U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ___________ to ____________
Commission File No.: 0-20760
GREKA Energy Corporation
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(Name of small business issuer in its charter)
Colorado 84-1091986
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(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification Number)
630 Fifth Avenue, Suite 1501 New York, NY 10111
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 218-4680
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
No Par Value Common Stock.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The issuer's revenues for 1999 were $29,137,810.
The aggregate market value of 2,476,853 shares of common stock held by
non-affiliates of the issuer, based on the closing bid price of the common stock
on April 13, 2000 of $7.875 as reported on the Nasdaq National Market System and
based on a total of 4,339,940 shares being outstanding on that date was
$19,505,217.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
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DOCUMENTS INCORPORATED BY REFERENCE
Part III is incorporated by reference to the Company proxy statement to be
filed within 120 days of its year end.
Transitional Small Business Disclosure Format (check one).
Yes [ ] No [X]
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Table of Contents
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PART I...................................................................................................4
Item 1. Description of Business....................................................................4
Item 2. Description of Property...................................................................18
Item 3. Legal Proceedings.........................................................................30
Item 4. Submission of Matters to a Vote of Security Holders.......................................31
PART II.................................................................................................31
Item 5. Market for Common Equity and Related Stockholder Matters..................................31
Item 6. Selected Financial Data...................................................................33
Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operation.....33
Item 7A. Quantitative and Qualitative Disclsoures About Market Risk................................37
Item 8. Financial Statements......................................................................37
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure................................................................................37
PART III................................................................................................37
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a) of the Exchange Act.........................................................37
Item 11. Executive Compensation....................................................................37
Item 12. Security Ownership of Certain Beneficial Owners and Management............................37
Item 13. Certain Relationships and Related Transactions............................................37
Part IV.................................................................................................39
Item 14. Exhibits and Reports on Form 8-K..........................................................39
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Definitions
The terms below are used in this document and have specific SEC
definitions as follows:
Proved oil and gas reserves. Proved oil and gas reserves are the
estimated quantities of crude oil, natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions, i.e., prices and costs as of the date the estimate is made. Prices
include consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future conditions.
Proved developed oil and gas reserves. Proved developed oil and gas
reserves are reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods. Additional oil and gas
expected to be obtained through the application of fluid injection or other
improved recovery techniques for implementing the natural forces and mechanisms
of primary recovery should be included as "proved developed reserves" only after
testing by a pilot project or after the operation of an installed program has
confirmed through production response that increased recovery will be achieved.
Proved undeveloped reserves. Proved undeveloped oil and gas reserves
are reserves that are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major expenditure is required
for recompletion. Reserves on undrilled acreage shall be limited to those
drilling units offsetting productive units that are reasonably certain of
production when drilled. Proved reserves for other undrilled units can be
claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Under no
circumstances should estimates for proved undeveloped reserves be attributable
to any acreage for which an application of fluid injection or other improved
recovery technique is contemplated, unless such techniques have been proved
effective by actual tests in the area and in the same reservoir.
As used in this Form 10-K:
"Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf"
means billion cubic feet, "Tcf" means trillion cubic feet, "Bbl" means barrel,
"MBbls" means thousand barrels, "MMBbls" means million barrels, "BOE" means
equivalent barrels of oil, "MBOE" means thousand equivalent barrels of oil and
"MMBOE" means million equivalent barrels of oil.
Unless otherwise indicated in this Form 10-K, gas volumes are stated at
the legal pressure base of the state or area in which the reserves are located
and at 60/o/ Fahrenheit. Equivalent barrels of oil are determined using the
ratio of 5.56 Mcf of gas to 1 Bbl of oil.
The term "gross" refers to the total acres or wells in which the
Company has a working interest, and "net" refers to gross acres or wells
multiplied by the percentage working interest owned by the Company. "Net
production" means production that is owned by the Company less royalties and
production due others.
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Cautionary Information About Forward-Looking Statements
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements, other than statements of historical facts, included in or
incorporated by reference into this Form 10-K which address activities, events
or developments which the Company expects, believes or anticipates will or may
occur in the future are forward-looking statements. The words "believes,"
"intends," "expects," "anticipates," "projects," "estimates," "predicts" and
similar expressions are also intended to identify forward-looking statements.
These forward-looking statements include, among others, statements concerning:
* the benefits expected to result from GREKA's acquisition of Saba Petroleum
Company ("Saba") discussed below, including
* synergies in the form of increased revenues,
* decreased expenses and avoided expenses and expenditures that are expected
to be realized as a result of the Saba acquisition, and
* the complementary nature of GREKA's horizontal drilling technology and
certain oil reserves acquired with the acquisition of Saba, 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 timing, amount and
nature thereof),
* drilling and reworking of wells, reserve estimates(including estimates of
future net revenues associated with such reserves and the present value of
such future net revenues),
* future production of oil and gas,
* repayment of debt,
* business strategies,
* oil, gas and asphalt prices and demand,
* exploitation and exploration prospects,
* expansion and other development trends of the oil and gas industry, and
* expansion and growth of business operations.
These statements are based on certain assumptions and analyses made by the
management of GREKA in light of its experience and its perception of historical
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances.
GREKA cautions the reader that these forward-looking statements are subject
to risks and uncertainties, including those associated with:
* the financial environment,
* general economic, market and business conditions,
* the regulatory environment,
* business opportunities that may be presented to and pursued by GREKA,
* changes in laws or regulations
* exploitation and exploration successes,
* availability to obtain additional financing on favorable conditions,
* trend projections, and
* other factors, many of which are beyond GREKA's control,
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that could cause actual events or results to differ materially from those
expressed or implied by the statements. Such risks and uncertainties include
those risks and uncertainties identified in the Description of the Business and
Management's Discussion and Analysis sections of this document and risk factors
discussed from time to time in the Company's filings with the Securities and
Exchange Commission.
Significant factors that could prevent GREKA from achieving its stated
goals include:
* the inability of GREKA to obtain financing for capital expenditures and
acquisitions,
* declines in the market prices for oil, gas and asphalt, and
* adverse changes in the regulatory environment affecting GREKA.
The cautionary statements contained or referred to in this document
should be considered in connection with any subsequent written or oral
forward-looking statements that may be issued by GREKA or persons acting on its
or their behalf. GREKA 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.
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PART I
Item 1. Description of Business
Overview of GREKA Energy Corporation
GREKA Energy Corporation, a Colorado corporation ("GREKA" or the
"Company") is an independent integrated energy company committed to creating
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 . GREKA has oil and gas production, exploration and
development activities in North America and the Far East, with primary areas of
activity in California, Louisiana, and China. In addition, GREKA owns and
operates an asphalt refinery in California through a wholly-owned subsidiary.
As of December 31, 1999, the Company had estimated net proved reserves of
approximately 14,614 MBOE with a PV-10 value before tax of $73.3 million. During
1999, the Company added an estimated net proved producing reserves of 10,108
MBOE at an average finding cost of $1.81 per BOE. During the period commencing
May 1, 1999, when GREKA'S subsidiary assumed full operation of its refinery, the
throughput averaged 4,000 BBL per day with the Company's present goal of
reaching full plant capacity of 10,000 BBL per day by year end 2001. Of the
current throughput, the Company's subsidiaries supply an average of
approximately 36%, or 1200 BBL per day, from their production in California, and
the subsidiary plans to increase its feed stock to 2,000 BBL per day by December
31, 2000.
The principal offices of the Company are located at 630 Fifth Avenue,
Suite 1501, New York, New York 10111 and its telephone number is (212) 218-4680.
Business Strategy
GREKA's objective is to build shareholder value through consistent economic
growth both in the increased throughput at its asphalt refinery and in the
growth of its reserves and production thereby creating an increase in net asset
value per share, cash flow per share and earnings per share. Management is
focused on a balanced program of low to medium risk exploitation and development
of its existing reserves utilizing its low cost horizontal short radius drilling
technology licensed from BP Amoco. This is balanced by rapid growth through the
acquisition of synergistic businesses such as the Saba acquisition concluded
during the first quarter of 1999. All asset and capital investment decisions are
measured and ranked by their risk-adjusted impact on per share value.
GREKA has established a three prong strategy that capitalizes on its
asset base to enhance shareholder value as follows:
Integrated Hedged Operations
Hedged operations of GREKA are planned to focus on the integration of its
subsidiaries' Santa Maria (California) assets, including an asphaltrefinery and
interest in heavy oil fields. The hedged operations are targeted to capitalize
on the stable asphalt market in California by providing a balance of equity and
third party feedstock (heavy oil) into the refinery. The integration of the
refinery (100% owned) with the interests in the heavy oil producing fields (100%
working interest) has successfully provided a stable hedge to GREKA on each
equity barrel (since June 1999). GREKA's strategy in these integrated assets is
two-fold:
1. GREKA intends to proceed with acquisitions that enhance the
long-term feedstock supply to the refinery.
2. GREKA intends to implement the proprietary BP Amoco Horizontal Drilling
Technology to cost-efficiently boost production rates from the 150
potential drilling locations identified in the Santa Maria Valley area of
central California.
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The two actions are targeted to increase throughput into the refinery from the
highest rate during 1999 of approximately 4,500 barrels per day to 10,000
barrels per day by year end 2001. It is anticipated that the profitability from
these integrated operations will not be affected by volatile oil prices. It is
also anticipated that, by using the equity barrels to supply the refinery,
working capital requirements should be lower and cash flow should be enhanced.
The continued stability of the price of asphalt, coupled with reduced costs for
processing and lifting, should create a substantial value for GREKA 's
shareholders.
Exploitation, Exploration & Production
GREKA is focusing on return to production ("RTP") work that had been
ignored by Saba. Such RTP is expected to enhance the current production levels
and capitalize on current oil prices. GREKA plans to capitalize on its existing
portfolio of domestic and international exploitation and exploration projects
that are synergistic with GREKA 's BP Amoco Horizontal Drilling Technology.
GREKA plans to specifically focus on its existing concessions in strategic
locations, such as China, where GREKA believes there is a significant, long-term
demand for energy and a niche advantage for the Company.
BP Amoco Horizontal Drilling Technology
GREKA 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.
Significant and lucrative markets exist for the application of the niche
technology for GREKA's short radius horizontal drilling know-how. Mature fields
are in abundance throughout the world where the operators are faced with
declining production, uncertain oil prices and upcoming costs to abandon and
plug the uneconomic wells at their production rates. Such an environment creates
a unique market for GREKA to acquire such fields through a conservative
selection process. Primary acquisition candidates will have existing production,
existing operating infrastructure and facilities, geological formations
conducive to the technology, well bores and pay zones under ten thousand feet
with sufficient recoverable oil in place. As an example, GREKA has found that
California is a unique opportunity due to its stringent new drilling
regulations. GREKA's activities are essentially "re-work" negating any lengthy
approvals through the regulatory authorities. Such an environment has created
"pockets" of opportunity whereby significant recoverable oil has been left in
place by the majors and owners which, rather than attempt a costly endeavor to
drill new wells in urban areas, choose to sell their oil and gas interests.
GREKA intends to pursue such opportunities.
Business Development of GREKA
GREKA Energy Corporation was formed in 1988 as a Colorado corporation
under the name of Kiwi III, Ltd. On May 13, 1996, GREKA , then known as Petro
Union, Inc., filed a voluntary petition for relief pursuant to Chapter 11 of the
United States Bankruptcy Code. Current GREKA management acquired Petro Union,
Inc. and simultaneously procured on August 28, 1997, an order confirming Petro
Union's First Amended Plan of Reorganization from the Bankruptcy Court for the
Southern District of Indiana. The bankruptcy court approved the final accounting
and closed the bankruptcy proceedings on March 26, 1998.
During 1998, management of GREKA 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 implementing its strategic niche growth plan.
During the latter part of 1998 and early 1999, management was primarily focused
on the acquisition of Saba, which had substantial reserves suited to
exploitation by GREKA'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 of the Saba acquisition,
GREKA's management and staff devoted a substantial amount of time and effort to
the acquisition.
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On March 22, 1999, the Company, then known as Horizontal Ventures,
Inc., changed its name to GREKA Energy Corporation. Effective March 24, 1999,
GREKA acquired Saba Petroleum Company as a wholly owned subsidiary.
Immediately subsequent to the completion of the acquisition, management
commenced its strategy to reverse the decline in value of the Saba assets which
resulted in the following material events:
* In May 1999, the Company's subsidiary assumed full operation
of its asphalt refinery which significantly increased, and is expected to
continue to increase, operating cash flows.
* Also in May 1999, the Company's subsidiaries secured financing
with a new bank, BNY Financial Corporation ("BNY"), for $11 million which was
later increased to $12 million in September 1999.
* Further in May 1999, the Company's subsidiary paid $6 million
to Bank One Texas, N.A. ("Bank One") to reduce the debt owed by Saba which was
in default since 1998.
* In June 1999, the Company's subsidiary sold its non-core
assets in Colombia, further reducing its debt by $10 million while maintaining
upside potential through either a repurchase option which has recently been
exercised or a court order directing rescission of the sale.
* In July 1999, the Company completed the acquisition of all of
the Beaver Lake Resources Corporation (the owner of the Company's Canadian
assets) shares it did not already own, thereby privatizing Beaver Lake as a
wholly owned subsidiary.
* In August 1999, the Company entered into a term sheet to
restructure Saba's 9% senior subordinated debentures.
* Also in August 1999, the Company released record earnings of
$0.27 per share for the second quarter 1999 which was the first opportunity
since the acquisition of Saba that the Company recognized a full three month
reporting period of earnings resulting from the successful implementation of
management's business plan.
* Also in August 1999, the Company's subsidiary emerged from
voluntary bankruptcy following consummation of the sale of its non-core assets
in Colombia.
* Further in August 1999, the Company's subsidiary signed a
production sharing contract with the China United Coalbed Methane Corporation
Ltd. to jointly exploit coalbed methane (CBM) resources in China.
* In September 1999, the Company filed with the Securities and
Exchange Commission an amendment to its annual report on Form 10-KSB for the
year ending December 31, 1998 which included the revised opinion of the
Company's independent auditors withdrawing their previous doubt as to the
ability of the Company to continue as a going concern, after consideration of
the Company's refinancing transactions and the Company's improvements in the
operations and financial position as a whole.
* In November 1999, the Company's subsidiaries closed the
financing of a $35 million facility with GMAC Commercial Credit LLC to provide
financing to reduce current liabilities and for future acquisitions.
* Also in November 1999, the Company's subsidiary made an
additional payment of $11.2 million to Bank One to reduce the defaulted debt
owed by Saba.
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* Also in November 1999, the Company reported record earnings
for the third quarter of $.33 per share which principally resulted from the
success of management's hedging strategy attributable to the integration of its
Santa Maria assets, including the asphalt refinery and heavy oil fields.
* Further in November 1999, the Company adopted a shareholder
rights plan to preserve the long-term value of the Company for its shareholders.
* In December 1999, the Company announced that its shares
commenced trading on the Nasdaq National Market System.
Acquisition Activities
Acquisition of Saba Petroleum Company
During the first quarter of 1999, the Company completed the acquisition
of Saba Petroleum Company which was effective as of March 24, 1999. GREKA
believes that the acquisition of Saba represented a unique opportunity to
capitalize on substantial oil and gas properties which are particularly suited
to exploitation by GREKA 's horizontal drilling technology.Through open-market
purchases conducted by the Company in conjunction with its affiliate,
International Publishing Holdings (IPH), the direct purchase of Saba shares from
Saba and the acquisition of what the Company believed was a control block of
Saba shares from Saba's largest shareholder, the Company acquired a roughly 27%
stake in Saba prior to the end of 1998. At approximately the same time, the
Company entered into a merger agreement with Saba which was approved by the
shareholders on March 19, 1999 resulting in the merger of Saba with and into a
wholly owned subsidiary of GREKA effective March 24, 1999 whereby, at a ratio of
1 share of GREKA common stock for every 6 shares of Saba common stock, the
Company issued approximately 1.24 million shares of its common stock.
Privatization of Beaver Lake Resources Corporation
In July 1999, GREKA acquired the remaining common stock of Beaver Lake
Resources Corporation ("BLRC") that it did not hold effective July 31, 1999
whereby GREKA had agreed to issue a total of approximately 68,000 shares
resulting in each BLRC shareholder receiving 1 share of GREKA's common stock in
exchange for 74.4 shares of BLRC's common stock. BLRC is now a wholly-owned
subsidiary of GREKA.
Assumption of Full Operations at Refinery
In May 1999, GREKA 's subsidiary assumed all marketing and distribution
operations at its refinery in Santa Maria, California that were previously
performed by a third party under a processing agreement terminated by GREKA 's
subsidiary. Under the terms of this agreement, each party had been receiving
approximately fifty percent of the net income from the refinery, and the
subsidiary had only recognized and reported its fifty percent share of the net
profits. Since termination of the processing agreement, GREKA recognizes and
reports one hundred percent of the refinery revenues and expenses, as well as
increased operating cash flows as a result of assuming the marketing and
distribution operations.
Divestiture Activities
Sale of Non-Core Colombian Assets
In April 1999, a subsidiary of the Company and Omimex Resources, Inc., a
privately-held oil and gas company which then operated a substantial portion of
Saba's producing properties, entered into an agreement to sell substantially all
of the assets of the subsidiary 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, which closed
in June 1999, provides for the payment of additional consideration to GREKA'S
Subsidiary. If the reserves sold at January 1, 1999 when re-evaluated with
fourth quarter 1999 prices had certain variances to the calculation done prior
to the sale in June 1999, additional consideration is owed to the Company's
subsidiary. If the differential were $5 million or less, by March 31, 2000
Omimex had to pay such amount to the subsidiary in cash or, upon non-payment,
reassign to the subsidiary the 50% interest in the Velasquez-Galan pipeline in
Colombia sold by the subsidiary to Omimex . If the differential were greater
than $5 million, the subsidiary has the option through May 31, 2000 of
repurchasing for approximately $12 million the assets sold to Omimex and
reassigning to Omimex the California assets acquired from Omimex. If this option
had not been exercised, Omimex would have been obligated to pay the subsidiary
$5 million in cash or, upon non-payment, reassign to the subsidiary the
Velasquez-Galan pipeline.
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The sale was approved by the bankruptcy court in April 1999, and an order
dismissing the subsidiary's bankruptcy case that was filed in 1998 to protect
the subsidiary pending the sale of its Colombian assets was entered by the court
in August 1999.
In February 2000, GREKA announced that it had the option to re-purchase
the Colombian assets valued at approximately $65 million (PV-10) pursuant to the
Company's calculations that the look-back provision is three times greater than
the required valuation threshold. In March 2000, GREKA further announced that,
subject to a court order directing rescission of the sale, it had exercised its
option to re-purchase its Colombian assets for an estimated cost of $12 million
which will result in the Company's receipt of assets with a PV-10 value of
approximately $65 million at December 31, 1999 (approximately $12.22 per share
outstanding). (See Item 3-"Legal Proceedings")
Sale of Non-Core Limestone Property
In April 1999, the Company and IPH closed an agreement with Pembrooke
Calox, Inc. for the sale of the Company's and IPH's interests in a 355-acre
limestone property located in Indiana in exchange for a non-recourse promissory
note, secured by the limestone property. The buyer had the option to pay either
$3.85 million by July 31, 1999 followed by four annual payments of $200,000 each
beginning in 2001, or $5.7 million by November 1, 1999. The buyer has not paid
any funds to the Company or IPH. (See Item 3-"Legal Proceedings") As part of
this transaction, the Company paid Pembrooke $50,000 and issued 16,736 shares of
Common Stock following the filing of a registration statement on May 17, 1999.
Sale of Non-Core Canadian Assets
In July and August 1999, GREKA's subsidiary, BLRC, sold certain
Canadian oil and gas interests for an aggregate contract price of $915,000.
Sale of Mid-Continent Assets
In January 1999, a purchase agreement entered into by Saba to sell all of
the outstanding stock of a subsidiary of Saba's, but excluding oil and gas
property interests in the Potash Field located in Louisiana for a contract price
of $6.25 million was terminated. Concurrently, a purchase and sale agreement was
entered into by the subsidiary to sell all of its oil and gas property interests
principally located in Louisiana, New Mexico, Texas and Wyoming, excepting
Potash Field located in Louisiana, for a contract price of $6.15 million. The
agreement, which was scheduled to close in March 1999, provided for an interim
closing in February 1999, at which time the buyer was to pay to the subsidairy
$1.5 million, In February 1999, the agreement was terminated for buyer's
non-performance.
In April 1999, the same subsidiary entered into an agreement to sell all of
its oil and gas property interests at a contract price of $12.5 million to close
in June 1999. The agreement terminated in June 1999 for buyer's non-performance.
(See Item 3-"Legal Proceedings")
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Financing & Debt Restructuring Activities
Bank Financing
In February 1999, Bank One 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 and
classified as currently payable was accelerated and declared immediately due and
payable. In connection with various borrowings from Bank One, Ilyas Chaudhary, a
former director and executive officer of Saba, has guaranteed payment of
approximately $3.7 million of Saba's debt to Bank One.
In April 1999, GREKA 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's subsidiaries the opportunity to complete contemplated
transactions on the condition that, among other things, each of the transactions
would be completed by June 11, 1999.
In April 1999, GREKA's subsidiaries procured a loan from BNY that
provided funds of up to $11 million under two credit facilities. A term loan in
the amount of $6 million 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 provided advances for working capital of up to $5
million against eligible receivables and inventory of the refinery. The loans
are secured by real estate interests located in Santa Maria, California and
certain assets owned by the Company's subsidiaries.
In July 1999, GREKA, Saba and Bank One entered into an Amended and
Restated Forbearance Agreement, under which Bank One agreed that it would
forbear from exercising its remedies under the credit facilities through
September 15, 1999, provided that Saba maintained compliance with certain
conditions regarding events of default, made timely interest payments and
secured alternative financing to retire the Bank One indebtedness.
In September 1999, the revolving credit facility with BNY that provided
advances to GREKA's subsidiaries for working capital of up to $5.0 million
against eligible receivables and inventory of the Santa Maria asphalt refinery
was increased to $6.0 million, raising the total available funds acquired in
April 1999 under the revolving credit facility and the reducing term loan of
$6.0 million from $11.0 million to $12.0 million.
In November 1999, the borrowers of the BNY credit facility entered into
a loan and security agreement with GMAC Commercial Credit LLC ("GMAC"). That
agreement amends the loan and security agreement the parties entered into in
April 1999. The November 1999 agreement increased from $11 million to $35
million the amount which GREKA's subsidiaries may borrow from GMAC upon the
satisfaction of the terms and conditions of the agreement. The financing
consists of a term loan of $25 million and a revolving credit facility of $10
million. Of the proceeds, $11.2 million were used to reduce the indebtedness
owed by Saba to Bank One. The financing is secured by GREKA's subsidiaries'
interests in certain California oil and gas properties and real estate.
IPH Loan
In October 1998 and November 1998, the Company borrowed $500,000 and
$1,500,000, respectively, from IPH which matured December 31, 1999 pursuant to
several extensions. Effective January 1, 2000, the loan amounts were
consolidated into a loan with a maturity date of June 30, 2000, bearing interest
at the rate of 9% per annum from January 1, 2000 payable quarterly, with monthly
installment payments of $100,000. The Company paid $180,000 in consideration of
the loan extension. If the entire unpaid principal and/or accrued interest is
not paid at maturity, the amount of principal owed and rate of increase shall
increase. The loan is collateralized by all of the issued and outstanding shares
of capital stock of a subsidiary of the Company.
Debentures
In February 1999, GREKA issued convertible senior subordinated
debentures in the principal amount of $1 million. The debentures bear interest
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at 15% through maturity on February 1, 2001, and are secured by GREKA's
subsidiary's interest in limestone deposits. The debentures may be converted by
the holders into GREKA common stock at any time from February 1, 2000, until
January 31, 2001 at a conversion price of $20.00 per share. At December 31,
1999, there were no conversions. GREKA 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 funds to conclude the Saba acquisition.
In July and August 1999, GREKA entered into a term sheet with a
majority of the holders of the outstanding Saba debentures to exchange the
debentures of Saba for new debentures of GREKA with interest at the rate of 9%,
maturing on December 31, 2005 with a right of GREKA to redeem at any time for an
amount equal to 102% of the principal amount plus any accrued but unpaid
interest, subject to the right of holders of first convert at any time. The
conversion price offered by GREKA is 95% of the average closing bid price of
GREKA 's common stock for the 30 consecutive trading days of GREKA's common
stock ending one day prior to the date notice of conversion is received by GREKA
, but in no event less than $8.50 nor greater than $12.50 per share. Assuming
full conversion, the minimum and maximum number of shares of GREKA common stock
issued would be 286,000 and 420,588, respectively. The Company is acting as the
exchange agent for the issuance of new GREKA debentures, the terms of which
include that, commencing August 1, 2000, each holder of GREKA's debentures shall
have the right upon written notice to GREKA to require that it redeem its
debentures at an amount equal to the principal amount plus any accrued but
unpaid interest. The Saba debentures were delisted from the American Stock
Exchange in August 1999.
GREKA's Horizontal Drilling Technology
Horizontal drilling has become widely accepted as a standard option for
exploiting oil & gas resources. The principle advantage of horizontal drilling
is that it results in a substantially greater surface area for drainage, and
thus extraction of the oil from the reservoir. In industry terms this is
referred to as communicating zones of permeability. The unique method of
reentering a well and horizontal drilling patented by BP Amoco and licensed to
GREKA allows for turning while drilling, which can cause a vertical well to be
horizontal in as little as 25 feet. Thus this technology provides considerable
flexibility to the geologists and engineers in designing their well plans around
geological formation and reservoir constraints to achieve maximum performance.
Furthermore, this technique facilitates multi-laterals off an existing well
bore, which avoids costly drilling of new wells, and has considerable advantages
in shallow reservoirs where the traditional horizontal tools cannot be utilized
due to their larger radius requirements and related economics.
Drilling horizontal laterals has the potential to:
* tap fresh oil by intersecting fractures, penetrating pay discontinuities
and drain up-dip traps,
* correct production problems such as:
* water coning,
* gas coning, and
* excessive water cuts from hydraulic fractures which extend
below the oil-water contact, and
* supplement enhanced secondary and tertiary oil recovery techniques.
The most common method of drilling a curved borehole utilizes a
mud-motor to rotate the drill bit. This is often too expensive to be economical
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for re-entries in mature fields with well bore casings less than 5 1/2 inches.
The lack of a cost-effective method to increase production in mature wells led
BP Amoco to devote significant resources in research and development in this
area. The result was the development of its patented short radius horizontal
drilling system. The primary advantages of the BP Amoco drilling system are:
* its short radius of curvature,
* it costs approximately one-fifth of traditional mud motors, and
* it takes only ten days to drill and yet provides all the benefits of a
horizontal well.
The BP Amoco short radius rotary steerable horizontal drilling system
is capable of drilling a 3.875" inch hole from inside 4.5" inch casing, or a
4.5" hole from inside 5.5" casing and larger. The radius of curvature ranges
from 30 feet and up, with lateral departures up to 1,000 feet. Multiple laterals
can be drilled in opposing directions or in the same direction, with kick-off
points spaced a minimum of eight feet apart. Compatibility with any circulating
medium including mud, foam or air mist allows for a variety of applications.
The system consistently drills a predictable radius of curvature in the
desired direction, resulting in a smoother planar well bore, which facilitates
drilling the lateral and completing the well. Vertical target accuracy is plus
or minus two feet, and azimuth is plus or minus 20 degrees.
The system is rotary steerable, and there are no mud motors, steering
tools or measurement while drilling ("MWD") tools. The system is purely
mechanical and very simple in design.
The BP Amoco bit is an anti-whirl, bi-center, low-friction
poly-crystalline diamond ("PCD") bit. Consistent and reliable angle build and
improved directional control is a result of stabilizing the PCD bit to
continually point along a curved path. The design of the bit enables it to cut
only in the direction it is pointed. The cutters are positioned so that they
direct a lateral force toward a smooth pad on the gauge of the bit, which
contracts the bore hole and acts as a bearing by transmitting a restoring force
to the bit. This force rotates with the bit, continually pushing a side of the
bit that does not have gauge cutter chips against the bore hole wall. This
design minimizes the side cutting action that is typically observed with PCD
bits and results in consistent well bore diameter.
The system drills a curved path by continually pointing the bit along a
tangent to the curved path. A contact point on the bit and smooth contact ring
at the flexible knuckle joint establishes two contact points and controls the
bit tilt. Tool design tilt allows the curve assembly to run smoothly, drill a
hole uniform in diameter, and negates the effects of varying lithology changes.
Various radii of curvatures are easily obtained by increasing or decreasing the
distance between the two contact points.
Azimuth or target direction is established by gyro orientation of the
eccentric deflection sleeve. Once oriented in the desired direction, the gyro is
released and orientation is monitored by pump pressures at the surface. These
signals are monitored throughout the curve drilling process, as repositioning of
the sleeve is required to maintain target direction.
Lateral drilling is strictly a rotary process. The lateral drilling
assemblies are not steerable, and there are no deflection sleeves or orientation
signals. At present, there are two lateral drilling assemblies, and both use the
anti-whirl PCD bit to achieve a smooth well bore and obtain fairly consistent
responses. Of the two lateral assemblies, one is engineered for gentle rise with
angle build rates of 7 to 11 degrees per 100 feet. The second is for maintaining
inclination, and produces near-neutral responses of -2 to 2 degrees per 100
feet. The assemblies work on the same principle as any directional drilling
assembly. Both have been found to drill with minimal walk, right or left, but
inclination is somewhat sensitive to formation and weight on the bit.
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The predominate application of short-radius horizontal drilling is for
re-entries, a procedure that requires the sectional milling of at least 20 feet
of casing. Following sectioning, a cement kick-off plug is set in the vertical
well bore just below the kick-off depth. Cement is brought up through the
sectioned interval, and 60 to 100 feet inside the casing. This multi-purpose
plug must provide zone isolation from the original completion and mechanical
strength for the curve assembly to side track. Open-hole completions, either
from existing wells or new wells, can be kicked off from formation or a squeeze
cement plug. Torque, weight of the bit, drill-off rate, and cuttings are
monitored during the kick-off procedure as the bit makes the transition from
drilling 100 percent cement to 100 percent formation. This transition usually
occurs after drilling a minimum of six feet, and can be greater depending on the
radius of curvature.
With regard to equipment requirements, many types of workover rigs have
been used in conjunction with the system, ranging from small pole units to five
and six axle carriers. Drilling rigs have been used in several instances, but
are not necessary. A top-drive power swivel, the most predominate of which is
the Bowen 2.5, is used to rotate the drill string and bit. A single conductor
wireline unit is used for gyro orientation and to run all electronic and
magnetic surveys. Circulating and solids control equipment vary depending on
formation conditions.
Management of GREKA considers this proprietary technology a leading
edge and a ground floor opportunity as a producer. GREKA management believes
that through the utilization of this system GREKA has the ability to
cost-effectively drill lateral completions and re-entries in shallow oil and gas
producing zones where existing technology has not been available or affordable.
As drilling new wells from the surface is not a necessity and current production
infrastructures can be utilized, GREKA anticipates that the economics of this
system will be improved. Management of GREKA believes that potential zones such
as shale gas and coalbed methane that contain trillions of cubic feet of
untapped reserves in the United States and China are candidates for short radius
horizontal drilling technology.
Marketing
Marketing of Asphalt Refinery Production
GREKA's asphalt refinery in Santa Maria, California produces light
naphtha, kerosene distillate, gas oils and numerous cut-back, paving and
emulsion asphalt products. Historically, marketing efforts have been focused on
the asphalt products which are sold to various users, primarily in the Central
and Northern California areas. Distillates are readily marketed to wholesale
purchasers. No one customer accounted for more than ten percent
of the Company's sales of North American refinery production during 1999 except
Granite Construction, Lawson Rock and Oil, and Union Asphalt Company.
GREKA regards the refinery as a valuable adjunct to its production of
crude oil in the Santa Maria Valley and surrounding areas. Generally, the crude
oil produced in these areas is of low gravity and makes an excellent asphalt.
Prices for asphalt exceed market prices for crude and costs of operating the
refinery. GREKA believes that as road building and repair increase in California
and surrounding western states, the market for asphalt will expand
significantly.
GREKA's subsidiary markets two principal products from its refinery:
liquid asphalt and light-end products (gas oil, naphtha and distillates). Liquid
asphalt, which accounted for approximately 65% of total refinery production in
1999, is marketed by GREKA's subsidiary primarily in California. While liquidate
asphalt is principally used for road paving and manufacturing roofing products,
all of the liquid asphalt sold by GREKA's subsidiary is used for pavement
applications. Paving grade liquid asphalt is sold by GREKA's subsidiary to hot
mix asphalt producers, material supply companies, contractors and government
agencies.
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These customers further treat the liquid asphalt which is used for road
paving. In addition to conventional paving grade asphalt, GREKA's subsidiary
also produces modified and cutback asphalt products. Modified asphalt is a blend
of recycled plastics, rubber and polymer materials with liquid asphalt, which
produces a more durable product that can withstand greater changes in
temperature. Cutback asphalt is a blend of liquid asphalt and lighter petroleum
products and is used primarily to repair asphalt road surfaces. Additionally,
some of the paving grade and modified asphalts produced by GREKA's subsidiary
are sold as base stocks for emulsified asphalt products that are primarily used
for pavement maintenance.
GREKA's subsidiary is particularly well positioned to supply the
asphalt specifications in accordance with the standards established by the
National Highway and Transportation Administrations Strategic Highway Research
Program (SHRP) or set by the American Association of State Highway and
Transportation Officials.
Demand for liquid paving asphalt products is primarily affected by
federal, state and local highway spending, as well as the general state of the
California economy, which drives commercial construction. Another factor is
weather, as asphalt paving projects are usually shut down in cold, wet weather
conditions. All of these demand factors are beyond the control of the Company.
Government highway spending provides a source of demand which has been
relatively unaffected by normal business cycles but is dependent on
appropriations. During 1999, approximately 70% of liquid asphalt sales were
ultimately funded by the public sector as compared to approximately 75% in 1998.
The California economy continued to improve in 1999, fueled by growth
in foreign trade as well as growth in high technology, tourism and
entertainment. This growth in business activity resulted in increases in road
construction and repair activity in both the private and public sectors. Further
expansion is being forecast for California in 2000, as growth rates as measured
by growth in jobs, personal income, consumer spending and construction are
expected to exceed national averages. Growth in the California economy generally
bodes well for the Company, as increased business activity results in increased
construction activity, including increased new road construction and increased
repair efforts on existing roads in both the public and private sectors. Private
asphalt demand rebounded slightly in 1997 and continued to improve through 1998
and 1999 due to the improvement in the California economy.
As the asphalt refinery of GREKA's subsidiary is located in California,
the following discussion focuses on government highway funds available in
California.
Federal Funding
Federal funding of highway projects is accomplished through the Federal
Aid Highway Program. The Federal Aid Highway Program is a federally-assisted,
state-administered program that distributes federal funds to the states to
construct and improve urban and rural highway systems. The program is
administered by the Federal Highway Administration (FHWA), an agency of the
Department of Transportation. Nearly all federal highway funds are derived from
gasoline user taxes assessed at the pump.
In June 1998, the $217 billion federal highway bill, officially known
as the Transportation Equity Act for the 21st Century or TEA-21 was enacted. The
bill is estimated to increase transportation-related expenditures by $850
million a year in California alone over a six fiscal year period beginning
October 1, 1997. This will equate to a 51% increase over previous funding
levels. For fiscal 1998 and 1999 funding apportioned to California under this
legislation was $2.07 billion and $2.42 billion respectively. The average
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California apportionment over the six year period ending in October 2003 is
estimated to be $2.50 billion per year or a total of $15 billion. Of this
amount, approximately $4.65 billion has been designated for Interstate
Maintenance and the National Highway System while another $4.56 billion has been
designated for the Surface Transportation and the Congestion Mitigation and Air
Quality Improvement programs, which concentrate on state and local roadways.
However, while management of GREKA's subsidiary believes it has benefited from
and should benefit in the future from such funding increases there can be no
guarantee that it will in fact do so in the future.
State and Local Funding
In addition to federal funding for highway projects, states
individually fund transportation improvements with the proceeds of a variety of
gasoline and other taxes. In California, the California Department of
Transportation (CALTRANS) administers state expenditures for highway projects.
According to the Department of Finance for the State of California funding
available from the State Highway Account is estimated to average $1.13 billion
per year over the next 10 years excluding the Seismic Retrofit Bond Fund. This
compares to an average of $0.36 billion over the previous ten years.
Marketing of GREKA's Oil and Gas Production
The prices obtained for oil and gas are dependent on numerous factors
beyond the control of GREKA, including domestic and foreign production rates of
oil and gas, market demand and the effect of governmental regulations and
incentives. Substantially all of GREKA's North American crude oil production is
sold at the wellhead at posted prices under short term contracts, as is
customary in the industry. No one customer accounted for more than ten percent
of the Company's sales of North American oil and gas production during 1999.
The market for heavy crude oil produced by GREKA from its Central Coast
Fields in California differs substantially from the remainder of the domestic
crude oil market, due principally to GREKA's sales to the market of asphalt,
naphtha and distillates rather than hydrocarbons. GREKA 's Santa Maria refinery
uses essentially all of its Central Coast Fields' crude oil, in addition to
third party crude oil, to produce asphalt, among other products. Ownership and
operation by the Company's subsidiary of the refinery gives GREKA's subsidiary a
steady and stable market for its local crude oil which is not enjoyed by other
producers.
Competition
Competition in the oil and gas business is intense, particularly with
respect to the acquisition of producing properties, proved undeveloped acreage
and leases. Major and independent oil and gas companies actively bid for
desirable oil and gas properties and for the equipment and labor required for
their operation and development. GREKA believes that the locations of its
leasehold acreage, its exploration, drilling and production capabilities and the
experience of its management and that of its industry partners generally enable
GREKA to compete effectively. Many of GREKA 's competitors, however, have
financial resources and exploration, development and acquisition budgets that
are substantially greater than those of GREKA, and these may adversely affect
GREKA 's ability to compete, particularly in regions outside of GREKA 's
principal producing areas. Because of this competition, GREKA cannot assure that
it will be successful in finding and acquiring producing properties and
development and exploration prospects.
Management of GREKA believes it hs an advantage over its competition
due to its acquired license from BP Amoco of the Short Radius Horizontal
Drilling technology, its level of field expertise in applying the patented BP
Amoco Short Radius Horizontal Drilling technology and its ability to apply these
drilling techniques at a fraction of the cost compared to conventional drilling
techniques utilized by the competition. Although, BP Amoco has provided licenses
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to others, GREKA feels that its strategy to apply the proprietary technology to
its own oil and gas properties and to penetrate new niche markets utilizing the
proprietary technology is within an entirely different market segment than any
of the other licensees who are concentrating on providing contract drilling
services to non-owned properties within their respective geographical area.
GREKA has not felt any competitive pressure relative to its acquisition strategy
focused on the unique application of its niche, short-radius horizontal drilling
technology.
Governmental Regulation
The following discussion of regulation of the oil and gas industry is
necessarily brief and is not intended to constitute a complete discussion of the
various statutes, rules, regulations or governmental orders to which operations
of GREKA and its subsidiaries may be subject.
Price Controls on Liquid Hydrocarbons
Oil sold by GREKA's subsidiaries is no longer subject to the Crude Oil
Windfall Profits Tax Act of 1980, as amended, which was repealed in 1988. As a
result, GREKA sells oil produced from its properties at unregulated market
prices.
Federal Regulation of First Sales and Transportation of Natural Gas
The sale and transportation of natural gas production from properties
owned by GREKA's subsidiaries may be subject to regulation under various federal
and state laws including, but not limited to, the Natural Gas Act and the
Natural Gas Policy Act, both of which are administered by the Federal Regulatory
Commission. The provisions of these acts and regulations are complex. Under
these acts, producers and marketers have been required to obtain certificates
from FERC to make sales, as well as obtaining abandonment approval from FERC to
discontinue sales. Additionally, first sales have been subject to maximum lawful
price regulation. However, the NGPA provided for phased-in deregulation of most
new gas production and, as a result of the enactment on July 26, 1989 of the
Natural Gas Wellhead Decontrol Act of 1989, the remaining regulations imposed by
the NGA and the NGPA with respect to "first sales" were terminated by not later
than January 1, 1993. FERC jurisdiction over transportation and sales other than
"first sales" has not been affected.
Because of current market conditions, many producers, including GREKA,
are receiving contract prices substantially below most remaining maximum lawful
prices under the NGPA. Management believes that most of the gas to be produced
from GREKA's properties is already price-deregulated. The price at which such
gas may be sold will continue to be affected by a number of factors, including
the price of alternate fuels such as oil. At present, two factors affecting
prices are gas-to-gas competition among various gas marketers and storage of
natural gas. Moreover, the actual prices realized under GREKA Energy's current
gas sales contracts also may be affected by the nature of the decontrolled price
provisions included therein and whether any indefinite price escalation clauses
in such contracts have been triggered by federal decontrol.
The economic impact on GREKA and gas producers generally of price
decontrol is uncertain, but it currently appears to be resulting in lower gas
prices. Currently, there is a surplus of deliverable gas in most areas of the
United States and, accordingly, it remains possible that gas prices will
continue to remain at relatively depressed levels or decrease further. Moreover,
many gas sales contracts provide for price redetermination upon decontrol, and,
as a result, it is possible that the newly redetermined prices applicable under
such contracts are likely to reflect the lower prices prevalent in today's
market. Producers such as GREKA or resellers may be required to reduce prices in
order to assure continued sales. It is also possible that gas production from
certain properties may be shut-in altogether for lack of an available market.
Commencing in the mid-1980's, FERC promulgated several orders designed
to correct market distortions and to make gas markets more competitive by
removing the transportation barriers to market access. These orders have had a
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profound influence upon natural gas markets in the United States and have, among
other things, fostered the development of a large spot market for gas. The
following is a brief description of the most significant of those orders and is
not intended to constitute a complete description of those orders or their
impact.
On April 8, 1992, FERC issued Order 636, which is intended to
restructure both the sales and transportation services provided by interstate
natural gas pipelines. The purpose of Order 636 is to improve the competitive
structure of the pipeline industry and maximize consumer benefits from the
competitive wellhead gas market. The major function of Order 636 is to assure
that the services non-pipeline companies can obtain from pipelines is comparable
to the services pipeline companies offer to their gas sales customers. One of
the key features of the Order is the "unbundling" of services that pipelines
offer their customers. This means that pipelines must offer transportation and
other services separately from the sale of gas. The Order is complex, and faces
potential challenges in court. GREKA is not able to predict the effect the Order
might have on its business.
FERC regulates the rates and services of "natural-gas companies", which
the NGA defines as persons engaged in the transportation of gas in interstate
commerce for resale. As previously discussed, the regulation of producers under
the NGA is being gradually phased out. Interstate pipelines, however, continue
to be regulated by FERC under the NGA. Various state commissions also regulate
the rates and services of pipelines whose operations are purely intrastate in
nature, although generally sales to and transportation on behalf of other
pipelines or industrial end-users are not subject to material state regulation.
There are many legislative proposals pending in Congress and in the
legislatures of various states that, if enacted, might significantly affect the
petroleum industry. It is impossible to predict what proposals will be enacted
and what effect, if any, such proposals would have on GREKA and its
subsidiaries.
State and Local Regulation of Drilling and Production
State regulatory authorities have established rules and regulations
requiring permits for drilling, drilling bonds and reports concerning
operations. The states in which GREKA'S subsidairies operate also have statutes
and regulations governing a number of environmental and conservation matters,
including the unitization and pooling of oil and gas properties and
establishment of maximum rates of production from oil and gas wells. A few
states also pro-rate production to the market demand for oil and gas.
Environmental Regulations
Operations of GREKA are subject to numerous laws and regulations governing
the discharge of materials into the environment or otherwise relating to
environmental protection. These laws and regulations may require the acquisition
of a permit before drilling commences, prohibit drilling activities on certain
lands lying within wilderness and other protected areas and impose substantial
liabilities for pollution resulting from drilling operations. Such laws and
regulations may also restrict air or other pollution resulting from GREKA's
operations. Moreover, many commentators believe that the state and federal
environmental laws and regulations will become more stringent in the future. For
instance, proposed legislation amending the federal Resource Conservation and
Recovery Act would reclassify oil and gas production wastes as "hazardous
waste". If such legislation were to pass, it could have a significant impact on
the operating costs of GREKA , as well as the oil and gas industry in general.
State initiatives to further regulate the disposal of oil and gas wastes are
also pending in certain states, including states in which GREKA'S subsidiaries
has operations, and these various initiative could have a similar impact on
GREKA.
GREKA has not filed any reports with estimates of its reserves with any
federal authority or agency, other than the Securities and Exchange Commission
and the Department of Energy.
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Operational Hazards and Insurance
GREKA's subsidiaries' operations are subject to the usual hazards
incident to the drilling and production of oil and gas, such as blowouts,
cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires,
pollution, releases of toxic gas and other environmental hazards and risks.
These hazards can cause personal injury and loss of life, severe damage to and
destruction of property and equipment, pollution or environmental damage and
suspension of operations.
GREKA and its subsidiaries has up to $15 million of general liability
insurance. GREKA's insurance does not cover every potential risk associated with
the drilling, production and processing of oil and gas. In particular, coverage
is not obtainable for certain types of environmental hazards. The occurrence of
a significant adverse event, the risks of which are not fully covered by
insurance, could have a material adverse effect on GREKA 's financial condition
and results of operations. Moreover, no assurance can be given that GREKA will
be able to maintain adequate insurance in the future at rates it considers
reasonable.
Employees
As of April 13, 2000, GREKA and its subsidiaries had 78 full-time
employees. None of GREKA's employees is subject to a collective bargaining
agreement. GREKA considers its relations with its employees to be satisfactory.
Shareholders Rights Plan
In November 1999, the Board of Directors of GREKA unanimously approved
the Company's adoption of a shareholder rights plan in order to preserve the
long-term value of the Company for GREKA 's shareholders. Under the shareholder
rights plan, one right will be distributed for each outstanding share of GREKA
common stock. Each right will entitle the holder to buy one share of GREKA
common stock for an initial exercise price of $60.00 per share. The rights will
initially trade with common shares and will not be exercisable unless certain
takeover events occur. The plan generally provides that if a person or group
acquires or announces a tender offer for the acquisition of 33% or more of GREKA
common stock without approval of the Board of Directors, the rights will become
exercisable and the holders of the rights, other than the acquiring person or
group, will be entitled to purchase shares of GREKA common stock (or under
certain circumstances stock of the acquiring entity) for 50% of its current
market price. The rights may be redeemed by GREKA for a redemption price of $.01
per right.
Retirement Plan
The Company sponsors a defined contribution retirement savings plan
(401(k) Plan) to assist all eligible U.S. employees in providing for retirement
or other future financial needs. The Company currently provides matching
contributions equal to 50% of each employee's contribution, subject to a maximum
of 8% of their eligible contribution.
Net Profit Sharing Plan
The Company has a net profit sharing plan (NPSP) for employees that
fulfill certain qualification requirements. The NPSP provides for an equal
disbursement of 10% of the Company's pretax income, excluding extraordinary
gains. Such disbursement is planned to follow the filing of the annual audited
financial statements of the Company. The NPSP could be suspended at the
discretion of the Company's Board of Directors for any specific year.
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Item 2. Description of Property
The following description of the GREKA properties at December 31, 1999
include all discussions of prior operations of all of GREKA's properties and
those of its wholly owned subsidiaries.
GREKA's Properties as of December 31, 1999
GREKA owned interests in approximately 805 wells at December 31, 1999.
The majority of these wells are concentrated along the central coast of
California and Louisiana. California (heavy oil) and Louisiana (gas) are the
primary and focused areas of exploitation and development activities in the near
term. At December 31, 1999, GREKA also operated wells and had exploitation and
development activities in other regions of California, in several states outside
of California and Louisiana, and in western Canada. GREKA's evaluation of
international projects resulted in the acquisition of exploration projects in
Indonesia and China. The Company continuously evaluates the profitability of its
oil, gas and related activities and, as part of its strategic business plan,
intends to divest unprofitable leases or areas of operations that are not
consistent with its business strategy.
Exploitation and Development Activities
The following is a brief discussion of significant developments in the
Company's recent exploitation and development activities through its whollyowned
subsidiaries:
United States
California (Integrated)
Approximately 38% of GREKA's proved reserves at December 31, 1999 (5.5
MMBOE) were located in four onshore fields in California's central coast region.
Daily production from the Central Coast Fields averaged 1,254 BOE for the year
ended December 31, 1999, representing 47% of GREKA's total production. GREKA
operates all of its wells in the Central Coast Fields.
California (E&P)
GREKA also holds interests in other California areas, which represented
24% (3.2 MMBOE) of GREKA's proved reserves at December 31, 1999. Daily
production from these other interests averaged 635 BOE for the year ended
December 31, 1999, representing 24% of GREKA's total production.
Louisiana
Approximately 22% of GREKA's proved reserves at December 31, 1999 (4.0
MMBOE) were located in two fields in Louisiana. GREKA's share of daily
production from the Louisiana fields averaged 580 BOE for the year ended
December 31, 1999, representing 22% of the Company's total production.
Other States
In addition to its California and Louisiana properties, GREKA owns
producing properties in a number of other states, primarily New Mexico and
Texas, which collectively represented 8% of GREKA's proved reserves at December
31, 1999 (1.0 MMBOE). Daily production from these properties averaged 75 BOE for
the year ended December 31, 1999, representing 9% of GREKA's total production.
Canada
Approximately 8% of GREKA's proved reserves at December 31, 1999 (1.0
MMBOE) were located in Canada. Daily production from these properties averaged
226 BOE for the year ended December 31, 1999, representing 9% of GREKA's total
production.
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GREKA seeks to acquire domestic and international producing properties
where it can significantly increase reserves through development or exploitation
activities and control costs by serving as operator. GREKA believes that its
substantial experience and established relationships in the oil and gas industry
enable it to identify, evaluate and acquire high potential properties on
favorable terms. As the market for acquisitions has become more competitive in
recent years, GREKA has taken the initiative in creating acquisition
opportunities, particularly with respect to adjacent properties, by directly
soliciting fee owners, as well as working and royalty interest holders, who have
not placed their properties on the market.
GREKA's 2000 capital expenditure budget for properties is dependent
upon the price for which its products are sold and upon the ability of GREKA to
obtain external financing. Subject to these variables and based on the current
asset base, GREKA expects its cash flow to fund approximately $12.0 million in
2000 for capital expenditures. By example, the Company expects that capital
improvements costing approximately $2.5 million will result in increased oil and
gas production of approximately 2300 BOEPD.
Exploration Activities
GREKA further plans to expand its existing reserve base by developing
high potential exploration prospects in known productive regions. GREKA believes
these activities complement its traditional development and exploitation
activities. In pursuing these exploration opportunities, GREKA may use advanced
technologies, including 3-D seismic and satellite imaging. In addition, GREKA
may seek to limit its direct financial exposure in exploration projects by
entering into strategic partnerships that shift the drilling related financial
risks to partners while providing the Company with an upside upon a successful
event. At December 31, 1999, GREKA had exploration plays in three primary areas:
California, Indonesia and China.
The following is a brief discussion of significant developments in the
Company's recent exploration activities through its whollyowned subsidiaries:
California
Coalinga Nose Exploration Prospect, Kern County, California. GREKA has
acquired leases covering approximately 3,600 acres of land and contractual
rights covering an additional approximate 7,000 acres of land in the region of
the prolific Coalinga oil field in the San Joaquin Valley of California. GREKA
has participated in a 16 square mile 3-D seismic survey covering this area and
has partially interpreted the survey. Nineteen anomalies have been identified in
the prospect area, covering five potentially productive zones, ranging in depth
from 6,500 to 12,000 feet. GREKA has an 85% working (68% net revenue) interest
in the well which it is seeking to farmout.
Indonesia
West Java Exploration Prospect, Jakarta, Indonesia. GREKA is a party to
a production sharing contract, along with Pertamina, the Indonesian state-owned
oil company, covering 1.7 million unexplored acres on the Island of Java near a
number of producing oil and gas fields. The 30-year contract provides that oil
and gas in commercial quantities must be discovered prior to September 2003. A
portion of the block has been distinctly identified as the Jonggol area
consisting of 500,000 acres. The Jonggol area has two prospects and eleven leads
with a well scheduled to be drilled in December 2000. The Company, which has a
75% interest in the block, is currently looking for a joint venture partner to
participate in the drilling of the Jonggol well. The remainder of the block is
being developed with additional seismic.
19
<PAGE>
China
Fengcheng Coalbed Methane Exploration Prospect, Jiangxi, China. In August
1999, GREKA announced its execution of a production sharing contract with the
China United Coalbed Methane Corporation Ltd., which has been approved by the
Chinese Ministry of Foreign Trade and Economic Cooperation, to jointly exploit
coalbed methane resources in Fengcheng, East China's Jiangxi Province. The
contract block in which GREKA has a 49% working interest covers a total area of
380,534 acres. The 30-year contract provides that GREKA as operator will drill
at least ten coalbed methane wells over a three year term. Production test wells
have been drilled and were both successful. The Company intends to drill six
wells in 2000 to conform proved reserves this year and expects commercial
operations commencing in 2001.
Oil and Gas Producing Properties
At December 31, 1999, the Company through its wholly owned subsidiaries
owned and operated producing properties in 8 states, with its U.S. proved
reserves located primarily in two core areas: California and Louisiana which
represent approximately 58% and 27%, respectively, of GREKA's proved reserves
(BOE).
The following table summarizes GREKA's estimated proved oil and gas
reserves by geographic area as of December 31, 1999. The following table
includes both proved developed (producing and non-producing) and proved
undeveloped reserves. Approximately 38% of the total reserves reflected in the
following table are proved undeveloped. There can be no assurance that the
timing of drilling, reworking and other operations, volumes, prices and costs
employed by the independent petroleum engineers will prove accurate. Since
December 31, 1999, oil and gas prices have generally increased. At such date,
the price of WTI crude oil as quoted on the New York Mercantile Exchange was
$25.30 per Bbl and the comparable price for March, 2000 was $29.90. Quotations
for the comparable periods for natural gas were $2.27 per Mcf and $2.90 per Mcf,
respectively. The proved developed and proved undeveloped oil and gas reserve
figures are estimates based on reserve reports prepared by GREKA's independent
petroleum engineers. The estimation of reserves requires substantial judgment on
the part of the petroleum engineers, resulting in imprecise determinations,
particularly with respect to new discoveries. Estimates of reserves and of
future net revenues prepared by different petroleum engineers may vary
substantially, depending, in part, on the assumptions made, and may be subject
to material adjustment. Estimates of proved undeveloped reserves comprise a
substantial portion of GREKA's reserves and, by definition, had not been
developed at the time of the engineering estimate. The accuracy of any reserve
estimate depends on the quality of available data as well as engineering and
geological interpretation and judgment. Results of drilling, testing and
production or price changes subsequent to the date of the estimate may result in
changes to such estimates. The estimates of future net revenues in this report
reflect oil and gas prices and production costs as of the date of estimation,
without escalation, except where changes in prices were fixed under existing
contracts. There can be no assurance that such prices will be realized or that
the estimated production volumes will be produced during the periods specified
in such reports. The estimated reserves and future net revenues may be subject
to material downward or upward revision based upon production history, results
of future development, prevailing oil and gas prices and other factors. A
material decrease in estimated reserves or future net revenues could have a
material adverse effect on GREKA and its operations.
December 31, 1999
Proved Reserves, net PV-10 Value
Gross Oil Gas
Property Wells (MBbls) (MMcf) MBOE Dollar Value %
-------- --------- ------- ------ ---- ------------ -------
(In thousands)
California:
Integrated Ops..178 .....5,239.5 1,275.3 5,454.4 $27,611 38%
E&P ............163 3,147.3 591.5 3,253.0 $17,793 24%
Total
California ....341 .....8,386.8 1,866.8 8,707.4 $45,404 62%
Louisiana .........55 1,665.9 13,922.6 4,152.1 $16,215 22%
Other United
States........206 617.8 1,880.9 953.7 $ 5,534 8%
Total United
States ........602......10,531.7 17,598.3 13,674.4 $67,153 92%
Canada ............68 ........235.4 3,937.6 940.1 $ 6,162 8%
Total Americas... 670 10,767.1 21,535.9 14,614.4 $73,315 100%
20
<PAGE>
The following is a brief discussion of the Company's oil and gas
operations for major fields:
California
Central Coast Fields. GREKA's subsidiary operates four fields in the
Central Coast area of California. These fields provide equity crude oil for
GREKA's wholly owned asphalt refinery. The fields are Cat Canyon, Casmalia, Gato
Ridge and Santa Maria Valley which collectively have an average working interest
of 100% and an approximate average net revenue interest of 90% in 124 active
wells producing 1254 BOEPD. These fields represent 36% of GREKA's total proved
reserves.
New drilling activity centered on horizontal drilling beginning in
1995. During the intervening years twenty-two horizontal wells were drilled in
these four fields. The drilling program resulted in mixed success, four of the
wells were extremely profitable, but the others were marginally economic or
uneconomic, primarily due to the high cost of drilling new wells with long reach
lateral sections. These long reach wells typically cost more than $500,000 each.
Additional problems were encountered due to sand intrusion during production.
Current management has spent considerable effort in developing a sand control
completion technique that supports long-term production and thus enhances
related economics.
Commencing in 1999 management changed the horizontal drilling program
by re-entering existing idle wellbores and drilling short radius laterals
utilizing proprietary technology patented from BP Amoco. The reduced cost for
re-entries ($125,000 per well) should contribute to a higher economic success
rate and additional economic reserves. Earlier drilling has delineated the S1b
Sisquac Sand in the Cat Canyon Field and S2 Sisquac Sand in the Gato Ridge Field
as those formations with the highest opportunities for success. Management plans
to drill ten horizontal re-entries during 2000 primarily to exploit these two
reservoirs.
Two of the horizontal wells drilled in the Gato Ridge Field are a SAGD
(steam assisted gravity drainage) pair. This pair of long reach lateral wells is
drilled in the S1b Sisquac formation with one wellbore in the upper section of
the formation and the other located directly underneath it. These wells were
designed to continuously inject steam in the upper well and produce from the
lower well. The project was discontinued in late 1997 before production and
after procuring all necessary equipment. Current management is working to secure
regulatory permits, and plans to activate the project with minimal capital
requirements in the current year.
The results of the horizontal drilling program in these fields provide
significant encouragement that the ultimate recovery of heavy oil from these
fields can be increased. Current estimates of ultimate recovery vary with each
of the fields in the range from 25% to as low as 5% of the original oil in
place. Horizontal drilling offers a new technology that should add reserves in
heavy oil fields that could not otherwise be economically recovered due to
several reasons including the following: 1)the propensity of water to
preferentially channel through the heavy oil to the well bore thus reducing
ultimate recoveries in heavy oil reservoirs 2)reduced friction pressures can be
created when heavy oil moves to a horizontal wellbore in the reservoir.
21
<PAGE>
Richfield East Dome Unit. The Richfield East Dome Unit is a waterflood
in Orange County, California, operated by GREKA's subsidiary and producing 780
BOPD. The field has proved net reserves of 1.9 MMBO valued at PV-10 $8.2 million
or 12% of the Company's total reserve value. Waterflood operations were
initiated in 1974 by Texaco. Field facilities are in sufficiently satisfactory
condition to service the waterflood operation through the eighteen years
remaining in the life of the field.
North Belridge Field. The North Belridge Field is located in Kern
County, California. GREKA's subsidiary is the operator and owns 100% working
interest in 37 wells on three leases covering 270 contiguous acres. The wells
produce from two formations-- light oil from the Diatomite zone and heavy oil
from the Tulare formation. Current production is about 330 BOEPD, net proved
reserves are 1.1 MMBOE valued at PV-10 $7.2 million. (See Item 3-"Legal
Proceedings")
Louisiana
Potash Dome Field. The Potash Dome Field is located in Plaquemines
Parish south of New Orleans, Louisiana, overlying a salt dome. The wells on the
west side of the field are land based while the wells on the east side produce
from single well structures located in shallow inland water. GREKA's subsidiary
operates the 3000 acre field and has 100% working interest in 23 wells. Proved
net reserves in the field are 1.5 MMBO and 13.9 BCFG valued at PV-10 $15.3
million. There exists substantial drilling opportunities in the field with net
proved undeveloped reserves of 0.9 MMBO and 10.7 BCFG in five drilling locations
as determined by Netherland, Sewell & Associates, Inc., GREKA's independent
petroleum engineers. Additionally GREKA believes there is substantial
opportunity to add gas reserves in a deeper zone called the Tex "W" which is
owned 50% by GREKA's subsidiary and 50% by Exxon-Mobil. To minimize the cost of
testing the deeper zones management expects to deepen at least one of the wells
required to develop the proved locations a maximum 1000' below the zone which
has proved reserves. Additionally there are several shut in wells requiring
workovers which management plans to return to production. The potential of
workovers was proven in 1999 with the successful recompletion of the State Lease
508 #25 well in the Miocene 12B zone. The well initially produced at rates as
high as 1.5 MMCFGPD from a zone previously assigned probable/possible reserves.
Manila Village Field. The Manila Village is located in Jefferson
Parish, south Louisiana. The field is operated by GREKA's subsidiary and
produces 300 BOPD (160 BOPD net) from 12 wells all located on single well
structures in shallow inland water. Proved developed reserves are 138 MBO net to
GREKA's subsidiary.
Other United States
Southwest Tatum Field. The Southwest Tatum Field operated by GREKA's
subsidiary is located in Lea County, New Mexico. This field was discovered in
1996 through the use of 3-D seismic. There are four different productive
horizons in the field, Devonian, Canyon, Cisco, and Wolfcamp. The emphasis is
currently focused on increasing production by recompleting the existing wells in
the optimum interval. Remaining drilling locations are under study. There are
net proved developed reserves of 172 MBO and 225 MMCFG in the field as of
December 31, 1999.
San Simeon Field. The San Simeon Field is located in Lea County, New
Mexico. GREKA's subsidiary operates one oil well and three gas wells. The oil
well is the only producer in the field completed in the Wolfcamp formation. It
currently flows oil at 85 BOPD with 150 MCFGPDGREKA. The well has cumulative
production of 330 MBO and 461 MMCFG with estimated remaining gross reserves of
181 MBO (73 MBO net) and 334 MMCFG (136 MMCFG net) with net PV-10 value of $1.0
million. The gas wells produce from the deeper Morrow formation offering an
opportunity to drill a second Wolfcamp well and test the Morrow formation at
minimal additional cost. GREKA's independent reservoir engineers have assigned a
proved undeveloped drilling location in the Wolfcamp which is valued at net
PV-10 $402,000.
22
<PAGE>
Oil and Gas Reserves
GREKA's proved reserves and the estimated present value of future
revenues from proved developed and undeveloped oil and gas properties in this
document have been estimated by the following independent petroleum engineers.
In 1997, 1998 and 1999 Netherland, Sewell & Associates, Inc. prepared reports on
GREKA's reserves in the United States and Sproule Associates Limited prepared a
report on GREKA's Canadian reserves. The estimates of these independent
petroleum engineers were based upon review of production histories and other
geological, economic, ownership and engineering data provided by GREKA. In
accordance with the SEC's guidelines, GREKA's estimates of future net revenues
from GREKA's proved reserves and the present value thereof are made using oil
and gas sales prices in effect as of the dates of such estimates and are held
constant throughout the life of the properties, except where such guidelines
permit alternate treatment, including, in the case of gas contracts, the use of
fixed and determinable contractual price escalation. Future net revenues at
December 31, 1999, reflect weighted average prices of $17.97 per BOE compared to
$8.29 per BOE and $13.13 per BOE as of December 31, 1998 and 1997, respectively.
There have been no reserve estimates filed with any other United States federal
authority or agency, except that GREKA participates in a Department of Energy
annual survey, which includes furnishing reserve estimates of certain of GREKA's
properties. The estimates furnished are identical to those included herein with
respect to the properties covered by the survey.
The following tables present total estimated proved developed
producing, proved developed non-producing and proved undeveloped reserve volumes
as of December 31, 1997, 1998 and 1999 and the estimated present value of future
net revenues ("PV-10") (based on current prices and costs at the respective
year's end, using a discount factor of 10 percent per annum). As used herein,
the term "proved undeveloped reserves" are those which can be expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage shall be limited to those drilling units offsetting productive units
that are reasonably certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and in the
same reservoir. There can be no assurance that these estimates are accurate
predictions of reserves or of future net revenues from oil and gas reserves or
their present value. As indicated elsewhere, the prices received for oil and gas
have increased since the preparation of the 1999 year end engineering estimates.
Estimated Proved Oil and Gas Reserves
At December 31,
---------------------------------
1997(1) 1998(1) 1999(1)
------ ------ ------
Net oil reserves (MBbl)
Proved developed producing ........ 78 1,915 6,608
Proved developed non-producing .... 153 659 826
Proved undeveloped ................ 2,321 1,732 3,333
------ ------ ------
Total proved oil reserves (MBbl) . 2,553 4,336 10,767
====== ====== ======
Net natural gas reserves (MMcf)
Proved developed producing ........ -- 899 4,134
Proved developed non-producing .... -- 1,759 5,398
Proved undeveloped ................ -- 2,416 12,005
------ ------ ------
Total proved natural gas
reserves (MMcf) ................ -- 5,074 21,536
====== ====== ======
Total proved reserves (MBOE) ......... 2,553 5,242 14,614
23
<PAGE>
(1) Does not include reserve volumes attributable to the Company's interest in
Colombian assets sold in June 1999 (see generally Item 1-"Description of
Business, Divestiture Activities")
Estimates of proved reserves may vary from year to year reflecting
changes in the price of oil and gas and results of drilling activities during
the intervening period. Reserves previously classified as proved undeveloped may
be completely removed from the proved reserves classification in a subsequent
year as a consequence of negative results from additional drilling or product
price declines which make such undeveloped reserves non-economic to develop.
Conversely, successful development and/or increases in product prices may result
in additions to proved undeveloped reserves.
Estimated Present Value of
Future Net Revenue
At December 31,
-------------------------------------
1997(1) 1998(1) 1999(1)
---- ---- ----
PV-10 Value (In thousands)
Proved developed producing ... $ 71 $ 2,247 $42,516
Proved developed non-producing 278 2,253 8,977
Proved undeveloped ........... 4,579 1,473 21,822
------- ------- -------
Total ..................... $ 4,927 $ 5,931 $73,315
======= ======= =======
(1) Does not include reserve volumes attributable to the Company's interest in
Colombian assets sold in June 1999 (see generally Item 1-"Description of
Business, Divestiture Activities")
As used herein, the terms "proved oil and gas reserves," "proved developed oil
and gas reserves," and "proved undeveloped reserves" have the meanings defined
by the SEC as set forth in the Table of Contents to this document. Reservoir
engineering is a subjective process of estimating the sizes of underground
accumulations of oil and gas that cannot be measured in an exact way. The
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. Reserve reports
of other engineers might differ from the reports contained herein. Results of
drilling, testing and production subsequent to the date of the estimate may
justify revision of such estimate. Future prices received for the sale of oil
and gas may be different from those used in preparing these reports. The amounts
and timing of future operating and development costs may also differ from those
used. Accordingly, reserve estimates are often different from the quantities of
oil and gas that are ultimately recovered.
24
<PAGE>
The following table summarizes sales volume, sales price and production
cost information for GREKA's net oil and gas production for each of the years in
the three-year period ended December 31, 1999.
Year Ended December 31,
--------------------------------
1997(1) 1998(1) 1999(1)
------ ------ ------
Production Data:
Oil (MBbls) ........ 2 13 528
Gas (MMcf) ......... -- -- 1,144
Total (MBOE) ..... 2 13 736
Average Sales
Price Data
(Per Unit):
BOE ................ $ 12 $ 6 $12.46
Selected Data
per BOE:
Production costs (2) $ 124 $ 9 $ 7.70
General and
administrative ... $ 378 $ 119 $ 3.63
Depletion,
depreciation and
amortization ..... $ 12 $ 26 $ 2.94
- - ---------------------
(1) Does not include reserve volumes attributable to the Company's interest in
Colombian assets sold in June 1999 (see generally Item 1-"Description of
Business, Divestiture Activities")
(2) Production costs include production taxes.
Drilling Activity
The following tables set forth certain information for each of the
years in the three-year period ended December 31, 1999, relating to GREKA's
participation in the drilling of exploratory and development wells in (excluding
information attributable to the Company's interest in Colombian assets (see Item
1-"Description of Business, Divestiture Activities")):
United States
Year Ended December 31,
-------------------------------------------------
1997 1998 1999
--------------- -------------- ---------------
Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)
-------- ------ -------- ------ -------- ------
Exploratory Wells
Oil - - - - 254 191.00
Gas - - - - 22 9.00
Dry (3) - - - - - -
Development Wells
Oil 2 1.67 3 2.30 360 321.00
Gas - - - - 13 8.00
Dry (3) - - - - - -
Total Wells
Oil - - 1 0.70 614 512.00
Gas - - - - 35 17.00
Dry (3) - - - - - -
- - -----------------------
(1) A gross well is a well in which a working interest is owned. The number of
gross wells is the total number of wells in which a working interest is
owned.
25
<PAGE>
(2) A net well is deemed to exist when the sum of fractional ownership working
interest in gross wells equals one. The number of net wells is the sum of
fractional working interests owned in gross wells expressed as whole
numbers and fractions thereof.
(3) A dry hole is an exploratory or development well that is not a producing
well.
Canada (1)
Year Ended December 31,
-------------------------------------------------
1997 1998 1999
--------------- -------------- ---------------
Gross(2) Net(3) Gross(2) Net(3) Gross(2) Net(3)
-------- ------ -------- ------ -------- ------
Exploratory Wells
Oil - - - - 6 4
Gas - - - - 6 3
Dry (4) - - - - 23 3
Development Wells
Oil - - - - 11 2
Gas - - - - 12 1
Dry (4) - - - - 14 3
Total Wells
Oil - - - - 17 7
Gas - - - - 20 4
Dry (4) - - - - 37 6
- - -------------
(1) See Item 1-"Description of Business, Divestiture Activities"
(2) A gross well is a well in which a working interest is owned. The number of
gross wells is the total number of wells in which a working interest is
owned.
(3) A net well is deemed to exist when the sum of fractional ownership working
interest in gross wells equals one. The number of net wells is the sum of
fractional working interests owned in gross wells expressed as whole
numbers and fractions thereof. No reduction is made for the minority
interest in Beaver Lake.
(4) A dry hole is an exploratory or development well that is not a producing
well.
Productive Oil and Gas Wells
The following table sets forth information at December 31, 1999, relating
to the number of productive oil and gas wells (producing wells and wells capable
of production, including wells that are shut in) in which GREKA through its
subsidiaries owned a working interest:
Oil Gas Total
Gross Net Gross Net Gross Net
----- ----- ----- ------ ------ -----
United States 430 226.9 135 49.0 565 275.9
Canada (1) 39 19.0 29 10.4 58 29.4
----- ----- ----- ------ ------ -----
469 245.9 164 59.4 633 305.3
===== ===== ===== ====== ====== =====
- - -------------
(1) No reduction is made for the minority interest in Beaver Lake that existed
until July, 1999.
26
<PAGE>
Oil and Gas Acreage
The following table sets forth certain information at December 31, 1999
relating to oil and gas acreage in which GREKA through its subsidiaries owned a
working interest:
Developed (1) Undeveloped
----------------------- ------------------
Gross Net Gross Net
United States 33,034 20,063 17,137 8,025
Canada (2) 23,840 7,192 20,400 9,206
- - ------------ -------- ------- ------ -------
Total 56,874 27,255 37,537 17,231
======== ======= ====== =======
- - ----------------
(1) Developed acreage is acreage assigned to productive wells.
(2) No reduction is made for the minority interest in Beaver Lake that existed
until July, 1999.
Title to Properties
Many of GREKA's subsidiaries' oil and gas properties are held in the form
of mineral leases, licenses, reservations, concession agreements and similar
agreements. In general, these agreements do not convey a fee simple title to
GREKA, but rather, depending upon the jurisdiction in which the apposite
property is situated, create lesser interests, varying from a profit a prendre
to a determinable interest in the minerals. In some jurisdictions, notably
non-U.S. jurisdictions, GREKA's subsidiaries' interest is only a contractual
relationship and bestows no interest in the oil or gas in place. As is customary
in the oil and gas industry, a preliminary investigation of title is made at the
time of acquisition of undeveloped properties. Title investigations are
generally completed, however, before commencement of drilling operations or the
acquisition of producing properties. GREKA believes that its methods of
investigating title to, and acquisition of, its oil and gas properties are
consistent with practices customary in the industry and that it has generally
satisfactory title to the leases covering its proved reserves. Because most of
GREKA's oil and gas leases require continuous production beyond the primary
term, it is always possible that a cessation of producing or operating
activities could result in the loss of a lease. Assignments of interest to
and/or from GREKA'S subsidiaries may not be publicly recorded.
From time to time, substantially all of GREKA's properties, including its
stock in its Subsidiaries, are hypothecated to secure GREKA's current and future
indebtedness. GREKA's subsidiaries' working interest in properties may be
subject to lienholders by non-payment. In the event of GREKA's non-payment or
untimely payment of its obligations, GREKA expects liens to be filed against its
assets and to be subject to lawsuits. Oil and gas leases in which GREKA'S
subsidiaries have an interest may be deficient, require ratifications and be
subject to action by GREKAsubsidiaries.
Average Sales Price and Production Cost
The following table sets forth information concerning average per unit
sales price and production cost for GREKA's oil and gas production for the
periods indicated:
27
<PAGE>
Year Ended December 31,
--------------------------------
1997 1998 1999
---- ---- ----
Average sales price per BOE:
Integrated Ops........... $ 11 $6 $10.82
E&P Americas............. 19 - 13.82
Combined................. 12 6 12.46
Average production cost per BOE:
Integrated Ops.. $109 $9 $ 7.96
E&P Americas............. 109 - 7.48
Combined................. 109 9 7.70
Asphalt Refinery
GREKA owns an asphalt refinery in Santa Barbara County, California through
a wholy owned subsidiary. The refinery is a fully self-contained plant with
steam generation, mechanical shops, control rooms, office, laboratory, emulsion
plant and related facilities, and is staffed with a total of 23 operating,
maintenance, laboratory and administrative personnel. Crude oil is delivered to
the refinery by truck to crude oil storage consisting of one 27,000 Bbl tank and
two 40,000 Bbl tanks. Crude oil processing equipment consists of a conventional
pre-flash tower, an atmospheric distillation tower, strippers and a vacuum
fractionation tower. The refinery has truck and rail loading facilities,
including some capability of tank car unloading.
The refinery is fed by production from the central California region.
Generally, the crude oil produced in these areas is of low gravity and is
ideally suited as feedstock for asphalt. Further, asphalt prices have
historically been less volatile than feedstock prices, providing GREKA with a
hedge against oil price movements. This refinery was acquired from Conoco Inc.
in 1994 and Conoco performs all environmental obligations that arose during and
as a result of its operations of the refinery prior to the acquisition.
Throughput at the refinery has ranged between 2,000 and 4,500 Bopd,
while production capacity is approximately 10,000 Bopd. Only approximately 36%
of the throughput has come from GREKA's production. GREKA believes that the
asphalt refinery's margins will improve significantly as it increases production
from the Central Coast Fields, providing additional feedstock and spreading the
fixed cost of the refinery over more units produced. Furthermore, GREKA intends
to increase the throughput to 10,000 Bopd by year end 2001. GREKA estimates that
each 1,000 Bopd increase in equity throughput could yield approximately $2
million in additional earnings before interest, taxes, depreciation and
amortization("EBITDA") annually.
In May 1999, the Company's subsidiary assumed full operation of its
asphalt refinery. (see Item 1-"Description of Business, Acquisition Activities")
The results of operations of the Company's refinery are somewhat
seasonal due to seasonal fluctuations in the asphalt market. Asphalt sales have
been generally higher in the third quarter and lower in the first quarter. Due
to these seasonal fluctuations, results of operations for interim quarterly
periods may not be indicative of results which may be realized on an annual
basis.
Real Estate Activities
GREKA'S subsidiaries from time to time purchased real estate in conjunction
with their acquisition of oil and gas and refining properties in California and
plan to continue this practice. At December 31, 1999, the Company owned through
28
<PAGE>
its subsidiaries approximately 2,500 acres in Santa Barbara County, California
and approximately 6 acres in Orange County, California. GREKA has used a portion
of its real estate holdings for agricultural purposes. GREKA plans to retain
some of these real estate holdings for asset appreciation which may include
developmental activities at a future date.
Limestone Properties
Indiana - Monroe Field. At December 31, 1998, GREKA owned through its
wholly owned subsidiary, Calox Inc, a 355 acre limestone property located in
Monroe County, Indiana. GREKA owned the land, timber and all the mineral rights
associated with the property. The limestone deposits are made up of Salem
limestone, which produces a high industrial grade calcium oxide or calcium
carbonate used in scrubbing machinery that cleans the gaseous emissions from
coal burning generators.
At December 31, 1998, IPH held a three year option expiring on
September 9, 2000 to acquire 90% of the shares of Calox for $3.5 million. In
April 1999, GREKA and IPH sold their interests in the limestone property to
Pembrooke Calox, Inc. in exchange for a non-recourse promissory note, secured by
the limestone property. (See Item 1-"Description of Business, Divestiture
Activities") During October 1999, Pembrook filed a legal action against GREKA in
an effort to extend the transaction which suit is still pending. (See Item
3-"Legal Proceedings")
Offices
GREKA leases approximately 1,000 square feet of office space at 630
Fifth Avenue, Suite 1501, New York, New York, for its executive offices on a
three year lease through March 31, 2001. GREKA 's offices are located in Santa
Maria, California; Houston, Texas; Beijing, China;Jakarta, Indonesia; Bogota,
Colombia; and Calgary, Alberta.
29
<PAGE>
Item 3. Legal Proceedings
Enervest LP v. Saba of Texas, Inc. (Case No. 1999-30673, 152nd Judicial District
Court of Harris County, Texas, June 1999) Enervest filed an action claiming that
the Company's subsidiary breached the agreement between the parties for failing
to close the sale of its interests in certain oil and gas properties. In
accordance with the agreement, Enervest deposited earnest money in the amount of
$1.25 million to a jointly controlled account to assure Enervest's performance
of the agreement. Enervest further seeks the court's declaration that it is
entitled to the deposit. In July 1999, the Company's subsidiary filed a
counterclaim against Enervest for damages incurred as a result of Enervest's
breach of the agreement by failing to close the sale. While the subsidiary plans
to vigorously defend all claims asserted by Enervest and to aggressively pursue
all counter and third party claims, the matter is in its discovery stage.
Capco Resources, Ltd. v. GREKA Energy Corporation, et al. (Case No. 99-K-2155,
U.S. District Court for the District of Colorado, August 1999). This action was
initially filed in the United States District Court for the Central District of
California and later moved to Colorado pursuant to a court order granting
GREKA's motion to transfer. Plaintiff Capco Resources, Ltd. ("Capco") has raised
claims for breach of contract, specific performance, fraud, and negligent
misrepresentation against the Company and Randeep Grewal, the President of
GREKA. The Company has brought counterclaims against Capco, CapcoEnergy, Inc.,
Ilyas Chaudhary, and Kal Saifi (the "Capco Group") for violation of the
Securities Exchange Act of 1934, Section 10B, and Rule 10b-5, fraud, breach of
contract, negligent misrepresentation, breach of fiduciary duty, and negligence.
The parties' respective claims relate to a November 23, 1998 Stock Exchange
Agreement between the Company and Capco, pursuant to which Capco was to exchange
2,971,766 shares of Saba stock, constituting all of Capco's ownership interest
in Saba, for 1,340,000 newly-issued shares of the Company to Capco. Even though
GREKA, in accordance with the terms of the agreement and in good faith, issued
all 1,340,000 shares of GREKA common stock, GREKA had actually received only
2,006,566 shares (two-thirds) of Saba common stock agreed upon. The Company
subsequently determined that the Capco Group had made numerous
misrepresentations and omissions of material fact in inducing GREKA to enter
into this transaction. These factual circumstances form the basis for the claims
in dispute. Capco is seeking damages of approximately $12.25 million related to
the Company's refusal to file a registration statement for the resale of 1
million shares of GREKA common stock that Capco received pursuant to the
exchange. GREKA claims that it is entitled to damages and requests partial
rescission and/or reformation of the Stock Exchange Agreement. Additionally, the
Company also plans to seek to recover from the Capco Group all monies owed by
the Capco Group and related parties since 1998 for unpaid accounts such as
promissory notes, interest on promissory notes, and reimbursable expenses. While
GREKA plans to vigorously defend all claims asserted by Capco and to
aggressively pursue all counter and third party claims, the litigation is in its
early stages of discovery.
Pembrooke Calox, Inc. v. GREKA Energy Corporation, et al. (Index No. 604905/99,
Supreme Court, New York County, October 1999). Pembrooke Calox, Inc.
("Pembrooke") has brought an action against GREKA and others seeking damages of
approximately $5 million for an alleged breach of a settlement agreement and
related contracts pursuant to which Pembrooke was to receive GREKA's interest in
a limestone reserve located in Indiana in exchange for payment on a $5.7 million
non-recourse promissory note. Pembrooke alleges that it was unable to make such
payment because of GREKA's purported failure to provide certain geological
documents concerning mineral reserves located under the property. GREKA has
filed fraud-based counterclaims, and the parties have agreed that the property
is to be held in escrow pending adjudication of all claims. While GREKA plans to
vigorously defend all claims asserted by Pembrooke and seek all counter-relief,
the litigation is in its preliminary discovery stages.
RGC International Investors, LDC v. GREKA Energy Corporation, et al. (C.A. No.
17674NC, Delaware Chancery Court, December 1999). RGC International Investors,
LDC ("RGC") brought suit against GREKA, Saba and the former directors of Saba
based on claims arising from GREKA's acquisition of Saba on March 24, 1999. RGC
seeks, among other things, rescission of the merger and an unspecified amount of
damages for GREKA's alleged failure adequately to provide for RGC's rights as a
Saba preferred shareholder in consummating that merger. GREKA has moved to
dismiss the complaint and that motion has not yet been scheduled for hearing.
30
<PAGE>
Sabacol, Inc. v. Omimex Resources, Inc., Omimex de Colombia, Ltd., and Omimex
International Corporation dba Omimex Petroleum, Inc. (C.A. No. BC224339,
California Superior Court, Los Angeles County, February 2000). GREKA's
subsidiary, filed an action against Omimex Resources, Inc. and its subsidiaries
seeking an order directing rescission of an asset purchase agreement effective
January 1, 1999 or, alternatively, directing specific performance of the
agreement by Omimex. The Company's subsidiary alleges claims for breach of
contract, breach of covenant of good faith and fair dealing, negligent
misrepresentation and fraudulent inducement and seeks damages. Omimex alleges
counter-claims of breach of contract and seeks declaratory judgment. While the
subsidiary plans to vigorously pursue all claims against Omimex and defend all
counter-allegations, the litigation is in its preliminary discovery stages.
From time to time, the Company and its subsidiaries are a named party in
legal proceedings arising in the ordinary course of business. While the outcome
of such proceedings cannot be predicted with certainty, management does not
expect these matters to have a material adverse effect on the Company's
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on December 22, 1999, the following
individuals were elected to the Board of Directors to serve for a 3-year term
ending 2002:
Votes For Votes Withheld
--------- --------------
Dai Vaughan....... 3,665,095 73,777
Susan M. Whalen... 3,668,444 70,428
The following proposal was voted on by Stockholders at the Annual Meeting:
Votes Votes
For Against
--------- -------
To approve the adoption of
GREKA's 1999 Omnibus
Stock Option Plan. 2,250,759 140,242
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
GREKA common stock is listed for trading on the Nasdaq National Market
under the symbol "GRKA". Prior to March 25, 1999, the trading symbol was "HVNV".
Except for a period from August to December of 1997, GREKA's common stock has
been quoted on NASDAQ since February 19, 1993. The following table sets forth,
for the periods indicated, the high and low closing bid quotations per share of
GREKA common stock as reported on the Nasdaq National Market. GREKA common stock
quotations represent inter-dealer quotations, without retail markup, markdown or
commissions, and may not represent actual transactions. There can be no
assurance that a public market for GREKA's common stock will be sustained in the
future.
Bid
Low High
Quarter Ended
March 31, 1998 12.00 14.75
June 30, 1998 8.0625 10.00
September 30, 1998 7.25 9.25
December 31, 1998 8.813 14.938
March 31, 1999 4.875 10.50
June 30, 1999 6.375 9.125
September 30, 1999 7.0 13.5
December 31, 1999 7.5 12.0
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<PAGE>
On April 13, 2000 there were approximately 879 registered holders of
GREKA's common stock. Based on a broker count, GREKA believes at least an
additional 5,861 persons are shareholders with street name positions.
Holders of GREKA common stock are entitled to receive such dividends as
may be declared by GREKA board of directors. GREKA has not yet paid any
dividends, and the board of directors of GREKA presently intends to pursue a
policy of retaining earnings, if any, for use in GREKA's operations and to
finance expansion of its business. With respect to GREKA's common stock, the
declaration and payment of dividends in the future, of which there can be no
assurance, will be determined by the GREKA board of directors in light of
conditions then existing, including GREKA earnings, financial condition, capital
requirements and other factors.
32
<PAGE>
Item 6. Selected Financial Data.
The following table sets forth selected consolidated financial data for
the Company as of the dates and for the periods indicated. The financial data
for each of the five years ended December 31, 1999, were derived from the
Consolidated Financial Statements of the Company. The following data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," which includes a discussion of factors
materially affecting the comparability of the information presented, and in
conjunction with the Company's financial statements included elsewhere in this
report.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Sales $29,138 $ 146 $ 212 $ 604 $ -
Production and Product Costs $17,821 $ 121 $ 248 $ 367 $ -
General and administrative $ 3,205 $ 1,542 $ 756 $ 575 $ 474
Depletion, depreciation &
amortization $ 3,024 $ 333 $ 24 $ 19 $ 17
Interest Expense $ 1,860 $ 32 $ 25 $ 35 $ 17
Other Income(Expense) Net $(1,696) $ (526) $ (34) $ 15 $ 2
Minority Interest $ 20 $ - $ - $ - $ -
Income tax (expense) benefit $ (46) $ - $ - $ - $ -
Equity in Earnings/Loss of Saba
(pre-acquisition) $ 569 $ 586 $ - $ - $ -
Net income(loss) $ 3,367 $(5,548) $ (851) $ (377) $ (423)
Income (loss) per common share:
Basic net income(loss) per share $ 0.84 $ (3.42) $ (1.44) $(4.70) $ n/a
Cash dividend per share $ - $ - $ - $ - $ -
Basic weighted average common
shares outstanding 4,003 1,621 591 80 $ n/a
Diluted weighted average common
shares outstanding 4,575 1,621 591 80 $ n/a
Balance Sheet Data (end of period):
Working Capital $(14,176) $(1,828) $ 3,133 $ 276 $ (15)
Net property and equipment $70,287 $ 926 $ 6,795 $ 735 $ 0
Total assets $84,214 $20,807 $10,803 $ 901 $ 68
Long-term obligations $15,696 $ 53 $ 77 $ 541 $ 25
Total stockholders' equity $33,378 $18,505 $ 9,095 $ (10) $ (3)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operation
Overview
In view of significant material changes to GREKA during 1998, the
acquisition of Saba in March 1999, and assumption of full operations related to
33
<PAGE>
the asphalt refinery, management believes that the financial condition and
results of operations of GREKA reported for periods prior to those herein are
not indicative of the future financial condition and results of operations of
GREKA. As a consequence of GREKA's subsidiary's assumption of full operations at
its refinery in May 1999, the Company has been reporting 100% of the revenue and
net income resulting from operations in contrast to recognition prior to May
1999 of only 50% of the net profit resulting from the same operations. Saba's
1998 financial statements are not consolidated with GREKA's 1998 financial
statements since the acquisition had not been consummated by December 31, 1998.
Furthermore, in accordance with the accounting rules for reverse mergers, the
GREKA statements of operations are not reflective of the combined revenues from
the September 1997 merger of Petro Union and Horizontal Ventures on an
annualized basis but rather reflect the combined income from the merger date.
Current management was appointed in September 1997 and spent the
balance of the year re-structuring, re-capitalizing, and completing mergers and
acquisitions that all were part of a specific and focused strategy. Management
has established a clear directive to focus on capitalizing on its experience
with the low cost horizontal drilling technology patented by Amoco and
thereafter licensed to GREKA. It is the intent of management to become a leader
in applying this horizontal drilling technology and exploiting declining
production wells on properties such as Saba's which have been acquired by GREKA.
During the latter of part of 1998 and early 1999, management of GREKA
was primarily focused on the acquisition of Saba and considerable expenses were
incurred in connection with the Saba transactions in the fourth quarter of 1998
and the first quarter of 1999. Due to the significance to GREKA of the Saba
acquisition, GREKA's management and staff devoted a substantial amount of time
and effort to the acquisition. GREKA has already executed, and continues to
execute, an aggressive rework program to return to production existing wells on
all properties that had wells shut-in for over eighteen months.
In view of the significant differences between GREKA's corporate
structure before the March 1999 acquisition of Saba and during 1997 and 1998,
comparisons of GREKA 's results of operations for those periods are considered
by management not to be either relevant or representative of GREKA Energy's
long-term potential.
Results of Operations
Comparison of Years Ended December 31, 1999 and 1998
Revenues increased from $145,813 for 1998 to $29,137,810 for 1999 primarily
as a result of acquisitions and restructuring of assets.
Production costs increased from $121,016 for 1998 to $17,820,620 for 1999
primarily as a result of significantly larger asset base of operations.
General and administrative expenses increased from $1,541,789 for 1998 to
$3,205,276 for 1999 primarily as a result of significantly larger asset base of
operations.
Depreciation, depletion and amortization increased from $333,468 for 1998
to $3,023,783 for 1999 primarily as a result of significantly larger asset base
of operations.
Interest expense increased from $32,145 for 1998 to $1,859,688 for 1999
primarily as a result of higher debt as a result of acquisitions.
Comparison of Years Ended December 31, 1998 and 1997
Revenues decreased from $211,696 for 1997 to $145,813 for 1998.
Revenues for 1998 were from oil production at the Cat Canyon field. The decline
in oil prices of over 50% coupled with the El Nino storms in California that
essentially shut the field down during February 1998 caused revenues to be lower
than initially expected.
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<PAGE>
Production costs decreased from $247,979 for 1997 to $121,016 for 1998.
Planned pilot program drilling operations in the Cat Canyon field account for
most of the expenses during 1998, and such expenses are not proportional to
revenues since the three wells drilled in the Cat Canyon field were not in
production during the entire period. In addition, GREKA incurred significant
repair expenses resulting from the El Nino storms in California during February
1998.
General and administrative expenses increased from $756,357 for 1997 to
$1,541,789 for 1998 primarily as a result of additional staff managing acquired
properties.
Depreciation, depletion and amortization increased from $24,016 for
1997 to $333,468 for 1998 primarily as a result of additional properties.
The writedown of oil and gas properties of 3,171,485 in 1998 was
primarily attributable to the dramatic decrease in oil prices during the fourth
quarter of 1998.
The equity in loss of Saba of $586,020 for 1998 was a result of
applying the equity method of accounting for the investment in Saba beginning in
the fourth quarter of 1998.
Interest income increased from $11,873 for 1997 to $83,242 for 1998.
The increase was primarily attributable to the significant amount of cash which
GREKA had at the beginning of 1998 as a result of the private placements of its
common stock in the fourth quarter of 1997.
Liquidity and Capital Resources
The working capital deficit at December 31, 1999 of $14,175,635 increased
from a working capital deficit of $1,827,854 at December 31, 1998. Current
assets increased $11,562,166 from $421,807 at December 31, 1998 to $11,983,973
at December 31, 1999 which includes a decrease of $152,932 in cash and cash
equivalents from $250,212 at December 31, 1998 to $97,319 at December 31, 1999.
Approximately $6.2 million of refinery raw material and finished product
inventory and refinery accounts receivable result from refinery operations.
Current liabilities increased from $2,249,661 at December 31, 1998 to
$26,159,608 at December 31, 1999, an increase of $23,909,947. The current
portion of long term debt increased $11,159,958 during the period. The foregoing
changes are a result of the acquisition of Saba and the Company's assumption of
the marketing and sales operations of its Santa Maria refinery.
Cash Flows
Cash used in operations improved from an outflow of $2,293,744 for the year
ended December 31, 1998 to an outflow of $401,150 for the year ended December
31,1999. Net income for the period, adjusted for non-cash charges, provided
$7,073,686 of cash inflow.
The Company's net cash flows from investing activities decreased from a net
outflow of $1,826,546 for the year ended December 31, 1998 to a net outflow of
$788,351 for the year ended December 31, 1999. This change was primarily
attributable to the cash outflow in the prior year to acquire the investment in
Saba.
The Company's net cash provided by financing activities decreased from an
inflow of $2,051,550 for the year ended December 31, 1998 to $1,036,608 for the
year ended December 31, 1999. Cash was provided during 1999 from proceeds of the
Company's financing facility with BNY/GMAC in the amount of $22,219,470 and
35
<PAGE>
from the Company's 15% Debenture in the amount of $1 million. Cash was used
during 1999 to reduce the Company's obligation to Bank One by $17,115,272.
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 $12.0 million by its
cash flow.
Under the direction of GREKA's management and in accordance with its
business strategy, GREKA has improved its liquidity and expects to have low
capital requirements. The Company is current on all its interest payments, and
has sufficient cash flow for all of its operating and foreseen capital
requirements. Further, GREKA intends to achieve the following:
* Continue to execute an aggressive rework program to return to
production existing wells on all properties that have shut-in wells.
* Utilize the in-house proprietary and cost effective horizontal
drilling technology to enhance production in the Santa Maria Valley
area.
* Continue to acquire assets to enhance the benefit of integrated
operations that collectively provide for low cost operating expenses
and high cash flow.
GREKA's management also believes that the disposition of non-core assets brings
opportunities for cost savings, and other synergies, resulting in improved cash
flow potential for the long-term growth of GREKA and of shareholder value.
Further, these dispositions give GREKA 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 will be able to secure
future financings.
Removal of Modified Opinion
GREKA's independent accountants issued a modified report on April 15, 1999
expressing substantial doubt about GREKA's ability to continue as a going
concern as a result of GREKA's acquisition of Saba whose independent accountants
issued a modified report in 1998 with respect to Saba's ability to continue as a
going concern. On September 16, 1999 GREKA's independent accountants issued a
report which reflects the removal of their previously modified opinion
concerning their doubt about GREKA's ability to continue as a going concern.
Recent Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
becomes effective on January 1, 2001, and prescribes accounting and disclosure
requirements for derivative instruments and hedging activities. This
pronouncement is not expected to affect GREKA because it has no such
investments.
Year 2000
To date, GREKA has not observed any damage to its operations resulting
from the Y2K change over.
36
<PAGE>
GREKA does not believe that inflation will have a material impact on
GREKA's future operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
At December 31, 1999, the Company's operations were not exposed to
market risks primarily as a result of changes in commodity prices, interest
rates and foreign currency exchange rates. The Company does not use derivative
financial instruments for speculative or trading purposes.
Item 8. Financial Statements.
Please see accompanying Index to Financial Statements commencing on
page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On February 18, 1999, GREKA engaged Arthur Andersen LLP to replace
Bateman & Co., Inc., P.C. as GREKA's independent accountant to audit GREKA 's
consolidated financial statements for the year ended December 31, 1998. Bateman
& Co., Inc., P.C. was dismissed as GREKA 's independent accountant on the same
date. GREKA 's Board of Directors approved the change in GREKA's independent
accountant.
The independent auditor's report of Bateman & Co., Inc., P.C. for GREKA
Energy's financial statements for the year ended December 31, 1997 did not
contain an adverse opinion or a disclaimer of opinion, and was not modified as
to uncertainty, audit scope, or accounting principles.
During GREKA's two most recent fiscal years and through the date of the
dismissal of Bateman & Co., Inc., P.C., GREKA did not have any disagreements
with Bateman & Co., Inc., P.C. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
Information concerning the Directors and Executive Officers of GREKA is
hereby incorporated by reference to GREKA's definitive proxy statement, which
will be filed with the Commission within 120 days after the close of the fiscal
year.
Item 11. Executive Compensation
Information concerning management remuneration is hereby incorporated
by reference to GREKA's definitive proxy statement, which will be filed with the
Commission within 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management of GREKA is hereby incorporated by reference to GREKA's
definitive proxy statement, which will be filed with the Commission within 120
days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related party
transactions is hereby incorporated by reference to GREKA's definitive proxy
statement, which will be filed with the Commission within 120 days after the
close of the fiscal year.
37
<PAGE>
Part IV
Item 14. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following exhibits are furnished as part of this report:
Exhibit No. Exhibit Description
3.1 Restated Articles of Incorporation of Horizontal Ventures (filed
as Exhibit 3A to Horizontal Ventures' Quarterly Report on Form
10-QSB for the quarter ended June 30, 1998 (File No. 0-20760)
and incorporated herein by reference)
3.2 Articles of Amendment to Articles of Incorporation effective March
22, 1999 (filed as Exhibit 3.1 to the Company's Current Report on
Form 8-K dated March 15, 1999 and incorporated herein by
reference)
3.3 ByLaws of Horizontal Ventures (incorporated by reference to
Exhibit No. 3 to the Horizontal Ventures' Registration Statement
(#33-24265-LA)
3.4 Amendment to Article II of the Bylaws of GREKA (filed as Exhibit
3.1 to the GREKA Report on Form 10-Q for the Quarter ended
September 30, 1999 and incorporated by reference herein)
10.1 First Amended and Restated Loan Agreement between Saba and Bank One,
Texas, N.A. (filed as Exhibit 10.1 to Saba's quarterly report on Form
10-QSB for the quarter ended September 30, 1996 (File No. 001-13880)
and incorporated herein by reference)
10.2 Amendment Number One to First Amended and Restated Loan Agreement
between Saba and Bank One, Texas, N.A. (filed as Exhibit 10.20 to
Saba's annual report on Form 10-KSB for the year ended December 31,
1996 (File No. 1-12322) and incorporated herein by reference)
10.3 Amendment Number Two to First Amended and Restated Loan Agreement
between Saba and Bank One, Texas, N.A. (filed as Exhibit 10.1 to
Saba's quarterly report on Form 10-Q for the quarter ended September
30, 1997 (File No. 001-13880) and incorporated herein by reference)
10.4 Amendment Number Three to First Amended and Restated Loan Agreement
between Saba and Bank One, Texas, N.A. (filed as Exhibit 10.2 to
Saba's quarterly report on Form 10-Q for the quarter ended September
30, 1997 (File No. 001-13880) and incorporated herein by reference)
10.5 Amendment Number Four to First Amended and Restated Loan Agreement
between Saba and Bank One, Texas, N.A. (filed as Exhibit 10 to Saba's
Current Report on Form 8-K filed September 24, 1997 (File No.
001-13880) and incorporated herein by reference)
10.6 Corrections relating to Second Amendment dated August 28, 1997, and
Fourth Amendment dated September 9, 1997 to the First Amended and
Restated Loan Agreement between Saba and Bank One, Texas, N.A. (filed
as Exhibit 10.4 to Saba's quarterly report on Form 10-Q for the
quarter ended September 30, 1997 (File No. 001-13880) and incorporated
herein by reference)
10.7 Amendment Number Five to First Amended and Restated Loan Agreement
between Saba and Bank One, Texas, N.A. (filed as Exhibit 10.4 to
Saba's Current Report on Form 8-K filed January 15, 1998 (File No.
001-13880) and incorporated herein by reference)
10.8 Consent Letter to Preferred Stock Transaction by Bank One, Texas, N.A.
dated December 31, 1997 (filed as Exhibit 10.2 to Saba's Current
Report on Form 8-K filed January 15, 1998 (File No. 001-13880) and
incorporated herein by reference)
10.9 Amendment of the First Amended and Restated Loan Agreement between
Saba and Bank One, Texas, N.A., dated December 31, 1997 (filed as
Exhibit 10.3 to Saba's Report Form 8-K filed January 15, 1998 (File
No. 001-13880) and incorporated herein by reference)
10.10 Amendment Number Seven to First Amended and Restated Loan Agreement
between Saba and Bank One, Texas, N.A. (Filed as Exhibit 10.21 to
Saba's annual report on Form 10-K for the year ended December 31, 1997
(File No. 001-13880) and incorporated herein by reference)
10.11 Production Sharing Contract between Perusahaan Pertambangan Minyak
Dan Gas Bumi Nagara (Pertamina) and Saba Jatiluhur Limited (filed as
Exhibit 10.5 to Saba's quarterly report on Form 10-Q for the quarter
ended September 30, 1997 (File No. 001-13880) and incorporated herein
by reference)
10.12 Securities Purchase Agreement dated December 31, 1997 (filed as
Exhibit 10.1 to Saba's Report Form 8-K filed January 15, 1998 (File
No. 001-13880) and incorporated herein by reference)
39
<PAGE>
10.13 Amendment to Promissory Notes dated January 20, 2000 between Greka
and International Publishing Holding, Inc.*
10.14 Beaver Lake Resources Corporation March 1997 Re-Financing
Agreement (filed as Exhibit 10.3 to Saba's quarterly report on
Form 10-QSB for the quarter ending March 31, 1997 (File No.
001-13880) and incorporated herein by reference)
10.15 Preferred Stock Transfer Agreement dated October 7, 1998 between
Horizontal Ventures and RGC (filed as Exhibit 10.1 to Horizontal
Ventures' Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1998 and incorporated herein by reference).
10.16 Common stock Purchase Agreement dated October 8, 1998 between
Horizontal Ventures and Saba (filed as Exhibit 10.2 to Horizontal
Ventures' Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1998 and incorporated herein by reference).
10.17 Option Agreement dated July 22, 1998 between Horizontal Ventures
and IPH (filed as Exhibit 10.3 to Horizontal Ventures' Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1998 and
incorporated herein by reference).
10.18 Promissory Note dated October 6, 1998 payable by Horizontal
Ventures to IPH (filed as Exhibit 10.4 to Horizontal Ventures'
Quarterly on Form 10-QSB for the quarter ended September 30, 1998
incorporated herein by reference).
10.19 Pledge Agreement dated October 6, 1998 between Horizontal Ventures
and IPH (filed as Exhibit 10.5 to Horizontal Ventures' Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1998 and
incorporated herein by reference).
10.20 Promissory Note dated November 4, 1998 payable by Horizontal
Ventures to IPH (filed as Exhibit 10.6 to Horizontal Ventures'
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1998 and incorporated herein by reference).
10.21 Pledge Agreement dated November 4, 1998 between Horizontal
Ventures and IPH (filed as Exhibit 10.7 to Horizontal Ventures'
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1998 and incorporated herein by reference).
10.22 Amendment to First Amended and Restated Loan Agreement dated
September 23, 1996, as amended among Saba et al. And Bank One,
Texas NA dated June 9,(filed as Exhibit 10.3 to Saba's Current
Report on Form 8-K dated June 16, 1998 (File No. 001-13880) and
herein by reference).
10.23 Letter Agreement dated October 8, 1998 between Saba and Horizontal
Ventures (filed as Exhibit 10.3 to Saba's Current Report on Form
8-K dated October 6, 1998 (File No. 001-138807) and incorporated
herein by reference).
10.24 Stock Exchange Agreement dated November 23, 1998 among Horizontal
Ventures and the Shareholders of Saba Acquisub, Inc. (filed as
Exhibit 10.85 to the GREKA Engrgy Report on Form 10-K/A for the
fiscal year ended December 31, 1998 and incorporated herein by
reference).
10.25 Agreement to Amend Common stock Purchase Agreement dated December
3, 1998 between Saba and Horizontal Ventures (filed as Exhibit
10.84 to the GREKA Engrgy Report on Form 10-K/A for the fiscal
year ended December 31, 1998 and incorporated herein by
reference).
10.26 Amendment No. 1 dated December 15, 1998 to Stock Exchange
Agreement dated November 23, 1998 among Horizontal Ventures and
the shareholders of Saba Acquisub, Inc. 10.1 to Saba's Current
Report on Form 8-K dated December 18, 1998 File No. 001-13880) and
incorporated herein by reference).
10.27 Amendment to $1,500,000 Promissory Note (filed as Exhibit 10.86 to
the Amendment No. 2 to the Company's Registration Statement filed
Form S-4 dated February 19, 1999 and incorporated herein by
reference)
10.28 Exchange Agreement between GREKA and RGC International Investors
(filed as Exhibit 10.87 to the GREKA Engrgy Report on Form 10-K/A
for the fiscal year ended December 31, 1998 and incorporated
herein by reference).
10.29 Secured Convertible Promissory Note (filed as Exhibit 10.88 to the
GREKA Engrgy Report on Form 10-K/A for the fiscal year ended
December 31, 1998 and incorporated herein by reference).
40
<PAGE>
10.30 Asset Purchase Agreement dated March 17, 1999 among Sabacol, Inc.
and the Omimex Group (filed as Exhibit 10.89 to the GREKA Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1998
and incorporated by reference herein).
10.31 Loan and Security Agreement dated April 30, 1999 among BNY
Financial Corporation, GREKA Integrated, Inc., Saba Realty, Inc.
and Santa Maria Refining Company (filed as Exhibit 10.1 to the
GREKA Report on Form 10-Q for the quarter ended March 31, 1999 and
incorporated by reference herein)
10.32 Arrangement Agreement dated June 16, 1999 among GREKA Energy
Corporation and Beaver Lake Resources Corporation (filed as
Exhibit 10.1 to the GREKA Report on Form 10-Q for the quarter
ended June 30, 1999 and incorporated by reference herein)
10.33 Forbearance Agreement dated April 19, 1999, First Amendment To
Forbearance Agreement dated April 30, 1999, and Amended And
Restated Forbearance Agreement dated July 15, 1999 among Bank One,
Texas, Saba Petroleum Company and GREKA Energy Corporation (filed
as Exhibit 10.2 to the GREKA Report on Form 10-Q for the quarter
ended June 30, 1999 SEC file #0-207670 and incorporated by
reference herein)
10.34 Closing Agreement dated June 30, 1999 among Sabacol, Inc. and
Omimex Resources, Inc. et al. (filed as Exhibit 4.2 to the GREKA
Report on Form 8-K filed July 14, 1999 and incorporated by
reference herein)
10.35 Amended and Restated Executive Employment Agreement dated November
3, 1999 among Randeep S. Grewal and GREKA (filed as Exhibit 10.2
to the GREKA Report on Form 10-Q for the quarter ended September
30, 1999 and incorporated by reference herein)
10.36 Amendment dated September 24, 1999 to Loan and Security Agreement
dated April 30, 1999 among BNY Financial Corporation, GREKA
Integrated, Inc., Saba Realty, Inc. and Santa Maria Refining
Company (filed as Exhibit 10.3 to the GREKA Report on Form 10-Q
for the quarter ended September 30, 1999 and incorporated by
reference herein)
10.37 Rights Agreement dated November 3, 1999 (filed as Exhibit 10.4 to
the GREKA Report on Form 10-Q for the quarter ended September 30,
1999 and incorporated by reference herein)
16.1 Letter by Bateman & Co., Inc., P.C., dated February 19, 1999
regarding change in accountants.
21.1 Subsidiaries of GREKA*
23.1 Consent of Arthur Andersen LLP *
23.2 Consent of Bateman & Co., Inc., P.C., Independent Certified Public
Accountants, related to the financial statements for GREKA *
23.3 Consent of Netherland, Sewell & Associates, Inc.*
23.4 Consent of Sproule Associates Limited *
27.1 Financial Data Schedule*
* Filed herewith.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth
quarter of 1998.
41
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GREKA ENERGY CORPORATION
Dated: April 13, 2000 By:/s/ Randeep S. Grewal
----------------------------------------
Randeep S. Grewal, Chairman of the Board
and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/Randeep S. Grewal
---------------------
Randeep S. Grewal Chairman of the Board of April 13, 2000
Directors and Chief
Executive Officer
(Principal Executive
Officer, Financial Officer
and Accounting Officer)
/s/ Dr. Jan F. Holtrop
----------------------
Dr. Jan F. Holtrop Director April 13, 2000
/s/Susan M. Whalen
----------------------
Susan M. Whalen Director April 13, 2000
/s/George C. Andrews
----------------------
George C. Andrews Director April 13, 2000
/s/Dai Vaughan
----------------------
Dai Vaughan Director April 13, 2000
42
<PAGE>
GREKA ENERGY CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
REQUIRED BY ITEM 8 AND ITEM 14
Page
Financial Statements of GREKA Energy Corporation
Report of Independent Public Accountants.............................F-2
Independent Auditors' Report.........................................F-3
Consolidated Balance Sheet as of December 31, 1999 and 1998..........F-4
Consolidated Statements of Operations for each of the
three years ended December 31, 1999 ...............................F-5
Consolidated Statements of Stockholders' Equity for each
of the three years ended December 31, 1999 ....................... F-6
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1999 .....................................F-8
Notes to Consolidated Financial Statements...........................F-9
Schedule II - Valuation and Qualifying Accounts
for the three years ended December 31, 1999........................F-28
All other financial statement schedules have been omitted since they are either
not required, are not applicable or the required information is included in the
consolidated financial statements or the notes thereto.
<PAGE>
Report of Independent Public Accountants
To the Shareholders of GREKA Energy Corporation:
We have audited the accompanying consolidated balance sheets of GREKA Energy
Corporation (a Colorado corporation) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the two years then ended. These financial statements
and Schedule II Valuation and Qualifying Accounts are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GREKA Energy
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the two years then ended in
conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II - Valuation and Qualifying Accounts is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This information has been subjected to the auditing procedures applied in our
audit of the basic financial statements, and in our opinion, is fairly stated in
all material respects in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
New York, New York
April 14, 2000
F-2
<PAGE>
Bateman & Co., Inc. P.C. S. Briardale Court
Certified Public Accountants Houston, TX 77027-2094
(713) 552-9800
Fax (713) 552-9700
www.batemanhouston.com
INDEPENDENT AUDITOR'S REPORT
To The Stockholders and Board of Directors
GREKA Energy Corporation, Inc.
We have audited the consolidated statement of operations, owner's equity
(deficit), and cash flow of GREKA Energy Corporation, formerly known as Petro
Union, Inc. (a Colorado corporation), dba Horizontal Ventures, Inc. for the year
ended December 31, 1997, and the related consolidated statements of operations,
stockholder's equity, and cash flows for the year ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations, changes in owner's equity and
cash flows of GREKA Energy Corporation as of December 31, 1997, and the results
of its operations cash flows for the year ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ BATEMAN & CO., INC., P.C.
Houston, Texas
April 14, 1998
F-3
<PAGE>
GREKA ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31,
<TABLE>
<CAPTION>
ASSETS
Current Assets 1999 1998
------------ ------------
<S> <C> <C>
Cash and equivalents .......................... $ 97,319 $ 250,212
Restricted cash................................ 1,000,000 -
Accounts receivable trade, net of allowance for
doubtfull accounts of $1,343,852 (1999)
and $74,000 (1998)........................... 4,681,823 20,807
Inventories ................................... 4,253,277 --
Other current assets .......................... 1,951,554 150,788
------------ ------------
Total Current Assets ................. 11,983,973 421,807
------------ ------------
Property and Equipment
Investment in limestone property, at cost ..... 3,675,973 3,500,000
Oil and gas properties (full cost method) ..... 29,653,061 3,445,816
Land .......................................... 17,210,814 85,814
Plant and equipment ........................... 26,875,661 1,475,661
============ ============
77,415,509 8,507,291
Less accumulated depletion, depreciation and
amortization ................................ (7,128,995) (4,081,340)
------------ ------------
Property and Equipment Net ............................ 70,286,514 4,425,951
Other Assets
Investment in Saba Petroleum Company .......... -- 15,804,110
Other ......................................... 1,943,196 154,937
------------ ------------
Total Other Assets ................... 1,943,196 15,959,047
------------ ------------
$ 84,213,683 $ 20,806,805
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current Liabilities 1999 1998
------------ ------------
<S> <C> <C>
Accounts payable and accrued expenses ................. $ 8,235,627 $ 236,323
Current maturities of long term notes and notes payable 13,173,296 2,013,338
Short term borrowing .................................. 4,750,685 --
------------ ------------
Total Current Liabilities .................... 26,159,608 2,249,661
Long term debt, net of current portion ........................ 15,695,825 52,634
Other Liabilities ............................................. 8,979,927
Commitments and contingencies ................................. -- --
Stockholders' Equity
Common Stock, no par value, 50,000,000 shares
authorized, 4,339,940 (1999) and 2,910,908 (1998)
shares issued and outstanding........................ 37,261,043 25,735,019
Accumulated comprehensive income ...................... (19,243) --
Accumulated deficit ................................... (3,863,477) (7,230,509)
------------ ------------
Total Stockholders' Equity ............................ 33,378,323 18,504,510
------------ ------------
$ 84,213,683 $ 20,806,805
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GREKA ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For The Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues ........................................... $ 29,137,810 $ 145,813 $ 211,696
------------ ------------ ------------
Costs and Expenses
Operating Costs ............................ 17,820,620 121,016 247,979
General and Administration ................. 3,205,276 1,541,789 756,357
Depreciation, depletion and ................ 3,023,783 333,468 24,016
Writedown of oil and gas properties ........ -- 3,171,485 --
------------ ------------ ------------
Total Costs and expenses ........................... 24,049,679 5,167,758 1,028,352
------------ ------------ ------------
Operating Income (loss) ............................ 5,088,131 (5,021,945) (816,656)
Other income (expense)
Equity in loss of Saba ..................... (568,751) (586,020) --
Interest income ............................ -- 83,242 11,873
Interest expense ........................... (1,859,688) (32,145) (25,271)
Other, net ................................. 732,723 9,223 (21,062)
------------ ------------ ------------
Other Income (expense), net ....... (1,695,716) (525,700) (34,460)
Minority Interest in loss of consolidated
subsidiary ................................. 20,617 -- --
------------ ------------ ------------
Income (loss) before income taxes .................. 3,413,032 (5,547,645) (851,116)
Provision for income tax ........................... 46,000 -- --
------------ ------------ ------------
Net Income (Loss) .................................. $ 3,367,032 $ (5,547,645) $ (851,116)
------------ ------------ ------------
Other Comprehensive (Loss) ......................... (19,243) -- --
============ ============ ============
Comprehensive Income (Loss) ........................ $ 3,347,789 $ (5,547,645) $ (851,116)
============ ============ ============
Net Income (Loss) per Share - Basic ................ $ 0.84 $ (3.42) $ (1.44)
============ ============ ============
Net Income(Loss) per Share - Diluted ............... $ 0.76 $ (3.42) $ (1.44)
============ ============ ============
Weighted average number of shares outstanding ...... 4,002,917 1,621,483 591,053
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
GREKA ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For Each of the Three Years Ended December 31, 1999
Common Stock Series A Preferred Stock
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance December 31, 1996 ......................... 3,690 $ 37
Stock issued for services................... 30,000 300
Stock issued in exchange for subordinated
debentures, and net assets of limited partnership 725,770 7,258 -- --
Stock issued for cash ............................. -- -- 3,000,000 30,000
----------- ----------- ----------- -----------
Balance prior to reverse merger with Petro Union,
Inc ............................................. 759,460 7,595 3,000,000 30,000
Effect of reverse merger with Petro Union, Inc. ... 240,805 6,174,675 (3,000,000) (30,000)
Stock issued for cash in Reg "S" offerings ........ 552,740 5,801,518 -- --
Less, related offering costs ...................... -- (454,837) -- --
Issuance of stock to retire note payable to
related parties ................................ 6,108 59,122 -- --
Net Loss .......................................... -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1997 ........................ 1,558,843 11,588,073 -- --
Stock issued for cash in Reg "S" offering, net .... 12,145 84,446 -- --
Issuance of stock to purchase shares of Saba
Petroleum ....................................... 1,340,000 14,062,500 -- --
Net loss .......................................... -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1998 ........................ 2,910,988 25,735,019 -- --
Issuance of stock for acquisition of Saba ......... 1,233,738 9,869,904 -- --
Issuance of stock for acquisition of Beaver Lake
minority interests .............................. 67,597 506,978 -- --
Other issuances, net .............................. 127,617 1,149,142 -- --
Net income......................................... -- -- -- --
Other comprehensive loss .......................... -- -- -- --
Balance, December 31, 1999 ........................ 4,339,940 $37,261,043 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
GREKA ENERGY CORPORATION
Consolidated Statements of Stockholders' Equity
For The Years Ended December 31, 1999 and 1998
(Continued)
Capital
Capital In Contributed
Excess of Par Accumulated by Limited
Value Deficit Partners Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 ................. $ 3,445 $ (831,748) $ 818,000 $ (10,266)
Stock issued for services .................. -- -- -- 300
Stock issued in exchange for subordinated
convertibel debentures, and not assets
of limited parternership ............... 1,398,831 -- (818,000) 588,089
Stock issued for cash ..................... 570,000 -- -- 600,000
------------ ------------ ------------ ------------
Balance prior to reverse merger with
Petro Union, Inc. ...................... 1,972,276 (831,748) -- 1,178,123
Effect of reverse merger with .............
Petro Union, Inc. ...................... (1,972,276) -- -- 4,172,399
Stock issued for cash in Reg. "S" offerings. -- -- -- $ 5,801,518
Loss, related offering costs -- -- -- (454,837)
Issuance of stock to purchase shares of Saba
Petroleum Company ....................... 1,340,000 14,062,500 -- --
Net loss ................................... -- -- -- --
Balance, December 31, 1998 ................. 2,910,988 $ 25,735,019 -- $ --
Issuance of stock to retire note payable to
related party .............................. -- -- -- 59,122
Net loss ...................................... -- 851,116) -- (851,116)
----------- ----------- ------------ ------------
Balance, December 31, 1997 .................... -- 1,682,864) -- 9,905,209
----------- ----------- ------------ ------------
Stock issued for cash in Reg. "S" offering, net -- -- -- 84,446
Issuance of stock to purchase shares of Saba
Petroleum Co. ................................. -- -- -- 14,062,500
Net Loss ...................................... -- 5,547,645) -- (5,547,645)
----------- ----------- ------------ ------------
Balance as of December 31, 1998 ............... -- (7,230,509) -- 18,504,510
----------- ----------- ------------ ------------
Issuance of stock for acquisition of Saba....... -- -- -- 9,869,904
Issuance of stock for acquisition of Beaver
Lake minority interest ....................... -- -- -- 506,978
Other issuances, net ........................... -- -- -- 1,149,142
Net income ..................................... -- 3,367,032 -- 3,367,032
Other comprehensive loss ....................... -- -- (19,243) (19,243)
------------ ----------- ------------ ------------
Balance, December 31, 1998 ..................... $ -- $(3,863,477) $ (19,243) $ 33,378,323
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
GREKA ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For Each of the Three Years Ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow operating activities: ............ -- -- --
Net Income (loss) ......................... $ 3,367,032 $ (5,547,645) $ (851,116)
Adjustments to reconcile net income
(loss) to net cash used in operations:
Depreciation, depletion, and
Amortization ............................. 3,023,788 333,468 177,426
Writedown of oil and gas properties ....... -- 3,171,485 --
(Gain) loss on sale of assets ............. -- (9,223) 21,062
Equity in net loss of Saba ................ 553,483 586,020 --
Stock and partners' capital issued
for services ............................. -- -- 300
Compensation expense attributable to
the issuance of Common Stock ............. 150,000 -- --
(Increase) decrease in accounts
receivable ............................... (1,101,994) (3,626) 66,040
(Increase) Accounts receivables, other ..... (5,126,741) (147,355) 520
(Increase) in inventory and other current
assets ................................... (66,310) (114,646) --
Increase (decrease) in accounts
payable and accrued expenses ............. (1,179,791) (562,222) 136,716
Minority Interest in (loss) of
Consolidated subsidiary .................. (20,617) -- --
------------ ------------ ------------
Net cash used in
operating activities ..................... (401,150) (2,293,744) (449,052)
------------ ------------ ------------
Cash flow from investing activities:
Decrease (increase) in time deposits
and funds held in escrow ................. -- 1,613,695 (1,613,695)
Purchases of property and equipment ....... (2,091,735) (1,168,519) (1,502,462)
Proceeds from sale of property and
Equipment ................................ 915,000 55,908 55,181
(Increase) decrease in deposits and
prepayments .............................. -- -- 1,286
Acquisition of Saba common and
preferred shares ......................... -- (2,327,630) --
cash aquired in Saba aquisition............ 444,764 -- --
Other ...................................... (56,380) -- --
------------ ------------ ------------
Net Cash (used) in investing activities .... (788,351) (1,826,546) (3,059,690)
Cash flows from financing activities:
Repayments of Notes Payable ............... (28,098,901) (32,896) (206,084)
Proceeds of loans from affiliates ......... 25,317,293 2,000,000 59,122
Decrease in customer payments
received in advance ...................... -- -- (30,000)
Net increase in Revolver Loan .............. 4,443,216 -- --
Payment of financing costs ................. (625,000)
Proceeds from sale of stock, net of
expenses .................................. -- 84,446 5,946,681
Other ...................................... -- -- 51,517
------------ ------------ ------------
Net Cash provided by financing activities .. 1,036,608 2,051,550 5,821,236
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents .......................... (152,893) (2,068,740) 2,312,494
Cash and cash equivalents:
Beginning of period ....................... 250,212 2,318,952 6,458
------------ ------------ ------------
End of period .............................. $ 97,319 $ 250,212 $ 2,318,952
============ ============ ============
Non-cash financing and investing activities:
Stock issued for services ................. $ (180,000) -- $ 300
Stock issued for subordinated
convertible debentures ................... -- -- 433,231
Stock issued for net assets of
limited partnership ...................... -- -- 972,858
Stock issued in satisfaction of
note payable ............................. -- -- 59,122
Stock issued for acquisition of
investment in Saba Petroleum Co. ........ 9,869,904 14,062,500 --
Property and equipment acquired by
issuance of notes payable ................ -- -- 500,000
Property and equipment acquired in
reverse merger with Petro Union,
Inc., net of debt assumed ................ -- -- 4,120,882
Stock issued for acquisition of Beaver Lake
minority interest......................... 506,978 -- --
Supplementary cash flow data:
Interest paid ............................. 1,719,688 20,562 26,324
Income taxes paid ......................... -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
GREKA Energy Corporation
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 1 - DESCRIPTION OF BUSINESS AND MANAGEMENT'S PLANS
GREKA Energy Corporation, a Colorado corporation ("GREKA" or the
"Company") is an independent integrated energy company committed to creating
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. GREKA has oil and gas production, exploration and development
activities in North America and the Far East, with primary areas of activity in
California, Louisiana, and China. In addition, GREKA owns and operates an
asphalt refinery in California through a wholly-owned subsidiary.
Business Strategy
GREKA's objective is to build shareholder value through consistent
economic growth both in the increased throughput at its asphalt refinery and in
the growth of its reserves and production thereby creating an increase in net
asset value per share, cash flow per share and earnings per share. Management is
focused on a balanced program of low to medium risk exploitation and development
of its existing reserves utilizing its low cost horizontal short radius drilling
technology licensed from BP Amoco. This is balanced by rapid growth through the
acquisition of synergistic businesses such as the Saba Petroleum Company
("Saba") acquisition concluded during the first quarter of 1999. All asset and
capital investment decisions are measured and ranked by their risk-adjusted
impact on per share value.
GREKA has established a three prong strategy that capitalizes on its
asset base to enhance shareholder value as follows:
Integrated Hedged Operations
Hedged operations of GREKA are planned to focus on the integration of
its Santa Maria (California) assets, including an asphalt refinery and interest
in heavy oil fields. The hedged operations are targeted to capitalize on the
stable asphalt market in California by providing a balance of equity and third
party feedstock (heavy oil) into the refinery. The integration of the refinery
(100% owned) with the interests in the heavy oil producing fields (100% working
interest) has successfully provided a stable hedge to GREKA on each equity
barrel (since June 1999). GREKA's strategy in these integrated assets is
two-fold:
1. GREKA intends to proceed with acquisitions that enhance the
long-term feedstock supply to the refinery.
2. GREKA intends to implement the proprietary BP Amoco Horizontal Drilling
Technology to cost-efficiently boost production rates from the 150
potential drilling locations identified in the Santa Maria Valley area of
central California.
The two actions are targeted to increase throughput into the refinery from the
highest rate during 1999 of approximately 4,500 barrels per day to 10,000
barrels per day by year end 2001. It is anticipated that the profitability from
these integrated operations will not be affected by volatile oil prices. It is
also anticipated that, by using the equity barrels to supply the refinery,
working capital requirements should be lower and cash flow should be enhanced.
The continued stability of the price of asphalt, coupled with reduced costs for
processing and lifting, should create a substantial value for GREKA's
shareholders.
Exploitation, Exploration & Production
GREKA is focusing on return to production ("RTP") work that had been
ignored by Saba. Such RTP is expected to enhance the current production levels
and capitalize on current oil prices. GREKA plans to capitalize on its existing
portfolio of domestic and international exploitation and exploration projects
that are synergistic with GREKA's BP Amoco Horizontal Drilling Technology. GREKA
plans to specifically focus on its existing concessions in strategic locations,
such as China, where GREKA believes there is a significant, long-term demand for
energy and a niche advantage for the Company.
F-9
<PAGE>
BP Amoco Horizontal Drilling Technology
GREKA 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.
Significant and lucrative markets exist for the application of the
niche technology for GREKA's short radius horizontal drilling know-how. Mature
fields are in abundance throughout the world where the operators are faced with
declining production, uncertain oil prices and upcoming costs to abandon and
plug the uneconomic wells at their production rates. Such an environment creates
a unique market for GREKA to acquire such fields through a conservative
selection process. Primary acquisition candidates will have existing production,
existing operating infrastructure and facilities, geological formations
conducive to the technology, well bores and pay zones under ten thousand feet
with sufficient recoverable oil in place. As an example, GREKA has found that
California is a unique opportunity due to its stringent new drilling
regulations. GREKA's activities are essentially "re-work" negating any lengthy
approvals through the regulatory authorities. Such an environment has created
"pockets" of opportunity whereby significant recoverable oil has been left in
place by the majors and owners which, rather than attempt a costly endeavor to
drill new wells in urban areas, choose to sell their oil and gas interests.
GREKA intends to pursue such opportunities.
Business Development of GREKA
GREKA Energy Corporation was formed in 1988 as a Colorado corporation
under the name of Kiwi III, Ltd. On May 13, 1996, GREKA, then known as Petro
Union, Inc., filed a voluntary petition for relief pursuant to Chapter 11 of the
United States Bankruptcy Code. Current GREKA management acquired Petro Union,
Inc. and simultaneously procured on August 28, 1997, an order confirming Petro
Union's First Amended Plan of Reorganization from the Bankruptcy Court for the
Southern District of Indiana. The bankruptcy court approved the final accounting
and closed the bankruptcy proceedings on March 26, 1998.
During 1998, management of GREKA 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 implementing its strategic niche growth plan.
During the latter part of 1998 and early 1999, management was primarily focused
on the acquisition of Saba, which had substantial reserves suited to
exploitation by GREKA'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 of the Saba acquisition,
GREKA's management and staff devoted a substantial amount of time and effort to
the acquisition.
On March 22, 1999, the Company, then known as Horizontal Ventures,
Inc., changed its name to GREKA Energy Corporation. Effective March 24, 1999,
GREKA acquired Saba as a wholly owned subsidiary.
Immediately subsequent to the completion of the acquisition, management
commenced its strategy to reverse the decline in value of the Saba assets which
resulted in the following material events:
o In May 1999, the Company's subsidiary assumed full operation of its asphalt
refinery which significantly increased, and is expected to continue to
increase, operating cash flows.
o Also in May 1999, the Company's subsidiaries secured financing with a new
bank, BNY Financial Corporation ("BNY"), for $11 million which was later
increased to $12 million in September 1999.
o Further in May 1999, the Company's subsidiary paid $6 million to Bank One
Texas, N.A. ("Bank One") to reduce the debt owed by Saba which was in
default since 1998.
o In June 1999, the Company's subsidiary sold its non-core assets in
Colombia, further reducing its debt by $10 million while maintaining upside
potential through either a repurchase option which has recently been
exercised or a court order directing rescission of the sale.
F-10
<PAGE>
o In July 1999, the Company completed the acquisition of all of the Beaver
Lake Resources Corporation (the owner of the Company's Canadian assets)
shares it did not already own, thereby privatizing Beaver Lake as a wholly
owned subsidiary. Greka issued approximately 68,000 shares to complete the
acquisition of the minority interest.
o In August 1999, the Company entered into a term sheet to restructure Saba's
9% senior subordinated debentures.
o Also in August 1999, the Company's subsidiary emerged from voluntary
bankruptcy following consummation of the sale of its non-core assets in
Colombia.
o Further in August 1999, the Company's subsidiary signed a production
sharing contract with the China United Coalbed Methane Corporation Ltd. to
jointly exploit coalbed methane (CBM) resources in China.
o In November 1999, the Company's subsidiaries closed the financing of a $35
million facility with GMAC Commercial Credit LLC to provide financing to
reduce current liabilities and for future acquisitions.
o Also in November 1999, the Company's subsidiary made an additional payment
of $11.2 million to Bank One to reduce the defaulted debt owed by Saba.
o Further in November 1999, the Company adopted a shareholder rights plan to
preserve the long-term value of the Company for its shareholders.
o In December 1999, the Company announced that its shares commenced trading
on the Nasdaq National Market System.
F-11
<PAGE>
Business Segments
During 1999, the Company operated in three industry segments:
Integrated Operations (California refinery and E&P), E&P Americas, and E&P
International. In 1998 and 1997, the Company operated in one segment: contract
drilling and development of oil and gas properties for its own account.
Information about the Company's operation by segment as of and for the year
ended December 31, 1999, is as follows (in thousands):
<TABLE>
<CAPTION>
Integrated E&P E&P Corp. &
Operations Americas Int'l Other Total
----------- --------- ------------- ------- ------
<S> <C> <C> <C> <C> <C>
Total Oil and Gas
Revenue $3,710 $5,457 $2,815 $(3,799) $8,183
Refinery Revenue 20,924 -- -- -- 20,924
------- ------- ------ ------- ------
Total Revenue 24,645 5,425 2,868 (3,799) 29,138
------- ------- ------ ------- ------
Production Costs 2,229 2,939 1,577 (3,799) 7,244
Refinery Costs 14,375 -- -- -- 10,576
Gross Profit 7,543 2,487 1,290 -- 11,318
Other Expenses 1,426 245 576 958 3,205
DD&A Expenses 1,453 1,064 506 -- 3,024
Interest and other
(expenses) income (31) (31) 747 (2,380) (1,695)
------- ------- ------ ------- ------
Net income/loss $4,630 1,147 955 (3,365) 3,367
====== ===== === ======= =====
Capital Expenditures $2,092 $0 $0 $0 $2,092
Assets at Year End $58,267 $16,886 $8,456 $244 $84,213
======= ======= ====== ==== =======
</TABLE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation - The consolidated financial statements include the
accounts of the Company and wholly owned subsidiaries. The investment in Saba
was accounted for using the equity method of accounting from the date of initial
share purchase through March 24, 1999 (the date of the merger, see Note 4).
All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Fair value of financial instruments - The carrying amounts of cash and cash
equivalents, accounts receivable, inventory, accounts payable and accrued
expenses, other current liabilities and notes payable, approximate fair value
because of the short maturity of these items. These fair value estimates are
subjective in nature and involve uncertainties and matters of significant
judgment, and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect these estimates.
Accounts receivable - The Company provides an allowance for uncollectible
receivables when it is determined that collection is doubtful. Substantially all
of the Company's subsidiaries' 1999 trade receivables are from sales of asphalt
and related products and oil and gas billings, including those to joint interest
property owners, while the 1998 trade receivables are from directional drilling
services.
Concentrations of credit risk - Substantially all of the Company's
subsidiaries' accounts receivable are from companies engaged in the
asphalt/paving and oil and gas businesses, and concentrated in the West and
Southern United States. Generally, the Company's subsidiaries do not require
collateral for its account receivable. The Company performed services for only a
limited number of customers in 1998 and 1997; therefore, each customer may be
considered a major customer. During 1999, the following customers were
significant:
Customers % of Total Revenue
Lawson Rock and Oil 19.9%
Granite Construction 9.8%
Union Asphalt Company 8.1%
Properties and equipment - Properties and equipment are stated at cost. The
Company follows the "full-cost" method of accounting for oil and gas property
and equipment costs. Under this method, all productive and nonproductive costs
F-12
<PAGE>
incurred in the acquisition, exploration, and development of oil and gas
reserves are capitalized. Such costs include lease acquisitions, geological and
geophysical services, drilling, completion, equipment, and certain general and
administrative costs directly associated with acquisition, exploration, and
development activities. General and administrative costs related to production
and general overhead are expensed as incurred. No gains or losses are recognized
upon the sale or disposition of oil and gas properties, except in transactions
that involve a significant amount of reserves. The proceeds from the sale of oil
and gas properties are generally treated as a reduction of oil and gas property
costs. Fees from associated oil and gas exploration and development
partnerships, if any, will be credited to oil and gas property costs to the
extent they do not represent reimbursement of general and administrative
expenses currently charged to expense.
Such costs can be directly identified with acquisition, exploration and
development activities and do not include any costs related to production,
general corporate overhead, or similar activities.
Future development, site restoration, and dismantlement and abandonment
costs, net of salvage values, are estimated on a property-by-property basis
based on current economic conditions and are amortized to expense as the
Company's subsidiaries' capitalized oil and gas property costs are amortized.
The Company's subsidiaries' properties are all onshore, and the Company expects
that the salvage value of the tangible equipment will offset any site
restoration and dismantlement and abandonment costs.
The provision for depreciation, depletion, and amortization of oil and gas
properties is computed on the unit-of-production method. Under this method, the
Company computes the provision by multiplying the total unamortized costs of oil
and gas properties including future development, site restoration, and
dismantlement and abandonment costs, but excluding costs of unproved properties
by an overall rate determined by dividing the physical units of oil and gas
produced during the period by the total estimated units of proved oil and gas
reserves. This calculation is done on a country by country basis for those
countries with oil and gas production. The cost of unevaluated properties
(approximately $5.2 million at December 31, 1999) not being amortized, to the
extent there is such a cost, is assessed quarterly to determine whether the
value has been impaired below the capitalized cost. Any impairment assessed is
added to the cost of proved properties being amortized The costs associated with
unevaluated properties relate to projects which were undergoing exploration or
development activities or in which the company intends to commence such
activities in the future. The Company will begin to amortize these costs when
proved reserves are established or impairment is determined. Management believes
no such impairment exists at December 31, 1999.
At the end of each quarterly reporting period, the unamortized cost of oil
and gas properties, net of related deferred income taxes, is limited to the sum
of the estimated future net revenues from proved properties using current
prices, discounted at 10%, and the lower of cost or fair value of unproved
properties, adjusted for related income tax effects ("Ceiling Limitation").
The calculation of the ceiling limitation and provision for depreciation,
depletion, and amortization is based on estimates of proved reserves. There are
numerous uncertainties inherent in estimating quantities of proven reserves and
in projecting the future rates of production, timing, and plan of development.
The accuracy of any reserves estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. Results of
drilling, testing, and production subsequent to the date of the estimate may
justify revision of such estimate. Accordingly, reserve estimates are often
different from the quantities of oil and gas that are ultimately recovered.
During 1998, the Company recorded a $3,171,485 non-cash ceiling writedown
of its oil and gas properties.
Depreciation for all other property and equipment is provided over
estimated useful lives using the straight line method of depreciation for
financial reporting purposes and the accelerated cost recovery system for income
tax purposes. Renewals and betterments are capitalized when incurred. Costs of
maintenance and repairs that do not improve or extend asset lives are charged to
expense.
The Company's investment in limestone reserves will be amortized on a
unit-of-production basis as the reserves are mined and produced. Since the
acquisition of the limestone reserves in 1993, there has been no development or
production of these properties. Management has determined that there is no
impairment in value of the reserves at December 31, 1999.
License agreements and organization expenses - The Company has acquired
certain licenses for the use of horizontal drilling technology developed by BP
Amoco. License agreements are amortized over a fifteen year life, respectively,
using the straight line method of amortization. Amortization charged to
operations was $16,593, $16,510 and $16,593 in 1999, 1998 and 1997,
respectively.
Environmental expenditures - If and when remediation of a property is
probable and the related costs can be reasonably estimated, the environmentally
related remediation costs will be expensed and recorded as liabilities. If
recoveries of environmental costs from third parties are probable, a receivable
will be recorded.
F-13
<PAGE>
Revenue recognition. Revenue from oil, gas and asphalt production is
recognized in the period in which the product is sold. The related costs and
expenses are recognized when incurred. Revenues from drilling operations are
recognized in the accounting period, which corresponds with the performance of
the service to the customer.
Federal and State income taxes - The Company follows SFAS No. 109,
"Accounting for Income Taxes", which accounts for income taxes using the
liability method. Under SFAS No. 109, deferred tax liabilities and assets are
determined based on differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates expected to be in effect for the
year in which the differences are expected to reverse. The net change in
deferred tax assets and liabilities is reflected in the statement of operations.
The primary differences between financial reporting and tax reporting relate to
the availability of net operating loss carryforwards, and the use of accelerated
methods of depreciation for income tax purposes.
Earnings per share - Basic earning/(loss) per share has been computed using
the weighted average number of common shares outstanding during the respective
periods. In computing average outstanding shares during 1997, the Company has
converted Horizontal Ventures shares outstanding prior to the merger to
equivalent Petro Union shares on a pro rata basis. Diluted earnings per share is
computed by considering the effect of outstanding options, warrants and other
convertible securities. However, diluted earnings per share is the same as basic
earnings per share in instances where a loss has been incurred.
NOTE 3 - MERGER OF PETRO UNION, INC. AND HORIZONTAL VENTURES, INC.
On June 13, 1997, Horizontal Ventures, Inc. and Petro Union, Inc. entered
into an agreement under which all of the outstanding common and preferred shares
Horizontal Ventures would be acquired by Petro Union. Petro Union was also
engaged in performing contract-drilling services using the licensed BP Amoco
technology. Petro Union was subject to supervision in the U.S. Bankruptcy Court
for the Southern District of Indiana under Chapter 11 of the U.S. Bankruptcy
Code, and the agreement with Horizontal Ventures was part of Petro Union's Plan
of Reorganization. On August 28, 1997, the Bankruptcy Court approved the Plan.
After the Plan was consummated on September 9, 1997, Horizontal Ventures
shareholders owned approximately 63% of the new Horizontal Ventures no par value
stock.
Pro-forma summary statements of operations, combining Petro Union, Inc., and
Horizontal Ventures, are as follows, assuming the merger had occurred January 1,
1997:
Year Ended December 31, 1997
Petro Union, Inc. Petro Union, Inc.,
(January 1 d/b/a
through Horizontal
September 9, 1997) Venutres Pro-Forma
----------- ----------- -----------
Revenues .....................$ 311,798 $ 211,696 $ 523,494
Cost of revenues ............. 237,801 247,979 485,780
----------- ----------- -----------
Gross profit (loss) .......... 73,997 (36,283) 37,714
General and administrative
expenses .................... 264,550 780,373 1,044,923
----------- ----------- -----------
(Loss) from operations ....... (190,553) (816,656) (1,007,209)
Other income (expense) ....... (7,933) (34,460) (42,393)
----------- ----------- -----------
(Loss) before tax ............ (198,486) (851,116) (1,049,602)
Provision for taxes .......... -- -- --
----------- ----------- -----------
Net (loss) ...................$ (198,486) $ (851,116) $(1,049,602)
=========== =========== ===========
F-14
<PAGE>
NOTE 4 - PURCHASE OF EQUITY INTEREST IN AND SUBSEQUENT MERGER WITH SABA
PETROLEUM COMPANY
During 1998 and 1999, GREKA entered into the following transactions to purchase
its interests in Saba:
<TABLE>
<CAPTION>
Date Consideration Common Stock Preferred Stock Cost
- - ---- ------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
(in 000's)
October 1998 Cash 80,000 $ 70
October 1998 Cash 690 750
November 1998 Cash 333,333 1,500
December 1998 1.34 million
shares of GREKA 2,971,766 14,070
------------ -------------- ------------
Total 3,385,099 690 $ 16,390
============ =============== ============
</TABLE>
On October 8, 1998, the Company disclosed that it had acquired over five percent
of the outstanding common stock of Saba, with the intent to gain control of
Saba.
In November, 1998, the Company paid $500,000 to the holder of Saba's Series A
Preferred Stock to extend the term of an option to purchase 6,910 shares of Saba
Series A Preferred Stock for an additional 30 days. The cash payment is
reflected in the above table as part of the November purchases of shares. Such
option expired unexercised.
In December, 1998, the Boards of Directors of both companies approved GREKA's
proposal to acquire Saba. Under the acquisition agreement, Saba's stockholders
would receive one share of the Company's Common Stock for each six shares of
Saba's common stock outstanding.
In addition to the shares owned directly by GREKA, 568,000 Saba shares were
owned by IPH, a GREKA shareholder. Such shares were subject to a call agreement
by GREKA at an exercise price equal to 120% of the cost of such shares to IPH,
payable in cash or common shares of GREKA. IPH had a put agreement that became
effective April 1, 1999 and was exercised on such date. GREKA issued 140,886
shares to IPH in exchange for the shares of SABA owned directly.
In March 1999, the Company, through a wholly owned subsidiary, merged with Saba
in a transaction accounted for as a purchase with a cost of approximately $9.9
million based upon the issuance of 1,233,738 shares of GREKA stock.
GREKA's $16.4 million equity method investment and the total acquisition cost of
$25.8 million have been allocated to the fair value of each of Saba's assets and
liabilities, as of December 31, 1998 and March 24, 1999 (as updated) in the
following table. The amounts presented for 1998 represent 29.8% of the estimated
fair value of Saba's assets and liabilities (dollars in thousands).
12/31/98 03/24/99
--------- ----------
Refinery $12,218 $ 25,400
Oil and Gas Properties 10,582 29,935
Land 3,580 16,600
Other Assets 5,994 7,027
Liabilities and minority interest (15,984) (53,207)
--------- ---------
Total investment $ 16,390 $ 25,755
========= =========
F-15
<PAGE>
The summarized audited financial information of Saba is shown below as of
December 31, 1998 and for the year ended December 31, 1998 and through March 24,
1999:
Balance Sheet Data 1998
-----------
Oil and gas properties, net......................$32,904,810
Other assets, net.................................16,783,602
Current liabilities...............................40,003,281
Other liabilities and
preferred stock ..................................13,176,220
.................................................-----------
Net assets...................................... $(3,491,089)
===========
GREKA 's equity in net assets................... $(1,040,344)
===========
Earnings Data 1998 1999
------------ -----------
Revenues .......................................$ 23,331,331 $ 3,660,742
Operating (loss)................................ (24,024,215) (1,377,618)
Net (loss)......................................$(28,650,823) (1,908,563)
============ ===========
GREKA's equity in loss..........................$ (586,020) $ (568,751)
============ ===========
GREKA's equity in loss of Saba represents GREKA's share of Saba's losses since
the acquisition dates of Saba's shares during the fourth quarter of 1998 through
March 24, 1999.
The following are the unaudited pro forma revenue, net loss and loss per share
of the Company giving effect to the acquisition of Saba, as if such acquisition
had occurred at the beginning of 1998. The unaudited pro forma financial data
does 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.
Year Ended Year Ended
December 31, 1998 December 31, 1999
----------------- -----------------
Dollars in thousands,
except share amounts
Revenue........................... $23,137 $32,779
Net Income (loss)................. (34,234) 1,459
Income (loss) per common share.... (8.08) 0.34
NOTE 5 - PROPERTY AND EQUIPMENT:
A summary of the Company's subsidiaries' property and equipment as of December
31, 1999 and 1998 is as follows:
1999 1998
---------- -----------
Investment in limestone properties............. 3,675,973 $ 3,500,000
Total oil and gas property..................... 29,653,061 3,445,816
Land and buildings............................. 17,210,814 85,814
Plant and equipment............................ 26,875,661 1,475,661
----------- -----------
Total Cost..................................... 77,415,509 8,507,291
Accumulated Depletion and depreciation......... ( 7,128,995) (4,081,340)
----------- -----------
$70,286,514 $ 4,425,951
=========== ===========
Depreciation, depletion and amortization (including an impairment charge in 1998
of $3,171,485) charged against income was $3,023,783 in 1999, $3,504,953 in 1998
and $0 in 1997.
Useful lives are as follows:
Refinery .............................................. 40 years
Buildings ............................................. 20 to 40 years
Drilling equipment .................................... 5 to 10 years
Transportation equipment .............................. 5 to 6 years
Office and computer equipment ......................... 3 to 10 years
F-16
<PAGE>
NOTE 6 - RESTRICTED CASH
At December 31, 1999, cash of $1,000,000 was held in escrow relating to a
potential acquisition by the Company. Subsequent to year end, the Company
determined that it would not pursue the transaction and the cash was released
from escrow.
NOTE 7 - EARNINGS PER SHARE
In 1998 and 1997, the company incurred a net loss and therefore, the basic and
diluted loss per share are the same. Diluted earnings per share for 1999 were
calculated as follows:
Net Income............................................................$3,367,030
Add: Income impact of assumed conversion of convertible debt.......... 241,313
----------
Net income plus impact of assumed conversion ......................... 3,608,343
==========
Weighted Average Common Shares Outstanding ........................... 4,202,917
Effect of Dilutive Securities -
Employee stock options ........................................... 151,343
Convertible debt ................................................. 420,588
----------
Weighted Average Shares plus impact of assumed conversion ............ 4,774,848
==========
NOTE 8 - INVENTORY
In connection with assuming operations of Saba's asphalt refinery in May, 1999
the Company acquired finished goods and raw materials from the prior operator.
Inventory is stated at the lower of cost, determined on a first-in, first-out
basis or market and includes material, labor and manufacturing overhead costs.
Due to the continuous manufacturing process, there is no significant work in
process at any time. Inventory consists of the following:
Raw Material ........................$ 1,830,632
Finished goods....................... 2,422,645
-----------
Total ............................$ 4,253,277
===========
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease office space, automobiles, computers,
and other equipment under various operating leases. The Company and its
subsidiaries have options to renew these leases. Aggregate commitments under
these leases at December 31, 1999 were as follows:
Year Ending December 31: Amount
----------------------- ----------
2000 $278,229
2001 155,218
2003 66,096
2004 60,588
F-17
<PAGE>
Rent expense included in the accompanying statements of operations was $370,133,
$76,778 and $31,262 in 1999, 1998 and 1997, respectively.
In October 1994, the Company licensed certain directional drilling technology
from BP Amoco, a major oil corporation. The license currently requires minimum
annual payments of $15,000 per year or $1,639 per well drilled under the
license, whichever is greater, and the amounts are adjusted periodically for
inflation. The Company incurred license payments approximating $30,000, $15,000
and $20,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Semi-annual settlements are required under the license, and BP Amoco has the
right to terminate the license for non-payment. If BP Amoco were to terminate
the Company's license, it could have an adverse affect on the Company's
operations.
In 1993, GREKA's subsidiary acquired a producing mineral interest in California
from a major oil company. At the time of acquisition, the subsidiary'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 the subsidiary 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. The subsidiary has
notified the seller of its obligation to remediate. Notwithstanding the
subsidiary's compliance in proceeding with any required remediation on seller's
account, the subsidiary is committed to hold the seller accountable for the
required remediation. Since the investigation is not complete, an accurate
estimate of cost cannot be made.
In 1995, GREKA's subsidiary 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 the subsidiary assume the
obligation to abandon any wells that the subsidiary did not return to
production, irrespective of whether certain consents of third parties necessary
to transfer the property to the subsidiary were obtained. Management believes
the subsidiary has no obligation to remediate this property because it believes
the seller did not give the subsidiary any consideration to enter into the
contract for the property. Notwithstanding the subsidiary's compliance in
proceeding with any required remediation on seller's account, the subsidiary is
committed to hold the seller accountable for the required obligations of the
property. Since the investigation is not complete, an accurate estimate of cost
cannot be made.
GREKA's subsidiary owns an asphalt refinery in Santa Maria, California, with
which significant environmental remediation obligations are associated. This
refinery was acquired from Conoco Inc. in 1994 and Conoco performs all
environmental obligations that arose during and as a result of its operations of
the refinery prior to the acquisition.
GREKA's subsidiaries, as is customary in the industry, are required to plug and
abandon wells and remediate facility sites on their 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
subsidiaries' other oil and gas properties would not have a material adverse
effect on the Company.
F-18
<PAGE>
NOTE 10 - FEDERAL AND STATE INCOME TAXES
The components of income (loss) before income taxes for the years ended December
31, are as follows:
United States $ 2,725,143 ($5,547,645) ($851,116)
International 687,889 - -
----------- ---------- --------
$ 3,413,032 ($5,547,645) ($851,116)
=========== ========== ========
Components of income tax expense for the years ended December 31, 1999 as
follows:
Current
Federal $40,000
State 46,000
Foreign -
-------
86,000
Deferred
Federal (40,000)
State -
Foreign -
-------
(40,000)
-------
$46,000
=======
Due to the losses recorded since inception, no provision or benefit for income
taxes was recorded in 1998 and 1997.
The effective tax rate differs from the amount that would result from the
application ofthe statutory rate due to the utilization of net operating loss
carry forwards.
The components of the deferred income tax asset/liability as of December 31,
1999 are as follows:
1999
-----------
Net operating loss carry forwards .......................... $ 4,879,000
Property and equipment .................................... 6,014,600
Foreign tax credits ....................................... 6,022,000
Alternative minimum tax credits ........................... 178,000
Other ..................................................... 216,000
-----------
17,309,600
Valuation allowance ....................................... (17,309,600)
Net deferred tax asset .................................... $ --
===========
A significant net operating loss carryover has been incurred in prior years,
primarily by Petro Union, Horizontal Ventures and Saba. The net operating loss
expires, if unused , as follows:
Expires in Amount
---------- ------------
2007 $ 1,039,000
2008 4,520,000
2009 452,000
2010 64,000
2011 1,067,000
2018 569,000
2019 6,229,000
------------
Total $ 13,940,000
============
The Company's review of its available net operating loss carry forwards is
ongoing. Upon completion of this review, additional net operating loss carry
forwards may be identified.
F-19
<PAGE>
NOTE 11 - NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable and long-term debt consist of the following at December 31, 1999
and 1998:
1999 1998
----------- ---------
Saba 9% senior subordinated
Debentures Due 2005 Net of
discount a......................... $ 3,320,778 $ -
Loan agreement - Bank One b .......... 2,986,497 -
Demand loan agreement with a bank c .. 794,185 -
Capital lease obligations d .......... 309,229 -
Term loan with a bank e .............. 351,562 -
Notes payable f ...................... 2,000,000 2,000,000
15% convertible senior subordinated
Debenture due 2001 g ............. 1,000,000 -
Term and Revolving Loan Agreement
GMAC Financial Corporation b ..... 22,219,469 -
Other notes and loans ................ 638,086 65,972
----------- ---------
$33,619,806 2,065,972
Less current portion ................. 17,923,981 2,013,338
----------- ---------
Net Long-term debt ................... $15,695,825 $ 52,634
=========== =========
F-20
<PAGE>
a In July and August 1999, GREKA entered into a term sheet with a majority of
the holders of the outstanding Saba debentures to exchange the debentures
of Saba for new debentures of GREKA with interest at the rate of 9%,
maturing on December 31, 2005 with a right of GREKA to redeem at any time
for an amount equal to 102% of the principal amount plus any accrued but
unpaid interest, subject to the right of holders of first convert at any
time. The conversion price offered by GREKA is 95% of the average closing
bid price of GREKA's common stock for the 30 consecutive trading days of
GREKA's common stock ending one day prior to the date notice of conversion
is received by GREKA, but in no event less than $8.50 nor greater than
$12.50 per share. Assuming full conversion, the minimum and maximum number
of shares of GREKA common stock issued would be 286,000 and 420,588,
respectively. The Company is acting as the exchange agent for the issuance
of new GREKA debentures, the terms of which include that, commencing August
1, 2000, each holder of GREKA's debentures shall have the right upon
written notice to GREKA to require that it redeem its debentures at an
amount equal to the principal amount plus any accrued but unpaid interest.
The Saba debentures were delisted from the American Stock Exchange in
August 1999.
b In February 1999, Bank One 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 and
classified as currently payable was accelerated and declared immediately
due and payable. In connection with various borrowings from Bank One, Ilyas
Chaudhary, a former director and executive officer of Saba, has guaranteed
payment of approximately $3.7 million of Saba's debt to Bank One.
In April 1999, GREKA 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's subsidiaries the opportunity to complete
contemplated transactions on the condition that, among other things, each
of the transactions would be completed by June 11, 1999.
In April 1999, GREKA's subsidiaries procured a loan from BNY that provided
funds of up to $11 million under two credit facilities. A term loan in the
amount of $6 million 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 provided advances for working capital of up to $5
million against eligible receivables and inventory of the refinery. The
loans are secured by real estate interests located in Santa Maria,
California and certain assets owned by the Company's subsidiaries.
In July 1999, GREKA, Saba and Bank One entered into an Amended and Restated
Forbearance Agreement, under which Bank One agreed that it would forbear
from exercising its remedies under the credit facilities through September
15, 1999, provided that Saba maintained compliance with certain conditions
regarding events of default, made timely interest payments and secured
alternative financing to retire the Bank One indebtedness.
In September 1999, the revolving credit facility with BNY that provided
advances to GREKA's subsidiaries for working capital of up to $5.0 million
against eligible receivables and inventory of the Santa Maria asphalt
refinery was increased to $6.0 million, raising the total available funds
acquired in April 1999 under the revolving credit facility and the reducing
term loan of $6.0 million from $11.0 million to $12.0 million.
In November 1999, the borrowers of the BNY credit facility entered into a
loan and security agreement with GMAC Commercial Credit LLC ("GMAC"). That
agreement amends the loan and security agreement the parties entered into
in April 1999. The November 1999 agreement increased from $11 million to
$35 million the amount which GREKA's subsidiaries may borrow from GMAC upon
the satisfaction of the terms and conditions of the agreement. The
financing consists of a term loan of $25 million and a revolving credit
facility of $10 million. Of the proceeds, $11.2 million were used to reduce
the indebtedness owed by Saba to Bank One. The financing is secured by
GREKA's subsidiaries' interests in certain California oil and gas
properties and real estate. The term loan had an outstanding balance of
$17,500,000 and the revolving credit facility $4,719,469 at December 31,
1999. Amounts outstanding under the credit facility bear interest at the
rate of prime plus 1% (9.25% at December 31, 1999). Amortization of the
term loan began in April 2000, and accordingly, $4.2 million of the term
loan amount is classified as currently payable at December 31, 1999.
F-21
<PAGE>
c The Company's Canadian subsidiary has a demand revolving reducing loan with
a borrowing base of $1.2 million. Interest is payable at a variable rate
equal to the Canadian prime rate plus 0.75% per annum (7.25% at December
31, 1999) The loan is collateralized by the subsidiary's oil and gas
producing properties and a fixed floating charge debenture in the principal
amount of $3.6 million over all assets of the subsidiary. The borrowing
reduces at the rate of $34,175 per month. In accordance with the terms of
the loan agreement, $290,001 of the total loan balance of $794,185 is
classified as currently payable at December 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. 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 December 31, 1999 was 8.21%.
e The term loan with a bank ($351,652) is due to the seller of a fee interest
in property in which the Company's subsidiary owns mineral interests. The
note bears interest at the prime rate plus 1% (9.25% at December 31, 1999),
is scheduled for repayment in monthly installments to a maturity date of
February 2001, and is collaterized by the fee interest acquired by the
subsidiary.
f In October 1998 and November 1998, the Company borrowed $500,000 and
$1,500,000, respectively, from IPH which matured December 31, 1999 pursuant
to several extensions. Effective January 1, 2000, the loan amounts were
consolidated into a loan with a maturity date of June 30, 2000, bearing
interest at the rate of 9% per annum from January 1, 2000 payable
quarterly, with monthly installment payments of $100,000. The Company paid
$180,000 in consideration of the loan extension. If the entire unpaid
principal and/or accrued interest is not paid at maturity, the amount of
principal owed and rate of increase shall increase. The loan is
collateralized by all of the issued and outstanding shares of capital stock
of a subsidiary of the Company.
g In February 1999, GREKA issued convertible senior subordinated debentures
in the principal amount of $1 million. The debentures bear interest at 15%
through maturity on February 1, 2001, and are secured by GREKA's interest
in limestone deposits. The debentures may be converted by the holders into
GREKA common stock at any time from February 1, 2000, until January 31,
2001 at a conversion price of $20.00 per share. At December 31, 1999, there
were no conversions. GREKA 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 funds to conclude the Saba acquisition.
NOTE 12 - OTHER LIABILITIES
Other libalities of $8,979,927 at December 31, 1999 premarily represent the
company's estimated exposure to litigation acquired in the Saba acquisition.
F-22
<PAGE>
NOTE 13 - LITIGATION:
Enervest Energy LP v. Saba Energy of Texas, Inc. (Case No. 1999-30673, 152nd
Judicial District Court of Harris County, Texas, June 1999) Enervest filed an
action claiming that the Company's subsidiary breached the agreement between the
parties for failing to close the sale of its interests in certain oil and gas
properties. In accordance with the agreement, Enervest deposited earnest money
in the amount of $1.25 million to a jointly controlled account to assure
Enervest's performance of the agreement. Enervest further seeks the court's
declaration that it is entitled to the deposit. In July 1999, the Company's
subsidiary filed a counterclaim against Enervest for damages incurred as a
result of Enervest's breach of the agreement by failing to close the sale. While
the subsidiary plans to vigorously defend all claims asserted by Enervest and to
aggressively pursue all counter and third party claims, the matter is in its
discovery stage.
Capco Resources, Ltd. v. GREKA Energy Corporation, et al. (Case No. 99-K-2155,
U.S. District Court for the District of Colorado, August 1999). This action was
initially filed in the United States District Court for the Central District of
California and later moved to Colorado pursuant to a court order granting
GREKA's motion to transfer. Plaintiff Capco Resources, Ltd. ("Capco") has raised
claims for breach of contract, specific performance, fraud, and negligent
misrepresentation against the Company and Randeep Grewal, the President of
GREKA. The Company has brought counterclaims against Capco, Capco Energy, Inc.,
Ilyas Chaudhary, and Kal Saifi (the "Capco Group") for violation of the
Securities Exchange Act of 1934, Section 10B, and Rule 10b-5, fraud, breach of
contract, negligent misrepresentation, breach of fiduciary duty, and negligence.
The parties' respective claims relate to a November 23, 1998 Stock Exchange
Agreement between the Company and Capco, pursuant to which Capco was to exchange
2,971,766 shares of Saba stock, constituting all of Capco's ownership interest
in Saba, for 1,340,000 newly-issued shares of the Company to Capco. Even though
F-23
<PAGE>
GREKA, in accordance with the terms of the agreement and in good faith, issued
all 1,340,000 shares of GREKA common stock, GREKA had actually received only
2,006,566 shares (two-thirds) of Saba common stock agreed upon. The Company
subsequently determined that the Capco Group had made numerous
misrepresentations and omissions of material fact in inducing GREKA to enter
into this transaction. These factual circumstances form the basis for the claims
in dispute. Capco is seeking damages of approximately $12.25 million related to
the Company's refusal to file a registration statement for the resale of 1
million shares of GREKA common stock that Capco received pursuant to the
exchange. GREKA claims that it is entitled to damages and requests partial
rescission and/or reformation of the Stock Exchange Agreement. Additionally, the
Company also plans to seek to recover from the Capco Group all monies owed by
the Capco Group and related parties since 1998 for unpaid accounts such as
promissory notes, interest on promissory notes, and reimbursable expenses. While
GREKA plans to vigorously defend all claims asserted by Capco and to
aggressively pursue all counter and third party claims, the litigation is in its
early stages of discovery.
Pembrooke Calox, Inc. v. GREKA Energy Corporation, et al. (Index No. 604905/99,
Supreme Court, New York County, October 1999). Pembrooke Calox, Inc.
("Pembrooke") has brought an action against GREKA and others seeking damages of
approximately $5 million for an alleged breach of a settlement agreement and
related contracts pursuant to which Pembrooke was to receive GREKA's interest in
a limestone reserve located in Indiana in exchange for payment on a $5.7 million
non-recourse promissory note. Pembrooke alleges that it was unable to make such
payment because of GREKA's purported failure to provide certain geological
documents concerning mineral reserves located under the property. GREKA has
filed fraud-based counterclaims, and the parties have agreed that the property
is to be held in escrow pending adjudication of all claims. While GREKA plans to
vigorously defend all claims asserted by Pembrooke and seek all counter-relief,
the litigation is in its preliminary discovery stages.
RGC International Investors, LDC v. GREKA Energy Corporation, et al. (C.A. No.
17674NC, Delaware Chancery Court, December 1999). RGC International Investors,
LDC ("RGC") brought suit against GREKA, Saba and the former directors of Saba
based on claims arising from GREKA's acquisition of Saba on March 24, 1999. RGC
seeks, among other things, rescission of the merger and an unspecified amount of
damages for GREKA's alleged failure adequately to provide for RGC's rights as a
Saba preferred shareholder in consummating that merger. GREKA has moved to
dismiss the complaint and that motion has not yet been scheduled for hearing.
Sabacol, Inc. v. Omimex Resources, Inc., Omimex de Colombia, Ltd., and Omimex
International Corporation dba Omimex Petroleum, Inc. (C.A. No. BC224339,
California Superior Court, Los Angeles County, February 2000). GREKA's
subsidiary filed an action against Omimex Resources, Inc. and its subsidiaries
seeking an order directing rescission of an asset purchase agreement effective
January 1, 1999 or, alternatively, directing specific performance of the
agreement by Omimex. The Company's subsidiary alleges claims for breach of
contract, breach of covenant of good faith and fair dealing, negligent
misrepresentation and fraudulent inducement and seeks damages. Omimex alleges
counter-claims of breach of contract and seeks declaratory judgment. While the
subsidiary plans to vigorously pursue all claims against Omimex and defend all
counter-allegations, the litigation is in its preliminary discovery stages.
From time to time, the Company and its subsidiaries are a named party
in legal proceedings arising in the ordinary course of business. While the
outcome of such proceedings cannot be predicted with certainty, management does
not expect these matters to have a material adverse effect on the Company's
financial condition or results of operations.
NOTE 14 - RELATED PARTY TRANSACTIONS
The Company has an agreement with Grupo de Creacion, Ltd. ("GDC"), a Gibraltar
corporation and a shareholder of the Company, for financial consulting services.
Under the agreement, GDC assisted the Company in arranging a private convertible
debenture offering during 1999 resulting in proceeds of approximately
$1,000,000. As compensation, GDC received a negotiated commission of 10% of the
financing less expenses.
F-24
<PAGE>
NOTE 15 - STOCK OPTIONS AND WARRANTS
On September 9, 1997, the Company's Chairman and CEO was granted options to
purchase an aggregate of 150,000 shares of the Company's no par value common
stock at an option price of $5 per share which, by amendment to the employment
agreement for the Company's Chairman and CEO in October 1998, became fully
vested upon the Company's acquisition of Saba. No compensation expense was
recorded in connection with the granting of these options as the option price
equaled the market price on the date of grant.
On October 14, 1998, the Company's Chairman and CEO was granted options to
purchase additional 110,000 shares of the Company's no par value common stock at
an option price of $8.25 per share (which equaled the market price on this
date). In addition, other employees, directors and consultants were granted
options to purchase an additional 140,000 shares of the Company's no par value
common stock at an option price of $8.25 per share.
During 1999, previously granted options to employees to purchase 39,000 shares
of the Company's no par value common stock at an exercise price of $8.25 were
terminated and options to purchase 14,000 shares of the Company's no par value
common stock at an exercise price of $7.75 were granted to a director of the
Company.
A summary of the outstanding options follows:
1999 1998 1997
------- ------ -------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- ------- ------ -------- ---------
Options outstanding,
January 1 ......... 400,000 $7.03 300,000 $5.00 -- $ --
Options granted .... 14,000 7.75 250,000 8.25 300,000 5.00
Options terminated . 39,000 8.25 150,000 5.00 -- --
-------- -------- ------- ----- -------- --------
Options outstanding,
December 31 ....... 375,000 $6.93 $400,000 $7.03 300,000 $5.00
Exercisable at
year end ......... 371,000 6.92 30,000 5.00 -- --
The Company also granted warrants to purchase common stock to the purchasers
of shares from one of the 1997 "Reg S" offerings. A summary is as follows:
Number of
Date Granted Shares Option Price Effective Date Expiration Date
- - ------------ ------ ------------ -------------- ---------------
September 29, 127,750 $15.00 January 1, December 1,
1997 1998 2000
As permitted under SFAS 123, the Company has elected to continue to account for
stock-based compensation under the provisions of APB Opinion No. 25. Had
compensation cost been determined consistent with SFAS No. 123, the Company's
net income and earnings per share would have been reduced to the following pro
forma amounts:
December 31
1999 1998 1997
---------- ----------- ----------
Net Income (Loss) as reported $3,367,032 $(5,547,645) $ (851,116)
Pro Forma 2,654,911 (6,139,691) (1,245,162)
Basic EPS as reported $0.84 $(3.42) $(1.44)
Pro Forma basic EPS $0.66 $(3.78) $(2.11)
The fair value of each option granted in1999, 1998 and 1997 is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions: (a) risk free interest rates ranging from 5.2% to 6.4% (b) expected
volatility of 59.2% to 64.2%(c) average time to exercise of 7 years and (d)
expected dividend yield of zero.
F-25
<PAGE>
NOTE 16 - SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
The following data is presented pursuant to FASB Statement No. 69 with respect
to oil and gas acquisition, exploration, development and producing activities,
which is based on estimates of year-end oil and gas reserve quantities and
forecasts of future development costs and production schedules. These estimates
and forecasts are inherently imprecise and subject to substantial revision as a
result of changes in estimates of remaining volumes, prices, costs and
production rates.
Future cash inflows are estimated using year-end prices. Oil and gas prices at
December 31, 1999 are not necessarily reflective of the prices the Company
expects to receive in the future.
<TABLE>
Colombia Canada USA
----------- -------------- --------------------------------------------------------
Proved developed and undevloped reserves 1999 1999 1999 1998 1997
Oil (Bbl) Gas (Mcf) Oil (Bbl) Gas (Mcf) Oil (Bbl) Oil (Bbl)
----------- -------------- --------------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance beginning of year - - 250,221 - 2,553,007 1,826,385
Production 220,197 281,731 (504,961) (861,261) (12,935) (2,112)
Discoveries, extensions, etc
Acquisition of reserves in place 10,191,991 3,655,869 10,786,446 18,459,557 728,734
Sale of reserves in place 9,971,794
Revisions of previous estimates (2,289,851)
Balance end of year - 3,937,600 10,531,706 17,598,296 250,221 2,553,007
============ ============= =============== ============ ============= ==========
USA
Production revenue and costs Colombia Canada --------------------------------------------
1999 1999 1999 1998 1997
------------ ------------- --------------- ----------- -------------
Production cost 1,111,395 465,256 5,667,665 121,016 247,979
Depletion expense 292,818 214,469 2,517,339 333,468 24,016
Impairment of oil and gas
property 3,171,485
------------ ------------- --------------- ----------- -------------
Income (Loss) from oil and gas
producing $603,517 $127,320 ($2,728,054) ($3,480,156) ($60,299)
============= ============== =============== ============ =============
USA
Canada --------------------------------------------
Capitalized Cost 1999 1999 1998 1997
-------------- --------------- ------------ -------------
Proven oil and gas property 5,910,090 $19,812,588 $3,445,816 $1,963,337
Unproven oil and gas property 0 2,743,673 400,000
5,910,090 22,556,261 3,445,816 2,363,337
Less accumulated depletion (2,068,683) (4,801,051) (3,242,711) (57,598)
Net investment in oil and gas property $3,841,407 $17,755,210 $203,105 $2,305,739
============== =============== ============ =============
USA
Canada --------------------------------------------
Discounted Future Net Cash Flows 1999 1999 1998 1997
-------------- --------------- ------------ -------------
Future cash flows 17,388,623 $245,779,700 $1,725,500 $40,103,600
Future cost:
Development cost (1,398,185) (24,109,700) (440,000) (5,281,800)
Production cost (4,673,318) (107,662,800) (793,700) (23,805,600)
Future net flow before income taxes 11,317,120 114,007,200 491,800 11,016,200
Future income taxes - - - (3,304,800)
-------------- --------------- ------------ -------------
Standardized measure of discounted
future net cash flows $ 6,161,574 $67,152,900 $260,700 $4,610,300
============== =============== ============ =============
USA
Canada --------------------------------------------
Changes in Discounted Future Net Cash Flows 1999 1999 1998 1997
-------------- --------------- ------------ -------------
Balance beginning of year - $260,700 $4,610,300 $ -
production cost (341,789) (3,499,657) (17,443) (13,578)
Net changes in prices and production costs (107,662,800) (3,721,007)
Changes in future development cost 1,398,185 24,109,700 4,841,800
Revision of previous quantity estimates 5,105,178 153,918,957 (4,771,053)
Accretion of discounts 26,000 861,000
Net change in income taxs 1,751,000
Changes in production rates, timing and other (3,293,897)
-------------- --------------- ------------ -------------
Standardized measure of discounted
future cash flows $6,161,574 $67,152,900 $260,700 $4,610,300
============== =============== ============ =============
</TABLE>
F-26
<PAGE>
NOTE 17 - SUBSEQUENT EVENTS
In April 1999, a subsidiary of the Company and Omimex Resources, Inc., a
privately-held oil and gas company which then operated a substantial portion of
Saba's producing properties, entered into an agreement to sell substantially all
of the assets of the subsidiary 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, which closed
in June 1999, provides for the payment of additional consideration to Greka"s
subsidiary. If the reserves sold at January 1, 1999 when re-evaluated with
fourth quarter 1999 prices had certain variances to the calculation done prior
to the sale in June 1999, additional consideration is owed to the subsidiary. If
the differential were $5 million or less, by March 31, 2000 Omimex had to pay
such amount to the subsidiary in cash or, upon non-payment, reassign to the
subsidiary the 50% interest in the Velasquez-Galan pipeline in Colombia sold by
the subsidiary to Omimex . If the differential were greater than $5 million, the
subsidiary has the option through May 31, 2000 of repurchasing for approximately
$12 million the assets sold to Omimex and reassigning to Omimex the California
assets acquired from Omimex. If this option had not been exercised, Omimex would
have been obligated to pay the subsidiary $5 million in cash or, upon
non-payment, reassign to the subsidiary the Velasquez-Galan pipeline.
The sale was approved by the bankruptcy court in April 1999, and an
order dismissing the subsidiary's bankruptcy case that was filed in 1998 to
protect the subsidiary pending the sale of its Colombian assets was entered by
the court in August 1999.
In March 2000, GREKA further announced that, subject to a court order
directing rescission of the sale, it had exercised its option to re-purchase its
Colombian assets for an estimated cost of $12 million which will result in the
Company's receipt of assets with a PV-10 value of approximately $65 million at
December 31, 1999 (approximately $12.22 per share outstanding).
F-27
<PAGE>
<TABLE>
<CAPTION>
Greka Energy Corporation and subsidiaries
Schedule II - Valuation and qualifying Accounts
For Each of the Tree Years Ended December 31, 1999
Balance at Charged to Charged to Balance
Beginning of costs and other at End of
Year Period expenses accounts Deductions Period
------ -------------- ------------ -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Reserve for 1999 $ 74,000 -- $ 1,269,852(a) -- $1,343,852
Doubtful 1998 74,092 -- -- (92) 74,000
Account 1997 74,092
</TABLE>
(a) Amount represents the reserve for doubtful accounts of Saba petroleum
Company, which was acquired on March 24, 1999.
F-28
AMENDMENT TO
PROMISSORY NOTES
THIS AMENDMENT (the "Amendment") is entered into as of this 20th day of
January, 2000 by and between Greka Energy Corporation f/k/a Horizontal Ventures,
Inc., a Colorado corporation ("Maker") and International Publishing Holding,
Inc., a Cayman Islands corporation and the assignee of International Publishing
Holding, s.a. of Luxembourg, or its designee ("Holder") based upon the following
terms and conditions.
WHEREAS, Maker promised to pay to the order of Holder the principal sum
of five hundred thousand dollars ($500,000), without interest, on December 31,
1998 pursuant to that certain Promissory Note executed October 6, 1998, as
amended, (the "First Note") and that certain Pledge Agreement dated October 6,
1998; and
WHEREAS, Maker promised to pay to the order of Holder the principal sum
of one million five hundred thousand dollars ($1,500,000), with interest at the
rate of 6% per annum, on December 31, 1998 pursuant to that certain Promissory
Note executed November 4, 1998, as amended, (the "Second Note") and that certain
Pledge Agreement dated November 2, 1998; and
WHEREAS, Maker and Holder desire to further amend and modify the First
and Second Notes as set forth below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Parties. The parties agree that all references in the First and Second
Notes to Maker and Holder shall be deemed to refer to Greka Energy
Corporation and International Publishing Holding, Inc., respectively.
2. Consolidation. Effective as of January 1, 2000, the terms of the First and
Second Notes are consolidated, providing for anaggregate principal amount
of two million dollars ($2,000,000) owed by Maker to Holder (collectively,
the "Consolidated Note").
3. Maturity Date. The Maturity Date of the Consolidated Note shall be extended
to June 30, 2000 whereupon the entire unpaidprincipal and accrued but
unpaid interest shall be paid in full.
4. Interest. The unpaid principal shall accrue simple interest at the rate of
nine percent (9%) per annum commencing January 1,2000 payable quarterly, on
March 31, 2000 and June 30, 2000.
5. Installment Payments. Commencing on February 25, 2000 and continuing on the
25th day of each month thereafter through theMaturity Date, Maker shall pay
Holder as a reduction in principal one hundred thousand dollars ($100,000).
6. Additional Consideration. Interest accrued on the unpaid balance up to
January 1, 2000 is cancelled. Upon the parties' full execution of this
Amendment, Maker shall pay to Holder the amount of one hundred eighty
thousand dollars ($180,000) as a restructuring fee, and such payment shall
not be deemed to be a payable under any other provision of this Amendment.
_/s/_____ /s/______
(initials) (initials)
<PAGE>
7. Prepayment. Maker may prepay any or all of the amounts due under the
Consolidated Note at any time, and from time to time, without penalty.
8. Security. The obligations of Maker under the Consolidated Note are secured
pursuant to the provisions of the Pledge Agreements dated October 6, 1998
and November 2, 1998 between Maker and Holder. The reference to
"obligations" in those Pledge Agreements shall be deemed to refer to the
obligations of Maker under the Consolidated Note.
9. Default. If the entire unpaid principal and/or accrued but unpaid interest
is not paid in full on June 30, 2000, then:
a. on July 1, 2000, the amount of principal owed by Maker shall increase
by fifteen percent (15%) of the unpaid principal outstanding on June
30, 2000, and
b. the accrued but unpaid interest as of July 1, 2000 will be added to
the amount of the unpaid principal; and
c. the interest accruing on the unpaid principal as of July 1, 2000 shall
increase to the rate of fifteen percent (15%) per annum commencing
July 1, 2000; however, in no event shall Holder be entitled to collect
any interest in excess of the maximum interest permitted by applicable
law.
10. Place of Payments. All payments by Maker to Holder under the Consolidated
Notes shall be made by wire transfer to:
Bank: United Bank of Switzerland
677 Washington Blvd., Stanford, CT 06901 USA
A/C no: 101WA003611000
ABA #: 026007993
SWIFT code: SBCO US33
For further credit to: VP Bank Luxembourg, Grand Duchy of Luxembourg
Beneficiary: International Publishing Holding Inc. A/C No. 69270
11. Miscellaneous. This Agreement, once executed by a party, may be delivered
to the other party hereto by facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.
This Amendment supersedes all prior amendments to the First and Second
Notes. All other terms and conditions of the First and Second Notes as
originally stated therein remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment effective as
of the day first written above.
Greka Energy Corporation International Publishing Holding, Inc.
By: /s/__________________________ By: /s/__________________________
LIST OF SUBSIDIARIES
GREKA Energy Corporation, a Colorado Corporation 6/27/88
GREKA Integrated, Inc, a Colorado Corporation 3/23/99
(wholly owned subsidiary of GREKA)
GREKA SMV, Inc, a Colorado Corporation 10/9/97
(wholly owned subsidiary of GREKA)
GREKA Services, Inc, a Colorado Corporation 10/8/99
(wholly owned subsidiary of GREKA)
GREKA AM, Inc, a Colorado Corporation 9/30/99
(wholly owned subsidiary of GREKA)
Saba International Limited, a Delaware Corporation 1/2/96
(wholly owned subsidiary of Saba Petroleum Company)
Saba Petroleum of Michigan, Inc, a Michigan Corporation 11/4/92
(wholly owned subsidiary of Saba Petroleum Company)
Saba of Texas, Inc, a Texas Corporation 6/3/88
(wholly owned subsidiary of Saba Petroleum Company)
Saba Jatiluhur Limited, a Cayman Islands Corporation 6/19/97
(wholly owned subsidiary of Saba Cayman Limited)
Saba Cayman Limited, a Cayman Islands Corporation 6/19/97
(wholly owned subsidiary of Saba Petroleum Company)
Saba Petroleum (UK) Limited, a U.K. Corporation 8/11/97
(wholly owned subsidiary of Saba Cayman Limited)
Calox Corporation, an Indian Corporation 6/10/92
(wholly owned subsidiary of GREKA)
Saba Realty, Inc., a California Corpoation 8/3/94
(wholly owned subsidiary of GREKA Integrated, Inc.)
Beaver Lake Resources Corporation, a Canada Corporation 7/12/91
(wholly owned subsidiary of GREKA)
Saba Petroleum Company, a Delaware Corporation 3/16/79
(wholly owned subsidiary of GREKA)
Saba Petroleum Inc, a California Corporation 2/3/92
(wholly owned subsidiary of Saba Petroleum Company)
Santa Maria Refining Company, a California Corporation 8/23/93
(wholly owned subsidiary of GREKA
Integrated, Inc.)
Saba Exploration Company, a California Corporation 5/4/95
(wholly owned subsidiary of Saba Petroleum Company)
Sabocol, Inc., a Delaware Corporation 1/17/95
(wholly owned subsidiary of Saba Petroleum Company)
Exhibit 23.1
Arthur Andersen LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K into GREKA Energy Corporation's
previously filed registration statements (File Nos. 333-60621, 333-78673 and
333-30402).
/s/ Arthur Andersen LLP
New York, New York
April 14, 2000
Exhibit 23.2
Bateman & Co., P.C.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this Annual Report on Form 10-K for the year
ended December 31, 1999, which report will upon its filing be incorporated by
reference into GREKA Energy Corporation's registration statements on Form S-3
(File Nos. 333-60621 and 333-78673) and form S-8 (File No. 333-30402), of our
report dated April 14, 1998, on our audits of the consolidated financial
statements of GREKA Energy Corporation, formerly known as Petro Union, Inc.
doing business as Horizontal Ventures Inc. the year ended December 31, 1997.
/s/Bateman & Co., P.C.
-------------------
Bateman & Co., P.C.
Houston, Texas
April 14, 2000
Exhibit 23.3
Netherland, Sewell & Associates, Inc.
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the references to our firm in the form and context
in which they appear in the Annual Report on Form 10-K of Greka Corporation for
the fiscal year ended December 31, 1999. We hereby further consent to the use of
information contained in our reserve report, as of January 1, 2000, setting
forth the Greka Energy Corporation oil and gas reserves and revenue estimates
properties located in the United States. We further consent to the incorporation
by reference thereof into Greka Energy Corporation's registration statements on
Form S-3 (File Nos. 333-60621 and 333-78673) and Form S-8 (File No. 333-30402).
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Frederic D. Sewell
-----------------------
Frederic D. Sewell
President
Dallas, Texas
April 14, 2000
Exhibit 23.4
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
Sproule Associates Limited hereby consents to being named in the Annual Report
on Form 10-K for the year eneded December 31, 1999, which report will upon its
filing be incorporated by reference in GREKA Energy Corporation's registration
statements on Form S-3 (File Nos 333-60621 and 333-78673) and Form S-8 (File No.
333-30402). We confirm that we have read excerpts from the draft document and
that we have no reason to believe that there are any misrepresentations in the
information contained therein that is derived from our reserve report as of
January 1, 2000.
/s/ Sproule Associates Limited
- - ------------------------------
Sproule Associates Limited
April 14, 2000
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