-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HuEtJfyVk1W7lRp1l4srqqAb04xAMXHZeKd2pCaa+wM8Hs+Ny3yEbh5Elqxqen1k 4ylzChR7fRl/VKjcOEvXwA== 0001050502-03-000322.txt : 20030414 0001050502-03-000322.hdr.sgml : 20030414 20030414171904 ACCESSION NUMBER: 0001050502-03-000322 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREKA ENERGY CORP CENTRAL INDEX KEY: 0000840402 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 841091986 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20760 FILM NUMBER: 03649160 BUSINESS ADDRESS: STREET 1: 630 FIFTH AVE STREET 2: STE 1501 CITY: NEW YORK STATE: NY ZIP: 10111 BUSINESS PHONE: 2122184680 MAIL ADDRESS: STREET 1: 630 FIFTH AVE STREET 2: STE 1501 CITY: NEW YORK STATE: NY ZIP: 10111 FORMER COMPANY: FORMER CONFORMED NAME: KIWI III LTD DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: HORIZONTAL VENTURES INC DATE OF NAME CHANGE: 19980824 10-K 1 greka1202.txt 10-K U.S. Securities and Exchange Commission Washington, D.C. 20549 Form 10-K (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, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ------------ Commission File No.: 0-20760 GREKA Energy Corporation ---------------------------------------------- (Name of issuer in its charter) Colorado 84-1091986 ------------------------------ ---------------------- (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification Number) 630 Fifth Avenue, Suite 1501 New York, NY 10111 - ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (212) 218-4680 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: No Par Value Common Stock Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The issuer's revenues for 2002 were $28,910,845. The aggregate market value of 4,656,727 shares of common stock held by non-affiliates of the issuer, based on the closing bid price of the common stock on March 17, 2003 of $3.90 as reported on the Nasdaq National Market System and based on a total of 4,951,451 shares being outstanding on that date, was $19,310,659. (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 [ ] Transitional Small Business Disclosure Format (check one). Yes [ ] No [X] Check whether the issuer is an accelerated filer (as defined in Rule 126-2 of the Act). Yes [ ] No [X] Table of Contents PART I ............................................................... 5 Item 1. Description of Business........................................ 5 Item 2. Description of Property........................................ 16 Item 3. Legal Proceedings.............................................. 23 Item 4. Submission of Matters to a Vote of Security Holders............ 23 PART II. ............................................................... 24 Item 5. Market for Common Equity and Related Stockholder Matters....... 24 Item 6. Selected Financial Data........................................ 25 Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations........................... 27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 31 Item 8. Financial Statements and Schedule.............................. 34 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures........................... 34 PART III. ............................................................... 35 Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act.............. 35 Item 11. Executive Compensation......................................... 38 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................. 40 Item 13. Certain Relationships and Related Transactions................. 42 Item 14. Controls and Procedures........................................ 42 Part IV. ............................................................... 43 Item 15. Exhibits and Reports on Form 8-K............................... 43 2 Definitions The terms below are used in this document and have specific Securities and Exchange Commission ("SEC") definitions as follows: Proved oil and gas reserves. Proved oil and gas reserves are the estimated quantities of crude oil and 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 supplementing the natural forces and mechanisms of primary recovery is 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 is limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units is claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances are estimates for proved undeveloped reserves 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 6.0 Mcf of gas to 1 Bbl of oil, for the year ended December 31, 2002 and 5.5 Mcf of gas to 1 Bbl of oil for the years ended December 31, 2001 and 2000. 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. 3 Cautionary Information About Forward-Looking Statements This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (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 1999 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: .. our ability to refinance our debt on favorable terms, .. our ability to successfully restructure our operations, .. 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 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. 4 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. 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. Our oil and gas production, exploration and development activities are concentrated in our properties in California where we also own and operate an asphalt refinery. We supply our asphalt refinery with equity oil, which is the crude oil we produce from our surrounding heavy crude oil reserves, and we also utilize crude oil purchased from third party producers. We believe that our vertically integrated operations reduce our exposure to material volatile swings in crude oil prices. Historically we have also engaged in oil and gas exploration, development and production from our properties in Louisiana, Texas and New Mexico which operations have substantially been sold as part of our strategic, internal reorganization. In addition, we have interests in coalbed methane properties and production sharing contracts in China. We conduct our operations through two divisions: o Integrated Operations o International Operations Integrated Operations. Our wholly owned and operated consolidated assets in central California include substantial oil in place, over 1,200 wells, extensive pipeline and production facilities, and an infrastructure including 3 work-over rigs, approximately 17,700 mineral acres, approximately 3,300 acres of real estate, a 1-acre island connected to land by a 2,700' causeway containing the gas and oil pipelines and facilitating vehicular access, and an asphalt refinery. We own and operate an asphalt refinery located in Santa Maria, California. Crude oil that we produce from our surrounding heavy crude oil reserves supplies feedstock to the refinery. We supplement our equity oil production with third party feedstock to achieve efficiencies through lower refinery operating costs of finished product per unit. Our asphalt refinery produces 65% asphalt and 30% gas oil, with the remainder produced as naphtha. We sell our asphalt to hot mix asphalt producers, material supply companies and government agencies for use in road surfacing applications, and we sell the gas oil and naphtha to end users and refineries. The relatively stable price of asphalt and the low cost of our oil compared to third party feedstock reduce our exposure to volatile swings in crude oil prices and position us to effectively compete in the asphalt market. 5 During 2002, approximately 2,609 Bbls per day of our oil produced locally were used as feedstock, accounting for approximately 91% of the asphalt refinery throughput. Our properties also produce natural gas which is used to fuel the field production and the refinery, in part. We operate all of the wells associated with our Integrated Operations division. International Operations. Other than the Fengcheng Block in which we have a 49% operating working interest, we have a 60% operating working interest in five coalbed methane ("CBM") exploration and development projects within the Provinces of Jiangxi, Shanxi and Anhui, China. As of December 31, 2002, the Company had estimated net proved reserves of approximately 28,542 MBOE with a PV-10 value (10 year present value) before tax of $177.6 million. During 2002, the estimated net proved reserves increased over last year by 14,966 MBOE. Our principal offices are located at 630 Fifth Avenue, Suite 1501, New York, New York 10111 and our telephone number is (212) 218-4680. Business Strategy We intend to implement a two-pronged strategy: Capitalize on Our California Market Position. Our asphalt refinery, prior to 1992 was owned and operated for approximately fifty years by Conoco and ran between 9,000 to 11,000 Bbls per day of throughput. We expect that our refinery can attain its rated capacity of 10,000 Bbls per day of throughput. As of December 31, 2002, we utilized approximately 30% of this rated capacity. Our strategy in these vertically integrated assets is to enhance the long-term equity barrel feedstock supply to the refinery and to cost-efficiently boost production from the drilling locations identified in California. Our total average throughput currently at the asphalt refinery is approximately 3,000 Bbls per day, a 24% increase over 2001 levels. Approximately 90% of current throughput is now equity barrels. In our integrated business on a recurring basis, we are designed to be a relatively fixed cost operation with an established infrastructure in place. Equity production and throughput at the refinery increases ought to be realized without significant infrastructural costs to us. In this division, we are focused on organic production growth by returning to production the large inventory of shut-in wells acquired in recent acquisitions. Major oil companies, such as Union Oil Company, Shell and Texaco, began drilling in the Santa Maria, California basin in the early 1900's and built a consolidated infrastructure of pipelines and facilities. Thousands of wells were drilled discovering several productive oil and gas zones between 2,500 ft. and 8,500 ft. The shallower Sisquoc zone with heavier 6-12 gravity oil was passed over in favor of the deeper Monterey zone which was generally at a depth below 5,000 ft. and the lightest oil zone carrying the highest margins. Thus, the majors primarily concentrated on the Monterey zone and largely ignored the others. It is this enormous proven reserve base that provides a specific road map for the Company to build a substantial production base. Our objectives are to exploit through increased production both the gas reservoirs for fuel self-sufficiency and the oil for asphalt production. Pursue High Potential International Prospects on a Longer-Term Basis. GREKA is party to and operator under five, 30-year production sharing contracts ("PSCs") with China United Coalbed Methane Corporation Ltd. ("CUCBM") for CBM exploitation in China within two development and three exploration blocks. The combined total contract area within the Jiangxi, Shanxi and Anhui Provinces is approximately 6,600 square kilometers (1.7 million acres) with average coalbed thickness of 16.5 feet and potential reserves of 34.5 Tcf, as estimated by CUCBM. GREKA has a 60% working interest in all PSCs other than the Fengcheng Block in which it has a 49% working interest. The remaining working interest is owned by CUCBM. 6 Empowered by the State Council, CUCBM, a wholly state-owned company, is the only company responsible for exploration, development, production and sales of CBM in China. The signing of the four contracts brings the total number of CBM PSCs signed by CUCBM with foreign companies to 18, five of which are with GREKA. The total area covered by the 18 PSCs is over 31,000 sq km containing CBM resources of approximately 3.4 trillion m3 (120 Tcf) of which GREKA's PSCs are estimated at 30%, as estimated by CUCBM. 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, our management 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. 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 Saba acquisition, management commenced its strategy to reverse the decline in value of the Saba assets which included securing bank financing of up to $47.0 million, reducing Saba debt by $27.2 million, assuming full operation of our asphalt refinery, which increased operating cash flows, selling non-core assets in Colombia (the "Columbian assets") while maintaining a repurchase option, acquiring all of the shares we did not already own of Beaver Lake Resources Corporation, and signing a production sharing contract with CUCBM to jointly exploit CBM resources in China. During December 1999, GREKA commenced trading on the Nasdaq National Market System. During 2000, management exercised GREKA's option to repurchase the Colombian assets, closed the financing with a new bank, Canadian Imperial Bank of Commerce, of up to $47.5 million with a portion of the proceeds used to reduce current debt resulting in the complete elimination of Saba's defaulted bank debt, completed the sale of all our non-core assets in Canada, settled with Capco Resources, Ltd. and its related parties whereby GREKA cancelled 840,000 shares of its common stock for $5.2 million and gained voting control over the remaining 514,500 shares owned by Capco, declared a payment of a 5% stock dividend to our shareholders of record at close of market on December 31, 2000, and completed a spot secondary public offering of 542,785 shares (including over-allotment option) at a price of $13.10 per share. During 2001, GREKA increased up to $46 million its credit facility with GMAC Commercial Credit LLC ("GMAC") and secured financing of up to $75 million with a new bank, Bank of Texas, N.A., closing on a revolving credit line of $16 million with an initial advance of $13.2 million. Later that year, the Company announced a repurchase program to buy back up to 10% of its outstanding common stock. Also in 2001, GREKA concluded the Colombian transaction resulting in its receipt of cash and assets with an aggregate value of $14 million, and, operationally, GREKA announced exploration success at the Potash Field with the drilling of its HD No. 1 well with initial production at over 6 MMCF per day. By the end of the year, GREKA concluded all material legal matters, including payment of $11.5 million to RGC International Investors for settlement in full of a court order awarding RGC $13.25 million. 7 Year 2002 Highlights o In March 2002, the Company announced that it intended to substantially restructure its operations by disposing of its exploration and production assets which had been operated through its E&P Americas subsidiary and to focus on its Integrated Operations around its asphalt refinery located in Santa Maria, California. At the end of May 2002, we closed the sale of the most substantial portion of the E&P Americas' assets, the Potash Field located in South Louisiana for $20 million, the proceeds of which were used to pay debt, which included $12.5 million to the Bank of Texas, N.A. The sale of the Potash Field essentially completed the divestiture of the Company's E&P Americas' assets. In June 2002, we concluded a refinancing of our debt by closing a $30 million secured credit facility through Guggenheim Investment Management, LLC. The proceeds of this credit facility were used to payoff the $14.3 million GMAC term loan, $12 million to purchase of the Vintage Petroleum, Inc. ("Vintage") properties in the Santa Maria Valley and the balance toward working capital and closing expenses. Also in June 2002, to complete the purchase of the Santa Maria Valley properties, we executed a promissory note for the remaining $6 million purchase price owed to Vintage to be paid within twelve months. In July 2002, we closed as planned our Houston office following the E&P asset divestitures. o As a result of the completed restructuring, substantially all of our oil, gas and refining assets and operations are located within a 20 mile radius in the Santa Maria Valley of California. As part of our restructuring strategy, we focused on boosting production of our heavy crude to increase the feedstock of our equity oil for use in our Santa Maria Refinery. The closing of the Vintage acquisition increased equity oil production. o In September 2002, we sold real estate for a contract price of $2.325 million, and we paid $1.1 million toward the $5.1 million bridge facility that closed in the second quarter of 2002. The payment was made from the sale proceeds of certain real estate owned by the Company. Also as of September 2002, we satisfied in full our 15% subordinated convertible debentures by converting $1.26 million in principal plus accrued interest into 251,348 shares of GREKA common stock and paying $0.26 million in principal plus accrued interest that had been redeemed. o In October 2002, the $4 million balance of the $5.1 million bridge facility was transferred to International Publishing Holding, Inc. ("IPH"), and IPH cancelled the irrevocable standby letter of credit in the amount of $4 million that was arranged in favor of the initial creditor. o Also in October 2002, we acquired Rincon Island Limited Partnership ("Rincon"), and its general partner, Windsor Energy US Corporation ("Windsor"), that owns and operates oil and gas producing properties and facilities located within the Rincon Island Field in central California. The properties cover approximately 1,700 mineral acres, including a 1-acre island connected to land by a 2,700' causeway containing the gas and oil pipelines and facilitating vehicular access. In October 2002, of the 56 wells on the property, 12 were producing at approximately 300 BOPD and 80 MCFD. Substantial value of the field lies in the large, proved undeveloped portion and in the partially exploited secondary recovery reserves of non-flooded zones where production historically peaked at approximately 2,500 BOPD and 1.5 MMCFD. Additionally, there are 21 slots available on the island providing the foundation for the development of the substantial reserves. 8 o Further in October 2002, we restructured some of our debt and increased working capital by institutionally placing $12.5 million of secured debt, which accretes up to $14.5 million until maturity. Of the $12.5 million proceeds, we paid off our outstanding debt to Vintage and all but approximately $832,000 of our convertible debentures, acquired $5.35 million worth of operational bonds related to the acquisition of Rincon and Windsor, and applied the balance toward working capital and closing costs. o Lastly in October 2002, we entered into an amendment to our 30-year production sharing contract with the CUCBM to extend for an additional two years through December 2004 the term in which core testing is to be conducted and the pilot program is to be developed in our Fengcheng Coalbed Methane Exploration Prospect in Jiangxi, China. Acquisition Activities; California Integrated Assets In June 2002, we closed, as scheduled, the acquisition of all of Vintage's oil and gas producing properties and facilities in the Santa Maria Valley of central California for $18 million. These properties, operated by the Company, consist of five fields and approximately 110 producing wells, encompassing approximately 8,000 acres of mineral interest and over 800 acres of real estate. In October 2002, we acquired Rincon, and its general partner, Windsor, that owns and operates oil and gas producing properties and facilities located within the Rincon Island Field in central California. The properties cover approximately 1,700 mineral acres, including a 1-acre island connected to land by a 2,700' causeway containing the gas and oil pipelines and facilitating vehicular access. At closing, of the 56 wells on the property, 12 were producing at approximately 300 BOPD and 80 MCFD. Divestiture Activities; Non-Core Assets In April 2002, we sold, as planned, our interest in the Manila Village Field located in Jefferson Parish, south Louisiana for approximately $55,000. In May 2002, we closed, as planned, the sale of our interest in the Potash Field, Plaquemines Parish, Louisiana for a contract price of approximately $20 million. In June 2002, we closed, as planned, the sale of our 75% exploration interest in the Jatiluhur Block, West Java for a $4 million future production payment upon discovery of reserves producible in commercial quantities and a retained 5% overriding royalty interest in the Block. Pertamina, the Indonesian state-owned oil company, consented to the sale. In September 2002, we sold real estate for a contract price of approximately $2.3 million. In January 2003, we closed, as planned, the sale of our 355-acre limestone reserve located in Monroe County, Indiana for a contract price of $0.5 million. Financing & Debt Restructuring Activities In April 2002, we closed a $5.1 million bridge facility to provide short-term liquidity during the implementation of GREKA's restructuring. In April 2002, we paid in full the loan obligation in the principal amount of $2.4 million to IPH, thereby releasing collateral of all issued and outstanding shares of capital stock of a GREKA subsidiary. In May 2002, Bank of Texas, N.A. was paid $12.5 million from the proceeds of the closed sale of our interest in the Potash Field. 9 In June 2002, we institutionally placed $30 million of a secured credit facility to conclude the Company's debt restructuring and to close the acquisition of the Santa Maria Valley oil and gas assets. Of these proceeds, we paid $14.3 million to GMAC to retire its term loan and $12 million to Vintage. Also in June 2002, we executed a promissory note for the remaining $6 million purchase price owed to Vintage to be paid within twelve months. In September 2002, we paid $1.1 million toward the $5.1 million bridge facility that closed in the second quarter 2002. The payment was made from the sale proceeds of certain real estate owned by the Company. In October 2002, the $4 million balance of the $5.1 million bridge facility was transferred to IPH, and IPH cancelled the irrevocable standby letter of credit in the amount of $4 million that was arranged in favor of the initial creditor. Also in October 2002, we restructured some of our debt and increased working capital by institutionally placing $12.5 million of secured debt, which accretes up to $14.5 million until maturity. Of the $12.5 million proceeds, we paid off our outstanding debt to Vintage and all but approximately $832,000 of our convertible debentures, acquired $5.35 million worth of operational bonds related to the acquisition of Rincon and Windsor, and applied the balance toward working capital and closing costs. In March 2003, our placed $20 million with an institutional investor through a 2-year, secured credit facility. From these proceeds, the Company paid $4.7 million to Bank of Texas and $4.1 million to IPH to retire their respective loans, and the balance, in addition to closing costs and working capital, will fund a portion of the Company's $15 million capital expenditure program for 2003. Of the $20 million, $13.5 million bears interest at a variable rate of Libor + 6.25% or 8.25%, whichever is greater, while the balance $6.5 million bears interest at a fixed rate of 9.25%. The Company paid a 4.25% closing fee, and the placement resulted in an increase of approximately $10 million of the Company's total debt. Debentures As of September 2002, we satisfied, in full, its 15% subordinated convertible debentures by converting $1.26 million in principal plus accrued interest into 251,348 shares of GREKA common stock and paying $0.26 million in principal plus accrued interest that had been redeemed. During 2002, GREKA converted $0.04 million in principal of its 9% senior subordinated convertible debentures into 4,118 shares of GREKA common stock and paid $1.74 million in principal of debentures that had been redeemed, with a resulting debenture balance of $0.83 million in principal at December 31, 2002. GREKA's Horizontal Drilling Technology Horizontal drilling has become widely accepted as a standard option for exploiting oil & gas resources. The principal 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 re-entering 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. 10 Marketing Marketing of Asphalt Refinery Production Our asphalt refinery in Santa Maria, California produces light naphtha, kerosene distillate, gas oils and numerous cut-back, paving and emulsion asphalt products. Historically, we have focused marketing efforts 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. Four customers exceeded individually more than 10 percent of the Company's sales of North American refinery production during 2002, namely FAMM, Lawson, Union and Granite which accounted for approximately 18%, 20%, 20% and 18%, respectively, of such sales. The receivable balance as of December 31, 2002 from the same customers amounted to $97,757, $848,237, $217,252 and $265,808, respectively. 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 repairs increase in California and surrounding western states, the market for asphalt will expand significantly. We market two principal products from our refinery: liquid asphalt and light-end products (gas oil, naphtha and distillates). Liquid asphalt, which accounted for approximately 60% of total refinery production in 2002, is marketed primarily in California. While liquid 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. These customers further treat the liquid asphalt which is used for road paving. In addition to conventional paving grade asphalt, our subsidiary can also produce 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 we produce are sold as base stocks for emulsified asphalt products that are primarily used for pavement maintenance. Because the chemical footprint unique to the heavy crude oil indigenous to the Santa Maria Valley readily blends, we are 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 our control. Government highway spending provides a source of demand which has been relatively unaffected by normal business cycles but is dependent on appropriations. Growth in the California economy is generally good for the Company, as increased business activity results in increased construction activity, including new road construction and repair efforts on existing roads in both the public and private sectors. A slowing economy could negatively impact both sales and pricing of products. As our asphalt refinery and principal markets are located in California, the following discussion focuses on government highway funds available in California. 11 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. The average 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. However, while management of one of GREKA's subsidiaries 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 our Oil and Gas Production The prices obtained for oil and gas are dependent on numerous factors beyond our control, including domestic and foreign production rates of oil and gas, market demand and the effect of governmental regulations and incentives. A portion of our North American crude oil production is sold at the wellhead at posted prices under short term contracts, as is customary in the industry. Other than production from the Company's Integrated Operations Division which is transported to our refinery, three customers exceeded individually more than 10 percent of the Company's sales of North American oil and gas production during 2002, namely Tosco, Adams Resources and Plains Marketing, L.P. which accounted for 51%, 12% and 15%, respectively, of such sales. Sales to Adams Resources and Plains Marketing, L.P. were from properties subsequently sold. The market for heavy crude oil produced by GREKA from properties in central California differs substantially from the remaining domestic crude oil market, due principally to GREKA's sale to the market of asphalt, naphtha and distillates rather than hydrocarbons. GREKA's Santa Maria refinery uses essentially all of its central California crude oil, in addition to third party crude oil, to produce asphalt, among other products. Ownership and operation of the refinery gives us 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. We believe that the locations of our leasehold acreage, our exploration, drilling and production capabilities and the experience of our management and that of our industry partners generally enable us to compete effectively. Many of our competitors, however, have financial 12 resources and exploration, development and acquisition budgets that are substantially greater than ours, 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. Our management believes we have an advantage over our competition in the regional asphalt market within central California because of our vertical integration and self-sufficiency in our Integrated Operations Division, resulting in margins higher than other refiners in the same market. 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. Federal Regulation of First Sales and Transportation of Natural Gas The sale and transportation of natural gas production from properties owned by our subsidiaries may be subject to regulation under various federal and state laws including, but not limited to, the Natural Gas Act ("NGA") and the Natural Gas Policy Act ("NGPA"), both of which are administered by the Federal Energy Regulatory Commission ("FERC"). 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 no 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. Our 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'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 higher gas prices. Currently, there is a shortage of deliverable gas in most areas of the United States and, accordingly, it remains possible that gas prices may remain at relatively high levels. This is in sharp contrast to even recent pricing which has been depressed for some time since deregulation. Producers such as GREKA or resellers may be required to reduce prices in the future in order to assure continued sales. It is also possible that gas production from certain properties may be shut-in altogether for lack of an available market. Commencing in the mid-1980's, FERC promulgated several orders designed to correct market distortions and to make gas markets more competitive by removing the transportation barriers to market access. These orders have had a profound influence upon natural gas markets in the United States and have, among other things, fostered the development of a large spot market for gas. The following is a brief description of the most significant of those orders and is not intended to constitute a complete description of those orders or their impact. 13 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 subsidiaries 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 Our operations 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 our subsidiaries have operations, and these various initiatives could have a similar impact on GREKA. 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. 14 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. GREKA and its subsidiaries have up to $11 million of general liability insurance. Additionally, GREKA and its subsidiaries have up to $10 million of environmental coverage through June 2007 covering the central California properties acquired in June 2002. The policy protects us against third party claims resulting from unknown pre-existing or new pollution conditions that cause on or offsite bodily injury, property damage or clean up. The policy also covers costs that exceed the projected costs for remediation of the known conditions on the properties. In addition to insurance coverage, bonds in the approximate principal amount of $6.8 million have been issued securing the operational performance of GREKA's subsidiaries in California. Employees As of March 17, 2003, GREKA and its subsidiaries had 126 full-time employees. None of GREKA's employees are subject to a collective bargaining agreement. GREKA considers its relations with its employees to be satisfactory. Shareholder Rights Plan We have 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 $57.14 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 9.9% 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. We currently provide 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 normally 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. However, the NPSP could be suspended, increased or otherwise amended at the discretion of the Board of Directors for any specific year. 15 Item 2. Description of Property The following description of the GREKA properties at December 31, 2002 includes 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, 2002 GREKA owned interests in approximately 1,200 wells at December 31, 2002. The majority of these wells are concentrated in central California. At December 31, 2002, California (heavy oil) was the primary and focused area of GREKA's exploitation and development activities. GREKA's evaluation of international exploration and exploitation project is in 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 California in the Company's recent exploitation and development activities through its wholly owned subsidiaries: Approximately 99% of GREKA's proved reserves at December 31, 2002 (28.2 MMBOE) were located in four regions in California. Daily production from these regions averaged 3,300 BOE (gross) for the year ended December 31, 2002, representing 99% of GREKA's total production. GREKA operates all of its wells in these California regions. The remaining 1% of GREKA's proved reserves at December 31, 2002 is allocated to domestic producing properties in which GREKA has an interest located in four states other than California. 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 2003 discretionary 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, we expect our cash flow and credit facilities to fund approximately $15 million in 2003 for capital expenditure. (See Item 1 - "Description of Business, Financing & Debt Restructuring Activities") The Company's 2003 capex program is designed to facilitate organic production increases from the integrated operations. Capex projects identified for 2003, namely workovers, redrills, recompletions, side-tracks, and various facility enhancements, are scheduled throughout the year. 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, 2002, GREKA had exploration plays in two primary areas: California and China. 16 The following is a brief discussion of significant developments in the Company's recent exploration activities through its wholly owned subsidiaries: Coalinga Nose Exploration Prospect, Fresno County, California. GREKA has leases and contractual rights covering approximately 9,000 acres of land in the region of the prolific Coalinga oil field in the San Joaquin Valley of California. GREKA participated in a 16 square mile 3-D seismic survey covering this area and has 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 89% working interest below and a 9% working interest above the Gatchell formation in the Leda Prospect, Pleasant Valley, and Cotton Gin Prospects. Since December 31, 2002, GREKA re-evaluated the potential productive zones within the field and identified the most prospective areas. The Company intends to reduce its acreage in the field to these identified areas. Coalbed Methane Exploration Prospect, Jiangxi, Shanxi and Anhui Provinces, China. In January 2003, GREKA's wholly-owned subsidiaries signed at the Great Hall of the People in China four Production Sharing Contracts PSCs with CUCBM for the exploitation of CBM resources in the Shanxi and Anhui Provinces. Considering the previously signed PSC for the Fengcheng Block in the Jiangxi Province, GREKA is now party to and operator under five, 30-year PSCs for CBM exploitation in China within two development and three exploration blocks. The combined total contract area is approximately 6,600 square kilometers (1.7 million acres) with average coalbed thickness of 16.5 feet and potential reserves of 34.5 Tcf, as estimated by CUCBM. Greka has a 60% working interest in all PSC's other than the Fengcheng Block in which it has a 49% working interest. The remaining working interest is owned by CUCBM. Oil and Gas Producing Properties The following table summarizes GREKA's estimated proved oil and gas reserves as of December 31, 2002. The following table includes both proved developed (producing and non-producing) and proved undeveloped reserves. Approximately 51% 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 Netherland Sewell & Associates and/or Ryder-Scott Company Petroleum Consultants, independent petroleum engineers, will prove accurate. Since December 31, 2002, 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 $29.39 per Bbl and the comparable price for March 17, 2003 was $34.93. Quotations for the comparable periods for natural gas were $4.84 per Mcf and $5.51 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 Netherland Sewell & Associates and Ryder-Scott Company Petroleum Consultants. 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. 17 December 31, 2002 Proved Reserves, net Gross Oil Gas PV-10 Value Wells (MBbls) (MMcf) MBOE (000's) ----- ------- ------ ------ ------------ 322 26,571 11,822 28,542 $177,584 The following is a brief discussion of our oil and gas operations in our major fields located in California at December 31, 2002: Central Coast Fields. One of GREKA's subsidiaries operates seven 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, Santa Maria Valley, Zaca, Clark Avenue and Los Flores which collectively have an average working interest of 100% in 179 active wells producing 2,364 BOEPD (gross). These fields represent 38% of GREKA's total proved reserves. North Belridge Field. The North Belridge Field is located in Kern County, California. One of GREKA's subsidiaries is the operator and owns 100% working interest in 42 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. Production is about 300 BOEPD, and this field represents 8% of GREKA's total proved reserves. Rincon Field. One of GREKA's subsidiaries operates the Rincon Field which is located in the Central Coast of California and covers approximately 1,700 mineral acres, including a 1-acre island connected to land by a 2,700' causeway containing the gas and oil pipelines and facilitating vehicular access. GREKA has a 100% working interest in 16 active wells producing approximately 371 BOEPD. This field represents 40% of the Company's total reserve value. Richfield East Dome Unit. The Richfield East Dome Unit is a mature waterflood (one method of secondary recovery in which water is injected into an oil reservoir for the purpose of washing the oil out of the reservoir rock into the bore of a producing well) in Orange County, California, operated by one of GREKA's subsidiaries and producing approximately 615 BOPD from 94 active wells. The field in which GREKA's working interest is 99%, represents 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 remaining life of the field. Oil and Gas Reserves Our 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 our independent petroleum engineers. In 2000, 2001 and 2002, Netherland, Sewell & Associates, Inc. prepared reports on GREKA's reserves in the United States (except in the Rincon Field, California), and in 2002 Ryder-Scott Company Petroleum Consultants prepared reports on GREKA's reserves in the Rincon Field, California. 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 year end 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 gross revenues at December 31, 2002 reflect weighted average prices of $23.07 per BOE compared to $14.53 per BOE and $26.93 per BOE as of December 31, 2001 and 2000, respectively. 18 The following tables present total estimated proved developed producing, proved developed non-producing and proved undeveloped reserve volumes as of December 31, 2000, 2001 and 2002 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 is limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units are claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. We do not include estimates for proved undeveloped reserves 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. The prices received for oil and gas have generally increased since the preparation of the 2002 year end engineering estimates. Estimated Proved Oil and Gas Reserves At December 31, --------------------------- 2000(1) 2001(1) 2002 ------- ------- ------- Net oil reserves (MBbl) Proved developed producing .............. 7,059 4,310 11,672 Proved developed non-producing .......... 1,309 2,664 1,839 Proved undeveloped ...................... 3,644 3,078 13,060 ------ ------ ------ Total proved oil reserves (MBbl) ....... 12,012 10,052 26,571 ====== ====== ====== Net natural gas reserves (MMcf) Proved developed producing .............. 5,184 2,206 1,929 Proved developed non-producing .......... 4,758 5,822 453 Proved undeveloped ...................... 10,133 11,354 9,440 ------ ------ ------ Total proved natural gas reserves (MMcf) ..................... 20,075 19,382 11,822 ====== ====== ====== Total proved reserves (MBOE) ............... 15,662 13,576 28,542 ====== ====== ====== - ---------- (1) Does include reserve volumes attributable to the Company's interest in assets subsequently divested. 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. 19 Estimated Present Value of Future Net Revenue (In thousands) At December 31, ------------------------------ 2000(1) 2001(1) 2002 -------- -------- -------- PV-10 Value Proved developed producing .......... $ 67,080 $15,180 $60,022 Proved developed non-producing ...... 37,160 21,164 13,615 Proved undeveloped .................. 59,637 20,274 103,947 -------- -------- -------- Total ............................ $163,877 $56,618 $177,584 ======== ======== ======== - ---------- (1) Does include value attributable to the Company's interest in assets subsequently divested. 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. 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, 2002. Year Ended December 31, -------------------------- 2000(1) 2001(1) 2002 ------- ------- ------ Production Data: Oil (MBbls) .................... 770 827 1,021 Gas (MMcf) ..................... 1,807 1,848 371 Total (MBOE) ................. 1,099 1,163 1,083 Average Sales Price Data (Per Unit): BOE ............................ $22.14 $19.51 $21.89 Selected Data per BOE: Production costs(2) ............ $ 5.51 $ 7.87 $ 4.90 General and administrative ............... $ 5.79 $ 3.22 $ 3.43 Depletion, depreciation and amortization ................. $ 2.90 $ 4.34 $ 3.12 - ---------- (1) Does include sales volumes attributable to the Company's interest in assets subsequently divested. (2) Production costs include production taxes. 20 Drilling Activity With respect to GREKA's participation in the drilling of exploratory and development wells for each of the three years in the three year period ended December 31, 2002, there has been no drilling activity except as set forth in the following table: Year Ended December 31, --------------------------------------------------------- 2000 2001 2002 ----------------- ----------------- ----------------- Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2) -------- ------ -------- ------ -------- ------ United States: Development Wells Oil 5 5 1 1 -- -- Gas -- -- 1 1 -- -- Dry (3) 1 1 -- -- -- -- - ---------- (1) A gross well is a well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned. (2) A net well is deemed to exist when the sum of fractional ownership working interest in gross wells equals one. The number of net wells is the sum of fractional working interests owned in gross wells expressed as whole numbers and fractions thereof. (3) A dry hole is an exploratory or development well that is not a producing well. Productive Oil and Gas Wells The following table sets forth information at December 31, 2002, 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 in the United States: Oil Gas Total Gross Net Gross Net Gross Net ----- ----- ----- ----- ----- ----- 2002 280 272 42 39 322 311 2001 498 450 25 9 523 459 2000 625 487 80 41 705 528 Oil and Gas Acreage The following table sets forth certain information at December 31, 2002 relating to oil and gas acreage in the United States in which GREKA through its subsidiaries owned a working interest: Developed(1) Undeveloped --------------- -------------- Gross Net Gross Net ----- --- ----- --- 2002 13,693 10,515 11,201 8,025 2001 21,070 16,180 11,201 8,025 2000 21,070 16,180 11,201 8,025 - ---------- (1) Developed acreage is acreage assigned to productive wells. 21 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 pertinent 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 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 GREKA subsidiaries. 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: Year Ended December 31, ------------------------ 2000 2001 2002 ------ ------ ------ Average sales price per BOE $22.14 $19.51 $21.89 Average production cost per BOE $ 5.51 $ 7.87 $ 4.90 Asphalt Refinery GREKA owns an asphalt refinery in Santa Barbara County, California through a wholly 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 17 operating, maintenance, laboratory and administrative personnel. 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, 2002, the Company owned through its subsidiaries approximately 3,300 acres in Santa Barbara County, California. GREKA has used a portion of its real estate holdings for leased agricultural purposes. GREKA plans to retain some of these real estate holdings for asset appreciation which may include developmental activities at a future date. 22 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 through September 30, 2004. GREKA's other offices are located in Santa Maria, California; and Beijing, China. In July 2002, due to the planned divestiture of related assets, GREKA closed its Houston, Texas office. Item 3. Legal Proceedings Bank of Texas, N.A. v. Greka AM, Inc. and GREKA Energy Corporation (Case No. 02-00771, 160th Judicial District Court of Dallas County, Texas, January 2002). In March 2003, the parties entered into a Settlement Agreement and Full Release resolving all outstanding issues. The settlement agreement provided full release of the Company upon repayment of the outstanding balance, which occurred in March 2003. People of State of California, et al. v. Greka SMV, Inc. (Case No. 1114292, Superior Court of State of California, County of Santa Barbara, Santa Maria Division, December 2002). Plaintiffs brought an action against GREKA's subsidiary seeking damages of approximately $1 million for alleged statutory violations relating to a fire caused by a third party, that, ignoring GREKA's instructions, entered GREKA's operations which were being conducted in accordance with common industry practice. GREKA has submitted this matter as an insurance claim, and plans to vigorously defend all claims asserted. The litigation is in its preliminary, pre-discovery stage. Union Oil Company of California, dba Unocal v. GREKA, et al. (Case No. 1125964, Superior Court of State of California, County of Santa Barbara, Santa Maria Division, December 2002). Plaintiff brought an action against GREKA and its subsidiaries seeking damages of approximately $6.25 million for alleged breach of contract claiming that, as successor-in-interest to Saba under the terms of the contract, the Company failed to abandon a certain number of wells or provide an acceptable abandonment plan, and failed to have in place instruments securing the abandonment. GREKA plans to vigorously defend all claims asserted. The litigation is in its preliminary, pre-discovery stage. 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 Shareholders held on December 5, 2002, the following individuals were elected to the Board of Directors to serve for a 3-year term ending 2005 as Class C directors: Votes For Votes Withheld --------- -------------- Dai Vaughan 3,805,812 320,312 Kenton D. Miller 3,809,717 316,407 23 PART II Item 5. Market for Common Equity and Related Stockholder Matters Our common stock is listed for trading on the Nasdaq National Market ("NASDAQ") 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. Our 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 --- Quarter Ended Low High March 31, 2000 $8.563 $9.500 June 30, 2000 8.625 8.813 September 30, 2000 14.375 15.688 December 31, 2000 12.750 13.438 March 31, 2001 12.250 14.813 June 30, 2001 10.000 14.375 September 30, 2001 7.500 11.600 December 31, 2001 6.950 9.150 March 31, 2002 6.010 8.630 June 30, 2002 4.580 7.330 September 30, 2002 4.750 6.290 December 31, 2002 3.760 6.120 On March 17, 2003 there were approximately 888 registered holders of GREKA's common stock. Based on a broker count, GREKA believes at least an additional 3,700 persons are shareholders with street name positions. Holders of GREKA common stock are entitled to receive such dividends as may be declared by GREKA's Board of Directors. GREKA has not yet paid any cash dividends, and the Board of Directors of GREKA presently intends to pursue a policy of retaining earnings for use in GREKA's operations and to finance expansion of its business. The declaration and payment of dividends in the future, of which there can be no assurance, will be determined by our Board of Directors in light of conditions then existing, including our earnings, financial condition, capital requirements and other factors. In April 2002, the Company granted to IPH the right and option to purchase up to 400,000 shares of common stock of the Company at an exercise price of $6.00 per share for the first 200,000 shares and at an exercise price of $6.50 per share for the remaining 200,000 shares. The options were granted in consideration of IPH arranging for an irrevocable standby letter of credit having a term expiring on September 29, 2003 and in the amount of $4 million in favor of the Company's creditor that loaned $5.1 million to the Company as a bridge facility. Such options shall be exercisable during a period of five days from the date that IPH receives written notice from the Company that the letter of credit has been surrendered in connection with the loan repayment, expired, or tendered to the bank in connection with a draw thereunder. These options are exempt from registration pursuant to Section 4(2) of the Securities Act. In October 2002 and in consideration of the transfer to IPH of the $4 million balance of the $5.1 million bridge facility, we amended and restated our grant to IPH of its right and option to purchase up to 400,000 shares of common stock of the Company at an exercise price of $6.00 per share for the first 200,000 shares and $6.50 per share for the remaining 200,000 shares. Such options shall be exercisable beginning on the earlier of March 31, 2003 or changes in capitalization of the Company and ending on the later of September 30, 2003 or fifteen days after the full repayment of the loan. These options are exempt from registration pursuant to Section 4(2) of the Securities Act. 24 In June 2002 and in consideration of the $30 million of secured debt institutionally placed, the Company granted to the note holders and the collateral agent warrants to purchase up to an aggregate 150,000 shares of common stock of the Company at an exercise price of $0.01 per share and expiring in ten years. In October 2002 and in consideration of the $12.5 million of secured debt institutionally placed, which accretes up to $14.5 million until maturity, the Company granted to the collateral agent warrants to purchase up to an aggregate of 80,000 shares of common stock of the Company at an exercise price of $0.01 per share and expiring in ten years. 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, 2002, 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. 25
Years Ended December 31, ----------------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- ------- (In thousands, except per share data) Statement of Operations: Revenues ....................................... $ 28,911(1) $ 40,755 $ 49,067(2) $ 29,138(3) $ 146 Production and product costs ................... $ 16,258(1) $ 24,782 $ 25,200(2) $ 17,821(3) $ 121 Sales, general and administration expenses ..... $ 9,183 $ 8,274 $ 7,195 $ 3,205 $ 1,542 Depletion, depreciation & amortization ................................. $ 3,245 $ 5,579 $ 3,592 $ 3,024 $ 333 Impairment of Long-lived Assets............ .... $ 5,961 $ -- $ 1,882 $ -- $ 3,171 Gain on sale of properties $ 3,960 $ -- $ -- $ -- $ -- Interest Expense, net .......................... $ 9,424 $ 4,157 $ 4,535 $ 1,860 $ (51) Other Income (Expenses), net ................... $ 1,151 $ (5,540)(4) $ - $ 733 $ 9 Minority Interest .............................. $ -- $ -- $ -- $ 21 $ -- (Benefit) Provision for Income taxes ........... $ (33) $ (37) $ 362 $ 46 $ -- Equity in Loss of Saba.......................... $ -- $ -- $ -- $ 569 $ 586 Cumulative effect of change in accounting principle $ -- $ -- $ 853 $ -- $ -- Net (loss) income ............................. $(10,083) $ (7,614) $ 4,457 $ 3,367 $(5,548) (Loss) income per common share: Basic net (loss) income per share .............. $ (2.11) $ (1.67) $ 1.00 $ 0.80 $ (3.25) Diluted net (loss) income per share . . . . . . $ (2.11) $ (1.67) $ .99 $ .75 $ (3.25) Cash dividend per share ........................ $ -- $ -- $ -- $ -- $ -- Basic weighted average common shares outstanding ........................... 4,768 4,555 4,476 4,203 1,703 Diluted weighted average common shares outstanding ........................... 4,768 4,555 4,763 4,801 1,703 Balance Sheet Data (end of period): Working Capital (deficit).......... ............ $(14,929) $(50,355)(5) $ (2,664) $(14,176) $(1,828) Net property and equipment ..................... $ 78,869 $ 89,465 $ 77,182 $ 70,287 $ 4,426 Total assets ................................... $ 97,589 $100,049 $ 98,813 $ 84,214 $20,807 Long-term obligations .......................... $ 47,665 $ 9,139 $ 28,207 $ 15,696 $ 53 Total stockholders' equity ..................... $ 26,051 $ 33,166 $ 40,211 $ 33,378 $18,505
(1) Revenues and production and products costs are affected by the sale of certain exploration and production assets in 2002. (2) Revenues and production and products costs are affected by the full consolidation of the subsidiary engaged in the refinery operations effective May 1999. (3) Revenues and production and products costs are affected by the acquisition of SABA in early 1999. (4) Other expense reflects costs incurred in connection with settlement of litigation. (5) Includes reclassification of long-term debt to current due to a technical default. 26 Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations Overview GREKA is an independent integrated energy company. Our oil and gas production, exploration and development activities are concentrated in our properties in California where we also own and operate an asphalt refinery. We supply our asphalt refinery with equity oil, which is the crude oil we produce from our surrounding heavy crude oil reserves, and we also utilize crude oil purchased from third party producers. We believe that our vertically integrated operations reduce our exposure to material volatile swings in crude oil prices. Historically we have also engaged in oil and gas exploration, development and production from our properties in Louisiana, Texas and New Mexico which operation has substantially been sold as part of our strategic, internal reorganization. In addition, we have interests in coalbed methane properties and production sharing contracts in China. Results of Operations Comparison of Years Ended December 31, 2002 and 2001 Revenue decreased from $40,755,282 for 2001 to $28,910,845 for 2002. This 29% decrease is the net effect of a decrease in revenue from our upstream activities by 59% from $14,151,828 in 2001 to $5,846,409 in 2002 resulting from the effects of the Company's restructuring plan and sale of its interests in the Potash Field, Manila Village and other oil and gas properties, in addition to a decrease of 10% in revenue from our downstream activities (asphalt sales) from $25,255,580 in 2001 to $22,751,809 in 2002. The decrease is the total effect of a 6% volume decrease from 998,640 Bbls in 2001 to 939,301 Bbls in 2002 or $1,500,683. Coupled with a 4% price decrease in the weighted average selling price per barrel of asphalt products from $25.29 in 2001 to $24.22 in 2002 or $1,003,088, this was also compounded by a decrease in other income from the farm operation and other sources by $1,035,248, from $1,347,874 in 2001 to $312,626 in 2002. Production and product costs decreased from $24,781,938 for 2001 to $16,258,337 for 2002. This 34% decrease consists of a 57% decrease in production costs from upstream activities from $5,219,044 in 2001 to $2,254,536 in 2002 due to the effect of the Company's restructuring plan, coupled with a 28% decrease in production costs from downstream activities from $19,562,894 in 2001 to $14,003,800 in 2002. The decrease of $5,559,094 is the aggregate effect of 6% decrease in volume or a reduction of production costs of $1,162,421 coupled with a 24% decrease in cost per barrel from $19.59 to $14.91, or a further reduction of $4,396,673. The decrease in the cost per barrel is due to a 24% increase of the average daily throughput from 2,369 Bbls in 2001 to 2,944 Bbls in 2002 coupled with a material decrease in the percentage of daily average throughput from third party crude (feedstock) from 47% or 1,277 Bbls in 2001 to 8% or 250 Bbls in 2002. The decrease in purchases of third party crude is due to the acquisition of properties, which increased contribution to feedstock from equity crude by approximately 1,500 Bbls per day from approximately 1,000 to 2,500 Bbls per day. Sales, general and administration expenses increased by 11% from $8,274,183 for 2001 to $9,182,828 for 2002. The increase is primarily due to incremental freight cost associated with shipment of distillates to customers, audit fees and acquisition-related expenses. Depreciation, depletion and amortization decreased significantly from $5,578,899 for 2001 to $3,244,847 for 2002. This decrease of 42% is the result of lower depletion rate for 2002 of $3.12 per barrel compared to $4.48 per barrel for 2001 coupled with a 23% decrease in volume of production from a weighted daily average of 3,179 BOE in 2001 to 2,441 BOE for 2002. The lower depletion rate resulted from 110% increase in the reserves from 13,576 MBOE for 2001 to 28,542 MBOE for 2002. This, however, was mitigated by a 52% increase in the related total oil and gas properties asset base from $60.7 million for 2001 to $91.8 million for 2002. 27 The Company reported an operating loss of $1,776,608 for 2002 compared to an operating income of $ 2,120,262 for 2001. This 184% decrease is due to: i) impairment of long-lived assets covering Indonesia and the limestone properties for an amount of $5,961,187, which was partly offset by a gain on the sale of real estates in California in the amount of $3,959,746 and, ii) a decrease in operating income of $1,895,429 primarily deriving from a decrease in oil and gas revenues due the sale of certain oil and gas properties in 2002. Interest expense increased from $4,157,110 for 2001 to $9,423,521 for 2002 as a result of an increase in the interest bearing loans outstanding from a weighted average of approximately $40 million in 2001 to $51 million in 2002 coupled with an increase in the weighted average interest rate from 10% to 18%. Other income and expenses for 2002 of $1,150,729 is primarily the net write off of capitalized financing costs of approximately $1.4 million relating to the payoff of the GMAC and bridge loans offset by write off of stale liabilities and non-recurring charges of approximately $1 million in addition to non-operating income realized from the sale of emission credits of $0.6 million. Net loss increased from $7,613,544 for 2001 to $10,082,509 for 2002 due to impairments of long-lived assets coupled with an increase in the cost of capital in addition to charges relating to issued warrants and options associated with financing activities in 2002 (see Item 5 - "Market for Common Equity and Related Stockholder Matters"). This, however, was somewhat mitigated by gains realized from sale of various real estate, discussed above. Capital expenditures increased 18% or $3,126,698 from $17,170,957 for 2001 to $20,297,655 for 2002. Capital expenditures were utilized primarily for the acquisition of oil and gas properties, as well as for drilling activities in oil and gas producing properties in California. Comparison of Years Ended December 31, 2001 and 2000 Revenue decreased by 17% or $8,311,858 from $49,067,140 for 2000 to $40,755,282 for 2001. The decrease was mostly due to both lower volume sales of 8% from 1,080,604 barrels in 2000 to 998,640 barrels in 2001, and 15% lower average sales prices of refined products from $29.26 in 2000 to $24.87 in 2001 at our integrated operations. Production and product costs decreased by 2% or $417,682 from $25,199,620 in 2000 to $24,781,938 in 2001. The overall decrease was net of an increase of 9% in the average per barrel cost from $11.20 in 2000 to $12.22 in 2001, or a total of $2,068,498 offset by a decrease of 10% in volume from 2,249,495 barrels in 2000 to 2,027,945 barrels in 2001 or a total decrease of $2,486,179. The decrease in volume of barrels of throughput at the integrated operations contributed to the overall increase in the average per barrel cost for the year. Sales, general and administration expenses increased by 15% or $1,079,662 from $7,194,521 for 2000 to $8,274,183 in 2001 due to increase in audit, legal, consulting and insurance costs coupled with costs associated with increase of personnel and related fringe benefits. Operating income decreased 81% or $9,078,639 from $11,198,901 in 2000 to $2,120,262 as a direct result of a decrease in revenues of $8,311,858 or 92% (explained above) coupled with increase in general and administration expenses and depreciation, depletion and amortization expenses. Depreciation, depletion and amortization increased 55% or $1,986,657 primarily as a result of an increase in the per barrel rate of depletion from $3.43 in 2000 to $4.80 in 2001. The increase in the depletion rate was a result of an increase of 40% in the asset base relating to oil and gas properties coupled with a decrease of 13% in the overall reserves from 15,662 MBOE in 2000 to 13,576 MBOE in 2001. 28 Interest expense decreased 8% from $4,535,174 in 2000 to $4,157,110 for 2001 mostly due to a decrease in the interest rates applied to average outstanding loan balances. Other expense, net, increased by 75%, or $4,170,693, from $5,526,613 in 2000 to $9,697,306 in 2001, mostly due to expenses and non-recurring charges associated with settlement of litigation post acquisition adjustments. Net income decreased by 271%, or $12,070,758, from a net income of $4,457,214 for 2000 to a net loss of $7,613,544 for 2001. The variance is mostly due to a 69% decrease in revenue of $8,311,858 and a 31% net increase in expenses, or $3,758,900 consisting mainly of non-recurring charges resulting from settlement of material litigation and post-acquisition adjustments. Capital expenditures increased 26% or $3,569,438 from $13,601,519 in 2000 to $17,170,957 in 2001. Capital expenditures were utilized primarily for drilling activities in E&P Americas. Cash Flows Cash provided by or used in operations decreased from an inflow of $5,317,847 for 2001 to an outflow of $14,582,896 for 2002. Net loss for the period ended December 31, 2002 contributed to $10,082,509 of cash outflow. The Company's net cash flows provided from investing activities increased from net outflows of $16,030,140 for 2001 to a net inflow of $4,294,959 for 2002. The change is the net of cash inflows from the sale of our interests in the Potash Field, Yorba Linda and other real estate properties offset by the acquisition cost of the Vintage properties and current year capital expenditures. The Company's net cash provided by financing activities increased by 79% or $4,940,517 from $6,296,697 for 2001 compared to net cash provided by financing activities of $11,227,214 for 2002. The increase of $4,940,517 is primarily a result of the Company's net proceeds from notes payable issued. Liquidity and Capital Resources The working capital deficit at December 31, 2002 of $14,928,691 decreased by $35,426,625 from a working capital deficit of $50,355,316 at December 31, 2001. Current assets increased by $453,039 from $7,389,081 at December 31, 2001 to $7,842,120 at December 31, 2002 which includes an increase of $939,277 in cash and cash equivalents from $422,103 at December 31, 2001 to $1,361,380 at December 31, 2002. The increase in the cash balance, as well as current assets is due primarily to the effect of the sale of non-core assets that had been earmarked for divestiture in accordance with the Company's restructuring plan announced in March 2002, Other changes include an increase in receivables and a decrease in inventories from $3,618,368 and $1,796,520 respectively at December 31, 2001 to $3,760,613 and $1,363,506, respectively, at December 31, 2002. Other changes included a decrease in other current assets of $655,469 from $1,552,090 at December 31, 2001 to $896,621 at December 31, 2002 mostly as a result of payment of notes receivables from both a third party and a related party. Current liabilities decreased $34,973,586 from $57,744,397 at December 31, 2001 to $22,770,811 at December 31, 2002 as a result of payment of loans to the Bank of Texas ($12,400,000) and to GMAC ($5,000,000 current portion) in addition to a decrease in accounts payable and accrued expenses of $10,653,457 from $23,751,354 at December 31 2001 to $13,097,897 at December 31, 2002 as a result of management's concerted effort to reduce aged outstanding liabilities. Although the Company decreased its working capital deficit by $35,426,625 from December 2001, the Company did continue to experience certain liquidity issues. However, as discussed in Item 1 - "Financing & Debt Restructuring Activities", the Company placed $20 million with an institutional investor through a 2-year secured credit facility. 29 In March 2003, the Company amended, with certain retrospective effects, the terms of its loan agreement, and it borrowed additional $20 million through its collateral agent by issuing 2-years promissory notes. From these proceeds, the Company paid $4.7 million to Bank of Texas and $4.1 million to IPH to retire their respective loans, and the balance, in addition to closing costs and working capital, will fund a portion of the Company's $15 million capital expenditure program for 2003. Of the $20 million, $13.5 million bears interest at a variable rate of Libor + 6.25% or 8.25%, whichever is greater, while the balance $6.5 million bears interest at a fixed rate of 9.25%. The Company paid a 4.25% closing fee, and the placement resulted in increase by approximately $10 million to the Company's total debt. See Note 9,(d)to the consolidated financial statements. The following discussion of our liquidity and capital resources is on a consolidated basis, noting the uses and contributions of our consolidated entity. The Company's growth is focused on organic production increases that are strategic and in accordance with our business plan. Historically, GREKA has relied on cash flow from operations to finance operational capitalized expenditures. In 2002, GREKA had expended $20,297,655 for its capitalized expenditures. For 2003, GREKA has budgeted $15 million for its discretionary capitalized expenditures. Factors affecting actual expenditures and investments include availability of capital and suitable investment opportunities, market volatility and economic trends. The anticipated sources of funds for such growth opportunity are cash flow from operations and external financings. Further, GREKA intends to achieve the following: . We have embarked on a complete restructuring of all our long-term and maturing debt. The debt restructuring scheduled during the second quarter is intended to payoff all remaining aged trade debt, provide availability for continued development within the Integrated Operations' business plan, continued development of our interests in China, and working capital. . Utilize cash on hand to implement an aggressive drilling program in the second and third quarters of 2003. . 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, increasing the equity oil and gas production as well as new gas treatment facilities. . Continue to acquire assets to enhance the benefit of integrated operations that collectively provide for low cost operating expenses and high cash flow. For an analysis of certain contractual and commercial obligations in 2002 and thereafter, see "Disclosures about Contractual Obligations and Commercial Obligations and Certain Investments", shown below. The following table reflects the contractual cash obligations and other commercial commitments in the respective periods in which they are due. 30
Total Amounts Less than Contractual Obligations Committed 1 Year 1-2 Years 3-4 Years Thereafter - ----------------------- --------- ------ --------- --------- ---------- (Thousands of Dollars) Debt $ 57,930 $ 9,673 $ 48,257 -- $ -- Operating Leases 355 216 137 2 -- ------------------------------------------------------------- Total Contractual Cash Obligations $ 58,285 $ 9,889 $ 48,394 $ 2 $ -- =============================================================
In March 2003, the Company borrowed an additional $20 million, by issuing 2-year promissory notes. Out of the total proceeds of $ 20 million, $8.8 million was used to repay the current portion of long-term debt (Bank of Texas and IPH), with the remaining balance to be used to fund a portion of the Company's 2003 capital expenditures and for working capital requirements. The Company's continuation as a going concern is dependent upon its ability to successfully establish the necessary financing arrangements and implement our strategies consistent with its restructuring plans and successful 2003 capital expenditure program. Item 7A. Quantitative and Qualitative Disclosures About Market Risk To some extent, at December 31, 2002, the Company's operations were exposed to market risks primarily as a result of changes in commodity prices and interest rates. The Company does not use derivative financial instruments for speculative or trading purposes. Interest Rate Risk - The Company is exposed to the impact of interest rate changes. The Company has approximately $3.3 million outstanding under its Revolving credit agreement. Changes in the interest rate on such debt are deemed not be material to the financial position of the Company. In addition, the Company issued $25 million in senior notes and $5 million in senior subordinated notes with an initial interest of 15% and 21% per year, respectively. The interest rates payable are adjusted downward based on the Company achieving certain financial targets and could result in a minimum interest of 11% and 17% for the senior and subordinated notes, respectively. The Company did not achieve these targets as of December 31, 2002. Commodity price risk - The Company is subject to the market risk associated with changes in commodity prices of the underlying crude oil and refined products. Credit Risk - Financial instruments which potentially subject the Company to credit risk consist principally of trade receivables. Concentration of credit risk with respect to trade receivables is mitigated by the stability, longevity and financial soundness of the Company's customers. Although four customers accounted for more than 10% each of the Company's sales, these customers are not currently considered a credit risk since most of their sales are to funded city, state or federal government projects. Inflation GREKA does not believe that inflation will have a material impact on GREKA's future operations. 31 Critical Accounting Policies and Use of Estimates Use of Estimates. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our most significant estimates involves the assessment of the amount of proved natural gas and oil reserves and the estimate of future development and plug and abandonment costs. Actual results could differ from those estimates. Full Cost Accounting - The Company uses the full cost method to account for our natural gas and oil properties. Under full cost accounting, all costs incurred in the acquisition, exploration and development of natural gas and oil reserves are capitalized into a "full cost pool". Capitalized costs include costs of all unproved properties, internal costs directly related to our natural gas and oil activities. The Company amortizes these costs using a unit-of-production method. Greka computes the provision for depreciation, depletion and amortization quarterly by multiplying production for the quarter by a depletion rate. The depletion rate is determined by dividing our total unamortized cost base by net equivalent proved reserves at the beginning of the quarter. Unevaluated properties and related costs are excluded from our amortization base until a determination is made as to the existence of proved reserves. The amortization base includes estimates for future development costs, as well as future abandonment and dismantlement costs. Estimates of proved reserves are key components of our depletion rate for natural gas and oil properties and our full cost ceiling test limitation. See Note 13 to the consolidated financial statements, "Supplemental Oil and Gas Information". Because there are numerous uncertainties inherent in the estimation process, actual results could differ from the estimates. Inventories - The Company values its inventory on the weighted average cost method. The weighted average cost method is considered the preferable method because the primary inventorable cost at the refinery is crude oil for which the price can fluctuate significantly. The weighted average method balances the impact of short term fluctuations in crude oil pricing on the Company's refinery inventory levels. Recent Accounting Pronouncements A summary of the recent accounting pronouncements, issued by the Financial Accounting Standards Board ("FASB"),that may affect the Company are presented below. The Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. SFAS No. 142, "Goodwill and Other Intangible Assets", addresses accounting for the acquisition of intangible assets and accounting for goodwill and other intangible assets after they have been initially recognized in the financial statements. We do not currently have goodwill or other similar intangible assets' therefore, the adoption of the new standard on January 1, 2002, has not had a material effect on our consolidated financial statements. SFAS No. 143, "Accounting for Asset Retirement Obligations," addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 became effective on January 1, 2003 and early adoption is encouraged. SFAS No. 143 requires that the fair value of a liability for an asset's retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded 32 amount, a gain or loss is recognized. Currently, the Company includes estimated future costs of abandonment and dismantlement in its full cost amortization base and amortizes these costs as a component of its depletion expense. The Company is continuing to revise its calculation of the impact the new standard will have on the consolidated financial statements and the Company does not believe there will be a material impact to the consolidated financial statements. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," became effective on January 1, 2002, and addresses accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed Of" and Accounting Principles Board ("ABP") Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 retains the fundamental provisions of SFAS NO. 121 and expands the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The standard had no impact on the consolidated financial statements for the year ended December 31, 2002. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds the provisions of SFAS No. 4 that require companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS No. 145 related to classification of debt extinguishment are effective for fiscal years beginning after May 15, 2002. The provisions of SFAS No. 145 related to lease modifications are effective for transactions occurring after May 15, 2002. The Company early adopted the provision of SFAS No. 145, as permitted, with respect to the classification of gains or losses from debt extinguishment. In 2002 the Company recorded approximately $265,000 of gain on extinguishment of debt as "other income". In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for costs associated with the exit or disposal of an activity be recognized when the liability is incurred. This statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The FASB has issued SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As of December 31, 2002, the Company accounts for stock-based employee compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. 33 In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees", which elaborates on the disclosures to be made in interim and annual financial statements of a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing a guarantee. Initial recognition and measurement provisions of the Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Under this Interpretation, at the inception of guarantees issued or modified after December 31, 2002, we will record the fair value of the guarantee as a liability, with the offsetting entry being recorded based on the circumstances in which the guarantee was issued. The Company does not have any third party guarantees outstanding other than certain guarantees issued in connection with the Company's debt. Such debt is recorded on the Consolidated Balance Sheet at December 31, 2002. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51". This Interpretation requires that the primary beneficiary in a variable interest entity consolidate the entity even if the primary beneficiary does not have a majority voting interest. The consolidation requirements of this Interpretation are required to be implemented for any variable interest entity created on or after January 31, 2003. In addition, the Interpretation requires disclosure of information regarding guarantees or exposures to loss relating to any variable interest entity existing prior to January 31, 2003 in financial statements issued after January 31, 2003. We do not believe that this Interpretation will have a material effect on our financial condition or results of operations. Item 8. Financial Statements Please see accompanying Index to Financial Statements and Schedule commencing on page F-1. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures In May 2001, the Company engaged Hein + Associates LLP to replace Arthur Andersen LLP as its independent public accountants to audit its consolidated financial statements for the year ending December 31, 2001. Refer to the Company's Form 8-K filed on May 21, 2001. In December 2001, the Company appointed Deloitte & Touche LLP to replace Hein + Associates LLP as its independent public accountants to audit its consolidated financial statements for the year ending December 31, 2001. Refer to the Company's Form 8-K filed on January 3, 2002. 34 PART III Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act The directors and executive officers of GREKA at December 31, 2002 are as follows: Name Since Age Positions - ----- --- --------- Randeep S. Grewal 38 Chairman of the Board, Chief Executive September 1997(1) Officer and President, Class A Director Dr. Jan F. Holtrop 67 Class B Director September 1997(2) George G. Andrews 77 Class B Director July 1998(3) Dai Vaughan 63 Class C Director March 1999(4) Kenton D. Miller 50 Class C Director October 2000(4) Brent E. Stromberg 58 Vice President-Operations December 2001 Susan M. Whalen 41 Vice President-Asset Management, Secretary August 2001 Richard "Sam" R. Lembcke 66 Vice President-Development December 2001 Max A. Elghandour 52 Chief Financial Officer August 2001 (1) term as Director expires 2004 (2) term as Director expires 2003 (3) deceased March 2003 (4) term as Director expires 2005 Randeep S. Grewal. Since September 1997, Mr. Grewal has served as our Chairman of the Board, Chief Executive Officer and President. From April 1997 to September 1997, Mr. Grewal served as Chairman and Chief Executive Officer for Horizontal Ventures, Inc., an oil and gas horizontal drilling technology company that became a subsidiary of our predecessor in September 1997. From 1993 to 1996, Mr. Grewal was the Corporate Vice President for the Rada Group with principal responsibilities for its global expansion and related operations. He has also been involved in various joint ventures, acquisitions, mergers and reorganizations since 1986 in the United States, Europe and the Far East within diversified businesses. Mr. Grewal has a Bachelor of Science degree in Mechanical Engineering from Northrop University. Dr. Jan Fokke Holtrop. Dr. Holtrop has been a Class B Director of GREKA since September 1997. Since 1989 he has been a senior Production Technology professor at Delft University of Technology within the Faculty of Petroleum Engineering and Mining in The Netherlands. Prior to Delft University, he served in various positions within the Shell Oil Company where he started his career in 1962. This includes mining engineering, reservoir engineering and petroleum engineering field work in at least 14 different countries, as well as deep sea 35 drilling, coal production and coal exploration operations, well technology research, and well design, drilling and production operations. Dr. Holtrop has more than 40 years of experience within the oil and gas exploration, drilling and production industry with a global hands-on background. Dr. Holtrop has a Ph.D. and a MSC in Mining Engineering from Delft University of Technology. George G. Andrews. Mr. Andrews became a Class B Director of GREKA in July 1998 and served on GREKA's Board until he passed away in March 2003. He had been a consultant and private investor since his retirement from the oil and gas industry in 1987. From 1982 until 1987 he was employed as Corporate Vice President of Intercontinental Energy Corporation of Englewood, Colorado and directed the company's land acquisition, lease and management operations. Between June 1981 and November 1982, Mr. Andrews was Vice President of Shelter Hydrocarbons, Inc. of Denver, Colorado where he directed all land management and operation procedures. From 1979 to June of 1981, Mr. Andrews was Senior Landman for the National Cooperative Refinery Association in Denver, Colorado. Mr. Andrews obtained his B.S. degree in 1947 from the University of Tulsa. Kenton D. Miller. In October 2000, Mr. Miller became a Class C Director of GREKA. Since 1991, Mr. Miller has maintained a private consulting practice specializing in management advisory services for a diverse group of petroleum related companies. His consulting services are oriented to improving financial performance for clients utilizing the combination of financial accounting with operations principles and providing assistance with strategic acquisitions or divestitures. Mr. Miller has 30 years of oil and gas experience in reservoir engineering, field operations and management, primarily with Ladd Petroleum Company, BP Amoco and Cities Service Oil Company. His management experience includes the successful drilling of the first commercial horizontal well in Oklahoma and the lead engineering of the early Beaufort Sea exploratory wells drilled. Mr. Miller has been a Registered Professional Petroleum Engineer since 1984 and a Certified Public Accountant since 1994. He has a Bachelor of Science in Petroleum Engineering from the University of Tulsa. Dai Vaughan. Mr. Vaughan has been a Class C Director of GREKA since March 1999. He has been an independent management consultant since 1994 with concentrated experience in business plan development, implementation, and business turn-arounds. From 1985 until 1994, he was with Continental Airlines, most recently as Manager of Aircraft Acquisition. Mr. Vaughan has served in numerous positions in his 44 year career in the airline industry with Pan American Airlines, Eastern Airlines and finally Continental Airlines, including Systems Engineering, Aircraft Maintenance and Aircraft Acquisition. Mr. Vaughan received a HNC degree (B.S. equivalent) in Electrical Engineering. Brent E. Stromberg. Mr. Stromberg joined us in May 1999 as General Manager - - Refinery Operations and in March 2000 was appointed Vice President -- Integrated Operations in Santa Maria, California. He was appointed Vice President-Downstream Operations in December 2001 and Vice President-Operations in July 2002. Mr. Stromberg's experience of 19 years in the management of crude oil operations includes 18 years with Petro Source Corporation/Crown Asphalt in Salt Lake City. From 1981 to 1999, he served in several management positions, including Santa Maria Project Manager, Transportation Manager, and Motor Gasoline Blending and Marketing Manager. Mr. Stromberg received a Bachelor of Arts in Business Management and a Masters in Business Administration Degree from the University of Utah. Susan M Whalen. Ms. Whalen served as General Counsel for Saba Petroleum Company from 1997 until 1999, when Saba was acquired by GREKA. Following the acquisition she served as our Vice President of Legal & Corporate Affairs and as Corporate Secretary. In October 2000 she was appointed Corporate Liaison to our Integrated Operations division and in August 2001 she was appointed our Vice President of Corporate Affairs. In July 2002, Ms. Whalen was appointed Vice President-Asset Management. Prior to joining Saba in 1997, Ms. Whalen was involved in various niche-market product developments within the retail industry for 10 years. Ms. Whalen received her J.D. degree from Western State University - - College of Law. 36 Richard "Sam" R. Lembcke. Mr. Lembcke joined us in February 2000 as Vice President of the E&P Americas division and, after his appointment in December 2001 as Vice President-Upstream Operations, he was appointed as Vice President-Business Development in July 2002. Mr. Lembcke possesses vast experience in the oil and gas industry that spans over 40 years. Throughout his tenure in the industry, he has held a series of positions with increasing responsibility, including President from 1996 to 2000 of Gulf Tech, a Louisiana focused oil and gas company, President and General Manager of Ultramar Oil & Gas Limited in Houston, Texas from 1989 to 1992, and as Vice President - Manager of Operations from 1983 to 1989. From 1978 to 1983, Mr. Lembcke served as Executive Vice President and Director for Marion Drilling Services Company. From 1960 to 1978, he served in several positions for Union Oil Company of California. Further, he has served as past President of the American Petroleum Institute and Society of Petroleum Engineers. Mr. Lembcke received a Bachelor of Science degree in Petroleum Engineering from the University of Oklahoma. Max A. Elghandour. Mr. Elghandour joined us in May 2001 as Chief Financial Officer. He has over 20 years of financial and operational experience in the oil, gas, and chemical industries. Prior to joining us, Mr. Elghandour spent 16 years as a member of the senior financial team at Elf Aquitaine, now Totalfinaelf, in progressive functional and engaging capacities in the United States, France and the Middle East. He has a Bachelor of Science in Accounting from Saint Francis College and is a Certified Public Accountant. He is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. During 2002, the Board of Directors met twelve times. No director attended less than 75% of the meetings. There are no family relationships among the directors. There are no arrangements or understandings between any director and any other person pursuant to which that director was elected. During the past five years, there have been no petitions under the Bankruptcy Act or any state insolvency law filed by or against, nor have there been any receivers, fiscal agents, or similar officers appointed by any court for the business or property of any of GREKA's directors or executive officers, or any partnership in which any such person was a general partner within two years before the time of such filing, or any corporation or business association of which any such director or executive officer was an executive officer within two years before the time of such filing. During the past five years, no incumbent director or executive officer of GREKA has been convicted of any criminal proceeding (excluding traffic violations and other minor offenses) and no such person is the subject of a criminal prosecution which is presently pending. Committees At December 31, 2002, GREKA's Audit Committee, whose charter was adopted in June 2000 and amended in October of 2002, consists of Messrs. Miller, Andrews and Vaughan, and its Compensation Committee consists of Messrs. Grewal, Vaughan and Andrews. The Board of Directors selects director nominees and will consider suggestions by shareholders for names of possible future nominees delivered in writing to the Secretary of GREKA on or before November 30th in any year. The Audit Committee met three times during 2002, and the Compensation Committee met twice during 2002. Section 16(a) Beneficial Ownership Reporting Compliance Based solely on a review of reports filed with GREKA, all directors, executive officers and beneficial owners of more than five percent of GREKA common stock timely filed all reports regarding transactions in GREKA's securities required to be filed during the last fiscal year by Section 16(a) of the Securities Exchange Act of 1934, except one Form 4 for Mr. Stromberg. 37 Item 11. Executive Compensation The following summary compensation table sets forth in summary form the compensation received during each of GREKA's last three completed fiscal years by the executive officers of GREKA, except no disclosure is required for those earning gross compensation less than $100,000. Executive Compensation
Summary Compensation Table Annual Compensation Long Term Compensation ----------------------- --------------------------- Restricted Securities Name and principal stock awards underlying All other position Year Salary($) Bonus($)(1) ($) options/SARS compensation - ------------------ ---- --------- ----------- ------------ ------------ ------------ Randeep S. Grewal, 2002 $402,101 $6,522 -- -- $284,144(2) Chairman and Chief 2001 $353,777 $8,844 -- -- $ 12,000(3) Executive Officer 2000 $290,269 -- -- 410,000 $ 12,000(3) Brent E. Stromberg, 2002 $104,056 $6,522 -- -- -- VP-Operations 2001 $ 97,386 $8,844 -- -- -- Susan M. Whalen, 2002 $109,144 $6,522 -- -- -- VP-Asset Management 2001 $ 93,445 $8,844 -- -- -- Richard R. Lembcke, 2002 $118,687 $6,522 -- -- -- VP-Development 2001 $114,471 $8,844 -- -- -- Max A. Elghandour, 2002 $160,000 -- -- -- -- Chief Financial Officer 2001 $103,385 -- -- 45,000 --
(1) The bonus paid to the executive officers of GREKA in 2001 and 2002 was their participation in the Company's NPSP. The executive officers of GREKA were not paid any bonuses during 2000. (2) Auto expense allowance and life-long valuation of 2% overriding royalty from acquired properties. (3) Auto expense allowance. No other form of compensation was paid during 2000, 2001 or 2002. No other executive officer or director of GREKA received total compensation in excess of $100,000 during the last three fiscal years. At December 31, 2002, GREKA had authorized 1.4 million options to acquire shares of common stock of GREKA, of which none were granted in 2002, to employees, directors and consultants of the Company. During 2002, a total of 2,000 options terminated through attrition and no options had been exercised, leaving the total option grants outstanding as of December 31, 2002 at 1,106,000 options. 38 Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values Value of Number of unexercised Shares unexercised in-the-money acquired options/SARS options/SARS on Value at FY-end(#) at FY-end($) exercise realized exercisable/ exercisable/ Name (#) ($) unexercisable unexercisable - ---- -------- -------- -------------- ------------- Randeep S. Grewal 0 - 520,000/ 0 $0/$0 Brent E. Stromberg 0 - 50,000/ 25,000 $0/$0 Susan M. Whalen 0 - 35,000/ 10,000 $0/$0 Richard R. Lembcke 0 - 50,000/ 25,000 $0/$0 Max A. Elghandour 0 - 15,000/ 30,000 $0/$0 Employment Contracts and Termination Agreements On September 9, 1997, GREKA entered into a five-year employment agreement with Randeep S. Grewal. This agreement was amended on October 14, 1998, and on November 3, 1999 the Board of Directors adopted an amended and restated employment agreement for Mr. Grewal (the "Restated Agreement"). Under the terms of the Restated Agreement, Mr. Grewal's annual salary is $287,500 subject to an annual increase effective on the anniversary date. Mr. Grewal participates in GREKA's benefit plans and is entitled to bonuses and incentive compensation as determined by the board of directors of GREKA. The Restated Agreement also allows Mr. Grewal to receive an assignment of a 2% overriding royalty of all oil and gas properties of GREKA and to receive fringe benefits which include an automobile allowance of $1,000 per month. Under the original agreement, 31,500 shares of GREKA common stock were issued to Mr. Grewal. The term of the Restated Agreement is through the fifth anniversary of December 31, 1999; however, it automatically rolls over so that it is a minimum of three years unless sixty days prior to any anniversary date the Company notifies Mr. Grewal that the change of control period shall not be extended. A change of control termination clause was added which is intended to deter hostile changes of control by providing a substantial termination payment should Mr. Grewal terminate his employment or be terminated as a result of a change of control. The Restated Agreement is terminable for cause or by the death or disability of Mr. Grewal. In addition, the Restated Agreement may be terminated by Mr. Grewal in the event of any diminution by GREKA in Mr. Grewal's position, authority, duties or responsibilities. Upon termination of the Restated Agreement by GREKA for any reason other than for cause, death or disability, or upon termination of the Restated Agreement by Mr. Grewal in the event of any diminution by GREKA in Mr. Grewal's position, authority, duties or responsibilities, GREKA is obligated to pay within 30 days after the date of termination: (a) Mr. Grewal's base salary through the date of the severance period, (b) Mr. Grewal's base salary for the balance of the term of the agreement if the date of termination is within the first five years of the employment agreement (base salary is the salary rate in effect at the date of termination), (c) the annual bonus paid to Mr. Grewal for the last full fiscal year during the employment period, and (d) all amounts of deferred compensation, if any. Director Compensation Each director, who is not an employee of GREKA, is reimbursed for expenses incurred in attending meetings of the board of directors and related committees. At December 31, 2002, GREKA had four outside directors. No compensation was paid to any outside director during fiscal 2002 and none is planned for the immediate future. 39 GREKA has no knowledge of any arrangement or understanding in existence between any executive officer named above and any other person pursuant to which any such executive officer was or is to be elected to such office or offices. All officers of GREKA serve at the pleasure of the board of directors. No family relationship exists among the directors or executive officers of GREKA. There is no person who is not a designated officer who is expected to make any significant contribution to the business of GREKA. Any officer or agent elected or appointed by the board of directors may be removed by the board whenever in its judgment the best interests of GREKA will be served thereby without prejudice, however, to any contractual rights of the person so removed. Future Transactions All transactions between GREKA and an officer, director, principal stockholder or affiliate of GREKA will be approved by a majority of the uninterested directors, only if they have determined that the transaction is fair to GREKA and its shareholders and that the terms of such transaction are no less favorable to GREKA than could be obtained from unaffiliated parties. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table presents, as of March 17, 2003 the common stock ownership of each person known by GREKA to be the beneficial owner of five percent or more of GREKA's common stock, all directors and officers individually, and all directors and officers of GREKA as a group. Except as noted, each person has sole voting and investment power with respect to the shares shown. GREKA is not aware of any contractual arrangements or pledges of GREKA's securities which may at a subsequent date result in a change of control of GREKA. As of March 17, 2003, there were 4,951,451 shares of GREKA common stock issued and outstanding. Amount of Beneficial Ownership Name and Address of Beneficial Owner Common Stock(1) Percent of Class - ------------------- --------------- ---------------- Strong Capital Management, Inc. 511,388 10.33% Richard S. Strong 100 Heritage Reserve Menomonee Falls, WI 53051 Wynnefield Capital Management, LLC 346,300 6.99% 450 Seventh Avenue, Suite 509 New York, NY 10123 Randeep S. Grewal 782,500(2) 14.30% Chairman of the Board, Chief Executive Officer, and President 630 Fifth Avenue, Suite 1501 New York, NY 10111 Dr. Jan F. Holtrop 73,499(3) 1.47% Director Van Alkemadelaan 2596 AS The Hague The Netherlands George G. Andrews 95,250(4) 1.89% Director 7899 West Frost Drive Littleton, CO 80123 40 Name and Address of Beneficial Owner Common Stock(1) Percent of Class - ------------------- --------------- ---------------- Kenton D. Miller 41,000(5) * Director 212 F. 25th Street Tulsa, OK 47114 Dai Vaughan 70,000(6) 1.39% Director 2536 Waterstone Way Marietta, GA 30062 Brent E. Stromberg 76,900(7) 1.53% VP Operations 2801B Santa Maria Way Santa Maria, CA 93455 Susan M. Whalen 45,000(8) * VP Asset Management 2801B Santa Maria Way Santa Maria, CA 93455 Richard R. Lembcke 76,575(9) 1.52% VP Business Development 2801B Santa Maria Way Santa Maria, CA 93455 Max A. Elghandour 30,000(10) * Chief Financial Officer 630 Fifth Avenue, Suite 1501 New York, NY 10111 All directors and officers as a group 1,290,724(11) 21.70% (9 persons) * Less than l% (1) Rule l3d-3 under the Securities Exchange Act of 1934 involving the determination of beneficial owners of securities, includes as beneficial owners of securities any person who directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has, or shares, voting power and/or investment power with respect to such securities, and any person who has the right to acquire beneficial ownership of such security within sixty days, including through the exercise of any option, warrant or conversion of a security. (2) Includes options presently exercisable to acquire 520,000 shares of GREKA Energy common stock, and 262,500 shares of GREKA Energy common stock held individually by Mr. Grewal. (3) Includes options presently exercisable to acquire 50,000 shares of GREKA Energy common stock. (4) Includes options presently exercisable to acquire 90,000 shares of GREKA Energy common stock. (5) Consists of options presently exercisable to acquire 41,000 shares of GREKA Energy common stock. (6) Consists of options presently exercisable to acquire 70,000 shares of GREKA Energy common stock. 41 (7) Includes options presently exercisable to acquire 75,000 shares of GREKA Energy common stock. (8) Consists of options presently exercisable to acquire 45,000 shares of GREKA Energy common stock. (9) Includes options presently exercisable to acquire 75,000 shares of GREKA Energy common stock. (10) Includes options presently exercisable to acquire 30,000 shares of GREKA Energy common stock. (11) Includes options presently exercisable to acquire 996,000 shares of GREKA Energy common stock held by directors and executive officers of GREKA Energy. Item 13. Certain Relationships and Related Transactions During the last three fiscal years, there have been no material transactions between GREKA and any officer, director, nominee for election as director, or any shareholder owning greater than five percent (5%) of GREKA's outstanding shares, nor any member of the above referenced individuals' immediate family, except for options granted to and financing transactions with IPH (See Item 5 - "Market for Common Equity and Related Stockholder Matters"; Item 1 - "Description of Business, Financing & Debt Restructuring Activities", Mr. Grewal's restated employment agreement (See Item 11 - "Executive Compensation") and the Settlement Agreement and Release entered into with Capco dated August 17, 2000, and as set forth below. The Company had a non-interest bearing note receivable at December 31, 2000 from Randeep S. Grewal, the Company's Chairman of the Board and Chief Executive Officer of $750,000 relating to an exercise of stock options on December 26, 2000. This note was repaid on January 9, 2001. The Company had a non-interest bearing note receivable at December 31, 2001 from Randeep S. Grewal, the Company's Chairman of the Board and Chief Executive Officer of $500,000 which was all due and payable on April 30, 2002. This note has been repaid in full. It is GREKA's policy that any future material transactions between it and members of its management or their affiliates shall be on terms no less favorable than those available from unaffiliated third parties. Item 14. Controls and Procedures Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of this report, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation. 42 Part IV Item 15. 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 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) 10.2 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) 10.3 First Amended and Restated Loan and Security Agreement dated November 30, 1999 by and among GMAC Commercial Credit LLC, Greka Integrated, Inc., Saba Realty, Inc. and Santa Maria Refining Company (filed as Exhibit 10.1 to the GREKA Report on Form 8-K filed February 18, 2000 and incorporated by reference herein) 10.4 Letter Agreement dated December 13, 1999 by and among GMAC Commercial Credit LLC, Greka Integrated, Inc., Saba Realty, Inc. and Santa Maria Refining Company (filed as Exhibit 10.2 to the GREKA Report on Form 8-K filed February 18, 2000 and incorporated by reference herein) 10.5 Settlement Agreement and Release by and among GREKA and Randeep S. Grewal and Capco Resources, Ltd., Capco Energy, Inc., and Ilyas Chaudhary dated August 17, 2000 (filed as Exhibit 10.8 to the Post Effective Amendment No. 1 to the registration statement on Form S-2, file no. 333-45352, and incorporated by reference herein) 10.6 First Amendment To First Amended And Restated Loan And Security Agreement dated February 22, 2001 by and among GMAC Commercial Credit LLC, Greka Integrated, Inc., Saba Realty, Inc. and Santa Maria Refining Company (filed as Exhibit 10.30 to the GREKA Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and incorporated by reference herein) 43 Exhibit No. Exhibit Description - ----------- ------------------- 10.7 Loan Agreement dated as of March 1, 2001 among Greka AM, Inc. as borrower, the Company as guarantor, and the Bank of Texas, National Association (filed as Exhibit 10.31 to the GREKA Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and incorporated by reference herein) 10.8 Amended and Restated Loan and Security Agreement between Greka AM, Inc. as borrower and International Publishing Holding, Inc. as Lender dated October 1, 2002 (filed as Exhibit 10.1 to the GREKA Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2002 and incorporated by reference herein) 10.9 Amendment No. 1 to Securities Purchase Agreement between GREKA Energy Corporation as borrower, certain of its affiliates as guarantors, and Guggenheim Investment Management, LLC as collateral agent dated October 28, 2002 (filed as Exhibit 10.2 to the GREKA Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2002 and incorporated by reference herein) 10.10 Stock Purchase Agreement between P.I. Holdings No. 3, Inc., P.I. Holdings No. 4, and the Company dated September 12, 2002; First Amendment thereto dated September 27, 2002; and Second Amendment thereto dated October 28, 2002* 10.11 Amendment No. 2 to Securities Purchase Agreement between GREKA Energy Corporation as borrower, certain of its affiliates as guarantors, and Guggenheim Investment Management, LLC as collateral agent dated March 11, 2003** 10.12 Note Purchase Agreement between GREKA AM, Inc. as borrower, certain of its affiliates as guarantors, and Guggenheim Investment Management, LLC as collateral agent dated March 11, 2003** 10.13 Amendment No. 3 to Securities Purchase Agreement between GREKA Energy Corporation as borrower, certain of its affiliates as guarantors, and Guggenheim Investment Management, LLC as collateral agent dated March 21, 2003** 21.1 Subsidiaries of GREKA** 23.1 Consent of Netherland, Sewell & Associates, Inc.** 23.2 Consent of Ryder-Scott Company Petroleum Consultants** 23.3 Consent of Deloitte & Touche LLP** * Request for confidentiality pending. ** Filed herewith. (b) Reports on Form 8-K. During the fourth quarter of 2002, GREKA filed no reports on Form 8-K. 44 GREKA ENERGY CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Page ---- Consolidated Financial Statements of GREKA Energy Corporation Independent Auditors' Report........................................ F-2 Independent Auditors' Report (Predecessor Auditor) .................. F-3 Consolidated Balance Sheets as of December 31, 2002 and 2001......... F-4 Consolidated Statements of Operations for the years ended December 31, 2002, 2001, and 2000 ................................. F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001, and 2000 ..................... F-6 Consolidated Statements of Cash Flows for the years ending December 31, 2002, 2001, and 2000 .......................... F-7 Notes to Consolidated Financial Statements........................... F-8 Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2002.. A-1 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. F-1 INDEPENDENT AUDITORS' REPORT - ---------------------------- To the Board of Directors and Stockholders of Greka Energy Corporation: We have audited the accompanying consolidated balance sheets of Greka Energy Corporation and subsidiaries (the "Company") as of December 31, 2002 and 2001 and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. Our audit also included the 2002 and 2001 financial statement schedule listed in the Index as Schedule II. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the 2002 and 2001 financial statements based on our audits. The consolidated statements of operations, stockholders' equity, and cash flows and financial statement schedules for the year ended December 31, 2000 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and stated that such 2000 financial statement schedule, when considered in relation to the 2000 basic financial statements taken as a whole, presented fairly, in all material respects, the information set forth therein, in their report dated April 13, 2001, which also included an explanatory paragraph indicating that the Company, effective January 1, 2000, changed its accounting for inventory from the first in, first out method to the average cost method. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 2002 and 2001 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the 2002 and 2001 financial statement schedules, when considered in relation to the 2002 and 2001 basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ Deloitte & Touche LLP March 27, 2003 New York, New York F-2 Greka Energy Corporation dismissed Arthur Andersen LLP on May 21, 2001, and subsequently engaged Deloitte & Touche LLP as its independent auditors. The predecessor auditors' report appearing below is a copy of Arthur Andersen LLP's previously issued opinion dated April 13, 2001. Since Greka Energy Corporation is unable to obtain a manually signed audit report, a copy of Arthur Andersen's LLP's most recently signed and dated report has been included to satisfy filing requirements, as permitted under Rule 2-02 (e) of Regulation S-X. 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, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements and the schedule referred to below 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 financial statements referred to above present fairly, in all material respects, the financial position of GREKA Energy Corporation and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. As explained in Note 2 to the financial statements, effective January 1, 2000, the Company has changed its accounting for inventory from the first in, first out method to the average cost method. Our audits were 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 schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements, and in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP New York, New York April 13, 2001 F-3
GREKA ENERGY CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets As of December 31, ASSETS Current Assets 2002 2001 ------------ ------------ Cash and cash equivalents ................................ $ 1,361,380 $ 422,103 Accounts receivable trade, net of allowance for doubtful accounts of $451,581 and of $436,258, respectively .......................... 3,760,613 3,618,368 Inventories .............................................. 1,363,506 1,796,520 Other current assets ..................................... 896,621 1,552,090 Assets held for Sale ..................................... 460,000 -- ------------ ------------ Total Current Assets ............................ 7,842,120 7,389,081 ------------ ------------ Property and Equipment Investment in limestone property ......................... -- 3,675,973 Oil and gas properties (full cost method) ................ 46,361,062 46,928,312 Unevaluated oil and gas properties ....................... 5,014,703 7,347,113 Land ..................................................... 19,135,235 17,247,744 Plant and equipment ...................................... 22,764,807 29,823,908 ------------ ------------ 93,275,807 105,023,050 Less accumulated depreciation, depletion and amortization ........................................... (14,407,101) (15,557,669) ------------ ------------ Property and Equipment, net ...................................... 78,868,706 89,465,381 Other Assets ..................................................... 10,877,792 3,194,985 ------------ ------------ Total Assets ..................................................... $ 97,588,618 $100,049,447 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities 2002 2001 ------------ ------------ Accounts payable and accrued expenses .................... $ 13,097,897 $ 23,751,354 Current maturities of long-term debt and notes payable ... 9,672,914 33,993,043 ------------ ------------ Total Current Liabilities ....................... 22,770,811 57,744,397 Long term debt, net of current portion ........................... 47,664,622 9,139,395 Other Liabilities ................................................ 1,101,705 -- Commitments and Contingent Liabilities Stockholders' Equity Common stock, no par value, 50,000,000 shares authorized, 4,951,451 and 4,694,953, respectively shares issued and outstanding .......................... 44,404,253 43,112,523 Additional paid-in capital ............................... 1,676,604 -- Accumulated deficit ...................................... (20,029,377) (9,946,868) ------------ ------------ Total Stockholders' Equity ............................... 26,051,480 33,165,655 ------------ ------------ Total Liabilities and Stockholders' Equity........................ $ 97,588,618 $100,049,447 ============ ============ The accompanying notes are an integral part of these consolidated financial statements F-4 GREKA ENERGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations For The Years Ended December 31, 2002 2001 2000 ------------ ------------ ------------- Revenues ..................................................... $ 28,910,845 $ 40,755,282 $ 49,067,140 ------------ ------------ ------------ Operating(Income)and Expenses Production and product costs ......................... 16,258,337 24,781,938 25,199,620 Sales, general and administration .................... 9,182,828 8,274,183 7,194,521 Depreciation, depletion and amortization ............. 3,244,847 5,578,899 3,592,242 Impairment of long-lived assets ...................... 5,961,187 -- 1,881,856 Gain on sale of properties ........................... (3,959,746) -- -- ------------ ------------ ------------ Operating (Loss)Income ....................................... (1,776,608) 2,120,262 11,198,901 Other Income (Expense) Interest expense, net ................................ (9,423,521) (4,157,110) (4,535,174) Loss on sale of properties ........................... -- -- (991,439) Other income (expense), net .......................... 1,150,729 (5,540,196) -- ------------ ------------ ------------ Other expense, net .......................... (8,272,792) (9,697,306) (5,526,613) ------------ ------------ ------------ (Loss) Income Before Income Taxes and cumulative effect of change in accounting principle ............. (10,049,400) (7,577,044) 5,672,288 Provision for Income Tax ..................................... 33,109 36,500 361,964 ------------ ------------ ------------ (Loss) Income before cumulative effect of change in accounting principle ................................. (10,082,509) (7,613,544) 5,310,324 Cumulative effect of change in accounting principle .......... -- -- (853,110) ------------ ------------ ------------ Net (loss) income ............................................ $(10,082,509) $ (7,613,544) $ 4,457,214 ============ ============ ============ Net (loss) Income per Common Share - Basic Before cumulative effect of a change in accounting principle $ (2.11) $ (1.67) $ 1.17 ============ ============ ============ Cumulative effect of a change in accounting principle ........ -- -- $ (.17) Net (loss) Income per Common Share - Basic ................... $ (2.11) $ (1.67) $ 1.00 ============ ============ ============ Basic Shares ................................................. 4,767,566 4,555,255 4,475,985 Net (loss) Income per Common Share - Diluted Before cumulative effect of a change in accounting principle $ (2.11) $ (1.67) $ 1.17 Cumulative effect of a change in accounting principle ........ -- -- $ (.18) ------------ ------------ ------------ Net (loss) Income per Common Share - Diluted ................. $ (2.11) $ (1.67) $ .99 ============ ============ ============ Diluted Shares ............................................... 4,767,566 4,555,255 4,762,979 ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-5 GREKA ENERGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity For The Years Ended December 31, 2000, 2001, and 2002 Common Stock Accumulated Additional Shares Amount (Deficit) Paid in Capital Total ----------- ------------ ------------ --------------- ------------ Balance as of January 1, 2000 4,556,937 $ 37,261,043 $ 3,882,720) -- $ 33,378,323 Issuance of stock for secondary offering 543,375 6,350,377 -- -- 6,350,377 Issuance of stock for options and warrants 219,427 1,292,420 -- -- 1,292,420 Issuance of stock for conversion of debentures 43,534 470,000 -- -- 470,000 Repurchase of common stock (840,000) (5,737,116) -- -- (5,737,116) Stock dividend -- 2,907,818 (2,907,818) -- -- Net Income -- -- 4,457,214 -- 4,457,214 ------------ ------------ ------------ ------------ ------------ Balance as of December 31, 2000 4,523,273 42,544,542 (2,333,324) -- 40,211,218 ------------ ------------ ------------ ------------ ------------ Issuance of stock for options and warrants 25,000 208,125 -- -- 208,125 Issuance of stock for conversion of debentures 37,101 395,743 -- -- 395,743 Issuance of Stock for Assets 20,000 202,000 -- -- 202,000 Repurchase of common stock (25,000) (237,887) -- -- (237,887) Reconciliation with Transfer Agent(a) 114,579 -- -- -- -- Net Loss -- -- (7,613,544) -- (7,613,544) ------------ ------------ ------------ ------------ ------------ Balance as of December 31, 2001 4,694,953 43,112,523 (9,946,868) -- 33,165,655 ------------ ------------ ------------ ------------ ------------ Issuance of stock for conversion of debentures 255,466 1,291,730 -- -- 1,291,730 Reconciliation with Transfer Agent(a) 1,032 -- -- -- -- Issuance of stock options and warrants(b) -- -- -- $ 1,676,604 1,676,604 Net Loss -- -- (10,082,509) -- (10,082,509) ------------ ------------ ------------ ------------ ------------ Balance as of December 31, 2002 4,951,451 $ 44,404,253 $(20,029,377) $ 1,676,604 $(26,051,480) ============ ============ ============ ============ ============ (a) Relates to finalization of SABA acquisition and other stock related transactions reported by the Transfer Agent. (b) Relates to the effect of warrants and options issued to non-employees in connection with financing arrangements. The accompanying notes are an integral part of these consolidated financial statements. F-6 GREKA ENERGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 2002 2001 2000 ------------- ------------ ------------ Cash flows from operating activities Net (loss) Income ........................................ $(10,082,509) $ (7,613,544) $ 4,457,214 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation, depletion, and amortization .......................................... 3,244,847 5,578,899 3,592,242 Net loss on settlements of litigation .................... -- 2,166,613 -- Net gain on sale of properties ........................... (3,959,746) -- -- Impairment of long lived assets .......................... 5,961,187 -- -- Loss on sale of Canadian properties ...................... -- -- 991,439 Provision for doubtful accounts .......................... 15,323 -- 153,457 Other non-cash (income) expense .......................... (1,150,729) -- 90,000 Cumulative effect of a change in accounting principle ............................................ -- -- 853,110 (Increase) decrease in accounts receivable ............................................... (157,568) 1,708,996 (1,607,262) (Increase) decrease in other current assets ................. 1,401,119 (853,145) 1,750,336 (Increase) decrease in inventory ............................ 433,014 2,018,472 (528,612) (Increase) decrease in other assets ......................... (273,166) 1,343,416 (3,076,133) Increase (decrease) in accounts payable and accrued expenses ............................. (10,014,668) 968,140 4,998,790 ------------ ------------ ------------ Net cash provided by (used in) operating activities ..................................... (14,582,896) 5,317,847 11,674,581 ------------ ------------ ------------ Cash flows from investing activities: Purchases of oil and gas property and equipment .......... (20,297,655) (17,170,957) (13,601,519) Proceeds from sale of property and equipment ............................................. 24,344,838 890,817 571,000 Loan to related party ....................................... -- (500,000) -- Repayment of loan to related party .......................... 247,776 750,000 -- ------------ ------------ ------------ Net cash provided by (used in) investing activities ......... 4,294,959 (16,030,140) (13,030,519) ------------ ------------ ------------ Cash flows from financing activities: Repayments of notes payable ................................. (36,358,463) (16,124,689) (9,085,831) Proceeds of Loan ............................................ 51,600,000 27,348,007 13,026,468 Net increase(decrease) in revolver loan ..................... (649,623) (3,647,875) -- Net increase(decrease) in other loans ....................... 1,101,704 -- -- Payment of financing costs .................................. (2,912,899) (1,294,535) -- Proceeds from sale of stock, net of offering costs .......... -- -- 6,350,377 Repurchase of common stock .................................. -- (237,887) (5,737,116) Decrease in restricted cash ................................. -- -- 1,000,000 Exercise of options ......................................... -- 320,676 542,420 Bond redemption ............................................. (1,553,505) (67,000) -- ------------ ------------ ------------ Net cash provided by financing activities ................... 11,227,214 6,296,697 6,096,318 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ......................................... 939,277 (4,415,596) 4,740,380 Cash and cash equivalents: Beginning of year ........................................ 422,103 4,837,699 97,319 ------------ ------------ ------------ End of year .............................................. $ 1,361,380 $ 422,103 $ 4,837,699 ============ ============ ============ Cash paid for: Interest ................................................. $ 5,075,819 $ 3,402,206 $ 3,830,243 Income taxes ............................................. $ 114,106 $ -- $ 197,938 Non-cash financing and investing activities: Stock issued upon conversion of convertible debentures ................................ $ 1,291,731 $ 395,743 $ 470,000 Issuance of stock options and warrants ...................... $ 1,676,604 $ 208,125 $ 1,292,420 Royalty to related party offset against loan to related party ...................................... $ 252,224 $ -- $ -- The accompanying notes are an integral part of these consolidated financial statements. F-7
GREKA Energy Corporation Notes to Consolidated Financial Statements December 31, 2002 NOTE 1 - DESCRIPTION OF BUSINESS GREKA Energy Corporation, a Colorado corporation ("GREKA" or the "Company") is an independent integrated energy company. The Company's oil and gas production, exploration and development activities are concentrated in its properties in California where the Company also owns and operates an asphalt refinery. The Company supplies its asphalt refinery with equity oil, which is the crude oil the Company produces from its surrounding heavy crude oil reserves, and it also utilizes crude oil purchased from third party producers. GREKA believes that its vertically integrated operations reduces its exposure to material volatile swings in crude oil prices. Historically the Company has also engaged in oil and gas exploration, development and production from its properties in Louisiana, Texas and New Mexico which operation has substantially been sold as part of its strategic, internal reorganization. In addition, GREKA has interests in coalbed methane properties and production sharing contracts in China. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our most significant estimates involves the assessment of the amount of proved natural gas and oil reserves, the estimate of future development and plug and abandonment costs. Actual results could differ from those estimates. Effective December 31, 2000, the Company declared a 5% stock dividend for issuance of .05 share of common stock for each share of common stock issued and outstanding to holders of the Company's common stock as of December 31, 2000. The fair market value of the dividend has been reflected as a charge to retained earnings in the accompanying consolidated financial statements. The accompanying financial statements have been adjusted to reflect the additional shares issued in connection with this stock dividend as if such shares had been outstanding for all periods presented. Certain reclassifications have been made to prior year financial statements to conform to the current year presentation. Cash and cash equivalents - The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Fair value of financial instruments - The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, other current liabilities and notes payable, approximate fair value because of the short maturity of these items. These fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment, and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. Accounts receivable - The Company provides an allowance for uncollectible receivables when it is determined that collection is doubtful. Substantially all of the Company's subsidiaries' trade receivables for 2002 and 2001 are from sales of asphalt and related products and oil and gas billings, including those to joint interest property owners. F-8 Inventories - Inventories are stated at the lower of cost or market. The Company's accounting method for inventory was changed from the first in, first out (FIFO) method to the weighted average cost method effective January 1, 2000. The weighted average cost method is preferable because the primary inventoriable cost at the refinery is crude oil for which the price can fluctuate significantly. The weighted average cost method balances the impact of short term fluctuations in crude oil pricing on the Company's refinery inventory levels. The Company recorded the effect of this change of $853,110 as a cumulative effect of a change in accounting principle as of January 1, 2000. 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 Western and Southern United States. Generally, the Company's subsidiaries do not require collateral for its accounts receivables. Four customers exceeded individually more than 10 percent of the Company's sales of North American refinery production during 2002, namely FAMM, Lawson, Union and Granite which accounted for approximately 18%, 20%, 20% and 18%, respectively, of such sales and approximately 2.6%, 22.6%, 5.8%, and 7.1%, respectively, of the related receivable balance as of December 31, 2002. Other than production from the Company's Integrated Operations Division which is transported to the Company's refinery, three customers exceeded individually more than 10 percent of the Company's sales of North American oil and gas production during 2002, namely Tosco, Adams Resources and Plains Marketing, L.P. which accounted for 51%, 12% and 15%, respectively, of such sales. Property and equipment - Property and equipment is stated at cost. The Company follows the "full-cost" method of accounting for oil and gas property and equipment costs. Under this method, all costs incurred in the acquisition, exploration, and development of oil and gas reserves are capitalized. Such costs include lease acquisitions, geological and geophysical services, drilling, completion, equipment, and certain general and administrative costs directly associated with acquisition, exploration, and development activities. Sales, 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 in a cost center. 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, are credited to oil and gas property costs to the extent they do not represent reimbursement of Sales, 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 substantially 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 $5.0 million and $7.3 million at December 31, 2002 and 2001, respectively) not being amortized 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. The unamortized cost of oil and gas properties capitalized, 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 estimated fair value of unproved properties, adjusted for related income tax effects ("Ceiling Limitation"). F-9 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. Depreciation for all other property and equipment is provided over estimated useful lives using the straight-line method of depreciation. Renewals and betterments are capitalized when incurred. Costs of maintenance and repairs that do not improve or extend asset lives are charged to expense as incurred. 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. Revenue recognition - Revenue from sale of oil, gas and asphalt production is recognized in the period in which title to the products is transferred, which is generally considered to have occurred upon delivery of the products. 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 income tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities using enacted income tax rates expected to be in effect for the year in which the differences are expected to reverse. The primary differences between financial reporting and income tax reporting relate to the availability of net operating loss carryforwards, and the use of accelerated methods of depreciation for income tax purposes. A full valuation allowance is recorded against the Company's net deferred tax asset due to uncertainty regarding its realization as it is more likely than not that the deferred tax assets will not be realized. Earnings per share - Basic earnings(loss) per share has been computed using the weighted average number of common shares outstanding during the respective periods. Diluted earnings (loss) per share is computed by considering the effect of outstanding options, warrants and other convertible securities. However, diluted earnings (loss) per share is the same as basic earnings per share in periods in which a loss has been incurred. The impact of a 5% stock dividend, which was effective on December 31, 2000, has been reflected in earnings (loss) per share for all periods presented. Comprehensive (loss) income - There were no other comprehensive (loss) income items for the years presented. Stock options issued to employees and directors - The Company follows the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 encourages, but does not require, companies to adopt a fair value based method for determining expense related to stock option compensation. The Company continues to account for stock based compensation for employees using the intrinsic value method as prescribed by Accounting Principles Board Opinion ("APB") No. 25, " Accounting for Stock Issued to Employees" and related Interpretations. Under APB Opinion No. 25, no compensation expense is recognized for employee option grants because the exercise price of the options granted to date has equaled the market price of the underlying shares on the date of grant (the "intrinsic value method"). F-10 Had compensation cost been determined consistent with SFAS No. 123, the Company's net (loss) income and (loss) earnings per share would have been adjusted to the following pro forma amounts:
December 31 ------------------------------------------------------ 2002 2001 2000 -------------- ------------- -------------- Net (Loss) Income as reported $ (10,082,509) $ (7,613,544) $ 4,457,214 Deduct:total stock-based compensation Expense under fair value based method for all periods, net of tax -- (36,500) (142,390) -------------- ------------- ------------- Pro Forma Net (Loss) Income (10,082,509) (7,650,044) 4,314,824 Basic EPS as reported $ (2.11) $ (1.67) $ 1.00 Pro Forma Basic EPS $ (2.11) $ (1.68) $ .96 Diluted EPS as reported $ (2.11) $ (1.67) $ .99 Pro Forma Diluted EPS $ (2.11) $ (1.68) $ .90
The fair value of each option granted in 2002, 2001, and 2000 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: a) risk free interest rate ranging from 5% to 6.48%, b)expected volatility ranging from 59.2% to 64.2%, c) average time to exercise of 7 years, and d) expected dividend yield of zero. Stock options and warrants issued to non-employees - The Company follows the provisions of SFAS No. 123 with respect to transactions in which goods or services are the consideration received for the issuance of equity instruments. Under SFAS No. 123, these transactions, which mainly represent financing costs, shall be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The Company has determined that the fair value of the equity instrument is the most reliable measure. The fair value of the equity instrument is determined based on the Black-Scholes Model for option pricing. Recent Accounting Pronouncements A summary of the recent accounting pronouncements, issued by the Financial Accounting Standards Board ("FASB"),that may affect the Company are presented below. SFAS No. 141, "Business Combinations," requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. SFAS No. 142, "Goodwill and Other Intangible Assets", addresses accounting for the acquisition of intangible assets and accounting for goodwill and other intangible assets after they have been initially recognized in the financial statements. The Company does not currently have goodwill or other similar intangible assets' therefore, the adoption of the new standard on January 1, 2002, did not have any material effect on its consolidated financial statements. F-11 SFAS No. 143, "Accounting for Asset Retirement Obligations," addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 became effective on January 1, 2003 and early adoption is encouraged. SFAS No. 143 requires that the fair value of a liability for an asset's retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized. Currently, the Company includes estimated future costs of abandonment and dismantlement in its full cost amortization base and amortizes these costs as a component of its depletion expense. The Company is continuing to revise its calculation of the impact the new standard will have on the consolidated financial statements and the Company does not believe there will be a material impact to the consolidated financial statements. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," became effective on January 1, 2002, and addresses accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed Of" and Accounting Principles Board ("ABP") Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 retains the fundamental provisions of SFAS No. 121 and expands the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The standard had no impact on the consolidated financial statements for the year ended December 31, 2002. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds the provisions of SFAS No. 4 that require companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS No. 145 related to classification of debt extinguishment are effective for fiscal years beginning after May 15, 2002. The provisions of SFAS No. 145 related to lease modifications are effective for transactions occurring after May 15, 2002. The Company early adopted the provision of SFAS No. 145, as permitted, with respect to the classification of gains or losses from debt extinguishment. In 2002, the Company recorded approximately $265,000 of gain on extinguishment of debt as "other income". In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for costs associated with the exit or disposal of an activity be recognized when the liability is incurred. This statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The FASB has issued SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As of December 31, 2002, the Company accounts for stock-based employee compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. F-12 In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees", which elaborates on the disclosures to be made in interim and annual financial statements of a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing a guarantee. Initial recognition and measurement provisions of the Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Under this Interpretation, at the inception of guarantees issued after December 31, 2002, the Company will record the fair value of the guarantee as a liability, with the offsetting entry being recorded based on the circumstances in which the guarantee was issued. The Company does not have any third party guarantees outstanding other than certain guarantees issued in connection with the Company's debt. Such debt is recorded on the consolidated balance sheet at December 31, 2002. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51". This Interpretation requires that the primary beneficiary in a variable interest entity consolidate the entity even if the primary beneficiary does not have a majority voting interest. The consolidation requirements of this Interpretation are required to be implemented for any variable interest entity created on or after January 31, 2003. In addition, the Interpretation requires disclosure of information regarding guarantees or exposures to loss relating to any variable interest entity existing prior to January 31, 2003 in financial statements issued after January 31, 2003. The Company does not believe that this Interpretation will have a material effect on its consolidated financial condition or results of operations. NOTE 3 - ACQUISITIONS AND DIVESTITURES Acquisitions - ------------ In June 2002, a subsidiary of the Company acquired from Vintage Petroleum California, Inc. ("Vintage") all of Vintage's oil and gas producing properties and facilities in the Santa Maria Valley of central California for approximately $17.5 million in cash. These properties, now operated by the Company, consist of five fields and approximately 110 producing wells, encompassing approximately 8,000 acres of mineral interest and over 800 acres of real estate. Of the purchase price paid, $2.4 million was allocated to real estate and $15.1 million was allocated to oil & gas properties. In October 2002, the Company entered into a stock purchase agreement to acquire all outstanding shares of Windsor Energy US Corporation ("Windsor") and all interests in Rincon Island Limited Partnership ("Rincon"), a Texas limited partnership that owns and operates oil and gas producing properties and facilities located within the Rincon Island Field in central California. The properties cover approximately 1,700 mineral acres, including a 1-acre island connected to land by a 2,700' causeway containing the gas and oil pipelines and facilitating vehicular access. At closing, of the 56 wells on the property, 12 were producing at approximately 300 BOPD and 80 MCFD. The purchase price, which consisted of assumption of certain liabilities was allocated to current assets ($1.2 million), to oil & gas properties ($0.3 million), and to other assets ($3.5 million). Divestitures - ------------ In April 2002, the Company sold its interest in the Manila Village Field located in Jefferson Parish, south Louisiana for approximately $55,000. In May 2002, the Company sold its interest in the Potash Field, Plaquemines Parish, Louisiana (the "Potash sale") for a contract price of approximately $20 million. F-13 In June 2002, the Company sold its 75% exploration interest in the Jatiluhur Block, West Java for a $4 million future production payment and a retained 5% overriding royalty interest in the Block. Pertamina, the Indonesian state-owned oil company, consented to the sale. As a result of an assessment of the status of development of this project based on current information available, management has determined that recovery of the future production payment is uncertain and, as such, has recorded an asset impairment charge of $2.7 million in the 2002 consolidated statement of operations. In September 2002, a subsidiary of the Company entered into certain real estate purchase and sale agreements and recognized a gain of $3.9 million on these transactions. Such gain is recorded within "Gain on sale of properties" in the 2002 consolidated statement of operations. In January 2003, the Company closed, as planned, the sale of its 355-acre limestone reserve located in Monroe County, Indiana for a contract price of $0.5 million. As of December 31, 2002, the carrying value of the limestone property has been written down by $3.2 million to $0.5 million in order to adjust the carrying value of the property to its fair value less cost to sell. Such write down is recorded within Impairment of long-lived assets in the 2002 consolidated statement of operations. This property is reflected as "Assets held for sale" as of December 31, 2002. NOTE 4 - PROPERTY AND EQUIPMENT A summary of the Company's subsidiaries' property and equipment as of December 31, 2002 and 2001 is as follows: 2002 2001 ------------- ------------- Investment in limestone property ............. -- $ 3,675,973 Oil and gas properties (Full cost method) .... $ 46,361,062 46,928,312 Unevaluated oil and gas properties ........... 5,014,703 7,347,113 Land and buildings ........................... 19,135,235 17,247,744 Plant and equipment .......................... 22,764,807 29,823,908 ------------- ------------- Total cost ................................... 93,275,807 105,023,050 Accumulated depreciation, depletion and amortization .......................... (14,407,101) (15,557,669) ------------- ------------- $ 78,868,706 $ 89,465,381 ============= ============= Depreciation, depletion and amortization charged against income was $3,244,847 in 2002, $5,578,899 in 2001, and $3,592,242 in 2000. Estimated useful lives are as follows: Refinery .............................................. 40 years Buildings ............................................. 20 to 40 years Transportation equipment .............................. 5 to 6 years Office and computer equipment ......................... 3 to 10 years F-14 NOTE 5 - (LOSS) EARNINGS PER SHARE Earnings (loss) per share for 2002, 2001, and 2000 was calculated as follows:
2002 2001 2000 ------------ ------------ ------------ Net (Loss) Income ...................................... $(10,082,509) $ (7,613,544) $ 4,457,214 Income impact of assumed conversion of convertible debt ................................... -- -- 256,770 ------------ ------------ ------------ Net (loss) income plus impact of assumed conversion .... $(10,082,509) $ (7,613,544) $ 4,713,984 ============ ============ ============ Weighted Average Common Shares Outstanding ............. 4,767,566 4,555,255 4,475,985 Effect of Dilutive Securities - Employee stock options and warrants/(a)/ ............ -- -- 58,754 Convertible Debt .................................... -- -- 228,240 ------------ ------------ ------------ Weighted Average Shares plus impact of assumed conversion ............................... 4,767,566 4,555,255 4,762,979 ============ ============ ============ Basic (Loss) Earnings per Share ..................... $ (2.11) $ (1.67) $ 1.00 Diluted (Loss) Earnings per share ................... $ (2.11) $ (1.67) $ 0.99
(a) During 2002 and 2001, employee stock options and warrants totaled 95,535 and 230,000, respectively. These securities are not included in 2002 and 2001 Diluted Loss per Share calculation since the effect is antidilutive. NOTE 6 - INVENTORIES Inventories includes material, labor and manufacturing overhead costs. Due to the continuous manufacturing process, there is no significant work in process at any time. Inventories consisted of the following as of December 31: 2002 2001 ---------- ---------- Raw Materials ........................ $ 209,167 $ 632,651 Finished goods ....................... 1,154,339 1,163,869 ---------- ---------- Total ............................. $1,363,506 $1,796,520 ========== ========== F-15 NOTE 7 - COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries lease office space, automobiles, computers, and other equipment under various leases. Aggregate commitments under these non-cancellable operating leases at December 31, 2002 were as follows: Year Ending December 31: Amount - ------------------------ ------- 2003 216,000 2004 133,000 2005 4,000 2006 2,000 --------- Total $355,000 ======== Rent expense included in the accompanying consolidated statements of operations was $336,328, $266,666, and $274,341 in 2002, 2001, and 2000, 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 fees approximating $15,000 for each of the years ended December 31, 2002, 2001, and 2000. Semi-annual settlements are required under the license, and BP Amoco has the right to terminate the license for non-payment. In 1995, the Company's predecessor agreed to acquire an oil and gas interest in California on which the seller had drilled a number of non-producing oil wells. The acquisition agreement required that the Company's predecessor assume the obligation to abandon any wells that it did not return to production. A third party whose consent was required to transfer the property did not consent to the transfer. The third party is holding the seller responsible for all remediation. The Company believes it has no financial obligation to remediate this property because it was never the owner of the property, never produced any oil or gas from the property and was not associated with the site and the seller did not give the Company's predecessor any consideration to enter into the contract for the property. Since May 2000, the Company commenced remediation on the subject property as directed by a regulatory agency as operator of record. Notwithstanding its compliance in proceeding with any required remediation on seller's account, the Company is committed to hold the seller accountable for the required obligations of the property. Through December 31, 2002, the Company has remediated 37 of 72 wells and related facilities on the property for a cost of approximately $2.15 million. This amount is recorded as a long-term receivable, as the Company believes it is probable that such amount will be recoverable from the seller. The Company has had informal discussions with the seller, which to date have not produced positive results. Therefore, the Company intends to pursue formal litigation for recovery. Based on future developments with this litigation, it is reasonably possible that the Company's estimate of recovery and ultimate liability could change in the near term and such change could be material. One of GREKA's subsidiaries owns an asphalt refinery in Santa Maria, California, with which environmental remediation obligations are associated. There could be additional environmental issues which may require material remediation efforts in the future. 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-16 NOTE 8 - FEDERAL AND STATE INCOME TAXES The components of (loss) income before (benefit) provision for income taxes for the years ended December 31, 2002, 2001, and 2000 are as follows: 2002 2001 2000 ------------ ------------ ------------ United States .......... $(10,049,400) $ (7,577,044) $ 5,542,481 International .......... -- -- 129,807 ------------ ------------ ------------ $(10,049,400) $ (7,577,044) $ 5,672,288 ============ ============ ============ Components of the (benefit) provision for income taxes for the years ended December 31, 2002, 2001 and 2000 are as follows: 2002 2001 2000 -------- -------- -------- Current Federal ................... $ -- $ -- $ 93,787 State ..................... 33,109 36,500 268,177 -------- -------- -------- $ 33,109 $ 36,500 $361,964 Deferred Federal ................... -- -- -- State ..................... -- -- -- -------- -------- -------- -- -- -- -------- -------- -------- $ 33,109 $ 36,500 $361,964 ======== ======== ======== The following presents the reconciliation of the provision for income taxes to United States federal income taxes computed at the statutory rate for years ended December 31:
2002 2001 2000 ------------ ------------ ------------ (Loss) Income before income taxes and cumulative effect of change in accounting principle ...... $(10,049,400) $ (7,577,044) $ 5,672,288 ============ ============ ============ (Benefit)Provision for income taxes at the statutory rate ................................ (3,517,290) (2,651,965) 1,985,300 State income tax (benefit) provision, net of federal tax (benefit) provision ............... (457,247) (344,755) 268,177 Benefit from utilization of net operating losses for which a full valuation allowance was provided for in prior years ..... -- -- (1,985,300) Change in valuation allowance .......................... 1,504,018 360,585 -- Non-deductible losses .................................. 2,503,628 2,672,635 -- Other, net ............................................. -- -- 93,787 ------------ ------------ ------------ Provision for income taxes ............................. $ 33,109 $ 36,500 $ 361,964 ============ ============ ============
F-17 The components of deferred tax assets and liabilities as of December 31, as follows: 2002 2001 ----------- ----------- Deferred Tax Assets: Depreciation and amortization .............. $ -- $ 1,102,642 Allowance for doubtful accounts ............ 189,664 183,228 Profit sharing plan ........................ 126,000 126,000 Net operating losses ....................... 7,900,810 8,050,390 Other ...................................... 502,359 502,359 ----------- ----------- Gross deferred tax assets .................. 8,718,833 9,964,619 Valuation allowance ........................ (8,306,241) (9,964,619) ----------- ----------- Deferred tax assets - net ........... 412,592 -- ----------- ----------- Deferred Tax Liability: Depreciation and amortization .............. $ 412,592 $ -- ----------- ----------- Deferred tax liability - net ........ 412,592 -- ----------- ----------- Net deferred tax asset (liability) ........... $ -- $ -- =========== =========== Significant net operating losses have been incurred in prior years, primarily by Petro Union, Horizontal Ventures and Saba, which generated net operating loss carry-forward credits. These net operating loss credits expire, if unused, as follows: Tax Year Expires In Approximate Amount - ----------- ---------- ------------------ 1998 2018 $ 8,000,000 1999 2019 2,000,000 2001 2021 8,000,000 ------------ Total $ 18,000,000 ============ The Company's review of its available net operating loss carry-forward credits is ongoing. Upon completion of this review, additional net operating loss carry-forward credits may be identified. In accordance with Internal Revenue Service regulations, the use of the above net operating loss carry-forward credits related to acquired companies is subject to an annual limitation. As of March 28, 2003, the Company had not filed its December 31, 2001 Federal, state and local tax returns. The Company does not believe that it will be required to pay any interest and penalties related to the late filing. Currently, the Company is working to complete such filings in order to be in compliance. F-18 NOTE 9 - NOTES PAYABLE AND LONG-TERM DEBT: Notes payable and long-term debt consisted of the following at December 31, 2002 and 2001: 2002 2001 ----------- ----------- 9% convertible senior subordinated debentures due 2005 net of discount(a) ............................... $ 831,897 $ 2,527,088 15% convertible senior subordinated debentures due 2002(b) .................... -- 1,300,000 Loan agreement(c) ............................ 5,280,574 18,055,000 Loan agreement(d) ............................ 42,119,622 -- Loan agreement(e) ............................ 4,000,000 -- Note payable(f) .............................. -- 325,972 Note payable(g) .............................. -- 2,390,000 Notes payable(h) ............................. 1,545,000 -- Term and revolving loan agreement(i) ......... 3,306,947 18,256,811 Other notes and loans ........................ 253,496 277,567 ----------- ----------- $57,337,536 $43,132,438 Less current portion ......................... 9,672,914 33,993,043 ----------- ----------- Net long-term debt ........................... $47,664,622 $ 9,139,395 =========== =========== The minimum future principal payments due on long-term debt as of December 31, 2002 are as follows (in 000's) : 2003 $ 9,673 2004 42,120 2005 5,545 ------- Total $57,338 ======= (a) In June 2000, GREKA exchanged $3.3 million of Saba 9% senior subordinated convertible debentures for GREKA debentures. The GREKA debentures are convertible to Company common stock at the option of the holders of the debentures at any time prior to the due date of the debenture (December 31, 2005), unless previously redeemed. Upon the receipt of a duly executed notice of election to convert the GREKA debenture, the Company will convert the debenture to GREKA common stock based upon a per share conversion price equal to 95% of the average closing bid price of its common stock for 30 consecutive trading days ending one day prior to the receipt of the notice of election to convert except that the conversion price shall in no case be less than $8.50 per share nor greater than $12.50 per share. GREKA also has the right to redeem the GREKA debenture by providing 30 days written notice of its intent to redeem during which time the debenture holder may convert his or her debenture. During 2002, GREKA converted $0.04 million in principal of its 9% senior subordinated convertible debentures into 4,118 shares of GREKA common stock and paid $1.74 million in principal of debentures that had been redeemed, with a resulting debenture balance of $0.83 million in principal at December 31, 2002. (b) As of September 2002, GREKA satisfied in full its 15% subordinated convertible debentures by converting $1.26 million in principal plus accrued interest into 251,348 shares of GREKA common stock and paying $0.26 million in principal plus accrued interest. F-19 (c) In March 2001, one of GREKA's subsidiaries entered into a credit and guarantee agreement with the Bank of Texas, N.A. ("Bank of Texas"). The agreement provides that GREKA's subsidiary may borrow up to $75 million bearing interest at prime rate less 1/2 percent. GREKA closed a revolving credit line of $16 million with an initial advance of $13.2 million against the line secured by GREKA's subsidiary's interest in certain North American oil and gas properties. A portion of the proceeds were used to reduce the current debt of GREKA. In May 2002, Bank of Texas, N.A. was paid $12.5 million from the proceeds of the Potash sale. This loan was repaid in March 2003. (d) In June 2002, GREKA institutionally placed $30 million of a secured credit facility (of which $25 million of senior notes and $5 million of subordinated notes) that expire on June 26, 2004. The senior notes bear initial interest of 15% per year while the senior subordinated notes bear initial interest of 21% per year. Interests are payable on a monthly basis. The interest rates payable are adjusted downward based on the Company achieving certain financial targets and could result in a minimum interest of 11% and 17% for the senior and subordinated notes, respectively. The Company did not achieve these targets as of December 31, 2002. Both senior and subordinate notes bear an additional compounded interest of 6% per year, which is payable upon maturity. Out of the proceeds of the above financing, the Company paid $14.3 million to GMAC to retire its term loan and $12 million to acquire Vintage's Santa Maria assets. In October 2002, GREKA institutionally placed additional senior subordinated notes of $12.5 million, which accretes up to $14.5 million until maturity on June 26, 2004. These notes bear interest of 12.37% per year. Of the $12.5 million proceeds, GREKA did: i) pay off its outstanding debt to Vintage ($6 million); ii) pay off all but approximately $832,000 of its convertible debentures; iii) acquire $5.35 million worth of operational bonds related to the acquisition of Rincon and Windsor; and iv) applied the excess borrowings balance toward working capital and closing costs. The senior and the subordinated notes are secured by certain California oil and gas assets and real estate of GREKA's subsidiaries and all the shares of common stock of such subsidiaries owned by the Company. In connection with the issuance of the senior and subordinated notes above, the Company granted warrants to purchase an aggregate of 230,000 shares of common stock of the Company to the note holders and to the collateral agent who arranged for such financing. Holders of the warrants have the right to have the shares underlying the warrants registered. The Company has allocated the proceeds of debt securities between the debt and the warrants issued to note-holders based on relative fair values at the time of issuance in accordance with the provisions of APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants". The portion of the proceeds allocated to the warrants issued to note-holders ($789,732) has been accounted for as paid-in capital and as a reduction of the debt (debt discount). With respect to the warrants issued to the collateral agent, such warrants have been recorded as deferred financing costs at their estimated fair value at the date of issuance ($430,463), against additional paid-in capital. See Note 12. The senior and subordinated notes contain covenants which include: (i) certain profitability and leverage ratios; (ii) restrictions on assumptions of new indebtedness; (iii) restrictions on capital expenditures; and (iv)requirements of minimum crude run and crude oil production. As of December 31, 2002, the Company was in compliance with such covenants after considering the retroactive effects of the amendments made to the debt agreement in March 2003 (see Note 16). F-20 (e) In April 2002, GREKA closed a $5.1 million bridge facility to provide short-term liquidity during the implementation of GREKA's restructuring. In September 2002, the Company paid $1.1 million toward the $5.1 million bridge facility that closed in the second quarter of 2002. The payment was made from the sale proceeds of certain real estate owned by the Company. In October 2002, the $4 million balance of the $5.1 million bridge facility was transferred to IPH, and IPH cancelled the irrevocable standby letter of credit in the amount of $4 million that was arranged in favor of the initial creditor. In connection with IPH providing such irrevocable letter of credit, the Company granted to IPH options to purchase 400,000 shares of common stock of the Company. See Note 12. (f) In September 2002, GREKA paid in full the loan obligation to a bank as seller of a fee interest in property, thereby releasing the collateral against the fee interest. (g) In April 2002, GREKA paid in full the loan obligation in the principal amount of $2.4 million to IPH, thereby releasing collateral of all issued and outstanding shares of capital stock of a GREKA subsidiary. (h) In connection with its acquisition of Rincon and Windsor in October 2002, the Company assumed $1.5 million in promissory notes issued by Windsor. GREKA exchanged $772,500 of this debt for subordinated notes with 10% interest all due and payable January 15, 2005, provided that a prepayment by January 15, 2004 would waive any interest accrued. (i) In November 1999, the Company 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. The financing consists of a term loan of $25 million and a revolving credit facility of $10 million. In February 2001, the credit facility with GMAC was increased providing for additional financing of up to $46 million by increasing the principal amount of the term loan to $36 million, and $10 million credit facility to fund working capital due November 30, 2005. In June 2002, the Company paid $14.3 million to GMAC to retire its term loan. The balance of working capital is secured by GREKA's subsidiaries' interests in the Company's refinery. The weighted average interest in 2002 was 10%. NOTE 10 - LITIGATION Bank of Texas, N.A. v. Greka AM, Inc. and GREKA Energy Corporation (Case No. 02-00771, 160th Judicial District Court of Dallas County, Texas, January 2002. In March 2003, the parties entered into a Settlement Agreement and Full Release resolving all outstanding issues. The settlement agreement provided full release of the Company upon repayment of the outstanding balance, which occurred in March 2003. People of State of California, et al. v. Greka SMV, Inc. (Case No. 1114292, Superior Court of State of California, County of Santa Barbara, Santa Maria Division, December 2002). Plaintiffs brought an action against one of GREKA's subsidiaries seeking damages of approximately $1 million for alleged statutory violations relating to a fire caused by a third party who, ignoring GREKA's instructions, entered GREKA's operations which were being conducted in accordance with common industry practice. GREKA has submitted this matter as an insurance claim, and plans to vigorously defend all claims asserted. The litigation is in its preliminary, pre-discovery stage. F-21 Union Oil Company of California, dba Unocal v. GREKA, et al. (Case No. 1125964, Superior Court of State of California, County of Santa Barbara, Santa Maria Division, December 2002). Plaintiff brought an action against GREKA and its subsidiaries seeking damages of approximately $6.25 million for alleged breach of contract claiming that, as successor-in-interest to Saba under the terms of the contract, the Company failed to abandon a certain number of wells or provide an acceptable abandonment plan, and failed to have in place instruments securing the abandonment. GREKA plans to vigorously defend all claims asserted. The litigation is in its preliminary, pre-discovery stage. 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 11 - EXECUTIVE OFFICER TRANSACTIONS On September 9, 1997, GREKA entered into a five-year employment agreement with Randeep S. Grewal. This agreement was amended on October 14, 1998, and on November 3, 1999, the Board of Directors adopted an amended and restated employment agreement for Mr. Grewal (the "Restated Agreement"). Under the terms of the Restated Agreement, Mr. Grewal's annual salary is $287,500 subject to an annual increase effective on the anniversary date. Mr. Grewal participates in GREKA's benefit plans and is entitled to bonuses and incentive compensation as determined by the Board of Directors of GREKA. The Restated Agreement also allows Mr. Grewal to receive an assignment of a 2% overriding royalty of all oil and gas properties of GREKA and its subsidiaries and to receive fringe benefits which include an automobile allowance of $1,000 per month. Under the original agreement, 31,500 shares of GREKA common stock were issued to Mr. Grewal. The Company had a $750,000 note receivable at December 31, 2000 from an officer of the Company relating to an exercise of stock options on December 26, 2000. This note was repaid on January 9, 2001. The Company had a $500,000 note receivable at December 31, 2001 from Randeep S. Grewal, the Company's Chairman of the Board and Chief Executive Officer, which was repaid in April, 2002. NOTE 12 - STOCK OPTIONS AND WARRANTS Stock Options issued to employees and directors At December 31, 2002, 2001, and 2000, GREKA had outstanding 1.4 million of authorized options to acquire shares of common stock of GREKA, of which 1,025,000 were granted in 2000 at an exercise price of $8.625 to employees and directors of the Company. A total of 164,000 options have terminated through attrition and 178,000 options were exercised during 2000, leaving the total option grants outstanding as of December 31, 2000 at 1,058,000 options. Management has determined not to adjust the exercise price or the number of employee options granted or available for grant not withstanding the 5% stock dividend issued during January 2001. During 2001, 113,000 options were granted at exercise prices of $12.50 (68,000 options) and $11.32 (45,000 options) to employees and directors of the Company. A total of 24,000 options have terminated through attrition and 39,000 options have been exercised, leaving the total option grants outstanding as of December 31, 2001 at 1,108,000 options. F-22 No options were granted or exercised in 2002, and a total of 2,000 options terminated through attrition leaving the total options grants outstanding as of December 31, 2002 at 1,106,000 options. A summary of the outstanding stock options issued to employees and directors follows:
2002 2001 2000 ---------- -------- -------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- ---------- --------- -------- ------ -------- Options outstanding, January 1 ................ 1,108,000 $ 8.84 1,058,000 $ 8.54 375,000 $ 6.93 Options granted ............. -- -- 113,000 12.03 1,025,000 8.63 Options exercised ........... -- -- (39,000) (8.23) (178,000 (5.17) Options terminated .......... (2,000) (8.63) (24,000) (11.85) (164,000) (8.63) --------- ---------- --------- ------ ------- ----- Options outstanding, December 31 .............. 1,106,000 $ 8.84 1,108,000 $ 8.84 1,058,000 $ 8.54 Exercisable at year end ................. 1,056,000 $ 8.70 1,037,000 $ 9.23 222,000 $ 8.26 The following table summmarizes information about stock options outstanding, at December 31, 2002: Options Outstanding Options Exercisable ------------------- -------------------- Remaining Exercise Number of Contractual Number of Exercise Price Shares Life Shares Price - -------- --------- ----------- --------- -------- $ 7.75 5,000 6.2 years 5,000 $ 7.75 $ 8.25 163,000 5.8 years 163,000 $ 8.25 $ 8.63 845,000 7.1 years 835,000 $ 8.63 $ 11.32 45,000 8.3 years 15,000 $ 11.32 $ 12.50 48,000 8.1 years 38,000 $ 12.50 --------- --------- $ 8.84 1,106,000 7.3 years 1,056,000 $ 8.70 ========= ========= Stock Warrants and Options issued to non-employees A summary of the stock warrants and options issued to non-employees by the Company during 2002 follows: Number of Stock Warrants/ Options Effective Expiration Number of Stock Warrants/ Granted Option Price Date Date Options Exercised in 2002 --------- ------------ ---------------- ----------------- ------------------ 200,000 $6.00 April 1, 2002 September 30, 2003 0 200,000 $6.50 April 1, 2002 September 30, 2003 0 150,000 $0.01 June 26, 2002 June 26, 2012 0 80,000 $0.01 October 28, 2002 October 28, 2012 0
F-23 The Company follows the provisions of SFAS No. 123 with respect to transactions in which goods or services are the consideration received for the issuance of equity instruments. Under SFAS No. 123, these transactions, which mainly represent financing costs, shall be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The Company has determined that the fair value of the equity instrument is the most reliable measure. The fair value of the equity instrument was determined based on the Black-Scholes Model for option pricing. The Company has recorded the fair values of stock warrants issued to a collateral agent and of the options issued to IPH at their respective fair values at the dates of grant as deferred financing costs in the consolidated balance sheet as of December 31, 2002 (against additional paid in capital). Such costs are being amortized over the period of the underlying financing. The unamortized balance of such costs as of December 31, 2002 is $0.6 million and is included within other assets in the consolidated balance sheet. The fair value of options and warrants granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: a) risk free interest rate ranging from 5% to 6.48%, b)expected volatility of 53.4% c) average time to exercise of 1.2 to 10 years, and d) expected dividend yield of zero. NOTE 13 - SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) Presented below is a summary of the changes in estimated domestic reserves of the Company for the years ended December 31:
Proved developed and undeveloped reserves 2002 2001 2000 ----------------------- ----------------------- ----------------------- Oil (Bbl) Gas (Mcf) Oil (Bbl) Gas (Mcf) Oil (Bbl) Gas (Mcf) ---------- ---------- ---------- ---------- ---------- ---------- Balance beginning of the year ........... 10,051,892 19,381,523 12,012,060 20,074,566 10,531,706 17,598,296 Production .............................. (738,923) (836,847) (837,664) (1,773,827) (770,007) (1,806,764) Acquisitions of reserves in place ....... 15,885,508 7,214,225 -- -- -- -- Sale of reserves in place ............... (1,762,798) (13,654,797) (450,292) (1,133,088) -- -- Revisions of previous estimates ......... 3,134,732 ( 281,560) (672,212) 2,213,872 2,250,361 4,283,034 ---------- ---------- ---------- ---------- ---------- ---------- Balance end of the year ................. 26,570,511 11,822,544 10,051,892 19,381,523 12,012,060 20,074,566 Balance proved developed producing....... 11,671,515 1,929,293 4,310,391 2,206,108 7,059,487 5,183,649 F-24 Capitalized costs 2002 2001 2000 ------------ ----------- ----------- Proved oil and gas properties (domestic) $ 46,361,062 $ 46,928,312 $31,318,933 Proved oil and gas properties (international) -- -- -- Unproved oil and gas properties (domestic) 3,036,065 3,036,065 4,656,659 Unproved oil and gas properties (international) 1,978,638 4,311,048 2,862,577 ------------ ------------ ----------- 51,375,766 54,275,425 38,838,169 Less accumulated depreciation, depletion and amortization (13,508,444) (15,257,669) (9,970,686) ------------ ------------ ----------- Net investment in oil and gas properties $ 37,867,322 $ 39,017,756 $28,867,483 ============ ============ =========== Results of Operations 2002 2001 2000 ----------- ----------- ----------- Oil and gas sales - Third party $ 5,887,136 $14,151,828 $14,673,501 Oil and gas sales - Affiliates 13,902,216 8,541,481 9,927,023 ----------- ----------- ----------- Total oil and gas sales 19,789,352 22,693,309 24,600,524 Production cost 8,161,640 8,976,720 6,057,571 Depreciation, depletion and amortization 2,860,907 5,050,189 3,024,801 ----------- ----------- ----------- Net income from Operations $ 8,746,209 $ 8,666,400 $15,518,152 =========== =========== =========== Depreciation, depletion and amortization rate per BOE $ 3.12 $ 4.34 $ 2.90 =========== =========== =========== Average production cost per BOE $ 4.90 $ 7.87 $ 5.51 =========== =========== =========== SFAS No. 69, "Disclosures About Oil and Gas Producing Activities," prescribes guidelines for computing a standardized measure of future net cash flows and changes therein relating to estimated proved reserves. The Company has followed these guidelines which are briefly discussed below. Future cash inflows and future production and development costs are determined by applying benchmark prices and costs, including transportation and basis differential, in effect at year-end. Estimated future income taxes are computed using current statutory income tax rates, including consideration for estimated future statutory depletion and alternative fuels tax credits. The resulting future net cash flows are reduced to present value amounts by applying a 10% annual discount factor. The assumptions used to compute the standardized measure are those prescribed by the FASB and, as such, do not necessarily reflect the Company's expectations of actual revenues to be derived from those reserves, nor their present worth. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations since these estimates are the basis for the valuation process. F-25 The following summary sets forth the Company's future net cash flows relating to proved oil and gas reserves based on the standardized measure prescribed in SFAS No. 69. Standardized measure of discounted future net cash flows 2002 2001 2000 ------------ ------------- ------------- Future cash flows $658,391,331 $197,238,400 $ 421,837,100 Future cost: Development cost (58,801,000) (26,749,700) (28,604,800) Production cost (268,991,259) (85,275,400) (116,726,900) ------------ ------------- ------------- Future net cash flows before income taxes 330,599,072 85,213,300 276,505,400 Future income taxes (115,709,675) (18,966,265) (92,590,000) ------------ ------------- ------------- Future net cash flows 214,889,397 66,247,035 183,915,400 10% annual discount for future cash flows (99,459,750) (28,595,600) (74,914,260) ------------ ------------- ------------- Standardized measure of discounted future cash flows, end of year(a) $115,429,647 $ 37,651,435 $ 109,001,140 ============ ============= ============= The principal sources of change in the standardized measure of discounted future net cash flows for the years ended December 31, are as follows: Changes in Standardized Future Cash Flows 2002 2001 2000 ------------- ------------- ------------- Beginning of year $ 37,651,435 $ 109,001,140 $ 46,255,189 Sales of Oil and Gas, net of production cost (11,627,712) (14,634,393) (19,431,000) Net changes in prices and production cost (92,537,015) (135,620,827) 116,861,306 Changes in development cost (32,051,300) (5,186,100) (4,495,100) Revision of previous quantity estimates includes purchase and sale of reserves in place 242,661,269 (30,102,209) 67,613,989 Accreciation of discount 3,765,144 10,900,114 4,364,766 Net change in income taxes (96,743,410) 73,623,735 (56,874,370) Net changes in production rates, timing and other 64,311,236 29,669,975 (45,293,640) ------------- ------------- ------------- Standardized measure of discounted future cash flows $ 115,429,647 $ 37,651,435 $ 109,001,140 ============= ============= ============= Costs incurred in oil and gas property acquisition, exploration and development activities 2002 2001 2000 ------------ ------------ ------------ USA Proved and unproved property acquisition $15,348,248 $ 1,856,302 $ 133,359 Exploration -- -- -- Development 8,587,968 17,995,879 5,255,734 ----------- ----------- ----------- Total Cost Incurred 23,936,216 19,852,181 5,389,093 International Proved and unproved property acquisition 412,804 999,026 1,192,554 Exploration -- -- -- Development -- -- -- ----------- ----------- ----------- Total Cost Incurred 412,804 999,026 1,192,554 ----------- ----------- ----------- Total Company $24,349,020 $20,851,207 $ 6,581,647 =========== =========== ===========
F-26 NOTE 14 - CONDENSED QUARTERLY FINANCIAL DATA (UNAUDITED) During the second quarter of 2002, the Company recorded a gain of $3.1 million on the sale of the Potash Field, Plaquemines Parish, Louisiana based on the significance of the reserves sold. After completion of the year-end reserve analysis by independent reservoir engineers that resulted in a 110% increase in proved reserves at December 31, 2002 versus December 31, 2001, the Company determined the Potash sale did not significantly alter the relationship between capitalized costs and proved reserves. As a result, in the fourth quarter, the Company deferred the gain on sale and reduced its oil and gas capitalized costs by $3.1 million.
Second Quarter ------------------------------ As First Previously As Third Fourth Quarter Reported Restated Quarter Quarter 2002 ------------ ------------ ------------ ------------ ------------ Revenues $ 4,403,733 $ 8,261,888 $ 8,261,888 $ 8,328,370 $ 7,916,854 Operating Income (loss) (925,157) 1,424,406 1424,406 1,959,599 (4,235,456) Net Income (loss) (2,073,662) 2,795,063 (347,863) 166,749 (10,970,659) Basic and Diluted earning per common share: Net Income (loss) $ (0.44) $ 0.59 $ (0.07) $ 0.03 $ (0.98) First Second Third Fourth Quarter Quarter Quarter Quarter --------- ----------- ----------- ------------ 2001 Revenues $ 6,989,830 $11,622,892 $13,311,897 $ 8,830,663 Operating Income (loss) 1,240,032 2,645,672 1,403,027 (3,168,469) Net Income (loss) 1,018,138 1,813,162 2,713,742 (13,158,586) Basic and Diluted earning per common share: Net Income (loss) $0.21 $0.37 $0.57 $(2.89)
NOTE 15 - EMPLOYEE BENEFIT PLANS 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. We currently provide matching contributions equal to 50% of each employee's contribution, subject to a maximum of 8% of their eligible contribution. In 2002, 2001 and 2000 the company contributed approximately $63,000, $55,000 and $53,000, respectively. 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 normally 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. However, the NPSP could be suspended, increased or otherwise amended at the discretion of the Board of Directors for any specific year. In 2002, 2001 and 2000 the Company expensed approximately $300,000, $300,000 and $500,000, respectively in connection with its NPSP. F-27 NOTE 16 - SUBSEQUENT EVENTS Coalbed Methane Exploration Prospect, Jiangxi, Shanxi and Anhui Provinces, China. In January 2003, GREKA's wholly-owned subsidiary signed at the Great Hall of the People in China four Production Sharing Contracts PSCs with CUCBM for the exploitation of CBM resources in the Shanxi and Anhui Provinces. Considering the previously signed PSC for the Fengcheng Block in the Jiangxi Province, GREKA is now party to and operator under five, 30-year PSC's for CBM exploitation in China within two development and three exploration blocks. The combined total contract area is approximately 6,600 square kilometers (1.7 million acres) with average coalbed thickness of 16.5 feet and potential reserves of 34.5 Tcf, as estimated by CUCBM. Greka has a 60% working interest in all PSC's other than the Fengcheng Block in which it has a 49% working interest. The remaining working interest is owned by CUCBM. In March 2003, the Company amended, with certain retrospective effects, the terms of its loan agreement (see Note 9 -(d)), and it borrowed additional $20 million through the same collateral agent by issuing 2-years promissory notes. From these proceeds, the Company paid $4.7 million to Bank of Texas and $4.1 million to IPH to retire their respective loans, and the balance, in addition to closing costs and working capital, will fund a portion of the Company's $15 million capital expenditure program for 2003. Of the $20 million, $13.5 million bears interest at a variable rate of Libor + 6.25% or 8.25%, whichever is greater, while the balance $6.5 million bears interest at a fixed rate of 9.25%. The Company paid a 4.25% closing fee, and the placement resulted in increase by approximately $10 million to the Company's total debt. F-28 Greka Energy Corporation and subsidiaries Schedule II - Valuation and qualifying accounts(a) For Each of the Three Years Ended December 31, 2002 Balance at Charged to Charged to Balance Beginning of costs and other at End of Year Period expenses accounts Deductions Period ---- ------------ ---------- ---------- ---------- ---------- 2002 $ 436,258 $ 15,323 $ -- $ -- $ 451,581 2001 $ 827,144 $ -- $ 390,886(b) $ -- $ 436,258 2000 $1,343,852 $153,457 $ 363,251 $ -- $ 827,144 (a) The schedule presents information related to the allowance for doubtful accounts. (b) Write-off of individual accounts receivables. A-1 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 10, 2003 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 10, 2003 Directors and Chief Executive Officer (Principal Executive Officer) /s/ Max A. Elghandour - ------------------------ Max A. Elghandour Chief Financial Officer April 10, 2003 and Principal Accounting Officer) /s/ Dr. Jan F. Holtrop - ------------------------ Dr. Jan F. Holtrop Director April 10, 2003 /s/ Dai Vaughan - ------------------------ Dai Vaughan Director April 10, 2003 /s/ Kenton D. Miller - ------------------------ Kenton D. Miller Director April 10, 2003 CERTIFICATIONS I, Randeep S. Grewal, certify that: 1. I have reviewed this annual report on Form 10-K of Greka Energy Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Randeep S. Grewal - ------------------------------------------ Randeep S. Grewal, Chief Executive Officer April 10, 2003 CERTIFICATIONS I, Max A. Elghandour, certify that: 1. I have reviewed this annual report on Form 10-K of Gerka Energy Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Max A. Elghandour - ------------------------------------------ Max A. Elghandour, Chief Financial Officer April 10, 2003 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each undersigned officer of Greka Energy Corporation (the "Company"), hereby certifies to such officer's knowledge, that the Company's Annual Report on Form 10-K for the period ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Randeep S. Grewal - ------------------------------------------ Randeep S. Grewal, Chief Executive Officer April 10, 2003 /s/ Max A. Elghandour - ------------------------------------------ Max A. Elghandour, Chief Financial Officer April 10, 2003 EX-10.10 3 grekaex10-10.txt AGREEMENT EXHIBIT 10.10 P.I. HOLDINGS NO. 3, INC. and GREKA ENERGY CORPORATION -------------------------------- STOCK PURCHASE AGREEMENT -------------------------------- for the Sale of Windsor Energy US Corporation Dated as of September 12, 2002 TABLE OF CONTENTS Page ---- ARTICLE I Definitions...................................................... 1 ARTICLE II Purchase and Sale............................................... 2 2.01 The Sale................................................. 2 2.02 Purchase Price........................................... 2 ARTICLE III Closing........................................................ 2 3.01 Date of Closing.......................................... 2 3.02 Actions at Closing....................................... 2 ARTICLE IV Representations and Warranties by the Seller.................... 3 4.01 Corporate/Limited Partnership Existence.................. 3 4.02 Capitalization of the Company............................ 4 4.03 Due Authorization........................................ 4 ARTICLE V Representations and Warranties by the Purchaser.................. 4 5.01 Purchase for Investment.................................. 5 5.02 Corporate Representations................................ 5 5.03 Due Authorization........................................ 5 5.04 No Broker................................................ 5 5.05 Hazardous Substances, Applicable Environmental Laws...... 5 ARTICLE VI Additional Agreements and Covenants of the Seller............... 5 6.01 Broker's Fee............................................. 6 6.02 Conduct of Business of the Company and Rincon............ 6 6.03 Access................................................... 6 6.04 Exclusivity.............................................. 6 ARTICLE VII Additional Agreements and Covenants of the Purchaser........... 7 7.01 Confidential Information................................. 7 i ARTICLE VIII Conditions Precedent to the Obligations of the Purchaser...... 7 8.01 Representations, Warranties and Agreements............... 7 8.02 Board Resignations....................................... 7 8.03 Bylaws................................................... 7 8.04 Liens and Indebtedness of the Company.................... 7 8.05 Environmental Contingencies.............................. 8 8.06 Rincon Partnership Interest.............................. 8 8.07 Necessary Approvals...................................... 8 8.08 Compliance with Agreements............................... 8 8.09 No Contracts Terminated.................................. 8 8.10 No Damage to Assets...................................... 8 8.11 Third-Party Consents..................................... 8 8.12 Absence of Certain Litigation............................ 8 8.13 Torch Escrow............................................. 8 8.14 No Consents.............................................. 8 8.15 Opinions................................................. 9 8.16 Tax Effect............................................... 9 8.17 Resolution of Claims..................................... 9 8.18 Purchase Price Agreement................................. 9 ARTICLE IX Conditions Precedent to the Obligations of the Seller........... 9 9.01 Representations, Warranties and Agreements............... 9 9.02 Consents and Approvals................................... 9 9.03 Absence of Certain Litigation............................ 9 9.04 Acceptance Insurance Corporation Indemnity Obligation.... 10 9.05 Necessary Approvals...................................... 10 9.06 Compliance with Agreements............................... 10 9.07 No Consents.............................................. 10 9.08 Tax Effect............................................... 10 9.09 Liens and Indebtedness of the Company.................... 10 9.10 Resolution of Claims..................................... 10 9.11 Purchase Price Agreement................................. 10 ARTICLE X Survival of Representations and Warranties; Waivers............. 11 10.01 Survival................................................. 11 10.02 Waiver by the Purchaser.................................. 11 ARTICLE XI Termination..................................................... 11 11.01 Grounds for Termination.................................. 11 ARTICLE XII Escrow......................................................... 12 12.01 Additional Conditions for Reimbursement from Escrow...... 12 12.02 Escrow Deposit........................................... 12 ii ARTICLE XIII Tax Implications............................................. 12 13.01 Tax Implications......................................... 12 ARTICLE XIV Limitation of Warranties; Release.............................. 12 14.01 Limitation of Warranties................................. 12 14.02 Release.................................................. 13 ARTICLE XV Miscellaneous................................................... 13 15.01 Expenses................................................. 13 15.02 Notices.................................................. 13 15.03 Applicable Law; Amendments; Headings..................... 14 15.04 Entire Agreement......................................... 15 15.05 Binding Effect; Assignments, Third Parties............... 15 15.06 Severability............................................. 15 15.07 Counterparts............................................. 15 15.08 Further Assurances....................................... 15 15.09 Attorneys' Fees.......................................... 15 15.10 Waiver of Conditions..................................... 16 15.11 Announcement............................................. 16 iii STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of September 12, 2002 by and between P.I. Holdings No. 3, Inc., a Texas corporation (the "Seller"), and Greka Energy Corporation, a Colorado corporation (the "Purchaser"). P.I. Holdings No. 4, Inc., a Texas corporation ("PIH No. 4"), joins this Agreement for the sole purpose of agreeing to be bound by those provisions of this Agreement, to the extent specifically applicable to PIH No. 4 and its ownership of the Rincon Interest (as defined below), and for no other purpose. WITNESSETH: WHEREAS, the Seller is the owner of 1,500 shares (the "Shares") of Common Stock, par value $1.00 per share (the "Common Stock"), of Windsor Energy US Corporation, a Delaware corporation (the "Company"), constituting all of the issued and outstanding shares of capital stock of the Company; WHEREAS, PIH No. 4 is the owner of .25% of the partnership interest ("Rincon Interest") of Rincon Island Limited Partnership, a Texas limited partnership ("Rincon"); WHEREAS, the Purchaser desires to acquire the Shares from the Seller, and to acquire the Rincon Interest from PIH No. 4, and the Seller desires to sell the Shares to the Purchaser, and PIH No. 4 desires to convey the Rincon Interest to Purchaser, upon the terms and subject to the conditions hereinafter set forth; and WHEREAS, the Purchaser may direct that the Shares and the Rincon Interest be sold and conveyed to one or more separate subsidiaries or affiliates of Purchaser ("Purchaser Affiliate"); NOW, THEREFORE, in consideration of the premises and of the respective representations, warranties, covenants, agreements and conditions contained herein, the parties hereto hereby agree as follows: ARTICLE I Definitions The terms set forth below in this Article I shall have the meanings ascribed to them below or in the part of this Agreement referred to below: Agreement: as defined above in the preamble. Best Efforts: means a party's best efforts in accordance with reasonable commercial practice and without the incurrence of unreasonable expense. Closing: as defined in Section 3.01. Closing Date: as defined in Section 3.01. Common Stock: as defined above in the recitals. 1 Company: as defined above in the recitals. Escrow Agreement: as defined in Section 12.02. Escrow Deposit: as defined in Section 12.02. Person: means any individual, firm, corporation, partnership, joint venture, association, trust, unincorporated organization, government or agency, or subdivision thereof or any other entity. Purchase Price Agreement: as defined in Section 2.02. Purchaser: as defined above in the preamble. Rincon: as defined above in the recitals. Rincon Interest: as defined above in the recitals. Seller: as defined above in the preamble. Shares: as defined above in the recitals. ARTICLE II Purchase and Sale 2.01 The Sale. Subject to the terms and conditions of this Agreement, the Seller shall sell, convey, transfer, assign and deliver to the Purchaser, or a Purchaser Affiliate, all of the Shares and the Purchaser, or a Purchaser Affiliate, shall purchase and acquire all of the Shares from the Seller. PIH No. 4 will convey the Rincon Interest to Purchaser or a Purchaser Affiliate. If the sale of the Shares or the conveyance of the Rincon Interest is to a Purchaser Affiliate, then the obligations to, and rights of, Purchaser under this Agreement shall apply to the Purchaser Affiliate to the same extent as if the sale or conveyance actually were to the Purchaser. 2.02 Purchase Price. The purchase price to be paid by the Purchaser for the Shares and the Rincon Interest shall be the agreement of Purchaser to pay to Seller the net profit participation to be agreed upon on or before Closing by Seller, PIH No. 4 and Purchaser and attached to this Agreement as Schedule 2.02 (the "Purchase Price Agreement"). ARTICLE III Closing 3.01 Date of Closing. The closing of the purchase and sale of the Shares and the conveyance of the Rincon Interest contemplated hereby (the "Closing") shall take place at 10:00 a.m. in the offices of Jackson Walker L.L.P., 1401 McKinney, Suite 1900, Houston, Texas 77010, on September 30, 2002 or such other date as the parties may mutually agree upon (the "Closing Date"). 3.02 Actions at Closing. At the Closing: 2 (a) The Seller shall make available for inspection by the Purchaser the certificate(s) representing the Shares, which certificate(s) shall be duly endorsed by the Seller, or shall be presented together with stock powers in the usual form duly executed by the Seller. Thereafter, the Seller shall deliver, or cause to be delivered, to the Purchaser all such stock certificates (together with stock powers, if any) or take such other action as reasonably requested by the Purchaser to complete the conveyance of the Shares to Purchaser. PIH No. 4 will execute instruments necessary to convey the Rincon Interest to Purchaser. (b) The Purchaser shall execute and deliver to Seller the Purchase Price Agreement. ARTICLE IV Representations and Warranties by the Seller Except as otherwise disclosed in this Agreement, the Seller represents and warrants to and agrees with the Purchaser as follows: 4.01 Corporate/Limited Partnership Existence. (a) The Company is a corporation incorporated, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own and operate Rincon. Except for the Company's ownership of 99.75% of the partnership interest of Rincon, the Company has no direct or indirect interest, either by way of stock, ownership or otherwise, in any other firm, corporation, association, or partnership. (b) Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Texas and has all requisite corporate power and authority to own and operate the Company. Except for Seller's ownership of the Company and the Company's ownership of 99.75% of the partnership interest of Rincon, Seller has no direct or indirect interest, either by way of stock ownership or otherwise, in any other firm, corporation, association or partnership. (c) PIH No. 4 is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Texas and has all requisite corporate power and authority to own the Rincon Interest. Except for PIH No. 4's ownership of the Rincon Interest, PIH No. 4 has no direct or indirect interest, either by way of stock ownership or otherwise, in any other firm, corporation, association or partnership. This representation and warranty is made by PIH No. 4 only. (d) Rincon is a limited partnership formed, validly existing and in good standing under the laws of the State of Texas and has all requisite power and authority to own and operate the Rincon Island oil production properties. Rincon has no direct or indirect interest, either by way of stock ownership or otherwise, in any firm, corporation, association or partnership. 3 4.02 Capitalization of the Company. The authorized capital stock of the Company consists solely of 1,500 shares of Common Stock, par value $1.00 per share, all of which are currently outstanding. All of the outstanding shares of Common Stock are fully paid and nonassessable. The Company has no preferred stock, treasury stock, or any other authorized series or class of stock. Except as set forth on Schedule 4.02, the Shares will, on the Closing Date, be free and clear of any security interest, liens or other encumbrances and the Purchaser will receive good and marketable title to the Shares free and clear of security interests, liens, adverse claims, options or other encumbrances. There are no outstanding options, warrants or other or similar rights to purchase shares of the Company's capital stock. 4.03 Due Authorization. The execution, delivery and performance of this Agreement by the Seller and by PIH No. 4, the performance of all the terms and conditions hereof to be performed by each of Seller and PIH No. 4, and the consummation of the transactions contemplated hereby have been duly authorized and approved by all requisite corporate and shareholder action on the respective parts of the Seller and PIH No. 4. This Agreement constitutes a valid and binding obligation of the Seller and of PIH No. 4, enforceable in accordance with its terms (except as such enforcement may be limited by any applicable bankruptcy, insolvency or similar laws generally affecting the enforcement of creditors' rights or other principles of equity, regardless of whether enforcement is considered in a proceeding in equity or at law). The execution, delivery and performance of this Agreement will not conflict with any provision of the Certificate of Incorporation of the Seller or PIH No. 4 and any amendments thereto, Bylaws of the Seller or PIH No. 4 and any amendments thereto, or of any contract to which the Seller or PIH No. 4 is a party or otherwise bound. Knowledge of Seller and PIH No. 4. For purposes of this Agreement, "knowledge" means the conscious awareness of the Seller or PIH No. 4 of facts or other information which would make the statements false or inaccurate. The knowledge of the Seller or PIH No. 4 does not include any notice or knowledge that may be imputed to or constructively attributed to the Seller or PIH No. 4, nor does knowledge imply that any special inquiry or investigation has been undertaken by Seller or PIH No. 4 with respect to the subject matter of the statement. The Shares were acquired by Seller during July 2001 through foreclosure, and the Rincon Interest was acquired thereafter by PIH No. 4 through foreclosure. The Seller's and PIH No. 4's knowledge is limited in many respects including the limited period of ownership of the Shares and the Rincon Interest. The representations and warranties contained in this Agreement are to the knowledge of Seller and PIH No. 4. However, Purchaser shall have the right to reimbursement under Article XII upon a representation or warranty or Condition set forth in Section 12.01 being incorrect or inaccurate irrespective of the knowledge or lack of knowledge of Seller or PIH No. 4 in making said representations and warranties. ARTICLE V Representations and Warranties by the Purchaser The Purchaser represents and warrants to and agrees with the Seller as follows: 4 5.01 Purchase for Investment. The Purchaser represents that the Shares to be acquired by it under the terms of this Agreement are being acquired for investment and not with a view to the disposition of all or any part thereof, and the Purchaser agrees that no disposition of all or any part thereof will be made under circumstances which would violate the Securities Act of 1933, as amended, or applicable state securities laws. 5.02 Corporate Representations. The Purchaser is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has all requisite corporate power to carry on its business as now conducted. The Purchaser is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction wherein the failure so to qualify would materially and adversely affect its business or assets, and is so qualified wherever the nature of its business or the character of its properties or both make such qualification necessary. 5.03 Due Authorization. The execution, delivery and performance of this Agreement by the Purchaser, the performance of all the terms and conditions hereof to be performed by it and the consummation of the transactions contemplated hereby have been duly authorized and approved by all requisite corporate action on the part of the Purchaser, and no further corporate action or approval by the shareholders of the Purchaser will be necessary on the part of the Purchaser to make this Agreement a valid and binding obligation of the Purchaser. This Agreement constitutes a valid and binding obligation of the Purchaser, enforceable in accordance with its terms (except as such enforcement may be limited by any applicable bankruptcy, insolvency or similar laws generally affecting the enforcement of creditors' rights or other principles of equity, regardless of whether enforcement is considered in a proceeding in equity or at law). The execution, delivery and performance of this Agreement will not conflict with any provision of the Certificate of Incorporation of the Purchaser and any amendments thereto, Bylaws of the Purchaser and any amendments thereto, or of any contract to which the Purchaser is a party or otherwise bound. 5.04 No Broker. The Purchaser has not engaged any broker or finder or otherwise acted so as to give rise to any claims for a broker's commission or finder's fee in connection with the transactions contemplated hereby. 5.05 Hazardous Substances, Applicable Environmental Laws. Purchaser is relying upon Purchaser's independent due diligence for environmental matters, and not upon any representation, warranty or statement of Seller, PIH No. 4, any affiliate of either, or any of their respective directors, officers, employees, agents, shareholders or representatives, and with respect to environmental matters, the sale of the Shares and the Rincon Interest is "AS-IS". ARTICLE VI Additional Agreements and Covenants of the Seller The Seller covenants and agrees with the Purchaser as follows: 5 6.01 Broker's Fee. The Seller and PIH No. 4 agree to pay any fee or commission due to any broker or finder employed by either the Seller or PIH No. 4 for its services in connection with this Agreement and the transactions contemplated herein. Seller and PIH No. 4 shall indemnify and hold the Purchaser harmless from and against any and all claim, loss, liability, claims, fines, expenses, costs (including attorney's fees and expenses) and causes of action, accruing or arising as a result of any fee or commission due to any broker or finder employed by the Seller or PIH No. 4 for its services in connection with this Agreement and the transactions contemplated herein. 6.02 Conduct of Business of the Company and Rincon. From the date hereof until the Closing Date, except as otherwise consented to by the Purchaser in writing or as provided in this Agreement, and except as set forth on Schedule 6.02, the Seller and PIH No. 4, as applicable, shall cause the Company and Rincon to conduct their respective business in the ordinary course consistent with past practices and to use their respective reasonable best efforts to preserve intact their respective business organization and relationships with third parties and to keep available the services of their respective present employees. 6.03 Access. Seller will, and shall cause the Company, PIH No. 4 and Rincon to, cooperate fully in permitting Purchaser to make a full investigation of the Company, PIH No. 4 and Rincon upon reasonable notice and in consummating the transactions contemplated hereby. Seller will, and shall cause the Company, PIH No. 4 and Rincon to, upon reasonable notice, afford Purchaser and its representatives and agents full access to the offices, buildings, real properties, machinery and equipment, inventory and supplies, records, files, books of account, tax returns, agreements and commitments, corporate record books and stock books, partnership files, and personnel of same, and will permit Purchaser and its representatives and agents to contact and interview the Company's, PIH No. 4's and Rincon's personnel, suppliers, vendors, referral sources and any other persons that Purchaser shall reasonably determine to be necessary for it to make a full investigation of the Company, PIH No. 4 and Rincon. Seller will furnish to Purchaser all such further information concerning the business and affairs of the Company, PIH No. 4 and Rincon as Purchaser may reasonably request. 6.04 Exclusivity. From the date hereof until October 1, 2002, or earlier termination of this Agreement, the Seller shall not, and the Seller shall cause the Company, PIH No. 4 and Rincon not to, directly or indirectly, through any officer, director, stockholder, partner, employee, representative, agent or affiliate, solicit, entertain, encourage, assist (including by way of furnishing nonpublic information) or take other action, either directly or indirectly, to facilitate any inquiries or the making of any proposal that constitutes an acquisition proposal of the Company or Rincon from any person or entity, or engage in any discussions or negotiations relating thereto or in furtherance thereof, or accept any acquisition proposal competitive to the Purchaser's rights hereunder. Seller shall, and Seller shall cause the Company, PIH No. 4 and Rincon to, immediately cease and cause to be terminated any existing discussions or negotiations with any parties other than Purchaser currently conducted or prior to the date of this Agreement with respect to an acquisition proposal. 6 ARTICLE VII Additional Agreements and Covenants of the Purchaser The Purchaser covenants and agrees with the Seller as follows: 7.01 Confidential Information. In the event that this Agreement is terminated, the confidentiality of any data or information received by the Purchaser regarding the business and assets of the Company and its affiliates will be maintained by the Purchaser and its representatives in accordance with the Confidentiality Agreement dated June 26, 2001, executed by the Purchaser. Notwithstanding the terms of the Confidentiality Agreement, Purchaser is permitted to engage in discussions with the Company's former debenture holders (now noteholders) and with Persons involved with the SouthCoast settlement agreement for the purpose of resolving any and all claims the Company's former debenture holders (now noteholders) or Persons involved with the SouthCoast settlement agreement may have against the Company, Rincon, or any affiliate of the Company or any officer, director, employee, or shareholder thereof. ARTICLE VIII Conditions Precedent to the Obligations of the Purchaser The obligations of the Purchaser hereunder are subject to the fulfillment, or waiver by the Purchaser, prior to or at the Closing Date of each of the following conditions: 8.01 Representations, Warranties and Agreements. The representations and warranties of the Seller and of PIH No. 4 herein contained shall be true as of and at the Closing Date with the same effect as though made at such date, except as affected by transactions permitted or contemplated by this Agreement; the Seller and PIH No. 4 shall have performed and complied with all covenants and agreements required by this Agreement to be performed or complied with by it prior to the Closing Date; and the Seller and PIH No. 4 shall have executed and delivered to the Purchaser an officer's certificate dated the Closing Date to such effect. 8.02 Board Resignations. The Company shall have received the resignations of all members of the Company's Board of Directors and the officers of the Company, effective as of the Closing Date. 8.03 Bylaws. The Purchaser shall have received a copy of the Company's corporate Bylaws and Rincon's partnership agreement as in effect on the Closing Date certified as true, correct and complete. 8.04 Liens and Indebtedness of the Company. Prior to Closing, Seller and Purchaser shall have agreed as to whether the liens encumbering the assets of the Company and Rincon, and the associated indebtedness or a portion thereof held by Compass Bank, an Alabama state bank ("Compass Bank"), shall be terminated, terminated for tax purposes or conveyed to Purchaser. 7 8.05 Environmental Contingencies. In the event Purchaser completes at its expense by September 30, 2002 environmental Phase I reports of the Company's sites of operation, such reports shall not have revealed contingencies unknown to the Purchaser as of the date hereof which are reasonably unacceptable to Purchaser. 8.06 Rincon Partnership Interest. Seller shall cause PIH No. 4 to convey all of its interest in Rincon to Purchaser. 8.07 Necessary Approvals. Consummation of the transactions contemplated herein shall have been approved by the Purchaser's Board of Directors. 8.08 Compliance with Agreements. The Seller shall have performed and complied with all agreements or conditions required by this Agreement to be performed and complied with by the Seller prior to or on the Closing Date. 8.09 No Contracts Terminated. Other than as set forth on Schedule 8.09, no contract or contracts, which in the aggregate would materially adversely affect the business of the Company or Rincon, shall have been terminated prior to the Closing Date. 8.10 No Damage to Assets. At the Closing Date the machinery, equipment, inventory, or other tangible property of the Company and Rincon shall not have suffered non-insured or non-indemnified loss or damage to an extent which substantially affects the value of the properties and assets of the Company or Rincon. Loss or damage shall be considered to affect substantially the value of said properties and assets within the meaning of this paragraph if the book value of such properties and assets so lost or damaged exceeds five percent (5%) in book value of all such tangible properties and assets. 8.11 Third-Party Consents. All necessary consents, approvals and waivers from third parties and governmental authorities shall have been obtained. 8.12 Absence of Certain Litigation. There shall be no pending or threatened litigation or other proceeding seeking to enjoin, restrain or prohibit the consummation of the transactions contemplated by this Agreement or questioning its validity, legality or binding effect. 8.13 Torch Escrow. All funds (approximately $1,000,000) now on deposit at The Chase Manhattan Bank plus all accrued interest thereon (the "Torch Funds") pursuant to that certain Escrow Agreement dated October 23, 1995 by and among the Company, Torch Energy Finance Fund Limited Partnership I, Torch Operating Company and Texas Commerce Bank, as amended by First Amendment to Escrow Agreement dated November 12, 1996 shall remain with the Company at Closing free and clear of any claim or ownership by Seller or any affiliate of Seller. 8.14 No Consents. Except for those obtained at or before Closing, Purchaser is satisfied that no additional authorizations, consents, approvals, exemptions of or filings or registrations with, any court or governmental department, commission, bureau, board, agency or instrumentality is or will be necessary for the valid execution and delivery of this Agreement by the Purchaser, the Seller or PIH No. 4, or the performance by the Purchaser, the Seller, or PIH No. 4 of their respective obligations hereunder, and that the execution and delivery of this Agreement does not constitute the violation by the Purchaser of any statute, law or regulation to which the Purchaser may be subject. 8 8.15 Opinions. Purchaser shall have received the opinion of counsel for Seller, satisfactory to Purchaser, regarding (i) the bankruptcy proceedings related to Joint Plan of Reorganization for the Company and Rincon, arising out of Case Nos. ND 98-14790-RR and ND 98-14791, United States Bankruptcy Court, Central District of California, Northern Division; and (ii) the foreclosure of the Shares and of the Rincon Interest. 8.16 Tax Effect. All tax implications of this transaction upon Purchaser shall have been resolved to Purchaser's satisfaction. 8.17 Resolution of Claims. The claims of the noteholders and any claims that may arise out of the SouthCoast settlement shall have settled or otherwise resolved to Purchaser's satisfaction. The Purchaser shall be satisfied that Seller has paid the property tax described in Schedule 12.01.6 and has paid Seller's broker pursuant to Section 6.01. 8.18 Purchase Price Agreement. The Purchase Price Agreement shall have been agreed upon by Seller, PIH No. 4 and Purchaser. 8.19 Financial Statements. Purchaser shall have received Financial Statements as of June 30, 2002 in the form set forth in Schedule 12.01.2 and otherwise satisfactory to Purchaser. ARTICLE IX Conditions Precedent to the Obligations of the Seller The obligations of the Seller hereunder are subject to the fulfillment, or waiver by the Seller in writing, prior to or at the Closing Date of each of the following conditions: 9.01 Representations, Warranties and Agreements. The representations and warranties of the Purchaser herein contained shall be true as of and at the Closing Date with the same effect as though made at such date, except as affected by transactions permitted or contemplated by this Agreement; the Purchaser shall have performed and complied with all covenants and agreements required in this Agreement to be performed or complied with prior to the Closing Date; and the Purchaser shall have delivered to the Company and the Seller an officer's certificate, executed by it and dated the Closing Date, to such effect. 9.02 Consents and Approvals. All necessary consents, approvals and waivers from third parties and governmental authorities shall have been obtained. 9.03 Absence of Certain Litigation. There shall be no pending litigation or other proceeding seeking to enjoin, restrain or prohibit the consummation of the transactions contemplated by this Agreement or questioning its validity, legality or binding effect. 9 9.04 Acceptance Insurance Corporation Indemnity Obligation. Prior to the Closing, Purchaser shall have obtained the full and final release of all obligations of Compass Bank, Compass Bancshares, Inc. and the Seller under or in connection with that certain General Indemnity Agreement by and among Rincon, Compass Bancshares, Inc., Compass Bank, the Seller, and the Company as principal and/or indemnitors, and The Connecticut Surety Company, Star Insurance Company, Acceptance Insurance Company and/or Redland Insurance Company as surety, and/or any successor or subsequent surety. In the event cash or cash equivalents or other property is substituted for the General Indemnity Agreement, in whole or in part, the Purchaser shall have obtained the full and final release of such cash, cash equivalent or other property which shall be delivered to and be the property of Seller or the affiliate of Seller designated by Seller. 9.05 Necessary Approvals. Consummation of the transactions contemplated herein shall have been approved by the Seller's Board of Directors. 9.06 Compliance with Agreements. The Purchaser shall have performed and complied with all agreements or conditions required by this Agreement to be performed and complied with by the Purchaser prior to or on the Closing Date. 9.07 No Consents. Except for those obtained at or before Closing, each of Seller and PIH No. 4 is satisfied that no additional authorizations, consents, approvals, exemptions of or filings or registrations with, any court or governmental department, commission, bureau, board, agency or instrumentality are or will be necessary for the valid execution and delivery of this Agreement by the Seller, PIH No. 4 or the Purchaser or the performance by the Seller, PIH No. 4 and the Purchaser of their respective obligations hereunder, and that the execution and delivery of this Agreement does not constitute the violation by the Seller or PIH No. 4 of any statute, law or regulation to which the Seller or PIH No. 4 may be subject. 9.08 Tax Effect. All tax implications of this transaction upon Seller, PIH No. 4 and their affiliates shall have been resolved to Seller's and PIH No. 4's satisfaction. 9.09 Liens and Indebtedness of the Company. Prior to Closing, Seller and Purchaser shall have agreed as to whether the liens encumbering the assets of the Company and Rincon, and the associated indebtedness or a portion thereof held by Compass Bank, an Alabama state bank ("Compass Bank"), shall be terminated, terminated for tax purposes or conveyed to Purchaser. 9.10 Resolution of Claims. The claims of the noteholders and any claims that may arise out of the SouthCoast settlement shall have settled or otherwise resolved to Seller's and PIH No. 4's satisfaction. 9.11 Purchase Price Agreement. The Purchase Price Agreement shall have been agreed upon by Seller, PIH No. 4 and Purchaser. ARTICLE X Survival of Representations and Warranties; Waivers 10 10.01 Survival. The representations and warranties of the Parties set forth in this Agreement and in any certificate or instrument delivered in connection herewith shall survive the Closing; provided however, any claims for breaches of such representations and warranties by Seller or PIH No. 4 shall be subject to and limited by Article XII hereof. 10.02 Waiver by the Purchaser. If, prior to the Closing, the Seller knows of the material breach by it of any of its warranties, representations, covenants or agreements contained herein, it shall immediately notify the Purchaser of such breach. If the Purchaser has or receives knowledge prior to the Closing of the material breach of any warranty, representation, covenant or agreement of the Seller then the Purchaser shall have as its sole remedy the right either to terminate this Agreement by written notice to the Seller prior to the Closing (in which event both parties shall be released from any further obligations and liabilities hereunder and the effect of such termination shall be as described in Section 11.02(a)) or to proceed to Closing (in which event the Purchaser shall be deemed to have waived all complaints and rights of the Purchaser to any damages by reason of such breach); provided however, that any waiver by Purchaser under this Section 10.02, other than a written waiver signed by the Purchaser, shall not constitute a reason to deny a Claim (as defined in Section 12.02(c)) for reimbursement from the Escrow Deposit pursuant to Article XII. ARTICLE XI Termination 11.01 Grounds for Termination. This Agreement may be terminated at any time on or prior to the Closing Date: (a) By the mutual written agreement of the Seller and the Purchaser; (b) By the Seller, at its option, if any of the conditions set forth in Article IX have not been satisfied as provided therein; (c) By the Purchaser, at its option, if any of the conditions set forth in Article VIII have not been satisfied as provided therein; (d) By operation of Section 10.02; or (e) By the Seller or the Purchaser if (i) the consummation of such transactions are not closed irrespective of the reason therefor, on or prior to September 30, 2002, or such other date as agreed to in writing by Seller and Purchaser; or (ii) the consummation of such transactions would violate any nonappealable final order, decree or judgment of any court or governmental body having competent jurisdiction enjoining, restraining or otherwise preventing, or awarding substantial damages in connection with, or imposing a material adverse condition upon, the consummation of this Agreement or the transactions contemplated hereby; or (iii) any schedule or exhibit to this Agreement is added, updated or modified by one party in any manner unacceptable to the other party. 11 (f) Effect of Termination. If this Agreement is terminated by the Seller or by the Purchaser as permitted under Section 11.01 hereof or otherwise, such termination shall be without liability to any party to this Agreement or any affiliate, stockholder, director, officer, employee, agent or representative of such party. ARTICLE XII Escrow Redacted. ARTICLE XIII Tax Implications 13.01 Tax Implications. Neither Seller, PIH No. 4 nor Purchaser make any representation or warranty regarding the tax effect of this transaction on the other party. ARTICLE XIV Limitation of Warranties; Release 14.01 Limitation of Warranties. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER THE SELLER NOR PIH NO. 4 MAKES ANY WARRANTY OR COVENANT OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY. WITHOUT LIMITATION OF THE GENERALITY OF THE IMMEDIATELY PRECEDING SENTENCE, WITH RESPECT TO ANY ASSETS OF THE COMPANY OR OF RINCON, EXCEPT AS EXPRESSLY PROVIDED FOR HEREIN, THE SELLER AND PIH NO. 4 EXPRESSLY DISCLAIM AND NEGATE (i) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY AND (ii) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS EXPRESSLY PROVIDED HEREIN, THE SELLER AND PIH NO. 4 EXPRESSLY DISCLAIM AND NEGATE ANY IMPLIED OR EXPRESS WARRANTY AS TO THE ACCURACY OF ANY OF THE INFORMATION FURNISHED WITH RESPECT TO THE COMPANY, RINCON, THE VALUE OF THE SHARES, THE VALUE OF THE RINCON INTEREST, OR THE VALUE OF THE ASSETS OF THE COMPANY OR OF RINCON OR THE CONDITION OR STATE OF REPAIR THEREOF, OR ANY LIABILITIES OF THE COMPANY OR RINCON, OR ANY OF THEIR RESPECTIVE ASSETS. The Purchaser acknowledges and affirms that it has as of Closing made its own independent investigation, analysis and evaluation of the Company and of Rincon and their respective properties, assets, business, financial condition, operations and prospects. The Purchaser has not been limited in its ability to conduct its due diligence. The Purchaser is a sophisticated purchaser of oil and gas properties. 12 14.02 Release. Purchaser acknowledges and agrees that its sole right and remedy for any expense, loss, cost, liability, damage or deficiency resulting from or relating to this Agreement is as set forth in Section 12.02(c). Without limiting the foregoing, Purchaser releases and discharges Seller, PIH No. 4, Compass Bank, Compass Bancshares, Inc., all affiliates of each of the foregoing, and all directors, officers, employees, shareholders, representatives, and agents of each of the foregoing from any and all Claims, causes of action and liabilities of every kind or nature, whether arising in tort, contract, common law or federal or state law, including without limitation any federal, state or local environmental law, regulation or rule, in any way relating to this Agreement or the performance or nonperformance thereof or relating to the Company or Rincon. PURCHASER HEREBY EXPRESSLY WAIVES ALL RIGHTS UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE WHICH READS AS FOLLOWS: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." ARTICLE XV Miscellaneous 15.01 Expenses. Each party hereto shall be responsible to bear, pay and discharge all of its respective expenses incurred in connection with the execution and performance of this Agreement, except as otherwise specifically provided herein. 15.02 Notices. Any notices or waivers to be given to any party hereto shall be in writing and shall be deemed to have been duly given when delivered personally or when received if sent by certified or registered mail, return receipt requested, or by facsimile transmission directed to the following parties at the addresses noted (or such other address as a party may specify by like notice): 13 SELLER - ------ P.I. Holdings No. 3, Inc. c/o Compass Bank 24 Greenway Plaza, Suite 1601 Houston, Texas 77046 Attn: Frank Heuszel Facsimile: 713/966-2339 E-Mail: FDH@compassbnk.com With copy to: Balch & Bingham LLP 1901 Sixth Avenue North, Suite 2600 Birmingham, Alabama 35203 Attn: H. Hampton Boles Facsimile: 205/488-5832 E-Mail: hboles@balch.com PURCHASER - --------- Greka Energy Corporation 630 Fifth Avenue, Suite 1501 New York, New York 10111 Attn: Randeep S. Grewal Facsimile: 212/218-4679 E-Mail: rsg@grekaenergy.com With copy to: Greka Energy P. O. Box 6209 Santa Maria, California 93456 Attn: Susan M. Whalen Facsimile: 805/347-1072 E-Mail: smw@grekaenergy.com Any party hereto may change its address for notice and communications by giving notice in writing, stating its new address for notices, to the other parties hereto. 15.03 Applicable Law; Amendments; Headings. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California. This Agreement may not be modified or terminated orally. The headings and the table of contents contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 14 15.04 Entire Agreement. This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and, except for the Confidentiality Agreement dated June 26, 2001 executed by the Purchaser which is hereby incorporated herein by reference, merges and supersedes all prior discussions, agreements and understandings of every kind and nature among them. No party shall be bound by any condition, definition, warranty or representation, other than as expressly set forth or provided for in this Agreement or as may be, on or subsequent to the date hereof, set forth in a writing signed by the party or parties to be bound thereby. This Agreement may not be amended, modified, waived or terminated orally or discharged unless by full performance by the parties hereto or by a writing signed by the parties hereto. Any waiver by any party of the breach of any term or condition of this Agreement shall not constitute a waiver of any subsequent breach of the same or any other term of this Agreement. 15.05 Binding Effect; Assignments, Third Parties. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No party hereto shall assign this Agreement or any part hereof without the prior written consent of the other party. No such assignment shall release a party of any of its obligations under this Agreement. Nothing in this Agreement shall entitle any Person other than the Seller, PIH No. 4, and to the extent applicable, any affiliate, shareholder, officer, director, employee, representative or agent thereof, or the Purchaser, or their respective successors and assigns permitted hereby, to any legal or equitable claim, cause of action, remedy or right of any kind. 15.06 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. 15.07 Counterparts. This Agreement may be executed via facsimile and in a number of identical counterparts, each of which for all purposes is deemed an original, and all of which constitute collectively one (1) agreement, but in making proof of this Agreement, it shall not be necessary to produce or account for more than one such counterpart. 15.08 Further Assurances. The Seller and the Purchaser agree to deliver or cause to be delivered to each other on the Closing Date, and at such other times thereafter as shall be reasonably agreed, any such additional instrument as either of them may reasonably request for the purpose of carrying out this Agreement, and which reasonably may be provided without cost or expense. 15.09 Attorneys' Fees. If any action at law or in equity, including an action for declaratory relief, is brought to enforce or interpret the provisions of this Agreement, the prevailing party shall be entitled to recover reasonable attorney fees and costs from the other party or parties, which fees and costs shall be in addition to any other relief which may be awarded. 15 15.10 Waiver of Conditions. Either party may waive any condition precedent, term or condition of this Agreement in favor of such party but such a waiver shall be ineffective unless in writing and executed by an authorized representative of a party hereto. 15.11 Announcement. Prior to Closing, a party may make a public disclosure or issue any press release or other communication regarding the subject matter of this Agreement as is required by applicable law or by the rules of a relevant stock exchange. Otherwise, each party shall obtain the consent of the other party as a condition to making any public disclosure or issuing any press release prior to Closing. The parties hereto have executed this Agreement as of the date first above written. PURCHASER GREKA ENERGY CORPORATION By: /s/ Randeep S. Grewal Print name: Randeep S. Grewal Print title: Chairman, CEO & President SELLER P.I. HOLDINGS NO. 3, INC. By: /s/ Lee D. Cutrone, Jr. Print name: Lee D. Cutrone, Jr. Print title: President For purposes set forth in the Preamble P. I. HOLDINGS NO. 4., INC. By: /s/ Lee D. Cutrone, Jr. Print name: Lee D. Cutrone, Jr. Print title: President 16 FIRST AMENDMENT TO THE STOCK PURCHASE AGREEMENT THIS AMENDMENT (this "Amendment") dated as of September 27, 2002 to the Stock Purchase Agreement (the "Stock Purchase Agreement") dated as of September 12, 2002 by and between P.I. Holdings No. 3, Inc., a Texas corporation (the "Seller"), and Greka Energy Corporation, a Colorado corporation (the "Purchaser"), and to which P.I. Holdings No. 4, Inc., a Texas corporation ("PIH No. 4") is a party, is entered into by and among Seller, Purchaser and PIH No. 4. RECITALS: WHEREAS, the parties hereto desire to amend certain provisions of the Stock Purchase Agreement as set forth below. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and in the Stock Purchase Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Terms. Capitalized terms used herein and not defined herein shall have the meaning set forth in the Stock Purchase Agreement. 2. Amendment to Sections 3.01, 11.01 and 6.04. Sections 3.01 and 11.01 of the Stock Purchase Agreement (Date of Closing and Grounds for Termination) are hereby amended by deleting the phrase "September 30, 2002" and substituting in its place "October 22, 2002". Section 6.04 of the Stock Purchase Agreement (Exclusivity) is hereby amended by deleting the phrase "October 1, 2002" and substituting in its place "October 22, 2002". 3. Effect on Stock Purchase Agreement. Except as expressly modified hereby or as necessary to conform to the express terms hereof, all terms and conditions of the Stock Purchase Agreement, shall remain in full force and effect. 4. Counterparts; Facsimile Copies. This Amendment may be executed in several counterparts, and by the parties on separate counterparts, and all such counterparts, which so executed and delivered, shall constitute but one and the same agreement, and a facsimile copy shall have the same force and effect as an original. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. GREKA ENERGY CORPORATION By: /s/ Susan M. Whalen Print name: Susan M. Whalen Print title: VP Asset Management P.I. HOLDINGS NO. 3, INC. By: /s/ Lee D. Cutrone, Jr. Print name: Lee D. Cutrone, Jr. Print title: President P. I. HOLDINGS NO. 4., INC. By: /s/ Lee D. Cutrone, Jr. Print name: Lee D. Cutrone, Jr. Print title: President SECOND AMENDMENT TO THE STOCK PURCHASE AGREEMENT THIS SECOND AMENDMENT (this "Amendment") dated as of October 22, 2002 to the Stock Purchase Agreement, as previously amended, dated as of September 12, 2002 by and between P.I. Holdings No. 3, Inc., a Texas corporation (the "Seller"), and Greka Energy Corporation, a Colorado corporation (the "Purchaser"), and to which P.I. Holdings No. 4, Inc., a Texas corporation ("PIH No. 4") is a party, is entered into by and among Seller, Purchaser and PIH No. 4 (the "Stock Purchase Agreement"). RECITALS: WHEREAS, the parties hereto previously entered into that certain First Amendment to the Stock Purchase Agreement dated as of September 27, 2002; and WHEREAS, the parties hereto desire to amend certain provisions of the Stock Purchase Agreement as set forth below. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and in the Stock Purchase Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Terms. Capitalized terms used herein and not defined herein shall have the meaning set forth in the Stock Purchase Agreement. 2. Purchase Price. Section 2.02 is hereby deleted and the following is inserted in lieu thereof: "The purchase price to be paid by the Purchaser for the Shares and the Rincon Interest is $10 together with the obligations of Purchaser under this Agreement (the "Purchase Price Agreement")." 3. Amendment to Sections 3.01, 6.04 and 11.01. Sections 3.01, 6.04 and 11.01 of the Stock Purchase Agreement (Date of Closing, Exclusivity and Grounds for Termination) are hereby amended by deleting the phrase "October 22, 2002" and substituting in its place "November 1, 2002". 4. Liens and Indebtedness of the Company. Section 8.04 is hereby deleted and the following is inserted in lieu thereof: "The liens encumbering the assets of the Company and Rincon and the associated indebtedness held by Compass Bank, an Alabama state bank ("Compass Bank") will be conveyed to Purchaser at closing without recourse, representation or warranty or any type." 6. Tax Effect. Section 8.16 is hereby deleted. 7. Resolution of Claims. The first sentence of Section 8.17 is hereby deleted because the claims of the noteholders, including but not limited to, the debenture holders, and any claims that may arise out of the SouthCoast settlement have been settled, or otherwise resolved, by Purchaser to Purchaser's satisfaction, or are accepted by Purchaser. 8. Tax Effect. Section 9.08 is hereby deleted. 9. Liens and Indebtedness of the Company. Section 9.09 is hereby deleted and the following is inserted in lieu thereof: "The liens encumbering the assets of the Company and Rincon and the associated indebtedness held by Compass Bank, an Alabama state bank ("Compass Bank") will be conveyed to Purchaser at Closing without recourse, representation or warranty or any type." 10. Resolution of Claims. Section 9.10 is hereby deleted. 11. Escrow. Article XII is hereby deleted and the following is inserted in lieu thereof: Redacted. 12. Tax Implications. Article XIII is amended by adding sections 13.02, 13.03 and 13.04 as follows: "13.02. Any tax benefit which accrued to Seller or any of its affiliates for all tax years and portions of tax years prior to the closing attributable to the ownership of the Company will be retained by Seller and affiliates of Seller. "13.03. Seller, at its expense, and subject to review by Purchaser, will cause the 2002 Rincon tax return to be prepared and filed. "13.04. The indebtedness of the Company and of Rincon to Compass Bank is intended to be cancelled only for tax purposes, and the tax attributes (including net operating losses) and tax basis of assets associated therewith will be reduced in accordance with Internal Revenue Code Section 108." 13. References. All references in the Stock Purchase Agreement and other closing documents to Section 12.02(c) thereof (including, but not limited to, those references in Sections 10.02 and 14.02 and item 7 of Schedule 12.01 of the Stock Purchase Agreement) are hereby deleted and replaced with "Section 12.03(a)(5)". 14. Schedule 2.02. Schedule 2.02 is hereby deleted. 15. Schedule 4.02. Schedule 4.02 is "None". 16. Schedule 12.01. Section 2 of Schedule 12.01 is amended by adding the following: "The Financial Statements overstate indebtedness owed to Compass Bank by approximately $8,000,000. Seller shall direct that the Financial Statements be corrected and delivered to Purchaser on or before October 31, 2002." 17. Effect on Stock Purchase Agreement. Except as expressly modified hereby or as necessary to conform to the express terms hereof, all terms, conditions and provisions of the Stock Purchase Agreement shall remain in full force and effect. 18. Counterparts; Facsimile Copies. This Amendment may be executed in several counterparts, and by the parties on separate counterparts, and all such counterparts, which so executed and delivered, shall constitute but one and the same agreement, and a facsimile copy shall have the same force and effect as an original. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. GREKA ENERGY CORPORATION By: /s/ Susan M. Whalen Print name: Susan M. Whalen Print title: Secretary P.I. HOLDINGS NO. 3, INC. By: /s/ Jerry W. Powell Print name: Jerry W. Powell Print title: Secretary P. I. HOLDINGS NO. 4., INC. By: /s/ Jerry W. Powell Print name: Jerry W. Powell Print title: Secretary EX-10.11 4 grekaex10-11.txt AGREEMENT EXHIBIT 10.11 AMENDMENT NO. 2 TO ------------------ SECURITIES PURCHASE AGREEMENT ----------------------------- This AMENDMENT No. 2 TO THE SECURITIES PURCHASE AGREEMENT, dated as of March 11, 2003, (this "Amendment") is entered into among Greka Energy Corporation, a Colorado corporation, as borrower ("Greka"), Greka Integrated, Inc., a Colorado corporation ("Greka Integrated"), and each of the entities listed as a guarantor on the signature pages hereto, as guarantors (each a "Guarantor" and collectively, the "Guarantors"), and each of the entities listed as a purchaser on the signature pages hereto (individually, a "Required Holder" and, collectively, the "Required Holders") and Guggenheim Investment Management, LLC, as collateral agent (the "Collateral Agent"), and amends the Securities Purchase Agreement dated as of June 26, 2002 (as amended, including hereby, supplemented, or otherwise modified from time to time, the "Securities Purchase Agreement") entered into among Greka as borrower, certain of the Guarantors, each of the entities from time to time party thereto as purchasers (individually, a "Purchaser" and, collectively, the "Purchasers") and the Collateral Agent. W I T N E S S E T H - - - - - - - - - - WHEREAS, Greka AM, Inc. ("Greka AM"), Greka and the Guarantors desire to enter into a Note Purchase Agreement dated as of the date hereof, by and among Greka AM, as borrower, and each of the entities listed as a guarantor on the signature pages thereto, including Greka and certain of the Guarantors, as guarantors, and each of the entities listed as a purchaser on the signature pages thereto and Guggenheim Investment Management, LLC, as collateral agent, as amended, supplemented or modified from time to time (the "Greka AM Note Purchase Agreement"); and WHEREAS, pursuant to Section 12.1(d) of the Securities Purchase Agreement, the consent of the Required Holders is required for the execution by Greka and certain of the Guarantors of the Greka AM Note Purchase Agreement and to modify the Securities Purchase Agreement as requested by the Credit Parties; NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained, it is agreed as follows: SECTION 1. DEFINITIONS ----------- As used in this Amendment, the following terms shall have the meanings specified below: "Second Amendment Effective Date" shall have the meaning set forth in Section 3(a). "Greka AM Note Purchase Agreement" shall have the meaning set forth in the Recitals. All other terms shall have the meanings given thereto in the Securities Purchase Agreement (as modified by Section 2(a)). SECTION 2. AMENDMENTS. ----------- The Securities Purchase Agreement is, effective as of the Second Amendment Effective Date, hereby amended as follows: (a) Amendments to Article 1 (Definitions). -------------------------------------- (1) The definitions of "Greka AM", "Greka AM Debt", "Greka AM Guaranty", "Greka AM Note Purchase Agreement" and "Greka AM Mortgages" are respectively inserted immediately before the definition of "Guaranteed Indebtedness", each to read in its entirety as follows: "Greka AM Debt" shall mean all principal of and premium, if any, and interest on, and all other amounts owing in respect of Indebtedness of Greka AM, Inc., Greka and certain Guarantors outstanding under the Greka AM Note Purchase Agreement. "Greka AM Guaranty" shall mean that certain guaranty, dated as of the Second Amendment Effective Date, executed by Greka AM, Inc. in favor of the Collateral Agent, for the benefit of the Purchasers, in the form of Exhibit A attached hereto. "Greka AM Mortgages" shall mean the mortgages, dated as of the Second Amendment Effective Date, executed by Greka AM, Inc. in favor or the Collateral Agent for the benefit of the Purchasers with respect to the real property of Greka AM, Inc. "Greka AM Note Purchase Agreement" shall mean that certain Note Purchase Agreement dated as of March 11, 2003, by and among Greka AM, Inc., as borrower, Greka and certain other Guarantors, as guarantors, the purchasers named therein and the collateral agent named therein, as the same may from time to time be amended, modified or supplemented. 2 (2) The definition of "Collateral Documents" is amended by inserting at the end of such definition the following: the Greka AM Guaranty and the Greka AM Mortgages. (3) The definition of "Guarantor" is amended by deleting the words "and Rincon" at the end of such definition and inserting the following: ,Rincon and Greka AM, Inc. (4) The definition of "Notes" is amended by deleting the words "and the Senior Subordinated Notes" at the end of such definition and inserting the following: ,the Senior Subordinated Notes and the Additional Senior Subordinated Notes (5) The definition of "Purchasers" is amended by inserting immediately after "each of the entities listed as a purchaser on the signature pages hereto", the following: and the Additional Senior Subordinated Purchasers (6) The definitions of "Second Amendment" and "Second Amendment Effective Date" are inserted immediately before the definition of "Second Priority Collateral", to read in their entirety as follows: "Second Amendment" shall mean the Second Amendment to the Securities Purchase Agreement dated as of the Second Amendment Effective Date among Greka, the Guarantors, Greka AM, Inc. and the Collateral Agent. "Second Amendment Effective Date" shall mean March 11, 2003. (7) The definition of "Total Debt" is deleted and replaced by inserting a new definition thereof, to read in its entirety as follows: "Total Debt" shall mean, as of any date, the GMAC Debt, the Greka AM Debt, the Indebtedness evidenced by the Notes and the Indebtedness described on Schedule 6.2(a). (8) The definition of "Bank of Texas Debt" is deleted. (b) Amendments to Article 6 (Covenants). ------------------------------------ (1) Section 6.1(q) is hereby deleted in its entirety and shall have no further force or effect. (2) A new Section 6.1(s) is herby inserted immediately following Section 6.1(r) as follows: 3 (s) Minimum Capital Expenditures. Collectively with all Credit Parties, make Capital Expenditures, measured on a Fiscal Year-end basis for the 12-month period ending December 31, 2003, of at least $10,000,000. (3) Section 6.2 (a) is amended by inserting a new subsection (7) at the end of such Section: (7) the Greka AM Debt. (4) Section 6.2 (b) is amended by inserting the words "and the Liens existing as of the Second Amendment Effective Date and securing the Greka AM Debt" immediately before the words "; provided, however". (5) Section 6.2 (f) is amended by inserting a new subsection (iv) at the end of that Section as follows: and (iv) pursuant to the Greka AM Guaranty. (6) Section 6.2 (h) is amended by inserting a new subsection (iii) at the end of that Section as follows: and (iii) the Greka AM Debt. (7) Section 6.2(t) is deleted and replaced by inserting a new Section 6.2(t), to read in its entirety as follows: (t) Financial Covenants. Fail to maintain: (i) Maximum Tangible Net Worth Ratio. A Tangible Net Worth Ratio, measured on the last day of each fiscal quarter after the Second Amendment Effective Date, of not more than 1.5:1.00; (ii) Fixed Charge Coverage Ratio. A Fixed Charge Coverage Ratio, measured on a fiscal quarter-end basis for the 12-month period ending each fiscal quarter after the Second Amendment Effective Date, of not less than 1.0:1.00. (iii) Minimum Interest Coverage Ratio. An Interest Coverage Ratio, measured on a fiscal quarter-end basis for the 12-month period ending on December 31, 2003 and each fiscal quarter thereafter, of not less than 2.00:1.00. (iv) Minimum EBITDA. (A) EBITDA for Greka and its Subsidiaries for the period commencing on the Second Amendment Effective Date and ending on each of the following dates to be not less than the amount set forth below for the corresponding period: 4 Period Ending Amount ------------- ------ March 31, 2003 $ 2,000,000 June 30, 2003 $ 6,000,000 September 30, 2003 $12,000,000 December 31, 2003 $17,500,000 and thereafter EBITDA for Greka and its Subsidiaries, measured on a fiscal quarter-end basis for the 12-month period ending on March 31, 2004 and each fiscal quarter thereafter, to be not less than $20,000,000. (v) Maximum Total Debt to EBITDA. On the last day of each fiscal quarter after December 31, 2003, a ratio of Total Debt as of each such date to EBITDA for Greka and its Subsidiaries for the 12- month period ending as of each such date of not more than 3.90:1.00. (vi) Minimum Crude Run and Crude Oil Production. (x) A Crude Run, measured on a month-end basis, equal to at least the number of barrels for the corresponding month specified in Schedule 6.2(t) to the Second Amendment or (y) crude oil produced from all properties owned or leased by Greka or any of its Subsidiaries, measured on a month-end basis, equal to at least the number of barrels for the corresponding month specified in Schedule 6.2(t) to the Second Amendment; provided, however, that non-compliance with the minimum Crude Run for any one month in any Fiscal Year other than Fiscal Year 2002 shall not be a Default or Event of Default hereunder so long as Greka provides the Collateral Agent with at least 30 days prior notice of any such potential non-compliance. (8) Section 6.2(u) is deleted and replaced by inserting a new Section 6.2(u), to read in its entirety as follows: (u) Capital Expenditures. Make Capital Expenditures, collectively with all Credit Parties, measured on a Fiscal Year-end basis for the 12-month period ending each Fiscal Year after the Second Amendment Effective Date, in excess of the amounts stated on Schedule 6.2(t) to the Second Amendment for the corresponding types of assets described on Schedule 6.2(t) to the Second Amendment and for the corresponding status of the GMAC Debt; provided, however, that proceeds from any asset sales permitted under Section 6.2(c) may be used to make Capital Expenditures so long as such proceeds are used within 90 days of any such asset sale. SECTION 3. CONDITIONS PRECEDENT TO EFFECTIVENESS. -------------------------------------- (a) Amendment Effective Date. This Amendment shall become effective on the date on which the following conditions precedent have been satisfied (the "Second Amendment Effective Date"): 5 (1) The Collateral Agent shall have received on or before the Second Amendment Effective Date all of the following, all of which shall be in form and substance satisfactory to the Collateral Agent, in sufficient originally executed copies for each of the Purchasers: (i) this Amendment executed by the Credit Parties and Purchasers constituting the Required Holders; (ii) an Acknowledgment, substantially in the form of Exhibit A attached hereto and executed by each Guarantor; (iii) an amendment to the Pledge Agreement providing for a pledge by Greka in favor of the Collateral Agent of all the outstanding stock of Greka AM, Inc. together with all stock certificates and executed blank stock power with respect thereto; (iv) the Greka AM Guaranty. (v) an Intercreditor Agreement duly executed by the Collateral Agent and the collateral agent under the Greka AM Note Purchase Agreement, in the form of Exhibit B attached hereto. (vi) the Greka AM Mortgages. (vii) certified board resolutions of Greka AM, Inc. authorizing the transactions, and execution and delivery of all documents, contemplated hereby and a Good Standing Certificate, certified charters and officer's/secretary's certificates of Greka AM, Inc., each substantially in the form provided pursuant to the Securities Purchase Agreement; (viii) a legal opinion of Greka's in-house counsel with respect to Greka AM, Inc., addressing matters substantially similar to those included in her legal opinion provided pursuant to the Securities Purchase Agreement. (ix) an updated President's Certificate with respect to all Credit Parties, substantially in the form provided pursuant to the Securities Purchase Agreement. (x) UCC-1 financing statements reflecting Greka AM, Inc. as the debtor in favor of the Collateral Agent for the benefit of the Purchasers; 6 (xi) such additional documentation as the Collateral Agent or the Required Holders may reasonably require. (2) Each of the representations and warranties made by the Credit Parties in or pursuant to the Securities Purchase Agreement, as amended by this Amendment, including the amended Schedules attached hereto and the other Loan Documents to which any Credit Party is a party or by which any Credit Party is bound, shall be true and correct in all material respects, and deemed made by each Credit Party, on and as of the Second Amendment Effective Date (other than representations and warranties in any such Loan Document which expressly speak as of a different date, which shall be true and correct in all material respects as of such date). (3) All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Amendment shall be satisfactory in all respects in form and substance to the Collateral Agent. (4) No Event of Default or Default shall have occurred and be continuing on the Second Amendment Effective Date. SECTION 4. CONSENT. -------- (a) The Required Holders hereby consent, as of the Second Amendment Effective Date, to the incurrence of the Greka AM Debt and the consummation of all of the transactions contemplated by the Greka AM Note Purchase Agreement and the documents executed in connection therewith. (b) Each Required Holder hereby approves and ratifies all Loan Documents entered into by the Collateral Agent pursuant to this Amendment. SECTION 5. REPRESENTATIONS AND WARRANTIES. ------------------------------- Each Credit Party hereby represents and warrants to the Purchasers that: (a) as of the date hereof and after giving effect to the terms of this Amendment, no Event of Default or Default under the Securities Purchase Agreement shall have occurred and be continuing; and (b) all of the representations and warranties of such Credit Party contained in Article 5 of the Securities Purchase Agreement, as amended by the amended Schedules attached hereto, and in any other Loan Document continue to be true and correct in all material respects as of the date of execution hereof, as though made on and as of such date (other than representations and warranties in any such Loan Document which expressly speak as of a different date, which shall be true and correct in all material respects as of such date); 7 SECTION 6. ACKNOWLEDGEMENTS. ----------------- Greka AM, Inc. and each other Credit Party hereby acknowledge and agree that Greka AM Inc. shall, by executing this Amendment, be a Credit Party under the Securities Purchase Agreement as of the Second Amendment Effective Date, grant to the Collateral Agent a security interest on all Collateral and shall have all of the other obligations and benefits of a "Credit Party" specified in the Securities Purchase Agreement. Section 7. REFERENCE TO AND EFFECT ON LOAN DOCUMENTS. ------------------------------------------ (a) Upon the effectiveness of this Amendment, on and after the date hereof, each reference in the Securities Purchase Agreement to "this Agreement", "hereunder", "hereof" or words of like import, and each reference in the other Loan Documents to the Securities Purchase Agreement, shall mean and be a reference to the Securities Purchase Agreement as amended hereby. (b) The table of contents of the Securities Purchase Agreement shall be updated to incorporate the changes effected by this Amendment. (c) Except as specifically provided herein, all of the terms of the Securities Purchase Agreement and all other Loan Documents shall remain unchanged and in full force and effect. (d) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Purchaser or the Collateral Agent under the Securities Purchase Agreement or any of the Loan Documents, nor constitute a waiver of any provision of the Securities Purchase Agreement or any of the Loan Documents. (e) This Amendment constitutes a Loan Document. SECTION 8. FEES, COSTS AND EXPENSES. ------------------------- (a) The Credit Parties agree to pay on demand in accordance with the terms of Section 12.2 of the Securities Purchase Agreement all costs and expenses of the Collateral Agent in connection with the preparation, reproduction, execution and delivery of this Amendment and all other Loan Documents entered into in connection herewith, including the reasonable fees and out-of-pocket expenses of counsel for the Collateral Agent with respect thereto. SECTION 9. EXECUTION IN COUNTERPARTS. -------------------------- This Amendment may be executed and delivered in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original and all of which taken together shall constitute one and the same original agreement. 8 SECTION 10. AFFIRMATION OF GUARANTIES AND SECURITY. --------------------------------------- Each of the Guarantors hereby consents to the terms of this Amendment in its capacity as a guarantor under the Securities Purchase Agreement and each other Loan Document to which it is a party and agrees that this Amendment and each other Loan Document and that the terms of this Amendment shall not otherwise affect in any way its respective obligations and liabilities thereunder or under any other Loan Document to which it is a party, all of which obligations and liabilities shall remain in full force and effect and each of which are hereby reaffirmed. SECTION 11. GOVERNING LAW. -------------- This Amendment shall be interpreted, and the rights and liabilities of the parties determined, in accordance with the internal law of the State of New York. [SIGNATURE PAGES FOLLOW] 9 CREDIT PARTIES: --------------- GREKA ENERGY CORPORATION By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman GREKA INTEGRATED, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman SANTA MARIA REFINING COMPANY By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman GREKA REALTY, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman 10 [Signature Page To Amendment No. 2 To Securities Purchase Agreement] GREKA SMV, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman SABA PETROLEUM COMPANY By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman SABA PETROLEUM, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman WINDSOR ENERGY US CORPORATION By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman 11 RINCON ISLAND LIMITED PARNERSHIP By: WINDSOR ENERGY US CORPORATION, its General Partner By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman GREKA CA, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman GREKA AM, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman 12 COLLATERAL AGENT: ----------------- Guggenheim Investment Management, LLC, as Collateral Agent By: -------------------------- Name: Todd Boehly Title: Managing Director REQUIRED HOLDERS ---------------- NORTH AMERICAN COMPANY FOR LIFE AND HEALTH INSURANCE as a Required Holder By: -------------------------- Name: Todd Boehly Title: Managing Director MIDLAND NATIONAL LIFE INSURANCE COMPANY as a Required Holder By: -------------------------- Name: Todd Boehly Title: Managing Director MAGMA CDO LTD. as a Required Holder By: -------------------------- Name: Todd Boehly Title: Managing Director 13 FORTWIRTH CDO LTD. as a Required Holder By: -------------------------- Name: Todd Boehly Title: Managing Director ADAMS STREET CBO 1998-1, LTD. as a Required Holder By: -------------------------- Name: Todd Boehly Title: Managing Director 14 EXHIBIT A TO AMENDMENT NO. 2 TO SECURITIES PURCHASE AGREEMENT ACKNOWLEDGEMENT --------------- Reference is hereby made to the Guaranty and each Loan Document (each as respectively defined in the Securities Purchase Agreement) to which each of the undersigned is a party. Each of the undersigned hereby consents to the terms of the foregoing Amendment No. 2 to the Securities Purchase Agreement and agrees that the terms thereof shall not affect in any way its obligations and liabilities under the undersigned's Guaranty or any other Loan Document, all of which obligations and liabilities shall remain in full force and effect and each of which is hereby reaffirmed. GREKA INTEGRATED, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman SANTA MARIA REFINING COMPANY By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman GREKA REALTY, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman 15 GREKA SMV, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman SABA PETROLEUM COMPANY By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman SABA PETROLEUM, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman WINDSOR ENERGY US CORPORATION By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman 16 RINCON ISLAND LIMITED PARNERSHIP By: WINDSOR ENERGY US CORPORATION, its General Partner By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman GREKA CA, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman 17 EX-10.12 5 grekaex10-12.txt AGREEMENT EXHIBIT 10.12 NOTE PURCHASE AGREEMENT ----------------------- NOTE PURCHASE AGREEMENT, dated as of March 11, 2003, by and among Greka AM, Inc., a Colorado corporation, as borrower ("Greka AM"), Greka Energy Corporation, a Colorado corporation ("Greka Energy") and each of the entities listed as a guarantor on the signature pages hereto, as guarantors (Greka Energy and each such entity, each a "Guarantor" and collectively, the "Guarantors"; Greka AM and each Guarantor individually, a "Credit Party" and collectively, the "Credit Parties"), and each of the entities listed as a purchaser on the signature pages hereto (individually, a "Purchaser" and collectively, the "Purchasers") and Guggenheim Investment Management, LLC, as collateral agent (the "Collateral Agent"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, Greka AM has agreed to issue and sell to the Purchasers, and the Purchasers have agreed to purchase from Greka AM, upon the terms and conditions hereinafter provided, secured Floating Rate Senior Notes in the aggregate principal amount of $13,500,000 in the form of Exhibit A-1 hereto (collectively, the "Floating Rate Senior Notes") and secured Fixed Rate Senior Notes in the aggregate principal amount of $6,500,000 in the form of Exhibit A-2 hereto (collectively, the "Fixed Rate Senior Notes" and together with the Floating Rate Senior Notes, the "Notes"); NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained, it is agreed as follows: 1. DEFINITIONS "Additional Documents" shall have the meaning set forth in Section 3.5. "Affiliate" shall mean, with respect to any Person, (i) each Person that, directly or indirectly, owns or controls, whether beneficially, or as a trustee, guardian or other fiduciary, 5% or more of the Stock having ordinary voting power in the election of directors of such Person, (ii) each Person that controls, is controlled by or is under common control with such Person or any Affiliate of such Person, (iii) each of such Person's officers, directors, joint venturers and partners, (iv) any trust or beneficiary of a trust of which such Person is the sole trustee or (v) any lineal descendants, ancestors, spouse or former spouses (as part of a marital dissolution) of such Person (or any trust for the benefit of such Person). For the purpose of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise. "Agreement" shall mean this Note Purchase Agreement including all amendments, modifications and supplements hereto and any appendices, exhibits and schedules hereto or thereto, and shall refer to the Agreement as the same may be in effect at the time such reference becomes operative. "Applicable Law" shall mean, in respect of any Person, all provisions of constitutions, statutes, rules, regulations and orders of governmental bodies or regulatory agencies applicable to such person, including, without limiting the foregoing, zoning ordinances and all Environmental Laws, and all orders, decisions, judgments and decrees of all courts and arbitrators in proceedings or actions to which the Person in question is a party or by which it is bound. "Balance Sheet" shall have the meaning set forth in Section 5.7(a) hereof. "Bank of Texas Debt" shall mean all principal of and premium, if any, and interest on, and all other amounts owing in respect of Indebtedness of Greka AM to the Bank of Texas, N.A., including under the Bank of Texas Loan Documents. "Bank of Texas Loan Documents" shall mean the Loan Agreement dated March 1, 2001 between Greka AM, Greka Energy, as guarantor and the Bank of Texas, N.A., as amended, and all other agreements, documents and instruments evidencing the Bank of Texas Debt and any Liens in respect thereof. "Bankruptcy Code" shall mean the United States Bankruptcy Code, as in effect from time to time. "Business Day" shall mean any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the State of New York. "Capital Expenditures" shall mean all cash payments for any fixed assets or improvements or for replacements, substitutions or additions thereto, that have a useful life of more than one year and which are required to be capitalized under GAAP. "Capital Lease" shall mean, with respect to any Person, any lease of any property (whether real, personal or mixed) by such Person as lessee that, in accordance with GAAP, either would be required to be classified and accounted for as a capital lease on a balance sheet of such Person or otherwise be disclosed as a capital lease in a note to such balance sheet, other than, in the case of any Credit Party or a Subsidiary of any Credit Party, any such lease under which such Credit Party or such Subsidiary is the lessor. "Capitalized Lease Obligation" shall mean, with respect to any Capital Lease, the amount of the obligation of the lessee thereunder that, in accordance with GAAP, would appear on a balance sheet of such lessee in respect of such Capital Lease or otherwise be disclosed in a note to such balance sheet. "Cash Equivalents" shall mean (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency thereof maturing within one year from the date of acquisition thereof; (ii) 2 commercial paper maturing no more than one year from the date of creation thereof and at the time of their acquisition having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc.; and (iii) certificates of deposit, maturing not more than one year from the date of creation thereof, issued by commercial banks incorporated under the laws of the United States of America, each having combined capital, surplus and undivided profits of not less than $200,000,000 and having a rating of "A" or better by a nationally recognized rating agency. "Change of Control" shall mean any of the following: (a) any person or group of persons (within the meaning of the Exchange Act) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the SEC under the Exchange Act) of 30% or more of the issued and outstanding shares of Common Stock of Greka Energy; (b) any Credit Party shall be a party to a merger or consolidation in which such Credit Party is not the survivor or in which such Credit Party's stockholders immediately prior thereto own less than a majority of the outstanding voting stock of the survivor; (c) any Credit Party shall have sold, leased or otherwise transferred all or substantially all of its assets; or (d) Greka Energy shall fail to have beneficial ownership (within the meaning of Rule 13d-3 promulgated by the SEC under the Exchange Act) of all of the issued and outstanding shares of Common Stock of Greka AM or any Guarantor. "Charges" shall mean all federal, state, county, city, municipal, local, foreign or other governmental (including, without limitation, PBGC) taxes at the time due and payable, levies, assessments, charges, liens, claims or encumbrances upon or relating to (i) any Credit Party's or any of its Subsidiaries' employees, payroll, income or gross receipts, (ii) any Credit Party's or any of its Subsidiaries' ownership or use of any of its assets, or (iii) any other aspect of any Credit Party's or any of its Subsidiaries' business. "Closing" shall have the meaning set forth in Section 2.2 hereof. "Closing Date" shall have the meaning set forth in Section 2.2 hereof. "Closing Fee" shall mean a fee in an amount equal to 4.25% of the aggregate principal amount of the Notes purchased by the Purchasers at the Closing, payable by Greka AM to the Collateral Agent. "COBRA" shall have the meaning set forth in Section 5.19(m) hereof. "Code" shall mean the New York Uniform Commercial Code, as in effect from time to time. "Collateral" shall mean, collectively, the Greka AM Collateral and the Guarantor Collateral. 3 "Collateral Access Agreement" shall mean a landlord waiver, bailee letter, or acknowledgement agreement of any lessor, warehouseman, processor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in the Inventory, in each case, in form and substance satisfactory to the Required Holders. "Collateral Agent" shall have the meaning set forth in the first paragraph of this Agreement. "Collateral Documents" shall mean the Guaranty, the Pledge Agreement and the Mortgages. "Collections" shall mean all cash, checks, notes, instruments, and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds and tax refunds) of the Credit Parties. "Common Stock" shall mean the common stock, no par value, of Greka Energy. "Compensation" shall mean, with respect to any Person, all payments and accruals commonly considered to be compensation, including, without limitation, all wages, salary, deferred payment arrangements, bonus payments and accruals, profit sharing arrangements, payments in respect of stock option or phantom stock option or similar arrangements, stock appreciation rights or similar rights, incentive payments, pension or employment benefit contributions or similar payments, made to or accrued for the account of such Person or otherwise for the direct or indirect benefit of such Person. "Consolidated Net Interest Expense" shall mean, with respect to any Person for any period, gross interest expense of such Person and its Subsidiaries for such period determined in conformity with GAAP (including, without limitation, interest expense paid to Affiliates of such Person), less the sum of interest income and non-cash accretion expense and non-cash amortization for debt origination cost for such period, each determined on a consolidated basis and in accordance with GAAP for such Person and its Subsidiaries. "Credit Party" shall have the meaning set forth in the first paragraph of this Agreement. "Crude Run" shall mean, for any month, the number of average barrels of crude oil throughput at the Santa Maria refinery per calendar day during such month. "Customer" shall mean and includes the account debtor with respect to any Receivable, the prospective purchaser of goods, services or both with respect to any contract or contract right, and/or any party who enters into or proposes to enter into any contract or other arrangement with Greka Energy or its Subsidiaries, pursuant to which Greka Energy or its Subsidiaries is to deliver any personal property or perform any services. 4 "Default" shall mean any event which, with the passage of time or notice or both, would, unless cured or waived, become an Event of Default. "Dispute" shall mean any claim asserted for nonpayment of Receivables, including, without limitation, any alleged defense, counterclaim, offset, dispute or other claim (real or merely asserted) whether arising from or relating to the sale of goods or rendition of services or arising from or relating to any other transaction or occurrence. "EBITDA" shall mean, with respect to any Person for any period, the result of (i) such Person's and its Subsidiaries' consolidated net earnings (or loss), minus (ii) the aggregate amount of all extraordinary gains of such Person and its Subsidiaries for such period, plus (iii) the aggregate amount of all extraordinary losses, non-cash and non-recurring expenses, interest expense, income taxes, and depreciation and amortization of such Person and its Subsidiaries for such period, as determined in accordance with GAAP. "Environmental Actions" shall mean any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter, or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or releases of Hazardous Materials from (a) any assets, properties, or businesses of any Credit Party or any predecessor in interest, (b) from adjoining properties or businesses, or (c) from or onto any facilities which received Hazardous Materials generated by any Credit Party or any predecessor in interest. "Environmental Complaint" shall have the meaning set forth in Section 6.1(j). "Environmental Law" shall mean any applicable federal, state, provincial, foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, to the extent binding on Credit Parties, relating to the environment, natural resources, employee health and safety, or Hazardous Materials, including, but not limited to, the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.ss. 9601 et seq., the Resource Conservation and Recovery Act, 42. U.S.C.ss.6901 et seq.; the Federal Water Pollution Control Act, 33 U.S.C.ss.1251 et seq.; the Toxic Substances Control Act, 15 U.S.C.ss. 2601 et seq.; the Clean Air Act, 42 U.S.C.ss.7401 et seq.; the Safe Drinking Water Act, 42 U.S.C.ss.3803 et seq.; the Oil Pollution Act of 1990, 33 U.S.C.ss.2701 et seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 U.S.C.ss.11001 et seq.; the Hazardous Material Transportation Act, 49 U.S.C.ss.1801 et seq.; and the Occupational Safety and Health Act, 29 U.S.C.ss. 651 et seq.; any state and local or foreign counterparts or equivalents, in each case as amended from time to time. 5 "Environmental Liabilities and Costs" shall mean all liabilities, obligations, responsibilities, remedial actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including, without limitation, all fees, disbursements and expenses of counsel, experts and consultants and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim, suit, action or demand by any person or entity, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute or common law (including, without limitation, any thereof arising under any Environmental Law, permit, order or agreement with any Governmental Authority) and which relate to any health or safety condition regulated under any Environmental Law or in connection with any other environmental matter or spill or the presence of or Release of a Hazardous Material or threatened Release of any Hazardous Material. "Environmental Lien" shall mean any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs. "Equipment" shall mean all of Credit Parties' now owned or hereafter acquired right, title, and interest with respect to equipment, machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "ERISA" shall mean the Employee Retirement Income Security Act of 1974 (or any successor legislation thereto), as amended from time to time and any regulations promulgated thereunder. "ERISA Affiliate" shall mean, with respect to any Credit Party, any trade or business (whether or not incorporated) under common control with such Credit Party and which, together with such Credit Party, are treated as a single employer within the meaning of Sections 414(b), (c), (m) or (o) of the IRC, excluding the Purchasers and each other person which would not be an ERISA Affiliate if the Purchasers did not own any issued and outstanding shares of Stock of such Credit Party. "Event of Default" shall have the meaning set forth in Section 8.1 hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and all rules and regulations promulgated thereunder. "Facility" shall have the meaning set forth in Section 5.10(a) hereof. "Fair Market Value" shall mean, with respect to any asset or property of a Person, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. 6 "Financial Subordinated Debt" shall mean any Indebtedness of Santa Maria permitted to be incurred under the GESPA which is subordinated to the obligations under the GESPA upon terms and conditions satisfactory to the required holders under the GESPA in their sole discretion. "Fiscal Year" shall mean the twelve-month period ending December 31. Subsequent changes of the fiscal year of any Credit Party shall not change the term "Fiscal Year" unless the Required Holders shall consent in writing to such changes. "Fixed Charge Coverage Ratio" shall mean, for any period, the ratio of (i) Santa Maria's EBITDA for such period, to (ii) the sum of (A) all principal of Indebtedness of Santa Maria scheduled to be paid or prepaid during such period (not including prepayments of revolving advances under the GMAC Loan Agreement unless such prepayments are accompanied by a reduction of the revolving commitment thereunder and not including the final scheduled payment of the GMAC Debt or the GESPA Debt at its maturity date), plus (B) Consolidated Net Interest Expense of Santa Maria for such period, plus (C) all amounts paid or payable by Santa Maria on Capitalized Lease Obligations having a scheduled due date during such period plus (D) all cash amounts paid in respect of Capital Expenditures of Santa Maria during such period. "Fixed Rate Senior Notes" shall have the meaning set forth in the Recitals. "Floating Rate Senior Notes" shall have the meaning set forth in the Recitals. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time, except that for purposes of the financial covenants contained in Section 6.2(t) hereof, GAAP shall be as in effect on the date of the most recent Financials and shall be applied in a manner consistent therewith. "General Intangibles" shall mean all of the Credit Parties' now owned or hereafter acquired right, title, and interest with respect to "general intangibles" as that term is defined in the Code (including payment intangibles, contract rights, rights to payment, proprietary rights, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing arrangements, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, money, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), and any and all supporting obligations in respect thereof. "GESPA" shall mean the Securities Purchase Agreement, dated as of June 26, 2002, by and among Greka Energy, as borrower, each of the entities listed as a guarantor on the signature pages thereto, as guarantors, and each of the entities listed as a purchaser on the signature pages thereto and Guggenheim Investment Management, LLC as collateral agent, as amended from time to time. 7 "GESPA Debt" shall mean all principal of and premium, if any, and interest on, and all other amounts owing in respect of Indebtedness of Greka Energy and certain Guarantors outstanding under the GESPA not exceeding $44,500,000 in aggregate principal amount. "GESPA Guarantors" shall mean each of the entities listed as guarantors on the signature pages of the GESPA. "GMAC Debt" shall mean all principal of and premium, if any, and interest on, and all other amounts owing in respect of Indebtedness of Greka Energy and certain Guarantors outstanding under the GMAC Loan Agreement not exceeding $10,000,000 in aggregate principal amount. "GMAC Loan Agreement" shall mean that certain First Amended and Restated Loan and Security Agreement dated as of November 30, 1999 by and among certain Guarantors and GMAC Commercial Credit LLC, as amended. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, and any agency, department or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Greka AM" shall have the meaning set forth in the first paragraph of this Agreement. "Greka AM Collateral" shall mean all of Greka AM's now or hereafter acquired right, title, and interest in and to each of the following: (a) Receivables, (b) Inventory, (c) Deposit Accounts, (d) Documents, (e) General Intangibles, (f) Instruments, (g) Investment Property, (h) Chattel Paper, 8 (i) Oil and Gas Properties, (j) Equipment, (k) all goods and personal property of Greka AM, whether tangible or intangible and wherever located, (l) all books and records pertaining to the property described in this definition of "Greka AM Collateral" and (m) the proceeds and products, whether tangible or intangible of any of the foregoing, including proceeds of insurance covering any or all of the foregoing, and any and all tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. All capitalized terms used in this definition and not defined in this Agreement shall have the respective meanings assigned to such terms in the Code. "Greka Energy" shall have the meaning set forth in the first paragraph of this Agreement. "Guaranteed Indebtedness" shall mean, as to any Person, any obligation of such Person guaranteeing any Indebtedness, lease, dividend, or other obligation ("primary obligations") of any other Person (the "primary obligor") in any manner including, without limitation, any obligation or arrangement of such Person (a) to purchase or repurchase any such primary obligation, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet condition of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) to indemnify the owner of such primary obligation against loss in respect thereof. "Guarantor" shall have the meaning set forth in the first paragraph of this Agreement. "Guarantor Collateral" shall mean all of each Guarantor's now or hereafter acquired right, title, and interest in and to each of the following (but excluding the Santa Maria Collateral): (a) Receivables, (b) Inventory, (c) Deposit Accounts, (d) Documents, 9 (e) General Intangibles, (f) Instruments, (g) Investment Property, (h) Chattel Paper, (i) Oil and Gas Properties, (j) Equipment, (k) all goods and personal property of such Guarantor, whether tangible or intangible and wherever located, (l) all books and records pertaining to the property described in this definition of "Guarantor Collateral" and (m) the proceeds and products, whether tangible or intangible of any of the foregoing, including proceeds of insurance covering any or all of the foregoing, and any and all tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. All capitalized terms used in this definition and not defined in this Agreement shall have the respective meanings assigned to such terms in the Code. "Guaranty" shall mean that certain Guaranty, dated as of the Closing Date, executed by the Guarantors in favor of the Collateral Agent, for the benefit of the Purchasers, in the form of Exhibit B attached hereto. "Hazardous Discharge" shall have the meaning set forth in Section 6.1(j). "Hazardous Material" shall mean any substance, material or waste, whether solid, liquid or gaseous, that is classified, characterized or otherwise regulated as hazardous, toxic, pollutant, contaminant or words of similar meaning or effect under the Environmental Laws and shall include, without limitation, any asbestos, polychlorinated biphenyls, radioactive substances, methane, petroleum and petroleum products or wastes. "Indebtedness" of any Person shall mean (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured, but not including obligations to trade creditors incurred in the ordinary course of business), (ii) all obligations evidenced by notes, bonds, debentures or similar instruments, (iii) all indebtedness created or arising under any conditional sale or other title retention agreements with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (iv) all Capital Lease Obligations, 10 (v) all Guaranteed Indebtedness, (vi) all Indebtedness referred to in clause (i), (ii), (iii), (iv) or (v) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness, (vii) all liabilities under Title IV of ERISA, and (viii) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), or pursuant to any sale-leaseback transaction. "Intercreditor Agreement" shall mean the Intercreditor Agreement, dated as of the Closing Date, executed by the Collateral Agent, for the benefit of the Purchasers and the collateral agent under the GESPA on behalf of the holders of the GESPA Debt, in form and substance satisfactory to the Purchasers. "Interest Coverage Ratio" shall mean, for any period, the ratio of Greka Energy and its Subsidiaries' EBITDA during such period to the Consolidated Net Interest Expense of Greka Energy and its Subsidiaries during such period. "Interest Payment Date" shall have the meaning assigned to such term in Section 2.7(a) hereof. "Inventory" shall mean all Credit Parties' now owned or hereafter acquired right, title, and interest with respect to inventory, including goods held for sale or lease or to be furnished under a contract of service, goods that are leased by a Credit Party as lessor, goods that are furnished by a Credit Party under a contract of service, and raw materials, work in process, or materials used or consumed in a Credit Party's business. "Investment" shall mean, with respect to any Person, any investment by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide accounts arising from the sale of goods or rendition of services in the ordinary course of business consistent with past practice), purchases or other acquisitions for consideration of Indebtedness or Stock, and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "IPH" shall mean International Publishing Holding Inc. "IPH Debt" shall mean all principal of and premium, if any, and interest on, and all other amounts owing in respect of Indebtedness of Greka AM to IPH, including under the IPH Funding Loan Documents. 11 "IPH Funding Loan Documents" shall mean the Loan and Security Agreement dated October 1, 2002, as amended, between Greka AM and IPH and all other agreements, documents and instruments evidencing the IPH Debt and any Liens in respect thereof. "IRC" shall mean the Internal Revenue Code of 1986, as amended, and any successor thereto. "IRS" shall mean the Internal Revenue Service, or any successor thereto. "LIBOR Business Day" means a Business Day on which banks in the City of London are generally open for interbank or foreign exchange transactions. "LIBOR Period" shall mean initially, the period commencing on the Closing Date and ending on March 31, 2003 and thereafter, a period commencing on the last day of the immediately preceding LIBOR Period and ending three months thereafter; provided, that the foregoing provision relating to LIBOR Periods is subject to the following: (n) if any LIBOR Period would otherwise end on a day that is not a LIBOR Business Day, such LIBOR Period shall be extended to the next succeeding LIBOR Business Day unless the result of such extension would be to carry such LIBOR Period into another calendar month in which event such LIBOR Period shall end on the immediately preceding LIBOR Business Day; (o) any LIBOR Period that would otherwise extend beyond the Maturity Date shall end two LIBOR Business Days prior to such date; and (p) any LIBOR Period that begins on the last LIBOR Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such LIBOR Period) shall end on the last LIBOR Business Day of a calendar month. "LIBOR Rate" means for each LIBOR Period, a rate of interest determined by the Collateral Agent equal to: (q) the offered rate for deposits in United States Dollars for the applicable LIBOR Period that appears on Telerate Page 3750 as of 11:00 a.m. (London time), on the second full LIBOR Business Day next preceding the first day of such LIBOR Period (unless such date is not a Business Day, in which event the next succeeding Business Day will be used); divided by (r) a number equal to 1.0 minus the aggregate (but without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on the day that is two LIBOR Business Days prior to the beginning of such LIBOR Period (including basic, supplemental, marginal and emergency reserves under any regulations of the Federal Reserve Board or other 12 Governmental Authority having jurisdiction with respect thereto, as now and from time to time in effect) for Eurocurrency funding (currently referred to as "Eurocurrency Liabilities", in Regulation D of the Federal Reserve Board that are required to be maintained by a member bank of the Federal Reserve System. If such interest rates shall cease to be available from Telerate News Service, the LIBOR Rate shall be determined from such financial reporting service or other information as shall be mutually acceptable to the Collateral Agent and Greka AM. "Lien" shall mean any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest as to assets owned by the relevant Person under the Uniform Commercial Code or comparable law of any jurisdiction). "Loan Documents" shall mean this Agreement, the Notes, the Collateral Documents and all other agreements, instruments, documents and certificates, including, without limitation, pledges, powers of attorney, consents, assignments, contracts, notices, and all other written matter whether heretofore, now or hereafter executed by or on behalf of any Credit Party, and delivered to the Collateral Agent or the Purchasers in connection with this Agreement or the transactions contemplated hereby. "Material Adverse Effect" shall mean a material adverse effect on (i) the business, assets, operations, prospects or financial or other condition of the Credit Parties and their Subsidiaries, taken as a whole, or (ii) Greka AM's or the Credit Parties', taken as a whole, ability to pay the Obligations in accordance with the terms hereof and the other Loan Documents. "Material Contracts" shall mean (i) all of each Credit Party's and its Subsidiaries' contracts, agreements, leases or other instruments to which such Credit Party or its Subsidiaries is a party or by which such Credit Party, its Subsidiaries or their properties are bound, which involve annual payments by or to such Credit Party or its Subsidiaries of more than $1,000,000 or which are filed as exhibits to any filing with the SEC, (ii) all of each Credit Party's and its Subsidiaries' loan agreements, credit agreements, indentures, mortgages, deeds of trust, pledge and security agreements, factoring agreements, conditional sales contracts, letters of credit or other debt instruments involving principal amounts of more than $1,000,000, (iii) all material operating or capital leases for equipment which involve annual payments by or to such Credit Party or its Subsidiaries of more than $1,000,000 to which any Credit Party or any of its Subsidiaries is a party, (iv) all non-competition and similar agreements to which any Credit Party or any of its Subsidiaries is a party, (v) all contracts for the employment of any officer or employee, (vi) all consulting agreements, (vii) any guarantees by any Credit Party or any of its Subsidiaries, (viii) all distributor and sales agency agreements and (ix) all other material contracts not made in the ordinary course of business. 13 "Maturity Date" shall mean March 11, 2005. "Maximum Lawful Rate" shall have the meaning set forth in Section 2.7(e) hereof. "Measurement Date" shall mean the date of the repayment in full of the GESPA Debt. "Mortgages" shall mean, collectively, the mortgages in favor of the Collateral Agent dated as of the Closing Date for the properties described on Schedule 1. "Multiemployer Plan" shall mean a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA, and to which any Credit Party, any of its Subsidiaries or any ERISA Affiliate is making, is obligated to make, has made or been obligated to make, contributions on behalf of participants who are or were employed by any of them. "Notes" shall have the meaning set forth in the Recitals. "Obligations" shall mean all amounts owing by the Credit Parties to the Purchasers (and any of their respective assignees) pursuant to any of the Loan Documents, including all principal, interest, fees, expenses, attorneys' fees and any other sum payable by the Credit Parties under any of the Loan Documents. "Oil and Gas Properties" shall mean all of the Credit Parties' oil and natural gas or other reserves and oil and gas rights located on or under or in any manner related to the premises described in Schedule 1 hereto and any other oil and natural gas or other reserves and oil and gas rights hereafter acquired by any Credit Party. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor thereto. "Pension Plan" shall have the meaning set forth in Section 5.19(a) hereof. "Permitted Acquisitions" shall mean the acquisitions of one or more of the oil and gas properties listed on Schedule 6.2(m) hereto. "Permitted Indebtedness" shall mean, with respect to any Credit Party, (i) taxes or assessments or other governmental charges or levies, either not yet due and payable or to the extent that nonpayment thereof is permitted by the terms of this Agreement or would not have a Material Adverse Effect; (ii) obligations under workmen's compensation, unemployment insurance, social security or public liability laws or similar legislation; (iii) bids, tenders, contracts (other than contracts for the payment of money) or leases to which any Credit Party or any of its Subsidiaries is a party as lessee made in the ordinary course of business; (iv) public or statutory obligations of any Credit 14 Party or any of its Subsidiaries; (v) all deferred taxes; (vi) trade payables in the ordinary course of business; and (vii) all unfunded pension fund and other employee benefit plan obligations and liabilities but only to the extent permitted to remain unfunded under applicable law. "Permitted Liens" shall mean (a) Liens existing on the date hereof in and to the Guarantor Collateral and securing the GESPA Debt, (b) Liens for unpaid taxes that either (A) are not yet delinquent, (B) would not have a Material Adverse Effect, or (C) do not constitute an Event of Default hereunder and are the subject of Permitted Protests, (c) Liens set forth on Schedule 5.8, (d) the interests of lessors under operating leases, (e) purchase money Liens or the interests of lessors under Capital Leases to the extent that such Liens or interests secure Permitted Purchase Money Indebtedness and so long as such Lien attaches only to the asset purchased or acquired and the proceeds thereof, (f) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of Credit Parties' business and not in connection with the borrowing of money, and which Liens either (A) are for sums not yet delinquent, or (B) are the subject of Permitted Protests, (g) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, social security and other similar laws, (h) Liens or deposits to secure performance of bids, tenders, or leases incurred in the ordinary course of Credit Parties' business and not in connection with the borrowing of money, (i) Liens granted as security for surety, performance or appeal bonds in connection with obtaining such bonds in the ordinary course of Credit Parties' business, (j) Liens resulting from any judgment or award that is not an Event of Default hereunder, and (k) with respect to any real property, easements, exceptions, reservations, encroachments, restrictions, rights of way, zoning restrictions and other similar title policy exceptions or encumbrances that do not materially interfere with or impair the use or operation thereof by Credit Parties. "Permitted Protest" shall mean the right of the applicable Credit Party to protest any Lien (other than any such Lien that secures the Obligations), taxes (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the Books in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by the applicable Credit Party in good faith, and (c) the Required Holders are satisfied in their reasonable discretion that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Purchasers' Liens. "Permitted Purchase Money Indebtedness" shall mean, as of any date of determination, Purchase Money Indebtedness in an aggregate amount outstanding at any one time not in excess of $3,000,000. "Person" shall mean any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). 15 "Plan" shall have the meaning set forth in Section 5.19(a) hereof. "Pledge Agreement" shall mean the Pledge Agreement, dated as of the Closing Date, executed by Greka Energy, Greka Integrated, Saba Petroleum Company, Windsor Energy US Corporation, Greka CA, Inc. and Rincon Island Limited Partnership in favor of the Collateral Agent, for the benefit of the Purchasers, pledging such Persons' equity interests in the other Credit Parties. "Purchase Money Indebtedness" shall mean Indebtedness (other than the Obligations, the GMAC Debt and the GESPA Debt, but including Capitalized Lease Obligations), incurred at the time of, or within 60 days after, the acquisition of any fixed assets for the purpose of financing all or any part of the acquisition cost thereof. "Purchaser" shall have the meaning set forth in the first paragraph of this Agreement and shall include any permitted assignee of a Note in accordance with Section 11.1 hereof. "Receivables" shall mean all of Credit Parties' now owned or hereafter acquired accounts and contract rights, instruments, insurance proceeds, documents, chattel paper, letters of credit and Credit Parties' rights to receive payment thereunder, any and all rights to the payment or receipt of money or other forms of consideration of any kind at any time now or hereafter owing or to be owing to Credit Parties, all proceeds thereof and all files in which Credit Parties has any interest whatsoever containing information identifying or pertaining to any of Credit Parties' Receivables, together with all of Credit Parties' rights to any merchandise which is represented thereby, and all Credit Parties' rights, title, security and guaranties with respect to each Receivable, including, without limitation, all rights of stoppage in transit, replevin and reclamation and all rights as an unpaid vendor. "Release" shall mean, with respect to any Person, any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration, in each case, of any Hazardous Material into the environment or into or out of any property owned by such Person, including the movement of Hazardous Material through or in the air, soil, surface water, ground water or property. "Remedial Action" shall mean all actions taken to (a) clean up, remove, remediate, contain, treat, monitor, assess, evaluate, or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform any pre-remedial studies, investigations, or post-remedial operation and maintenance activities, or (d) conduct any other actions authorized by 42 U.S.C. ss. 9601. 16 "Required Holders" shall mean Persons who hold at least a majority of the outstanding principal amount of the Notes. "Retained Goods" shall have the meaning set forth in Section 3.3(e) hereof. "Retiree Welfare Plan" shall refer to any Welfare Plan providing for continuing coverage or benefits for any participant or any beneficiary of a participant after such participant's termination of employment, other than continuation coverage provided pursuant to Section 4980B of the IRC and at the sole expense of the participant or the beneficiary of the participant. "Sanction/Embargo Programs" shall mean economic and other sanctions and embargo program restrictions promulgated by the government of the United States of America or any office or agency thereof including but not limited to the President and the Office of Foreign Assets Control of the Treasury Department, or either of them. "Santa Maria" shall mean Santa Maria Refining Company. "Santa Maria Collateral" shall mean, collectively, all of Santa Maria's now or hereafter acquired right, title, and interest in and to each of the following: (s) Inventory; (t) Receivables; (u) General Intangibles as they relate to Inventory and Receivables; (v) all of its books, records, ledgercards, files, correspondence, computer programs, tapes, disks and related data processing software (owned by it or in which it has an interest) which at any time evidence or contain information relating to (a), (b) and (c) above or are otherwise necessary or helpful in the collection thereof or realization thereupon; (w) all of its documents of title, policies and certificates of insurance, securities, chattel paper, other documents or instruments evidencing or pertaining to (a), (b) and (c) above; and (x) all products and proceeds of (a), (b), (c), (d) and (e) above (including, but not limited to, all claims to items referred to in (a), (b), (c), (d) and (e) above) and all claims of Santa Maria against third parties for (x) (i) loss of, damage to, or destruction of, and (ii) payments due or to become due under leases, rentals and hires of, any or all of (a), (b), (c), (d) and (e) above and (y) proceeds payable under, or unearned premiums with respect to, policies of insurance in whatever form. "SEC" shall mean the U.S. Securities and Exchange Commission, or any successor thereto. 17 "Securities Act" shall mean the Securities Act of 1933, as amended, and all rules and regulations promulgated thereunder. "Settlement Date" shall mean two (2) Business Days after the day on which the applicable Receivable is actually collected. "Solvent" shall mean, with respect to any Person, that the value of the assets of such Person (both at fair value and present fair saleable value) is, on the date of determination, greater than the total amount of liabilities (including contingent and unliquidated liabilities) of such Person as of such date and that, as of such date, such Person is able to pay all liabilities of such Person as such liabilities mature and does not have unreasonably small capital. In computing the amount of contingent or unliquidated liabilities at any time, such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Stock" shall mean all shares, options, warrants, general or limited partnership interests, limited liability company membership interest, participations or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company or equivalent entity whether voting or nonvoting, including, without limitation, common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Subsidiary" shall mean, with respect to any Person, (a) any corporation of which an aggregate of more than 50% of the outstanding Stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, Stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned legally or beneficially by such Person and/or one or more Subsidiaries of such Person, and (b) any partnership or other entity in which such Person and/or one or more Subsidiaries of such Person shall have an interest (whether in the form of voting or participation in profits or capital contribution) of more than 50%. "Tangible Net Worth" shall mean, as at a particular date, (a) the aggregate amount of all tangible assets of Santa Maria as may be properly classified as such in accordance with GAAP consistently applied excluding such other assets as are properly classified as intangible assets under GAAP, less (b) the aggregate amount of all liabilities of Santa Maria. "Tangible Net Worth Ratio" shall mean, as of any date, the ratio of (a) the Total Liabilities as of such date to (b) the sum of (i) Tangible Net Worth as of such date and (ii) Financial Subordinated Debt as of such date. "Taxes" shall have the meaning set forth in Section 2.12(a) hereof. 18 "Total Debt" shall mean, as of any date, the GESPA Debt, the GMAC Debt, the Indebtedness evidenced by the Notes and the Indebtedness described on Schedule 6.2(a). "Total Liabilities" shall mean, at any date, all obligations of Santa Maria which in conformity with GAAP would be included in determining total liabilities as shown on the liabilities side of a balance sheet of Santa Maria at such date, and in any event includes all Indebtedness of Santa Maria at such date, whether or not the same would be so shown. "Welfare Plan" shall mean any welfare plan, as defined in Section 3(1) of ERISA, which is maintained or contributed to by any Credit Party, any of its Subsidiaries or any ERISA Affiliate. "Withdrawal Liability" shall mean, at any time, the aggregate amount of the liabilities, if any, pursuant to Section 4201 of ERISA, and any increase in contributions pursuant to Section 4243 of ERISA with respect to all Multiemployer Plans. References to this "Agreement" shall mean this Notes Purchase Agreement, including all amendments, modifications and supplements and any exhibits or schedules to any of the foregoing, and shall refer to the Agreement as the same may be in effect at the time such reference becomes operative. Any accounting term used in this Agreement shall have, unless otherwise specifically provided herein, the meaning customarily given such term in accordance with GAAP, and all financial computations hereunder shall be computed, unless otherwise specifically provided herein, in accordance with GAAP consistently applied. That certain terms or computations are explicitly modified by the phrase "in accordance with GAAP" shall in no way be construed to limit the foregoing. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole, including the Exhibits and Schedules hereto, as the same may from time to time be amended, modified or supplemented, and not to any particular section, subsection or clause contained in this Agreement. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. 2. PURCHASE OF SECURITIES 2.1 PURCHASE OF NOTES. Subject to the terms and conditions set forth in this Agreement, the Purchasers agree, severally and not jointly, to purchase from Greka AM, and Greka AM agrees to issue and sell to each such Purchaser, on the Closing Date, the Floating Rate Senior Notes and the Fixed Rate Senior Notes to be issued by Greka AM set forth opposite each such Purchaser's name on Schedule A on the signature pages hereto. The aggregate principal amount of the Notes to be purchased on the Closing Date, and the aggregate purchase price therefor, shall be $20,000,000. 19 2.2 CLOSING. The closing of the purchase and sale of the Notes (the "Closing") shall take place on March 11, 2003 or such date and time as shall be mutually agreed to by the parties hereto (the "Closing Date") at the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York, or such other place as shall be mutually agreed to by the parties hereto. On the Closing Date, Greka AM will deliver to each Purchaser a Floating Rate Senior Note or a Fixed Rate Senior Note, as applicable, each payable to such Purchaser against delivery by such Purchaser of the applicable purchase price therefor (as set forth on Schedule A hereto), by wire transfer of funds in such amount to the account of Greka AM. On the Closing Date, Greka AM will also deliver to the Collateral Agent the Closing Fee. 2.3 OPTIONAL PREPAYMENT. Greka AM shall have the right, on 10 days prior notice to the Purchasers, to voluntarily prepay all or any portion (in multiples of not less than $500,000 or the amount outstanding on the Notes on a pro rata basis among each of the Notes) of the Notes. Each prepayment shall be accompanied by the payment of the accrued and unpaid interest on the amount being prepaid with respect to the Notes through the date of payment, plus a prepayment premium equal to the principal amount prepaid on the Notes multiplied by the following percentage: If Prepaid During the 6-Month Period Ending on: Percentage ------------------- ---------- October 31, 2003 0.00% April 30, 2004 1.00% October 31, 2004 2.00% If Prepaid at Anytime After October 31, 2004 0% 2.4 INTENTIONALLY OMITTED. 2.5 REPAYMENT OF NOTES. Greka promises to repay the entire unpaid principal amount of, and any unpaid and accrued interest on, the Notes on the Maturity Date. 2.6 USE OF PROCEEDS. The proceeds of the purchase price hereunder at the Closing shall be used solely (i) to repay the Bank of Texas Debt and the IPH Debt, (ii) to pay related transaction costs and fees, (iii) for working capital needs of Greka AM and (iv) to finance certain Capital Expenditures of the Credit Parties permitted pursuant to Section 6.2(t). 20 2.7 INTEREST RATES AND INTEREST PAYMENTS. (a) Floating Rate Senior Notes. Greka AM shall pay accrued interest on the Floating Rate Senior Notes to each Purchaser of a Floating Rate Senior Note, quarterly in arrears on the first day of each calendar quarter commencing on April 1, 2003 through the date of repayment in full (each, an "Interest Payment Date"), on such Purchaser's ratable share of the aggregate principal amount of the Floating Rate Senior Notes. The Floating Rate Senior Notes will bear interest on the outstanding principal amount thereof at a rate per annum equal to the greater of (i) the LIBOR Rate plus 6.25% and (ii) 8.25%. Interest on the Floating Rate Senior Notes will be computed on the basis of a year of 360 days, composed of twelve 30-day months, and the actual number of days elapsed. (b) Fixed Rate Senior Notes. Greka AM shall pay accrued interest on the Fixed Rate Senior Notes to each Purchaser of a Fixed Rate Senior Note, quarterly in arrears on each Interest Payment Date, on such Purchaser's ratable share of the aggregate principal amount of the Fixed Rate Senior Notes. The Fixed Rate Senior Notes will bear interest on the outstanding principal amount thereof at a rate per annum equal to 9.25%. Interest on the Fixed Rate Senior Notes will be computed on the basis of a year of 360 days, composed of twelve 30-day months, and the actual number of days elapsed. (c) If any payment on any Note becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate for such Note during such extension. (d) So long as any Event of Default shall be continuing, the interest rate applicable to the Notes shall each be increased by 2% per annum above the rate of interest otherwise applicable to such Notes. (e) Notwithstanding anything to the contrary set forth in this Section 2.7, if at any time until payment in full of the Notes, the interest rate payable on any Notes exceeds the highest rate of interest permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto (the "Maximum Lawful Rate"), then in such event and so long as the Maximum Lawful Rate would be so exceeded, the rate of interest payable on such Notes shall be equal to the Maximum Lawful Rate; provided, however, that if at any time thereafter the interest rate payable on such Notes is less than the Maximum Lawful Rate, Greka AM shall continue to pay interest thereunder at the Maximum Lawful Rate until such time as the total interest received by the Purchasers is equal to the total interest which they would have received had the interest rate on such Notes been (but for the operation of this paragraph) the applicable interest rate payable since the Closing Date. Thereafter, the interest rate payable on such Notes shall be the applicable interest rate pursuant to clauses (a) through (d) above unless and until such rate again exceeds the Maximum Lawful Rate, in which event this paragraph shall 21 again apply. In no event shall the total interest received by any Purchaser for any Notes pursuant to the terms hereof exceed the amount which it could lawfully have received for such Notes had the interest due hereunder for such Notes been calculated for the full term thereof at the Maximum Lawful Rate. In the event the Maximum Lawful Rate is calculated pursuant to this paragraph, such interest shall be calculated at a daily rate equal to the Maximum Lawful Rate divided by the number of days in the year in which such calculation is made. In the event that a court of competent jurisdiction, notwithstanding the provisions of this Section 2.7(f), shall make a final determination that a Purchaser has received interest hereunder or under any of the Loan Documents in excess of the Maximum Lawful Rate, such Purchaser shall, to the extent permitted by applicable law, promptly apply such excess first to any interest due or accrued and not yet paid under the Notes, then to the outstanding principal of the Notes, then to other unpaid Obligations and thereafter shall refund any excess to Greka AM or as a court of competent jurisdiction may otherwise order. (f) In addition to all amounts required to be paid by the Greka AM pursuant to this Section 2.7, Greka AM shall compensate each Purchaser, upon demand, for all losses, expenses and liabilities (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Purchaser to fund or maintain such Purchaser's Floating Rate Senior Notes that such Purchaser may sustain if for any reason any Floating Rate Senior Note is prepaid on a date that is not the last day of the applicable LIBOR Period or as a consequence of any failure by Greka AM to repay Floating Rate Senior Notes when required by the terms hereof. The Purchasers making demand for such compensation shall deliver to Greka AM concurrently with such demand a written statement as to such losses, expenses and liabilities, and this statement shall be conclusive as to the amount of compensation due to such Purchaser, absent manifest error. 2.8 RECEIPT OF PAYMENTS. Greka AM shall make each payment under the Notes not later than 5:00 P.M. (New York City time) on the day when due in lawful money of the United States of America in immediately available funds to each Purchaser's respective depository bank in the United States as designated by such Purchaser from time to time for deposit in such Purchaser's depositary account. For purposes only of computing interest under the Notes, all payments shall be applied by each Purchaser to the Notes on the day payment has been credited by such Purchaser's depository bank to such Purchaser's account in immediately available funds. 2.9 APPLICATION OF PAYMENTS. All payments hereunder shall be applied in the following order: (i) then due and payable or accrued interest payments on the Notes; (ii) then due and payable fees and expenses; (iii) then outstanding principal of the Notes; (iv) then other unpaid Obligations. 2.10 SHARING OF PAYMENTS. If any holder of the Notes or a portion thereof shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Notes held by it in excess of its ratable share of payments on account of the Notes, held by all holders thereof, such holder shall forthwith purchase from each other holder 22 of Notes, as applicable, such participations in the Note held by it as shall be necessary to cause such purchasing holder to share the excess payment ratably with each other holder of Notes; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing holder, such purchase shall be rescinded and such holder shall repay to the purchasing holder the purchase price to the extent of such recovery together with an amount equal to such holder's ratable share (according to the proportion of (i) the amount of such holder's required repayment to (ii) the total amount so recovered from the purchasing holder) of any interest or other amount paid or payable by the purchasing holder in respect of the total amount so recovered. Greka AM agrees that any holder so purchasing a participation from another holder pursuant to this Section 2.10 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such holder were the direct creditor of Greka AM in the amount of such participation. Greka AM further agrees to make all payments on the Notes to all holders thereof on a pro rata basis, based on the principal amount of the Notes held by each. 2.11 ACCESS. The Collateral Agent or, any of its officers, employees and/or agents shall have the right, exercisable no more than once per fiscal quarter upon 30 days' notice to Greka Energy (except that during the continuance of an Event of Default, no such limit on the number of visits shall apply and only 48 hours' notice shall be required with respect to visits of administrative offices and only 7 days' notice shall be required with respect to visits of operational sites) during normal business hours to visit and inspect the properties and facilities of Greka Energy and its Subsidiaries, including, without limitation, the Collateral, and to inspect, audit and make extracts from all of Greka Energy and its Subsidiaries' records, files, corporate books and books of account and to discuss the affairs, finances and accounts of Greka Energy and its Subsidiaries with the principal officers of the respective Person. The Collateral Agent and each other Person granted rights pursuant to this Section agree to be escorted by a Greka Energy employee while on Greka Energy's or any of its Subsidiaries' premises. Greka Energy shall deliver any document or instrument reasonably necessary for the Collateral Agent or any other Person granted rights pursuant to this Section, as such Person may request, to obtain records from any service bureau maintaining records for Greka Energy and its Subsidiaries. Greka Energy shall instruct its and its Subsidiaries' banking and other financial institutions to make available to the Collateral Agent and each other Person granted rights pursuant to this Section such information and records as such Person may reasonably request. All reasonable expenses incurred by the Collateral Agent or its agents in exercising its respective rights pursuant to this Section 2.11 shall be paid by Greka AM. Any Person exercising the rights pursuant to this Section 2.11 shall be subject to the confidentiality obligation set forth in Section 11.15. 2.12 TAXES. (a) Any and all payments by Greka AM hereunder or under the Notes shall be made, in accordance with this Section 2.12, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding taxes imposed on or measured by the net income of the respective 23 Purchaser, by the jurisdiction under the laws of which such Purchaser is organized or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If Greka AM shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under the Notes to any Purchaser, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.12) such Purchaser receives an amount equal to the sum it would have received had no such deductions been made, (ii) Greka AM shall make such deductions, and (iii) Greka AM shall pay the full amount deducted to the relevant taxing or other authority in accordance with applicable law. (b) In addition, Greka AM agrees to pay any present or future stamp or documentary taxes or any other sales, transfer, exercise, mortgage recording or property taxes, charges or similar levies that arise from any payment made hereunder or under the Notes or from the execution, sale, transfer, delivery or registration of, or otherwise with respect to, any of the Loan Documents (hereinafter referred to as "Other Taxes"). (c) Greka AM shall indemnify each Purchaser for the full amount of Taxes or Other Taxes (including without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.12) paid by such Purchaser and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date such Purchaser makes written demand therefor. (d) Within 30 days after the date of any payment of Taxes, Greka AM shall furnish to each Purchaser the original or a certified copy of a receipt evidencing payment thereof. (e) Without prejudice to the survival of any other agreement of any Credit Party hereunder, the agreements and obligations of Greka AM contained in this Section 2.12 shall survive the payment in full of the Notes. 3. CREATION OF SECURITY INTEREST 3.1 SECURITY INTEREST. To secure the prompt payment to the Purchasers of all Obligations, each Credit Party hereby assigns, pledges and grants to the Collateral Agent, for the benefit of the Purchasers, a continuing security interest in and to the Collateral, whether now owned or existing or hereafter acquired or arising and wheresoever located (whether or not the same is subject to Article 9 of the Code). All of the Credit Parties' ledger sheets, files, records, books of account, business papers and documents relating to the Collateral shall, until delivered to or removed by the Collateral Agent, be kept by the Credit Parties in trust for the Collateral Agent until all Obligations have been paid in full. Each confirmatory assignment schedule or other form of assignment hereafter executed by any Credit Party shall be deemed to include the foregoing grant, whether or not the same appears therein. 24 3.2 REPRESENTATIONS CONCERNING THE COLLATERAL. The Credit Parties represent and warrant: (a) all Receivables (i) represent complete bona fide transactions which require no further act under any circumstances on any Credit Party's part to make such Receivables payable by the respective Customers, (ii) to the best of the Credit Parties' knowledge, are not subject to any present, future or contingent Disputes; and (iii) do not represent bill and hold sales, consignment sales, guaranteed sales, sale or return or other similar understandings or obligations of any Affiliate or Subsidiary of any Credit Party; (b) the Credit Parties have no knowledge of any fact or circumstance not disclosed to the Purchasers which would impair the validity or collectibility of any Receivable other than Receivables not exceeding $500,000 in aggregate amount and that all documents in connection with each Receivable are genuine; and (c) in the event any amounts due and owing from any Customer to any Credit Party on any Receivable shall become subject to any Dispute, or to any other adjustment, such Credit Party agrees that it shall promptly provide the Collateral Agent with notice thereof. The Credit Parties further agree that they shall also notify the Collateral Agent promptly of all returns and credits in respect of any Receivables, which notice shall specify the Receivables affected. 3.3 COVENANTS CONCERNING THE COLLATERAL. The Credit Parties covenant that they shall: (a) place notations upon their respective books of account and any financial statement prepared by them to disclose the Collateral Agent's security interest in the Collateral; (b) defend the Collateral against the claims and demands of all parties; (c) not extend the payment terms of any Receivable without prompt notice thereof to the Collateral Agent; (d) perform all other steps reasonably requested by the Collateral Agent to create and maintain in the Collateral Agent's favor, for the benefit of the Purchasers, a valid perfected security interest in all Collateral in accordance with the priorities set forth in Section 3.9 hereof; and (e) promptly provide the Collateral Agent with duplicate originals of all credits which any Credit Party issues to its Customers with respect to any Receivable and immediately notify the Collateral Agent of any merchandise returns or Disputes with respect to any Receivable. The Credit Parties shall settle all Disputes at no cost or expense to the Collateral Agent. Should the 25 Collateral Agent so elect, upon the occurrence of any Event of Default, the Collateral Agent may at any time in its discretion: (i) withdraw any Credit Party's authority to issue credits to its Customers with respect to any Receivable without the Collateral Agent's prior written consent; (ii) litigate Disputes with respect to any Receivable or settle them directly with Customers on terms acceptable to the Collateral Agent; or (iii) direct any Credit Party to set aside and identify as the Collateral Agent's property any returned or repossessed merchandise or other goods which by sale resulted in Receivables theretofore assigned to the Collateral Agent ("Retained Goods"). All Retained Goods (and the proceeds thereof) shall be (A) held by the Credit Parties in trust for the Collateral Agent, (B) subject to the Collateral Agent's security interest hereunder, and (C) disposed of only in accordance with the Collateral Agent's express written instructions. 3.4 COLLECTION AND MAINTENANCE OF COLLATERAL AND RECORDS. The Collateral Agent may at any time verify the Receivables utilizing an audit control company or any other agent of the Collateral Agent. The Collateral Agent or the Collateral Agent's designee may notify Customers, at any time after a Default or Event of Default, at the Collateral Agent's sole discretion, of the Collateral Agent's security interest in Receivables, collect them directly and charge the collection costs and expenses to Greka AM, but, if requested by the Collateral Agent, the Credit Parties shall instruct all of their Customers to make payments on account of Receivables to an account under the Collateral Agent's dominion and control at such bank as the Collateral Agent may designate. To the extent any Credit Party receives any payments on account of Receivables, it shall hold such payments for the Collateral Agent's benefit in trust as the Collateral Agent's trustee and immediately deliver them to the Collateral Agent in their original form with all necessary endorsements or, as directed by the Collateral Agent, deposit such payments as directed by the Collateral Agent. All of the Credit Parties' invoices shall bear the terms stated on the applicable customer order. The Credit Parties shall provide the Collateral Agent, as requested by the Collateral Agent, such other schedules, documents and/or information regarding the Collateral as the Collateral Agent may reasonably require. 3.5 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time upon the request of the Collateral Agent, the Credit Parties shall execute and deliver to the Collateral Agent, any and all financing statements, original financing statements in lieu of continuation statements, fixture filings, security agreements, pledges, assignments, endorsements of certificates of title, and all other documents (the "Additional Documents") that the Collateral Agent may request in its reasonable discretion, in form and substance satisfactory to the Collateral Agent, to perfect and continue perfected or better perfect the Collateral Agent's Liens in the Collateral (whether now owned or hereafter arising or acquired) and in order to fully consummate all of the transactions contemplated hereby and under the other Loan Documents. To the maximum extent permitted by applicable law, each Credit Party authorizes the Collateral Agent to execute any such Additional Documents in the applicable Credit Party's name and authorizes the Collateral Agent to file such executed Additional Documents in any appropriate filing office. 26 3.6 POWER OF ATTORNEY. Each Credit Party hereby irrevocably makes, constitutes, and appoints the Collateral Agent (and any of the Collateral Agent's officers, employees, or agents designated by the Collateral Agent) as such Credit Party's true and lawful attorney, with power to (a) if such Credit Party refuses to, or fails timely to execute and deliver any of the documents described in Section 3.5, sign the name of such Credit Party on any of the documents described in Section 3.5, (b) at any time that an Event of Default has occurred and is continuing, sign such Credit Party's name on any invoice or bill of lading relating to the Collateral, drafts against Customers, or notices to Customers, (c) send requests for verification of Receivables, (d) endorse such Credit Party's name on any Collection item that may come into any Purchaser's possession, (e) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under such Credit Party's policies of liability insurance and other insurance covering any Collateral and make all determinations and decisions with respect to such policies of insurance, and (f) at any time that an Event of Default has occurred and is continuing, settle and adjust Disputes respecting the Receivables, chattel paper, or general intangibles directly with Customers, for amounts and upon terms that the Collateral Agent determines to be reasonable, and the Collateral Agent may cause to be executed and delivered any documents and releases that the Collateral Agent determines to be necessary. The appointment of the Collateral Agent as each Credit Party's attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed. 3.7 CODE AND OTHER REMEDIES. During the continuance of an Event of Default, the Collateral Agent may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code or any other applicable law. Without limiting the generality of the foregoing, the Collateral Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Credit Party or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Collateral Agent or any Purchaser or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Collateral Agent shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Credit Party, which right or equity is hereby waived and released. Each Credit Party further agrees, at the Collateral Agent's 27 request, to assemble the Collateral and make it available to the Collateral Agent at places which the Collateral Agent shall reasonably select, whether at such Credit Party's premises or elsewhere. The Collateral Agent shall apply the net proceeds of any action taken by it pursuant to this Section 3.7, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Collateral Agent and the Purchasers hereunder, including reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in accordance with the terms of this Agreement, and only after such application and after the payment by the Collateral Agent of any other amount required by any provision of law, need the Collateral Agent account for the surplus, if any, to any Credit Party. To the extent permitted by applicable law, each Credit Party waives all claims, damages and demands it may acquire against the Collateral Agent or any Purchaser arising out of the exercise by them of any rights hereunder, except for such claims, damages and demands resulting from the Collateral Agent's or any Purchaser's gross negligence or willful misconduct. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. 3.8 DEFICIENCY. Each Credit Party shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by the Collateral Agent or any Purchaser to collect such deficiency. 3.9 LIEN PRIORITY AND SUBORDINATION. The Collateral Agent, for the benefit of the Purchasers, shall have a first priority Lien on the Greka AM Collateral, free and clear of all Liens and subject only to Permitted Liens described in clauses (b) through (k) of the definition of Permitted Liens. The Collateral Agent, for the benefit of the Purchasers, shall have a second priority Lien on the Guarantor Collateral, free and clear of all Liens and subject only to Permitted Liens. 4. PURCHASERS' REPRESENTATIONS AND WARRANTIES Each Purchaser, severally and not jointly, makes the following representations and warranties to Greka AM, each and all of which shall survive the execution and delivery of this Agreement and the closings hereunder: 4.1 INVESTMENT INTENTION. Such Purchaser is purchasing the Notes for its own account, for investment purposes and not with a view to the distribution thereof. Such Purchaser will not, directly or indirectly, offer, transfer, sell, assign, pledge, hypothecate or otherwise dispose of the Notes (or solicit any offers to buy, purchase, or otherwise acquire any of the Notes), except in compliance with the Securities Act and any other applicable law. 4.2 ACCREDITED INVESTOR. Such Purchaser is an "accredited investor" (as that term is defined in Rule 501 of Regulation D under the Securities Act) and by reason of its business and financial experience, it has such knowledge, 28 sophistication and experience in business and financial matters as to be capable of evaluating the merits and risks of the prospective investment, is able to bear the economic risk of such investment and is able to afford a complete loss of such investment. 4.3 RESTRICTED SECURITIES. Each Purchaser understands that the Notes it is purchasing may be characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from Greka AM in a transaction not involving a public offering and that under such laws and applicable regulations such Notes may be resold without registration under the Securities Act, only in certain limited circumstances. In this connection, such Purchaser represents that it is familiar with Rule 144 of the Securities Act, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. 4.4 EXISTENCE. Such Purchaser is an entity duly organized, validly existing and in good standing under the laws of the state of its organization. 4.5 POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The execution, delivery and performance by such Purchaser of this Agreement and the other Loan Documents to be executed by it: (i) are within such Purchaser's corporate or other power; (ii) have been duly authorized by all necessary corporate or other action; (iii) are not in contravention of any provision of such Purchaser's certificate of incorporation or by-laws or other organizational documents; and (iv) will not violate any law or regulation, or any order or decree of any court or governmental instrumentality binding on such Purchaser. This Agreement and the other Loan Documents to which such Purchaser is a party have each been duly executed and delivered by such Purchaser and constitute the legal, valid and binding obligations of such Purchaser, enforceable against it in accordance with their respective terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). 5. CREDIT PARTIES' REPRESENTATIONS AND WARRANTIES Each Credit Party, jointly and severally, makes the following representations and warranties to each Purchaser and the Collateral Agent, each and all of which shall survive the execution and delivery of this Agreement and the Closing hereunder: 5.1 AUTHORIZED AND OUTSTANDING SHARES OF CAPITAL STOCK. After giving effect to the Closing, the authorized capital stock of Greka Energy consists of 50,000,000 shares of common stock, no par value, of which 4,951,451 shares are issued and outstanding. All of such issued and outstanding shares are validly issued, fully paid and non-assessable. Except as set forth on Schedule 5.1, (i) there is no existing option, warrant, call, commitment or other agreement to which Greka Energy is a party requiring, and there are no convertible securities 29 of Greka Energy outstanding which upon conversion would require, the issuance of any additional shares of Stock of Greka Energy or other securities convertible into shares of equity securities of Greka Energy, and (ii) there are no agreements to which Greka Energy is a party with respect to the voting or transfer of the Stock of Greka Energy. There are no stockholders' preemptive rights or rights of first refusal or other similar rights with respect to the issuance of Stock by Greka Energy. True and correct copies of the certificate of incorporation and by-laws of Greka Energy have been delivered to each Purchaser. Greka Energy is the record and beneficial owner of all issued and outstanding shares of capital stock of Greka AM and any right to acquire the same. 5.2 AUTHORIZATION AND ISSUANCE OF THE NOTES. The issuance of the Notes has been duly authorized by all necessary corporate action on the part of Greka AM and, upon delivery of the Notes against payment in accordance with the terms hereof, the Notes will have been validly issued, free and clear of all pledges, liens, encumbrances and preemptive rights. 5.3 SECURITIES LAWS. In reliance on the investment representations contained in Sections 4.1 and 4.2 hereof, the offer, issuance, sale and delivery of the Notes, as provided in this Agreement, are exempt from the registration requirements of the Securities Act and all applicable state securities laws, and are otherwise in compliance with such laws. Neither Greka AM nor any Person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of Greka AM under circumstances which would require the integration of such offering with the offering of the Notes under the Securities Act and the rules and regulations of the SEC thereunder) which might subject the offering, issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act. 5.4 CORPORATE EXISTENCE. Each of the Credit Parties, (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of its incorporation, as set forth on Schedule 5.5; (ii) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification (except for jurisdictions in which such failure to so qualify or to be in good standing would not have a Material Adverse Effect); (iii) has the requisite corporate power and authority and the legal right to own, pledge, mortgage or otherwise encumber and operate its properties, to lease the property it operates under lease, and to conduct its business as now being conducted and as proposed to be conducted; and (iv) has, or has applied for, all material licenses, permits, consents or approvals from or by, and has made all material filings with, and has given all material notices to, all Governmental Authorities having jurisdiction, to the extent required for such ownership, operation and conduct. 5.5 SUBSIDIARIES. There currently exist no Subsidiaries of Greka Energy or Greka AM other than as set forth on Schedule 5.5 hereto, which sets forth such Subsidiaries, together with their respective jurisdictions of organization, and the authorized and outstanding capital Stock of each such Subsidiary, by class and number and percentage of each class owned by Greka Energy or any other Person. There are no options, warrants, rights to purchase or similar rights covering capital Stock for any such Subsidiary. 30 5.6 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The execution, delivery and performance by each Credit Party of this Agreement, the other Loan Documents to which each is a party and all instruments and documents to be delivered by each Credit Party, and the consummation of the other transactions contemplated by any of the foregoing: (i) are within such Credit Party's corporate power and authority; (ii) have been duly authorized by all necessary or proper corporate action; (iii) are not in contravention of any provision of such Credit Party's certificate of incorporation or by-laws; (iv) will not violate any law or regulation, or any order or decree of any court or governmental instrumentality; (v) will not conflict with or result in the breach or termination of, constitute a default under or accelerate any performance required by, any indenture, mortgage, deed of trust, lease, agreement or other instrument to which such Credit Party or any of its Subsidiaries is a party or by which such Credit Party, any of its Subsidiaries or any of their property is bound; (vi) will not result in the creation or imposition of any Lien upon any of the property of such Credit Party or any of its Subsidiaries other than Permitted Liens; and (vii) do not require the consent or approval of, or any filing with, any Governmental Authority or any other Person (except to the extent previously obtained or made). At or prior to the Closing Date, each of this Agreement and the other Loan Documents shall have been duly executed and delivered by each Credit Party thereto and each shall then constitute a legal, valid and binding obligation of such Credit Party, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). 5.7 FINANCIAL STATEMENTS. (a) The audited consolidated balance sheets of Greka Energy and its Subsidiaries and Greka AM and its Subsidiaries as at December 31, 2001, and the related consolidated statements of income and cash flows for the year then ended, with the opinion thereon of a nationally known accounting firm acceptable to the Required Holders, copies of which have been previously delivered to each Purchaser, and the audited consolidated balance sheet of Greka Energy and its Subsidiaries and Greka AM and its Subsidiaries as at December 31, 2002 (the "Balance Sheet") and the related consolidated statements of income, and cash flows for the year then ended with the opinion thereof of a nationally known accounting firm acceptable to the Required Holders, copies of which shall be delivered to each Purchaser by March 31, 2003, have been or will be, except as noted therein, prepared in conformity with GAAP consistently applied throughout the periods involved and present fairly or will present fairly in all material respects the consolidated financial position of Greka Energy and its Subsidiaries and Greka AM and its Subsidiaries, as applicable, as at the dates thereof, and the consolidated results of their operations and cash flows for the periods then ended, subject, in the case of the unaudited financial statements, to normal year-end audit adjustments. Each Credit Party is, and after giving effect to the transaction contemplated hereby will be, Solvent. 31 (b) Except as set forth on Schedule 5.7, no Credit Party nor any of its Subsidiaries has any material obligations, contingent or otherwise, including, without limitation, liabilities for Charges, long-term leases or unusual forward or long-term commitments which are not reflected in the Balance Sheet, other than those incurred since December 31, 2001 in the ordinary course of business. (c) Except as set forth on Schedule 5.7, no dividends or other distributions have been declared, paid or made upon any shares of capital Stock of any Credit Party, nor have any shares of capital Stock of any Credit Party been redeemed, retired, purchased or otherwise acquired for value by any Credit Party since December 31, 2001. 5.8 OWNERSHIP OF PROPERTY. (a) Except as set forth on Schedule 5.8, neither Credit Party nor any of its Subsidiaries owns any material interest in real estate. Each Credit Party and its Subsidiaries has good and marketable and insurable fee simple title to its owned real property, free and clear of all Liens. Each Credit Party and its Subsidiaries has valid and marketable leasehold interests in the leases described on Schedule 5.8 hereto, and, except as set forth on Schedule 5.8, good and marketable title to, or valid leasehold interests in, all of its other properties and assets free and clear of all Liens, except Permitted Liens. (b) All material real property leased by each Credit Party and its Subsidiaries is set forth on Schedule 5.8. Each of such leases is valid and enforceable in accordance with its terms (subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity)) and is in full force and effect. The Credit Parties have made available or delivered to each Purchaser true and complete copies of each of such material leases set forth on Schedule 5.8 and all documents affecting the rights or obligations of the Credit Parties or any of their Subsidiaries, including, without limitation, any non-disturbance and recognition agreements, subordination agreements, attornment agreements and agreements regarding the term or rental of any of the leases. Except as set forth on Schedule 5.8, none of the Credit Parties, any of its Subsidiaries nor, to its knowledge, any other party to any such lease is in default of its obligations thereunder or has delivered or received any notice of default under any such lease, nor has any event occurred which, with the giving of notice, the passage of time or both, would constitute a default under any such lease. (c) Except as disclosed on Schedule 5.8, no Credit Party or its Subsidiaries is obligated under or a party to, any option, right of first refusal or any other contractual right to purchase, acquire, sell, assign or dispose of any real property owned or leased by such Credit Party or such Subsidiary. 32 5.9 MATERIAL CONTRACTS; INDEBTEDNESS. Schedule 5.9 contains a true, correct and complete list and description of all Material Contracts. Each Material Contract is a valid and binding agreement of a Credit Party or its Subsidiaries (as the case may be) enforceable against such Credit Party or such Subsidiary in accordance with its terms (subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity)), and none of the Credit Parties nor any of its Subsidiaries has any knowledge that any Material Contract is not a valid and binding agreement against the other parties thereto. Each Credit Party and each of its Subsidiaries has fulfilled or is complying with all obligations required pursuant to the Material Contract to have been performed by such Credit Party or such Subsidiary on its part. Except as set forth in Schedule 5.9, none of the Credit Parties nor any of its Subsidiaries is in default or breach, nor to such Credit Party's or such Subsidiary's knowledge, is any third party in default or breach under, or with respect to, any Material Contract. Except as set forth on Schedule 5.9, none of the Credit Parties nor any of its Subsidiaries has any Indebtedness or Liens on its assets except Permitted Indebtedness and Permitted Liens, respectively. 5.10 ENVIRONMENTAL PROTECTION. (a) Except as set forth on Schedule 5.10, (i) all real property owned, leased or otherwise operated by each Credit Party and its Subsidiaries (each, a "Facility") is free of contamination from any Hazardous Materials, the presence of which could result in Environmental Liabilities and Costs in excess of more than $500,000 with respect to any one such event or $1,000,000 in the aggregate, (ii) none of the Credit Parties nor any of its Subsidiaries has caused or suffered to occur any Release at, or under any current or formally owned Facility and, to the knowledge of any Credit Party, no Release has occurred at any current or former Facility, except in either case, Releases which would not reasonably be expected to result in the Credit Parties and its Subsidiaries incurring Environmental Liabilities and Costs in excess of $500,000 with respect to any one such event or $1,000,000 in the aggregate, (iii) each Credit Party and each of its Subsidiaries and each Facility and the operations thereon have been and are in compliance with Environmental Laws, except for noncompliance that would not reasonably be expected to result in any Credit Party and its Subsidiaries incurring Environmental Liabilities and Costs in excess of $500,000 with respect to any one such event or $1,000,000 in the aggregate; (iv) each Credit Party and each of its Subsidiaries has obtained, or has applied for, currently maintains and is in full compliance with and in good standing under all permits, licenses, or other authorizations required under Environmental Laws except where the failure to obtain, maintain or comply with such Environmental Permits is not reasonably expected to result in any Credit Party or any Subsidiary incurring Environmental Liabilities and Costs in excess of $1,000,000 with respect to any one such event or $1,000,000 in the aggregate and none of the Credit Parties nor any of its 33 Subsidiaries has any knowledge of any proceedings to substantially modify or to revoke any such permit, (v) there are no investigations, proceedings or litigation pending or, to any Credit Party's or its Subsidiaries' knowledge, threatened affecting or against such Credit Party, any of its Subsidiaries or the Facilities alleging noncompliance with or potential liability under Environmental Laws, (vi) except for communications in connection with the matters listed on Schedule 5.10, none of the Credit Parties nor any of its Subsidiaries has received any communication or notice (including, without limitation, requests for information) indicating the potential of Environmental Liabilities and Costs against such Credit Party or its Subsidiaries, which has not been resolved, and (vii) none of the Credit Parties nor any of its Subsidiaries is aware of any facts, circumstances or conditions that could result in the Credit Parties or its Subsidiaries incurring unbudgeted Environmental Liabilities and Costs in excess of $500,000 with respect to any one such event and $1,000,000 in the aggregate. (b) Each of the Credit Parties has provided Purchasers with copies of any material environmental assessments, audits, inspections or similar reports relating to the Credit Parties and their respective Subsidiaries and all real estate owned, operated or leased by or for any Credit Party or any of its Subsidiaries. 5.11 LABOR MATTERS. (a) There are no strikes or other labor disputes against any Credit Party or any of its Subsidiaries pending or, to such Credit Party's or its Subsidiaries' knowledge, threatened. Hours worked by and payment made to employees of such Credit Party's and its Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable law dealing with such matters. All payments due from each Credit Party and each of its Subsidiaries on account of employee health and welfare insurance have been paid or accrued as a liability on the books of such Credit Party or such Subsidiary. There is no organizing activity involving any Credit Party or any of its Subsidiaries pending or, to such Credit Party's or its Subsidiaries' knowledge, threatened by any labor union or group of employees. There are no representation proceedings pending or, to any Credit Party's or its Subsidiaries' knowledge, threatened with the National Labor Relations Board, and no labor organization or group of employees of any Credit Party or its Subsidiaries has made a pending demand for recognition. There are no complaints or charges against any Credit Party or any of its Subsidiaries pending or, to such Credit Party's or its Subsidiaries' knowledge, threatened to be filed with any federal, state, local or foreign court, governmental agency or arbitrator based on, arising out of, in connection with, or otherwise relating to the employment or termination of employment by such Credit Party's or any of its Subsidiaries of any individual. (b) Neither Credit Party nor any of its Subsidiaries is, or during the five years preceding the date hereof was, a party to any labor or collective bargaining agreement and there are no labor or collective bargaining agreements which pertain to employees of any Credit Party or its Subsidiaries. 34 5.12 OTHER VENTURES. Except as set forth on Schedule 5.12, none of the Credit Parties nor any of its Subsidiaries is engaged in any joint venture or partnership with any other Person. 5.13 TAXES. Except as set forth on Schedule 5.13, all material federal, state, local and foreign tax returns, reports and statements required to be filed by each Credit Party and its Subsidiaries have been timely filed with the appropriate Governmental Authority and all such returns, reports and statements are true, correct and complete in all material respects. All Charges and other impositions due and payable for the periods covered by such returns, reports and statements have been paid prior to the date on which any fine, penalty, interest or late charge may be added thereto for nonpayment thereof, or any such fine, penalty, interest, late charge or loss has been paid. Proper and accurate amounts have been withheld by such Credit Party and its Subsidiaries from its employees for all periods in full and complete compliance with the tax, social security and unemployment withholding provisions of applicable federal, state, local and foreign law and such withholdings have been timely paid to the respective governmental agencies. No Credit Party nor any of its Subsidiaries has executed or filed with the IRS or any other Governmental Authority any agreement or other document extending, or having the effect of extending, the period for assessment or collection of any Charges. No tax audits or other administrative or judicial proceedings are pending or threatened with regard to any Charges for which any Credit Party or its Subsidiary may be liable and no assessment of Charges is proposed against any Credit Party or its Subsidiary. No Credit Party nor any of its Subsidiaries has filed a consent pursuant to IRC Section 341(f) or agreed to have IRC Section 341(f)(2) apply to any dispositions of subsection (f) assets (as such term is defined in IRC Section 341(f)(4)). None of the property owned by any Credit Party or any of its Subsidiaries is property which such Credit Party is required to treat as being owned by any other Person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended, and in effect immediately prior to the enactment of the Tax Reform Act of 1986 or is "tax-exempt use property" within the meaning of IRC Section 168(h). No Credit Party nor any of its Subsidiaries has agreed or has been requested to make any adjustment under IRC Section 481(a) by reason of a change in accounting method or otherwise. No Credit Party nor any of its Subsidiaries has any obligation under any written tax sharing agreement. 5.14 NO LITIGATION. Except as disclosed on Schedule 5.14, no action, claim or proceeding is now pending or, to the knowledge of any Credit Party or its Subsidiaries, threatened against such Credit Party or any of its Subsidiaries, at law, in equity or otherwise, before any court, board, commission, agency or instrumentality of any federal, state, or local government or of any agency or subdivision thereof, or before any arbitrator or panel of arbitrators, which if adversely determined would result in a Material Adverse Effect or a judgment for the payment of money in excess of $10,000. 5.15 BROKERS. No broker or finder acting on behalf of any Credit Party or any of its Subsidiaries brought about the consummation of the transactions contemplated pursuant to this Agreement and neither such Credit Party nor any of 35 its Subsidiaries has any obligation to any Person in respect of any finder's or brokerage fees (or any similar obligation) in connection with the transactions contemplated by this Agreement. 5.16 EMPLOYMENT AGREEMENTS. Except as set forth on Schedule 5.16, there are no employment, consulting or management agreements covering management of any Credit Party or any of its Subsidiaries. 5.17 PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES. Each Credit Party and each of its Subsidiaries owns all licenses, patents, patent applications, copyrights, service marks, trademarks and registrations and applications for registration thereof, and trade names necessary to continue to conduct its business as heretofore conducted by it and now being conducted by it, each of which is listed, together with Patent and Trademark Office or Copyright Office application or registration numbers, where applicable, on Schedule 5.17. To such Credit Party's knowledge, such Credit Party and each of its Subsidiaries conducts its businesses without infringement or claim of infringement of any license, patent, copyright, service mark, trademark, trade name, trade secret or other intellectual property right of others, except as set forth on Schedule 5.17. To such Credit Party's knowledge, there is no infringement by others of any license, patent, copyright, service mark, trademark, trade name, trade secret or other intellectual property right of such Credit Party's or any of its Subsidiaries, except as set forth on Schedule 5.17. 5.18 NO MATERIAL ADVERSE EFFECT. Except as set forth on Schedule 5.18, no event has occurred since December 31, 2001 which has had or could be reasonably expected to have a Material Adverse Effect. 5.19 ERISA. (a) Schedule 5.19 sets forth: (i) all "employee benefit plans", as defined in Section 3(3) of ERISA, and any other employee benefit arrangements or payroll practices, including, without limitation, severance pay, sick leave, vacation pay, salary continuation for disability, consulting or other compensation agreements, retirement, deferred compensation, bonus, stock purchase, hospitalization, medical insurance, life insurance and scholarship programs (the "Plans") maintained by any Credit Party and any of its Subsidiaries or to which such Credit Party or any its Subsidiaries contributed or is obligated to contribute thereunder, and (ii) all "employee pension plans", as defined in Section 3(2) of ERISA (the "Pension Plans"), maintained by such Credit Party, any of its Subsidiaries or any of its ERISA Affiliates to which such Credit Party, any of its Subsidiaries or any of its ERISA Affiliates contributed or is obligated to contribute thereunder. (b) No Purchaser will have (i) any obligation to make any contribution to any Multiemployer Plan or (ii) any withdrawal liability from any such Multiemployer Plan under Section 4201 of ERISA which it would not have had if it had not purchased the Notes from Greka AM at the Closing in accordance with the terms of this Agreement. 36 (c) The Pension Plans intended to be qualified under Section 401 of the IRC are so qualified and the trusts maintained pursuant thereto are exempt from federal income taxation under Section 501 of the IRC, and nothing has occurred with respect to the operation of the Pension Plans which could cause the loss of such qualification or exemption or the imposition of any liability, penalty, or tax under ERISA or the IRC. (d) All contributions required by law or pursuant to the terms of the Plans (without regard to any waivers granted under Section 412 of the IRC) to any funds or trusts established thereunder or in connection therewith have been made by the due date thereof (including any valid extension) and no accumulated funding deficiencies exist in any of the Pension Plans. (e) There is no "amount of unfunded benefit liabilities" as defined in Section 4001(a)(18) of ERISA in any of the respective Pension Plans. Each of the respective Pension Plans are fully funded in accordance with the actuarial assumptions used by the PBGC to determine the level of funding required in the event of the termination of the Pension Plan and all benefit liabilities do not exceed the assets of such Pension Plans. (f) There has been no "reportable event" as that term is defined in Section 4043 of ERISA and the regulations thereunder with respect to the Pension Plans which would require the giving of notice, or any event requiring disclosure under Sections 4041(c)(3)(C), 4063(a) or 4068(f) of ERISA. (g) There is no material violation of ERISA with respect to the filing of applicable reports, documents, and notices regarding the Plans with the Secretary of Labor and the Secretary of the Treasury or the furnishing of such documents to the participants or beneficiaries of the Plans. (h) True, correct and complete copies of the following documents, with respect to each of the Plans, have been made available or delivered to each Purchaser by each Credit Party: (A) any plans and related trust documents, and amendments thereto, (B) the most recent Forms 5500 (including any schedules thereto) and the most recent actuarial valuation report, if any, (C) the last IRS determination letter, (D) summary plan descriptions, (E) written communications to employees relating to the Plans and (F) written descriptions of all non-written agreements relating to the Plans. (i) There are no pending actions, claims or lawsuits which have been asserted or instituted against the Plans, the assets of any of the trusts under such Plans or the Plan sponsor or the Plan administrator, or against any fiduciary of the Plans with respect to the operation of such Plans (other than routine benefit claims), nor does any Credit Party or any of its Subsidiaries have knowledge of facts which could form the basis for any such claim or lawsuit. 37 (j) All amendments and actions required to bring the Plans into conformity in all material respects with all of the applicable provisions of ERISA and other applicable laws have been made or taken except to the extent that such amendments or actions are not required by law to be made or taken until a date after the Closing Date. (k) The Plans have been maintained, in all material respects, in accordance with their terms and with all provisions of ERISA (including rules and regulations thereunder) and other applicable Federal and state law, and no Credit Party nor any of its Subsidiaries or "party in interest" or "disqualified person" with respect to the Plans has engaged in a "prohibited transaction" within the meaning of Section 4975 of the IRC or Section 406 of ERISA. (l) None of the Credit Parties, any of their Subsidiaries or any ERISA Affiliate has terminated any Pension Plan, or incurred any outstanding liability under Section 4062 of ERISA to the PBGC, or to a trustee appointed under Section 4042 of ERISA. (m) None of the Credit Parties, any of their Subsidiaries or any ERISA Affiliate maintains retired life and retired health insurance plans which are Welfare Plans and which provide for continuing benefits or coverage for any participant or any beneficiary of a participant except as may be required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and at the expense of the participant or the participant's beneficiary. Each Credit Party, all of its Subsidiaries and all ERISA Affiliates which maintain a Welfare Plan have complied with the notice and continuation requirements of COBRA and the regulations thereunder. (n) None of the Credit Parties, any of their Subsidiaries or any ERISA Affiliate has contributed or been obligated to contribute to a Multiemployer Plan as of the Closing. (o) None of the Credit Parties, any of their Subsidiaries or any ERISA Affiliate has withdrawn in a complete or partial withdrawal from any Multiemployer Plan prior to the Closing Date, nor has any of them incurred any liability due to the termination or reorganization of a Multiemployer Plan. (p) None of the Credit Parties, any of their Subsidiaries, any ERISA Affiliate or any organization to which any Credit Party is a successor or parent corporation, within the meaning of Section 4069(b) of ERISA, has engaged in any transaction, within the meaning of Section 4069 of ERISA. 5.20 SEC DOCUMENTS. Greka Energy has made available to each Purchaser a true and complete copy of each report, schedule, registration statement and definitive proxy statement filed by Greka Energy with the SEC since December 31, 2000 and prior to the date of this Agreement (the "SEC Documents"), which are all the documents (other than preliminary material) that either of them was required to file with the SEC since such date. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 38 Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 5.21 ORDINARY COURSE OF BUSINESS. Except as set forth on Schedule 5.7 hereto or in response to the events described therein, since December 31, 2001, each Credit Party and each of its Subsidiaries has conducted its operations only in the ordinary course of business consistent with past practice. 5.22 INSURANCE. Schedule 5.22 hereto contains a complete and correct list of all policies of insurance of any kind or nature covering any Credit Party and its Subsidiaries, including, without limitation, policies of life, fire, theft, employee fidelity and other casualty and liability insurance, indicating the type of coverage, name of insured, the insurer, the premium, the expiration date of each policy and the amount of coverage, and such policies are in full force and effect. Complete and correct copies of each such policy have been furnished or made available to each Purchaser. Such policies are in amounts customary for the industry in which the Credit Parties and their Subsidiaries operate. 5.23 COMPLIANCE WITH LAW. Each Credit Party and its Subsidiaries are in compliance with all Applicable Law, except where the failure to be in compliance would not have a Material Adverse Effect. 5.24 ABSENCE OF DEFAULT. Each Credit Party and its Subsidiaries are in material compliance in all respects with all of the provisions of their respective certificates of incorporation and by-laws (or the equivalent thereof), and no event has occurred or failed to occur (including, without limitation, any matter which could create a default hereunder by cross-default) which has not been remedied or waived, the occurrence or non-occurrence of which constitutes, (i) a Default or (ii) a default by such Credit Party or any of its Subsidiaries under any indenture, agreement or other instrument relating to Indebtedness of such Credit Party or any of its Subsidiaries in the amount of $1,000,000 or more in the aggregate, any material license, or any judgment, decree or order to which such Credit Party or any of its Subsidiaries is a party or by which such Credit Party or any of its Subsidiaries or any of their respective properties may be bound or affected. 5.25 AGREEMENTS WITH AFFILIATES. Except for agreements or arrangements with Affiliates wherein any Credit Party or one or more of its Subsidiaries provides services to such Affiliates for fair consideration or which are set forth on Schedule 5.25 hereto, neither Credit Party nor any of its Subsidiaries has (i) any written agreements or binding arrangements of any kind with any Affiliate or (ii) any management or consulting agreements of any kind with any Affiliate. 39 5.26 GAS CONTRACTS. No Credit Party (i) is obligated in any material respect by virtue of any prepayment made under any contract containing a "take-or-pay" or "prepayment" provision or under any similar agreement to deliver hydrocarbons produced from or allocated to any Oil and Gas Properties at some future date without receiving full payment therefor at the time of delivery, and (ii) has not produced gas, in any material amount, subject to, and neither any Credit Party nor any of the Oil and Gas Properties is subject to, balancing rights of third parties or balancing duties under governmental requirements, except as to such matters for which such Credit Party has established monetary reserves adequate in amount to satisfy such obligations and has segregated such reserves from other accounts. 5.27 REFUNDS. No orders of, proceedings pending before, or other governmental requirements of, the Federal Energy Regulatory Commission, or any other similar state or federal regulatory body or governmental authority exist which could result in any Credit Party being required to refund any material portion of the proceeds received or to be received from the sale of hydrocarbons constituting part of the Oil and Gas Properties. 5.28 MINUTE BOOKS. The minute books of each Credit Party, as previously made available to each Purchaser, accurately reflect all formal corporate action of the stockholders and Board of Directors of such Credit Party. 5.29 FULL DISCLOSURE. No information contained in this Agreement, any other Loan Document, the Financials or any written statement furnished by or on behalf of any Credit Party pursuant to the terms of this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which made. 6. COVENANTS 6.1 AFFIRMATIVE COVENANTS. Each Credit Party, jointly and severally, covenants and agrees that from and after the date hereof (except as otherwise provided herein, or unless the Required Holders have given their prior written consent) so long as the Notes are outstanding, it shall: (a) BOOKS AND RECORDS. Keep adequate records and books of account with respect to its business activities, and the Collateral, in which proper entries reflecting all of its financial transactions are made, in accordance with GAAP. (b) FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Provide to each Purchaser: (i) as soon as available, but in any event within 90 days (or, if such Person has filed a Form 12b-25 filing extension with the SEC, 105 days) after the end of each Fiscal Year, Greka Energy's and its Subsidiaries' and Greka AM and its Subsidiaries' balance sheet as at the end of such Fiscal Year 40 and the related statements of income, retained earnings and statement of cash flow for such Fiscal Year, setting forth in comparative form the figures as at the end of and for the previous Fiscal Year, which shall have been reported on by independent certified public accountants acceptable to the Required Holders and shall be accompanied by an unqualified audit report issued by such independent certified public accountants; (ii) as soon as available, but in any event within 45 days (or, if such Person has filed a Form 12b-25 filing extension with the SEC, 50 days) after the close of each quarter except the fourth quarter, and upon request by the Required Holders with respect to the fourth quarter, the balance sheet as at the end of such quarter and the related statements of income, retained earnings and statement of cash flow for such quarter covering Greka Energy's and its Subsidiaries' and Greka AM and its Subsidiaries' operations during such period, which have been internally prepared by Greka Energy and Greka AM. All financial statements required by this Section 6.1(b) shall be prepared in accordance with GAAP, subject to year-end adjustments in the case of quarterly statements. At the times the financial statements are furnished pursuant to this Section 6.1(b), a certificate of Greka Energy's President or Chief Financial Officer shall be delivered to the Purchasers stating that, based on an examination sufficient to enable him to make an informed statement, no Default or Event of Default exists, or, if such is not the case, specifying such Default or Event of Default and its nature, when it occurred, whether it is continuing and the steps being taken by Greka AM or Greka Energy with respect to such event. (iii) monthly (with respect to the month then most recently ended): (x) flash reports containing information contained in Schedule 6.1(b) hereto, (y) reports on the average sales prices of crude oil produced by fields operated by the Credit Parties and sold to non-affiliates of the Credit Parties and (z) balance sheets and the related statements of income covering Greka Energy's and its Subsidiaries' and Greka AM's and its Subsidiaries' operations during each such month, which have been internally prepared by Greka Energy and Greka AM in accordance with GAAP. (iv) by January 31 of each Fiscal Year commencing with Fiscal Year 2003, a month-by-month projected operating budget and cash flow for such Fiscal Year (including an income statement for each month and a balance sheet as at the end of the last month in each fiscal quarter), such projections to be accompanied by a certificate signed by Greka Energy's President or Chief Financial Officer to the effect that such projections have been prepared on the basis of sound financial planning practice consistent with past budgets and financial statements and that such officer has no reason to question the reasonableness of any material assumptions on which such projections were prepared. (c) COMMUNICATIONS WITH ACCOUNTANTS. Permit the Purchasers, upon reasonable notice and with a representative of Greka AM or Greka Energy present, to communicate directly with its independent certified public accountants and 41 tax advisors and authorize those accountants to disclose to the Purchasers any and all financial statements and other supporting financial documents and schedules including copies of any management letter with respect to the business, financial condition and other affairs of the Credit Parties and their Subsidiaries. (d) MAINTENANCE OF EXISTENCE; CONDUCT OF BUSINESS AND OPERATION OF PROPERTIES. Do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, and its rights and franchises, (ii) at all times maintain, preserve and protect all of its patents, trademarks and trade names, and preserve all the remainder of its material assets, in use or useful in the conduct of its business and keep the same in good repair, working order and condition (taking into consideration ordinary wear and tear) and from time to time make, or cause to be made, all needful and proper repairs, renewals and replacements, betterments and improvements thereto consistent with industry practices, and (iii) operate or, to the extent that the right of operation is vested in others, will exercise its best efforts to require the operator to operate the Oil and Gas Properties and all wells drilled thereon and that may hereafter be drilled thereon, continuously and in good workmanlike manner in accordance with the best usage of the field and in accordance with all laws of the United States of America and the state in which such property is situated, as well as all rules, regulations and laws of any governmental agency having jurisdiction to regulate the manner in which the operation of such property shall be carried on, and will comply with all terms and conditions of the Leases such Credit Party now holds and each assignment or contract obligating such Credit Party in any way with respect to the Oil and Gas Property; but nothing herein shall be construed to empower any Credit Party to bind the Purchasers to any contract or obligation or render the Purchasers in any way responsible or liable for bills or obligations incurred by any Credit Party. (e) TAXES. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against the Credit Parties or any of their assets to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. The Credit Parties shall pay all transfer, excise or similar taxes (not including income or franchise taxes) in connection with the issuance, sale, delivery or transfer by the Credit Parties to Purchasers of the Notes, and shall indemnify and save Purchasers harmless without limitation as to time against any and all liabilities with respect to such taxes. The Credit Parties shall not be responsible for any taxes in connection with the transfer of the Notes by the holder thereof. The obligations of the Credit Parties under this Section 6.1(e) shall survive the payment, prepayment or redemption of the Notes and the termination of this Agreement. (f) INSURANCE. At its own cost and expense in amounts and with carriers acceptable to the Purchasers, (i) keep all its insurable properties and properties in which it has an interest insured against the hazards of fire, flood, sprinkler leakage, those hazards covered by extended coverage insurance and such other hazards, and for such amounts, as is customary in the case of companies engaged in businesses similar to the Credit Parties' including, without limitation, business interruption insurance; (ii) maintain a bond in 42 such amounts as is customary in the case of companies engaged in businesses similar to the Credit Parties' insuring against larceny, embezzlement or other criminal misappropriation of insured's officers and employees who may either singly or jointly with others at any time have access to the assets or funds of the Credit Parties either directly or through authority to draw upon such funds or to direct generally the disposition of such assets; (iii) maintain public and product liability insurance against claims for personal injury, death or property damage suffered by others; (iv) maintain all such workers' compensation or similar insurance as may be required under the laws of any state or jurisdiction in any Credit Party is engaged in business; (v) furnish the Collateral Agent with (x) copies of all policies within 5 days after any expiration date and evidence of the maintenance of such policies at least 15 days before any expiration date, and (y) appropriate loss payable endorsements in form and substance satisfactory to the Required Holders, in the case of Greka AM Collateral, naming the Collateral Agent as loss payee for the benefit of the Purchasers and in the case of Guarantor Collateral, naming the Collateral Agent as loss payee for the benefit of the Purchasers subject to the rights granted to the holders of the GESPA Debt and in each case, providing that as to the Purchasers the insurance coverage shall not be impaired or invalidated by any act or neglect of any Credit Party and the insurer will provide the Collateral Agent with at least 30 days notice prior to cancellation. The Credit Parties shall instruct the insurance carriers that in the event of any loss thereunder, the carriers shall make payment for such loss to the Collateral Agent and not to the Credit Parties and the Collateral Agent jointly. If any insurance losses are paid by check, draft or other instrument payable to the Credit Parties and the Collateral Agent jointly, the Collateral Agent may endorse any Credit Party's name thereon and do such other things as the Collateral Agent may deem advisable to reduce the same to cash. The Collateral Agent is hereby authorized to adjust and compromise claims. The Collateral Agent shall permit the Credit Parties to use any loss recoveries received by the Collateral Agent upon any such insurance to acquire replacement assets useful in one or more of the Credit Parties' businesses or to effect repairs on any asset that suffers such loss. If the Credit Parties do not use such loss recoveries in such manner within 90 days of the Collateral Agent's receipt of such loss recoveries, such loss recoveries received by the Collateral Agent shall be applied to the Obligations; provided, however, that loss recoveries in respect of the Guarantor Collateral received by the Collateral Agent shall be applied to the Obligations in the same manner described above, subject to the terms of the GESPA Debt. Notwithstanding the foregoing, to the extent that any insurance proceeds received by the Collateral Agent do not belong to the Credit Parties or result from the loss of property of the Credit Parties which is not Collateral, the Collateral Agent will return such proceeds to the Credit Parties. Any surplus shall be paid by the Collateral Agent to the Credit Parties or applied as may be otherwise required by law. Any deficiency thereon shall be paid by the Credit Parties to the Purchasers, on demand. (g) LOCATION OF INVENTORY AND EQUIPMENT. Keep the Inventory and Equipment only at the locations identified on Schedule 6.1(g); provided, however, that the Credit Parties may amend Schedule 6.1(g) with respect to the location of Inventory so long as such amendment occurs by written notice to the Collateral Agent not less than 30 days prior to the date on which the Inventory 43 is moved to such new location, so long as such new location is within the continental United States, and so long as, at the time of such written notification, the applicable Credit Party provides any financing statements necessary to perfect and continue perfected the Purchasers' Liens on such assets and also provides to the Collateral Agent a Collateral Access Agreement; provided, further that the Credit Parties may move to, and keep in, China certain Equipment identified on Schedule 6.1(g). (h) COMPLIANCE WITH LAWS. (i) Comply with the requirements of all applicable laws, rules, regulations, and orders of any Governmental Authority, including without limitation the Fair Labor Standards Act, the Americans With Disabilities Act and Sanction/Embargo Programs, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, would not result in and reasonably could not be expected to result in a Material Adverse Effect and (ii) maintain a system to assure and monitor continued compliance with all applicable Environmental Laws and Sanction/Embargo Programs, which system shall include periodic reviews of such compliance. (i) LEASES. Pay when due all rents and other amounts payable under any leases to which any Credit Party is a party or by which any Credit Party's properties and assets are bound, unless such payments are the subject of a Permitted Protest. (j) ENVIRONMENTAL. (i) In the event that any Credit Party obtains, gives or receives notice of any material release or threat of Release of any Hazardous Materials on its property at concentrations exceeding those allowed by Environmental Laws or that need to be reported to a Governmental Authority (any such event being hereinafter referred to as a "Hazardous Discharge") or receives any notice of a material violation, request for information or notification that it is potentially responsible for Environmental Liabilities and Costs, demand letter or complaint, order, citation, or other written notice with regard to any Hazardous Discharge or violation of any Environmental Laws affecting its property or its interest therein (any of the foregoing is referred to herein as an "Environmental Complaint") from any Governmental Authority or Person, then the Credit Parties shall, within 5 Business Days, give written notice of same to the Purchasers detailing facts and circumstances of which any Credit Party is aware giving rise to the Hazardous Discharge or Environmental Complaint and periodically inform the Purchasers of the status of the matter. Such information is to be provided to allow the Purchasers to protect their security interest in the Collateral and is not intended to create nor shall it create any obligation upon the Purchasers with respect thereto. (ii) The Credit Parties shall respond promptly to any Hazardous Discharge or Environmental Complaint and take all necessary action in order to comply with the Environmental Laws and safeguard the health and safety of any Person and to avoid subjecting the Collateral to any lien, charge, claim or encumbrance. If the Credit Parties shall fail to respond promptly to any Hazardous Discharge or Environmental Complaint or the Credit Parties shall fail to comply with any of the requirements of any Environmental Laws, the Required Holders may, but without the obligation to do so, for the sole purpose of 44 protecting the Purchasers' interest in the Collateral: (A) give such notices or (B) enter onto the Credit Parties' property (or authorize third parties to enter onto such property) and take such actions as the Required Holders (or such third parties as directed by the Required Holders) deem reasonably necessary or advisable, to clean up, remove, mitigate or otherwise deal with any such Hazardous Discharge or Environmental Complaint. All reasonable costs and expenses directly incurred by the Purchasers (or such third parties) in the exercise of any such rights, including any sums paid in connection with any judicial or administrative investigation or proceedings, fines and penalties, together with interest thereon from the date expended at the default rate of interest hereunder shall be paid upon demand by the Credit Parties, and until paid shall be added to and become a part of the Obligations secured by the Liens created by the terms of this Agreement or any other agreement between the Purchasers and the Credit Parties. (iii) The Credit Parties shall defend and indemnify the Purchasers and hold the Purchasers harmless from and against all loss, liability, damage and expense, claims, costs, fines, penalties, including attorney's and consulting fees, and any Environmental Liabilities and Costs suffered or incurred by the Purchasers under or on account of (A) any Environmental Laws, including, without limitation, the assertion of any Environmental Lien, with respect to any Hazardous Discharge, the presence of any Hazardous Materials affecting Credit Party's or Subsidiary's property, whether or not the same originates or emerges from Credit Party's property or any contiguous real estate, including any loss of value of the Collateral as a result of the foregoing except to the extent such loss, liability, damage and expense is attributable to any Hazardous Discharge resulting from actions on the part of the Purchasers, and (B) any Sanction/Embargo Program. The Credit Parties' obligations under this Section 6.1(j) (A) shall arise upon the discovery of the presence of any Hazardous Materials on any Credit Party's property, whether or not any Governmental Authority has taken or threatened any action in connection with the presence of any Hazardous Materials, and (B) on failure to comply with any Sanction/Embargo Program. The Credit Parties' obligation and the indemnification hereunder shall survive the termination of this Agreement. (iv) For purposes of this Section 6.1(j) all references to the Credit Parties' property shall be deemed to include all of the Credit Parties' right, title and interest in and to all their owned and/or leased premises. (k) TRANSFER OR DIVISION ORDERS. Subject to the rights of the holders of the GESPA Debt, upon the Collateral Agent's request, each Credit Party will execute and deliver written notices of assignments to any persons, corporations or other entities owing or which may in the future owe to such Credit Party monies or accounts arising in connection with (a) any oil, gas or mineral production from all or any portion of the Oil and Gas Properties; (b) any gas contracts, processing contracts or other contracts relating to all or any portion of the Oil and Gas Properties; or (c) the operation of or production from all or any portion of the Oil and Gas Properties. The notices of assignments shall advise the third parties that all of the monies or accounts described above have been assigned to the Collateral Agent, and if required by Collateral Agent, shall also require and direct that future payments thereof, including amounts then owing and unpaid, be paid directly to the Collateral Agent. 45 (l) DISCLOSURE UPDATES. Promptly and in no event later than 5 Business Days after obtaining knowledge thereof, (a) notify the Purchasers if any written information, exhibit, or report furnished to the Purchasers contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made, and (b) correct any defect or error that may be discovered therein or in any Loan Document or in the execution, acknowledgement, filing, or recordation thereof. (m) BOARD OBSERVER. Provide the Purchasers, so long as such Purchasers collectively hold Notes in the aggregate principal amount equal to at least $5,000,000, with the right to designate an observer, without voting rights, who will be entitled to attend all meetings of Greka Energy's, Greka AM's and Greka Integrated's Boards of Directors (including audit and compensation committees). Any observer designated by such Purchasers holding at least a majority in principal amount of the Notes held by such Purchasers shall be entitled to notice of all meetings of Greka Energy's, Greka AM's and Greka Integrated's Boards of Directors (including committee meetings) and to all information provided to directors subject to the confidentiality provisions in Section 11.15 hereof. Such observer shall be reimbursed for reasonable out-of-pocket expenses incurred in connection with attendance at Board of Directors and committee meetings. Notwithstanding anything to the contrary in this Section, the observer designated pursuant to this Section shall not be entitled to be present at any meeting of the Board of Directors of Greka Energy, Greka AM or Greka Integrated during the time at such meeting any matters related to the Notes are discussed if (i) an Event of Default is then continuing or (ii) if all of the members of the Board of Directors of Greka Energy, Greka AM, or Greka Integrated, as applicable, vote unanimously to prevent such observer from being present at such meeting during such time. (n) NOTICES. Promptly inform the Collateral Agent in writing of: (i) the commencement of all proceedings and investigations by or before and/or the receipt of any notices from, any governmental or nongovernmental body and all actions and proceedings in any court or before any arbitrator against or in any way concerning any the Credit Parties' properties, assets or business, involving a possible liability in excess of $500,000 which might, singly or in the aggregate, have a Material Adverse Effect; (ii) any amendment of any Credit Party's certificate of incorporation or by-laws; (iii) any change in any Credit Party's business, assets, liabilities, condition (financial or otherwise), results of operations or business prospects which has had or might have a Material Adverse Effect; (iv) any Default or Event of Default; (v) any default or any event which with the passage of time or giving of notice or both would constitute a default under any agreement for the payment of money to which any Credit Party is a party or by which any Credit Party or any Credit Party's properties may be bound which would have a Material Adverse Effect; (vi) any change in the location of Credit Party's executive offices; (vii) any change in the location of any Credit Party's Inventory or Equipment from the locations listed on Schedule 6.1(g) hereto, (viii) any change in any Credit Party's 46 corporate name; (ix) any material delay in any Credit Party's performance of any of its obligations to any Customer and of any assertion of any material claims, offsets, counterclaims or Disputes by any Customer and of any allowances, credits and/or other monies granted by any Credit Party to any Customer; (x) and furnish to and inform the Purchasers of all material adverse information relating to the financial condition of any Customer; and (xi) any material return of goods; (o) EMPLOYEE PLANS. (i) With respect to other than a Multiemployer Plan, for each Plan and Pension Plan intended to be qualified under Section 401(a) of the IRC hereafter adopted or maintained by the Credit Parties or any ERISA Affiliate, the Credit Parties shall (A) seek, or cause its ERISA Affiliates to seek, and receive determination letters from the IRS to the effect that such Plan or Pension Plan is qualified within the meaning of Section 401(a) of the IRC; and (B) from and after the adoption of any such Plan or Pension Plan, cause such plan to be qualified within the meaning of Section 401(a) of the IRC and to be administered in all material respects in accordance with the requirements of ERISA and Section 401(a) of the IRC. (ii) With respect to each Welfare Plan hereafter adopted or maintained by the Credit Parties or any ERISA Affiliate, to the extent applicable, the Credit Parties shall comply, or cause its ERISA Affiliates to comply, with the notice and continuation coverage requirements of Section 4980B of the IRC and the regulations thereunder. (iii) The Credit Parties shall not, directly or indirectly, and shall not permit any ERISA Affiliate to directly or indirectly by reason of an amendment or amendments to, or the adoption of, one or more Pension Plans, permit the present value of all benefit liabilities, as defined in Title IV of ERISA, (using the actuarial assumptions utilized by the PBGC upon termination of a plan) to exceed the fair market value of assets allocable to such benefits by more than $50,000, or to increase to the extent security must be provided to any Pension Plan under Section 401(a)(29) of the IRC. The Credit Parties shall not establish or become obligated to any new Retiree Welfare Plan, which would result in the present value of future liabilities under any such plans to exceed $50,000. Neither the Credit Parties nor any of its ERISA Affiliates shall establish or become obligated to any new unfunded Pension Plan, which would result in the present value of future liabilities under any such plans to exceed $50,000. The Credit Parties shall not directly or indirectly, and shall not permit any ERISA Affiliate to (a) satisfy any liability under any Pension Plan by purchasing annuities from an insurance company or (b) invest the assets of any Pension Plan with an insurance company, unless, in each case, such insurance company is rated AA by Standard & Poor's Corporation and the equivalent by each other nationally recognized rating agency at the time of the investment. (iv) The Credit Parties and any ERISA Affiliate shall not contribute or become obligated to contribute to any Multiemployer Plan. 47 (p) ROLL FORWARD RESERVE REPORTS. Deliver, on an annual basis, roll forward reserve reports of the Oil and Gas Properties prepared by appraisers satisfactory to the Collateral Agent. (q) Minimum Capital Expenditures. Collectively with all Credit Parties, make Capital Expenditures, measured on a Fiscal Year-end basis for the 12-month period ending December 31, 2003, of at least $10,000,000. 6.2 NEGATIVE AND FINANCIAL COVENANTS. Each Credit Party covenants and agrees that from and after the date hereof (except as otherwise provided herein, or unless the Required Holders have given their prior written consent) so long as the Notes are outstanding it shall not: (a) INDEBTEDNESS. (i) With respect to any Credit Party other than Greka AM, create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (1) Permitted Indebtedness (2) Indebtedness evidenced by this Agreement and the other Loan Documents; (3) the GESPA Debt; (4) the GMAC Debt; (5) Indebtedness set forth on Schedule 6.2(a); (6) Permitted Purchase Money Indebtedness; and (7) Indebtedness owing by any Credit Party other than Greka AM to any other Credit Party other than Greka AM. (ii) With respect to Greka AM, create, incur , assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (1) Permitted Indebtedness (2) Indebtedness evidenced by this Agreement and the other Loan Documents; and (3) the Indebtedness evidenced by the Guaranty executed by Greka AM with respect to the GESPA Debt. 48 (b) LIENS. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of its assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens and with respect to the Santa Maria Collateral, the Lien existing on the date hereof securing the GMAC Debt. (c) SALES OF ASSETS; LIQUIDATION. (i) Sell, transfer, convey or otherwise dispose of any assets or properties or (ii) liquidate, dissolve or wind up the Credit Parties, except for in the case of any Credit Party other than Greka AM, transfers to Credit Parties other than Greka AM, whether voluntary or involuntary; provided, however, that the foregoing shall not prohibit (i) the sale of inventory in the ordinary course of business, (ii) the sale of obsolete equipment and fixtures so long as the proceeds of such sale are used to (A) replace such equipment and fixtures within 90 days of such sale or (B) repay the GESPA Debt or the Obligations, if such proceeds are from Guarantor Collateral or the Obligations if such proceeds are from Greka AM Collateral (iii) transfers resulting from any casualty or condemnation of assets or properties, or (iv) other sales of assets or properties of any Credit Party not described on Schedule 6.2(c), the net proceeds of which, in the aggregate, do not exceed $1,000,000 in any Fiscal Year, so long as the net cash proceeds of such sale are placed in an escrow account satisfactory to the Collateral Agent. If Credit Parties do not use such amounts in the escrow account to make Capital Expenditures within 90 days of such sale, such amount shall be applied to repay the GESPA Debt or the Obligations or, if such amounts are proceeds of the Santa Maria Collateral, the GMAC Debt and the GESPA Debt, and then the Obligations. (d) MERGERS AND SUBSIDIARIES. (i) Directly or indirectly, by operation of law or otherwise, merge with, consolidate with, or otherwise combine with any Person other than another Credit Party, provided that in any merger or combination involving Greka AM, Greka AM is the surviving entity in such transaction or (ii) create any Subsidiary, unless such Subsidiary becomes a signatory to the Loan Documents as an additional Credit Party, bound by all the obligations of the Credit Parties thereunder, all in form and substance satisfactory to the Required Holders. (e) CHANGE NAME. Change any Credit Party's name, Federal Employee Identification Number, corporate structure or identity, or add any new fictitious name; provided, however, that a Credit Party may change its name or add any new fictitious name upon at least 30 days prior written notice by a Credit Party to the Collateral Agent and the Purchasers of such change and so long as, at the time of such written notification, such Credit Party provides any financing statements or fixture filings necessary to perfect and continue perfected the Purchasers' Liens. (f) GUARANTEE. Guarantee or otherwise become in any way liable with respect to the obligations of any third Person except (i) by endorsement of instruments or items of payment for deposit to the account of Credit Parties or which are transmitted or turned over to the Purchasers with respect to the GMAC Debt, (ii) for guarantees of Indebtedness permitted under Section 6.2(a) with respect to such Credit Party and guarantees set forth on Schedule 6.2(f) hereto and (iii) for guarantees of performance, surety or appeal bonds of any Credit Party. 49 (g) NATURE OF BUSINESS. Make any change in the principal nature of any Credit Party's business. (h) PREPAYMENTS. Directly or indirectly, prepay, redeem, defease, purchase, or otherwise acquire any Indebtedness of any Credit Party in excess of $250,000 in the aggregate during any Fiscal Year, other than the Obligations in accordance with this Agreement; provided, however, that the Guarantors may prepay the GESPA Debt and the GMAC Debt. (i) CHANGE OF CONTROL. Cause, permit, or suffer to exist, directly or indirectly, any Change of Control. (j) CONSIGNMENTS. Consign any Inventory or sell any Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale. (k) DISTRIBUTIONS. Other than distributions or the declaration and payment of dividends by a Guarantor to another Credit Party, make any distribution or declare or pay any dividends (in cash or other property, other than common stock) on, or purchase, acquire, redeem, or retire any of, any Credit Party's Stock of any class, whether now or hereafter outstanding or pay any management or similar fees; provided, however, that at any time after June 30, 2003, so long as the Leverage Ratio is less than 2:1 and provided that no Default or Event of Default has occurred and is continuing or would result therefrom, the Guarantors may repurchase Greka Energy's Stock for an aggregate purchase price not exceeding $5,000,000 in any Fiscal Year; provided further, however, that the Guarantors may not acquire more then 10% of the outstanding common stock of Greka Energy as of June 26, 2002. (l) ACCOUNTING METHODS. Modify or change its method of accounting (other than as may be required to conform to GAAP) or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Credit Parties' accounting records without said accounting firm or service bureau agreeing to provide the Collateral Agent and Purchasers information regarding the assets with respect to which the Purchasers have a Lien or the Credit Parties' financial condition. (m) INVESTMENTS. Directly or indirectly in any transaction or related series of transactions, acquire or invest in any assets or business of any Person other than investments in Cash Equivalents and, in the case of Guarantors, Permitted Acquisitions. (n) TRANSACTIONS WITH AFFILIATES. Except for agreements set forth on Schedule 6.2(n) hereto or transactions among the Credit Parties, directly or indirectly enter into or permit to exist any transaction with any Affiliate of 50 any Credit Party except for transactions that are in the ordinary course of such Credit Parties' business, upon fair and reasonable terms, that are fully disclosed to the Credit Parties, and that are no less favorable to such Credit Parties than would be obtained in an arm's length transaction with a non-Affiliate. (o) SUSPENSION. Suspend or go out of a substantial portion of its business. (p) LOANS AND ADVANCES. Make or accrue any loans or other advances of money or extensions of credit to any Person in excess of $250,000 in the aggregate during any Fiscal Year; provided, however, that any Guarantor may accrue loans to another Guarantor. (q) CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new location without the Credit Parties providing 30 days prior written notification thereof to the Collateral Agent and the Purchasers and so long as, at the time of such written notification, the applicable Credit Party provides any financing statements or fixture filings necessary to perfect and continue perfected the Purchasers' Liens and also provides the Collateral Agent a Collateral Access Agreement with respect to such new location. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without the Required Holders' prior written consent. (r) RECEIVABLES. Bill Receivables under any name except the present name of the respective Credit Party. (s) Financial Covenants. Fail to maintain: (i) Maximum Tangible Net Worth Ratio. A Tangible Net Worth Ratio, measured on the last day of each fiscal quarter after the Measurement Date, of not more than 1.5:1.00; (ii) Fixed Charge Coverage Ratio. A Fixed Charge Coverage Ratio, measured on a fiscal quarter-end basis for the 12-month period ending each fiscal quarter after the Measurement Date, of not less than 1.0:1.00. (iii) Minimum Interest Coverage Ratio. An Interest Coverage Ratio, measured on a fiscal quarter-end basis for the 12-month period ending on each fiscal quarter after the Measurement Date, of not less than 2.00:1.00. (iv) Minimum EBITDA. (A) EBITDA for Greka Energy and its Subsidiaries for the period commencing on the Closing Date and ending on each of the following dates to be not less than the amount set forth below for the corresponding period: 51 Period Ending Amount ------------- ------ March 31, 2003 $ 2,000,000 June 30, 2003 $ 6,000,000 September 30, 2003 $12,000,000 December 31, 2003 $17,500,000 and thereafter EBITDA for Greka Energy and its Subsidiaries, measured on a fiscal quarter-end basis for the 12-month period ending on March 31, 2004 and each fiscal quarter thereafter, to be not less than $20,000,000. (v) Maximum Total Debt to EBITDA. On the last day of each fiscal quarter after the Measurement Date, a ratio of Total Debt as of each such date to EBITDA for Greka Energy and its Subsidiaries for the 12- month period ending as of each such date of not more than 3.90:1.00. (vi) Minimum Crude Run and Aggregate Crude Oil Production. (x) A Crude Run, measured on a month-end basis for each month after the Measurement Date, equal to at least the number of barrels for the corresponding month specified in Schedule 6.2(s) or (y) crude oil production from all properties owned or leased by Greka Energy or any of its Subsidiaries, measured on a month-end basis for each month after the Measurement Date, equal to at least the number of barrels for the corresponding month specified in Schedule 6.2(s); provided, however, that non-compliance with the minimum Crude Run for any one month in any Fiscal Year shall not be a Default or Event of Default hereunder so long as Greka Energy provides the Collateral Agent with at least 30 days prior notice of any such potential non-compliance. (vii) Greka AM Minimum Crude Oil Production. Crude oil production from all properties owned or leased directly by Greka AM measured on a month-end basis, equal to at least the number of barrels for the corresponding month specified in Schedule 6.2(s). (t) Capital Expenditures. Make Capital Expenditures, collectively with all other Credit Parties, measured on a Fiscal Year-end basis for the 12-month period ending each Fiscal Year after the Closing Date, in excess of the amounts stated on Schedule 6.2(s) for the corresponding types of assets described on Schedule 6.2(s) and for the corresponding status of the GMAC Debt; provided, however, that proceeds from any asset sales permitted under Section 6.2(c) may be used to make Capital Expenditures so long as such proceeds are used within 90 days of any such asset sale. (u) MANAGEMENT COMPENSATION. Increase the salary and bonus of any officer of any Credit Party in any calendar year, except consistent with past practice of such Credit Party. 52 (v) AMENDMENTS TO CERTIFICATE OF INCORPORATION AND BY-LAWS. Authorize, adopt or approve an amendment to the certificate of incorporation or by-laws of any Credit Party, except to increase the number of authorized shares of common stock. 7. CONDITIONS PRECEDENT 7.1 CONDITIONS PRECEDENT. The obligation of each Purchaser to purchase the Notes at the Closing pursuant to Section 2.1 hereof, is subject to the condition that such Purchaser shall have received, on the Closing Date, the following, each dated the Closing Date unless otherwise indicated, in form and substance satisfactory to such Purchaser: (a) Favorable opinion of Susan Whalen, Esq., in-house counsel to the Credit Parties, substantially in the form attached hereto as Exhibit C, it being understood that to the extent that such opinion of counsel to the Credit Parties shall rely upon any other opinion of counsel, each such other opinion shall be in form and substance reasonably satisfactory to the Purchasers and shall provide that Purchasers may rely thereon. (b) Resolutions of the Board of Directors of each Credit Party, certified by the Secretary or Assistant Secretary of such Credit Party, as of the Closing Date, to be duly adopted and in full force and effect on such date, authorizing (i) the consummation of each of the transactions contemplated by this Agreement and (ii) specific officers to execute and deliver this Agreement and each other Loan Document to which it is a party. (c) Governmental certificates, dated the most recent practicable date prior to the Closing Date, with telegram updates where available, showing that each Credit Party is organized and in good standing in the state of its organization, and is qualified as a foreign corporation and in good standing in all other jurisdictions in which it is qualified to transact business. (d) A copy of the certificate of incorporation and all amendments thereto of each Credit Party, certified as of a recent date by the Secretary of State of the state of its organization, and copies of each Credit Party's by-laws, certified by the Secretary or Assistant Secretary of such Credit Party as true and correct as of the Closing Date. (e) Each of the Notes duly executed by Greka AM. (f) Each of the Collateral Documents, duly executed by the parties thereto. (g) UCC-1 financing statements reflecting each Credit Party as the debtor in favor of Collateral Agent for the benefit of the Purchasers, in form and substance satisfactory to the Purchasers. 53 (h) Certificates of the Secretary or an Assistant Secretary of each Credit Party, dated the Closing Date, as to the incumbency and signatures of the officers of such Credit Party executing this Agreement, the Notes, each other Loan Document to which it is a party and any other certificate or other document to be delivered pursuant hereto or thereto, together with evidence of the incumbency of such Secretary or Assistant Secretary. (i) Certificate of the President of each Credit Party, dated the Closing Date, stating that all of the representations and warranties of such Credit Party contained herein or in the other Loan Documents are true and correct on and as of the Closing Date as if made on such date and that no breach of any covenant contained in Section V has occurred or would result from the Closing hereunder. (j) Such additional documentation as the Collateral Agent or the Required Holders may reasonably require. 7.2 ADDITIONAL CONDITIONS. The obligation of each Purchaser to purchase the Notes at the Closing pursuant to Section 2.1 is subject to the additional conditions precedent that: (a) Such Purchaser shall have received evidence that the insurance policies provided for in Section 5.22 are in full force and effect, certified by the insurer thereof. (b) Such Purchaser shall have received pay-off letters and UCC-3 termination statements, in form and substance satisfactory to it, with respect to the Bank of Texas Debt and the IPH Debt. (c) Such Purchaser shall have received a copy of the Intercreditor Agreement, duly executed by the parties thereto. (d) The Credit Parties shall have paid the Closing Fee and all fees required to be paid by them pursuant to Section 11.2 hereof for which the Credit Parties shall have received an invoice on or prior to the Closing Date. (e) Except as disclosed pursuant to Section 5.18 hereof, there shall not have occurred any event or condition since December 31, 2001 which could have a Material Adverse Effect. (f) All of the representations and warranties of each Credit Party contained herein or in the other Loan Documents shall be true and correct on and as of the Closing Date as if made on such date and no breach of any covenant contained in Section V and no Default or Event of Default shall have occurred or would result from the Closing hereunder. 54 (g) All required consents and approvals from any third parties to consummate the transactions contemplated hereby, including pursuant to the GESPA, shall have been obtained. (h) The Closing shall have occurred no later than March 11, 2003. 8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES 8.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events (regardless of the reason therefor) shall constitute an "Event of Default" hereunder and under the Notes: (a) Any Credit Party fails to make any payment of principal of, or interest on or any other amount owing in respect of, any Note, or any of the other Obligations, when due and payable or declared due and payable which, other than principal (which shall constitute an immediate Event of Default), shall have remained unremedied for a period of 10 days. (b) Any Credit Party fails or neglects to perform, keep or observe any of the provisions of Section 6.2 or Section 6.1(b) hereof. (c) Any Credit Party fails or neglects to perform, keep or observe any other provision of this Agreement or of any of the other Loan Documents, and the same shall remain unremedied for a period of 30 days after the Credit Parties shall receive written notice of any such failure from the Purchasers. (d) A default shall occur under any other agreement, document or instrument to which any Credit Party is a party or by which any Credit Party or any of their property is bound (after giving effect to any applicable notice or cure periods), and such default (i) involves the failure to make any payment (whether of principal, interest or otherwise) due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) in respect of any Indebtedness of any Credit Party in an aggregate amount exceeding $250,000, or (ii) causes (or permits any holder of such Indebtedness or a trustee to cause) such Indebtedness or a portion thereof in an aggregate amount exceeding $250,000, to become due prior to its stated maturity or prior to its regularly scheduled dates of payment. (e) Any representation or warranty herein or in any Loan Document or in any written statement pursuant thereto or hereto, report, financial statement or certificate made or delivered to Purchasers by any Credit Party pursuant hereto or thereto is untrue or incorrect in any material respect, as of the date when made. (f) Any of the assets of any Credit Party shall be attached, seized, levied upon or subjected to a writ or distress warrant, or come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors of any Credit Party and shall remain unstayed or undismissed for 60 consecutive days; or any Credit Party shall have concealed, removed or permitted 55 to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or any of them or made or suffered a transfer of any of its property or the incurring of an obligation which may be fraudulent under any bankruptcy, fraudulent conveyance or other similar law. (g) A case or proceeding shall have been commenced against any Credit Party in a court having competent jurisdiction seeking a decree or order in respect of any Credit Party (i) under title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable federal, state or foreign bankruptcy or other similar law, (ii) appointing a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) of any Credit Party of any substantial part of its or their properties, or (iii) ordering the winding-up or liquidation of the affairs of any Credit Party and such case or proceeding shall remain undismissed or unstayed for 60 consecutive days or such court shall enter a decree or order granting the relief sought in such case or proceeding. (h) Any Credit Party (i) files a petition seeking relief under title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable federal, state or foreign bankruptcy or other similar law, (ii) consents to the institution of proceedings thereunder or to the filing of any such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) of any Credit Party of any substantial part of its properties, (iii) fails generally to pay its debts as such debts become due, or (iv) takes any corporate action in furtherance of any such action. (i) Final judgment or judgments (after the expiration of all times to appeal therefrom) for the payment of money in excess of $500,000 in the aggregate shall be rendered against any Credit Party and the same shall not be (i) fully covered by insurance, or (ii) vacated, stayed, bonded, paid or discharged for a period of 30 days. (j) (i) With respect to any Plan, a prohibited transaction within the meaning of Section 4975 of the IRC or Section 406 of ERISA occurs which in the reasonable determination of the Required Holders could result in direct or indirect liability to any Credit Party, (ii) with respect to any Title IV Plan, the filing of a notice to voluntarily terminate any such plan in a distress termination, (iii) with respect to any Multiemployer Plan, any Credit Party or any ERISA Affiliate shall incur any Withdrawal Liability, (iv) with respect to any Pension Plan subject to Section 412 of the Code or Section 302 of ERISA, any Credit Party or any ERISA Affiliate shall incur an accumulated funding deficiency or request a funding waiver from the IRS, or (v) with respect to any Title IV Plan or Multiemployer Plan which has an ERISA Event not described in clauses (ii) - (iv) hereof, in the reasonable determination of the Agent there is a reasonable likelihood for termination of any such plan by the PBGC; provided, however, that the events listed in clauses (i) - (v) hereof shall constitute Events of Default only if the liability, deficiency or waiver request of any Credit Party or any ERISA Affiliate, whether or not assessed, exceeds $500,000 in any case set forth in (i) - (v) above, or exceeds $500,000 in the aggregate for all such cases. 56 8.2 REMEDIES. If any Event of Default specified in Section 8.1 shall have occurred and be continuing, the Required Holders may, without notice, declare all Obligations to be forthwith due and payable, whereupon all such Obligations shall become and be due and payable, without presentment, demand, protest or further notice of any kind, all of which are expressly waived by Greka AM; provided, however, that upon the occurrence of an Event of Default specified in Section 8.1(f), (g) or (h) hereof, all Obligations shall become due and payable without declaration, notice or demand by any Purchaser. Any Purchaser may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in its best interests, including any action (or the failure to act) pursuant to the Loan Documents. 8.3 WAIVERS BY THE CREDIT PARTIES. Except as otherwise provided for in this Agreement and applicable law, the Credit Parties waive (i) presentment, demand and protest and notice of presentment, dishonor notice of intent to accelerate and notice of acceleration, (ii) all rights to notice and a hearing prior to the Purchasers' taking possession or control of, or to the Purchasers' replevy, attachment or levy upon, any collateral securing the Obligations or any bond or security which might be required by any court prior to allowing such Purchasers to exercise any of their remedies, and (iii) the benefit of all valuation, appraisal and exemption laws. The Credit Parties acknowledge that they have been advised by counsel of their choice with respect to this Agreement, the other Loan Documents and the transactions evidenced by this Agreement and the other Loan Documents. 8.4 RIGHT OF SET-OFF. Upon the occurrence and during the continuance of any Event of Default, each Purchaser, with the prior consent of the Collateral Agent, is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Purchaser to or for the credit or the account of Greka AM against any and all of the obligations of Greka AM now or hereafter existing under this Agreement and the Notes held by Purchaser irrespective of whether or not such Purchaser shall have made any demand under this Agreement or any Note and although such obligations may be unmatured. Each Purchaser agrees promptly to notify Greka AM, after any such set-off and application made by such Purchaser; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Purchasers under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Purchasers may have. 9. INDEMNIFICATION Each Credit Party agrees to indemnify and hold harmless each Purchaser, the Collateral Agent and their Affiliates and their respective officers, directors and employees from and against any losses, liabilities, obligations, damages, penalties, actions, proceedings, judgments, suits, claims, 57 costs, fees, expenses and disbursements (including, without limitation, reasonable attorneys' fees and disbursements) of any kind ("Losses") which may be imposed upon, incurred by or asserted against such Purchaser, Collateral Agent or such other indemnified Persons as a result of such Purchaser or Collateral Agent having entered into this Agreement or any of the other Loan Documents or relating to or arising out of any untrue representation, breach of warranty or failure to perform any covenants or agreement by any Credit Party contained herein or in any certificate or document delivered pursuant hereto or arising out of, under or pursuant to any Environmental Law applicable to any Credit Party or its Subsidiaries or any Hazardous Materials located at, on, under, or Released from any Facility or by any Credit Party or any of its Subsidiaries or otherwise relating to or arising out of the transactions contemplated hereby; provided, however, that such Credit Party shall not be liable for such indemnification to such indemnified Person to the extent that any such Losses result from such indemnified Person's gross negligence or willful misconduct. 10. COLLATERAL AGENT 10.1 COLLATERAL AGENCY PROVISIONS. (a) Appointment. Guggenheim Investment Management, LLC is hereby appointed to act on behalf of all the Purchasers as the Collateral Agent under this Agreement, and the other Loan Documents. The provisions of this Section 11.1 are solely for the benefit of the Collateral Agent and such Purchasers, and no Credit Party nor any other Person shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement, the Collateral Agent shall act solely as an agent of the respective Purchasers and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for any Credit Party or any other Person. The Collateral Agent shall have no duties or responsibilities except for those expressly set forth in this Agreement. The duties of the Collateral Agent shall be mechanical and administrative in nature and the Collateral Agent shall not have, or be deemed to have, by reason of this Agreement or otherwise a fiduciary relationship in respect of any Purchaser. The Purchasers hereby authorize the Collateral Agent to execute the Intercreditor Agreement. (b) Actions. If the Collateral Agent shall request instructions from the Required Holders or all Purchasers affected thereby with respect to any act or action (including failure to act) in connection with this Agreement, then the Collateral Agent shall be entitled to refrain from such act or taking such action unless and until the Collateral Agent shall have received instructions from the Required Holders or all Purchasers affected thereby, as the case may be, and the Collateral Agent shall not incur liability to any Person by reason of so refraining. The Collateral Agent shall be fully justified in failing or refusing to take any action hereunder (a) if such action would, in the opinion of the Collateral Agent, be contrary to law or the terms of this Agreement, (b) if such action would, in the opinion of the Collateral Agent, expose the Collateral Agent to any liability or (c) if the Collateral Agent shall not first be indemnified to its satisfaction against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Without limiting the foregoing, no Purchaser shall have any right of 58 action whatsoever against the Collateral Agent as a result of the Collateral Agent acting or refraining from acting hereunder in accordance with the instructions of the Required Holders or all affected Purchasers, as applicable. (c) Collateral Agent's Reliance, etc. Neither the Collateral Agent nor any of its Affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for damages caused by its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Collateral Agent: (i) may treat the payee of any Note as the holder thereof until the Collateral Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Collateral Agent; (ii) may consult with legal counsel, independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Purchaser and shall not be responsible to any Purchaser for any statements, warranties or representations made in or in connection with this Agreement; (iv) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of any Credit Party or to inspect the Collateral including the books and records of any Credit Party; (v) shall not be responsible to any Purchaser for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto or thereto; and (vi) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopy, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. (d) Purchaser Credit Decisions. Each Purchaser acknowledges that it has, independently and without reliance upon the Collateral Agent or any other Purchaser and based on such financial statements and other documents and information as it has deemed appropriate, made its own credit and financial analysis of the Credit Parties and its own decision to enter into this Agreement. Each Purchaser also acknowledges that it will, independently and without reliance upon the Collateral Agent or any other Purchaser and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. Each Purchaser acknowledges the potential conflict of interest of each other Purchaser as a result of the Purchasers holding disproportionate interests in the Notes, and expressly consents to, and waives any claim based upon, such conflict of interest. (e) Successor Collateral Agent. The Collateral Agent may resign at any time by giving not less than 30 days' prior written notice thereof to the Purchasers and Greka AM. Upon any such resignation, the Required Holders shall have the right to appoint a successor Collateral Agent. If no successor Collateral Agent shall have been so appointed by the Required Holders and shall have accepted such appointment within 30 days after the resigning Collateral Agent's giving notice of resignation, then the resigning Collateral Agent may, 59 on behalf of the Purchasers, appoint a successor Collateral Agent, which shall be a Purchaser, if a Purchaser is willing to accept such appointment, or otherwise shall be a commercial bank or financial institution or a subsidiary of a commercial bank or financial institution if such commercial bank or financial institution is organized under the laws of the United States of America or of any State thereof and has a combined capital and surplus of at least $300,000,000. If no successor Collateral Agent has been appointed pursuant to the foregoing by the 30th day after the date such notice of resignation was given by the resigning Collateral Agent, such resignation shall become effective and the Required Holders shall thereafter perform all the duties of the Collateral Agent hereunder until such time, if any, as the Required Holders appoint a successor Collateral Agent as provided above. Prior to the occurrence and continuation of an Event of Default any successor Collateral Agent appointed by the Collateral Agent or the Required Holders shall be subject to the prior approval of Greka AM, such approval not to be unreasonably withheld or delayed. Upon the acceptance of any appointment as the Collateral Agent hereunder by a successor Collateral Agent, such successor Collateral Agent shall succeed to and become vested with all the rights, powers, privileges and duties of the resigning Collateral Agent. Upon the earlier of the acceptance of any appointment as the Collateral Agent hereunder by a successor Collateral Agent or the effective date of the resigning Collateral Agent's resignation, the resigning Collateral Agent shall be discharged from its duties and obligations under this Agreement, except that any indemnity rights or other rights in favor of such resigning Collateral Agent shall continue. After any resigning Collateral Agent's resignation hereunder, the provisions of this Section 11.1 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Collateral Agent under this Agreement. (f) Indemnification by the Purchasers. The Purchasers agree to indemnify the Collateral Agent (to the extent the Collateral Agent is not reimbursed by the Credit Parties and without limiting the obligations of Greka AM hereunder), ratably on a pro rata basis based on the principal amount outstanding under the Notes from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Collateral Agent in any way relating to or arising out of this Agreement or any other Loan Document or any action taken or omitted by the Collateral Agent in connection therewith; provided, however, that no Purchaser shall be liable to the extent it is finally judicially determined that such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements arose primarily from the Collateral Agent's gross negligence or willful misconduct. 11. MISCELLANEOUS 11.1 COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT; SALE OF INTEREST. (a) The Loan Documents constitute the complete agreement between the parties with respect to the subject matter hereof and thereof, supercede any previous agreement or understanding between them relating hereto or thereto and may not be modified, altered or amended except as provided therein, or in the case of the Loan Documents by an agreement in writing signed by the Credit Parties and 60 the Purchasers in accordance with Section 11.1(d) hereof. The Credit Parties may not sell, assign or transfer any of the Loan Documents or any portion thereof, including, without limitation, their rights, title, interests, remedies, powers and duties hereunder or thereunder. The Credit Parties hereby consent to any Purchaser's sale of participations, assignment, transfer or other disposition, at any time or times, of any of the Loan Documents or of any portion thereof or interest therein, including, without limitation, such Purchaser's rights, title, interests, remedies, powers or duties thereunder, whether evidenced by a writing or not. (b) In the event any Purchaser assigns or otherwise transfers all or any part of any of the Notes, Greka AM shall, upon the request of such Purchaser issue new Notes to effectuate such assignment or transfer. (c) Any Purchaser may sell, assign, transfer or negotiate to one or more other lenders, commercial banks, insurance companies, other financial institutions or any other Person acceptable to such Purchaser all or a portion of its rights and obligations under the Notes held by such Purchaser and this Agreement; provided, however, that acceptance of such assignment by any assignee shall constitute the agreement of such assignee to be bound by the terms of this Agreement applicable to such Purchaser; provided further, however, the Purchasers may not assign any interest in the Notes to any Person who is in the oil and gas business without Greka AM's prior consent, not to be unreasonably withheld, except that such consent shall not be required if an Event of Default has occurred and is continuing. From and after the effective date of such an assignment, (x) the assignees thereunder shall, in addition to the rights and obligations hereunder held by it immediately prior to such effective date, have the rights and obligations hereunder that have been assigned to it pursuant to such assignment and (y) the assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such assignment, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an assignment and acceptance covering all or the remaining portion of an assignor's rights and obligations under this Agreement, such assignor shall cease to be a party hereto). (d) No amendment or waiver of any provision of this Agreement, any Note or any other Loan Document, nor consent to any departure by any Credit Party therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Holders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by each holder of a Note affected thereby do any of the following: (i) subject such holder to any additional obligations, (ii) reduce the principal of, or interest on, any Note or other amounts payable hereunder or release or discharge any Credit Party from its obligations to make such payments, (iii) postpone any date fixed for any payment of principal of, or interest on, any Note or other amounts payable hereunder, (iv) change the aggregate unpaid principal amount of any Note, or the number of holders thereof, which shall be required for such holders or any of them to take any action hereunder, or (v) amend this Section 11.1(d). 61 11.2 FEES AND EXPENSES. The Credit Parties shall pay all reasonable out-of-pocket costs, fees and expenses of each of the Purchasers and the Collateral Agent in connection with the preparation of the Loan Documents and the transactions contemplated thereby, including, without limitation, all reasonable legal fees and expenses of Weil, Gotshal & Manges LLP, counsel to the Purchasers and the Collateral Agent, and any other local counsel. If, at any time or times, regardless of the existence of an Event of Default (except with respect to paragraph (iii) below, which shall be subject to an Event of Default having occurred and be continuing), the Required Holders or, in the case of paragraphs (ii) or (iii) below, any Purchaser, shall employ counsel or other advisors for advice or other representation or shall incur reasonable legal or other costs and expenses in connection with: (i) any amendment, modification or waiver, or consent with respect to, any of the Loan Documents or advice in connection with the administration of the loans made pursuant hereto or its rights hereunder or thereunder; (ii) any litigation, contest, dispute, suit, proceeding or action (whether instituted by such Purchaser, any Credit Party, any Subsidiary of such Credit Party or any other Person) in any way relating to any of the Loan Documents or any other agreements to be executed or delivered in connection herewith; or (iii) any attempt to enforce any rights of such Purchaser against any Credit Party, any of its Subsidiaries or any other Person, that may be obligated to such Purchaser by virtue of any of the Loan Documents; then, and in any such event, the reasonable attorneys' and other parties' fees arising from such services, including those of any appellate proceedings, and all expenses, costs, charges and other fees incurred by such counsel and others in any way or respect arising in connection with or relating to any of the events or actions described in this Section shall be payable, on demand, by the Credit Parties to such Purchaser and shall be additional Obligations under this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, such expenses, costs, charges and fees may include: paralegal fees, costs and expenses; accountants' and investment bankers' fees, costs and expenses; court costs and expenses; photocopying and duplicating expenses; court reporter fees, costs and expenses; long distance telephone charges; air express charges; telegram charges; secretarial overtime charges; expenses for travel, lodging and food paid or incurred in connection with the performance of such legal services; and costs and expenses of the Collateral Agent. 11.3 NO WAIVER BY PURCHASER. Any Purchaser's failure, at any time or times, to require strict performance by any Credit Party of any provision of this Agreement and any of the other Loan Documents shall not waive, affect or diminish any right of such Purchaser thereafter to demand strict compliance and performance therewith. Any suspension or waiver by such Purchaser of an Event of Default by any Credit Party under the Loan Documents shall not suspend, waive or affect any other Event of Default by any Credit Party under this Agreement and any of the other Loan Documents whether the same is prior or subsequent thereto 62 and whether of the same or of a different type. None of the undertakings, agreements, warranties, covenants and representations of any Credit Party contained in this Agreement or any of the other Loan Documents and no Event of Default by any Credit Party under this Agreement and no defaults by any Credit Party under any of the other Loan Documents shall be deemed to have been suspended or waived by any Purchaser, unless such suspension or waiver is by an instrument in writing signed by an officer of such Purchaser and the Required Holders and directed to any Credit Party specifying such suspension or waiver. 11.4 REMEDIES. Each Purchaser's rights and remedies under this Agreement shall be cumulative and nonexclusive of any other rights and remedies which such Purchaser may have under any other agreement, including without limitation, the Loan Documents, the other Loan Documents, by operation of law or otherwise. 11.5 WAIVER OF JURY TRIAL. The parties hereto waive all right to trial by jury in any action or proceeding to enforce or defend any rights under the Loan Documents. 11.6 SEVERABILITY. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 11.7 BINDING EFFECT; BENEFITS. This Agreement and the other Loan Documents shall be binding upon, and inure to the benefit of, the successors of each Credit Party and each Purchaser and the assigns, transferees and endorsees of each Purchaser. 11.8 CONFLICT OF TERMS. Except as otherwise provided in this Agreement or any of the other Loan Documents by specific reference to the applicable provisions of this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 11.9 GOVERNING LAW. Except as otherwise expressly provided in any of the Loan Documents, in all respects, including all matters of construction, validity and performance, this Agreement and the Obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of New York applicable to contracts made and performed in such state, without regard to the principles thereof regarding conflict of laws, and any applicable laws of the United States of America. Each Purchaser and each Credit Party agree to submit to personal jurisdiction and to waive any objection as to venue in the federal or New York State courts located in the County of New York, State of New York. Service of process on Purchaser or Company in any action arising out of or relating to any of the Loan Documents shall be effective if 63 mailed to such party at the address listed in Section 11.10 hereof. Nothing herein shall preclude any Purchaser or any Credit Party from bringing suit or taking other legal action in any other jurisdiction. 11.10 NOTICES. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties by another, or whenever any of the parties desires to give or serve upon another any such communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and either shall be delivered in person with receipt acknowledged or by registered or certified mail, return receipt requested, postage prepaid, or by telecopy and confirmed by telecopy answerback addressed to the respective party hereto at the address indicated for such party on Schedule A and Schedule B; provided, however, any party may substitute such other address by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, telecopied and confirmed by telecopy answerback, or three (3) business days after the same shall have been deposited with the United States mail. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration or other communication to the persons designated above to receive copies shall in no way adversely affect the effectiveness of such notice, demand, request, consent, approval, declaration or other communication. 11.11 SURVIVAL. The representations and warranties of the Credit Parties in this Agreement shall survive the execution, delivery and acceptance hereof by the parties hereto and the closing of the transactions described herein or related hereto. 11.12 SECTION AND OTHER HEADINGS. The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 11.13 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. 11.14 PUBLICITY. Neither any Credit Party nor its Subsidiaries nor any Purchaser shall issue any press release or make any public disclosure regarding the transactions contemplated hereby unless such press release or public disclosure is approved by the other parties hereto in advance. Notwithstanding the foregoing, each of the parties hereto may, in documents required to be filed by it with the SEC or other regulatory bodies, make such statements with respect to the transactions contemplated hereby as each may be advised by counsel is legally necessary or advisable, and may make such disclosure as it is advised by its counsel is required by law, subject to advance notice to the Purchasers. 64 11.15 CONFIDENTIALITY. Each of the Credit Parties and Purchasers agrees to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by any other party hereto as being confidential without the prior written approval of such other party; provided, however, that this provision shall not apply to (a) information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement), (b) information which is required to be disclosed by law (including, without limitation, pursuant to Item 10 of Rule 601 of Regulation S-K under the Securities Act and the Exchange Act) and (c) any disclosure of information to assignees or prospective assignees of any Notes or to participants or prospective participants in any Notes. [Signature Page Follow] 65 IN WITNESS WHEREOF, the Credit Parties and the Purchasers have executed this Agreement as of the day and year first above written. Borrower: GREKA AM, INC. By: --------------------------- Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman Guarantors: GREKA ENERGY CORPORATION By: --------------------------- Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman GREKA INTEGRATED, INC. By: --------------------------- Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman GREKA REALTY, INC. By: --------------------------- Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman 66 GREKA SMV, INC. By: --------------------------- Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman WINDSOR ENERGY US CORPORATION By: --------------------------- Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman RINCON ISLAND LIMITED PARTNERSHIP By: WINDSOR ENERGY US CORPORATION, its General Partner By: --------------------------- Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman GREKA CA, INC. By: --------------------------- Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman 67 SABA PETROLEUM COMPANY By: --------------------------- Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman SABA PETROLEUM, INC. By: --------------------------- Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman SANTA MARIA REFINING COMPANY By: --------------------------- Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman 68 Purchasers: ----------- 1888 FUND LTD. By: --------------------------- Name: Title: Bingham CDO L.P. By: --------------------------- Name: Title: North American Company For Life and Health Insurance of New York By: --------------------------- Name: Title: Midland National Life Insurance Company By: --------------------------- Name: Title: Collateral Agent: ----------------- Guggenheim Investment Management, LLC By: --------------------------- Name: Todd L. Boehly Title: Managing Director 69 - -------------------------------------------------------------------------------- NOTE PURCHASE AGREEMENT dated as of March 11, 2003 by and among GREKA AM, as BORROWER and GREKA ENERGY CORPORATION and THE OTHER ENTITIES PARTY HERETO, as GUARANTORS and THE PURCHASERS PARTY HERETO and GUGGENHEIM INVESTMENT MANAGEMENT, LLC, as COLLATERAL AGENT - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page 1. DEFINITIONS...........................................................1 2. PURCHASE OF SECURITIES...............................................19 2.1 Purchase of Notes...........................................19 2.2 Closing.....................................................20 2.3 Optional Prepayment.........................................20 2.4 Intentionally Omitted.......................................20 2.5 Repayment of Notes..........................................20 2.6 Use of Proceeds.............................................20 2.7 Interest Rates and Interest Payments........................21 2.8 Receipt of Payments.........................................22 2.9 Application of Payments.....................................22 2.10 Sharing of Payments.........................................22 2.11 Access......................................................23 2.12 Taxes.......................................................23 3. CREATION OF SECURITY INTEREST........................................24 3.1 Security Interest...........................................24 3.2 Representations Concerning the Collateral...................25 3.3 Covenants Concerning the Collateral.........................25 3.4 Collection and Maintenance of Collateral and Records........26 3.5 Delivery of Additional Documentation Required...............26 3.6 Power of Attorney...........................................27 3.7 Code and Other Remedies.....................................27 3.8 Deficiency..................................................28 3.9 Lien Priority and Subordination.............................28 4. PURCHASERS' REPRESENTATIONS AND WARRANTIES...........................28 4.1 Investment Intention........................................28 4.2 Accredited Investor.........................................28 4.3 Restricted Securities.......................................29 4.4 Existence...................................................29 i TABLE OF CONTENTS (continued) Page 4.5 Power; Authorization; Enforceable Obligations...............29 5. CREDIT PARTIES' REPRESENTATIONS AND WARRANTIES.......................29 5.1 Authorized and Outstanding Shares of Capital Stock..........29 5.2 Authorization and Issuance of the Notes.....................30 5.3 Securities Laws.............................................30 5.4 Corporate Existence.........................................30 5.5 Subsidiaries................................................30 5.6 Corporate Power; Authorization; Enforceable Obligations.....31 5.7 Financial Statements........................................31 5.8 Ownership of Property.......................................32 5.9 Material Contracts; Indebtedness............................33 5.10 Environmental Protection....................................33 5.11 Labor Matters...............................................34 5.12 Other Ventures..............................................35 5.13 Taxes.......................................................35 5.14 No Litigation...............................................35 5.15 Brokers.....................................................35 5.16 Employment Agreements.......................................36 5.17 Patents, Trademarks, Copyrights and Licenses................36 5.18 No Material Adverse Effect..................................36 5.19 ERISA.......................................................36 5.20 SEC Documents...............................................38 5.21 Ordinary Course of Business.................................39 5.22 Insurance...................................................39 5.23 Compliance with Law.........................................39 5.24 Absence of Default..........................................39 5.25 Agreements with Affiliates..................................39 5.26 Gas Contracts...............................................40 5.27 Refunds.....................................................40 ii TABLE OF CONTENTS (continued) Page 5.28 Minute Books................................................40 5.29 Full Disclosure.............................................40 6. COVENANTS............................................................40 6.1 Affirmative Covenants.......................................40 6.2 Negative and Financial Covenants............................48 7. CONDITIONS PRECEDENT.................................................53 7.1 Conditions Precedent........................................53 7.2 Additional Conditions.......................................54 8. EVENTS OF DEFAULT; RIGHTS AND REMEDIES...............................55 8.1 Events of Default...........................................55 8.2 Remedies....................................................57 8.3 Waivers by the Credit Parties...............................57 8.4 Right of Set-Off............................................57 9. INDEMNIFICATION......................................................57 10. COLLATERAL AGENT.....................................................58 10.1 Collateral Agency Provisions................................58 11. MISCELLANEOUS........................................................60 11.1 Complete Agreement; Modification of Agreement; Sale of Interest....................................................60 11.2 Fees and Expenses...........................................62 11.3 No Waiver by Purchaser......................................62 11.4 Remedies....................................................63 11.5 Waiver of Jury Trial........................................63 11.6 Severability................................................63 11.7 Binding Effect; Benefits....................................63 11.8 Conflict of Terms...........................................63 11.9 Governing Law...............................................63 11.10 Notices.....................................................64 11.11 Survival....................................................64 11.12 Section and Other Headings..................................64 iii TABLE OF CONTENTS (continued) Page 11.13 Counterparts................................................64 11.14 Publicity...................................................64 11.15 Confidentiality.............................................65 Schedules Schedule A - Purchasers and Allocations of Notes Schedule B - Credit Parties Schedule 1 - Mortgages Schedule 2 - Oil and Gas Properties Schedule 5.1 - Stock and Warrants Schedule 5.5 - Subsidiaries and Organization Schedule 5.7 - Financial Statements; Other Obligations Schedule 5.8 - Ownership and Properties Schedule 5.9 - Material Contracts and Indebtedness Schedule 5.10 - Environmental Protection Schedule 5.12 - Other Ventures Schedule 5.13 - Taxes Schedule 5.14 - Litigation Schedule 5.16 - Employment Agreements Schedule 5.17 - Patents, Trademarks, Etc. Schedule 5.18 - Material Adverse Effect Schedule 5.19 - ERISA Schedule 5.22 - Insurance Schedule 5.25 - Agreements with Affiliates Schedule 6.1(b) - Monthly Flash Reports Schedule 6.1(g) - Inventory Schedule 6.2(a) - Indebtedness Schedule 6.2(c) - Sales of Assets; Liquidation Schedule 6.2(f) - Guarantees Schedule 6.2(m) - Permitted Acquisitions Schedule 6.2(n) - Affiliate Transactions Schedule 6.2(s)(v) Crude Production Exhibits Exhibit A-1 Form of Floating Rate Senior Note Exhibit A-2 Form of Fixed Rate Senior Note Exhibit B Form of Guaranty Exhibit C Form of Opinion of Credit Parties' Counsel i EX-10.13 6 grekaex10-13.txt AGREEMENT EXHIBIT 10.13 AMENDMENT NO.3 TO ----------------- SECURITIES PURCHASE AGREEMENT ----------------------------- This AMENDMENT No.3 TO THE SECURITIES PURCHASE AGREEMENT, dated as of March 21, 2003, (this "Amendment") is entered into among Greka Energy Corporation, a Colorado corporation, as borrower ("Greka"), Greka Integrated, Inc., a Colorado corporation ("Greka Integrated"), and each of the entities listed as a guarantor on the signature pages hereto, as guarantors (each a "Guarantor" and collectively, the "Guarantors"), and each of the entities listed as a purchaser on the signature pages hereto (individually, a "Required Holder" and, collectively, the "Required Holders") and Guggenheim Investment Management, LLC, as collateral agent (the "Collateral Agent") (collectively the "Parties"), and amends the Securities Purchase Agreement dated as of June 26, 2002 as amended (as further amended hereby and as the same may be further amended, supplemented, or otherwise modified from time to time, the "Securities Purchase Agreement") entered into among Greka as borrower, the Guarantors, each of the entities from time to time party thereto as purchasers (individually, a "Purchaser" and, collectively, the "Purchasers") and the Collateral Agent as collateral agent. W I T N E S S E T H - - - - - - - - - - WHEREAS, on and effective October 28, 2002 Greka, the Guarantors, Required Holders, Additional Senior Subordinated Purchasers, and Collateral Agent entered into that certain Amendment No. 1 to the Securities Purchase Agreement ("AMENDMENT No.1") that provided, amongst other things, Greka to issue and sell to certain of the Purchasers, and such Purchasers to purchase from Greka secured Additional Senior Subordinated Notes; WHEREAS, pursuant to this Amendment, the parties desire to clarify the payoff amount for the Additional Senior Subordinated Notes and the fixed amount of interest thereon payable monthly; NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained and in that of the Loan Documents, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS ----------- As used in this Amendment, the term "Amendment Effective Date" shall have the meaning as of October 28, 2002. All other terms shall have the meanings given thereto in the Securities Purchase Agreement, as amended. SECTION 2. AMENDMENTS. ----------- The Securities Purchase Agreement is, effective as of the Amendment Effective Date, hereby amended as follows: Section 2.16 is added to read as follows: 2.16 Payoff and Fixed Amount of Interest. Notwithstanding anything herein to the contrary, (a) Cash Interest and Additional Interest shall be payable monthly at the aggregate fixed amount of One Hundred Forty-Nine Thousand Five Hundred Thirty-One Dollars ($149,531.00), and (b) Greka may payoff as payment in full of all Obligations due in connection with the Additional Senior Subordinated Notes at any time in the amount as of the respective date set forth in Annex E hereto. SECTION 3. REFERENCE TO AND EFFECT ON LOAN DOCUMENTS. ------------------------------------------ (a) Upon the effectiveness of this Amendment, on and after the date hereof, each reference in the Securities Purchase Agreement to "this Agreement", "hereunder", "hereof" or words of like import, and each reference in the other Loan Documents to the Securities Purchase Agreement, shall mean and be a reference to the Securities Purchase Agreement as amended hereby. (b) The table of contents of the Securities Purchase Agreement shall be updated to incorporate the changes effected by this Amendment. (c) Except as specifically provided herein, all of the terms of the Securities Purchase Agreement and all other Loan Documents shall remain unchanged and in full force and effect. (d) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Purchaser or the Collateral Agent under the Securities Purchase Agreement or any of the Loan Documents, nor constitute a waiver of any provision of the Securities Purchase Agreement or any of the Loan Documents. (e) This Amendment constitutes a Loan Document. SECTION 4. EXECUTION IN COUNTERPARTS. -------------------------- This Amendment may be executed and delivered in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original and all of which taken together shall constitute one and the same original agreement. SECTION 5. AFFIRMATION OF GUARANTIES AND SECURITY. --------------------------------------- Each of the Guarantors hereby consents to the terms of this Amendment in its capacity as a guarantor under the Securities Purchase Agreement and each other Loan Document to which it is a party and agrees that the Obligations shall include all those Obligations which arise from time to time pursuant to the Additional Senior Subordinated Notes, this Amendment and each other Loan Document and that the terms of this Amendment shall not otherwise affect in any way its respective obligations and liabilities thereunder or under any other Loan Document to which it is a party, all of which obligations and liabilities shall remain in full force and effect and each of which are hereby reaffirmed. SECTION 6. GOVERNING LAW. This Amendment shall be interpreted, and the rights and liabilities of the parties determined, in accordance with the internal law of the State of New York. [SIGNATURE PAGES FOLLOW] 2 CREDIT PARTIES: --------------- GREKA ENERGY CORPORATION By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman WINDSOR ENERGY US CORPORATION By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman RINCON ISLAND LIMITED PARNERSHIP By: WINDSOR ENERGY US CORPORATION, its General Partner By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman GREKA CA, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman GREKA INTEGRATED, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman 3 SANTA MARIA REFINING COMPANY By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman GREKA REALTY, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman GREKA SMV, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman SABA PETROLEUM COMPANY By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman SABA PETROLEUM, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman 4 GREKA AM, INC. By:__________________________ Name: Randeep S. Grewal Title: President, Chief Executive Officer and Chairman COLLATERAL AGENT: ----------------- Guggenheim Investment Management, LLC, as Collateral Agent By: -------------------------- Name: Todd Boehly Title: Managing Director REQUIRED HOLDERS ---------------- NORTH AMERICAN COMPANY FOR LIFE AND HEALTH INSURANCE as a Required Holder By: -------------------------- Name: Todd Boehly Title: Managing Director MIDLAND NATIONAL LIFE INSURANCE COMPANY as a Required Holder By: -------------------------- Name: Todd Boehly Title: Managing Director 5 ADDITIONAL SENIOR SUBORDINATED ------------------------------ PURCHASERS: ----------- MAGMA CDO LTD. as an Additional Senior Subordinated Purchaser By: --------------------------- Name: Todd Boehly Title: Managing Director FORTWIRTH CDO LTD. as an Additional Senior Subordinated Purchaser By: --------------------------- Name: Todd Boehly Title: Managing Director ADAMS STREET CBO 1998-1, LTD. as an Additional Senior Subordinated Purchaser By: --------------------------- Name: Todd Boehly Title: Managing Director 6 EX-21.1 7 grekaex21-1.txt SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES GREKA Energy Corporation, a Colorado Corporation 6/27/88 Greka AM, Inc., a Colorado Corporation 9/30/99 (wholly owned subsidiary of GREKA) Greka Integrated, Inc, a Colorado Corporation 3/23/99 (wholly owned subsidiary of GREKA) Santa Maria Refining Company, a California 8/23/93 Corporation (wholly owned subsidiary of GREKA Integrated, Inc.) Greka Realty, Inc., a California Corporation 8/3/94 (wholly owned subsidiary of GREKA Integrated, Inc.) Greka SMV, Inc, a Colorado Corporation 10/9/97 (wholly owned subsidiary of GREKA Integrated, Inc.) Greka CA, Inc., a Colorado corporation 2/14/02 (wholly owned subsidiary of GREKA) Windsor Energy US Corporation, a Delaware corporation 3/24/95 (wholly owned subsidiary of GREKA) Rincon Island Limited Partnership, a Texas 9/7/95 limited partnership (wholly owned by Greka CA, Inc. and Windsor Energy US Corporation) Calox, Inc., an Indiana Corporation 6/10/92 (wholly owned subsidiary of GREKA) Grecogas Limited, a Cayman Islands Corporation 6/19/97 (wholly owned subsidiary of Greka) Greka Energy (International) B.V., a Dutch Corporation 3/22/01 (wholly owned subsidiary of Grecogas Limited) Greka Jatiluhur Limited, a Cayman Islands Corporation 6/19/97 (wholly owned subsidiary of Greka) Greka Energy (Colombia) B.V., a Dutch Corporation 6/21/00 (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) Saba Exploration Company, a California Corporation 5/4/95 (wholly owned subsidiary of Saba Petroleum Company) 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 Energy of Texas, Inc, a Texas Corporation 6/3/88 (wholly owned subsidiary of Saba Petroleum Company) EX-23.1 8 grekaex23-1.txt CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS --------------------------------------------------------- We hereby consent to the use in the Form 10-K of Greka Energy Corporation of the reserve estimates from our reports as of January 1, 2000; December 31, 2000; December 31, 2001; and December 31, 2002; and all references to our firm appearing in the Form 10-K of Greka Energy Corporation for the fiscal years ended January 1, 2000; December 31, 2000; December 31, 2001; and December 31, 2002. NETHERLAND, SEWELL & ASSOCIATES, INC. By: /s/ Frederic D. Sewell ----------------------------- Frederic D. Sewell Chairman and Chief Executive Officer Dallas, Texas April 9, 2003 EX-23.2 9 grekaex23-2.txt CONSENT EXHIBIT 23.2 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS --------------------------------------------------------- We hereby consent to the use in the Form 10-K of Greka Energy Corporation of the reserve estimates from our report as of December 31, 2002; and all references to our firm appearing in the Form 10-K of Greka Energy Corporation for the fiscal year ended December 31, 2002. By: /s/ Ryder Scott Company, L.P. ---------------------------------------------- Ryder Scott Company, L.P. Houston, Texas April 9, 2003 EX-23.3 10 grekaex23-3.txt CONSENT EXHIBIT 23.3 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statements No. 333-60621, 333-78673, 333-30402, 333-49098, and 333-49134 of Greka Energy Corporation on Form S-3 of our report dated March 27, 2003, relating to the consolidated financial statements of Greka Energy Corporation as of and for the year ended December 31, 2002 appearing in this Annual Report on Form 10-K of Greka Energy Corporation for the year ended December 31, 2002. Deloitte & Touche LLP New York, New York March 27, 2003 -----END PRIVACY-ENHANCED MESSAGE-----