purchase rights, rights of first refusal, or
similar rights (collectively, "Preferential Rights"), or
third party consents to assign, lessor's approvals or
similar rights (collectively, "Consents"). Promptly
following the execution of this Agreement, Seller shall use
reasonable efforts to 1. notify the holders of the
Preferential Rights and Consents that it intends to transfer
the Interests to Buyer, 2. provide them with any information
about the transfer of the Interests to which they are
contractually entitled, and 3. in the case of Consents, ask
the holders of the Consents to consent to the assignment of
the affected Interests to Buyer.
(ii) Seller shall promptly notify Buyer whether (a) any
Preferential Rights are exercised, waived or deemed waived,
(b) any Consents are denied, or (c) the requisite time
periods have elapsed without any Preferential Rights being
exercised or Consents being received.
5.4.2 Remedies Before Closing. If Seller is unable before Closing to
obtain the required Consents (other than Consents ordinarily
obtained after closing and Consents on hydrocarbon sales,
purchase, gathering, transportation, treating, marketing,
exchange, processing and fractionating agreements) and waivers
of all Preferential Rights, then:
(i) Seller and Buyer by agreement may proceed with Closing as to
the Interests affected by the unwaived Preferential Rights
or unobtained Consents, subject to the further obligations
of Seller and Buyer set forth in Section 5.4.3 in the event
that such Preferential Rights are validly exercised or such
Consents are ultimately denied after Closing;
(ii) Either Seller or Buyer may exclude the affected
portion of the Interests from the transaction under this
Agreement, adjust the Sale Price by the Allocated Value of
the excluded Interests, and proceed with Closing as to the
rest of the Interests; or
(iii) If neither of the remedies set forth in subparts (i)
and (ii) of this Section 5.4.2 is exercised, Seller or Buyer
may exercise the termination rights set forth in Article 6.
5.4.3 Remedies After Closing.
(i) Preferential Rights. After Closing, if (a) any holder of
Preferential Rights alleges improper notice of sale, or (b)
Seller or Buyer discover, or any third party alleges, the
existence of additional Preferential Rights, Seller and
Buyer will attempt to obtain waivers of those discovered or
alleged Preferential Rights. If Seller and Buyer are unable
to obtain waivers of such Preferential Rights, or the third
party ultimately establishes and exercises its rights, and
such exercise denies the Interests to Buyer, then Buyer and
Seller will rescind the assignment of the affected Interests
under this Agreement, after which Seller shall pay Buyer the
Allocated Value of the affected Interests, and Buyer shall
immediately reassign the affected Interests to the Seller.
(ii) Consents. After Closing, if Seller or Buyer discover,
or any third party alleges, the existence of additional
Consents, Seller and Buyer will attempt to obtain waivers of
those discovered or alleged Consents. If Seller and Buyer
are unable to obtain waivers of such Consents (other than
Consents on Hydrocarbon sales, purchase, gathering,
transportation, treating, marketing, exchange, processing
and fractionating agreements), and such unwaived Consents
deny the affected Interests to Buyer, then Seller and Buyer
will rescind the assignment of the affected Interests under
this Agreement, after which Seller shall pay Buyer the
Allocated Value of the affected Interests, and Buyer shall
immediately reassign the affected Interests to the Seller.
Rescission of the assignment of the affected Interests and
receipt of the Allocated Value of the affected Interests
shall be Buyer's sole remedy if undiscovered or alleged
Preferential Rights are exercised or Consents are denied
after Closing.
5.5 Title Defects.
5.5.1 Definition of Title Defect. For the purpose of this Agreement,
a "Title Defect" shall mean any deficiency in the Interests or
Seller's title to the Interests which results or could result
in:
(i) Seller's title, as to one or more Interests, being subject
to an outstanding mortgage, deed of trust, lien or security
interest;
(ii) Seller owning less than the net revenue interest shown
on Exhibit A-1 hereto or being obligated to bear a share of
the costs and expenses of operation greater than the working
interest shown on Exhibit A-1 hereto without a corresponding
increase in net revenue interest at any time after the
Effective Date during the life of the affected Interest;
(iii) Seller's rights and interests being reduced at any
time after the Effective Date during the life of the
affected Interest by virtue of the exercise by a third party
reversionary or back-in interest, farm-out of other than
wellbore rights, or other similar right not reflected on
Exhibit A1;
(iv) any default of Seller under any Lease or other
agreement which results or could result in the occurrence of
(i), (ii), or (iii) of this Section 5.5.1; or
(v) the restriction or termination of Buyer=s right to use an
Interest as owner, lessee, licensee or permittee, as
applicable.
5.5.2 Notice of Title Defects. Upon the discovery of a Title Defect
by Buyer, Buyer shall immediately notify Seller in writing. Any
such notice by Buyer shall include appropriate evidence and
documentation to substantiate its position and shall be
delivered to Seller on or before three (3) business days prior
to Closing Date (the ATitle Claim Date@). After the Title Claim
Date, the Interests shall be deemed to be free of Title Defects
except for those for which notice has been timely provided as
set forth herein. Any Title Defect which is not disclosed to
Seller on or before the Title Claim Date shall conclusively be
deemed waived by Buyer for all purposes except to the extent
such Title Defect may be covered by Seller=s special warranty of
title contained in the conveyance document delivered pursuant to
this Agreement.
5.5.3 Right to Cure Title Defect. If Buyer notifies Seller of a Title
Defect as provided in Section 5.5.2, Seller shall have the right
but not the obligation to cure the Title Defect. If Seller
chooses to cure a Title Defect, Seller must cure the Title
Defect to the reasonable satisfaction of Buyer before Closing,
unless the Parties otherwise agree in writing.
5.5.4 Remedies for Uncured Title Defects. If Buyer notifies Seller of
any Title Defect as provided in Section 5.5.2, and Seller
refuses or is unable to cure the Title Defect before Closing,
then Buyer and Seller will have the following rights and
remedies with respect to the uncured Title Defects, unless the
Parties otherwise agree in writing.
(i) Buyer may waive the uncured Title Defect and proceed with
Closing.
(ii) The Parties will attempt to agree on the value of each
uncured, unwaived Title Defect. If the Parties are unable
to agree as to whether a Title Defect exists or the value
thereof, Seller and Buyer may refer the matter to a mutually
agreeable third party expert for determination. The
determination of such expert shall be binding on the
Parties. Seller and Buyer shall reduce the Sale Price by
the value agreed upon by the Parties or determined by the
expert (as applicable) of each uncured, unwaived Title
Defect and proceed with Closing.
(iii) If any uncured, unwaived Title Defect reduces the
value of the affected Interest by an amount equal to or more
than fifty percent (50%) of the Allocated Value of that
Interest, either Seller or Buyer may exclude the affected
Interest from the transaction under this Agreement, in which
case Seller and Buyer will adjust the Sale Price by the
Allocated Value of the excluded Interest, and proceed with
Closing as to the balance of the Interests.
5.6 Casualty Losses and Government Takings.
5.6.1 Notice of Casualty Losses and Government Takings. If, prior to
the Closing Date, all or part of the Interests is damaged or
destroyed by fire, flood, storm or other casualty (ACasualty
Loss@), or is taken in condemnation or under the right of
eminent domain, or if proceedings for such purposes shall be
pending or threatened (AGovernment Taking@), Seller must
promptly notify Buyer in writing of the nature and extent of the
Casualty Loss or Government Taking and Seller=s estimate of the
cost required to repair or replace that portion of the Interests
affected by the Casualty Loss or value of the Interests taken by
the Government Taking.
5.6.2 Remedies for Casualty Losses and Government Takings. With
respect to each Casualty Loss to or Government Taking of the
Interests, Seller and Buyer will have the following rights and
remedies.
(i) If the agreed cost to repair or replace the portion of the
Interests affected by the Casualty Loss or the agreed value
of the Interests taken in any Government Taking is less than
twenty-five percent (25%) of the Allocated Value of the
Interests affected, the Sale Price will be adjusted by the
agreed cost of the Casualty Loss or the agreed value of the
Interests taken by the Government Taking, and the Parties
will proceed with Closing.
(ii) If the agreed cost to repair or replace the portion of
the Interests affected by the Casualty Loss or the agreed
value of the Interests taken in any Government Taking equals
or exceeds twenty-five percent (25%) of the Allocated Value
of the Interests affected, either Seller or Buyer may
exclude the affected Interest from the transaction under
this Agreement, in which case Seller and Buyer will adjust
the Sale Price by the Allocated Value of the excluded
Interest and proceed with Closing as to the balance of the
Interests.
(iii) In addition to the remedies set forth in subparts (i)
and (ii) of this Section 5.6.2, Seller and Buyer will have
the termination rights in connection with Casualty Losses
and Government Takings as set forth in Section 6.1.
5.6.3 Insurance Proceeds and Settlement Payments. If Seller and Buyer
adjust the Sale Price of the Interests due to a Casualty Loss or
Government Taking, and proceed with Closing, Seller will be
entitled to retain (i) all insurance proceeds payable to Seller
with respect to any such Casualty Loss, (ii) all sums paid to
Seller by third parties by reason of any such Casualty Loss, and
(iii) all compensation paid to Seller with respect to any such
Government Taking. Seller shall retain all insurance proceeds
paid or payable on or after the Effective Date which relate to
any Casualty Loss or Government Taking which occurred prior to
the Effective Date.
5.6.4 Exclusion of Ordinary Depreciation and Depletion. Buyer will
assume all risk and loss with respect to any change, between the
Effective Date and the Closing Date, in the condition of the
Interests resulting from production of Hydrocarbons through
normal depletion (including the watering-out or sand
infiltration of any well) and the depreciation of personal
property through ordinary wear and tear. None of the events or
conditions set forth in this Section 5.6.4 will be considered a
Casualty Loss with respect to the Interests, nor will they be
cause for any other reduction in the Sale Price, or give rise to
any right to terminate this Agreement.
ARTICLE 6. TERMINATION AND EFFECT OF TERMINATION.
6.1 Right to Terminate. If, on the Closing Date, the Sale Price is to be
reduced as a result of uncured Title Defects, unwaived Preferential
Rights, unobtained Consents, Environmental Conditions and/or Casualty
Losses or Government Takings by an aggregate amount equal to or greater
than twenty-five percent (25%) of the total unadjusted Sale Price,
either Buyer or Seller shall have the right to terminate this Agreement,
and thereafter neither Party will have any further rights, duties or
obligations under this Agreement. Either Party may exercise this right
by notifying the other Party of its election to terminate this Agreement
in writing no later than two (2) business days before the Closing Date.
6.2 Effect of Termination. The following provisions shall apply in the
event this Agreement is terminated prior to the Closing Date.
6.2.1 Termination by Agreement. If this Agreement is terminated by
the mutual agreement of the Seller and the Buyer and not as the
result of the failure of either Party to perform its obligations
hereunder, such termination shall be without liability of any
Party to this Agreement or any shareholder, director, officer,
employee, agent or representative of such party, and the Seller
shall return the Earnest Money together with any interest
accrued thereon to the Buyer promptly and neither Party will
have any further rights, duties or obligations.
6.2.2 Termination as a Result of Buyer=s Breach. If this Agreement is
terminated as a result of Buyer=s material breach of this
Agreement, then Seller shall be entitled to retain the Earnest
Money as liquidated damages and as reimbursement for Seller's
out-of-pocket fees and expenses incurred in connection with the
transactions contemplated by this Agreement. The Parties hereby
acknowledge that (i) the extent of damages to Seller occasioned
by such breach or default or failure to proceed by Buyer would
be impossible or extremely impractical to ascertain, (ii) that
the amount of the Earnest Money is a fair and reasonable
estimate of such damage, and (iii) the retention by Seller of
the Earnest Money hereunder shall constitute Seller=s sole
remedy with respect to Buyer=s breach of this Agreement.
6.2.3 Termination as a Result of Seller=s Breach. If this Agreement
is terminated as a result of Seller=s material breach of this
Agreement, then Seller shall return the Earnest Money together
with any interest accrued thereon promptly, and neither Party
shall have any further rights, duties or obligations under this
Agreement.
6.2.4 Termination Pursuant to Section 6.1. If this Agreement is
terminated pursuant to Section 6.1 hereof, then Seller shall
return the Earnest Money together with any interest accrued
thereon promptly, and neither Party shall have any further
rights, duties or obligations under this Agreement.
6.2.5 Return of Data. If this Agreement is terminated, upon written
request by Seller, Buyer shall return to Seller all data and
other information delivered to Buyer by or on behalf of Seller
in connection with the transactions contemplated in this
Agreement.
ARTICLE 7. CONDITIONS OF CLOSING AND CLOSING.
7.1 Conditions of Closing by Buyer. The obligation of Buyer to close the
transactions contemplated in this Agreement is subject to the
satisfaction of the following conditions.
7.1.1 Representations, Warranties and Covenants. All representations
and warranties of Seller contained in this Agreement shall be
true, correct, and not misleading in all material respects, and
Seller shall have performed and satisfied in all material
respects all agreements and covenants required by this Agreement
to be performed and satisfied by Seller.
7.1.2 Consents. Seller shall have obtained and delivered to Buyer all
necessary consents for transfer of the Interests, except those
which by their nature cannot be requested or obtained until
after Closing.
7.1.3 Lawsuits and Claims. No suit or other proceeding shall be
pending or threatened before any court or governmental agency
seeking to restrain or prohibit this transaction, or to declare
the transaction illegal, or to obtain substantial damages in
connection with the transaction contemplated hereby.
7.1.4 Bank Releases. Seller shall have obtained and delivered to
Buyer the fully executed Bank Releases.
7.1.5 Guaranty. Seller shall have obtained and delivered to Buyer the
guaranty of Saba Petroleum Company, a Delaware corporation and
parent entity of Seller, guaranteeing all of Seller=s continuing
obligations under or pursuant to this Agreement, such guaranty
to be in substantially the form of guaranty attached hereto as
Exhibit L and made a part hereof for all purposes (the
AGuaranty@).
7.2 Conditions of Closing by Seller. The obligation of Seller to close the
transactions contemplated in this Agreement is subject to the
satisfaction of the following conditions.
7.2.1 Representations, Warranties and Covenants. All representations
and warranties of Buyer contained in this Agreement shall be
true, correct, and not misleading in any and all material
respects, and Buyer shall have performed and satisfied in all
material respects all agreements and covenants required by this
Agreement to be performed and satisfied by Buyer.
7.2.2 Lawsuits and Claims. No suit or other proceeding shall be
pending or threatened before any court or governmental agency
seeking to restrain or prohibit this transaction, or to declare
this transaction illegal, or to obtain substantial damages in
connection with the transaction contemplated hereby.
7.2.3 Bonds and Insurance. Seller shall have received evidence that
Buyer has in place, effective on or before the Closing Date and
relating to the ownership of the Interests after the Closing
Date (i) all necessary state, federal and local bonds, and (ii)
insurance as is reasonable and customary in the industry.
7.3 Closing. The Closing ("Closing") shall occur on June 11, 1999 at 9:00
a.m. ("Closing Date"), at the offices of Seller, or on such other date
and time or at such other location as may be agreed upon by the Parties.
7.4 Actions to Occur at Closing. At Closing the following actions shall
occur.
7.4.1 Delivery of Assignment. Seller shall execute, acknowledge and
deliver an Assignment and Bill of Sale substantially in the form
and substance of Exhibit M attached hereto and made a part
hereof for all purposes, covering all of the Interests to be
conveyed to Buyer pursuant hereto.
7.4.2 Delivery of Bank Releases. Seller shall deliver to Buyer the
fully executed Bank Releases.
7.4.3 Delivery of Guaranty. Seller shall deliver to Buyer the fully
executed Guaranty.
7.4.4 Delivery of Sale Price. Buyer shall deliver to Seller by wire
transfer the Sale Price as adjusted hereunder, subject to
further adjustment after Closing as provided for herein.
7.4.5 Change of Operatorship Forms. Seller and Buyer shall execute
designation of operator forms required by applicable
conservation or regulatory agencies and notices to third party
working interest owners of the change of ownership.
7.4.6 Evidence of Bonds. Buyer shall deliver to Seller evidence of
its appropriate state and federal plugging bond, surety letter,
or letter of credit acceptable to such authority to authorize
Buyer's right to conduct operations.
7.4.7 Possession of the Interests. Seller shall, subject to the terms
of any applicable operating agreements and to the provisions
hereof, deliver to Buyer exclusive possession of the Interests.
7.4.8 Letters-in-Lieu. Seller and Buyer shall execute letters-in-lieu
of transfer orders.
7.4.9 Officer's Certificates. Each Party shall deliver to the other
Party a certificate executed by a duly authorized officer of
such Party certifying that the representations and warranties of
such Party contained herein are true and correct as of the
Closing Date.
7.5 Post-Closing Obligations. Seller and Buyer shall have the following
post-Closing obligations:
7.5.1 Delivery of Records. Seller shall provide Buyer, promptly after
Closing, at Buyer's sole expense, any and all original maps,
reports and other written material relating to the Interests,
including without limitation, lease files, property records,
contract files, operations files, copies of tax and accounting
records and files (other than Seller=s income tax returns), well
files, core analyses and hydrocarbon analyses, well logs, mud
logs, core data, field studies, seismic, digital data
(geographics data set) geological, geochemical or geophysical
data or interpretations thereof ("Records"); however, Seller
shall have no obligation to provide Buyer any such data or
information which Seller cannot legally provide Buyer because of
third-party restrictions on Seller. Buyer agrees to maintain
the Records and allow Seller reasonable access thereto for a
period of six (6) years after Closing.
7.5.2 Recording and Filing. Buyer, within thirty (30) days after the
Closing Date, shall (i) record all assignments, conveyances and
other instruments that must be recorded to effectuate the
transfer of the Interests, (ii) file for approval with the
applicable governmental agencies all state and federal transfer
and assignment documents for the Interests, and (iii) file with
the applicable government agencies all applications and other
documents required for the transfer of permits and operatorship
of the Interests. Buyer shall provide Seller a recorded copy of
each assignment, conveyance and other recorded instrument, and
approved copies of the state and federal transfer and assignment
documents, if any, as soon as they are available.
7.5.3 Change of Operator Requirements. Buyer shall comply with all
applicable laws, ordinances, rules and regulations, orders,
terms of permits and authorizations of any governmental body
which may have jurisdiction with respect to the Interests to be
transferred hereunder (including, without limitation, the filing
with such governmental bodies of any and all compliance reports,
notices, or other compliance documents which are due after the
Closing Date regardless of the period covered by such reports,
notices or documents) and shall promptly obtain and maintain all
permits and bonds required by public authorities in connection
with the Interests.
7.5.4 Further Assurances. Seller and Buyer agree to execute and
deliver from time to time such further instruments and do such
other acts as may be reasonably necessary to effectuate the
purposes of this Agreement.
ARTICLE 8. ASSUMED RIGHTS AND OBLIGATIONS AND INDEMNITIES.
8.1 Condition of the Interests.
8.1.1 Oil and Gas Activities. The Interests have been used for
exploring, developing, producing, treating and transporting oil
and gas. Spills of wastes, crude oil, produced water, hazardous
substances and other materials may have occurred in the past on
the Leases or in connection with the Interests. There is a
possibility that there are currently unknown, abandoned wells,
plugged wells, pipelines and other equipment on or underneath
the property subject to the Interests. Except as otherwise
provided in this Agreement, it is the intent of Buyer and Seller
that all liability associated with the above matters as well as
any liability to plug or replug any and all wells located on the
Leases in accordance with the applicable rules, regulations and
requirements of governmental agencies be passed to the Buyer at
Closing and that Buyer shall assume all liability for such
matters and all Claims related thereto.
8.1.2 NORM. The Interests may contain asbestos, hazardous substances,
or NORM. NORM may affix or attach itself to the inside of
wells, materials and equipment as scale or in other forms;
wells, materials and equipment located on the Leases or included
in the Interests may contain NORM, and NORM containing material
may have been buried or otherwise disposed of on the Leases.
Special procedures may be required for remediating, removing,
transporting and disposing of asbestos, NORM, hazardous
substances and other materials from the Interests, and, except
as otherwise provided in this Agreement, Buyer assumes all
liability for any assessment, remediation, removal,
transportation, and disposal of these materials and associated
activities in accordance with the applicable rules, regulations
and requirements of governmental agencies.
8.2 Assumption of Obligations by Buyer. Buyer shall, at Closing, assume and
be responsible for and comply with all duties and obligations of Seller,
express or implied, arising on or after the Effective Time, with respect
to the Interests, including, without limitation, those arising under or
by virtue of any lease, contract, agreement, document, permit,
applicable statue or rule, regulation or order of any governmental
authority, (specifically including, without limitation, any governmental
request or requirement to plug, re-plug and/or abandon any well of
whatsoever type, status or classification, remove all equipment and
facilities, including but not limited to pipelines, pipeline laterals,
and flowlines and any such request or requirement to remove any and all
platforms and restore the site whether such obligation arose before, on
or after the Effective Time, or take any clean-up or other action with
respect to the property or premises, including hazardous waste cleanup
costs under the Resource Conservation and Recovery Act of 1976, as
amended, 42 U.S.C. 6901-6991 (ARCRA@), the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C.
9601-9675 (ACERCLA@), The Clean Water Act (33 U.S.C. & 466 et. seq.),
The Safe Drinking Water Act (14 U.S.C. & 1401-1450), The Hazardous
Materials Transportation Act (49 U.S.C. & 1401-7401 et. seq.) as
amended, The Clean Air Act amendments of 1990, or similar laws, rules or
regulations), excluding, however, any and all duties and obligations
arising from or relating to (i) contractual obligations of Seller with
respect to the Interests attributable to periods of time prior to the
Effective Date including, without limitation, the obligation to fully
and timely pay royalties (excluding, however, specific amounts by which
the Sale Price is reduced pursuant to sub-Sections 2.2.3(iii), (iv), (v)
and (vi) hereof), (ii) the gross negligence or willful misconduct of
Seller during the Interim Period and (iii) the disposal offsite from the
Interests prior to the Closing Date of any hazardous substances, wastes,
materials and products generated by or used in connection with the
operation of the Interests.
8.3 Retention of Liabilities by Seller. Seller hereby retains and shall
remain liable and responsible for any and all duties and obligations
arising from or relating to (i) contractual obligations of Seller with
respect to the Interests attributable to periods of time prior to the
Effective Date including, without limitation, (y) the obligation to
fully and timely pay royalties and (z) all such duties and obligations
reflected in Exhibits to this Agreement (excluding, however specific
amounts by which the Sale Price is reduced pursuant to sub-Sections
2.2.3(iii), (iv), (v) and (vi) hereof), (ii) the gross negligence or
willful misconduct of Seller during the Interim Period, and (iii) the
disposal offsite from the Interests prior to the Closing Date of any
hazardous substances, wastes, materials and products generated by or
used in connection with the operation of the Interests.
8.4 General Indemnification by Buyer. Buyer shall defend, indemnify and
hold the Seller Indemnified Group harmless from and against any and all
Claims for personal injury, death or damage to property or to the
environment, or for any other relief, arising directly or indirectly
from, or incident to (i) the use, occupation, operation, maintenance or
abandonment of any of the Interests, or condition of the property or
premises, whether latent or patent, and whether asserted against Buyer
and/or any member of the Seller Indemnified Group after the Effective
Date, whether or not any such Claims result from conditions, actions or
inactions at or before the Effective Time; (ii) Seller=s operation of
the Interests under Article 10 (if applicable), except to the extent
caused by Seller=s gross negligence or willful misconduct; (iii) all
obligations assumed by Buyer pursuant to this Article 8 or Section 9.5;
(iv) any obligations for broker=s fees incurred by Buyer in connection
with its purchase of the Interests; (v) any violation by Buyer of state
or federal securities laws, or Buyer=s dealings with its partners,
investors, financial institutions and other third parties in connection
with the transactions contemplated under this Agreement; (vi) Buyer=s
operation of any Interest that is reconveyed or reassigned to Seller
pursuant to Section 5.4.3(ii) due to failure to obtain requisite
Consents, and (vii) the specific amounts by which the Sale Price is
reduced pursuant to sub-Sections 2.2.3(iii), (iv), (v) and (vi) hereof,
excluding, however, any and all such Claims arising from or relating to
(i) contractual obligations of Seller with respect to the Interests and
attributable to periods of time prior to the Effective Date including,
without limitation, the obligation to fully and timely pay royalties
(excluding, however, the specific amounts by which the Sale Price is
reduced pursuant to sub-Sections 2.2.3(iii), (iv), (v) and (vi) hereof),
(ii) the gross negligence or willful misconduct of Seller during the
Interim Period, and (iii) the disposal offsite from said Interests prior
to the Closing Date of any hazardous substances, wastes, materials and
products generated by or used in connection with the operation of the
Interests. With respect to any Claim Buyer may be obligated to defend
pursuant to Buyer=s indemnification obligations contained in this
Agreement, Seller shall have the right, but not the obligation, to
participate fully in the defense of the Claim.
8.5 Indemnification by Seller. Seller shall defend, indemnify and hold the
Buyer and Buyer=s affiliates, partners, members, shareholders,
directors, officers, agents, representatives, consultants, advisers,
successors and assigns (collectively, the ABuyer Indemnified Group@)
harmless from and against any and all Claims for personal injury, death
or damage to property or to the environment, or for any other relief,
arising directly or indirectly from, or incident to, (i) contractual
obligations of Seller with respect to the Interests attributable to
periods of time prior to the Effective Date including, without
limitation, (y) the obligation to fully and timely pay royalties and (z)
all such duties and obligations reflected in Exhibits to this Agreement
(excluding, however, the specific amounts by which the Sale Price is
reduced pursuant to sub-Sections 2.2.3(iii), (iv), (v) and (vi) hereof),
(ii) the gross negligence or willful misconduct of Seller during the
Interim Period, (iii) the disposal offsite from said Interests prior to
the Closing Date of any hazardous substances, wastes, materials and
products generated by or used in connection with the operation of the
Interests, and (iv) any obligations for broker=s fees incurred by Seller
in connection with its sale of the Interests. With respect to any Claim
Seller may be obligated to defend pursuant to Seller=s indemnification
obligations contained in this Agreement, Buyer shall have the right, but
not the obligation, to participate fully in the defense of the Claim.
8.6 Environmental Indemnity and Release. Buyer releases and forever
discharges the Seller Indemnified Group and Buyer agrees to defend,
indemnify and hold the Seller Indemnified Group harmless from any and
all Claims, whether direct or indirect, known or unknown, foreseen or
unforeseen, that may arise on account of or in any way be connected with
the physical condition of the Interests and property or any law or
regulation applicable thereto, including, without limitation, CERCLA,
RCRA, The Clean Water Act (33 U.S.C. & 466 et. seq.), The Safe Drinking
Water Act (14 U.S.C. & 1401-1450), The Hazardous Materials
Transportation Act (49 U.S.C. & 1401-7401 et. seq.) as amended, The
Clean Air Act amendments of 1990, and any other applicable federal,
state or local law, regardless whether or not arising during the period
of, or from, or in connection with Seller's ownership or use of the
Interests, excluding, however, any and all such Claims arising from or
relating to duties and obligations of Seller arising from or relating to
(i) contractual obligations of Seller with respect to the Interests
attributable to periods of time prior to the Effective Date including,
without limitation, the obligation to fully and timely pay royalties,
(ii) the gross negligence or willful misconduct of Seller during the
Interim Period, and (iii) the disposal offsite from said Interests prior
to the Closing Date of any hazardous substances, wastes, materials and
products generated by or used in connection with the operation of the
Interests.
8.7 Limitations on Liabilities. Buyer=s indemnification obligations
contained in Sections 8.4 and 8.6 hereof, and Seller=s indemnification
obligations contained in Section 8.5 hereof, shall continue in force and
effect for the five (5) year period immediately following the Closing
Date and, with respect to any indemnified Claim raised during said five
year period, until final, unappealable resolution of said Claim.
Neither Seller nor Buyer shall have any obligation or liability under
this Agreement or in connection with or with respect to the transactions
contemplated in this Agreement for (i) any breach, misrepresentation or
noncompliance with respect to any representation, warranty, covenant or
obligation if such breach, misrepresentation or noncompliance shall have
been waived by the other party, (ii) any misrepresentation or breach of
warranty if such other party had knowledge of the relevant facts at or
before Closing, or (iii) any misrepresentation or breach of warranty if
such other party should have known, in the exercise of reasonable
diligence, of the relevant facts at or before Closing.
8.8 Successors and Assigns. The indemnities of this Article 8 shall inure
to the benefit of Buyer and Seller and the respective affiliates,
partners, members, officers, directors, employees, agents, successors
and assigns of each of them.
8.9 EXCEPT AS OTHERWISE PROVIDED HEREIN, THE INDEMNIFICATION, RELEASE AND
ASSUMPTION PROVISIONS PROVIDED FOR IN ARTICLE 8 OF THIS AGREEMENT SHALL
BE APPLICABLE WHETHER OR NOT THE CLAIMS IN QUESTION AROSE FROM THE
GROSS, SOLE, CONCURRENT, ACTIVE OR PASSIVE NEGLIGENCE OF THE SELLER AND
ITS EMPLOYEES AND/OR AGENTS OR ANY THIRD PARTY AND REGARDLESS OF WHO MAY
BE AT FAULT OR OTHERWISE RESPONSIBLE UNDER ANY OTHER CONTRACT, OR ANY
STATUTE, RULE, OR THEORY OF LAW, INCLUDING, BUT NOT LIMITED TO, THEORIES
OF STRICT LIABILITY. BUYER AND SELLER ACKNOWLEDGE THAT THIS STATEMENT
COMPLIES WITH THE EXPRESS NEGLIGENCE RULE AND IS CONSPICUOUS.
ARTICLE 9. TAXES AND EXPENSES.
9.1 Recording and Transfer Expenses. Buyer shall pay all costs of recording
and filing (i) the assignments delivered hereunder for the Interests,
(ii) all state, federal and Indian transfer and assignment documents,
(iii) all applications and other documents required for the transfer of
permits and operatorship of the Interests, and (iv) all other
instruments.
9.2 Ad Valorem, Real Property and Personal Property Taxes. All Ad Valorem
Taxes, Real Property Taxes, Personal Property Taxes, and similar
obligations (AProperty Taxes@) on the Interests are Seller=s obligation
for periods before the Effective Date and Buyer=s obligation for periods
on and after the Effective Date. If Property Taxes for the current year
have not been assessed and paid as of the Closing Date, (i) such taxes
shall be estimated based upon the prior year=s Property Taxes, (ii) the
Seller will reimburse the Buyer for its proportionate share of these
estimated taxes, prorated as of the Effective Date, as a closing
adjustment to the Sale Price, as provided in Section 2.2 of this
Agreement, and (iii) the Buyer shall file all required reports and
returns incident to the Property Taxes and pay the Property Taxes for
the current tax year and subsequent periods. If Property Taxes for the
current tax year have been assessed and paid as of the Closing Date, the
Buyer will reimburse the Seller for its proportionate share of these
taxes, prorated as of the Effective Date, as a closing adjustment to the
Sale Price, as provided in Section 2.2 of this Agreement.
9.3 Severance Taxes. Seller shall bear and pay all severance or other taxes
measured by Hydrocarbon production from the Interests, or the receipt of
proceeds therefrom, to the extent attributable to production from the
Interests before the Effective Date. Buyers shall bear and pay all such
taxes on production from the Interests on and after the Effective Date.
Seller shall withhold and pay on behalf of Buyer all such taxes on
production from the Interests between the Effective Date and the Closing
Date, and the amount of any such payment shall be reimbursed to Seller
as a closing adjustment to the Sale Price pursuant to Section 2.2
hereof. If either Party pays taxes owed by the other, upon receipt of
evidence of payment the nonpaying party will reimburse the paying Party
promptly for its proportionate share of such taxes.
9.4 Tax and Financial Reporting.
9.4.1 IRS Form 8594. If the Parties mutually agree that a filing of
Form 8594 is required, the Parties will confer and cooperate in
the preparation and filing of their respective forms to reflect
a consistent reporting of the Allocated Values of the Interests.
9.4.2 Financial Reporting. Seller and Buyer agree to furnish to each
other at Closing or as soon thereafter as practicable any and
all information and documents reasonably required to comply with
tax and financial reporting requirements and audits.
9.5 Sales and Use Taxes. Buyer shall be responsible for all sales, use and
similar taxes applicable to the transfer of the Interests. If Seller is
required to pay such sales, use or similar taxes on behalf of Buyer,
Buyer will reimburse Seller at Closing for all sale and use taxes due
and payable on the transfer of the Interests to Buyer. Buyer shall
indemnify Seller and hold Seller harmless from any liability, including,
without limitation, penalties, interest and attorneys= fees, arising out
of Buyer=s failure to pay Seller at Closing the amount equal to all
state and local sales and use taxes payable by Seller on the transfer of
ownership of any tangible personal property.
9.6 Income Taxes. Each Party shall be responsible for its own state and
federal income taxes, if any, as may result from this transaction.
9.7 Incidental Expenses. Each Party shall bear its own respective expenses
incurred in connection with the negotiation and Closing of this
transaction, including its own consultants= fees, attorneys= fees,
accountants= fees, and other similar costs and expenses.
ARTICLE 10. OPERATIONS DURING THE TRANSITION PERIOD.
10.1 Operations by Seller. Seller shall continue to operate that portion of
the Interests for which Seller is the operator during the period between
the Effective Date and 7:00 a.m., local time where the Interests are
located, on the Closing Date, or such other date as Seller and Buyer may
agree in writing or may be required by the applicable operating
agreement (the AInterim Period@). However, Seller will have no
obligation to operate any portion of the Interests after the Interim
Period. Seller shall operate the Interests during the Interim Period in
a prudent manner consistent with generally accepted industry practices
and standards, applicable laws and regulations, and all applicable lease
and operating agreements and other applicable agreements. Transfer of
operations for the Interests is controlled by the applicable operating
agreements and governmental regulatory requirements. Seller shall use
its good faith efforts to assist Buyer in becoming operator of those
Interests currently operated by Seller but shall in no event be required
to expend funds in connection therewith.
10.2 Buyer=s Approval. In conducting operations during the Interim Period,
Seller shall, except for emergency action taken in the face of serious
risk of life, property or the environment, (i) obtain Buyer=s prior
written approval of all expenditures and proposed contracts and
agreements, or amendments to existing contracts and agreements relating
to the Interests that involve individual commitments of more than
$25,000.00 which approval shall not be unreasonably withheld; (ii)
consult with and advise Buyer regarding all material matters concerning
the operation, management and administration of the Interests; and (iii)
obtain Buyer=s written approval before voting under any operating, unit,
joint venture or similar agreement which approval shall not be
unreasonably withheld. Seller shall notify Buyer of any emergency
action taken, and to the extent reasonably practicable, obtain Buyer=s
prior approval of such actions. However, except for emergency action
that must be taken in the face of serious risk of life, property or
environment, Seller will have no obligation to undertake any actions
with respect to the Interests that are not required in the course of the
normal operation of the Interests.
10.3 Compensation of Seller. Buyer will pay Seller, as provided under the
applicable operating agreement, for Buyer=s working interest share of
all operating expenses and other expenditures paid by Seller in
connection with the operation of the Interests during the Interim
Period, including overhead charges at the rate specified in the
applicable operating agreement. Seller will have no obligation to make
capital expenditures or extraordinary operating expenditures in
connection with the Interests during the Interim Period. Additionally,
Seller may require Buyer to prepay on a monthly basis any and all
expenses that Seller estimates it will pay in connection with the
operation of the Interests. If Buyer is ultimately selected as operator
of the Interests, Buyer will additionally reimburse Seller for the
amounts of any unpaid operating expenses and capital expenditures of
other working interests owners paid by Seller and attributable to
operations during the Interim Period. Seller will be entitled to retain
any overhead payments received from other working interest owners and
attributable to operations during the Interim Period.
ARTICLE 11. MISCELLANEOUS.
11.1 Notices. All communications required or permitted under this Agreement
shall be in writing and any communications or delivery hereunder shall
be deemed to have been fully made if actually delivered, or if mailed by
registered or certified mail, postage prepaid or by facsimile
transmission, to the address set forth below:
SELLER
SABA ENERGY OF TEXAS, INC.
1603 Southeast 19th Street
Suite 202
Edmond, OK 73013
Attention: Randeep S. Grewal
Phone: 405.340.3600
Fax: 405.340.3691
with a copy to:
Susan M. Whalen
650 Fifth Avenue
Suite 1501
New York, NY 10211
Phone: 212.218.4680
Fax: 212.218.4679
BUYER
ENERVEST ENERGY, L.P.
c/o EnerVest Management Company, L.C.
1001 Fannin, Suite 1111
Houston, Texas 77002
Attention: John B. Walker
Phone: 713.659.3500
Fax: 713.659.3556
with a copy to:
Fabene Welch Talbot
Haynes and Boone, LLP
1000 Louisiana
Suite 4300
Houston, TX 77002
Phone: 713.547.2004
Fax: 713.236.5578
11.2 Further Assurance. After Closing, each of the Parties shall execute,
acknowledge and deliver to the other such further instruments, and take
such other actions as may be reasonably necessary to carry out the
provisions of this Agreement. However, Buyer shall assume all
responsibility for notifying the purchaser of oil and gas production
from the Interests, and such other designated persons who may be
responsible for disbursing payments for the purchase of such production,
of the change of ownership of the Interests. Buyer shall take all
actions necessary to effectuate the transfer of such payments to Buyer.
After final settlement has been made in accordance with Section 2.3,
additional proceeds received by or expenses paid by either Buyer or
Seller on behalf of the other Party shall be settled by invoicing such
Party for expenses paid or remitting to such other Party any proceeds
received.
11.3 Removal of Signs. Seller may either remove its name and signs from the
Seller-operated Interests or require Buyer to do so. Buyer grants
Seller a right of access to the Interests to remove Seller's signs and
name from all wells, facilities and Leases, or to confirm that Buyer has
done so. If Seller's name or signs remain on the Interests after
Closing, Buyer will promptly, but no later than required by applicable
rules and regulations or thirty (30) days after Closing, whichever is
earlier, remove all remaining signs and references to Seller and erect
or install signs complying with applicable rules and regulations,
including signs showing the Buyer as Operator of the Interests as
operated by Seller.
11.4 Securities Laws. The solicitation of offers and the sale of the
Interests by Seller have not been registered under any securities laws.
Buyer represents that at no time has it been presented with or solicited
by or through any public promotion or any form of advertising in
connection with this transaction. Buyer represents that it intends to
acquire the Interests for its own benefit and account and that it is not
acquiring the Interests with the intent of distributing fractional,
undivided interests that would be subject to regulation by federal or
state securities laws, and that if it sells, transfers, or otherwise
disposes of the Interests or fractional, undivided interests, it will do
so in compliance with applicable federal and state securities laws.
11.5 Due Diligence. Buyer represents that it has performed, or will perform
prior to Closing, sufficient review and due diligence with respect to
the Interests, which includes reviewing well-data, title, and other
files, and performing necessary evaluations, assessments, and other
tasks involved in evaluating the Interests, to satisfy its requirements
completely and to enable it to make an informed decision to acquire the
Interests under the terms of this Agreement.
11.6 Material Factor. Buyer acknowledges that Buyer's representations under
Sections 11.4 and 11.5 are a material inducement to Seller to enter into
this Agreement with, and close the sale to, Buyer.
11.7 Press Release. There shall be no press release or public communication
concerning this purchase and sale by either Party, except as required by
law, rule, regulation or order or with the consent of the Party not
originating said release or communication. The Parties will endeavor to
consult each other in a timely manner on all press releases required by
law.
11.8 Entire Agreement. This instrument and the exhibits hereto state the
entire agreement between the Parties and may be supplemented, altered,
amended, modified or revoked by writing only, signed by all Parties.
This Agreement supersedes any prior agreements between the Parties
concerning sale of the Interests, except that any confidentiality
agreement shall continue as provided in Section 5.1 hereof. The headings
are for guidance only and shall have no significance in the
interpretations of this Agreement.
11.9 Assignability. This Agreement and the rights and obligations hereunder
shall not be assignable or delegable by either Party hereto without the
prior written consent of the other Party. This Agreement shall inure to
the benefit of the Parties and their respective successors and permitted
assigns.
11.10 Survival. Except with respect to the representations contained in
Sections 3.1.11 through 3.1.17 and unless otherwise expressly limited
herein, all of the representations, warranties, and agreements of or by
the Parties hereto shall survive the execution and delivery of the
Assignment and Bill of Sale. The representations contained in Section
3.1.11 through 3.1.17 shall terminate at Closing.
11.11 Severability. If any provision of this Agreement is found by a court of
competent jurisdiction to be invalid or unenforceable, that provision
will be deemed modified to the extent necessary to make it valid and
enforceable and if it cannot be so modified, it shall be deemed deleted
and the remainder of the Agreement shall continue and remain in full
force and effect.
11.12 Counterparts. This Agreement may be executed in counterparts, each of
which shall constitute an original and all of which shall constitute one
document.
11.13 Governing Law. This Agreement is governed by and must be construed
according to the laws of the State of Texas, excluding any conflicts-of-
law rule or principle that might apply the law of another jurisdiction.
11.14 Dispute Resolution. If a dispute arises between the Parties under this
Agreement, other than a dispute relating to an Environmental Condition
which shall be resolved pursuant to Section 5.3.3, and cannot be
resolved by negotiation, the Parties agree to submit the dispute to
mediation before resorting to litigation. Either Party may request
mediation of a dispute by sending a written request to the other Party.
If either Party requests mediation of a dispute, the Parties agree to
choose a mutually acceptable mediator, promptly begin mediation of the
dispute, and share the costs of all mediation services equally. Each
Party agrees to have present at all mediation conferences at least one
individual who has authority to settle the dispute. Notwithstanding
this agreement to mediate disputes, either Party may file a complaint
for statute of limitation or venue reasons, or seek a preliminary
injunction or other provisional judicial relief, if in its sole judgment
such action is necessary to avoid irreparable damage or to preserve the
status quo. Despite any such protective action, the Parties will
continue to try to resolve the dispute by negotiation or mediation.
11.15 Production Imbalances. The Sale Price does not take into account any
gas imbalances attributable to the Interests as of the Effective Date.
Set forth in Exhibit N attached hereto and made a part hereof for all
purposes is a listing of all gas imbalance volumes measured in mcf and
the aggregate net volume of overproduction or underproduction, as
applicable, attributable to the Interests as of the Effective Date. At
Closing, the Purchase Price shall be adjusted, upward or downward, as
appropriate, to reflect the value of said aggregate net volume of
overproduction or underproduction as said volume may be adjusted prior
to Closing in accordance with each Party=s due diligence investigation.
The value of said aggregate net volume of overproduction or
underproduction, as applicable, shall be the product obtained by
multiplying $1.00 by the volume of such aggregate net overproduction or
underproduction measured in mcf. The Parties acknowledge that the
imbalances assumed at Closing may be incorrect, and Buyer agrees that
the Sale Price will not be adjusted, irrespective of any actual
variance(s) from the assumed imbalances that may exist. Buyer will be
solely responsible for any liability and solely entitled to any benefit
from production imbalances relating to the Interests from and after the
Closing Date.
11.16 Exhibits. In the event of a conflict between the provisions of the
Exhibits attached to this Agreement and the foregoing provisions of this
Agreement, the provisions of this Agreement shall take precedence. The
omission of certain provisions of this Agreement from any conveyance
delivered pursuant hereto does not constitute a conflict between this
Agreement and said conveyance document and will not effect a merger of
the omitted provisions.
11.17 Amendments and Waivers. This Agreement may not be modified or amended
except by an instrument or instruments in writing signed by the Party
against whom enforcement of any such modification or amendment is
sought. Any Party hereto may, only by an instrument in writing, waive
compliance by the other Party hereto with any term or provision of this
Agreement on the part of such other Party hereto to be performed or
complied with. The waiver by any Party hereto of a breach of any term
or provision of this Agreement shall not be construed as a waiver of any
subsequent breach.
BUYER ACKNOWLEDGES THAT IT HAS READ THIS AGREEMENT IN ITS ENTIRETY, AND
THAT IT UNDERSTANDS ALL THE PROVISIONS SET FORTH THEREIN, INCLUDING, BUT NOT
LIMITED TO, THOSE PROVISIONS LOCATED IN ARTICLE 8 WHEREIN BUYER AGREES TO
INDEMNIFY SELLER IN CERTAIN CIRCUMSTANCES EVEN THOUGH THE LOSSES, COSTS,
EXPENSES AND/OR DAMAGES MAY HAVE BEEN CAUSED BY THE GROSS, SOLE, CONCURRENT,
ACTIVE OR PASSIVE NEGLIGENCE OF THE SELLER, ITS EMPLOYEES, OR ANY THIRD PARTY
AND EVEN THOUGH THE SELLER MAY BE RESPONSIBLE FOR SUCH LOSSES, COSTS, EXPENSES
AND/OR DAMAGES UNDER ANY THEORY OF LAW, INCLUDING BUT NOT LIMITED TO STRICT
LIABILITY.
EXECUTED as of the date first above mentioned.
SELLER:
SABA ENERGY OF TEXAS, INC.
By:
Randeep S. Grewal
Chief Executive Officer
BUYER:
ENERVEST ENERGY, L.P.
By: EnerVest Management Company, L.C.,
Managing General Partner
By:
John B. Walker
President and Chief Executive Officer
PURCHASE AND SALE AGREEMENT
BETWEEN
SABA ENERGY OF TEXAS, INC.
AND
ENERVEST ENERGY, L.P.
DATED
April 21, 1999
TABLE OF CONTENTS
Page No.
ARTICLE 1. PROPERTY DESCRIPTION . . . . . . .1
1.1 The Interests. . . . . .1
1.2 Ownership of Production from the Interests Prior to the
Effective
Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3 Ownership of Production from the Interests After the Effective
Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE 2. CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . 4
2.1 Sale Price . . . . . . .4
2.1.1 Amount Due at Closing . . . . . . 4
2.1.2 Allocated Values. . . . . . .4
2.1.3 Earnest Money . . . . . 4
2.1.4 Identification of Acquisition Funds . . . . . . .5
2.2 Adjustments at Closing . . . . . .5
2.2.1 Preliminary Settlement Statement. . . . . . 5
2.2.2 Upward Adjustments. . . . . .5
2.2.3 Downward Adjustments. . . . . . . 6
2.3 Adjustments After Closing. . . . . . . 7
2.3.1 Final Settlement Statement. . . . . . .7
2.3.2 Payment of Post-Closing Adjustments . . . . . . .7
2.3.3 Resolution of Disputed Items. . . . . .7
2.4 Payment Method . . . . . . . 8
2.5 Principles of Accounting . . . . . . . 8
ARTICLE 3. REPRESENTATIONS AND WARRANTIES . . . . . . .8
3.1 Seller's Representations . . . . . . . 8
3.1.1 Corporate Authority . . . . . . . 8
3.1.2 Requisite Approvals . . . . . . . 8
3.1.3 Validity of Obligation. . . . . . 8
3.1.4 No Violation of Contractual Restrictions. . . . . . . 9
3.1.5 No Violation of Other Legal Restrictions. . . . . . . 9
3.1.6 Bankruptcy. . . . . . . 9
3.1.7 Broker's Fees . . . . . 9
3.1.8 Lawsuits and Claims . . . . . . . 9
3.1.9 Permits . . . . . .9
3.1.10 Tax Partnerships. . . . . . 10
3.1.11 Operations and Expenditures.. . . . . 10
3.1.12 Prepayment Contracts. . . . . . .10
3.1.13 Taxes. . . . . . 10
3.1.14 Call on Production. . . . . 10
3.1.15Status and Operation of the Leases. . . . . . . 10
3.1.16 Compliance with Laws. . . . . . .11
3.1.17 Suitability of Equipment. . . . . . . 11
3.1.18 Accuracy of Information Furnished . . . . .12
3.2 Buyer's Representations. . . . . 12
3.2.1 Partnership Authority . . . . . .12
3.2.2 Requisite Approvals . . . . . . .12
3.2.3 Validity of Obligation. . . . . .12
3.2.4 No Violation of Contractual Restrictions. . . . . . .13
3.2. No Violation of Other Legal Restrictions. . . . . . .13
3.2.6 Bankruptcy. . . . . . .13
3.2.7 Broker=s Fees . . . . .13
3.2.8 Lawsuits and Claims . . . . . . .13
3.2.9 Securities Laws . . . . . . 13
3.3 Notice of Changes. . . . . .13
ARTICLE 4. TITLE WARRANTY; DISCLAIMER OF WARRANTIES . . . . . . 14
4.1 Special Warranty of Title; Encumbrances. . . . . . . 14
4.2 Condition and Fitness of the Interests . . . . .14
4.3 Information About the Interests. . . . . . 15
4.4 Subrogation of Warranties. . . . . . .15
ARTICLE 5. DUE DILIGENCE REVIEW OF THE INTERESTS. . . . . .15
5.1 Access to Records. . . . . .15
5.2 Physical and Environmental Inspection. . . . . .16
5.3 Environmental Assessment . . . . . . .16
5.3.1 Inspection and Test Results . . . . . 16
5.3.2 Notice of Environmental Conditions. . . . . . . 17
5.3.3 Rights and Remedies for Environmental Conditions. . . . . 17
5.4 Preferential Rights and Consents to Assign . . . . . 18
5.4.1 Notices to Holders. . . . . 18
5.4.2 Remedies Before Closing . . . . .19
5.4.3 Remedies After Closing. . . . . .20
(i) Preferential Rights. . . . . . . 20
(ii) Consents . . . . .20
5.5 Title Defects. . . . . 20
5.5.1 Definition of Title Defect. . . . . . 20
5.5.2 Notice of Title Defects . . . . .21
5.5.3 Right to Cure Title Defect. . . . . . 21
5.5.4 Remedies for Uncured Title Defects. . . . . . . 22
5.6 Casualty Losses and Government Takings.. . . . . . . 22
5.6.1 Notice of Casualty Losses and Government Takings. . . . . 22
5.6.2 Remedies for Casualty Losses and Government Takings . . . . . .23
5.6.3 Insurance Proceeds and Settlement Payments. . . . . .23
5.6.4 Exclusion of Ordinary Depreciation and Depletion. . . . . 23
ARTICLE 6. TERMINATION AND EFFECT OF TERMINATION. . . . . .24
6.1 Right to Terminate . . . . .24
6.2 Effect of Termination. . . . . . 24
6.2.1 Termination by Agreement. . . . . . . 24
6.2.2 Termination as a Result of Buyer=s Breach . . . . . .24
6.2.3 Termination as a Result of Seller=s Breach. . . . . .25
6.2.4 Termination Pursuant to Section 6.1.. . . . . . 25
6.2.5 Return of Data. . . . . . . 25
ARTICLE 7. CONDITIONS OF CLOSING AND CLOSING. . . . . 25
7.1 Conditions of Closing by Buyer . . . . . . 25
7.1.1 Representations, Warranties and Covenants. . . . . . . . 25
7.1.2 Consents. . . . . 25
7.1.3 Lawsuits and Claims . . . . . . .26
7.1.4 Bank Releases . . . . .26
7.1.5 Guaranty. . . . . 26
7.2 Conditions of Closing by Seller. . . . . . 26
7.2.1 Representations, Warranties and Covenants . . . . . .26
7.2.2 Lawsuits and Claims . . . . . . .26
7.2.3 Bonds and Insurance . . . . . . .26
7.3 Closing. . . . . .27
7.4 Actions to Occur at Closing. . . . . .27
7.4.1 Delivery of Assignment. . . . . .27
7.4.2 Delivery of Bank Releases . . . . . . 27
7.4.3 Delivery of Guaranty. . . . . . .27
7.4.4 Delivery of Sale Price. . . . . .27
7.4.5 Change of Operatorship Forms. . . . . 27
7.4.6 Evidence of Bonds . . . . . 27
7.4.7 Possession of the Interests . . . . . 27
7.4.8 Letters-in-Lieu . . . . . . 27
7.4.9 Officer=s Certificates. . . . . .28
7.5 Post-Closing Obligations . . . . . . .28
7.5.1 Delivery of Records . . . . . . .28
7.5.2 Recording and Filing. . . . . . .28
7.5.3 Change of Operator Requirements . . . . . .28
7.5.4 Further Assurances. . . . . . . .29
ARTICLE 8. ASSUMED RIGHTS AND OBLIGATIONS AND INDEMNITIES.. . . . . .29
8.1 Condition of the Interests . . . . . .29
8.1.1 Oil and Gas Activities. . . . . .29
8.1.2 NORM. . . . . . . 29
8.2 Assumption of Obligations by Buyer . . . . . . .30
8.3 Retention of Liabilities by Seller . . . . . . .30
8.4 General Indemnification by Buyer . . . . . 30
8.5 Indemnification by Seller. . . . . . .31
8.6 Environmental Indemnity and Release. . . . . . .32
8.7 Limitations on Liabilities . . . . . .32
8.8 Successors and Assigns . . . . . 33
ARTICLE 9. TAXES AND EXPENSES.. . . . . . . 33
9.1 Recording and Transfer Expenses. . . . . . 33
9.2 Ad Valorem, Real Property and Personal Property Taxes. . . . . 33
9.3 Severance Taxes. . . . . . .34
9.4 Tax and Financial Reporting. . . . . .34
9.4.1 IRS Form 8594 . . . . .34
9.4.2 Financial Reporting . . . . . . .34
9.5 Sales and Use Taxes. . . . . . . 34
9.6 Income Taxes . . . . . 35
9.7 Incidental Expenses. . . . . . . 35
ARTICLE 10. OPERATIONS DURING THE TRANSITION PERIOD. . . . . . . 35
10.1 Operations by Seller . . . . . . 35
10.2 Buyer=s Approval . . . . . .35
10.3 Compensation of Seller . . . . . 36
ARTICLE 11. MISCELLANEOUS. . . . . 36
11.1 Notices. . . . . .36
11.2 Further Assurance. . . . . .37
11.3 Removal of Signs . . . . . .38
11.4 Securities Laws. . . . . . .38
11.5 Due Diligence. . . . . 38
11.6 Material Factor. . . . . . .38
11.7 Press Release. . . . . 38
11.8 Entire Agreement . . . . . .Page 39
11.9 Assignability. . . . . Page 39
11.10 Survival . . . . .Page 39
11.11 Severability . . . . . Page 39
11.12 Counterparts . . . . . Page 39
11.13 Governing Law. . . . . Page 39
11.14 Dispute Resolution . . . . .Page 39
11.15 Production Imbalances. . . . . . Page 40
11.16 Exhibits . . . . .Page 40
11.17 Amendments and Waivers . . . . . Page 40
LIST OF EXHIBITS
Exhibit A-1 Description of Interests
Exhibit A-2 Description of Leases
Exhibit B Equipment
Exhibit C Easements, Rights-of Way, Licenses, Permits, etc.
Exhibit D Contracts
Exhibit E Liens, Mortgages and Other Encumbrances Affecting the Leases
Exhibit F Allocated Values
Exhibit G Suspense Accounts
Exhibit H Lawsuits and Claims
Exhibit I Unpaid Operating Costs
Exhibit J Compliance With Laws
Exhibit K Preferential Purchase Rights and Consents to Assign
Exhibit L Guaranty of Saba Petroleum Company
Exhibit M Form of Assignment, Bill of Sales and Conveyance
Exhibit N Production Imbalances
EXHIBIT 10.4
AGREEMENT FOR PURCHASE AND SALE OF REAL ESTATE
This agreement for purchase and sale of real estate ("Agreement") made
this 28th day of April, 1999, between Pembrooke Calox, Inc., a Florida
corporation ("Purchaser"), Calox Corporation, an Indiana corporation
("Seller"), and Greka Energy Corporation (f/k/a Horizontal Ventures, Inc.), a
Colorado corporation ("HVI") .
R E C I T A L S:
WHEREAS, Seller owns that certain land located in the County of Monroe,
State of Indiana, legally described on Exhibit A attached hereto (the "Land"),
and also owns those certain other assets, rights, licenses, privileges,
benefits, profits, accounts and claims hereinafter more specifically
described, all of which (including the Land) taken together hereinafter
sometimes collectively referred to as the "Purchased Assets"; and
WHEREAS, Seller desires to sell and Purchaser desires to purchase the
Purchased Assets upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, for and in consideration of the mutual covenants,
agreements, representations and warranties herein contained, the parties
hereto do hereby covenant and agree as follows:
1. PURCHASE AND SALE; PURCHASED ASSETS.
1.1 Seller agrees to sell and convey to Purchaser, and Purchaser agrees
to purchase from Seller, upon the terms and conditions hereinafter set forth,
the Purchased Assets, comprised of all of the lands, assets, rights,
licenses, privileges, benefits, profits, accounts and claims of Seller of
every kind, character and description now or hereafter existing on the Closing
Date (hereinafter defined), whether tangible or intangible, real, personal or
mixed, being or in way belonging or relating to the Land and their ownership
and operation, including the following:
A. The Land and all easements, tenements, hereditaments, rights,
licenses, privileges and appurtenances, whether or not of record, in any way
belonging or relating thereto and all limestone, rock, timber, mineral, oil,
gas and other hydrocarbon substances and all other natural resources of every
nature and description on or under the Land and all development, air, water
and other rights in any way belonging or relating to the Land (collectively,
the "Premises").
B. All right, title and interest in and to any streets, roads,
alleys or other public ways adjoining or serving the Land or any part thereof,
including any land lying in the bed of any street, road, alley or other public
way, open or proposed, and any strips, gores, culverts and rights-of-way
adjoining or serving the Land or any part thereof (including all riparian and
other rights in and to submerged lands).
C. All certificates, permits, licenses, franchises,
authorizations and approvals in any way belonging or relating to the
Premises or the ownership, use, access, occupancy, repair or maintenance
thereof or any part thereof, running to or in favor of any one or more
of Seller Parties (hereinafter defined) or the Premises and which
Purchaser hereafter elects in writing to accept.
D. All right, title and interest of any one or more of Seller
Parties of every kind, character and description in and to the
following: All surveys, title reports, engineering reports, drawings,
plans and specifications covering the Purchased Assets or any part
thereof; all geological, drilling, reserve, environmental, hazardous
waste and other files relating to the natural resources on or under the
Land and the actual or potential development thereof; and all books,
records and other files which have been or are used in connection with
the ownership or operation of the Purchased Assets or any part thereof
or the conduct of the business of any one or more of Seller Parties in
any way relating to the Purchased Assets or any part thereof.
2. PURCHASE PRICE.
2.1 Subject to prorations and adjustments as herein provided, the
total purchase price for the Purchased Assets shall be Five Million Seven
Hundred Thousand Dollars ($5,700,000.00) payable by the delivery at Closing of
Purchaser's non-recourse promissory note, the form of which is annexed hereto
as Exhibit B (the "Note"); provided, however, in the event that $3,850,000.00
is paid in one lump sum by July 31, 1999, the purchase price shall be
reduced to a total of $4,650,000.00 and the $800,000.00 balance thereof shall
be an unsecured obligation of Seller due in four $200,000.00 payments due on
or before March 31 in each of the years 2001, 2002, 2003 and 2004. In the
event that either the $5,700,000.00 or $3,850,000.00 is paid by November 1 or
July 31, 1999, as the case may be, the reasonable cost of the Policy as
defined is section 3.3 may be deducted from such payment.
3. TITLE; TITLE PAPERS.
3.1 Conveyance to Purchaser of title to the Premises shall be by
delivery of Seller's executed special warranty deed ("Seller's Deed"), in
recordable form, conveying good, insurable and marketable fee simple title to
the Premises subject only to the Permitted Encumbrances (hereinafter defined)
and real estate taxes not due and payable at Closing.
3.2 Conveyance to Purchaser of title to the remainder of the Purchased
Assets shall be by delivery of Seller's executed unconditional deeds,
assignments and other conveyance instruments as set forth herein with
covenants and general warranties of good and marketable title, free and clear
of all security interests, liens, charges, claims and encumbrances.
3.3 Seller, at Purchaser's expense, shall furnish to Purchaser at the
Closing a fully paid title insurance policy ("Policy") in the amount of the
Purchase Price issued by a title insurance company licensed to do business in
the state where the Land is located and satisfactory to Purchaser (such title
insurance company, as applicable, hereinafter sometimes referred to as the
"Title Company"), insuring Purchaser's fee title to the Premises free and
clear of all liens and encumbrances other than (i) the matters set forth on
Exhibit 3.3 attached hereto (the "Permitted Encumbrances"), and (ii) real
estate taxes not due and payable at the date thereof, which policy shall be in
form and substance, and contain such coverages, endorsements, and negotiated
additional changes and additional endorsements, as agreed upon by the Title
Company and Purchaser, dated concurrent with Closing. The Policy shall
provide "gap" protection.
4. CLOSING.
4.1 The consummation of the transaction contemplated hereunder
("Closing") shall take place on the date of execution of this Agreement.
5. SELLER'S AND PURCHASER'S REPRESENTATIONS, WARRANTIES AND
COVENANTS.
5.1 Seller represents and warrants as follows:
A. (i) None of Seller or any of its Related Parties
(hereinafter defined) (Seller and its Related Parties are herein
referred to collectively as the "Seller Parties", and individually as a
"Seller Party") is a party to, subject to or bound by (a) any provision
of a partnership or joint venture agreement, other instrument or
agreement, contract, license, permit, trust, custodianship, or other
restriction, or (b) any judgment, order, statute, rule, regulation,
writ, injunction or decree of any court, governmental body,
administrative agency or arbitrator, which would prevent or be violated
by, or under which there would be a default, acceleration, or right to
accelerate any maturity date or other obligation, or which would result
in creation of any lien, charge, claim or encumbrance upon any of the
Purchased Assets as a result of any of the items set forth below; and
(ii) no designation, registration or declaration with, or approval,
order, authorization or consent of, or payment of any premium, fee or
penalty to, any governmental authority or any other person or entity,
which has not been obtained, is required for or will arise out of any of
the items set forth below:
(1) the execution, delivery and performance of this
Agreement and any other agreements, obligations and instruments
referred to in or contemplated by this Agreement;
(2) the performance or satisfaction, subsequent to the
Closing, by Purchaser of any agreement or liability taken subject
to or accepted or assumed by Purchaser pursuant to this Agreement
or any document which is an Exhibit hereto or described or
referred to on any Schedule hereto;
(3) the deeding, conveyancing, assignment or other
transfer to Purchaser in accordance with this Agreement of the
Purchased Assets and any agreements and liabilities to which
Purchaser is taking subject or is accepting or assuming pursuant
to this Agreement or any document which is an Exhibit hereto or
described or referred to on any Schedule hereto; or
(4) the ownership or operation of the Purchased
Assets by
Purchaser subsequent to the Closing in the same or similar manner,
if so determined by Purchaser, of the ownership and operation of
the Purchased Assets by Seller prior to the Closing.
Seller's "Related Parties" shall mean collectively (i) any person or
entity owing or controlling Seller or owned or controlled by Seller, in
whole or in part, directly or indirectly, (ii) the joint venturers,
partners, directors, officers, shareholders, employees, agents
(including managing and leasing agents and their officers and employees)
and attorneys of Seller and of any such person or entity described in
(i), and (iii) the heirs, legal representatives, successors and assigns
of each and all of the foregoing.
B. Seller is a corporation duly created, validly existing and
in good standing under the laws of Indiana. Seller has all power and
authority to conduct its business as now being conducted and to own and
lease all of the properties owned and leased by it.
C. Seller and HVI each have the requisite power and authority
to enter into and perform the terms of this Agreement; HVI is the sole
shareholder of Seller; HVI and each of the other of Seller Parties has
the requisite power and authority to authorize Seller to enter into and
perform the terms of this Agreement to the extent such authorization is
required; the execution and delivery of this Agreement and the
consummation of the transaction contemplated hereby have been duly
authorized by all necessary parties and no other proceedings on the part
of any of Seller Parties are necessary in order to permit them to
consummate the transaction contemplated hereby. This Agreement has been
duly executed and delivered by Seller Parties that are parties or
signatories hereto and (assuming valid execution and delivery by
Purchaser) is a legal, valid and binding obligation of each Seller Party
enforceable against it in accordance with its terms.
5.2 The Seller covenants to warrant and forever defend the Purchaser
from and against all persons claiming under the Seller any interest in the
Purchased Assets.
5.3 Purchaser represents and warrants as follows:
A. Purchaser is a Florida corporation duly organized, validly
existing and in good standing under the laws of the State of Florida.
At Closing Purchaser or any applicable assignee or nominee will have all
power and authority to own and operate the Purchased Assets.
B. Purchaser has the requisite power and authority to enter
into and perform the terms of this Agreement. The execution and
delivery of this Agreement and the consummation of the transaction
contemplated hereby have been duly authorized by all necessary parties
and no proceedings on the part of Purchaser are necessary in order to
permit it to consummate the transaction contemplated hereby. This
Agreement has been duly executed and delivered by Purchaser and
(assuming valid execution and delivery by Seller) is a legal, valid and
binding obligation of Purchaser enforceable against it in accordance
with its terms.
5.4 All of the covenants, agreements, representations and warranties
of Purchaser and Seller contained in this Agreement shall be deemed made of
Closing, shall survive the Closing, and shall not be deemed to merge upon the
delivery and acceptance of Seller's Deed or any other conveyance document.
6. CLOSING; CLOSING DOCUMENTS.
6.1 At the Closing, Seller shall deliver to Purchaser the following:
A. The ALTA Owner's Policy of title insurance in form and
content required by Paragraph 3.
B. Seller's duly executed Seller's Deed in recordable form
conveying to Purchaser fee simple title to the Premises in the condition
required by Paragraph 3.1.
C. Seller's duly executed bills of sale, assignments,
conveyances and/or deeds referred to in Paragraph 3.2.
D. Seller's duly executed assignment of all certificates,
permits, licenses, franchises, authorizations and approvals if any exist
which Purchaser desires to have assigned to it, and all of Seller's
rights thereunder, together with the originals thereof.
E. Seller's duly executed closing statement in accordance
herewith.
F. A certificate that Seller is not a "foreign person" as
defined in the Federal Foreign Investment in Real Property Tax Act of 1980 and
the 1984 Tax Reform Act, as amended, in a form complying with federal tax law.
G. All applicable state, county and municipal transfer
declarations, certificates respecting payment of water and sewer bills and any
other governmental furnished services or facilities, and any other required
governmental certificates.
H. The Escrow Agreement, Special Warranty Deed Deposit
Agreement, Assignment and Assumption of Rights and Obligations, and all other
agreements and documents required to be delivered by Seller under this
Agreement if not previously delivered.
In addition to the obligations required to be performed hereunder by Seller at
Closing, from time to time subsequent to the Closing Seller shall perform such
other acts, and shall execute, acknowledge and deliver such other agreements
and documents as Purchaser reasonably may request in order to effectuate the
consummation of the transaction contemplated herein or as may be needed to
vest good, insurable and marketable title to the Purchased Assets in Purchaser
or its assignee or nominee.
6.2 At the Closing, Purchaser shall deliver to Seller the following:
A. The Note.
B. The Mortgage Agreement in the form attached as Exhibit C.
C. Purchaser's duly executed closing statement in accordance
herewith.
D. Corporate Special Warranty Deed, Assignment and Assumption
of Rights and Obligations, Escrow Agreement, Special Warranty Deed
Deposit Agreement and any other documents required to be delivered by
Purchaser under this Agreement if not previously delivered.
In addition to the obligations required to be performed hereunder by Purchaser
at Closing, from time to time subsequent to the Closing Purchaser shall
perform such other acts, and shall execute, acknowledge and deliver such other
agreements and documents as Seller reasonably may request in order to
effectuate the consummation of the transaction contemplated herein.
7. CLOSING PRORATIONS.
7.1 Prorations and adjustments to the Closing Payment, as described in
Paragraph 2.1, payable hereunder shall be made between Seller and Purchaser
and shall be prorated on a per diem basis as of midnight of the day preceding
the Closing Date, such time on such day being the "Proration Date".
7.2 Real property taxes for the then (at the Proration Date) current
tax fiscal year and any installment of real property taxes for any prior tax
fiscal year not yet due and payable shall be prorated in proportion to the
portions of such tax fiscal years elapsed prior to the Proration Date and
remaining after the Proration Date.
7.3 Purchaser shall be responsible for the payment of all assessments
made after the Proration Date or imposed against the Premises or any part
thereof for governmental improvements affecting the Premises not substantially
completed or installed prior to the Proration Date (subject to Seller's
warranties and representations set forth in Paragraph 5.1) and Seller shall
provide to Purchaser a proration credit and be responsible for all of same for
improvements substantially completed or installed prior to the Proration Date,
and each shall indemnify, defend, exonerate and save the other and its Related
Parties harmless from any claims therefor or any liability, loss, cost or
expense arising therefrom.
7.4 Seller shall pay all sales, use, excise and other similar taxes
and all transfer taxes, conveyance taxes, documentary stamp taxes, deed taxes
and other similar taxes. Purchaser shall pay recording charges in respect of
the recordation of Seller's Deed.
7.5 Utilities, if any, payable by Seller, shall be prorated. Seller
shall endeavor to obtain meter readings as of the Proration Date, and if such
readings are obtained, there shall be no proration of such items and Seller
shall pay the bills therefor for the period to the Proration Date, and
Purchaser shall pay the bills therefor for the period subsequent to the
Proration Date as and when rendered. If Seller is unable to obtain meter
readings as of the Proration Date, utilities shall be prorated at the
Proration Date based upon the most recent utility bills, adjusted for
seasonality, and reprorated upon issuance of the actual bills.
7.6 Prepaid and unpaid current expenses and charges respecting
expenses incurred in the operation of the Premises shall be prorated at and as
of the Proration Date. (However, fees paid by Seller with respect to
certificates, permits, licenses, franchises, authorizations and approvals
assigned by Seller to Purchaser at the Closing shall not be prorated, but
shall be paid for and assumed entirely by Seller.)
8. BROKER.
8.1 Seller and Purchaser each represent and warrant to the other that
they know of no brokers or other persons or entities who have been
instrumental in submitting or showing the Premises to, or procuring Purchaser.
9. NOTICE.
9.1 All notices to be given hereunder shall be hand delivered or sent
by registered or certified mail, return receipt requested, with postage
prepaid, or by Federal Express or other comparable nationwide overnight air
courier service to the parties at the following addresses (or to such other or
further addresses as the parties may hereafter designate by like notice
similarly sent):
A. If intended for Purchaser:
Pembrooke Calox, Inc.
11066 Seaport Lane
Boca Raton, Florida 33428
with a simultaneous copy to:
Hofheimer Gartlir & Gross, LLP
530 Fifth Avenue, 9th Floor
New York, New York 10036
Attn: Richard G. Klein, Esq.
Fax (212) 661-3132
B. If intended for Seller:
Calox, Inc.
c/o Greka Energy Corporation
630 Fifth Avenue, Suite 1501
New York, New York 10111
Fax (212) 218-4679
with a simultaneous copy to:
Roger V. Davidson, Esq.
Ballard Spahr Andrews & Ingersoll, LLP
1225 17th Street, Suite 2300
Denver, Colorado 80202-5596
Fax (303) 296-3956
C. If intended for HVI:
Greka Energy Corporation
630 Fifth Avenue, Suite 1501
New York, New York 10111
Fax (212) 218-4679
with a simultaneous copy to:
Roger V. Davidson, Esq.
Ballard Spahr Andrews & Ingersoll, LLP
1225 17th Street, Suite 2300
Denver, Colorado 80202-5596
Fax (303) 296-3956
Any notice given hereunder shall be deemed given on the date and at the time
of delivery (or the first business day thereafter if delivered on Saturday,
Sunday or legal holiday) to any of said addresses. The inability to deliver
notice because of changed address of which no notice was given hereunder,
rejection or any refusal to accept any notice shall be deemed to be the
receipt of the notice as of the date of such inability to deliver, rejection
or refusal to accept. Any party's above-named attorney may give an effective
and binding notice in accordance with this Paragraph 9.1 on behalf of such
party. Also, each notice shall be effective and binding even though the
above-described copy of such notice is not received by the above-described
parties to whom only a copy of such notice is to be transmitted (i.e., the
above-named second party and, as concerns Purchaser, also the above-named
third party to whom only a copy of such notice is to be transmitted).
10. CAPTIONS OR HEADINGS.
10.1 The captions or headings of the Paragraphs of this Agreement are
for convenience only, and shall not control or affect the meaning or
construction of any of the terms or provisions of this Agreement.
11. GOVERNMENTAL FILINGS.
11.1 Purchaser on the one hand and Seller on the other hand shall use
their best efforts to:
A. promptly and timely file all filings, reports, certificates
and applications required to carry out the transactions contemplated by
this Agreement or to consummate the transactions contemplated hereby
required, if at all, by (i) the federal securities laws, or (ii) the
United States or any commission, agency or department thereof; and
B. promptly and timely prepare, file and prosecute all filings,
reports, certificates and applications required by the State of Indiana
or any commission, agency or department thereof.
12. INTENTIONALLY OMITTED.
13. INDEMNITY.
13.1 Notwithstanding the absence in this Agreement of any particular or
specific representation, warranty or covenant of the Seller, it being the
intention of the parties to abbreviate this Agreement to the greatest extent
possible, Seller does hereby agree to indemnify, defend and hold harmless
Purchaser and any person or entity affiliated with or owning or controlling,
in whole or in part, directly or indirectly, Purchaser; the joint venturers,
partners, trustees, officers, directors, shareholders, employees, agents and
attorneys at any time and from time to time of any of the foregoing; and the
heirs, legal representatives, successors and assigns of each and all of the
foregoing (collectively "Purchaser Related Parties") of and from any and all
claims, demands, damages, losses, injuries, liabilities, penalties, costs,
expenses (including reasonable attorneys' fees), suits, actions,
investigations, judgments and fees which may be imposed upon, incurred or
suffered by or asserted against any one or more of Purchaser or Purchaser
Related Parties arising out of or in connection with any one or more of the
following:
A. any act or omission in, on or about or relating to or in
connection with, the Premises and its ownership, use and occupancy
before Closing;
B. any use, occupancy, ownership or operation of any of the
Purchased Assets or any occurrence in, on or about the Premises before
Closing;
C. any accident, injury (including death) or damage, regardless
of the cause thereof, to any person or property occurring in, on or
about the Premises before Closing;
D. any failure to perform or comply with any agreements,
obligations or undertakings on Seller's part to be performed before
Closing;
E. any income, sales, use, excise, receipts or other tax,
including any transferee liability, (i) with respect to the use,
ownership, occupation and operation of any of the Purchased Assets
before Closing, (ii) with respect to any agreement or obligation of
Seller under this Agreement to pay same, and (iii) with respect to any
income or other gain or any other governmental charge, whether
incidental to this transaction or otherwise; and
F. any breach of any representation, warranty, covenant or
agreement made by Seller in this Agreement.
13.2 Notwithstanding the absence in this Agreement of any particular or
specific representation, warranty or covenant of the Purchaser, it being the
intention of the parties to abbreviate this Agreement to the greatest extent
possible, Purchaser does hereby agree to indemnify, defend and hold harmless
Seller and any person or entity affiliated with or owning or controlling, in
whole or in part, directly or indirectly, Purchaser; the joint venturers,
partners, trustees, officers, directors, shareholders, employees, agents and
attorneys at any time and from time to time of any of the foregoing; and the
heirs, legal representatives, successors and assigns of each and all of the
foregoing (collectively "Seller Related Parties") of and from any and all
claims, demands, damages, losses, injuries, liabilities, penalties, costs,
expenses (including reasonable attorneys' fees), suits, actions,
investigations, judgments and fees which may be imposed upon, incurred or
suffered by or asserted against any one or more of Purchaser or Purchaser
Related Parties arising out of or in connection with any one or more of the
following:
A. any act or omission in, on or about or relating to or in
connection with, the Premises and its ownership, use and occupancy on or
after the Closing Date;
B. any use, occupancy, ownership or operation of any of the
Purchased Assets or any occurrence in, on or about the Premises on or
after the Closing Date;
C. any accident, injury (including death) or damage, regardless
of the cause thereof, to any person or property occurring in, on or
about the Premises on or after the Closing Date;
D. any failure to perform or comply with any agreements,
obligations or undertakings on Purchaser's part to be performed after
the Closing Date; and.
E. any breach of any representation, warranty, covenant or
agreement made by Purchaser in this Agreement.
14. MISCELLANEOUS.
14.1 This Agreement, and the Exhibits and Schedules attached hereto
embody the entire agreement between the parties in connection with the
purchase of the Purchased Assets and the Premises transaction and there are
no oral or parol agreements, representations or inducements existing between
the parties relating to this transaction which are not expressly set forth
herein and covered hereby; provided, however that expressly surviving this
Agreement and the transactions contemplated hereby are the respective rights
and obligations set forth in Section 2(d) and the last sentence of Section 9
of that certain Settlement Agreement dated as of February 1, 1999 relating to
Pembrooke Holdings Corp. v. International Publishing Holding, Supreme Court of
New York, County of New York, Index No. 6035621/98; and this Agreement may not
be modified except by a written agreement signed by all of the parties.
14.2 This Agreement shall be binding upon and inure to the benefit of
the parties hereto, their respective heirs, legal representatives, successors,
and assigns, except that no party hereto may assign or transfer any of its
interest hereunder without the express written consent of the other party
hereto; provided, however, Purchaser may assign its interest in this Agreement
simultaneously with the Closing hereunder and/or identify a nominee to receive
its conveyances, in which event Seller's Deed, bills of sale, assignments and
all other conveyances (and the acceptances thereof), documents, title
insurance policy and survey certifications otherwise herein to be conveyed or
provided to Purchaser and/or executed by Purchaser as applicable, shall be
conveyed and provided to Purchaser's assignee or nominee and/or executed by
Purchaser's assignee or nominee, as applicable.
14.3 All of the covenants, agreements, obligations, liabilities,
indemnification undertakings, representations and warranties of Seller in this
Agreement shall be deemed to be joint and several covenants, agreements,
obligations, liabilities, indemnification undertakings, representations and
warranties of Seller and HVI, and may be enforced against any one or more of
them concurrently or successively, in such order as Purchaser may determine.
14.4 No written waiver by any party at any time of any breach of any
provision of this Agreement shall be deemed a waiver of any breach of any
other provision herein or a consent to any subsequent breach of the same or
any other provision. If any action by any party shall require the consent or
approval of another party, such consent or approval of such action on any
occasion shall not be deemed a consent to or approval of such action on any
subsequent occasion or a consent to or approval of any other action on the
same or any subsequent occasion.
14.5 This Agreement shall not be recorded without the written consent of
the parties hereto; however, upon the request of any one party, the other
parties shall join in the execution of a memorandum of this Agreement for the
purposes of recordation.
14.6 This Agreement shall be governed by and interpreted in accordance
with the local laws of the State of New York applicable to contracts made and
to be performed entirely within such State.
14.7 The parties hereto irrevocably: (a) agree that any suit, action
or other legal proceeding arising out of this Agreement and the transactions
contemplated hereby, including the related Note, Mortgage Agreement, and other
agreements delivered at closing related to the purchase and sale of the
Purchased Assets, other than any suit, action or other proceeding seeking
foreclosure under the Mortgage Agreement or any action which requires
jurisdiction over the escrow agent under the Escrow Agreement delivered at
closing hereunder, may be brought in the courts of the State of New York or
the courts of the United States located in New York County, New York, (b)
consent to the jurisdiction of each such court in any such suit, action or
proceeding, (c) waive any objection which they, or any of them, may have to
the laying of venue of any such suit, action or proceeding in any of such
courts except as otherwise provided herein, and (d) waive the right to a trial
by jury in any such suit, action or other legal proceeding. With respect to
all matters arising in connection with this Agreement and the transactions
contemplated hereby, as its agent for service of process Purchaser hereby
appoints Hofheimer Gartlir & Gross, LLP and Seller and HVI each hereby appoint
Ballard Spahr Andrews & Ingersoll, LLP.
14.8 For the purposes of this Agreement, the terms "include",
"including" and similar terms shall be construed in all cases as if followed
by the phrase "without being limited to". Also, for the purposes of this
Agreement, the phrases "to the best knowledge of any Seller Party", "to the
best knowledge of Seller", "to the knowledge of any Seller Party", "to the
knowledge of Seller" and similar phrases shall imply a reasonable
investigation by each applicable Seller Party and Seller and its agents.
14.9 This Agreement shall not be construed more strictly against one
party than against the other merely by virtue of the fact that it may have
been prepared primarily by counsel for one of the parties, it being recognized
that both Purchaser and Seller have contributed substantially and materially
to the preparation of this Agreement.
14.10 This Agreement may be executed in any number of original
counterparts, all of which evidence only one agreement and only one of which
need be produced for any purpose.
IN WITNESS WHEREOF the undersigned have executed this Agreement as of
the day and year first above set forth.
SELLER PURCHASER
CALOX CORPORATION, an Indiana corporation PEMBROOKE CALOX, INC., a Florida
corporation
By:____________________________________ By:_____________________________
Its:___________________________________ Its: President
HVI:
GREKA ENERGY CORPORATION (f/k/a HORIZONTAL VENTURES, INC.), a Colorado
corporation
By:
Its:
EXHIBITS
A Legal Description
3.3 Permitted Encumbrances
Exhibit 11.1
GREKA ENERGY CORPORATION
Computation of Earnings (Loss) Per Common Share
For the Three Month Period Ended March 31, 1999 and 1998
1999 1998
Basic Earnings
Net Income (loss) before minority interest
in earnings (loss) of consolidated subsidiary (1,133,580) (358,304)
Minority interest in earnings (loss) of
consolidated subsidiary (1,038) 0
Preferred Stock dividends (8,958) 0
----------- ----------
Net Income (loss) available to Common (1,141,498) (358,304)
=========== ==========
Basic Shares
Weighted average number of Common ----------- ----------
Shares outstanding 3,025,655 1,558,843
=========== ==========
Basic Earnings per Common Share ----------- ----------
Net Income (loss) available to Common $ (0.38) $ (0.23)
=========== ==========
Diluted Earnings
Net Income (los) before minority interest
in earnings (loss) of consolidated
subsidiary (1,133,580) (358,304)
Minority Interest in earnings (loss) of
consolidated subsidiary (1,038) 0
Preferred Stock dividends (8,958) -
Plus Interest expense attributable
to Debentures, net of related income taxes - 0
----------- ----------
Net Income (loss) available to Common (1,141,498) (358,304)
=========== ==========
Diluted Shares
Weighted average number of Common
Shares outstanding 3,025,655 1,558,843
Effect of dilutive securities:
Of shares underlying options - 0
Of shares underlying convertible
Debentures - 0
----------- ----------
Diluted Shares 3,025,655 1,558,843
=========== ==========
Diluted Earnings per Common Share ----------- ----------
Net Income (loss) $ (0.38) $ (0.23)
=========== ==========
Memo only (do not EDGARize)
Dilution factor: diluted EPS/basic EPS 100.000% 100.000%
=========== ==========
