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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________ to
Commission file number 0-20760
GREKA ENERGY CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1091986
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
630 Fifth Avenue, Suite 1501
New York, New York 10111
(212) 218-4680
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
X Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of November 11, 2002, GREKA
had 4,951,418 shares of Common Stock, no par value per share, outstanding.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION.............................................. 3
Item 1. Financial Statements............................................... 3
Condensed Consolidated Balance Sheets as of September 30, 2002
(Unaudited) and December 31, 2001...................................... 3
Condensed Consolidated Statements of Operations for the Nine and
Three Month Periods Ended September 30, 2002 and 2001 (Unaudited).... 4
Condensed Consolidated Statements of Cash Flows for the
Nine Month Periods Ended September 30, 2002 and 2001 (Unaudited)... 5
Notes to Condensed Consolidated Financial Statements (Unaudited)......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation....................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 15
Item 2. Changes in Securities and Use of Proceeds.......................... 16
Item 3. Defaults Upon Senior Securities.................................... 16
Item 4. Submission of Matters to a Vote of Security Holders................ 15
Item 5. Other Information.................................................. 16
Item 6. Exhibits and Reports on Form 8-K................................... 16
SIGNATURE................................................................... 17
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
GREKA ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FOR THE PERIODS ENDED
September 30, 2002 December 31, 2001
------------------ -----------------
(Unaudited)
Current Assets
Cash and cash equivalents $ 1,774,126 $ 422,103
Accounts receivable trade, net of allowance for
doubtful accounts of $586,501 (2002)
and $827,141 (2001) 4,381,683 3,618,368
Inventories 2,493,717 1,796,520
Other current assets 1,999,988 1,552,090
Assets held for resale 8,280,168 --
------------- -------------
Total Current Assets 18,929,682 7,389,081
Property and Equipment
Investment in limestone property, at cost -- 3,675,973
Oil and gas properties (full cost method) 40,530,884 46,928,312
Oil and gas properties - Unproven 4,754,020 7,347,113
Land 19,221,049 17,247,744
Plant and equipment 26,377,751 29,823,908
------------- -------------
90,883,704 105,023,050
Less accumulated depreciation, depletion and
amortization (13,546,458) (15,557,669)
------------- -------------
Property and Equipment, net 77,337,246 89,465,381
Other Assets 7,282,643 3,194,985
------------- -------------
Total Assets $ 103,549,571 $ 100,049,447
============= =============
Current Liabilities
Accounts payable and accrued expenses $ 14,737,745 $ 23,751,354
Current maturities of long-term notes and notes
payable 7,972,856 33,993,043
Short-term borrowing 11,484,604 --
------------- -------------
Total Current Liabilities 34,195,205 57,744,397
Long-term debt, net of current portion 34,000,000 9,139,395
Commitments and Contingent Liabilities -- --
Stockholders' Equity
Common stock, no par value, 50,000,000 shares
authorized, 4,694,953 (2001) 4,951,395 (2002)
shares issued and outstanding 44,404,253 43,112,523
Accumulated earnings (deficit) (9,049,887) (9,946,868)
------------- -------------
Total Stockholders' Equity 35,354,366 33,165,655
------------- -------------
$ 103,549,571 $ 100,049,447
============= =============
The accompanying notes are an integral part of these financial statements.
3
GREKA ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30,
(UNAUDITED)
Nine Months Ended Sept. 30 Three Months Ended Sept. 30
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues $ 20,993,991 $ 31,924,619 $ 8,328,370 $ 13,311,897
Expenses
Production costs 10,298,651 17,755,931 3,718,745 9,246,408
General and administrative 5,852,288 6,121,375 1,623,713 1,692,949
Depletion, depreciation and
amortization 2,384,204 2,758,582 1,026,313 969,513
------------ ------------ ------------ ------------
Total Expenses 18,535,143 26,635,888 6,368,771 11,908,870
Operating Income 2,458,848 5,288,731 1,959,599 1,403,027
Other Income (Expenses)
Other Income Income, net 4,102,397 3,601,079 984,507 2,707,717
Interest Expense, net (5,658,374) (3,231,603) (2,777,357) (1,341,620)
------------ ------------ ------------ ------------
Other Income (Expense) net (1,555,977) 369,476 (1,792,850) 1,366,097
Income before Provision for Income Taxes 902,871 5,658,207 166,749 2,769,124
Provision for Income Taxes (14,722) (113,164) -- (55,382)
------------ ------------ ------------ ------------
Net Income $ 888,149 $ 5,545,043 $ 166,749 $ 2,713,742
============ ============ ============ ============
Net Income per Common Share - Basic $ 0.19 $ 1.22 $ 0.03 $ 0.59
============ ============ ============ ============
Basic Shares 4,726,706 4,530,732 4,825,722 4,577,283
============ ============ ============ ============
Net Income per Common Share - Diluted $ 0.18 $ 1.15 $ 0.03 $ 0.57
============ ============ ============ ============
Diluted Shares 4,876,448 4,821,029 4,975,464 4,734,429
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
GREKA ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS PERIODS ENDED SEPTEMBER 30,
(UNAUDITED)
2002 2001
------------ ------------
Cash Flows from Operating Activities
Net Income $ 888,149 $ 5,545,043
Adjustments to reconcile net income to net
cash provided by (used for) operating activities
Depletion, depreciation and amortization 4,578,992 2,758,582
Net cash received from litigation settlements -- 3,577,282
Net gain on litigation settlements -- (3,365,111)
Net gain on Sale of assets (4,117,020) --
Changes in:
(Increase) Decrease Accounts receivable (763,315) (1,881,074)
(Increase) Decrease Other current assets 297,752 963,210
(Increase) Decrease Other assets 223,884 (1,030,139)
(Increase) Decrease Inventory (697,197) 324,671
Increase (Decrease) Accounts payable and
accrued liabilities (9,382,633) 1,192,315
------------ ------------
Net Cash (Used in) Provided by Operating Activities (8,971,388) 8,084,779
Cash Flows from Investing Activities
Expenditures for property and equipment (14,475,774) (13,996,078)
Proceeds from sale of property 22,390,757 --
Loan repayment from related party 247,776 750,000
Loans to related party -- (500,000)
------------ ------------
Net Cash (Used in) Provided by Investing Activities 8,162,759 (13,746,078)
Cash Flows from Financing Activities
Proceeds from notes payable and long-term debt 39,100,000 13,269,530
Principal payments on notes payable and long-term debt (36,058,463) (13,223,007)
Net increase in revolver loan 1,947,459 2,590,474
Payments of financing costs (2,828,344) --
Proceeds from exercise of stock options -- 527,500
Purchase of treasury stock -- (196,152)
------------ ------------
Net Cash Provided by Financing Activities 2,160,652 2,968,345
Net Increase (Decrease) in Cash and Cash Equivalents 1,352,023 (2,692,954)
Cash and Cash Equivalents at Beginning of Period 422,103 4,837,699
------------ ------------
Cash and Cash Equivalents at End of Period $ 1,774,126 $ 2,144,745
============ ============
The accompanying notes are an integral part of these financial statements.
5
GREKA ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been
prepared on a basis consistent with the accounting principles and policies
reflected in the financial statements for the year ended December 31, 2001, and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 2001 Form 10-K and the Company's 2002
form 10-Q for the periods ended March 31, 2002 and June 30, 2002. In the opinion
of management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (which, except as otherwise disclosed herein,
consist of normal recurring accruals only) necessary to present fairly the
Company's consolidated financial position as of September 30, 2002, and the
consolidated results of operations for the nine and three month periods ended
September 30, 2002 and 2001, and the consolidated cash flows for the nine month
periods ended September 30, 2002 and 2001.
Oil and Gas Property
The Company periodically reviews the carrying value of its oil and gas
properties in accordance with requirements of the full cost method of
accounting. Under these rules, capitalized costs of oil and gas properties may
not exceed the present value of estimated future net revenues from proved
reserves, discounted at 10%, plus the lower of cost or fair market value of
unproved properties ("ceiling"). Application of this ceiling test generally
requires pricing future revenue at the prices in effect as of the end of each
reporting period and requires a writedown for accounting purposes if the ceiling
is exceeded.
Reclassifications
Certain reclassifications have been made to prior year financial statements to
conform to the current year presentation.
Assets Held for Sale
Consistent with the Company's previously announced restructure plan which
included the sale of certain E&P properties, the Company has classified all
assets for which there is a plan of sale in place, approved by management, and
which are likely to be sold within one year. Assets held for sale on the
Consolidated Balance Sheet as of September 30, 2002 consisted of our real estate
and oil and gas interest in the Richfield East Dome Unit and the Limestone
property.
New Accounting Standards
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addressed financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. The Company plans to adopt the provisions of SFAS
No. 143 on January 1, 2003 and is evaluating the impact of this pronouncement,
on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long- Lived Assets. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company was
required to adopt the provisions of SFAS No. 144 for its 2002 fiscal year. The
adoption of SFAS No. 144 on January 1, 2002 did not have a material impact on
the Company's financial position or results of operations.
NOTE 2 - Net Income Per Share
Basic earnings per share ("EPS") is calculated by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
No dilution for any potentially dilutive securities is included. Diluted EPS
assumes the conversion of all potentially dilutive securities and is calculated
by dividing net income, as adjusted, by the weighted average number of shares of
common stock outstanding, plus all potentially dilutive securities.
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Basic Earnings Per Share
Net Income to Common Shares $ 888,149 $5,545,043 $ 166,749 $2,713,742
========== ========== ========== ==========
Weighted Average Shares
Outstanding 4,726,706 4,530,732 4,825,722 4,577,283
Dilutive stock options -- 290,647 -- 157,146
Dilutive stock warrants 149,742 -- 149,742 --
Fully diluted shares 4,876,448 4,821,029 4,975,464 4,734,429
========== ========== ========== ==========
Basic EPS $ 0.19 $ 1.22 $ 0.03 $ 0.59
========== ========== ========== ==========
Diluted EPS $ 0.18 $ 1.15 $ 0.03 $ 0.57
========== ========== ========== ==========
6
The Company's convertible debt and stock options were not dilutive for the
period ending September 30, 2002.
NOTE 3 - INVENTORY
Inventory includes material, labor and manufacturing overhead costs. Due to the
continuous manufacturing process, there is no significant work in process at any
time. Inventory consists of the following at September 30, 2002:
Raw Material ........................ $1,406,269
Finished goods....................... 1,087,448
----------
Total ............................ $2,493,717
==========
NOTE 4 - STATEMENT OF CASH FLOWS
Following is certain supplemental information regarding cash flows for the
nine-month periods ended September 30, 2002 and 2001:
2002 2001
---------- ----------
Interest paid ....... $3,841,277 $2,919,166
Income taxes paid ... $ 0 $ 0
NOTE 5 - CONTINGENCIES
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,
irrespective of whether certain consents of third parties necessary to transfer
the property to the Company were obtained. 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 its
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 the regulatory agency. 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
September 30, 2002, the Company has remediated 34 of 72 wells and related
facilities on the property for a cost of approximately $1.9 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.
7
GREKA's subsidiary owns an asphalt refinery in Santa Maria, California, with
which environmental remediation obligations are associated. The party who sold
the asphalt refinery to the Company's subsidiary performs all environmental
obligations that arose during and as a result of its operations of the refinery
prior to the acquisition. There could be additional environmental issues, which
may require material remediation efforts in the future.
GREKA's subsidiaries, as is customary in the industry, are required to plug and
abandon wells and remediate facility sites on their properties after production
operations are completed. The cost of such operation will be significant and
will occur, from time to time, as properties are abandoned.
There can be no assurance that material costs for remediation or other
environmental compliance will not be incurred in the future. The occurrence of
such environmental compliance costs could be materially adverse to the Company.
No assurance can be given that the costs of closure of any of the Company's
subsidiaries' other oil and gas properties would not have a material adverse
effect on the Company.
NOTE 6 - DIVESTITURE ACTIVITIES, NON-CORE ASSETS
In July 2002, we closed as planned our Houston office following the E&P asset
divestitures in the second quarter 2002.
In September 2002, we sold real estate for a contract price of approximately
$2.3 million.
NOTE 7 - FINANCING & DEBT RESTRUCTURING ACTIVITIES
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.
As of September 2002, we satisfied in full our 15% subordinated convertible
debentures by converting $1.08 million in principal plus accrued interest into
251,348 shares of GREKA common stock and paying $0.23 million in principal plus
accrued interest that had been redeemed.
All deferred financing charges relating to extinguishment of debt was written
off in the quarter ending September 30, 2002.
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.
NOTE 8 - SUBSEQUENT EVENTS
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.
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 Company assumed approximately
$1.7 million of debt to acquire over 12 MMBOE of proven reserves estimated by
independent reservoir engineers, resulting in a purchase price of $0.14 per
barrel. 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. Of the 56 wells on the property, 12
are currently producing at approximately 300 BOPD and 80 MCFD.
Also in October 2002, we had restructured most of our debt and increased working
capital by institutionally placing $12.5 million of secured debt. Of the net
$12.5 million proceeds, we paid off our outstanding debt to Vintage Petroleum,
Inc. and all but approximately $600,000 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.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
GREKA's predecessor was formed in 1988 and commenced oil and gas operations in
1992 as Petro Union, Inc. Current management acquired control of Petro Union in
August 1997 and re-directed the company's operations to the present strategy.
Following the acquisition of Saba Petroleum Company in March of 1999, the
company changed its name to GREKA Energy Corporation.
GREKA Energy Corporation is an independent integrated energy company. Our oil
and gas production, exploration and development activities are concentrated in
our properties in Santa Maria, 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
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 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; and
o International Operations.
Integrated Operations. Our wholly owned and operated consolidated assets in
central California include substantial oil in place, over 1,100 wells, extensive
pipeline and production facilities, and an infrastructure including 3 work-over
rigs, approximately 16,000 mineral acres, approximately 3,300 acres of real
estate, 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.
As of September 30, 2002, approximately 3,500 Bbls per day of our oil produced
locally were used as feedstock, accounting for approximately 90% 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. We have a 49% operated working interest in a coalbed
methane exploration and development project in Jiangxi, China.
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
September 30, 2002, we utilized approximately 35% of this rated capacity. Our
strategy in these vertically integrated assets is to enhance the long-term
9
equity barrel feedstock supply to the refinery and to cost-efficiently boost
production from the drilling locations identified in the Santa Maria Valley
area. Our total average throughput currently at the asphalt refinery is
approximately 3,500 Bbls per day, a 40% increase over 2001 levels. Over 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 the
recent acquisitions.
Major oil companies, such as Union Oil Company, Shell and Texaco, began drilling
in the Santa Maria 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.
In consideration of low gas prices, most of the gas zones were largely passed
over. Likewise, 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 oil and gas 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. We have a
49% operated working interest in our production sharing contract with the China
United Coalbed Methane Corporation Ltd. The Chinese Ministry of Foreign Trade
and Economic Cooperation approved this contract that covers a total area of
380,534 acres. The 30-year contract provides that we as operator will drill at
least five coalbed methane wells over a three-year term. Two production test
wells have been drilled and both were successful. We will continue to look for
high potential international prospects in areas with attractive terms that do
not require significant capital commitments by us.
Recent Developments
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 our 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
Commercial Credit, LLC 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.
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 feed stock of
our equity oil for use in our Santa Maria Refinery. As a result, the closing of
the Vintage acquisition had increased equity oil production by approximately
2,000 Bbls a day.
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 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 $1.08 million in
principal plus accrued interest into 251,348 shares of GREKA common stock and
paying $0.23 million in principal plus accrued interest that had been redeemed.
10
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.
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 Company assumed approximately
$1.7 million of debt to acquire over 12 MMBOE of proven reserves estimated by
independent reservoir engineers, resulting in a purchase price of $0.14 per
barrel. 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. Of the 56 wells on the property, 12
are currently 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.
Further in October 2002, we had restructured most of our debt and increased
working capital by institutionally placing $12.5 million of secured debt. Of the
net $12.5 million proceeds, we paid off our outstanding debt to Vintage and all
but approximately $600,000 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.
Lastly in October 2002, we entered into an amendment to our 30-year production
sharing contract with the China United Coalbed Methane Corporation Ltd. 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.
Accounting Matters
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS 144). SFAS No. 143 addressed financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The Company plans to adopt the
provisions of SFAS No. 143 on January 1, 2003 and is evaluating the impact of
this pronouncement, on the Company's financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long- Lived Assets (SFAS 144). SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The Company was required to adopt the provisions of SFAS No. 144 for its 2002
fiscal year. The adoption of SFAS No. 144 on January 1, 2002 did not have a
material impact on the Company's financial position or results of operations.
Critical Accounting Policies
We use the full cost method of accounting for oil and natural gas property
acquisition, exploration and development activities. Under this method, all
productive and non-productive costs incurred in connection with the acquisition
of, exploration for and development of oil and natural gas reserves are
capitalized. Capitalized costs included lease acquisitions, geological and
geophysical work, delayed rentals and the costs of drilling, completing and
equipping oil and gas wells. Gains or losses are recognized only upon sales or
dispositions of significant amounts of oil and gas reserves. Proceeds from all
other sales or dispositions are treated as reductions to capitalized costs.
Cautionary Information About Forward-Looking Statements
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements, other than statements of historical facts, included in or
incorporated by reference into this Form 10-Q 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
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,
11
* 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.
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.
Long-Term Potential
Management believes that the results of operations for the three-month period
ended September 30, 2002 and cash flows of GREKA reported herein are reasonably
indicative of the expected future quarterly results of operations and cash flows
of GREKA for similar three month periods. Furthermore, the refined product sales
are somewhat seasonal due to seasonal fluctuations in asphalt consumption.
Refined product sales are generally higher in the second and third quarter and
lower the first quarter. Due to these seasonal fluctuations, results of
operations for interim quarterly periods may not be indicative of results, which
may be realized on an annual basis. The results of the Company as reported
herein, and which are demonstrative of the successful implementation of
management's business plan, continue to reflect the long-term potential of the
Company.
12
Comparison of Three Month Periods Ended September 30, 2002 and 2001
Revenues decreased from $13,311,897 for the third quarter of 2001 to $8,328,370
for the third quarter 2002. This 37% decrease is the net effect of a decrease in
revenues from upstream activities or 81% from $3,922,000 in 2001 to $732,000 in
2002 resulting from the effects of the Company's restructuring plan and sale of
Potash, Manila Village and other oil and gas properties, in addition to a
decrease of 19% in revenues from our downstream activities (refined product
sales) from $9,389,000 in 2001 to $7,597,000 in 2002. The decrease is the net
effect of a 27% volume decrease, from 381,356 BBLS in 2001 to 277,055 BBLS in
2002 or $2,531,000. This was offset by a 2% price increase in the weighted
average selling price of refined products from $24.78 in 2001 to $25.31 per
barrel in 2002 or $147,000.
Production and product costs decreased from $9,246,408 for the third quarter
2001 to $3,718,745 for the third quarter 2002. This 60% decrease consists of a
59% decrease in production costs from upstream activities from $1,366,048 in
2001 to $565,141 in 2002 due to the effect of the Company's restructuring plan
discussed above and coupled with a 60% decrease in production cost from
downstream activities from $7,880,392 in 2001 to $3,153,604 in 2002. The
decrease of $4,726,788 is the net effect of a 27% decrease in volume or a
reduction of production cost of $2,135,041 and a 45% decrease in the cost
per barrel from $20.47 to $11.33, or a further reduction of $2,591,746. The
decrease in the cost per barrel is due to an increase of 44% of the average
daily throughput from 2,369 BBLS in 2001 to 3,417 BBLS in 2002 coupled with a
decrease in the percentage of daily average throughput from third party crude
(feedstock) from 49% or 1,172 BBLS in 2001 to 4% or 152 BBLS in 2002. The
decrease in purchases of third party crude is due to the acquisition of the
Vintage properties, which increased contribution to feedstock from equity crude
by 2,000 BBLS per day from approximately 1,000 to 3,000 BBLS per day.
General and Administrative expenses decreased by 4% from $1,692,949 for the
third quarter 2001 to $1,623,713 for the third quarter 2002.
The Company's operating income increased from $1,403,027 in the third quarter
2001 to $1,959,599 in the third quarter 2002. This 40% improvement over 2001 is
primarily due to the decrease in the production cost discussed above.
Depreciation, depletion and amortization increased from $969,513 in the third
quarter 2001 to $1,026,313 in the third quarter 2002 primarily as a result of a
higher depletion rate for 2002 compared to 2001 offset by a lower volume of
production from a weighted daily average of 3,292 BOE in 2001 to 2,847 BOE for
2002.
Interest expense increased from $1,341,620 for the third quarter 2001 to
$2,777,357 for the second quarter 2002 as a result of an increase in the
interest bearing loans outstanding from a weighted average of approximately $41
million in 2001 to $55 million in 2002 coupled with an increase in the weighted
average interest rate from 13% to 20%.
Other income and expenses for the third quarter 2002 of $984,507 is primarily
the net of a write off of capitalized financing costs of approximately $1
million relating to the payoff of loans offset by a gain of $1,811,000 realized
on the sale of real estate and the write off of stale liabilities.
Net income decreased from $2,713,742 in the third quarter 2001 to $166,749 for
the third quarter 2002 mostly due to the increased cost of capital and lower
other income for the period compared to 2001.
Comparison of Nine Month Periods Ended September 30, 2002 and 2001
Revenues decreased from $31,924,619 for the first nine months of 2001 to
$20,993,991 for the first nine months of 2002, or 34% primarily as a result of
the Company's restructuring plan and related upstream property sales. This had
an effect of reducing revenues from $12,368,000 for the first nine months of
2001 to $3,850,000 for the same period in 2002. Additionally, revenues from
13
downstream activities also decreased from $19,556,000 in the first nine months
of 2001 to $17,144,000 for the same period in 2002. The decrease of 12% or
$2,412,000 is due to 6% lower volume sales from total barrels of 735,248 sold in
2001 to 688,199 barrels sold in 2002 for the same period or a net decrease of
$1,251,000 coupled with a 6% decrease in the weighted average selling price from
$26.59 in 2001 to $24.91 in 2002. This contributed to a further reduction of
revenues by $1,161,000.
Production and product cost decreased 42% from $17,755,931 for the first nine
months of 2001 to $10,298,651 for the first nine months of 2002 primarily as a
result of lower volume of production from upstream activities (discussed above)
from a total of 512,694 BOE in 2001 to a total of 261,101 BOE in 2002 or a total
decrease of $2,646,000 from $3,605,000 in 2001 to $959,000 in 2002. Furthermore,
and more importantly, the Company reduced the cost of production at its
downstream operation by 29% from a weighted average cost of $19.25 for the first
nine months of 2001 to $13.57 for the same period in 2002. Coupled with lower
production volume (discussed above) this resulted in a total reduction in cost
by $4,810,000 from $14,150,000 in 2001 to $9,340,000 in 2002.
General and administrative expenses decreased from $6,121,375 in the first nine
months of 2001 to $5,852,288 in the first nine months of 2002 primarily as
result of recognizing an expense relating to Net Profit Sharing in 2001.
Operating Income decreased from $5,288,731 in the first nine months of 2001 to
$2,458,848 in the first nine months of 2002 mostly due to lower revenues
resulting from the effects of the Company's restructuring plan and related
upstream property sales discussed above.
Depreciation, depletion and amortization decreased from $2,758,582 in the first
nine months of 2001 to $2,384,204 in the first nine months of 2002 mostly due to
decrease in volume production resulting from the restructuring plan or 928,575
BBLS in the first nine months of 2001 to 645,038 BBLS in the first nine months
of 2002. This was offset by a higher depletion rate from a weighted average rate
of $2.70 per barrel in the first half 2001 to a weighted average rate of $3.28
per barrel for the first half 2002.
Interest expense increased from $3,231,603 for the first nine months of 2001 to
$5,658,374 for the first nine months of 2002. The increase is due to an increase
in the interest bearing weighted average debt from approximately $38 million for
the first nine months of 2001 to $48 million, as well as, the increase in the
weighted average interest rate from 11.33% in 2001 to 15.83% in 2002.
Other income increased from $3,601,079 for the first nine months of 2001 to
$4,102,397 for the first nine months of 2002. Other income for 2002 mostly
relates to the gain on the sale of Potash and real estate for $2,378,000 and
$1,811,000, respectively, while other income for 2001 mostly relates to a
favorable settlement of material litigation.
Net income decreased from $5,545,043 for the first nine months of 2001 to
$888,149 in the first nine months of 2002 mostly due to lower revenues resulting
from the effect of the Company's restructuring plan.
Liquidity and Capital Resources
The working capital deficit, at September 30, 2002 of $15,265,523 decreased by
$35,089,793 from a working capital deficit of $50,355,316 at December 31, 2001.
Current assets increased by $11,540,601 from $7,389,081 at December 31, 2001 to
$18,929,682 at September 30, 2002 which includes an increase of $1,352,023 in
cash and cash equivalents from $422,103 at December 31, 2001 to $1,774,126 at
September 30, 2002. The increase in both cash balance as well as current assets
is due primarily to the effect of reclassifications (Limestone and Redu) or sale
of non core assets that have been earmarked for divestiture in accordance with
the Company's restructuring plan in the first quarter. Other changes include an
increase in inventory and receivables of $3,618,318 and $1,796,500,
respectively, at December 31, 2001 to $4,381,683 and $2,493,717, respectively,
at September 30, 2002 reflecting a normal seasonal effect on sales and build up
of inventory of refined products. Current liabilities decreased from $57,744,397
at December 31, 2001 to $34,195,205 at September 30, 2002 as a result of payment
of loans to the Bank of Texas, N.A. $12,400,000 and to GMAC $14,300,000 offset
by a note from Vintage $4,920,000.
14
Cash Flows
Cash provided by or used in operations decreased from an inflow of $8,084,779
for the nine months ended September 30, 2001 to an outflow of $8,971,389 for the
nine months period ended September 30, 2002. Net income for the period provided
$888,149 of cash inflow.
The Company's net cash flows provided from investing activities increased from
net outflows of $13,746,078 for the nine months period ended September 30, 2001
to a net inflow of $8,162,759 for the nine months ended September 30, 2002. The
change was the net of cash inflow from the sale of the Potash and real estate
offset by the acquisition cost of the Vintage properties.
The Company's net cash provided by financing activities was $2,968,345 for the
nine months ended September 30, 2001 compared to net cash provided by financing
activities of $2,160,652 for the nine months period ended September 30, 2002.
Capital Expenditures
Our growth is focused on acquisitions that are strategic and in accordance with
our business plan. It is intended that these acquisitions will be achieved
concurrent with the closing of adequate financing. Historically, Greka has
relied on cash flow from operations to finance discretionary capital
expenditures. For 2002, we have budgeted $22 million for our discretionary
capital expenditures for which the acquisition of Vintage properties used $18
million. Additionally, we continue to implement our capital programs which
resulted in an additional expenditure of approximately $2.2 million for the
period ending September 30, 2002.
Inflation
GREKA does not believe that inflation will have a material impact on GREKA's
future operations.
Financing and Debt Restructuring Activities
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.
As of September 2002, we satisfied in full our 15% subordinated convertible
debentures by converting $1.08 million in principal plus accrued interest into
251,348 shares of GREKA common stock and paying $0.23 million in principal plus
accrued interest that had been redeemed.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
To some extent, at September 30, 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. (For a more comprehensive discussion related to
Quantitative and Qualitative Disclosures about Market Risk refer to GREKA's 2001
Annual Report on Form 10-K.)
Item 4. Controls and Procedure.
In accordance with the Sarbanes-Oxley Act within the week preceeding this filing
our Chief Executive Officer and Chief Financial Officer as part of the process
of preparing the Form 10-Q for the period ended September 30, 2002, for filing
with the Securities and Exchange Commission met to evaluate the procedures and
controls developed by the Company to gather information, including financial
information and other information material for an understanding of the Company's
business and prospects. They concluded that at present, the procedures and
controls are satisfactory to permit the Company to provide information to the
persons responsible for preparing the report to ensure that the report fairly
presents in all material respects the financial condition, results of operation
and cash flows of the Company, and all other information necessary to understand
the condition of the Company and its operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The following material developments occurred during the quarter ended September
30, 2002 with respect to the legal proceedings reported in the GREKA Annual
Report on Form 10-K for the fiscal year ended December 31, 2001:
In the matter previously reported in GREKA's 2001 Annual Report on Form 10-K as
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),
the parties entered into an extension of their forbearance agreement through
December 31, 2002.
15
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 2. Changes in Securities and Use of Proceeds.
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.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following exhibits are furnished as part of this report:
Exhibit No. Description
10.1 Amended and Restated Loan and Security Agreement
between Greka AM, Inc. as borrower and
International Publishing Holding, Inc. as Lender
dated October 1, 2002*
10.2 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 herewith
(b) During the quarter for which this report is filed, GREKA filed the following
Reports on Form 8-K:
(1) A Current Report on Form 8-K dated July 1, 2002 which reported events under
Item 5, Other Events.
(2) A Current Report on Form 8-K dated August 13, 2002 which reported events
under Item 7, Financial Statements and Exhibits.
16
Signature
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREKA ENERGY CORPORATION
Date: November 13, 2002 By: /s/ Randeep S. Grewal
---------------------------------------
Randeep S. Grewal, Chairman,
Chief Executive Officer and
President
Date: November 13, 2002 By: /s/ Max A. Elghandour
----------------------------------------
Max A. Elghandour,
Chief Financial Officer
17
CERTIFICATIONS
Randeep S. Grewal, Chief Executive Officer, and Max A. Elghandour, Chief
Financial Officer of Greka Energy Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure 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 quarterly 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 filling date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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 officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significant 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
November 13, 2002
/s/ Max A. Elghandour
- ------------------------------------------
Max A. Elghandour, Chief Financial Officer
November 13, 2002
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 officers' knowledge, that the
Company's Quarterly Report on Form 10-Q for the period ending September 30,
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
November 13, 2002
/s/ Max A. Elghandour
- ------------------------------------------
Max A. Elghandour, Chief Financial Officer
November 13, 2002