As Filed with the Securities and Exchange Commission on September 22, 1998.
Registration No. 333-51327
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM S-3
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
CHAPARRAL RESOURCES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
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, (Name, address, including zip
and telephone number, including area code, and telephone number,
ode, of registrant's principal executive including area code, of agent
offices) for service)
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 the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
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, other than securities offered only in connection with dividend or interest
reimbursement plans, 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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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(1) Per Share Offering Price Fee
- - --------------------------- ------------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Common Stock ....................... 11,969,174 Shares(2) $ 2.03125(6) $ 24,312,385 $ 7,172.15(6)
Common Stock ....................... 7,083,334 Shares(2) $ 1.3125(5) $ 9,296,876 $ 2,742.58(5)
Common Stock Underlying Warrants.... 3,330,720 Shares(3) $ 2.03125(6) $ 6,765,525 $ 1,995.83(6)
Common Stock Underlying Convertible
Preferred Stock .................. 2,222,222 Shares(4) $ 2.03125(6) $ 4,513,889 $ 1,331.60(6)
Total 24,605,450 Shares XXX XXX $13,242.16(7)
========================================================================================================================
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(1) 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.
(2) The 11,969,174 shares and 7,083,334 shares consist of shares of Common
Stock previously issued in private placements or upon exercise of warrants
issued in private placements.
(3) Registered for resale upon exercise of outstanding Warrants.
(4) Registered for resale upon conversion of outstanding Series A Preferred
Stock.
(5) The registration fee that is being paid herewith 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 SmallCap
Market on September 17, 1998.
(6) These registration fees were paid by the Registrant upon filing of this
Registration Statement on Form S-1 on July 8, 1998. The Registrant paid a
registration fee of $7,172.15 for the registration of 11,969,174 shares of
Common Stock, a registration fee of $1,995.83 for the registration of
3,330,720 shares of Common Stock Underlying Warrants and a registration fee
of $1,331.60 for the registration of 2,222,222 shares of Common Stock
Underlying Convertible Preferred Stock.
(7) $10,499.50 of this registration fee was paid by the Registrant upon filing
of this Registration Statement on Form S-1 on July 8, 1998.
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-3 Item Number Caption or Location in Prospectus
- - ------ -------------------- ---------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Front of Registration Statement and
Outside Front Cover of Prospectus Outside 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. Material Changes Not Applicable
12. Experts Experts
13. Incorporation of Certain Information by Reference Incorporation of Certain Information by Reference
14. Disclosure of Commission Position on Description of Securities
Indemnification for Securities Act Liabilities
iii
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<PAGE>
PROSPECTUS
CHAPARRAL RESOURCES, INC.
24,605,450 Shares of Common Stock
This Prospectus describes the offer for resale by the holders (the "Selling
Securityholders") of up to 24,605,450 shares of the $0.10 par value common stock
("Common Stock") of Chaparral Resources, Inc. ("Us" or "We"). 19,052,508 of
these shares offered for resale are currently issued and outstanding, 3,330,720
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") into shares of Common
Stock. We have issued or will be issuing, in private transactions, the shares of
Common Stock offered by the Selling Securityholders for resale and the shares of
Common Stock issuable upon exercise of the Warrants and upon conversion of the
Preferred Stock. See "Plan of Distribution" and "Selling Securityholders."
We 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, we will receive proceeds of approximately $614,635. We
do not know if any or all of the Warrants will be exercised, but the holders of
the Warrants will have to exercise the Warrants in order to publicly sell the
underlying shares of Common Stock that are offered for resale in this
Prospectus.
The Common Stock is quoted for trading on the Nasdaq SmallCap Market under
the symbol "CHAR."
For information concerning certain factors which should be considered by
purchasers of the Common Stock offered hereby, see "Risk Factors" commencing on
page 4 of this Prospectus.
Neither the Securities and Exchange Commission ("Commission") nor any state
securities commission has approved or disapproved of these securities or passed
upon the adequacy or accuracy of this prospectus. Any representation to the
contrary is a criminal offense.
The date of this Prospectus is ___________, 1998
<PAGE>
PROSPECTUS SUMMARY
This entire summary is qualified by the more detailed information and
financial statements and related notes incorporated by reference into, or
appearing elsewhere in, this Prospectus.
Chaparral Resources, Inc.
We were incorporated under the laws of the state of Colorado in 1972. We
are an independent oil and gas exploration and production company. We were based
in Denver, Colorado, until March 1, 1997, when we moved our headquarters to
Houston, Texas.
We began by producing and selling crude oil and natural gas to oil and gas
purchasers in the Rocky Mountain and Western states of the United States. During
early 1994, we made a strategic decision to pursue international oil projects
and began exploration in the Commonwealth of Independent States (part of the
former Soviet Union). In early 1997, we sold all of our remaining oil properties
in the United States. Our strategy is to obtain development rights to oil fields
located outside the United States where oil has been discovered by other
companies and our tests indicate oil reserves remain underground, but the fields
have either never been placed on production or we believe that we could enhance
production with our management and technical experience. We acquired an interest
in the Karakuduk Oil Field Project ("Karakuduk Field" or "Karakuduk Project")
described below as the first oil field acquired under our new corporate
strategy.
We have 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. The Karakuduk Field is a 16,900 acre oil field in the Republic
of Kazakhstan. The government of the former Soviet Union discovered the
Karakuduk Field in 1972 and drilled 22 exploratory and development wells. These
wells were not produced commercially. In December 1997, KKM delivered oil from
the first well that KKM had reentered in the Karakuduk Field. We plan to further
develop and commercially produce the oil reserves in the Karakuduk Field.
Our address is 2211 Norfolk, Suite 1150, Houston, Texas 77098. Our
telephone number is (713) 807-7100.
ORGANIZATIONAL CHART
This page contains a chart setting forth the relationship between Chaparral
Resources, Inc. and the companies that we own, or, in other words, our
subsidiaries. The following is a description of the chart:
At the top, or first level, of the chart is a box containing our name
"Chaparral Resources, Inc." This box contains a footnote which reads:
"Chaparral Resources, Inc. was incorporated in Colorado in 1972 and our
current strategy is to obtain development rights to, and develop our
existing, oil and gas fields located outside of the United States."
Dropping down from the box on the first level are lines connected to three
boxes on the second level and one box on the third level. The boxes on the
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second level represent our wholly-owned subsidiaries. The first of the
three boxes on the second level contains the name "Road Runner Service
Company, Inc." This box has a line dropping down from it, with the word
"services" on it, to the fourth level to a box containing the name
"Karakuduk-Munay, Inc." This first box on the second level also contains a
footnote which reads: "Road Runner Service Company, Inc. was incorporated
in Colorado and provides personnel services to Karakuduk-Munay, Inc. in
Kazakhstan." The second box on the second level contains the name "Central
Asian Petroleum (Delaware), Inc." This box has a line with the figure "20%"
on it dropping down from it to the third level to a box containing the name
"Central Asian Petroleum (Guernsey) Limited." Additionally, this second box
on the second level contains a footnote which reads: "Central Asian
Petroleum (Delaware), Inc. was incorporated in Delaware and owns 20% of
Central Asian Petroleum (Guernsey) Limited." The third box on the second
level contains the name "Chaparral Acquisition Corp." with a footnote,
which reads: "Chaparral Acquisition Corp. was incorporated in Delaware and
has no operations." On the third level is the box with a line dropping into
it from the first level box with the figure "80%" on it and a line with the
figure "50%" on it dropping down to the box on the fourth level containing
the name "Karakuduk-Munay, Inc." The box on the third level contains a
footnote which reads: "Central Asian Petroleum (Guernsey) Limited was
incorporated on the Isle of Guernsey, is 80% owned by us and 20% owned by
our subsidiary Central Asian Petroleum (Delaware), Inc. Central Asian
Petroleum (Guernsey) Limited owns 50% of Karakuduk-Munay, Inc." On the
fourth level is a box which contains the name "Karakuduk-Munay, Inc." This
box, in addition to the line dropping down to it from the third level,
contains two lines extending from it in a lateral direction, one with the
figure "40%" on it and one with the figure "10%" on it. The box on the
fourth level contains a footnote which reads: "Karakuduk-Munay, Inc. is a
Kazakhstan joint stock company which holds a governmental license to
develop the Karakuduk Field." The first lateral box on the fourth level,
with the figure "40%" on its line, contains the name "KazakhOil" and a
footnote, which reads: "This is the national petroleum company for
Kazakhstan, which owns 40% of Karakuduk-Munay, Inc." The second lateral box
on the fourth level, with the figure "10%" on its line, contains the name
"Korporatsiya Mangistau Terra International" and contains a footnote, which
reads "Korporatsiya Mangistau Terra International is a Kazakhstan joint
stock company and owns 10% of Karakuduk-Munay, Inc."
3
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<TABLE>
<CAPTION>
The Offering
<S> <C>
Common Stock Outstanding Before the Offering..................... 58,298,790 shares which do not include
30,000 shares granted subject to vesting
requirements.
Total Possible Shares of Common Stock
Outstanding After the Offering................................... 63,851,732 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
63,851,732 shares do not include any
shares issuable upon the exercise of
outstanding options.
Use of Proceeds ................................................. We will use the proceeds from any exercise
of Warrants for general corporate purposes.
Securities Being Offered for Resale by Selling
Securityholders ................................................. 19,052,508 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 in this Prospectus involve a high degree of risk and
you should consider buying them only if you can afford to lose your entire
investment. See "Risk Factors."
RISK FACTORS
An investment in our Common Stock is speculative and involves a high degree
of risk. You should purchase the Common Stock only if you are sophisticated in
financial matters and business investments. You should carefully consider the
following factors, in addition to those discussed in certain documents
incorporated in this Prospectus by reference, before purchasing our Common
Stock. See "Incorporation of Certain Information by Reference."
4
</TABLE>
<PAGE>
1. Financial Condition and Possible Need for Additional Financing. We have
incurred operating losses for each of our last five fiscal years. We incurred a
net loss of approximately $2,603,000 for the fiscal year ended December 31,
1997. We also incurred a net loss of approximately $1,939,000 for the six months
ended June 30, 1998. As of June 30, 1998, we had an accumulated deficit of
$16,843,000. As of September 15, 1998, we have an outstanding loan of $975,000.
We have pledged substantially all of our assets as collateral for the loan. We
can repay the loan at any time without a prepayment penalty and remove the
security interest in our assets. As a result of such losses and other factors,
the opinion on our audited financial statements for the fiscal year ended
December 31, 1997 contains an explanatory paragraph regarding our ability to
continue as a going concern.
At the end of December 1997, we first delivered oil from one well located
in the Karakuduk Field. However, the Karakuduk Field is substantially
undeveloped and we will require substantial amounts of additional capital for
further development. Under the terms of our license, through KKM, we must
establish a minimum work plan. The work plan must be carried out unless we
obtain waivers or deferrals from the licensing authority. We must provide funds
to KKM for KKM to satisfy the work plan in order to maintain our interest in the
Karakuduk Project.
In July 1998, we received approximately $10,000,000 from the sale of
6,666,669 shares of our Common Stock. With this cash investment, as of September
15, 1998, we had unrestricted cash available for operations of approximately
$6,000,000. We cannot assure you that we will have the financial resources to
meet our expected cash requirements for 1998. We will be required to raise
additional capital to finance the obligations under the license for the
Karakuduk Project and to satisfy working capital needs. We may seek to raise
additional capital through debt or equity offerings, encumbering properties or
entering into arrangements in which certain costs of exploration or development
will be paid by others to earn an interest in the properties. In part because of
substantial instability in oil prices in recent years, the present environment
for financing of small oil companies is uncertain. We cannot guarantee that the
additional debt or equity financing that might be required in the future to fund
our operations and obligations will be available to us on economically
acceptable terms. We may lose our interest in the Karakuduk Project if
sufficient funds are not available to meet our obligations with respect to the
Karakuduk Project.
2. Risks Inherent in Oil and Gas Exploration. We cannot guarantee that we
will be able to discover, develop and produce sufficient reserves in the
Karakuduk Field, or elsewhere. Further, we cannot guarantee that we will recover
the expenses incurred when we explore the Karakuduk Field or that we will
achieve profitability. The odds against discovering commercially exploitable oil
reserves are always substantial. The odds against us will be increased as a
result of the concentration of our activities in areas that have not yet been
significantly explored and where political or other unknown developments could
adversely affect commercialization. We, through KKM, will be required to perform
expensive geological and/or seismic surveys on our properties. Depending on the
results of our surveys, only subsequent drilling at substantial cost and high
risk can determine whether commercial development of the properties is feasible.
Oil drilling is frequently marked by unprofitable efforts from unproductive
wells, from productive wells which do not produce sufficient amounts of oil to
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return a profit and from developed oil reserves which cannot be marketed. We
will be subject to all of the risks normally incident to drilling for and
producing oil. These risks include blowouts, cratering, fires and accidents. Any
of the risks could result in us being liable for damages from loss of life and
property. We are not fully insured against these risks. Many of these risks are
not insurable.
3. Risks Inherent in Operations in Kazakhstan. We will be subject to
certain risks inherent in the ownership and development of properties in
Kazakhstan. The contracts that we have with the government of Kazakhstan may be
arbitrarily cancelled or forced into renegotiation. Cancellation or
renegotiation is likely to adversely affect our ability to profitably extract
oil from the Karakuduk Field. The government of Kazakhstan may impose royalty
increases, tax increases and retroactive tax claims against us. These taxes
would adversely affect our ability to profitably extract oil from the Karakuduk
Field because of increased expenses. Expropriation, import and export
regulations, environmental controls, and other laws and regulations may
adversely affect our interest in the Karakuduk Project because of increased
costs, inaccessibility or delays.
Our operations and agreements will also be governed by the laws of
Kazakhstan. We may be subject to arbitration in Kazakhstan or to the
jurisdiction of the courts of Kazakhstan. We may not be successful in subjecting
foreign persons to the jurisdiction of courts in the United States. We may be
hindered or prevented from enforcing our rights against a government agency,
instrumentality or other government entity of Kazakhstan because these entities
may consider themselves immune from the jurisdiction of any court.
Although certain members of our management have had prior experience
operating in foreign countries, we are not experienced in operating in any
foreign country, including Kazakhstan. We may encounter unexpected difficulties
in conducting foreign operations. Although we believe 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, the stability of Kazakhstan and the autonomy of the
parties involved with us in Kazakhstan.
We have obtained a commitment for political risk insurance against certain
political and commercial events. We have not yet purchased the insurance. Even
if we purchase the insurance, we cannot guarantee that the insurance will
adequately protect our endeavors in Kazakhstan.
4. Risks of Joint Ventures; Risks Associated With Indirect Investments. 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 Kazakhstan, and the terms of a joint venture
agreement between Central Asian Petroleum (Guernsey) Limited ("CAP-G") and KKM
govern the exploration and development of the Karakuduk Field. CAP-G has a 50%
interest in KKM. We own all of CAP-G. The shareholders of KKM also include
KazakhOil, the national petroleum company for the Republic of Kazakhstan, and a
private Kazakhstan joint stock company. KazakhOil holds a 40% interest in KKM
and the private Kazakh joint stock company holds the remaining 10%. The
government of Kazakhstan indirectly owns 40% of KKM through KazakhOil's direct
ownership interest. The 1995 Agreement requires KKM to borrow all of the money
required for development of the Karakuduk Field. The joint venture agreement
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requires CAP-G to loan funds to KKM, which KKM does not borrow from other
parties. The funds will be used to pay for the development of the Karakuduk
Field.
5. Requirements to Maintain License. The 1995 Agreement and the Kazakhstan
License include numerous requirements, which must be met to maintain KKM's
interest in the Karakuduk Field, including the investment of certain amounts of
funds. The 1995 Agreement is KKM's contract with Kazakhstan. It grants KKM
rights to develop the Karakuduk Field. The 1995 Agreement specifies the rights
and obligations of KKM and KKM's investors regarding the development of the
Karakuduk Field and conducting business operations in Kazakhstan. Additionally,
KKM obtained the Kazakhstan License to legally conduct petroleum activities in
the Karakuduk Field. The Kazakhstan License specifies KKM's minimum work program
and capital spending requirements regarding the Karakuduk Field. If KKM fails to
meet either the minimum work program or financial commitment requirements, KKM
may lose all rights to develop the Karakuduk Field.
The minimum work program requires KKM to drill 8 new wells and 4 workover
wells by December 31, 1999. The new wells must be between 3,250 and 3,500 meters
in depth. The field infrastructure and equipment necessary for processing and
transferring production from the initial 12 wells must also be completed by
December 31, 1999.
KKM has conducted all 4 well workovers, establishing production from 2
wells. The other two workover wells will be completed when additional field
facilities are in place. KKM has also contracted for a development drilling rig
and is expecting to begin drilling operations in October or November of 1998.
KKM does not expect any difficulty in drilling 8 new wells before December 31,
1999. Additional field facilities are either in place or in construction to
support the development and production of the wells in the first phase work
program. KKM has constructed a base camp with living quarters for 50 men,
storage facilities, processing facilities, warehouses, a repair shop, and other
related facilities. KKM has also completed a main road between the export
pipeline and the field and is clearing roads to other planned drilling
locations. KKM is constructing an 18-mile pipeline from the field to an export
pipeline. The pipeline will enable up to 12,000 barrels of oil per day to be
transferred to the export terminal. Finally, KKM is expanding the base camp to
support additional personnel required for expanded drilling and production
operations.
The Kazakhstan License requires a minimum financial commitment of
approximately $10 million by December 31, 1997, of approximately $34.5 million
by December 31, 1998 and of approximately $12 million by December 31, 1999. KKM
fulfilled the $10 million commitment as of December 31, 1997. KKM has not met
the commitments for either December 31, 1998 or December 31, 1999. KKM may not
be able to satisfy the commitment for December 31, 1998. KKM may request a
deferral of part of the commitment for 1998 until December 31, 1999. While KKM
was previously permitted to defer the original financial commitments under the
License, there is no assurance that KKM will receive permission for any future
deferrals. If KKM is unable to satisfy its commitment and is unable to obtain a
deferral, KKM likely would lose the Kazakhstan license.
7
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6. Competition. Foreign oil and gas exploration and the acquisition of
producing and undeveloped properties is a highly competitive and speculative
business. We compete in all areas of the oil and gas industry with a number of
other companies. These companies include large multi-national oil and gas
companies and other independent operators which might have greater financial
resources and more experience than us. We do not hold a significant competitive
position in the oil and gas industry.
The Commonwealth of Independent States ("CIS") is currently a primary focal
point of the oil and gas industry for exploration and development activities. We
compete with both major oil and gas companies and independent producers for
rights to develop available oil and gas properties, access to limited pipeline
capacity, procurement of available materials and resources, and hiring qualified
international and local personnel.
7. Unstable Market Prices. We are uncertain about the prices at which we
can sell any oil produced by us. 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 on numerous factors beyond our control. Domestic
markets in Kazakhstan might not mirror world market prices. The current market
for oil is characterized by instability. This instability has caused
fluctuations in world oil prices in recent years. There can be no assurance of
any price stability.
If we produce oil in the future, our estimated future net revenue will be
highly dependent on the price of oil. The energy market makes it difficult to
estimate future prices of oil. Various factors beyond our control affect prices
of oil, including worldwide and domestic supplies of, and demand for, oil, the
ability of the members of the Organization of Petroleum Exporting Countries to
agree to and maintain oil price and production controls, political instability
or armed conflict in oil-producing regions, the price of foreign 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. This may adversely affect our business.
8. Limited Transportation Routes. Our ability to maximize the value of our
assets depends on our ability to extract and transport oil and find appropriate
markets for its sale. Exports from Kazakhstan depend on limited transportation
routes and, in particular, access to the Russian pipeline system. We believe,
however, that over the life of the Karakuduk Project, these transportation
restrictions will be eased. If so, we may be able to export oil less expensively
and maximize the value of our assets. KKM has entered into a tentative agreement
with the entity that operates the KazTrans Oil pipeline to enter into a contract
to provide KKM access to the pipeline. This access will allow KKM to export oil
to markets outside of Kazakhstan. On March 7, 1998, KKM also entered into a
contract ("Munay-Impex Contract") with the export-import firm of Munay-Impex, a
subsidiary of Kazakh Oil, to export up to 100,000 tons of crude oil produced by
KKM to both the Commonwealth of Independent States and other countries 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 five to 10 thousand metric tons.
8
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KKM anticipates that production facilities will be completed during the
fourth quarter of 1998. The production 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 KazTrans Oil pipeline. Production entered
into the pipeline is considered inventory of KKM until the five to 10 thousand
metric ton minimum volume requirement has been met. Then the production will be
sold under the terms of the Munay-Implex Contract. KKM expects to record
revenues from the sale of crude oil only when KKM places the minimum of 5,000
tons of oil production in the pipeline. We believe this will occur by the end of
the third quarter of 1998.
9. No Proven Reserves. Estimated quantities of our proven 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 the sale of
certain producing properties and the abandonment of other properties which
produced oil at uneconomic rates. The present value of our proven reserves
decreased 100% as of November 30, 1996, as compared to the end of the previous
fiscal year, due to the sale and abandonment of proven reserves. We currently
claim no proven reserves. We currently have production from the J-1 Lower sand.
We will transfer the reserves to proved developed and proved undeveloped when we
have the necessary field facilities and associated transportation pipeline to
allow sustained commercial production. We expect to be able to obtain an updated
reserve report for the Karakuduk Field in late 1998 or early 1999.
10. Government Regulation and Environmental Risks. Our operations may be
subject to regulation by governments or other regulatory bodies governing the
area in which our overseas operations are located. Regulations govern such
things as drilling permits, production rates, environmental protection and
pollution control, royalty rates and taxation rates. Drilling permits could be
difficult to obtain or prohibitably expensive. Production rates could be set so
low that they would make production unprofitable. Environmental protection and
pollution control could be so restrictive as to make production unprofitable.
Royalty and taxation rates could be set so high as to make production
unprofitable. These regulations may substantially increase the costs of doing
business and may prevent or delay the starting or continuation of any given
exploration or development project. 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 us in particular. It is
impossible to predict the effect any current or future proposals or changes in
existing laws or regulations will have on our operations. We believe that we are
in compliance with all applicable legislation and regulations in all material
respects.
Based on a study undertaken on our behalf by an unaffiliated party, we do
not believe that our business operations presently create any environmental
liabilities. However, compliance with foreign laws and regulations which
regulate the discharge of materials into the environment could have an adverse
effect on us. We cannot assess the extent of any such effect. We have not made
any material capital expenditures for environmental control facilities and have
no plans to do so.
11. Dependence On Management. We depend on the expertise and abilities of
our current officers. The loss of the services of any one of our officers could
adversely affect our business until a replacement could be found. We do not hold
life insurance policies on our officers.
9
<PAGE>
12. Currency Risks. KKM's Kazakhstan License for the Karakuduk Field
includes the right to export the oil that it produces and to establish and
maintain bank accounts in dollars or other foreign currency of Kazakhstan. The
1995 Agreement allows KKM to maintain it's books and records in U.S. dollars. It
requires local Kazakh taxes be reported in Tenge, the local Kazakh currency.
KKM's functional currency is the U.S. dollar. Due to current limited production
from the Karakuduk Field, KKM plans to sell all of the oil that it produces in
1998 to Munay-Impex, a subsidiary of KazakhOil. KKM will receive payment for oil
sold under the Munay-Impex contract in Tenge. Because Kazakh law prohibits the
export of Tenge, all of the current proceeds will be used for the payment of
local costs and expenses. When the volume of production of oil increases, we
expect that the oil will be exported and sold outside of Kazakhstan and payment
will be in U.S. dollars. The U.S. dollars will be deposited in bank accounts
established outside Kazakhstan. We expect the majority of KKM's transactions
will be in U.S. dollars.
13. Taxes. KKM is subject to various taxes in Kazakhstan, including, but
not limited to, income tax, value added tax, customs duties, excise taxes,
property taxes, payroll taxes, and excess profits tax. Payments made by KKM to
us or our subsidiaries may also be subject to additional withholding tax
depending upon the type of payment and the country of incorporation of the
entity which receives the payment. We and our subsidiaries (other than CAP-G)
are incorporated in the United States and enjoy all tax benefits provided by the
tax treaty between the United States and Kazakhstan. CAP-G is incorporated in
the Isle of Guernsey. The Isle of Guernsey does not have a tax treaty with
Kazakhstan. Payments of interest and dividends to a non-resident are subject to
a 15% withholding tax. Under the 1995 Agreement, interest payments made by KKM
to CAP-G are not subject to withholding tax. Any dividends paid by KKM to CAP-G
are currently subject to a withholding tax rate of 15%. We do not expect KKM to
pay any income tax in Kazakhstan nor to declare any dividends for the benefit of
its shareholders in the foreseeable future.
14. No Dividends. We have paid no cash dividends on our Common Stock. We do
not anticipate paying any dividends on our Common Stock in the foreseeable
future. Our decision whether to pay future dividends will depend on our
earnings, if any, dividend payments that we will have to make on any outstanding
preferred stock and our other financial requirements.
15. Possible Ownership Interest Dilution. As of September 15, 1998, we had
outstanding warrants and options entitling the holders to purchase a total of
4,634,500 and 3,456,000 shares of our Common Stock, respectively. The exercise
prices of the outstanding warrants and options currently range from less than
$0.01 per share to $3.50 per share. The holders of the outstanding warrants and
options might have the opportunity to profit from a rise in the market price (of
which there is no assurance) of the shares of our Common Stock underlying the
warrants and options. Also, the exercise of such warrants and options may dilute
the ownership interest in us 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 affect the market price for the Common Stock.
16. Required Redemption of Preferred Stock. We currently have outstanding
50,000 shares of our Series A Preferred Stock which have a liquidation
preference over the Common Stock of $5,000,000. Further, the holders of shares
10
<PAGE>
of the Series A Preferred Stock may convert them into shares of Common Stock at
any time. 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 holders of shares of the Series A Preferred Stock are entitled to
receive cumulative dividends at the annual rate of $5.00 per share and may
redeem their shares for $100.00 per share plus any unpaid dividends.
After November 30, 2002, we must 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 before the
scheduled redemption date. We have the right to redeem all or any portion of any
shares of Series A Preferred Stock before any mandatory redemption.
Each holder of shares of Series A Preferred Stock is entitled to the same
number of votes on any matter as the largest number of full shares of Common
Stock into which all shares of the holder's Series A Preferred Stock are
convertible.
The shares of Common Stock that are underlying the Series A Preferred Stock
are registered for resale. The holders of the outstanding Series A Preferred
Stock have the opportunity to profit from a rise in the market price of the
shares of Common Stock into which the shares of the Series A Preferred Stock are
convertible. The Series A Preferred Stock conversion may dilute the ownership
interest in us held by other shareholders of the Common Stock. 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.
17. Additional Preferred Stock. Our 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 our preferred stock, when and if issued. The rights and preferences could
include preferences as to liquidation, redemption and conversion rights, voting
rights, dividends or other preferences, any of which may dilute the issued and
outstanding 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 the stock, including the dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption and other
terms and conditions, could make it more difficult for a person to engage in, or
discourage a person from engaging in, a change in control transaction without
cooperation of our management.
18. Risks Associated With Forward Looking Statements. This Prospectus, and
the documents incorporated in this Prospectus by reference, contain certain
forward looking statements within the meaning of Private Securities Litigation
Reform Act of 1995. We intend that such forward looking statements be subject to
the safe harbors provided under this act. Our forward looking statements include
our plans and objectives for future operations, including plans and objectives
11
<PAGE>
relating to the Karakuduk Project and our future performance. The forward
looking statements and associated risks described in this Prospectus and the
documents incorporated by reference include or relate to (i) our success in
developing, producing and selling expected reserves of oil in the Karakuduk
Field, (ii) our success in raising required financing to meet the funding
obligations of KKM, (iii) our success in producing and marketing proven oil and
natural gas reserves and (iv) our success in improving our overall financial
operating results.
The forward looking statements in this Prospectus are based on current
expectations that involve a number of risks and uncertainties. These forward
looking statements are based on assumptions that we 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 our
operations or business. These assumptions are based on our judgment with respect
to, among other things, oil and natural gas reserve information available to us,
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 our control. Accordingly, although we believe 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 our business and operations which
could cause our 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 we must periodically
revise our decisions to reflect actual conditions and business developments. The
impact of these decisions may cause us to alter our capital investment and other
expenditures, which may also adversely affect our results of operations. In
light of significant uncertainties inherent in forward looking information, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives or plans will be achieved.
USE OF PROCEEDS
We intend to use the net proceeds, if any, from exercise of the Warrants
for general corporate purposes. It is uncertain when, if ever, we will receive
proceeds from exercise of the Warrants. See "Selling Securityholders,"
"Description of Securities" and "Plan of Distribution."
SELLING SECURITYHOLDERS
The following table sets forth certain information regarding the shares of
Common Stock beneficially owned as of September 15, 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 us 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
12
<PAGE>
the Selling Securityholder after completion of the offering (assuming the
Selling Securityholder sells 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
Owned Shares Percent of
Prior to Being Shares Owned Shares Owned
Name Offering Offered After Offering After Offering
- - ---- -------- ------- -------------- --------------
<S> <C> <C> <C> <C>
Agassi, Andre ............................... 106,712 106,712 0
Agassi, Mike ............................... 234 234 0
Allen & Company Incorporated(1).................. 9,031,107 7,291,107 1,740,000 2.725%
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
Cascade Investments, LLC......................... 3,333,333 3,333,333 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
Darijac Corporation.............................. 500,000 500,000 0
13
<PAGE>
Shares
Owned Shares Percent of
Prior to Being Shares Owned Shares Owned
Name Offering Offered After Offering After Offering
- - ---- -------- ------- -------------- --------------
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
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
Holmes, Gail E. ............................... 166,668 166,668 0
Hoovler, M.R.(5) 607,457 250,000 357,457 0.560%
Hoovler, P.V.(6) ............................... 1,489,522 700,000 789,522 1.236%
Keller, William(7) .............................. 802,750 40,000 762,750 1.195%
Keough, Clark ............................... 100,000 100,000 0
Keough, Michael L................................ 7,998 7,998 0
14
<PAGE>
Shares
Owned Shares Percent of
Prior to Being Shares Owned Shares Owned
Name Offering Offered After Offering After Offering
- - ---- -------- ------- -------------- --------------
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
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)........................ 1,666,667 1,666,667 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
Raptor Global Fund, L.P.......................... 221,333 221,333 0
Raptor Global Fund Ltd........................... 630,700 630,700 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. 12/16/64 19,996 19,996 0
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 0.313%
Schwab, David ............................... 11,998 11,998 0
15
<PAGE>
Shares
Owned Shares Percent of
Prior to Being Shares Owned Shares Owned
Name Offering Offered After Offering After Offering
- - ---- -------- ------- -------------- --------------
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
Triangle Bridge Group, L.P....................... 39,992 39,992 0
Truman, James ............................... 7,998 7,998 0
Tudor Arbitrage Partners, L.P.................... 68,000 68,000 0
Tudor BVI Futures Ltd............................ 413,300 413,300 0
Warburg Pincus Post-Venture Capital Fund......... 333,333 333,333 0
Warburg Pincus Trust, Inc. Postventure Capital 166,667 166,667 0
Portfolio ...............................
Warburg Pincus Emerging Growth Fund.............. 833,333 833,333 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 3.13%
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 .078%
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.
(2) Represents 52,500 shares underlying Warrants, all of which shares have been
registered for resale upon exercise of the Warrants.
16
<PAGE>
(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.
(5) Matthew R. Hoovler is one of our former officers and directors. 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.
(6) Paul V. Hoovler is one of our former officers and directors. 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) We have agreed that, if at any time by March 31, 1999, we issue additional
shares of our 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 its original purchase of 1,250,000 shares divided by
$2,500,000 is equal to the price at which the additional shares are sold.
Pursuant to this agreement, we have issued an additional 416,667 shares of
Common Stock due to the July 1998 purchases of 6,666,667 shares of Common
Stock at a price of $1.50 per share. Further, we have agreed that if, by
March 31, 1999, we issue or sell 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.
(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.
(12) Includes 262,000 shares underlying Warrants, all of which shares have been
registered for resale upon exercise of the Warrants.
17
<PAGE>
(13) Michael B. Young is one of our officers. 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 us on
those dates. The shares will vest earlier if Mr. Young is terminated
without due cause or if we are bought or merge with another company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Certain Provisions of Restated Articles of Incorporation + Amendments
Our Restated Articles of Incorporation + Amendments contain a provision,
authorized under Colorado law, which limits the liability of our directors 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 us or our
shareholders for negligence by individuals while acting as our officers.
Although this provision would not prohibit injunctive or similar actions against
our 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
We have officer and director liability insurance and our Restated Articles
of Incorporation + Amendments and bylaws provide that we shall indemnify our
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 us
pursuant to the foregoing provisions, we have been advised that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Securities Act of 1933 and is, therefore, unenforceable.
Transfer Agent
American Securities Transfer & Trust, Inc., Denver, Colorado, is the
transfer agent for our Common Stock.
PLAN OF DISTRIBUTION
We are registering the shares of Common Stock on behalf of the Selling
Securityholders. As used herein, "Selling Securityholders" includes donees and
pledgees selling shares of Common Stock received from a named Selling
Securityholder after the date of this Prospectus. All costs, expenses and fees
in connection with the registration of the shares of Common Stock offered hereby
will be borne by us. Brokerage commissions and similar selling expenses, if any,
attributable to the sale of shares of Common Stock will be borne by the Selling
Securityholders. Sales of shares of Common Stock may be effected by Selling
Securityholders from time to time in one or more types of transactions (which
may include block transactions), in the over-the-counter market, in negotiated
18
<PAGE>
transactions, through put or call option transactions relating to the shares of
Common Stock, through short sales of shares of Common Stock, or a combination of
such methods of sale, at market prices prevailing at the time of sale, or at
negotiated prices. Such transactions may or may not involve brokers or dealers.
We have not been advised by the Selling Securityholders that they have entered
into any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of Common Stock, nor that
there is an underwriter or coordinating broker acting in connection with the
proposed sale of shares of Common Stock by the Selling Securityholders.
The Selling Securityholders may effect such transactions by selling shares
of Common Stock directly to purchasers or to or through broker-dealers, which
may act as agents or principals. Such broker-dealers may receive compensation in
the form of discounts, concessions, or commissions from the Selling
Securityholders and/or the purchasers of shares of Common Stock for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
The Selling Securityholders and any broker-dealers that act in connection
with the sale of shares of Common Stock might be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act of 1933, as amended,
and any commissions received by such broker-dealers and any profit on the resale
of the shares of Common Stock sold by them while acting as principals might be
deemed to be underwriting discounts or commissions under the Securities Act of
1933, as amended. The Selling Securityholders may agree to indemnify any agent,
dealer or broker-dealer that participates in transactions involving sales of the
shares of Common Stock against certain liabilities, including liabilities
arising under the Securities Act of 1933, as amended.
Because Selling Securityholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act of 1933, as amended, the
Selling Securityholders will be subject to the prospectus delivery requirements
of the Securities Act of 1933, as amended.
Selling Securityholders also may resell all or a portion of the shares of
Common Stock in transactions in reliance upon Rule 144 or Regulation S under the
Securities Act of 1933, as amended, provided they meet the criteria and conform
to the requirements of such Rule or Regulation.
Upon us being notified by a Selling Securityholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares of
Common Stock through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplement to this
Prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act of 1933, as amended, disclosing (i) the name of each such selling
shareholder and of the participating broker-dealer(s), (ii) the number of shares
of Common Stock involved, (iii) the price at which such shares of Common Stock
were sold, (iv) the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not
conduct any investigation to verify the information set out or incorporated by
19
<PAGE>
reference in this Prospectus and (vi) other facts material to the transaction.
In addition, upon us being notified by a Selling Securityholder that a donee or
pledgee intends to sell more than 500 shares of Common Stock, we will file a
supplement to this Prospectus.
EXPERTS
The consolidated financial statements of the Company included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, 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 (each of which 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). Such consolidated financial statements are
incorporated herein by reference in reliance upon such reports given upon the
authority of such firms as experts in accouunting and auditing.
The financial statements of KKM included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997, 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 KKM's ability to continue as a going concern as
described in Note 3 to the financial statements). Such financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents of ours are specifically incorporated by
reference into this Prospectus:
Annual Report on Form 10-K for the fiscal year ended December 31,
1997;
Current Report on Form 8-K dated April 3, 1998;
Form 12b-25 for the Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998;
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998;
Definitive Proxy Materials on Form 14A dated May 28, 1998;
Current Report on Form 8-K dated July 28, 1998;
Form 12b-25 for the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998;
20
<PAGE>
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998;
Amendment to Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
All documents subsequently filed by us pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to termination of the
offering shall be deemed incorporated by reference herein.
We will provide to each person, including any beneficial owner, to whom
this Prospectus is delivered, a copy of any and all of the information that has
been incorporated by reference in this Prospectus but not delivered with this
Prospectus. We will provide this information upon written or oral request at no
cost to the requester. Requests for information should be directed to our
Treasurer at 2211 Norfolk, Suite 1150, Houston, Texas 77098. Our telephone
number is 713-807-7100.
We are subject to the informational requirements of the Securities Exchange
Act of 1934 (the "Exchange Act") and, in accordance with the Exchange Act, we
file periodic reports with the Commission. Such reports include Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. We
also file proxy materials with the Commission. Such reports and proxy materials
filed by us with the Commission can be read and copied at the Commission's
Public Reference Room at 450 Fifth Street, N.W., Washington, D. C. 20549.
Information about the operation of the Commission's Public Reference Room can be
obtained by calling 1-800-SEC-0330. The Commission maintains a Web site that
contains reports, proxy and information statements and other information about
us. The address of such site is http://www.sec.gov. Our Internet address is
http://chaparralresources.com.
21
<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 24,605,450 Shares
must not be relied upon as having been of Common Stock
authorized. This Prospectus does not
constitute an offer to sell or
solicitation of an offer to buy any of
the Common Stock 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 implication that information
contained herein is correct as of any
time subsequent to the date hereof.
------------- -----------------
PROSPECTUS
Page No.
------------------
PROSPECTUS SUMMARY................ 2
RISK FACTORS...................... 3
USE OF PROCEEDS................... 10
SELLING SECURITYHOLDERS........... 10
LIMITATION OF LIABILITY AND
INDEMNIFICATION................. 16
PLAN OF DISTRIBUTION.............. 16
EXPERTS........................... 17
INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE........ 17
September___, 1998
====================================== =======================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
--------------------------------------------
Expenses payable by us in connection with the issuance and distribution of
the securities being registered hereby are as follows:
SEC Registration Fee..................................$13,242.16
Accounting Fees and Expense...........................$ 50,000*
Legal Fees and Expenses...............................$ 30,000*
Blue Sky Fees and Expenses............................$ 0*
Printing, Freight and Engraving.......................$ 1,000*
Miscellaneous.........................................$ 0*
Total........................................$94,242.16*
- - -------------------
*Estimated.
Item 15. Indemnification of Directors and Officers.
------------------------------------------
We have a $2,000,000 directors and officers liability insurance policy.
This insurance policy insures the past, present and our future officers and
directors, 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 our 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 we
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 our director or officer, except in relation to
matters as to which such person shall be 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.
II-1
<PAGE>
Article Fifteenth of our 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
our directors shall not be personally liable to us or our shareholders for
monetary damages for breach of fiduciary duty as a director; except that the
provision shall not eliminate or limit the liability of our director or our
shareholders for monetary damages for: (i) any breach of the director's duty of
loyalty to us 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 our shareholders shall not adversely affect
any right or protection of our director existing at the time of such repeal or
modification.
Article V of our Bylaws, filed as Exhibit 3.7 hereto, includes provisions
requiring us 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 our
director, officer, employee, fiduciary or agent, or is or was serving at our
request 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 us, that such person's
conduct was in our best interest, or (ii) in all other cases (except criminal
cases) that such person's conduct was at least not opposed to our 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 our right in which the person being
indemnified is adjudged liable to us 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 our right shall be limited to reasonable expenses, including attorneys' fees,
incurred in connection with the proceeding. Reasonable expenses (including
attorneys' fees) incurred in defending an action, suit or proceeding) may be
paid by us 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
our disinterested director (as described in the Bylaws) that the facts then
known to a disinterested director would not preclude indemnification. The Bylaws
II-2
<PAGE>
require that we 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 16. Exhibits.
---------
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.
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-3
<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)
incorporated by reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the fiscal year ended November 30, 1995.
10.7 Letter Agreement, dated January 3, 1996, between the Company and
certain stockholders of Darka Petrol Ticaret Ltd. Sti., together
with Exhibits A--E, incorporated by reference to Exhibit 10.7 to
the Company's Annual Report on 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-4
<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-5
<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
Resources, 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.
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.
II-6
<PAGE>
Exhibit No. Description and Method of Filing
- - ----------- --------------------------------
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,
incorporated 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.
10.35 Form of Subscription Agreement between the Company and certain
investors, incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated July 28, 1998.
10.36 Subordinated Loan Agreement dated as of June 4, 1997 between the
Company and Allen & Company, Incorporated, incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998.
10.37 Warrants issued to Allen & Company, Incorporated and John G.
McMillian, incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998.
10.38 Loan agreements between the Company and Howard Karren dated May
27, 1998 and July 1, 1998, respectively, incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998.
10.39 1998 Incentive and Nonstatutory Stock Option Plan
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
II-7
<PAGE>
Exhibit No. Description and Method of Filing
- - ----------- --------------------------------
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).
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 the purposes of determining any 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.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
II-8
<PAGE>
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
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-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and 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 September 21, 1998.
CHAPARRAL RESOURCES, INC.
By: /s/ Howard Karren
---------------------------------------------
Howard Karren, President and
Chief Executive Officer
By: /s/ Michael B. Young
---------------------------------------------
Michael B. Young, Treasurer, Controller
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/ Ted Collins, Jr.*
- - ---------------------------------------
Ted Collins, Jr. Director September 21, 1998
/s/ David A. Dahl*
- - ---------------------------------------
David A. Dahl Director September 21, 1998
/s/ Howard Karren
- - ---------------------------------------
Howard Karren Director September 21, 1998
/s/ J. Michael Muckleroy*
- - ---------------------------------------
J. Michael Muckleroy Director September 21, 1998
*By /s/Howard Karren
- - ---------------------------------------
Howard Karren, Attorney-in-Fact September 21, 1998
II-10
<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.
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.
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.
<PAGE>
Exhibit No. Description and Method of Filing
- - ----------- --------------------------------
10.6 Purchase Agreement, dated effective January 12, 1996, between the
Company and Guntekin Koksal (purchase of CAP-G shares)
incorporated by reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the fiscal year ended November 30, 1995.
10.7 Letter Agreement, dated January 3, 1996, between the Company and
certain stockholders of Darka Petrol Ticaret Ltd. Sti., together
with Exhibits A--E, incorporated by reference to Exhibit 10.7 to
the Company's Annual Report on 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.
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.
<PAGE>
Exhibit No. Description and Method of Filing
- - ----------- --------------------------------
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.
<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
Resources, 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.
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.
<PAGE>
Exhibit No. Description and Method of Filing
- - ----------- --------------------------------
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,
incorporated 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.
10.35 Form of Subscription Agreement between the Company and certain
investors, incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated July 28, 1998.
10.36 Subordinated Loan Agreement dated as of June 4, 1997 between the
Company and Allen & Company, Incorporated, incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998.
10.37 Warrants issued to Allen & Company, Incorporated and John G.
McMillian, incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998.
10.38 Loan agreements between the Company and Howard Karren dated May
27, 1998 and July 1, 1998, respectively, incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998.
10.39 1998 Incentive and Nonstatutory Stock Option Plan
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
<PAGE>
Exhibit No. Description and Method of Filing
- - ----------- --------------------------------
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).
<PAGE>
January 13, 1995
Chaparral Resources, Inc.
621 Seventeenth Street, Suite 1301
Denver, Colorado 80293
Attention: Paul V. Hoovler
Gentlemen:
At your request, Ryder Scott Company Petroleum Engineers (Ryder Scott) has
reviewed the reserve estimates prepared by P & M Petroleum Management (P & M) of
the Karakuduk Field located in The Republic of Kazakhstan. The summary table
below presents a comparison of the estimated recoverable reserves as prepared by
P & M with Ryder Scott's estimates.
Comparison
Estimated Gross Undeveloped Reserves
Attributable to the Karakuduk Field
P & M Ryder Scott
Formation (Thousand bbls) (Thousand bbls)
---------------------------------
Proved
------------------------
J1 Lower 64,207 61,786
J2 357 257
J4 521 500
J5 1,639 1,199
J8 7,360 9,198
J9 881 950
--- ---
Total 74,965 73,890
<PAGE>
Chaparral Resources, Inc.
January 13, 1995
Page 2
P & M Ryder Scott
Formation (Thousand bbls) (Thousand bbls)
------------------------------------------
Probable
-----------------------------------
J1 Lower 32,104 (1) 30,893 (1)
J1 Upper 2,893 2,777
J2 3,668 3,606
J3 7,526 7,225
J4 4,729 4,540
J8 3,680 (1) 4,599 (1)
----- -----
Total 54,600 53,640
(1) Pressure Maintenance - Water injection reserves
Review Procedure and Opinion
- - ----------------------------
In performing our review, we have relied on the data furnished by P & M and
Chaparral Resources, Inc. These data were accepted as authentic and sufficient
for determining the reserves.
In our opinion, P & M's estimates of future proved undeveloped reserves
were prepared in accordance with generally accepted procedures for the
estimation of future reserves, and we found no bias in the utilization and
analysis of the data in estimates of reserves for the properties.
In general, Ryder Scott was in agreement with the use of the data that was
available. The isopach maps of net pay reflect a reasonable and consistent use
of the available data. In certain reservoirs where test data was limited, the
assignment of proved reserves for limited areas of the reservoir was reasonable
and appropriate.
Porosity values utilized for making the estimate of original oil in place
were based on available core data and the average values selected by P & M are
very reasonable, based on data which was available for our review.
Water saturation, the other key parameter in volumetric calculations, was
more difficult to estimate. Because of the uncalibrated nature of resistivity
logs and the lack of porosity logs, water saturation values could not be
calculated. A large number of successful well tests have been conducted in the
various members of the Jurassic formation. These tests have indicated limited
water production and based on the overall results of these tests, P & M assigned
an average water saturation of 35 percent. Empirical correlations available in
the literature which relates porosity, permeability and water saturation
indicate that 35 percent assigned by P & M is reasonable and possibly high.
<PAGE>
Chaparral Resources, Inc.
January 13, 1995
Page 3
P & M utilized the results of a laboratory PVT analysis of a bottom hole
sample for fluid properties for the J1 through the J5 members of the Jurassic.
Test data indicated higher GOR performances from the J8 and J9 reservoirs. P & M
utilized Standing correlations for developing fluid properties for these members
of the Jurassic. Checking the results of the PVT analysis with available
correlations, Ryder Scott accepted the fluid properties utilized by P & M as
reasonable.
In summary, it is Ryder Scott's opinion that the estimates of original oil
in place prepared by P & M are reasonable. In some instances minor adjustments
were made to the P & M estimates due to small differences in the pay counts.
For assignment of primary reserves, P & M utilized a recovery efficiency of
20 percent. In addition, they assigned an additional 10 percent incremental
probable reserves for pressure maintenance water injection in the J1 Lower and
J8 reservoirs. Ryder Scott utilized the API correlation for recovery in solution
gas drive reservoirs to estimate a recovery efficiency of 19.2 percent for the
J1 through J5 members and 25.2 percent for the J8 and J9. It was our opinion
that the secondary to primary ratio of .5 utilized by P & M to assign pressure
maintenance water injection reserves was reasonable and utilized this same ratio
in assigning incremental probable reserves to the J1 Lower and J8.
Reserves Estimate
- - -----------------
The original reserve estimates were based on a volumetric analysis and
assignment of recover factors for primary and incremental pressure maintenance
reserves.
The reserves presented herein, as estimated by P & m and reviewed by Ryder
Scott, are estimates only and should not be construed as being exact quantities.
Moreover, estimates of reserves may increase or decrease as a result of future
operations.
The proved and probable reserves, which are attributable to the wells and
locations reviewed by Ryder Scott, conform to the definitions approved by the
Society of Petroleum Engineers and The Society of Petroleum Evaluation
Engineers, except that no economic evaluations have been performed by either P &
M or Ryder Scott at this time. It is assumed, based on current development
activity in Kazakhstan, that economic development of these reserves can be
achieved. Our definitions of proved and probable reserves follows.
Proved reserves of crude oil, natural gas, or natural gas liquids are
estimated quantities that geological and engineering data demonstrate with
reasonable certainty to be recoverable in the future from known reservoirs.
Reservoirs are considered probed if economic productibility is supported by
actual production or formation tests. In certain instances, proved reserves may
be assigned on the basis of a combination of core analysis and electrical and
<PAGE>
Chaparral Resources, Inc.
January 13, 1995
Page 4
other type logs which indicate the reservoirs are analogous to reservoirs in the
same field which are producing or have demonstrated the ability to produce on a
formation test. The area of a reservoir considered proved includes (1) that
portion delineated by drilling and defined by fluids contacts, if any, and (2)
the adjoining portions not yet drilled that can be reasonably judged as
economically productive on the basis of available geological and engineering
data. In the absence of data on fluid contacts, the lowest known structural
occurrence of hydrocarbons controls the lower proved limit of the reservoir.
Proved reserves are estimates of hydrocarbons to be recovered from a given date
forward. They may be revised as hydrocarbons are produced and additional data
become available.
Reserves that can be produced economically through the application of
established improved recovery techniques are included in the proved
classification when these qualifications are met: (1) successful testing by a
pilot project or the operation of an installed program in the reservoir, or one
in the immediate area with similar rock and fluid properties, provides support
for the engineering analysis on which the project or program was based, and (2)
it is reasonably certain the project will proceed. Reserves to be recovered by
improved recovery techniques that have yet to be established through repeated
economically successful applications are included in the proved category only
after successful testing by a pilot project or after the operation of an
installed program in the reservoir provides support for the engineering analysis
on which the project or program was based. Improved recovery includes all
methods for supplementing natural reservoir forces and energy, or otherwise
increasing ultimate recovery from a reservoir, including (1) pressure
maintenance, (2) cycling, and (3) secondary recovery in its original sense.
Improved recovery also includes the enhanced recovery methods of thermal,
chemical flooding, and the use of miscible and immiscible displacement fluids.
Estimates of proved reserves do not include crude oil, natural gas, or
natural gas liquids being held in underground or surface storage.
Probable reserves are the estimated quantities of recoverable hydrocarbons
which are based on engineering and geological data similar to those used in the
estimates of proved reserves but, for various reasons, these data lack the
certainty required to classify the reserves as proved. Probable reserves
include, without limitation: (a) reserves that apparently exist a reasonable
distance beyond the proved limits of productive reservoirs where water contacts
have not been determined and proved limits are established by the lowest datum
at which proved reserves exist; (b) reserves in formations that appear to be
productive from log characteristics only, but lack definitive tests or core
analysis data; (c) reserves in a portion of a formation that has been proved
productive in other areas in a field but is separated from the proved area by
sealing faults, provided that the geologic interpretation indicates the probable
<PAGE>
Chaparral Resources, Inc.
January 13, 1995
Page 5
area is structurally high relative to the proved portion of the formation; (d)
reserves obtainable by improved recovery where an improved recovery program,
that has yet to be established through repeated economically successful
operations, is planned but is not yet in operation and a successful pilot test
has not been performed, but reservoir and formation characteristics appear
favorable for its success; and (e) reserves in the same reservoir as proved
reserves that would be recoverable if a more efficient primary recovery
mechanism develops than was assumed in estimating the proved reserves.
General
- - -------
Neither Ryder Scott not any of its employees has any interest in the
subject properties and neither the employment to do this work nor the
compensation is contingent on our estimates of reserves for the properties which
were reviewed.
This report was prepared for the exclusive use of Chaparral Resources, Inc.
The work papers used in the preparation of this report are available for
examination by Authorized parties in our office. Please contact us if we can be
of further service.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Larry T. Nelms
Group Vice President
<PAGE>
December 8, 1994
Mr. Paul V. Hoovler, President
Chaparral Resources, Inc.
621 17th Street, Suite 1301
Denver, CO 80293
Dear Mr. Hoovler:
As per your request, I am enclosing a copy of my engineering report of the
estimated recoverable oil reserves for the Karakuduk Field located in the
western portion of the Republic of Kazakhstan. These reserves, from the Jurassic
formation, have been determined using generally accepted petroleum engineering
practices. The geologic and engineering data for the most part was supplied by
the Mangistau Regional Geologic Section. This entity would be comparable to the
Oil and Gas Commission for the state of Colorado.
The oil reserves are defined in two categories, (1) Proved Undeveloped Reserves,
and (2) Probable Reserves. The two classifications are described below as
general definitions adopted by The Society of Petroleum Evaluation Engineers:
Proved Undeveloped Reserves: Oil reserves in which the proven commercial
producibility is supported by a number of wells that have been drilled and from
which actual oil production or positive formation tests were achieved. The area
of the reservoir considered as proved has been delineated from information
obtained by drilling and the determination of oil/water contacts defining the
parameters of the reservoir are reasonably judged as being commercially
productive on the basis of available geologic and engineering information
derived from the existing wells. The reserves are classified as proved
undeveloped in the areas where interpretation of data from the tested wells is
laterally continuous and the formations contain commercially recoverable oil
reserves on locations beyond the direct offsets to the existing wells.
Probable Reserves: Oil reserves that are less certain than proved reserves
but can be estimated to exist with a degree of certainty. Such reserves
based on the available geologic and engineering data in the probable
productive area indicate that such reserves may be recovered. This includes
oil or gas reserves from formations that appear to be productive by log
characteristics, but lack definite core data, drillstem test data or
production testing. This category also includes oil reserves that may be
recoverable through enhanced recovery methods. As an example, a limited
project or pilot program for secondary and/or tertiary recovery that is
planned but has not been implemented or placed into operation but the
reservoir characteristics appear favorable for such adaptation leading to
commercial production.
<PAGE>
Mr. Paul V. Hoovler
Chaparral Resources, Inc.
December 8, 1994
Page Two of Two
The Karakuduk Field, located in the Mangistau Region of western Kazakhstan,
appears to be a very good candidate for an extensive development drilling
program. Most of the wells that have been previously drilled were production
tested through casing or formation tested. The clastic sandstones within the
Jurassic formation should be receptive to stimulation by acidizing or fracture
treatment. Daily production rates from this development program should be
significantly increased by such stimulation. This should also increase
recoverable oil reserves. As development drilling takes place, additional
reservoir data will increase or decrease the estimated ultimate recoverable
reserves from these multiple sand reservoir within the Jurassic formation.
As an aside and beyond the scope of this study, the Karakuduk #20 well, drilled
into the next lower formation, although not tested, appears to have very thick
productive porosity zone within the Triassic section. Other fields within the
general area proven this formation productive and if exploration within the
Karakuduk Field finds these same reservoir characteristics, it should add
substantially to future recoverable reserves.
In summary, I believe the Karakuduk Field offers an excellent opportunity for a
small independent oil company to drill and develop significant low risk oil
reserves. I don't know of any other province in North American that this type of
opportunity exists. Topographic conditions are very favorable for development
and the field is located within twenty miles of a major pipeline that has
deliveries to the Black Sea ports. Access to local roads and the major railroad
in this part of Kazakhstan all lie within thirty miles.
I also believe that as the development project gets underway, there will be
substantial improvements over the drilling operations, completions and
production methods previously utilized. This should significantly enhance daily
oil flows and ultimate reserves.
The reserve report has not taken into consideration any cash flow forecasts or
time schedules as to the development of the project. I am not privy to the
parameters of the Agreement between Chaparral Resources, Inc. and the Karakuduk
Munay Joint Stock Company, nor am I aware of any agreements that could affect
Chaparral's ultimate reserves in this field. This study simply defines the
recoverable reserves for the field.
Best regards,
Robert W. Peterson
<PAGE>
KARAKUDUK OIL FIELD
ESTIMATED OIL RESERVES
PREPARED FOR
CHAPARRAL RESOURCES, INC.
P&M PETROLEUM MANAGEMENT
DECEMBER, 1994
<PAGE>
KARAKUDUK OIL FIELD
ESTIMATED OIL RESERVES
The Karakuduk Oil Field is located in the Republic of Kazakhstan, 227 miles
northeast of the city of Aktau. The oil reservoir was originally drilled because
seismic data showed a geological subsurface structure at this location. The
first well was drilled in 1972 and found oil production in the Jurassic Age
formations.
A total of 22 wells have been drilled on this geological structure by the
Russians. Ten of these wells encountered oil sands. Some of the wells were drill
stem tested and other wells were production tested. The first well was drilled
1972 and the last four wells were drilled since 1991. The Kazkhstans did not
furnish us with any data showing which wells had casing run in them and which
wells they thought the casing would be satisfactory to place the wells on
production. The wells reportedly were plugged by placing cement plugs inside the
casing. The Turkish Petoil personnel stated that the #20 and #21 Karakuduk wells
ere the only wells that had casing that could be re-entered for sure. Five other
wells could possibly be re-entered.
The Jurassic formation is approximately 2300' thick and has been divided into 15
porous sand sections divided by continuous shale beds.
The producing sands are described generally as fine to medium grained sandstone
and coarse grained siltstone. The porosities from core analysis average 15
percent. In some of the reserves, the Russians used up to 17 percent porosity
and the Petoil personnel prefer this figure.
The Jurassic sand sections are identified as J1, J2, J3, etc. Listed below is a
brief description of the oil potential of each sand.
<PAGE>
J1: This sand section consist of two sand beds that I have identified as the J1
upper and the J1 lower. These two sand beds are continuous over the structure
and the J1 lower has been tested in 14 wells. The sands are very easy to
identify on the open hole logs. And oil-water contact has not been definitely
established. Some production and drill stem tests in J1 have recovered only a
small amount of water of no fluid recovery could be from formation damage.
According to the information we received from geologist and engineers in Turkey
with Petoil and a very competent consultant who has thoroughly studied this oil
reservoir, the Russians used no drilling solids, mud weight, water loss, or
formation damage. The mud weight was much higher than the formation pressure
when the sand beds were drilled so you would expect high damage. The intervals
tested by perforating were not stimulated in any way to the best of our
knowledge.
The J1 upper sand averages about 6 feet thick and J1 lower sand averages about
35 feet thick. The J1 upper sand has not been production tested adequately by
itself to determine whether it is definitely oil productive or not. The J1 lower
sand has produced oil over 100 bbls/day in nine wells and possibly ten (well
#22). We don't have the production rate form Karakuduk #22 but the Petoil people
indicated it produced over 100 bbls/day from the lower J1 sand. I have given the
J1 lower sand 517,800 acre feet of reservoir and 64,207,000 barrels of proved
undeveloped reserves. By pressure maintenance from water injection they should
recover at least and additional 32,104,000 barrels of probable reserves.
I have reduced the areal extent of the J1 upper sand and have calculated a
reservoir volume of 23,332 acre feet for it and assigned it 2,893,000 barrels of
probable reserves. The J1 upper sand and the J1 lower sand are separated by a
consistent shale bed about 16 feet thick.
J2: The J2 section consists of three sand. Oil production has been tested in
wells #4, #7, and #10 in the J2 sands. The production rate from the #10 well was
385 barrels of oil and 533 mcf of gas. This reservoir has oil-water contact at
- - -8074 feet. I have isopached this J2 oil sand and calculated an oil reservoir of
32,456 acre feet and proved undeveloped reserves of 357,000 barrels and
2,893,000 barrels probable reserves due to the thin sand thickness in the rest
of the wells. A small amount of oil was also tested from the #4 well but the
sand is lower structurally from the main reservoir and is located over one mile
west of the main reservoirs.
<PAGE>
J3: The J3 section consists of two sand beds. The #7 wsell tested 20 bbls/day of
oil from 36 feet of perforations. This sand section has an oil-water contact at
- - -8321'. The sands cover an area of 5,043 acres and the oil reservoir is 60,693
acre feet with oil reserves of 7,526.000 barrels. These oil reserves are
classified as probable reserves since only one well has been production tested
but it was determined to be uneconomical.
J4: The J4 sand beds flowed 288 barrels of oil and 498 mcf/day gas in the #7
well. The #20 and the #21 wells also have porpous sands above the oil-water
contact of -8465' datum. The oil reservoir has a volume of 42,336 acre feet. I
have assigned 524,000 barrels of proved undeveloped reserves for well #7. I have
also assigned 4,729,000 barrels of probable reserves because well #7 is the only
well that tested oil flow rates at near commercial rates.
J5: The #7 well was perforated 9124-9140' and recovered oil and was perforated
9140-9157' and recovered oil and water with no fluid recovery amounts recorded.
The feasibility study shows only one fluid recovery at 936 bbls/day oil and 971
mch/day gas but it does not name the well. Presumably the oil production is from
the upper perforations of the #7 well at 9124-9140'. They also list an oil-water
contact of -8513' which matches the #7 log. To complicate the information the
#21 well tested 900 bbls/day oil and 971 mcf/day gas from perforations
9153-9249' and the lower perforations are at -8663' datum which is 150' below
the previous stated oil-water contact without recovering any water.
Based on 120 acre spacing, I have given wells #7, #20, and #21 1,639,000 barrels
of primary proved undeveloped reserves. Since it is difficult to understand what
is going on in this reservoir I haven't assigned any other reserves although it
is very possible there are some in the structurally lower parts of the J5 sand
reservoir.
J6: No reserves.
J7: No reserves.
J8: The J8 sand section is a thick sand with up to 66' of porous sand in well #7
and 63" in well #21. The isopack of the J8 sand calculates 72,867 acre feet of
volume and 7,360,000 barrels of proved undeveloped reserves for the J8 sand and
3,680,000 barrels of probable reserves for pressure maintenance by water
injection.
<PAGE>
J9: The #21 is the only well that has penetrated this interval that has
recovered oil production. Although Petoil personnel say oil was recovered in the
#22 well the records we received don't verify this. The #21 was perforated
9918-9947' and recovered oil at the rate of 562 bbls/day and gas at the rate of
837 mcf/day. The interval 9839-9904' was also perforated and tested 543 bbls/day
oil and 684 mcf/day gas. The proved undeveloped reserves calculated to this well
based on 120 acre spacing are 881,000 barrels.
The total reserves calculated for this field are 74,965,000 barrels of proven
undeveloped reserves and 54,600,000 barrels of probable reserves for a total of
129,565,000 barrels.
The size of the reservoir is easily determined for the J1 sands since they are
uniform in thickness in all the wells that penetrated it. Due to the poor
logging tools and capabilities of the Russian logging equipment and the lack of
information supplied with the open hole logs it is impossible to calculate the
porosity or water saturations from logs. The information that was valuable were
the well test listed on Table I. The limited core data was also helpful.
The oil reserves assigned in this report were calculated using data supplied by
the Russian and Kazakhstan government personnel. The reservoir data supplied
ranged from poor to good. The poor data in general were from the open hole
Russian logs and the good data from the wells tests. In general I thought the
data was better than normal in attempting to determine the feasibility of
developing a field of this size and complexity due to the multitude of producing
sands.
The Russian open hole logs are poor for quantitative data for determining
porosity, water saturation, and shaliness of the producing wells. The Russian
logs don't have any calibration data or drilling mud or filtrate data. The only
open hole porosity logs are the micro-log and single detector neutron logs which
neither are good for porosity calculations. The micro-log is good for permeable
sand thickness determinations. The resistivity logs are lateral type logs which
aren't good for thin bed water saturations and without mud filtrate and
calibration data are not good for calculating reservoir water saturations. The
gamma ray logs were not calibrated in standard API counts so they have limited
use for reservoir shaliness. The reproduction of some of the open hole logs was
so poor they were not legible so that further detracted from their usefulness.
The Russians did run some DST's and cased hole tests of perforated sands which
were very useful. Also a lot of cores were taken and were analyzed in a
laboratory. Some of this data was available.
<PAGE>
The cores data showed an average sand porosity of 15.1 percent for the J1 lower
sand so I used 15 percent although Karakuduk Oil Field Production Feasibility
used 15,16, and 17 percent porosities in their studies.
I used a water saturation of 35 percent in the reserve calculations. I though
that 35 percent water saturation was near the upper limit of saturation that
could be in place without producing free water from the higher permeability
zones flowing oil at high rates. The water saturations could be considerably
lower, also, so I though this was a good conservative compromise. The
Kazakhstan's did use water saturations from 45 to 50 percent in their study. The
formation volume factor of 1.22 was determined by the Kazakhstan laboratory in
Aktau.
I used a primary oil recovery of 20 percent for the proved undeveloped reserves
and an additional 10 percent oil recovery for pressure maintenance by water
injection for probable reserves. The Kazakhstans used an oil recovery factor of
40 percent of the original-in-place for primary recovery with water injection
for pressure maintenance. The Petoil personnel stated that a large field to the
south producing from the same Jurassic sands is going to recover 43 percent of
the oil-in-place with water injection for pressure maintenance.
I have used the data available to attempt to arrive at the best conclusion to
the oil reserves of the Karakuduk Field using accepted engineering practices.
Due to the limited amount of engineering data available, the data being
generated in a foreign country by personnel not familiar with our standards or
using our quality of equipment, and also due tot he complexity of the reservoir,
the results of this report could vary considerably from other reports or the
actual future oil recoveries.
This report has been prepared utilizing methods and procedures regularly used by
petroleum engineers to estimate oil and gas reserves for properties of this type
and character. The recovery of oil reserves and projection of producing rates
are dependent upon many variable factors. These include, among others, prudent
operation, compression of gas when needed, market demand, installation of
lifting equipment, and remedial work when required.
<PAGE>
Reserves included in this report have been based upon the assumption that all
wells will be operated in a prudent manner by responsible parties.
The basic data used to prepare this report has been retained in our files and is
available for review by appropriate parties.
P&M PETROLEUM MANAGEMENT
------------------------------------
Robert W. Peterson
Petroleum Engineer
<PAGE>
<TABLE>
<CAPTION>
KARAKUDUK FIELD
WELL TESTS
GEOLOGICAL TEST INTERVAL NET PAY FLUID GAS FLOW CHOKE SIZE GOR
WELL SECTION DEPTH-FT DATUM-FT FT REC BBLS/DAY CU FT/DAY INCHES CU FT/BBL COMMENTS
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Karakuduk #1 J1 8546-8563' -(7920-7936') 16' OIL 151 -- 0.1959
Karakuduk #4 J1 8596-8612' -(8004-8020') 16' WATER 2.5 --
Karakuduk #5 J1 8543-8559' -(7921-7937') 16' OIL 19.5 706 With compressor
Karakuduk #6 J1 8550-8573' -(7943-7966') 23' OIL 236 49434 0.2756 209
Karakuduk #7 J1 8435-8471' -(7834-7870') 36' OIL 446.6 564960 0.3150 1265
Karakuduk #8 J1 8481-8994' -(7869-7882') 13' OIL 90.6 ? ?
Karakuduk #8 J1 8481-8994' -(7869-7882') 13' OIL 15.1 ? 1.0236 Natural flow
Karakuduk #10 J1 8517-8537' -(7922-7942') 20' OIL 289.4 529650 0.2756 1832 Gas out oil
Karakuduk #10 J1 8537-8553' -(7942-7958') 16' OIL 966.2 600270 0.3543 621 Gas out oil
Karakuduk #11 J1 8474-8491' -(7873-7890') 17' OIL 162.9 -- --
Karakuduk #11 J1 8474-8491' -(7873-7891') 17' OIL 2.8 1.0236 Natural flow
Karakuduk #12 J1 8458-8484' -(7856-7882') 26' OIL 132.1 ? ? Water comes from
Karakuduk #12 J1 8441-8448' -(7839-7846') 7' WATER 12.6 upper zones of J1
Karakuduk #13 J1 8520-8533' -(7912-7925') 13' OIL 4.4 -- 1.0236
Karakuduk #20 J1 8464-8507' -(7840-7883') 43' OIL 122.6
Karakuduk #20 J1 8464-8507' -(7840-7883') 43' OIL 20.1 -- Nautral flow
Karakuduk #21 J1 8425-8458' -(7839-7872') 33' OIL 452.9 384879 0.2756 850
Karakuduk #21 J1 OIL 364.8 300135 0.1968 823
Karakuduk #22 J1 8618-8635' -(8017-8039') 17' OIL W/GAS ? ? ? Gas out oil
Karakuduk #22 J1 8618-8635' -(8017-8034') 17' OIL W/WTR ? ? ?
Karakuduk #22 J1 8543-8727' -(7942-8126') 84' OIL W/GAS ? ? ?
Karakuduk #23 J1 8514-8681' -(7928-8095') 167' WTR W/GAS ? ? ?
Karakuduk #4 J2 8737-8760' -(8145-8168') 23' OIL 7.5 ? 1.0236
Karakuduk #7 J2 8556-8760' -(7955-8159') 204' OIL 3.1 ? 1.0236
Karakuduk #10 J2 8652-8681' -(8057-8086') 29' OIL & GAS 385 533181 0.2756 1385
Karakuduk #7 J3 8865-8901' -(8264-8300') 36' OIL 20.1 1.0236
Karakuduk #21 J3 8865-8878' -(8279-8312') 33' OIL 88.1 ? ? Rowing
8901-8920' -(8321-8334') 13' OIL W/WTR 3.0 ? ?
Karakuduk #7 J4 9025-9035' -(8425-8435') 10')
9045-9068' -(8444-8467') 23') OIL 287.5 497871 0.4724 1732
9084-9094' -(8484-8494') 10')
Karakuduk #21 J4 8996-8029' -(8410-8443') 33' OIL W/WTR 1.6 ? ?
Karakuduk #21 J4 9071-9081' -(8485-8495') 10' OIL 1.9 ? ?
Karakuduk #21 J5 9153-9249' -(8567-8663') 96' OIL & GAS 900 971025 ? 1079
Karakuduk #21 J7 9524-9563' -(8938-8977') 39' OIL & WTR ? ? ?
Karakuduk #7 J8 9652-9731' -(9051-9130') 79' OIL 283.1 198442 0.2756 701
Karakuduk #21 J8 9665-9731' -(9079-9145') 66' OIL W/GAS 283 459030 ? 1622
Karakuduk #21 J9 9839-9905' -(9253-0319') 66' OIL W/GAS 546 688545 0.3543 1261
Karakuduk #21 66' OIL W/GAS 425 582615 0.2756 1370
Karakuduk #21 J9 9915-9947' -(9372-9361') 29' OIL W/GAS 437 730917 ? 1672
</TABLE>
EXHIBIT 5.1
SMITH McCULLOUGH, P.C. Lynne M. Hanson
Thomas S. Smith Garrett M. Tuttle
Kim I. McCullough 4643 South Ulster Street, Suite 900 Mark A. Meyer
Douglas R. Ferguson Denver, Colorado 80237-2866 Kevin J. Kanouff
Jeffrey J. Cowman
Harold R. Bruno, III (303) 221-6000 Of Counsel
Telecopy (303) 221-6001 Stephen G. Petrucci
Theresa M. Mehringer
September 21, 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 19,052,508 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-3 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 19,052,508 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 2,222,222 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 10.39
CHAPARRAL RESOURCES, INC.
1998 INCENTIVE AND NONSTATUTORY
STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1998 Incentive and
Nonstatutory Stock Option Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to Employees and Consultants and to promote the success of the
Company's business. Options granted hereunder may be either "incentive stock
options," as defined in Section 422 of the Internal Revenue Code of 1986, as
amended, or "nonstatutory stock options," at the discretion of the Board and as
reflected in the terms of the written stock option agreement.
2. Definitions. As used herein, the following definitions shall apply:
a. "Board" shall mean the Committee, if one has been appointed, or the
Board of Directors of the Company if no Committee is appointed.
b. "Code" shall mean the Internal Revenue Code of 1986, as amended.
c. "Common Stock" shall mean the $0.10 par value common stock of the
Company.
d. "Company" shall mean Chaparral Resources, Inc., a Colorado
corporation.
e. "Committee" shall mean the Committee appointed by the Board in
accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed, or the Board if no committee is appointed.
f. "Consultant" shall mean any person who is engaged by the Company or
by any Parent or Subsidiary to render consulting services and is
compensated for such consulting services, but does not include a director
of the Company who is compensated for services as a director only with the
payment of a director's fee by the Company.
g. "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as
an Employee shall not be considered interrupted in the case of sick leave,
military leave, or any other leave of absence approved by the Board;
provided that such leave is for a period of not more than 90 days or
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
<PAGE>
h. "Employee" shall mean any person, including officers and directors,
employed by the Company or by any Parent or Subsidiary. The payment of a
director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
i. "Incentive Stock Option" shall mean an Option which is intended to
qualify as an incentive stock option within the meaning of Section 422 of
the Code and which shall be clearly identified as such in the written Stock
Option Agreement provided by the Company to each Optionee granted an
Incentive Stock Option under the Plan.
j. "Non-Employee Director" shall mean a director who:
(i) Is not currently an officer (as defined in Section 16a-1(f)
of the Securities Exchange Act of 1934, as amended) of the Company or
of a Parent or Subsidiary or otherwise currently employed by the
Company or by a Parent or Subsidiary.
(ii) Does not receive compensation, either directly or
indirectly, from the Company or from a Parent or Subsidiary, for
services rendered as a Consultant or in any capacity other than as a
director, except for an amount that does not exceed the dollar amount
for which disclosure would be required pursuant to Item 404(a) of
Regulation S-K adopted by the United States Securities and Exchange
Commission.
(iii) Does not possess an interest in any other transaction for
which disclosure would be required pursuant to Item 404(a) of
Regulation S-K adopted by the United States Securities and Exchange
Commission.
k. "Nonstatutory Stock Option" shall mean an Option granted under this
Plan which does not qualify as an Incentive Stock Option and which shall be
clearly identified as such in the written Stock Option Agreement provided
by the Company to each Optionee granted a Nonstatutory Stock Option under
this Plan. To the extent that the aggregate fair market value of Optioned
Stock to which Incentive Stock Options granted under Options to an Employee
are exercisable for the first time during any calendar year (under the Plan
and all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such Options shall be treated as Nonstatutory Stock Options under the Plan.
The aggregate fair market value of the Optioned Stock shall be determined
as of the date of grant of each Option and the determination of which
Incentive Stock Options shall be treated as qualified incentive stock
options under Section 422 of the Code and which Incentive Stock Options
exercisable for the first time in a particular year in excess of the
$100,000 limitation shall be treated as Nonstatutory Stock Options shall be
determined based on the order in which such Options were granted in
accordance with Section 422(d) of the Code.
2
<PAGE>
l. "Option" shall mean an Incentive Stock Option, a Nonstatutory Stock
Option or both as identified in a written Stock Option Agreement
representing such stock option granted pursuant to the Plan.
m. "Optioned Stock" shall mean the Common Stock subject to an Option.
n. "Optionee" shall mean an Employee or other person who is granted an
Option.
o. "Parent" shall mean a "parent corporation" of the Company, whether
now or hereafter existing, as defined in Section 424(e) of the Code.
p. "Plan" shall mean this 1998 Incentive and Nonstatutory Stock Option
Plan.
q. "Share" shall mean a share of the Common Stock of the Company, as
adjusted in accordance with Section 11 of the Plan.
r. "Stock Option Agreement" shall mean the agreement to be entered
into between the Company and each Optionee which shall set forth the terms
and conditions of each Option granted to each Optionee, including the
number of Shares underlying such Option and the exercise price of each
Option granted to such Optionee under such agreement.
s. "Subsidiary" shall mean a "subsidiary corporation" of the Company,
whether now or hereafter existing, as defined in Section 424(f) of the
Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 3,000,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
the unpurchased Shares which were subject thereto shall, unless the Plan shall
have been terminated, become available for future grant under the Plan.
4. Administration of the Plan.
a. Procedure. The Plan shall be administered by the Board or a
Committee appointed by the Board consisting of two or more Non-Employee
Directors to administer the Plan on behalf of the Board, subject to such
terms and conditions as the Board may prescribe.
3
<PAGE>
(i) Once appointed, the Committee shall continue to serve until
otherwise directed by the Board (which for purposes of this paragraph
(a)(i) of this Section 4 shall be the Board of Directors of the
Company). From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with
or without cause) and appoint new members in substitution therefor,
fill vacancies however caused, or remove all members of the Committee
and thereafter directly administer the Plan.
(ii) Members of the Board who are granted, or have been granted,
Options may vote on any matters affecting the administration of the
Plan or the grant of any Options pursuant to the Plan.
b. Powers of the Board. Subject to the provisions of the Plan, the
Board shall have the authority, in its discretion:
(i) To grant Incentive Stock Options, in accordance with Section
422 of the Code, and Nonstatutory Stock Options or both as provided
and identified in a separate written Stock Option Agreement to each
Optionee granted such Option or Options under the Plan; provided
however, that in no event shall an Incentive Stock Option and a
Nonstatutory Stock Option granted to any Optionee under a single Stock
Option Agreement be subject to a "tandem" exercise arrangement such
that the exercise of one such Option affects the Optionee's right to
exercise the other Option granted under such Stock Option Agreement;
(ii) To determine, upon review of relevant information and in
accordance with Section 8(b) of the Plan, the fair market value of the
Common Stock;
(iii) To determine the exercise price per Share of Options to be
granted, which exercise price shall be determined in accordance with
Section 8(a) of the Plan;
(iv) To determine the Employees or other persons to whom, and the
time or times at which, Options shall be granted and the number of
Shares to be represented by each Option;
(v) To interpret the Plan;
(vi) To prescribe, amend and rescind rules and regulations
relating to the Plan;
4
<PAGE>
(vii) To determine the terms and provisions of each Option
granted (which need not be identical) and, with the consent of the
holder thereof, modify or amend each Option;
(viii) To accelerate or defer (with the consent of the Optionee)
the exercise date of any Option, consistent with the provisions of
Section 7 of the Plan;
(ix) To authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an Option
previously granted by the Board; and
(x) To make all other determinations deemed necessary or
advisable for the administration of the Plan.
c. Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees
and any other permissible holders of any Options granted under the Plan.
5. Eligibility.
a. Persons Eligible. Options may be granted to any person selected by
the Board. Incentive Stock Options may be granted only to Employees. An
Employee, who is also a director of the Company, its Parent or a
Subsidiary, shall be treated as an Employee for purposes of this Section 5.
An Employee or other person who has been granted an Option may, if he is
otherwise eligible, be granted an additional Option or Options.
b. No Effect on Relationship. The Plan shall not confer upon any
Optionee any right with respect to continuation of employment or other
relationship with the Company nor shall it interfere in any way with his
right or the Company's right to terminate his employment or other
relationship at any time.
6. Term of Plan. The Plan became effective on May 21, 1998. It shall
continue in effect until May 20, 2008, unless sooner terminated under Section 13
of the Plan.
7. Term of Option. The term of each Option shall be 10 years from the date
of grant thereof or such shorter term as may be provided in the Stock Option
Agreement. However, in the case of an Option granted to an Optionee who, at the
time the Option is granted, owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, if the Option is an Incentive Stock Option, the term of the Option
shall be five years from the date of grant thereof or such shorter time as may
be provided in the Stock Option Agreement.
5
<PAGE>
8. Exercise Price and Consideration.
a. Exercise Price. The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be such price as is
determined by the Board, but the per Share exercise price under an
Incentive Stock Option shall be subject to the following:
(i) If granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than 10% of
the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall not be less than
110% of the fair market value per Share on the date of grant.
(ii) If granted to any other Employee, the per Share exercise
price shall not be less than 100% of the fair market value per Share
on the date of grant.
b. Determination of Fair Market Value. The fair market value per Share
on the date of grant shall be determined as follows:
(i) If the Common Stock is listed on the New York Stock Exchange,
the American Stock Exchange or such other securities exchange
designated by the Board, or admitted to unlisted trading privileges on
any such exchange, or if the Common Stock is quoted on a National
Association of Securities Dealers, Inc. system that reports closing
prices, the fair market value shall be the closing price of the Common
Stock as reported by such exchange or system on the day the fair
market value is to be determined, or if no such price is reported for
such day, then the determination of such closing price shall be as of
the last immediately preceding day on which the closing price is so
reported;
(ii) If the Common Stock is not so listed or admitted to unlisted
trading privileges or so quoted, the fair market value shall be the
average of the last reported highest bid and the lowest asked prices
quoted on the National Association of Securities Dealers, Inc.
Automated Quotations System or, if not so quoted, then by the National
Quotation Bureau, Inc. on the day the fair market value is determined;
or
(iii) If the Common Stock is not so listed or admitted to
unlisted trading privileges or so quoted, and bid and asked prices are
not reported, the fair market value shall be determined in such
reasonable manner as may be prescribed by the Board.
6
<PAGE>
c. Consideration and Method of Payment. The consideration to be paid
for the Shares to be issued upon exercise of an Option, including the
method of payment, shall be determined by the Board and may consist
entirely of cash, check, other shares of Common Stock having a fair market
value on the date of exercise equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, or any combination of
such methods of payment, or such other consideration and method of payment
for the issuance of Shares to the extent permitted under the Colorado
Business Corporation Act.
9. Exercise of Option.
a. Procedure for Exercise: Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of
the Plan.
In the sole discretion of the Board, at the time of the grant of an
Option or subsequent thereto but prior to the exercise of an Option, an
Optionee may be provided with the right to exchange, in a cashless
transaction, all or part of the Option for Common Stock of the Company on
terms and conditions determined by the Board.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Stock Option Agreement by the person entitled to exercise the Option and
full payment for the Shares with respect to which the Option is exercised
has been received by the Company. Full payment, as authorized by the Board,
may consist of a consideration and method of payment allowable under
Section 8(c) and this Section 9(a) of the Plan. Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of the
duly authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote or receive dividends or any other
rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. No adjustment will be made for
a dividend or other right for which the record date is prior to the date
the stock certificate is issued, except as provided in Section 11 of this
Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised.
b. Termination of Status as an Employee. In the case of an Incentive
Stock Option, if any Employee ceases to serve as an Employee, he may, but
only within such period of time not exceeding three months as is determined
by the Board at the time of grant of the Option after the date he ceases to
be an Employee of the Company, exercise his Option to the extent that he
was entitled to exercise it at the date of such termination. To the extent
that he was not entitled to exercise the Option at the date of such
termination, or if he does not exercise such Option (which he was entitled
to exercise) within the time specified herein, the Option shall terminate.
7
<PAGE>
c. Disability of Optionee. In the case of an Incentive Stock Option,
notwithstanding the provisions of Section 9(b) above, in the event an
Employee is unable to continue his employment with the Company as a result
of his total and permanent disability (as defined in Section 22(e)(3) of
the Code), he may, but only within such period of time not exceeding 12
months as is determined by the Board at the time of grant of the Option
from the date of termination, exercise his Option to the extent he was
entitled to exercise it at the date of such termination. To the extent that
he was not entitled to exercise the Option at the date of termination, or
if he does not exercise such Option (which he was entitled to exercise)
within the time specified herein, the Option shall terminate.
d. Death of Optionee. In the case of an Incentive Stock Option, in the
event of the death of the Optionee:
(i) During the term of the Option if the Optionee was at the time
of his death an Employee and had been in Continuous Status as an
Employee or Consultant since the date of grant of the Option, the
Option may be exercised, at any time within 12 months following the
date of death, by the Optionee's estate or by a person who acquired
the right to exercise the Option by bequest or inheritance, but only
to the extent that the right to exercise would have accrued had the
Optionee continued living and remained in Continuous Status as an
Employee 12 months after the date of death; or
(ii) Within such period of time not exceeding three months as is
determined by the Board at the time of grant of the Option after the
termination of Continuous Status as an Employee, the Option may be
exercised, at any time within 12 months following the date of death,
by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent
that the right to exercise had accrued at the date of termination.
10. Nontransferability of Options. Unless permitted by the Code, in the
case of an Incentive Stock Option, the Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent and distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
8
<PAGE>
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of Shares covered
by each outstanding Option, and the number of Shares which have been authorized
for issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of any
Option, as well as the price per Share covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to an Option.
In the event of the proposed dissolution or liquidation of the Company, the
Option will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. The Board may, in the exercise
of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. In the event
of the proposed sale of all or substantially all of the assets of the Company,
or the merger of the Company with or into another corporation in a transaction
in which the Company is not the survivor, the Option shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Board determines, in the
exercise of its sole discretion and in lieu of such assumption or substitution,
that the Optionee shall have the right to exercise the Option as to all of the
Optioned Stock, including Shares as to which the Option would not otherwise be
exercisable. If the Board makes an Option fully exercisable in lieu of
assumption or substitution in the event of such a merger or sale of assets, the
Board shall notify the Optionee that the Option shall be fully exercisable for a
period of 30 days from the date of such notice, and the Option will terminate
upon the expiration of such period.
12. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Board makes the determination granting such
Option. Notice of the determination shall be given to each Employee or other
person to whom an Option is so granted within a reasonable time after the date
of such grant. Within a reasonable time after the date of the grant of an
Option, the Company shall enter into and deliver to each Employee or other
person granted such Option a written Stock Option Agreement as provided in
Sections 2(r) and 16 hereof, setting forth the terms and conditions of such
Option and separately identifying the portion of the Option which is an
Incentive Stock Option and/or the portion of such Option which is a Nonstatutory
Stock Option.
9
<PAGE>
13. Amendment and Termination of the Plan.
a. Amendment and Termination. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval
of the shareholders of the Company in the manner described in Section 17 of
the Plan:
(i) An increase in the number of Shares subject to the Plan above
3,000,000 Shares, other than in connection with an adjustment under
Section 11 of the Plan;
(ii) Any change in the designation of the class of Employees
eligible to be granted Incentive Stock Options; or
(iii) Any material amendment under the Plan that would have to be
approved by the shareholders of the Company for the Board to continue
to be able to grant Incentive Stock Options under the Plan.
b. Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if the Plan had not been
amended or terminated, unless mutually agreed otherwise between the
Optionee and the Board, which agreement must be in writing and signed by
the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, the rules and
regulations promulgated thereunder, applicable state securities laws, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of legal counsel for the Company with
respect to such compliance.
As a condition to the existence of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares and such other
representations and warranties which in the opinion of legal counsel for the
Company, are necessary or appropriate to establish an exemption from the
registration requirements under applicable federal and state securities laws
with respect to the acquisition of such Shares.
10
<PAGE>
15. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's legal counsel to be necessary for the lawful issuance
and sale of any Share hereunder, shall relieve the Company of any liability
relating to the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
16. Stock Option Agreement. Each Option granted to an Employee or other
persons shall be evidenced by a written Stock Option Agreement in such form as
the Board shall approve.
17. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company on or before May 20, 1999. Such
shareholder approval and any shareholder approval required under Section 13 of
the Plan, may be obtained at a duly held shareholders meeting if the votes cast
in favor of the approval exceed the votes cast opposing the approval, or by
unanimous written consent of the shareholders in accordance with the provisions
of the Colorado Business Corporation Act.
18. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
19. Gender. As used herein, the masculine, feminine and neuter genders
shall be deemed to include the others in all cases where they would so apply.
20. CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND
INTERPRETATION OF THIS PLAN AND THE INSTRUMENTS EVIDENCING OPTIONS WILL BE
GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF
COLORADO.
11
<PAGE>
IN WITNESS WHEREOF, the Company has caused its duly authorized officer to
execute this Plan effective as of May 21, 1998.
CHAPARRAL RESOURCES, INC.,
a Colorado corporation
By: /s/ Howard Karren
-------------------------------------
Howard Karren, President
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3 No. 333-51327) and related Prospectus of
Chaparral Resources, Inc. for the registration of 24,605,450 shares of its
common stock and to the incorporation by reference therein of our report dated
March 13, 1998, (except for Note 7, as to which the date is March 31, 1998),
with respect to the consolidated financial statements of Chaparral Resources,
Inc. included in its Annual Report (Form 10-K) for the year ended December 31,
1997, filed with the Securities and Exchange Commission.
Ernst & Young LLP
Houston, Texas
September 18, 1998
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3 No. 333-51327) and related Prospectus of
Chaparral Resources, Inc. for the registration of 24,605,450 shares of its
common stock and to the incorporation by reference therein of our report dated
March 13, 1998, with respect to the financial statements of Karakuduk-Munay,
Inc. included in the Chaparral Resources, Inc. Annual Report (Form 10-K) for the
year ended December 31, 1997, filed with the Securities and Exchange Commission.
Ernst & Young-Kazakhstan
Almaty, Kazakhstan
September 18, 1998
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated January 19, 1996 accompanying the consolidated
financial statements included in the Annual Report of Chaparral Resources, Inc.
and subsidiary (the Company) on Form 10-K for the year ended December 31, 1997.
We consent to the incorporation by reference in the Company's Registration
Statement on Amendment No. 1 on Form S-3 to Form S-1 of the aforementioned
report.
/s/ Grant Thornton, LLP
-------------------------------------
Grant Thornton, LLP
Denver, Colorado
September 18, 1998
EXHIBIT 24
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 or Form S-3, whichever is applicable, and any and all amendments
thereto (including posteffective 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: August 24, 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 or Form S-3, whichever is applicable, and any and all amendments
thereto (including posteffective 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: August 24, 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 or Form S-3, whichever is applicable, and any and all amendments
thereto (including posteffective 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: August 24, 1998
/s/ J. Michael Muckleroy
--------------------------------
J. Michael Muckleroy
