FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1996
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: 0-7261
CHAPARRAL RESOURCES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0630863
------------------------------ ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
3400 Bissonnet Street, Suite 135
Houston, Texas 77005
--------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 669-0932
Securities registered pursuant to Section 12(g) of the Act:
$0.10 Par Value Common Stock
----------------------------
(Title of Class)
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 and, (2) has been subject to such filing requirements
for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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.
[ ]
As of April 7, 1997, the aggregate market value of the Registrant's voting
stock held by nonaffiliates was approximately $24,427,197.
As of April 7, 1997, Registrant had 37,526,517 shares of its $0.10 par
value common stock issued and outstanding.
Total Pages ___
Exhibit Index ___
<PAGE>
PART I
ITEM 1. BUSINESS
Chaparral Resources, Inc. ("Company"), which was incorporated under the
laws of the state of Colorado in 1972, is an independent oil and gas exploration
and production company that was based in Denver, Colorado, until March 1, 1997,
when the Company moved its headquarters to Houston, Texas.
Until 1994, the Company's oil and gas activities were concentrated solely
in the United States. During early 1994, the management of the Company made a
strategic decision to pursue international oil and gas projects, with initial
emphasis on the Commonwealth of Independent States (the former Soviet Union)
and, in early 1997, the Company divested itself of all of its remaining oil and
gas properties in the United States.
Karakuduk Project
The Company currently owns 90% of the outstanding common stock of Central
Asian Petroleum Guernsey Limited ("CAP-G") which has a 50% interest in
Karakuduk-Munay, Inc. ("KKM"), which holds 100% of the right to develop the
Karakuduk Oil Field Project in Kazakstan ("Karakuduk Field" or "Karakuduk
Project").
The Company acquired 45% of the outstanding stock of CAP-G prior to
December 1, 1995. In January and February 1996, the Company entered into
agreements to acquire, for a total of $5,850,000 cash and 1,785,000 shares of
the Company's restricted common stock, up to an additional 55% of the
outstanding stock of CAP-G. The Company consummated the purchase of 25% of the
outstanding stock of CAP-G in April 1996 by paying $2,000,000 in cash and
issuing 685,000 shares of the Company's common stock. The Company acquired an
additional 5% of the outstanding stock of CAP-G in April 1996 for $250,000 cash.
To acquire an additional 15% of the outstanding common stock of CAP-G, the
Company agreed to pay $1,975,000 in cash and issue 900,000 shares of the
Company's common stock. This purchase was consummated on March 11, 1996, when
the Company paid $750,000 in cash and issued 900,000 shares of the Company's
common stock. The remaining cash balance of $1,225,000 for the purchase was to
be paid in four quarterly equal payments of $306,250 between June 11, 1996 and
March 11, 1997. The first payment of $306,250 was paid in June 1996 and an
additional $175,000 was paid in September 1996. The agreement was subsequently
revised so that the Company paid $200,000 in December 1996. The Company was to
pay $543,750 on or before March 11, 1997. The Company is currently negotiating
to obtain an extension of the due date of the remaining payment. In addition,
the Company has an option to purchase the remaining 10% of the outstanding
common stock of CAP-G for an additional $1,625,000 and 200,000 shares of the
Company's common stock at any time following completion of the initial purchase
and prior to December 11, 1997.
<PAGE>
Uzbekistan Project
The Company has been negotiating an agreement pursuant to which the Company
would acquire 100% of the issued and outstanding capital stock of MD
International Petroleum, Inc. ("MDI"), a private company of which the
shareholders include two directors of the Company (Messrs. Dilling and McGee).
At the time of the acquisition, the only asset that MDI would have would be a 5%
interest in a joint venture that Enron Oil & Gas Uzbekistan Ltd. is attempting
to negotiate for the development of natural gas fields in Uzbekistan. It is
currently contemplated that, if the agreement is consummated, the Company would
issue MDI's shareholders an as of yet undetermined number of shares of the
Company's restricted common stock in exchange for their MDI shares. Of these
shares, the Company anticipates that a percentage of the shares would be issued
at closing and the balance upon the occurrence of certain events. On January 8,
1997, the Company agreed to issue 180,000 shares of the Company's common stock
to Enron Oil & Gas Uzbekistan, Ltd. ("EOGU") to obtain an option to acquire MDI.
The Company also granted EOGU registration rights with respect to the 180,000
shares. In the interim, the principal shareholders of MDI, including Messrs.
Dilling and McGee, have agreed that if the Company does not acquire MDI within a
specified time period, the principal shareholders will transfer 180,000 shares
of the Company's common stock owned by them to the Company to replace the
180,000 shares issued by the Company to EOGU. Such principal shareholders also
agreed to place the 180,000 shares in escrow to ensure compliance with their
obligation. There are no assurances that the Company will be able to consummate
the agreement to acquire the shares of MDI or that EOGU will be able to
consummate a joint venture or other arrangement for the development of the
natural gas fields in Uzbekistan.
Venezuela Project
In January, 1997 the Company was pre-qualified by PDVSA, the Venezuelan
state oil company, to submit a bid with others on certain oil fields. It is
contemplated that the Company will be part of a consortium of oil and gas
companies that will place a bid or bids to acquire one or more of the 21 oil
fields that have been put up for auction. The auction is expected to be highly
competitive and is expected to be completed by the summer of 1997. There are no
assurances that the Company will be successful in joining a consortium to bid on
the oil fields or that any such consortium will be a successful bidder.
Risks of Foreign Operations. As a result of the Company's interest in KKM
and the Karakuduk Field, the Company will be subject to certain risks inherent
in the ownership and development of foreign properties, including without
limitation, cancellation or renegotiation of contracts, royalty increases, tax
increases, retroactive tax claims, expropriation, adverse changes in currency
values, foreign exchange controls, import and export regulations, environmental
controls, and other laws and regulations which may adversely affect the
Company's interest in the Karakuduk Field. The Company's operations and
agreements will also be governed by foreign laws. In the event of a dispute, the
Company may be subject to arbitration in a foreign country or the jurisdiction
of foreign courts or may not be successful in subjecting foreign persons to the
2
<PAGE>
jurisdiction of courts in the United States. In addition, the Company might be
hindered or prevented from enforcing its rights with respect to a government
instrumentality because of the doctrine of sovereign immunity.
Although certain members of management of the Company have had prior
experience operating in foreign countries, the Company has no prior experience
operating in any foreign country, including the Republic of Kazakstan, and may
encounter unexpected difficulties in conducting foreign operations. Although the
recent and continuing political, social and economic upheavals in Kazakstan have
created opportunities for foreign investment, substantial uncertainty exists
about the stability of the central Kazakstan government, the status of Kazakstan
law and the autonomy of the parties involved with the Company in Kazakstan.
The Company has endeavored to protect itself against the political and
commercial risks, but there is no certainty that the steps taken will provide
adequate protection. In this regard, the Company has applied with Overseas
Private Investment Corporation ("OPIC") for political risk insurance. OPIC
insurance can cover the following political risks:
o Currency Inconvertibility--deterioration of the investor's ability to
convert profits, debt service and other remittances from local currency
unto U.S. dollars;
o Expropriation--loss of an investment due to expropriation, nationalization
or confiscation by a foreign government;
o Political Violence--loss of assets or income due to war, revolution,
insurrection or politically motivated civil strife, terrorism and sabotage;
and
o Interference With Operations--loss of assets or income due to cessation of
operations lasting six months or more caused by political violence.
The coverage elections for each category of insurance are computed on a
ceiling and an active amount. The coverage ceiling represents the maximum
insurance available for the insured investment and future earnings under an
insurance contract. The premiums for each category are based on a maximum
insured amount ("MIA"), a current insured amount ("CIA") and a standby amount.
The MIA represents the maximum insurance available for the insured investment
under an insurance contract. The CIA represents the insurance actually in force
during the contract period. The difference between the CIA and the MIA is the
standby amount. There is a charge for standby coverage.
The Company has applied with OPIC for all four political risk coverages on
the Company's investment in the Karakuduk Field in western Kazakstan. The MIAs
sought for each coverage range from $23.4 to $40.2 million. The estimated yearly
premium amounts for the CIAs for each coverage range up to $84,000. The
estimated yearly standby premiums for each coverage range up to $88,000. The
3
<PAGE>
actual premium values may be higher or lower depending on the contract offered
to the Company by OPIC.
The Investment Committee of OPIC approved the Company's Karakuduk
operations for political risk insurance coverage by OPIC on December 19, 1995.
The Company has received an executed Letter of Commitment on September 25, 1996,
from OPIC binding issuance of Political Risk Insurance for the Karakuduk
project. Currently, the Company has a standby facility for which it has made
three previous payments of $31,250 and has a fourth payment of $31,250 due on
June 30, 1997. In July 1997, the Company expects to receive the actual contract
offered to the Company by OPIC.
Under the terms of OPIC's Expropriation and Interference With Operations
insurance coverage, the Company must be able to transfer to OPIC the shares of
beneficial interests related to the insured investment, free and clear of all
encumbrances. There are certain restrictions on the transfer of shares and
assignment of the Company's beneficial interests in KKM. At such time as the
Company obtains coverage, the Company will seek a waiver of the transfer
restrictions from the shareholders of KKM. The Company does not anticipate
problems in obtaining the waiver.
On February 1, 1997, the Company was informed that a Kazakstan Presidential
Edict had been issued announcing the liquidation of Munaygaz, the
government-owned company which holds a 20% interest in KKM. As a result of this
action, KKM was unable to complete its re-registration as required by Kazakstan
regulations, resulting in the risk that applicable judicial bodies could
initiate legal proceedings to declare KKM invalid. On March 4, 1997, another
Kazakstan Presidential Edict was issued announcing the formation of "Kazakoil,"
the Kazakstan National Petroleum Company, which will take over the interests of
the government of Kazakstan in all hydrocarbon ventures. Kazakoil will be
assigned the shares of KKM held by Munaygaz within the next few weeks. At that
time, the shareholders of KKM will be complete and KKM can commence the
re-registration process, thus avoiding the risk that applicable judicial bodies
could initiate legal proceedings to declare KKM invalid. Management of the
Company has assurances from the appropriate authorities that such action would
not be taken.
Markets
In fiscal 1996, the only customer having purchases which accounted for 10%
or more of the Company's revenue was Conoco Inc. which accounted for 32% of the
Company's revenue. In early 1997, the Company divested itself of all of its
remaining oil and gas properties in the United States.
The Company's business is not seasonal, except that severe weather
conditions could limit the Company's exploration and drilling activities.
However, severe cold weather increases the demand for oil and natural gas which
are used for heating purposes.
4
<PAGE>
There is substantial uncertainty as to the prices at which any oil reserves
produced by the Company from the Karakuduk Field could be sold. It is possible
that, under the market conditions prevailing in the future, the production and
sale of oil from the Karakuduk Field may not be commercially feasible. The
availability of ready markets and the price obtained for oil produced depends
upon numerous factors beyond the control of the Company. The current market for
oil is characterized by instability which has caused dramatic declines as well
as increases in world oil prices in recent years and there can be no assurance
of any price stability. See also "Item 2. Properties--The Karakuduk Field."
Competition
Foreign oil and gas exploration and the acquisition of producing and
undeveloped properties is a highly competitive and speculative business. In
seeking suitable opportunities, the Company competes in all areas of the oil and
gas industry with a number of other companies, including large multi-national
oil and gas companies and other independent operators with greater financial
resources and, in some cases, with more experience than the Company. The Company
does not hold a significant competitive position in the oil and gas industry.
Regulation
General. The Company's operations may be subject to regulation by
governments or other regulatory bodies governing the area in which the Company's
overseas operations are located. Regulations govern such things as drilling
permits, production rates, and environmental protection and pollution control,
royalty rates and taxation rates among others. These regulations may
substantially increase the costs of doing business and sometimes may prevent or
delay the starting or continuing of any given exploration or development
project. Moreover, regulations are subject to future changes by legislative and
administrative action and by judicial decisions which may adversely affect the
petroleum industry in general and the Company in particular. At the present
time, it is impossible to predict the effect any current or future proposals or
changes in existing laws or regulations will have on the Company's operations.
Subject to the matter described in the next paragraph, the Company believes that
it complies with all applicable legislation and regulations in all material
respects.
On February 1, 1997, the Company was informed that a Kazakstan Presidential
Edict had been issued announcing the liquidation of Munaygaz, the
government-owned company which holds a 20% interest in KKM. As a result of this
action, KKM was unable to complete its re-registration as required by Kazakstan
regulations, resulting in the risk that applicable judicial bodies could
initiate legal proceedings to declare KKM invalid. On March 4, 1997, another
Kazakstan Presidential Edict was issued announcing the formation of "Kazakoil,"
the Kazakstan National Petroleum Company, which will take over the interests of
the government of Kazakstan in all hydrocarbon ventures. Kazakoil will be
assigned the shares of KKM held by Munaygaz within the next few weeks. At that
time, the shareholders of KKM will be complete and KKM can commence the
re-registration process, thus avoiding the risk that applicable judicial bodies
5
<PAGE>
could initiate legal proceedings to declare KKM invalid. Management of the
Company has written assurances from the appropriate authorities that such action
would not be taken.
Environmental. The Company does not believe that its business operations
presently impair environmental quality. However, compliance with foreign laws
and regulations which have been enacted or adopted regulating the discharge of
materials into the environment could have an adverse effect upon the Company,
the extent of which the Company is unable to assess. Since inception the Company
has not made any material capital expenditures for environmental control
facilities and has no plans to do so.
Employees
The Company operates through its officers, directors and consultants. Such
persons are not yet employees of the Company but certain of such officers,
directors and consultants may become employees of the Company in the near
future. The Company employs one person on a full-time basis in Kazakstan. The
Company also has four part-time employees.
ITEM 2. PROPERTIES
The Karakuduk Field
The Karakuduk Field is located in the Mangistau Region of the Republic of
Kazakstan. KKM's license to develop the Karakuduk Field covers an area of
approximately 16,922.5 acres and has been granted to KKM for a period of 25
years. The agreement granting KKM the right to develop the Karakuduk Field was
approved by the Ministry of Oil and Gas Industries of the Republic of Kazakstan
on August 30, 1995. CAP-G's share of the initial capitalization of KKM is
$100,000, of which the Company's share has been paid.
On February 1, 1997, the Company was informed that a Kazakstan Presidential
Edict had been issued announcing the liquidation of Munaygaz, the
government-owned company which holds a 20% interest in KKM. As a result of this
action, KKM was unable to complete its re-registration as required by Kazakstan
regulations, resulting in the risk that applicable judicial bodies could
initiate legal proceedings to declare KKM invalid. On March 4, 1997, another
Kazakstan Presidential Edict was issued announcing the formation of "Kazakoil,"
the Kazakstan National Petroleum Company, which will take over the interests of
the government of Kazakstan in all hydrocarbon ventures. Kazakoil will be
assigned the shares of KKM held by Munaygaz within the next few weeks. At that
time, the shareholders of KKM will be complete and KKM can commence the
re-registration process, thus avoiding the risk that applicable judicial bodies
could initiate legal proceedings to declare KKM invalid. Management of the
Company has assurances from the appropriate authorities that such action would
not be taken.
6
<PAGE>
The Karakuduk Field is geographically located, approximately 227 miles
northeast of the regional capital city of Aqtau, on the Ust-Yurt Plateau. The
closest settlement is the Say-Utes Railway Station approximately 38 miles
southeast of the field. The ground elevation varies between 590 and 656 feet
above sea level. The region has a dry, continental climate, with fewer than 10
inches of rainfall per year. Mean temperatures range from -25 degrees Fahrenheit
in January to 100 degrees Fahrenheit in July. The operating environment is
similar to that found in northern Arizona and New Mexico in the United States.
The Karakuduk structure is an asymmetrical anticline located on the Aristan
Uplift in the North Ustyurt Basin. Oil was discovered on the structure in 1972,
when Kazakstan was a republic of the former Soviet Union, from Jurassic age
sediments between 8,500 and 10,000 feet. Twenty-two exploratory and development
wells were drilled to delineate the field, however, none of the wells was ever
placed on production. The productive area of the Karakuduk Field is 11,300
acres, with a minimum of seven separate productive horizons present in the
Jurassic formation. Oil has been recovered in tests from all seven horizons
within the Jurassic formation with flow rates ranging from 3 to 966 barrels per
day. The Company estimates that the drilling of approximately 90 additional oil
wells and 26 water injection wells may be required to fully develop the field.
Peak oil production from the field is expected to occur within seven years after
start-up, although time or amount of development or production cannot presently
be assured.
In January 1995, Ryder Scott Company Petroleum Engineers ("Ryder Scott"),
an internationally recognized petroleum engineering group retained by the
Company, has stated that in its opinion, after review, a reserve report
commissioned by the Company which estimated that the Karakuduk Field has
estimated recoverable oil of 74 million barrels which could be considered proved
undeveloped, is reasonable. However, neither the Ryder Scott opinion or the
reserve report considered the potential adverse impact of marketability on price
of any oil which might be produced due to the remote location of the field or
potential political instability and, therefore, none of the reserves can
presently be considered proven. The production and marketing of the oil reserves
will be subject to a number of political, economic and other risks. See
"--Markets and --Competition."
The Karakuduk Field is approximately 18 miles north of the Mukat-Mangishlak
railroad, the Mangishlak-Astraghan water pipeline, the Beyneu-Uzen high voltage
utility lines, and the Uzen-Atrau-Samara oil and gas pipelines. KKM has the
right of priority to use the existing oil and gas pipeline facilities to
transport produced oil from the Karakuduk Field to the Baltic Sea ports of
Kaliningrad and Ventspils and/or the Black Sea port of Novorsiysk, thus offering
a potential world market for the produced crude oil. This priority use of
existing facilities is granted within the guarantee issued by the Ministry of
Oil and Gas Industry of the Republic of Kazakstan. The planned development
program for the Karakuduk Field will include a secondary recovery operation that
the Company believes could result in additional recoverable reserves.
7
<PAGE>
The ability of the Company to realize the carrying value of its assets is
dependent on being able to extract and transport hydrocarbons and finding
appropriate markets for their sale. Currently, exports from the Republic of
Kazakstan are restricted since they are dependent on limited transport routes
and, in particular, access to the Russian pipeline system. Access to such routes
is currently restricted. Domestic markets in the Republic of Kazakstan currently
do not permit world market price to be obtained. Management believes, however,
that over the life of the project, transportation restrictions will be
alleviated and prices will be achievable for hydrocarbons extracted to allow
full recovery of the carrying value of its assets.
Because of uncertainties surrounding the Karakuduk Project, no proved
reserves have been attributed to the field. The Karakuduk Project will require
significant development costs for which the financing is not complete. There can
be no assurance that the project will be adequately financed or that the field
will be successfully developed. The license requires minimum work plans of
approximately $10 million by August 31, 1997, of approximately $35 million by
August 31, 1998 and of approximately $12 million by August 31, 1999. The
agreement provides KKM with the right to defer the minimum work program under
certain conditions. As part of the minimum work plan requirement, the Company
has loaned CAP-G more than $4 million to fund KKM's current operations. KKM's
1997 budget, which has not been approved, would entail a minimum expenditure of
$6 million through August 31, 1997. Subject to the receipt of additional
financing by the Company, this requirement will be funded by the Company through
loans by its subsidiary CAP-G to KKM.
The Karakuduk Field will be developed in phases. Phase I, expected to
require at least one year, began during 1996. Phase I expenditures are to
include the recompletion of four existing wells. Also, subject to the receipt of
additional financing by the Company, a new development well will be drilled in
the Karakuduk Field during 1997.
Total costs, including engineering design, well recompletions, drilling and
completion costs, storage tanks and facilities, oil transport trucks, roads,
camp facilities, communication facilities, field transportation, office overhead
and personnel costs, for Phase I are estimated to be $8 million.
Unless and until the Company exercises its option to acquire the remaining
10% of the outstanding common stock of CAP-G, the Company will be responsible
for providing 90% of the funding necessary for the completion of Phase I of the
development of the Karakuduk Field. If the Company exercises the option, the
Company will be responsible for providing 100% of the funding.
The Company anticipates that produced crude oil from Phase I development
would be sold beginning within five to six months after start-up of this phase.
The produced oil will be transported by pipeline from the field to a storage
terminal to be built at Railroad Station #6 or to a railroad boarding facility
at the same location or to both approximately 18 miles from the Karakuduk Field.
The oil will be transported by railroad or via the Uzen-Atrau- Samara pipeline
8
<PAGE>
to the Black Sea ports described above for sale to either domestic or
international consumers.
The Company has established oil production at a rate of approximately 400
barrels of oil per day from the first well to be re-entered in the Karakuduk Oil
Field. The well is one of 22 wells drilled between 1972 and 1992 to delineate
the Karakuduk Oil Field. None of such wells were then placed on production.
Production now has been established from one of six zones in the first well to
be reentered and the remaining five zones will be tested at a later date, when
additional oil storage and upgraded workover equipment have been provided. The
well is now shut in and operations have been suspended because of winter
conditions and lack of ability to market the test oil. It is currently planned
that recommencement of work-over operations and infrastructure construction will
begin in May, 1997.
Management of the Company believes the risk-to-reward considerations
involved with the development of the Karakuduk Field are very positive and may
lead to substantial growth of the Company over the next several years. However,
the Company can provide no assurances that the Karakuduk Field will produce oil
in any amounts or that the Company will ever realize a profit as a result of the
Company's interest in the field.
The exploration and development of the Karakuduk Field is governed by the
terms of the agreements with the other shareholders in CAP-G and KKM. There can
be no assurance that such shareholders, or any successor thereto, will
contribute or will be in a position to contribute its proportionate share of
costs and expenses for either entity for which it is responsible without raising
additional capital.
While a majority of the permits and licenses required to develop the
Karakuduk Field are in place, there is no assurance that all of them will be
obtained. Also, because of uncertainties surrounding the project, no proved
reserves have been attributed to the field. The project will require significant
development costs for which the financing is not in place. There can be no
assurance that the project will be financed or that the Karakuduk Field will be
successfully developed. Further, the Company will face all of the risks inherent
in attempting to develop an oil and gas property in a foreign country.
See also Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations.
In the first quarter of calendar 1997, the Company disposed of all of its
remaining interests in oil and gas properties in the United States. Accordingly,
the following is provided for information purposes even though it relates solely
to those properties.
Reserves. As detailed in "Disclosures About Oil and Gas Producing
Activities" following the Notes to Consolidated Financial Statements in this
Annual Report on From 10- K, estimated quantities of the Company's proved oil
reserves decreased 100% for the fiscal year ended November 30, 1996, as compared
to the previous fiscal year and natural gas reserves decreased 100%. Reserves
decreased due to production during the year, the sale of all producing
9
<PAGE>
properties and the abandonment of certain properties which produced at
uneconomic rates. The present value of the Company's proved reserves decreased
100% as of November 30, 1996, as compared to the end of the previous fiscal
year, due to lower natural gas prices, production, the sale of proved reserves
and abandonment of proved reserves.
In January 1995, Ryder Scott Company Petroleum Engineers ("Ryder Scott"),
an internationally recognized petroleum engineering group retained by the
Company, has stated that in its opinion, after review, a reserve report
commissioned by the Company which estimated that the Karakuduk Field has
estimated recoverable oil of 74 million barrels which could be considered proved
undeveloped, is reasonable. However, neither the Ryder Scott opinion or the
reserve report considered the potential adverse impact of marketability on price
of any oil which might be produced due to the remote location of the field or
potential political instability and, therefore, none of the reserves can
presently be considered proven. The production and marketing of the oil reserves
will be subject to a number of political, economic and other risks. See
"--Markets and --Competition."
Net Quantities of Oil and Gas Produced. The Company's net oil and gas
production for each of the last three years (all of which was from properties
located in the United States) was as follows:
Year Ended November 30,
--------------------------------
1996 1995 1994
---- ---- ----
Oil (Bbls) ........... 1,737 8,224 11,286
Gas (Mcf) ........... 96,906 132,924 159,041
The average sales price per barrel of oil and Mcf of gas, and average
production costs per barrel of oil equivalent ("BOE") excluding depreciation,
depletion and amortization were as follows:
<TABLE>
<CAPTION>
Average Average Average
Year Ended Sales Price Sales Price Production
November 30 Oil (Bbls) Gas (Mcf) Cost Per BOE
----------- ------------ ----------- ------------
<S> <C> <C> <C>
1996 ............... 17.53 1.17 2.07
1995 ............... 14.27 1.02 3.78
1994 ............... 12.75 1.44 6.06
</TABLE>
The above table represents activities related only to oil and gas
production.
10
<PAGE>
Productive Wells and Acreage. As of November 30, 1996, the Company had
interests in 65 gross productive oil wells (1.73 net oil wells) and 62 gross
productive gas wells (4.61 net gas wells). There are no multiple completion
wells. Production was from 45,775 gross (2,793) developed acres.
Undeveloped Acreage. The Company on November 30, 1996, held interests in
2,500 gross (690 net) undeveloped oil and gas leases, all located within the
State of Wyoming.
Drilling Activity. During the last three fiscal years ended November 30,
1996, the Company participated in the drilling of the following productive
exploratory and development wells in the United States. This table does not
include any wells in which the Company had a carried or overriding royalty
interest, nor any wells that were recompleted.
<TABLE>
<CAPTION>
Fiscal Year Exploratory Wells Development Wells
Ended ----------------------------------- ---------------------------------
November 30, Productive Dry Productive Dry
------------ --------------- -------------- -------------- -------------
Gross Net Gross Net Gross Net Gross Net
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 ..................... 0 0 0 0 0 0 0 0
1995 ..................... 0 0 0 0 0 0 0 0
1994 ..................... 1 .11 0 0 5 .81 1 .15
</TABLE>
Present Activities. As of April 7, 1997, the Company was not participating
in the drilling of any oil or natural gas wells.
Offices. The Company's offices comprise 1,746 square feet and are rented
for $1,920 per month, under a lease which expires in November 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during
the Company's fiscal quarter ended November 30, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's $0.10 par value common stock is listed on the Nasdaq
Small-Cap Market under the symbol CHAR.
11
<PAGE>
At March 7, 1997, the Company had approximately 2,061 shareholders of
record of its $0.10 par value common stock. No dividends have been paid on the
Company's common stock and there are no plans to pay dividends in the
foreseeable future.
The following table shows the range of high and low "real-time" trade
prices for each quarter during the Company's last two fiscal years ended
November 30, 1996, as reported by the National Association of Securities
Dealers, Inc.
<TABLE>
<CAPTION>
Price Range
Trading Range -------------------
Fiscal Quarter Ended High Low
-------------------- ---- ---
<S> <C> <C>
February 28, 1995................................ 23/32 5/8
May 31, 1995..................................... 7/8 21/32
August 31, 1995.................................. 11/16 15/32
November 30, 1995................................ 1 1/2
February 29, 1996................................ 1 11/32 11/16
May 31, 1996..................................... 1 11/32 1 1/32
August 31, 1995.................................. 1 3/4 1 1/16
November 30, 1996................................ 1 15/32 29/32
</TABLE>
The following is information as to all securities of the Company sold by
the Company during the fiscal year ended November 30, 1996, which were not
registered under the Securities Act of 1933, as amended ("Securities Act").
Between September 13, 1994 and June 1, 1996, the Company issued 1,448,325
shares of its Common Stock to 37 persons which exercised stock purchase warrants
issued by the Company in a private offering completed on May 31, 1993. The
exercise price of the warrants was $0.40 per share, paid at the time of
exercise. The certificates evidencing the shares issued bear appropriate
restrictive legends under the Securities Act and stop transfer instructions have
been placed with the Company's stock transfer agent. No underwriter was involved
in the transaction. The Company issued the shares in reliance upon exemptions
from registration under Section 4(2) of the Securities Act and Regulation D
thereunder. All of such persons had available to them material information
concerning the Company. A Form D was filed in connection with the issuances.
Between March 8, 1996 and April 5, 1996, Company issued 14,000,000 shares
of its Common Stock to 32 persons in a private placement. The purchase price for
the shares was $0.50 per share. Allen & Company Incorporated served as placement
agent in the private offering and received the compensation described below. The
Company issued the shares in reliance upon exemptions from registration provided
by Regulation D and Section 4(2) of the Securities Act. All of such persons had
available to them material information concerning the Company. A Form D was
filed in connection with the issuances. All purchasers represented that they
were accredited investors as defined in Regulation D, and that the shares were
being acquired for the investors' own account and not with a view to
distribution. The certificates evidencing the shares issued bear appropriate
12
<PAGE>
restrictive legends under the Securities Act and stop transfer instructions have
been placed with the Company's stock transfer agent.
On April 5, 1996, Company issued 600,000 shares of its Common Stock to two
persons upon conversion of two outstanding unsecured promissory notes of the
Company in the total principal amount of $300,000. Allen & Company Incorporated
assisted the Company in connection with the conversion and received the
compensation described below. The Company relied upon exemptions from
registration under Section 4(2) of the Securities Act. All of such persons had
available to them material information concerning the Company. Each of the
persons represented that such person acquired the shares for the person's
account and not with a view to distribution and that the investor is an
accredited investor. The certificates evidencing the shares issued bear
appropriate restrictive legends under the Securities Act and stop transfer
instructions have been placed with the Company's stock transfer agent.
On March 4, 1996, the Company issued 625,000 shares and on March 21, 1996,
the Company issued an additional 60,000 shares to four persons in consideration
for 25% of the outstanding shares of CAP-G owned by Darka Petrol Ticaret Ltd.
Sti. ("DARKA"), controlled by the persons. The Company issued the shares in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act. The persons represented to the Company that they acquired the
shares for their own accounts and not with a view to distribution. Such persons
had available to them material information concerning the Company. The
certificates evidencing the shares issued bear appropriate restrictive legends
under the Securities Act and stop transfer instructions have been placed with
the Company's stock transfer agent. No underwriter was involved in the
transaction.
On March 6, 1996, the Company issued 900,000 shares to two persons in
consideration for the acquisition by the Company of 15% of the outstanding
shares of CAP-G owned by the persons. The Company issued the shares in reliance
upon the exemption from registration under Section 4(2) of the Securities Act.
The persons represented to the Company that they acquired the shares for their
own accounts and not with a view to distribution. Such persons had available to
them all material information concerning the Company. The certificates
evidencing the shares issued bear appropriate restrictive legends under the
Securities Act and stop transfer instructions have been placed with the
Company's stock transfer agent. No underwriter was involved in the transaction.
Effective April 8, 1996, the Company issued stock purchase warrants
entitling the holder to purchase 1,022,000 shares of the Company's Common Stock
for $10.00 consideration to Allen & Company Incorporated, the placement agent in
the Company's 1996 private placement described above and as compensation for
assistance by the placement agent in the conversion of $300,000 of the Company's
outstanding promissory note described above. The Company issued the warrants in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act. Allen & Company Incorporated represented to the Company that it
acquired the warrants for its own account and not with a view to distribution.
13
<PAGE>
Such person had available to it all material information concerning the Company.
The certificate evidencing the warrants bears an appropriate restrictive legend
under the Securities Act. No underwriter was involved in the transaction.
Between December 1995 and January 1996, the Company issued stock purchase
warrants entitling the holders to purchase up to 780,000 shares of the Company's
Common Stock at an exercise price of $0.25 per share to one individual, one
pension plan, Brae Group, Inc., and Allen & Company, Incorporated in
consideration for the making of loans to the Company by the individual, the plan
and Brae Group, Inc. and Allen & Company totaling $1,050,000 in November and
December 1995. The Company issued the warrants in reliance upon the exemption
from registration under Section 4(2) of the Securities Act. The persons
represented to the Company that they acquired the warrants for their own
accounts and not with a view to distribution. Such persons had available to them
all material information concerning the Company. The certificates evidencing the
warrants bears an appropriate restrictive legend under the Securities Act.
In November and December, 1996, the Company borrowed $1,850,000 for interim
financing pursuant to unsecured convertible promissory notes that bear interest
at 8% per annum, which is payable monthly, and that are due and payable on or
before May 29, 1998. The promissory notes are convertible into the Company's
common stock at the lower of $0.75 per share or 75% of the market price of the
common stock on the date of the conversion if the market price is less than
$1.00 per share on such date. The proceeds from the first of such loans was
received on November 22, 1996.
In connection with such borrowings, the Company issued the lenders stock
purchase warrants that terminate on November 30, 1999, to purchase a total of
462,500 shares of the Company's common stock at $0.25 per share. The Company
further agreed that the Company would issue the lenders warrants to purchase an
additional 185,000 shares of the Company's common stock if the promissory notes
are not paid or converted by May 29, 1997, and warrants to purchase an
additional 370,000 shares of the Company's common stock if the promissory notes
are not paid or converted by November 30, 1997. Such warrants would be
exercisable for a period of three years at $0.25 per share. The Company issued
the notes and warrants in reliance upon the exemption from registration under
Section 4(2) of the Securities Act. The persons represented to the Company that
they acquired the notes and warrants for their own accounts and not with a view
to distribution. Such persons had available to them all material information
concerning the Company. The certificates evidencing the notes and warrants bear
an appropriate restrictive legend under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following is selected consolidated financial information concerning the
Company. This information should be read in conjunction with the Consolidated
Financial Statements appearing elsewhere in this Annual Report on Form 10-K.
14
<PAGE>
<TABLE>
<CAPTION>
November 30,
---------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Oil and gas sales ............................. $ 147,000 $ 255,000 $ 374,000 $ 414,000 $ 492,000
Total revenues* ............................... 147,000 255,000 374,000 414,000 492,000
Noncash write-down of oil
and gas properties .......................... --- 619,000 416,000 230,000 ---
Loss before extraordinary item ................ (2,179,000) --- --- --- ---
Net loss per share before extraordinary
item ........................................ (0.07) --- --- --- ---
Net (loss) .................................... (2,416,000) (704,000) (474,000) (123,000) (121,000)
Net (loss) per common share ................... (0.08) (0.04) (0.02) (0.01) (0.01)
Working capital ............................... 52,000 366,000 497,000 709,000 357,000
Total assets .................................. 14,760,000 5,595,000 2,388,000 2,597,000 2,292,000
Long-term obligations ......................... 1,106,000 461,000 -- 115,000 135,000
Stockholders' equity .......................... 12,114,000 4,920,000 2,035,000 2,167,000 1,880,000
Present value of proved reserves .............. -0-** 427,000 1,084,000 1,360,000 1,429,000
Proved oil reserves (bbls) .................... -0-** 66,185 111,690 141,748 105,973
Proved gas reserves (mcf) ..................... -0-** 3,062,417 3,294,730 2,305,142 1,485,556
- -------------------
</TABLE>
*Certain reclassifications have been made to conform prior years'
information with the current year presentation.
**Reflects the divestiture by the Company of all of its remaining oil and
gas properties in the United States in early 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Until 1996, the Company's primary source of capital historically had been
from oil and gas sales. The Company had working capital of approximately $52,000
at November 30, 1996. Total current assets were $1,207,000 and total current
liabilities were $1,155,000 for a working capital ratio of approximately 1.05 to
1.
Net cash and cash equivalents increased by $299,000 from November 30, 1995
to November 30, 1996, primarily due to funds received from the completion of a
private placement of 14,000,000 shares of the Company's common stock for gross
proceeds of $7,000,000 in April, 1996.
The Company currently owns 90% of the outstanding common stock of Central
Asian Petroleum Guernsey Limited ("CAP-G") which has a 50% interest in
Karakuduk-Munay, Inc. ("KKM"), which holds 100% of the right to develop the
Karakuduk Field.
The Company acquired 45% of the outstanding stock of CAP-G prior to
December 1, 1995. In January and February 1996, the Company entered into
agreements to acquire, for a total of $5,850,000 cash and 1,785,000 shares of
the Company's restricted common stock, up to an additional 55% of the
15
<PAGE>
outstanding stock of CAP-G. The Company consummated the purchase of 25% of the
outstanding stock of CAP-G in April 1996 by paying $2,000,000 in cash and
issuing 685,000 shares of the Company's common stock. The Company acquired an
additional 5% of the outstanding stock of CAP-G in April 1996 for $250,000 cash.
To acquire an additional 15% of the outstanding common stock of CAP-G, the
Company agreed to pay $1,975,000 in cash and issue 900,000 shares of the
Company's common stock. This purchase was consummated on March 11, 1996, when
the Company paid $750,000 in cash and issued 900,000 shares of the Company's
common stock. The remaining cash balance of $1,225,000 for the purchase was to
be paid in four quarterly equal payments of $306,250 between June 11, 1996 and
March 11, 1997. The first payment of $306,250 was paid in June 1996 and an
additional $175,000 was paid in September 1996. The agreement was subsequently
revised so that the Company paid $200,000 in December 1996. The Company was to
pay $543,750 on or before March 11, 1997. The Company is currently negotiating
to obtain an extension of the due date of the remaining payment. In addition,
the Company has an option to purchase the remaining 10% of the outstanding
common stock of CAP-G for an additional $1,625,000 and 200,000 shares of the
Company's common stock at any time following completion of the initial purchase
and prior to December 11, 1997.
The Company does not have any income producing properties and the Karakuduk
Oil Field is substantially undeveloped. The Karakuduk Project will require
significant development costs for which the financing is not complete. There can
be no assurance that the project will be adequately financed or that the field
will be successfully developed. The license requires minimum work plans of
approximately $10 million by August 31, 1997, of approximately $35 million by
August 31, 1998 and of approximately $12 million by August 31, 1999. The
agreement provides KKM with the right to defer the minimum work program under
certain conditions. As part of the minimum work plan requirement, the Company
has loaned CAP-G $4 million to fund KKM's current operations. KKM's 1997 budget,
which has not been approved, would entail a minimum expenditure of $6 million
through August 31, 1997. Subject to the receipt of additional financing by the
Company, this requirement will be funded by the Company through loans by its
subsidiary CAP-G to KKM.
The Company has applied with Overseas Private Investment Corporation
("OPIC") for four political risk coverages on the Company's investment in the
Karakuduk Field in western Kazakstan. The maximum insured amounts sought for
each coverage range from $23.4 to $40.2 million. The estimated yearly premium
amounts for the current insured amounts for each coverage range up to $84,000.
The estimated yearly standby premiums for each coverage range up to $88,000. The
actual premium values may be higher or lower depending on the contract offered
to the Company by OPIC.
The Investment Committee of OPIC approved the Company's Karakuduk
operations for political risk insurance coverage by OPIC on December 19, 1995.
The Company has received an executed Letter of Commitment on September 25, 1996,
from OPIC binding issuance of Political Risk Insurance for the Karakuduk
16
<PAGE>
project. Currently, the Company has a standby facility for which it has made
three previous payments of $31,250 and has a fourth payment of $31,250 due on
June 30, 1997. In July 1997, the Company expects to receive the actual contract
offered to the Company by OPIC.
The Company completed a private placement of 14,000,000 shares of the
Company's common stock for gross proceeds of $7,000,000 in April, 1996. To date,
the Company has used the approximately $6,907,000 of net proceeds from the
private placement to complete the acquisition of the additional 55% of CAP-G, to
repay borrowings, to pay CAP-G's share of the second quarter budget and third
quarter budget for the Karakuduk Field, for working capital and for other
corporate purposes.
In November and December, 1996, the Company borrowed $1,850,000 for interim
financing pursuant to unsecured convertible promissory notes that bear interest
at 8% per annum, which is payable monthly, and that are due and payable on or
before May 29, 1998. The promissory notes are convertible into the Company's
common stock at the lower of $0.75 per share or 75% of the market price of the
common stock on the date of the conversion if the market price is less than
$1.00 per share on such date. The proceeds from the first of such loans was
received on November 22, 1996. The Company used the funds from the loans
primarily for the Company's obligations to provide financing for the Company's
Karakuduk Project in Kazakstan and to make a payment of $200,000 due in
connection with the Company's previous purchase of 15% of the outstanding shares
of CAP-G.
Without additional financing, the Company's present cash and other capital
resources are not sufficient to fund the obligations of CAP-G to pay the
Karakuduk Field development expenses incurred by KKM for the balance of 1997, to
make the balance of the payments to complete the purchase of 15% of the CAP-G
stock and to provide working capital for the Company.
The Company has raised capital to finance a portion of its obligations in
connection with the acquisition of its interest in CAP-G and the development of
the Karakuduk Field and to satisfy working capital needs in the short term. The
Company plans to meet its additional capital needs through debt or equity
offerings, encumbering properties, entering into arrangements whereby certain
costs of development will be paid by others to earn an interest in the
properties, or sale of a portion of the Company's interests in the Karakuduk
Field. The present environment for financing the acquisition of oil and gas
properties or the ongoing obligations of the oil and gas business is uncertain
due, in part, to instability in oil and gas pricing in recent years. The
Company's small size and the early stage of development of the Karakuduk Field
may also increase the difficulty in raising needed financing. There can be no
assurance that debt or equity financing anticipated to be necessary to continue
to fund the Company's operations and obligations will be available to the
Company on economically acceptable terms, if at all. If sufficient funds cannot
be raised to meet the continuing obligations with respect to the Karakuduk Field
development, the Company's interest in such property may be lost. Also, if
17
<PAGE>
sufficient funds cannot be raised to provide additional working capital, it is
likely that the Company will not be able to continue operations.
The Company has no other material commitments for cash outlay and capital
expenditures other than for normal operations.
Results of Operations Fiscal 1996 Compared with Fiscal 1995
The Company's operations during fiscal 1996 resulted in a loss before
extraordinary item of $2,179,000 primarily due to the move from domestic
operations into an international operation. Production costs were down from
$115,000 in 1995 to $37,000 in 1996 as a result of continued decreased
production from the Company's domestic operations. General and administrative
expenses increased from $166,000 in 1995 to $2,336,000 in 1996 as a result of
consulting fees to MDI of approximately $500,000, additional compensation
recorded of approximately $385,000, consisting of $210,000 for bonuses to the
former Chief Executive Officer and the former Chief Financial Officer of the
Company and $175,000 for compensation related to 350,000 shares of the Company's
common stock granted to the Chairman of the Board of the Company, and additional
expenses for start-up costs in Kazakstan relating to the proportionate
consolidation of KKM into the Company, which began in 1996. Interest expense
also increased in relation to the financing of the projects. In 1996, there was
no write down of oil and gas properties as there had been in 1995 which had
totaled $619,000. The result of these changes was a loss of $2,416,000 or $0.08
per share for 1996 as compared to a loss of $704,000 or $0.04 per share for
1995, before extraordinary loss.
For 1996, there was a $237,000 or $0.01 extraordinary per share loss on the
extinguishment of long term debt which resulted in a net loss of $2,416,000 or
$0.08 per share for 1996.
Results of Operations Fiscal 1995 Compared with Fiscal 1994
The Company's operations during fiscal 1995 resulted in a loss of $719,000
primarily due to a noncash write-down of oil and gas properties of $619,000 for
fiscal 1995. Due to the noncash write-down, the net loss for fiscal 1995 was
$704,000 compared to a net loss of $474,000 during fiscal 1994. The noncash
write-down was primarily the result of the decreased value of estimated future
net values of proved reserves due to lower gas prices during the fourth quarter
of fiscal 1995 and the sale of proved reserves during 1995.
Revenue from oil and gas sales decreased $119,000 or 31.8% from $374,000 in
fiscal 1994 due to lower production, lower crude oil and natural gas prices and
sale or abandonment of certain producing properties.
Costs and expenses increased $91,000, or 20.4% during fiscal 1995,
excluding the noncash write-down of oil and gas properties. Production costs
decreased by 50.4% to $115,000 in fiscal 1995 due to the sale of certain
properties and shut-in of certain properties due to lower natural gas prices.
Depreciation and depletion also decreased by 38.3% to $74,000 for the same
18
<PAGE>
reasons that production decreased. General and administrative expenses increased
$72,000, or 76.6% in fiscal 1995 due to the costs related to the acquisition and
operation of the Company's interest in the Karakuduk Field.
Inflation. The Company cannot control prices in its oil and gas sales and
to the extent the Company is unable to pass on increases in operating costs, it
may be affected by inflation.
Management's Discussion of Changes in Standardized Measure
Standardized measure of discounted future net cash flows decreased 100% in
fiscal 1996 as compared to fiscal 1995. This decrease was the result of
production in 1996, lower oil and gas prices, the sale of proved reserves, and
the abandonment of proved reserves during the year.
The forward-looking statements herein are based on current expectations
that involve a number of risks and uncertainties. Such forward-looking
statements are based on assumptions that the Company will have adequate
financial resources to fund the development of the Karakuduk Field, that
significant reserves of oil will be developed in the Karakuduk Field which can
be readily and profitably marketed, and that there will be no material adverse
change in the Company's operations or business. The foregoing assumptions are
based on judgment with respect to, among other things, oil and natural gas
reserve information available to the Company, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Accordingly, although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any such assumption
could prove to be inaccurate and therefore there can be no assurance that the
results contemplated in forward-looking statements will be realized. There are a
number of other risks presented by the Company's business and operations which
could cause the Company's financial performance to vary markedly from prior
results or results contemplated by the forward-looking statements. Management
decisions, including budgeting, are subjective in many respects and periodic
revisions must be made to reflect actual conditions and business developments,
the impact of which may cause the Company to alter its capital investment and
other expenditures, which may also adversely affect the Company's results of
operations. In light of significant uncertainties inherent in forward-looking
information included in this Annual Report on Form 10-K, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the Company's objectives or plans will be achieved.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for a list of the Financial Statements and the supplementary
financial information included in this report following the signature page.
19
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On January 16, 1997, the Company engaged Ernst & Young LLP as the Company's
principal independent accountant in place of Grant Thornton LLP. On July 23,
1996, the Company requested and received the resignation of Grant Thornton LLP.
There were no disagreements during the Company's two fiscal years ended November
30, 1995, or any interim period subsequent thereto between the Company and Grant
Thornton LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which, if not resolved to
the satisfaction of Grant Thornton LLP, would have caused Grant Thornton LLP to
make reference in its reports to the subject matter of such disagreements. The
opinions of Grant Thornton LLP on the Company's financial statements for the
fiscal years ended November 30, 1995 and 1994, contain no adverse opinion or
disclaimer of opinion, nor were such opinions qualified as to uncertainty, audit
scope or accounting principles, except that the opinion on the Company's
financial statements for the fiscal year ended November 30, 1995, raised
substantial doubt about the Company's ability to continue as a going concern.
The decision to change accountants was approved by the Company's Board of
Directors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, position with the Company, age of each director and executive
officer and the period during which each director and executive officer of the
Company has served are as follows:
<TABLE>
<CAPTION>
Name of Director and Executive Director Principal Occupation
Officer and Position, in the Company Since Age During the last Five Years
- ------------------------------------ -------- --- --------------------------
<S> <C> <C> <C>
Howard Karren....................... 1996 66 Chairman of the Board of the Company since 1996; Chief
Executive Officer of the Company since January 1997 and
President since February 1997. Senior Advisor to the
Chairman and Chief Executive Officer of Enron Oil & Gas
Co., an oil and gas company, from 1994 to 1996. President
and Vice Chairman of Enron Oil & Gas International Co.
from 1984 until 1994.
20
<PAGE>
<CAPTION>
Name of Director and Executive Director Principal Occupation
Officer and Position, in the Company Since Age During the last Five Years
- ------------------------------------ -------- --- --------------------------
<S> <C> <C> <C>
Peter G. Dilling.................... 1995 47 Vice Chairman of the Board of the Company since March
1997; President and a director of M-D International
Petroleum, Inc., an oil and gas company, since September
1994. A partner of M-D International, an unincorporated
oil and gas business, from March 1993 to the present.
Jay W. McGee........................ 1995 49 Executive Vice President of Exploration and Production of
the Company since March 1997; Director of M-D
International Petroleum, Inc., an oil and gas company,
since September 1994. Manager of M-D International, an
unincorporated oil and gas entity, from March 1993 to the
present. Vice President of Anglo Suisse L.P., an oil and
gas company, from September 1990 to February 1993. Prior
thereto, Director of Exploration of Anglo Suisse, Inc., an
oil and gas company.
Alan D. Berlin...................... 1997 57 A partner of Aitken Irvin Lewin Berlin Vrooman & Cohn,
LLP since 1995. Engaged in the private practice of law for
over five years prior to joining Aitken Irvin Lewin Berlin
Vrooman & Cohn LLP. A director of Belco Oil & Gas Corp.
David A. Dahl....................... 1997 35 President of Whittier Energy Company, an oil and gas
exploration and production company, since 1997, President
of Whittier Ventures, LLC, a private investment entity,
since January 1996, and a Vice President of Whittier
Trust Company, a trust company, since April 1993, a Vice
President of Merus Capital Management, an investment
manager, from 1990 to 1993.
Arlo G. Sorensen.................... 1996 56 Chief Financial Officer and Principal Accounting Officer
of the Company since March 1997. Trustee of M.H. Whittier
Corporation, a private investment entity, since 1985.
Chairman of the Board and a director of Whittier Trust
Company, a trust company since 1988.
21
<PAGE>
<CAPTION>
Name of Director and Executive Director Principal Occupation
Officer and Position, in the Company Since Age During the last Five Years
- ------------------------------------ -------- --- --------------------------
<S> <C> <C> <C>
Charles P. Karren................... -- 30 Vice President of Business Development of the Company
since March 1997; Consultant to the Company from May 1996
to March 1997; Consultant to M-D International Petro-
leum, Inc., an oil and gas company, since May 1996;
employed in various capacities with Enron Development
Corp., an energy development company, from 1992 to 1996;
Associate with Hill Samuel-Middle East, an English
merchant bank, from 1990 to 1992.
</TABLE>
Howard Karren and Charles P. Karren are father and son.
The present term of office of each director will expire at the next annual
meeting of shareholders.
Each executive officer will hold office until his successor duly is elected
and qualified, until his resignation or until he is removed in the manner
provided by the Company's Bylaws.
In connection with the Company's acquisition of all of the stock of Central
Asian Petroleum, Inc. ("CAP-D") in 1994, the former shareholders of CAP-D
acquired certain rights to nominate directors of their choosing for election to
the Company's Board of Directors. Pursuant to these rights, the former CAP-D
shareholders caused the nomination of Jay W. McGee, who was elected a director
at the 1995 annual meeting of shareholders. If by June 30, 2000, the Karakuduk
Field obtains 5,000 barrels of oil production per day averaged over any sixty
(60) day period, or the Company's beneficial interest in the field is sold or
the Company and the former shareholders jointly participate in a new exploratory
development project, the former shareholders have the right to cause the Company
to nominate one additional director at the Company's 2000 annual meeting of
shareholders.
In connection with a loan to the Company from the Brae Group, Inc.
("Brae"), in November 1995, the Company was required to appoint Messrs. Karren
and Dilling as directors of the Company and to appoint Mr. Karren as Chairman of
the Board of Directors of the Company. The Company borrowed $750,000 represented
by an unsecured promissory note with interest at 8% per annum. The note was
repaid on April 30, 1996. As a result of the repayment of the note, the Company
is no longer required to continue to nominate such persons as directors.
22
<PAGE>
In connection with borrowings in August 1996, the Company agreed to add two
directors selected by two of the lenders, Whittier Ventures LLC and Whittier
Energy Company (collectively "Whittiers"). In connection with the transactions,
James A. Jeffs resigned from the Company's Board of Directors. At the request of
the Whittiers, on December 2, 1996, Arlo G. Sorensen replaced Mr. Jeffs on the
Company's Board of Directors and on January 3, 1997, David A. Dahl was appointed
to the Company's Board of Directors. The Whittiers will have the right to have
their two representatives nominated for directors of the Company until the later
of the date their promissory notes are paid in full or the date the Whittiers no
longer have any investment in the Company.
There are no other arrangements or understandings between any executive
officer and any director or other person pursuant to which any person was
selected as a director or an executive officer.
Except as set forth above, no director of the Company is a director of an
entity that has its securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of the Forms 3 and 4 and any amendments thereto
furnished to the Company during the Company's fiscal year ended November 30,
1996, and Form 5 and amendments thereto furnished to the Company with respect to
such fiscal year, during the Company's fiscal year ended November 30, 1996, no
persons who were directors, officers or beneficial owners of more than 10% of
the Company's outstanding Common Stock during such fiscal year filed late
reports on Form 3, 4, or 5 except for Howard Karren, Peter G. Dilling and James
A. Jeffs who did not timely file their Forms 3 during the fiscal year ended
November 30, 1996, Howard Karren and Peter G. Dilling who have not yet filed
needed amendments to their Forms 3, and Jay W. McGee who did not timely file his
Form 3 during the fiscal year ended November 30, 1995.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the Company's last three fiscal years
ended November 30, 1996, 1995 and 1994, the compensation paid by the Company for
services rendered in all capacities to the Company by Paul V. Hoovler, who was
the chief executive officer of the Company during the Company's three fiscal
years ended November 30, 1996. No other person who served as an executive
officer of the Company during the Company's fiscal year ended November 30, 1996
received total annual salary and bonus in excess of $100,000 from the Company
during the Company's fiscal year ended November 30, 1996:
23
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
----------------------------------------- ------------
Year Other
Ended Annual Securities All Other
Name and November Compen- Underlying Compen-
Principal Position 30, Salary($) Bonus($) sation($) Options(#) sation($)
- ------------------ -------- -------- ------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Paul V. Hoovler .............. 1996 .......... $60,000(1) -- $ 4,937(2) -- $40,000(3)
Chief Executive 1995 .......... $60,000 -- $ 4,413(2) -- $40,000(3)
Officer and Presi- 1994 .......... $60,000 -- $ 3,518 (2) -- $40,000(3)
dent until January
1997 and February
1997, respectively
- ---------------------
</TABLE>
(1) In addition, on August 19, 1996, the Company's board of directors awarded
Mr. Hoovler a cash b nus of $140,000 as recognition of past and present
services to the Company to be used by Mr. Hoovler to exercise certain
warrants, granted to Mr. Hoovler pursuant to the Company's 1989 Stock
Warrant Plan, to purchase 500,000 shares of the Company's common stock at
an exercise price of $0.28 per share. This bonus will not become payable
until receipt of notice from Mr. Hoovler, which notice may not be given and
shall not be effective, until the earlier of (i) completion of a sale or
farmout by the Company of all or a portion of its interest in the Karakuduk
Project, or (ii) the date when the Company makes a public disclosure of a
sale or farmout of the Karakuduk Project. At its sole option and
discretion, the Company may, in lieu of making payment of such bonus to Mr.
Hoovler, use all or a portion of such bonus as a direct offset to Mr.
Hoovler's obligation to make any payment due to the Company upon exercise
of the warrant. Anything mentioned above to the contrary notwithstanding,
in the event Mr. Hoovler has exercised and paid for the warrant prior to
the date the bonus becomes payable, the Company shall pay such bonus
directly to Mr. Hoovler, but only upon completion of a sale or farmout of
all or a portion of its interest in the Karakuduk Project.
(2) Represents the amounts distributed pursuant to a royalty participation plan
to Paul V. Hoovler.
(3) The Company has a Deferred Compensation and Death Benefit Plan for Paul V.
Hoovler. The plan allows for Mr. Hoovler to continue in active employment
of the Company until age 70.5. The Company pays Mr. Hoovler $40,000
annually from this plan. If Mr. Hoovler voluntarily terminates his
employment prior to his retirement, disability, or death, he or his estate
will receive the remaining residual funds to be disbursed from the plan. If
Mr. Hoovler dies prior to retirement or other termination of employment,
Mr. Hoovler's estate will receive the remaining residual funds to be
disbursed from the plan. The plan is funded by a life insurance policy on
the life of Mr. Hoovler which provides for the major portion of any costs
24
<PAGE>
to the Company. The plan was fully funded when the Company paid, during the
Company's fiscal year ended November 30, 1991, the final payment of a
premium of $18,000 on a life insurance policy insuring the life of Paul V.
Hoovler. See "Termination of Employment Arrangements."
Option Grants in Fiscal Year Ended November 30, 1996
No options were granted by the Company to Paul V. Hoovler during the
Company's fiscal year ended November 30, 1996.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning unexercised options
(warrants) held by Paul V. Hoovler at November 30, 1996:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options as of In-the-Money Options at
November 30, 1996(#) November 30, 1996($)
--------------------------- --------------------------
Name Exercisable/ Unexercisable Exercisable/ Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Paul V. Hoovler ............. 500,000 - 0 - $406,875(1) - 0 -
- -----------------------
</TABLE>
(1) The value was determined by multiplying the number of shares underlying the
warrants by the difference between the exercise price and the closing sale
price of the Company's Common Stock on November 30, 1996. No options
(warrants) were exercised by Paul V. Hoovler during the Company's fiscal
year ended November 30, 1996.
Compensation of Directors
There were no standard or other arrangements for the compensation of the
Company's directors in effect for the Company's fiscal year ended November 30,
1996. The Board of Directors also agreed to pay to Frank H. Gower, Jr., who
served as a director of the Company from 1972 to 1997, a cash bonus of $28,000
that was paid in July 1996 and was used by Mr. Gower to purchase 100,000 shares
of the Company's Common Stock upon exercise of a stock purchase warrant held by
him.
There are no employment contracts between the Company and any executive
officer.
Termination of Employment Arrangements
Paul V. Hoovler, the former Chief Executive Officer and President of the
Company, entered into a severance agreement ("Agreement") with the Company
effective February 12, 1997. Pursuant to the Agreement, Mr. Hoovler receives his
salary and unpaid vacation time accrued through February 12, 1997. Also, the
25
<PAGE>
Company agreed to amend the Company's 1989 Stock Warrant Plan to enable Mr.
Hoovler to transfer the warrants granted to him in 1996 to a member of his
family or a trust created by him.
Further, Mr. Hoovler was granted warrants to purchase 100,000 shares of the
Company's common stock at an exercise price of $0.85 per share, for a period of
four years and warrants to purchase 100,000 shares of the Company's common stock
at an exercise price of $1.25 per share that become exercisable on January 1,
1998, and remain exercisable for a period of four years from such date.
Also, pursuant to the Agreement, the Company agreed to assign to Mr.
Hoovler, or an entity controlled by Mr. Hoovler, the existing overriding royalty
interest ("ORRI") that the Company holds in approximately 89 wells. Such
assignment will be for a three-year period. In exchange for the assignment, Mr.
Hoovler agreed to pay a former employee of the Company ten percent (10%) of the
net revenues received from such ORRI during the three-year period. In addition,
upon Mr. Hoovler's request, the Company agreed to assign its interest in the
Company's royalty participation plan to Mr. Hoovler or an entity controlled by
Mr. Hoovler. The Company also agreed to assign to Mr. Hoovler the Company's
ownership interest in two life insurance policies that the Company held on Mr.
Hoovler's life. Finally, pursuant to the Agreement, Mr. Hoovler was allowed to
bid on or retain certain office furniture and equipment of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following persons are the only persons known to the Company who on
April 2, 1997, owned beneficially 5% or more of the Company's 37,526,517
outstanding shares of $0.10 par value common stock:
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Amount and Nature of Percent
or Name of Officer or Director Beneficial Ownership(1) of Class
- ------------------------------------ ---------------------- --------
<S> <C> <C>
Drake and Company .................................................... 3,000,000 8.0%
Citibank Performance Portfolio A.A.
c/o Citibank, N.A.
153 E. 53rd Street, 21st Floor
New York, New York 10043
Allen & Company Incorporated ......................................... 2,962,000(2) 7.7%
711 Fifth Avenue
New York, New York 10022
Crescent Investment .................................................. 2,000,000 5.3%
865 Figueroa Street, Suite 1500
Los Angeles, California 90017
26
<PAGE>
<CAPTION>
Name and Address of Beneficial Owner Amount and Nature of Percent
or Name of Officer or Director Beneficial Ownership(1) of Class
- ------------------------------------ ---------------------- --------
<S> <C> <C>
Whittier Ventures, LLC ............................................... 3,187,000(3) 8.2%
1600 Huntington Drive
So. Pasadena, California 91030
Howard Karren ........................................................ 350,000(4) 0.9%
Peter G. Dilling ..................................................... 753,000(5) 2.0%
Jay W. McGee ......................................................... 930,678(6) 2.5%
Alan D. Berlin ....................................................... -0- --
David A. Dahl ........................................................ 3,582,833(7) 9.2%
Arlo G. Sorensen ..................................................... 11,242(8) 0.03%
Charles P. Karren .................................................... 75,000 0.2%
All Directors and Officers as a Group (seven
persons) ............................................................. 5,702,753(9) 14.9%
- ----------------------
</TABLE>
(1) To the knowledge of the Company's management, the beneficial owners listed
have sole voting and investment power with respect to the shares shown
unless otherwise indicated.
(2) Includes 1,022,000 shares underlying unexercised warrants.
(3) Includes 1,000,000 shares underlying a convertible note and 187,500 shares
underlying unexercised warrants. Does not include shares underlying
additional warrants that will be issued if the debt to Whittier Ventures,
LLC is not repaid by May 31, 1997 or by November 30, 1997.
(4) The 350,000 shares are reserved to be issued to Mr. Karren. See "Certain
Relationships and Related Transactions."
(5) All 753,000 shares are owned directly by Spectrum Development, Inc. which
is controlled by Mr. Dilling, and the 753,000 shares include 301,618 of a
total of 1,250,000 shares being held in escrow in connection with the
acquisition of Central Asian Petroleum, Inc. as described under "Certain
Relationships and Related Transactions."
(6) Includes 272,205 of a total of 1,250,000 shares being held in escrow in
connection with the acquisition of Central Asian Petroleum, Inc. as
described under "Certain Relationships and Related Transactions." Also
includes 2,589 shares owned in Mr. McGee's Individual Retirement Account
and 2,589 shares owned by Mr. McGee's wife.
27
<PAGE>
(7) Includes the shares beneficially owned by Whittier Ventures LLC and
includes 333,333 shares underlying a convertible note and 62,500 shares
underlying unexercised warrants owned by Whittier Energy Company. David A.
Dahl has no pecuniary interest in such shares but, as the President of
each, Mr. Dahl has voting power and investment power over such shares and,
thus, may be deemed to beneficially own such shares pursuant to Rule 13d-3
adopted under the Securities Exchange Act of 1934, as amended. Does not
include shares underlying additional warrants that will be issued if the
debt to Whittier Ventures, LLC and Whittier Energy Company is not repaid by
May 29, 1997 or by November 30, 1997.
(8) The 11,242 shares are owned by Whittier 1982 Oil Trust for which Mr.
Sorensen is the trustee and has voting and investment power over such
shares.
(9) Includes the shares as described in notes (2) through (8) above.
There are presently no arrangements of any kind which may at a subsequent date
result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In early September 1994, the Company signed a letter of intent with Central
Asian Petroleum, Inc., a Delaware corporation ("CAP-D"), and Overseas Consulting
Services Company, Inc. ("OCSCO"), both private companies based in Houston,
Texas, to jointly pursue the registration and development of the Karakuduk
Field, a shut-in oil field in the central Asian Republic of Kazakstan, that was
discovered in the early 1970s but never placed on production.
In mid-September 1994, the Company acquired a 25% interest in Central Asian
Petroleum (Guernsey) Limited ("CAP-G"), with headquarters in Ankara, Turkey,
which holds a 50% interest in KKM. In April 1995, the Company acquired all of
the stock of CAP-D, which also owned an interest in CAP-G. Following the
acquisition of CAP-D, the Company's beneficial interest in CAP-G increased to
45%, giving the Company a 22.5% beneficial interest in KKM and the Karakuduk
Field. Under terms of the acquisition, the former shareholders of CAP-D have
certain rights to cause the Company to nominate persons selected by the former
shareholders to the Company's Board of Directors. Jay W. McGee, a former
shareholder of CAP-D, was first elected at the 1995 Company's Annual Meeting of
Shareholders under the arrangement. Additionally, in connection with the
acquisition, the Company may be required to pay a brokerage fee to Mr. McGee in
the amount of up to $175,000. The Company paid Mr. McGee $50,000 in 1995 and the
balance is payable upon the occurrence of certain milestones in development of
the Karakuduk Field. The Company issued 4,250,000 shares of restricted common
stock for CAP-D which will be held in escrow and released to the former
28
<PAGE>
shareholders of CAP-D, including Messrs. McGee and Dilling, or affiliates of
them, from time to time in connection with development of the Karakuduk Field.
Of the shares held in escrow, 3,000,000 shares have been released and delivered
to the former shareholders of CAP-D.
The Company has agreed to issue a minimum of 350,000 shares of the
Company's restricted common stock to Howard Karren, a director of the Company,
or his designee at a future date selected by Mr. Karren. The Company is
negotiating to acquire MDI, and has issued 180,000 shares of the Company's
restricted common stock to Enron to facilitate the participation of MDI in the
Uzbekistan Project. See "Business." The Company paid Mr. Karren a fee of $4,000
per month for the four month period ending August 31, 1996, for office expenses
and travel expenses in connection with the Company's efforts to satisfy its
funding obligations for the Karakuduk Project.
Beginning in May 1996 through February 1997, the Company paid a base
consulting fee of $60,000 per month to MDI for assistance by MDI in seeking
means for meeting the Company's funding obligations for the Karakuduk Project.
The Company also assumed obligations of MDI to pay up to $42,000 during the six
month period ending September 30, 1996 to two other unaffiliated consultants
engaged to assist MDI and the Company to acquire and review oil and natural gas
exploration or development projects in countries of the former Soviet Union.
Commencing in March 1997, the Company began to reimburse MDI for MDI's expenses
incurred in connection with the Karakuduk Project.
On April 5, 1996, the Company completed a private placement of 14,000,000
shares of the Company's common stock at $0.50 a share for gross proceeds of
$7,000,000. In connection with the private placement, the Company issued a five
year warrant to purchase 1,022,000 shares of the Company's common stock for, a
nominal amount, to Allen & Company Incorporated ("Allen") and paid $21,849 of
Allen's expenses. The Company paid additional miscellaneous expenses related to
the offering of $71,363. Allen also purchased shares of the Company's common
stock in the private placement on the same terms and conditions as other
purchasers thereof. The Company also issued Allen a three year warrant to
purchase 200,000 shares of the Company's common stock at $0.25 per share, in
connection with the $750,000 loan referred to above. Drake and Company, Crescent
Investment and Whittier Ventures, LLC also purchased shares of the Company's
common stock, in the above described private placement on the same terms and
conditions as other purchasers thereof. See "Security Ownership of Certain
Beneficial Owners and Management."
In November and December, 1996, the Company borrowed $1,850,000 for interim
financing pursuant to unsecured convertible promissory notes that bear interest
at 8% per annum, which is payable monthly, and that are due and payable on or
before May 29, 1998. The promissory notes are convertible into the Company's
common stock at the lower of $0.75 per share or 75% of the market price of the
common stock on the date of the conversion if the market price is less than
$1.00 per share on such date. The proceeds from the first of such loans was
29
<PAGE>
received on November 22, 1996. Whittier Ventures, LLC and Whittier Energy
Company loaned $1,000,000 of the $1,850,000 that was loaned to the Company.
In connection with such borrowings, the Company agreed to issue the lenders
warrants that terminate on November 30, 1999, to purchase a total of 462,500
shares of the Company's common stock at $0.25 per share and agreed to add two
directors selected by two of the lenders, Whittier Ventures LLC and Whittier
Energy Company, to the Company's Board of Directors. See "Item 10. Directors and
Executive Officers of the Registrant." The Company further agreed that the
Company would issued the lenders warrants to purchase an additional 185,000
shares of the Company's common stock if the promissory notes are not paid or
converted by May 31, 1997, and warrants to purchase an additional 370,000 shares
of the Company's common stock if the promissory notes are not paid or converted
by November 30, 1997. Such warrants would be exercisable for a period of three
years at $0.25 per share.
Matthew R. Hoovler, the former Vice President and Treasurer of the Company,
was awarded on August 19, 1996 a cash bonus of $70,000 as recognition for past
and present services to the Company to be used solely and exclusively by Mr.
Hoovler to exercise certain warrants granted to him pursuant to the Company's
1989 Stock Warrant Plan, to purchase 250,000 shares of the Company's common
stock at an exercise price of $0.28 per share. The bonus will not become payable
until receipt of notice from Mr. Hoovler, which notice may not be given and
shall not be effective until the earlier of (i) completion of a sale or farmout
by the Company of all or a portion of its interest in the Karakuduk Project, or
(ii) the date when the Company makes a public disclosure of a sale or farmout of
the Karakuduk Project. At its sole option and discretion, the Company may, in
lieu of making payment of such bonus to Mr. Hoovler, use all or a portion of
such bonus as a direct offset to Mr. Hoovler's obligation to make any payment
due to the Company upon exercise of the Warrant. Anything mentioned above to the
contrary notwithstanding, in the event Mr. Hoovler has exercised and paid for
the warrant prior to the date the bonus becomes payable, Chaparral will pay such
bonus directly to Mr. Hoovler, but only upon completion of a sale or farmout of
all or a portion of its interest in the project. The Company amended its 1989
Stock Warrant Plan to enable Mr. Hoovler to transfer the warrants granted to him
in 1996 to a member of his family or a trust created by him.
See "Termination Arrangements with Previous Officers and Directors" set
forth in Item 11 for a description of the termination agreement between the
Company and Paul V. Hoovler.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a)(1) Financial Statements.
Table of Contents
Reports of Independent Auditors
Balance Sheets--As of November 30, 1996 and 1995
30
<PAGE>
Consolidated Statements of Operations--Years ended November 30, 1996,
1995 and 1994
Consolidated Statements of Cash Flows--Years ended November 30, 1996,
1995, and 1994
Consolidated Statements of Changes in Stockholders' Equity--Years
ended November 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Supplemental Information Disclosures About Oil and Gas Producing
Activities (Unaudited)
(a)(2) Financial Statement Schedules.
None.
(b) Current Reports on Form 8-K:
The Company filed no reports on Form 8-K during the last fiscal quarter
ended November 30, 1996:
(c) Exhibits.
2.1 Stock Acquisition Agreement and Plan of Reorganization dated
April 12, 1995 between Chaparral Resources, Inc., and the
Shareholders of Central Asian Petroleum, Inc., incorporated by
reference to Exhibit 2.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 1995.
2.2 Escrow Agreement dated April 12, 1995 between Chaparral
Resources, Inc., the Shareholders of Central Asian Petroleum,
Inc. and Barry W. Spector, incorporated by reference to Exhibit
2.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1995.
2.3 Amendment to Stock Acquisition Agreement and Plan of
Reorganization dated March 10, 1996 between Chaparral Resources,
Inc., and the Shareholders of Central Asian Petroleum, Inc.
3.1 Restated Articles of Incorporation and Amendments, incorporated
by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1993.
3.2 Articles of Amendment to the Restated Articles of Incorporation
dated April 20, 1988, incorporated by reference to Exhibit 3.2 to
the Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1993.
3.3 Bylaws, as amended through January 3, 1997.
31
<PAGE>
3.4 Articles of Amendment to the Restated Articles of Incorporation
and Amendments dated June 21, 1995, incorporated by reference to
Exhibit B to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1995.
3.5 Articles of Amendment to the Restated Articles of Incorporation
and Amendments dated July 17, 1996, incorporated by reference
to Exhibit 3.5 to the Company's Registration Statement No.
333-7779.
10.1 Royalty Participation Plan dated June 15, 1982, incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K for the fiscal year ended November 30, 1993.
10.2 Chaparral Resources, Inc. 1989 Stock Warrant Plan effective May
1, 1989, incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1993.
10.3 Target Benefit Plan effective December 1, 1990 incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on Form
10-K for the fiscal year ended November 30, 1991.
10.4 Deferred Compensation and Death Benefit Plan as amended November
15, 1991 incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1991.
10.5 Promissory Note dated November 1, 1995 from Chaparral Resources,
Inc., to Brae Group, Inc., incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K dated November
1, 1995.
10.6 Purchase Agreement, dated effective January 12, 1996, between the
Company and Guntekin Koksal (purchase of CAP-G shares)
incorporated by reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the fiscal year ended November 30, 1995.
10.7 Letter Agreement, dated January 3, 1996, between the Company and
certain stockholders of Darka Petrol Ticaret Ltd. Sti., together
with Exhibits A--E, incorporated by reference to Exhibit 10.7 to
the Company's Annual Report on From 10-K for the fiscal year
ended November 30, 1995.
10.8 Amendment, effective March 4, 1996, to the Letter Agreement
revising the terms pursuant to which the Company is to acquire
all shares of CAP(G) stock owned by Darka Petrol Ticaret Ltd.
Sti., incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on From 10-K for the fiscal year ended November 30,
1995.
32
<PAGE>
10.9 Warrant Certificate entitling Allen & Company to purchase up to
1,022,000 shares of Common Stock of Chaparral Resources, Inc.,
incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated April 1, 1996.
10.10 Consulting Agreement dated May 14, 1996 with M-D International
Petroleum, Inc., incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement No. 333-7779.
10.11 Promissory Notes and Modification of Promissory Notes
incorporated by reference to Exhibit (3) to the Company's Current
Report on Form 8-K dated November 22, 1996.
10.12 Amendment effective December 6, 1996 to Purchase Agreement dated
effective January 12, 1996 between the Company and Guntekin
Koksal.
10.13 Severance Agreement dated February 12, 1997 between the Company
and Paul V. Hoovler.
10.14 Severance Agreement dated February 12, 1997 between the Company
and Matthew R. Hoovler.
10.15 Purchase and Sale Agreement effective January 1, 1997 between
the Company and Conoco Inc.*
10.16 Amendments to Chaparral Resources, Inc. Stock Warrant Plan.
10.17 Agreement dated August 30, 1995 for Exploration Development and
Production of Oil in Karakuduk Oil Field in Mangistan Oblast of
the Republic of Kazakhstan between Ministry of Oil and Gas
Industries of the Republic of Kazakhstan for and on Behalf of the
Government of the Republic of Kazakhstan and Joint Stock Company
of Closed Type Karakuduk Munay Joint Venture.
10.18 License for the Right to Use the Subsurface in the Republic of
Kazakhstan.
16 Letter dated July 23, 1996 from Grant Thornton LLP confirming the
circumstances pursuant to which Grant Thornton resigned as
Registrant's principal independent accountants, incorporated by
reference to Exhibit 16 to the Company's Current Report on Form
8-K dated July 23, 1996.
21 List of Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP for S-8.
33
<PAGE>
23.2 Consent of Ernst & Young LLP for S-8.
27 Financial Data Schedule.
*The Exhibits to the Purchase and Sale Agreement have been omitted and will
be provided to the United States Securities and Exchange Commission upon
request.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHAPARRAL RESOURCES, INC.
a Colorado corporation
By /s/ Howard Karren
----------------------------------------
Howard Karren,
President, Principal Executive Officer
By /s/ Arlo G. Sorensen
----------------------------------------
Arlo G. S rensen,
Chief Financial Officer and
Principal Accounting Officer
Dated: April 11, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Date Name and Title Signature
April 11, 1997 Howard Karren, /s/ Howard Karren
Director --------------------------
April 11, 1997 Peter G. Dilling,
Director
April 11, 1997 Jay W. McGee, /s/ Jay W. McGee
Direct --------------------------
April 11, 1997 Alan D. Berlin, /s/ Alan D. Berlin
Director --------------------------
April 11, 1997 David A. Dahl, /s/ David A. Dahl
Director --------------------------
April 11, 1997 Arlo G. Sorensen, /s/ Arlo G. Sorensen
Director --------------------------
<PAGE>
Contents
Reports of Independent Auditors ...............................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets ...................................................3
Consolidated Statements of Operations..........................................5
Consolidated Statements of Cash Flows..........................................6
Consolidated Statements of Changes in Stockholders' Equity.....................8
Notes to Consolidated Financial Statements.....................................9
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited...........................................24
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Chaparral Resources, Inc.
We have audited the accompanying consolidated balance sheet of Chaparral
Resources, Inc. as of November 30, 1996, and the related consolidated statements
of operations, cash flows and changes in stockholders' equity for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chaparral
Resources, Inc. as of November 30, 1996, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred recurring operating losses and has no
operating assets which are presently generating cash to fund its operating and
capital requirements. The Company requires significant additional financing to
meet its financial requirements through fiscal 1997. In addition, as discussed
in Note 2, the Company's investee, Karakuduk-Munay, Inc. (KKM), has been unable
to reregister with the Republic of Kazakstan, which may cause KKM to be declared
invalid and be liquidated. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Denver, Colorado
April 8, 1997
1
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Chaparral Resources, Inc.
We have audited the accompanying consolidated balance sheet of Chaparral
Resources, Inc. as of November 30, 1995, and the related consolidated statements
of operations, cash flows and changes in stockholders' equity for each of the
two years in the period ended November 30, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
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 consolidated financial position of Chaparral
Resources, Inc. as of November 30, 1995, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
November 30, 1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the financial statements, the
Company incurred a net loss of $704,000 during the year ended November 30, 1995.
As discussed in Note 2 to the financial statements, the Company requires
significant additional financing to meet its financial requirements. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Denver, Colorado
January 19, 1996
2
<PAGE>
<TABLE>
<CAPTION>
Chaparral Resources, Inc.
Consolidated Balance Sheets
November 30
-------------------------------------
1996 1995
-------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ............................. $ 800,000 $ 501,000
Accounts receivable:
Joint interest participants ......................... 8,000 31,000
Oil and gas purchasers .............................. 53,000 46,000
Prepaid expenses ...................................... 40,000 2,000
Oil and gas properties under agreement for sale ....... 306,000 --
------------ -----------
Total current assets ..................................... 1,207,000 580,000
Property and equipment--at cost:
Oil and gas properties--full cost:
United States:
Subject to depletion .............................. -- 16,149,000
Not subject to depletion .......................... -- 40,000
Republic of Kazakstan (Karakuduk Field)--
not subject to depletion .......................... 11,189,000 --
Less accumulated depletion and depreciation
and impairment .................................... -- (15,722,000)
------------ -----------
11,189,000 467,000
Furniture, fixtures and equipment ..................... 441,000 197,000
Less accumulated depreciation ......................... (198,000) (177,000)
------------ -----------
243,000 20,000
------------ -----------
11,432,000 487,000
Other assets:
Investment in and advances to affiliates .............. -- 4,507,000
Cash value of insurance and annuities ................. 8,000 8,000
Due from Karakuduk-Munay, Inc. ........................ 2,012,000 --
Equipment inventory ................................... 27,000 13,000
Other ................................................. 74,000 --
------------ -----------
2,121,000 4,528,000
------------ -----------
Total assets ............................................. $ 14,760,000 $ 5,595,000
============ ===========
3
<PAGE>
<CAPTION>
November 30
-------------------------------
1996 1995
-------------------------------
<S> <C> <C>
Liabilities and stockholders' equity Current liabilities:
Accounts payable:
Trade .............................................................. $ 278,000 $ 102,000
Joint interest participants--revenue ............................... 42,000 26,000
Accrued liabilities .................................................. 91,000 86,000
Accounts payable--CAP-G shares ....................................... 744,000 --
------------ -----------
Total current liabilities ............................................... 1,155,000 214,000
Long-term obligations:
Notes payable (including $1,000,000 to related
party) ............................................................. 1,106,000 461,000
Accrued compensation ................................................. 385,000 --
Stockholders' equity:
Common stock - authorized, 100,000,000
shares and 25,000,000 shares at November 30,
1996 and 1995, respectively, of $.10 par value;
issued and outstanding, 37,526,517 and
20,484,192 shares at November 30, 1996 and
1995, respectively ................................................. 3,753,000 2,048,000
Capital in excess of par value ....................................... 20,482,000 12,577,000
Preferred stock - authorized, 1,000,000
shares, no shares issued or outstanding ........................... -- --
Retained earnings (deficit) .......................................... (12,121,000) (9,705,000)
------------ -----------
Total stockholders' equity .............................................. 12,114,000 4,920,000
------------ -----------
Total liabilities and stockholders' equity .............................. $ 14,760,000 $ 5,595,000
============ ===========
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
Chaparral Resources, Inc.
Consolidated Statements of Operations
Year ended November 30
------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Oil and gas sales ....................................... $ 147,000 $ 255,000 $ 374,000
Costs and expenses:
Production costs ........................................ 37,000 115,000 232,000
Write-down of oil and gas properties .................... -- 619,000 416,000
Depreciation and depletion .............................. 25,000 74,000 120,000
General and administrative .............................. 2,336,000 166,000 94,000
------------ ---------- ------------
2,398,000 974,000 862,000
------------ ---------- ------------
Loss from operations ....................................... (2,251,000) (719,000) (488,000)
Other income (expense):
Interest income ......................................... 85,000 25,000 13,000
Interest expense ........................................ (90,000) (17,000) (4,000)
Exchange loss ........................................... (12,000) -- --
Other, net .............................................. 89,000 7,000 5,000
------------ ---------- ------------
72,000 15,000 14,000
------------ ---------- ------------
Loss before extraordinary item ............................. (2,179,000) (704,000) (474,000)
Extraordinary loss on extinguishment of
long-term debt .......................................... (237,000) -- --
------------ ---------- ------------
Net loss ................................................... $ (2,416,000) $ (704,000) $ (474,000)
============ ========== ============
Net loss per share before extraordinary
item .................................................... $ (.07) $ (.04) $ (.02)
Extraordinary loss per share ............................... $ (.01) $ -- $ --
Net loss per share ......................................... $ (.08) $ (.04) $ (.02)
Weighted average number of shares
outstanding ............................................. 32,081,382 18,865,454 15,064,856
</TABLE>
See accompanying notes.
5
<PAGE>
<TABLE>
<CAPTION>
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows
Year ended November 30
-------------------------------------------------------
1996 1995 1994
-------------------------------------------------------
Cash flows from operating activities
Net loss ......................................................... $(2,416,000) $ (704,000) $ (474,000)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and depletion .................................. 25,000 74,000 120,000
Decrease in deferred compensation ........................... -- -- (40,000)
Write-down of oil and gas properties ........................ -- 619,000 416,000
Stock issued for services and bonuses ....................... -- 27,000 8,000
Amortization of note discount ............................... -- 17,000 --
Loss on extinguishment of debt .............................. 237,000 -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable ..................................... 16,000 218,000 22,000
Prepaid expenses ........................................ 10,000 -- --
Increase (decrease) in:
Accounts payable ........................................ 108,000 (64,000) 47,000
Accrued liabilities ..................................... (355,000) (59,000) (9,000)
Accrued compensation .................................... 385,000 -- --
----------- ---------- -----------
Net cash provided by (used in) operating
activities .................................................... (1,990,000) 128,000 90,000
Cash flows from investing activities
Additions to property and equipment .............................. (208,000) (86,000) (255,000)
Additions to oil and gas properties .............................. (652,000) -- --
Acquisition of additional interest in
CAP-G, net of cash acquired ................................... (3,269,000) -- --
Investment in foreign oil and gas properties ..................... -- (1,088,000) (256,000)
Proceeds from sale of interest in oil and gas
properties .................................................... 161,000 41,000 71,000
Decrease in cash value of insurance
and annuities ................................................. -- 40,000 40,000
Decrease in minority interest .................................... -- (16,000) (1,000)
(Increase) decrease in equipment inventory ....................... (14,000) 1,000 --
Sale (purchase) of bonds ......................................... -- 299,000 (299,000)
Advances to Karakuduk-Munay, Inc. ................................ (1,778,000) -- --
Redemption of certificates of deposit ............................ -- 20,000 146,000
Increase in other assets ......................................... (74,000) -- --
----------- ---------- -----------
Net cash used in investing activities ............................ (5,834,000) (789,000) (554,000)
6
<PAGE>
<CAPTION>
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (continued)
Year ended November 30
-----------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities
Proceeds from notes payable ................................. $ 1,650,000 $ 750,000 $ --
Repayment of note payable ................................... (750,000) -- --
Proceeds from warrant exercise .............................. 316,000 -- --
Proceeds from issuance of capital stock ..................... -- 94,000 260,000
Net proceeds from private placement ......................... 6,907,000 -- --
----------- ---------- -----------
Net cash provided by financing
activities ............................................... 8,123,000 844,000 260,000
----------- ---------- -----------
Net increase (decrease) in cash and
cash equivalents ......................................... 299,000 183,000 (204,000)
Cash and cash equivalents at beginning
of year .................................................. 501,000 318,000 522,000
----------- ---------- -----------
Cash and cash equivalents at end of year .................... $ 800,000 $ 501,000 $ 318,000
=========== ========== ===========
Supplemental cash flow disclosure
Interest paid ............................................ $ 36,000 $ 5,000 $ 4,000
Supplemental schedule of noncash
investing and financing activities
Common stock issued for acquisition
of CAP-G ............................................. $ 1,833,000 $ -- $ --
Accounts payable--CAP-G shares ......................... 744,000 -- --
Common stock issued for investment
in affiliate ......................................... -- 3,162,000 --
Discount recognized for note issued
with detachable stock warrants ....................... 290,000 306,000 --
Common stock issued upon
conversion of debentures ............................. 264,000 -- 75,000
</TABLE>
See accompanying notes.
7
<PAGE>
<TABLE>
<CAPTION>
Chaparral Resources, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Capital
Common Stock in Excess Retained
---------------------------- of Par Earnings
Shares Amount Value (Deficit) Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at November 30, 1993 ................ 14,923,625 $ 1,492,000 $ 9,202,000 $ (8,527,000) $ 2,167,000
Warrants exercised for capital
stock .................................... 650,625 65,000 195,000 -- 260,000
Conversion of debentures for
capital stock ............................ 200,067 20,000 55,000 -- 75,000
Capital stock issued for services ........... 8,000 1,000 6,000 -- 7,000
Net loss .................................... -- -- -- (474,000) (474,000)
------------ ----------- ----------- ------------ -----------
Balance at November 30, 1994 ................ 15,782,317 1,578,000 9,458,000 (9,001,000) 2,035,000
Warrants exercised for capital
stock .................................... 265,375 27,000 67,000 -- 94,000
Capital stock issued for
investment in affiliate .................. 4,400,000 440,000 2,722,000 -- 3,162,000
Capital stock issued for services ........... 12,500 1,000 9,000 -- 10,000
Capital stock issued for
employee and director bonuses ............ 24,000 2,000 15,000 -- 17,000
Debt issuance costs--stock
warrants issued .......................... -- -- 306,000 -- 306,000
Net loss .................................... -- -- -- (704,000) (704,000)
------------ ----------- ----------- ------------ -----------
Balance at November 30, 1995 ................ 20,484,192 2,048,000 12,577,000 (9,705,000) 4,920,000
Warrants exercised for capital
stock .................................... 857,325 86,000 230,000 -- 316,000
Conversion of debentures for
capital stock ............................ 600,000 60,000 204,000 -- 264,000
Capital stock issued for
acquisition of additional
interest in CAP-G ........................ 1,585,000 159,000 1,674,000 -- 1,833,000
Capital stock issued in private
placement ................................ 14,000,000 1,400,000 5,507,000 -- 6,907,000
Debt issuance costs--stock
warrants issued .......................... -- -- 290,000 -- 290,000
Net loss .................................... -- -- -- (2,416,000) (2,416,000)
------------ ----------- ----------- ------------ -----------
Balance at November 30, 1996 ................ 37,526,517 $ 3,753,000 $ 20,482,000 $(12,121,000) $ 12,114,000
============ =========== =========== ============ ===========
</TABLE>
See accompanying notes.
8
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
1. Summary of Significant Accounting Policies
Organization
Chaparral Resources, Inc. was incorporated in the state of Colorado on January
13, 1972, principally to engage in the exploration, development and production
of oil and gas properties. During 1996, Chaparral Resources, Inc. focused
substantially all of its efforts on the exploration and development of the
Karakuduk Field, located in the central Asian Republic of Kazakstan.
Principles of Consolidation and Basis of Presentation
The November 30, 1996 consolidated financial statements include the accounts of
Chaparral Resources, Inc. and its 90% owned subsidiary, Central Asian Petroleum
(Guernsey) Limited ("CAP-G") (see Note 3). Hereinafter, Chaparral Resources,
Inc. and CAP-G are collectively referred to as "the Company." CAP-G has a fiscal
year end of December 31. All significant intercompany transactions have been
eliminated.
In 1995, the Company's ownership in CAP-G increased from 25% to 45%. The Company
accounted for its investment in CAP-G on the equity method in the 1994 and 1995
financial statements.
CAP-G owns a 50% interest in Karakuduk-Munay, Inc. ("KKM"), a Kazakstan Joint
Stock Company, which is a participant in an agreement for the exploration,
development and production of oil in the Karakuduk Field. CAP-G, and therefore
the Company, beginning in 1996 when the Company's ownership in CAP-G exceeded
50%, accounts for its investment in KKM using proportionate consolidation.
The 1994 consolidated financial statements include the accounts of Chaparral
Resources, Inc. and its 87% owned joint venture, Reservoir Creek Gathering
System. All significant intercompany transactions have been eliminated. On April
15, 1995, Chaparral Resources, Inc. sold its 87% interest in this joint venture.
Cash and Cash Equivalents
Cash equivalents are defined as highly liquid investments purchased with an
original maturity of three months or less.
9
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Oil and Gas Property and Equipment
The Company uses the full cost method of accounting for its oil and gas
properties. All costs incurred directly associated with the acquisition,
exploration and development of oil and gas properties are capitalized in cost
pools for each country in which the Company operates. The limitation on such
capitalized costs is determined in accordance with rules specified by the
Securities and Exchange Commission. Capitalized costs are depleted using the
units of production method.
Sales of Proved Oil and Gas Property
Sales of oil and gas properties, whether or not being amortized currently, are
accounted for as adjustments of capitalized costs, with no gain or loss
recognized unless such adjustments significantly alter the relationship between
capitalized costs and proved reserves of oil and gas. A significant alteration
would not ordinarily be expected to occur for sales involving less than 25% of
the reserve quantities of a given cost center. If gain or loss is recognized on
such a sale, total capitalized costs within the cost center are allocated
between the reserves sold and reserves retained on the same basis used to
compute amortization, unless there are substantial economic differences between
the properties sold and those retained, in which case capitalized costs are
allocated on the basis of the relative fair values of the properties.
Oil and Gas Properties Not Subject to Depletion
Costs associated with acquisition and evaluation of unproved properties are
excluded from the amortization computation until it is determined if proved
reserves can be attributed to the properties. These unevaluated properties are
assessed annually for possible impairment and the amount impaired, if any, is
added to the amortization base. Costs of exploratory dry holes and geological
and geophysical costs not directly associated with specific unevaluated
properties are added to the amortization base as incurred.
Sales of Unproved Properties
Proceeds received from drilling arrangements are credited to the appropriate
cost center and recognized as a lower amortization provision as reserves are
produced.
10
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Depreciation of Other Property and Equipment
Furniture, fixtures and equipment are depreciated using the straight-line method
over estimated useful lives which range from three to ten years.
Administrative Overhead Reimbursement
The Company, as operator of drilling and/or producing properties, was reimbursed
by the nonoperators for administration, supervision, office services and
warehousing costs on an annually adjusted fixed rate basis per well per month.
These charges are applied as a reduction of general and administrative expenses
for purposes of the statement of operations.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") Statement No. 109, Accounting for Income
Taxes, which require that taxes be provided on the liability method based upon
the tax rate at which items of income and expense are expected to be settled in
the Company's tax return.
Earnings Per Common Share
Earnings (loss) per common and common equivalent share is based on the weighted
average number of shares outstanding. Fully diluted earnings per share are not
presented because the exercise of stock warrants would be antidilutive.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets to be disposed of. The Company
will adopt Statement No. 121 in the first quarter of 1997 and, based on current
circumstances, does not believe the effect of adoption will be material.
11
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based
Compensation. Statement No. 123 is applicable for fiscal years beginning after
December 15, 1995 and gives the option to follow either fair value accounting or
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), and related Interpretations.
The Company has elected to continue to follow APB 25 and related Interpretations
in accounting for outstanding stock options. Under APB 25, because the exercise
price of the Company's stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation is recognized. However,
the Company will be required to provide fair value disclosures relating to stock
options effective with the year ending November 30, 1997.
Fair Value of Financial Instruments
All of the Company's financial instruments, including cash and cash equivalents,
trade receivables, notes receivable, and notes payable, have fair values which
approximate their recorded values as they are either short-term in nature or
carry interest rates which approximate market rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Risks and Uncertainties
The ability of KKM to realize the carrying value of its assets is dependent on
being able to extract, transport and market hydrocarbons. Currently, exports
from the Republic of Kazakstan are restricted since they are dependent on
limited transport routes and, in particular, access to the Russian pipeline
system. Access to such routes is currently restricted. Domestic markets in the
Republic of Kazakstan currently do not permit world market price to be obtained.
Management believes, however, that over the life of the project, transportation
restrictions will be alleviated and prices will be achievable for hydrocarbons
extracted to allow full recovery of the carrying value of its assets.
12
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
2. Going Concern
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As of November 30, 1996,
substantially all of the Company's assets are invested in the development of the
Karakuduk Field, a shut-in oil field in the central Asian Republic of Kazakstan,
which will require significant additional funding.
The Company has incurred recurring operating losses and has no operating assets
which are presently generating cash to fund its operating and capital
requirements. The Company does not anticipate that its current cash reserves and
cash flow from operations will be sufficient to meet its capital requirements
through fiscal 1997. Should the Company not meet its capital requirements under
the license agreement to develop the Karakuduk Field, the Company's rights under
the agreement may be terminated. The Company believes that additional financing
will be available; however, there is no assurance that additional financing will
be available, or if available, that it can be obtained on terms favorable or
affordable to the Company.
The Company has a 45% beneficial interest in KKM, which owns 100% of the right
to develop the Karakuduk Field (Note 4). The Company's continued existence as a
going concern is dependent upon the success of future operations, which is, in
the near term, dependent on the successful financing and development of the
Karakuduk Field, of which there is no assurance.
On February 1, 1997, KKM was informed that a Kazakstan Presidential Edict had
been issued announcing the liquidation of Munaygaz, the government-owned company
which holds a 20% interest in KKM. As a result of this action, KKM was unable to
complete its re-registration as required by Kazakstan regulations, resulting in
the risk that applicable judicial bodies could initiate legal proceedings to
declare KKM invalid, which could lead to liquidation. Management of the Company
believes, based on verbal assurances from Kazakstan authorities, the Kazakstan
government will allow the assignment of the Munaygaz interests and allow the
re-registration to occur and that KKM will not be declared invalid.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
13
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
3. Acquisition of Additional Interest in CAP-G
In September 1994, the Company acquired a 25% interest in CAP-G, with
headquarters in Ankara, Turkey. CAP-G has a 50% interest in KKM, which owns 100%
of the right to develop the Karakuduk Field.
In April 1995, the Company acquired all of the stock of Central Asian Petroleum,
Inc. ("CAP-D"), in exchange for 4,400,000 shares of the Company's common stock.
Of the 4,400,000 shares issued, 4,250,000 shares were to be held in escrow and
released from time to time in connection with the development of the Karakuduk
Field. Of the shares held in escrow, 3,000,000 shares have been released and
delivered. As a result of the acquisition, the Company's beneficial interest in
CAP-G increased to 45%.
During 1996, the Company acquired an additional 45% interest in CAP-G from
various entities, increasing the Company's ownership interest in CAP-G to 90%
and its beneficial interest in KKM to 45%. Total consideration for this
acquisition was approximately $6,058,000, consisting of $3,481,000 in cash,
$1,833,000 from the issuance of 1,585,000 shares of its common stock and a
purchase commitment for the remaining $744,000. The Company paid $200,000 of
this commitment in December 1996. The Company was to pay the remaining amount on
or before March 11, 1997. The Company is currently negotiating to obtain an
extension of the due date of the remaining payment. The Company has accounted
for this increase in ownership percentage in CAP-G under the purchase method of
accounting, and has allocated substantially all the purchase price to the
Karakuduk Field.
The Company has the option to acquire the remaining 10% interest of CAP-G shares
for an additional $1,625,000 and 200,000 shares of the Company's common stock at
any time following completion of the initial purchase, and prior to December 11,
1997.
4. Oil and Gas Properties--Full Cost
KKM has undertaken certain appraisal and feasibility work in 1996 in order to
ascertain the most appropriate future development and drilling program for the
Karakuduk Field in Kazakstan. The results are still being analyzed. Until the
future program has been agreed upon, no additional development work or
hydrocarbon production will occur. The estimated future development expenditure
is significant in order to ascertain the quantities of proved reserves
attributable to the Karakuduk Field.
All costs capitalized related to the Karakuduk license are included in oil and
gas properties not subject to depletion.
14
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
4. Oil and Gas Properties--Full Cost (continued)
Management fees related to salary costs of individuals directly associated with
exploration activity on the Karakuduk Field have been capitalized along with the
license acquisition costs and geological and geophysical expenditures. No basis
for allocation of other overhead costs has been developed by the management of
KKM and hence such overhead costs are expensed as incurred.
While the future ability of the Company to export hydrocarbons and therefore
realize world market prices is uncertain under current restricted transport
options in the Republic of Kazakstan, management believes that over the life of
the project as a whole, future cash flows justify the carrying amount of the oil
and gas properties. Therefore, no impairment provision has been reflected in
these financial statements.
5. Long-Term Debt
Long-term obligations at November 30, 1996 consisted of convertible notes
payable to private corporations and individuals in the amount of $1,350,000. Of
the $1,350,000, $1,000,000 was received from two private companies, one of which
is a beneficial owner of over 5% of the outstanding common stock of the Company.
Under the terms of the notes, the Company agreed to add two directors selected
by the private companies to the Company's Board of Directors. The notes are due
on the earlier of May 31, 1998 or the third business day following the receipt
by the Company of any proceeds from one of the following sources: (1) the sale
or issuance of its securities, or (2) any debt financing provided or guaranteed
by the Overseas Private Investment Corporation or other governmental entity.
Interest is payable monthly at a rate of 8%.
As additional consideration for these notes, the Company issued to the holders,
warrants to purchase 337,500 shares of the Company's common stock at $.25 per
share, exercisable at any time, but no later than November 30, 1999. The notes
have been discounted by the fair value of the warrants. The discount will be
amortized over the life of the notes. The following is a summary of the notes
payable at November 30, 1996:
Notes payable $1,350,000
Less unamortized discount 244,000
----------
$1,106,000
==========
15
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
The notes are subject to a provision whereby, if they are not repaid by May 31,
1997, the Company will issue 135,000 additional warrants to the holders.
Furthermore, if the notes are not repaid before November 30, 1997, the Company
is required to issue 270,000 additional warrants to the holders.
Aggregate maturities of long-term debt as of November 30, 1996 are as follows:
1997 $ --
1998 1,350,000
During 1995, the Company issued a note payable to a private corporation in the
amount of $750,000. As additional consideration for this note, the Company
issued to the holder warrants to purchase 500,000 shares of the Company's common
stock, and to a private corporation, as a finder's fee, warrants to purchase
200,000 shares, at $.25 per share, exercisable at any time, but no later than
October 30, 1998. The note was discounted by the difference between the market
value of the Company's common stock on the date of issuance and the exercise
price of the warrants. During 1996, the note was repaid by the Company at the
face value of $750,000. The Company has recorded an extraordinary loss on
extinguishment of debt for the unamortized discount of approximately $237,000.
6. Common Stock and Stock Warrants
Stock Warrant Plan
During 1989, the Board of Directors approved a stock warrant plan for key
employees and directors. The Company has reserved 1,175,000 shares of its common
stock for issuance under the plan. Warrants must be granted and exercised within
a 10-year period ending April 30, 1999. The exercise price must be at least
equal to the fair market value of the Company's common stock on the date of
grant.
Immediately following approval of the plan by the Board of Directors, warrants
for 1,175,000 shares were granted with an exercise price of $.28 per share. The
plan was approved in 1990 by the Company's stockholders. Warrants for 225,000
and 100,000 shares were exercised for values of $63,000 and $28,000 during 1996
and 1995, respectively.
16
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
6. Common Stock and Stock Warrants (continued)
Stock Offering
During 1994, 650,625 of the warrants issued in the Company's 1993 private
placement were exercised for the purchase of shares of common stock. The
exercise price was $.40 per share, for a total of $260,000.
During 1995, 165,375 of the warrants issued in the private placement were
exercised for the purchase of shares of common stock. The exercise price was
$.40 per share, for a total of $66,000.
During 1996, 632,325 of the warrants issued in the private placement were
exercised at an exercise price of $.40 per share, for a total of $252,930. As of
November 30, 1996, all warrants issued in connection with the 1993 private
placement have been exercised.
During 1996, the Company sold 14,000,000 shares of common stock in a private
placement at a price of $.50 per share. In connection with the private
placement, the Company issued warrants to purchase 1,022,000 shares to the sales
agent as a commission, at an exercise price of $.25 per share. As of November
30, 1996, no warrants have been exercised.
The following table summarizes all stock purchase warrant activity for the year
ended November 30, 1996:
<TABLE>
<CAPTION>
Number of Exercise
Stock Price
Warrants Range
----------------------------
<S> <C> <C>
Outstanding, November 30, 1995 ............. 2,407,325 $.25 - $.40
Granted .................................... 1,439,500 $.25 - $.40
Exercised .................................. (857,325) $.28 - $.40
---------- ----------
Outstanding, November 30, 1996 ............. 2,989,500 $.25 - $.28
========== ==========
</TABLE>
17
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
7. Income Taxes
The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
Year ended November 30
-------------------------------------
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Income taxes (benefit) computed
at federal statutory rate .......... $(762,000) $(241,000) $(161,000)
Change in asset valuation
allowance .......................... 848,000 298,000 256,000
Other ................................ (86,000) (57,000) (95,000)
--------- -------- ---------
Income taxes ......................... $ -- $ -- $ --
========= ======== =========
</TABLE>
The components of the Company's deferred tax assets and liabilities under FASB
No. 109 are as follows:
<TABLE>
<CAPTION>
Year ended November 30
-------------------------------------
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards ................ $ 4,958,000 $ 4,131,000 $ 3,934,000
Full cost pool capitalization ... 267,000 246,000 145,000
Valuation allowance ............. (5,225,000) (4,377,000) (4,079,000)
----------- ---------- ----------
Deferred tax assets ............... $ -- $ -- $ --
=========== ========== ==========
</TABLE>
There were no deferred tax assets or income tax benefits recorded in the
financial statements for net deductible temporary differences or net operating
loss carryforwards due to the fact that the realization of the related tax
benefits is not considered likely.
At November 30, 1996, the Company has tax loss carryforwards of approximately
$14,500,000 available to offset future taxable income. These carryforwards will
expire at various times between 1997 and 2011. The Company has issued a
significant number of shares of common stock during the year ended November 30,
1996 and has also issued warrants. The Company is also currently negotiating for
additional capital which, if successful, will require additional shares of stock
to be issued. The changes in ownership may significantly restrict the use of net
operating loss carryforwards. At November 30, 1996, unused statutory depletion
18
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
carryforwards, which have unlimited duration, are approximately $567,000. The
unused investment tax credit carryover was approximately $86,000 at November 30,
1996 and expires through 2000. The loss carryforward at November 30, 1996 for
financial reporting purposes is approximately $11,264,000. The difference
between the loss carryforward for financial reporting and income tax purposes
results principally from the difference in book and tax basis of oil and gas
properties.
8. Related Party Transactions
The Company paid a director $24,000 during 1995 and 1994 for public relations
consulting services.
During 1996, the Company paid a basic consulting fee of approximately $500,000
to MD Petroleum ("MDI"), a private company of which the stockholders include two
directors of the Company, for assistance in seeking means for meeting the
Company's funding obligation for the Karakuduk Project.
The Company leased office space under a noncancelable operating lease which
expired on March 31, 1997. Beginning April 1, 1997, the Company leases office
space with MDI at a rate of approximately $2,000 per month. This lease expires
in November 1997.
Net rent expense was $46,000 for 1996, $36,000 for 1995, and $37,000 for 1994.
Related party sublease income included in rent expense was $6,000 for 1994.
There was no sublease income in 1995 or 1996.
9. Major Customers
The Company is presently engaged in exploration for and development of oil and
gas. The Company sells its production under contracts with various purchasers,
with certain domestic purchasers accounting for sales of 10% or more per year as
follows:
1996 32%
1995 16%
1994 15%, 13% and 11%
19
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
10. Royalty Participation Plan
During 1982, the Company adopted a Royalty Participation Plan for the employees
of the Company. Under the plan, the Company may contribute to a trust fund,
royalty interests acquired by the Company together with any proceeds of
production received by the Company which are attributable to such royalty
interests. The net income of the trust fund will be distributed yearly to the
participants based on years of service and position in the Company.
Distributions were $12,000 for 1996, $12,000 for 1995 and $10,000 for 1994.
In February 1997, as part of the severance agreement with the former Chief
Executive Officer of the Company (see Note 14), the Company assigned its
interest in the Royalty Participation Plan to the former Chief Executive
Officer.
11. Accrued Compensation
On August 19, 1996, the Company's Board of Directors awarded the former Chief
Executive Officer and the former Vice President of the Company cash bonuses
totaling $210,000 as recognition for past and present services to be used to
exercise certain warrants granted in connection with the Company's 1989 Stock
Warrant Plan. These bonuses will not become payable until the earlier of (i)
completion of a sale or farmout by the Company of all or a portion of its
interest in the Karakuduk Project, or (ii) the date when the Company makes a
public disclosure of a sale or farmout of the Karakuduk Project.
In connection with the appointment of Mr. Howard Karren as the Chairman of the
Board of Directors of the Company during fiscal 1996, the Company agreed to
transfer to Mr. Karren, or his designee, 350,000 shares of restricted stock of
the Company at a future date selected by Mr. Karren. The Company has recorded
accrued compensation for this transaction in the amount of $175,000.
12. Defined Contribution Plans
Effective December 31, 1990, the Company adopted a new defined contribution plan
(the "Plan") which covers all full-time eligible employees. Contributions are
determined as a percent of each covered employee's salary and are funded as
accrued. Plan contributions for the Company were $27,000 in 1995 and $26,000 in
1994, of which $20,000 in 1995 and $20,000 in 1994 was attributable to the
President of the Company.
20
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
12. Defined Contribution Plans (continued)
The Company also adopted a 401(k) plan covering all full-time employees,
effective January 1, 1991. Employee contributions are in the form of salary
reductions up to the maximum percentage allowable under the Internal Revenue
Code. There are no employer matching contributions. During 1996, the Plan merged
into the 401(k) plan; as such, there were no contributions made by the Company
during 1996.
13. Commitments and Contingencies
Under the terms of the license agreement, approved by the Ministry of Oil and
Gas Industries of the Republic of Kazakstan, granting KKM the right to develop
the Karakuduk Field, KKM has committed to minimum capital expenditures of
approximately $10 million by August 31, 1997, $35 million by August 31, 1998 and
$12 million by August 31, 1999.
14. Subsequent Events
Issuance of Note Payable
On December 6, 1996, the Company entered into a $500,000 note payable agreement
with a private company. The note is due by May 29, 1998, or the third business
day following the Company's receipt of a minimum of $1,850,000 from one of the
following sources: (1) the sale or issuance of its securities; (2) any debt
financing provided or guaranteed by the Overseas Private Investment Corporation
or other governmental entity; (3) the sale or farmout of assets for cash; or (4)
any other form of financing. Interest is payable monthly at a rate of 8%. In
connection with the issuance of this note, the Company issued warrants to
purchase 125,000 shares of the Company's common stock to the holder. The
exercise price of the warrants is $.25 per share, exercisable at any time, but
no later than November 30, 1999. The note is also subject to a provision
whereby, if the note is not repaid by May 31, 1997 and November 30, 1997, the
Company is required to issue 50,000 and 100,000 additional warrants,
respectively, to the holder.
Severance Agreement
Paul V. Hoovler, the former Chief Executive Officer and President of the
Company, entered into a severance agreement ("Agreement") with the Company
effective February 12, 1997. Pursuant to the Agreement, Mr. Hoovler receives his
salary and unpaid vacation time accrued through February 12, 1997. Also, the
21
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
14. Subsequent Events (continued)
Company agreed to amend the Company's 1989 Stock Warrant Plan to enable Mr.
Hoovler to transfer the warrants granted to him in 1996 to a member of his
family or a trust created by him.
Further, Mr. Hoovler was granted warrants to purchase 100,000 shares of the
Company's common stock at an exercise price of $.85 per share, for a period of
four years, and warrants to purchase 100,000 shares of the Company's common
stock at an exercise price of $1.25 per share that become exercisable on January
1, 1998, and remain exercisable for a period of four years from such date.
Also, pursuant to the Agreement, the Company agreed to assign to Mr. Hoovler, or
an entity controlled by Mr. Hoovler, the existing overriding royalty interest
("ORRI") that the Company holds in approximately 89 wells. Such assignment will
be for a three-year period. In exchange for the assignment, Mr. Hoovler agreed
to pay a former employee of the Company 10% of the net revenues received from
such ORRI during the three-year period.
Uzbekistan Project
The Company has been negotiating an agreement pursuant to which the Company
would acquire 100% of the issued and outstanding capital stock of MDI. At the
time of the acquisition, the only asset that MDI would have would be a 5%
interest in a joint venture that Enron Oil & Gas Uzbekistan, Ltd. is attempting
to negotiate for the development of natural gas fields in Uzbekistan. It is
currently contemplated that if the agreement is consummated, the Company would
issue MDI's stockholders an as of yet undetermined number of shares of the
Company's common stock in exchange for their MDI shares. On January 8, 1997, the
Company agreed to issue 180,000 shares of the Company's common stock in
consideration for the exclusive right, until July 7, 1997, to acquire MDI. The
Company also granted Enron Oil & Gas Uzbekistan, Ltd. registration rights with
respect to the 180,000 shares. In the interim, the principal shareholders of MDI
have agreed that if the Company does not acquire MDI by July 7, 1997, the
principal stockholders will transfer 180,000 shares of the Company's common
stock owned by them to the Company to replace the 180,000 shares issued by the
Company to Enron Oil & Gas Uzbekistan, Ltd.
22
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
14. Subsequent Events (continued)
Sale of Domestic Oil and Gas Properties
Effective January 1, 1997, the Company entered into an agreement to sell its
domestic oil and gas properties for a sales price of approximately $270,000.
Accordingly, the Company's domestic oil and gas properties have been classified
as oil and gas properties under agreement for sale in the balance sheet at
November 30, 1996.
23
<PAGE>
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited
The following supplemental information regarding the oil and gas activities of
the Company is presented pursuant to the disclosure requirements promulgated by
the Securities and Exchange Commission and Statement of Financial Accounting
Standards ("SFAS") No. 69, Disclosures About Oil and Gas Producing Activities.
As discussed in Note 14, the Company entered into an agreement effective January
1, 1997 to sell its domestic oil and gas properties. Accordingly, the Company's
domestic oil and gas properties have been classified as oil and gas properties
under an agreement for sale at November 30, 1996 and no disclosures for proved
reserves or future cash flows have been made at November 30, 1996. In addition,
because of the uncertainties surrounding the development of the Karakuduk Field,
no proved reserves have been attributed to the field.
The following estimates of reserve quantities and related standardized measure
of discounted net cash flow are estimates only, and do not purport to reflect
realizable values or fair market values of the Company's reserves. The Company
emphasizes that reserve estimates are inherently imprecise and that estimates of
new discoveries are more imprecise than those of producing oil and gas
properties. Additionally, the price of oil has been very volatile and downward
changes in prices can significantly affect quantities that are economically
recoverable. Accordingly, these estimates are expected to change as future
information becomes available and the changes may be significant. All of the
Company's proved reserves are located in the United States.
Proved reserves are estimated reserves of crude oil and natural gas that
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those expected to be
recovered through existing wells, equipment and operating methods.
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses. The estimated future net
cash flows are then discounted using a rate of 10% a year to reflect the
estimated timing of the future cash flows.
24
<PAGE>
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited (continued)
<TABLE>
<CAPTION>
Proved Oil and Gas Reserve Quantities
(All Within the United States)
Oil Gas
reserves reserves
(bbls.) (Mcf.)
-----------------------
<S> <C> <C>
Balance November 30, 1993 .......................... 141,748 2,305,142
Revisions of previous estimates .................... (125) (455,946)
Sales of reserves .................................. (20,392) (95,714)
Extensions, discoveries and other additions ........ 1,745 1,700,289
Production ......................................... (11,286) (159,041)
---------- ----------
Balance November 30, 1994 .......................... 111,690 3,294,730
Revisions of previous estimates .................... (1,438) (98,536)
Sales of reserves .................................. (36,425) (10,228)
Extensions, discoveries and other additions ........ 582 9,375
Production ......................................... (8,224) (132,924)
---------- ----------
Balance November 30, 1995 .......................... 66,185 3,062,417
Revisions of previous estimates .................... (58,749) 18,703
Sales of reserves .................................. (531) (34,417)
Extensions, discoveries and other additions ........ 267 6,638
Production ......................................... (1,737) (96,906)
Transfer to oil and gas properties under agreement
for sale ........................................ (5,435) (2,956,435)
---------- ----------
Balance November 30, 1996 .......................... -- --
========== ==========
Proved developed reserves:
November 30, 1994 ............................... 52,740 1,103,203
November 30, 1995 ............................... 7,235 870,890
November 30, 1996 ............................... -- --
</TABLE>
25
<PAGE>
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited (continued)
<TABLE>
<CAPTION>
Standardized Measure of Discounted Future Net Cash Flows
and Changes Therein Relating to Proved Oil and Gas Reserves
Year ended November 30
-----------------------------------------
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Future cash inflows .............. $ -- $ 3,449,000 $ 5,041,000
Future production and development
costs ......................... -- (2,478,000) (3,051,000)
Future income tax expenses ....... -- -- --
----------- ---------- ----------
Future net cash flows ............ -- 971,000 1,990,000
10% annual discount for estimated
timing of cash flows .......... -- (544,000) (907,000)
----------- ---------- ----------
Standardized measure of discounted
future net cash flows ......... $ -- $ 427,000 $ 1,083,000
=========== ========== ==========
</TABLE>
The following are the principal sources of changes in the standardized measure
of discounted future net cash flows:
<TABLE>
<CAPTION>
Year ended November 30
----------------------------------------
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Beginning balance .................. $ 427,000 $ 1,084,000 $ 1,360,000
Expenditures which reduced future
development costs ............... -- (3,000) (146,000)
Acquisition of proved reserves ..... -- -- --
Sale of proved reserves ............ (54,000) (81,000) (102,000)
Sales and transfers of oil and gas
produced, net of production costs (110,000) (140,000) (143,000)
Net increase (decrease) in price ... 860,000 (593,000) (568,000)
Net decrease in costs .............. -- 247,000 3,000
Extensions and discoveries ......... 17,000 165,000 526,000
Revisions of previous quantity
estimates ....................... (91,000) (38,000) (214,000)
Accretion of discount .............. 99,000 108,000 136,000
Effect of change in timing and other 253,000 (322,000) 232,000
Transfer to oil and gas properties
under agreement for sale ........ (1,401,000) -- --
----------- ---------- ----------
Ending balance ..................... $ -- $ 427,000 $ 1,084,000
=========== ========== ==========
</TABLE>
26
<PAGE>
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited (continued)
<TABLE>
<CAPTION>
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil and Gas Reserves (continued)
Year ended November 30
--------------------------------------
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Costs Incurred
Property acquisition costs--
unproved leases .................... $ -- $ -- $ 7,000
Property acquisition costs--
proved properties .................. -- 30,000 37,000
Exploration costs ..................... -- --
Development costs ..................... -- 30,000 146,000
Production Costs
Lease operating expense ............... $ 26,000 $ 95,000 $ 176,000
Production tax ........................ 11,000 20,000 56,000
----------- ---------- -----------
$ 37,000 $ 115,000 $ 232,000
=========== ========== ===========
Other Information
Net revenue (revenue less production
costs, ad valorem and severance
taxes) ............................. $ 110,000 $ 140,000 $ 142,000
Amortization per equivalent barrel
of production* ..................... 1.40 2.33 3.18
Price per bbl. (oil) .................. 17.53 14.27 12.75
Production cost per bbl. (oil) ........ 2.13 6.34 8.21
Price per Mcf. (gas) .................. 1.17 1.02 1.44
Production cost per Mcf. (gas) ........ .34 .47 .86
Price per net equivalent bbl.* ........ 8.22 8.33 9.86
Production cost per net equivalent bbl 2.07 3.78 6.06
</TABLE>
* Natural gas converted to equivalent barrels using conversion ratio of 6:1.
27
<PAGE>
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited (continued)
<TABLE>
<CAPTION>
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil and Gas Reserves (continued)
Year ended November 30
--------------------------------------
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Present value of proved reserves:
Proved developed ...................... $ -- $ 266,000 $ 650,000
Proved undeveloped .................... -- 161,000 433,000
---------- --------- ---------
Total ................................. $ -- $ 427,000 $1,083,000
========== ========= =========
Future net revenues of proved reserves:
Proved developed .................... $ -- $ 383,000 $ 950,000
Proved undeveloped .................. -- 588,000 1,040,000
---------- --------- ----------
Total ............................... $ -- $ 971,000 $1,990,000
========== ========= ==========
</TABLE>
28
<PAGE>
EXHIBIT INDEX
Exhibit Description Page No.
- ------- ----------- --------
2.1 Stock Acquisition Agreement and Plan of Reorganization dated N/A
April 12, 1995 between Chaparral Resources, Inc., and the
Shareholders of Central Asian Petroleum, Inc., incorporated by
reference to Exhibit 2.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 1995.
2.2 Escrow Agreement dated April 12, 1995 between Chaparral N/A
Resources, Inc., the Shareholders of Central Asian Petroleum,
Inc. and Barry W. Spector, incorporated by reference to Exhibit
2.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1995.
2.3 Amendment to Stock Acquisition Agreement and Plan of N/A
Reorganization dated March 10, 1996 between Chaparral Resources,
Inc., and the Shareholders of Central Asian Petroleum, Inc.
3.1 Restated Articles of Incorporation and Amendments, incorporated N/A
by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1993.
3.2 Articles of Amendment to the Restated Articles of Incorporation N/A
dated April 20, 1988, incorporated by reference to Exhibit 3.2 to
the Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1993.
3.3 Bylaws, as amended through January 3, 1997.
3.4 Articles of Amendment to the Restated Articles of Incorporation N/A
and Amendments dated June 21, 1995, incorporated by reference to
Exhibit B to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1995.
3.5 Articles of Amendment to the Restated Articles of Incorporation N/A
and Amendments dated July 17, 1996, incorporated by reference
to Exhibit 3.5 to the Company's Registration Statement No.
333-7779.
10.1 Royalty Participation Plan dated June 15, 1982, incorporated by N/A
reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K for the fiscal year ended November 30, 1993.
10.2 Chaparral Resources, Inc. 1989 Stock Warrant Plan effective May N/A
1, 1989, incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1993.
10.3 Target Benefit Plan effective December 1, 1990 incorporated by N/A
reference to Exhibit 10.9 to the Company's Annual Report on Form
10-K for the fiscal year ended November 30, 1991.
10.4 Deferred Compensation and Death Benefit Plan as amended November N/A
15, 1991 incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1991.
10.5 Promissory Note dated November 1, 1995 from Chaparral Resources, N/A
Inc., to Brae Group, Inc., incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K dated November
1, 1995.
10.6 Purchase Agreement, dated effective January 12, 1996, between the N/A
Company and Guntekin Koksal (purchase of CAP-G shares)
incorporated by reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the fiscal year ended November 30, 1995.
<PAGE>
10.7 Letter Agreement, dated January 3, 1996, between the Company and N/A
certain stockholders of Darka Petrol Ticaret Ltd. Sti., together
with Exhibits A--E, incorporated by reference to Exhibit 10.7 to
the Company's Annual Report on From 10-K for the fiscal year
ended November 30, 1995.
10.8 Amendment, effective March 4, 1996, to the Letter Agreement N/A
revising the terms pursuant to which the Company is to acquire
all shares of CAP(G) stock owned by Darka Petrol Ticaret Ltd.
Sti., incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on From 10-K for the fiscal year ended November 30,
1995.
10.9 Warrant Certificate entitling Allen & Company to purchase up to N/A
1,022,000 shares of Common Stock of Chaparral Resources, Inc.,
incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated April 1, 1996.
10.10 Consulting Agreement dated May 14, 1996 with M-D International N/A
Petroleum, Inc., incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement No. 333-7779.
10.11 Promissory Notes and Modification of Promissory Notes N/A
incorporated by reference to Exhibit (3) to the Company's Current
Report on Form 8-K dated November 22, 1996.
10.12 Amendment effective December 6, 1996 to Purchase Agreement dated
effective January 12, 1996 between the Company and Guntekin
Koksal.
10.13 Severance Agreement dated February 12, 1997 between the Company
and Paul V. Hoovler.
10.14 Severance Agreement dated February 12, 1997 between the Company
and Matthew R. Hoovler.
10.15 Purchase and Sale Agreement effective January 1, 1997 between
the Company and Conoco Inc.*
10.16 Amendments to Chaparral Resources, Inc. Stock Warrant Plan.
10.17 Agreement dated August 30, 1995 for Exploration Development and
Production of Oil in Karakuduk Oil Field in Mangistan Oblast of
the Republic of Kazakhstan between Ministry of Oil and Gas
Industries of the Republic of Kazakhstan for and on Behalf of the
Government of the Republic of Kazakhstan and Joint Stock Company
of Closed Type Karakuduk Munay Joint Venture.
10.18 License for the Right to Use the Subsurface in the Republic of
Kazakhstan.
16 Letter dated July 23, 1996 from Grant Thornton LLP confirming the N/A
circumstances pursuant to which Grant Thornton resigned as
Registrant's principal independent accountants, incorporated by
reference to Exhibit 16 to the Company's Current Report on Form
8-K dated July 23, 1996.
21 List of Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP for S-8.
23.2 Consent of Ernst & Young LLP for S-8.
27 Financial Data Schedule.
As Amended January 3, 1997
BYLAWS
OF
CHAPARRAL RESOURCES, INC.
ARTICLE
Offices
The principal office of the corporation shall be designated from time to
time by the corporation and may be within or outside of Colorado.
The corporation may have such other offices, either within or outside
Colorado, as the board of directors may designate or as the business of the
corporation may require from time to time.
The registered office of the corporation required by the Colorado Business
Corporation Act to be maintained in Colorado may be, but need not be, identical
with the principal office, and the address of the registered office may be
changed from time to time by the board of directors.
ARTICLE I
Shareholders
Section 1. Annual Meeting. The annual meeting of the shareholders shall be
held each year on a date and at a time fixed by the board of directors of the
corporation (or by the chairman of the board or the president in the absence of
action by the board of directors), for the purpose of electing directors and for
the transaction of such other business as may come before the meeting. If the
election of directors is not held on the day fixed as provided herein for any
annual meeting of the shareholders, or any adjournment thereof, the board of
directors shall cause the election to be held at a special meeting of the
shareholders as soon thereafter as it may conveniently be held.
A shareholder may apply to the district court in the county in Colorado
where the corporation's principal office is located or, if the corporation has
no principal office in Colorado, to the district court of the county in which
the corporation's registered office is located to seek an order that a
shareholder meeting be held (i) if an annual meeting was not held within six
months after the close of the corporation's most recently ended fiscal year or
fifteen months after its last annual meeting, whichever is earlier, or (ii) if
the shareholder participated in a proper call of or proper demand for a special
meeting and notice of the special meeting was not given within thirty days after
the date of the call or the date the last of the demands necessary to require
calling of the meeting was received by the corporation, or the special meeting
was not held in accordance with the notice.
<PAGE>
Section 2. Special Meetings. Unless otherwise prescribed by statute,
special meetings of the shareholders may be called for any purpose by the
chairman of the board, by the president or by the board of directors. The
president shall call a special meeting of the shareholders if the corporation
receives one or more written demands for the meeting, stating the purpose or
purposes for which it is to be held, signed and dated by holders of shares
representing at least ten percent of all the votes entitled to be cast on any
issue proposed to be considered at the meeting.
Section 3. Place of Meeting. The board of directors may designate any
place, either within or outside Colorado, as the place for any annual meeting or
any special meeting called by the board of directors. A waiver of notice signed
by all shareholders entitled to vote at a meeting may designate any place,
either within or outside Colorado, as the place for such meeting. If no
designation is made, or if a special meeting is called other than by the board,
the place of meeting shall be the principal office of the corporation.
Section 4. Notice of Meeting. Written notice stating the place, date, and
hour of the meeting shall be given not less than ten nor more than sixty days
before the date of the meeting, except that (i) if the number of authorized
shares is to be increased, at least thirty days' notice shall be given, or (ii)
any other longer notice period is required by the Colorado Business Corporation
Act. Notice of a special meeting shall include a description of the purpose or
purposes of the meeting. Notice of an annual meeting need not include a
description of the purpose or purposes of the meeting except the purpose or
purposes shall be stated with respect to (i) an amendment to the articles of
incorporation of the corporation, (ii) a merger or share exchange in which the
corporation is a party and, with respect to a share exchange, in which the
corporation's shares will be acquired, (iii) a sale, lease, exchange or other
disposition, other than in the usual and regular course of business, of all or
substantially all of the property of the corporation or of another entity which
this corporation controls, in each case with or without the goodwill, (iv) a
dissolution of the corporation, or (v) any other purpose for which a statement
of purpose is required by the Colorado Business Corporation Act. Notice shall be
given personally or by mail, private carrier, telegraph, teletype,
electronically transmitted facsimile or other form of wire or wireless
communication by or at the direction of the president, the secretary, or the
officer or persons calling the meeting, to each shareholder of record entitled
to vote at such meeting. If mailed and if in a comprehensible form, such notice
shall be deemed to be given and effective when deposited in the United States
mail, addressed to the shareholder at his address as it appears in the
corporation's current record of shareholders, with postage prepaid. If notice is
given other than by mail, and provided that such notice is in a comprehensible
form, the notice is given and effective on the date received by the shareholder.
If requested by the person or persons lawfully calling such meeting, the
secretary shall give notice thereof at corporate expense. No notice need be sent
to any shareholder if three successive notices mailed to the last known address
of such shareholder have been returned as undeliverable until such time as
another address for such shareholder is made known to the corporation by such
shareholder. In order to be entitled to receive notice of any meeting, a
shareholder shall advise the corporation in writing of any change in such
shareholder's mailing address as shown on the corporation's books and records.
- 2 -
<PAGE>
When a meeting is adjourned to another date, time or place, notice need not
be given of the new date, time or place if the new date, time or place of such
meeting is announced before adjournment at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
which may have been transacted at the original meeting. If the adjournment is
for more than 120 days, or if a new record date is fixed for the adjourned
meeting, a new notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the meeting as of the new record date.
A shareholder may waive notice of a meeting before or after the time and
date of the meeting by a writing signed by such shareholder. Such waiver shall
be delivered to the corporation for filing with the corporate records. Further,
by attending a meeting either in person or by proxy, a shareholder waives
objection to lack of notice or defective notice of the meeting unless the
shareholder objects at the beginning of the meeting to the holding of the
meeting or the transaction of business at the meeting because of lack of notice
or defective notice. By attending the meeting, the shareholder also waives any
objection to consideration at the meeting of a particular matter not within the
purpose or purposes described in the meeting notice unless the shareholder
objects to considering the matter when it is presented.
Section 5. Fixing of Record Date. For the purpose of determining
shareholders entitled to (i) notice of or vote at any meeting of shareholders or
any adjournment thereof, (ii) receive distributions or share dividends, or (iii)
demand a special meeting, or to make a determination of shareholders for any
other proper purpose, the board of directors may fix a future date as the record
date for any such determination of shareholders, such date in any case to be not
more than seventy days, and, in case of a meeting of shareholders, not less than
ten days, prior to the date on which the particular action requiring such
determination of shareholders is to be taken. If no record date is fixed by the
directors, the record date shall be the date on which notice of the meeting is
mailed to shareholders, or the date on which the resolution of the board of
directors providing for a distribution is adopted, as the case may be. When a
determination of shareholders entitled to vote at any meeting of shareholders is
made as provided in this Section, such determination shall apply to any
adjournment thereof unless the board of directors fixes a new record date, which
it must do if the meeting is adjourned to a date more than 120 days after the
date fixed for the original meeting.
Notwithstanding the above, the record date for determining the shareholders
entitled to take action without a meeting or entitled to be given notice of
action so taken shall be the date a writing upon which the action is taken is
first received by the corporation. The record date for determining shareholders
entitled to demand a special meeting shall be the date of the earliest of any of
the demands pursuant to which the meeting is called.
- 3 -
<PAGE>
Section 6. Voting Lists. The secretary shall make, at the earlier of ten
days before each meeting of shareholders or two business days after notice of
the meeting has been given, a complete list of the shareholders entitled to be
given notice of such meeting or any adjournment thereof. The list shall be
arranged by voting groups and within each voting group by class or series of
shares, shall be in alphabetical order within each class or series, and shall
show the address of and the number of shares of each class or series held by
each shareholder. For the period beginning the earlier of ten days prior to the
meeting or two business days after notice of the meeting is given and continuing
through the meeting and any adjournment thereof, this list shall be kept on file
at the principal office of the corporation, or at a place (which shall be
identified in the notice) in the city where the meeting will be held. Such list
shall be available for inspection on written demand by any shareholder
(including for the purpose of this Section 6 any holder of voting trust
certificates) or his agent or attorney during regular business hours and during
the period available for inspection. The original stock transfer books shall be
prima facie evidence as to the shareholders entitled to examine such list or to
vote at any meeting of shareholders.
Any shareholder, his agent or attorney may copy the list during regular
business hours and during the period it is available for inspection, provided
(i) the shareholder has been a shareholder for at least three months immediately
preceding the demand or holds at least five percent of all outstanding shares of
any class of shares as of the date of the demand, (ii) the demand is made in
good faith and for a purpose reasonably related to the demanding shareholder's
interest as a shareholder, (iii) the shareholder describes with reasonable
particularity the purpose and the records the shareholder desires to inspect,
(iv) the records are directly connected with the described purpose, and (v) the
shareholder pays a reasonable charge covering the costs of labor and material
for such copies, not to exceed the estimated cost of production and
reproduction.
Section 7. Recognition Procedure for Beneficial Owners. The board of
directors may adopt by resolution a procedure whereby a shareholder of the
corporation may certify in writing to the corporation that all or a portion of
the shares registered in the name of such shareholder are held for the account
of a specified person or persons. The resolution may set forth (i) the types of
nominees to which it applies, (ii) the rights or privileges that the corporation
will recognize in a beneficial owner, which may include rights and privileges
other than voting, (iii) the form of certification and the information to be
contained therein, (iv) if the certification is with respect to a record date,
the time within which the certification must be received by the corporation, (v)
the period for which the nominee's use of the procedure is effective, and (vi)
such other provisions with respect to the procedure as the board deems necessary
or desirable. Upon receipt by the corporation of a certificate complying with
the procedure established by the board of directors, the persons specified in
the certification shall be deemed, for the purpose or purposes set forth in the
certification, to be the registered holders of the number of shares specified in
place of the shareholder making the certification.
Section 8. Quorum and Manner of Acting. One-third of the votes entitled to
be cast on a matter by a voting group shall constitute a quorum of that voting
group for action on the matter. If less than one-third of such votes are
represented at a meeting, a majority of the votes so represented may adjourn the
meeting from time to time without further notice, for a period not to exceed 120
days for any one adjournment. If a quorum is present at such adjourned meeting,
any business may be transacted which might have been transacted at the meeting
- 4 -
<PAGE>
as originally noticed. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to leave less than a quorum, unless the meeting is
adjourned and a new record date is set for the adjourned meeting.
If a quorum exists, action on a matter other than the election of directors
by a voting group is approved if the votes cast within the voting group favoring
the action exceed the votes cast within the voting group opposing the action,
unless the vote of a greater number or voting by classes is required by law or
the articles of incorporation.
Section 9. Proxies. At all meetings of shareholders, a shareholder may vote
by proxy by signing an appointment form or similar writing, either personally or
by his duly authorized attorney-in-fact. A shareholder may also appoint a proxy
by transmitting or authorizing the transmission of a telegram, teletype, or
other electronic transmission providing a written statement of the appointment
to the proxy, a proxy solicitor, proxy support service organization, or other
person duly authorized by the proxy to receive appointments as agent for the
proxy, or to the corporation. The transmitted appointment shall set forth or be
transmitted with written evidence from which it can be determined that the
shareholder transmitted or authorized the transmission of the appointment. The
proxy appointment form or similar writing shall be filed with the secretary of
the corporation before or at the time of the meeting. The appointment of a proxy
is effective when received by the corporation and is valid for eleven months
unless a different period is expressly provided in the appointment form or
similar writing.
Any complete copy, including an electronically transmitted facsimile, of an
appointment of a proxy may be substituted for or used in lieu of the original
appointment for any purpose for which the original appointment could be used.
Revocation of a proxy does not affect the right of the corporation to
accept the proxy's authority unless (i) the corporation had notice that the
appointment was coupled with an interest and notice that such interest is
extinguished is received by the secretary or other officer or agent authorized
to tabulate votes before the proxy exercises his authority under the
appointment, or (ii) other notice of the revocation of the appointment is
received by the secretary or other officer or agent authorized to tabulate votes
before the proxy exercises his authority under the appointment. Other notice of
revocation may, in the discretion of the corporation, be deemed to include the
appearance at a shareholders' meeting of the shareholder who granted the proxy
and his voting in person on any matter subject to a vote at such meeting.
The death or incapacity of the shareholder appointing a proxy does not
affect the right of the corporation to accept the proxy's authority unless
notice of the death or incapacity is received by the secretary or other officer
or agent authorized to tabulate votes before the proxy exercises his authority
under the appointment.
- 5 -
<PAGE>
The corporation shall not be required to recognize an appointment made
irrevocable if it has received a writing revoking the appointment signed by the
shareholder (including a shareholder who is a successor to the shareholder who
granted the proxy) either personally or by his attorney-in-fact, notwithstanding
that the revocation may be a breach of an obligation of the shareholder to
another person not to revoke the appointment.
Subject to Section 11 and any express limitation on the proxy's authority
appearing on the appointment form, the corporation is entitled to accept the
proxy's vote or other action as that of the shareholder making the appointment.
Section 10. Voting of Shares. Each outstanding share, regardless of class,
shall be entitled to one vote, except in the election of directors, and each
fractional share shall be entitled to a corresponding fractional vote on each
matter submitted to a vote at a meeting of shareholders, except to the extent
that the voting rights of the shares of any class or classes are limited or
denied by the articles of incorporation as permitted by the Colorado Business
Corporation Act. Cumulative voting shall not be permitted in the election of
directors or for any other purpose. Each record holder of stock shall be
entitled to vote in the election of directors and shall have as many votes for
each of the shares owned by him as there are directors to be elected and for
whose election he has the right to vote.
At each election of directors, that number of candidates equaling the
number of directors to be elected, having the highest number of votes cast in
favor of their election, shall be elected to the board of directors.
Except as otherwise ordered by a court of competent jurisdiction upon a
finding that the purpose of this Section would not be violated in the
circumstances presented to the court, the shares of the corporation are not
entitled to be voted if they are owned, directly or indirectly, by a second
corporation, domestic or foreign, and the first corporation owns, directly or
indirectly, a majority of the shares entitled to vote for directors of the
second corporation except to the extent the second corporation holds the shares
in a fiduciary capacity.
Redeemable shares are not entitled to be voted after notice of redemption
is mailed to the holders and a sum sufficient to redeem the shares has been
deposited with a bank, trust company or other financial institution under an
irrevocable obligation to pay the holders the redemption price on surrender of
the shares.
Section 11. Corporation's Acceptance of Votes. If the name signed on a
vote, consent, waiver, proxy appointment, or proxy appointment revocation
corresponds to the name of a shareholder, the corporation, if acting in good
faith, is entitled to accept the vote, consent, waiver, proxy appointment or
proxy appointment revocation and give it effect as the act of the shareholder.
If the name signed on a vote, consent, waiver, proxy appointment or proxy
appointment revocation does not correspond to the name of a shareholder, the
corporation, if acting in good faith, is nevertheless entitled to accept the
vote, consent, waiver, proxy appointment or proxy appointment revocation and to
give it effect as the act of the shareholder if:
- 6 -
<PAGE>
(i) the shareholder is an entity and the name signed purports to be
that of an officer or agent of the entity;
(ii) the name signed purports to be that of an administrator,
executor, guardian or conservator representing the shareholder and, if the
corporation requests, evidence of fiduciary status acceptable to the
corporation has been presented with respect to the vote, consent, waiver,
proxy appointment or proxy appointment revocation;
(iii) the name signed purports to be that of a receiver or trustee in
bankruptcy of the shareholder and, if the corporation requests, evidence of
this status acceptable to the corporation has been presented with respect
to the vote, consent, waiver, proxy appointment or proxy appointment
revocation;
(iv) the name signed purports to be that of a pledgee, beneficial
owner or attorney-in-fact of the shareholder and, if the corporation
requests, evidence acceptable to the corporation of the signatory's
authority to sign for the shareholder has been presented with respect to
the vote, consent, waiver, proxy appointment or proxy appointment
revocation;
(v) two or more persons are the shareholder as co-tenants or
fiduciaries and the name signed purports to be the name of at least one of
the co-tenants or fiduciaries, and the person signing appears to be acting
on behalf of all the co-tenants or fiduciaries; or
(vi) the acceptance of the vote, consent, waiver, proxy appointment or
proxy appointment revocation is otherwise proper under rules established by
the corporation that are not inconsistent with this Section 11.
The corporation is entitled to reject a vote, consent, waiver, proxy
appointment or proxy appointment revocation if the secretary or other officer or
agent authorized to tabulate votes, acting in good faith, has reasonable basis
for doubt about the validity of the signature on it or about the signatory's
authority to sign for the shareholder.
Neither the corporation nor its officers nor any agent who accepts or
rejects a vote, consent, waiver, proxy appointment or proxy appointment
revocation in good faith and in accordance with the standards of this Section is
liable in damages for the consequences of the acceptance or rejection.
Section 12. Informal Action by Shareholders. Any action required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting if a written consent (or counterparts thereof) that sets forth the
action so taken is signed by all of the shareholders entitled to vote with
- 7 -
<PAGE>
respect to the subject matter thereof and received by the corporation. Such
consent shall have the same force and effect as a unanimous vote of the
shareholders and may be stated as such in any document. Action taken under this
Section 12 is effective as of the date the last writing necessary to effect the
action is received by the corporation, unless all of the writings specify a
different effective date, in which case such specified date shall be the
effective date for such action. If any shareholder revokes his consent as
provided for herein prior to what would otherwise be the effective date, the
action proposed in the consent shall be invalid. The record date for determining
shareholders entitled to take action without a meeting is the date the
corporation first receives a writing upon which the action is taken.
Any shareholder who has signed a writing describing and consenting to
action taken pursuant to this Section 12 may revoke such consent by a writing
signed by the shareholder describing the action and stating that the
shareholder's prior consent thereto is revoked, if such writing is received by
the corporation before the effectiveness of the action.
Section 13. Meetings by Telecommunication. Any or all of the shareholders
may participate in an annual or special shareholders' meeting by, or the meeting
may be conducted through the use of, any means of communication by which all
persons participating in the meeting may hear each other during the meeting. A
shareholder participating in a meeting by this means is deemed to be present in
person at the meeting.
ARTICLE II
Board of Directors
Section 1. General Powers. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the corporation shall be
managed under the direction of its board of directors, except as otherwise
provided in the Colorado Business Corporation Act or the articles of
incorporation.
Section 2. Number, Qualifications and Tenure. The number of directors of
the corporation shall be six. A director shall be a natural person who is
eighteen years of age or older. A director need not be a resident of Colorado or
a shareholder of the corporation.
Directors shall be elected at each annual meeting of shareholders. Each
director shall hold office until the next annual meeting of shareholders
following his election and thereafter until his successor shall have been
elected and qualified. Directors shall be removed in the manner provided by the
Colorado Business Corporation Act.
Section 3. Vacancies. Any director may resign at any time by giving written
notice to the corporation. Such resignation shall take effect at the time the
notice is received by the corporation unless the notice specifies a later
effective date. Unless otherwise specified in the notice of resignation, the
corporation's acceptance of such resignation shall not be necessary to make it
effective. Any vacancy on the board of directors may be filled by the
affirmative vote of a majority of the shareholders or the board of directors. If
the directors remaining in office constitute fewer than a quorum of the board,
- 8 -
<PAGE>
the directors may fill the vacancy by the affirmative vote of a majority of all
the directors remaining in office. If elected by the directors, the director
shall hold office until the next annual shareholders' meeting at which directors
are elected. If elected by the shareholders, the director shall hold office for
the unexpired term of his predecessor in office; except that, if the director's
predecessor was elected by the directors to fill a vacancy, the director elected
by the shareholders shall hold office for the unexpired term of the last
predecessor elected by the shareholders.
Section 4. Regular Meetings. A regular meeting of the board of directors
shall be held without notice immediately after and at the same place as the
annual meeting of shareholders. The board of directors may provide by resolution
the time and place, either within or outside Colorado, for the holding of
additional regular meetings without other notice.
Section 5. Special Meetings. Special meetings of the board of directors may
be called by or at the request of the chairman of the board, the president or
any two directors. The person or persons authorized to call special meetings of
the board of directors may fix any place, either within or outside Colorado, as
the place for holding any special meeting of the board of directors called by
them, provided that no meeting shall be called outside the state of Colorado
unless a majority of the board of directors has so authorized.
Section 6. Notice. Notice of any special meeting shall be given at least
two days prior to the meeting by written notice either personally delivered or
mailed to each director at his business address, or by notice transmitted by
telegraph, telex, electronically transmitted facsimile or other form of wire or
wireless communication. If mailed, such notice shall be deemed to be given and
to be effective on the earlier of (i) three days after such notice is deposited
in the United States mail, properly addressed, with postage prepaid, or (ii) the
date shown on the return receipt, if mailed by registered or certified mail
return receipt requested. If notice is given by telex, electronically
transmitted facsimile or other similar form of wire or wireless communication,
such notice shall be deemed to be given and to be effective when sent, and with
respect to a telegram, such notice shall be deemed to be given and to be
effective when the telegram is delivered to the telegraph company. If a director
has designated in writing one or more reasonable addresses or facsimile numbers
for delivery of notice to him, notice sent by mail, telegraph, telex,
electronically transmitted facsimile or other form of wire or wireless
communication shall not be deemed to have been given or to be effective unless
sent to such addresses or facsimile numbers, as the case may be.
A director may waive notice of a meeting before or after the time and date
of the meeting by a writing signed by such director. Such waiver shall be
delivered to the corporation for filing with the corporate records. Further, a
director's attendance at or participation in a meeting waives any required
notice to him of the meeting unless at the beginning of the meeting, or promptly
upon his later arrival, the director objects to holding the meeting or
transacting business at the meeting because of lack of notice or defective
notice and does not thereafter vote for or assent to action taken at the
meeting. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the board of directors need be specified in the
notice or waiver of notice of such meeting.
- 9 -
<PAGE>
Section 7. Quorum. A majority of the number of directors fixed by the board
of directors pursuant to Section 2 or, if no number is fixed, a majority of the
number in office immediately before the meeting begins, shall constitute a
quorum for the transaction of business at any meeting of the board of directors.
If less than such majority is present at a meeting, a majority of the
directors present may adjourn the meeting from time to time without further
notice, for a period not to exceed sixty days at any one adjournment.
Section 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors.
Section 9. Compensation. By resolution of the board of directors, any
director may be paid any one or more of the following: his expenses, if any, of
attendance at meetings, a fixed sum for attendance at each meeting, a stated
salary as director, or such other compensation as the board of directors and the
director may reasonably agree upon. No such payment shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor.
Section 10. Presumption of Assent. A director of the corporation who is
present at a meeting of the board of directors or committee of the board at
which action on any corporate matter is taken shall be presumed to have assented
to the action taken unless (i) the director objects at the beginning of the
meeting, or promptly upon his arrival, to the holding of the meeting or the
transaction of business at the meeting and does not thereafter vote for or
assent to any action taken at the meeting, (ii) the director contemporaneously
requests that his dissent or abstention as to any specific action taken be
entered in the minutes of the meeting, or (iii) the director causes written
notice of his dissent or abstention as to any specific action to be received by
the presiding officer of the meeting before its adjournment or by the
corporation promptly after the adjournment of the meeting. A director may
dissent to a specific action at a meeting, while assenting to others. The right
to dissent to a specific action taken at a meeting of the board of directors or
a committee of the board shall not be available to a director who voted in favor
of such action.
Section 11. Committees. By resolution adopted by a majority of all the
directors in office when the action is taken, the board of directors may
designate from among its members an executive committee and one or more other
committees, and appoint one or more members of the board of directors to serve
on them. To the extent provided in the resolution, each committee shall have all
the authority of the board of directors, except that no such committee shall
have the authority to (i) authorize distributions, (ii) approve or propose to
- 10 -
<PAGE>
shareholders actions or proposals required by the Colorado Business Corporation
Act to be approved by shareholders, (iii) fill vacancies on the board of
directors or any committee thereof, (iv) amend articles of incorporation, (v)
adopt, amend or repeal the bylaws, (vi) approve a plan of merger not requiring
shareholder approval, (vii) authorize or approve the reacquisition of shares
unless pursuant to a formula or method prescribed by the board of directors, or
(viii) authorize or approve the issuance or sale of shares, or contract for the
sale of shares or determine the designations and relative rights, preferences
and limitations of a class or series of shares, except that the board of
directors may authorize a committee or officer to do so within limits
specifically prescribed by the board of directors. The committee shall then have
full power within the limits set by the board of directors to adopt any final
resolution setting forth all preferences, limitations and relative rights of
such class or series and to authorize an amendment of the articles of
incorporation stating the preferences, limitations and relative rights of a
class or series for filing with the Secretary of State under the Colorado
Business Corporation Act.
Sections 4, 5, 6, 7, 8 and 12 of Article III, which govern meetings,
notice, waiver of notice, quorum, voting requirements and action without a
meeting of the board of directors, shall apply to committees and their members
appointed under this Section 11.
Neither the designation of any such committee, the delegation of authority
to such committee, nor any action by such committee pursuant to its authority
shall alone constitute compliance by any member of the board of directors or a
member of the committee in question with his responsibility to conform to the
standard of care set forth in Article III, Section 14 of these bylaws.
Section 12. Informal Action by Directors. Any action required or permitted
to be taken at a meeting of the directors or any committee designated by the
board of directors may be taken without a meeting if a written consent (or
counterparts thereof) that sets forth the action so taken is signed by all of
the directors entitled to vote with respect to the action taken. Such consent
shall have the same force and effect as a unanimous vote of the directors or
committee members and may be stated as such in any document. Unless the consent
specifies a different effective date, action taken under this Section 12 is
effective at the time the last director signs a writing describing the action
taken, unless, before such time, any director has revoked his consent by a
writing signed by the director and received by the president or the secretary of
the corporation.
Section 13. Telephonic Meetings. The board of directors may permit any
director (or any member of a committee designated by the board) to participate
in a regular or special meeting of the board of directors or a committee thereof
through the use of any means of communication by which all directors
participating in the meeting can hear each other during the meeting. A director
participating in a meeting in this manner is deemed to be present in person at
the meeting.
Section 14. Standard of Care. A director shall perform his duties as a
director, including without limitation his duties as a member of any committee
of the board, in good faith, in a manner he reasonably believes to be in the
best interests of the corporation, and with the care an ordinarily prudent
person in a like position would exercise under similar circumstances. In
- 11 -
<PAGE>
performing his duties, a director shall be entitled to rely on information,
opinions, reports or statements, including financial statements and other
financial data, in each case prepared or presented by the persons herein
designated. However, he shall not be considered to be acting in good faith if he
has knowledge concerning the matter in question that would cause such reliance
to be unwarranted. A director shall not be liable to the corporation or its
shareholders for any action he takes or omits to take as a director if, in
connection with such action or omission, he performs his duties in compliance
with this Section 14.
The designated persons on whom a director is entitled to rely are (i) one
or more officers or employees of the corporation whom the director reasonably
believes to be reliable and competent in the matters presented, (ii) legal
counsel, public accountant, or other person as to matters which the director
reasonably believes to be within such person's professional or expert
competence, or (iii) a committee of the board of directors on which the director
does not serve if the director reasonably believes the committee merits
confidence.
ARTICLE III
Officers and Agents
Section 1. General. The officers of the corporation shall be a president, a
secretary and a treasurer, each of whom shall be a natural person eighteen years
of age or older. The board of directors or an officer or officers authorized by
the board may appoint such other officers, assistant officers, committees and
agents, assistant secretaries and assistant treasurers, as they may consider
necessary. The board of directors or the officer or officers authorized by the
board shall from time to time determine the procedure for the appointment of
officers, their term of office, their authority and duties and their
compensation. One person may hold more than one office. In all cases where the
duties of any officer, agent or employee are not prescribed by the bylaws or by
the board of directors, such officer, agent or employee shall follow the orders
and instructions of the president of the corporation.
Section 2. Appointment and Term of Office. The officers of the corporation
shall be appointed by the board of directors at each annual meeting of the board
held after each annual meeting of the shareholders. If the appointment of
officers is not made at such meeting or if an officer or officers are to be
appointed by another officer or officers of the corporation, such appointments
shall be made as soon thereafter as conveniently may be. Each officer shall hold
office until the first of the following occurs: his successor shall have been
duly appointed and qualified, his death, his resignation, or his removal in the
manner provided in Section 3.
Section 3. Resignation and Removal. An officer may resign at any time by
giving written notice of resignation to the corporation. The resignation is
effective when the notice is received by the corporation unless the notice
specifies a later effective date.
- 12 -
<PAGE>
Any officer or agent may be removed at any time with or without cause by
the board of directors or an officer or officers authorized by the board or by
the shareholders. Such removal does not affect the contract rights, if any, of
the corporation or of the person so removed. The appointment of an officer or
agent shall not in itself create contract rights.
Section 4. Vacancies. A vacancy in any office, however occurring, may be
filled by the board of directors, or by the officer or officers authorized by
the board, for the unexpired portion of the officer's term. If an officer
resigns and his resignation is made effective at a later date, the board of
directors, or officer or officers authorized by the board, may permit the
officer to remain in office until the effective date and may fill the pending
vacancy before the effective date if the board of directors or officer or
officers authorized by the board provide that the successor shall not take
office until the effective date. In the alternative, the board of directors, or
officer or officers authorized by the board of directors, may remove the officer
at any time before the effective date and may fill the resulting vacancy.
Section 5. Chairman of the Board. The chairman of the board of directors,
if elected and if available, or if not elected or not available, the president,
shall preside at all meetings of the stockholders and of the board of directors.
Section 6. President. Subject to the direction and supervision of the board
of directors, the president shall have general and active control of the
corporation's affairs and business and general supervision of its officers,
agents and employees. Unless otherwise directed by the board of directors, the
president shall attend in person or by substitute appointed by him, or shall
execute on behalf of the corporation written instruments appointing a proxy or
proxies to represent the corporation, at all meetings of the stockholders of any
other corporation in which the corporation holds any stock. On behalf of the
corporation, the president may in person or by substitute or by proxy execute
written waivers of notice and consents with respect to any such meetings. At all
such meetings and otherwise, the president, in person or by substitute or proxy,
may vote the stock held by the corporation, execute written consents and other
instruments with respect to such stock, and exercise any and all rights and
powers incident to the ownership of said stock, subject to the instructions, if
any, of the board of directors. The president shall have custody of the
treasurer's bond, if any.
Section 7. Vice Presidents. If elected, the vice presidents shall assist
the chairman of the board and the president and shall perform such duties as may
be assigned to them by the chairman of the board and the president or by the
board of directors. In the absence of the chairman of the board and the
president, the vice president, if any (or, if more than one, the vice presidents
in the order designated by the board of directors, or if the board makes no such
designation, then the vice president designated by the chairman of the board or
by the president, or if neither the board, the chairman of the board nor the
president makes any such designation, the senior vice president as determined by
first election to that office), shall have the powers and perform the duties of
the chairman of the board and the president.
Section 8. Secretary. The secretary shall (i) prepare and maintain as
permanent records the minutes of the proceedings of the shareholders and the
board of directors, a record of all actions taken by the shareholders or board
- 13 -
<PAGE>
of directors without a meeting, a record of all actions taken by a committee of
the board of directors in place of the board of directors on behalf of the
corporation, and a record of all waivers of notice of meetings of shareholders
and of the board of directors or any committee thereof, (ii) see that all
notices are duly given in accordance with the provisions of these bylaws and as
required by law, (iii) serve as custodian of the corporate records and of the
seal of the corporation and affix the seal to all documents when authorized by
the board of directors, (iv) keep at the corporation's registered office or
principal place of business a record containing the names and addresses of all
shareholders in a form that permits preparation of a list of shareholders
arranged by voting group and by class or series of shares within each voting
group, that is alphabetical within each class or series and that shows the
address of, and the number of shares of each class or series held by, each
shareholder, unless such a record shall be kept at the office of the
corporation's transfer agent or registrar, (v) maintain at the corporation's
principal office the originals or copies of the corporation's articles of
incorporation, bylaws, minutes of all shareholders' meetings and records of all
action taken by shareholders without a meeting for the past three years, all
written communications within the past three years to shareholders as a group or
to the holders of any class or series of shares as a group, a list of the names
and business addresses of the current directors and officers, a copy of the
corporation's most recent corporate report filed with the Secretary of State,
and financial statements showing in reasonable detail the corporation's assets
and liabilities and results of operations for the last three years, (vi) have
general charge of the stock transfer books of the corporation, unless the
corporation has a transfer agent, (vii) authenticate records of the corporation,
and (viii) in general, perform all duties incident to the office of secretary
and such other duties as from time to time may be assigned to him by the
president or by the board of directors. Assistant secretaries, if any, shall
have the same duties and powers, subject to supervision by the secretary. The
directors and/or shareholders may however respectively designate a person other
than the secretary or assistant secretary to keep the minutes of their
respective meetings.
Any books, records, or minutes of the corporation may be in written form or
in any form capable of being converted into written form within a reasonable
time.
Section 9. Treasurer. The treasurer shall be the principal financial
officer of the corporation, shall have the care and custody of all funds,
securities, evidences of indebtedness and other personal property of the
corporation and shall deposit the same in accordance with the instructions of
the board of directors. He shall receive and give receipts and acquittances for
money paid in on account of the corporation, and shall pay out of the
corporation's funds on hand all bills, payrolls and other just debts of the
corporation of whatever nature upon maturity. He shall perform all other duties
incident to the office of the treasurer and, upon request of the board, shall
make such reports to it as may be required at any time. He shall, if required by
the board, give the corporation a bond in such sums and with such sureties as
shall be satisfactory to the board, conditioned upon the faithful performance of
his duties and for the restoration to the corporation of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the corporation. He shall have such other powers and
perform such other duties as may from time to time be prescribed by the board of
directors or the president. The assistant treasurers, if any, shall have the
same powers and duties, subject to the supervision of the treasurer.
- 14 -
<PAGE>
The treasurer shall also be the principal accounting officer of the
corporation. He shall prescribe and maintain the methods and systems of
accounting to be followed, keep complete books and records of account as
required by the Colorado Business Corporation Act, prepare and file all local,
state and federal tax returns, prescribe and maintain an adequate system of
internal audit and prepare and furnish to the president and the board of
directors statements of account showing the financial position of the
corporation and the results of its operations.
ARTICLE IV
Stock
Section 1. Certificates. The board of directors shall be authorized to
issue any of its classes of shares with or without certificates. The fact that
the shares are not represented by certificates shall have no effect on the
rights and obligations of shareholders. If the shares are represented by
certificates, such shares shall be represented by consecutively numbered
certificates signed, either manually or by facsimile, in the name of the
corporation by the president and secretary or by one or more other persons
designated by the board of directors. In case any officer who has signed or
whose facsimile signature has been placed upon such certificate shall have
ceased to be such officer before such certificate is issued, such certificate
may nonetheless be issued by the corporation with the same effect as if he were
such officer at the date of its issue. Certificates of stock shall be in such
form and shall contain such information consistent with law as shall be
prescribed by the board of directors. If shares are not represented by
certificates, within a reasonable time following the issue or transfer of such
shares, the corporation shall send the shareholder a complete written statement
of all of the information required to be provided to holders of uncertificated
shares by the Colorado Business Corporation Act.
Section 2. Consideration for Shares. Certificated or uncertificated shares
shall not be issued until the shares represented thereby are fully paid. The
board of directors may authorize the issuance of shares for consideration
consisting of any tangible or intangible property or benefit to the corporation,
including cash, promissory notes, services performed or other securities of the
corporation. Future services shall not constitute payment or partial payment for
shares of the corporation. The promissory note of a subscriber or an affiliate
of a subscriber shall not constitute payment or partial payment for shares of
the corporation unless the note is negotiable and is secured by collateral,
other than the shares being purchased, having a fair market value at least equal
to the principal amount of the note. For purposes of this Section 2, "promissory
note" means a negotiable instrument on which there is an obligation to pay
independent of collateral and does not include a non-recourse note.
- 15 -
<PAGE>
Section 3. Lost Certificates. In case of the alleged loss, destruction or
mutilation of a certificate of stock, the board of directors may direct the
issuance of a new certificate in lieu thereof upon such terms and conditions in
conformity with law as the board may prescribe. The board of directors may in
its discretion require an affidavit of lost certificate and/or a bond in such
form and amount and with such surety as it may determine before issuing a new
certificate.
Section 4. Transfer of Shares. Upon surrender to the corporation or to a
transfer agent of the corporation of a certificate of stock duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, and receipt of such documentary stamps as may be required by law and
evidence of compliance with all applicable securities laws and other
restrictions, the corporation shall issue a new certificate to the person
entitled thereto, and cancel the old certificate. Every such transfer of stock
shall be entered on the stock books of the corporation which shall be kept at
its principal office or by the person and the place designated by the board of
directors.
Except as otherwise expressly provided in Article II, Sections 7 and 11,
and except for the assertion of dissenters' rights to the extent provided in
Article 113 of the Colorado Business Corporation Act, the corporation shall be
entitled to treat the registered holder of any shares of the corporation as the
owner thereof for all purposes, and the corporation shall not be bound to
recognize any equitable or other claim to, or interest in, such shares or rights
deriving from such shares on the part of any person other than the registered
holder, including without limitation any purchaser, assignee or transferee of
such shares or rights deriving from such shares, unless and until such other
person becomes the registered holder of such shares, whether or not the
corporation shall have either actual or constructive notice of the claimed
interest of such other person.
Section 5. Transfer Agent, Registrars and Paying Agents. The board may at
its discretion appoint one or more transfer agents, registrars and agents for
making payment upon any class of stock, bond, debenture or other security of the
corporation. Such agents and registrars may be located either within or outside
Colorado. They shall have such rights and duties and shall be entitled to such
compensation as may be agreed.
ARTICLE V
Indemnification of Certain Persons
Section 1. Indemnification. For purposes of Article VI, a "Proper Person"
means any person who was or is a party or is threatened to be made a party to
any threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, and whether formal or informal, by
reason of the fact that he is or was a director, officer, employee, fiduciary or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, partner, trustee, employee, fiduciary or agent of any
foreign or domestic profit or nonprofit corporation or of any partnership, joint
venture, trust, profit or nonprofit unincorporated association, limited
liability company, or other enterprise or employee benefit plan. The corporation
shall indemnify any Proper Person against reasonably incurred expenses
(including attorneys' fees), judgments, penalties, fines (including any excise
- 16 -
<PAGE>
tax assessed with respect to an employee benefit plan) and amounts paid in
settlement reasonably incurred by him in connection with such action, suit or
proceeding if it is determined by the groups set forth in Section 4 of this
Article that he conducted himself in good faith and that he reasonably believed
(i) in the case of conduct in his official capacity with the corporation, that
his conduct was in the corporation's best interests, or (ii) in all other cases
(except criminal cases), that his conduct was at least not opposed to the
corporation's best interests, or (iii) in the case of any criminal proceeding,
that he had no reasonable cause to believe his conduct was unlawful. A Proper
Person will be deemed to be acting in his official capacity while acting as a
director, officer, employee or agent on behalf of this corporation and not while
acting on this corporation's behalf for some other entity.
No indemnification shall be made under this Article VI to a Proper Person
with respect to any claim, issue or matter in connection with a proceeding by or
in the right of a corporation in which the Proper Person was adjudged liable to
the corporation or in connection with any proceeding charging that the Proper
Person derived an improper personal benefit, whether or not involving action in
an official capacity, in which he was adjudged liable on the basis that he
derived an improper personal benefit. Further, indemnification under this
Section in connection with a proceeding brought by or in the right of the
corporation shall be limited to reasonable expenses, including attorneys' fees,
incurred in connection with the proceeding.
Section 2. Right to Indemnification. The corporation shall indemnify any
Proper Person who was wholly successful, on the merits or otherwise, in defense
of any action, suit, or proceeding as to which he was entitled to
indemnification under Section l of this Article VI against expenses (including
attorneys' fees) reasonably incurred by him in connection with the proceeding
without the necessity of any action by the corporation other than the
determination in good faith that the defense has been wholly successful.
Section 3. Effect of Termination of Action. The termination of any action,
suit or proceeding by judgment, order, settlement or conviction, or upon a plea
of nolo contendere or its equivalent shall not of itself create a presumption
that the person seeking indemnification did not meet the standards of conduct
described in Section l of this Article VI. Entry of a judgment by consent as
part of a settlement shall not be deemed an adjudication of liability, as
described in Section 2 of this Article VI.
Section 4. Groups Authorized to Make Indemnification Determination. Except
where there is a right to indemnification as set forth in Sections 1 or 2 of
this Article or where indemnification is ordered by a court in Section 5, any
indemnification shall be made by the corporation only as authorized in the
specific case upon a determination by a proper group that indemnification of the
Proper Person is permissible under the circumstances because he has met the
applicable standards of conduct set forth in Section l of this Article. This
determination shall be made by the board of directors by a majority vote of
those present at a meeting at which a quorum is present, which quorum shall
consist of directors not parties to the proceeding ("Quorum"). If a Quorum
cannot be obtained, the determination shall be made by a majority vote of a
committee of the board of directors designated by the board, which committee
shall consist of two or more directors not parties to the proceeding, except
that directors who are parties to the proceeding may participate in the
- 17 -
<PAGE>
designation of directors for the committee. If a Quorum of the board of
directors cannot be obtained and the committee cannot be established, or even if
a Quorum is obtained or the committee is designated and a majority of the
directors constituting such Quorum or committee so directs, the determination
shall be made by (i) independent legal counsel selected by a vote of the board
of directors or the committee in the manner specified in this Section 4 or, if a
Quorum of the full board of directors cannot be obtained and a committee cannot
be established, by independent legal counsel selected by a majority vote of the
full board (including directors who are parties to the action) or (ii) a vote of
the shareholders.
Section 5. Court-Ordered Indemnification. Any Proper Person may apply for
indemnification to the court conducting the proceeding or to another court of
competent jurisdiction for mandatory indemnification under Section 2 of this
Article, including indemnification for reasonable expenses incurred to obtain
court-ordered indemnification. If the court determines that such Proper Person
is fairly and reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not he met the standards of conduct set forth in
Section l of this Article or was adjudged liable in the proceeding, the court
may order such indemnification as the court deems proper except that if the
Proper Person has been adjudged liable, indemnification shall be limited to
reasonable expenses incurred in connection with the proceeding and reasonable
expenses incurred to obtain court-ordered indemnification.
Section 6. Advance of Expenses. Reasonable expenses (including attorneys'
fees) incurred in defending an action, suit or proceeding as described in
Section 1 may be paid by the corporation to any Proper Person in advance of the
final disposition of such action, suit or proceeding upon receipt of (i) a
written affirmation of such Proper Person's good faith belief that he has met
the standards of conduct prescribed by Section l of this Article VI, (ii) a
written undertaking, executed personally or on the Proper Person's behalf, to
repay such advances if it is ultimately determined that he did not meet the
prescribed standards of conduct (the undertaking shall be an unlimited general
obligation of the Proper Person but need not be secured and may be accepted
without reference to financial ability to make repayment), and (iii) a
determination is made by the proper group (as described in Section 4 of this
Article VI) that the facts as then known to the group would not preclude
indemnification. Determination and authorization of payments shall be made in
the same manner specified in Section 4 of this Article VI.
Section 7. Witness Expenses. The sections of this Article VI do not limit
the corporation's authority to pay or reimburse expenses incurred by a director
in connection with an appearance as a witness in a proceeding at a time when he
has not been made a named defendant or respondent in the proceeding.
Section 8. Report to Shareholders. Any indemnification of or advance of
expenses to a director in accordance with this Article VI, if arising out of a
proceeding by or on behalf of the corporation, shall be reported in writing to
the shareholders with or before the notice of the next shareholders' meeting. If
- 18 -
<PAGE>
the next shareholder action is taken without a meeting at the instigation of the
board of directors, such notice shall be given to the shareholders at or before
the time the first shareholder signs a writing consenting to such action.
ARTICLE VI
Provision of Insurance
By action of the board of directors, notwithstanding any interest of the
directors in the action, the corporation may purchase and maintain insurance, in
such scope and amounts as the board of directors deems appropriate, on behalf of
any person who is or was a director, officer, employee, fiduciary or agent of
the corporation, or who, while a director, officer, employee, fiduciary or agent
of the corporation, is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, fiduciary or agent of any other
foreign or domestic corporation or of any partnership, joint venture, trust,
profit or nonprofit unincorporated association, limited liability company or
other enterprise or employee benefit plan, against any liability asserted
against, or incurred by, him in that capacity or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under the provisions of Article VI or applicable law. Any
such insurance may be procured from any insurance company designated by the
board of directors of the corporation, whether such insurance company is formed
under the laws of Colorado or any other jurisdiction of the United States or
elsewhere, including any insurance company in which the corporation has an
equity interest or any other interest, through stock ownership or otherwise.
ARTICLE VII
Miscellaneous
Section 1. Seal. The corporate seal of the corporation shall be circular in
form and shall contain the name of the corporation and the words, "Seal,
Colorado."
Section 2. Fiscal Year. The fiscal year of the corporation shall be as
established by the board of directors.
Section 3. Amendments. The board of directors shall have power, to the
maximum extent permitted by the Colorado Business Corporation Act, to make,
amend and repeal the bylaws of the corporation at any regular or special meeting
of the board unless the shareholders, in making, amending or repealing a
particular bylaw, expressly provide that the directors may not amend or repeal
such bylaw. The shareholders also shall have the power to make, amend or repeal
the bylaws of the corporation at any annual meeting or at any special meeting
called for that purpose.
- 19 -
<PAGE>
Section 4. Gender. The masculine gender is used in these bylaws as a matter
of convenience only and shall be interpreted to include the feminine and neuter
genders as the circumstances indicate.
Section 5. Conflicts. In the event of any irreconcilable conflict between
these bylaws and either the corporation's articles of incorporation or
applicable law, the latter shall control.
Section 6. Definitions. Except as otherwise specifically provided in these
bylaws, all terms used in these bylaws shall have the same definition as in the
Colorado Business Corporation Act.
- 20 -
AMENDMENT
TO
PURCHASE AGREEMENT
This Amendment to the Purchase Agreement is made effective this 6th day of
December, 1996, between Chaparral Resources, Inc. ("Chaparral") and Guntekin
Koksal ("Shareholder").
WHEREAS, Chaparral and Shareholder entered into the Purchase Agreement
("Agreement") dated January 12, 1996 for the purchase by Chaparral of certain
shares of Central Asian Petroleum (Guernsey) Limited ["CAP(G)"] stock owned by
Shareholder;
WHEREAS, Chaparral and Shareholder desire to amend the first sentence of
Section 1.c. of the Agreement;
NOW, THEREFORE, Chaparral and Shareholder agree that the first sentence of
Section 1.c. of the Agreement is deleted in its entirety and replaced by the
following revised first sentence for Section 1.c.:
1.c. Following the Closing A, Chaparral paid to Shareholder $306,250
on June 11, 1996 and $175,000 on September 11, 1996. On December 11,
1996 Chaparral shall pay the balance of the September 11, 1996
payment of $131,250 and $68,750 of the $306,250 payment due to
Shareholder. The balance of the December payment of $237,500 will be
paid to Shareholder on the fifth business day following completion of
interim financing by Chaparral, if so directed by Chaparral's Board
of Directors, but in any event no later than March 11, 1997. On March
11, 1997, Chaparral shall pay Shareholder the regular installment of
$306,250 due on that date and additionally, the payment of $237,500
(should said payment still be outstanding as of that date); (each
such payment referred to here as "Installment Payment").
This Amendment may be executed in one or more counterparts each or which
shall be deemed an original, but all of which together shall constitute one and
the same instrument; and shall only be binding upon the full execution by the
parties.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
and year first set forth above.
CHAPARRAL RESOURCES, INC.
/s/Paul V. Hoovler
- ------------------------------------
Paul V. Hoovler, President
SHAREHOLDER
/s/Guntekin Koksal
- ------------------------------------
Guntekin Koksal
SEVERANCE AGREEMENT
This Severance Agreement is entered into as of the 12th day of February, 1997,
by and among Chaparral Resources, Inc. ("Chaparral"), a Colorado corporation,
and Paul V. Hoovler ("Hoovler"). Chaparral and Hoovler are hereinafter jointly
referred to as the Parties.
For good and valuable consideration, including the promises and mutual general
releases contained herein, the Parties hereby agree as follows:
1. Approval and Effective Date This Agreement shall be effective as of February
12, 1997 ("Effective Date") and will become binding on the Parties upon its
ratification and approval by the Chaparral Board of Directors.
2. Salary and Benefits This agreement will be effective as of February 12, 1997.
Hoovler will receive his salary and unpaid vacation pay accrued through February
12, 1997. Hoovler may request that Chaparral transfer to him, in accordance with
the plan's terms, the vested portion of his 401K plan account.
3. Warrants
3.1 On August 19, 1996, the Chaparral Board of Directors awarded Hoovler a
cash bonus of $140,000 as recognition of past and present services to
the company; said bonus to be used by Hoovler to exercise certain
Warrants, granted to Hoovler pursuant to the company's 1989 Stock
Warrant Plan (the "Plan"), to purchase 500,000 shares of Chaparral
common stock at an exercise price of $0.28 per share. This bonus will
not become payable until receipt of notice from Hoovler, which notice
may not be given and shall not be effective until the earlier of a)
completion of a sale or farmout by Chaparral of all or a portion of its
interest in the Karakuduk Oil Field Development Project (the
"Project"), or b) the date when Chaparral makes a public disclosure of
a sale or farmout of the Project. At its sole option and discretion,
Chaparral may, in lieu of making payment of such bonus to Hoovler, use
all or a portion of such bonus as a direct offset to Hoovler's
obligation to make any payment due to Chaparral upon exercise of the
Warrant. Anything contained in the foregoing provisions of this
paragraph to the contrary notwithstanding, in the event Hoovler has
exercised and paid for the Warrant prior to the date the bonus becomes
payable, Chaparral shall pay such bonus directly to Hoovler, but only
upon completion of a sale or farmout of all or a portion of its
interest in the Project,
Chaparral shall use its reasonable best efforts, consistent with its
past policy and practice, to continue to maintain the registration
statement registering the shares underlying the Warrant until the date
that the Warrant is either exercised or expires, whichever shall first
occur; provided, however, that Chaparral shall not be required to take
any action or make any filing with the Securities and Exchange
Commission that, in the sole discretion of the Board of Directors of
Chaparral, is not in the best interest of the company.
<PAGE>
Chaparral shall amend the Plan to permit Hoovler to transfer the
Warrant to a member of his family or to a trust created by Hoovler. For
purposes of this Agreement, the term family shall mean a parent, child,
grandchild or spouse.
3.2 On or before March 15, 1997, Chaparral will cause a certificate to be
delivered to Hoovler representing the warrants to purchase 100,000
shares of Chaparral common stock at an exercise price of $0.85 per
share, for a period of four (4) years from the date of such grant that
were granted to Hoovler on February 12, 1997. The warrant shall be in
form and substance similar in all material respects to the Warrant
issued to Hoovler under the Plan, and shall permit Hoovler to assign
the warrant on terms and conditions similar to those stated in Section
3.1 above. The shares underlying these warrants will be registered by
Chaparral when it next amends its current registration statement.
3.3 On or before March 15, 1997, Chaparral will cause a certificate to be
delivered to Hoovler representing the warrants to purchase 100,000
shares of Chaparral common stock at an exercise price of $1.25 per
share that were granted to Hoovler on February 12, 1997. Such warrants
shall not be exercisable prior to January 1, 1998, and shall remain
exercisable for a period of four (4) years from such date. The warrant
shall be in form and substance similar in all material respects to the
Warrant issued to Hoovler under the Plan, and shall permit Hoovler to
assign the warrant on terms and conditions similar to those stated in
Section 3.1 above.
4. ORRI Chaparral will assign to Hoovler, or to an entity controlled by Hoovler,
the existing ORRI that Chaparral holds in approximately 89 wells. Such
assignment shall be for a three (3) year period, at the end of which Hoovler
will reassign the ORRI to Chaparral. Hoovler agrees to pay ten percent (10%) of
the net revenues received from such ORRI during this three (3) year period to
Jan Podoll, and acknowledges that Chaparral has agreed to such assignment in
reliance upon Hoovler's promise to make such payment.
Hoovler also agrees to execute the reassignment at the same time that the
assignment is entered into, with the understanding that such reassignment will
be held in escrow by Alan D. Berlin, Esq. during the three year term of the
assignment.
5. Road Runner At Hoovler's request, Chaparral will assign its interest in Road
Runner, Ltd .to Hoovler, or to an entity controlled by Hoovler.
6. Insurance Chaparral will assign to Hoovler its ownership interest in two life
insurance policies that it currently holds on Hoovler's life. The Parties
acknowledge that such policies currently have a combined cash surrender value of
approximately $32,000.
-2-
<PAGE>
7. Office Equipment Hoovler understands that Chaparral intends to sell certain
office furniture, equipment and supplies, and that if Hoovler so desires,
Hoovler may bid for these items. Hoovler also understand that the furniture and
equipment presently located in his office will be given to him by Chaparral.
8. Resignation Hoovler will resign, as of the Effective Date, as an officer of
Chaparral and as an officer and director of its subsidiaries and affiliates. A
copy of Hoovler's resignation is attached hereto. Hoovler will continue as a
director of Chaparral until the next annual shareholders meeting.
9. General Release by Hoovler Hoovler, his successors, heirs and assigns (the
"Releasors") fully and forever release and discharge Chaparral, its subsidiaries
and related companies, their officers, directors, employees, shareholders,
agents, representatives, attorneys, accountants, predecessors, successors and
assigns (the "Releasees") from any and all actions, causes of action, suits,
debts, claims, promises and demands, other than those specifically stated in
this Severance Agreement, or any claim by Hoovler for indemnification against
claims of others for actions or matters which occurred while Hoovler was an
officer, director or employee of Chaparral and for which he would have been
entitled to indemnification by Chaparral under Chaparral's Certificate of
Incorporation, By-laws or policies as in effect on February 12, 1997, whether in
law or equity which the Releasors ever had now have or hereafter can, shall or
may have against Releasees, which are based upon or arise out of Hoovler's
employment with Chaparral, including without limitation, his service as a member
of the Board of Directors of Chaparral, as a shareholder of Chaparral, or his
execution of this Severance Agreement, other than any action, claim or
proceeding to enforce his rights under this Severance Agreement.
10. General Release by Chaparral Chaparral, its subsidiaries and related
companies, their officers, directors, employees, shareholders, agents,
representatives, attorneys, accountants, predecessors, successors and assigns
(the "Releasors") fully and forever release and discharge Hoovler, his
successors, heirs or assigns (the "Releasees") from any and all actions, causes
of action, suits, debts, claims, promises and demands, other than those
specifically stated in this Severance Agreement, whether in law or equity which
the Releasors ever had now have or hereafter can, shall or may have against
Releasees, which are based upon or arise out of Hoovler's employment with
Chaparral, including without limitation, his service as a member of the Board of
Directors of Chaparral or as a shareholder of Chaparral.
11. Covenant Not to Sue The Parties agree not to commence, directly or
indirectly cause the commencement of, or cause or attempt to cause any third
party to commence, any suit, arbitration or proceeding to enforce any claim or
other matter released under this Severance Agreement.
12. Severability If any provision of this Agreement or the application thereof
to any Party or circumstance shall be determined by any court of competent
-3-
<PAGE>
jurisdiction to be invalid and unenforceable to any extent, the remainder of
this Agreement or the application of such provision to such Party or
circumstance, other than those as to which it was so determined to be invalid or
unenforceable, shall not be affected thereby, and each provision thereof shall
be valid and shall be enforced to the fullest extent permitted by law.
13 Applicable Law This Agreement shall be construed and enforced in accordance
with the laws of the State of Colorado, without giving effect to the provisions
or principals thereof relating to choice or conflict of laws.
14. Section Headings Section titles and headings are for descriptive purposes
only and shall not control or alter the meaning of this Agreement as set forth
in the text. Reference to the singular includes a reference to the plural and
vice versa. Reference to any gender includes a reference to all other genders.
15. Counterparts This Agreement may be executed in several counterparts, all of
which together shall constitute one agreement binding on all parties hereto
notwithstanding that all the parties have not signed the same counterpart.
IN WITNESS WHEREOF, the Parties have executed this Severance Agreement as of the
date first written above.
CHAPARRAL RESOURCES, INC. PAUL V. HOOVLER
By:/s/Arlo G. Sorensen /s/Paul V. Hoovler
----------------------------------- -----------------------
Arlo G. Sorensen, Chairman
Board of Directors Severance Committee
-4-
SEVERANCE AGREEMENT
This Severance Agreement is entered into as of the 12th day of February, 1997,
by and among Chaparral Resources, Inc. ("Chaparral"), a Colorado corporation,
and Matthew R. Hoovler ("Hoovler"). Chaparral and Hoovler are hereinafter
jointly referred to as the Parties.
For good and valuable consideration, including the promises and mutual general
releases contained herein, the Parties hereby agree as follows:
1. Approval and Effective Date This Agreement shall be effective as of February
12, 1997 ("Effective Date") and will become binding on the Parties upon its
ratification and approval by the Chaparral Board of Directors.
2. Salary and Benefits Hoovler will receive his salary and unpaid vacation pay
accrued through the Effective Date. Hoovler may request that Chaparral transfer
to him, in accordance with the plan's terms, the vested portion of his 401K plan
account .
3. Warrants On August 19, 1996, the Chaparral Board of Directors awarded
Hoovler a cash bonus of $70,000 as recognition of past and present services to
the company; said bonus to be used solely and exclusively by Hoovler to exercise
certain Warrants, granted to Hoovler pursuant to the company's 1989 Stock
Warrant Plan (the "Plan"), to purchase 250,000 shares of Chaparral common stock
at an exercise price of $0.28 per share. This bonus will not become payable
until receipt of notice from Hoovler, which notice may not be given and shall
not be effective until the earlier of a) completion of a sale or farmout by
Chaparral of all or a portion of its interest in the Karakuduk Oil Field
Development Project (the "Project"), or b) the date when Chaparral makes a
public disclosure of a sale or farmout of the Project. At its sole option and
discretion, Chaparral may, in lieu of making payment of such bonus to Hoovler,
use all or a portion of such bonus as a direct offset to Hoovler's obligation to
make any payment due to Chaparral upon exercise of the Warrant. Anything
contained in the foregoing provisions of this paragraph to the contrary
notwithstanding, in the event Hoovler has exercised and paid for the Warrant
prior to the date the bonus becomes payable, Chaparral shall pay such bonus
directly to Hoovler, but only upon completion of a sale or farmout of all or a
portion of its interest in the Project,
Chaparral shall use its reasonable best efforts, consistent with its past policy
and practice, to continue to maintain the registration statement registering the
shares underlying the Warrant until the date that the Warrant is either
exercised or expires, whichever shall first occur; provided, however, that
Chaparral shall not be required to take any action or make any filing with the
Securities and Exchange Commission that, in the sole discretion of the Board of
Directors of Chaparral, is not in the best interest of the company.
<PAGE>
Chaparral shall request the Board of Directors to amend the Plan to permit
Hoovler to transfer the Warrant to a member of his family or to a trust created
by Hoovler. For purposes of this Agreement, the term family shall mean a parent,
child, grandchild or spouse.
4. Office Equipment Hoovler understands that Chaparral intends to sell certain
office furniture, equipment and supplies, and that if Hoovler so desire, Hoovler
may bid for these items. The furniture presently located in Hoovler's office
will be given to Hoovler by Chaparral as well as any of the computers in his
office that Chaparral does not want.
5. Resignation Hoovler will resign, as of the Effective Date, as an officer and
director of Chaparral and its subsidiaries and affiliates. A copy of Hoovler's
resignation is attached hereto.
6. General Release by Hoovler Hoovler, his successors, heirs and assigns (the
"Releasors") fully and forever release and discharge Chaparral, its subsidiaries
and related companies, their officers, directors, employees, shareholders,
agents, representatives, attorneys, accountants, predecessors, successors and
assigns (the "Releasees") from any and all actions, causes of action, suits,
debts, claims, promises and demands, other than those specifically stated in
this Severance Agreement, or any claim by Hoovler for indemnification against
claims of others for actions or matters which occurred while Hoovler was an
officer, director or employee of Chaparral and for which he would have been
entitled to indemnification by Chaparral under Chaparral's Certificate of
Incorporation, By-laws or policies as in effect on February 12, 1997, whether in
law or equity which the Releasors ever had now have or hereafter can, shall or
may have against Releasees, which are based upon or arise out of Hoovler's
employment with Chaparral, including without limitation, his service as a member
of the Board of Directors of Chaparral, as a shareholder of Chaparral, or his
execution of this Severance Agreement, other than any action, claim or
proceeding to enforce his rights under this Severance Agreement.
7. General Release by Chaparral Chaparral, its subsidiaries and related
companies, their officers, directors, employees, shareholders, agents,
representatives, attorneys, accountants, predecessors, successors and assigns
(the "Releasors") fully and forever release and discharge Hoovler, his
successors, heirs or assigns (the "Releasees") from any and all actions, causes
of action, suits, debts, claims, promises and demands, other than those
specifically stated in this Severance Agreement, whether in law or equity which
the Releasors ever had now have or hereafter can, shall or may have against
Releasees, which are based upon or arise out of Hoovler's employment with
Chaparral, including without limitation, his service as a member of the Board of
Directors of Chaparral or as a shareholder of Chaparral.
8. Covenant Not to Sue The Parties agree not to commence, directly or indirectly
cause the commencement of, or cause or attempt to cause any third party to
commence, any suit, arbitration or proceeding to enforce any claim or other
matter released under this Severance Agreement.
-2-
<PAGE>
9 Severability If any provision of this Agreement or the application thereof to
any Party or circumstance shall be determined by any court of competent
jurisdiction to be invalid and unenforceable to any extent, the remainder of
this Agreement or the application of such provision to such Party or
circumstance, other than those as to which it was so determined to be invalid or
unenforceable, shall not be affected thereby, and each provision thereof shall
be valid and shall be enforced to the fullest extent permitted by law.
10. Applicable Law This Agreement shall be construed and enforced in accordance
with the laws of the State of Colorado, without giving effect to the provisions
or principals thereof relating to choice or conflict of laws.
11. Section Headings Section titles and headings are for descriptive purposes
only and shall not control or alter the meaning of this Agreement as set forth
in the text. Reference to the singular includes a reference to the plural and
vice versa. Reference to any gender includes a reference to all other genders.
12. Counterparts This Agreement may be executed in several counterparts, all of
which together shall constitute one agreement binding on all parties hereto
notwithstanding that all the parties have not signed the same counterpart.
IN WITNESS WHEREOF, the Parties have executed this Severance Agreement as of the
date first written above.
CHAPARRAL RESOURCES, INC. MATTHEW R. HOOVLER
By:/s/Arlo G. Sorensen /s/Matthew R. Hoovler
----------------------------------- --------------------------
Arlo G. Sorensen, Chairman
Board of Directors Severance Committee
-3-
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement (the "Agreement"), effective 7:00 a.m., M.S.T.,
January 1, 1997 (the "Effective Date"), is between CHAPARRAL RESOURCES, INC. a
Colorado corporation, (hereinafter collectively referred to as "SELLER"), and
CONOCO INC., a Delaware corporation ("BUYER").
RECITALS:
SELLER owns certain oil and gas properties located in Rio Blanco County,
Colorado, and related contractual rights and desires to sell these properties
and transfer these contractual rights.
BUYER desires to purchase these properties from SELLER and acquire these
contractual rights.
Accordingly, in consideration of the mutual promises contained in this
Agreement, BUYER and SELLER agree as follows:
ARTICLE 1. PURCHASE AND SALE
1.1 The Property. Subject to the terms of this Agreement, SELLER agrees to sell
and assign to BUYER and BUYER agrees to purchase and acquire from SELLER all of
SELLER's right and title to, and interest in, the following (collectively the
"Property"):
1.1.1 The oil, gas and mineral lease(s) and other interests in oil and
gas described in Exhibit A and all rights, privileges and obligations
appurtenant to the leases INSOFAR AND ONLY INSOFAR AS the leases cover
and include the lands, depths and rights described in Exhibit A
("Leases");
1.1.2 All rights in any unit in which the Leases are included, to the
extent that these rights arise from and are associated with the Leases,
including without limitation all rights derived from any unitization,
pooling, operating, communitization or other agreement or from any
declaration or order of any governmental authority;
1.1.3 All of SELLER'S rights and interests in and to producing,
non-producing, shut-in, and abandoned oil, gas and condensate wells,
water source, water injection and other injection or disposal wells and
associated facilities located on the Leases or lands unitized or pooled
with the Leases;
1.1.4 All equipment, facilities and other personal property on the
Leases used in developing or operating the Leases or producing,
treating, storing, gathering, compressing, processing or transporting
hydrocarbons on or from the Leases.;
1.1.5 All easements, rights-of-way, licenses, permits, servitudes and
similar interests applicable to or used in operating the Leases or the
personal property described above;
1.1.6 All contracts and contractual rights, obligations and interests
relating to the Leases, including without limitation unit agreements,
farmout agreements, farmin agreements, operating agreements, and
hydrocarbon sales, purchase, gathering, transportation, treating,
marketing, exchange, processing and fractionating agreements ("Related
Contracts"), including without limitation those Related Contracts
described in Exhibit A; and
1.2 Exclusions. The Property sold and assigned under this Agreement does not
include:
1.2.1 SELLER's intellectual property used in developing or operating
the Property, including without limitation proprietary computer
software, patents, trade secrets, copyrights, names, marks and logos,
all of which SELLER will remove before or as soon as possible after
Closing;
1.2.2 Trade credits, accounts and notes receivable, and adjustments or
refunds (including without limitation transportation tariff refunds,
take-or-pay claims, and audit adjustments) attributable to the Property
with respect to any period before the Effective Date;
1
<PAGE>
1.3 Ownership of Production from the Property.
1.3.1 Production Before the Effective Date. SELLER owns all
merchantable oil, gas, condensate and distillate ("Hydrocarbons")
produced from the Property before the Effective Date. If Hydrocarbons
produced from the Property before the Effective Date are stored in the
Lease stock tanks on the Effective Date ("Stock Tank Oil"), BUYER shall
purchase the Stock Tank Oil above pipeline connections in the stock
tanks from SELLER at the prevailing market value in the area, adjusted
for grade and gravity and less taxes. BUYER will pay SELLER for the
Stock Tank Oil by upward adjustment to the Purchase Price, as provided
in Section 6.5.3.1. SELLER and BUYER shall accept the Lease operator's
tank gauge readings or other inventory records of the Stock Tank Oil.
1.3.2 Production After the Effective Date. BUYER owns all Hydrocarbons
produced from the Property on and after the Effective Date. SELLER will
sell on BUYER's behalf all Hydrocarbons produced from the Property
between the Effective Date and the Closing Date. SELLER will credit
BUYER for the proceeds of these sales as a downward adjustment to the
Purchase Price, as provided in Section 6.5.3.2. Subject to any
continuing sale obligations under the Related Contracts, BUYER may sell
Hydrocarbons produced from the Property on and after the Closing Date
as it deems appropriate.
ARTICLE 2. PURCHASE PRICE
2.1 Purchase Price. BUYER shall pay SELLER a purchase price for the Property of
$270,000 ("Purchase Price"), allocated $27,000 to depreciable assets and
$243,000 to nondepreciable assets, subject to any adjustments to the Purchase
Price made at Closing or in the post-closing final settlement.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES
3.1 Reciprocal Representations and Warranties. SELLER and BUYER each represent
and warrant to the other that as of the Effective Date and the Closing Date:
3.1.1 Corporate Authority. It is a corporation duly organized and in
good standing under the laws of its state of incorporation, is duly
qualified to carry on its business in the state where the Property is
located, and has all the requisite power and authority to enter into
and perform this Agreement.
3.1.2 Requisite Approvals. It has taken all necessary actions pursuant
to its Articles of Incorporation, By-laws and other governing documents
to fully authorize it to consummate the transaction contemplated by
this Agreement.
3.1.3 Validity of Obligation. This Agreement and all documents it is to
execute and deliver on or before the Closing Date have been duly
executed by its appropriate officials and constitute valid and legally
binding obligations, enforceable against it in accordance with the
terms of this Agreement and such documents.
3.1.4 Impediments to Consummation of Agreement. Its executing,
delivering and performing this Agreement does not conflict with or
violate any agreement or instrument to which it is a party, or any law,
rule, regulation, ordinance, judgment, decree or order to which it is
subject.
3.1.5 Bankruptcy. There are no bankruptcy, reorganization or
receivership proceedings pending, being contemplated by, or to its
actual knowledge, threatened against it.
3.2 BUYER's Representations and Warranties. BUYER represents and warrants to
SELLER that as of the Effective Date and the Closing Date:
3.2.1 Independent Evaluation. BUYER is an experienced and knowledgeable
investor in the oil and gas business. BUYER has been advised by and
has relied solely on its own expertise and legal, tax, reservoir
engineering and other professional counsel concerning this
transaction.
3.2.2 Qualification. BUYER is now or at Closing will be, and thereafter
will continue to be, qualified to own and operate federal and State of
Colorado oil, gas and mineral leases, including meeting all bonding
requirements.
2
<PAGE>
Consummating the transaction contemplated in this Agreement will not
cause BUYER to be disqualified or to exceed any acreage limitation
imposed by law, statute or regulation.
3.2.3 Securities Laws. BUYER has complied with all federal and state
securities laws applicable to the sale of the Property and will comply
with such laws if it subsequently disposes of all or any part of the
Property.
3.3 SELLER's Representations and Warranties. SELLER represents and warrants to
BUYER that as of the Effective Date and the Closing Date:
3.3.1 Lawsuits and Claims. SELLER has not been notified of any action,
suit, proceeding, claim or investigation by any person, entity,
administrative agency or governmental body pending or threatened in
writing against SELLER that may adversely affect title to any of the
Property or the value thereof or otherwise hinder operations on the
Property and, to the best of SELLER's knowledge, there is no reasonable
basis for any such action, suit, proceeding, claim or investigation.
3.3.2 Environmental Proceedings. SELLER has not been notified that the
Property is the subject of any pending environmental enforcement
proceeding, investigation, inquiry or claim of noncompliance by any
governmental agency or private party and, except as disclosed to BUYER
in writing, there is no reasonable basis to the best of SELLER's
knowledge, for any such proceeding, investigation, inquiry or claim.
3.3.3 Leases and Contracts. The Leases and Related Contracts are in
full force and effect, and SELLER has made all payments (including
royalties, minimum royalties, delay rentals and shut-in payments) due
thereunder or required to be made to maintain the leases and other
agreements in effect. To the best of SELLER's knowledge, all unrecorded
agreements to which the Property is subject are described in Exhibit A.
3.3.4 Sales Agreements. Crude oil , condensate, and/or natural gas
production from the Property is not subject to any sale or exchange
contracts or arrangements, a "take or pay" arrangement, production
payment or any other arrangement to deliver hydrocarbons that cannot be
terminated at any time after the Effective Date, without breach or
penalty, upon 60 days' notice. SELLER further represents that
production from the Property is not subject to any call on production
or preferential right to purchase the production by any party.
3.3.5 Adverse Changes. To the best of SELLER's knowledge, since the
Effective Date, there has been no material adverse change in the
physical condition of, or title to the Property, except depletion
through normal production, and depreciation of equipment through
ordinary wear and tear.
3.4 Notice. SELLER and BUYER shall each give the other prompt written notice of
any matter materially affecting any of its representations or warranties under
this Article 3 or rendering any such warranty or representation untrue.
ARTICLE 4. WARRANTIES
4.1 Title and Encumbrances. SELLER SELLS AND TRANSFERS THE PROPERTY TO BUYER
SUBJECT TO ALL ROYALTIES, OVERRIDING ROYALTIES, BURDENS AND ENCUMBRANCES, AND
WITHOUT WARRANTY OF TITLE, EXPRESS, STATUTORY, OR IMPLIED, PROVIDED, HOWEVER,
SELLER SHALL AGREE TO DEFEND THE TITLE TO THE PROPERTY AGAINST THE LAWFUL CLAIMS
AND DEMANDS OF ALL PERSONS OR ENTITIES CLAIMING THE SAME OR ANY PART THEREOF BY,
THROUGH OR UNDER SELLER, BUT NOT OTHERWISE.
4.2 Information About the Property. SELLER MAKES NO WARRANTY OR REPRESENTATION,
EXPRESS, STATUTORY OR IMPLIED, AS TO (i) THE ACCURACY, COMPLETENESS, OR
MATERIALITY OF ANY DATA, INFORMATION OR RECORDS FURNISHED TO BUYER IN CONNECTION
WITH THE PROPERTY; (ii) THE QUALITY AND QUANTITY OF HYDROCARBON RESERVES (IF
ANY) ATTRIBUTABLE TO THE PROPERTY; (iii) THE ABILITY OF THE PROPERTY TO PRODUCE
HYDROCARBONS, INCLUDING WITHOUT LIMITATION PRODUCTION RATES, DECLINE RATES AND
RECOMPLETION OPPORTUNITIES; (iv) ALLOWABLES OR OTHER REGULATORY MATTERS, OR (v)
THE PRESENT OR FUTURE VALUE OF THE ANTICIPATED INCOME, COSTS OR PROFITS, IF ANY,
TO BE DERIVED FROM THE PROPERTY. ANY AND ALL DATA, INFORMATION OR OTHER RECORDS
FURNISHED BY SELLER ARE PROVIDED TO BUYER AS A CONVENIENCE AND BUYER'S RELIANCE
ON OR USE OF THE SAME IS AT BUYER'S SOLE RISK.
3
<PAGE>
ARTICLE 5. TITLE EXAMINATION AND PHYSICAL INSPECTION
5.1 Information and Access. Prior to Closing, to allow BUYER to confirm SELLER's
title to the Property, SELLER shall give BUYER and BUYER's authorized
representatives, during normal business hours, the right to examine all
contract, land and lease records, to the extent such data and records are in
SELLER's possession and relate to the Property. BUYER may photocopy such records
at its sole expense. BUYER shall keep confidential all information made
available to BUYER until Closing.
5.2 Preferential Rights and Consents to Assign.
5.2.1 If any of the Property is subject to preferential purchase
rights, rights of first refusal, or similar rights (collectively, "Preferential
Rights"), or consents to assign, lessor's approvals or similar rights
(collectively, "Consents"), SELLER shall (i) notify the holders of the
Preferential Rights and Consents that it intends to sell the Property to BUYER,
(ii) provide them with any information about the sale of the Property to which
they are entitled, and (iii) in the case of Consents, ask the holders of the
Consents to consent to the assignment of the affected Property to BUYER. SELLER
shall promptly notify BUYER whether Preferential Rights are exercised, waived or
deemed waived, or if any Consents are denied. SELLER will not be liable to BUYER
if any Preferential Rights are exercised, or any Consents are denied.
5.2.2. If SELLER is unable before Closing to obtain the required
Consents (other than Consents ordinarily obtained after Closing) and waivers of
all Preferential Rights, at the option of the BUYER, that portion of the
Property affected by the unwaived Preferential Rights or Consents will be
excluded from the transaction under this Agreement, and the Purchase Price will
be adjusted by the Allocated Value of the affected Property listed in Exhibit
"D" to this Agreement (the "Allocated Value"), and proceed with Closing.
5.3 Title Pending Governmental Consents. Until SELLER and BUYER obtain federal
and state approval of the sale and assignment of Leases requiring such approval,
SELLER will continue to hold record title to such Leases as nominee for BUYER.
Until the required approvals are obtained, SELLER will act only upon and in
accordance with BUYER's specific written instructions and will have no
authority, responsibility or discretion to perform any tasks with respect to
such Leases other than purely administrative or ministerial tasks, unless
otherwise specifically requested and authorized by BUYER in writing. If any
required approval is finally denied, SELLER shall refund to BUYER the Allocated
Value of the Leases and other Property affected and BUYER shall immediately
reassign such Leases and other Property to SELLER.
5.4 Title Defects
5.4.1 BUYER will review title to the Property prior to Closing and
notify SELLER in writing of any title defect it discovers as soon a reasonably
practicable after its discovery, but in no event less than three business days
prior to the Closing Date. BUYER will be deemed to have conclusively waived any
title defect about which it fails to notify SELLER in writing at least three
business days prior to the Closing Date.
5.4.2 If BUYER properly notifies SELLER of any title defect, BUYER
shall have the option to either (i) waive the title defect and close,
(ii) request SELLER to cure the title defect, but SELLER will have no
obligation to cure any title defects in the Property, or (iii) if
SELLER declines to cure a material title defect, exclude the portion of
the Property affected by the title defect from the transaction under
this Agreement, in which case the Purchase Price will be reduced by the
Allocated Value of the excluded Property. If BUYER asks SELLER to cure
a material title defect, and SELLER agrees to attempt to cure the title
defect, SELLER will have 180 days after the Closing Date to correct the
title defect. With respect to all material title defects that SELLER
fails to cure by 180 days after the Closing Date, BUYER may rescind its
purchase of that portion of the Property affected by those title
defects, after which SELLER shall refund the Allocated Value of the
affected Property to BUYER, and BUYER (at SELLER's sole option) shall
immediately reassign the affected Property to SELLER.
5.5 Inspection; Assumption of Risk. Promptly after the execution of this
Agreement and until Closing, SELLER, at times approved by SELLER, shall allow
BUYER and its representatives, at their sole risk and expense, to conduct
reasonable inspections of the Property.
4
<PAGE>
ARTICLE 6. CLOSING AND FINAL SETTLEMENT
6.1 Closing Date. Unless BUYER and SELLER otherwise agree, the closing of this
purchase and sale ("Closing") will occur on or before February 28, 1997 (the
actual date on which Closing occurs being the "Closing Date") in SELLER's
offices in Denver, Colorado. If SELLER and BUYER agree to close the purchase and
sale of the Property by mail rather than in person, the Closing Date of this
purchase and sale will be the date on which SELLER receives payment of the
Purchase Price.
6.2 Conditions to Closing. BUYER or SELLER are not obligated to close the
transaction that is the subject of this Agreement if:
6.2.1 Any matter represented or warranted by the other party in this
Agreement is not true, or is misleading in any material respect, as of
the Closing Date or any obligation of the other party before the
Closing Date is not satisfied on the Closing Date.
6.2.2 Any suit or other proceeding is pending or threatened before any
court or governmental agency seeking to restrain, prohibit, or declare
illegal, or seeking substantial damages in connection with, the
transaction that is the subject of this Agreement, or there is
reasonable basis for any such suit or other proceeding.
6.2.3 Any necessary waivers of Preferential Rights and Consents (other
than Consents typically obtained after Closing) have not been secured.
6.3 Preliminary Settlement. At Closing, BUYER and SELLER shall execute a
settlement statement (the "Preliminary Settlement Statement") prepared by
SELLER, subject to the approval of BUYER, which shall set forth adjustments (as
set forth in this paragraph) to the Purchase Price to be paid by BUYER at
Closing. At least three days prior to Closing, SELLER agrees to furnish BUYER
the Preliminary Settlement Statement for BUYER's review.
6.3.1 Increase to Purchase Price. The Purchase Price to be paid by
BUYER to SELLER at Closing shall be increased by:
(i) The amount of lease operating expenses which accrued to the
Property from operations, and under the Joint Operating Agreement subsequent to
the Effective Date and which have been paid by SELLER.
(ii) An amount equal to the market value of the Stock Tank Oil above
the pipeline connection as measured on the Effective Date.
(iii) An amount equal to the estimated value of underproduced oil
and/or gas production from the Property on the Effective Date.
6.3.2 Decrease Purchase Price. The Purchase Price to be paid by BUYER
to SELLER shall be decreased by:
(i) The amount of capital expenditures (including without limitation,
drilling costs, completion costs, equipment, and construction costs) and lease
operating expenses which accrued to the Property prior to the Effective Date
which have not been paid by SELLER.
(ii) An amount equal to all estimated and unpaid ad valorem, property,
production, severance and similar taxes and assessments based upon or measured
by the ownership of the Property or the production of hydrocarbons or the
receipt of proceeds therefrom accruing to the Property prior to the Effective
Date.
(iii) An amount equal to the Allocated Value for that portion of the
Property not conveyed as a result of the exercising of Preferential Rights or
denial of Consents to Assign pursuant to Section 5.2.
(iv) An amount equal to any title defects as set forth in Section 5.4.
(v) An amount equal to the estimated value of overproduced oil and/or
gas production from the Property on the Effective Date;
5
<PAGE>
6.4 Closing. SELLER and BUYER have the following obligations at Closing:
6.4.1 SELLER's Obligations. At Closing, SELLER shall deliver to BUYER:
(i) An executed and acknowledged Assignment and Bill of
Sale (in sufficient counterparts for recording) in
the form of Exhibit B (the "Assignment and Bill of
Sale"); and
(ii) Any other appropriate instruments necessary to effect
or support the transaction contemplated in this
Agreement, including, without limitation, any lease
assignment forms or other forms or filings required
by federal or state agencies to transfer ownership of
the Property.
6.4.2 BUYER's Obligations. At Closing, BUYER shall:
(i) Pay SELLER the Purchase Price, as adjusted under
Section 6.3, either by cashier's check or wire
transfer of immediately available funds into an
account designated by SELLER in accordance with
SELLER's instructions;
(ii) Furnish fully executed change of operator notices,
which BUYER shall file with the appropriate
regulatory authorities, if BUYER becomes operator;
and
(iii) Any ratification and joinder instruments required to
transfer the SELLER's rights, obligations and
interests in the Related Contracts and other
Property.
6.5 Post-Closing Obligations. SELLER and BUYER have the following post-closing
obligations:
6.5.1 Property Records. At or as soon as possible after Closing, SELLER
shall deliver to BUYER the originals of all lease, contract or well
records (excluding any internal valuation or interpretive data or
documentation) relating to the Property (the "Property Records"), at a
location designated by BUYER.
6.5.2 Recording and Filing. BUYER, within a reasonable time after
Closing, shall (i) record the Assignment and Bill of Sale and all other
instruments that must be recorded to effectuate the transfer of the
Property; and (ii) file for approval with the applicable government
agencies all state and federal transfer and assignment documents for
the Property. BUYER shall provide SELLER a recorded copy of the
Assignment and Bill of Sale and other recorded instruments, and
approved copies of the state and federal transfer and assignment
documents as soon as they are available.
6.5.3 Settlement Statement. SELLER shall use its best efforts to
deliver to BUYER, within 90 days after the Closing Date, a final
settlement statement that will adjust the Purchase Price as follows;
however, SELLER's failure to deliver the final settlement statement
within 90 days will not constitute a waiver of any right to an
adjustment otherwise due.
6.5.3.1 The Purchase Price will be adjusted upward by the amount
of:
(i) All actual production expenses, operating
expenses, overhead under the applicable
operating agreements, and capital
expenditures (including without limitation
royalties, minimum royalties, rentals, and
prepaid charges) paid or incurred by SELLER
and attributable to operation of the
Property on and after the Effective Date;
(ii) The actual value of the Stock Tank Oil from
any proceeds received by BUYER for the sale
of production from the Property before the
Effective Date; and
(iii) Any other amounts to which SELLER is
entitled under this Agreement that are not
paid as part of the Purchase Price at
Closing.
6.5.3.2 The Purchase Price will be adjusted downward by the amount
of:
(i) Any proceeds received by SELLER for
production from the Property on and after
the Effective Date, as provided in Section
1.3.2 of this Agreement;
(ii) Any other amounts to which BUYER is entitled
under this Agreement that are not paid or
reimbursed at Closing.
6.5.4 Final Settlement. The parties will attempt to agree to the final
settlement statement within 30 days after its delivery to BUYER, and
settlement will be made (taking into account adjustment for the
estimate made under Section 6.3 and deducted from the Purchase Price
under Section 6.4.2(i) by company check, or wire transfer, at the
receiving party's option, within 15 days after agreement. Thereafter,
6
<PAGE>
if SELLER or BUYER receives additional proceeds or pays additional
expenses for or on behalf of the other party, they shall promptly
invoice the other party for expenses paid or remit to the other party
any proceeds received.
6.5.5 Further Assurances. BUYER and SELLER agree to execute and deliver
from time to time such further instruments and do such other acts as
may be reasonably necessary to effectuate the purposes of this
Agreement.
ARTICLE 7. ASSUMPTION OF OBLIGATIONS
7.1 Ownership and Operations. Except as provided in Section 10.1, upon and after
Closing, BUYER shall assume and perform all the rights, duties, obligations and
liabilities of ownership and operation of the Property, including without
limitation: (i) all of SELLER's express and implied obligations and covenants
under the terms of the Leases, the Related Contracts and all other orders and
contracts to which the Property is subject; (ii) responsibility for all
royalties, overriding royalties, production payments, net profits obligations,
rentals, shut-in payments and other burdens or encumbrances to which the
Property is subject accruing after the Effective Date; (iii) responsibility for
compliance with all applicable laws, ordinances, rules and regulations
pertaining to the Property, and the procurement and maintenance of all permits
required by public authorities in connection with the Property; and (iv) all
other obligations assumed by BUYER under this Agreement. With respect to (i) any
part of the Property for which BUYER is not duly elected operator, or (ii) any
non-operating interests in the Property being transferred to BUYER under this
Agreement, BUYER shall assume full responsibility and liability for that portion
of the foregoing rights, duties, obligations and liabilities for which
non-operators are responsible. SELLER will remain responsible for all costs,
expenses and liabilities incurred by SELLER in connection with the ownership or
operation of the Property before the Effective Date, except those for which
BUYER indemnifies SELLER, or which BUYER assumes in the Agreement.
7.2 Plugging and Abandonment Obligations. From and after the Effective Date,
BUYER assumes full responsibility and liability for the following obligations
related to the Property ("Plugging and Abandonment Obligations"): (i) plugging,
replugging and abandoning all wells on the Property plugged after the Effective
Date; (ii) removing and disposing of all structures and equipment located on or
comprising part of the Property; (iii) the necessary and proper capping and
burying of all associated flow lines located on or comprising part of the
Property; (iv) restoring the leasehold premises of the Property, both surface
and subsurface, to the condition they were in before commencement of oil and gas
operations, as may be required by applicable laws, regulation or contract; and
(v) any necessary disposal of Property contaminated by naturally occurring
radioactive material ("NORM"). BUYER shall conduct all plugging, replugging,
abandonment, removal, disposal and restoration operations in a good and
workmanlike manner and in compliance with all applicable laws and regulations.
With respect to any non-operating interests in the Property being transferred to
BUYER under this Agreement, BUYER shall assume full responsibility and
liability, from and after the Effective Date, for that portion of the Plugging
and Abandonment Obligations for which non-operators are responsible.
7.3 Environmental Obligations. BUYER assumes full responsibility and liability
for the following occurrences, events and activities on or related to the
Property ("Environmental Obligations") whether arising before or after the
Effective Date: (i) environmental pollution or contamination, including
pollution of the soil, groundwater or air; (ii) underground injection activities
and waste disposal onsite; (iii) clean-up responses, and the cost of
remediation, control or compliance with respect to surface and subsurface
pollution caused by spills, pits, ponds or lagoons; (iv) failure to comply with
applicable land use, surface disturbance, licensing or notification
requirements; and (v) violation of environmental or land use rules, regulations,
demands or orders of appropriate state or federal regulatory agencies. With
respect to any non-operating interests in the Property being transferred to
BUYER under this Agreement, BUYER agrees to assume full responsibility and
liability, from and after the Effective Date, for that portion of the
Environmental Obligations for which non-operators are responsible.
ARTICLE 8. INDEMNITIES
8.1 Definition of Claims. As used in this Agreement, the term "Claims" means any
and all losses, liabilities, damages, obligations, expenses, fines, penalties,
costs, claims, causes of action and judgments for (i) breaches of contract; (ii)
loss or damage to property; and (iii) violations of applicable laws, rules,
regulations, orders or any other legal right or duty actionable at law or
equity. The term "Claims" also includes attorneys fees and court costs resulting
from the defense of any claim or cause of action within the scope of the
indemnities in this Agreement.
7
<PAGE>
8.2 Application of Indemnities. Unless this Agreement expressly provides to the
contrary, the indemnities set forth in this Agreement apply regardless of
whether: (i) the indemnified party (or its employees, agents, contractors,
successors or assigns) causes, in whole or part, an indemnified Claim; (ii) an
indemnified Claim arises out of or results from the indemnified party's (or its
employees', agents', contractors', successors' or assigns') sole or concurrent
negligence; (iii) the indemnified party (or its employees, agents, contractors,
successors or assigns) is deemed to be strictly liable, in whole or part, for an
indemnified Claim; or (iv) any part of an indemnified Claim is the result of the
imposition of punitive damages. All indemnities set forth in this Agreement
extend to the officers, directors, employees and affiliates of the party
indemnified, and cover the acts and omissions of the officers, directors,
employees, contractors, successors and assigns of the indemnifying party.
8.3 BUYER's Indemnity. BUYER shall indemnify, defend and hold SELLER harmless
from and against any and all Claims caused by, resulting from or incidental to:
(i) BUYER's ownership or operation of the Property after the Effective Date,
including without limitation the obligations assumed by BUYER in Section 7.1;
(ii) all Plugging and Abandonment Obligations arising after the Effective Date;
(iii) all Environmental Obligations, whether arising before or after the
Effective Date; (iv) BUYER's disbursement of production proceeds from the
Property accruing after the Effective Date, including funds in any suspense
accounts received from SELLER; (v) any obligations for broker's fees incurred by
BUYER in connection with the purchase of the Property; (vi) BUYER'S acts or
omissions; (vii) any failure by BUYER to comply with applicable laws,
ordinances, rules and regulations pertaining to the Property, and procure and
maintain permits required by public authorities in connection with the Property;
(viii) any violation by BUYER of state or federal securities laws, or BUYER's
dealings with its partners, investors, financial institutions and other third
parties with respect to this Agreement; and (ix) SELLER's operation of the
Property under Article 10, if applicable, except to the extent caused by
SELLER's gross negligence or willful misconduct. BUYER further agrees to
indemnify, defend and hold SELLER harmless from and against any and all claims
for personal injury, illness, disease and wrongful death which arise or are
asserted after the Effective Date and which are attributable to the ownership
and operation of the Property by BUYER, including without limitation, any
interest, penalty, reasonable attorney's fees and other costs and expenses
incurred in connection therewith or the defense thereof.
8.4 SELLER's Indemnity. SELLER shall indemnify, defend and hold BUYER harmless
from and against any and all Claims caused by, resulting from or incidental to:
(i) SELLER's ownership or operation of the Property before the Effective Date,
except to the extent such obligations are assumed by BUYER in Section 8.3; (ii)
SELLER's disbursement of production proceeds from the Property accruing before
the Effective Date; (iii) any failure by SELLER to comply with applicable laws,
ordinances, rules and regulations pertaining to the Property, or to procure and
maintain permits required by public authorities in connection with the Property;
(iv) any violation by SELLER of state or federal securities laws, or SELLER's
dealings with its partners, investors, financial institutions and other third
parties with respect to this Agreement; and (v) SELLER's operation of the
Property under Article 10, if applicable, to the extent caused by SELLER's gross
negligence or willful misconduct. SELLER further agrees to indemnify, defend and
hold BUYER harmless from and against any and all claims for personal injury,
illness, disease, and wrongful death which arise or are asserted prior to the
Effective Date or are asserted after Effective Date and are solely attributable
to the ownership and operation of the Property by SELLER prior to the Effective
Date, including without limitation, any interest, penalty, reasonable attorney's
fees, and other costs and expenses in connection therewith or in defense
thereof. It is understood and agreed that SELLER's indemnity under this Section
is limited to claims against BUYER by third parties, including government
agencies.
8.5 NORM. BUYER ACKNOWLEDGES THAT IT HAS BEEN INFORMED THAT OIL AND GAS
PRODUCING FORMATIONS CAN CONTAIN NATURALLY OCCURRING RADIOACTIVE MATERIAL. SOME
OR ALL OF THE EQUIPMENT, MATERIALS AND OTHER PROPERTY SUBJECT TO THIS AGREEMENT
MAY HAVE LEVELS OF NORM ABOVE BACKGROUND LEVELS. A HEALTH HAZARD MAY EXIST IN
CONNECTION WITH THIS EQUIPMENT, MATERIALS AND OTHER PROPERTY. THEREFORE, BUYER
MAY NEED TO FOLLOW SAFETY PROCEDURES WHEN HANDLING THIS EQUIPMENT, AND OTHER
PROPERTY.
ARTICLE 9. TAXES AND EXPENSES.
9.1 Recording Expenses. BUYER shall pay the cost of recording and filing the
Assignment and Bill of Sale for the Property, all state and federal transfer and
assignment documents, and all other instruments.
9.2 Ad Valorem, Real Property and Personal Property Taxes. Unless paid pursuant
to Article 6.3, all Ad Valorem Taxes, Real Property Taxes, Personal Property
Taxes, and similar obligations ("Property Taxes") on the Property are SELLER's
obligation for periods before the Effective Date and BUYER's obligation for
periods after the Effective Date.
8
<PAGE>
9.3 Severance Taxes. SELLER shall bear and pay all severance or other taxes
measured by Hydrocarbon production from the Property, or the receipt of proceeds
therefrom, to the extent attributable to production from the Property before the
Effective Date. BUYER shall bear and pay all such taxes on production from the
Property on and after the Closing Date.
9.4 Sales Taxes. SELLER shall remit on behalf of BUYER all state and county
sales taxes due on the Property, using the Allocated Values listed in Exhibit D.
BUYER will reimburse SELLER at Closing for all sales taxes paid on behalf of
BUYER.
ARTICLE 10. INTERIM OPERATION OF THE PROPERTY
10.1 Operations by SELLER. If SELLER is operator of the Property, SELLER shall
continue to operate the Property during the period between the Effective Date
and 7:00 a.m., local time where the Property is located, on the first day of the
month following the month in which Closing occurs, or such later date to which
SELLER and BUYER agree in writing ("Interim Period"), but SELLER has no
obligation to operate the Property after the Interim Period. SELLER shall
operate the Property during the Interim Period in a prudent manner consistent
with generally accepted industry practices and standards, applicable laws and
regulations, and all applicable lease and other agreement terms. SELLER is
entitled to retain any overhead payments received and attributable to operations
during the Interim Period. SELLER makes no representation or warranty that BUYER
will become operator of any portion of the Property, as that matter is
controlled by the applicable operating agreements and governmental regulatory
requirements.
10.2 Marketing of Production. If SELLER continues to operate the Property after
the Closing Date under this Article 10, SELLER and BUYER will agree on continued
marketing of production, disbursement of proceeds of production, billing and
collection of amounts due from the nonoperating interest owners, and payment of
all delay rentals, minimum royalties, shut-in royalties and other lease payments
until BUYER begins operating the Property.
ARTICLE 11. MISCELLANEOUS
11.1 Purchase and Sale/Qualified Intermediary. Subject to the terms and
conditions of this Agreement, SELLER agrees to sell and convey to BUYER, and
BUYER agrees to purchase, pay for and receive the Assets and to assume the
obligations as provided herein. SELLER and BUYER hereby agree that BUYER, in
lieu of the purchase of the Assets from SELLER for the cash consideration
provided herein, shall have the right at any time prior to Closing to assign all
or a portion of its rights under this Agreement to a Qualified Intermediary (as
that term is defined in Section 1.1031(k)- 1(g)(4)(v) of the Treasury
Regulations) in order to accomplish the transaction in a manner that will
comply, either in whole or in part, with the requirements of a like-kind
exchange pursuant to Section 1031 of the Internal Revenue Code of 1986, as
amended, ("Code"). Likewise, SELLER shall have the right at any time prior to
Closing to assign all or a portion of its rights under this Agreement to a
Qualified Intermediary for the same purpose. In the event either Party assigns
its rights under this Agreement pursuant to this Section 11.1, such Party agrees
to notify the other Party in writing of such assignment at or before Closing. If
SELLER assigns its rights under this Agreement for this purpose, BUYER agrees to
(i) consent to SELLER's assignment of its rights in this Agreement in the form
attached hereto as Exhibit "E-1", and (ii) pay the Purchase Price into a
qualified escrow or qualified trust account at Closing as directed in writing.
If BUYER assigns its rights under this Agreement for this purpose, SELLER agrees
to (i) consent to BUYER's assignment of its rights in this Agreement in the form
of Exhibit "E-2", (ii) and accept the Purchase Price from the qualified escrow
or qualified trust account at Closing, and (iii) at Closing, convey and assign
directly to BUYER the Assets which are the subject of this Agreement upon
satisfaction of the other conditions to Closing and other terms and conditions
hereof. SELLER and BUYER acknowledge and agree that any assignment of this
Agreement to a Qualified Intermediary shall not release either Party from any of
their respective liabilities and obligations to each other under this Agreement,
and that neither Party represents to the other that any particular tax treatment
will be given to either Party as a result thereof.
11.2 Broker's Fees. Each party represents that it has not incurred any
obligation for brokers, finders or similar fees for which the other party would
be liable.
11.3 Press Releases. After Closing, either BUYER or SELLER may make a statement
to the press concerning this transaction, provided such statement shall not make
reference to the Purchase Price or consideration paid.
9
<PAGE>
11.4 Notices. All notices under this Agreement must be in writing. Any notice
under this Agreement may be given by personal delivery, facsimile transmission,
U.S. mail (postage prepaid), or commercial delivery service, and will be deemed
duly given when received by the party charged with such notice and addressed as
follows:
SELLER: CHAPARRAL RESOURCES, INC. BUYER: CONOCO INC.
- ------ -----
3400 Bissonnet, Suite 135 10 Desta Drive, Suite 100W
Houston, TX 77005 Midland, TX 79705-4500
Howard Karren Attn: Division Manager
FAX: (713) 669-0994 FAX: (915) 686-5422
Any party, by written notice to the other, may change the address or the
individual to which or to whom notices are to be sent under this Agreement.
11.5 Assignment. Neither party may assign its rights or obligations under this
Agreement without the prior written consent of the other, unless the assignment
occurs by merger, reorganization or sale of all of a party's assets.
11.6 Entirety of Agreement; Amendment. This Agreement constitutes the entire
understanding between the parties with respect to the subject matter hereof,
superseding all negotiations, prior discussions, representations, and prior
agreements and understandings relating to such subject matter. This Agreement
may be amended, modified, and supplemented only in a writing duly executed by
BUYER and SELLER.
11.7 Successors and Assigns. This Agreement binds and inures to the benefit of
the parties hereto their respective permitted successors and assigns, and
nothing contained in this Agreement, express or implied, is intended to confer
upon any other person or entity any benefits, rights, or remedies.
11.8 Governing Law. This Agreement is governed by and must be construed in
accordance with the laws of the State of Colorado, excluding any
conflicts-of-law rule or principle that might apply the law of another
jurisdiction.
11.9 Survival. All of the representations, warranties, and agreements of or by
the parties to this Agreement survive the execution and delivery of the
Assignment and Bill of Sale and the transfer of the Property to BUYER.
11.10 Exhibits. The Exhibits attached to this Agreement are incorporated into
and made a part of this Agreement. In the event of a conflict between the
provisions of the Exhibits or the executed Assignment and Bill of Sale and the
foregoing provisions of this Agreement, the provisions of the Exhibits and the
executed Assignment and Bill of Sale take precedence over the foregoing
provisions of this Agreement. In the event of a conflict between the provisions
of the pro forma Assignment and Bill of Sale attached to this Agreement as
Exhibit B and the executed Assignment and Bill of Sale, the provisions of the
executed Assignment and Bill of Sale take precedence.
This instrument may be executed in any number of counterparts, each of which
shall be considered an original for all purposes.
The authorized representatives of SELLER and BUYER sign below indicating their
agreement to the terms of this Agreement.
SELLER: BUYER:
CHAPARRAL RESOURCES, INC. CONOCO INC.
By: By:
--------------------------------------- ---------------------------------
Name: Howard Karren Name:
------------------------------------ -------------------------------
Title: Chairman & Chief Executive Officer Title:
------------------------------------ -------------------------------
Date: Date:
------------------------------------ -------------------------------
10
<PAGE>
EXHIBIT B
FORM OF
ASSIGNMENT AND BILL OF SALE
STATE OF COLORADO ss.
ss.
COUNTY OF RIO BLANCO ss.
CHAPARRAL RESOURCES, INC., a Colorado corporation ("SELLER"), in
consideration of the agreements set forth herein, hereby sells and assigns to
CONOCO INC., a Delaware corporation ("BUYER"), all of SELLER's right, title and
interest in and to the Property described in this Assignment and Bill of Sale
("Assignment"), subject to the terms of this Assignment, effective as of January
1, 1997 (the "Effective Date"). This Assignment relates to the Purchase and Sale
Agreement, effective January 1, 1997 between SELLER and BUYER (the "Agreement").
ARTICLE 1. PURCHASE AND SALE
1.1 The Property. Subject to the terms of this Assignment, SELLER agrees to sell
and assign to BUYER and BUYER agrees to purchase and acquire from SELLER all of
SELLER's right and title to, and interest in, the following (collectively the
"Property"):
1.1.1 The oil, gas and mineral lease(s) and other interests in oil and
gas described in Attachment 1 and all rights, privileges and
obligations appurtenant to the leases INSOFAR AND ONLY INSOFAR AS the
leases cover and include the lands, depths and rights described in
Attachment 1 ("Leases");
1.1.2 All rights in any unit in which the Leases are included, to the
extent that these rights arise from and are associated with the Leases,
including without limitation all rights derived from any unitization,
pooling, operating, communitization or other agreement or from any
declaration or order of any governmental authority;
1.1.3 All of SELLER'S rights and interest in and to producing,
non-producing, shut-in, and abandoned oil, gas, and condensate wells,
water source, water injection and other injection or disposal wells and
associated facilities located on or from the Leases;
1.1.4 All equipment, facilities and other personal property on the
Leases used in developing or operating the Leases or producing,
treating, storing, gathering, compressing, processing or transporting
hydrocarbons on or from the Leases;
1.1.5 All easements, rights-of-way, licenses, permits, servitudes and
similar interests applicable to or used in operating the Leases or the
personal property described above; and
1.1.6 All contracts and contractual rights, obligations and interests
relating to the Leases, including without limitation unit agreements,
farmout agreements, farmin agreements, operating agreements, and
hydrocarbon sales, purchase, gathering, transportation, treating,
marketing, exchange, processing and fractionating agreements ("Related
Contracts"), including without limitation those Related Contracts
described in Attachment 1.
1.2 Exclusions. The Property sold and assigned under this Assignment does not
include:
1.2.1 SELLER's intellectual property used in developing or operating
the Property, including without limitation proprietary computer
software, patents, trade secrets, copyrights, names, marks and logos;
1.2.2 Trade credits, accounts and notes receivable, and adjustments or
refunds (including without limitation transportation tariff refunds,
take-or-pay claims, and audit adjustments) attributable to the Property
with respect to any period before the Effective Date;
1
<PAGE>
ARTICLE 2. WARRANTIES
2.1 Title; Encumbrances. SELLER SELLS AND TRANSFERS THE PROPERTY TO BUYER
SUBJECT TO ALL ROYALTIES, OVERRIDING ROYALTIES, BURDENS AND ENCUMBRANCES, AND
WITHOUT WARRANTY OF TITLE, EXPRESS, STATUTORY, OR IMPLIED, PROVIDED, HOWEVER,
SELLER SHALL AGREE TO DEFEND THE TITLE TO THE PROPERTY AGAINST THE LAWFUL CLAIMS
AND DEMANDS OF ALL PERSONS OR ENTITIES CLAIMING THE SAME OR ANY PART THEREOF BY,
THROUGH OR UNDER SELLER, BUT NOT OTHERWISE.
2.2 Information About the Property. SELLER MAKES NO WARRANTY OR REPRESENTATION,
EXPRESS, STATUTORY OR IMPLIED, AS TO (i) THE ACCURACY, COMPLETENESS, OR
MATERIALITY OF ANY DATA, INFORMATION OR RECORDS FURNISHED TO BUYER IN CONNECTION
WITH THE PROPERTY; (ii) THE QUALITY AND QUANTITY OF HYDROCARBON RESERVES (IF
ANY) ATTRIBUTABLE TO THE PROPERTY; (iii) THE ABILITY OF THE PROPERTY TO PRODUCE
HYDROCARBONS, INCLUDING WITHOUT LIMITATION PRODUCTION RATES, DECLINE RATES AND
RECOMPLETION OPPORTUNITIES; (iv) ALLOWABLES OR OTHER REGULATORY MATTERS, OR (v)
THE PRESENT OR FUTURE VALUE OF THE ANTICIPATED INCOME, COSTS OR PROFITS, IF ANY,
TO BE DERIVED FROM THE PROPERTY. ANY AND ALL DATA, INFORMATION OR OTHER RECORDS
FURNISHED BY SELLER ARE PROVIDED TO BUYER AS A CONVENIENCE AND BUYER'S RELIANCE
ON OR USE OF THE SAME IS AT BUYER'S SOLE RISK.
ARTICLE 3. ASSUMPTION OF OBLIGATIONS
3.1 Ownership and Operations. Except as provided in Section 5.1, upon and after
Closing, BUYER shall assume and perform all the rights, duties, obligations and
liabilities of ownership and operation of the Property, including without
limitation: (i) all of SELLER's express and implied obligations and covenants
under the terms of the Leases, the Related Contracts and all other orders and
contracts to which the Property is subject; (ii) responsibility for all
royalties, overriding royalties, production payments, net profits obligations,
rentals, shut-in payments and other burdens or encumbrances to which the
Property is subject accruing after the Effective Date; (iii) responsibility for
compliance with all applicable laws, ordinances, rules and regulations
pertaining to the Property, and the procurement and maintenance of all permits
required by public authorities in connection with the Property; and (iv) all
other obligations assumed by BUYER under this Assignment. With respect to (i)
any part of the Property for which BUYER is not duly elected operator, or (ii)
any non-operating interests in the Property being transferred to BUYER under
this Agreement, BUYER shall assume full responsibility and liability for that
portion of the foregoing rights, duties, obligations and liabilities for which
non-operators are responsible. SELLER will remain responsible for all costs,
expenses and liabilities incurred by SELLER in connection with the ownership or
operation of the Property before the Effective Date, except those for which
BUYER indemnifies SELLER, or which BUYER assumes in the Agreement.
3.2 Plugging and Abandonment Obligations. From and after the Effective Date,
BUYER assumes full responsibility and liability for the following obligations
related to the Property ("Plugging and Abandonment Obligations"): (i) plugging,
replugging and abandoning all wells on the Property plugged after the Effective
Date; (ii) removing and disposing of all structures and equipment located on or
comprising part of the Property; (iii) the necessary and proper capping and
burying of all associated flow lines located on or comprising part of the
Property; (iv) restoring the leasehold premises of the Property, both surface
and subsurface, to the condition they were in before commencement of oil and gas
operations, as may be required by applicable laws, regulation or contract; and
(v) any necessary disposal of Property contaminated by naturally occurring
radioactive material ("NORM"). BUYER shall conduct all plugging, replugging,
abandonment, removal, disposal and restoration operations in a good and
workmanlike manner and in compliance with all applicable laws and regulations.
With respect to any non-operating interests in the Property being transferred to
BUYER under this Agreement, BUYER shall assume full responsibility and
liability, from and after the Effective Date, for that portion of the Plugging
and Abandonment Obligations for which non-operators are responsible.
3.3 Environmental Obligations. BUYER assumes full responsibility and liability
for the following occurrences, events and activities on or related to the
Property ("Environmental Obligations") whether arising before or after the
Effective Date: (i) environmental pollution or contamination, including
pollution of the soil, groundwater or air; (ii) underground injection activities
and waste disposal onsite; (iii) clean-up responses, and the cost of
remediation, control or compliance with respect to surface and subsurface
pollution caused by spills, pits, ponds or lagoons; (iv) failure to comply with
applicable land use, surface disturbance, licensing or notification
requirements; and (v) violation of environmental or land use rules, regulations,
demands or orders of appropriate state or federal regulatory agencies. With
respect to any non-operating interests in the Property being transferred to
BUYER under this Assignment, BUYER agrees to assume full responsibility and
liability, from and after the Effective Date, for that portion of the
Environmental Obligations for which non-operators are responsible.
2
<PAGE>
ARTICLE 4. INDEMNITIES
4.1 Definition of Claims. As used in this Assignment, the term "Claims" means
any and all losses, liabilities, damages, obligations, expenses, fines,
penalties, costs, claims, causes of action and judgments for (i) breaches of
contract; (ii) loss or damage to property; and (iii) violations of applicable
laws, rules, regulations, orders or any other legal right or duty actionable at
law or equity. The term "Claims" also includes attorneys fees and court costs
resulting from the defense of any claim or cause of action within the scope of
the indemnities in this Assignment
4.2 Application of Indemnities. Unless this Assignment expressly provides to the
contrary, the indemnities set forth in this Assignment apply regardless of
whether: (i) the indemnified party (or its employees, agents, contractors,
successors or assigns) causes, in whole or part, an indemnified Claim; (ii) an
indemnified Claim arises out of or results from the indemnified party's (or its
employees', agents', contractors', successors' or assigns') sole or concurrent
negligence; (iii) the indemnified party (or its employees, agents, contractors,
successors or assigns) is deemed to be strictly liable, in whole or part, for an
indemnified Claim; or (iv) any part of an indemnified Claim is the result of the
imposition of punitive damages. All indemnities set forth in this Assignment
extend to the officers, directors, employees and affiliates of the party
indemnified, and cover the acts and omissions of the officers, directors,
employees, contractors, successors and assigns of the indemnifying party.
4.3 BUYER's Indemnity. BUYER shall indemnify, defend and hold SELLER harmless
from and against any and all Claims caused by, resulting from or incidental to:
(i) BUYER's ownership or operation of the Property after the Effective Date,
including without limitation the obligations assumed by BUYER in Section 3.1;
(ii) all Plugging and Abandonment Obligations arising after the Effective Date;
(iii) all Environmental Obligations, whether arising before or after the
Effective Date; (iv) BUYER's disbursement of production proceeds from the
Property accruing after the Effective Date, including funds in any suspense
accounts received from SELLER; (v) any obligations for broker's fees incurred by
BUYER in connection with the purchase of the Property; (vi) BUYER'S acts or
omissions; (vii) any failure by BUYER to comply with applicable laws,
ordinances, rules and regulations pertaining to the Property, and procure and
maintain permits required by public authorities in connection with the Property;
(viii) any violation by BUYER of state or federal securities laws, or BUYER's
dealings with its partners, investors, financial institutions and other third
parties with respect to this Agreement; and (ix) SELLER's operation of the
Property under Article 10, if applicable, except to the extent caused by
SELLER's gross negligence or willful misconduct. BUYER further agrees to
indemnify, defend and hold SELLER harmless from and against any and all claims
for personal injury, illness, disease and wrongful death which arise or are
asserted after the Effective Date and which are attributable to the ownership
and operation of the Property by BUYER, including without limitation, any
interest, penalty, reasonable attorney's fees and other costs and expenses
incurred in connection therewith or the defense thereof.
4.4 SELLER's Indemnity. SELLER shall indemnify, defend and hold BUYER harmless
from and against any and all Claims caused by, resulting from or incidental to:
(i) SELLER's ownership or operation of the Property before the Effective Date,
except to the extent such obligations are assumed by BUYER in Section 4.3; (ii)
SELLER's disbursement of production proceeds from the Property accruing before
the Effective Date; (iii) any failure by SELLER to comply with applicable laws,
ordinances, rules and regulations pertaining to the Property, or to procure and
maintain permits required by public authorities in connection with the Property;
(iv) any violation by SELLER of state or federal securities laws, or SELLER's
dealings with its partners, investors, financial institutions and other third
parties with respect to this Agreement; and (v) SELLER's operation of the
Property under Article 5, if applicable, to the extent caused by SELLER's gross
negligence or willful misconduct. SELLER further agrees to indemnify, defend and
hold BUYER harmless from and against any and all claims for personal injury,
illness, disease, and wrongful death which arise or are asserted prior to the
Effective Date or are asserted after Effective Date and are solely attributable
to the ownership and operation of the Property by SELLER prior to the Effective
Date, including without limitation, any interest, penalty, reasonable attorney's
fees, and other costs and expenses in connection therewith or in defense
thereof. It is understood and agreed that SELLER's indemnity under this Section
is limited to claims against BUYER by third parties, including government
agencies.
3
<PAGE>
4.5 NORM. BUYER ACKNOWLEDGES THAT IT HAS BEEN INFORMED THAT OIL AND GAS
PRODUCING FORMATIONS CAN CONTAIN NATURALLY OCCURRING RADIOACTIVE MATERIAL. SOME
OR ALL OF THE EQUIPMENT, MATERIALS AND OTHER PROPERTY SUBJECT TO THIS ASSIGNMENT
MAY HAVE LEVELS OF NORM ABOVE BACKGROUND LEVELS. A HEALTH HAZARD MAY EXIST IN
CONNECTION WITH THIS EQUIPMENT, MATERIALS AND OTHER PROPERTY. THEREFORE, BUYER
MAY NEED TO FOLLOW SAFETY PROCEDURES WHEN HANDLING THIS EQUIPMENT, AND OTHER
PROPERTY.
ARTICLE 5. INTERIM OPERATION OF THE PROPERTY
5.1 Operations by SELLER. If SELLER is the operator of the Property,
SELLER shall continue to operate the Property during the period between the
Effective Date and 7:00 a.m., local time, where the Property is located, on the
Closing Date, or such later date to which SELLER and BUYER agree in writing (the
"Interim Period"), but SELLER has no obligation to operate the Property after
the Interim Period. SELLER shall operate the Property during the Interim Period
in a prudent manner consistent with generally accepted industry practices and
standards, applicable laws and regulations, and all applicable lease and other
agreement terms. SELLER is entitled to retain any overhead payments received and
attributable to operations during the Interim Period. SELLER makes no
representation or warranty that BUYER will become operator of any portion of the
Property, as that matter is controlled by the applicable operating agreements
and governmental regulatory requirements.
5.2 Marketing of Production. If SELLER continues to operate the
Property after the Closing Date under this Article 5, SELLER and BUYER will
agree on continued marketing of production, disbursement of proceeds of
production, billing and collection of amounts due from the nonoperating interest
owners, and payment of all delay rentals, minimum royalties, shut-in royalties
and other lease payments until BUYER begins operating the Property.
ARTICLE 6. TAXES AND EXPENSES
6.1 Recording Expenses. BUYER shall pay all costs of recording and
filing the Assignment and Bill of Sale for the Property, all state and federal
transfer and assignment documents, and all other instruments.
6.2 Ad Valorem, Real Property and Personal Property Taxes. Except as
adjusted pursuant to the terms of the Agreement, all Ad Valorem Taxes, Real
Property Taxes, Personal Property Taxes, and similar obligations ("Property
Taxes") on the Property are SELLER's obligation for periods before the Effective
Date and BUYER's obligation for periods after the Effective Date.
6.3 Severance Taxes. SELLER shall bear and pay all severance or other
taxes measured by production from the Property, or the receipt of proceeds
therefrom, to the extent attributable to production from the Property before the
Effective Date. BUYER shall bear and pay all such taxes on production from the
Property on and after the Closing Date.
6.4 Sales Taxes. SELLER shall remit on behalf of BUYER all state and
county sales taxes due on the Property, using the allocated values listed in
Exhibit D of the Agreement. BUYER will reimburse SELLER at Closing for all sales
taxes paid on behalf of BUYER.
ARTICLE 7. MISCELLANEOUS
7.1 Covenant Running With the Land. This Assignment and all of its rights,
reservations, and covenants are covenants running with the land and inure to and
are binding upon the parties hereto, their heirs, successors, and assigns. BUYER
shall make any transfer or encumbrance of any of the Property expressly subject
to this Assignment and the assignee or transferee must assume all obligations
set forth herein.
4
<PAGE>
7.2 Purchase and Sale Agreement. The terms of the Agreement are incorporated by
reference in this Assignment. In the event of a conflict between the provisions
of this Assignment and the provisions of the Agreement, the provisions of this
Assignment prevail.
The authorized representatives of SELLER and BUYER sign below indicating their
agreement to the terms of this Assignment.
SELLER: BUYER:
CHAPARRAL RESOURCES, INC. CONOCO INC.
By: By:
--------------------------------------- ---------------------------------
Name: Howard Karren Name:
------------------------------------ -------------------------------
Title: Chairman & Chief Executive Officer Title:
------------------------------------ -------------------------------
Date: Date:
------------------------------------ -------------------------------
[Add Appropriate Acknowledgment Forms]
5
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PROPERTY NAME COUNTY STATE OPERATOR GWI NRI ALLOCATED VALUE
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
SDC #6 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.106876 $5,000.00
- -----------------------------------------------------------------------------------------------------------------------
SDC #1-B Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.107509 $11,100.00
- -----------------------------------------------------------------------------------------------------------------------
SDC #22 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $13,200.00
- -----------------------------------------------------------------------------------------------------------------------
SDC #23 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $15,500.00
- -----------------------------------------------------------------------------------------------------------------------
Superior Fee #1-18 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.107510 $6,500.00
- -----------------------------------------------------------------------------------------------------------------------
SDC Fee #20 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.111708 $1,000.00
- -----------------------------------------------------------------------------------------------------------------------
SDC #16 Rio Blanco CO Chaparral Resources, Inc. 0.300000 0.223417 $8,600.00
- ------------------------------------------------------------------------------------------------------------------------
SDC #13 Rio Blanco CO Chaparral Resources, Inc. 0.300000 0.225000 combined with SDC #16
- ------------------------------------------------------------------------------------------------------------------------
SDC #31 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $200.00
- ------------------------------------------------------------------------------------------------------------------------
SDC #10 Rio Blanco CO Chaparral Resources, Inc. 0.300000 0.227219 $300.00
- ------------------------------------------------------------------------------------------------------------------------
SDC #7 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.106875 $6,200.00
- ------------------------------------------------------------------------------------------------------------------------
SDC #25 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $44,700.00
- ------------------------------------------------------------------------------------------------------------------------
SDC #26 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $7,500.00
- ------------------------------------------------------------------------------------------------------------------------
SDC #21 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $9,900.00
- ------------------------------------------------------------------------------------------------------------------------
SDC #24 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $13,500.00
- ------------------------------------------------------------------------------------------------------------------------
Tipperary #7-3 Rio Blanco CO Chaparral Resources, Inc. 0.135000 0.105469 $23,400.00
- ------------------------------------------------------------------------------------------------------------------------
SDC #17-2 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $1,500.00
- ------------------------------------------------------------------------------------------------------------------------
SDC #29 Rio Blanco CO Chaparral Resources, Inc. 0.211100 0.151464 $29,500.00
- ------------------------------------------------------------------------------------------------------------------------
Fuelco #7-4 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.123750 $16,900.00
- ------------------------------------------------------------------------------------------------------------------------
SDC Fee #15 Rio Blanco CO Chaparral Resources, Inc. 0.300000 0.228573 $300.00
- ------------------------------------------------------------------------------------------------------------------------
SDC #12 Rio Blanco CO Chaparral Resources, Inc. 0.300000 0.220500 $300.00
- ------------------------------------------------------------------------------------------------------------------------
SDC #30 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.107510 $800.00
- ------------------------------------------------------------------------------------------------------------------------
Superior #12-1 Rio Blanco CO Chaparral Resources, Inc. 0.221250 0.166055 $300.00
- ------------------------------------------------------------------------------------------------------------------------
SDC #14 Rio Blanco CO Chaparral Resources, Inc. 0.300000 0.241266 $300.00
- ------------------------------------------------------------------------------------------------------------------------
Government 32-3 Rio Blanco CO Chaparral Resources, Inc. 0.300000 0.236250 $15,800.00
- ------------------------------------------------------------------------------------------------------------------------
SDC #1M-34 Rio Blanco CO Chaparral Resources, Inc. 0.168750 0.134531 $200.00
- ------------------------------------------------------------------------------------------------------------------------
Undeveloped Acreage Rio Blanco CO Chaparral Resources, Inc. $37,500.00
- ------------------------------------------------------------------------------------------------------------------------
TOTAL $270,000.00
---------------------------------------------
</TABLE>
<PAGE>
Rio Blanco County, Colorado Oil and Gas Leases/Surface Leases/Mineral
Interests
Lessor Lessee Description Date Exp. Gross Ac.
Hill Foundation F.S. Di Grappa T4S-R102W 8/8/75 HBP 320.000
Sec 12: S/2SW/4
Sec 13: E/2W/2
Sec 24: E/2NW/4
Robert M. Allan III F.S. Di Grappa T4S-R102W 8/1/75 HBP
Sec 12: S/2SW/4
Sec 13: E/2W/2
<PAGE>
Sec 24: E/2NW/4
Gerald Buckles et al F.S. Di Grappa T4S-R102W 8/12/75 HBP
Sec 12: S/2SW/4
Sec 13: E/2W/2
Sec 24: E/2NW/4
Ruth Mayes Guardian F.S. Di Grappa T4S-R102W 8/1/75 HBP
Sec 12: S/2SW/4
<PAGE>
Sec 13: E/2W/2
Sec 24: E/2NW/4
The Superior Oil Co Cities Service Oil Co T4S-R102W 4/15/64 HBP 320.000
Sec 1: SE/4SW/4
Sec 12: E1/2NW1/4, SW1/4NE1/4, NE1/4SW1/4, N1/2SE1/4
T4S-R101W
Sec 7: NW1/4SW1/4
From the surface to 100' below the base of the Entrada.
<PAGE>
Frances M Spence J.R. Williams T4S-R102W 9/10/56 HBP 40.000
Sec 12: SW/4SW/4
Lillian D. McCowan J.R. Williams T4S-R102W 9/10/56 HBP
Sec 12: SW/4SW/4
M.J. Mayes Cities Service Oil Co T4S-R102W 2/5/62 HBP
Sec 12: SW/4SW/4
T.H. Hammett Cities Service Oil Co T4S-R102W 2/23/62 HBP
<PAGE>
Sec 12: SW/4SW/4
First National Bank Cities Service Oil Co T4S-R102W 2/23/62 HBP
Sec 12: SW/4SW/4
Robert M. Allan III Cities Service Oil Co T4S-R102W 2/5/62 HBP
Sec 12: SW/4SW/4
Lynn Allan Barr Cities Service Oil Co T4S-R102W 2/5/62 HBP
<PAGE>
Sec 12: SW/4SW/4
Virginia M. Colvin Cities Service Oil Co T4S-R102W 4/12/62 HBP
Sec 12: SW/4SW/4
Lou L. Powell Cities Service Oil Co T4S-R102W 3/20/63 HBP
Sec 12: SW/4SW/4
Lorraine L. Winterer Cities Service Oil Co T4S-R102W 3/21/63 HBP
Sec 12: SW/4SW/4
<PAGE>
Ralph E. Smith Cities Service Oil Co T4S-R102W 3/22/63 HBP
Sec 12: SW/4SW/4
Ray E. Jensen Cities Service Oil Co T4S-R102W 3/22/63 HBP
Sec 12: SW/4SW/4
Albert C. Kirby C.B. Exploration Co T4S-R102W 7/8/71 HBP 320.000
Sec 12: S/2SW/4
<PAGE>
Sec 13: E/2W/2
Sec 24: E/2NW/4
R.W. Pendleton Tst F.S. Di Grappa T4S-R102W 12/8/75 HBP
Sec 12: S/2SW/4
Sec 13: E/2W/2
Sec 24: E/2NW/4
Virginia M. Colvin F.S. Di Grappa T4S-R102W 8/1/75 HBP
Sec 12: S/2SW/4
<PAGE>
Sec 13: E/2W/2
Sec 24: E/2NW/4
Edward Juhan et al F.S. Di Grappa T4S-R102W 8/1/75 HBP
Sec 12: S/2SW/4
Sec 13: E/2W/2
Sec 24: E/2NW/4
Lorraine L. Winterer F.S. Di Grappa T4S-R102W 8/1/75 HBP
<PAGE>
Sec 12: S/2SW/4
Sec 13: E/2W/2
Sec 24: E/2NW/4
Ray E. Jensen F.S. Di Grappa T4S-R102W 8/13/75 HBP
Sec 12: S/2SW/4
Sec 13: E/2W/2
Sec 24: E/2NW/4
Ralph E. Smith F.S. Di Grappa T4S-R102W 8/1/75 HBP
<PAGE>
Sec 12: S/2SW/4
Sec 13: E/2W/2
Sec 24: E/2NW/4
John R. Anderson F.S. Di Grappa T4S-R102W 8/12/75 HBP 320.000
Resurvey Tract 37
comprising parts of Sections 2, 3, 10 & 11
Albert G. Kirby Cities Service Oil Co T4S-R102W 3/22/75 HBP
Resurvey Tract 37
<PAGE>
comprising parts of Sections 2, 3, 10 & 11
David D. Robinson Cities Service Oil Co T4S-R102W 3/22/75 HBP
Resurvey Tract 37
comprising parts of Sections 2, 3, 10 & 11
Max B. Lewis Cities Service Oil Co T4S-R102W 8/12/75 HBP
Resurvey Tract 37
comprising parts of Sections 2, 3, 10 & 11
<PAGE>
First Congregational Cities Service Oil Co T4S-R102W 3/10/74 HBP
Church of Grand Resurvey Tract 37
Junction comprising parts of Sections 2, 3, 10 & 11
Marguerite B. Smith Lawrence Barker T4S-R102W 1/1/78 HBP 200.000
Sec 12: SE/4SW/4
Sec 13: E1/2W1/2
Sec 24: E/2NW/4
<PAGE>
C-03997 Cascade Land T4S-101W 6/1/68 HBP 640.000
Leasing Co Sec 3: N/2
Sec 4: S/2
C-03638 Cascade Land T4S-R101
Leasing Co Sec 9: SW/4, NE/4SE/4, W/2SE/4 5/1/68 HBP 280.000
C-0121361 Walter Duncan T3S-R102W 5/1/64 HBP 2,240.000
Sec 27: ALL
<PAGE>
Sec 28: ALL
Sec 33: ALL
Sec 34: N/2
C-2864 Robert L. Milkulich T3S-R101W 12/1/67 HBP 640.000
Sec 32: ALL
C-03961 J. Pelham Johnston T4S-R102W 4/1/52 HBP 1,403.780
Sec 1: Lots 5-8, S/2N/2, SE/4, N/2SW/4, SW/4SW/4
Sec 2: Lots 5-10, S/2N/2, N/2S/2, S/2SE/4
<PAGE>
Sec 3: Lots 5,6,9, S/2NE/4, N/2SE/4
C-03286 Preston Oil Co T4S-R101W 9/1/51 HBP 280.000
Sec 11: NW/4SE/4, E/2SE/4
Sec 11: NE/4
C-03955 Cities Service Oil Co T4S-R102W 4/1/52 HBP 1,800.000
Sec 12: SE/4NE/4, NW/4SW/4, S/2SE/4, N1/2NE1/4
Sec 13: E/2, W1/2W1/2
Sec 14: ALL
<PAGE>
Sec 15: N/2, N/2SE/4, SE/4SE/4
C-12755 Cascade Land T4S-R101W 6/1/71 HBP 1,044.190
Leasing Co Sec 5: W/2SE/4
Sec 7: S1/2SW1/4, NE1/4SW1/4, SE1/4
Sec 8: Lots 1,2, W/2NE/4, NW/4
Sec 17: Lots 1,2, W/2NE/4, NW1/4
C-03967 Carol Miller T4S-R101W 4/1/52 HBP 1,160.520
<PAGE>
Sec 5: Lots 5-10, SW/4NE/4, S/2NW/4, SW/4
Sec 6: Lots 8-11, S/2N/2, S/2 (ALL)
C-03286-B Preston Oil Co T4S-R101W 9/1/51 HBP 40.000
Sec 11: SW/4SE/4
C-25358 John H. Brunel T4S-R101W 6/1/77 HBP 200.000
Sec 9: SE/4SE/4
Sec 16: W/2NE/4, E/2SE/4
<PAGE>
C-03963 J. Pelham Johnston T4S-R102W 4/1/52 HBP 754.100
Sec 10: Lots 1-6, 8, 9, N1/2NW1/4, SW1/4NW1/4, SE1/4SE1/4
Sec 11: Lots 1,2,3, SE/4NW/4, SW/4
Sec 12: W/2NW/4
C-12754 Raymond Chorney T4S-R101W 4/15/64 HBP 160.000
Sec 7: NW1/4
Twin Buttes Land Teton Energy Co. T4S-R102W
<PAGE>
Company Sec 10: SE1/4NW1/4
Sec 13: NE1/4SW1/4
Surface Access Agreement
Chaparral Resources, T4S-R102W
Inc. Sec 12: S1/2SW/4
Sec 13: E1/2W1/2
Sec 24: E1/2NW1/4
<PAGE>
2/100ths mineral interest
TOTALS 12,162.590
<PAGE>
Rio Blanco County, Colorado Related Contracts
Effective Date Contract Description
7/8/63 Operating Agreement South Douglas Creek Unit and Unit Operating
Agreement
11/20/75 Operating Agreement Cities Service Agreement
6/1/76 Operating Agreement Mountain Fuel Agreement
11/3/76 Operating Agreement Tipperary Agreement
9/1/77 Operating Agreement Superior Agreement
4/18/84 Operating Agreement Joint Operating Agreement (individual well)
6/21/84 Operating Agreement Joint Operating Agreement (individual well)
<PAGE>
11/1/75 Farmout Farmout Agreement between Cities Service and Frank
DiGrappa
6/1/76 Letter Agreement Letter Agreement between Mountain Fuel and Frank
DiGrappa
7/19/76 Agreement Agreement between Norris Oil Co. and Frank DiGrappa
9/23/76 Farmout Farmout Agreement between Teton and Tipperary
6/3/77 Farmout Superior - Teton Farmout Agreement
1/1/95 Marketing Marketing Agreement between Conoco Inc. and Chaparral
Resources, et al
11/1/96 Marketing Marketing Agreement between Wasatch Oil & Gas and
Chaparral Res., et al
<PAGE>
EXHIBIT C
FORM OF NONFOREIGN AFFIDAVIT
Exemption from Withholding of Tax
For
Dispositions of U.S. Real Property Interests
Section 1445 of the Internal Revenue Code provides that a transferee of a U.S.
real property interest must withhold tax if the transferor is a foreign person.
To inform Conoco Inc. that withholding of tax is not required upon the
disposition of a U.S. real property interest by -------------------------, the
undersigned hereby certifies the following:
1. ---------------------- is not a nonresident alien, foreign corporation,
foreign partnership, foreign trust, or foreign estate for purposes of U.S.
income taxation.
2. ------------------------ taxpayer identifying number is ------------------.
3. --------------------------- office address is --------------.
- ----------------- understands that this certification may be disclosed to the
Internal Revenue Service by ------------------ and that any false statement
contained herein could be punished by fine, imprisonment, or both.
Under penalties of perjury, I declare that I have examined this certification
and, to the best of my knowledge and belief, it is true, correct, and complete,
and I further declare I have authority to sign this document.
By:
--------------------------------
Title:
-----------------------------
SUBSCRIBED AND SWORN TO by the said -------------------------------------
- ------------------------------------, --------------------------------------- of
- ---------------, before me this ---- day of --------, 199-, to certify which
witness my hand and seal of office.
My commission expires on the ----- day of ----------, 19--.
---------------------------------
NOTARY PUBLIC in and for
THE STATE OF ------------------
<PAGE>
EXHIBIT E-1
SELLER'S ASSIGNMENT NOTICE
February 28, 1997
Conoco Inc.
10 Desta Drive, Suite 100W
Midland, TX 79705-4500
Re: Notice of Assignment of Purchase and Sale Agreement dated February ---,
1997, Effective January 1, 1997 between Chaparral Resources, Inc. and
Conoco Inc.
Chaparral Resources, Inc. ("Seller") hereby notifies Conoco Inc. ("Buyer") that
Seller has assigned all of its rights under the Purchase and Sale Agreement
dated February ---, 1997, effective January 1, 1997, between Seller and Buyer
("Purchase and Sale Agreement") to ------------------------, a qualified
intermediary (as that term is defined in Section 1.1031(k)- 1(g)(4)(v) of the
Treasury Regulations), as provided in Section 11.1 of the Purchase and Sale
Agreement. The assignment of the Purchase and Sale Agreement is effective
February ---, 1997.
Seller makes this assignment of the Purchase and Sale Agreement solely for the
purpose of completing the transaction contemplated by the Purchase and Sale
Agreement as a like-king exchange of property under Section 1031 of the Internal
Revenue Code of 1986, as amended. Nothing in this letter will be deemed to
evidence and release of either Seller or Buyer from any of their respective
liabilities and obligations to each other under the Purchase and Sale Agreement.
Sincerely Yours,
CHAPARRAL RESOURCES, INC.
- ------------------------------
BUYER'S ACKNOWLEDGEMENT OF NOTIFICATION
Buyer hereby acknowledges receipt of notification to Buyer as required by
Treasury Regulation Section 1.1031(k)-1(g)(4)(v) and Buyer's signature hereon
shall constitute acceptance of such notification. Buyer's acceptance of this
notification shall in no way be deemed to release Seller or Buyer from any of
their agreements, representations, warranties and/or indemnifications set forth
in the Purchase and Sale Agreement, nor shall the assignment of the Purchase and
Sale Agreement be deemed to enlarge the rights, duties or obligations of any
party under the Purchase and Sale Agreement.
CONOCO INC.
- ------------------------------
<PAGE>
EXHIBIT E-2
BUYER'S ASSIGNMENT NOTICE
February 28, 1997
Chaparral Resources, Inc.
3400 Bissonnet, Suite 135
Houston, TX 77005
Re: Notice of Assignment of Purchase and Sale Agreement dated February ---,
1997, Effective January 1, 1997 between Conoco Inc. and Chaparral
Resources, Inc.
Conoco Inc. ("Buyer") hereby notifies Chaparral Resources, Inc. ("Seller") that
Buyer has assigned all of its rights under the Purchase and Sale Agreement dated
February ----, 1997, effective January 1, 1997, between Seller and Buyer
("Purchase and Sale Agreement") to Petroleum Strategies, Inc., a qualified
intermediary (as that term is defined in Section 1.1031(k)-1(g)(4)(v) of the
Treasury Regulations), as provided in Section 11.1 of the Purchase and Sale
Agreement. The assignment of the Purchase and Sale Agreement is effective
February ----, 1997.
Buyer makes this assignment of the Purchase and Sale Agreement solely for the
purpose of completing the transaction contemplated by the Purchase and Sale
Agreement as a like-king exchange of property under Section 1031 of the Internal
Revenue Code of 1986, as amended. Nothing in this letter will be deemed to
evidence and release of either Seller or Buyer from any of their respective
liabilities and obligations to each other under the Purchase and Sale Agreement.
Sincerely Yours,
CONOCO INC.
- -------------------------
SELLER'S ACKNOWLEDGEMENT OF NOTIFICATION
Seller hereby acknowledges receipt of notification to Seller as required by
Treasury Regulation Section 1.1031(k)-1(g)(4)(v) and Seller's signature hereon
shall constitute acceptance of such notification. Seller's acceptance of this
notification shall in no way be deemed to release Seller or Buyer from any of
their agreements, representations, warranties and/or indemnifications set forth
in the Purchase and Sale Agreement, nor shall the assignment of the Purchase and
Sale Agreement be deemed to enlarge the rights, duties or obligations of any
party under the Purchase and Sale Agreement.
CHAPARRAL RESOURCES, INC.
- ------------------------------
AMENDMENTS
TO
CHAPARRAL RESOURCES, INC.
1989 STOCK WARRANT PLAN
RESOLVED, that Section 6(g) of the Company's 1989 Stock
Warrant Plan (the "Plan") is hereby amended to provide that upon
termination of employment by a Warrant Holder who is not a
director of the Company, the Board of Directors shall have the
option, in its sole discretion, to extend the expiration date of
any Warrant previously granted to a Warrant Holder for a period
of up to nine (9) months following the date of termination of the
Warrant Holder's employment with the Company.
RESOLVED, that Section 8 of the Company's 1989 Stock Warrant
Plan (the "Plan") is hereby amended to provide that a Warrant
granted under the Plan may be assigned by a Warrant Holder to a
Warrant Holder's family member or to a charitable trust created
by the Warrant Holder. For purposes of this Section and the Plan,
the term family member means a parent, child, grandparent or
spouse.
AGREEMENT
FOR EXPLORATION, DEVELOPMENT AND
PRODUCTION
OF OIL IN KARAKUDUK OIL FIELD
IN MANGISTAU OBLAST
OF THE REPUBLIC OF KAZAKHSTAN
BETWEEN
MINISTRY OF OIL AND GAS INDUSTRIES
OF THE REPUBLIC OF KAZAKHSTAN
FOR AND ON BEHALF OF
THE GOVERNMENT OF THE REPUBLIC OF
KAZAKHSTAN
AND
JOINT STOCK COMPANY OF CLOSED TYPE
KARAKUDUK MUNAY JOINT VENTURE
ALMATY - 1995
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
SUBJECT OF THE AGREEMENT......................................................................................1
SECTION 1. Definitions.......................................................................................2
SECTION 2. Ownership Rights..................................................................................6
SECTION 3. Duration of the Agreement and Termination.........................................................7
3.1. Duration.....................................................................7
3.2. Exploration Phase............................................................7
3.3. Development and Production Phase.............................................8
3.4. Termination..................................................................8
SECTION 4. Principle Rights and Obligations of the
Contractor and Investor.................................................................9
4.1. Rights of the Contractor and Investor........................................9
4.2. Obligations of the Contractor...............................................12
SECTION 5. Assistance and the Support of the
Authorized Body........................................................................14
SECTION 6. Board of Directors...............................................................................15
SECTION 7. Operational and Financial Requirements
and Budget.............................................................................15
7.1. Exploration.................................................................15
7.2. Development and Production..................................................16
7.3. Procedural and Approval Method of the
Operational Documents.................................................17
SECTION 8. Expenditures and Compensation....................................................................19
SECTION 9. Commercial and Financial Terms and Conditions....................................................19
9.1. Financial Matters...........................................................19
9.2. Customs.....................................................................20
9.3. Taxes and Payments..........................................................20
9.4. Compensation................................................................26
9.5. Accounting Procedures and Auditing..........................................26
SECTION 10. Protection of Subsurface Resources, Natural
Environment and Labor and Population Safety............................................27
SECTION 11. Other Legal Issues..............................................................................28
11.1. Transfer and Assignment of Rights..........................................28
11.2. Payments Related with Field Allocation
and Usage Right......................................................28
11.3. Insurance..................................................................28
11.4. Legal Adjustments in Relation with
Working Conditions...................................................29
11.5. Force Majeure..............................................................29
11.6. Local Consumption..........................................................29
11.7. Amendments to the Terms and Conditions
of the Agreement.....................................................30
11.8. Confidentiality............................................................30
11.9. Settlement of Disputes.....................................................31
11.10. Waiver....................................................................31
11.11. Correspondence............................................................32
11.12. Headings..................................................................32
</TABLE>
<PAGE>
SUBJECT OF AGREEMENT
This agreement (hereinafter referred to as "Agreement") is prepared and signed
on "30" August 1995 by and between the Ministry of Oil and Gas Industry of the
Republic of Kazakhstan, (hereinafter referred to as "Authorized Body") acting
for and on behalf of and representing the Government of Republic of Kazakhstan
in accordance with the legislation of the Republic of Kazakhstan and Joint Stock
Company of closed type "Karakuduk-Munay Inc." Joint Venture, established and
operating in accordance with and under the existing Laws of Republic of
Kazakhstan, (hereinafter referred to as "Contractor"); and having the following
shareholders: PGO "Mangistauneftegazgeologiya" with its new name GHK Zharkyn,
"Kazakhstanmunaygaz" National Petroleum Company with its new name GHK Munaygaz
and "Korporatsiya KRAMDS-Mangistau" Inc. which is owned by Korporatsiya
Mangistau Terra International, by assignment of shares, established and
operating under the laws of the Republic of Kazakhstan, hereinafter collectively
referred to as "Shareholders of Kazakhstan Side" and Central Asian Petroleum
(Guernsey) Limited, established and operating under the laws of Island of
Guernsey, (hereinafter referred to as "Investor"). The Authorized Body and the
Contractor are sometimes referred to individually as "Party" and collectively as
"Parties" hereinafter in this Agreement.
WHEREAS; as a result of the transfer of some of the rights and shares of the
Contractor to the Investor in accordance with the Clauses 4.1.9. and 11.1.1, the
parties to that certain agreement dated 1st of July 1993 between the Authorized
Body and the Contractor, signed in accordance with the Decree of the Cabinet of
Ministers of the Republic of Kazakhstan No: 498 dated June 11, 1993. Thus, by
execution of this Agreement, the 1st of July 1993 dated agreement, as amended by
this Agreement, is superseded by this Agreement and now this Agreement shall be
in full force and valid.
WHEREAS; the Contractor has been formed with the re-registration of the Articles
of Association of joint stock company of closed type Karakuduk-Munay Inc. Joint
Venture (hereinafter referred to as the "Articles"); by the Registrar Office of
Economical Corporations, Incorporated Partnerships and Companies of Financial
Directorate of Mangistau Province No. 23625 dated March 1, 1995; and by the
National Agency of Foreign Investments No. 2262 dated April 27, 1995.
WHEREAS; the usage right of the Subsurface Resources of the Field of 68.4 sq.km.
in the Town of Mangistau of Mangistau Region of which the Geographical
Coordinates are given herein below in drawing number L-39-xx, and whereas the
Observation Map is provided as Enclosure-I to this Agreement; has been given to
joint stock Company of closed type Karakuduk-Munay Inc. Joint Venture, for a
period of 30 (thirty) years, for exploration, development, production,
treatment, storage, refining, transporting and sales including export of
hydrocarbons from Karakuduk oil field;
<PAGE>
44o51'43" North Parallel 53o52'30" East Meridian 44o52'20" North Parallel
53o54'08" East Meridian 44o52'10" North Parallel 53o59'10" East Meridian
44o49'10" North Parallel 54o02'50" East Meridian 44o48'13" North Parallel
53o57'10" East Meridian 44o49'40" North Parallel 53o53'17" East Meridian
WHEREAS; the Contractor shall have the obligation to conduct the Work Program in
accordance with the terms and conditions of this Agreement by taking into
consideration the License for the Right to Use Natural Deposits (hereinafter
referred to as "License") issued by the Government of Republic of Kazakhstan on
June 28, 1995 with the serial number MG No:249 Oil.
SECTION-1
DEFINITIONS
Unless otherwise specifically referred to in this Agreement, any singular word
may define the plural and any plural word may define the singular.
1.1. "Agreement" means this Agreement signed by and between the Ministry of Oil
and Gas Industry of the Republic of Kazakhstan and joint stock company of closed
type Karakuduk-Munay Inc. Joint Venture for the implementation of the Petroleum
Activities.
1.2. "Petroleum Activities" means as foreseen in the Agreement; geological
research, development, production, treatment and purification (treatment and
drying process for the natural gas and the separation of it in different
elements from petroleum), refining, storage, pipeline transportation and
marketing and sales activities in local and international markets of the
hydrocarbons and any other preparation and sub-activities associated with.
1.3. "Expenditures for Petroleum Activities" means all types of costs and
expenditures incurred by the Contractor for the Petroleum Activities in
accordance with the Agreement i.e. (expenditures related with well and
equipment, maintenance, construction, subsurface and earth studies, repairs,
chemicals, oils and lubricants, spare parts, labor force, required services for
operations, catering and accommodation, management and administration, personnel
training and the preparation and issue of project-budget documentation and other
related documentation as well as removing the remaining).
1.4. "Authorized Body" means the Ministry of Oil and Gas Industry of the
Republic of Kazakhstan who is acting for and on behalf of the Government of the
Republic of Kazakhstan and legally empowered to conduct Petroleum Activities.
2
<PAGE>
1.5. "Contractor" means joint stock company of closed type Karakuduk-Munay Inc.
Joint Venture whose Shareholders are; GHK Zharkyn with 20% (twenty percent)
share, GHK Munaygaz with 20% (twenty percent) share, Korporatsiya Mangistau
Terra International with 10% (ten percent) share and the Investor, Central Asian
Petroleum (Guernsey) Limited with 50% (fifty percent) share.
1.6. "Sub-Contractor" means any private and/or juridical person who is used by
the Contractor for the supply of required equipment, material and services in
the required and demanded quality in order to fulfill the requirements of the
Agreement.
1.7. "Agreement Field" means Karakuduk Oil Field allocated for Petroleum
Activities, as defined in the Subject of the Agreement Section of this Agreement
and as shown in geographic coordinates in Enclosure-I. During the course of the
Petroleum Activities, in case the geographic settlement borders of the Oil and
Gas fields are determined to be extended the borders of the field defined in the
Subject of the Agreement Section of this Agreement and in Enclosure-I; issue of
expanding the "Agreement Field" shall be resolved by the Parties through mutual
negotiations.
1.8. "Commercial Disclosure" or "Commercial Exploration" means the exploration
of the Hydrocarbon reserves in the Agreement Field of which their operation is
found economical and where the income to be obtained from their production shall
meet with the operation and production expenditures and shall generate the
profit to be found appropriate and reasonable by the Parties. In such a case,
the field is considered productive for the purpose of operation.
1.9. "Field" means one or more natural accumulation of Hydrocarbons, which are
deposited in the Agreement Field one over the other either in connected or
isolated levels or reservoirs, within one or several interconnected geological
traps in vertical form and considered as the whole for the purpose of the
operations.
1.10. "Hydrocarbons" means Crude Oil, Condensate, Natural Gas, natural gas
liquids and any other associated substances found during the production of
those. Natural gas liquid is the Hydrocarbons where the Natural Gas and
Associated Gas is turning into liquid in a different environment than normal
conditions.
1.11. "Petroleum" or "Crude Oil" means; asphalt bithium and liquid Hydrocarbons
that are also known as "Distillate" or "Condensate" and obtained from the wells
in the form of liquid under normal heat and pressure without being dependent
upon their density by densing Natural Gas that can also easily be steamed.
1.12. "Gas" or "Natural Gas" means the gas which is not Hydrocarbon but obtained
from the wells with the Hydrocarbons in the form of gas liquid and Gas remains
after densing different type of Hydrocarbons and elements, sulfur, carbonic
acid, helium (excluding densed gasses that can become liquid), greasy mineral
gas, dry mineral gas, Associated Gas and Hydrocarbons, under normal heat and
pressure.
3
<PAGE>
1.13. "Associated Gas" means the gas comes out during the production of the
Petroleum which is mixed with Crude Oil or accumulated in the Gas cap.
1.14. "Subordinate Petroleum Components" means various mineral and other
elements.
1.15. "Work Program" means all programs that are prepared and issued for the
implementa- tion of the Petroleum Activities in accordance with the License and
the terms and conditions of the Agreement.
1.16. "Investment" means all amounts required for the Petroleum Operations
including properties, rights on properties and intellectual rights.
1.17. "Effective Date" means the date when this Agreement is signed by the
Parties.
1.18. "Commencement Date of the Productive Production" means the date when the
income achieved from the sale of the Petroleum becomes in excess of the
expenditures made for the production and sales of the same.
1.19. "Payout" means the date when Contractor has repaid Investor the
Investment.
1.20. "Shareholders Of The Kazakhstan Side Profit" means the amount of the
Shareholders of the Kazakhstan Side are collectively entitled to as their share
of the distributable profit of Contractor. Such amount shall be calculated and
distributed on a quarterly basis, unless the Board of Directors determines
otherwise, and shall be equal to 50% (fifty percent) of the amount of Contractor
cash flow remaining after subtracting from Contractor's gross revenue for the
quarter: Royalty, Investment Recovery, all operating expenditures, Fiscal
Obligations as required pursuant to this Agreement, any other actual
expenditures made by Contractor during the quarter.
1.21. "License" means a permission granted by the Government of the Republic of
Kazakhstan to the Contractor for conducting exploration and production
activities for a period of 25 (twenty five) years within the Agreement Field.
1.22. "Delivery Point" means the point where the link is established to the
existing pipeline for the further transportation of the product. Such point is
determined with the mutual agreement of the Parties and shall be placed either
within the boundaries of the Agreement Field or outside of such boundaries, in
the most economical point for the transportation of the product.
4
<PAGE>
1.23. "Force-Majeure" means any occurrence that can not be predicted by and
outside the reasonable control of the Parties preventing or delaying any of the
Parties' timely performance of obligations. (Such as riot or civil commotion,
declared or undeclared war, hostilities, actions of not being compliant with the
law, terrorism, natural hazards and disasters, decisions issued by the
Government Authorities, etc.).
1.24. "Investor" means Central Asian Petroleum (Guernsey) Limited who possesses
the 50% (fifty percent) shares of closed type Karakuduk Munay Inc. Joint Venture
or any other juridical body that its shares are transferred and/or assigned to.
The priority for the assignment of the shares is given to the Shareholders of
the Kazakhstan Side.
1.25. "Investment Recovery" means the amount of each installment Investor is
entitled to receive as partial repayment of the Investment from the Contractor,
inclusive of interest at the rate of Libor plus 1% (one percent). Such
installments shall be calculated and paid on a quarterly basis and shall be
equal to 65% (sixty-five percent) of Contractor's gross revenues after deduction
of Royalty (State Share). Any amount of Investment, plus interest, remaining
unpaid after each quarterly installment shall be carried forward to the next
quarter until the full amount of the Investment, plus interest, is repaid. The
Investment Recovery shall be exempt from all Fiscal Obligations.
1.26. "Investor Profit" means the amount the Investor is entitled to as its
share of the dividend (distributable profit) of Contractor. Such amount shall be
calculated and distributed on a quarterly basis, unless the Board of Directors
determines otherwise, and shall be equal to 50% (fifty percent) of the amount of
Contractor cash flow remaining after subtracting from Contractor's gross revenue
for the quarter. Royalty, Investment Recovery, all operating expenditures,
Fiscal Obligations as required pursuant to this Agreement, and any other actual
expenditures made by Contractor during the quarter.
1.27. "Libor" means the annual interest rate on US Dollars ("US$") for one night
offered to the leading banks of the London Interbank by Citibank N.A., London
Branch on the 15th day of each month at 11:00 hr. and published by the Financial
Times Journal in London/United Kingdom. In case the 15th day of the month is a
holiday then the immediately subsequent working day shall be accepted as the
base date for the purpose of such calculation.
1.28. "Royalty (State Share)" means the percentages of the gross production of
the Contractor as shown in Clause 9.3.1. hereinbelow.
1.29. "Board of Directors" means the highest Executive Committee of Karakuduk
Munay Inc. (Contractor) consisting of 8 (eight) members, 4 (four) members each
assigned by Shareholders of the Kazakhstan Side including the Authorized Body
and by the Investor.
1.30. "Fiscal Obligations" means without limitations: all taxes, royalties,
levies, imposts, fees, fines, withholdings, forced savings, mandatory funds,
escrow's, accounting or valuation procedures which impact the timing or
magnitude of Shareholders Of the Kazakhstan Side Profit, Investor's Profit, or
5
<PAGE>
Investment Recovery or any other amounts to be received by the shareholders of
the Contractor.
SECTION - 2
OWNERSHIP RIGHTS
2.1. The Contractor, as a result of the expenditures incurred and due to the
obligations undertaken, has the exclusive right to perform any type of
activities to conduct research, exploration, development, operations,
production, sales activities, transportation, export, and any other related
activities or sub-activities regarding any, and all, Hydrocarbon (hereinafter
referred to as "HC") reserves within the boundaries of the Agreement Field, for
the full term of this Agreement.
Republic of Kazakhstan has the authority to protect the ownership right of earth
and subsurface. Contractor is not the owner of natural resources in the
Agreement Field and can only demand the HC produced in accordance with the terms
and conditions of this Agreement.
2.2. Contractor receives the ownership to all HC produced from the Agreement
Field at the point of severance from the wellhead, free of any debts or
financial obligations except as may be provided for in this Agreement.
2.3. If the Government of the Republic of Kazakhstan elects to take Royalty in
kind as provided in Clause 9.3.1. then any such amount of HC shall be brought to
the Point of Delivery by the Contractor and shall be transported by the
Authorized Body on behalf of the Government of the Republic of Kazakhstan
promptly without any delay. Contractor can transport and sell the HC share of
the Government if the Parties so agree. In such a case, Contractor has the
authority to buy and sell the HC share of the Government. If the Government
intends to raise a demand to have its own share partially or wholly sold by the
Contractor, then Government shall notify the Contractor in written form 3
(three) months before the end of each calendar year and semi-annual year and
shall reach an agreement with the Contractor about the terms and conditions and
time period for the sale of its own HC share by the Contractor. Contractor can
be compensated as a result of performing such services. This compensation should
be equal to transportation and marketing expenses. Therefore, the amount
received by the Government out of this HC shall equal to the amount obtained out
of sale after deduction of the mentioned compensation. In case the Contractor
wishes to buy the HC share of the Government, then sales price shall be
determined in accordance with Clause 9.4.2. In such a case, the payment shall
take place on monthly basis. (Within 30 (thirty) days commencing from the end of
the month that the HC share of the Government is sold.)
2.4. Contractor shall bear the ownership of the tangible assets in the Agreement
Field after the execution of the Assignment/Delivery Certificate of the
6
<PAGE>
Karakuduk Field in accordance with the balance sheet of the Ministry of Geology
and Preservation of Underground Resources (GHK Zharkyn).
The right of ownership of the tangible assets shall be transferred to the
Authorized Body after the completion of the amortization. Contractor shall be
entitled to use these amortized tangible assets during the whole term of the
Contract free of charge.
2.5. Contractor possesses all and every type of rights on any type of geological
and other information received in relation to the Field Assignment/Delivery
Certificate of the Karakuduk and on any type of geological, geophysical,
technical and other information obtained by the Contractor during the course of
Petroleum Activities.
Contractor, during the term of the Agreement shall give all obtained information
related with the subsurface to the Ministry of Geology and Preservation of
Underground Resources of the Republic of Kazakhstan in accordance with clause
3.37 of the Law of "Subsurface Resources and Raw-Material Operation" subject to
and without prejudice to its right of bearing ownership on this information.
SECTION - 3
DURATION OF THE AGREEMENT AND
TERMINATION
3.1. Duration
3.1.1. Duration of the Agreement is continuous 30 (thirty) years
commencing from the date of the execution of this Agreement and later
on can be extended to a date to be mutually agreed between the Parties
as long as Productive Production of Petroleum and/or Gas is continued
in the Agreement Field.
3.1.2. The information regarding the necessary funding/financing, as
convincing evidence shall be submitted to the Authorized Body prior to
the operations.
3.1.3. Contractor, prior to Field research and operation activities,
shall include the assets in the Field and the geological and
geophysical data related to the Agreement Field to its own balance
sheet in accordance with the issued Assignment/Delivery Certificates.
3.2. Exploration Phase
Exploration activities in the Field shall start within 1 (one) month commencing
from the date of the execution of this Agreement, and/or as indicated in Clause
9.1.5. hereinbelow, to conduct the project studies and field seismic surveys,
7
<PAGE>
preparation and operation of temporary production projects, the evaluation of HC
reserves by determining the geological-mining characteristics and the production
capacity of the Field, preparation and completion of the technology and project
documentation needed for the industrial usage of the Field and finally to secure
the necessary permissions and the required funding/financing. The Petroleum
produced (which cannot exceed 100,000 (one hundred thousand) tons during the
full exploration phase) from the exploration and development wells during the
testing of the wells, will belong to the Contractor and will be utilized to
cover the expenditures incurred for the Petroleum Activities. The exploration
phase will be 3 (three) years. The forgoing shall not in any way diminish
Contractor's exclusive right, even after the initial 3 (three) year exploration
phase, to conduct exploration, development, production and other related
activities in all areas within the Agreement Field for the full term of this
Agreement, as provided in Clause 3.1.
3.3. Development and Production Phase
3.3.1. Operation Activities of the Agreement Field shall be started
within 6 (six) months following the approval of Technology and Project
Documentation in the required order. Within the capacity of this
operation, completion of the exploration and the construction as
required for the production wells as indicated in the Project Documents
and the disposal of water and/or the application and realization of
other technologies as necessary to obtain maximum Petroleum, are
included. For the purpose of all permits and licenses required for
development of the Hydrocarbon reserves in the Agreement Field, the
entire Agreement Field shall be considered a single Field for such
purpose, and such permits and licenses shall permit development of any
and all Hydrocarbon reserves within the Agreement Field for the full
term of this Agreement.
3.3.2. Petroleum development, production and sales activities may start
before, but shall start no later than upon the conclusion of the
initial exploration phase and Contractor's obtaining of the permits and
licenses to develop the Agreement Field.
3.4. Termination
3.4.1. Contractor may terminate this Agreement by serving 60 (sixty)
days written notice to the Authorized Body without any cause at any
time. Termination shall not exempt the Contractor from its obligations
which were due but not fulfilled prior to the Contractor's written
notice in this respect. Provided, however, that should at the time such
obligations are due to be performed and Contractor terminates this
Agreement: (i) a reasonable dependable means of export, or authority to
export from applicable government authorities, to export the reasonably
projected production capacity are unavailable to Contractor; or, (ii)
the available means of export become uneconomic; then Contractor shall
be exempt from such obligation.
8
<PAGE>
3.4.2. If the Contractor commits a material breach of the Agreement
and/or the License, the Authorized Body shall have the right to demand
that such breach be remedied within a reasonable period of time. If
such breach is not remedied within such period of time reasonably
requested, by the Contractor to remedy such breach, the Authorized Body
shall have the right to notify the Contractor of termination of this
Agreement and such termination shall become effective 90 (ninety) days
after such written notice, unless, Contractor dispute such material
breach, or such remedy of same. If Contractor disputes such material
breach or such remedy of same, then the matter shall be determined by
arbitration in accordance with Clause 11.9.
3.4.3. In case of the termination of the Contract; Contractor can
receive back all of its assets existing in the Agreement Field of which
their cost has not been fully amortized before termination. Amortized
assets are the property of the Authorized Body but nevertheless can be
used by the Contractor during the term of the Agreement. In case of
termination, Contractor shall hand-over and deliver the Agreement Field
to the related State Authorities in the condition as required by the
principles of mining and health, and of the protection of subsurface
resources and natural environment.
SECTION - 4
PRINCIPLE RIGHTS AND OBLIGATIONS
OF THE CONTRACTOR AND THE
INVESTOR
4.1. Rights of the Contractor and the Investor
Contractor has the following rights and authority:
4.1.1. The exclusive right of conducting Petroleum Activities in the
Agreement Field in accordance with the provisions of this Agreement.
4.1.2. Right of entry to the Agreement Field and to the other fields
in order to conduct Petroleum Activities.
4.1.3. Right for the utilization of local and world-wide known most
effective methods and technologies in order to conduct the Petroleum
Activities.
4.1.4. Right for selecting any type of activity form and administrative
organization structure within the boundaries of the purpose defined in
the Agreement.
4.1.5. Right to construct and equip industrial and social facilities
in the Agreement Field and to use public facilities and communication
systems in or outside of the Agreement Field provided that an
agreement is reached with the possessors of such facilities in that
respect in order to maintain the activities under normal and standard
conditions.
9
<PAGE>
4.1.6. Right of utilizing the services of local and/or foreign
Sub-Contractors who have required technical facilities and experience,
in case of necessity during the implementation of the Petroleum
Activities.
4.1.7. Right of using own Petroleum Profit and the related products in
the way as desired.
4.1.8. Right of participating in the Petroleum Activities and in any
type of other activities conducted in other fields either within the
lands or outside the lands of the Republic of Kazakhstan and opening
branch offices and liaison offices thereof.
4.1.9. Right to assign and transfer wholly and/or partially its own
rights, priorities and benefits to third parties or to authorize those
by another method provided that practice of such right shall be
compliant with the provisions of the Agreement and shall be notified to
the Authorized Body in written form. Such notification shall contain,
as being completely compliant to this Agreement, all changes,
amendments and additions implemented prior to delivery for the purpose
of identifying assignee and/or authorized party as the case may be.
4.1.10. Right of submitting applications to the Government and/or to
the Authorized Body for the re-negotiation of the License and the
contractual terms and conditions in the case of occurrences outside the
contractual terms and conditions after the execution of the Agreement.
4.1.11. Right of priority in the case of extension of the term of the
existing License and Agreement and/or executing a new agreement in the
Agreement Field.
4.1.12. Right to relinquish a portion of the Field in accordance with
the conducted program studies or relinquishing a portion of the Fields
before completing such studies.
Nevertheless, the relinquished portion of the Field shall be in the
simple geometric shape when it is divided from the Agreement Field by
straight or cracked line.
4.1.13. Right to export, and the right to receive export quotas and
export licenses for the full production capacity of HC from the
Agreement Field. Additionally, the right, but not the obligation, to
negotiate Contractor's own quota with other related countries
authorized bodies and establishments, and to have the Republic of
Kazakhstan recognize and grant export quotas and export licenses in
regard to any such quota.
10
<PAGE>
4.1.14. Right to use the existing Pipeline for the purpose of
transferring the produced Hydrocarbons to the Baltic Sea, Kainingrad
and Vendspils ports and/or to Black Sea, Novorosiysk Port. And the
right of priority to use all other available means of transportation,
storage, and marine terminals. The transportation fees and tariffs
charged to the Contractor shall be no more than those paid by any other
transporter.
4.1.15. Right to unobstructed use of the surface of the Agreement Field
in conjunction with Petroleum Activities, and the right to water
necessary for Petroleum Activities.
4.1.16. Right to keep hard currency proceeds of HC sales, free of
mandatory currency conversions in accordance with the laws of the
Republic of Kazakhstan.
4.1.17. Right to have a hard currency bank account within the Republic
of Kazakhstan and hard currency bank accounts outside of Republic of
Kazakhstan as Contractor may deem appropriate, in accordance with the
laws of the Republic of Kazakhstan.
4.1.18. Right to import and export same as that provided to Foreign
Contractor and Foreign Contractor's personnel pursuant to Clause 9.2.
4.1.19. Right to defer the work obligations of the Contractor as
mentioned in the License, in case of inability for the exportation of
Hydrocarbons, for the same period.
4.1.20. Investor possesses the following rights:
o Right to Investment Recovery and Investor Profit;
o Right of having been exempted from every type of
Fiscal Obligations on the Investment Recovery;
o Right to export, and the right to receive export
quotas and export licenses for all Crude Oil taken in
kind by the Investor pursuant to this Agreement.
Additionally, the right, but not the obligation, to
negotiate Investor's own quota with other related
countries authorized bodies and establishments and to
have the Republic of Kazakhstan, recognize and grant
export quotas and export licenses in regard to any
such quota;
o Right to use the existing Pipeline for the purpose of
transferring the produced Hydrocarbon to the Baltic
Sea, Kainingrad and Vendspils ports and/or to Black
Sea, Novorosiysk Port. And the right of priority to
use all other available means of transportation,
storage, and marine terminals. The transportation
fees and tariffs charged to the Investor shall be no
more than those paid by any other transporter;
11
<PAGE>
o Right to market and sell any, or all, Crude Oil taken
in kind to any purchaser within or without the
Republic of Kazakhstan;
o Right to retain export proceeds outside of Kazakhstan
without any obligation to return same to Kazakhstan
after fulfilling the Fiscal Obligations mentioned in
this Agreement;
o Right to export all Investment Recovery, Investors
Profit and all other amounts due Investor pursuant to
this Agreement;
o Right to keep foreign currency and to exchange
Republic of Kazakhstan currency for hard currency and
the right to exchange hard currency for the Republic
of Kazakhstan currency at the most favorable rate
available in the Republic of Kazakhstan in accordance
with the laws of the Republic of Kazakhstan; and
o Right to import and export same as that provided to
Foreign Contractor and Foreign Contractor's personnel
pursuant to Clause 9.2..
4.2. Obligations of the Contractor
Obligations of the Contractor during the implementation of the Agreement are as
follows:
4.2.1. Using the Agreement Field only for the purposes defined in the
Agreement.
4.2.2. Detailed geological studies and investigations of the subsurface
resources as well as supply of the Markschader service and to guarantee
that all the reports issued about the product and the associated
products are true and correct.
4.2.3. In case of deficiencies in the legislation of the Republic of
Kazakhstan with reference to the Petroleum Activities, for the cases
mentioned herein below, Contractor shall follow and practice the
International Principles:
o Field usage
o Proper implementation of the Petroleum Activities for
the security of personnel and population.
o To protect subsurface resources, air, earth,
forestry, water, zoological animates and other
facilities from harmful effects arising from the
Petroleum Activities. Nevertheless, Contractor shall
have no responsibility for the damages given to the
natural environment prior to the effectively of the
Agreement.
12
<PAGE>
o To protect places and areas with historical and
cultural value.
o To indemnify the nature and lands damaged during the
course of the Petroleum Activities at its own cost
for the purpose of future utilization.
4.2.4. To permit all types of activities and studies for the research,
exploration, operation and production of other natural resources,
excluding HC, to be conducted by other persons including giving
permission for the usage and utilization of the communication
facilities and other public facilities provided that such activities
shall not effect and prevent the Petroleum Activities in the Agreement
Field.
4.2.5. To be compliant with the technological schedules, drawings and
projects approved within the scope of the current mining study norms
related to the conduct of Petroleum Activities.
4 2.6. To give priority to the equipment, materials and products
manufactured locally in the Republic of Kazakhstan as long as these are
competitive in terms of quality, price, working capacity and delivery
terms.
4.2.7. To give preference to the services of Kazakh Entities and
Organizations such as airways, railways, hydraulic works, etc.
including the usage and utilization of motor vehicles to be used during
the course of Petroleum Activities, as long as these local services are
competitive in terms of price, effectively, and quality.
4.2.8. To give priority to the work-force of the Republic of Kazakhstan
during the course of the Petroleum Activities by employing required
qualified engineers and technical team and where there is a shortage or
insufficiency, to provide training and education opportunities to these
staff at the account of the Contractor in accordance with the agreed
program.
4.2.9. To submit to the Board of Directors; the program of determined
studies, and every type of information obtained during the
implementation of those of those (geological, industrial, statistical,
etc. account reports in force) in accordance with the standards.
4.2.10. To give permission to the Auditing Organs of the Republic of
Kazakhstan for free entry and visit the work-place, to provide them
with all necessary documentation and appropriate conditions for the
purpose of enabling these units to perform their duties properly.
4.2.11. In case of a necessity, to provide the information obtained
during the course of the Petroleum Activities to the third parties,
provided that a mutual agreement is reached by the Parties in this
respect.
13
<PAGE>
4.2 12. To effectuate tax payments and other payments as provided in
the existing legislation of the Republic of Kazakhstan.
4.2.13. In case of a cease the rights on the Agreement Field, or
partial relinquishment in accordance with Clause 4.1.12 hereinabove,
the Contractor, shall rearrange the land by clearing and removing all
mass and garbage occurred as a result of the Petroleum Activities
related with the Agreement at its own cost, in compliance with the
instructions of State Mining, Health, Subsurface Resources and Natural
Environment Protection Organs.
4.2.14. During the term of the Agreement it is expected that the total
financial requirements will reach to an aggregate amount of US $
216,000,000 (two hundred sixteen million US Dollars).
SECTION - 5
ASSISTANCE AND SUPPORT OF THE
AUTHORIZED BODY
5.1. Authorized Body, where necessary, shall provide help and assistance to the
Contractor for the following matters:
o Within and outside the boundaries of the Republic of
Kazakhstan; to obtain all required licenses and permits
necessary for the transportation of products, raw-materials
and consignment.
o The application and usage of the latest techniques, technology
and equipment.
o During the purchase of foreign technology and equipment, to
prepare and issue customs permissions and to provide foreign
currency.
o To provide all required permissions and licenses to open
Foreign Currency Bank Accounts within and outside the
boundaries of the Republic of Kazakhstan.
o To obtain every type of geological, geophysical, etc. data
belonging to entities and/or organizations related or not
related with the Agreement field but can be used for an
efficient Petroleum Activity.
o To apply to obtain the approval of the Cabinet of Ministers of
the Republic of Kazakhstan regarding the exemption of the
export duty for the exportation of the HC.
14
<PAGE>
5.2. Authorized Body, by furnishing the Contractor with the authority of
conducting Petroleum Activities within the boundaries of the Agreement Field, is
deemed to be having delivered the authority and duty of auditing the realization
of the Petroleum Activities to the Board of Directors in accordance with Section
6 hereto.
SECTION - 6
BOARD OF DIRECTORS
6.1. In order to realize this Agreement, the Board of Directors of the
Contractor should be established within 30 (thirty) days commencing from the
execution date of this Agreement. Board of Directors shall realize the general
management and control of the Petroleum Activities including the approval of
Working Program, Budget, and Work and Project Documentation.
6.2. Board of Directors shall consist of 8 (eight) members (referred to here as
"Members"), 4 (four) members each assigned by Shareholders Of The Kazakhstan
Side including the Authorized Body and by the Investor. Voting shall be
conducted in accordance with the Articles.
6 3. All other items which are not provided otherwise in this Agreement related
to the rights, obligations and authorities of the Directors or Board of
Directors will be applicable as mentioned in the Articles.
SECTION - 7
OPERATIONAL AND FINANCIAL REQUIREMENTS
AND THE BUDGET
7.1. Exploration
The project related to the research, exploration, seismic operations and trial
production of the wells drilled in the Field shall be prepared in accordance
with the principles and the instructions in force related with and applicable
for geological exploration and petroleum production activities for the
protection of subsurface resources and the population; providing all geological
investigations, natural environment and other operational buildings, facilities
and equipment from the harmful effects of the activities and studies conducted.
The project, as required, shall be confirmed and attested by the authorities of
state mining control, subsurface resources, economical and biological resources
and hygienic and public health control. Geological and geophysical working plans
shall be approved by the Board of Directors, in accordance with the current
practices.
15
<PAGE>
The following issues shall be confirmed for the field trial operation project:
o The quantity and the location of the exploration and
production wells.
o Geological, mining, geophysical and laboratory studies and
investigations conducted for the determination of the physical
and hydrodynamic characteristics, of petroleum stratum
particularities and productive stratum and of the production
possibilities in the wells.
o Predictions for Petroleum and Gas production levels and when
necessary predictions for water pumping capacity during the
trial production.
o Evaluation and the confirmation of the ecological payments and
of the activities for the protection of subsurface resources
and natural environment and for the supply of safety and
security during the Petroleum Activities in the Field and the
construction of drainage.
On the basis of the trial study approved by the Board of Directors,
field-arrangement, project-account documentation containing the issues of
Petroleum Gas and Condensate and drainage usage shall be prepared and issued
within the trial production period.
7.2 Development and Production
7.2.1. Preparation of the project documentation and the conduct of the
design works for the Field and to put the Field into the operation, can
only be realized following the trail production by the state reserves
commission at the reserves recognized by the international standards in
accordance with the Petroleum production and the "Principles of
Operating Petroleum and Gas Fields."
The project documentation (Field operation technical chart) shall be prepared
and issued in accordance with the provisions of by-laws in force related with
the protection of sub-surface resources, natural environment, health and mining.
The organization of production of Petroleum from the Field as an industrial
product shall be realized in accordance with the project budget that has been
prepared in compliance with the field operations technical chart, approved and
attested by Board of Directors. Project documents related with the Petroleum
Activities shall include the following items;
o Determination of the production targets, method of starting
the operation, selection of the stimulation methods to be
applied to the wells,
o Determination of the production wells,
16
<PAGE>
o Production dynamics of the Petroleum, Gas and liquids in the
wells, injection of chemicals,
o Demands and recommendations about the program of the well and
the drilling activities, selection of well location,
o Recommendation for drilling operation, equipment and materials
used on the surface and in the well,
o Recommendation for the production of the wells and the demands
for collection system (including the collection and the usage
of the associated gas and the water), proposals for the motor
vehicles, machinery-equipment and their locations related with
the Petroleum production, storage and transportation,
o Proposals for the supply of materials and equipment for the
usage of production and other services, in order to realize
the principles of the capital investment and the petroleum
production,
o Proposals for the actual period for the field operation
phases, necessary expenditures, evaluation of the capital
investment,
o Determination of the types and the quantities of all
activities and studies needed for the exploration of the Field
and the principles of operating a petroleum and gas field as
well as the determination of the rules and principles for the
protection of the sub-surface and natural environment,
job-safety, health and appropriate fire and security rules.
7.2.2 Production of Associated Gas
The Associated Gas, being produced together with the Petroleum shall be used in
line with the needs of the Contractor (heating, product heating, etc.). The
usage of the Associated Gas shall be made in accordance with the project
technical documentation. In case there is an impossibility for the usage of the
Associated Gas (this will be confirmed on the basis of project and technological
requirements), the Associated Gas shall be flared, with the permission of the
Ministry of Environment.
7.3. Procedures and Approval Method of the Operational Documentation
Project documentation related with the research, exploration, development and
production activities defined in clauses 7.1 and 7.2 shall be prepared and
issued by the Contractor in accordance with the determined and agreed principles
and procedures (or state control shall be applied to those documentation in
terms of being compliant with working conditions, job safety, technology,
17
<PAGE>
ecology and health regulations) and shall be submitted to the Board of Directors
for investigation and approval. Such documentation shall receive approval or
disapproval within 30 (thirty) days, commencing from the date of delivery to the
Board. In case of a requirement by the Authorized Body for a change and/or
modification to the project documentation, following the receipt of the
notification by the Parties containing changes and the modifications required to
be conducted by the Contractor, the Board shall meet to discuss such issue
within 15 (fifteen) days commencing from the date of the receipt of such
notification. Changes and modifications agreed by the Parties and incorporated
to the project documentation shall be deemed to be accepted and approved. Any of
the Parties who could not reach an agreement about the project shall present the
case to an industrial specialist (expert) to resolve the disputes. Contractor
not accepting the project is not obliged to finance the studies and the
activities and shall be reimbursed the cost of all Petroleum Activities already
conducted by the Contractor.
Following the acceptance of the project documentation related with the Petroleum
Activities at every stage, Contractor, at the soonest time possible and prior to
the first month of the each calendar year, shall prepare and issue the detailed
plan and budget of the works for the subsequent year and shall submit it to the
Board of Directors for review and approval.
Contractor at any time may submit budget changes and modifications to the Board
of Directors about research, exploration, operation and production. All changes
and modifications shall be prepared and issued in accordance with the principles
and procedures defined in Section-6 hereto.
As a result of the additional information obtained during the course of the
Petroleum Activities, in case the Agreement Field is determined as larger or
smaller than previously considered, then such field shall be expanded or reduced
to the previously considered magnitude of the Agreement Field. Agreement Field
shall be extended as required with the execution of an amendment to the previous
Agreement.
Contractor shall prepare a general plan for the purpose of improving working
conditions for the subsequent calendar year in accordance with the principles of
job-safety and technical safety and security applicable in the Region and
following having those confirmed by the organs of Gosgortehnadzor in line with
the procedural applications shall present to the Board of Directors for
approval.
7.4. Petroleum Activities are conducted in accordance with the Work Program and
the Budget (referred to here as "Budget") approved by the Board of Directors.
The General Manager and the Assistant General Manager of the Contractor shall
jointly prepare and submit the Work Program and the Budget for the subsequent
year, 3 (three) months prior to the start of that program year for the approval
of the Board of Directors. Any changes and/or amendments to be made to the Work
Program and to the Budget within the year shall also be submitted for the
approval of the Board of Directors separately.
18
<PAGE>
SECTION - 8
EXPENDITURES AND COMPENSATION
8.1 Payment of Expenditures
Investor shall provide the Investment to the Contractor excluding cash
requirements which cannot be met by the self generated income of the Contractor,
as Contractor may determine pursuant to the Articles, excluding any amounts
Contractor may wish to borrow from third parties. All such amounts provided as
the Investment by the Investor to Contractor, shall be repaid by the Contractor
to the Investor as Investment Recovery.
SECTION - 9
COMMERCIAL AND FINANCIAL TERMS AND
CONDITIONS
9.1 Financial Matters
9.1.1. All calculations to be made between the Parties in relation
with the Agreement shall be made in Tenge and US$.
9.1.2. The price for Hydrocarbons voluntarily marketed by the
Contractor in the local market within the boundaries of the Republic of
Kazakhstan shall be freely decided by the Contractor.
9.1.3. Foreign currency exchange transactions to be carried out by the
Contractor shall be in compliance with the laws and regulation in force
in the Republic of Kazakhstan. Contractor is free to use the foreign
currency obtained out of the Petroleum Activities within or outside the
boundaries of the Republic of Kazakhstan. All foreign currency
transactions related with the Petroleum Activities shall be carried out
in US$ or in any other convertible currency depending upon the mutual
agreement between the Parties.
9.1.4. Re-exportation of the foreign currency brought into the Republic
of Kazakhstan by the foreign sub-contractors for the implementation of
the Petroleum Activities shall be realized in accordance with the laws
and regulations of the Republic of Kazakhstan.
9.1.5. Financing of the Petroleum Activities has to start within 6
(six) months following the secure of the License for the Land defined
in this Agreement (Land allocated for the Petroleum Activities).
19
<PAGE>
9.2. Customs
9.2.1. In case of a requirement for the services of a foreign
Contractor in order to fulfill the obligations and terms and conditions
of this Agreement, the foreign SubContractor can import all equipment,
machinery, vehicle, work-shop, material, spare parts related with the
Petroleum Activities and its own goods into the Republic of Kazakhstan
free of custom duties and funds without any prohibition. The above
mentioned consignment includes, without any limitation, mobile dwelling
units, equipment, raw-materials, sub-materials, convenient products,
mobile offices, office equipment and stationary, furniture, audio and
video equipment, communication equipment (including satellite
communication), medical and educational equipment, hobby and sports
facilities and every type of educational and information containing
press and books provided that these are not prohibited by the laws of
the Republic of Kazakhstan. The machinery and equipment to be brought
shall be fully compliant to the laws and regulations of the Republic of
Kazakhstan in terms of technical security and safety, health and
hygiene norms, protection of subsurface and natural environment.
9.2.2. The personnel of the Foreign Sub-Contractors dealing with the
Petroleum Activities can import into the Republic of Kazakhstan their
own private property and goods as well as house-hold goods with the
exemption of taxes in order to meet with their own and family needs,
provided that it is not against the laws and regulations of the
Republic of Kazakhstan.
9.2.3. Any goods and property imported to the Republic of Kazakhstan in
accordance with clauses 9.2.1 and 9.2.2 is exempted from custom duties
and taxes during exportation.
9.3. Taxes and Payments
9.3.1. Fiscal Obligations:
Contractor and Investor shall have the obligation to pay the Fiscal
Obligations, as mentioned in this Clause 9.3.1. Any other Fiscal
Obligation applicable to Contractor shall be subject to tax
stabilization as mentioned in Clause 9.3.1(H) hereinbelow.
A) Contractor shall pay the following nation wide taxes in
accordance with the existing tax law:
o Income Tax at the rate of 30% (thirty percent);
20
<PAGE>
o Dividend tax deductions: The shareholders of the
Contractor shall be subject to a 15% (fifteen percent)
Dividend tax on the distributed dividends of the
shareholders. The Contractor shall be obliged to
withhold such tax on distributions to Investor
(Investors Profit) or to Shareholders of Kazakhstan
Side (Shareholders of Kazakhstan Side Profit);
o Value Added Tax at the rate of 20% (twenty percent)
applied to expenditures made locally in the territory
of the Republic of Kazakhstan as mentioned in the
existing tax law. In case of sales of Hydrocarbons
through exportation, if the paid Value Added Tax is
more than the collected Value Added Tax during any
period, then the Contractor shall be entitled to be
reimbursed either by payment by the Republic of
Kazakhstan or by crediting the amount against its
Fiscal Obligations. In case of no reimbursement through
direct payment or crediting against Fiscal obligations
within 10 (ten) days following the application of the
Contractor then the Contractor will be entitled to
receive interest on the late reimbursement in
accordance with the tax laws of the Republic of
Kazakhstan; and
o If applicable, tax on securities transactions
accordance with the existing laws of the Republic of
Kazakhstan. No income or gain shall be recognized by
the Contractor on the creation of or transfer of an
interest in the Agreement.
B) Contractor shall pay the following special taxes and payments as
mineral resources user:
o An Excess Profits Tax may be required to be paid by the
Contractor on the basis of the Real Internal Rate of
Return (hereinafter referred to as "RIRR") of the
Contractor, calculated at the end of each calendar year
staring from the effective date of this Agreement. The
RIRR shall be determined after discounting the
Contractor's annual net cash flow (hereinafter referred
to as "NCFs") for inflation on a compound basis from
the effective date of this Agreement. NCF shall be
calculated after reducing Royalty, operating expenses,
other payments, amortized amount of the capital
expenditures and Fiscal Obligations, from the gross
revenues of the Contractor. The inflation rate used for
this purpose shall be the World Consumer Price Index
set out in "Interna- tional Financial Statistics"
published by the International Monetary Fund for each
applicable year. If any such calculation at the end of
any calendar year (excluding Excess Profit Tax for such
calendar year but including Excess Profit Tax paid in
all prior years) produces an RIRR in excess of 23%
(twenty three percent), the Contractor shall pay an
Excess Profit Tax on the Contractor's NCF for that
calendar year as follows:
21
<PAGE>
(i) an Excess Profit Tax of 10% (ten percent) shall
be applied to that portion of the difference between
the NCF corresponding an original RIRR in excess of
23% (twenty three percent) but less than 25% (twenty
five percent) and the NCF corresponding the
recalculated RIRR of 23% (twenty three percent).
(ii) if the original RIRR is greater than 25% (twenty
five percent), then the RIRR shall be recalculated
after subtracting the Excess Profit Tax from the NCF
as calculated pursuant to (i) above. If after such
recalculation the RIRR continues to be greater than
25% (twenty five percent), then in addition to (i)
above, an Excess Profit Tax of 20% (twenty percent)
shall be applied to that portion of the difference
between such NCF corresponding an original RIRR in
excess of 25% (twenty five percent) but less than or
equal to 30% (thirty percent) and the NCF
corresponding the recalculated RIRR of 25% (twenty
five percent).
(iii) if the original RIRR is greater than 30%
(thirty percent), then the RIRR shall be recalculated
after subtracting the Excess Profit Tax from the NCF
as calculated pursuant to (ii) above. If after such
recalculation the RIRR continues to be greater than
30% (thirty percent), then in addition to (ii) above,
an Excess Profit Tax of 30% (thirty percent) shall be
applied to that portion of the difference between
such NCF corresponding an original RIRR in excess of
30% (thirty percent) but less than or equal to 35%
(thirty five percent) and the NCF corresponding the
recalculated RIRR of 30% (thirty percent).
(iv) if the original RIRR is greater than 35% (thirty
five percent), then the RIRR shall be recalculated
after subtracting the Excess Profit Tax from the NCF
as calculated pursuant to (iii) above. If after such
recalculation the RIRR continues to be greater than
35% (thirty five percent), then in addition to (iii)
above, an Excess Profit Tax of 40% (forty percent)
shall be applied to that portion of the difference
between such NCF corresponding an original RIRR in
excess of 35% (thirty five percent) but less than or
equal to 40% (forty percent) and the NCF
corresponding the recalculated RIRR of 35% (thirty
five percent).
(v) if the original RIRR is greater than 40% (forty
percent), then the RIRR shall be recalculated after
subtracting the Excess Profit Tax from the NCF as
calculated pursuant to (iv) above. If after such
22
<PAGE>
recalculation the RIRR continues to be greater than 40%
(forty percent), then in addition to (iv) above, an
Excess Profit Tax of 50% (fifty percent) shall be
applied to that portion of the difference between such
NCF corresponding an original RIRR in excess of 40%
(forty percent) and the NCF corresponding the
recalculated RIRR of 40% (forty percent).
o Royalty. The Contractor will give 8% (eight percent) of
the gross production as Royalty. The authorized
authorities may elect to take Royalty either in cash or
in kind; and
o Bonuses. Contractor shall pay US $513,000 (five hundred
thirteen thousand US Dollars) within 7 (seven) months
in equal monthly installments starting from the end of
the 5th (fifth) month following the registration of
this Agreement with the Ministry of Geology and
Preservation of Underground Resources, as an
unrecoverable signature bonus; and
Contractor will pay US $500,000 (five hundred US
dollars) when the cumulative production reaches to
10,000,000 (ten million) barrels and US $1,200,000 (one
million two hundred US Dollars) when the cumulative
production reaches to 50,000,000 (fifty million)
barrels as one time production bonus.
The Royalty and Production Bonuses will be considered as tax
deductible expenditures for the calculation of the income tax
and the excess profit tax.
C) Contractor shall pay the following local taxes and fees:
o Rental for the Agreement Field as agreed with the local
authorities, in accordance with the existing
legislation of the Republic of Kazakhstan. The
calculation of the Rental shall be same as applied to
other petroleum companies working in Mangistau Region;
o Property Tax at the rate of 0,5% (half percent) applied
to depreciated value of the capital goods and non
productive assets (non material assets excluded) every
year;
o Vehicle tax according to the existing legislation;
o Fee for the registration of the Contractor according to
applicable legislation;
23
<PAGE>
o Fee for the licenses for certain activities according
to the applicable legislation; and
o Fee on auction sales if applicable according to the
existing applicable legislation.
D) Contractor will be obliged to make the following payments and
deductions:
o The contractor is obliged to withhold the income tax for the
local and foreign personnel working for the Contractor in
accordance with the existing tax law. The foreign personnel
of the Contractor will be subject to 0,1% (zero point one
percent) property tax on the properties they own in the
Republic of Kazakhstan;
o Deduction of 2% (two percent) for Employment Development
Fund from the Kazakhstan national personnel salaries;
o Local taxes for the usage of water and the forestry
resources as mentioned in the legislation and the payments
for the protection of the environment in accordance with the
provisions of the existing legislation;
o Payment for the additional and special services rendered by
the authorized governmental organizations in the Republic of
Kazakhstan, if applicable to all other citizens and
enterprises of the Republic of Kazakhstan; and
o Deductions for the state social insurance in regard to the
Contractor personnel salaries.
E) Transfer Pricing
If the Contractor applies in its commercial or financial
transactions with a related party prices which differ from prices
applied between independent enterprises, the Tax Service shall
adjust the taxpayer's income by the price difference for taxation
purposes, if one of the parties non-resident of the Republic of
Kazakhstan, or enterprise entitled to tax preferences. The tax
service, when effecting such actions, may redefine the given
transactions for the purpose of determining their actual nature
and imposing sanctions.
24
<PAGE>
F) General Tax Liability
The activities of the Contractor which are not related to the
Petroleum Activities will be taxed according to the existing
legislation.
G) Sub-Contractors and affiliates of the Contractor
The Contractor is obliged to inform its Sub-Contractors and
affiliates for their tax liabilities according to the existing
legislation.
H) Tax Stabilization
The Parties hereto agree that this Contract has been
negotiated and agreed upon, based upon the tax structure set
forth herein and the laws of the Republic of Kazakhstan as the
date of the execution hereof. The Government of Republic of
Kazakhstan expressly agrees that any changes to tax laws of
the Republic of Kazakhstan occurring after the date of this
Agreement shall not affect the tax obligations of the
Contractor or the Investor, save and except where such change
is in the nature of a substitution for a tax identified herein
and does not cause an increase in the rate for that tax as of
the date of this Agreement. In case of any deterioration in
the position of either Party, or the Investor, resulting from
a change in legislation or any superseding international
treaty which occurs subsequent to the execution date of this
Agreement, the Parties shall meet promptly and shall agree on
such amendments to this Agreement as are necessary to restore
the economic balance of the Parties, or the Investor, as
applicable.
I) Payment
The Royalty, bonuses and excess profit tax will be paid by the
Contractor to an account notified by the chief tax inspector
of the Ministry of Finance. All other taxes and fees will be
paid to the authorities shown in the laws and the state budget
of the Republic of Kazakhstan. The fines and penalties,
incurred because of the delayed payments and wrong calculation
of the taxable income will be paid in accordance with the
existing state budget and tax laws.
J) Audit right of the tax authorities
The tax authorities are entitled to audit the accounts,
foreign banks inclusive, all bank accounts and the Contractor
agreed to provide to the tax authorities, all related
information and documentation.
25
<PAGE>
9.4 Compensation
9.4.1 Contractor and Investor may take and freely export its own share
of the HC produced in accordance with the terms and conditions of this
Agreement.
9.4.2 The Shareholders of the Kazakhstan Side may elect to take
Shareholders of the Kazakhstan Side Profit in kind. The Authorized Body
may elect to take Royalty in kind. Investor may elect to take Investors
Profit and Investment Recovery in kind. For the valuation of
Hydrocarbons for the purpose of calculating amounts of Hydrocarbons
taken in kind and for all purposes pursuant to this Agreement, the
price applicable shall be determined by a separate agreement of the
Parties, taking into account Hydrocarbon quality and prevailing market
prices in effect during the period in question at the locations where
the Contractor has been making Hydrocarbon sales, as well as applicable
transportation and marketing costs at the market prices in effect
during the period in question.
9.5 Accounting Procedures and Auditing
9.5.1 The Board of Directors shall approve an accounting procedure to
be applicable to this Agreement and to the Contractor. The expenditures
of the Contractor will be calculated in US Dollars during the whole
term of the Contract in order to calculate the Investment Recovery and
the Contractors Profit. Such accounting procedure shall:
o provide for accounting in US dollars for all purposes and
calculations pursuant to this Agreement and also a Tenge
account for the purpose of the inspection of the tax
auditors;
o provide for accounting in accordance with internationally
accepted and recognized accounting systems and consistent
with the standard practice of the international petroleum
industry as well as the provisions of the Agreement, the
Articles and the Standard Oil and Gas Accounting Systems of
the Republic of Kazakhstan;
o provide for depreciation schedules and for the option of
expensing capital expenditures;
o provide for the entire Agreement Field to be considered as a
single area for the purposes of the calculation of Fiscal
Obligations; and
o provide for Contractor income subject to Income Tax and to
be calculated by deducting from gross revenues from the
Agreement Field all Royalties, all other Fiscal Obligations
which the Contractor is subject to in accordance with this
Agreement, contributions to the reserve fund, and all direct
and indirect costs reasonably necessary for conduct of
Contractor's business.
26
<PAGE>
9.5.2. Auditing of the Contractor's financial activities shall be
conducted by the related authorized State Organ. In case it is needed,
Contractor may invite any Organization as Auditor.
9.5.3. Status of the accounting records, correct filing of the
financial results, effectuation of the payment transferred to the
budget shall be made completely and on time, and other issues related
with the taxation shall be followed by the State Tax Office of the
Republic of Kazakhstan.
SECTION - 10
PROTECTION OF SUBSURFACE RESOURCES,
NATURAL ENVIRONMENT AND LABOR
AND POPULATION SAFETY
Field research, exploration and development activities shall be conducted in
accordance with the laws and regulations of the Republic of Kazakhstan, with
technical principles, and the principles for the protection of job safety and
natural environment and finally in accordance with the precautions for the
protection of all subsurface, earth, hydraulic resources, atmosphere, zoological
and vegetal life, historical and cultural properties, and with the precautions
for security and health protection in the Agreement field. Contractor shall
conduct the following activities during the design and construction studies of
the auxiliary buildings:
. Using advanced local and international techniques and technologies for
the purpose of preventing any waste and to obtain the maximum
production in order to obtain the maximum benefit.
. To minimize the harmful effects given to the natural environment and
to prevent the destruction and uninhabitance of the lands including
technical and biological recultivation.
. To protect subsurface and earth hydraulic resources from pollution and
loss.
. To protect air from every type of harmful substances including
facilitated (such as heating rooms, deposed petroleum production
points containing Hydrocar- bon, Gas and etc.) and unfacilitated (such
as diesel units of the drainage equipment, vehicles, tractors, etc.)
pollution resources.
. To protect the zoological and vegetal life and historical and cultural
properties covered by the RED BOOK of the Republic of Kazakhstan.
27
<PAGE>
. To provide safe and healthy working conditions, to organize the
control of job safety status and to convey the information on these
issues to the employees on time.
During the implementation of the Petroleum Activities, continuous official and
industrial ecological control for the protection of natural environment,
ecological monitoring shall be supplied in the Agreement Field. During the trial
production project stage, ecological investigations of the wells, well
surroundings in the Agreement Field shall be made and the areas needs to be paid
exclusive attention shall be determined. In addition, possibility of potential
accident cases shall be analyzed and plans containing these studies to be
applied and the programs for the normalization of the region for ecological
purposes shall be prepared.
Funds allocated for the Contractor's activities to inspect and analyze the
ecological status of the lands, to organize and realize environment protection
activities shall be deposited in the account of nature protection payments.
SECTION - 11
OTHER LEGAL ISSUES
11.1. Transfer and Assignment of the Rights
11.1.1. Contractor may transfer and/or assign its rights, liabilities,
obligations or shares related with the Agreement wholly or partially to
the third parties.
11.1.2. In case of any transfer and/or assignment of rights partially,
the Contractor shall be jointly and severally liable along with the
assignee in connection with the Agreement.
11.2. Payment Related with Field Allocation and Usage Right
In case of an allocation of a land belonging to any other real and/or juridical
body for the realization of the Petroleum Activities, Contractor shall make
payment to the landlord or to the person who possesses the usage right on the
land, since the usage of such land is limited because of the Petroleum
Activities.
11.3. Insurance
Contractor is obliged to insure its assets in compliance with the legislation of
the Republic of Kazakhstan and in accordance with the recognized world
standards, norms and customer practices.
28
<PAGE>
11.4. Legal Adjustments In Relation With Working Conditions
Employment, redundancy, resignation, salary, work and leave status, social
indemnity and social security of the citizens of the Republic of Kazakhstan
employed by the Contractor shall be dealt with in accordance with the
legislation and communiques in force in the Republic of Kazakhstan and with
recognized world norms and standards. Unless otherwise indicated by the
international treaty signed between the Republic of Kazakhstan and the country
of the foreign subcontractor, for the foreign personnel employed by the
Contractor; laws and regulations of the Republic of Kazakhstan is applicable.
11.5. Force-Majeure
11.5.1. In case one of the Parties do not fulfill its obligations due
to any Force-Majeure condition, then such Party shall notify the other
Party in written form about the commencement date of such Force-Majeure
condition within a reasonable time period.
11.5.2. Within the defined time period, the obligations of the Party
directly effected by loss shall be frozen during the existence of the
Force-Majeure conditions.
11.5.3. Term of the Agreement, shall be extended automatically as long
as the Force-Majeure case lasts in equal time period including the time
for the repair of equipment and technology.
11.5.4. Force-Majeure conditions are not accepted as valid excuses for
the Parties not to fulfill their financial liabilities and
obligations.
11.6. Local Consumption
11.6.1. In case of a declaration of an extra-ordinary status by the
Government and/or a decision that the Petroleum need in the local
market is not met during the term of the Agreement, then, Authorized
Body can demand the HC share of the Contractor for the local market.
Such demand shall be notified to the Contractor in written form 100
(hundred) days before and a separate agreement shall be executed in
that respect.
11.6.2. Maximum amount of HC given by the Contractor to meet with the
requirement of the local market in accordance with Clause 11.6.1 herein
above shall be equal to the shortage in the local market and to the
shares given by other contractors equipped with production rights by
the Republic of Kazakhstan.
11.6.3. In case the Contractor delivers its own share in accordance
with Clause 11.6.1 herein above to meet with the requirements of the
local market, the payment to be made to the Contractor, shall not be
less than the prices agreed between the Contractor and the buyers and
shall also include the penalty and the termination fee payable by the
Contractor for its failure in meeting its commitments as a practical
result of the Clause 11.6.
29
<PAGE>
11.6.4. When Contractor markets its own HC share in the world market,
then Authorized Body shall not intercept to such HC share to meet with
the requirements of the local market. However, in case of such
interception, Authorized Body shall pay to the Contractor on the basis
of world market prices in foreign currency for its HC share and the
penalty and termination fee Contractor shall be liable to pay as a
result of its failure in meeting with its commitments to the buyers.
11.6.5. In case the payment for the delivery made by the Contractor in
accordance with Clause 11.6 herein above is not effectuated within 30
(thirty) days commencing from the date of loading, then Contractor, as
being compliant to this Agreement, shall have the right of receiving
back and market the Crude Oil to be delivered to the Authorized Body in
the amount which enables the Contractor to fulfill its commitments and
liabilities.
11.7. Amendments to the Terms and Conditions of the Agreement
11.7.1. All terms and conditions stated in the Agreement can only be
amended with the mutual agreement of the Parties. In case of an
amendment to this Agreement, it shall be effective with the execution
of a written protocol or an agreement.
11.7.2. Clause 3.4 herein above shall be applicable for the
termination of this Agreement.
11.8 Confidentiality
11.8.1. Except the conditions stated herein below, any type of
information obtained and/or purchased by the Parties related with the
Agreement and needed for the fulfillment of the terms and conditions of
the Agreement shall be kept confidential.
11.8.2. As an exception to the rule referred in clause 11.8.1. herein
above, the Parties can use every type of information for the
preparation of the reports and documentation required by law.
11.8.3. Parties, jointly or severally can publish every type of
scientific and geological information related or unrelated with the
Agreement Field but directly related with the Petroleum Activities,
provided that such information shall not create any negative effect on
the Petroleum Activities.
30
<PAGE>
11.8.4. Contractor can not disclose any information obtained out of the
Agreement to the third parties without the permission of the Board of
Directors. In the following cases, Contractor can disclose such
information and data:
a) to judicial organ according to the laws and regulations
applicable to the Contractor,
b) to any financial organ and/or authority, its own branches
and technical consultants and to the potential assignee of
the Agreement for the purpose of enabling the Contractor to
fulfill its commitments and obligations arising out of the
Agreement,
c) to the Sub-Contractors and to the third parties for the
implementation of the Petroleum Activities, and
d) in the cases of exchange of information.
11.8.5. The terms and conditions referred in Clause 11.8 herein above
shall be in force and effect after the termination of the Contract as
well.
11.9. Settlement of Disputes
In case of any disagreement involving this Agreement and License that cannot be
settled, such disagreement shall be resolved by an arbitration to be established
on the basis of the arbitral rules of the International Chamber of Commerce
(ICC) at Zurich, Switzerland. Any procedural issues not determined under such
arbitral rules shall be determined in accordance with the laws and legislation
of Switzerland, other than any such law which would refer the matter to another
jurisdiction. The governing law for the interpretation of this Agreement shall
be the law of Switzerland, and the arbitration should be conducted in English
language. The decision of the arbitration shall be final and binding. The
English version of this Agreement shall control in the event of any discrepancy
between the English version and any other language version. This Agreement shall
control in the event of any discrepancy between this Agreement and the Articles.
Investor is a third party beneficiary of this Agreement and Contractor agrees to
act on behalf of Investor in regard to any dispute Investor may have regarding
the implementation of this Agreement.
11.10. Waiver
To be effective, any waiver must be in writing and signed by the Party to be
charged.
31
<PAGE>
11.11. Correspondences
11.11.1. Any type of communication, demand, request etc. delivered
and/or transmitted via courier, post, telegraph, telex or facsimile in
written form appropriate for the terms and conditions of the Agreement
to the below mentioned address shall be deemed to be delivered.
a) Authorized Body
480091; Almaty
Bogenbay Batyra Str.142
Ministry of Oil and Gas Industries
Phone: 3272 - 62 60 80
Fax : 8 3272 - 69405
Telex: 251238 KURS SU
b) Contractor
426200 Aktau
4 Mikrorayan Building No. 10 Block A
Phone: 51 46 62
Fax : 8 37922 514639
11.11.2. Any Party may change its address by a written notice to the
other Party.
11.12. Headings
The headings of the Clauses used in this Agreement are only for the purpose of
the references and will not effect the interpretation of the provisions.
This Agreement is prepared and executed in 3 (three) copies each both in English
and Russian language with the same power and effect.
AUTHORIZED BODY CONTRACTOR
Republic of Kazakhstan Karakuduk-Munay Inc.
Ministry of Oil and Gas
Industry
- ------------------------------ ----------------------------------
N.U.Balgim U.B.Hairoy
32
<PAGE>
MAP GOES ON THIS PAGE
Attachment 6 to the License
MG #249 (oil)
as of June 28, 1995
RESOLUTION # P 65-H
September 18, 1996
Concerning Amending License Terms
LICENSE: License MG #249 (oil) dated 28.06.95
LICENSEE: "Karakudukmunay" Joint-Stock Company
MINISTRY OF GEOLOGY AND SUBSURFACE PROTECTION OF THE
REPUBLIC OF KAZAKSTAN
pursuant to the resolution of the Cabinet of Ministers of the Republic of
Kazakstan #882 as of 27.06.95 and following the Letter # 2-03-1845 as of
10.08.96 of the Ministry of Oil and Gas Industry of the Republic of Kazakstan
(Authorized Body)
Hereby introduces the following amendments to the license terms:
Clause 8.2 Minimum Work Program:
8.2.1 Evaluation Stage:
1. Drilling of Pilot Wells:
Between 01.09.1996 - 31.08.1997 - 2 wells 3250 m deep and re-entry of 4
exploration wells.
Between 01.09.1997 - 31.08.1998 - 6 wells 3250-3500 m deep.
3D Seismic is not recommended by the resolution of the State Reserves Committee
and therefore it is suggested to resolve this issue separately based upon
geological results of drilling of first production wells.
8.2.2 First 3 year Development Stage:
Between 01.09.1996 - 31.08.1997 - 5 000 000 US Dollars
Between 01.09.1997 - 31.08.1998 - 25 000 000 US Dollars
Between 01.09.1998 - 31.08.1999 - 12 000 000 US Dollars
Total financial obligations specified in Clause 8.2.1 and Clause 8.2.2 are:
Up to 31.08.1997 - 10 000 000 US Dollars
Up to 31.08.1998 - 34 500 000 US Dollars
Up to 31.08.1997 - 12 000 000 US Dollars
Minister S.Zh.Daukeev
Amendments to the license terms of Clauses 8.2.1 and 8.2.2.
Agreed upon by Licensee: Klinchev N. D.
Director General
KarakudukmunayJSC
<PAGE>
Certificate Goes on this Page
<PAGE>
LICENSE
for the right to use the subsurface in the Republic of Kazakhstan
Issued by the Government of the Republic of Kazakhstan to Karakuduk
Munay Joint Stock Company Joint Venture for exploration and
production of hydrocarbons at Karakuduk
oilfield in Mangystau Oblast.
June 28, 1995
Series MG #249 (oil)
On behalf of the Government
of the Republic of Kazakhstan
First Deputy Prime Minister [signature, seal] V.L. Mette
<PAGE>
Exhibit 1 to License Series MG #249 (oil)
To the Government of the Republic of Kazakhstan
RESOLUTION
regarding the issue of the license for the use of the subsurface
The Ministry of Geology and Protection of the Subsurface has reviewed
the application of Karakuduk Munay Joint Stock Company Joint Venture for
geological exploration and production of hydrocarbons at Karakuduk oilfield in
Mangystau Oblast.
Based on Claim LTs-233 dated 04.21.95 published on 04.28.95 in the
Legal Information Bulletin # 4 (7) 1995, Resolution of the Cabinet of Ministers
of the Republic of Kazakhstan On the execution of the contract for exploration,
development and oil production at Karakuduk oil field under production sharing
arrangements with Karakuduk Munay Joint Stock Company Joint Venture # 498 dated
06.11.1993, and submitted materials, as follows: Certificate of the State
Registration of a Business #23625 dated 03.01.1995; Foundation Agreement of
10.26.1994; Bylaws of Karakuduk Munay Joint Stock Company Joint Venture;
Contract made by and between the Ministry of Energy and Fuels and Karakuduk
Munay Joint Stock Company Joint Venture executed on 07.01.1993; Certificate of
Geological Exploration Rights #4 issued by West Kazakhstan Territorial
Administration on 02.16.1995; Certificate of Production Rights # 30 of
04.12.1995 issued by the Ministry of Oil and Gas Industry; and Minutes of
Interdepartmental Commission # 7 dated 05.19.1995, Karakuduk Munay Closed Joint
Stock Company Joint Venture has been granted the License for the right to use
the subsurface for exploration and production of hydrocarbons at Karakuduk
oilfield in Mangystau Oblast.
The License is forwarded to the Government of the Republic of
Kazakhstan for ratification.
[seal, signature] S.Zh. Daukeev
<PAGE>
Exhibit 2 to License series MG#249 (oil)
Hereby the Government of the Republic of Kazakhstan grants the License
series MG #249 (oil) for the right to use the subsurface for geological
exploration and production of hydrocarbons.
CONTENTS OF THE LICENSE
1. License holder data
1.1 Name: Karakuduk Munay Closed Joint Stock Company Joint Venture (SP AO KKM).
1.2 Address: 466200 Republic of Kazakhstan, Mangystau Oblast, City of Aktau,
4th district, building 10, unit A.
1.3 Type of ownership: mixed
1.4 Founders: Munaygaz State Holding Company, Zharkyn Limited Liability
Company, Mangystau Terra International Corporation, Guernsey LTD Central
Asian Oil Company.
1.5 Date of Incorporation: Government Registration Certificate # 23625 dated
03.01.1995 issued by Oblast Finance Administration.
1.6 Management: Interim General Director - Khairov U.B.
Deputy General Director - Rza Yurttutan
1.7 Main line of business: exploration, production, processing and
transportation of hydrocarbons and processed products.
1.8 Types of performed petroleum operations: Petroleum operations related to
develop- ment and operation of oil and gas fields.
2. Purpose of operations pertaining to certain types of the use of the
subsurface.
2.1 Purpose of operations: Geological exploration and production of hydrocar-
bons.
2.2 Hydrocarbons deposits: Karakuduk oilfield with the following reserves by
categories as of 01.01.1995:
A+B+C 25,547,000 tonnes - in place
9,774,000 tonnes - recoverable
C2 9,593,000 tonnes - in place
3,265,000 tonnes - recoverable
and average recovery factor of 0.33.
3. Spatial coordinates of the allotted area of the subsurface
3.1 Geographical coordinates: Shown in Geological Allotment (Exhibit 3).
<PAGE>
3.2 Depth of stratigraphic range. Down to absolute elevation of minus 3,320 m.
4. Effective date of the License: Date issued.
5. Term of the License: 25 years.
5.1 Evaluation stage: 3 years.
5.2 Development stage: Pursuant to development plan.
5.3 Production stage: 22 years including construction stage.
6. Conditions for extension of the License: The License may be extended only
by the resolution of the Licensor.
7. Authorized agency to enter into an Agreement on behalf of the Government of
the Republic of Kazakhstan. The Contract is made by and between the
Ministry of Energy and Fuels of the Republic of Kazakhstan and Karakuduk
Munay Joint Stock Company Joint Venture and executed on 07.01.1993.
8. Mandatory pre-requisites
8.1 Timing of Contract execution and registration with the Ministry of Geology.
The contract must be registered no later than within 30 days of the
issuance of the License.
8.2 Minimum work program.
8.2.1 Evaluation stage:
1. 3D Sesmics
1996, 15 km with processing = 500,000 US dollars.
2. Drilling of pilot production wells:
1996 - 3 wells, 3,250 m deep = 4,500,000 US dollars.
1997 - 6 wells, 3,250 to 3,500 m deep = 9,500,000 US dollars
8.2.2 Development stage, first 3 years
1996 = 5,000,000 US dollars
1997 = 25,000,000 US dollars
1998 = 12,000,000 US dollars
8.2.3. Production stage: Pursuant to field development plan.
8.3 Land release: Shown in Geological allotment (Exhibit 3).
<PAGE>
8.4 Timing for field development plan approval: Within 6 months of the date
of approval of Karakuduk field reserves by the State Commission on
Mineral Reserves (GKZ) of the Ministry of Geology and Protection of the
Subsurface of the Republic of Kazakhstan.
8.5 Commencement of operations at the oilfield: Within 3 months of the
date the License is issued.
8.6 Property rights pertaining to data on the subsurface: Available
information will be transferred under a separate agreement with
Geoinform department. Rights of ownership pertaining to mineral data
acquired in the course of petroleum operations shall be held by
Karakuduk Munay Joint Stock Company Joint Venture.
Upon expiration of the License term all original geological-geophysical
data shall be transferred to the Republic of Kazakhstan and shall
become its property.
8.7 Submission of geological information. Copies of geological information
shall be transferred annually to the Geoinform Department of the
Ministry of Geology and Protection of the Subsurface. Reports on
completion of work programs and budgets shall be submitted quarterly to
the Authorized Agency and the Main Department of Mineral Resources of
the Ministry of Geology. Reports on reserve variations (Form 6-GR)
shall be sent to the Ministry of Geology on February 15 of each year.
9. Contract terms.
9.1 Use of Kazakhstan contractors: Only Kazakhstan contractors shall be
used. Foreign subcontractors will be employed, if necessary.
9.2 Use of local labor. Local labor shall be used.
9.3 Training of Kazakhstan specialists: No less than 1% of the annual
oilfield budget shall be allocated for the training of Kazakhstan
specialists.
9.4 Payments related to the use of subsurface and land plots:
Pursuant to the
Laws of the Republic of Kazakhstan and the Contract.
9.5 Production or profit sharing: Pursuant to the Contract.
10. Obligations pertaining to the rational use of the subsurface,
protection of the subsurface and the environment, and safe operations,
including the study of technogenic earthquakes. Work plans related to
the use of the subsurface must provide measures for rational use and
protection of the subsurface and the environment, safe operations, as
well as forecast of technogenic earthquakes.
<PAGE>
11. Control procedures. The use of the subsurface shall be controlled by
state regulatory agencies pursuant to the Laws of the Republic of
Kazakhstan.
12. Other terms. License terms shall be strictly adhered to and shall
apply to all modifications and addenda to the Contract.
The License may be revoked for violation of License terms.
<PAGE>
Exhibit 3 to License series MG #249 (oil)
KAZAKHSTAN MINISTRY OF GEOLOGY - CENTRAL DEPARTMENT
OF MINERAL RESOURCES
GEOLOGICAL ALLOTMENT
Granted to Karakuduk Munay Joint Stock Company Joint Venture for the
use of the subsurface for the purpose of geological exploration and production
within Karakuduk oilfield.
Geological allotment is located within Mangystau Region of Mangystau
Oblast and has corner point coordinates shown on attached topographic map:
1. 44o 51'43" N, 53o 52'30" E
2. 44o 52'20" N, 53o 54'08" E
3. 44o 52'10" N, 53o 59'10" E
4. 44o 49'10" N, 54o 02'50" E
5. 44o 48'13" N, 53o 57'10" E
6. 44o 49'48" N, 53o 53'17" E
and extends vertically down to minus 3,320 m absolute elevation.
The surface area of the geological allotment marked by the corner
points on the topographic map is 68.4 km2 (sixty eight thousand square
kilometers [Translator's note: as in the original].
Land return
Upon completion of the evaluation stage, 100% of the land located
outside the oilfield boundary, in the sanitary protection zone, shall be
returned. If the oil field is found to have no commercial importance, then
Karakuduk oilfield shall be returned to the Republic of Kazakhstan.
June 28, 1995
Director,
Central Department of Mineral Resources,
Kazakhstan Ministry of Geology O. M. Tyugay
[signature, seal]
City of Almaty
<PAGE>
Karakuduk Oilfield Map Goes on this Page
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
State or Other
Jurisdiction of Name Under Which
Subsidiary Organization Business Done
- ---------- --------------- ----------------
<S> <C> <C>
Central Asian Petroleum, Inc. Delaware Central Asian
Petroleum, Inc.
Central Asian Petroleum Guernsey Central Asian
(Guernsey) Limited Petroleum (Guernsey)
Limited
Karakuduk-Munay, Inc. Kazakstan Karakuduk-Munay, Inc.
Road Runner Service Colorado Road Runner
Company, Inc. Service Company, Inc.
</TABLE>
Consent of Independent Certified Public Accountants
We have issued our reports dated January 19, 1996, accompanying the consolidated
financial statements incorporated by reference or included in the Annual Report
of Chaparral Resources, Inc. and subsidiary (the Company) on Form 10-K for the
year ended November 30, 1996. We consent to the incorporation by reference in
the Company's Registration Statement on Form S-8 of the aforementioned reports.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Denver, Colorado
April 8, 1997
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement on
Form S-8 pertaining to the Chaparral Resources, Inc. 1989 Stock Warrant Plan of
our report dated April 8, 1997, with respect to the consolidated financial
statements of Chaparral Resources, Inc. included in the Annual Report (Form
10-K) for the year ended November 30, 1996.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Denver, Colorado
April 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> NOV-30-1996
<CASH> 800
<SECURITIES> 0
<RECEIVABLES> 61
<ALLOWANCES> 0
<INVENTORY> 27
<CURRENT-ASSETS> 1,207
<PP&E> 11,189
<DEPRECIATION> (198)
<TOTAL-ASSETS> 14,760
<CURRENT-LIABILITIES> 1,155
<BONDS> 1,106
0
0
<COMMON> 3,753
<OTHER-SE> 8,361
<TOTAL-LIABILITY-AND-EQUITY> 14,760
<SALES> 147
<TOTAL-REVENUES> 147
<CGS> 37
<TOTAL-COSTS> 2,398
<OTHER-EXPENSES> 12
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90
<INCOME-PRETAX> (2,251)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,251)
<DISCONTINUED> 0
<EXTRAORDINARY> (237)
<CHANGES> 0
<NET-INCOME> (2,417)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
