As Filed with the Securities and Exchange Commission on April 29, 1998.
Registration No.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
-------------------------
CHAPARRAL RESOURCES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
1311
---------------------------
(Primary Standard Industrial
Classification Code Number)
Colorado 84-0630863
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
HOWARD KARREN
2211 Norfolk, Suite 1150 2211 Norfolk, Suite 1150
Houston, Texas 77098 Houston, Texas 77098
(713) 807-7100 (713) 807-7100
- --------------------------------- ------------------------------------
(Address, including zip code, and (Name, address, including zip code,
telephone number, including area and telephone number, including area
code, of Registrant's principal code, of agent for service)
executive offices)
With Copies to:
Thomas S. Smith, Esq.
Smith McCullough, P.C.
4643 South Ulster Street, Suite 900
Denver, Colorado 80237
(303) 221-6000
Approximate date of proposed sale to the public: As soon as practicable
following the date on which the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ X ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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<CAPTION>
CALCULATION OF REGISTRATION FEE
=========================================================================================================================
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities To Be Registered Registered(5) Per Share Offering Price Fee
- --------------------------- ------------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C>
Common Stock............................ 11,969,174 Shares(1) $2.03125 (4) $24,312,385 $ 7,172.15 (4)
Common Stock Underlying Warrants........ 3,330,720 Shares(2) $2.03125 (4) $ 6,765,525 $ 1,995.83 (4)
Common Stock Underlying Convertible
Preferred Stock....................... 2,222,222 Shares(3) $2.03125 (4) $ 4,513,889 $ 1,331.60 (4)
Total XXX XXX $35,591,799 $10,499.58
==========================================================================================================================
</TABLE>
(1) The 11,969,174 shares consist of shares of Common Stock previously
issued in private placements or upon exercise of warrants issued in
private placements.
(2) Registered for resale upon exercise of outstanding Warrants.
(3) Registered for resale upon conversion of outstanding Series A
Preferred Stock.
(4) The registration fee was calculated in accordance with Rule 457 (c)
and is based on the average of the high and low prices of Registrant's
Common Stock, as reported on the NASDAQ Small-Cap Market on April 24,
1998.
(5) In accordance with Rule 416, there are hereby being registered an
indeterminate number of additional shares of Common Stock which may be
issued as a result of the anti-dilution provisions of the Warrants and
of the Series A Preferred Stock or as a result of any future stock
split or stock dividend.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
ii
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<TABLE>
<CAPTION>
CHAPARRAL RESOURCES, INC.
Cross Reference Sheet
PART I
INFORMATION REQUIRED IN THE PROSPECTUS
Item
Number Form S-1 Item Number Caption or Location in Prospectus
- ------ -------------------- ---------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Front of Registration Statement and Outside
Front Cover of Prospectus Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus Prospectus
3. Summary Information, Risk Factors, and Ratio of Prospectus Summary and Risk Factors
Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Securityholders
8. Plan of Distribution Plan of Distribution
9. Description of Securities to be Registered Front of Registration Statement, Outside Front
Cover of Prospectus and Description of
Securities
10. Interests of Named Experts and Counsel Not Applicable
11. Information With Respect to the Registrant
(a) Description of Business Business of the Company
(b) Description of Property Business of the Company
(c) Legal Proceedings Legal Proceedings
(d) Market Price of and Dividends on the Registrant's Market Prices of Common Equity, Dividend
Common Equity and Related Stockholder Matters Policy and Related Stockholder Matters
(e) Financial Statements Financial Statements
(f) Selected Financial Data Prospectus Summary
(g) Supplementary Financial Information Management's Discussion and Analysis of
Financial Condition and Results of Operations
(h) Management's Discussion and Analysis of Management's Discussion and Analysis of
Financial Condition and Results of Financial Condition and Results of Operations
Operations
(i) Changes in and Disagreements with Accountants Change in Accountants
on Accounting and Financial Disclosure
(j) Directors, Executive Officers, Promoters Directors and Executive Officers
and Control Persons
(k) Executive Compensation Executive Compensation
(l) Security Ownership of Certain Beneficial Owners Security Ownership of Certain Persons
and Management
(m) Certain Relationships and Related Transactions Certain Relationships and Related Transactions
12. Disclosure of Commission Position on Description of Securities
Indemnification for Securities Act Liabilities
iii
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<PAGE>
PROSPECTUS
CHAPARRAL RESOURCES, INC.
17,522,116 Shares of Common Stock
This Prospectus relates to the resale by the holders (the "Selling
Securityholders") named herein of up to 17,522,116 shares of the $0.10 par value
common stock ("Common Stock") of Chaparral Resources, Inc. ("Company"), of which
11,969,174 shares are currently issued and outstanding, 3,330,720 shares are
issuable upon the exercise of outstanding warrants ("Warrants") to purchase
shares of Common Stock and 2,222,222 shares are issuable upon conversion of
outstanding Series A Preferred Stock ("Preferred Stock"). See "Description of
Securities--Preferred Stock.". The shares of Common Stock offered hereby for
resale and the shares of Common Stock issuable upon exercise of the Warrants and
upon conversion of the Preferred Stock were, or will be, issued in private
transactions by the Company. See "Plan of Distribution" and "Selling
Securityholders."
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Securityholders or upon conversion of the Preferred Stock. If all of
the Warrants are exercised, of which there is no assurance, the Company would
receive proceeds of up to approximately $614,635. There is no assurance that all
or any portion of the Warrants will be exercised. However, the holders of the
Warrants will have to exercise the Warrants in order to publicly sell the shares
of Common Stock that underlie the Warrants and that are offered for resale
hereby.
---------------------------------------
FOR INFORMATION CONCERNING CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" COMMENCING ON
PAGE 6 OF THIS PROSPECTUS.
--------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is ___________, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance with the Exchange
Act files periodic reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy and information
statements and other information filed by the Company with the Commission can be
inspected and copied (at prescribed rates) at the Commission's Public Reference
Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D. C.
20549, and at the Regional Offices of the Commission located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. The
commission maintains a Web site that contains reports, proxy and information
statements and other information regarding the Company. The address of such site
is http://www.sec.gov. In addition, the Company's securities are listed on the
Nasdaq Small-Cap Market and reports, proxy statements and other information
concerning the Company can be inspected and copied at the office of the National
Association of Securities Dealers, Inc. 9513 Key West Avenue, Rockville,
Maryland 20850-3389.
The Company has filed with the Commission a registration statement (the
"Registration Statement") under the Securities Act of 1933 (the "Securities
Act") with respect to the securities offered hereby. This Prospectus, which is
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain items of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
securities offered hereby, reference is hereby made to the Registration
Statement and such exhibits and schedules.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and related notes appearing elsewhere in
this Prospectus.
The Company
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. Historically, the
Company produced and sold crude oil and natural gas to oil and gas purchasers in
the Rocky Mountain and Western states of 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 (part of 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. The Company's strategy is to obtain development
rights to oil and gas fields located outside the United States where discoveries
have been made and the Company estimates there are oil reserves, but the fields
have either never been placed on production or the Company believes that the
fields could be enhanced with efficient management and technical experience
provided by the Company. The Karakuduk Oil Field Project ("Karakuduk Field" or
"Karakuduk Project") described below is the Company's first oil field to be
acquired under the Company's new corporate strategy.
The Company has a net 50% beneficial interest in Karakuduk Munay, Inc.
("KKM"), a Kazakhstan joint stock company which holds a governmental license to
develop the Karakuduk Field ("Karakuduk Field" or "Karakuduk Project"), a 16,900
acre oil field in the Republic of Kazakhstan which was discovered in 1972 with
the drilling of 22 exploratory and development wells by the former Soviet Union.
These wells were not produced commercially. In December 1997, KKM delivered oil
from the first well that KKM had reentered in the Karakuduk Field. The Company
is pursuing the further development and commercial production of the reserves of
oil in the Karakuduk Field. See "Properties."
The Company's address is 2211 Norfolk, Suite 1150, Houston, Texas 77098 and
its telephone number is (713) 807-7100.
3
<PAGE>
The Offering
Common Stock Outstanding Prior to the Offering... 51,130,456 shares which do not
include 30,000 shares granted
subject to vesting
requirements.
Total Possible Shares of Common Stock
Outstanding After the Offering................... 56,683,398 shares which
include 5,552,942 shares
issuable upon the exercise of
various outstanding Warrants
and the conversion of
outstanding Series A Preferred
Stock. See "Description of
Securities--Preferred Stock."
The 56,683,398 shares do not
include any shares issuable
upon the exercise of
outstanding options.
Use of proceeds.................................. Proceeds from any exercise of
Warrants will be used by the
Company for general corporate
purposes.
Securities being offered for resale by Selling
Securityholders.................................. 11,969,174 shares of Common
Stock and 5,552,942 shares of
Common Stock issuable upon the
exercise of outstanding
Warrants and the conversion of
outstanding Series A Preferred
Stock. See "Description of
Securities--Preferred Stock."
NASDAQ symbol.................................... CHAR for Common Stock.
- -------------------
The securities offered hereby involve a high degree of risk and should be
considered only by persons who can afford the loss of their entire investment.
See "Risk Factors."
Selected Consolidated Financial Information
The following selected consolidated financial information of the Company
for the year ended December 31, 1997, for the month of December 1996 and for
each of the years ended November 30, 1996, 1995, 1994 and 1993, are derived from
the financial statements of the Company and should be read in conjunction with
the consolidated financial statements appearing elsewhere in this Prospectus.
4
<PAGE>
<TABLE>
<CAPTION>
Year Ended Month of
December 31,* December Year Ended November 30,
------------- -------- -----------------------------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Oil and gas sales -- -- $ 147,000 $ 255,000 $ 374,000 $ 414,000
Total revenue** -- -- 147,000 255,000 374,000 414,000
Noncash write-down of oil
and gas properties -- -- -- 619,000 416,000 230,000
Net (loss) (2,603,000) (130,000) (2,416,000) (704,000) (474,000) (123,000)
Net (loss) per common (0.06) (0.00) (0.08) (0.04) (0.02) (0.01)
share
Present value of proved -- 427,000 1,084,000 1,360,000
reserves -- --
Proved oil reserves (bbls) -- -- -- 66,185 111,690 141,748
Proved gas reserves (mcf) -- -- -- 3,062,417 3,294,730 2,305,142
- -----------
*On May 29, 1997, the Company changed its fiscal year end from November 30
to December 31.
**Certain reclassifications have been made to conform prior years'
information with the current year presentation.
December 31, November 30, November 30,
1997 1996 1995
----------- ----------- -----------
Balance Sheet Data:
Working capital (deficit) $ 3,356,000 $ 259,000 $ 366,000
Total assets 23,519,000 14,498,000 5,595,000
Long-term obligations and 4,710,000 1,491,000 461,000
redeemable preferred stock
Shareholders' equity 18,578,000 12,114,000 4,920,000
RISK FACTORS
An investment in the Company's Common Stock is speculative and involves a
high degree of risk. The Common Stock should be purchased only by persons who
are sophisticated in financial matters and business investments. The following
factors, in addition to those discussed elsewhere in this Prospectus, should be
considered carefully before purchasing Common Stock of the Company.
5
</TABLE>
<PAGE>
1. Financial Condition and Possible Need for Additional Financing. The
Company has incurred operating losses for each of its last five fiscal years,
including a loss of approximately $2,603,000 for the fiscal year ended December
31, 1997. As a result of such losses and other factors, the opinion on the
Company's audited financial statements contains an explanatory paragraph
regarding the Company's ability to continue as a going concern. Also, the
Company will incur an operating loss for the three months ended March 31, 1998.
At the end of December 1997, the Company first delivered oil from one well
located on the Company's principal asset, an interest in the Karakuduk Field.
However, the Karakuduk Field is substantially undeveloped and further
development will require substantial amounts of additional capital. The license
to KKM specifies that a minimum work plan be established, which must be expended
unless waivers or deferrals are obtained from the licensing authority. The
Company's subsidiary must provide funds required by KKM to satisfy the work plan
in order to maintain the Company's interest in the Karakuduk Project. As of
April 22, 1998, the Company had unrestricted cash available for operations of
approximately $1,400,000. There is no assurance that the Company will have the
financial resources to meet its expected cash requirements for 1998. The Company
will be required to raise additional capital to finance the obligations under
the license for the Karakuduk Project and to satisfy working capital needs. The
Company may seek to raise additional capital through debt or equity offerings,
encumbering properties or entering into arrangements whereby certain costs of
exploration or development will be paid by others to earn an interest in the
properties. The present environment for financing of small oil and gas
companies, or the ongoing obligations of an oil and gas business, or the
acquisition of oil and gas properties, is uncertain due, in part, to the
substantial instability in oil and gas prices in recent years. There can be no
assurance that the additional debt or equity financing that might be required in
the future to fund the Company's operations and obligations will be available to
the Company on economically acceptable terms. If sufficient funds are not
available to meet the Company's obligations with respect to the Karakuduk
Project, the Company's interest in such property might be lost. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Properties."
2. Risks Inherent in Oil and Gas Exploration. There can be no assurance
that the Company, through KKM, will be able to discover, develop and produce
sufficient reserves in the Karakuduk Field, or elsewhere, to recover the
expenses incurred in connection with the exploration thereof and achieve
profitability. The odds against discovering commercially exploitable oil or gas
reserves are always substantial and, in the case of the Company, will be
increased as a result of the concentration of its activities in areas that have
not yet been significantly explored and where political or other unknown
developments could adversely affect commercialization. The Company, through KKM,
will be required to perform expensive geological and/or seismic surveys with
respect to its properties and, depending on the results of such surveys, only
6
<PAGE>
subsequent drilling at substantial cost and high risk can determine whether
commercial development of the properties is feasible. Oil and gas drilling is
frequently marked by unprofitable efforts, not only from unproductive wells, but
also from productive wells which do not produce sufficient amounts to return a
profit on the amount expended and from developed oil or natural gas reserves
which cannot be marketed. The Company will be subject to all of the risks
normally incident to drilling for and producing oil and gas, including such
events as blowouts, cratering, fires or accidents, any of which could result in
damage to or loss of life and property. In accordance with industry practice,
the Company is not fully insured against these risks nor are all such risks
insurable.
3. Risks Inherent in Foreign Operations. Because of the Company's interests
in KKM and the Karakuduk Project, 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 Project. 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 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 agency, instrumentality or other entity 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 Kazakhstan, and may
encounter unexpected difficulties in conducting foreign operations. Although the
Company believes that the recent and continuing political, social and economic
developments in Kazakhstan have created opportunities for foreign investment,
uncertainty exists about the status of Kazakhstan law and the autonomy of the
parties involved with the Company in Kazakhstan.
The Company has obtained a commitment for political risk insurance against
certain political and commercial risks. As of the date hereof, the Company has
not purchased the insurance and, even if the insurance is purchased, there is no
certainty that the insurance will provide adequate protection to the Company's
endeavors in Kazakhstan. See "Business--Risks of Foreign Operation."
4. Risks of Joint Ventures; Risks Associated With Indirect Investments. The
exploration and development of the Company's Kazakhstan property is governed by
the terms of an agreement (the "1995 Agreement") between KKM and the Ministry of
Oil and Gas Industry for Kazakhstan, a license issued June 28, 1995, as amended,
to KKM (the "Kazakhstan License") from the Republic of Kazakhstan, and the terms
of a joint venture agreement between Central Asian Petroleum (Guernsey) Limited
("CAP-G") and KKM. The Company currently owns all of CAP-G. The 1995 Agreement
7
<PAGE>
requires KKM to advance 100% of the costs required for development of the
Karakuduk Field and the joint venture agreement requires CAP-G to loan funds to
KKM to pay all such costs. The 1995 Agreement and the Kazakhstan License include
numerous requirements which must be met to maintain the interest in the
Karakuduk Field. In addition, the Company's ability to utilize any revenue
generated by the successful development of the Karakuduk Field and marketing of
any petroleum produced, held indirectly and beneficially by the Company through
CAP-G and KKM, may be limited. Limitations may result from governmental or other
restrictions which may prevent or inhibit shipment or sale of petroleum products
produced, or the distribution of funds from KKM to CAP-G or from CAP-G to the
Company. See "Business--Karakuduk Project."
5. 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 which might
have greater financial resources and more experience than the Company. The
Company does not hold a significant competitive position in the oil and gas
industry.
6. Markets. There is substantial uncertainty as to the prices at which
reserves of oil and gas produced by the Company, if any, 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 fluctuations in world oil prices in recent years and there can be no
assurance of any price stability.
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
Kazakhstan are dependent on limited transport routes and, in particular, access
to the Russian pipeline system. Domestic markets in the Republic of Kazakhstan
might not permit world market price to be obtained. Management believes,
however, that over the life of the Karakuduk 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. In this
regard, KKM has entered into a protocol of intentions whereby the entity that
operates the KazTrans Oil pipeline and KKM have undertaken to conclude a
contract which will give KKM access to the pipeline. This access will allow KKM
to ship oil to export markets. In addition to this protocol, on March 7, 1998,
KKM signed a contract with the export-import firm of Munay-Impex, a subsidiary
of KazakhOil, to export crude oil produced by KKM to both the Commonwealth of
Independent States (CIS) and other countries in the amount up to 100,000 (one
hundred thousand) metric tons according to the schedule of shipment of
Kazakhstan oil during 1998. KKM will supply crude oil to Munay-Impex in amounts
of not less than 5 to 10 thousand tons.
8
<PAGE>
KKM anticipates that the production facilities will be completed during the
late second quarter or early third quarter of 1998, which will initially allow
up to 12,000 barrels of oil per day to be transported to the main pipeline
terminal. Until the production facilities are completed, any produced oil will
first be placed into storage tanks and then trucked to the pipeline under the
terms of the protocol. Production entered into the pipeline is considered
inventory of KKM, until the 5 to 10 thousand ton minimum volume requirement has
been met, at which time the production will be sold under the terms of the
Munay-Impex contract. KKM expects to record revenues from the sale of crude oil
by the end of the second quarter of 1998.
7. Reserves. As detailed in "Disclosures About Oil and Gas Producing
Activities" following the Notes to Consolidated Financial Statements, estimated
quantities of the Company's proved oil and natural gas reserves decreased 100%
for the fiscal year ended November 30, 1996, as compared to the previous fiscal
year. Reserves decreased due to production during the year, the sale of certain
producing 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. The Company claims no proved reserves as of
December 31, 1997.
Although the Company has a reserve report on the Karakuduk Field that was
commissioned by the Company and that was reviewed by a petroleum engineering
group retained by the Company, the reserve report is over three years old and
did not consider the potential adverse impact of marketability on the price of
any oil which might be produced due to the remote location of the Karakuduk
Field or the potential of political instability. Therefore, the Company does not
claim that any of the reserves specified in the reserve report are proven. As a
result of the Company recently reentering a well in the Karakuduk Field and
because of the Company's future drilling plans for the Karakuduk Field, the
Company expects to be able to obtain an updated reserve report for the Karakuduk
Field in late 1998 or early 1999.
8. Price Volatility. Assuming the Company is able to produce oil in the
future, of which there are no assurances, the revenues that would be generated
by the Company and estimated future net revenue will be highly dependent upon
the prices of oil. The energy market makes it difficult to estimate future
prices of oil. Various factors beyond the control of the Company affect prices
of oil, including worldwide and domestic supplies, and demand for, oil, the
ability of the members of the Organization of Petroleum Exporting Countries
("OPEC") to agree to and maintain oil price and production controls, political
instability or armed conflict in oil-producing regions, the price of foreign
9
<PAGE>
imports, the level of consumer demand, the price and availability of alternative
fuels, the availability of pipeline capacity and changes in existing federal
regulation and price controls. As in the past, it is likely that oil prices will
continue to fluctuate in the future which may adversely affect the Company's
business.
9. Government Regulation and Environmental Risks. 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, environmental
protection and pollution control, royalty rates and taxation rates. These
regulations may substantially increase the costs of doing business and sometimes
may prevent or delay the starting or continuation 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. The Company believes that it complies with all
applicable legislation and regulations in all material respects.
Based upon a study undertaken on behalf of the Company by an unaffiliated
party, the Company does not believe that its business operations presently
create any environmental liabilities for the Company. 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.
10. Dependence On Management. The Company is dependent upon the expertise
and abilities of its current officers. If the Company loses the services of any
one of its officers as a result of disability, death, or otherwise, its business
could be adversely affected until a replacement could be found.
11. No Dividends. The Company has paid no cash dividends on its Common
Stock since incorporation. At the present time, the Company does not anticipate
paying any dividends on its Common Stock in the foreseeable future. Any future
dividends will depend upon the earnings, if any, of the Company, dividend
payments that the Company will have to make on any outstanding preferred stock,
financial requirements of the Company and other factors.
12. Outstanding Warrants and Options. As of April 24, 1998, the Company had
outstanding warrants and options entitling the holders to purchase a total of
7,649,500 shares of the Company's Common Stock. The exercise prices of the
outstanding warrants and options currently range from $0.00001 per share to
$2.25 per share. The holders of the outstanding warrants and options might have
10
<PAGE>
the opportunity to profit from a rise in the market price (of which there is no
assurance) of the shares of the Company's Common Stock underlying the warrants
and options and their exercise may dilute the ownership interest in the Company
held by other shareholders. 3,330,720 shares of Common Stock underlying
outstanding warrants have been registered for resale. Resales of Common Stock
issued upon exercise of warrants and options could adversely effect the market
price for the Common Stock.
13. Preferred Stock. The Company currently has outstanding 50,000 shares of
the Company's Series A Preferred Stock which have a liquidation preference over
the Company's Common Stock of $5,000,000. Further, the Series A Preferred Stock
is convertible at the option of the holders thereof at any time or from time to
time on or prior to the redemption date into Common Stock. The conversion price
of the Series A Preferred Stock is initially $2.25 per share. The number of
shares of Common Stock issuable upon conversion of each share of Series A
Preferred Stock is determined by dividing $100 by the conversion price per
share.
The Series A Preferred Stock is entitled to receive cumulative dividends at
the annual rate of $5.00 per share and has a redemption price of $100.00 plus
any unpaid dividends.
Commencing on November 30, 2002, the Company will be required to redeem the
Series A Preferred Stock to the extent of the lesser of (i) the number of shares
of Series A Preferred Stock outstanding on each scheduled redemption date or
(ii) one-third of the largest number of shares of Series A Preferred Stock
outstanding at any time prior to the scheduled redemption date. The Company has
the right to redeem all or any portion of any shares of Series A Preferred Stock
prior thereto.
Each holder of shares of Series A Preferred Stock is or will be entitled to
vote on all matters in an amount equal to the largest number of full shares of
Common Stock into which all shares of the Series A Preferred Stock held by such
holders are convertible.
The shares of Common Stock that are underlying the Series A Preferred Stock
have been registered for resale. The holders of the outstanding Series A
Preferred Stock might have the opportunity to profit from a rise in the market
price (of which there is no assurance) of the shares of the Company's Common
Stock into which the shares of the Series A Preferred Stock are convertible and
their conversion may dilute the ownership interest in the Company held by other
shareholders. Resales of shares of Common Stock issued upon conversion of the
Series A Preferred Stock could adversely affect the market price of the Common
Stock.
Under the Company's Restated Articles of Incorporation + Amendments, the
Board of Directors has the power, without further action by the holders of the
Common Stock, to designate the relative rights and preferences of the remaining
authorized but unissued shares of preferred stock of the Company, when and if
issued. Such rights and preferences could include preferences as to liquidation,
11
<PAGE>
redemption and conversion rights, voting rights, dividends or other preferences,
any of which may be dilutive of the holders of the Common Stock. The ability of
the Board of Directors to issue shares of preferred stock and determine the
rights, preferences, privileges, designations and limitations of such stock,
including the dividend rights, dividend rate, conversion rights, voting rights,
terms of redemption and other terms and conditions of such preferred stock,
could make it more difficult for a person to engage in, or discourage a person
from engaging in, a change in control transaction without the cooperation of
management of the Company.
14. Risks Associated With Forward-Looking Statements. This Prospectus
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act and the Company intends
that such forward-looking statements be subject to the safe harbors for such
statements under such sections. The Company's forward-looking statements include
the plans and objectives of management for future operations, including plans
and objectives relating to the Karakuduk Project and future performance of the
Company. The forward-looking statements and associated risks set forth in this
Prospectus include or relate to the (i) success of the Company in developing,
producing and selling expected reserves of oil in the Karakuduk Field, (ii)
success of the Company in raising required financing to meet the funding
obligations for KKM, (iii) success of the Company in producing and marketing
proven oil and natural gas reserves and (iv) success of the Company in improving
its overall financial operating results.
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. In
addition, as disclosed elsewhere in this "Risk Factors" section, 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 Prospectus, 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
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<PAGE>
USE OF PROCEEDS
The Company intends to use the net proceeds, if any, from exercise of the
Warrants for general corporate purposes. It is uncertain when, if ever, the
Company will receive proceeds from exercise of the Warrants. See "Selling
Securityholders," "Description of Securities" and "Plan of Distribution."
MARKET PRICES OF COMMON EQUITY, DIVIDEND POLICY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq Small-Cap Market under the
symbol CHAR.
On April 24, 1998, the Company had approximately 2,024 shareholders of
record of its Common Stock. No dividend has been paid on the Company's Common
Stock and there are no plans to pay dividends on the Common Stock in the
foreseeable future.
The following table shows the range of high, low and closing sales prices
of the Common Stock during each quarter of the last two calendar years and for
the quarter ended March 31, 1998, as reported by the National Association of
Securities Dealers, Inc.
Price Range
Trading Range -----------------------
Quarter Ended High Low Closing
- ------------- ---- ------ -------
March 31, 1996 1 11/32 11/16 1 3/16
June 30, 1996 1 21/32 1 1/32 1 3/8
September 30, 1996 1 3/4 1 3/16 1 5/16
December 31, 1996 1 13/32 3/4 29/32
March 31, 1997 1 3/16 3/4 7/8
June 30, 1997* 1 3/4 13/16
September 30, 1997 1 1/4 11/16 1 5/32
December 31, 1997 3 3/32 1 1/16 2 1/2
March 31, 1998 2 7/16 2 3/8 2 7/16
* On May 29, 1997, the Company changed its fiscal year end from November 30
to December 31.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
Previously, the Company's primary source of capital was from oil and gas
sales from domestic properties. All domestic properties have been sold or
otherwise disposed. The only oil and gas interest of the Company at this time is
the Company's investment in KKM through CAP-G. KKM is a closed joint stock
company in Kazakhstan.
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.
Since January 1, 1997, the Company raised $4,800,000 through the sale of Common
Stock and warrants, $3,309,250 through the exercises of warrants and $5,000,000
through the sale of Series A Preferred Stock. The Company may seek to obtain
additional capital 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 interest 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
any financing that may be needed in the future. There can be no assurance that
the debt or equity financing that might be required to fund the Company's
operations and obligations in the future will be available to the Company on
economically acceptable terms if at all.
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. The Company has
incurred recurring operating losses and has no operating assets presently
generating cash to fund its operating and capital requirements. The Company does
not expect to record any revenues from KKM's operations until late second
quarter of 1998, and expects to realize an overall operating loss for the year
ended December 31, 1998. As of April 22, 1998, the Company's unrestricted cash
available for operations was approximately $1,400,000. The Company's current
cash reserves and cash flow from operations will not be sufficient to meet its
capital requirements through fiscal 1998.
In December 1997 the Company exercised an option to acquire the remaining
10% of CAP-G. The Company now owns all of CAP-G, providing a 50% beneficial
interest in the Karakuduk Field. The Company was required to pay $1,625,000
(which includes $800,000 of costs the Company previously paid on behalf of the
prior owner of the 10% interest) and issue 400,000 shares of Common Stock for
the remaining 10% of CAP-G.
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<PAGE>
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
Kazakhstan. Since the Karakuduk Field is in the early stage of development, the
Karakuduk Field does not currently produce revenues sufficient to meet its cash
outflow needs. The development of the Karakuduk Field, through KKM, will require
substantial amounts of additional capital. The terms of the KKM revised license
require a work plan from the commencement of operations through December 31,
1997, of at least $10 million which has been satisfied. Additional requirements
of $34.5 million and $12 million exist for the years ending December 31, 1998
and 1999, respectively. Without additional funding and significant revenues from
oil sales, of which there are no assurances, the Company will not be able to
provide sufficient funds to satisfy these requirements and the Company's
interest in the Karakuduk Field may be lost.
The Company received an extension to June 30, 1998, from the Overseas
Private Investment Corp. ("OPIC") for political risk insurance. OPIC granted the
Company a binding executed letter of commitment on September 25, 1996. The
Company has a standby facility for which it has made seven payments of $31,250.
The Company expects to execute the contract on or before June 30, 1998.
Year 2000 Issue
- ---------------
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company does not expect to
incur any material operating expenses or be required to invest heavily in
computer system improvements to be Year 2000 compliant.
The Company has no other material commitments for cash outlay and capital
expenditures other than normal operations.
Change in Fiscal Year End
- -------------------------
In order to unite the reporting period of the Company with that of its
subsidiaries, the fiscal year of the Company was changed to a December 31 year
end from the previous November 30 year end. This change took effect on May 29,
1997. As a result of this change, year to date data is as of December 31 for
1997 and as of November 30 for 1996 and 1995. The activity for December 1996
only includes corporate activity and is immaterial.
15
<PAGE>
Results of Operations Year Ended December 31, 1997 Compared with Year Ended
- --------------------------------------------------------------------------------
November 30, 1996
- -----------------
As mentioned above, during 1997 the Company changed from a fiscal year
ended November 30 to a fiscal year ended December 31. The Company's operations
during the fiscal year ended December 31, 1997, and the month ended December 31,
1996, resulted in losses before extraordinary items of $2,389,000 and $130,000,
respectively, due to the Company's ongoing transition to international
exploration and production operations. The Company's operational loss for the
month of December 1996, consisted of miscellaneous corporate level expenses and
is immaterial to the overall operational results of the Company.
Results for the fiscal year ended November 30, 1996, have also been
reclassified to reflect the equity method of accounting for the Company's
investment in KKM. In 1996, the Company accounted for KKM using proportional
consolidation. The Company's net loss for the fiscal year ended November 30,
1996, $2,416,000 remained unchanged from the amount originally reported.
Oil and gas revenues and production costs decreased by $147,000 and
$37,000, respectively, from the year ended November 30, 1996, due to the
disposition of all of the Company's domestic oil and gas properties during the
first quarter of 1997. Interest income increased by $267,000 from the year ended
November 30, 1996 due to increased financing of 100% of KKM's operations in
Kazakhstan. As of December 31, 1997, the Company held a 50% equity interest in
KKM.
General and administrative costs and interest expense increased by $186,000
and $208,000, respectively, also due to KKM's increased operational activity in
Kazakhstan. The Company's equity loss in KKM, however, decreased by $139,000
from the year ended November 30, 1996 due to additional capitalization of costs
directly related to development of oil and gas properties held by KKM. The
Company recognized a $36,000 loss on the disposition of the Company's domestic
properties.
In 1997, the Company recognized a $214,000 extraordinary loss on the
extinguishment of long term debt. The Company did not have any other debt
obligations outstanding as of December 31, 1997.
Results of Operations Year Ended November 30, 1996 Compared with Year Ended
- --------------------------------------------------------------------------------
November 30, 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 fiscal 1995 to $37,000 in fiscal 1996 as a result of continued
16
<PAGE>
decreased production from the Company's domestic operations. General and
administrative expenses increased from $166,000 in fiscal 1995 to $1,468,000 in
fiscal 1996 as a result of consulting fees to M-D International Petroleum, Inc.
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 Kazakhstan. Interest expense also increased in relation to the
financing of the projects. In fiscal 1996, there was no write down of oil and
gas properties as there had been in fiscal 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 fiscal 1995, before
extraordinary loss.
For fiscal 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.
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 remained unchanged
from the fiscal year ended November 30, 1996, and decreased 100% in the year
ended November 30, 1996, as compared to the year ended November 30, 1995, due to
the withdrawal of the Company from domestic operations.
CHANGE IN ACCOUNTANTS
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
opinion of Grant Thornton LLP on the Company's financial statements for the
fiscal year ended November 30, 1995, contains no adverse opinion or disclaimer
of opinion, nor was such opinion 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.
17
<PAGE>
BUSINESS OF THE COMPANY
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. Historically, the
Company produced and sold crude oil and natural gas to oil and gas purchasers in
the Rocky Mountain and Western states of 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 (part of 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. The Company's strategy is to obtain development
rights to oil and gas fields located outside the United States where discoveries
have been made and the Company estimates there are oil reserves, but the fields
have either never been placed on production or the Company believes that the
fields could be enhanced with efficient management and technical experience
provided by the Company. The Karakuduk Field is the Company's first oil field to
be acquired under the Company's new corporate strategy.
Karakuduk Project
The Company currently owns all 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 Kazakhstan ("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
18
<PAGE>
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 has now
paid the $543,750 balance of the purchase price. In addition, in December 1997
the Company acquired the remaining 10% of the outstanding common stock of CAP-G
for which the Company paid $1,625,000 (which includes $800,000 of costs the
Company previously paid on behalf of the prior owner of the 10% interest) and
issued 400,000 shares of Common Stock.
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
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 Kazakhstan, and may
encounter unexpected difficulties in conducting foreign operations.
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
19
<PAGE>
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 Kazakhstan. 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
actual premium values may be higher or lower depending on the terms of the final
contract between OPIC and the Company.
The Investment Committee of OPIC approved the Company's Karakuduk
operations for political risk insurance coverage by OPIC on December 19, 1995.
The Company 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 paid
$218,750. The Company expects to execute the actual contract offered to the
Company by OPIC on or before June 30, 1998.
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 that are not affiliated with the
Company. The Company does not anticipate problems in obtaining the waiver.
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 limit the Company's exploration and drilling activities.
20
<PAGE>
There is substantial uncertainty as to the prices at which any oil reserves
produced by the Company from the Karakuduk Field in the future 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. KKM has entered into a protocol of
intentions whereby the entity that operates the KazTrans Oil pipeline and KKM
have undertaken to conclude a contract which will give KKM access to the
pipeline. This access will allow KKM to ship oil to export markets. In addition
to this protocol, on March 7, 1998, KKM signed a contract with the export-import
firm of Munay-Impex, a subsidiary of KazakhOil, to export crude oil produced by
KKM to both the Commonwealth of Independent States (CIS) and other countries in
the amount up to 100,000 (one hundred thousand) metric tons according to the
schedule of shipment of Kazakhstan oil during 1998. KKM will supply crude oil to
Munay-Impex in amounts of not less than 5 to 10 thousand tons.
KKM anticipates that the production facilities will be completed during the
late second quarter or early third quarter of 1998, which will initially allow
up to 12,000 barrels of oil per day to be transported to the main pipeline
terminal. Until the production facilities are completed, any produced oil will
first be placed into storage tanks and then trucked to the pipeline under the
terms of the protocol. Production entered into the pipeline is considered
inventory of KKM, until the 5 to 10 thousand ton minimum volume requirement has
been met, at which time the production will be sold under the terms of the
Munay-Implex contract. KKM expects to record revenues from the sale of crude oil
by the end of the second quarter of 1998.
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 environmen- tal protection and pollution control,
21
<PAGE>
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.
The Company believes that it complies with all applicable legislation and
regulations in all material respects.
Subsequent to December 31, 1997, the Kazakhstan government tax authority
began conducting an audit of KKM. The Company believes that as of December 31,
1997, KKM has adequately provided for any potential tax liabilities which may
exist.
Environmental. Based upon a study undertaken on behalf of the Company by an
unaffiliated party, 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
As of April 27, 1998, the Company had 7 full-time employees and 1 part-time
employee. CAP-G operates through its officers and directors and has no
employees. KKM had 80 employees and retains independent contractors on an as
needed basis through the Company's wholly owned subsidiary, Road Runner Services
Company.
Properties
- ----------
The Karakuduk Field
The Karakuduk Field is located in the Mangistau Region of the Republic of
Kazakhstan. 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 Kazakhstan
on August 30, 1995.
The Karakuduk Field is geographically located, approximately 227 miles
northeast of the regional capital city of Aktau, 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
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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 Kazakhstan 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 drilling a maximum 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 by 2001, although the time or
amount of development or production cannot presently be assured.
Although the Company has a reserve report on the Karakuduk Field that was
commissioned by the Company and that was reviewed by a petroleum engineering
group retained by the Company, the reserve report is over three years old and
did not consider the potential adverse impact of marketability on price of any
oil which might be produced. Therefore, the Company does not claim that any of
the reserves specified in the reserve report are proven. As a result of the
Company recently reentering a well in the Karakuduk Field and because of the
Company's future drilling plans for the Karakuduk Field, the Company expects to
be able to obtain an updated reserve report for the Karakuduk Field in 1998 or
early 1999.
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 entered
into a protocol of intentions whereby the entity that operates the KazTrans Oil
pipeline and KKM have undertaken to conclude a contract which will give KKM
access to the pipeline. This access will allow KKM to ship oil to export
markets. In addition to this protocol, on March 7, 1998, KKM signed a contract
with the export-import firm of Munay-Impex, a subsidiary of KazakhOil, to export
crude oil produced by KKM to both the Commonwealth of Independent States (CIS)
and other countries in the amount up to 100,000 (one hundred thousand) metric
tons according to the schedule of shipment of Kazakhstan oil during 1998. KKM
will supply crude oil to Munay-Impex in amounts of not less than 5 to 10
thousand tons. The planned development program for the Karakuduk Field will
include a pressure maintenance operation that the Company believes could result
in additional recoverable reserves.
The ability of the Company to realize the carrying value of its assets is
dependent on the Company being able to extract and transport hydrocarbons and
finding appropriate markets for their sale. Currently, exports from the Republic
of Kazakhstan are dependent on limited transport routes and, in particular,
23
<PAGE>
access to the Russian pipeline system. Domestic markets in the Republic of
Kazakhstan might 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 the Company full recovery of the carrying value of its
assets. KKM, according to its license agreement with the Government of
Kazakhstan, has a priority use of the existing pipeline network. In this regard,
on March 7, 1998, KKM entered into a contract with Munay-Impex, which is
described above, for export of crude oil of up to 100,000 metric tons during
1998. Currently, oil is being produced through the field separators into storage
tanks or directly into oil transport trucks for delivery to the pipeline under
the terms of the contract.
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 December 31, 1997 (which has been satisfied), of
approximately $34.5 million by December 31, 1998 and of approximately $12
million by December 31, 1999. Although KKM was previously permitted to defer the
minimum work program, there are no assurances that KKM would receive permission
for any future deferrals if requested by KKM. As part of the minimum work plan
requirement, the Company has loaned CAP-G more than $12 million to fund KKM's
current operations. KKM's 1998 budget of $34 million has been approved by the
KKM Board of Directors through December 31, 1998. It is planned that this
requirement will be funded by the Company through loans by its subsidiary CAP-G
to KKM and by the sale of oil by KKM. In addition, the Company is attempting to
obtain limited or non-recourse project financing for KKM, which may reduce the
amount of loans from CAP-G.
The Company currently is responsible for providing 100% of the balance of
the funding necessary for the completion of development of the Karakuduk Field.
The Company first delivered crude oil from the Karakuduk Field in December
1997. The oil is transported by truck to the export pipeline of Say-Utes which
is 38 miles from the field. By the beginning of the third quarter of 1998, it is
anticipated that any oil produced will be transported by pipeline from the field
to a storage terminal to be built at Railroad Station #6, which is approximately
18 miles from the Karakuduk Field. Until the production facilities are
completed, any produced oil will first be placed into storage tanks and then
trucked to the pipeline under the terms of the protocol. Production entered into
the pipeline is considered inventory of KKM, until the 5 to 10 thousand ton
minimum volume requirement has been met, at which time the production will be
sold under the terms of the Munay-Impex contract. KKM expects to record revenues
from the sale of crude oil by the end of the second quarter of 1998.
The first two workover wells reentered in the Karakuduk field were tested
by KKM at a combined sustained flow rate of approximately 2,000 barrels of oil
per day. Production has been established from the two uppermost oil-producing
zones in the field. The Company plans to drill subsequent wells to attempt to
24
<PAGE>
obtain production from the additional zones. The wells, #21 and #10, are two of
twenty-two wells drilled between 1972 and 1992 to delineate the Karakuduk Field.
None of such wells were placed on limited production when originally drilled.
Well #21 and well #10 currently have been placed on limited production to fill
storage tanks and transport trucks that deliver oil to the export pipeline. KKM
is acquiring additional trucks and equipment to increase the amount of daily
production currently deliverable to the pipeline terminal. KKM also has begun
preparations to workover additional wells and, if the wells are productive, will
place them on production at such time as the field facility construction is
completed.
KKM has entered into a drilling contract with Challenger Drilling Company,
Ltd. ("Challenger"), a company based in the United Kingdom, to use a mobile
drilling rig for a six-well development program commencing in August, 1998. The
rig is currently being upgraded in Houston, Texas, for shipment to Kazakhstan in
June 1998. Challenger was awarded the contract by KKM as a result of a worldwide
bidding process in which Challenger was the low bidder that met the requirements
of a western-equipped rig. The Company has extended a short-term loan to
Challenger to enable it to purchase additional equipment and spare parts
required by KKM for the drilling program.
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 specific amounts or that the Company will ever realize a profit as a
result of the Company's interest in the field.
KKM was re-registered on July 24, 1997, with the government of Kazakhstan.
The re-registration was required as a result of new legislation in Kazakhstan.
The Company believes that KKM is now in compliance with all Kazakhstan laws and
regulations related to the registration requirements relating to legal entities.
The re-registered KKM includes as a shareholder KazakhOil, the national
petroleum company which holds the majority of the interest of the government of
Kazakhstan in KKM. The balance is owned by a private Kazakhstan joint stock
company.
The permits and licenses required to develop the Karakuduk Field have been
obtained. However, there is no assurance that any further permits or licenses,
if required, 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.
25
<PAGE>
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.
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Reserves. As detailed in "Disclosures About Oil and Gas Producing
Activities" following the Notes to Consolidated Financial Statements, estimated
quantities of the Company's proved oil and natural gas reserves decreased 100%
for the fiscal year ended November 30, 1996, as compared to the previous fiscal
year. Reserves decreased due to production during the year, the sale of certain
producing 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. The Company claims no proved reserves as of
December 31, 1997.
Although the Company has a reserve report on the Karakuduk Field that was
commissioned by the Company and that was reviewed by a petroleum engineering
group retained by the Company, the reserve report is over three years old and
did not consider the potential adverse impact of marketability on price of any
oil which might be produced due to the remote location of the Karakuduk Field or
the potential of political instability. Therefore, the Company does not claim
that any of the reserves specified in the reserve report are proven. As a result
of the Company recently reentering a well in the Karakuduk Field and because of
the Company's future drilling plans for the Karakuduk Field, the Company expects
to be able to obtain an updated reserve report for the Karakuduk Field in late
1998 or early 1999.
Since January 1, 1997, the Company has not filed with or included in any
reports to any other Federal authority or agency any estimates of total, proved
net oil or gas reserves.
Net Quantities of Oil and Gas Produced. The Company's net oil and gas
production for each of the last three fiscal years and for the month of December
1996 (all of which prior to 1997 was from properties located in the United
States) was as follows:
Year ended November 30,
Year ended Month of -----------------------
December 31, 1997 December 1996 1996 1995
----------------- ------------- ---- ----
Oil (Bbls) Less than 1,000 -0- 1,737 8,224
Gas (Mcf) -0- -0- 96,906 132,924
26
<PAGE>
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:
Average Average Average
Year Ended Month of Year Ended Sales Price Sales Price Production
December 31, December November 30 Oil (Bbls) Gas (Mcf) Cost Per BOE
- ------------ -------- ----------- ------------ ----------- ------------
1997 * * *
1996 * * *
1996 17.53 1.17 2.07
1995 14.27 1.02 3.78
*The Company did not sell any significant quantities of oil or gas during
these periods.
The above table represents activities related only to oil and gas
production.
Productive Wells and Acreage. As of December 31, 1997, the Company had
interests in one productive oil well and no productive gas wells. As of December
31, 1997, the Company had a net 50% beneficial interest in KKM which holds a
governmental license to develop the Karakuduk Field, a 16,900 acre oil field in
the Republic of Kazakhstan which was discovered in 1972 with the drilling of 22
exploratory and development wells by the former Soviet Union. These wells were
not produced commercially. On December 31, 1997, KKM delivered by truck to the
pipeline oil that KKM had recovered from testing well #21, the first well KKM
reentered in the Karakuduk Field. Well #21 tested on a sustained flow of 526
barrels of oil per day. The well was subsequently shut-in until installation of
a transfer system and a laboratory at Say-Utes was completed in February 1998.
Well #10 has been reperforated and was produced at a sustained test flow rate of
1,450 barrels of oil per day with a 1/2" choke. Well #21 and well #10 currently
have been placed on limited production to fill storage tanks and transport
trucks that deliver oil to the export pipeline. KKM is acquiring additional
trucks and equipment to increase the amount of daily production currently
deliverable to the pipeline terminal. KKM also has begun preparations to
workover additional wells and, if the wells are productive, will place them on
production at such time as the field facility construction is completed.
Drilling Activity. During the last fiscal year ended December 31, 1997, the
month of December 1996 and the previous two fiscal years ended November 30,
1996, the Company did not participate in the drilling of any productive
exploratory and development wells. The Company did participate in the reentry of
one previous oil well which had never been placed on production.
27
<PAGE>
Present Activities. As of the date of this Prospectus, the Company was in
the process of reentering well #20 and well #7.
Offices. On March 16, 1998, the Company relocated its offices to 2211
Norfolk, Suite 1150, Houston, Texas 77098. The new offices are comprised of
approximately 5,570 square feet and are leased for a five year term at an
initial rental of approximately $7,891 per month.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the current directors
and executive officers of the Company, the principal offices and positions with
the Company held by each person and the date such person became a director or
executive officer of the Company.
<TABLE>
<CAPTION>
Name of Director or Executive Director Principal Occupation
Officer and Position, in the Company Since Age During the last Five Years
- ------------------------------------ ------- --- --------------------------
<S> <C> <C> <C>
Howard Karren 1996 67 Chairman of the Board of the
Chairman of the Board, Company since 1996; Chief Executive
President and Chief Officer of the Company since
Executive Officer January 1997 and President of the
Company 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.
Arlo G. Sorensen 1996 57 Chief Financial Officer and
Chief Financial Officer Principal Accounting Officer of the
Company since March 1997. Treasurer
of the Company from February 1997
to February 1998. 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.
David A. Dahl 1997 36 Secretary of the Company since
Secretary August 1997; 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.
28
<PAGE>
Name of Director or Executive Director Principal Occupation
Officer and Position, in the Company Since Age During the last Five Years
- ------------------------------------ ------- --- --------------------------
Alan D. Berlin 1997 58 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.
Secretary of the Company from
January 1997 to August 1997;
President of the International
Division of Belco Petroleum Corp.
from 1985 to 1987 and held various
other positions with Belco
Petroleum Corp. from 1977 to 1985.
Currently a director of Belco Oil &
Gas Corp.
Walter A. Carozza 1997 42 President of Victory Ventures LLC,
a private equity reinvestment firm,
since 1997. Manager of and investor
in East River Ventures, LP, and M3
Partners, LC, venture capital
funds, since 1996 and 1994,
respectively. Involved in the
financing and management of
companies since 1986. A director of
ETEX, Inc., Caring Technologies,
Inc., Interlink Health Services,
Inc. and The Rock Island Group,
Inc.
Ted Collins, Jr. 1997 59 President of Collins & Ware, Inc.,
an independent oil and gas company,
since 1988. President of Enron Oil
& Gas Co. or its predecessors, oil
and gas companies, from 1982 to
1988; Executive Vice President and
a director of American Quasar
Petroleum Co. from 1969 to 1982.
Mr. Collins is a director of
Hanover Compression Company, Mid
Coast Energy Resources, Inc. and
Queen Sand Resources, Inc.
Peter G. Dilling 1995 47 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. Vice Chairman
of the Board of the Company from
March 1997 to August 1997.
29
<PAGE>
Name of Director or Executive Director Principal Occupation
Officer and Position, in the Company Since Age During the last Five Years
- ------------------------------------ ------- --- --------------------------
John G. McMillian 1997 71 Retired since 1995. Chairman,
President and Chief Executive
Officer of Allegheny & Western
Energy Corporation, an oil and gas
company, from 1987 to 1995; founder
and former Chairman and Chief
Executive Officer of Northwest
Energy Company and owner and
Chairman and Chief Executive
Officer of Burger Board Company. A
director of Marker International
and Excalibur Technologies.
Michael J. Muckleroy 1997 67 Independent oil operator since
1994. Chairman and Chief Executive
Officer of Enron Liquid Fuels, a
subsidiary of Enron Corp. which is
engaged in the processing and
marketing of oil and gas and
manufacturing of appliances and
distributing of liquid gas, from
1984 to 1994.
Michael B. Young N/A 29 Treasurer and Controller of the
Treasurer and Controller Company since February 1998; Tax
Manager in the Oil & Gas Tax
Practice of Arthur Andersen LLP, an
accounting firm, from June 1991 to
February 1998.
</TABLE>
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
appointed and qualified, until his resignation or death 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 1995, 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. Mr. McGee subsequently resigned as a
director and officer of the Company to become Co-Managing Director of KKM. The
former shareholders of CAP-D had the right to nominate an additional director
for election to the Company's board of directors at the Company's 1996 annual
meeting of shareholders but failed to do so. 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 annual meeting of
shareholders held in the year 2000.
30
<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
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.
EXECUTIVE COMPENSATION
In May 1997, the Company changed its fiscal year end from November 30 to
December 31. The following table shows all cash compensation paid by the Company
for services rendered during the fiscal years ended December 31, 1997, during
the month of December 1996 and during the fiscal years ended November 30, 1996
and November 30, 1995 to Howard Karren and to Paul V. Hoovler (there were no
executive officers of the Company whose annual salary and bonus exceeded
$100,000 during the fiscal year ended December 31, 1997).
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
-------------------------------------- -----------
Year Year Other
Ended Ended Annual Securities All Other
Name and December Month of November Compen- Underlying Compen-
Principal Position 31, December 30, Salary($) Bonus($) sation($) Options(#) tion($)
- ------------------ ----- -------- -------- -------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Howard Karren............... 1997 -- -- -- 1,025,000 --
Chief Executive Officer and 1996 -- -- -- -- --
President since January 1997 1996 -- -- $175,000(1) -- --
and February 1997, respec- 1995 -- -- -- -- --
tively --
Paul V. Hoovler............. 1997 $12,408 -- -- 200,000(4) --
Chief Executive 1996 $ 5,000 $12,500 -- -- --
Officer and President until 1996 $60,000(2) -- $4,937(3) -- $40,000(5)
January 1997 and February 1995 $60,000 -- $4,413(3) -- $40,000(5)
1997, respectively
- ---------------------
31
</TABLE>
<PAGE>
(1) In connection with Howard Karren becoming a director of the Company,
subject to a certain contingency which was satisfied in April 1996,
the Company agreed to issue 350,000 shares of the Company's restricted
common stock to Howard Karren, a director of the Company, or his
designees. The $175,000 represents the fair market value of the
350,000 shares on April 5, 1996, the date the contingency was
satisfied. The fair market value is based on the $0.50 per share sales
price of sales by the Company of restricted stock to nonaffiliated
parties in April 1996.
(2) In addition, on August 19, 1996, the Company's board of directors
awarded Mr. Hoovler a cash bonus 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 Oil Field
in Kazakhstan, ("Karakuduk Field") or (ii) the date when the Company
makes a public disclosure of a sale or farmout of the Karakuduk Field.
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 warrants. Anything
mentioned above to the contrary notwithstanding, in the event Mr.
Hoovler has exercised and paid for the warrants 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 Field.
(3) Represents the amounts distributed pursuant to a royalty participation
plan to Paul V. Hoovler.
(4) Represents shares underlying warrants that were received by Mr.
Hoovler as a part of a severance agreement with the Company. See
"Executive Compensation--Termination of Employment Agreements."
(5) The Company had a Deferred Compensation and Death Benefit Plan for
Paul V. Hoovler. The Company paid Mr. Hoovler $40,000 annually from
this plan until Mr. Hoovler voluntarily terminated his employment in
February 1997 at which time he received the life insurance policy on
his life which previously provided for the major portion of any costs
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 the life insurance policy.
32
<PAGE>
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
The following table sets forth information concerning options (warrants)
granted by the Company to Howard Karren and Paul V. Hoovler from December 1,
1996 through December 31, 1997.
Number of
Securities
Underlying % of Total Options Market
Options (Warrants) Granted Price on
(Warrants) to Employees Exercise or Expiration Date of
Name Granted During Period Base Price Date Grant(1)
- ---- ------- ------------- ---------- ---- --------
<S> <C> <C> <C> <C> <C>
Howard Karren 25,000 1.9% $0.828125 7/16/2007 $0.828125
Shares
500,000 36.6% $0.75 9/1/2002 $0.8125
Shares
500,000 36.6% $1.50 9/1/2002 $0.8125
Shares
Paul V. Hoovler 100,000(2) 7.5% $0.85 2/12/2001 $0.828125
Shares
100,000(2) 7.5% $1.25 1/1/2002 $0.828125
Shares
</TABLE>
(1) The market price on the date of grant is based on the mean between the
closing bid and asked prices of the Company's Common Stock on the date of
grant or on the next day before the date of grant on which there were
reported bid and asked prices of the Company's Common Stock.
(2) Mr. Hoovler's warrants were received as a part of a severance agreement
with the Company. See "Executive Compensation--Termination of Employment
Agreements."
Fiscal Year-End Option Values
The following table sets forth information concerning unexercised options
(warrants) held by Howard Karren and by Paul V. Hoovler at December 31, 1997:
33
<PAGE>
Number of Securities
Underlying Unexercised Value of Unexercised
Options as of In-the-Money Options at
December 31, 1997(#) December 31, 1997($)
---------------------------- -----------------------------
Name Exercisable/ Unexercisable Exercisable/ Unexercisable
- ---- ------------ ------------- ------------ -------------
Howard Karren..... 1,025,000 - 0 - $1,379,180(1) - 0 -
Paul V. Hoovler... 600,000 100,000 $1,285,000(1) $125,000
- -----------------------
(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 December 31, 1997.
Compensation of Directors
On July 17, 1997, the shareholders of the Company approved a 1997 Incentive
Stock Plan pursuant to which all non-employee directors were to receive an award
of 250 shares of Common Stock of the Company for each meeting of the board of
directors attended by such director. The directors have waived their rights to
receive shares for the meetings in 1997. Also on July 17, 1997, the shareholders
approved a 1997 Non-Employee Directors' Stock Option Plan pursuant to which each
year each non-employee director will receive an option to purchase 25,000 shares
of Common Stock of the Company.
On January 23, 1998, the Board of Directors of the Company, subject to
ratification of the grants by the shareholders of the Company at the next Annual
Meeting of Shareholders, granted each director of the Company 10,000 shares of
the Company's Common Stock for their service to the Company. There were no other
standard or other arrangements for the compensation of the Company's directors
in effect for the Company's fiscal year ended December 31, 1997.
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 received his
salary and unpaid vacation time accrued through February 12, 1997. Also, the
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 became exercisable on January 1,
1998, and remain exercisable for a period of four years from such date.
34
<PAGE>
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.
SECURITY OWNERSHIP OF CERTAIN PERSONS
The following table sets forth as of April 24, 1998, the number of shares
of the Company's outstanding Common Stock beneficially owned by each of the
Company's current directors and executive officers, sets forth the number of
shares of the Company's outstanding Common Stock beneficially owned by all of
the Company's current directors and executive officers as a group and sets forth
the number of shares of the Company's outstanding Common Stock owned by each
person who owned of record, or was known to own beneficially, more than 5% of
the Company's outstanding shares of Common Stock:
Name and Address of Beneficial Owner Amount and Nature of Percent
or Name of Executive Officer or Director Beneficial Ownership(1) of Class
- ---------------------------------------- ----------------------- --------
Allen & Company Incorporated............ 8,431,107(2) 16.1%
711 Fifth Avenue
New York, New York 10022
Drake and Company....................... 2,490,000 4.9%
Citibank Performance Portfolio A.A.
c/o Citibank, N.A.
153 E. 53rd Street, 21st Floor
New York, New York 10043
Whittier Ventures, LLC.................. 3,233,556(3) 6.3%
1600 Huntington Drive
South Pasadena, California 91030
Howard Karren........................... 1,185,000(4) 2.3%
David A. Dahl........................... 5,029,803(5) 9.8%
35
<PAGE>
Name and Address of Beneficial Owner Amount and Nature of Percent
or Name of Executive Officer or Director Beneficial Ownership(1) of Class
- ---------------------------------------- ----------------------- --------
Alan D. Berlin.......................... 35,000(6) *
Walter A. Carozza....................... 35,000(7) *
Ted Collins, Jr......................... 110,000 *
Peter G. Dilling........................ 636,618(8) 1.3%
John G. McMillian....................... 435,000(9) *
Michael J. Muckleroy.................... 20,000 *
Arlo G. Sorensen........................ 96,242(10) *
Michael B. Young........................ 60,000(11) *
All Directors and Officers as a Group (ten
persons)................................ 7.642,663(12) 14.5%
* Less than 1%.
(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. The shares shown do not include any shares that
any directors are entitled to receive pursuant to the 1997 Incentive Stock
Plan for meetings held in 1998.
(2) Based on Amendment No. 1 to Schedule 13D. Includes 1,228,720 shares
underlying presently exercisable warrants. Does not include 600,000 shares
underlying a warrant that is not exercisable. See "Certain Relationships
and Related Transactions."
(3) Includes 262,500 shares underlying presently exercisable warrants.
(4) Includes 1,025,000 shares underlying presently exercisable options. Does
not include 285,000 shares underlying an option granted to Mr. Karren in
January 1998 because the directors are still discussing the terms of such
grant.
(5) Includes 75,000 shares underlying presently exercisable options owned by
David A. Dahl, the 3,233,556 shares beneficially owned by Whittier Ventures
LLC, 349,185 shares owned by Whittier Energy Company, 87,500 shares
underlying presently exercisable warrants owned by Whittier Energy Company
and 1,274,562 shares beneficially owned by Whittier Trust Company. David A.
Dahl has no pecuniary interest in the shares beneficially owned by Whittier
Ventures LLC, Whittier Energy Company or Whittier Trust Company but, as the
36
<PAGE>
President of Whittier Ventures LLC and Whittier Energy Company and as the
Vice President of Whittier Trust Company, 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. Mr. Dahl's address is the same as the
address of Whittier Ventures, LLC.
(6) Includes 25,000 shares underlying a presently exercisable option.
(7) Includes 25,000 shares underlying a presently exercisable option.
(8) Includes 25,000 shares underlying presently exercisable options. 601,618
shares are owned directly by Spectrum Development, Inc. which is controlled
by Mr. Dilling, and the 601,618 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. Does not include 400,000 shares underlying an
option that is not currently exercisable.
(9) Includes 25,000 shares underlying a presently exercisable option.
(10) Includes 75,000 shares underlying presently exercisable options and 11,242
shares owned by Whittier 1982 Oil Trust for which Mr. Sorensen is the
trustee and has voting and investment power over such shares. Mr. Sorensen
is a director of Whittier Ventures LLC and Whittier Energy Company.
However, Mr. Sorensen disclaims beneficial ownership of the shares that are
owned by Whittier Ventures LLC and Whittier Energy Company.
(11) Includes 50,000 shares underlying a presently exercisable option. Does not
include a grant for 30,000 shares that will vest with respect to 10,000
shares on each of January 30, 1999, 2000 and 2001, if Mr. Young is still
employed by the Company on those dates. The shares will vest earlier if Mr.
Young is terminated without due cause or if the Company is bought or merges
with another Company.
(12) Includes the shares as described in notes (5) through (11) above.
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 field in the central Asian Republic of Kazakhstan, that was
discovered in the early 1970s but never placed on production.
37
<PAGE>
In mid-September 1994, the Company acquired a 25% interest in CAP-G. 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 Stockholders under the arrangement. Mr. McGee
resigned as a director of the Company on October 1, 1997, and became the Co-
Managing Director of CAP-G. 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 were placed in escrow and are to be released to the former
shareholders of CAP-D, including Messrs. Dilling and McGee and James A. Jeffs, a
director of the Company until November 1996, or their affiliates, from time to
time in connection with development of the Karakuduk Field. Of the 4,250,000
shares originally placed in escrow, 3,000,000 shares have been released and
delivered to the former shareholders of CAP-D. The additional 55% interest in
CAP-G was acquired by the Company from nonaffiliated parties.
The previous management of the Company had been negotiating an agreement
pursuant to which the Company would have acquired 100% of the issued and
outstanding capital stock of MDI, a private company of which the shareholders
include a director of the Company, Mr. Dilling, and two former directors of the
Company, Messrs. Jeffs and McGee. At the time of the acquisition, the only asset
that MDI would have had would have been a 5% interest in a joint venture that
Enron Oil and Gas Uzbekistan Ltd. ("EOGU") was negotiating for the development
of natural gas fields in the Republic of Uzbekistan. The agreement with MDI was
not consummated. On January 8, 1997, the Company agreed to issue 180,000 shares
of the Company's Common Stock to 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, Jeffs and McGee, agreed that if the Company did not acquire MDI within
a specified time period, the principal shareholders would 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. Because such acquisition did not
occur within the specified time period, such principal shareholders transferred
the 180,000 shares to the Company and the shares were cancelled. The Company is
no longer pursuing the acquisition of MDI.
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
38
<PAGE>
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 the former Soviet Union. From March 1997 to August,
1997, the Company reimbursed MDI for MDI's expenses incurred in connection with
the Karakuduk Project. Currently there are no transactions contemplated between
the Company and MDI.
In November and December, 1996, the Company borrowed $1,850,000 for interim
financing pursuant to unsecured convertible promissory notes that bore interest
at 8% per annum, which was payable monthly, and that were due and payable on or
before May 29, 1998. The promissory notes were 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 were
received on November 22, 1996. Whittier Ventures, LLC, Whittier Energy Company
and Victory Ventures LLC loaned $1,500,000 of the $1,850,000 that was loaned to
the Company. Whittier Ventures, LLC, Whittier Energy Company and Victory
Ventures LLC subsequently converted their loans into the Company's Common Stock
as described below.
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. 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 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. Just prior to November 30, 1997, the
Company offered to repay the then outstanding promissory notes, including the
promissory notes to Whittier Ventures LLC and Whittier Energy Company. The
lenders advised the Company that they were considering whether or not to convert
their promissory notes into shares of the Company's Common Stock and requested
the Company to not repay the promissory notes by November 30, 1997. In
connection with such requests, the lenders agreed that the lenders would not
receive any of the warrants to purchase an additional 370,000 of the Company's
Common Stock if the promissory notes were not paid or converted by November 30,
1997. The warrants that were issued are exercisable for a period of three years
at $0.25 per share. Effective November 30, 1997, Whittier Ventures LLC and
Whittier Energy Company converted the principal and accrued interest in their
promissory notes into 1,047,556 shares and 349,185 shares, respectively, of the
Company's Common Stock.
Walter A. Carozza, a director of the Company, is the President of Victory
Ventures LLC. On April 22, 1997, the Company sold 3,076,923 shares of the
Company's Common Stock for $0.65 per share for a total of $2,000,000 to Victory
Ventures LLC. In connection with the transaction, the Company also issued a
39
<PAGE>
warrant to Victory Ventures LLC to purchase up to an additional 4,615,385 shares
of the Company's Common Stock for $3,000,000 or $0.65 per share. In October,
1997, Victory Ventures LLC exercised a portion of the warrant by purchasing
2,307,692 shares of the Company's Common Stock. At the same time, the Company
agreed to extend the expiration date of the remaining portion of the warrant to
December 31, 1998. In November, 1997, Victory Ventures LLC exercised the
remaining portion of the warrant by purchasing 2,307,693 shares of the Company's
Common Stock and exercised another warrant that Victory Ventures LLC had
received in connection with a loan made by Victory Ventures LLC in December,
1996, to the Company. The warrant related to 125,000 shares of the Company's
Common Stock and was exercisable at a price of $0.25 per share. Victory Ventures
LLC subsequently distributed to its members or sold to various persons all of
the Company's Common Stock owned by Victory Ventures LLC so that, as of the date
hereof, Victory Ventures LLC no longer owns any shares of the Company's Common
Stock.
In April, 1997, Victory Ventures LLC also converted a $500,000 promissory
note (plus $2,000 of accrued interest) that had previously been issued by the
Company to Victory Ventures LLC in December 1996 into 772,308 shares of the
Company's Common Stock at a conversion price of $0.65 per share.
On August 29, 1997, Whittier Ventures LLC loaned the Company $100,000. The
loan was repaid on December 4, 1997, with interest at a rate of 1% per month.
The loan was unsecured. On October 9, 1997, Whittier Ventures LLC loaned the
Company an additional $200,000. The loan was repaid on December 4, 1997, with
interest at a rate of 1% per month. The loan was unsecured. In September 1997,
Howard Karren advanced $61,000 to CAP-G which was repaid by CAP-G to Mr. Karren
without interest in December 1997. Mr. Karren also personally guaranteed
payments to various suppliers.
Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP, a law firm in which Alan D.
Berlin, a director of the Company, is a partner, provides legal services to the
Company for which the law firm charges the Company an amount not in excess of
the law firm's normal billing rates. The total amount of fees that were paid by
the Company to the law firm during the Company's year ended December 31, 1997,
did not exceed 5% of the law firm's gross revenues for the law firm's last full
fiscal year. The Company believes that the fees paid to the law firm were
reasonable for the services rendered.
On November 24, 1997, the Company executed a Subscription Agreement
("Agreement") with an investor, which was not affiliated with the Company.
Pursuant to the Agreement, the Company sold to the investor 50,000 shares of the
Company's Series A Preferred Stock, no par value, for a purchase price of
$100,000 per share or an aggregate purchase price of Five Million Dollars
($5,000,000). The investor also agreed to purchase an additional 25,000 shares
of the Company's Series A Preferred Stock for an additional $2,500,000 and
150,000 shares of the Company's Series B and Series C Preferred Stock for
$15,000,000.
40
<PAGE>
In March 1998, prior to the receipt of the funds for any additional
purchases the investor was to make under the Agreement, the Company and the
investor mutually released each other from any further obligations under the
Agreement. The investor retained the initial 50,000 shares of Series A Preferred
Stock that are convertible into the Company's Common Stock at $2.25 per share.
The number of shares of Common Stock issuable upon conversion of each share of
Series A Preferred Stock will be determined by dividing $100 by the conversion
price per share. The Company is not required to issue any additional preferred
stock under the Agreement and the investor has no other obligation to provide
funds to the Company in exchange for such stock.
The Series B Preferred Stock and Series C Preferred Stock would have been
convertible at the option of the holders thereof at any time or from time to
time on or prior to the redemption date into Common Stock. The conversion price
of the Series B Preferred Stock was initially $3.00 per share; and the
conversion price of the Series C Preferred Stock was initially $4.25 per share.
The number of shares of Common Stock issuable upon conversion of each share of
Series B Preferred Stock and Series C Preferred Stock would have been determined
by dividing $100 by the conversion price per share.
Allen & Company Incorporated ("Allen & Company") acted as placement agent
in connection with the sale of the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock pursuant to the Agreement. Allen & Company
elected to receive its fees in the form of warrants to purchase 900,000 shares
of the Company's Common Stock that were all originally exercisable through
November 25, 2002, at an exercise price of $0.01 per share.
The Company has agreed to allow Allen & Company to retain the warrants to
purchase 700,000 shares of the Company's Common Stock related to the $17,500,000
in funds not received under the original terms of the Agreement, provided Allen
& Company raises additional capital for the Company within the two year period
ending November 25, 1999. Based on a subsequent agreement, the unearned warrants
to purchase 700,000 shares of the Company's Common Stock held by Allen & Company
are fully restricted from exercise unless Allen & Company raises additional
capital for the Company that is acceptable to the Company's Board of Directors.
For each $25 of additional capital raised, a warrant to purchase one share of
Common Stock will be deemed to be earned. If, before November 25, 1999, Allen &
Company fails to raise additional capital for the Company under terms acceptable
to the Company, the unearned portion of the warrants will expire. In April 1998,
Allen & Company raised an additional $2,500,000 of capital for the Company
through the sale by the Company of 1,250,000 shares of the Company's Common
Stock at $2.00 per share. As a result, the warrants became exercisable as to an
additional 100,000 shares of the Company's Common Stock.
On July 17, 1997, the shareholders of the Company approved a 1997 Incentive
Stock Plan pursuant to which all non-employee directors were to receive an award
of 250 shares of Common Stock of the Company for each meeting of the board of
41
<PAGE>
directors attended by such director. The directors have waived their rights to
receive shares for the meetings in 1997. Also on July 17, 1997, the shareholders
approved a 1997 Non-Employee Directors' Stock Option Plan pursuant to which each
year each non-employee director will receive an option to purchase 25,000 shares
of Common Stock of the Company. The first options relating to a total of 200,000
shares that are exercisable at a price of $0.828125 per share were received
effective July 17, 1997.
On January 23, 1998, the Board of Directors of the Company, subject to
ratification of the grants by the shareholders of the Company at the next Annual
Meeting of Shareholders, granted each director of the Company 10,000 shares of
the Company's Common Stock for their service to the Company.
In connection with his employment, the Company granted Michael B. Young a
five year option to purchase 50,000 shares of the Company's Common Stock at an
exercise price of $2.25 per share and granted Mr. Young 40,000 shares of the
Company's Common Stock that, subject to certain conditions, will vest 10,000
shares on each of January 30, 1998, 1999, 2000, and 2001. All unvested shares
shall vest immediately if the Company is acquired or merges with another company
or if Mr. Young is terminated without cause.
SELLING SECURITYHOLDERS
The following table sets forth certain information regarding the shares of
Common Stock beneficially owned as of April 24, 1998, by each Selling
Securityholder herein as adjusted to reflect the sale by all Selling
Securityholders of the shares of Common Stock offered hereby by each Selling
Securityholder. This list indicates any position, office or other material
relationship with the Company that the Selling Securityholder had within the
past three years, the number of shares of Common Stock owned by such Selling
Securityholder prior to the offering, the maximum number of shares of Common
Stock to be offered for such Selling Securityholder's account and the amount and
the percentage (if one percent or more) of the shares of Common Stock to be
owned by the Selling Securityholder after completion of the offering (assuming
the Selling Securityholder sold the maximum number of shares of Common Stock).
The Selling Securityholders are not required, and may choose not, to sell any of
their shares of Common Stock. Further, certain of the Selling Securityholders
may have already sold their shares of Common Stock prior to the date hereof.
<TABLE>
<CAPTION>
Shares Shares Percent of
Owned Shares Owned Shares
Prior to Being After Owned After
Name Offering Offered Offering Offering
- ---- -------- ------- -------- --------
<S> <C> <C> <C> <C>
Agassi, Andre.......................... 106,712 106,712 0
Agassi, Mike........................... 234 234 0
42
<PAGE>
Shares Shares Percent of
Owned Shares Owned Shares
Prior to Being After Owned After
Name Offering Offered Offering Offering
- ---- -------- ------- -------- --------
Allen & Company Incorporated(1)........ 9,031,107 7,291,107 1,740,000
Allen, A. Clinton...................... 937 937 0
Allen, Lawson P........................ 468 468 0
Ardizzone, Ramon D..................... 2,399 2,399 0
Bailey, Clarke H....................... 49,362 49,362 0
Bailey, Higgins D...................... 492 492 0
Bailey, Scott H........................ 984 984 0
Barron, Thomas A....................... 937 937 0
Berrard, Steven R. Revocable Trust..... 79,983 79,983 0
Black Diamond Partners LP(2)........... 52,500 52,500 0
Brady, Pat............................. 47,019 47,019 0
Brennan, Bernadette.................... 1,200 1,200 0
Brenner, Karen......................... 3,999 3,999 0
Brookings Group LLC, The............... 1,600 1,600 0
Buelter, H. Tom TTE, U/A/D 08/19/96.... 15,997 15,997 0
Carlson, Clint D.(3)................... 188,334 188,334 0
CNA Trust Corporation.................. 7,998 7,998 0
Cuccia, Frederick J.................... 281 281 0
Cyrk Foundation, The................... 2,342 2,342 0
Cyrk, Inc.............................. 19,675 19,675 0
Cyrk International Foundation.......... 2,342 2,342 0
Denman, Robert and Beckie.............. 7,998 7,998 0
Dewey, Robert M., Jr................... 19,996 19,996 0
DiMartino, Joseph S.................... 39,992 39,992 0
Drazan, Jeffrey M...................... 164,651 164,651 0
Drazan, Sandra Living Trust............ 7,998 7,998 0
Drutman, Richard A..................... 99 99 0
Egan, Robert L......................... 5,999 5,999 0
43
<PAGE>
Shares Shares Percent of
Owned Shares Owned Shares
Prior to Being After Owned After
Name Offering Offered Offering Offering
- ---- -------- ------- -------- --------
Elsener, Charles, Jr................... 17,871 17,871 0
Elsener, Charles, Sr................... 272,399 272,399 0
Elsener, Paul.......................... 27,994 27,994 0
Encore Company, Inc.................... 468 468 0
Enron Oil & Gas Uzbekistan, Ltd........ 180,000 180,000 0
EPC PSP................................ 295 295 0
Exeter Finance Group, Inc.(4).......... 2,222,222 2,222,222 0
Faber, Timothy B....................... 19,996 19,996 0
Farrell, Vincent D., Jr................ 10,341 10,341 0
Friedman, Herbert M.................... 2,868 2,868 0
Genesi, Bob............................ 7,998 7,998 0
Goldfaden, Jeffrey G................... 799 799 0
Hackett, Montague H., Jr............... 39,992 39,992 0
Harman Investments, LP................. 9,370 9,370 0
Hart, M. Leo........................... 201,957 201,957 0
Hayes, Francis G....................... 1,600 1,600 0
Hicks, Thomas O........................ 159,966 159,966 0
Hoovler, M.R.(5) ...................... 607,457 250,000 357,457
Hoovler, P.V.(6) ...................... 1,489,522 700,000 789,522
Keller, William(7) .................... 802,750 40,000 762,750
Keough, Clark ......................... 100,000 100,000 0
Keough, Michael L...................... 7,998 7,998 0
Kouris, Jim............................ 1,200 1,200 0
L'Esperance, Dr. Francis A., Jr........ 23,995 23,995 0
Lewis, Sherman R., Jr.................. 27,994 27,994 0
Limit & Co............................. 239,949 239,949 0
Lively, Keith R........................ 15,997 15,997 0
Lufkin, Dan W.......................... 39,992 39,992 0
44
<PAGE>
Shares Shares Percent of
Owned Shares Owned Shares
Prior to Being After Owned After
Name Offering Offered Offering Offering
- ---- -------- ------- -------- --------
Maasbach, Ruth......................... 15,997 15,997 0
Massachusetts Mutual Life
Insurance Company...................... 46,261 46,261 0
MassMutual Corporate Investors......... 9,838 9,838 0
MassMutual Participation Investors..... 2,460 2,460 0
Moyers, Edward L....................... 1,874 1,874 0
Murphy, Tom G., Pension Plan(8) ....... 40,000 40,000 0
Network Fund III, Ltd.(9).............. 1,250,000 1,250,000 0
Newman, Harold J....................... 239,949 239,949 0
Newman, Paul L......................... 468 468 0
Pascal, Donald T....................... 4,380 4,380 0
Purdue, Cheryl......................... 295 295 0
Rawn, Carol Lee........................ 6,887 6,887 0
Rawn, James D.......................... 6,887 6,887 0
Rawn, Robert S......................... 6,887 6,887 0
Rawn, Stanley R., Jr................... 151,641 151,641 0
Reed Hobe Sound Trust U/A Dtd. 19,996 19,996 0
12/16/64 FBO Samuel P. Reed............
Reiss, James J., Jr.................... 9,838 9,838 0
Reynolds, Eric......................... 1,279 1,279 0
Saltz, Jack ........................... 846,154 846,154 0
Schneider, John A.(10) ................ 235,000 35,000 200,000
Schwab, David.......................... 11,998 11,998 0
Seefurth, Thomas....................... 984 984 0
Shlopak, Gregory P..................... 47,019 47,019 0
Spencer, John ......................... 4,468 4,468 0
Swiss Army Brands, Inc................. 87,634 87,634 0
Task (USA), Inc........................ 90,586 90,586 0
The 1990 Wendell Trust................. 39,992 39,992 0
45
<PAGE>
Shares Shares Percent of
Owned Shares Owned Shares
Prior to Being After Owned After
Name Offering Offered Offering Offering
- ---- -------- ------- -------- --------
Triangle Bridge Group, L.P............. 39,992 39,992 0
Truman, James.......................... 7,998 7,998 0
Weinberg, John L....................... 39,992 39,992 0
West, Kathy J., TTEE U/A Dtd.
12/06/96............................... 3,999 3,999 0
Whittier Energy Company(11)............ 436,685 436,685 0
Whittier Opportunity Fund I LLC........ 9,370 9,370 0
Whittier Ventures LLC(12).............. 3,233,556 1,233,556 2,000,000
Win Com, Inc........................... 984 984 0
Wolf, G. Theodore, II.................. 937 937 0
Wolf, G. Thomas........................ 937 937 0
Young, Michael B.(13).................. 60,000 10,000 50,000
ZD Air, Inc............................ 11,998 11,998 0
</TABLE>
- ----------------------
(1) The shares owned include 1,828,720 shares underlying Warrants, all of which
shares have been registered for resale upon exercise of the Warrants. See
"Certain Relationships and Related Transactions."
(2) Represents 52,500 shares underlying Warrants, all of which shares have been
registered for resale upon exercise of the Warrants.
(3) The shares owned include 35,000 shares underlying Warrants, all of which
shares have been registered for resale upon exercise of the Warrants.
(4) Represents shares of Common Stock into which Series A Preferred Stock is
convertible. See "Description of Securities."
(5) Matthew R. Hoovler is a former officer and a former director of the
Company. The shares include 250,000 shares underlying Warrants, all of
which shares have been registered for resale upon exercise of the Warrants.
The shares owned include shares owned by Mr. Hoovler's wife and children
and the shares being offered include shares being offered by Mr. Hoovler
and his wife.
46
<PAGE>
(6) Paul V. Hoovler is a former officer and a former director of the Company.
The shares include 700,000 shares underlying Warrants, all of which shares
have been registered for resale upon exercise of the Warrants. The shares
owned include 576,000 shares owned by the PVH Family Limited Partnership of
which Mr. Hoovler is the General Partner.
(7) Includes 40,000 shares underlying exercisable Warrants, all of which shares
have been registered for resale upon exercise of the Warrants.
(8) Includes 40,000 shares underlying exercisable Warrants, all of which shares
have been registered for resale upon exercise of the Warrants.
(9) The Company has agreed that, if at any time by March 31, 1999, the Company
issues additional shares of the Company's common stock at a price of less
than $2.00 per share, Network Fund III, Ltd. will receive an additional
number of shares of common stock which when added to the 1,250,000 shares
divided into $2,500,000 is equal to the price at which the additional
shares are sold. Further, the Company has agreed that if, by March 31,
1999, the Company issues or sells convertible securities (i.e., securities
directly or indirectly convertible into or exchangeable for common stock),
other than as a dividend or other distribution on any class of stock,
Network Fund III, Ltd. is entitled to exchange the 1,250,000 shares for the
convertible securities. The amount of convertible securities to be issued
to Network Fund III, Ltd. is to be determined by dividing the market price
of the common stock into the issue price of such convertible securities.
Finally, the Company has agreed that, in the event that by March 31, 1999
(i) the Company has not received an investment of $7,500,000 and (ii) the
average market price of the common stock for the twenty day trading period
preceding March 31, 1999, is less than $2.00 per share, then Network Fund
III, Ltd. is entitled to an additional number of shares of common stock
which when added to the 1,250,000 shares and divided into $2,500,000 is
equal to the market price of the common stock on March 31, 1999. This last
provision is not applicable if either of the provisions are satisfied on or
before March 31, 1999.
(10) Includes 35,000 shares underlying Warrants, all of which shares have been
registered for resale upon exercise of the Warrants.
(11) Includes 87,500 shares underlying Warrants, all of which shares have been
registered for resale upon exercise of the Warrants. See "Certain
Relationships and Related Transactions."
(12) Includes 262,000 shares underlying Warrants, all of which shares have been
registered for resale upon exercise of the Warrants. See "Certain
Relationships and Related Transactions."
47
<PAGE>
(13) Michael B. Young is an officer of the Company. The shares include 50,000
shares underlying a presently exercisable option. Does not include a grant
for 30,000 shares that will vest with respect to 10,000 shares on each of
January 30, 1999, 2000 and 2001, if Mr. Young is still employed by the
Company on those dates. The shares will vest earlier if Mr. Young is
terminated without due cause or if the Company is bought or merges with
another Company.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 100,000,000 shares of $0.10 par value
Common Stock and 1,000,000 shares of preferred stock, without par value. As of
April 24, 1998, there were 51,130,456 shares of Common Stock and 50,000 shares
of Series A Preferred Stock outstanding. The Series A Preferred Stock is
convertible into 2,222,222 shares of Common Stock. An additional 7,649,500
shares of Common Stock are reserved for issuance upon exercise of outstanding
warrants and options.
Common Stock
Holders of shares of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders of the Company. Except as may be
required by applicable law, holders of shares of Common Stock will not vote
separately as a class, but will vote together with the holders of outstanding
shares of other classes of capital stock that have voting rights including the
Series A Preferred Stock. There is no right to cumulate votes in the election of
directors. A majority of the issued and outstanding voting stock constitutes a
quorum at any meeting of shareholders and the vote by the holders of a majority
of the outstanding voting stock is required to effect certain fundamental
corporate changes such as liquidation, merger or amendment of the Restated
Articles of Incorporation + Amendments.
Holders of shares of Common Stock are entitled to receive dividends, if,
as, and when declared by the Board of Directors out of funds available therefor,
after payment of dividends required to be paid on outstanding shares of
preferred stock. Upon liquidation of the Company, holders of shares of Common
Stock are entitled to share ratably in all assets of the Company remaining after
payment of liabilities, subject to the liquidation preference rights of any
outstanding shares of preferred stock. Holders of shares of Common Stock have no
conversion, redemption or preemptive rights. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any outstanding preferred stock. The outstanding shares of Common
Stock are, and all shares of Common Stock issued upon exercise of warrants
described in this Prospectus and payment therefor and upon conversion of
promissory notes described in this Prospectus will be, validly issued, fully
paid and nonassessable.
48
<PAGE>
Preferred Stock
Under the Company's Restated Articles of Incorporation + Amendments, the
Board of Directors has the power, without further action by the holders of the
Common Stock, to designate the relative rights and preferences of one or more
classes of preferred stock of the Company, when and if issued. Such rights and
preferences could include preferences as to liquidation, redemption and
conversion rights, voting rights, dividends or other preferences, any of which
may be dilutive of the interest of the holders of the Common Stock. The Board of
Directors' ability to issue shares of preferred stock and to determine the
rights, preferences, privileges, designations and limitations of such stock,
including the dividend rights, dividend rate, conversion rights, voting rights,
terms of redemption and other terms and conditions of such stock, could make it
more difficult for a person to engage in, or discourage a person from engaging
in, a change in control transaction without the cooperation of management of the
Company.
On November 26, 1997, the Company filed an amendment to the Company's
Restated Articles of Incorporation + Amendments to create Series A Preferred
Stock.
On November 24, 1997, the Company executed a Subscription Agreement
("Agreement") with an investor which was not affiliated with the Company.
Pursuant to the Agreement, the investor purchased 50,000 shares of the Company's
Series A Preferred Stock, no par value, for a purchase price of $100.00 per
share or an aggregate purchase price of Five Million Dollars ($5,000,000).
The Series A Preferred Stock will be entitled to receive cumulative
dividends at the annual rate of $5.00 per share and will have a redemption price
of $100.00 plus any unpaid dividends.
Commencing on November 30, 2002, the Company will be required to redeem the
Series A Preferred Stock to the extent of the lesser of (i) the number of shares
of Series A Preferred Stock outstanding on each scheduled redemption date or
(ii) one-third of the largest number of shares of Series A Preferred Stock
outstanding at any time prior to the scheduled redemption date. The Company has
the right to redeem all or any portion of any shares of Series A Preferred Stock
prior thereto.
Each holder of shares of Series A Preferred Stock is entitled to vote on
all matters in an amount equal to the largest number of full shares of Common
Stock into which all shares of the Series A Preferred Stock held by such holders
are convertible.
Further, the Series A Preferred Stock is convertible at the option of the
holders thereof at any time or from time to time on or prior to the redemption
date into Common Stock. The conversion price of the Series A Preferred Stock is
49
<PAGE>
initially $2.25 per share. The number of shares of Common Stock issuable upon
conversion of each share of Series A Preferred Stock is determined by dividing
$100 by the conversion price per share.
The holders of the Series A Preferred Stock have demand registration rights
with respect to the underlying Common Stock and the Company has agreed to
register the underlying Common Stock on most registration statements filed by
the Company.
Certain Provisions of Restated Articles of Incorporation + Amendments
The Company's Restated Articles of Incorporation + Amendments contain a
provision, authorized under Colorado law, which limits the liability of
directors of the Company for monetary damages for breach of fiduciary duty as an
officer or director other than for intentional misconduct, fraud or a knowing
violation of law or for payment of a dividend in violation of Colorado law. Such
provision limits recourse for money damages which might otherwise be available
to the Company or shareholders for negligence by individuals while acting as
officers of the Company. Although this provision would not prohibit injunctive
or similar actions against directors, the practical effect of such relief would
be limited. This limitation of liability under state law does not apply to any
liabilities which may exist under federal securities laws.
Indemnification and Insurance Provisions
The Company has officer and director liability insurance and the Company's
Restated Articles of Incorporation + Amendments and bylaws provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by Colorado law. Insofar as indemnification for liabilities arising
under the Securities Act of 1933, as amended, may be permitted to directors,
officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
Transfer Agent
American Securities Transfer & Trust, Inc., Denver, Colorado, is the
transfer agent for the Common Stock.
PLAN OF DISTRIBUTION
The Selling Securityholders intend to sell their shares of Common Stock
directly, through agents, dealers, or underwriters, in the over-the-counter
market, or otherwise, on terms and conditions determined at the time of sale by
the Selling Securityholders or as a result of private negotiations between buyer
and seller. Sales of the shares of Common Stock may be made pursuant to this
50
<PAGE>
Prospectus or pursuant to Rule 144 or Regulation S adopted under the Securities
Act of 1933, as amended. No underwriting arrangements exist as of the date of
this Prospectus for the Selling Securityholders to sell their shares. Upon being
advised of any underwriting arrangements that may be entered into by a Selling
Securityholder after the date of this Prospectus, the Company will prepare a
supplement to this Prospectus to disclose such arrangements. It is anticipated
that the per share selling price for the shares will be at/or between the "bid"
and "asked" prices of the Company's Common Stock as quoted in the
over-the-counter market immediately preceding the sale. Expenses of any such
sale will be borne by the parties as they may agree.
LEGAL PROCEEDINGS
On November 14, 1997, Heartland, Inc. of Wichita and Collins & McIlhenny,
Inc. ("Plaintiffs") filed a lawsuit against the Company, Howard Karren, Whittier
Trust Company and James A. Jeffs in the District Court of Harris County, Texas.
The Company was served with the Complaint on December 3, 1997. Plaintiffs claim
that the Company breached an alleged agreement with them whereby Plaintiffs were
to raise capital for the Company through a private placement of the Company's
securities, that the Company and Mr. Karren made false representations in
connection with the alleged contract and that Whittier Trust Company and James
A. Jeffs interfered with the Company's performance of the alleged contract.
Plaintiffs are seeking actual damages of $3,435,000 and exemplary damages of
$25,000,000 from each defendant, plus attorneys' fees. A motion for a summary
judgment filed by the Plaintiff was denied by the Court.
The defendants believe the allegations are without merit and intend to
vigorously defend the lawsuit.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock being offered
hereby have been passed upon for the Company by Smith McCullough, P.C., Denver,
Colorado.
EXPERTS
The consolidated financial statements of the Company at December 31, 1997,
and for the year then ended, for the one month period ended December 31, 1996,
and at November 30, 1996 and for the year then ended, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, and for the year ended November 30, 1995, by Grant
Thornton LLP, independent auditors, as set forth in their respective reports
thereon (which each contains an explanatory paragraph describing conditions that
raise substantial doubt about the Company's ability to continue as a going
concern as described in Note 2 to the consolidated financial statements)
appearing elsewhere herein, and are included in reliance upon such reports given
upon the authority of such firms as experts in accounting and auditing.
51
<PAGE>
The financial statements of Karakuduk-Munay, Inc. at December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young--Kazakhstan, independent auditors, as set forth in their report
thereon (which contains an explanatory paragraph describing conditions that
raise substantial doubt about Karakuduk-Munay, Inc.'s ability to continue as a
going concern as described in Note 3 to the financial statements) appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
52
<PAGE>
Consolidated Financial Statements
Chaparral Resources, Inc.
Years ended December 31, 1997,
November 30, 1996 and November 30, 1995 and
the One Month Period ended December
31, 1996 with Reports of Independent Auditors
<PAGE>
Chaparral Resources, Inc.
Consolidated Financial Statements
Years ended December 31, 1997, November 30, 1996 and
1995 and One Month Period ended December 31, 1996
Contents
Chaparral Resources, Inc.
Report of Independent Auditors ........................................... 1
Report of Independent Certified Public Accountants........................ 2
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...................................... 26
Karakuduk-Munay, Inc.
Report of Independent Auditors........................................... 31
Balance Sheets........................................................... 32
Statements of Expenses and Accumulated Deficit .......................... 33
Statements of Cash Flows ............................................... 34
Notes to the Financial Statements ...................................... 35
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Chaparral Resources, Inc.
We have audited the accompanying consolidated balance sheets of Chaparral
Resources, Inc. as of December 31, 1997 and November 30, 1996, and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity for each of the years then ended and for the one month period ended
December 31, 1996. 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 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 December 31, 1997 and November 30, 1996, and the
consolidated results of its operations and its cash flows for the years then
ended and for the one month period ended December 31, 1996, 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 commitments and requirements through calendar year 1998.
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
Houston, Texas
March 13, 1998,
except for Note 15, as to which the date is
April 3, 1998
1
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Chaparral Resources, Inc.
We have audited the accompanying consolidated statements of operations, cash
flows and changes in stockholders' equity of Chaparral Resources, Inc. for the
year 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 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of its operations and its cash
flows for the year ended November 30, 1995 of Chaparral Resources, Inc., 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
December 31 November 30
1997 1996
-------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,423,000 $ 782,000
Accounts receivable:
Joint interest participants -- 8,000
Oil and gas purchasers -- 53,000
Other 102,000 --
Prepaid expenses 62,000 3,000
Oil and gas properties under agreement for sale -- 306,000
------------ ------------
Total current assets 3,587,000 1,152,000
Oil and gas properties and investments - full cost method
Republic of Kazakhstan (Karakuduk Field)--
not subject to depletion (Notes 3 and 4): 19,922,000 13,234,000
Furniture, fixtures and equipment 13,000 193,000
Less accumulated depreciation (3,000) (176,000)
------------ ------------
10,000 17,000
------------ ------------
Other assets -- 95,000
------------ ------------
Total assets $ 23,519,000 $ 14,498,000
============ ============
See accompanying notes
3
<PAGE>
Chaparral Resources, Inc.
Consolidated Balance Sheets
December 31 November 30
1997 1996
---------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable:
Trade $ 177,000 $ 16,000
Joint interest participants--revenue -- 42,000
Accrued liabilities 54,000 91,000
Accounts payable--CAP-G shares -- 744,000
------------ ------------
Total current liabilities 231,000 893,000
Long-term obligations:
Notes payable (including $1,000,000 to related
party in 1996) -- 1,106,000
Accrued compensation 210,000 385,000
Commitments and contingencies (Note 14)
Redeemable preferred stock - cumulative,
convertible (Note 7):
Series A, 50,000 issued and outstanding,
at stated value, includes $5.00 cumulative
annual dividend, less $500,000 cost of issuance,
$5,000,000 redemption value 4,500,000 --
175,000 shares subscribed (25,000 Series A;
75,000 Series B; 75,000 Series
C), less subscription
receivable of $17,500,000 -- --
Stockholders' equity (Note 7):
Common stock - authorized, 100,000,000
shares at December 31, 1997 and
November 30, 1996, of $.10 par value;
issued and outstanding, 49,720,456 and
37,526,517 shares at December 31, 1997
and November 30, 1996 4,971,000 3,753,000
Capital in excess of par value 30,340,000 20,482,000
Unearned portion of restricted stock awards (109,000) --
Preferred stock - 1,000,000 shares authorized,
225,000 shares outstanding or subscribed
of Series A, B and C as per above -- --
Stock subscription receivable (1,770,000) --
Accumulated Deficit (14,854,000) (12,121,000)
------------ ------------
Total stockholders' equity 18,578,000 12,114,000
------------ ------------
Total liabilities and stockholders' equity $ 23,519,000 $ 14,498,000
============ ============
See accompanying notes.
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Chaparral Resources, Inc.
Consolidated Statements of Operations
Year Ended Month Ended Year Ended Year Ended
December 31 December 31 November 30 November 30
1997 1996 1996 1995
------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $ -- $ -- $ 147,000 $ 255,000
Costs and expenses:
Production costs -- -- 37,000 115,000
Write-down of oil and gas properties -- -- -- 619,000
Depreciation and depletion 7,000 -- 3,000 74,000
General and administrative 1,654,000 118,000 1,468,000 166,000
------------------------------------------------------------
1,661,000 118,000 1,508,000 974,000
------------------------------------------------------------
Loss from operations (1,661,000) (118,000) (1,361,000) (719,000)
Other income (expense):
Interest income 421,000 4,000 154,000 25,000
Interest expense (298,000) (17,000) (90,000) (17,000)
Equity in loss from investment
(Note 3 and 4) (832,000) -- (971,000) --
Other, net (19,000) 1,000 89,000 7,000
------------------------------------------------------------
(728,000) (12,000) (818,000) 15,000
------------------------------------------------------------
Loss before extraordinary item (2,389,000) (130,000) (2,179,000) (704,000)
Extraordinary loss on extinguishment
of long-term debt (214,000) -- (237,000) --
------------------------------------------------------------
Net loss $ (2,603,000) (130,000) $ (2,416,000) $ (704,000)
============================================================
Basic and Diluted Earnings per Share:
Net loss per share before extraordinary item $ (.05) $ -- $ (.07) $ (.04)
Extraordinary loss per share $ (.01) $ -- $ (.01) $ --
Net loss per share $ (.06) $ -- $ (.08) $ (.04)
Weighted average number of shares
outstanding 41,561,432 37,526,517 32,081,382 18,865,454
See accompanying notes
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows
Year ended Month Ended Year Ended Year Ended
December 31 December 31 November 30 November 30
1997 1996 1996 1995
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(2,603,000) $ (130,000) $(2,416,000) $ (704,000)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Equity loss from investment 832,000 -- 971,000 --
Depreciation and depletion 7,000 -- 4,000 74,000
Loss on the sale of oil and gas properties 3,000 (3,000) -- --
Bad debt expense 37,000 -- -- --
Write-down of oil and gas properties 30,000 -- -- 619,000
Stock issued for services and bonuses 195,000 -- -- 27,000
Amortization of note discount 198,000 -- -- 17,000
Loss on extinguishment of debt 214,000 -- 237,000 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (129,000) 51,000 25,000 218,000
Prepaid expenses (59,000) -- 10,000 --
Other 95,000 -- -- --
Increase (decrease) in:
Accounts payable 177,000 (44,000) 108,000 (64,000)
Accrued liabilities 19,000 (19,000) (317,000) (59,000)
Accrued compensation -- -- 385,000 --
----------------------------------------------------------------
Net cash provided by (used in) operating activities
(984,000) (145,000) (993,000) 128,000
Cash flows from investing activities
Additions to property and equipment (6,000) -- -- (86,000)
Investment in foreign oil and gas properties (6,504,000) (17,000) (6,936,000) (1,088,000)
Proceeds from sale of interest in oil and gas
properties 282,000 -- 161,000 41,000
Decrease in cash value of insurance
and annuities -- -- -- 40,000
Decrease in minority interest -- -- -- (16,000)
Decrease in equipment inventory -- -- -- 1,000
Sale of bonds -- -- -- 299,000
Redemption of certificates of deposit -- -- -- 20,000
Increase in other assets -- -- (74,000) --
----------------------------------------------------------------
Net cash used in investing activities (6,228,000) (17,000) (6,849,000) (789,000)
6
<PAGE>
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (continued)
Year ended Month Ended Year Ended Year Ended
December 31 December 31 November 30 November 30
1997 1996 1996 1995
--------------------------------------------------------------------
Cash flows from financing activities
Proceeds from notes payable $ 300,000 $ 500,000 $ 1,650,000 $ 750,000
Payable for CAP(G) shares (744,000) -- -- --
Repayment of note payable (450,000) (200,000) (750,000) --
Proceeds from warrant exercise 3,309,000 -- 316,000 --
Net proceeds from redeemable preferred stock
issuance 5,000,000 -- -- --
Net proceeds from private placement 2,300,000 -- 6,907,000 94,000
--------------------------------------------------------------------
Net cash provided by financing
Activities 9,715,000 300,000 8,123,000 844,000
--------------------------------------------------------------------
Net increase in cash and
cash equivalents 2,503,000 138,000 281,000 183,000
Cash and cash equivalents at beginning
of period 920,000 782,000 501,000 318,000
--------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,423,000 $ 920,000 $ 782,000 $ 501,000
====================================================================
Supplemental cash flow disclosure
Interest paid $ 53,000 $ 17,000 $ 36,000 $ 5,000
Supplemental schedule of noncash
investing and financing activities
Common stock issued for acquisition
of CAP-G $ 1,000,000 $ -- $ 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 74,250 93,750 290,000 306,000
Warrants issued for common stock in
conjunction with subscription and
issuance of preferred stock 2,270,000 -- -- --
Common stock issued for compensation 175,000 -- -- --
Common stock issued upon:
Conversion of debentures 1,500,000 -- 264,000 --
Conversion of accrued interest 50,000 -- -- --
See accompanying notes.
7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Chaparral Resources, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Common Stock Capital in Stock Unearned
------------------------ Excess of Subscription Restricted Accumulated
Shares Amount Par Value Receivable Stock Awards Deficit Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 services
Capital stock issued for
investment in affiliate 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
Warrants exercised for capital
stock 5,648,077 564,000 2,745,000 -- -- -- 3,309,000
Conversion of debentures for
capital stock 2,169,732 216,000 1,333,000 -- -- -- 1,549,000
Capital stock issued for services 437,669 44,000 209,000 -- -- -- 253,000
Stock options issued for services -- -- 227,000 -- (109,000) -- 118,000
Capital stock issued for
investment in affiliate 400,000 40,000 960,000 -- -- -- 1,000,000
Capital stock issued in private
Placement 3,538,461 354,000 1,946,000 -- -- -- 2,300,000
Debt issuance costs--stock
warrants issued -- -- 168,000 -- -- -- 168,000
Preferred stock issuance and
related common stock warrants -- -- 2,270,000 (1,770,000) -- -- 500,000
Net Loss -- -- -- -- -- (2,733,000) (2,733,000)
----------------------------------------------------------------------------------------------
Balance at December 31, 1997 49,720,456 4,971,000 30,340,000 (1,770,000) (109,000) (14,854,000) 18,578,000
===============================================================================================
See accompanying notes
8
</TABLE>
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies and Organization
Organization, Principles of Consolidation, and Basis of Presentation
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 1997, 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 Kazakhstan.
The consolidated financial statements include the accounts of Chaparral
Resources, Inc. and its 100% owned subsidiaries, Central Asian Petroleum
(Guernsey) Limited ("CAP-G"), Road Runner Services Company ("RRSC"), and Central
Asian Petroleum, Inc. (Delaware). Hereinafter, Chaparral Resources, Inc. and its
wholly-owned subsidiaries are collectively referred to as "the Company". All
significant intercompany transactions have been eliminated.
In order to unite the reporting period of the Company with that of its
subsidiaries, the fiscal year of the Company was changed to a December 31 year
end from the previous November 30 year end. This change took effect on May 29,
1997. As a result of this change, financial information is reported as of
December 31, 1997, November 30, 1996, and November 30, 1995. Additionally, a
statement of operations and cash flows for the month ended December 31, 1996,
are presented.
In 1995, the Company's ownership in CAP-G increased from 25% to 45%. The Company
acquired an additional 45% interest in CAP-G in 1996. In 1997, the Company
concluded the acquisition of the remaining 10% minority interest in CAP-G,
increasing its total ownership to 100%.
CAP-G owns a 50% interest in Karakuduk-Munay, Inc. ("KKM"), a Kazakhstan joint
stock company, which is a participant in an agreement for the exploration,
development and production of oil in the Karakuduk Field. In 1996, the Company
accounted for its investment in KKM using pro rata consolidation. In 1997, the
Company changed to the equity method in order to reflect the legal ownership
right of the other shareholders in KKM. The consolidated financial statements
for the year ended November 30, 1996 reported herein have been reclassified to
reflect the equity method. There was no impact on previously reported earnings.
9
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies and Organization (continued)
Organization, Principals of Consolidation, and Basis of Presentation (continued)
On February 1, 1997, KKM was informed that a Kazakhstan Presidential Edict had
been issued announcing the liquidation of Munaygaz, the government-owned company
which held a 20% interest in KKM. As a result of this action, KKM was required
to re-register as required by Kazakh regulations. KKM was re-registered on July
24, 1997, with the government of Kazakhstan. The Company believes that KKM is
now in compliance with all laws and regulations related to the registration
requirements relating to Kazakhstan legal entities. The re-registered KKM is
owned jointly by CAP-G (50%), KazakhOil (40%) and a private Kazakhstan joint
stock company (10%). KazakhOil, the national petroleum company of Kazakhstan,
represents the majority of the ownership interest in KKM held by the Kazakhstan
government.
On April 15, 1995, the Company sold its 87% interest in the Reservoir Creek
Gathering System joint venture.
Cash and Cash Equivalents
Cash equivalents are defined as highly liquid investments purchased with an
original maturity of three months or less.
Oil and Gas Property and Equipment
The Company and KKM use the full cost method of accounting for their 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 based on proven reserves.
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.
10
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies and Organization (continued)
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.
Revenue Recognition
Revenues are recognized when economic performance has occurred as a result of
the sale of oil and gas production, in accordance with the accrual method of
accounting. Losses, if any, are provided for in the period in which the loss is
determined to occur.
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, including
equity investees, was reimbursed by the non-operators 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") 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
Basic earnings (loss) per common share is calculated by dividing net income
(loss) by the aggregate of the weighted average shares outstanding during the
period. Diluted earnings (loss) per common share considers the dilutive effect,
if any, of the average number of common stock equivalents that are outstanding
during the period. Diluted earnings per share are not presented because the
exercise of stock options and warrants and the effect of the convertible
preferred stock outstanding would be antidilutive.
Stock Based Compensation
The Company follows the method of accounting for employee stock based
compensation plans prescribed by APB No. 25, which is allowed by SFAS No. 123,
Accounting for Stock-Based Compensation. In accordance with APB No. 25, the
Company has not recognized compensation expense for stock options in situations
where the exercise price of the options equals the market price of the
underlying stock on the date of grant, otherwise known as the measurement date.
11
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies and Organization (continued)
New Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS 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 adopted
Statement No. 121 in 1997; the effect of the adoption is immaterial to the
Company's overall financial results.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share exclude any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share are very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the SFAS 128 requirements. There is no impact of SFAS 128 on the
calculation of both basic and diluted earnings per share for these periods
because all potentially dilutive securities are antidilutive.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
130, which is effective for fiscal years beginning after December 15, 1997,
establishes standards for reporting and presentation of comprehensive income and
its components. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company adopted SFAS 130 as of January 1, 1998.
The impact of SFAS 130 on the Company's financial position and results of
operations is not expected to be material.
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 Kazakhstan are restricted since they are dependent on
limited transport routes and, in particular, access to the Russian pipeline
system. Domestic markets in the Republic of Kazakhstan might not currently
permit world market prices 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. See Note 2.
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 December 31, 1997,
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
Kazakhstan, which will require significant additional funding.
The Company has incurred recurring operating losses and has no operating assets
presently generating cash to fund its operating and capital requirements. The
Company's current cash reserves and cash flow from operations will not be
sufficient to meet the capital spending requirements required of KKM by its
operating license through fiscal 1998. Should the Company not meet its capital
requirements under the license agreement to develop the Karakuduk Field, the
Company's rights under the agreement can be terminated (see Note 14). 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 is timely or on terms favorable to the Company. The Company's continued
existence as a going concern is dependent upon the success of future KKM
operations, which are, in the near term, dependent on the successful financing
and development of the Karakuduk Field, of which there is no assurance.
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 CAP-G
As of December 31, 1997, the Company owns 100% of the outstanding common stock
of CAP-G. This wholly-owned subsidiary was acquired on a step basis.
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, the remaining 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
common 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 has now
paid the $543,750 balance of the purchase price. Finally, in 1997 the Company
exercised an option to acquire the remaining 10% of the outstanding common stock
of CAP-G. The Company paid $1,625,000 (which includes $800,000 of loans the
Company previously made to GAP-G on behalf of the prior owner of the 10%
interest) and issued 400,000 shares of common stock, which includes an
additional 200,000 shares above the original agreed amount.
On September 17, 1997, the Company granted an option to an investor entitling
the investor to acquire 5% of the issued and outstanding shares of CAP-G on or
before October 31, 1997. Upon the closing of this agreement, the investor paid
the Company $450,000 of the $1.5 million purchase price, with the remaining due
on or before September 30, 1997. The option agreement expired and the Company
was not required to return the deposit. The Company has recorded the $450,000
deposit as a reduction in the oil and gas properties and investments in
Kazakhstan.
The acquisition costs exceeding the underlying net assets at the time of each
acquisition of CAP-G common stock have been added to Oil and Gas Investments
reflected on the balance sheet. The equity in losses for 1997 and 1996 have been
recorded at the full 50% interest due to the earlier agreements to acquire the
remaining shares in CAP-G and the Company financing 100% of CAP-G's operations.
4. Oil and Gas Investments
All costs capitalized related to the Karakuduk license are included in oil and
gas properties not subject to depletion. Certain license acquisition costs and
geological and geophysical expenditures incurred by the Company but not rebilled
to KKM have been capitalized. Certain overhead costs and general administrative
costs have been expensed as incurred by KKM.
14
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
4. Oil and Gas Investments (continued)
Costs capitalized to Oil and Gas Investments consist of:
<TABLE>
<CAPTION>
December 31, November 30,
1997 1996
-----------------------------------------
<S> <C> <C>
Oil and Gas Investments:
Investments in KKM common stock $ 100,000 $ 90,000
Advances to and interest due from KKM 9,820,000 4,023,000
Acquisition Costs 10,613,000 9,291,000
Other Capitalizable Costs 1,192,000 801,000
-----------------------------------------
Total Gross Oil and Gas Investments 21,725,000 14,205,000
Less: Equity losses (1,803,000) (971,000)
-----------------------------------------
Total Oil and Gas Investment $ 19,922,000 $ 13,234,000
=========================================
The condensed financial statements
of KKM are as follows:
December 31, December 31,
1997 1996
-----------------------------------------
Condensed Balance Sheet
Current Assets $ 796,000 $ 111,000
Non-Current Assets (primarily oil and gas
properties, full cost method)
7,975,000 2,286,000
Current Liabilities 2,194,000 172,000
Non-Current Liabilities 573,000 353,000
Advances to and interest due from KKM 9,820,000 4,023,000
Common stock 200,000 200,000
Accumulated Deficit 4,016,000 2,351,000
Condensed Income Statement
Revenues $ -- $ --
Cost and Expenses 1,665,000 1,942,000
Net Loss 1,665,000 1,942,000
</TABLE>
The Karakuduk Field is still in a preliminary stage of development by KKM. The
estimated future development expenditures in order to ascertain the quantities
of proved reserves attributable to the Karakuduk Field are significant. All
costs incurred related to the Phase I workover program have been capitalized to
oil and gas properties not subject to depletion. None of the wells being
recompleted were put into production, therefore the costs incurred to recomplete
these wells were deemed equivalent to exploration costs of new oil and gas
properties.
In 1996, the Company entered into an agreement, effective January 1, 1997, to
sell its remaining 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 and the full cost pool for the
United States has been fully written down.
15
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
4. Oil and Gas Investments (continued)
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 Kazakhstan, 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. No impairment provision has been reflected in these
financial statements.
5. Long-Term Debt
The Company has no long-term debt as of December 31, 1997. Long-term debt 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 stockholder of the
Company. On December 6, 1996, the Company borrowed an additional $500,000 under
the same terms from a private corporation. As additional consideration for these
notes, the Company issued to the note holders, warrants to purchase 462,500
shares of the Company's common stock at $.25 per share, exercisable at any time,
but no later than November 30, 1999. The notes were discounted by the fair value
of the warrants, with the discount being amortized over the life of the notes.
16
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
If the notes were still outstanding on May 31, 1997, the Company agreed to issue
185,000 warrants as additional consideration to the holders. Furthermore, if the
notes were still outstanding on November 30, 1997, the Company agreed to issue
370,000 warrants as additional consideration to the holders. Under these
provisions, the Company issued 125,000 of the 185,000 warrants due to the May
31, 1997 deadline and none due to the November 30, 1997 deadline. The additional
warrants were discounted by the fair value of the warrants, with the discount
being amortized over the life of the notes. On dates between May 1997 and
November 1997 the notes were repaid by the Company at their face value. The
Company recorded an extraordinary loss on extinguishment of debt of
approximately $214,000.
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 recorded an extraordinary loss on
extinguishment of debt for the unamortized discount of approximately $237,000.
6. Common Stock
1989 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. Under the plan, warrants must be granted and
exercised within a 10-year period ending April 30, 1999. 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. Warrants for 100,000,
225,000, and 100,000 shares were exercised for values of $28,000,$63,000, and
$28,000 during 1997,1996, and 1995, respectively.
1997 Incentive Stock Plan
On July 17, 1997, the shareholders of the Company approved the 1997 Incentive
Stock Plan pursuant to which up to 1,000,000 shares of the Company's common
stock may be granted to directors and employees of, or consultants to, the
Company. As of December 31, 1997, none of the Company's common stock had been
granted under the plan.
1997 Non-employee Directors' Stock Option Plan
On July 17, 1997, the shareholders approved the 1997 Non-employee Directors'
Stock Option Plan. As of the date of each annual meeting of the stockholders of
the Company, each non-employee director then in office or elected to the Board
of Directors of the Company on such date will receive a ten-year option to
purchase 25,000 shares at an exercise price equal to the average stock price on
the date of grant. The aggregate number of options to acquire shares under the
plan which may be issued may not exceed 5% of the total outstanding number of
shares on the date of grant. As of December 31, 1997, options for 200,000 shares
with an exercise price of $0.83 have been issued under the plan.
Non-Qualified Stock Options
During 1997, the Company granted five year non-qualified options, generally with
vesting periods of one year, to purchase 2,885,000 restricted shares of the
Company's common stock to various directors of, and consultants to, the Company.
Options relating to 1,442,500 shares have an exercise price of $.75 per share
and options relating to 1,442,500 shares have an exercise price of $1.50 per
share.
17
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
6. Common Stock (continued)
Non-Qualified Stock Options (continued)
The Company issued various five-year, non-qualified stock options to employees,
consultants and directors of the Company during the year. The Company granted
options to purchase 126,000 shares of the Company's common stock, at an exercise
price of $.75. The Company granted options to purchase another 131,000 shares of
the Company's common stock, at an exercise price of $1.50 a share. The Company
has recorded the fair value of these stock options on the date of grant at
$227,000.
In January 1998, the Company granted five-year, non-qualified options to
purchase 633,000 shares of the Company's common stock at an exercise price of
$.87 a share to various employees of, and consultants to, the Company. The
Company also granted five-year, non-qualified options to purchase 60,000 shares
of the Company's common stock at an exercise price of $2.25 a share, to various
employees of, and consultants to, the Company. Furthermore, the Company granted
90,000 shares of the Company's common stock, subject to shareholder
ratification, to the directors of the Company and granted 190,000 shares of the
Company's common stock to various employees of, and consultants to, the Company.
Common Stock Offerings and Common Stock Warrant Issuances
During 1993, the Company sold a total of 2,685,750 shares of common stock and
issued 1,342,875 warrants to purchase common stock with an exercise price of
$.40. An additional 105,540 warrants to acquire shares of common stock were paid
as commission. Prior to 1995, 650,625 of these warrants were exercised. During
1995, 165,375 of these warrants 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 these warrants were exercised at an exercise price of
$.40 per share, for a total of $252,930. All warrants issued in connection with
the 1993 private placement have been exercised.
During 1997, the Company entered into an agreement to allow the Company to
acquire M-D, International Petroleum (MDI), a private company. Accordingly, on
January 8, 1997 the Company agreed to issue 180,000 shares of the Company's
common stock having a value of $90,000 to the potential joint venture partner.
Simultaneously, the principal stockholders of MDI put 180,000 shares of the
Company's common stock into escrow. These shares would be returned to the
Company if the Company did not acquire MDI by July 7, 1997. Under the agreement,
the Company was to acquire a 5% joint venture interest for the development of
certain natural gas fields in Uzbekistan. The agreement of the Company to
acquire MDI was contingent upon the potential joint venture partner successfully
obtaining rights to develop the natural gas fields in Uzbekistan. As of July 7,
1997, EOGU had not obtained the agreement with Uzbekistan to develop the natural
gas fields. Consequently, the agreement by the Company to acquire MDI was
nullified and the escrowed shares were returned to the Company and retired.
During February 1997, the Company entered into a severance agreement with Paul
V. Hoovler, the former Chief Executive Officer and President of the Company,
pursuant to which Mr. Hoovler received warrants to purchase 100,000 shares of
the Company's common stock at an exercise price of $.85 per share and warrants
to purchase 100,000 shares of the Company's common stock at an exercise price of
$1.25 per share.
18
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
6. Common Stock (continued)
Common Stock Offerings and Common Stock Warrant Issuances (continued)
During 1997, the Company sold 3,076,923 shares of the Company's common stock for
$.65 per share for a total of $2,000,000 to a private investor. In connection
with the transaction, the Company also issued a warrant to the investor to
purchase up to an additional 4,615,385 shares of the Company's common stock for
$3,000,000 or $.65 per share. The warrant was to expire on December 31, 1997. In
October and November 1997, the private investor exercised warrants to acquire
4,615,385 shares of the Company's common stock. The same party exercised another
warrant for 125,000 shares of the Company's common stock exercisable at an
exercise price of $0.25 per share. In April 1997, a private investor converted a
$500,000 promissory note (plus $2,000 of accrued interest) that had previously
been issued by the Company into 772,991 shares of the Company's common stock at
a conversion price of $.65 per share.
On October 28, 1997, 423,076 shares of the Company's common stock were issued to
a private investor by way of a "cashless" exercise of a warrant as allowed by
the warrant. This warrant was originally exercisable for 500,000 shares at a
conversion price of $.25 per share.
In November 1997, a private investor converted a $1,000,000 promissory note
(plus $48,000 of accrued interest) that previously had been issued by the
Company into 1,396,741 shares of the Company's common stock at a conversion
price of $.75 per share.
During 1997, the Company issued 87,669 shares of the Company's common stock to a
consultant in lieu of $78,000 of accrued fees that had not been paid.
In December 1997, the Company exercised an option to acquire the remaining 10%
of the outstanding shares of CAP-G (Note 3). As a part of the consideration, the
Company issued 400,000 shares valued at $1,000,000.
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 a warrant to purchase 1,022,000 shares to the
sales agent as a commission, at an exercise price of $10.00. As of December 31,
1997 and November 30, 1996, the warrant has not been exercised.
During 1997, the Company sold 461,538 shares of the Company's common stock for
$.65 per share for a total of $300,000 to a private investor. In connection with
the transaction, the Company also issued warrants to the investor to purchase up
to an additional 461,538 shares of the Company's common stock for $300,000 or
$.65 per share. The private investor exercised a portion of the warrant on
December 31, 1997, and received a total of 384,616 shares of the Company's
common stock. The remaining warrants expired on the same day.
SFAS 123 Disclosure
SFAS 123 requires that pro forma information regarding net income and earnings
per share be determined as if the Company had accounted for its employee stock
option under the fair value method as defined in that Statement for options
granted or modified after December 31, 1994. SFAS 123 requires disclosure of
option plans for the previous three years, but since 1997 was the first year for
stock option issuances to meet the new requirement, weighted average assumptions
are calculated only for 1997. The fair value for applicable options was
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted average assumption for 1997: risk free interest rates of
5.53%; dividend yield of 0%; volatility factors of the expected market price of
the Company's common stock of 0.83; and a weighted average life expectancy of
the options of 4.9 years.
19
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
6. Common Stock and Common Stock Warrants (continued)
Common Stock Offerings and Common Stock Warrant Issuances (continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows:
Year ended Month ended
December 31, December 31,
1997 1996
-------------------------------------
Net Loss under APB 25 (2,603,000) (130,000)
Effect of FASB 123 (525,000) --
Pro forma Net Loss (3,128,000) (130,000)
Pro forma Basic and Diluted
Earnings per Share $(0.08) --
A summary of the Company's stock option activity and related information for the
periods ended follows:
<TABLE>
<CAPTION>
Shares Weighted Weighted
Under Average Exercise Average Contractual
Option Price Life Remaining
------------------- -------------------- --------------------
<S> <C> <C> <C>
Outstanding, November 30, 1996 - - -
Granted 1,786,000 $ .763 4.4 years
1,556,000 $ 1.50 4.3 years
Exercised - $ 0.00 -
Canceled - $ 0.00 -
------------------- -------------------- --------------------
Outstanding, December 31, 1997 3,342,000 $ 1.11 -
------------------- -------------------- --------------------
Exercisable, December 31, 1997 200,000 $ 0.83 -
------------------- -------------------- --------------------
</TABLE>
20
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
6. Common Stock and Common Stock Warrants (continued)
SFAS 123 Disclosure
The following table summarizes all common stock purchase warrant activity for
the year ended December 31, 1997:
Number of Exercise
Stock Price
Warrants Range
---------------------------------
Outstanding, November 30, 1995 2,407,325 $0.25 - $0.40
Granted 1,439,500 $0.00001 - $0.40
Exercised (857,325) $0.25 - $0.40
----------------------------------
Outstanding, November 30, 1996 2,989,500 $0.00001 - $0.28
Granted 6,426,923 $0.01 - $1.25
Exercised (5,648,077) $0.25 - $0.65
Expired (153,846) $0.25 - $0.65
----------------------------------
Outstanding, December 31, 1997 3,614,500 $0.00001 - $1.25
==================================
The following table summarizes the price ranges of all common stock purchase
warrants outstanding as of December 31, 1997:
Stock Warrants Outstanding as of December 31, 1997
Number of Warrants Exercise Price
-----------------------------------------
100,000 $0.85
100,000 $1.25
750,000 $0.28
742,500 $0.25
900,000 $0.01
1,022,000 $0.00001
-------------------------------------
3,614,500 $0.00001 - $1.25
=====================================
7. Redeemable Preferred Stock and Related Common Stock Warrants
On November 24, 1997, the Company executed a Subscription Agreement
("Agreement") with an unaffiliated investor for 225,000 shares of three classes
of Redeemable $5.00 Cumulative Convertible Preferred Stock ("Preferred Stock").
The investor agreed to purchase 75,000 shares of each of the Company's Series A,
B and C Preferred Stock. Pursuant to the Agreement, the Company initially sold
to the investor 50,000 shares of the Company's Series A Preferred Stock, no par
value, for a purchase price of $100.00 per share, equal to the redemption value,
or an aggregate purchase price of $5,000,000. The number of shares of common
stock issuable upon conversion of each share of Series A Preferred Stock is
determined by dividing $100 by the conversion price of $2.25 per share. The
Company is not required to establish a sinking fund, however, the preferred
stock dividends in arrears must be paid before dividends can be paid on the
common stock. The basis difference representing issuance costs is being
amortized directly to additional paid-in-capital for the period through the
redemption date.
21
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
7. Redeemable Preferred Stock and Related Common Stock Warrants (continued)
The Series B Preferred Stock and Series C Preferred Stock, once issued, are
convertible into common stock at the option of the holders thereof at any time
prior to the redemption date. The conversion price of the Series B Preferred
Stock is $3.00 per share; and the conversion price of the Series C Preferred
Stock is $4.25 per share. The number of shares of common stock issuable upon
conversion of each share of Series B Preferred Stock and Series C Preferred
Stock is determined by dividing $100 by the conversion price per share. The
Preferred Stock has scheduled redemptions beginning November 30, 2002.
The five-year aggregate redemption amounts are as follows:
-------------------------------
1998 -
1999 -
2000 -
2001 -
2002 $5,000,000
-------------------------------
Total $5,000,000
===============================
Allen & Company Incorporated (Allen & Company), a significant shareholder of the
Company, acted as placement agent in connection with the subscription for the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
pursuant to the Agreement. Allen & Company elected to receive its fees in the
form of warrants to purchase 900,000 shares of the Company's common stock that
were all originally exercisable through November 25, 2002, at an exercise price
of $.01 per share.
In March 1998, prior to the receipt of the funds for any additional purchases
the investor was to make under the Agreement, the Company and the investor
mutually released each other from any further obligations under the Agreement.
The investor retained the initial 50,000 shares of Series A Preferred Stock. The
Company is not required to issue any additional preferred stock under the
Agreement and the investor has no other obligation to provide funds to the
Company in exchange for such stock.
22
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
Year Ended One Month Ended Year Ended Year Ended
December 31, December 31, November 30, November 30,
1997 1996 1996 1995
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income taxes (benefit) computed
at federal statutory rate $ (910,000) $(46,000) $(762,000) $(241,000)
Other (60,000) (3,000) (86,000) (57,000)
Change in asset valuation
allowance 970,000 49,000 848,000 298,000
-----------------------------------------------------------------------------------------
Income taxes $ -- $ -- $ -- $ --
=========================================================================================
The components of the Company's deferred tax assets and liabilities under FASB
No. 109 are as follows:
1997 1996 1995
-------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 5,812,000 $4,958,000 $4,131,000
Full cost pool capitalization -- 267,000 246,000
Valuation allowance (5,812,000) (5,225,000) (4,377,000)
-------------------------------------------------------------
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 December 31, 1997, the Company has tax loss carryforwards for federal income
tax purposes of approximately $11,653,000 available to offset future taxable
income. These carryforwards will expire at various times between 1998 and 2012.
The Company has issued a significant number of shares of common stock, stock
warrants, and preferred stock during the year ended December 31, 1997. 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 December 31, 1997, unused statutory depletion carryforwards,
which have unlimited duration, are approximately $567,000. the unused investment
tax carryover was approximately $86,000 at December 31, 1997 and expires through
2000. The loss carryforward at December 31, 1997 for financial reporting
purposes is approximately $15,324,000, consisting of $13,408,000 in domestic and
$1,916,000 foreign loss carryforwards, respectively. 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
and organizational costs related to foreign activities.
9. Related Party Transactions
The Company paid a director $24,000 during 1995 for public relations consulting
services.
During 1996, the Company paid a basic consulting fee of approximately $500,000
to MDI, 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. During 1997, the Company paid an additional $180,000 to MDI,
but terminated the agreement in the first quarter of 1997.
The Company leased office space under a non-cancelable operating lease, which
expired on March 31, 1997 from a related party. Beginning April 1, 1997, the
Company leased office space at a rate of approximately $2,000 per month. This
lease expired in November 1997, was renewed and then later cancelled. In
February 1998, the Company signed a new lease with an unrelated party. Rent
expense was $37,000 for 1997, $46,000 for 1996, and $36,000 for 1995. The
Company believes these rental expenses were at an arms length basis.
23
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
10. 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:
1997 0%
1996 32%
1995 16%
11. 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. No
distributions were made in 1997. Distributions were $12,000 for 1996 and $12,000
for 1995.
In February 1997, as part of the severance agreement with the former Chief
Executive Officer of the Company (Note 14), the Company assigned its interest in
the Royalty Participation Plan to the former Chief Executive Officer and
President of the Company.
12. 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. The Company
does not expect any events to occur in the near future, therefore, the bonus
payable is considered long-term in nature.
In connection with the appointment of Mr. Howard Karren as the Chairman of the
Board of Directors of the Company in 1996, the Company agreed to issue to Mr.
Karren, or his designee, 350,000 shares of restricted common stock of the
Company. In 1996, the Company recorded accrued compensation for this transaction
in the amount of $175,000. During 1997, the common stock was issued.
13. 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, of which
$20,000 was attributable to the President of the Company.
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 1997 or 1996.
14. Commitments and Contingencies
Under the terms of the license agreement, approved by the Ministry of Oil and
Gas Industries of the Republic of Kazakhstan, granting KKM the right to develop
the Karakuduk Field, KKM has committed to minimum capital expenditures of
approximately $10 million by December 31, 1997, an additional $34.5 million by
December 31, 1998, and another $12 million by December 31, 1999. As of December
31, 1997, KKM has fully satisfied its 1997 capital commitments under the
license agreement.
24
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
14. Commitments and Contingencies (continued)
The Company has outstanding legal proceedings involving a lawsuit initiated by
Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. (Plaintiffs). The
Complaint was filed on November 14, 1997 against the Company, Howard Karren,
Whittier Trust Company and James A. Jeffs in the District Court of Harris
County, Texas. Plaintiffs claim the Company breached an alleged agreement
whereby Plaintiffs were to raise capital for the Company through a private
placement of the Company's securities. The plaintiffs contend that the Company
and Howard Karren made false representations in connection with the alleged
contract and that Whittier Trust Company and James A. Jeffs interfered with the
Company's performance of the alleged contract. Plaintiffs are seeking actual
damages of $3,435,000 and exemplary damages of $25,000,000, plus attorney's
fees. A motion for a summary judgment filed by the Plaintiff was denied by the
Court. The Company has not recorded any provision related to this legal
proceeding as management believes the Company will prevail.
Subsequent to December 31, 1997, the Kazakhstan government tax authority began
an audit of KKM. The Company believes KKM provided for all potential tax
contingencies which may exist.
15. Subsequent Events
In an agreement dated March 31, 1998, the Company has agreed to allow Allen &
Company to retain, subject to certain performance criteria, the warrants to
purchase 700,000 shares (presented as a $1,770,000 stock subscription receivable
in equity) of the Company's common stock related to the $17,500,000 subscription
not received under the original terms of the Agreement. The unearned warrants to
purchase 700,000 shares of the Company's common stock held by Allen & Company
are fully restricted from exercise unless Allen & Company assists the Company in
raising additional capital for the Company that is acceptable to the Company's
Board of Directors. For each $25 of additional capital raised, a warrant to
purchase one share of common stock will be deemed to be earned. If, before
November 25, 1999, Allen & Company fails to assist the Company in raising the
additional capital for the Company under terms acceptable to the Company, the
unearned portion of the warrants will expire.
Effective on April 3, 1998, the Company sold 1,250,000 shares of the Company's
Common Stock for $2.00 per share for a total of $2,500,000 to a private
investor. Allen & Company Incorporated acted as placement agent in connection
with the sale of the 1,250,000 shares and therefore earned warrants to an
additional 100,000 shares of the Company's Common Stock. The warrants to
purchase the additional 100,000 shares of the Company's Common Stock are
exercisable through November 25, 2002, at an exercise price of $0.01 per share.
The Company has agreed that, if at any time by March 31, 1999, the Company
issues additional shares of the Company's common stock at a price of less than
$2.00 per share, the investor will receive an additional number of shares of
common stock which when added to the 1,250,000 shares divided into $2,500,000 is
equal to the price at which the additional shares are sold. Further, the Company
has agreed that if, by March 31, 1999, the Company issues or sells convertible
securities (i.e., securities directly or indirectly convertible into or
exchangeable for common stock), other than as a dividend or other distribution
on any class of stock, the investor is entitled to exchange the 1,250,000 shares
for the convertible securities. The amount of convertible securities to be
issued to the investor is to be determined by dividing the market price of the
common stock into the issue price of such convertible securities. Finally, the
Company has agreed that, in the event that by March 31, 1999 (i) the Company has
not received an investment of $7,500,000 and (ii) the average market price of
the common stock for the twenty day trading period preceding March 31, 1999, is
less than $2.00 per share, then the investor is entitled to an additional number
of shares of common stock which when added to the 1,250,000 shares and divided
into $2,500,000 is equal to the market price of the common stock on March 31,
1999. This last provision is not applicable if either of the provisions are
satisfied on or before March 31, 1999.
25
<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 4, 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 were 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. The
properties were sold in accordance with the above agreement. Due to the
uncertainties surrounding the development of the Karakuduk Field, along with the
limited amount of production established as of December 31, 1997, no proved
reserves have been attributed to the field. The Company acquired no additional
producing properties in 1997. Therefore, no disclosures for proved reserves or
future cash flows have been made at December 31, 1997. Acquisition and
exploratory costs incurred related to the Company's interest in the Karakuduk
Field, however, are disclosed below. The exploration costs reflect the entire
exploratory costs incurred by the Company and KKM.
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 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 were 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.
26
<PAGE>
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited (continued)
Proved Oil and Gas Reserve Quantities
(All Within the United States)
<TABLE>
<CAPTION>
Oil Gas
reserves reserves
(bbls.) (Mcf.)
-----------------------------------
<S> <C> <C>
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 -- --
Revisions of previous estimates -- --
Sales of reserves -- --
Extensions, discoveries and other additions -- --
Production -- --
-----------------------------------
Balance December 31, 1997 -- --
===================================
Proved developed reserves:
November 30, 1995 7,235 870,890
November 30, 1996 -- --
December 31, 1997 -- --
27
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited (continued)
Standardized Measure of Discounted Future Net Cash Flows
and Changes Therein Relating to Proved Oil and Gas Reserves
Year ended November 30
1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C>
Future cash inflows $ -- $ -- $ 3,449,000
Future production and development
costs -- -- (2,478,000)
Future income tax expenses -- -- --
-------------------------------------------------------------
Future net cash flows -- -- 971,000
10% annual discount for estimated
timing of cash flows -- -- (544,000)
-------------------------------------------------------------
Standardized measure of discounted
future net cash flows $ -- $ -- $ 427,000
=============================================================
The following are the principal sources of changes in the standardized measure
of discounted future net cash flows:
Year ended November 30
1997 1996 1995
------------------------------------------------------------
Beginning balance $ -- $ 427,000 $ 1,084,000
Expenditures which reduced future
development costs -- -- (3,000)
Acquisition of proved reserves -- -- --
Sale of proved reserves -- (54,000) (81,000)
Sales and transfers of oil and gas
produced, net of production costs -- (110,000) (140,000)
Net increase (decrease) in price -- 860,000 (593,000)
Net decrease in costs -- -- 247,000
Extensions and discoveries -- 17,000 165,000
Revisions of previous quantity
estimates -- (91,000) (38,000)
Accretion of discount -- 99,000 108,000
Effect of change in timing and other -- 253,000 (322,000)
Transfer to oil and gas properties
under agreement for sale -- (1,401,000) --
-------------------------------------------------------------
Ending balance $ -- $ -- $ 427,000
=============================================================
28
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited (continued)
Standardized Measure of Discounted Future Net Cash Flows
and Changes Therein Relating to Proved Oil and Gas Reserves (continued)
Year ended November 30
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
Costs Incurred
Property acquisition costs--
unproved leases $ 943,000 $ 6,559,000 $ 3,162,000
Property acquisition costs--
proved properties -- -- 30,000
Exploration costs 5,745,000 1,701,000 1,088,000
Development costs -- -- 30,000
Production Costs
Lease operating expense $ -- $ 26,000 $ 95,000
Production tax -- 11,000 20,000
-----------------------------------------------------
$ -- $ 37,000 $ 115,000
=====================================================
Other Information
Net revenue (revenue less production
costs, ad valorem and severance
taxes) $ -- $ 110,000 $ 140,000
Amortization per equivalent barrel
of production* -- 1.40 2.33
Price per bbl. (oil) -- 17.53 14.27
Production cost per bbl. (oil) -- 2.13 6.34
Price per Mcf. (gas) -- 1.17 1.02
Production cost per Mcf. (gas) -- .34 .47
Price per net equivalent bbl.* -- 8.22 8.33
Production cost per net equivalent bbl -- 2.07 3.78
* Natural gas converted to equivalent barrels using conversion ratio of 6:1.
29
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited (continued)
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil and Gas Reserves (continued)
Year ended November 30
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Present value of proved reserves:
Proved developed $ -- $ -- $266,000
Proved undeveloped -- -- 161,000
---------------------------------------------------
Total $ -- $ -- $427,000
===================================================
Future net revenues of proved reserves:
Proved developed $ -- $ -- $383,000
Proved undeveloped -- -- 588,000
---------------------------------------------------
Total $ -- $ -- $971,000
===================================================
30
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Karakuduk-Munay, Inc.
We have audited the accompanying balance sheets of Karakuduk-Munay, Inc. as of
December 31, 1997 and 1996, and the related statements of expenses and
accumulated deficit and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with U.S. 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 financial position of Karakuduk-Munay, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company has incurred recurring operating losses and relies
solely on the foreign shareholder to provide all funding in the form of an
interest bearing loan. The Company requires significant additional financing to
meet its financial commitments and requirements through calendar year 1998 as
described in Note 16. 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 3. 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
---------------------------------------
ERNST & YOUNG
Almaty, Kazakhstan
March 13, 1998
31
<PAGE>
Karakuduk-Munay Inc
Balance Sheets
December 31, 1997 and 1996
(Amounts in US Dollars)
ASSETS 1997 1996
----------------------------
Cash $ 414,384 $ 36,889
Prepaid and Other Receivables (Note 4) 272,455 16,476
VAT Receivable (Note 5) 109,099 57,296
------------ ------------
Total Current Assets 795,938 110,661
Materials and Supplies Inventory (Note 6) 511,858 28,421
Property, Plant and Equipment, net (Note 7) 1,589,057 451,935
Oil and Gas Properties - full cost method,
not subject to depletion (Note 8) 5,874,525 1,805,588
------------ ------------
TOTAL ASSETS $ 8,771,378 $ 2,396,605
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Accounts Payable (Note 10) $ 2,100,722 $ 50,016
Accrued Liabilities (Note 10) 621,750 390,806
Miscellaneous Taxes Payable 45,106 49,406
------------ ------------
Current Liabilities $ 2,767,578 $ 490,228
Loans Payable to Partner (Note 11) 9,819,497 4,023,095
Accrued Payable for compensation for land usage -- 34,000
Commitments and Contingencies (Note 14 & 16)
PARTNER'S DEFICIT
Charter Capital (Note 13) 200,000 200,000
Accumulated Deficit (4,015,697) (2,350,718)
------------ ------------
(3,815,697) (2,150,718)
------------ ------------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 8,771,378 $ 2,396,605
============ ============
See accompanying notes which form an
integral part of these financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
Karakuduk-Munay Inc
Statements of Expenses and Accumulated Deficit
For the Periods Ended December 31, 1997, 1996 and 1995
(Amounts in US Dollars)
1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
Management Service Fee (Note 11) $ 495,000 $ 825,000 $ 318,750
General and Administrative Expenses 836,868 909,520 86,799
Interest Expense (Note 11) 155,624 137,533 2,414
Depreciation on Fixed Assets (Note 7) 147,660 42,709 581
Miscellaneous Taxes 30,214 2,937 --
Exchange Loss/Gain (387) 24,475 --
----------- ----------- -----------
Net Loss 1,664,979 1,942,174 408,544
Accumulated deficit, beginning of period 2,350,718 408,544 --
----------- ----------- -----------
Accumulated deficit, end of period $ 4,015,697 $ 2,350,718 $ 408,544
=========== =========== ===========
See accompanying notes which form an
integral part of these financial statements.
33
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Karakuduk-Munay Inc
Statements of Cash Flows
For the Periods Ended December 31, 1997, 1996 and 1995
(Amounts in US Dollars)
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,664,979) $(1,942,174) $ (408,544)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation of fixed assets 147,660 42,709 581
Amortization of Signature Bonus -- -- 5,130
Changes in working capital:
(Increase)/Decrease in Prepaid and Other Receivables (255,979) 76,230 (92,706)
(Increase) in VAT Receivable (51,803) (57,296) --
(Increase) in Inventory (483,437) (28,421) --
Increase in Accounts Payable and Accrued Liabilities 2,026,650 100,834 21,238
Increase/(Decrease) in Miscellaneous Taxes Payable (4,300) 45,985 3,421
Increase/(Decrease) in Long Term Payable for Land Usage (34,000) 34,000 --
----------- ----------- -----------
Net Cash Used by Operating Activities (320,188) (1,728,133) (470,880)
Cash Flows From Investing Activities:
Purchase of Fixed Assets (1,284,782) (464,208) (31,017)
Investments in Oil and Gas Assets
(net of assets contributed
in-kind through Charter Fund) (4,068,937) (1,237,718) --
Payment of Signature Bonus -- (513,000) --
----------- ----------- -----------
Net Cash Used in Investing Activities (5,353,719) (2,214,926) (31,017)
Cash Flows From Financing Activities:
Cash contributed as Charter Fund -- 40,000 100,000
Increase in Loan due to Cash Contribution 4,134,783 2,240,000 100,000
Increase in Loans Payable for Management
Services and Other Expenditures 1,526,995 1,527,339 334,559
Increase in Loans Payable for Interest 389,624 137,533 2,414
----------- ----------- -----------
Net Cash Provided by Financing Activities 6,051,402 3,944,872 536,973
Net Increase in Cash 377,495 1,813 35,076
Cash at beginning of year 36,889 35,076 --
----------- ----------- -----------
Cash at end of year $ 414,384 $ 36,889 $ 35,076
See accompanying notes which form an
integral part of these financial statements.
34
</TABLE>
<PAGE>
Karakuduk-Munay Inc.
Notes to the Financial Statements
December 31, 1997
In terms of US Dollars
1. Organization and Background Information
Formation
- ---------
Karakuduk-Munay Inc. (the "Company"), a Kazakhstan Joint Stock Company of Closed
Type, was founded by "Munaygaz" State Holding Company (formerly
Kazakhstanmunaygaz National Petroleum Company), "Jarkin" State Holding Company
(formerly PGO Mangistauneftegazgeologiya), and Korporatsiya Mangistau Terra
International (formerly Korporatsiya Kramds-Mangistau Inc.), collectively the
"Kazakh Shareholders", and Central Asian Petroleum (Guernsey) Limited. The
Company and the Ministry of Oil and Gas in the Republic of Kazakhstan entered
into an agreement on August 30, 1995 ("Inception") referred to as the Agreement
for Exploration, Development and Production of Oil in Karakuduk Oil Field in
Mangistau Oblast of the Republic of Kazakhstan (the "Agreement"). The management
and operational framework within which the Company must conduct its activities
are dictated by the Agreement.
The Company may be terminated under certain conditions specified in the
Agreement. The term of the Agreement is 25 years commencing from the date of the
Company's registration. The Agreement can be extended to a date agreed between
the Ministry of Oil and Gas and the Company as long as production of petroleum
and/or gas is continued in the exploration field.
Changes in Shareholders
- -----------------------
In accordance with the Edict # 410 dated 24 March 1997 and Edict # 1287 dated 26
August 1997 issued by the Government of the Republic of Kazakhstan, 40 % of the
Charter Fund of the Company belonging to "Jarkin"/"Aksay" and "Munaygaz" were
transferred to KazakhOil, the state owned oil and gas company. The Company and
new shareholder have been legally re-registered with the Ministry of Justice of
the Republic of Kazakhstan on July 24, 1997.
Principal Activity
The Company was established for the purposes of exploring, developing, and
producing oil and gas deposits in the Karakuduk Field in the Republic of
Kazakhstan acting on the basis of the Agreement which the Company entered into
with the Ministry of Oil and Gas in the Republic of Kazakhstan on August 30,
1995.
The Company's work program and minimum expenditure commitment was stipulated in
License MG 249 dated June 28, 1995. These expenditure obligations were
subsequently amended by Resolution P65-H of September 18, 1996, and by
Resolution P97-H of December 8, 1997. The latter Resolution requires the Company
to expenditure commitments of US$10 million by December 31, 1997, US$34.5
million by December 31, 1998, and US$12 million by December 31, 1999.
Expenditure commitments through 1997 exceeded the commitment requirement. The
excess is applicable against future obligations. Should the license terms not be
adhered to, the License may be withdrawn by the Government of the Republic of
Kazakhstan.
The activity during 1997 has been primarily to conduct various studies into the
most appropriate drilling and development strategy for the Karakuduk field. The
Company also commenced construction of the field camp and access road to the
field to facilitate the commencement of expansion of activities when production
commences in 1998. The Company also worked over one well, which will be brought
into production in 1998. The remaining operations conducted by the Company
related to corporate affairs, re- registration of the Company necessitated by
the transfer of shareholders, and other activity pertaining to the startup of
the operations.
35
<PAGE>
Karakuduk-Munay Inc.
Notes to the Financial Statements
December 31, 1997
In terms of US Dollars
2. Basis of Presentation
The Company maintains its accounting records and prepares its financial
statements in US dollars and in accordance with accounting prescribed in the
Accounting Procedure of the Agreement. The accompanying financial statements,
prepared in accordance with U.S. generally accepted accounting principles,
differ in minor respects (related to disclosure) from those issued for statutory
purposes in Kazakhstan.
The material accounting principles adopted by the Company are described below:
Foreign Currency Translation
- ----------------------------
Transactions arising in currencies other than US dollars are translated into US
dollars in accordance with the temporal method.
Cash and other monetary assets held and liabilities denominated in currencies
other than US dollars are translated to US dollars at the rates of exchange
ruling as of December 31, 1997 (75.55 Kazakh Tenge per US dollar). Non-monetary
assets and liabilities denominated in currencies other than US dollars have been
translated at the estimated historical exchange rate prevailing on the date of
the transaction. Exchange gains and losses arising from translation of non-US
dollar amounts at the balance sheet date are recognized as an increase or
decrease in income for the period. By using the US dollar as its reporting
currency for the financial statements and by using the temporal method of
translation where applicable, the effects of inflation have been taken into
consideration in all material respects since movements in the exchange rate
between the US dollars and Tenge during 1995 to 1997 are considered a reasonable
approximation of the general price index.
The Tenge is not a convertible currency outside of the Republic of Kazakhstan.
The translation of Tenge denominated assets and liabilities in these financial
statements does not indicate that the Company could realize or settle these
assets and liabilities in U.S. dollars.
As of 31 December, 1997, US$103,966 of net monetary liabilities are denominated
in Tenge.
Interest Capitalization
- -----------------------
Beginning in 1997, the Company capitalized certain borrowing costs as part of
the cost of oil and gas properties. The Company has capitalized US$234,000 for
1997. Other interest costs are expensed as incurred.
Depreciation, Depletion and Amortization
- ----------------------------------------
Oil and Gas Assets
- ------------------
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs directly associated with acquisition,
exploration and development of oil and gas reserves 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 based on proven reserves.
36
<PAGE>
Karakuduk-Munay Inc.
Notes to the Financial Statements
December 31, 1997
In terms of US Dollars
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.
Property Plant and Equipment
- ----------------------------
Depreciation of equipment is calculated on the straight line method based on the
estimated useful life of the assets as follows:
Office Buildings and Apartments 20 years
Office Equipment 3 years
Vehicles 5 years
Field Buildings 15 years
Field Equipment up to 10 years
Inventory
- ---------
Inventory is valued using the first-in, first-out method and is at the lower of
cost and net realizable value.
Revenue Recognition
- -------------------
Revenues are recognized when economic performance has occurred as a result of
the sale of oil and gas production, in accordance with the accrual method of
accounting. Losses, if any, are provided for in the period in which the loss is
determined to occur.
Income Taxes
- ------------
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") 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
- -------------------------
Basic earnings (loss) and diluted earnings (loss) per share are not presented
due to the Company being of a "closed" nature and having no underlying shares
outstanding.
37
<PAGE>
Karakuduk-Munay Inc.
Notes to the Financial Statements
December 31, 1997
In terms of US Dollars
New Accounting Standards
- ------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS 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 adopted
Statement No. 121 in 1997; the effect of the adoption is immaterial to the
Company's overall financial results.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income .
SFAS 130, which is effective for fiscal years beginning after December 15, 1997,
establishes standards for reporting and presentation of comprehensive income and
its components. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company adopted SFAS 130 as of January 1, 1998.
The impact of SFAS 130 on the Company's financial position and results of
operations is not expected to be material.
Fair Value of Financial Instruments
- -----------------------------------
All of the Company's financial instruments, including loans payable to partner,
cash and trade receivables 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.
38
<PAGE>
Karakuduk-Munay Inc.
Notes to the Financial Statements
December 31, 1997
In terms of US Dollars
Leases
- ------
Rent expenses for non-cancelable operating leases are recognized on a straight
line basis.
3. Going Concern
These financial statements have been prepared assuming that Karakuduk-Munay
Inc., will continue as a going concern. The Company has incurred an operating
loss and relies solely on Central Asian Petroleum (Guernsey) Limited to provide
all funding in the form of an interest bearing loan, as discussed in Note 11.
The Company does not anticipate that its current cash reserves and cash flows
from operations will be sufficient to meet its capital requirements through
fiscal year 1998. 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.
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
liabilities that may result from the outcome of this uncertainty.
4. Prepaid and Other Receivables
Prepayments and Other Receivables consists of outstanding travel advances at
December 31, 1997, prepayment of taxes and prepayments of equipment to be added
to Oil and Gas Assets in 1998 and can be summarized as follows:
1997 1996
Travel Advances to employees $ 18,606 $ 6,868
Import VAT, Custom duties and prepaid taxes 41,256 1,796
Advance payment for Oil and Gas Assets 212,593 7,812
--------- --------
Total $ 272,455 $ 16,476
========= ========
The increase in these amounts reflects the higher activity level of operations
towards the end of 1997.
5. VAT Receivable
VAT receivable is a Tenge denominated asset and is due from the Republic of
Kazakhstan. While theoretically refunds of excess VAT paid are due from the
Republic within 10 days of a claim being made, and several refunds have been
received by the Company in 1996 and 1997, current practice indicates that
receipt is uncertain until such time as other taxes payable to the Republic by
the Company, are available for offset against the VAT receivable.
39
<PAGE>
Karakuduk-Munay Inc.
Notes to the Financial Statements
December 31, 1997
In terms of US Dollars
6. Materials and Supplies Inventory
1997 1996
------------------------------
Inventory in-house $224,998 $28,421
Inventory in-transit 286,860 -
-------- -------
Total $511,858 $28,421
======== =======
The above categories of Materials and Supplies Inventory represent workover
materials, spare parts and diesel fuel for use in oil field operations.
7. Plant, Property and Equipment
Upon full amortization of tangible assets, the right of ownership of the
tangible assets shall be transferred to the Kazakhstan Ministry of Oil and Gas
in accordance with the Agreement. The Company is entitled to the use of the
fully amortized tangible assets during the whole term of the Agreement. A
summary of property, plant and equipment at December 31, 1997 is provided in the
table below:
Cost Balance as at Balance as at
December 31, 1996 December 31, 1997
----------------- ----------------
US Dollars US Dollars
Office Buildings and Apartments $ 29,469 $ 67,212
Office Equipment and Furniture 167,594 227,318
Vehicles 298,162 541,479
Field Buildings -- 329,936
Field Equipment and Furniture -- 169,190
Capital work-in process
-- 444,872
---------- ----------
Total 495,225 1,780,007
---------- ----------
Accumulated Depreciation 43,290 190,950
---------- ----------
Net Book Value $ 451,935 $1,589,057
========== ==========
Included in the additions to Field Buildings is US$89,962 relating to the
residential camp that was previously classified within Oil and Gas Assets in
1996.
40
<PAGE>
Karakuduk-Munay Inc.
Notes to the Financial Statements
December 31, 1997
In terms of US Dollars
8. Oil and Gas Assets Not Subject to Amortization
The Company has undertaken certain appraisal and feasibility work in 1997 in
order to ascertain the most appropriate future development and drilling program
for the Karakuduk field in Kazakhstan. The results are still being analyzed.
There are no other licenses currently held by the Company and hence all costs
capitalized as related to the Karakuduk license have not been amortized in 1997.
Management fees related to the salary costs of individuals directly associated
with exploration and appraisal activities on the Karakuduk field have been
capitalized along with the license acquisition costs and geological and
geophysical expenditures. Certain overhead costs and general and administrative
costs have been expensed.
Costs excluded from the amortization consist of the following at December 31,
1997 (US dollars):
Exploration
Year Acquisition and Appraisal Development
Incurred Costs Costs Costs Total
-------- ---------- ------------ ----------- ----------
1995 $ 507,870 -- -- $ 507,870
1996 -- $1,297,718 -- 1,297,718
1997 -- 4,068,937 -- 4,068,937
---------- ---------- ---------- ----------
Total $ 507,870 $5,366,655 -- $5,874,525
Management believe that over the life of the project as a whole, future cash
flows justify the carrying amount of assets disclosed above. No impairment
provision has therefore been deemed necessary in these financial statements.
9. Bonuses
The Company was required to pay an unrecoverable (non-tax deductible) Signature
Bonus to the Kazakhstan Ministry of Geology amounting to US$513,000 in
accordance with the Agreement. This amount will be amortized using the units of
production method over 25 years, when production commences.
Production based bonuses will be payable to the Kazakhstan Ministry of Geology
amounting to US$500,000 when cumulative production reaches ten million barrels
and US$1,200,000 when cumulative production reaches fifty million barrels. The
production bonuses will be considered tax deductible expenditures in the
calculation of profits taxes. No amounts related to the production bonuses have
been accrued as production had not commenced at December 31, 1997.
41
<PAGE>
Karakuduk-Munay Inc.
Notes to the Financial Statements
December 31, 1997
In terms of US Dollars
10. Accounts Payable and Accrued Liabilities
1997 1996
---------- --------
Accounts Payable $2,100,722 $ 50,016
Accrued Management Service Fee 573,750 318,750
Accrued Liabilities 48,000 72,056
Miscellaneous Taxes Payable 45,106 49,406
---------- --------
Total $2,767,578 $490,228
========== ========
Accounts Payable as of December 31, 1997 includes US$1.3 million in respect of
the acquisition of the pipeline that is to link the oil field to the state
pipeline. The remaining Accounts Payable represents payables for equipment to be
installed in the oil field.
11. Loans Payable to Partner
As discussed in Note 3, Central Asian Petroleum (Guernsey) Limited bears sole
financial responsibility for the fulfillment of all funding for the Company. The
various forms of funding from Central Asian Petroleum (Guernsey) Limited are
treated as long term loans to the Company and bear interest at the rate of LIBOR
plus 1%. The Agreement requires installment payments on the loan to be
calculated and paid on a quarterly basis and to be equal to 65% of gross revenue
after deduction of royalties due to the Republic of Kazakhstan. No production
occurred in 1997 and therefore, no payments on the loan have been made or are
due as of December 31, 1997. Management believe that no net repayment will occur
in 1998 and hence the entire loan is treated as falling due in more than one
year.
The loan is made up as follows (US dollars):
1997 1996
---------- ----------
Cash Funding $6,474,783 $2,340,000
Management Services Fee 2,295,000 1,275,000
Other Expenditures 520,143 268,148
Accrued Interest Payable 529,571 139,947
---------- ----------
Total Interest and Loan Payable to Partner $9,819,497 $4,023,095
========== ==========
Management services are provided by Road Runner Services Company, a subsidiary
of Chaparral Resources, Inc. the parent company of Central Asian Petroleum
(Guernsey) Limited. The services are provided for a fixed fee of US$106,250 per
month. Management services were provided to the Company for 1997 amounting to
US$1,275,000.
42
<PAGE>
Karakuduk-Munay Inc.
Notes to the Financial Statements
December 31, 1997
In terms of US Dollars
12. Tax
Under Kazakh legislation, the Company is permitted to carryforward tax losses
arising in each year. These can be applied against future tax profits arising in
the subsequent five years; however, certain uncertainties exist as to the amount
of the carryforward due to the issues discussed in Note 14 related to the method
of calculation of tax losses for Kazakh purposes.
The Agreement specifies profits taxes and other taxes applicable to the Company.
As discussed in Note 9, the Signature Bonus is not recoverable or deductible in
calculating income tax expense.
The following is a summary of the provision for income taxes:
Year ended December 31
1997 1996 1995
-------------------------------------
Income taxes (benefit) computed
at statutory rate $(499,494) $(582,652) $(122,563)
Change in asset valuation
allowance 499,494 582,652 122,563
-------------------------------------
Income taxes $ -- $ -- $ --
=====================================
The components of the Company's deferred tax assets and liabilities under FASB
No. 109 are as follows:
Year ended December 31
1997 1996 1995
-----------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 1,204,709 $ 705,215 $ 122,563
Valuation allowance (1,204,709) (705,215) (122,563)
-----------------------------------------
Deferred tax assets $ -- $ -- $ --
=========================================
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 December 31, 1997, the Company has tax loss carryforwards of approximately
US$4,016,000 available to offset future taxable income. These carryforwards will
expire at various times between 2000 and 2002. The loss carryforward at December
31, 1997 for financial reporting purposes is approximately US$4,016,000.
43
<PAGE>
Karakuduk-Munay Inc.
Notes to the Financial Statements
December 31, 1997
In terms of US Dollars
13. Charter Capital
The total Charter Fund contribution specified in the new Founders Agreement of
Karakuduk-Munay (dated June 12, 1997) is $200,000. Each of the shareholder's
portion of the Charter Fund and their respective participating interest in the
Company is:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------
Charter Charter
Shareholder: Contribution Percent Contribution Percent
- ------------ ------------ ------- ------------ -------
<S> <C> <C> <C> <C>
"Munaygaz" State Holding Company $ -- -- $ 40,000 20 %
"Aksay" Company -- -- 40,000 20 %
KazakhOil 80,000 40 % -- --
Korporatsiya Mangistau Terra International 20,000 10 % 20,000 10 %
Central Asian Petroleum (Guernsey) Limited - CAP(G) 100,000 50 % 100,000 50 %
-------- ----- -------- -----
Total Charter Capital $200,000 100 % $200,000 100 %
</TABLE>
During 1997, KazakhOil as the successor to Munaygaz state holding company,
contributed US $ 40,000 as Munaygaz's initial charter contribution obligation
that was previously settled by CAP(G). The CAP(G) 1996 contribution has been
reclassified as additional funding of the Company's operations in 1997.
14. Contingencies
Taxation
- --------
The existing legislation with regard to taxation in the Republic of Kazakhstan
is constantly evolving as the Government manages the transition from a command
to a market economy. Tax and other laws applicable to the Company are not always
clearly written and their interpretation is often subject to the opinions of the
local or main State Tax Service. Instances of inconsistent opinions between
local, regional and national tax authorities are not unusual.
Management believes that it has paid or accrued all taxes that are applicable
for current and prior years. Two tax audits in 1997 resulted in no additional
tax or penalties levied against the Company.
Basis of Accounting
- -------------------
The Company maintains its statutory books and records and calculates its taxable
loss in accordance with International Accounting Standards, which it believes it
may do under the terms of its accounting procedures in the Agreement. The
Republic of Kazakhstan currently requires companies to comply with Kazakh
accounting regulations and to calculate tax profits or losses in accordance with
these regulations as well as prevailing tax law. Therefore, there is currently
uncertainty as to the extent of tax losses available to the Company.
44
<PAGE>
Karakuduk-Munay Inc.
Notes to the Financial Statements
December 31, 1997
In terms of US Dollars
15. Current Kazakhstan Environment
The ability of the Company to realize the carrying value of its assets is
dependent on being able to transport hydrocarbons and finding appropriate
markets for their sale. The Company has various options available to it in terms
of possible exportation routes to potential markets, based on experience of
other joint venture operations in the vicinity of the Company's activity.
Domestic markets in the Republic of Kazakhstan currently do not permit world
market prices to be obtained.
16. Capital Commitments and Operating Lease Commitment
As specified in Note 1, under the terms of the license the Company has committed
to minimum capital expenditure of US$34.5 million for the year ended December
31, 1998 (US$2 million already incurred in 1997) and US$12 million for the year
ended December 31, 1999.
Minimum lease payments under non-cancelable operating leases are due for the
year ended December 31, 1998 amounting to US$24,929. On expiration of this
lease, the Company may obtain legal title to the office building should
negotiations with the landlord prove successful. At this stage there is no
certainty that title will transfer, therefore all rental obligations have been
expensed.
17. Subsequent Events
Subsequent to December 31, 1997, the Kazakh Government Tax Authority began an
audit of KKM. The Company believes KKM has provided for all potential tax
contingencies which may exist.
45
<PAGE>
- --------------------------------------------------------------------------------
CHAPARRAL RESOURCES, INC
No person has been authorized to give any
information or to make any representation
in connection with the Offering being made
hereby not contained in this Prospectus,
and, if given or made, such information or
representation must not be relied upon as
having been authorized. This Prospectus
does not constitute an offer to sell or
solicitation of an offer to buy any of the
securities offered hereby in any
jurisdiction in which it is unlawful to
make such offer or solicitation in such
jurisdiction. Neither the delivery of this
Prospectus nor any sale made hereunder
shall under any circumstances create an 17,522,116 Shares
implication that information contained of Common Stock
herein is correct as of any time
subsequent to the date hereof.
-------------------------
Page No.
--------
AVAILABLE INFORMATION.................. 2
PROSPECTUS SUMMARY..................... 3
RISK FACTORS........................... 4
USE OF PROCEEDS........................ 13
MARKET PRICES OF COMMON EQUITY,
DIVIDEND POLICY AND RELATED
STOCKHOLDER MATTERS.................. 13 ------------
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION PROSPECTUS
AND RESULTS OF OPERATIONS ........... 14
CHANGE IN ACCOUNTANTS.................. 17 ------------
BUSINESS OF THE COMPANY................ 18
DIRECTORS AND EXECUTIVE OFFICERS....... 28
EXECUTIVE COMPENSATION................. 31
SECURITY OWNERSHIP OF CERTAIN
PERSONS............................... 35
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.................. 37
SELLING SECURITYHOLDERS................ 42
DESCRIPTION OF SECURITIES.............. 48
PLAN OF DISTRIBUTION................... 50
LEGAL PROCEEDINGS.......................51
LEGAL MATTERS.......................... 51
EXPERTS................................ 51
FINANCIAL STATEMENTS...................F-1
May __, 1998
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
--------------------------------------------
Expenses payable by the Company in connection with the issuance and
distribution of the securities being registered hereby are as follows:
SEC Registration Fee...................................... $ 10,500
Accounting Fees and Expenses.............................. 35,000*
Legal Fees and Expenses................................... 10,000*
Blue Sky Fees and Expenses................................ 0*
Printing, Freight and Engraving........................... 1,000*
Miscellaneous............................................. 0*
---------
Total............................................ $ 56,500
=========
- -------------------
*Estimated.
Item 14. Indemnification of Directors and Officers.
------------------------------------------
The Company has a $2,000,000 directors and officers liability insurance
policy. This insurance policy insures the past, present and future officers and
directors of the Company, with certain exceptions, from claims arising out of
any actual or alleged act, error, omission, misstatement, misleading statement
or breach of duty by such officer or director in his or her capacity as such.
Section 7-109-102 of the Colorado Business Corporation Act permits a
Colorado corporation to indemnify any director against liability if such person
acted in good faith and, in the case of conduct in an official capacity with the
corporation, that the director's conduct was in the corporation's best interests
and, in all other cases, that the director's conduct was at least not opposed to
the best interests of the corporation or, with regard to criminal proceedings,
the director had no reasonable cause to believe the director's conduct was
unlawful.
Article Twelfth of the Company's Restated Articles of Incorporation +
Amendments, as amended, filed as Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6
provides that the Company shall indemnify each director and each officer, and
the heirs, executors and administrators of each director and each officer,
against expenses reasonably incurred or liability incurred by such person in
connection with any action, suit or proceeding to which such person may be made
a party by reason of such person being or having been a director or officer of
the Company, except in relation to matters as to which such person shall be
II-1
<PAGE>
finally adjudged in such action, suit or proceeding to be liable for fraud or
misconduct, which right of indemnification shall not exclude other rights to
which such person may be entitled.
Article Fifteenth of the Company's Restated Articles of Incorporation +
Amendments, as amended, filed as Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6
provides that a director of the Company shall not be personally liable to the
Company or its shareholders for monetary damages for breach of fiduciary duty as
a director; except that the provision shall not eliminate or limit the liability
of a director to the Company or its shareholders for monetary damages for: (i)
any breach of the director's duty of loyalty to the Company or its shareholders;
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law; (iii) acts involving unlawful distributions
as specified in the Colorado Business Corporation Act; or (iv) any transaction
from which the director derived an improper personal benefit. Further, Article
Fifteenth states that any repeal or modification of the foregoing by the
shareholders of the Company shall not adversely affect any right or protection
of a director of the Company existing at the time of such repeal or
modification.
Article V of the Bylaws of the Company, filed as Exhibit 3.7 hereto,
includes provisions requiring the Company to indemnify any person who was or is
a party or is threatening 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 such
person is or was a director, officer, employee, fiduciary or agent of the
Company, or is or was serving at the request of the Company 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 an employee benefit plan against reasonably incurred
expenses (including attorneys' fees), judgments, penalties, fines (including any
excise tax assessed with respect to an employee benefit plan) and amounts paid
in settlement reasonably incurred by such person in connection with such action,
suit or proceeding if it is determined by disinterested directors that such
person conducted himself or herself in good faith and that such person
reasonably believed (i) in the case of conduct in such person's official
capacity with the Company, that such person's conduct was in the Company's best
interest, or (ii) in all other cases (except criminal cases) that such person's
conduct was at least not opposed to the Company's best interest, or (iii) in the
case of any criminal proceeding, that such person had no reasonable cause to
believe such person's conduct was unlawful. No indemnification shall be made
with respect to any claim, issue or matter in connection with a proceeding by or
in the right of the Company in which the person being indemnified is adjudged
liable to the Company or in connection with any proceeding charging that the
person being indemnified derived an improper personal benefit, whether or not
involving acting in an official capacity, in which such person was adjudged
liable on the basis that such person derived an improper personal benefit.
Further, indemnification in connection with a proceeding brought by or in the
right of the Company shall be limited to reasonable expenses, including
attorneys' fees, incurred in connection with the proceeding. Reasonable expenses
II-2
<PAGE>
(including attorneys' fees) incurred in defending an action, suit or proceeding)
may be paid by the Company to any person being indemnified in advance of the
final disposition of the action, suit or proceeding upon receipt of (i) a
written affirmation by the person being indemnified as to such person's good
faith and belief that such person met the standards of conduct described by the
Bylaws, (ii) a written undertaking, executed personally or on behalf of the
person being indemnified, to repay such advances if it is ultimately determined
that such person did not meet the prescribed standards of conduct, and (iii) a
determination is made by a disinterested director of the Company (as described
in the Bylaws) that the facts then known to a disinterested director would not
preclude indemnification. The Bylaws require that the Company report in writing
to shareholders with or before notice of the next meeting of shareholders of any
indemnification of or advance of expenses to any director under the
indemnification provisions of the Bylaws.
Item 15. Recent Sales of Unregistered Securities
---------------------------------------
The following is information as to all securities of the Company sold by
the Company within the past three years which were not registered under the
Securities Act of 1933, as amended ("Securities Act").
(a) 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.
(b) Between March 8, 1996 and April 5, 1996, the 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
in (k) 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 restrictive legends under the Securities Act and stop transfer
instructions have been placed with the Company's stock transfer agent.
II-3
<PAGE>
(c) On April 5, 1996, the 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 in (k) 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.
(d) On February 27, 1995, the Company issued 100,000 shares of its Common
Stock to Overseas Consulting Services Company, Inc. ("OCSCO") as partial
consideration for the acquisition by the Company of an interest in Central Asian
Petroleum (Guernsey), Limited ("CAP-G"). The Company issued the shares in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act. OCSCO represented to the Company that it acquired the shares for
its own account and not with a view to distribution. OCSCO had available to it
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.
(e) On April 12, 1995, the Company issued 4,250,000 shares of its Common
Stock to seven persons in exchange for acquisition by the Company of all the
outstanding stock of Central Asian Petroleum Delaware, Inc. ("CAP-D"). In
consideration for the issuance of the shares the Company acquired 100% of the
issued and outstanding stock of CAP-D. No underwriter was involved in the
transaction. The Company issued the shares in reliance upon the exemptions from
registration under Section 4(2) of the Securities Act. The persons to whom the
shares were issued represented to the Company that they are accredited investors
as defined under the Securities Act and 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 business and affairs of 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.
(f) On April 17, 1995, the Company issued 24,000 shares of its Common Stock
to six individuals, three of whom were directors of the Company and four of whom
(including one director) were employees of the Company as stock bonuses. The
Company issued the shares in reliance upon the exemption from registration under
Section 4(2) of the Securities Act. The individuals 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
II-4
<PAGE>
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.
(g) On April 24, 1995, the Company issued 12,500 shares of its Common Stock
to Frank C. Alexander, Jr. for services rendered to the Company. The Company
issued the shares in reliance upon the exemption from registration under Section
4(2) of the Securities Act. The individual represented to the Company that he
acquired the shares for his own account and not with a view to distribution. Mr.
Alexander had available to him all material information concerning the Company.
The certificate evidencing the shares issued bears an appropriate restrictive
legend 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.
(h) On November 20, 1995, the Company issued 50,000 shares of its Common
Stock to OCSCO as partial consideration for the acquisition by the Company of an
interest in Central Asian Petroleum (Guernsey), Limited ("CAP-G"). The Company
issued the shares in reliance upon the exemption from registration under Section
4(2) of the Securities Act. OCSCO represented to the Company that it acquired
the shares for its own account and not with a view to distribution. OCSCO had
available to it all material information concerning the Company. The certificate
evidencing the shares issued bears an appropriate restrictive legend 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.
(i) 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.
(j) 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.
II-5
<PAGE>
(k) Effective April 8, 1996, the Company issued its Stock Purchase Warrants
to Allen & Company Incorporated entitling Allen & Company Incorporated to
purchase 1,022,000 shares of the Company's Common Stock for $10.00. The Stock
Purchase Warrants were issued as consideration to Allen & Company Incorporated
for acting as 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. 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.
(l) Between December 1995 and January 1996, the Company issued its 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 and 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 bear an
appropriate restrictive legend under the Securities Act.
(m) In connection with Howard Karren becoming a director of the Company,
subject to a certain contingency which was satisfied in April, 1996, the Company
agreed to issue 350,000 shares of the Company's restricted Common Stock to
Howard Karren, a director of the Company, or his designees. Of the 350,000
shares, Mr. Karren directed that 200,000 of the shares be issued to his two sons
to compensate them for services they provided to Mr. Karren. 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 bear an appropriate restrictive legend
under the Securities Act. No underwriter was involved in the transaction.
(n) In November and December, 1996, the Company borrowed $1,850,000 for
interim financing pursuant to unsecured convertible promissory notes that bore
interest at 8% per annum, which is payable monthly, and that were due and
II-6
<PAGE>
payable on or before May 29, 1998. The promissory notes were 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 issued the promissory notes
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
promissory notes for their own accounts and not with a view to distribution.
Such persons had available to them all material information concerning the
Company. The promissory notes bear an appropriate restrictive legend under the
Securities Act. No underwriter was involved in the transaction.
(o) 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
were not paid or converted by November 30, 1997. Of the warrants to purchase
185,000 shares, the Company was required to issue warrants to purchase 135,000
shares. All of the promissory notes were paid or converted by November 30, 1997.
Such warrants are exercisable for a period of three years at $0.25 per share.
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 bear an
appropriate restrictive legend under the Securities Act. No underwriter was
involved in the transaction.
(p) The Company attempted to negotiate an agreement pursuant to which the
Company would acquire 100% of the issued and outstanding capital stock of M-D
International Petroleum, Inc. ("MDI"), a private company. 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 M-D
International Petroleum, Inc. The Company issued the shares upon reliance upon
the exemption from registration under Section 4(2) of the Securities Act. EOGU
had available to EOGU all material information concerning the Company. The
certificate evidencing the shares bears an appropriate restrictive legend under
the Securities Act. No underwriter was involved in the transaction.
(q) On February 12, 1997, the Company entered into a Severance Agreement
with Paul V. Hoovler pursuant to which Mr. Hoovler received warrants to purchase
100,000 shares of the Company's Common Stock at an exercise price of $0.85 per
share and warrants to purchase 100,000 shares of the Company's Common Stock at
an exercise price of $1.25 per share. The Company issued the warrants in
II-7
<PAGE>
reliance upon the exemption from registration under Section 4(2) of the
Securities Act. Mr. Hoovler had available to him all material information
concerning the Company. The warrants have and the certificates evidencing the
shares underlying the warrants will bear an appropriate restrictive legend under
the Securities Act. No underwriter was involved in the transaction.
(r) On April 22, 1997, the Company sold 3,076,923 shares of the Company's
Common Stock for $0.65 per share for a total of $2,000,000 to a private
investor. In connection with the transaction, the Company also issued a warrant
to the investor to purchase up to an additional 4,615,385 shares of the
Company's Common Stock for $3,000,000 or $0.65 per share. The warrant was to
expire on December 31, 1997, if not previously exercised. In October, 1997, the
private investor exercised a portion of the warrant by purchasing 2,307,692
shares of the Company's Common Stock. At the same time, the Company agreed to
extend the expiration date of the remaining portion of the warrant to December
31, 1998. In November, 1997, the private investor exercised the remaining
portion of the warrant by purchasing 2,307,693 shares of the Company's Common
Stock and exercised another warrant that the private investor had received in
connection with a loan made by the private investor in December, 1996, to the
Company. The warrant related to 125,000 shares of the Company's Common Stock and
was exercisable at a price of $0.25 per share. In April 1997, the private
investor also converted a $500,000 promissory note (plus $2,000 of accrued
interest) that had previously been issued by the Company to it into 772,991
shares of the Company's Common Stock at a conversion price of $0.65 per share.
The Company issued the shares and the warrant in reliance upon the exemption
from registration under Section 4(2) of the Securities Act. The investor had
available to the investor all material information concerning the Company. The
certificates evidencing the shares and the warrant bear an appropriate
restrictive legend under the Securities Act. No underwriter was involved in the
transaction.
(s) On July 17, 1997, the Company approved a 1997 Incentive Stock Plan
pursuant to which all non-employee directors were to receive an award of 250
shares of Common Stock of the Company for each meeting of the board of directors
attended by such person. The directors have waived their rights to receive
shares for the meetings in 1997. The Company grants the shares in reliance upon
the exemption from registration under Section 4(2) of the Securities Act. Such
persons will have available to them all material information concerning the
Company. The certificates evidencing the shares will bear an appropriate
restrictive legend under the Securities Act. No underwriter will be involved in
the transactions.
(t) On July 17, 1997, the shareholders approved a 1997 Non-Employee
Directors' Stock Option Plan pursuant to which each year each non-employee
director will receive an option to purchase 25,000 shares of Common Stock of the
Company. The first options relating to a total of 200,000 shares that are
exercisable at a price of $0.82 per share were received effective July 17, 1997.
The non-employee directors who received options were Howard Karren, Peter G.
Dilling, Jay W. McGee, Alan D. Berlin, Walter Carozza, David A. Dahl, John G.
McMillian and Arlo G. Sorensen. The Company does not consider the grants of the
options to be sales under the Securities Act of 1933, as amended, because the
Company received no consideration for the grants.
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<PAGE>
(u) On September 2, 1997, the Company agreed to issue 87,669 shares of the
Company's Common Stock to Charles P. Karren in lieu of $78,000 of accrued salary
that had not been paid to Mr. Karren. The Company issued the shares in reliance
upon the exemption from registration under Section 4(2) of the Securities Act.
Mr. Karren had available to him all material information concerning the Company.
The certificates evidencing the shares will bear an appropriate restrictive
legend under the Securities Act. No underwriter was involved in the transaction.
(v) On September 2, 1997, the Company granted five year options to purchase
2,885,000 shares of the Company's Common Stock to various directors of, and
consultants to, the Company. Options relating to 1,442,500 shares have an
exercise price of $0.75 per share and options relating to 1,442,500 shares have
an exercise price of $1.50 per share. The Company issued the options in reliance
upon the exemption from registration under Section 4(2) of the Securities Act.
Such persons had available to them all material information concerning the
Company. The options have and the certificates evidencing the shares underlying
the options will bear an appropriate restrictive legend under the Securities
Act. No underwriter was involved in the transaction.
(w) On September 3, 1997, the Company sold 461,538 shares of the Company's
Common Stock for $0.65 per share for a total of $300,000 to a private investor.
In connection with the transaction, the Company also issued a warrant to the
investor to purchase up to an additional 461,538 shares of the Company's Common
Stock for $300,000 or $0.65 per share. The warrant was to expire on December 31,
1997, if not previously exercised. The private investor exercised the warrant on
December 31, 1997, and received a total of 384,616 shares of the Company's
Common Stock. The Company issued the shares and the warrant in reliance upon the
exemption from registration under Section 4(2) of the Securities Act. The
investor had available to the investor all material information concerning the
Company. The certificates evidencing the shares bear an appropriate restrictive
legend under the Securities Act. No underwriter was involved in the transaction.
(x) On November 24, 1997, the Company executed a Subscription Agreement
("Agreement") with an investor which was not affiliated with the Company.
Pursuant to the Agreement, the Company purchased 50,000 shares of the Company's
Series A Preferred Stock, no par value, for a purchase price of $100.00 per
share or an aggregate purchase price of Five Million Dollars ($5,000,000).
The Series A Preferred Stock is convertible at the option of the holders
thereof at any time or from time to time on or prior to the redemption date into
Common Stock. The conversion price of the Series A Preferred Stock is initially
II-9
<PAGE>
$2.25 per share. The number of shares of Common Stock issuable upon conversion
of each share of Series A Preferred Stock will be determined by dividing $100 by
the conversion price per share.
Allen & Company Incorporated acted as placement agent in connection with
the sale of the Series A Preferred Stock. Allen & Company Incorporated elected
to receive its fees in the form of warrants to purchase 900,000 shares of the
Company's Common Stock that were originally exercisable through November 25,
2002, at an exercise price of $0.01 per share. Due to the fact that the investor
did not purchase additional shares of preferred stock pursuant to the Agreement,
Allen & Company Incorporated has agreed that warrants to purchase 700,000 of the
shares of the Company's Common Stock will only be exercisable if Allen & Company
Incorporated finds alternative funding acceptable to the Company by November 25,
1999.
The Company issued the shares of Series A Preferred Stock and the warrants
in reliance upon the exemption from registration under Section 4(2) of the
Securities Act. The investor represented to the Company that the investor
acquired the shares for the investor's own account and not with a view to
distribution. The investor had available to the investor all material
information concerning the Company. The certificates evidencing the shares and
the warrants bear an appropriate restrictive legend under the Securities Act.
(y) In December 1997, the Company exercised an option to acquire 10% of the
outstanding shares of CAP-G owned by one person. As a part of the consideration,
the Company issued 200,000 shares of Common Stock and has agreed to issue an
additional 200,000 shares of Common Stock to such person. The Company issued and
will issue the shares in reliance upon the exemption from registration under
Section 4(2) of the Securities Act. Such person had available to him all
material information concerning the Company. The certificates evidencing the
shares issued bear and will bear an appropriate restrictive legend under the
Securities Act and stop transfer instructions have been and will be placed with
the Company's stock transfer agent. No underwriter was involved in the
transaction.
(z) On January 23, 1998, the Company ratified the grants of options to
purchase 257,000 shares of the Company's Common Stock to various employees of,
and consultants to, the Company, granted options to purchase 693,000 shares of
the Company's Common Stock to various employees of, and consultants to, the
Company, granted (subject to shareholder ratification) 90,000 shares of the
Company's Common Stock to the directors of the Company and granted 190,000
shares of the Company's Common Stock to various employees of, and consultants
to, the Company. The Company made the grants in reliance upon the exemption from
registration under Section 4(2) of the Securities Act. Such persons had
available to them all material information concerning the Company. The options
have and the certificates evidencing the shares underlying the options and
representing the shares granted will bear an appropriate restrictive legend
under the Securities Act. No underwriter was involved in the transaction.
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<PAGE>
(aa) Effective on April 3, 1998, the Company sold 1,250,000 shares of the
Company's Common Stock for $2.00 per share for a total of $2,500,000 to a
private investor. The Company sold the shares in reliance upon the exemption
from registration under Section 4(2) of the Securities Act. The investor had
available to the investor all material information concerning the Company. The
certificate evidencing the shares bears an appropriate restrictive legend under
the Securities Act. Allen & Company Incorporated acted as placement agent in
connection with the sale of the 1,250,000 shares. As a result, Allen & Company,
Incorporated's warrants to purchase 900,000 shares of the Company's Common Stock
referenced in paragraph (x) above became exercisable for an additional 100,000
shares of the Company's Common Stock. The warrants to purchase the additional
100,000 shares of the Company's Common Stock are exercisable through November
25, 2002, at an exercise price of $0.01 per share.
Item 16. Exhibits and Financial Statement Schedules.
-------------------------------------------
The following is a list of all exhibits filed as part of this Registration
Statement or, as noted, incorporated by reference to this Registration
Statement:
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
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.,
incorporated by reference to the Company's Registration Statement
No. 333-7779.
3.1 Restated Articles of Incorporation + Amendments dated September
25, 1976, 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 +
Amendments dated April 21, 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.
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<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
3.3 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated April 12, 1994, incorporated by reference to
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
3.4 Articles of Amendment to the Restated Articles of Incorporation +
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 +
Amendments dated July 17, 1996, incorporated by reference to the
Company's Registration Statement No. 333-7779.
3.6 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated November 25, 1997, incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K dated
October 31, 1997.
3.7 Bylaws, as amended through October 31, 1997, incorporated by
reference to Exhibit 3(ii) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
5.1 Opinion of Smith McCullough, P.C. on legality of shares of Common
Stock.*
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.
II-12
<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
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) incorpo-
rated 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 Form 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 Form 10-K for the fiscal year ended November 30,
1995.
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 the Company's
Registration Statement No. 333-7779.
10.11 Promissory Notes and Modifications of Promissory 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, incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1996.
10.13 Severance Agreement dated February 12, 1997 between the Company
and Paul V. Hoovler, incorporated by reference to Exhibit 10.13
to the Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1996.
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<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.14 Severance Agreement dated February 12, 1997 between the Company
and Matthew R. Hoovler, incorporated by reference to Exhibit
10.14 to the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1996.
10.15 Purchase and Sale Agreement effective January 1, 1997 between the
Company and Conoco Inc., incorporated by reference to Exhibit
10.15 to the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1996.
10.16 Amendments to Chaparral Resources, Inc. Stock Warrant Plan,
incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the fiscal year ended November 30,
1996.
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, incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on Form
10-K for the fiscal year ended November 30, 1996.
10.18 License for the Right to Use the Subsurface in the Republic of
Kazakhstan, incorporated by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1996.
10.19 Amendment dated April 14, 1997 to Purchase Agreement dated
effective January 12, 1996, between the Company and Guntekin
Koksal, incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
February 28, 1997.
10.20 Subscription Agreement dated April 22, 1997 between Chaparral
Resources, Inc. and Victory Ventures LLC, incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
10.21 Warrant Certificate dated December 31, 1997 entitling Victory
Ventures LLC to purchase up to 4,615,385 shares of Common Stock
of Chaparral Resources, Inc., incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997.
II-14
<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.22 Form of Warrant issued to Black Diamond Partners LP, Clint D.
Carlson, John A. Schneider, Victory Ventures LLC, Whittier Energy
Company and Whittier Ventures LLC in connection with loans made
by them to Chaparral Resources, Inc. in November and December
1996 and to Black Diamond Partners LP, Clint D. Carlson, Wittier
Energy Company and Whittier Ventures LLC in July 1997 in
connection with the same loans, incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997.
10.23 Chaparral Resources, Inc. 1997 Incentive Stock Plan, incorporated
by reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
10.24 Chaparral Resources, Inc. 1997 Nonemployee Directors' Stock
Option, incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
10.25 Amendment to Common Stock Purchase Warrant dated December 31,
1997 entitling Victory Ventures LLC to purchase up to 4,615,385
shares of Common Stock of Chaparral Resources, Inc., incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10.26 Amendment dated September 11, 1997, to License for Right to Use
the Subsurface in the Republic of Kazakhstan, incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10.27 Warrant Certificate entitling Allen & Company Incorporated to
purchase up to 900,000 shares of Common Stock of Chaparral Re-
sources, Inc., incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K/A dated October 31, 1997.
10.28 Form of Subscription Agreement dated November 21, 1997,
incorporated by reference to Exhibit 10.19 to the Company's
Current Report on Form 8-K dated October 31, 1997.
10.29 Letter dated February 4, 1998, from the Company to Michael B.
Young, incorporated by reference to Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
II-15
<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.30 Release and Understanding with H. Guntekin Koksal, incorporated
by reference to Exhibit 10.30 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
10.31 Termination Agreement dated March 6, 1998 with Exeter Finance
Group, incorporated by reference to Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
10.32 Agreement dated March 7, 1998, with Munay-Implex, incorporated by
reference to Exhibit 10.32 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
10.33 Agreement dated March 31, 1998, effective as of November 4, 1997,
between the Company and Allen & Company Incorporated, incorporat-
ed by reference to Exhibit 10.33 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.
10.34 Subscription Agreement dated April 1, 1998 between the Company
and Network Fund III, Ltd., incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K dated April 3,
1998.
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 Subsidiaries of the Registrant, incorporated by reference to
Exhibit 21 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
23.1 Consent of Ernst & Young LLP.*
23.2 Consent of Ernst & Young Kazakhstan.*
23.3 Consent of Grant Thornton LLP.*
23.4 Consent of Smith McCullough, P.C. (included in Exhibit 5.1).*
24 Powers of Attorney.*
27 Financial Data Schedule (Not required).
- -----------------
* Filed as an Exhibit to this Registration Statement.
II-16
<PAGE>
Item 17. Undertakings
------------
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1993;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change in such information in the registration statement.
(2) That for purposes of determining liability under the Securities Act of
1933, each such post-effective amendment shall be deemed a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas
on April 28, 1998.
CHAPARRAL RESOURCES, INC.
By: /s/ Howard Karren
------------------------------------
Howard Karren, President and
Chief Executive Officer
By: /s/ Arlo G. Sorensen
------------------------------------
Arlo G. Sorensen, Chief Financial
Officer and Principal Accounting
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/Alan D. Berlin*
- -----------------------------------
Alan D. Berlin Director April 28, 1998
/s/Walter A. Carozza*
- -----------------------------------
Walter A. Carozza Director April 28, 1998
/s/Ted Collins, Jr.*
- -----------------------------------
Ted Collins, Jr. Director April 28, 1998
/s/David A. Dahl*
- -----------------------------------
David A. Dahl Director April 28, 1998
/s/Peter G. Dilling*
- -----------------------------------
Peter G. Dilling Director April 28, 1998
/s/Howard Karren
- -----------------------------------
Howard Karren Director April 28, 1998
/s/John G. McMillian*
- -----------------------------------
John G. McMillian Director April 28, 1998
/s/Michael J. Muckleroy*
- -----------------------------------
Michael J. Muckleroy Director April 28, 1998
/s/Arlo G. Sorensen
- -----------------------------------
Arlo G. Sorensen Director April 28, 1998
*By/s/Howard Karren
- -----------------------------------
Howard Karren, Attorney-in-Fact April 28, 1998
II-18
<PAGE>
EXHIBIT INDEX
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
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.,
incorporated by reference to the Company's Registration Statement
No. 333-7779.
3.1 Restated Articles of Incorporation + Amendments dated September
25, 1976, 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 +
Amendments dated April 21, 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.
II-11
<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
3.3 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated April 12, 1994, incorporated by reference to
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
3.4 Articles of Amendment to the Restated Articles of Incorporation +
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 +
Amendments dated July 17, 1996, incorporated by reference to the
Company's Registration Statement No. 333-7779.
3.6 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated November 25, 1997, incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K dated
October 31, 1997.
3.7 Bylaws, as amended through October 31, 1997, incorporated by
reference to Exhibit 3(ii) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
5.1 Opinion of Smith McCullough, P.C. on legality of shares of Common
Stock.*
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.
II-12
<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
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) incorpo-
rated 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 Form 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 Form 10-K for the fiscal year ended November 30,
1995.
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 the Company's
Registration Statement No. 333-7779.
10.11 Promissory Notes and Modifications of Promissory 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, incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1996.
10.13 Severance Agreement dated February 12, 1997 between the Company
and Paul V. Hoovler, incorporated by reference to Exhibit 10.13
to the Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1996.
II-13
<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.14 Severance Agreement dated February 12, 1997 between the Company
and Matthew R. Hoovler, incorporated by reference to Exhibit
10.14 to the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1996.
10.15 Purchase and Sale Agreement effective January 1, 1997 between the
Company and Conoco Inc., incorporated by reference to Exhibit
10.15 to the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1996.
10.16 Amendments to Chaparral Resources, Inc. Stock Warrant Plan,
incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the fiscal year ended November 30,
1996.
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, incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on Form
10-K for the fiscal year ended November 30, 1996.
10.18 License for the Right to Use the Subsurface in the Republic of
Kazakhstan, incorporated by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1996.
10.19 Amendment dated April 14, 1997 to Purchase Agreement dated
effective January 12, 1996, between the Company and Guntekin
Koksal, incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
February 28, 1997.
10.20 Subscription Agreement dated April 22, 1997 between Chaparral
Resources, Inc. and Victory Ventures LLC, incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
10.21 Warrant Certificate dated December 31, 1997 entitling Victory
Ventures LLC to purchase up to 4,615,385 shares of Common Stock
of Chaparral Resources, Inc., incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997.
II-14
<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.22 Form of Warrant issued to Black Diamond Partners LP, Clint D.
Carlson, John A. Schneider, Victory Ventures LLC, Whittier Energy
Company and Whittier Ventures LLC in connection with loans made
by them to Chaparral Resources, Inc. in November and December
1996 and to Black Diamond Partners LP, Clint D. Carlson, Wittier
Energy Company and Whittier Ventures LLC in July 1997 in
connection with the same loans, incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997.
10.23 Chaparral Resources, Inc. 1997 Incentive Stock Plan, incorporated
by reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
10.24 Chaparral Resources, Inc. 1997 Nonemployee Directors' Stock
Option, incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
10.25 Amendment to Common Stock Purchase Warrant dated December 31,
1997 entitling Victory Ventures LLC to purchase up to 4,615,385
shares of Common Stock of Chaparral Resources, Inc., incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10.26 Amendment dated September 11, 1997, to License for Right to Use
the Subsurface in the Republic of Kazakhstan, incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10.27 Warrant Certificate entitling Allen & Company Incorporated to
purchase up to 900,000 shares of Common Stock of Chaparral Re-
sources, Inc., incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K/A dated October 31, 1997.
10.28 Form of Subscription Agreement dated November 21, 1997,
incorporated by reference to Exhibit 10.19 to the Company's
Current Report on Form 8-K dated October 31, 1997.
10.29 Letter dated February 4, 1998, from the Company to Michael B.
Young, incorporated by reference to Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
II-15
<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.30 Release and Understanding with H. Guntekin Koksal, incorporated
by reference to Exhibit 10.30 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
10.31 Termination Agreement dated March 6, 1998 with Exeter Finance
Group, incorporated by reference to Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
10.32 Agreement dated March 7, 1998, with Munay-Implex, incorporated by
reference to Exhibit 10.32 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
10.33 Agreement dated March 31, 1998, effective as of November 4, 1997,
between the Company and Allen & Company Incorporated, incorporat-
ed by reference to Exhibit 10.33 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.
10.34 Subscription Agreement dated April 1, 1998 between the Company
and Network Fund III, Ltd., incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K dated April 3,
1998.
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 Subsidiaries of the Registrant, incorporated by reference to
Exhibit 21 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
23.1 Consent of Ernst & Young LLP.*
23.2 Consent of Ernst & Young Kazakhstan.*
23.3 Consent of Grant Thornton LLP.*
23.4 Consent of Smith McCullough, P.C. (included in Exhibit 5.1).*
24 Powers of Attorney.*
27 Financial Data Schedule (Not required)
- ---------------------
* Filed as an Exhibit to this Registration Statement.
II-16
EXHIBIT 5.1
April 27, 1998
Chaparral Resources, Inc.
2211 Norfolk, Suite 1150
Houston, Texas 77098
Gentlemen:
You have requested our opinion as to certain matters under the Colorado
Business Corporation Act that relate to the 11,969,174 issued and outstanding
shares of $0.10 par value common stock ("Common Stock") of Chaparral Resources,
Inc. ("Company"), the 3,330,720 shares of Common Stock issuable upon exercise of
outstanding warrants ("Warrants") of the Company and the 2,222,222 shares of
Common Stock issuable upon conversion of the Company's outstanding Series A
Preferred Stock ("Preferred Stock"), all of which are described on the cover
page of the Registration Statement on Form S-1 that the Company plans to file
with the United States Securities and Exchange Commission.
We have reviewed the Restated Articles of Incorporation + Amendments, as
amended, of the Company, the minutes of the meetings of the board of directors
and of the shareholders of the Company and such other documents we considered
necessary in order to render this opinion. As a result of our review, we are of
the opinion that the 11,969,174 shares of outstanding Common Stock of the
Company being registered are validly issued, fully paid and nonassessable under
the Colorado Business Corporation Act and that, assuming the exercise price of
the Warrants is paid for upon the exercise thereof, the 3,330,720 shares of
Common Stock underlying the Warrants, when issued, will be validly issued, fully
paid and nonassessable under the Colorado Business Corporation Act, and that,
assuming conversion of the Preferred Stock, the 2,222,220 shares of Common Stock
underlying the Preferred Stock, when issued, will be validly issued, fully paid
and nonassessable under the Colorado Business Corporation Act.
This opinion is limited to the applicability of the Colorado Business
Corporation Act to the shares of Common Stock. This opinion does not cover or in
any way relate to the applicability of, or compliance by the Company with, any
other law, including any federal or state securities laws, any state common law,
or any other federal law.
We consent to you describing this firm as having issued this opinion in the
Prospectus which is a part of the Registration Statement referenced above.
SMITH McCULLOUGH, P.C.
EXHIBIT 23.1
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 13, 1998 (except Note 15, as to which the date
is April 3, 1998) in the Registration Statement (Form S-1 No. 33-00000) and the
related Prospectus of Chaparral Resources, Inc. for the registration of
17,522,116 shares of its common stock.
/s/Ernst & Young, LLP
Houston, Texas
April 27, 1998
EXHIBIT 23.2
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 13, 1998 on the financial statements of
Karakuduk-Munay, Inc. in the Registration Statement (Form S-1 No. 33-00000) and
the related Prospectus of Chaparral Resources, Inc. for the registration of
17,522,116 shares of its common stock.
/s/Ernst & Young--Kazakhstan
Almaty, Kazakhstan
April 24, 1998
EXHIBIT 23.3
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 19, 1996 in the Registration Statement (Form
S-1 No. 33-00000) and the related Prospectus of Chaparral Resources, Inc. for
the registration of 17,522,116 shares of its common stock.
/s/Grant Thornton LLP
Denver, Colorado
April 27, 1998
POWER OF ATTORNEY
The person whose signature appears below constitutes and appoints Howard
Karren his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him in his name, place and stead, in his
capacity as an officer, director, or both of Chaparral Resources, Inc., a
Colorado corporation ("Company"), to sign the Company's Registration Statement
on Form S-1, and any and all amendments thereto (including post-effective
amendments), and to file the same with the United States Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact or agent or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Dated: April 15, 1998
/s/ Alan D. Berlin
-----------------------------------
Alan D. Berlin
<PAGE>
POWER OF ATTORNEY
The person whose signature appears below constitutes and appoints Howard
Karren his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him in his name, place and stead, in his
capacity as an officer, director, or both of Chaparral Resources, Inc., a
Colorado corporation ("Company"), to sign the Company's Registration Statement
on Form S-1, and any and all amendments thereto (including post-effective
amendments), and to file the same with the United States Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact or agent or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Date: April 15, 1998
/s/ Walter A. Carozza
-----------------------------------
Walter A. Carozza
<PAGE>
POWER OF ATTORNEY
The person whose signature appears below constitutes and appoints Howard
Karren his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him in his name, place and stead, in his
capacity as an officer, director, or both of Chaparral Resources, Inc., a
Colorado corporation ("Company"), to sign the Company's Registration Statement
on Form S-1, and any and all amendments thereto (including post-effective
amendments), and to file the same with the United States Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact or agent or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Date: April 13, 1998
/s/ Ted Collins, Jr.
-------------------------------------
Ted Collins, Jr.
<PAGE>
POWER OF ATTORNEY
The person whose signature appears below constitutes and appoints Howard
Karren his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him in his name, place and stead, in his
capacity as an officer, director, or both of Chaparral Resources, Inc., a
Colorado corporation ("Company"), to sign the Company's Registration Statement
on Form S-1, and any and all amendments thereto (including post-effective
amendments), and to file the same with the United States Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact or agent or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Date: April 9, 1998
/s/ David A. Dahl
---------------------------------------
David A. Dahl
<PAGE>
POWER OF ATTORNEY
The person whose signature appears below constitutes and appoints Howard
Karren his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him in his name, place and stead, in his
capacity as an officer, director, or both of Chaparral Resources, Inc., a
Colorado corporation ("Company"), to sign the Company's Registration Statement
on Form S-1, and any and all amendments thereto (including post-effective
amendments), and to file the same with the United States Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact or agent or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Date: April 15th, 1998
/s/ Peter G. Dilling
------------------------------------
Peter G. Dilling
<PAGE>
POWER OF ATTORNEY
The person whose signature appears below constitutes and appoints Howard
Karren his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him in his name, place and stead, in his
capacity as an officer, director, or both of Chaparral Resources, Inc., a
Colorado corporation ("Company"), to sign the Company's Registration Statement
on Form S-1, and any and all amendments thereto (including post-effective
amendments), and to file the same with the United States Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact or agent or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Date: April 14, 1998
/s/ John G. McMillian
----------------------------------
John G. McMillian
<PAGE>
POWER OF ATTORNEY
The person whose signature appears below constitutes and appoints Howard
Karren his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him in his name, place and stead, in his
capacity as an officer, director, or both of Chaparral Resources, Inc., a
Colorado corporation ("Company"), to sign the Company's Registration Statement
on Form S-1, and any and all amendments thereto (including post-effective
amendments), and to file the same with the United States Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact or agent or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Date: April 9, 1998
/s/ Michael J. Muckleroy
-------------------------------------
Michael J. Muckleroy
<PAGE>
POWER OF ATTORNEY
The person whose signature appears below constitutes and appoints Howard
Karren his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him in his name, place and stead, in his
capacity as an officer, director, or both of Chaparral Resources, Inc., a
Colorado corporation ("Company"), to sign the Company's Registration Statement
on Form S-1, and any and all amendments thereto (including post-effective
amendments), and to file the same with the United States Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact or agent or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Date: April 14, 1998
/s/ Arlo G. Sorensen
-------------------------------------
Arlo G. Sorensen
