FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission file number: 0-7261
CHAPARRAL RESOURCES, INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-063086
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2211 Norfolk, Suite 1150
Houston, Texas 77098
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(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 807-7100
Securities registered pursuant to Section 12(g) of the Act:
$0.10 Par Value Common Stock
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
As of March 31, 1999, the aggregate market value of Registrant's voting
stock held by nonaffiliates was $24,311,368.
As of March 31, 1999, Registrant had 58,588,790, shares of its $0.10 par
value common stock issued and outstanding.
Total Pages ___
Exhibit Index ___
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PART I
ITEM 1. BUSINESS
Business
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Chaparral Resources, Inc. ("Company"), incorporated under the laws of the
state of Colorado in 1972, is an independent oil and gas exploration and
production company, based in Houston, Texas. In June 1999, the Company plans to
move its corporate offices to Golden, Colorado. The Company currently owns all
of the outstanding common stock of Central Asian Petroleum Guernsey Limited
("CAP-G") which has a 50% interest in Karakuduk-Munay, JSC("KKM"). KKM holds
100% of the rights to develop the Karakuduk Field in Kazakhstan.
The Company's business strategy is to acquire and develop oil and gas
projects in emerging markets, specifically targeting fields with previously
discovered reserves, which either have never been placed on production or could
be materially enhanced with efficient management and technical experience
provided by the Company. The Karakuduk Field ("Karakuduk Field" or "Karakuduk
Project") described below is the Company's first oil field to be acquired under
the Company's new corporate strategy.
The Company has called for a special meeting of the Company's shareholders
to approve proposals for reincorporating the Company from the state of Colorado
to the state of Delaware and to effect a reverse stock split in which one new
share of the Company's common stock would be exchanged for every 60 shares of
common stock presently outstanding. The Company expects the special meeting to
occur in late April 1999.
Risks Inherent in Oil and Gas Exploration
There can be no assurance that the Company will be able to discover,
develop and produce sufficient reserves in the Karakuduk Field, or elsewhere.
Further, there can be no assurance that the Company will recover the expenses
incurred when it explores the Karakuduk Field or that it will achieve
profitability. The odds against discovering commercially exploitable oil and gas
reserves are always substantial and are increased as a result of the
concentration of the Company's activities in areas that have not yet been
significantly explored and where political or other unknown developments could
adversely affect commercialization. The Company, through KKM, will be required
to perform extensive geological and/or seismic surveys on its properties.
Depending on the results of the surveys, only subsequent drilling at substantial
cost and high risk can determine whether commercial development of the
properties is feasible. Oil and gas drilling is frequently marked by
unprofitable efforts, including unproductive wells, productive wells which do
not produce sufficient amounts of reserves to return a profit, and developed
reserves which cannot be marketed. The Company will be subject to all of the
risks inherent to drilling for and producing oil and gas. These risks include
blowouts, cratering, fires and accidents. Any of the risks could result in the
Company being liable for damages from loss of life and property. The Company is
not fully insured against these risks. Many of these risks are not insurable.
Risks of Operations in Kazakhstan
As a result of the Company's interest in KKM and the Karakuduk Field, it
will be subject to certain risks inherent in the ownership and development of
properties in Kazakhstan. The contracts that the Company has with the government
of Kazakhstan may be arbitrarily cancelled or forced into renegotiation.
Cancellation or renegotiation will or is likely to adversely affect the
Company's ability to profitably extract oil from the Karakuduk Field. The
government of Kazakhstan may impose royalty increases, tax increases and
retroactive tax claims against the Company. These taxes would adversely affect
the Company's ability to profitably extract oil from the Karakuduk Field because
of increased expenses. Expropriation, environmental controls, and other laws and
regulations may adversely affect the Company's interest in the Karakuduk Project
because of increased costs, inaccessibility or delays.
Due to the fact that the Company only controls a 50% interest in KKM, the
Company must seek the approval of KKM's other two shareholders, KazakhOil, which
is the national petroleum company for the Republic of Kazakhstan, and a private
Kazakhstan joint stock company, before any major actions are taken by KKM. If
the Company is unable to obtain the approval of one of KKM's remaining
shareholders, the operations of KKM may come to a standstill, which could result
in the loss of KKM's rights to explore and develop the Karakuduk Field. There
are no practical mechanisms in the agreement with KazakhOil and the joint stock
company to resolve any such stalemate.
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The Company's operations and agreements are also governed by the laws of
Kazakhstan. The Company may be subject to arbitration in Kazakhstan or to the
jurisdiction of the courts in Kazakhstan. The Company may not be successful in
subjecting foreign persons to the jurisdiction of courts in the United States.
The Company may be hindered or prevented from enforcing its rights with respect
to a government agency, instrumentality or other government entity of Kazakhstan
because such entities may consider themselves immune from the jurisdiction of
any court.
KKM's Kazakhstan license for the Karakuduk Field includes the right to
export oil produced and to establish and maintain bank accounts in U.S. dollars
or other foreign currency outside of Kazakhstan. The Kazakhstan government's
agreement with KKM allows KKM to maintain its books and records in U.S. dollars,
but requires local Kazakh taxes be reported in tenge, the local Kazakh currency.
KKM's functional currency is the U.S. dollar. Because Kazakh law prohibits the
export of tenge, any payment for oil sold in tenge will be used for the payment
of local costs and expenses. KKM expects that the majority of the oil it
produces will be exported and sold outside of Kazakhstan and that payment will
be in U.S. dollars. The U.S. dollars will be deposited in bank accounts
established outside of Kazakhstan.
The Company may encounter unexpected difficulties in conducting foreign
operations. Although management of the Company believes that the recent and
continuing political, social and economic developments in Kazakhstan have
created opportunities for foreign investment, uncertainty exists about the
status of Kazakhstan law, the stability of Kazakhstan and the autonomy of the
parties involved with the Company in Kazakhstan.
Political Risk Insurance.
The Company has applied with Overseas Private Investment Corporation
("OPIC") for political risk insurance. OPIC insurance can cover the following
political risks:
o Currency Inconvertibility--deterioration of the investor's ability to
convert profits, debt service and other remittances from local
currency into U.S. dollars;
o Expropriation--loss of an investment due to expropriation,
nationalization or confiscation by a foreign government;
o Political Violence--loss of assets or income due to war, revolution,
insurrection or politically motivated civil strife, terrorism and
sabotage; and
o Interference With Operations--loss of assets or income due to
cessation of operations lasting six months or more caused by political
violence.
The coverage elections for each category of insurance are computed on a
ceiling and an active amount. The coverage ceiling represents the maximum
insurance available for the insured investment and future earnings under an
insurance contract. The premiums for each category are based on a maximum
insured amount ("MIA"), a current insured amount ("CIA") and a standby amount.
The MIA represents the maximum insurance available for the insured investment
under an insurance contract. The CIA represents the insurance actually in force
during the contract period. The CIA cannot exceed the book value of the insured
assets physically in Kazakhstan. The difference between the CIA and the MIA is
the standby amount. There is a charge for standby coverage.
The Company has applied with OPIC for all four political risk coverages on
the Company's investment in the Karakuduk Field. The Investment Committee of
OPIC approved the Company's Karakuduk operations for political risk insurance
coverage on December 19, 1995. The Company received an executed Letter of
Commitment from OPIC on September 25, 1996, binding issuance of Political Risk
Insurance for the Karakuduk Project. Currently, the Company has a standby
facility for which it has made eight equal payments of $31,250 and two payments
of $15,625. The Company expects to execute the actual contract offered to the
Company by OPIC on or before June 30, 1999.
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The final terms of the contract must be agreed upon at the time the
contract is executed. The CIA will be equal to the book value of the Company's
assets physically located in Kazakhstan. The MIA will equal the total coverage
available for current and future assets placed in Kazakhstan by the Company. The
MIA directly impacts both the premiums and deductible requirements in the
contract. Premiums will be paid quarterly. The Company will not know the
specific terms of the contract until the MIA required has been firmly
established. In the event of a loss, the reimbursement by OPIC to the Company
will be limited to the Company's actual loss of physical property in Kazakhstan.
The maximum reimbursement cannot exceed 90% of the MIA. The Company has delayed
execution of a final OPIC contract until the substantial costs of the premiums
are justified by the Company's investment in the Karakuduk Field.
Under the terms of OPIC's Expropriation and Interference with Operations
insurance coverage, the Company must be able to transfer to OPIC the shares of
beneficial interests related to the insured investment, free and clear of all
encumbrances. There are certain restrictions on the transfer of shares and
assignment of the Company's beneficial interests in KKM. At such time as the
Company obtains coverage, the Company will seek a waiver of the transfer
restrictions from the shareholders of KKM that are not affiliated with the
Company. While there is no assurance the waiver will be obtained, the Company
does not anticipate significant problems in obtaining the waiver, if required to
secure long term financing for the benefit of KKM
Markets
There is substantial uncertainty as to the future prices the Company could
obtain for any oil reserves produced from the Karakuduk Field. It is possible
that, under the market conditions prevailing in the future, the production and
sale of oil from the Karakuduk Field may not be commercially feasible. The
availability of ready markets and the price obtained for oil produced depends
upon numerous factors beyond the control of the Company. The current market for
oil is characterized by instability, which has caused dramatic declines and
increases in world oil prices in recent years. There can be no assurance of any
price stability in the current, and future, oil and gas market.
During 1998, the oil industry experienced major declines in oil prices
worldwide. The Commonwealth of Independent States (CIS), and Kazakhstan in
particular, were impacted severely, with competition increasing dramatically for
limited pipeline capacity required to access the world oil market. Furthermore,
instability in the economies of Russia and other CIS countries led to the
devaluation of the Ruble and weakening of other regional currencies. Competition
to sell oil on the world market, in exchange for more stable, western currencies
(i.e. the US dollar), drove oil prices in the CIS down even farther than
declines in other markets.
On March 7, 1998, KKM entered into a contract with the export-import firm
of Munay-Impex, a subsidiary of KazakhOil, to export up to 100,000 tons of crude
oil produced by KKM to both the CIS and other countries. KKM was to supply crude
oil to Munay-Impex in amounts of not less than five to 10 thousand metric tons.
Munay-Impex, acting as a broker, would market KKM's crude oil production for
sale on either the local or export market. KKM produced a total of 11,103 tons
(81,052 barrels) of oil during 1998, which has been stored as inventory in the
KazTransOil pipeline. Due to existing market conditions, however, Munay-Impex
was unable to find a suitable market to sell KKM's limited crude oil production
for an economical return. As a result, KKM did not sell any crude oil in 1998,
and allowed the Munay-Impex contract to terminate on December 31, 1998 at the
end of the contractual term. During December of 1998 and throughout the first
quarter of 1999, KKM continued to attempt to sell it's crude oil production at
acceptable economic terms, but was unsuccessful.
On March 30, 1999, KKM entered into a contract with KazakhOil JSC, a
shareholder of KKM, to export up to 19,000 tons of crude oil during April 1999.
Under the contract, KazakhOil guaranteed KKM the necessary transit quota to sell
to export markets outside of Kazakhstan, via the KazTansOil pipeline. As of
March 31, 1999, KKM had approximately 18,000 tons of crude oil production stored
in the KazTransOil pipeline, and expects to achieve 19,000 tons of cumulative
production in early April 1999. KKM expects to sell the entire 19,000 tons of
oil during April, with payment expected in late April or May of 1999.
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KKM anticipates that production facilities required to process and
transport larger volumes of expected future production from the Karakduk Field
will be completed during 1999. The production facilities currently under
construction will initially allow up to 16,000 barrels of oil per day to be
transported to the KazTransOil pipeline. Until the production facilities are
completed, crude oil production is being placed into storage tanks and then
trucked to the pipeline. The number of crude oil trucks operating in the
Karakuduk Field has been increased to facilitate 24 hours a day transportation
to the pipeline, which allows increased production from existing wells.
The Company's business is not seasonal, except that severe weather
conditions could limit the Company's exploration and drilling activities.
However, severe cold weather increases the demand for oil and natural gas, which
are used for heating purposes.
See also "Item 2. Properties - The Karakuduk Field."
Competition
Foreign oil and gas exploration and the acquisition of producing and
undeveloped properties is a highly competitive and speculative business. In
seeking suitable opportunities, the Company competes in all areas of the oil and
gas industry with a number of other companies, including large multi-national
oil and gas companies and other independent operators with greater financial
resources and, in some cases, with more experience than the Company. The Company
does not hold a significant competitive position in the oil and gas industry.
Such competition may adversely affect the Company's ability to market its oil
and/or obtain a competitive price for any oil sold. At this time, no prediction
can be made as to the effect such competition will ultimately have upon the
Company.
Even considering the recent downturn in the oil and gas industry, the CIS
is currently a primary focal point for substantial exploration and development
activities. Within Kazakhstan, the Company competes with both major oil and gas
companies and independent producers for, among other things, 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.
Regulation
General. The Company's operations may be subject to regulation by
governments or other regulatory bodies governing the area in which the Company's
overseas operations are located. Regulations govern such things as drilling
permits, production rates, environmental protection and pollution control,
royalty rates and taxation rates, among others. These regulations may
substantially increase the costs of doing business and sometimes may prevent or
delay the starting or continuing of any given exploration or development
project. Moreover, regulations are subject to future changes by legislative and
administrative action and by judicial decisions, which may adversely affect the
petroleum industry in general and the Company in particular. At the present
time, it is impossible to predict the effect any current or future proposals or
changes in existing laws or regulations will have on the Company's operations.
The Company believes that it complies with all applicable legislation and
regulations in all material respects.
KKM is subject to various taxes in Kazakhstan, including, but not limited
to, income tax, value added tax (VAT), customs duties, excise taxes, property
taxes, payroll taxes, and excess profits tax. Furthermore, payments made by KKM
to the Company or its subsidiaries may also be subject to additional withholding
tax depending upon the type of payment and the country of incorporation of the
recipient of the payment. Without consideration of tax treaty benefits,
Kazakhstan requires 15% withholding on payments for dividends and interest to
foreign persons. Royalties and services are subject to a 20% withholding rate,
as well.
The Company and all its subsidiaries, other than CAP-G, are incorporated in
the United States and enjoy the tax benefits provided by the tax treaty between
the United States and Kazakhstan. Under the U.S./Kazakhstan tax treaty currently
in effect, withholding rates are substantially reduced. Generally, the tax
treaty rates are 5% for dividends paid to 10% or greater shareholders, 10% for
interest and royalties, and no withholding on payments for services as long as a
permanent residence has not been established by the foreign person.
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CAP-G is incorporated in the Isle of Guernsey, which currently does not
have a tax treaty with Kazakhstan. Under KKM's license with Kazakhstan ,
interest payments made by KKM to CAP-G are not subject to withholding tax. Any
dividends paid by KKM to CAP-G, however, are currently subject to a withholding
tax rate of 15%. Currently, and for the foreseeable future, the Company does not
expect KKM to pay any income tax in Kazakhstan or to declare any dividends for
the benefit of its shareholders.
Environmental. Based upon a study undertaken on behalf of the Company by an
unaffiliated party, the Company believes that its business operations presently
meet all legally required environmental quality standards. However, compliance
with foreign laws and regulations, which have been enacted or adopted regulating
the discharge of materials into the environment could have an adverse effect
upon the Company, the extent of which the Company is unable to assess. As is the
case with other companies engaged in oil and gas exploration, production and
refining, the Company faces exposure from potential claims and lawsuits
involving environmental matters. These matters may involve alleged soil and
water contamination and air pollution. Since inception the Company has not made
any material capital expenditures for environmental control facilities and has
no plans to do so.
Devaluation of Currency. On April 5, 1999, the government of Kazakhstan,
with the approval of the International Monetary Fund, allowed the national
currency of Kazakhstan, the tenge, to float freely against the US dollar.
Immediately thereafter, the official exchange rate declined from 87.5 tenge to
the US dollar to 142 tenge to the US dollar. As of April 12, 1999, the exchange
rate was approximately 115 tenge to the US dollar. The devaluation of the tenge
significantly decreases the realizable value of tenge monetary assets, but also
decreases the financial obligation of tenge denominated liabilities.
The instability resulting from the tenge devaluation creates uncertainty
regarding the future business climate in Kazakhstan and for the Company's
investment in KKM. The Company, however, does not expect an material adverse
impact to it's operations. The majority of KKM's current assets and current
liabilities are denominated in US dollars and are unaffected. While statutory
tax reporting is done in tenge, the Kazakh government allows revaluation
adjustments to step-up the tax basis in assets to offset the effects of Kazakh
deflation. KKM expects to utilize the revaluation adjustments to determine
taxable income or loss reported to the Kazakh tax authorities.
Expected revenue from KKM's pending sale of crude oil is denominated in US
dollars, although final settlement is expected in tenge based upon the exchange
rate on the date of payment. KKM expects future sales to be both denominated and
settled in US dollars.
Employees
As of March 31,1999, the Company had 8 full-time employees and 1 part-time
employee. CAP-G operates through its officers and directors and had no
employees. KKM had 161 employees and retains independent contractors on an as
needed basis through the Company's wholly owned subsidiary, Road Runner Service
Company, Inc.
ITEM 2. PROPERTIES
Properties
The Karakuduk Field
The Karakuduk Field is located in the Mangistau Region of the Republic of
Kazakhstan. KKM's license to develop the Karakuduk Field covers an area of
approximately 16,922.5 acres and has been granted to KKM for a period of 25
years. The agreement granting KKM the right to develop the Karakuduk Field was
approved by Kazakhstan's Ministry of Energy and Natural Resources on August 30,
1995.
The Karakuduk Field is geographically located, approximately 227 miles
northeast of the regional capital city of Aktau, on the Ust-Yurt Plateau. The
closest settlement is the Say-Utes Railway Station approximately 51 miles
southeast of the field. The ground elevation varies between 590 and 656 feet
above sea level. The region has a dry, continental climate, with fewer than 10
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inches of rainfall per year. Mean temperatures range from -25 degrees Fahrenheit
in January to 100 degrees Fahrenheit in July. The operating environment is
similar to that found in northern Arizona and New Mexico in the United States.
The Karakuduk structure is an asymmetrical anticline located on the Aristan
Uplift in the North Ustyurt Basin. Oil was discovered in the structure in 1972,
when Kazakhstan was a republic of the former Soviet Union, from Jurassic age
sediments between 8,500 and 10,000 feet. Twenty-two exploratory and development
wells were drilled to delineate the field. However, none of the wells were ever
placed on production. The productive area of the Karakuduk Field is 11,300
acres, with a minimum of seven separate productive horizons present in the
Jurassic formation. Oil has been recovered in tests from seven horizons within
the Jurassic formation with flow rates ranging from 3 to 966 barrels per day.
The Company estimates that drilling a maximum of 80 additional oil wells and 26
water injection wells may be required to fully develop the field. Peak oil
production from the field is expected to occur by 2002, although the time or
amount of development or production cannot presently be assured. The planned
development program for the Karakuduk Field will include a pressure maintenance
operation that the Company believes could result in additional recoverable
reserves.
The ability of the Company to realize the carrying value of its assets is
dependent on the Company being able to extract and transport hydrocarbons and
finding appropriate markets for their sale. Currently, exports from Kazakhstan
are dependent on limited transport routes and, in particular, access to the
Russian pipeline system. Domestic markets in Kazakhstan might not permit world
market price to be obtained. Management believes, however, over the life of the
project, transportation restrictions will be alleviated and adequate prices will
be obtained for hydrocarbons produced from the Karakuduk Field, for the Company
to fully recover the the carrying value of its assets.
The Karakuduk Field is approximately 18 miles north of the Mukat-Mangishlak
railroad, the Mangishlak-Astrakghan water pipeline, the Beyneu-Uzen high voltage
utility lines, and the Uzen-Atrau-Samara oil and gas pipelines. KKM, according
to its license agreement with Kazakhstan, has a priority use of the existing
pipeline network. In early 1998, KKM entered into a contract with KazTransOil
JSC, the state-owned company controlling the Uzen-Atrau-Samara pipeline. The
contract grants KKM rights to use the pipeline for transportation of crude oil
to local and export markets, subject to transit quota restrictions, and as a
temporary storage facility until the produced hydrocarbons are sold by KKM.
Currently, KKM is producing oil through field separators, into storage tanks and
then into crude oil trucks, for delivery to the pipeline. As of March 31, 1999,
KKM had produced approximately 18,000 tons (131,000 barrels) of crude oil, which
has been stored in the KazTransOil pipeline.
On March 30, 1999, KKM entered into a contract with KazakhOil JSC, a
shareholder of KKM, to export up to 19,000 tons of crude oil during April 1999.
Under the contract, KazakhOil guaranteed KKM the necessary transit quota to sell
to export markets outside of Kazakhstan, via the KazTansOil pipeline. KKM
expects to achieve 19,000 tons of cumulative production in early April 1999. KKM
nominated 13,000 tons for sale in early April, and expects to sell the remaining
6,000 tons of oil in late April, with payment expected in late April or May of
1999. KKM has no other existing contracts for sales of future crude oil
production. Although the management of the Company believes long-term sales
contracts for KKM's crude oil production will be available in the future, at
terms acceptable to KKM, there is no assurance that any such agreements will
ever be obtained by KKM.
Because of uncertainties surrounding the Karakuduk Project, no proved
reserves have been attributed to the field as of March 31, 1999. The crude oil
production stored in the KazTransOil pipeline throughout 1998 was not considered
commercially viable by the Company as of December 31, 1998, primarily due to the
depressed crude oil prices during the fall of 1998 and early spring of 1999. The
Karakuduk Project will require significant development costs for which the
financing is not complete. There can be no assurances that the project will be
adequately financed or that the field will be successfully developed.
On December 31, 1998, the government of Kazakhstan approved KKM's request
to amend KKM's license to develop the Karakuduk Field. The license, as amended,
requires the KKM to meet expenditure commitments of $16.5 million by December
31, 1998 and $30 million by December 31, 1999. Expenditure commitments through
December 31, 1998 exceeded the commitment requirement of $16.5 million by
approximately $480,000. The excess is applicable against the expenditure
commitment required as of December 31, 1999. As of March 31, 1999, KKM has
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incurred approximately $3.5 million in expenses against its 1999 expenditure
commitment. Should the license terms not be adhered to, the license may be
withdrawn by the government of Kazakhstan.
The Company is responsible for providing 100% of the funding necessary for
the development of the Karakuduk Field, which is not provided by third-party
sources. KKM plans to meet it's funding requirements through loans from CAP-G to
KKM, and through proceeds from the sale of oil extracted by KKM from the
Karakuduk Field. As of March 31, 1999, the Company has loaned CAP-G in excess of
$25 million to fund KKM's current operations. The Company is attempting to
obtain project financing for either CAP G or KKM, which may reduce the amount of
loans from the Company to CAP-G.
KKM first produced crude oil from the Karakuduk Field in December 1997. At
present, the oil is transported by truck to the export pipeline at Say-Utes,
which is approximately 51 miles from the field. By the end of the second quarter
of 1999, it is anticipated that any oil produced will be transported by pipeline
from the field to the pipeline terminal to be built at Railroad Station No. 6,
which is approximately 18 miles from the Karakuduk Field. During 1998, KKM began
construction of an 18-mile pipeline from the field to the the Station No. 6
pipeline terminal, capable of transporting up to 16,000 barrels of oil per day
to the KazTransOil pipeline. Once construction is completed on the Station No. 6
terminal, allowing direct access into the export pipeline, KKM plans to complete
and bring on-line the 18-mile pipeline.
Until the pipeline and related production facilities are completed, daily
crude oil production is being processed, placed into storage tanks, and then
trucked to the Say-Utes pipeline terminal. Production placed into the pipeline
is considered inventory of KKM until the production is sold. As of March 31,
1999, KKM had not recognized any revenue from the sale of oil production, but
expects to complete a sale during April 1999.
During 1998, KKM re-entered four of the original twenty-two wells drilled
in the Karakuduk Field, establishing production from two wells. KKM plans to
complete the other two workover wells in the spring of 1999. KKM began drilling
the initial exploratory well No. 101, on February 14, 1999, and reached total
depth in early April. KKM plans to complete Well No. 101 during April 1999. If
Well No. 101 is successful, KKM expects to bring production on-line in May of
1999. KKM also plans to drill 7 new wells before December 31, 1999, in
accordance with KKM's license obligation to the government of Kazakhstan.
Additional field facilities are either in place or under construction to
support the development and production of the wells to be drilled during 1999.
KKM has constructed a base camp with living quarters for 150 men, a mini-camp
for the drilling contractor and other service company personnel, storage
facilities, processing facilities, warehouses, a repair shop, and other related
support facilities. KKM has also completed a main road between the KazTransOil
pipeline terminal at the Station No. 6 and the field. KKM is also clearing
access roads and performing other required site preparation activities for other
planned drilling locations.
Management of the Company believes the risk-to-reward considerations
involved with the development of the Karakuduk Field are very positive and may
lead to substantial growth of the Company over the next several years. However,
the Company can provide no assurances that the Karakuduk Field will produce oil
in any specific amounts or that the Company will ever realize a profit as a
result of the Company's interest in the field.
KKM was re-registered on July 24, 1997, with the government of Kazakhstan.
The re-registration was required as a result of new legislation in Kazakhstan.
The Company believes that KKM is now in compliance with all Kazakhstan laws and
regulations related to the registration requirements relating to legal entities.
The current KKM shareholders' include CAP-G, KazakhOil, and a local Kazakhstan
joint stock company. KazakhOil JSC, the national petroleum company of the
government of Kazakhstan holds a 40% ownership interest in KKM. The private
Kazakhstan joint stock company owns the remaining 10%.
The permits and licenses required to develop the Karakuduk Field have been
obtained. However, there is no assurance that any further permits or licenses,
if required, will be obtained. Also, because of uncertainties surrounding the
project and lack of proven commercial viability of crude oil production
extracted during 1998 and early 1999, no proved reserves have been attributed to
the Karakuduk Field. The project will require significant development costs for
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which the financing is not in place. There can be no assurance that the project
will be financed or that the Karakuduk Field will be successfully developed.
Further, the Company will face all of the risks inherent in attempting to
develop an oil and gas property in a foreign country.
See also Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Reserves. The Company claims no proved reserves as of December 31, 1998.
As a result of the Company recently reentering a well in the Karakuduk
Field and because of the Company's future drilling plans for the Karakuduk
Field, the Company expects to be able to obtain a reserve report for the
Karakuduk Field during 1999.
Since January 1, 1998, the Company has not filed with or included in any
reports to any other federal authority or agency any estimates of total, proved
net oil or gas reserves.
Net Quantities of Oil and Gas Produced. The Company's net oil and gas
production for each of the last three fiscal years and for the month of December
1996 (all of which prior to 1997 was from properties located in the United
States) was as follows:
<TABLE>
<CAPTION>
Year ended Year ended Month of Year ended
December 31, 1998 December 31, 1997 December 1996 November 30, 1996
----------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Oil (Bbls) 81,052 Less than 1,000 -0- 1,737
Gas (Mcf) -0- -0- -0- 96,906
</TABLE>
KKM did not sell any oil during 1998. Oil production for 1998 represents
100% of KKM's 1998 production, which was placed into the KazTransOil pipeline.
While the Company, through CAP-G, owns 50% of KKM, the Company will receive the
entire economic benefit from the sale of KKM's initial production. The net
proceeds to be received from the sale of KKM's 1998 production will be used to
partially repay CAP-G's loan to KKM and to fund KKM's ongoing operations,
reducing CAP-G's funding commitment to do the same.
The average sales price per barrel of oil and Mcf of gas, and average
production costs per barrel of oil equivalent ("BOE") excluding depreciation,
depletion and amortization were as follows:
<TABLE>
<CAPTION>
Average Average Average
Year Ended Month of Year Ended Sales Price Sales Price Production
December 31, December, November 30, Oil (Bbls) Gas (Mcf) Cost Per BOE
------------ --------- ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
1998 * * *
1997 * * *
1996 * * *
1996 $17.53 $1.17 $2.07
</TABLE>
The above table represents activities related only to oil and gas
production.
*The Company did not sell any significant quantities of oil or gas during
these periods. KKM did not sell any oil or gas during the years presented.
Productive Wells and Acreage. As of December 31, 1998, KKM had interests in
one productive oil well, one shut-in productive oil well, and no productive gas
wells. As of December 31, 1998, the Company had a net 50% beneficial interest in
KKM which holds a governmental license to develop the Karakuduk Field, a 16,900
acre oil field in Kazakhstan which was discovered in 1972 with the drilling of
22 exploratory and development wells by the former Soviet Union. None of these
wells were produced commercially prior to 1998.
9
<PAGE>
On December 31, 1997, KKM delivered by truck to the pipeline oil that KKM
had recovered from testing Well No. 21, the first well KKM reentered in the
Karakuduk Field. Well No. 21 tested on a sustained flow of 526 barrels of oil
per day. The well was subsequently shut-in until additional facilities are put
in place to process and transport the combined daily production from Well No. 21
and Well No. 10. In February 1998, Well No. 10 was reperforated and produced at
a sustained test flow rate of 1,450 barrels of oil per day. Well No. 10 was
placed on limited production to fill storage tanks and transport trucks that
deliver oil to the export pipeline. In March 1999, KKM acquired additional
trucks and personnel to increase the amount of daily production currently
deliverable to the pipeline terminal. KKM also has begun preparations to
workover Well Nos. 7 and 20 and, if the wells are productive, will place them on
production at such time as the field facility construction is completed.
On February 14 1999, KKM began drilling well No. 101, reaching total depth
in early April. The well has not been completed as of the filing date of this
report.
Drilling Activity. During the last two fiscal years ended December 31,
1998, the month of December 1996 and the fiscal year ended November 30, 1996,
the Company did not participate in the drilling of any productive exploratory or
development wells. The Company did participate in the capital workover of four
previous drilled wells, which had never been placed on production.
Present Activities. As of April 13, 1999, the Company was in the process of
drilling Well No. 101, reopening Well No. 21, previously shut-in during 1998,
and planning the reentry of Well No. 20. Well No. 10 is currently producing
approximately 1,200 barrels of oil per day.
Offices. On March 1, 1999, the Company announced that it is relocating its
principal office from Houston, Texas to Golden, Colorado. On this date, the
Company leased office space from a related party, on 1010 Tenth Street, Suite
100, Golden, Colorado 80401. The offices consist of approximately 2,255 square
feet and will be leased until August 31, 1999 at an initial rent of
approximately $4,000 per month, and on a month to month basis after that. On
April 1, 1999, the Company assigned its office space at 2211 Norfolk, Suite
1150, Houston, Texas 77098 to an unaffiliated third party. The Company is
currently subleasing the Houston office space on a month by month basis for
approximately $5,000 per month. The Company expects the relocation to be
completed by the fall of 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings required to be reported
hereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during the Company's fiscal quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's $0.10 par value common stock is currently traded on the
Nasdaq Small-Cap Market (Nasdaq) under the symbol CHAR. The Company has been
advised that the Company's common stock is subject to being delisted by Nasdaq
as a result of the common stock not meeting the minimum bid price requirements.
The Company has scheduled a hearing with Nasdaq for April 30, 1999, to request
additional time to satisfy Nasdaq's minimum bid price requirements. Additionaly,
the Company has requested a special meeting of the Company's shareholder's in
late April, 1999 to approve a reverse stock split in which one new share of the
Company's common stock would be exchanged for every 60 shares of common stock
presently outstanding.
10
<PAGE>
As of April 7, 1999, the Company had approximately 2,022 shareholders
of record of its $0.10 par value common stock. No dividend has been paid on the
Company's common stock, and there are no plans to pay dividends in the
foreseeable future.
The following table shows the range of high, low and closing sales
prices for each quarter during the Company's last two calendar years ended
December 31, 1998 and December 31, 1997, as reported by the National Association
of Securities Dealers, Inc.
Price Range
--------------------------
Fiscal Quarter Ended High Low Closing
- -------------------- ---- --- -------
March 31, 1997 1 3/16 3/4 7/8
June 30, 1997 * 1 3/4 13/16
September 30, 1997 1 1/4 11/16 1 5/32
December 31, 1997 3 3/32 1 1/16 2 1/2
March 31, 1998 2 25/32 2 2 7/16
June 30, 1998 2 1/2 1 1/2 1 11/16
September 30, 1998 2 1/2 3/4 1 9/32
December 31, 1998 1 3/4 11/32 11/32
* On May 29, 1997, the Company changed its fiscal year end from November 30 to
December 31.
The following is information as to all securities of the Company sold by
the Company since October 1, 1998, which were not registered under the
Securities Act of 1933, as amended ("Securities Act").
On October 30, 1998, the Company issued warrants to purchase 200,000 shares
of the Company's common stock at an exercise price of $1.00 per share as part of
the settlement for a lawsuit filed against the Company and others in the
District Court of Harris County, Texas, by Heartland, Inc. of Wichita and
Collins & McIlhenny, Inc. on November 14, 1997. The warrants are exercisable
through January 2, 1999. The Company issued the warrants in reliance upon the
exemption from registration under Section 4(2) of the Securities Act. The
recipients had available all material information concerning the Company. The
warrant certificates bear an appropriate restrictive legend under the Securities
Act. No underwriter was involved in the transaction.
During the quarter ended December 31, 1998, the Company granted 5-year
options to purchase 38,500 shares of the Company's common stock to employees of,
and consultants to, the Company. The Company made the grants in reliance upon
the exemption from registration under Section 4(2) of the Securities Act. Such
persons had available to them all material information concerning the Company.
The options will have an appropriate restrictive legend under the Securities
Act. No underwriter was involved in the transaction.
On December 31, 1998, warrants to purchase 80,000 shares of the Company's
common stock were exercised, at a price of $0.25 per share, for a total of
$20,000.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following is selected consolidated financial information concerning the
Company. This information should be read in conjunction with the Consolidated
Financial Statements appearing elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
As of or for
the Year As of or for the Year Ended
Ended Month of -------------------------------------------
December 31 , December 31, December November 30, November 30, November 30,
1998 1997 1996 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Oil and gas sales (1)........... -- -- -- $ 147,000 $ 255,000 $ 374,000
Total revenues.................. -- -- -- 147,000 255,000 374,000
Noncash write-down of oil
and gas properties ............. -- -- -- -- 619,000 416,000
Net income (loss)............... (4,266,000) (2,603,000) (130,000) (2,416,000) (704,000) (474,000)
Net income (loss) per
common share.................. (.09) (.06) (.00) (.08) (0.04) (0.02)
Working capital................. (287,000) 3,356,000 * 259,000 366,000 497,000
Total assets.................... 34,324,000 23,519,000 * 14,498,000 5,595,000 2,388,000
Long-term obligations and
redeemable preferred stock 5,060,000 4,710,000 * 1,491,000 461,000
Shareholders' equity............ 27,579,000 18,578,000 * 12,114,000 4,920,000 2,035,000
Other Data
- ----------
Present value of proved reserves -- -- -- -- 427,000 1,084,000
Proved oil reserves (bbls) -- -- -- -- 66,185 111,690
Proved gas reserves (mcf) -- -- -- -- 3,062,417 3,294,730
</TABLE>
(1) In 1994, the Company made a strategic decision to pursue international oil
and gas projects and, by early 1997, had completely disposed of all
domestic oil and gas properties.
* Not applicable due to one month short period ended December 31, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
During 1998, the Company raised additional capital to finance CAP-G's
obligation for the development of the Karakuduk Field and to satisfy other
working capital needs of the Company. Since January 1, 1998, the Company raised
$12,500,000 through the sale of common stock and $20,000 through the exercises
of common stock warrants. The Company also raised an additional $2,070,000
through various loans to the Company, of which $975,000 was outstanding as of
December 31, 1998. The Company's material capital and financing transactions
during 1998 were as follows:
On April 3, 1998, the Company sold 1,250,000 shares of the Company's common
stock for $2.00 per share for at total of $2,500,000 to a private investor.
Allen & Company, Incorporated acted as placement agent in connection with the
12
<PAGE>
sale of the 1,250,000 shares. As a result, Allen & Company, Incorporated's
warrants to purchase shares of the Company's common stock, originally issued as
a commission in connection with the Redeemable Preferred Stock sale on November
24, 1997, became exercisable for an additional 100,000 shares. The warrants to
purchase the additional 100,000 shares of the Company's common stock are
exercisable through November 25, 2002, at an exercise price of $0.01 per share.
On July 28 and July 29, 1998, the Company sold 6,666,667 shares of the
Company's common stock for $1.50 per share for at total of $10,000,000 to
certain investors. Issuance costs incurred were approximately $50,000 and have
been recorded as a reduction to the proceeds received from the sale. Allen &
Company, Incorporated acted as placement agent in connection with the sale of
the 6,666,667 shares. As a result, Allen & Company, Incorporated's warrants to
purchase 900,000 shares of the Company's common stock, originally issued as
commission in connection with the Redeemable Preferred Stock sale on November
24, 1997, became exercisable for an additional 400,000 shares of the Company's
common stock. The 400,000 warrants are exercisable through November 25, 2002, at
an exercise price of $0.01 per share. As of December 31, 1998, 200,000 warrants
held by Allen & Company, Incorporated were unexercisable pending the performance
of future services.
Due to the fact, the sales price of the 6,666,667 shares was below a price
of $2.00 per share, the Company was required to issue an additional 416,667
shares to the investor who purchased 1,250,000 shares of the Company's common
stock for $2,500,000 in April 1998 in order to satisfy certain price protection
agreements the Company has with such investor.
On August 5, 1998, the Company retired two outstanding loans, totaling
$1,000,000, from two related parties: Allen & Company, Incorporated ($900,000)
and John McMillian, a director and current Chairman and Chief Executive Officer
of the Company ($100,000). The Company borrowed the $1,000,000 on June 3, 1998,
subject to a 7% interest rate. The note was payable in full, plus accrued
interest, on the earlier of 180 days from the funding of the loans or upon the
Company's receipt of a minimum of $10,000,000 in equity investments. In
conjunction with the loans, the Company issued warrants to purchase 1,000,000
shares of the Company's common stock, at an exercise price of $3.50 per share.
The Company recorded the warrants at their fair market value of $367,000, as a
discount of notes payable, amortizable over the life of the loans. On July 27,
1998, the Company received $10,000,000 in equity financing and repaid the loans,
recognizing an extraordinary loss on the extinguishment of debt of approximately
$236,000.
On July 3, 1998, the Company borrowed $975,000 from the Chase Bank of Texas
(Chase). The Company subsequently amended the Chase note on December 3, 1998 and
on February 28, 1999. Under the restructured terms of the note dated February
28, 1999, the loan accrues interest at an adjustable prime rate, as determined
by Chase. As of December 31, 1998 the stated prime rate was 7.75%. Principal
payments in the amount of $250,000, plus accrued interest, are due quarterly,
beginning on August 31, 1999.
The $975,000 loan is fully guaranteed with a stand-by letter of credit from
Whittier Ventures, LLC, an investor in the Company. In return for issuing the
loan guarantee, the Company paid the guarantor $10,000 plus related costs,
issued warrants to purchase 20,000 shares of the Company's common stock, and
granted the guarantor a security interest in the Company's common stock of
Central Asian Petroleum (Guernsey) (CAP-G).
In the event of the Company's default on the $975,000 note, the guarantor's
security interest in the Company's common stock in CAP-G cannot be perfected for
at least 30 days after notification of such default. In the event of default,
the Company may make full payment of any outstanding principal and interest on
the note plus any additional charges incurred by the guarantor to completely
remove any security interest held by the guarantor.
The Company may seek to obtain additional capital through debt or equity
offerings, encumbering properties, entering into arrangements whereby certain
costs of development will be paid by others to earn an interest in the
properties, or sale of a portion of the Company's interest in the Karakuduk
Field. The present environment for financing the acquisition of oil and gas
properties or the ongoing obligations of the oil and gas business is uncertain
due, in part, to instability in oil and gas pricing in recent years. The
Company's small size and the early stage of development of the Karakuduk Field
may also increase the difficulty in raising any financing that may be needed in
the future. There can be no assurance that the debt or equity financing that
13
<PAGE>
might be required to fund the Company's operations and obligations in the future
will be available to the Company on economically acceptable terms if at all.
During the first quarter of 1999, the Company borrowed an additional
$3,800,000 from related party investors. The notes are repayable in full on
August 31, 1999 and accrue interest at an 8% rate. The financing was primarily
utilized to fund KKM's operations during the first quarter of 1999.
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred recurring operating losses and has no operating assets presently
generating cash to fund its operating and capital requirements. The Company does
not anticipate that its current cash reserves and cash flow from operations will
be sufficient to meet its capital requirements through fiscal 1999.
As of December 31, 1998, substantially all of the Company's assets are
invested in the development of the Karakuduk Field. The Karakuduk Field has not
produced any revenues as of December 31, 1998 and is not expected to produce
revenues sufficient to meet KKM's cash needs during 1999. The development of the
Karakuduk Field, through KKM, will require substantial amounts of additional
capital. KKM's revised license with the government required KKM to expend $10
million as of December 31, 1997 and another $16.5 million as of December 31,
1998. Total expenditure commitments, from the commencement of operations through
December 31, 1998, of $26,500,000 have been satisfied by KKM. KKM has an
additional expenditure commitment of $30 million for the year ending December
31, 1999, of which KKM has spent approximately $3.5 million as of April 8, 1999.
The 1999 expenditure commitment is expected to be spent primarily for KKM's
drilling operations and completion of the field facilities capable of sustaining
expected future production from the Karakuduk Field, along with general overhead
expenses. Without additional funding and significant revenues from oil sales, of
which there are no assurances, the Company will not be able to provide necessary
funds to KKM in order to satisfy these requirements. As a result, the Company's
interest in the Karakuduk Field may be lost.
The Company received an extension to June 30, 1999, from the Overseas
Private Investment Corp. ("OPIC") for political risk insurance. OPIC granted the
Company a binding executed letter of commitment on September 25, 1996. The
Company has a standby facility for which it has made eight payments of $31,250
and another two payments of $15,625. The Company expects to execute the contract
on or before June 30, 1999.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal
business activities.
The Company has addressed the availability and integrity of financial
systems and the reliability of operational systems. The Company has specifically
reviewed the status of readiness for the year 2000 for it's management and
financial reporting systems in the U.S. and in Kazakhstan, and believes the
systems are year 2000 compliant. The Company does not expect to incur any
material operating expenses or be required to make significant investment in
computer system improvements to become Year 2000 compliant.
Third party systems that expose the Company to risk are primarily those
surrounding the Company's equity investee, KKM. Management has begun
communications with KKM regarding their readiness for the year 2000 and is
currently assisting KKM to formalize an evaluation and assessment process.
KKM has completed a partial assessment and currently believes that the
computer systems it has in place are year 2000 compliant. KKM has initiated
formal communication with all of its significant suppliers and large customers
to determine the extent to which the Company is vulnerable to those third
14
<PAGE>
parties failure to remediate their own year 2000 issues. In particular, it is
unclear as to the extent the Kazakh government and other organizations who
provide significant infrastructure services within the Kazakh Republic have
addressed the year 2000 issue. Furthermore, the current crisis in Russia and the
CIS could adversely affect the ability of the government and such organizations
to fund adequate Year 2000 compliance programs. There is no guarantee that the
systems of the government or of other organizations on which the Company and KKM
rely will be timely converted and will not have an adverse effect on the Company
and its systems.
The most likely worst case scenario the Company can foresee from a failure
of internal or third-party systems would include an inability of vendors to
timely deliver required materials, supplies, or services to the Karakuduk Field
necessary to conduct drilling or other field operations. In order to mitigate
the possibility of timely delivery of critical materials and supplies, KKM can
fully stock materials to sustain drilling operations over the transition period
from December 1999 through the first quarter of the 2000. At this time, KKM will
assess if any critical vendors are having difficulties due to year 2000 issues.
KKM has an extensive selection of vendors for all types of materials and service
needs. If certain vendors cannot perform on a timely basis, KKM will simply
utilize a different service provider.
Furthermore, a breakdown of the existing KazTransOil pipeline required by
KKM to export oil outside of Kazakhstan would seriously delay or even halt KKM's
ability to sell oil. KKM management has performed physical inspections of the
KazTransOil pipeline and do not foresee any problems with placing production
into the pipeline and properly recording the volumes attributable to KKM. There
are no assurances, however, that problems will not occur at different points
along the pipeline, inside or outside of Kazakhstan, including points of
destination for the throughput. Due to the limited transportation options for
marketing crude oil within Kazakhstan and the CIS, KKM will not be able to avoid
the negative consequences associated with a breakdown in the export pipeline if
it should occur. The management of KKM, however, considers this likelihood to be
remote.
Results of Operations Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997
Interest income increased by $763,000 from the year ended December 31, 1997
due to increased financing of 100% of KKM's operations in Kazakhstan. As of
December 31, 1998, the Company held a 50% equity interest in KKM.
General and administrative costs increased by $1,363,000 from the year
ended December 31, 1997 due mainly to the Company's increase in compensation
expense and legal fees. Compensation expense increased by $992,000, primarily
due to stock based compensation granted to directors, employees, and consultants
of the Company during 1998 plus amortization of prior year equity based
compensation. Furthermore, the Company's cash based compensation increased due
to the hiring of additional personnel required for normal business operations.
Legal fees increased $125,000, primarily relating to the Heartland lawsuit,
which was settled on October 30, 1998. The Company's equity loss in KKM,
increased $912,000 from the year ended December 31, 1997. The increase is the
result of KKM's increased operational activity in Kazakhstan.
In 1998, the Company settled a lawsuit filed against the Company on
November 14, 1997, for a total of $200,000 and warrants to purchase 200,000
shares of the Company's common stock at an exercise price of $1.00, exercisable
through January 2, 1999. The warrants were recorded at the fair market value of
the warrants (approximately $34,000).
In 1998, the Company recognized a $236,000 extraordinary loss on the
extinguishment of long term debt. The Company has debt obligations of $940,000
outstanding as of December 31, 1998.
Inflation. The Company cannot control prices in its oil and gas sales and
to the extent the Company is unable to pass on increases in operating costs, it
may be affected by inflation.
Results of Operations Year Ended December 31, 1997 Compared to Year Ended
November 30, 1996
As mentioned above, during 1997 the Company changed from a fiscal year
ended November 30 to a fiscal year ended December 31. The Company's operations
during the fiscal year ended December 31, 1997, and the month ended December 31,
1996, resulted in losses before extraordinary items, if any, of $2,389,000 and
$130,000, respectively, due to the Company's ongoing transition to international
exploration and production operations. The Company's operational loss for
15
<PAGE>
December 1996 consisted of miscellaneous corporate level expenses and is
immaterial to the overall operational results of the Company.
Results for the fiscal year ended November 30, 1996 have also been restated
to reflect the equity method of accounting for the Company's investment in KKM.
In 1996, the Company accounted for KKM using proportional consolidation. After
adoption of the equity method, the Company's net loss for the fiscal year ended
November 30, 1996, $2,416,000, remained unchanged from the amount originally
reported.
Oil and gas revenues and production costs decreased by $147,000 and
$37,000, respectively, from the year ended November 30, 1996, due to the
disposition of all of the Company's domestic oil and gas properties during the
first quarter of 1997. Interest income increased by $267,000 from the year ended
November 30, 1996 due to increased financing of 100% of KKM's operations in
Kazakhstan. As of December 31, 1997, the Company held a 50% equity interest in
KKM.
General and administrative costs and interest expense increased by $186,000
and $208,000, respectively, also due to KKM's increased operational activity in
Kazakhstan. The Company's equity loss in KKM, however, decreased by $139,000
from the year ended November 30, 1996 due to additional capitalization of costs
directly related to development of oil and gas properties held by KKM. The
Company recognized a $36,000 economic loss on the disposition of the Company's
domestic properties.
In 1997, the Company recognized a $214,000 extraordinary loss on the
extinguishment of long term debt. The Company did not have any other debt
obligations outstanding as of December 31, 1997.
Inflation. The Company cannot control prices in its oil and gas sales and
to the extent the Company is unable to pass on increases in operating costs, it
may be affected by inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for a list of the Financial Statements and the supplementary
financial information included in this report following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 31, 1999, the following table sets forth the names and ages of
the current directors and executive officers of the Company, the principal
offices and positions with the Company held by each person and the date such
person became a director or executive officer of the Company. The executive
officers of the Company are elected annually by the board of directors.
Executive officers serve terms of one year or until their death, resignation or
removal by the board of directors. The present term of office of each director
will expire at the next annual meeting of shareholders. Each executive officer
will hold office until his successor duly is elected and qualified, until his
resignation or until he is removed in the manner provided by the Company's
Bylaws.
16
<PAGE>
<TABLE>
<CAPTION>
Name of Director or Officer and Director Principal Occupation
Position in the Company Since Age During the last Five Years
- ----------------------- ----- --- --------------------------
<S> <C> <C> <C>
John G. McMillian 1997 72
Chairman Retired since 1995. Chairman, President and Chief Executive
Officer of Allegheny & Western Energy Corporation, an oil and gas
company, from 1987 to 1995; founder and former Chairman and Chief
Executive Officer of Northwest Energy Company and owner and
Chairman and Chief Executive Officer of Burger Boat Company. A
director of Marker International and Excalibur Technologies.
Dr. Jack A. Krug 1999 53
President and Chief
Operating Officer President and Chief Operating Officer of the Company since January
1999, a director, Vice President, and former owner of Questa
Engineering, LLC, prior to 1999; First Deputy Project Manager,
LukOil-AIK, an oil and gas joint venture in Russia, from October
1994 to December 1998; First Deputy of Zhetaby Quest an oil and gas
joint venture in the Republic of Kazakhstan, from 1993 to November,
1994.
David A. Dahl 1997 37 Secretary of the Company from August 1997 to May 1998; President
of Whittier Energy Company, an oil and gas exploration and
production company, since 1997; President of Whittier Ventures,
LLC, a private investment entity, since January 1996; Vice
President of Whittier Trust Company since April 1993;, Vice
President of Merus Capital Management, an investment firm, from
1990 to 1993.
Ted Collins, Jr. 1997 60 President of Collins & Ware, Inc., an independent oil and gas
company, since 1988. President of Enron Oil & Gas Co. from 1982
to 1988; Executive Vice President and a director of American
Quasar Petroleum Co. from 1969 to 1982. Mr. Collins is a director
of Hanover Compression Company, Mid Coast Energy Resources, Inc.
and Queen Sand Resources, Inc.
Richard L. Grant 1998 44 President of Cabot LNG Corporation, a natural gas company, since
September 1998; President of Mountaineer Gas Company, the largest
natural gas distribution copany in West Virginia, from 1988 to
September 1998; Prior thereto, legal counsel with The Cincinnati
Gas & Electric Company.
James A. Jeffs 1999 46 Chief Investment Officer for the Whittier Trust Company since
1994; A director of M-D International Petroleum, Inc., an oil and
gas company, since 1994; Senior Vice President of Union Bank of
Los Angeles from 1993 to 1994; Chief Investment Officer for
Northern Trust of California, N.A., from 1991 to 1992; President
and Chief Executive Officer of TSA Capital Management and Senior
Vice President of Trust Services of America, capital managem
17
<PAGE>
Arlo G. Sorensen 1996 58 Chief Financial Officer and Principal Accounting Officer of the
Company from March 1997 to June 1998; Treasurer of the Company
from February 1997 to February 1998; Trustee of M.H. Whittier
Corporation, a private investment entity, since 1985; Chairman of
the Board and a director of Whittier Trust Company since 1988.
Michael B. Young N/A 30
Treasurer and Controller Treasurer and Controller and Principal Accounting Officer of the
Company since February 1998; Tax Manager in the oil & gas tax
practice of Arthur Andersen LLP, an accounting firm, from June
1991 to February 1998.
Alan D. Berlin 1997 58
Secretary A partner of Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP since
1995. Engaged in the private practice of law for over five years
prior to joining Aitken Irvin Lewin Berlin Vrooman & Cohn LLP;
Secretary of the Company from January 1996 to August 1997 and
from June 1998 to the present; President of the International
Division of Belco Petroleum Corp. from 1985 to 1987 and held
various other positions with Belco Petroleum Corp. from 1977 to
1985; Currently a director of Belco Oil & Gas Corp.
</TABLE>
Except as indicated in the above table, no director of the Company is a
director of an entity that has its securities registered pursuant to Section 12
of the Securities Exchange Act of 1934.
In connection with the Company's acquisition of all of the stock of CAP-D
in 1995, the former shareholders of CAP-D have certain rights to nominate
directors of their choosing for election to the Company's Board of Directors. If
by June 30, 2000, the Karakuduk Field obtains 5,000 barrels of oil production
per day averaged over any sixty (60) day period, or the Company's beneficial
interest in the field is sold or the Company and the former shareholders jointly
participate in a new exploratory development project, the former shareholders
(one of which is James A. Jeffs) have the right to cause the Company to nominate
one additional director at the Company's 2000 year annual meeting of
shareholders.
In connection with borrowings in August 1996, the Company agreed to add two
directors selected by two of the lenders, Whittier Ventures LLC and Whittier
Energy Company (collectively "Whittiers"). In connection with the transactions,
James A. Jeffs resigned from the Company's board of directors. At the request of
the Whittiers, on December 2, 1996, Arlo G. Sorensen replaced Mr. Jeffs on the
Company's board of directors and on January 3, 1997, David A. Dahl was appointed
to the Company's board of directors. The Whittiers will have the right to have
their two representatives nominated for directors of the Company until the
Whittiers no longer have any investment in the Company.
There are no other arrangements or understandings between any executive
officer and any director or other person pursuant to which any person was
selected as a director or an executive officer.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of the Forms 3 and 4 and any amendments thereto
furnished to the Company during the Company's fiscal year ended December 31,
1998 and Form 5 and amendments thereto furnished to the Company with respect to
18
<PAGE>
such fiscal year, during the Company's fiscal year ended December 31, 1998, no
persons who were directors, officers or beneficial owners of more than 10% of
the Company's outstanding Common Stock during such fiscal year filed late
reports on Form 3, 4, or 5.
ITEM 11. EXECUTIVE COMPENSATION
In May 1997, the Company changed its fiscal year end from November 30 to
December 31. The following table shows all cash compensation paid by the Company
for services rendered during the fiscal years ended December 31, 1998 and
December 31, 1997, during the month of December 1996 and during the fiscal year
ended November 30, 1996 to Howard Karren (there were no executive officers of
the Company whose annual salary and bonus exceeded $100,000 during the fiscal
year ended December 31, 1998).
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
------------------- ------
Name and Year Year Year
Principal Position Ended Ended Ended Other Securities All Other
------------------ December December Month of November Annual Underlying Compen-
31, 31, December 30, Salary($) Bonus($) Compensation Options(#) tion($)
--- --- -------- --------- --------- -------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Howard Karren 1998 -- -- -- -- --
Chief Executive
Officer
and President from 1997 -- -- -- 1,025,000 --
January 1997 and
February 1997, 1996 -- -- -- -- --
respectively, to 1996 -- -- $175,000(1) -- --
January 1999 1995 -- -- -- -- --
</TABLE>
(1) In connection with Howard Karren becoming a Director and Chairman of the
Company, subject to a certain contingency which was satisfied in April
1996, the Company agreed to issue 350,000 shares of the Company's
restricted common stock to Howard Karren, a director of the Company, or his
designees. The $175,000 represents the market value of the 350,000 shares
on April 5, 1996, the date the contingency was satisfied.
On January 11, 1999, the Company entered into an employment agreement with
Dr. Jack A. Krug pursuant to which Dr. Krug was employed as the President and
Chief Operating Officer of the Company. The employment agreement has a term of
three years and is automatically extended for successive one year terms
thereafter unless either the Company or Dr. Krug elects to terminate the
agreement. Under the terms of the employment agreement, the Company pays Dr.
Krug a salary of $250,000 and has agreed to grant Dr. Krug 200,000 shares of the
Company's common stock for each year, up to a maximum of five years, of Dr.
Krug's services under the agreement. The first stock grant was made on January
15, 1999. Each subsequent grant is to be made on each subsequent January 15.
Option Grants in Last Fiscal Year
The Company did not grant any options to Howard Karren, the former Chairman
and Chief Executive Officer of the Company, during the year ended December 31,
1998.
19
<PAGE>
Fiscal Year-End Option Values
The following table sets forth information concerning unexercised options
held by Howard Karren on December 31, 1998:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options as of In-the-Money Options at
December 31, 1998(#) December 31, 1998($)
---------------------- ---------------------
Name Exercisable/ Unexercisable Exercisable/ Unexercisable
- ---- ------------ ------------- --------------------------
<S> <C> <C> <C> <C>
Howard Karren........ 1,025,000 - 0 - $ -0- - 0 -
</TABLE>
(1) The value was determined by multiplying the number of shares underlying the
warrants by the difference between the exercise price and the closing sale
price of the Company's common stock on December 31, 1998.
Compensation of Directors
On July 17, 1997, the shareholders of the Company approved a 1997 Incentive
Stock Plan pursuant to which all non-employee directors were to receive an award
of 250 shares of common stock of the Company for each meeting of the board of
directors attended by such director. The directors have waived their rights to
receive shares for the meetings in 1997 and 1998. Also on July 17, 1997, the
shareholders approved a 1997 Non-Employee Directors' Stock Option Plan pursuant
to which each year each non- employee director was to receive an option to
purchase 25,000 shares of common stock of the Company. The only options granted
were granted effective July 17, 1997 and relate to a total of 200,000 shares
that were exercisable at a price of $0.828125 per share. Both plans were
terminated in June 1998.
On January 23, 1998, the Board of Directors of the Company granted each
director of the Company 10,000 shares of the Company's common stock for their
service to the Company. There were no other standard or other arrangements for
the compensation of the Company's directors in effect for the Company's fiscal
year ended December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of April 7, 1999, the number of shares of
the Company's outstanding $0.10 par value common stock beneficially owned by
each of the Company's current directors and the Company's executive officers
named in Item 11, sets forth the number of shares of the Company's outstanding
Common Stock beneficially owned by all of the Company's current directors and
executive officers as a group, sets forth the number of shares of the Company's
outstanding common stock owned by each person who owned of record, or was known
to own beneficially, more than 5% of the Company's outstanding shares of common
stock and sets forth the number of shares of the Company's outstanding common
stock owned by Howard Karren. The address for all directors and executive
officers of the Company is 2211 Norfolk, Suite 1150, Houston, Texas 77098-4096.
20
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Beneficial Common
Name of Beneficial Owner Position Ownership (1) Stock (1)
- ------------------------ -------- ------------- ---------
<S> <C> <C> <C>
Allen & Company Incorporated -- 11,222,387 (2) 18.31%
711 Fifth Avenue
New York, New York 10022
Cascade Investment, LLC -- 3,333,333 5.69%
2365 Carillon Point
Kirkland, WA 98033
Whittier Ventures, LLC -- 3,373,556 (3) 5.73%
1600 Huntington Drive
South Pasadena, California 91030
Jack A. Krug President and Chief Operating 200,000 (4) *
Officer
John G. McMillian Chairman of the Board, 250,000 (5) *
Director, and Chief Executive
Officer
David A. Dahl Director 5,679,803 (6) 8.84%
Ted Collins, Jr. Director 60,000 *
James Jeffs Director 2,568,247(7) 4.38%
Arlo G. Sorensen Director 96,242 (8) *
Richard L. Grant Director -0- *
Howard Karren Former President and Chief 1,195,000 (9) 2.00%
Executive Officer
All Current Directors and Executive 8,869,292 (10) 15.03%
Officers as a Group (nine persons)
</TABLE>
* Represents less than 1% of the shares of the Common Stock outstanding.
(1) Beneficial ownership of the Common Stock has been determined for this
purpose in accordance with Rule 13d-3 under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), under which a person is
deemed to be the beneficial owner of securities if he or she has or
shares voting power or investment power with respect to such
securities or has the right to acquire beneficial ownership within 60
days.
(2) Includes 2,697,720 shares underlying warrants to purchase shares of
Common Stock. The number of warrants reflected includes 225,000
warrants that Allen & Company Incorporated ("ACI") acquired and holds
for the benefit of certain of its officers, directors and employees.
ACI is a wholly owned subsidiary of Allen Holding Inc. ("AHI"), and,
consequently, AHI may be deemed to beneficially own the shares
beneficially owned by ACI. Does not include certain shares owned
directly by certain officers and stockholders of AHI and ACI with
respect to which AHI and ACI disclaim beneficial ownership. Certain
officers and stockholders of AHI and ACI may be deemed to beneficially
own certain shares of the Common Stock reported to be beneficially
owned directly by AHI and ACI.
21
<PAGE>
(3) Includes 282,500 shares underlying currently exercisable warrants.
(4) Does not include 800,000 shares that vest annually at a rate of
200,000 shares on January 15th of each year. If Dr. Krug's employment
terminates, the stock award will be prorated as to that year.
(5) Includes 25,000 shares underlying a currently exercisable option and
25,000 shares underlying a currently exercisable warrant.
(6) Includes 75,000 shares underlying currently exercisable options owned
by Mr. Dahl, 3,373,556 shares beneficially owned by Whittier Ventures
LLC, 349,185 shares owned by Whittier Energy Company, 87,500 shares
underlying currently exercisable warrants owned by Whittier Energy
Company, 1,285,192 shares beneficially owned by Whittier Trust
Company, 9,370 shares owned by Whittier Opportunity Fund and 500,000
shares underlying currently exercisable options owned by Whittier
Opportunity Fund. Although Mr. Dahl has no pecuniary interest in the
shares beneficially owned by Whittier Ventures LLC, Whittier Energy
Company, Whittier Trust Company or Whittier Opportunity Fund, as the
President of Whittier Ventures LLC and Whittier Energy Company, as the
Vice President of Whittier Trust Company, and as a Manager of Whittier
Opportunity Fund, Mr. Dahl has voting power and investment power over
such shares and, thus, may be deemed to beneficially own such shares.
(7) Includes 349,185 shares owned by Whittier Energy Company, 87,500
shares underlying currently exercisable options owned by Whittier
Energy Company, 1,285,192 shares beneficially owned by Whittier Trust
Company, 9,370 shares owned by Whittier Opportunity Fund and 500,000
shares underlying currently exercisable options owned by Whittier
Opportunity Fund. Although Mr. Jeffs has no pecuniary interest in the
shares beneficially owned by Whittier Energy Company, Whittier Trust
Company and Whittier Opportunity Fund, as Vice President of Whittier
Energy Company, Vice President of Whittier Trust Company and a Manger
of Whittier Opportunity Fund, Mr. Jeffs has voting power and
investment power over such shares and, thus, may be deemed to
beneficially own such shares. Does not include 235,000 shares subject
to an escrow agreement which provides that such shares will be
released to Mr. Jeffs if the Company's oil and gas interests attain
specified performance levels.
(8) Includes 75,000 shares underlying currently exercisable options and
11,242 shares owned by Whittier 1982 Oil Trust for which Mr. Sorensen
is the trustee and has voting and investment power over such shares.
Mr. Sorensen is a director of Whittier Ventures LLC and Whittier
Energy Company. Mr. Sorensen disclaims beneficial ownership of the
shares that are owned by Whittier Ventures LLC and Whittier Energy
Company.
(9) Includes 1,025,000 shares underlying currently exercisable options.
Mr. Karren is no longer employed by the Company.
(10) Includes the shares as described in notes (4) through (8) above. Also
includes (i) 20,000 shares owned by Michael B. Young, the Treasurer
and Controller of the Company, and 70,000 shares underlying presently
exercisable options owned by Mr. Young, and (ii) 10,000 shares owned
by Mr. Berlin, the Secretary of the Company, and 25,000 shares
underlying a presently exercisable option owned by Mr. Berlin. Does
not include a grant for 20,000 shares that will vest with respect to
10,000 shares on each of January 30, 2000 and 2001, if Mr. Young is
still employed by the Company on those dates. The shares will vest
earlier if Mr. Young is terminated without due cause or if the Company
is acquired or merges with another entity.
22
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP, a law firm in which Alan D.
Berlin, who is currently the Secretary of the Company and who was a director of
the Company from March 1997 to May 1998, is a partner, provides legal services
to the Company for which the law firm charges the Company an amount not in
excess of the law firm's normal billing rates. The total amount of fees that
were paid by the Company to the law firm during the Company's year ended
December 31, 1998, did not exceed 5% of the law firm's gross revenues for the
law firm's last full fiscal year. The Company believes that the fees paid to the
law firm were reasonable for the services rendered.
On November 24, 1997, the Company executed a Subscription Agreement
("Agreement") with an investor, which was not affiliated with the Company.
Pursuant to the Agreement, the Company sold to the investor 50,000 shares of the
Company's Series A Preferred Stock, no par value, for a purchase price of
$100.00 per share or an aggregate purchase price of $5,000,000. The investor
also agreed to purchase an additional 25,000 shares of the Company's Series A
Preferred Stock for an additional $2,500,000 and 150,000 shares of the Company's
Series B and Series C Preferred Stock for $15,000,000.
In March 1998, prior to the receipt of the funds for any additional
purchases the investor was to make under the Agreement, the Company and the
investor mutually released each other from any further obligations under the
Agreement. The investor retained the initial 50,000 shares of Series A Preferred
Stock that are convertible into the Company's Common Stock at $2.25 per share.
The number of shares of Common Stock issuable upon conversion of each share of
Series A Preferred Stock will be determined by dividing $100 by the conversion
price per share. The Company is not required to issue any additional preferred
stock under the Agreement and the investor has no other obligation to provide
funds to the Company in exchange for such stock.
The Series B Preferred Stock and Series C Preferred Stock would have been
convertible at the option of the holders thereof at any time or from time to
time on or prior to the redemption date into Common Stock. The conversion price
of the Series B Preferred Stock was initially $3.00 per share; and the
conversion price of the Series C Preferred Stock was initially $4.25 per share.
The number of shares of Common Stock issuable upon conversion of each share of
Series B Preferred Stock and Series C Preferred Stock would have been determined
by dividing $100 by the conversion price per share.
Allen & Company Incorporated ("Allen & Company") acted as placement agent
in connection with the sale of the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock pursuant to the Agreement. Allen & Company
elected to receive its fees in the form of warrants to purchase 900,000 shares
of the Company's common stock that were all originally exercisable through
November 25, 2002, at an exercise price of $0.01 per share.
The Company has agreed to allow Allen & Company to retain the warrants to
purchase 700,000 shares of the Company's common stock related to the $17,500,000
in funds not received under the original terms of the Agreement, provided Allen
& Company raises additional capital for the Company within the two year period
ending November 25, 1999. Based on a subsequent agreement, the unearned warrants
to purchase 700,000 shares of the Company's Common Stock held by Allen & Company
are fully restricted from exercise unless Allen & Company raises additional
capital for the Company that is acceptable to the Company's board of directors.
For each $25 of additional capital raised, a warrant to purchase one share of
common stock will be deemed to be earned. If, before November 25, 1999, Allen &
Company fails to raise additional capital for the Company under terms acceptable
to the Company, Allen & Company will return the unearned portion of the warrants
to the Company. In April 1998, Allen & Company raised an additional $2,500,000
of capital for the Company through the sale by the Company of 1,250,000 shares
of the Company's common stock at $2.00 per share. As a result, the warrants
became exercisable as to an additional 100,000 shares of the Company's common
stock.
On January 23, 1998, the board of directors of the Company granted each
then director of the Company 10,000 shares of the Company's common stock for
their service to the Company.
23
<PAGE>
In connection with his employment, the Company granted Michael B. Young a
five year option to purchase 50,000 shares of the Company's common stock at an
exercise price of $2.25 per share and granted Mr. Young 40,000 shares of the
Company's common stock that, subject to certain conditions, vested 10,000 shares
on each of January 30, 1998 and 1999 and will vest 10,000 shares on each of
January 30, 2000 and 2001. All unvested shares shall vest immediately if the
Company is acquired or merge with another company or if Mr. Young is termination
without due cause. The Company also granted Mr. Young an option to purchase
20,000 shares of the Company's common stock at $0.75 per share, which was fully
vested as of January 31, 1999.
On March 10, 1999, Whittier Ventures LLC loaned the Company $500,000. On
March 19, 1999, Whittier Ventures LLC loaned the Company an additional $500,000.
Both loans bear interest at a rate of 8% per annum and both loans are due and
payable on or before August 31, 1999. Both loans are secured by all of the
issued and outstanding shares of CAP-G owned by the Company. If the Company
issues convertible securities within one year after the date of each respective
loan, Whittier Ventures LLC shall have the right to exchange all the outstanding
principal and interest due under the loans for such convertible securities. The
amount of convertible securities to be issued to Whittier Ventures LLC is
determined by dividing the amount of all principal and interest outstanding
under the loans into the issue price of the convertible securities.
On March 31, 1999, the Company issued a promissory note in the amount of
$2,769,978.08 to Allen & Company. The new promissory note superseded promissory
notes dated January 12, January 19, January 26, February 4, February 11 and
February 22, 1999, in the aggregate amount of $1,750,000 which represented loans
that Allen & Company had previously made to the Company. The new promissory note
to Allen & Company bears interest at a rate of 8% per annum and is due and
payable on or before August 31, 1999. The new promissory note is secured by all
of the outstanding stock of CAP-G and carries the same exchange privileges as
the promissory notes issued to Whittier Ventures LLC.
On January 4, 1999, Howard Karren, who was then the President and a
director of the Company, advanced the Company $50,000. The Company accrues
interest on the advance at an 8% annual interest rate.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
---------------------
Table of Contents
Chaparral Resources, Inc.
Report of Independent Auditors
Consolidated Balance Sheets--As of December 31, 1998 and December 31, 1997
Consolidated Statements of Operations--Years ended December 31, 1998,
December 31, 1997, November 30, 1996 and the month ended December 31, 1996
Consolidated Statements of Cash Flows--Years ended December 31, 1998,
December 31, 1997, November 30, 1996 and the month ended December 31, 1996
Consolidated Statement of Changes in Stockholders' Equity--Year ended
December 31, 1998, Thirteen months ended December 31, 1997 and the year
ended November 30, 1996
Notes to Consolidated Financial Statements
Supplemental Information - Disclosures About Oil and Gas producing
Activities - Unaudited
Karakuduk-Munay, JSC
Report of Independent Auditors
Balance Sheets--As of December 31, 1998 and 1997
Statements of Expenses and Accumulated Deficit--Years ended December
31, 1998, 1997 and 1996
24
<PAGE>
Statements of Cash Flows--Years ended December 31, 1998, 1997 and 1996
Statements of Shareholders' Deficit
Notes to the Financial Statements
(a)(2) Financial Statement Schedules.
-----------------------------
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
(b) Current Reports on Form 8-K:
----------------------------
The Company did not file any Current Reports on Form 8-K during the last
fiscal quarter ended December 31, 1998:
25
<PAGE>
(c) Exhibits.
---------
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
2.1 Stock Acquisition Agreement and Plan of Reorganization dated
April 12, 1995 between Chaparral Resources, Inc., and the
Shareholders of Central Asian Petroleum, Inc., incorporated by
reference to Exhibit 2.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 1995.
2.2 Escrow Agreement dated April 12, 1995 between Chaparral
Resources, Inc., the Shareholders of Central Asian Petroleum,
Inc. and Barry W. Spector, incorporated by reference to Exhibit
2.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1995.
2.3 Amendment to Stock Acquisition Agreement and Plan of
Reorganization dated March 10, 1996 between Chaparral Resources,
Inc., and the Shareholders of Central Asian Petroleum, Inc.,
incorporated by reference to the Company's Registration Statement
No. 333-7779.
3.1 Restated Articles of Incorporation + Amendments dated September
25, 1976, incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1993.
3.2 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated April 21, 1988, incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1993.
3.3 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated April 12, 1994, incorporated by reference to
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
3.4 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated June 21, 1995, incorporated by reference to
Exhibit B to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1995.
3.5 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated July 17, 1996, incorporated by reference to the
Company's Registration Statement No. 333-7779.
3.6 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated November 25, 1997, incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K dated
October 31, 1997.
3.7 Bylaws, as amended through October 31, 1997, incorporated by
reference to Exhibit 3(ii) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10.1 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.
10.2 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.
26
<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.3 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.
10.4 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 3
10.5 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.
10.6 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.
10.7 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.
10.8 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 quarter ended
June 30, 1997.
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
27
<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.15 Release and Understanding with H. Guntekin Koksal, incorporated
by reference to Exhibit 10.30 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24 1998 Incentive and Nonstatutory Stock Option Plan
10.25 Amendment to License for the Right to Use the Subsurface in the
Republic of Kazakhstan, dated December 31, 1998.
10.26 Credit Support and Pledge Agreement between Whittier Ventures,
LLC and Chaparral Resources, Inc. dated July 2, 1998,
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
10.27 Warrants issued to Whittier Ventures, LLC, incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
10.28 Settlement Agreement and Release between Heartland, Inc. of
Wichita and Collins & McIlhenny, Inc. and Chaparral Resources,
Inc., Howard Karren, Whittier Trust Company and James A. Jeffs
dated October 30, 1998, incorporated by reference to Exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
10.29 Warrants issued to Heartland, Inc. of Wichita and Collins &
McIlhenny, Inc., as joint tenants and to Don M. Kennedy,
incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
28
<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.30 Loan Agreement between Challenger Oil Services, PLC and Chaparral
Resources, Inc. dated September 10, 1998, incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
10.31 Promissory Note between Challenger Oil Services, PLC and
Chaparral Resources, Inc. dated September 10, 1998, incorporated
by reference to Exhibit 10.6 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
10.32 International Daywork Drilling Contract - Land between Challenger
Oil Services, PLC and Karakuduk-Munay, JSC, dated April 7, 1998
10.33 Amendment No. 1 to the International Daywork Drilling Contract -
Land between Challenger Oil Services, PLC and Karakuduk-Munay,
JSC, dated April 7, 1998
10.34 Amendment No. 2 to the International Daywork Drilling Contract -
Land between Challenger Oil Services, PLC and Karakuduk-Munay,
JSC, dated March 17, 1999
10.35 Letter Agreement dated March 17, 1999 between Karakuduk-Munay,
JSC and Challenger Oil Services, PLC.
10.36 Letter Agreement and Restated Amendment No. 1 to Loan Agreement
and Promissory Note dated March 18, 1999 between Challenger Oil
Services, PLC and the Company.
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
27 Financial Data Schedule
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHAPARRAL RESOURCES, INC.,
a Colorado corporation
By /s/ Dr. Jack a. Krug
-------------------------------------------
Dr. Jack A. Krug
President and Chief Operating Officer
By /s/ Michael B. Young
-------------------------------------------
Michael B. Young, Treasurer, Controller,
and Principal Accounting Officer
Dated April 14, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Date Name and Title Signature
April 14, 1999 Ted Collins, Jr., Director
April 14, 1999 David A. Dahl, Director
April 14, 1999 James A. Jeffs, Director
April 14, 1999 Richard L. Grant, Director
April 14, 1999 John G. McMillian, Director
April 14, 1999 Arlo G. Sorensen Director
April 14, 1999 *By
Dr. Jack A. Krug, Attorney-in-Fact
30
<PAGE>
Consolidated Financial Statements
Chaparral Resources, Inc.
Years ended December 31, 1998, December 31, 1997,
and November 30, 1996 and the One Month Period ended
December 31, 1996 with Reports of Independent Auditors
<PAGE>
Chaparral Resources, Inc.
Consolidated Financial Statements
Contents
Chaparral Resources, Inc.
Report of Independent Auditors .............................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets ................................................2
Consolidated Statements of Operations.......................................4
Consolidated Statements of Cash Flows.......................................5
Consolidated Statements of Changes in Stockholders' Equity..................8
Notes to Consolidated Financial Statements..................................9
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited........................................27
Karakuduk-Munay, JSC
Report of Independent Auditors.............................................33
Audited Financial Statements
Balance Sheets.............................................................34
Statements of Operations...................................................35
Statements of Cash Flows...................................................36
Statements of Shareholders' Deficit........................................37
Notes to Financial Statements..............................................38
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Chaparral Resources, Inc.
We have audited the accompanying consolidated balance sheets of Chaparral
Resources, Inc. as of December 31, 1998 and 1997 and the related consolidated
statements of operations, cash flows and changes in stockholders' equity for
each of the two years then ended and for the one month period ended December 31,
1996 and the year ended November 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chaparral
Resources, Inc. as of December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for the two years then ended and for the
one month period ended December 31, 1996 and the year ended November 30, 1996 ,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred recurring operating losses and has no
operating assets which are presently generating cash to fund its operating and
capital requirements. The Company requires significant additional financing to
meet its financial commitments and requirements through calendar year 1999.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
Houston, Texas
April 8, 1999
1
<PAGE>
<TABLE>
<CAPTION>
CHAPARRAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
December 31 December 31
1998 1997
-------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 121,000 $ 3,423,000
Restricted cash (Note 3) 756,000 --
Accounts receivable 25,000 102,000
Prepaid expenses 76,000 62,000
Current portion of note receivable (Note 4) 420,000 --
-------------------------------------
Total current assets 1,398,000 3,587,000
Note receivable (Note 4) 589,000 --
Oil and gas properties and investments - full cost method
Republic of Kazakhstan (Karakuduk Field)--
Not subject to depletion (Notes 5 and 6): 32,261,000 19,922,000
Furniture, fixtures and equipment 93,000 13,000
Less accumulated depreciation (17,000) (3,000)
-------------------------------------
76,000 10,000
-------------------------------------
Total assets $ 34,324,000 $ 23,519,000
=====================================
See accompanying notes
2
<PAGE>
CHAPARRAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
December 31 December 31
1998 1997
-------------------------------------
Liabilities and stockholders' equity Current liabilities:
Trade accounts payable $ 223,000 $ 177,000
Accrued liabilities:
Accrued compensation 418,000 --
Accrued other 104,000 54,000
Current portion of note payable, net of discount (Note 7) 940,000 --
-------------------------------------
Total current liabilities 1,685,000 231,000
Accrued compensation (Note 13) 210,000 210,000
Redeemable preferred stock (Note 10)- cumulative, convertible,
Series A, 50,000 issued and outstanding,
at stated value, $5.00 cumulative annual
dividend, $5,250,000 redemption value 4,850,000 4,500,000
Stock Subscription - 0 shares subscribed at December 31, 1998
175,000 shares subscribed (25,000 Series A; 75,000 Series B;
75,000 Series C) at December 31, 1997 -- --
Stockholders' equity (Note 8):
Common stock - authorized, 100,000,000 shares at
December 31, 1998 and December 31, 1997, of
$.10 par value; issued and outstanding,
58,378,790 and 49,720,456 shares at
December 31, 1998 and December 31, 1997 5,837,000 4,971,000
Capital in excess of par value 41,774,000 30,340,000
Unearned portion of restricted stock awards (56,000) (109,000)
Preferred stock - 1,000,000 shares authorized,
225,000 shares designated of
Series A, B, and C as per above -- --
Stock subscription receivable (Note 10) (506,000) (1,770,000)
Accumulated deficit (19,470,000) (14,854,000)
-------------------------------------
Total stockholders' equity 27,579,000 18,578,000
-------------------------------------
Total liabilities and stockholders' equity $ 34,324,000 $ 23,519,000
=====================================
See accompanying notes.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Month Ended Year Ended
December 31 December 31 December 31 November 30
1998 1997 1996 1996
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $ -- $ -- $ -- $ 147,000
Costs and expenses:
Production costs -- -- -- 37,000
Depreciation and depletion 14,000 7,000 -- 3,000
General and administrative 3,017,000 1,654,000 118,000 1,468,000
---------------------------------------------------------------------
3,031,000 1,661,000 118,000 1,508,000
---------------------------------------------------------------------
Loss from operations (3,031,000) (1,661,000) (118,000) (1,361,000)
Other income (expense):
Interest income 1,184,000 421,000 4,000 154,000
Interest expense (205,000) (298,000) (17,000) (90,000)
Equity in loss from investment (Note 5, (1,744,000) (832,000) -- (971,000)
Note 6, and Note 19)
Legal settlement (Note 9) (234,000) -- -- --
Other, net -- (19,000) 1,000 89,000
---------------------------------------------------------------------
(999,000) (728,000) (12,000) (818,000)
---------------------------------------------------------------------
Loss before extraordinary item (4,030,000) (2,389,000) (130,000) (2,179,000)
Extraordinary loss on extinguishment of
long-term debt (236,000) (214,000) -- (237,000)
---------------------------------------------------------------------
Net loss $ (4,266,000) $ (2,603,000) $ (130,000) $ (2,416,000)
=====================================================================
Basic and diluted earnings per share:
Net loss per share before extraordinary item $ (.08) $ (.05) $ -- $ (.07)
Extraordinary loss per share $ (.01) $ (.01) $ -- $ (.01)
Loss per share $ (.09) $ (.06) $ -- $ (.08)
Weighted average number of shares
outstanding 53,908,649 41,561,432 37,526,517 32,081,382
See accompanying notes
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASHFLOWS
Year ended Year ended Month Ended Year Ended
December 31 December 31 December 31 November 30
1998 1997 1996 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(4,266,000) $(2,603,000) $ (130,000) $(2,416,000)
Adjustments to reconcile net loss to
net cash used in operating
Activities:
Equity loss from investment 1,744,000 832,000 -- 971,000
Depreciation and depletion 14,000 7,000 -- 4,000
Loss on the sale of oil and gas properties -- 3,000 (3,000) --
Bad debt expense 29,000 37,000 -- --
Write-down of oil and gas properties -- 30,000 -- --
Stock issued for services and bonuses 600,000 78,000 -- --
Stock options issued for services and bonuses 113,000 117,000 -- --
Warrants issued for legal settlement 34,000 -- -- --
Amortization of note discount 154,000 198,000 -- --
Loss on extinguishment of debt 236,000 214,000 -- 237,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 48,000 (129,000) 51,000 25,000
Prepaid expenses (14,000) (59,000) -- 10,000
Note receivable (1,009,000) -- -- --
Other -- 95,000 -- --
Increase (decrease) in:
Accounts payable 46,000 177,000 (44,000) 108,000
Accrued liabilities other 50,000 19,000 (19,000) (317,000)
Accrued compensation 418,000 -- -- 385,000
-----------------------------------------------------------------
Net cash used in operating activities $(1,803,000) $ (984,000) $ (145,000) $ (993,000)
5
<PAGE>
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASHFLOWS (CONTINUED)
Cash flows from investing activities
Additions to property and equipment $ (80,000) $ (6,000) $ -- $ --
Investment in and advances to foreign oil and
gas properties (14,083,000) (6,504,000) (17,000) (6,936,000)
Proceeds from sale of interest in oil and gas
properties - domestic -- 282,000 -- 161,000
Increase in other assets -- -- -- (74,000)
---------------------------------------------------------------------
Net cash used in investing activities (14,163,000) (6,228,000) (17,000) (6,849,000)
Cash flows from financing activities
Net proceeds from notes payable $ 2,045,000 $ 300,000 $ 500,000 $ 1,650,000
Restricted cash (756,000) -- -- --
Payable for CAP-G shares -- (744,000) -- --
Repayment of note payable (1,095,000) (450,000) (200,000) (750,000)
Proceeds from warrant exercise 20,000 3,309,000 -- 316,000
Net proceeds from redeemable preferred stock
issuance -- 5,000,000 -- --
Net proceeds from private placement 12,450,000 2,300,000 -- 6,907,000
----------------------------------------------------------------------
Net cash provided by financing activities 12,664,000 9,715,000 300,000 8,123,000
----------------------------------------------------------------------
Net increase in cash and
cash equivalents (3,302,000) 2,503,000 138,000 281,000
Cash and cash equivalents at beginning
of period 3,423,000 920,000 782,000 501,000
---------------------------------------------------------------------
Cash and cash equivalents at end of period $ 121,000 $ 3,423,000 $ 920,000 $ 782,000
=====================================================================
6
<PAGE>
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASHFLOWS (CONTINUED)
Supplemental cash flow disclosure
Interest paid $ 58,000 $ 53,000 $ 17,000 $ 36,000
Supplemental schedule of noncash
Investing and financing activities
Common stock issued for acquisition
of CAP-G $ -- $1,000,000 $ -- $1,833,000
Accounts payable--CAP-G shares -- -- -- 744,000
Discount recognized for note issued
with detachable stock warrants 146,000 74,250 93,750 290,000
Warrants issued for common stock in
conjunction with subscription and
issuance of preferred stock -- 2,270,000 -- --
Common stock issued for accrued
compensation -- 175,000 -- --
Common stock issued upon:
Conversion of debentures -- 1,500,000 -- 264,000
Conversion of accrued interest -- 50,000 -- --
See accompanying notes.
7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Capital in Stock Unearned
-------------------------- Excess of Par Subscription Restricted Accumulated
Shares Amount Value Receivable Stock Awards Deficit Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1995 20,484,192 2,048,000 12,577,000 -- -- (9,705,000) 4,920,000
Warrants exercised for
capital stock 857,325 86,000 230,000 -- -- -- 316,000
Conversion of debentures for
capital stock 600,000 60,000 204,000 -- -- -- 264,000
Investment in affiliate 1,585,000 159,000 1,674,000 -- -- -- 1,833,000
Capital stock issued in
private placement 14,000,000 1,400,000 5,507,000 -- -- -- 6,907,000
Debt issuance costs-stock
warrants issued -- -- 290,000 -- -- -- 290,000
Net loss -- -- -- -- -- (2,416,000) (2,416,000)
---------------------------------------------------------------------------------------------
Balance at November 30, 1996 37,526,517 3,753,000 20,482,000 -- -- (12,121,000) 12,114,000
Warrants exercised for capital
stock 5,648,077 564,000 2,745,000 -- -- -- 3,309,000
Conversion of debentures for
capital stock 2,169,732 216,000 1,333,000 -- -- -- 1,549,000
Capital stock issued for services 87,669 9,000 69,000 -- -- -- 78,000
Stock options issued for services -- -- 227,000 -- (109,000) -- 118,000
Capital stock issued for accrued
compensation 350,000 35,000 140,000 -- -- -- 175,000
Capital stock issued for
investment in affiliate 400,000 40,000 960,000 -- -- -- 1,000,000
Capital stock issued in private
placement 3,538,461 354,000 1,946,000 -- -- -- 2,300,000
Debt issuance costs--stock
warrants issued -- -- 168,000 -- -- -- 168,000
Preferred stock issuance and
related common stock warrants -- -- 2,270,000 (1,770,000) -- -- 500,000
Net loss -- -- -- -- -- (2,733,000) (2,733,000)
---------------------------------------------------------------------------------------------
Balance at December 31, 1997 49,720,456 4,971,000 30,340,000 (1,770,000) (109,000) (14,854,000) 18,578,000
Warrants exercised for capital
stock 80,000 8,000 12,000 -- -- -- 20,000
Conversion of debentures for
capital stock -- -- -- -- -- -- --
Capital stock issued for services 245,000 25,000 620,000 -- (45,000) -- 600,000
Stock options issued for services -- -- 34,000 -- (34,000) -- --
Stock options expired -- -- (19,000) -- 17,000 -- (2,000)
Amortization of restricted stock
awards -- -- -- -- 115,000 -- 115,000
Capital stock issued in private
placement 8,333,334 833,000 11,617,000 -- -- -- 12,450,000
Legal Settlement
warrants issued -- -- 34,000 -- -- -- 34,000
Debt issuance costs-stock
warrants issued -- -- 400,000 -- -- -- 400,000
Preferred stock issuance and
related common stock warrants -- -- (1,264,000) 1,264,000 -- -- --
Cumulative dividend Series A
Redeemable Preferred Stock -- -- -- -- -- (250,000) (250,000)
Discount accretion on redeemable
preferred stock -- -- -- -- -- (100,000) (100,000)
Net loss -- -- -- -- -- (4,266,000) (4,266,000)
---------------------------------------------------------------------------------------------
Balance at December 31, 1998 58,378,790 5,837,000 41,774,000 (506,000) (56,000) (19,470,000) 27,579,000
=============================================================================================
See accompanying notes
8
</TABLE>
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies and Organization
Organization, Principles of Consolidation, and Basis of Presentation
Chaparral Resources, Inc. was incorporated in the state of Colorado on January
13, 1972, principally to engage in the exploration, development and production
of oil and gas properties. During 1998, Chaparral Resources, Inc. focused
substantially all of its efforts on the exploration and development of the
Karakuduk Field, located in the central Asian Republic of Kazakhstan.
The consolidated financial statements include the accounts of Chaparral
Resources, Inc. and its 100% owned subsidiaries, Central Asian Petroleum
(Guernsey) Limited ("CAP-G"), Road Runner Services Company ("RRSC"), and Central
Asian Petroleum, Inc. (Delaware). Hereinafter, Chaparral Resources, Inc. and its
wholly-owned subsidiaries are collectively referred to as "the Company". All
significant intercompany transactions have been eliminated.
In order to unite the reporting period of the Company with that of its
subsidiaries, the fiscal year of the Company was changed to a December 31
year-end from the previous November 30 year end. This change took effect on May
29, 1997. As a result of this change, a statement of operations and cash flows
for the year ended November 30, 1996 and the month ended December 31, 1996, are
presented.
In 1995, the Company's ownership in CAP-G increased from 25% to 45%. The Company
acquired an additional 45% interest in CAP-G in 1996. In 1997, the Company
concluded the acquisition of the remaining 10% minority interest in CAP-G,
increasing its total ownership to 100%.
CAP-G owns a 50% interest in Karakuduk-Munay, JSC. ("KKM"), a Kazakhstan joint
stock company, which is a participant in an agreement for the exploration,
development and production of oil in the Karakuduk Field. The Company shares
control of KKM through participation on the Board and accordingly accounts for
its investment using the equity method.
On February 1, 1997, KKM was informed that a Kazakhstan Presidential Edict had
been issued announcing the liquidation of Munaygaz, the government-owned company
which held a 20% interest in KKM. As a result of this action, KKM was required
to re-register as required by Kazakh regulations. KKM was re-registered on July
24, 1997, with the government of Kazakhstan. The Company believes that KKM is
now in compliance with all laws and regulations related to the registration
requirements relating to Kazakhstan legal entities. The re-registered KKM is
owned jointly by CAP-G (50%), KazakhOil (40%) and a private Kazakhstan joint
stock company (10%). KazakhOil, the national petroleum company of Kazakhstan,
represents the majority of the ownership interest in KKM held by the Kazakhstan
government.
Cash and Cash Equivalents
Cash equivalents are defined as highly liquid investments purchased with an
original maturity of three months or less.
Oil and Gas Property and Equipment
The Company and KKM use the full cost method of accounting for their oil and gas
properties. All costs incurred directly associated with the acquisition,
exploration and development of oil and gas properties are capitalized in cost
pools for each country in which the Company operates. The limitation on such
capitalized costs is determined in accordance with rules specified by the
Securities and Exchange Commission. Capitalized costs are depleted using the
units of production method based on proven reserves.
9
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
Sales of Proved Oil and Gas Property
Sales of oil and gas properties, whether or not being amortized currently, are
accounted for as adjustments of capitalized costs, with no gain or loss
recognized unless such adjustments significantly alter the relationship between
capitalized costs and proved reserves of oil and gas. A significant alteration
would not ordinarily be expected to occur for sales involving less than 25% of
the reserve quantities of a given cost center. If gain or loss is recognized on
such a sale, total capitalized costs within the cost center are allocated
between the reserves sold and reserves retained on the same basis used to
compute amortization, unless there are substantial economic differences between
the properties sold and those retained, in which case capitalized costs are
allocated on the basis of the relative fair values of the properties.
Oil and Gas Properties Not Subject to Depletion
Costs associated with acquisition and evaluation of unproved properties are
excluded from the amortization computation until it is determined if proved
reserves can be attributed to the properties. These unevaluated properties are
assessed annually for possible impairment and the amount impaired, if any, is
added to the amortization base. Costs of exploratory dry holes and geological
and geophysical costs not directly associated with specific unevaluated
properties are added to the amortization base as incurred.
Revenue Recognition
Revenues and their related costs are recognized upon delivery of commercial
quantities of oil and gas production, in accordance with the accrual method of
accounting. Losses, if any, are provided for in the period in which the loss is
determined to occur.
Depreciation of Other Property and Equipment
Furniture, fixtures and equipment are recorded at cost and are depreciated using
the straight-line method over estimated useful lives, which range from three to
ten years.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes,
which require that taxes be provided on the liability method based upon the tax
rate at which items of income and expense are expected to be settled in the
Company's tax return.
Loss Per Common Share
Basic loss per common share is calculated by dividing net loss, after deducting
preferred stock dividends, by the aggregate of the weighted average shares
outstanding during the period. Diluted loss per common share considers the
dilutive effect of the average number of common stock equivalents that are
outstanding during the period.
10
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Loss Per Common Share (Continued)
Diluted loss per share is not presented because the exercise of 3,483,500 stock
options and 4,554,500 warrants are antidilutive. In addition, the effect of the
conversion of the convertible preferred stock into 2,335,178 shares of common
stock is also antidilutive.
The following table sets forth the computation of the numerator for purposes of
determining basic and diluted loss per share.
<TABLE>
<CAPTION>
Year ended Year ended Month Ended Year Ended
December 31 December 31 December 31 November 30
1998 1997 1996 1996
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss before extraordinary item ($4,030,000) ($2,389,000) ($ 130,000) ($2,179,000)
Cumulative annual dividend
Series A Redeemable Preferred Stock (250,000) -- -- --
Discount accretion
Series A Redeemable Preferred Stock (100,000) -- -- --
--------------------------------------------------------------------
Numerator for basic and diluted loss per share ($4,380,000) ($2,389,000) ($ 130,000) ($2,179,000)
=========== =========== =========== ===========
</TABLE>
Stock Based Compensation
The Company follows the method of accounting for employee stock based
compensation plans prescribed by APB No. 25, which is allowed by SFAS No. 123,
Accounting for Stock-Based Compensation. In accordance with APB No. 25, the
Company has not recognized compensation expense for stock options in situations
where the exercise price of the options equals the market price of the
underlying stock on the date of grant, otherwise known as the measurement date.
New Accounting Standards
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, which revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. The Company adopted SFAS 132 during 1998. The impact of SFAS 132
on the Company's reporting of pension and other post retirement benefits is not
material.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. This statement is effective for years beginning after June
15, 1999. As of December 31, 1998, the Company has not adopted SFAS 133. The
Company is evaluating SFAS 133 and intends to adopt the statement no later than
January 1, 2000. The impact of SFAS 133 on the Company's financial position and
results of operations is not expected to be material.
Fair Value of Financial Instruments
All of the Company's financial instruments, including cash and cash equivalents,
trade receivables, notes receivable, and notes payable, have fair values which
approximate their recorded values as they are either short-term in nature or
carry interest rates which approximate market rates.
11
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Risks and Uncertainties
The ability of KKM to realize the carrying value of its assets is dependent on
being able to extract, transport and market hydrocarbons. Currently, exports
from the Republic of Kazakhstan are restricted since they are dependent on
limited transport routes and, in particular, access to the Russian pipeline
system. Domestic markets in the Republic of Kazakhstan might not currently
permit world market prices to be obtained. Management believes, however, that
over the life of the project, transportation restrictions will be alleviated and
prices will be achievable for hydrocarbons extracted to allow full recovery of
the carrying value of its assets.
2. Going Concern
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As of December 31, 1998,
substantially all of the Company's assets are invested in the development of the
Karakuduk Field, a shut-in oil field in the central Asian Republic of
Kazakhstan, which will require significant additional funding.
The Company has incurred recurring operating losses and has no operating assets
presently generating cash to fund its operating and capital requirements. The
Company's current cash reserves and cash flow from operations will not be
sufficient to meet the expenditure requirements required of KKM by its operating
license through 1999. Should the Company not meet its expenditure requirements
under the license agreement to develop the Karakuduk Field, the Company's rights
under the agreement can be terminated (see Note 15). The Company believes that
additional financing will be available; however, there is no assurance that
additional financing will be available, or if available, that it is timely or on
terms favorable to the Company. The Company's continued existence as a going
concern is dependent upon the success of future KKM operations, which are, in
the near term, dependent on the successful financing and development of the
Karakuduk Field, of which there is no assurance.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
3. Restricted Cash
As of December 31, 1998, the Company held $756,000 cash on hand, as collateral
for loans made by a financial institution to KKM for the acquisition of tangible
equipment used in the Karakuduk Field.
12
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Notes Receivable
As of December 31, 1998, the Company has an outstanding $1,009,000 note
receivable, dated September 10, 1998, from a third-party drilling contractor
(Contractor). The note consists of $1,000,000 in cash advances from the Company,
plus accrued interest, used by the Contractor to ready a drilling rig for use in
Kazakhstan.
Under the original terms of the note, the principal balance was to be repaid in
twelve monthly payments of approximately $84,000, plus accrued interest,
beginning on the date the first payment is made to the Contractor by KKM for use
of the drilling rig.
On March 17, 1999, the Company amended the terms of the note to extend the
repayment period from twelve to twenty four months, beginning with the first
payment to the Contractor for services provided to KKM. The Company will receive
principal payments of approximately $42,000 per month, plus accrued interest,
through February 2001. As of December 31, 1998, the Company recorded $420,000 as
the current portion of note receivable, reflecting management's estimated
repayment to be received during 1999.
5. Acquisition of CAP-G
As of December 31, 1998, the Company owns 100% of the outstanding common stock
of CAP-G. This wholly-owned subsidiary was acquired on a step basis. The Company
acquired 45% of the outstanding stock of CAP-G prior to December 1, 1995. In
January and February 1996, the Company entered into agreements to acquire, for a
total of $5,850,000 cash and 1,785,000 shares of the Company's restricted common
stock, the remaining 55% of the outstanding stock of CAP-G.
The Company consummated the purchase of 25% of the outstanding stock of CAP-G in
April 1996 by paying $2,000,000 in cash and issuing 685,000 shares of the
Company's common stock. The Company acquired an additional 5% of the outstanding
common stock of CAP-G in April 1996 for $250,000 cash.
To acquire an additional 15% of the outstanding common stock of CAP-G, the
Company agreed to pay $1,975,000 in cash and issue 900,000 shares of the
Company's common stock. This purchase was consummated on March 11, 1996, when
the Company paid $750,000 in cash and issued 900,000 shares of the Company's
common stock. The remaining cash balance of $1,225,000 for the purchase was to
be paid in four quarterly equal payments of $306,250 between June 11, 1996 and
March 11, 1997. The first payment of $306,250 was paid in June 1996 and an
additional $175,000 was paid in September 1996. The agreement was subsequently
revised so that the Company paid $200,000 in December 1996 and the remaining
balance of $543,750 in a series of payments in 1997.
Finally, in 1997 the Company exercised an option to acquire the remaining 10% of
the outstanding common stock of CAP-G. The Company paid $1,625,000 (which
includes $800,000 of loans the Company previously made to GAP-G on behalf of the
prior owner of the 10% interest) and issued 400,000 shares of common stock,
which includes an additional 200,000 shares above the original agreed amount.
On September 17, 1997, the Company granted an option to an investor entitling
the investor to acquire 5% of the issued and outstanding shares of CAP-G on or
before October 31, 1997. Upon the closing of this agreement, the investor paid
the Company $450,000 of the $1.5 million purchase price, with the remaining due
on or before September 30, 1997. The option agreement expired and the Company
was not required to return the deposit. The Company has recorded the $450,000
deposit as a reduction in the oil and gas properties and investments in
Kazakhstan.
The acquisition costs exceeding the underlying net assets at the time of each
acquisition of CAP-G common stock have been added to Oil and Gas Investments
reflected on the balance sheet. The equity in losses for 1997 and 1996 have been
recorded at the full 50% interest due to the earlier agreements to acquire the
remaining shares in CAP-G and the Company financing 100% of CAP-G's operations.
13
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Oil and Gas Investments
All costs capitalized related to the Karakuduk license are included in oil and
gas properties not subject to depletion. Certain license acquisition costs and
geological and geophysical expenditures incurred by the Company but not rebilled
to KKM have been capitalized. Certain overhead costs and general administrative
costs have been expensed as incurred by KKM.
Costs capitalized to Oil and Gas Investments consist of:
December 31, December 31,
1998 1997
-----------------------------
Oil and Gas Investments:
Investments in KKM common stock $ 100,000 $ 100,000
Advances to and interest due from KKM 23,380,000 9,820,000
Acquisition costs 10,613,000 10,613,000
Other capitalizable costs 1,715,000 1,192,000
-----------------------------
Total gross oil and gas investments 35,808,000 21,725,000
Less: equity losses (3,547,000) (1,803,000)
-----------------------------
Total oil and gas investment $ 32,261,000 $ 19,922,000
=============================
The condensed financial statements of KKM are as follows:
December 31, December 31,
1998 1997
-----------------------------
Condensed Balance Sheet
Current Assets $ 730,000 $ 796,000
Non-Current Assets (primarily oil and
gas properties, full cost method) 19,130,000 7,975,000
Current Liabilities
Current Loan Payable to Related Party 3,000,000 --
Other Current Liabilities 3,205,000 2,767,000
Non-Current Liabilities
Loan Payable to Related Party 20,380,000 9,820,000
Other Non-Current Liabilities 578,000 --
Common stock 200,000 200,000
Accumulated Deficit 7,503,000 4,016,000
Condensed Income Statement
Revenues $ -- $ --
Cost and Expenses 3,488,000 1,665,000
Net Loss $ 3,488,000 $ 1,665,000
14
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Oil and Gas Investments (Continued)
The Karakuduk Field is still in a preliminary stage of development by KKM. The
estimated future development expenditures in order to ascertain the quantities
of proved reserves attributable to the Karakuduk Field are significant. All
costs incurred related to the workover program have been capitalized as
exploration costs to oil and gas properties not subject to depletion.
While the future ability of the Company to export hydrocarbons and therefore
realize world market prices is uncertain under current restricted transport
options in the Republic of Kazakhstan, management believes that over the life of
the project as a whole, future cash flows justify the carrying amount of the oil
and gas properties. No impairment provision has been reflected in these
financial statements.
7. Notes Payable
On December 3, 1998, the Company restructured a $975,000 loan that the Company
borrowed on July 3, 1998, from the Chase Bank of Texas (Chase). Under the new
terms, the note accrues interest at an adjustable prime rate, as determined by
Chase. As of December 31, 1998 the stated prime rate was 7.75%. Principal
payments in the amount of $250,000, plus accrued interest, are due quarterly,
beginning on February 28, 1999.
The $975,000 loan is fully guaranteed with a stand-by letter of credit from an
investor in the Company. In return for issuing the loan guarantee, the Company
paid the guarantor $10,000 plus related costs, issued warrants to purchase
20,000 shares of the Company's common stock (See Note 8), and granted the
guarantor a security interest in the Company's common stock of Central Asian
Petroleum (Guernsey) (CAP-G).
In the event of the Company's default on the $975,000 note, the guarantor's
security interest in the Company's common stock in CAP-G cannot be perfected for
at least 30 days after notification of such default. In the event of default,
the Company may make full payment of any outstanding principal and interest on
the note plus any additional charges incurred by the guarantor to completely
remove any security interest held by the guarantor.
8. Common Stock
1989 Stock Warrant Plan
During 1989, the Board of Directors approved a stock warrant plan for key
employees and directors. The Company reserved 1,175,000 shares of its common
stock for issuance under the plan. The warrants must be granted and exercised
within a 10-year period ending April 30, 1999. Immediately following approval of
the plan by the Board of Directors, warrants for 1,175,000 shares were granted
with an exercise price of $.28 per share. Warrants for 100,000, 225,000, and
100,000 shares were exercised for values of $28,000, $63,000, and $28,000 during
1997, 1996, and 1995, respectively.
1997 Incentive Stock Plan
On July 17, 1997, the shareholders of the Company approved the 1997 Incentive
Stock Plan pursuant to which up to 1,000,000 shares of the Company's common
stock may be granted to directors and employees of, or consultants to, the
Company. On June 26, 1998, the shareholders of the Company repealed the 1997
Incentive Stock Plan and approved the 1998 Incentive and Nonstatutory Stock
Option Plan, described below. No options were granted under this plan.
15
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Common Stock (Continued)
1997 Non-employee Directors' Stock Option Plan
On July 17, 1997, the shareholders approved the 1997 Non-employee Directors'
Stock Option Plan, which authorized granting 25,000 options annually to each
non-employee director in office or elected to the Board of Directors of the
Company, as of the date of the annual meeting of the Company's shareholders. On
June 26, 1998, the shareholders of the Company repealed the 1997 Non-employee
Directors' Stock Option Plan and approved the 1998 Incentive and Nonstatutory
Stock Option Plan, described below. As of June 26, 1998, the date of termination
of the plan, options for 200,000 shares with an exercise price of $.83 had been
issued to non-employee directors.
1998 Incentive and Nonstatutory Stock Option Plan
On June 26, 1998, the shareholders approved the 1998 Incentive and Nonstatutory
Stock Option Plan (the "Plan"), pursuant to which up to 3,000,000 options to
acquire the Company's common stock may be granted to officers, directors,
employees, or consultants of the Company and its subsidiaries. The stock options
granted under the Plan may be either incentive stock options or nonstatutory
stock options. The Plan has an effective term of ten years, commencing on May
20, 1998. The Company did not grant any options under the Plan during 1998.
Non-Qualified Stock Options
During 1997, the Company granted five year non-qualified options, generally with
vesting periods of one year, to purchase 2,885,000 restricted shares of the
Company's common stock to various directors of, and consultants to, the Company.
Options relating to 1,442,500 shares have an exercise price of $.75 per share
and options relating to 1,442,500 shares have an exercise price of $1.50 per
share.
The Company issued various five-year, non-qualified stock options to employees,
consultants and directors of the Company during 1997. The Company granted
options to purchase 126,000 shares of the Company's common stock, at an exercise
price of $.75. The Company granted options to purchase another 131,000 shares of
the Company's common stock, at an exercise price of $1.50 a share. The Company
has recorded the fair value of these stock options at the date of grant at
$227,000.
During 1998, the Company granted five-year non-qualified options to purchase
297,500 shares of the Company's common stock to various employees of, and
consultants to, the Company at various exercise prices ranging between $.72 and
$2.43 per share. The Company recorded the stock options granted to the
consultants at their fair value of $34,000 on the date of grant.
During 1998, 156,000 options to purchase the Company's common stock granted to
various employees of, and consultants to, the Company expired. The options had
exercise prices ranging between $.75 and $2.43 per share.
Common Stock Offerings and Common Stock Warrant Issuances
During 1993, the Company sold a total of 2,685,750 shares of common stock and
issued 1,342,875 warrants to purchase common stock with an exercise price of
$.40. An additional 105,540 warrants to acquire shares of common stock were paid
as commission. Prior to 1995, 650,625 of these warrants were exercised. During
1995, 165,375 of these warrants were exercised for the purchase of shares of
common stock. The exercise price was $.40 per share, for a total of $66,000.
During 1996, 632,325 of these warrants were exercised at an exercise price of
$.40 per share, for a total of $252,930. All warrants issued in connection with
the 1993 private placement have been exercised.
16
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Common Stock (Continued)
During December 1995 and January 1996, the Company borrowed $1,050,000. In
connection to the loans, the Company issued 780,000 warrants to purchase common
stock at an exercise price of $0.25. During 1998, 80,000 warrants were exercised
at a price of $0.25 for a total of $20,000. On October 30, 1998, 200,000
warrants to purchase the Company's common stock at an exercise price of $0.25
expired.
During 1996, the Company sold 14,000,000 shares of common stock in a private
placement at a price of $.50 per share. In connection with the private
placement, the Company issued warrants to purchase 1,022,000 shares of the
Company's common stock for a total of $10.00 to the sales agent as a commission.
In April 1996, private investors converted promissory notes totaling $300,000
into 600,000 shares of the Company's common stock at a conversion price of $.50
per share.
During 1997, the Company entered into an agreement to allow the Company to
acquire M-D, International Petroleum (MDI), a private company. Accordingly, on
January 8, 1997 the Company agreed to issue 180,000 shares of the Company's
common stock having a value of $90,000 to the potential joint venture partner.
Simultaneously, the principal stockholders of MDI put 180,000 shares of the
Company's common stock into escrow. These shares would be returned to the
Company if the Company did not acquire MDI by July 7, 1997. Under the agreement,
the Company was to acquire a 5% joint venture interest for the development of
certain natural gas fields in Uzbekistan. The agreement of the Company to
acquire MDI was contingent upon the potential joint venture partner successfully
obtaining rights to develop the natural gas fields in Uzbekistan. As of July 7,
1997, the agreement with Uzbekistan to develop the natural gas fields had not
been obtained. Consequently, the agreement by the Company to acquire MDI was
nullified and the escrowed shares were returned to the Company and retired.
During February 1997, the Company entered into a severance agreement with Paul
V. Hoovler, a former Chief Executive Officer and President of the Company,
pursuant to which Mr. Hoovler received warrants to purchase 100,000 shares of
the Company's common stock at an exercise price of $.85 per share and warrants
to purchase 100,000 shares of the Company's common stock at an exercise price of
$1.25 per share.
During 1997, the Company sold 3,076,923 shares of the Company's common stock for
$.65 per share for a total of $2,000,000 to a private investor. In connection
with the transaction, the Company also issued a warrant to the investor to
purchase up to an additional 4,615,385 shares of the Company's common stock for
$3,000,000 or $.65 per share. The warrant was to expire on December 31, 1997. In
October and November 1997, the private investor exercised warrants to acquire
4,615,385 shares of the Company's common stock. The same party exercised another
warrant for 125,000 shares of the Company's common stock exercisable at an
exercise price of $0.25 per share. In April 1997, a private investor converted a
$500,000 promissory note (plus $2,000 of accrued interest) that had previously
been issued by the Company into 772,991 shares of the Company's common stock at
a conversion price of $.65 per share.
On October 28, 1997, 423,076 shares of the Company's common stock were issued to
a private investor by way of a "cashless" exercise of a warrant as allowed by
the warrant. This warrant was originally exercisable for 500,000 shares at a
conversion price of $.25 per share.
In November 1997, a private investor converted a $1,000,000 promissory note
(plus $48,000 of accrued interest) that previously had been issued by the
Company into 1,396,741 shares of the Company's common stock at a conversion
price of $.75 per share.
During 1997, the Company issued 87,669 shares of the Company's common stock to a
consultant in lieu of $78,000 of accrued fees that had not been paid.
As further described in Note 13, The Company issued 350,000 shares of the
Company's restricted common stock to Mr. Howard Karren, former Chairman of the
Board of Directors of the Company, as payment of $175,000 for services during
1996. The Company recorded accrued compensation of $175,000 in 1996, and issued
the common stock in 1997.
17
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Common Stock (Continued)
In December 1997, the Company exercised an option to acquire the remaining 10%
of the outstanding shares of CAP-G (Note 3). As part of the consideration, the
Company issued 400,000 shares valued at $1,000,000.
During 1997, the Company sold 461,538 shares of the Company's common stock for
$.65 per share for a total of $300,000 to a private investor. In connection with
the transaction, the Company also issued warrants to the investor to purchase up
to an additional 461,538 shares of the Company's common stock for $300,000 or
$.65 per share. The private investor exercised a portion of the warrant on
December 31, 1997, and received a total of 384,616 shares of the Company's
common stock. The remaining warrants expired on the same day.
On January 23, 1998, the Company, granted 90,000 shares of the Company's common
stock to the directors of the Company and granted 185,000 shares of the
Company's common stock to various employees of, and consultants to, the Company,
of which 30,000 shares will vest with respect to 10,000 shares on each of
January 30, 1999, 2000, and 2001. As a result of these transactions, the Company
recognized $600,000 in 1998 compensation expense. An additional $45,000 relating
to the non-vested stock grants will be amortized over the vesting period of the
grants.
On April 3, 1998, the Company sold 1,250,000 shares of the Company's Common
stock for $2.00 per share for at total of $2,500,000 to a private investor.
Allen & Company, Incorporated acted as placement agent in connection with the
sale of the 1,250,000 shares. As a result, Allen & Company, Incorporated's
warrants to purchase shares of the Company's common stock, originally issued as
a commission in connection with the Redeemable Preferred Stock sale on November
24, 1997 (See Note 10), became exercisable for an additional 100,000 shares. The
warrants to purchase the additional 100,000 shares of the Company's Common stock
are exercisable through November 25, 2002, at an exercise price of $0.01 per
share.
In connection with the $1,000,000 loan referred to in Note 12, on June 4, 1998,
the Company issued warrants to purchase 1,000,000 shares of the Company's common
stock to two related parties, one of which is a director of the Company. The
warrants are exercisable through November 25, 2002, at an exercise price of
$3.50 per share. The Company recorded the fair market value of the warrants
($367,000) as a discount of notes payable, amortizable as interest expense over
the life of the loan. The fair market value of the warrants was estimated as of
June 4, 1998, using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rates of 5.53%, dividend yield
of 0%, volatility factors of the expected market price of the Company's Common
stock of .593, and a weighted average life expectancy of the warrants of 4.5
years.
On July 3, 1998, as discussed in Note 7, the Company issued warrants to purchase
20,000 shares of the Company's Common stock at an exercise price of $.01 per
share. The Company recorded the fair market value of the warrants (approximately
$32,000) plus the related loan costs, as a discount of notes payable and is
being amortized as additional interest expense over the life of the loan. The
fair market value of the warrants was determined using the Black-Scholes option
pricing model, with the following weighted average assumptions: risk free
interest rate 5.53%, dividend yield of 0%, volatility factors of the Company's
common stock of .644, and a weighted average life expectancy of the warrants of
5 years.
On July 28 and July 29, 1998, the Company sold 6,666,667 shares of the Company's
common stock for $1.50 per share for at total of $10,000,000 to certain
investors. Issuance cost incurred were approximately $50,000 and has been
recorded as a reduction to the proceeds received from the sale. Allen & Company,
Incorporated acted as placement agent in connection with the sale of the
6,666,667 shares. As a result, Allen & Company, Incorporated's warrants to
purchase 900,000 shares of the Company's common stock, originally issued as
commission in connection with the Redeemable Preferred Stock sale on November
24, 1997, became exercisable for an additional 400,000 shares of the Company's
common stock. The 400,000 warrants are exercisable through November 25, 2002, at
an exercise price of $0.01 per share. As of December 31, 1998, 200,000 warrants
held by Allen & Company were unexercisable pending the performance of future
services.
18
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Common Stock (Continued)
Due to the fact, the sales price of the 6,666,667 shares was below a price of
$2.00 per share, the Company was required to issue an additional 416,667 shares
to the investor who purchased 1,250,000 shares of the Company's common stock for
$2,500,000 in April 1998 in order to satisfy certain price protection agreements
the Company has with such investor.
On October 30, 1998, the Company issued warrants to purchase 200,000 shares of
the Company's common stock at an exercise price of $1.00, exercisable through
January 02, 1999, to settle the lawsuit filed against the Company by Heartland,
Inc. of Wichita and Collins & McIlhenny, Inc. on November 14, 1997. The Company
recorded legal settlement expense of $34,000, equal to the fair market value of
the warrants issued on the date of grant. On January 03, 1999, the 200,000
warrants expired. See Note 9.
SFAS 123 Disclosure
SFAS 123 requires that pro forma information regarding net income and earnings
per share be determined as if the Company had accounted for its employee stock
option under the fair value method as defined in that Statement for options
granted or modified after December 31, 1994. SFAS 123 requires disclosure of
option plans for the previous three years, but since 1997 was the first year for
stock option issuances to meet the new requirement, weighted average assumptions
are calculated only for 1997 and 1998. The fair value for applicable options was
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions for 1997 and 1998: risk free interest
rates of 5.53%; dividend yield of 0%; volatility factors of the expected market
price of the Company's common stock between 0.528 and 1.07; and a weighted
average life expectancy of the options of 4.9 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows:
Year ended Year ended Month ended
December 31, December 31, December 31,
1998 1997 1996
-----------------------------------------
Net Loss under APB 25 (4,616,000) (2,603,000) (130,000)
Effect of FASB 123 (190,000) (525,000) --
----------------------------------------
Pro forma Net Loss (4,806,000) (3,128,000) (130,000)
========================================
Pro forma Basic and Diluted
Earnings per Share $ (0.09) $ (0.08) $ --
19
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Common Stock (Continued)
A summary of the Company's stock option activity and related information for the
periods ended follows:
<TABLE>
<CAPTION>
Shares Weighted Weighted
Under Average Exercise Average
Option Price Fair Value
------------------------------------------------------
<S> <C> <C> <C>
Unexercised options outstanding -
November 30, 1996 -- -- --
Options Granted 3,342,000 $ 1.11 $ 0.59
Options Exercised -- -- --
Options Cancelled -- -- --
Unexercised options outstanding -
December 31, 1997 3,342,000 $ 1.11 --
Options Granted 297,500 $ 1.63 $ 1.09
Options Exercised -- -- --
Options Cancelled (156,000) $ 1.54 --
Unexercised options outstanding -
December 31, 1998 3,483,500 $ 1.13
Price range $0.72-$1.00
(weighted-average contractual
life of 4.2 years) 1,817,000 $ 0.76
Price range $1.34-$2.43
(weighted-average contractual
life of 3.7 years) 1,666,500 $ 1.53
Exercisable options
November 30, 1996 -- --
December 31, 1997 200,000 $ 0.83
December 31, 1998 3,297,000 $ 1.11
20
</TABLE>
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Common Stock (Continued)
The following table summarizes all common stock purchase warrant activity for
the year ended December 31, 1998:
<TABLE>
<CAPTION>
Number of Exercise
Stock Price
Warrants Range
-------------------------------------------------
<S> <C> <C>
Outstanding, November 30, 1995 2,407,325 $ 0.25 - $0.40
Granted 1,439,500 $ 0.00001 - $0.40
Exercised (857,325) $ 0.25 - $0.40
-------------------------------------------------
Outstanding, November 30, 1996 2,989,500 $ 0.00001- $0.28
Granted 6,426,923 $ 0.01 - $1.25
Exercised (5,648,077) $ 0.25 - $0.65
Expired (153,846) $ 0.25 - $0.65
-------------------------------------------------
Outstanding, December 31, 1997 3,614,500 $ 0.00001 - $1.25
Granted 1,220,000 $ .01 - $3.50
Exercised (80,000) $ 0.40
Expired (200,000) $ 0.25
-------------------------------------------------
Outstanding, December 31, 1998 4,554,500 $ 0.00001 - $3.50
=================================================
</TABLE>
The following table summarizes the price ranges of all common stock purchase
warrants outstanding as of December 31, 1998:
Stock Warrants Outstanding as of December 31, 1998
Number of Warrants Exercise Price
---------------------------------------------------
1,000,000 $3.50
200,000 $1.00
100,000 $0.85
100,000 $1.25
750,000 $0.28
462,500 $0.25
920,000 $0.01
1,022,000 $.00001
----------------------------------------------
4,554,500 $0.00001 - $3.50
9. Legal Settlement
On October 30, 1998, the Company settled the lawsuit filed against the Company
and others in the District Court of Harris County, Texas, by Heartland, Inc. of
Wichita and Collins & McIlhenny, Inc. on November 14, 1997, for a total of
$200,000 and warrants to purchase 200,000 shares of the Company's common stock
at an exercise price of $1.00, exercisable through January 02, 1999. The lawsuit
was dismissed with prejudice for all defendants involved. The Company believes
the lawsuit was without merit, but a settlement was reached to avoid incurring
additional legal costs. The Company recorded the fair market value of the
warrants using the Black-Scholes option pricing model. On January 03, 1999, the
200,000 warrants expired.
21
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Redeemable Preferred Stock and Related Common Stock Warrants
On November 24, 1997, the Company entered into a Subscription Agreement
("Agreement") with an unaffiliated investor to purchase 225,000 shares of the
Company's designated Series A, B, and C Redeemable Preferred Stock, for $100 per
share. As of December 31, 1997, the investor had purchased 50,000 shares of the
Company's Series A Redeemable Preferred Stock for $5,000,000. In March 1998, the
Company and the investor mutually released each other from any further
obligations. The Company is not required to issue any additional preferred stock
under the Agreement and the investor has no obligation to provide funds to the
Company in exchange for such stock.
The Series A Redeemable Preferred Stock is convertible and accrues an annual,
cumulative dividend of $5 per share. The dividends are payable semi-annually on
May 31 and November 30, as declared by the Company's Board of Directors. As of
December 31, 1998, dividends in arrears relating to the Series A Redeemable
Preferred Stock were $250,000. The Company increased the carrying value of the
Series A Redeemable Preferred Stock by $250,000 by accreting this amount
directly to accumulated deficit.
The number of shares of common stock issuable upon conversion of each share of
Series A Redeemable Preferred Stock is determined by dividing $100 by the
conversion price of the preferred stock. As of December 31, 1997, the conversion
price was $2.25 per share. The conversion price is subject to recalculation if,
and when, the Company issues additional common stock or common stock equivalents
to obtain additional equity or debt financing. During 1998, the Company issued
common stock and common stock warrants in both equity and debt financing
transactions. Adjusted for these transactions, the conversion price as of
December 31, 1998 was $2.14 per share (rounded), equivalent to 46.7 shares of
common stock for each share of Series A Redeemable Preferred Stock.
The Series A Redeemable Preferred Stock has voting privileges identical to the
Company's common stock. The total number of votes allowed to the holders of the
Series A Redeemable Preferred Stock is equal to the number of shares of common
stock the Series A Redeemable Preferred Stock could be converted into on the
specific date of record. As of December 31, 1998, the 50,000 shares of Series A
Redeemable Preferred Stock were convertible into 2,335,178 shares of common
stock.
The Series A Redeemable Preferred Stock has preferential liquidation rights over
the Company's common stock. In the event of liquidation or dissolution of the
Company, any assets available for distribution to the Company's shareholders
will first be distributed to the holders of the Series A Redeemable Preferred
Stock up to each redeemable preferred share's liquidation value. The liquidation
value equals $100 per share, plus all unpaid dividends in arrears.
The Series A Redeemable Preferred Stock is subject to mandatory redemptions,
beginning on November 30, 2002. As of December 31, 1998, the schedule of
redemptions of the stated value, plus any unpaid dividends, is as follows:
Year Amount
---------------------------------------
1999 -
2000 -
2001 -
2002 $1,750,000
2003 and Thereafter $3,500,000
----------
Total $5,250,000
==========
On November 24, 1997, the Company also designated Series B and C Redeemable
Preferred Stock, authorizing 75,000 shares for each class of preferred. As of
December 31, 1998, none of the Series B or Series C Redeemable Preferred Stock
was issued or outstanding. The conversion price of the Series B Redeemable
Preferred Stock is $3.00 per share and the conversion price of the Series C
Redeemable Preferred Stock is $4.25 per share and the conversion price is
subject to change in a manner similar to the Series A. Except for the conversion
price, the terms and conditions of both the Series B and Series C Redeemable
Preferred Stock are similar in nature to the Series A Redeemable Preferred
Stock.
22
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Redeemable Preferred Stock and Related Common Stock Warrants (Continued)
Allen & Company Incorporated (Allen & Company), a significant shareholder of the
Company, acted as placement agent in connection with the Agreement. Allen &
Company elected to receive its fees in the form of warrants to purchase 900,000
shares of the Company's common stock that were all originally exercisable
through November 25, 2002, at an exercise price of $.01 per share. The warrants
were recorded at their fair value. Out of the 900,000 warrants issued to Allen &
Company, 200,000 directly relate to the issuance of 50,000 shares of the Series
A Preferred Stock. The 200,000 warrants were recorded as issuance costs of
$500,000, reducing the $5,000,000 proceeds from Series A Preferred Stock. The
remaining 700,000 warrants, discussed below, were recorded as a stock
subscription receivable. The basis difference of $500,000 upon issuance of the
Series A Redeemable Preferred Stock is accreted directly to accumulated deficit
for the period through the redemption date. During 1998, the Company increased
the carrying value of the Series A Redeemable Preferred Stock by $100,000 to
reflect the current year accretion.
In an agreement dated March 31, 1998, the Company agreed to allow Allen &
Company to retain, subject to certain performance criteria, the warrants to
purchase 700,000 shares of the Company's common stock related to the
subscriptions not received under the original terms of the Agreement. The
unearned portion of the warrants is presented as a $1,770,000 stock subscription
receivable as of December 31, 1997.
The unearned warrants to purchase 700,000 shares of the Company's common stock
held by Allen & Company are fully restricted from exercise unless Allen &
Company assists the Company in raising additional capital on acceptable terms to
the Company's Board of Directors. For each $25 of additional capital raised, a
warrant to purchase one share of common stock is deemed earned by Allen &
Company.
During 1998, Allen & Company assisted the Company in raising an additional
$12,500,000 in equity capital. As a result, 500,000 of the 700,000 warrants are
no longer restricted. As of December 31, 1998, the remaining 200,000 restricted
warrants are presented as a $506,000 stock subscription receivable in equity.
If, before November 25, 1999, Allen & Company fails to assist the Company in
raising an additional $5,000,000 in capital under acceptable terms, the unearned
portion of the warrants will expire.
11. Income Taxes
The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
One Month
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, November 30,
1998 1997 1996 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income taxes (benefit) computed
at federal statutory rate $(1,493,000) $ (910,000) $ (46,000) $ (762,000)
Other 121,000 (60,000) (3,000) (86,000)
Change in asset valuation
Allowance 1,372,000 970,000 49,000 848,000
----------------------------------------------------------------------------
Income taxes $ -- $ -- $ -- $ --
============================================================================
</TABLE>
23
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Income Taxes (Continued)
The components of the Company's deferred tax assets and liabilities under FASB
No. 109 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 6,807,000 $ 5,812,000 $ 4,958,000
Full cost pool capitalization 267,000
Valuation allowance (6,807,000) (5,812,000) (5,225,000)
-----------------------------------------------------------
Deferred tax assets $ -- $ -- $ --
===========================================================
</TABLE>
The Company did not record any deferred tax assets or income tax benefits for
net operating loss carryforwards as the future realization of the related tax
benefits is not considered likely as of December 31, 1998.
At December 31, 1998, the Company has tax loss carryforwards for federal income
tax purposes of approximately $11,456,000 available to offset future taxable
income. These carryforwards will expire at various times between 1999 and 2013.
During the two years ended December 31, 1998 and 1997, respectively, the Company
has issued a significant number of shares of common stock, stock warrants, and
preferred stock in private equity and debt financing transactions. The Company
is continuing to negotiate for additional capital, which, if obtained, may
require additional shares of stock to be issued. The changes in ownership may
significantly restrict the use of net operating loss carryforwards by the
Company. As of December 31, 1998, unused statutory depletion carryforwards,
which have unlimited duration, are approximately $567,000. The unused investment
tax credit carryover was approximately $86,000 as of December 31, 1998 and
expires through 2000. The loss carryforward at December 31, 1998 for financial
reporting purposes is approximately $18,167,000, consisting of $13,212,000 in
domestic and $4,954,000 in foreign loss carryforwards, respectively. The
difference between the loss carryforward for financial reporting and income tax
purposes results principally from the difference in book and tax basis of oil
and gas properties and organizational costs related to foreign activities.
12. Related Party Transactions
The Company paid a director $24,000 during 1995 for public relations consulting
services.
During 1996, the Company paid a basic consulting fee of approximately $500,000
to MDI, of which the stockholders include two directors of the Company, for
assistance in seeking means for meeting the Company's funding obligation for the
Karakuduk Project. During 1997, the Company paid an additional $180,000 to MDI,
but terminated the agreement in the first quarter of 1997.
The Company leased office space under a non-cancelable operating lease, which
expired on March 31, 1997 from a related party. Beginning April 1, 1997, the
Company leased office space at a rate of approximately $2,000 per month. This
lease expired in November 1997, was renewed and then later canceled. In February
1998, the Company signed a new lease with an unrelated party. Rent expense was
$37,000 for 1997, $46,000 for 1996, and $36,000 for 1995. The Company believes
these rental expenses were at an arms length basis.
On July 31, 1998, the Company retired two outstanding loans, totaling $95,000,
from Howard Karren, The former Chairman and Chief Executive Officer of the
Company. The Company borrowed $75,000 on May 27, 1998 and $20,000 on July 1,
1998. The notes were paid during 1998.
24
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Related Party Transactions (Continued)
On August 5, 1998, the Company retired two outstanding loans, totaling
$1,000,000, from two related parties: Allen & Company, Incorporated ($900,000)
and John McMillian, the current Chairman and Chief Executive Officer of the
Company ($100,000). The Company borrowed the $1,000,000 on June 3, 1998, subject
to a 7% interest rate. The note was payable in full, plus accrued interest, on
the earlier of 180 days from the funding of the loans or upon the Company's
receipt of a minimum of $10,000,000 in equity investments. In conjunction with
the loans, the Company issued warrants to purchase 1,000,000 shares of the
Company's Common stock, at an exercise price of $3.50 per share. The Company
recorded the warrants at their fair market value of $367,000, as a discount of
notes payable, amortizable over the life of the loans. On July 27, 1998, the
Company received $10,000,000 in equity financing and repaid the loans,
recognizing an extraordinary loss on the extinguishment of debt of approximately
236,000.
13. Accrued Compensation
On August 19, 1996, the Company's Board of Directors awarded a former Chief
Executive Officer and a former Vice President of the Company cash bonuses
totaling $210,000 as recognition for past and present services to be used to
exercise certain warrants granted in connection with the Company's 1989 Stock
Warrant Plan. These bonuses will not become payable until the earlier of (i)
completion of a sale or farmout by the Company of all or a portion of its
interest in the Karakuduk Project, or (ii) the date when the Company makes a
public disclosure of a sale or farmout of the Karakuduk Project. The Company
does not expect any events to occur in the near future, therefore, the bonus
payable is considered long-term in nature.
In connection with the appointment of Mr. Howard Karren as the Chairman of the
Board of Directors of the Company in 1996, the Company agreed to issue to Mr.
Karren 350,000 shares of restricted common stock of the Company. In 1996, the
Company recorded accrued compensation for this transaction in the amount of
$175,000. During 1997, the common stock was issued.
14. Operating leases
The Company has a noncancelable operating lease for office facilities.
Approximate future minimum annual lease payments under the lease are as follows:
1999 $ 95,000
2000 99,000
2001 104,000
2002 106,000
2003 26,000
----------------------------------
Total $ 430,000
=========
The Company's rental expense for 1998, 1997, and 1996 was approximately $87,000,
$37,000, and $46,000 respectively.
15. Defined Contribution Plans
The Company adopted a 401(k) plan covering all full-time employees, effective
January 1, 1991. The plan was terminated as of December 31, 1997.
16. Commitments and Contingencies
Under the terms of the license agreement, approved by the Ministry of Oil and
Gas Industries of the Republic of Kazakhstan, granting KKM the right to develop
the Karakuduk Field, KKM has committed to minimum expenditures of $30 million
for the year ended December 31, 1999. The Company has excess expenditures from
1998 of $480,000, which will be applied against the 1999 commitment. The Company
has no other expenditure commitments under the license after December 31, 1999.
The license, as amended, also establishes a minimum work program, requiring the
Company to drill 8 new wells before December 31, 1999.
25
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Extraordinary Losses
During 1997, the Company retired several notes payable totaling $1,850,000 As
additional consideration for these notes, the Company issued to the note
holders, warrants to purchase 462,500 shares of the Company's common stock at
$.25 per share, exercisable at any time, but no later than November 30, 1999.
The notes were discounted by $290,000, the estimated fair value of the warrants,
with the discount being amortized over the life of the notes.
If the notes were still outstanding on May 31, 1997, the Company agreed to issue
185,000 warrants as additional consideration to the holders. Furthermore, if the
notes were still outstanding on November 30, 1997, the Company agreed to issue
370,000 warrants as additional consideration to the holders. Under these
provisions, the Company issued 125,000 of the 185,000 warrants due to the May
31, 1997 deadline and none due to the November 30, 1997 deadline. The Company
recorded debt issuance costs of $168,000 for the estimated fair value of the
additional warrants issued, to be amortized over the life of the notes. On dates
between May 1997 and November 1997 the notes were repaid by the Company at their
face value. The Company recorded an extraordinary loss on extinguishment of debt
of approximately $214,000.
On August 5, 1998, the Company retired two outstanding loans, totaling
$1,000,000, from two related parties: Allen & Company, Incorporated ($900,000)
and John McMillian, a director of the Company ($100,000). The Company borrowed
the $1,000,000 on June 3, 1998, subject to a 7% interest rate. The note was
payable in full, plus accrued interest, on the earlier of 180 days from the
funding of the loans or upon the Company's receipt of a minimum of $10,000,000
in equity investments. In conjunction with the loans, the Company issued
warrants to purchase 1,000,000 shares of the Company's Common stock, at an
exercise price of $3.50 per share. The Company recorded the warrants at their
fair market value of $367,000, as a discount of notes payable, amortizable over
the life of the loans. On July 27, 1998, the Company received $10,000,000 in
equity financing and repaid the loans, recognizing an extraordinary loss on the
extinguishment of debt of approximately $236,000.
18. Subsequent Events
On January 15, 1999, the Company granted 1,000,000 shares of common stock to the
Company's President and Chief Operating Officer, Dr. Jack Krug, as part of his
employment contract with the Company. Of the 1,000,000 shares granted, 200,000
vested immediately. The remaining 800,000 shares vest ratably over four years,
on the anniversary date of grant.
On February 28, 1999, the terms relating to the note between Chase and the
Company were amended. The $250,000 principal payment that was due on February
28, 1999 was deferred. Under the revised the terms, the Company is required to
begin making installments in August 1999.
From January 01, 1999 to March 31, 1999, the Company has borrowed approximately
$3,800,000 from certain shareholders of the Company, repayable by the Company on
or before August 31, 1999. The loans are subject to an 8% annual interest rate.
Effective March 1, 1999, the Company announced that it is relocating its
principal office from Houston, Texas to Golden, Colorado. The Company expects
the relocation to be completed by the fall of 1999. Effective April 1, 1999, the
Company assigned its operating lease, disclosed in Note 14, to an unaffiliated
third party.
On April 8, 1999, the Board of Directors has recommended for shareholder
approval, a 60 to 1 reverse stock split. Management is anticipated a vote on
this matter in a special meeting of the Company's shareholders, expected to
occur in late April 1999.
19. Karakuduk Munai, JSC Financial Statements
Due to the significance of the Company's equity investee, the Company has
attached audited financial statements for KKM. Reflected in the financial
statements are management fees of $1,980,000, $1,020,000, $85,000, and
$1,020,000, that have been charged by the Company to KKM for the years ending
December 31, 1998, December 31, 1997, and the month period ended December 31,
1996, and the year ended November 30, 1996 respectively. These amounts are
exclusive of any local withholding tax, which may be accrued by KKM. Also, (for
the same periods) the financial statements include interest on the note payable
to the Company from KKM in the amounts $1,043,565, $389,624, $20,102, and
$117,431.
26
<PAGE>
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
The following supplemental information regarding the oil and gas activities of
the Company is presented pursuant to the disclosure requirements promulgated by
the Securities and Exchange Commission and Statement of Financial Accounting
Standards ("SFAS") No. 69, Disclosures About Oil and Gas Producing Activities.
The Company entered into an agreement effective January 1, 1997 to sell its
domestic oil and gas properties. Accordingly, the Company's domestic oil and gas
properties were classified as oil and gas properties under an agreement for sale
at November 30, 1996 and no disclosures for proved reserves or future cash flows
have been made at November 30, 1996. The properties were sold in accordance with
the above agreement. Due to the uncertainties surrounding the development of the
Karakuduk Field, along with the limited amount of production established as of
December 31, 1998, no proved reserves have been attributed to the field. The
Company acquired no additional producing properties in 1998. Therefore, no
disclosures for proved reserves or future cash flows have been made at December
31, 1998. Acquisition and exploratory costs incurred related to the Company's
interest in the Karakuduk Field, however, are disclosed below. The exploration
costs reflect the entire exploratory costs incurred by the Company and KKM.
The following estimates of reserve quantities and related standardized measure
of discounted net cash flow are estimates only, and do not purport to reflect
realizable values or fair market values of the Company's reserves. The Company
emphasizes that reserve estimates are inherently imprecise and that estimates of
new discoveries are more imprecise than producing oil and gas properties.
Additionally, the price of oil has been very volatile and downward changes in
prices can significantly affect quantities that are economically recoverable.
Accordingly, these estimates are expected to change as future information
becomes available and the changes may be significant. All of the Company's
proved reserves were located in the United States.
Proved reserves are estimated reserves of crude oil and natural gas that
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those expected to be
recovered through existing wells, equipment and operating methods.
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses. The estimated future net
cash flows are then discounted using a rate of 10% a year to reflect the
estimated timing of the future cash flows.
27
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
Proved Oil and Gas Reserve Quantities
(All Within the United States)
Oil Gas
Reserves reserves
(bbls.) (Mcf.)
----------------------------------
<S> <C> <C>
Balance November 30, 1995 66,185 3,062,417
Revisions of previous estimates (58,749) 18,703
Sales of reserves (531) (34,417)
Extensions, discoveries and other additions 267 6,638
Production (1,737) (96,906)
Transfer to oil and gas properties under agreement
For sale (5,435) (2,956,435)
Balance November 30, 1996 -- --
Revisions of previous estimates -- --
Sales of reserves -- --
Extensions, discoveries and other additions -- --
Production -- --
Balance December 31, 1997 -- --
Revisions of previous estimates -- --
Sales of reserves -- --
Extensions, discoveries and other additions -- --
Production -- --
---------------------------------
Balance December 31, 1998 -- --
=================================
28
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
Capitalized Costs Relating to Oil and Gas Producing Activities
December 31, December 31, November 30,
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Unproved oil and gas properties in the Republic of
Kazakhstan $22,696,000 $15,934,000 $12,091,000
Proved oil and gas properties -- -- --
---------------------------------------------
$22,296,000 $15,934,000 $12,091,000
---------------------------------------------
Accumulated depreciation, depletion, and amortization
And valuation allowances -- -- --
---------------------------------------------
Net capitalized costs $22,296,000 $15,934,000 $12,091,000
=============================================
Company's share of equity method investee's
Capitalized costs $ 9,565,000 $ 3,988,000 $ 1,143,000
=============================================
29
<PAGE>
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
Costs Incurred in Oil and Gas Property Acquisition,
Exploration, and Development Activities
Year Ended Year Ended Year Ended
December 31, December 31, November 30,
1998 1997 1996
-----------------------------------------------------
Property acquisition costs--
unproved leases:
United States $ -- $ -- $ --
Republic of Kazakhstan -- 2,625,000 6,058,000
Property acquisition costs--
proved properties:
United States -- -- --
Republic of Kazakhstan -- -- --
Exploration costs
United States -- -- --
Republic of Kazakhstan 6,761,000 1,218,000 1,610,000
Development costs
United States -- -- --
Republic of Kazakhstan -- -- --
Company's share of equity method investee's
Costs of property acquisition, exploration,
And development $ 5,578,000 $ 2,845,000 $ 874,000
-----------------------------------------------------
$12,339,000 $ 6,688,000 $ 8,542,000
=====================================================
30
<PAGE>
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
Results of Operations for Producing Activities
Year Ended Year Ended Year Ended
December 31, December 31, November 30,
1998 1997 1996
-----------------------------------------------------
Revenues
Sales $ -- $ -- $147,000
Transfers -- -- --
---------------------------------------------------
Total -- -- 147,000
Production Costs -- -- 37,000
Exploration Expenses -- -- --
Depreciation, depletion, and amortization
and valuation provisions -- -- 3,000
-- -- 107,000
Income tax expenses -- -- --
--------------------------------------------------
Results of operations from producing
Activities (excluding corporate overhead
And interest costs) $ -- $ -- $107,000
==================================================
Company's share of equity method investee's
Results of operations for producing
Activities -- -- --
==================================================
31
<PAGE>
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
Standardized Measure of Discounted Future Net Cash Flows
and Changes Therein Relating to Proved Oil and Gas Reserves
The following are the principal sources of changes in the standardized measure
of discounted future net cash flows:
Thirteen
Year Ended Months ended Year Ended
December 31 December 31 November 30
1998 1997 1996
------------------------------------------------------
Beginning balance $ -- $ -- $ 27,000
Expenditures which reduced future
development costs -- -- --
Acquisition of proved reserves -- -- --
Sale of proved reserves -- -- (54,000)
Sales and transfers of oil and gas
produced, net of production costs -- -- (110,000)
Net increase (decrease) in price -- -- 860,000
Net decrease in costs -- -- --
Extensions and discoveries -- -- 17,000
Revisions of previous quantity
Estimates -- -- (91,000)
Accretion of discount -- -- 99,000
Effect of change in timing and other -- -- 253,000
Transfer to oil and gas properties
under agreement for sale -- -- (1,401,000)
-----------------------------------------------------
Ending balance $ -- $ -- $ --
=====================================================
32
</TABLE>
<PAGE>
Ernst & Young Kazakhstan Tel. 7 (3272) 50 94 24
Kazakhstan 7 (3272) 50 94 25
Almaty 480009 7 (3272) 60 82 99
Prospekt Abai 153a 7 (3272) 41 48 00
Fax: 7 (3272) 50 94 27
Report of Independent Auditors
The Board of Directors and Shareholders
Karakuduk-Munay, JSC
We have audited the accompanying balance sheets of Karakuduk-Munay, JSC ("the
Company") as of December 31, 1998 and 1997, and the related statements of
operations and cash flows and changes in shareholders' deficit for each of the
three years ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with US generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of Karakuduk-Munay, JSC as of December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years ended December 31, 1998, in conformity with US generally accepted
accounting principles.
Without qualifying our opinion, we draw your attention to the fact that the
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As more fully described in Note 3 to the financial
statements, the Company has incurred recurring operating losses and relies
solely on the foreign shareholder to provide all funding in the form of an
interest bearing loan. The Company requires significant additional financing to
meet its financial commitments and requirements through calendar year 1999 as
described in Note 18. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG KAZAKHSTAN
April 8, 1999
Almaty, Kazakshtan
33
<PAGE>
Karakuduk-Munay JSC
Balance Sheets as at
December 31, 1998 and 1997
(Amounts in US Dollars)
December 31, December 31,
1998 1997
------------------------------
ASSETS
Cash $ 52,958 $ 414,384
Prepaid and other receivables (Note 4) 125,231 272,455
VAT receivable (Note 5) -- 109,099
Crude oil inventory (Note 6) 551,342 --
----------------------------
Total current assets 729,531 795,938
Long term VAT receivable (Note 5) 863,077 --
Materials and supplies inventory (Note 7) 1,494,572 511,858
Property, plant and equipment, net (Note 8) 4,209,396 1,589,057
Oil and gas properties - full cost
method (Note 9) 12,563,120 5,874,525
----------------------------
TOTAL ASSETS $ 19,859,696 $ 8,771,378
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable (Note 11) $ 2,247,954 $ 2,100,722
Accrued liabilities (Note 12) 779,596 666,856
Current portion of loans payable
to third parties (Note 13) 177,780 --
Current portion of loans payable
to partner (Note 13) 3,000,000 --
----------------------------
Current liabilities 6,205,330 2,767,578
Loans payable to third parties (Note 13) 577,775 --
Loans payable to partner (Note 13) 20,380,080 9,819,497
TOTAL LIABILITIES $ 27,163,185 $ 12,587,075
SHAREHOLDERS' DEFICIT
Charter capital (Note 15) 200,000 200,000
Accumulated deficit (7,503,489) (4,015,697)
-----------------------------
(7,303,489) (3,815,697)
-----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 19,859,696 $ 8,771,378
============ ============
See accompanying notes which form an integral
part of these financial statements.
34
<PAGE>
<TABLE>
<CAPTION>
Karakuduk-Munay JSC
Statements of Operations
for the years ended December 31, 1998, 1997 and 1996
(Amounts in US Dollars)
December 31, December 31, December 31,
1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C>
Management service fee (Note 13) $ 845,840 $ 495,000 $ 825,000
General and administrative expenses 1,297,513 836,868 909,520
Interest expense (Note 13) 508,539 155,624 137,533
Depreciation on fixed assets (Note 8) 440,901 147,660 42,709
Miscellaneous taxes 135,441 30,214 2,937
Write-down of crude oil inventory (Note 6) 192,481 -- --
Exchange loss/(gain) 67,077 (387) 24,475
----------- ----------- -----------
Net loss 3,487,792 1,664,979 1,942,174
============ =========== ===========
</TABLE>
See accompanying notes which form an integral
part of these financial statements.
35
<PAGE>
<TABLE>
<CAPTION>
Karakuduk-Munay JSC
Statements of Cash Flows
(Amounts in US Dollars)
December 31, December 31, December 31,
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,487,792) $ (1,664,979) $ (1,942,174)
Adjustments to reconcile net loss to net
cash used by operating activities:
Write-down of crude oil inventory 192,481 -- --
Depreciation of fixed assets 440,901 147,660 42,709
Changes in working capital:
(Increase)/decrease in prepaid and other receivables 147,224 (255,979) 76,230
(Increase) in VAT receivable (753,978) (51,803) (57,296)
(Increase) in crude oil inventory (743,823) -- --
(Increase) in materials and supplies inventory (982,714) (483,437) (28,421)
Increase in accounts payable and accrued liabilities 259,972 2,022,350 146,819
Increase/(decrease) in long term payable for land usage -- (34,000) 34,000
--------------------------------------------------
Net cash used by operating activities (4,927,729) (320,188) (1,728,133)
Cash flows from investing activities
Purchase of fixed assets (3,061,240) (1,284,782) (464,208)
Investments in oil and gas assets (net of assets
contributed in-kind through Charter Fund) (6,688,595) (4,068,937) (1,237,718)
Payment of signature bonus -- -- (513,000)
--------------------------------------------------
Net cash used in investing activities (9,749,835) (5,353,719) (2,214,926)
Cash flows from financing activities
Cash contributed as charter fund -- -- 40,000
Increase in loans from third parties 800,000 -- --
Principal payments on third party loans (44,445) -- --
Increase in loan due to cash contribution 10,422,567 4,134,783 2,240,000
Increase in loans payable for management
services and other expenditures 2,094,451 1,526,995 1,527,339
Increase in loans payable for interest 1,043,565 389,624 137,533
----------------------------------------------------
Net cash provided by financing activities 14,316,138 6,051,402 3,944,872
Net increase/(decrease) in cash (361,426) 377,495 1,813
Cash at beginning of year 414,384 36,889 35,076
----------------------------------------------------
Cash at end of year $ 52,958 $ 414,384 $ 36,889
============ ============ ============
See accompanying notes which form an integral
part of these financial statements.
36
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Karakuduk-Munay JSC
Statements of Shareholders' Deficit
(Amounts in US Dollars)
Authorized Accumulated
Charter Capital Deficit Total
-------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31,1995 $ 100,000 $ (408,544) $ (308,544)
Charter capital contributions 100,000 - 100,000
Net loss for the year 1996 - (1,942,174) (1,942,174)
Balance at December 31,1996 200,000 (2,350,718) (2,150,718)
Net loss for the year 1997 - (1,664,979) (1,664,979)
Balance at December 31,1997 200,000 (4,015,697) (3,815,697)
Net loss for the year 1998 - (3,487,792) (3,487,792)
-----------------------------------------------------------
Balance at December 31,1998 $200,000 $ (7,503,489) $(7,303,489)
===========================================================
See accompanying notes which form an integral
part of these financial statements.
37
</TABLE>
<PAGE>
Karakuduk-Munay JSC
Notes to the Financial Statements
(Amounts in US dollars unless otherwise stated)
1. Organization and Background Information
Formation
- ---------
Karakuduk-Munay Inc. (the "Company"), a Kazakhstan Joint Stock Company of Closed
Type, was founded by "Munaygaz" State Holding Company (formerly
Kazakhstanmunaygaz National Petroleum Company), "Jarkin" State Holding Company
(formerly PGO Mangistauneftegazgeologiya), and Korporatsiya Mangistau Terra
International (formerly Korporatsiya Kramds-Mangistau Inc.), collectively the
"Kazakh Shareholders", and Central Asian Petroleum (Guernsey) Limited. The
Company and the Ministry of Energy and Natural Resources (formerly the Ministry
of Oil and Gas) in the Republic of Kazakhstan, entered into an agreement on
August 30, 1995 ("Inception") referred to as the Agreement for Exploration,
Development and Production of Oil in Karakuduk Oil Field in Mangistau Oblast of
the Republic of Kazakhstan (the "Agreement"). The management and operational
framework within which the Company must conduct its activities are dictated by
the Agreement.
The Company may be terminated under certain conditions specified in the
Agreement. The term of the Agreement is 25 years commencing from the date of the
Company's registration. The Agreement can be extended to a date agreed between
the Ministry of Energy and Natural Resources and the Company as long as
production of petroleum and/or gas is continued in the Karakuduk oil field.
Changes in Shareholders
- -----------------------
In accordance with Edict # 410 dated March 24, 1997 and Edict # 1287 dated
August 26, 1997 issued by the Government of the Republic of Kazakhstan, 40 % of
the Charter Fund of the Company belonging to "Jarkin"/"Aksay" and "Munaygaz"
were transferred to KazakhOil, the state owned oil and gas company. The Company
and new shareholder were legally re-registered with the Ministry of Justice of
the Republic of Kazakhstan on July 24, 1997. There were no shareholder changes
in 1998.
Principal Activity
- ------------------
The Company was established for the purposes of exploring, developing, and
producing oil and gas deposits in the Karakuduk Field in the Republic of
Kazakhstan acting on the basis of the Agreement which the Company entered into
with the Ministry of Energy and Natural Resources in the Republic of Kazakhstan
on August 30, 1995. Prior to the Company entering into the Agreement, the
Government of Kazakhstan drilled 22 test wells in the Karakuduk Field,
establishing the existence of crude oil reserves. No additional exploration or
production operations have been conducted on the Karakuduk Field. Neither were
there any commercial quantities of crude oil produced from the original test
wells, prior to Inception of the Agreement. In accordance with the Agreement,
the Company retains the contractual rights to explore, develop, and produce the
crude oil reserves, if any, underlying the Karakuduk Field.
The Company's work program and minimum expenditure commitment was stipulated in
License MG 249 dated June 28, 1995. These expenditure obligations were
subsequently amended by Resolution P65-H of September 18, 1996, Resolution P97-H
of December 8, 1997, and Decree No. 1392 of December 31, 1998. Decree No. 1392
requires the Company to meet expenditure commitments of $16.5 million by
December 31, 1998 and $30 million by December 31, 1999. Expenditure commitments
through December 31, 1998 exceeded the commitment requirement of $16.5 million
by approximately $480,000. The excess is applicable against the expenditure
commitment required as of December 31, 1999. Should the license terms not be
adhered to, the License may be withdrawn by the Government of Kazakhstan.
38
<PAGE>
Karakuduk-Munay JSC
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
1. Organization and Background Information (continued)
During 1998, the Company was engaged in various exploration and appraisal
activities associated with the Karakduk Field. The Company's activities included
conducting capital workover operations, processing and transportation of limited
crude oil production to the KazTransOil pipeline, completing construction of the
field camp and main access road, beginning construction of various field
facilities required to bring the Karakuduk Field onto full production, and
importing a drilling rig into Kazakhstan for commencement of exploratory
drilling activities in 1999. The Company's operations also included general
corporate affairs, such as applying for, and obtaining, an amendment of the
Company's License MG-249 with the Government of Kazakhstan as well as other
general and administrative activities.
The Company conducted capital workover operations on four test wells, which were
drilled prior to the Company entering into the Agreement. Production was
established from two of the four wells. The Company did not commence exploratory
drilling operations during 1998.
The Company produced limited amounts of crude oil throughout the majority of
1998. The crude oil was produced, processed, and transported to the KazTransOil
pipeline by truck. As of December 31, 1998, the Company had placed 11,103 tons
(81,052 barrels) of crude oil into the KazTransOil pipeline, but did not sell
any of the crude oil produced during 1998. In accordance with an agreement
between the Company and KazTransOil, all of the crude oil production placed into
the pipeline is recorded as crude oil inventory, until formally nominated for
sale by the Company.
2. Basis of Presentation
The Company maintains its accounting records and prepares its financial
statements in US dollars in accordance with the accounting procedures prescribed
by the Agreement. The accompanying financial statements, prepared in accordance
with U.S. generally accepted accounting principles, differ in minor respects
(related to disclosure) from those issued for statutory purposes in Kazakhstan.
The Company has reclassified some of its comparative numbers in order to be
consistent with the current year classifications in the Balance Sheet and
Statement of Operations. This has no impact on the results for the year or the
net assets of the Company.
The material accounting principles adopted by the Company are described below:
Foreign Currency Translation
- ----------------------------
The Company's functional currency is the US dollar. All transactions arising in
currencies other than US dollars, including assets, liabilities, revenue,
expenses, gains, or losses are measured and recorded into US dollars using the
exchange rate in effect on the date of the transaction.
Cash and other monetary assets held and liabilities denominated in currencies
other than US dollars are translated to US dollars at the rates of exchange
ruling as of December 31, 1998 (83.80 Kazakh Tenge per US dollar). Non-monetary
assets and liabilities denominated in currencies other than US dollars have been
translated at the estimated historical exchange rate prevailing on the date of
the transaction. Exchange gains and losses arising from translation of non-US
dollar amounts at the balance sheet date are recognized as an increase or
decrease in income for the period. By using the US dollar as its reporting
currency for the financial statements and by using the temporal method of
translation where applicable, the effects of inflation have been taken into
consideration in all material respects since movements in the exchange rate
between the US dollars and Tenge during 1996 to 1998 are considered a reasonable
approximation of the general price index. (See Note 19).
39
<PAGE>
Karakuduk-Munay JSC
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
2. Basis of Presentation (continued)
The Tenge is not a convertible currency outside of the Republic of Kazakhstan.
The translation of Tenge denominated assets and liabilities in these financial
statements does not indicate that the Company could realize or settle these
assets and liabilities in dollars.
As of December 31, 1998, $530,511 of net monetary assets are denominated in
Tenge.
Interest Capitalization
- -----------------------
The Company capitalizes interest on significant construction projects for which
expenditures are being made. The Company follows the full cost method of
accounting. Accordingly, the Company's assets qualifying for interest
capitalization include unusually significant investments in unproved properties
and other major development projects that are not being depreciated, depleted,
or amortized currently, provided that work is currently in progress.
The Company began exploration activities in 1997. As of December 31, 1998, the
Company's oil and gas investment in the Karakuduk Field is not considered a
proven property and economic production has not commenced. Consequently, none of
the capital costs related to the Karakuduk Field have been depreciated,
depleted, or amortized during 1998. Beginning in 1997, and throughout all of
1998, the Company capitalized certain borrowing costs to significant, unproven
oil and gas properties on which the Company is currently conducting exploration
and appraisal activities. The Company capitalized $565,542 in 1998 and $234,000
in 1997, respectively. Other interest costs are expensed as incurred.
Oil and Gas Assets Subject to Depreciation, Depletion and Amortization
- ----------------------------------------------------------------------
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs directly associated with acquisition,
exploration and development of oil and gas reserves are capitalized in cost
pools for each country in which the Company operates. The limitation on such
capitalized costs is determined in accordance with rules specified by the
Securities and Exchange Commission. Capitalized costs are depleted using the
units of production method based on proven reserves.
Oil and Gas Properties Not Subject to Depletion
- -----------------------------------------------
Costs associated with acquisition and evaluation of unproved properties are
excluded from the amortization computation until it is determined if proved
reserves can be attributed to the properties. These unevaluated properties are
assessed annually for possible impairment and the amount impaired, if any, is
added to the amortization base. Costs of exploratory dry holes and geological
and geophysical costs not directly associated with specific unevaluated
properties are added to the amortization base as incurred.
40
<PAGE>
Karakuduk-Munay JS
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
2. Basis of Presentation (continued)
Depreciation of Property Plant and Equipment
- --------------------------------------------
Depreciation of equipment is calculated on the straight-line method based on the
estimated useful life of the assets as follows:
Period
------
Office buildings and apartments 20 years
Office equipment 3 years
Vehicles 5 years
Field buildings 15 years
Field equipment up to 10 years
Inventory
- ---------
Crude oil inventory is valued using the first-in, first-out method, at the lower
of cost or net realizable value. The Company's capitalized cost of crude oil
inventory is the lesser of the actual costs to produce, transport and store the
crude oil in inventory, or the inventory's net realizable value.
Materials and supplies inventory is valued using the first-in, first-out method
and is recorded at the lower of cost or net realizable value. Certain unique
items, such as drilling equipment, are valued using the specific identification
method.
Revenue Recognition
- -------------------
Revenues and their related costs are recognized upon delivery of commercial
quantities of oil and gas production, in accordance with the accrual method of
accounting. Losses, if any, are provided for in the period in which the loss is
determined to occur.
Income Taxes
- ------------
The Company accounts for income taxes under the provisions of the Statement of
Financial Accounting Standards ("SFAS") 109, Accounting for Income Taxes, which
require that taxes be provided on the liability method based upon the tax rate
at which items of income and expense are expected to be settled in the Company's
tax return.
Earnings Per Common Share
- -------------------------
Basic earnings (loss) and diluted earnings (loss) are not presented due to the
Company being of a "closed" nature, and having no underlying shares outstanding.
New Accounting Standards
- ------------------------
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. This statement is effective for years beginning after June
15, 1999. As of December 31, 1998, the Company has not adopted SFAS 133.
41
<PAGE>
Karakuduk-Munay JSC
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
2. Basis of Presentation (continued)
The Company is evaluating SFAS 133 and intends to adopt the statement no later
than January 1, 2000. The impact of SFAS 133 on the Company's financial position
and results of operations is not expected to be material.
Fair Value of Financial Instruments
- -----------------------------------
All of the Company's financial instruments, including loans payable to partner,
cash and trade receivables, have fair values which approximate their recorded
values as they are either short-term in nature or carry interest rates which
approximate market rates.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Leases
- ------
The Company expenses rentals on operating leases over the lease term, on a
straight-line basis, as the rents become payable.
3. Going Concern
These financial statements have been prepared assuming that Karakuduk-Munay,
JSC, will continue as a going concern. The Company has recurring operating
losses and relies solely on Central Asian Petroleum (Guernsey) Limited (CAP-G)
to provide all funding in the form of an interest bearing loan, as discussed in
Note 13. In accordance with the license agreement, CAP-G is required to provide
all funding to the Company which is not provided by self-generated income from
the sale of oil and gas production or borrowed from other third-party sources.
The Company does not anticipate that its current cash reserves and cash flows
from operations will be sufficient to meet its capital requirements through
fiscal year 1999. Should the Company not meet its capital requirements, as
described in Note 18, under the license agreement to develop the Karakuduk
Field, the Company's rights under the agreement may be terminated. The Company
believes additional financing will be available; however there is no assurance
that additional financing will be available, or if available, that it can be
obtained on terms favorable or affordable to the Company.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
liabilities that may result from the outcome of this uncertainty.
42
<PAGE>
Karakuduk-Munay JSC
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
4. Prepaid and Other Receivables
As of December 31, 1998, Prepayments and Other Receivables, primarily consisted
of advances to the Custom's Post for payment of VAT and custom's duties on
future imported materials and supplies. As of December 31, 1997, Prepayments and
Other Receivables primarily consisted of prepaid equipment, which was
capitalized to plant & equipment during 1998. The breakdown of Prepaid and Other
Receivables is as follows:
December 31, December 31,
1998 1997
------------------------------
Travel advances to employees $ -- $ 18,606
Import VAT, custom duties and prepaid taxes 120,631 41,256
Advance payment for oil and gas assets 4,600 212,593
--------- ---------
Total $ 125,231 $ 272,455
========= =========
5. VAT Receivable
VAT receivable is a Tenge denominated asset due from the Republic of Kazakhstan.
The VAT receivable consists of VAT paid on local expenditures (Local VAT) and
VAT paid on Imported goods (Import VAT). Currently, VAT is calculated as 20% of
the value of goods received (Import and Local VAT) or services rendered (Local
VAT only). VAT charged to the Company is recoverable in future periods as an
offset against the Company's fiscal obligations.
From December 31, 1997 to December 31, 1998, the Company's VAT receivable
increased from $109,099 to $863,077, respectively, due to the Company's
increased spending on operations. During 1998, the Company offset both the Local
and Import VAT receivable against additional VAT charged on imported goods. In
prior years, the Company received several refunds of VAT previously paid into
the Government of Kazakhstan. The ability of the Company to obtain future
refunds or to offset the VAT receivable against future Import VAT liabilities is
uncertain. The Company does expect, however, to obtain full economic benefit
from the VAT receivable through the Company's right of offset against future
fiscal obligations, as provided for in the Agreement.
6. Crude Oil Inventory
During 1998, the Company produced approximately 11,103 tons of crude oil from
two capital workover wells recompleted in the Karakuduk Field in early 1998. The
crude oil was produced into storage tanks, transferred to heated oil trucks,
transported to the KazTransOil pipeline terminal at Say-Utes (approximately 80
kilometers), and placed into the KazTransOil pipeline. In an agreement with
KazTransOil, the entity controlling the export pipeline, the Company's oil
production placed into the pipeline is recorded as crude oil inventory until
formally nominated for sale by the Company.
As of December 31, 1998, the Company had not completed a sale of crude oil,
either to the local or export markets. The Company recorded all operating
(lifting) costs required to produce, transport, and store the Company's 1998 oil
production as costs of crude oil inventory. As of December 31, 1998, the actual
costs of the inventory, based upon year-end crude oil prices, exceeded the net
realizable value (NRV) of the inventory. Therefore, the Company recognized an
impairment to crude oil inventory, to properly reflect the estimated net
realizable value of $551,342. The impairment, totaling $192,481, was charged
directly to expense.
43
<PAGE>
Karakuduk-Munay JSC
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
7. Materials and Supplies Inventory
The categories of Materials and Supplies Inventory listed below represent plant
and equipment for development activities, tangible drilling costs (drillbits,
tubing, casing, wellheads, etc.) required for exploratory drilling operations,
spare parts, diesel fuel, and various materials for use in oil field operations.
The Inventory in Transit as of December 31, 1998 includes additional tubing and
casing required for drilling planned exploratory wells in 1999.
December 31, December 31,
1998 1997
--------------------------------
Inventory in-house $1,084,359 $ 224,998
Inventory in-transit 410,213 286,860
---------- ----------
Total $1,494,572 $ 511,858
========== ==========
8. Property, Plant and Equipment
Upon full amortization of tangible assets, the right of ownership of the
tangible assets shall be transferred to the Kazakhstan Ministry of Energy and
Natural Resources in accordance with the Agreement. The Company is entitled to
the use of the fully amortized tangible assets during the whole term of the
Agreement. A summary of property, plant and equipment is provided in the table
below:
December 31, December 31,
1998 1998
-------------------------------
Office buildings and apartments $ 214,468 $ 67,212
Office equipment and furniture 390,671 227,318
Vehicles 1,663,364 541,479
Field buildings 2,248,920 329,936
Field equipment and furniture 323,824 169,190
Capital work-in progress -- 444,872
----------- -----------
Total 4,841,247 1,780,007
Accumulated depreciation (631,851) (190,950)
----------- -----------
Net book value $ 4,209,396 $ 1,589,057
=========== ===========
Vehicles includes both vehicles for specialized tasks (cranes, bulldozers, heavy
trucks, crude oil trucks, etc.) and vehicles for personnel transport. Field
buildings include the construction of the main field camp and construction of a
mini-camp to house the drilling crew and service company personnel required to
perform exploratory drilling operations. Field equipment and furniture includes
furniture and fixtures for the field camp and other equipment. The majority of
plant and equipment was placed in service in the latter part of 1998.
The office and apartment buildings, office and apartment furniture and fixtures,
office equipment, vehicles, field buildings, field furniture and fixtures and
other equipment are all depreciated on a straight-line basis over the estimated
useful life of each asset.
44
<PAGE>
Karakuduk-Munay JSC
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
9. Oil and Gas Properties
As of December 31, 1998, the Company's Oil and Gas Properties are not subject to
amortization under the Full Cost method of accounting. While the Company has
obtained a certain level of crude oil production in 1998, the reserves
underlying the Karakuduk Field are classified as unproven until the Company can
establish the commercial viability of the reserves. As of December 31, 1998, the
Company's reserves are not considered commercially viable, as the production
costs required to obtain the crude oil in inventory exceeded the net realizable
value of the production, based upon year-end crude oil prices.
Management fees related to the salary costs of individuals directly associated
with exploration and appraisal activities on the Karakuduk field have been
capitalized along with the license acquisition costs, geological and geophysical
expenditures, and related interest costs. Other overhead and general and
administrative costs have been expensed as incurred.
Costs of Oil and Gas Properties excluded from the amortization consist of the
following:
December 31, December 31,
1998 1997
------------------------------
Acquisition costs $ 507,870 $ 507,870
Exploration and appraisal costs 11,255,708 5,132,655
Capitalized interest 799,542 234,000
----------- -----------
Total $12,563,120 $ 5,874,525
=========== ===========
Management believes that over the life of the project, future cash flows justify
the carrying amount of assets disclosed above. No impairment provision has
therefore been deemed necessary in these financial statements.
10. Bonuses
The Company was required to pay an unrecoverable (non-tax deductible) signature
bonus to the Kazakhstan Ministry of Geology amounting to $513,000 in accordance
with the Agreement. The Company capitalized the initial signature bonus to Oil
and Gas Assets - Acquisition Costs (see Note 9). This amount will be amortized
by the units of production method, when the Company begins producing proven
reserves. Production based bonuses will be payable to the Kazakhstan Ministry of
Geology amounting to $500,000 when cumulative production reaches ten million
barrels and $1,200,000 when cumulative production reaches fifty million barrels.
Under current Kazakhstan tax law, the production bonuses will be considered tax
deductible expenditures in the calculation of profits taxes. No amounts related
to the production bonuses have been achieved as of December 31, 1998.
45
<PAGE>
Karakuduk-Munay JSC
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
11. Accounts Payable
Accounts Payable as of December 31, 1998 includes payables for equipment and
services required for field operations, including construction of field
facilities, transportation services, catering services, mobilization of the
drilling rig, project design costs of capital projects, etc.
12. Accrued Current Liabilities
December 31, December 31,
1998 1997
------------------------------
Accrued management service fee 573,750 573,750
Accrued audit fees 75,000 48,000
Accrued interest payable 3,613 --
Miscellaneous taxes payable 127,233 45,106
-------- --------
Total accrued liabilities $779,596 $666,856
======== ========
13. Loans Payable
Loans Payable to Third Parties
- ------------------------------
During 1998, the Company borrowed a total of $800,000 from the Chase Bank of
Texas, N.A. (Chase), a U.S. financial institution. On March 6, 1998, the Company
borrowed the initial $500,000 from Chase. The note accrues interest at a fixed,
annual interest rate of 6.84% and is repayable in 18 equal, quarterly
installments of $27,778, which began on December 6, 1998. The final principal
payment is due on or before February 26, 2003. On June 9, 1998, the Company
borrowed an additional $300,000 from Chase. The second note accrues interest at
a fixed, annual interest rate of 6.875% and is repayable in 18 equal, quarterly
installments of $16,667, which also began on December 6, 1998. The final
principal payment is payable on or before March 6, 2003.
As of December 31, 1998, the Company's outstanding principal balance on the
notes totaled $755,555, of which $177,780 is due before December 31, 1999.
Loans Payable to Partners
- -------------------------
As discussed in Note 3, the major shareholder, Central Asian Petroleum
(Guernsey) Limited bears sole financial responsibility for providing all funding
for the Company, which is not generated by the Company's operations through the
sale of oil and gas production or borrowed from third party sources. The various
forms of funding from Central Asian Petroleum (Guernsey) Limited are treated as
long term loans to the Company and bear interest at the rate of LIBOR plus 1%.
The Agreement requires installment payments on the loan to be calculated and
paid on a quarterly basis and to be equal to 65% of gross revenue after
deduction of royalties due to the Republic of Kazakhstan. No sales of crude oil
production occurred in 1998 and no payments on the loan have been made or are
due as of December 31, 1998.
46
<PAGE>
Karakuduk-Munay JSC
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
13. Loans Payable (continued)
The loan is made up as follows (US dollars):
December 31,
---------------------------
1998 1997
----------- -----------
Cash funding $16,897,350 $ 6,474,783
Management services fee 4,275,000 2,295,000
Other expenditures 634,594 520,143
Accrued interest payable 1,573,136 529,571
----------- -----------
Total interest and loan payable to partner $23,380,080 $ 9,819,497
=========== ===========
Management services are provided by a subsidiary of Chaparral Resources, Inc.,
the parent company of Central Asian Petroleum (Guernsey) Limited. Services were
provided in 1998 for a fixed fee of $140,000 per month for January and February,
1998, and $170,000 per month for the remainder of 1998. Management services were
provided to the Company in the amount of $1,980,000 and $1,275,000 for the years
ended December 31, 1998 and 1997, respectively.
As of December 31, 1998, the Company's outstanding principal and accrued
interest balance on Loans Payable to Partners totaled $23,380,080, of which
$3,000,000 is due before December 31, 1999. The Company determined the current
portion of Loans Payable to Partner based upon best estimates of projected 1999
sales revenue, of which 65% will be distributed to Central Asian Petroleum
(Guernsey) Limited on a quarterly basis as described above.
14. Taxes
The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C>
Income taxes (benefit) computed
at statutory rate $(1,046,338) $ (499,494) $ (582,652)
Non-deductible expenses 347,012 -- --
Change in asset valuation allowance 699,326 499,494 582,652
-----------------------------------------------------------
Income taxes $ -- $ -- $ --
===========================================================
The components of the Company's deferred tax assets and liabilities under FASB No. 109 are as follows:
Year ended December 31
1998 1997 1996
-----------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 1,904,035 $ 1,204,709 $ 705,215
Valuation allowance (1,904,035) (1,204,709) (705,215)
-----------------------------------------------------------
Deferred tax assets $ -- $ -- $ --
===========================================================
47
</TABLE>
<PAGE>
Karakuduk-Munay JSC
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
14. Taxes (Continued)
There were no net deferred tax assets or net income tax benefits recorded in the
financial statements for deductible temporary differences or net operating loss
carryforwards due to the fact that the realization of the related tax benefits
is not considered likely.
The Agreement specifies profits taxes and other taxes applicable to the Company,
which are subject to the laws of the Republic of Kazakhstan. As discussed in
Note 10, the signature bonus is not recoverable or deductible in calculating
income tax expense and has not been recorded as a recoverable asset for tax
purposes.
The Company began extracting hydrocarbons from the Karakuduk field in 1998. At
December 31, 1998, the Company has tax loss carryforwards of approximately
$6,346,783 available to offset against future taxable income, in accordance with
the terms of the contract and legislation existing as of the date the contract
was signed. There is a five-year carryforward of tax losses beginning with the
first year the Company generates net income.
The Company has used the best estimates available to determine the Company's
deferred tax assets before consideration of the valuation allowance. Please
refer to Note 16 regarding the uncertainties of taxation in the Republic of
Kazakhstan.
15. Charter Capital
The total Charter Fund contribution specified in the new Founders Agreement of
Karakuduk-Munay (dated June 12, 1997) is $200,000. Each of the shareholder's
portion of the Charter Fund and their respective participating interest in the
Company is:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
Charter Percent Charter Percent
Contribution Contribution
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KazakhOil 80,000 40 % 80,000 40 %
Korporatsiya Mangistau Terra International 20,000 10 % 20,000 10 %
Central Asian Petroleum (Guernsey)
Limited - CAP(G) 100,000 50 % 100,000 50 %
----------------------------------------------------------
Total charter capital $200,000 100 % $200,000 100 %
======== ========
</TABLE>
During 1997, KazakhOil as the successor to Munaygaz state holding company,
contributed US $ 40,000 as Munaygaz's initial charter contribution obligation
that was previously settled by CAP(G). The CAP(G) 1996 contribution has been
reclassified as additional funding of the Company's operations in 1997.
48
<PAGE>
Karakuduk-Munay JSC
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
16. Contingencies
Taxation
- --------
The existing legislation with regard to taxation in the Republic of Kazakhstan
is constantly evolving as the Government manages the transition from a command
to a market economy. Tax and other laws applicable to the Company are not always
clearly written and their interpretation is often subject to the opinions of the
local or main State Tax Service. Instances of inconsistent opinions between
local, regional and national tax authorities are not unusual.
Basis of Accounting
- -------------------
The Company maintains its statutory books and records and calculates its taxable
loss in accordance with U.S. generally accepted accounting principles, which it
believes it may do under the terms of the Agreement. The Republic of Kazakhstan
currently requires companies to comply with Kazakh accounting regulations and to
calculate tax profits or losses in accordance with these regulations as well as
prevailing tax law. There is currently uncertainty, therefore, as to the extent
of tax losses available to the Company.
17. Current Kazakhstan Environment
The ability of the Company to realize the carrying value of its assets is
dependent on being able to transport hydrocarbons and finding appropriate
markets for their sale. The Company has various options available to it in terms
of possible exportation routes to potential markets, based on experience of
other joint venture operations in the vicinity of the Company's activity.
Domestic markets in the Republic of Kazakhstan currently do not permit world
market prices to be obtained.
18. License Commitments and Operating Lease Commitment
As specified in Note 1, under the terms of the license the Company has committed
to minimum expenditures of $30 million for the year ended December 31, 1999. The
Company has excess expenditures from 1998 of $480,000, which will be applied
against the 1999 commitment. The Company has no other expenditure commitments
under the license after December 31, 1999. The license, as amended, also
establishes a minimum work program, requiring the Company to drill 8 new wells
before December 31, 1999. The new wells must be between 3,250 and 3,500 meters
in depth.
As of December 31, 1998, the Company's only major operating contractual
commitment is the drilling contract with Challenger Oil Services, PLC
(Contractor) entered into on April 7, 1998. The Company mobilized the drilling
rig in late 1998, but did not begin drilling operations until early 1999.
The drilling contract was retroactively amended as of March 17, 1999, to reflect
the current economic environment in the oil and gas industry as a whole, and
specifically in the Commonwealth of Independent States (CIS). The amended
contract terms are disclosed in Note 19, Subsequent Events. Any cost reductions
relating to the contract amendments have been incorporated in the Company's
financial statements as of December 31, 1998.
The terms of the drilling contract, as amended, require the Company to minimum
lease commitments for two years (1999 and 2000) of $3,102,500 per year. The
original drilling contract obliged the Company to minimum lease commitments of
$3,102,500 for one year only. Minimum lease payments are based upon stand-by
rates without crews.
49
<PAGE>
Karakuduk-Munay JSC
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
19. Subsequent Events
Drilling contract
- -----------------
As stated in Note 18, on March 17, 1999 the Company retroactively amended it's
drilling contract with Challenger Oil Services, PLC, originally entered into on
April 7, 1998. The Company is subject to the following terms of the amended
contract:
Amount
------
Operational rate $12,500/Day
Stand-by-rate with crews 11,250/Day
Stand-by rate without crews 8,500/Day
Rig move rate 20,000/Move
Rig memobilization (one time charge only) $250,000
Lease term 2 years
The Company spudded the first exploratory well (#101) on February 14, 1999.
Sales contract with KazakhOil
- -----------------------------
On March 30, 1999, the Company entered into a contract with KazakhOil, JSC,
shareholder of the Company, for the sale of 19,000 tons (138,700 barrels) of the
Company's crude oil production in April 1999. Under the terms of the contract,
the Company has been granted a transit quota to export 19,000 tons of crude oil
to the far abroad and near abroad markets. KazakhOil will act as a broker for
the sale.
According to the contract, net revenue to the Company is based upon a formula
indexed to the price of Brent crude on the date of sale, adjusted for
transportation costs and other minor charges. The sale will occur in two
batches: 13,000 tons and 6,000 tons. The Company expects the initial 13,000 tons
to be nominated for sale in early April. The Company expects the remaining 6,000
tons to be nominated before April 30, 1999.
Devaluation of Tenge
- --------------------
On April 5, 1999, the government decided not to continue its support of the
National currency, the Tenge and allowed it to float freely against the US
dollar. Immediately thereafter, the official exchange rate declined from 87.5
tenge to the US dollar to 142 tenge to the US dollar.
The devaluation decreases the tenge realizable value of any US dollar or other
hard currency denominated monetary assets held by the Company, and increases the
tenge obligation of any US dollar or other hard currency denominated monetary
liabilities held by the Company.
As these financial statements are denominated in US dollars, the only impact
will relate to that described on Note 2 to these accounts. The net impact is not
expected to be material to the Company's financial statements.
50
<PAGE>
Karakuduk-Munay JS
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
20. Impact of Year 2000 (unaudited)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software which is not "Year 2000
Compliant" may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities.
The Company has completed an assessment and currently believes that the computer
systems it has in place are Year 2000 compliant.
The Company has initiated formal communication with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties failure to remediate their own Year 2000
Issue. In particular, it is unclear as to the extent the Kazakh government and
other organizations who provide significant infrastructure services within the
Kazakh Republic have addressed the Year 2000 Issue. Furthermore, the current
crisis in Russia and the CIS could adversely affect the ability of the
government and such organizations to fund adequate Year 2000 compliance
programs. There is no guarantee that the systems of the government or of other
organizations on which the Company relies will be timely converted and would not
have an adverse effect on the Company and its systems.
The Company's financial statements as of December 31, 1998 and 1997 and for the
periods then ended do not include any adjustments to reflect the possible future
effect on the recoverability and classification of assets or the amounts or
classifications of liabilities that may result from the outcome of this
uncertainty.
51
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM 10-K
CHAPARRAL RESOURCES, INC.
<PAGE>
EXHIBIT INDEX
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
2.1 Stock Acquisition Agreement and Plan of Reorganization dated
April 12, 1995 between Chaparral Resources, Inc., and the
Shareholders of Central Asian Petroleum, Inc., incorporated by
reference to Exhibit 2.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 1995.
2.2 Escrow Agreement dated April 12, 1995 between Chaparral
Resources, Inc., the Shareholders of Central Asian Petroleum,
Inc. and Barry W. Spector, incorporated by reference to Exhibit
2.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1995.
2.3 Amendment to Stock Acquisition Agreement and Plan of
Reorganization dated March 10, 1996 between Chaparral Resources,
Inc., and the Shareholders of Central Asian Petroleum, Inc.,
incorporated by reference to the Company's Registration Statement
No. 333-7779.
3.1 Restated Articles of Incorporation + Amendments dated September
25, 1976, incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1993.
3.2 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated April 21, 1988, incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1993.
3.3 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated April 12, 1994, incorporated by reference to
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
3.4 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated June 21, 1995, incorporated by reference to
Exhibit B to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1995.
3.5 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated July 17, 1996, incorporated by reference to the
Company's Registration Statement No. 333-7779.
3.6 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated November 25, 1997, incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K dated
October 31, 1997.
3.7 Bylaws, as amended through October 31, 1997, incorporated by
reference to Exhibit 3(ii) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10.1 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.
10.2 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.
1
<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.3 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.
10.4 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 3
10.5 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.
10.6 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.
10.7 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.
10.8 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 quarter ended
June 30, 1997.
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
2
<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.15 Release and Understanding with H. Guntekin Koksal, incorporated
by reference to Exhibit 10.30 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24 1998 Incentive and Nonstatutory Stock Option Plan
10.25 Amendment to License for the Right to Use the Subsurface in the
Republic of Kazakhstan, dated December 31, 1998.
10.26 Credit Support and Pledge Agreement between Whittier Ventures,
LLC and Chaparral Resources, Inc. dated July 2, 1998,
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
10.27 Warrants issued to Whittier Ventures, LLC, incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
10.28 Settlement Agreement and Release between Heartland, Inc. of
Wichita and Collins & McIlhenny, Inc. and Chaparral Resources,
Inc., Howard Karren, Whittier Trust Company and James A. Jeffs
dated October 30, 1998, incorporated by reference to Exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
3
<PAGE>
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.29 Warrants issued to Heartland, Inc. of Wichita and Collins &
McIlhenny, Inc., as joint tenants and to Don M. Kennedy,
incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
10.30 Loan Agreement between Challenger Oil Services, PLC and Chaparral
Resources, Inc. dated September 10, 1998, incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
10.31 Promissory Note between Challenger Oil Services, PLC and
Chaparral Resources, Inc. dated September 10, 1998, incorporated
by reference to Exhibit 10.6 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
10.32 International Daywork Drilling Contract - Land between Challenger
Oil Services, PLC and Karakuduk-Munay, JSC, dated April 7, 1998
10.33 Amendment No. 1 to the International Daywork Drilling Contract -
Land between Challenger Oil Services, PLC and Karakuduk-Munay,
JSC, dated April 7, 1998
10.34 Amendment No. 2 to the International Daywork Drilling Contract -
Land between Challenger Oil Services, PLC and Karakuduk-Munay,
JSC, dated March 17, 1999
10.35 Letter Agreement dated March 17, 1999 between Karakuduk-Munay,
JSC and Challenger Oil Services, PLC.
10.36 Letter Agreement and Restated Amendment No. 1 to Loan Agreement
and Promissory Note dated March 18, 1999 between Challenger Oil
Services, PLC and the Company.
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
27 Financial Data Schedule
4
EXHIBIT 10.24
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
Exhibit 10.25
DECREE OF THE GOVERNMENT OF THE REPUBLIC OF KAZAKSTAN
NO1392, Dated: December 31, 1998
About licensing for right of subsurface resources user, redrawing up and
alteration of license, withdraw of licenses for eight of subsurface resources
user.
In accordance with articles 14, 23, 40 and 70 of the Republic of Kazakstan
Presidents Decree # 2828 "About subsurface resources and its use", which is in
legal force from January 27, 1996, (Journal of the Parliament of the Republic of
Kazakstan #2,1996, article 182) the Government of the Republic of Kazakstan
enacts :
1. To license the enterprises for prospecting and producing of thermal and
mineral subsurface waters and medical mud according to attachment #1
2. To license the enterprises for prospecting and producing of hydrocarbon
stocks and solid minerals according to attachment #2.
3. To make alteration in license for right of use of subsurface recourses
according to attachment #3.
4. To reregister the licenses for right of use of subsurface resources to new
subsurface resources users in connection with its transfer according to
attachment #4.
5. To withdraw the previous licenses for right of use of subsurface resources
in connection with breaches of the license terms and call-back of the
licenses by subsurface resources user according to attachment 5.
6. To the State Commmittee of the Republic of Kazakstan on investments to take
necessary measures ensuing from the Present Decree.
7. The decree will come into force from the moment of its signing
Prime Minister of
the Republic of Kazakstan /s/ N. Balgimbaev.
<PAGE>
<TABLE>
<CAPTION>
LIST
of licenses for right of subsurface resources user with alternations
- ------------------------------------------------------------------------------------------------------------------------------------
License Subsurface Alterations
(series, No date) resources
user
---------------------------------------------------------------------------------------------
No Relevant Contract Name of the Prolongation of Alteration of Alteration Other
authority conclusion subsurface the term of minimum of
resources user license, new program geological
types of branch
subsurface
resources use
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2 3 4 5 6 7 8 9 10
- ------------------------------------------------------------------------------------------------------------------------------------
22 Series MG #249 KKM JV Minimum work
from 06/28/95 program. Until
12/31/98
$16,500,000;
Until 12/31/99
$30,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit 10.32
INTERNATIONAL DAYWORK DRILLING CONTRACT - LAND
----------------------------------------------
THIS AGREEMENT, dated the 7th day of April, 1998, is made between Challenger Oil
Services, PLC, a company organized under the laws of England, with its principal
office located in London, England (hereinafter called Contractor), and
Karakuduk-Munai, Inc., a corporation organized under the laws of the Republic of
Kazakstan, with and office located at Microdistrict, Region 3, Building 82,
Aktau, Republic of Kazakstan. (hereinafter called "Operator").
WHEREAS, Operator desires to have onshore wells drilled, produced or worked over
in the Operating Area and to have performed or carried out all auxiliary
operations and services as detailed in the Appendices hereto or as Operator may
require, and
VVHEREAS, Contractor is willing to furnish the land drilling rig Challenger No.
23, which is a Cabot 900 rig, together with drilling and other equipment
(hereinafter called the "Drilling Unit"), insurance and personnel, all as
detailed in the Appendices hereto for the purpose of drilling or producing said
wells and performing said auxiliary operations and services for Operator.
NOVV THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises
and the covenants and agreements herein it is agreed as follows:
ARTICLE I - INTERPRETATION
101. Definitions
In this Contract, unless the context otherwise requires:
(a) "Commencement Date" means the day and time within the nearest hour that the
Contractor's drilling crew has arrived at Operator's first drilling
location and is ready to commence the rigging up of the Drilling Unit.
Operator hereby agrees to give to Contractor a written notice two weeks
before the Drilling Unit is expected to arrive at the first drilling
location in the Operating Area to enable Contractor to mobilize its
drilling crew to the first drilling location on a timely basis,
(b) "Operators Items" means the equipment, material and services owned by
Operator or which are listed in Appendix D that are to be provided at the
expense of Operator;
<PAGE>
(c) "Contractors Items" mean the Dulling Unit, equipment, material and services
owned by Contractor or which are listed in Appendices B and D that are to
be provided at expense of Contractor;
(d) "Contractor's Personnel" means the personnel and subcontractors to be
provided by Contractor from time to time to conduct operations hereunder as
listed in Appendix C;
(e) "Operator's Personnel" means the personnel and other contractors to be
provided by Operator from time to time in connection with operations
hereunder;
(f) "Operating Area" means the area specified in Appendix A.
(g) "Operating Base" means the place onshore designated by Operator and
specified in Appendix A;
(h) "Affiliated Company" means a company owning fifty percent (50%) or more of
the stock of Operator or Contractor, a company in which Operator or
Contractor own fifty percent (50%) of more of its stock, or a company fifty
percent (50%) or more of whose stock is owned by the same company that owns
fifty percent (50~) or more of the stock of Operator or Contractor.
102. Currency
--------
In this Contract, all amounts expressed in dollars are United States dollar
amounts, unless otherwise indicated in Appendix A.
103. Conflicts
---------
Appendices A, B, C, D and E attached hereto are incorporated herein by
reference. If any provision of the Appendices conflicts with a provision in the
body hereof, the latter shall prevail.
104. Headings
--------
The paragraph headings shall not be considered in interpreting the text of
this Contract.
105. Further Assurances
------------------
Each party shall perform the acts and execute and deliver the documents and
give the assurances necessary to give effect to the provisions of this Contract.
<PAGE>
106. Contractor Status
-----------------
Contractor in performing its obligations hereunder shall be an independent
contractor. Operator may instruct and direct Contractor as to the results to be
obtained from Contractor's employees, however, Contractor as an independent
contractor shall have sole and complete control, supervision and direction over
the Drilling Unit, its equipment and personnel, and over all operations to be
carried out. This is a Contract for drilling services and shall not be construed
as a charter, lease or demise of Contractor's equipment. None of Contractors
employees are, nor shall be deemed to be, employees or agents of Operator. Use
of subcontractors by Contractor shall not relieve Contractor from any liability
or obligation under this Contract.
107. Governing Law
-------------
This Contract shall be construed and the relations between the parties
determined in accordance with the law designated in Appendix A, not including,
however, any of its conflicts of law rules which would direct or refer to the
laws of another jurisdiction. In the event any provision of this Contract is
inconsistent with or contrary to any applicable law, rule or regulations, said
provision shall be deemed to be modified to the extent required to comply with
said law, rule or regulation, and as so modified said provision and this
Contract shall continue in full force and effect.
<PAGE>
ARTICLE II - TERM
201. Effective Date
---------------
The parties shall be bound by this Contract when each of them has executed
it (hereinafter referred to as "Effective Date").
202. Duration
--------
This Contract shall, subject to Paragraphs 203 and 204 below, be for the
term specified in Appendix A.
203. Termination
-----------
This Contract shall terminate:
(a) immediately if the Drilling Unit becomes an actual loss on the date
Contractor's insurance surveyor determines a constructive or arranged
total loss to have occurred;
(b) on the later of the date specified in Appendix A or, if operations are
then being conducted on a well, as soon thereafter as such operations
are completed and the Drilling Unit has been safely stacked at the
demobilization location specified in Appendix A, unless some other
location or port is mutually agreed, and all of Operator's Items have
been off loaded;
(c) in accordance with Paragraph 708;
(d) in accordance with Paragraph 802.
<PAGE>
204. Option to Extend
----------------
This Contract may be renewed by Operator for an additional one year term at
the same rates, terms and conditions, provided that Operator first gives to
Contractor a written notice of renewal at least ninety (90) days prior to the
expiration of the initial term of this Contract.
205. Continuing Obligations
----------------------
The provisions of Article ~X, Article 1304, 1305 and 1309 shall survive the
termination of this Contract and the Parties shall continue to be bound thereby.
206. Return of Operator's Item
---------------------------
Upon termination of operations, Contractor shall return to Operator at the
last drilling location of the Drilling Unit under this Contract, or at any other
location as directed by Operator at Operator's sole cost, any of Operator's
Items which are at the time in Contractor's possession, Operator's Items shall
be returned by Contractor in the same condition in which they were received by
Contractor, normal wear and tear excepted.
<PAGE>
ARTICLE Ill - CONTRACTOR'S PERSONNEL
301. Number. Selection, Hours of Labor and Remuneration
--------------------------------------------------
Except where herein otherwise provided, the number, selection, replacement,
hours of labor and remuneration of Contractors Personnel shall be determined by
the Contractor. Such employees or subcontractors shall be the employees or
subcontractors solely of Contractor. Notwithstanding the above, minimum manning
shall be as specified in Appendix C.
302. Contractor's Representative
---------------------------
Contractor shall nominate one of its personnel as Contractors
Representative who shall be in charge of the remainder of Contractor's Personnel
and who shall have full authority to resolve all day-to-day matters which arise
between Operator and Contractor.
303. Increase in Contractor's Personnel
----------------------------------
Operator may, subject to mutual agreement of the parties as to additional
compensation to Contractor, require Contractor to increase the number of
Contractor's Personnel.
304. Replacement of Contractor's Personnel
-------------------------------------
Contractor will remove and replace at anytime any of Contractors Personnel
if Operator so requests. Operator shall not exercise this right in an
unreasonable or arbitrary manner and shall give to Contractor the reasons for
any such request.
305. Personnel Shortages
-------------------
Should Contractor, at any time during the term of this Contract, provide
less than a full crew of personnel as established by the Appendices, the
applicable dayrate payable to Contractor hereunder shall be reduced by an amount
calculated by multiplying the applicable dayrate by a fraction, where the number
of crew members absent from the Dolling Unit is the numerator and the total
number of required crew members is the denominator.
If at any time in Operator's opinion, Contractor's failure to provide a
full crew of personnel as established in the Appendices is interfering with or
delaying the conduct of its operations, and such failure continues for a period
of five (5) days after written notice from Operator to Contractor, then in
addition to (i) a reduction in the applicable day rate as provided herein and
(ii) any other remedies the Operator may have under this Contract, the Operator
may terminate this Contract.
<PAGE>
306. Safety Measures
---------------
Contractor shall, at its expense, take all measures reasonably necessary or
proper to provide safe working conditions, and shall comply with Operator's
safety regulations and with all safety requirements of the country of operation.
Contractor shall give notice to all persons at the drill site of all safety
regulations which apply to such personnel. Additionally, Contractor shall ensure
that such persons are fully informed of and comply with such regulations. The
Contractor shall set up and conduct monthly safety drills.
ARTICLE IV - CONTRACTOR'S ITEMS
401. Obligation to Supply
--------------------
Contractor shall provide Contractors Items and Personnel and perform the
services to be performed by it in accordance with Appendices B, C and D.
402. Maintain Stocks
---------------
Contractor shall be responsible, at its cost, for maintaining adequate
stock levels of Contractor's Items and replenishing as necessary.
403. Maintain and Repair Equipment
-----------------------------
Contractor shall, subject to Paragraph 901, be responsible for the
maintenance and repair of all Contractor's Items and shall provide all spare
parts and materials required therefor. Contractor shall, if requested by
Operator, also maintain or repair any of Operator's Items in the Operating Area
which Contractor is qualified to and can maintain or repair with Contractor's
normal complement of personnel and equipment at the drill site, provided,
however, that Operator shall at its cost provide all spare parts and materials
required to maintain or repair Operator's Items, and the basic responsibility
and ability for furnishing and maintaining such items shall remain in Operator.
ARTICLE V - CONTRACTOR'S GENERAL OBLIGATION
501. Contractor's Standard of Performance
------------------------------------
Contractor shall carry out all its operations under this Contract on a
daywork basis For purposes hereof the term "daywork basis" means Contractor
shall furnish equipment, labor and perform services as herein provided, for a
specified sum per day under the direction and supervision of Operator (which
term is deemed to include any employee, agent, consultant of subcontractor
engaged by Operator to direct drilling operations). When operating on a daywork
basis, Contractor shall be fully paid at the applicable rates of payment and
assumes only the obligations and liabilities stated herein. Except for such
obligations and liabilities specifically assumed by Contractor, Operator shall
be solely responsible and assumes liability for all consequences of operations
by both parties while on a daywork basis, including results and all other risks
or liabilities incurred in or incident to such operations, notwithstanding any
breach of representation or warranty, either expressed or implied, or latent
defects (whether or not preexisting) and any liability based on any theory of
tort, breach of contract or strict liability, including defect or ruin or
premises, either latent or patent.
502. Operation of Drilling Unit
--------------------------
Subject to Paragraph 606, Contractor shall be responsible for the operation
of the Drilling Unit, including, supervising moving operations and positioning
on drilling locations as required by Operator. Operations under this Contract
will be performed on a twenty-four (24) hour per day, seven (7) days a week
basis. Contractor warrants that the Drilling Unit will operate efficiently and
is physically capable of drilling wells to depths specified in the Appendices
hereto.
<PAGE>
503. Compliance with Operator's Instructions
---------------------------------------
Contractor shall comply with all instructions of Operator consistent with
the provisions of this Contract, including, without limitation, drilling, well
control and safety instructions. Such instructions shall, if Contractor so
requires and time permits, be confirmed in writing by the authorized
representative of Operator. However, Operator shall not issue any instructions
which would be inconsistent with Contractors rules, policies or procedures
pertaining to the safety of its personnel, equipment or the Drilling Unit, or
require Contractor to exceed the capacity of the Drilling Unit.
504. Adverse Weather
---------------
Contractor, in consultation with Operator, shall decide when, in the face
of impending adverse weather conditions, to institute precautionary measures in
order to safeguard the well, the well equipment, the Drilling Unit and personnel
to the fullest possible extent. Contractor and Operator shall each ensure that
each respective senior representative will not act unreasonably in the exercise
of their discretion under this Paragraph.
505. Drilling Fluids and Casing Program
----------------------------------
Contractor shall follow any of Operator's instructions with respect to the
Drilling Fluid and Casing Program as may be specified by Operator. Operator
shall provide Contractor with any such programs reasonably in advance of the
spud date of each well to be drilled hereunder.
506. Cutting/Coring Program
----------------------
Contractor shall save and identify cuttings and cores according to
Operator's instructions and place them in containers furnished by Operator.
507. Records to be Kept by Contractor
-------------------------------
Contractor shall keep and furnish to Operator an accurate record of the
work performed and formations drilled on the IADC-API Daily Drilling Report Form
or other form acceptable to Operator. A legible copy of said form signed by
Contractor's Representative shall be furnished by Contractor to Operator.
508. Difficulties During Drilling
----------------------------
In the event of any difficulty arising which precludes either drilling
ahead under reasonably normal procedures or the performance of any other
operations planned for a well, Contractor may suspend the work in progress and
shall immediately notify the representative of Operator of the difficulty, and
in the meantime exert its best efforts to overcome the difficulty.
509. Well Control Equipment
----------------------
Subject to Article IX, Contractor shall maintain its well control equipment
listed in Appendices B and D in good condition at all times and shall use all
reasonable means to prevent and control fires and blowouts and to protect the
hole.
510. Inspection of Materials Furnished by Operator
---------------------------------------------
Contractor agrees to visually inspect all materials furnished by Operator
before using same and to notify Operator of any apparent defects therein.
Contractor shall not be liable for any loss or damage resulting from the use of
materials furnished by Operator.
<PAGE>
ARTICLE Vl - OPERATOR'S RIGHTS AND OBLIGATIONS
501. Equipment and Personnel
-----------------------
Operator shall at its cost provide Operator's Items and Operator's
Personnel and perform the services to be provided or performed by it according
to Appendix D. ln addition to providing the initial supply of Operator's Items,
Operator shall be responsible, at its cost, for maintaining adequate stock
levels and replenishing as necessary. When, at Operator's request and with
Contractor's agreement, the Contractor furnishes or subcontracts for certain
items which Operator is required herein to provide, for purposes of this
Contract said items or services shall be deemed to be Operators items or
Contractors, and Operator shall not be relieved of any of its liabilities in
connection therewith. For furnishing said items and services, Operator shall
reimburse Contractor its entire cost plus a handling charge as specified in
Appendix A.
602. Maintenance and Repair
----------------------
Operator shall be responsible, at its cost, for the maintenance and repair
of all Operator's Items on the Drilling Unit which Contractor is not qualified
to or cannot maintain or repair with Contractors normal complement of personnel
and the equipment at the drill site.
603. Operator's Employees
--------------------
Operator shall designate a senior representative to resolve day-to-day
matters requiring decision by Operator who will be present at the drill site.
Contractor may treat Operator's senior representative for the time being at the
drill site as being in charge of all Operator Personnel.
604. Replacement of Operator's Personnel
-----------------------------------
Contractor shall have the right to request in writing Operator to remove
and replace any Operator Personnel at the drill site if the Contractor can show
reasonable grounds for such request; however the final decision with respect to
such removal shall rest with Operator.
605. Drilling Site and Access
------------------------
Operator shall be responsible for providing access to the drilling
location, as well as selecting, surveying, marking and clearing the drilling
locations as may be reasonably required by Contractor for location approval.
Operator shall obtain and provide all required certificates, drilling permits
and licenses required for the drilling operations and Dolling Unit hereunder.
Operator shall notify Contractor of any impediments or hazards to operations at
each drilling location or at any access routes to the drilling locations of
which it has knowledge. Notwithstanding any other provision of this Contract,
should there be obstructions at or within the area of the drill site and these
obstructions result in damage to the Drilling Unit, Operator shall be
responsible for and hold harmless and indemnify Contractor for all resulting
damage, including the payment of the Standby Rate during repairs, but Operator
shall receive credit for any physical damage insurance proceeds received by
Contractor as a result of such damage.
606. Custom or Excise Duties, Taxes and Fees
---------------------------------------
Contractor shall transport the Drilling Unit and its equipment to the port
of Houston and provide Operator with information and documentation concerning
the Drilling Unit and equipment which Operator may need to arrange shipment.
Operator shall arrange for and pay all expenses of shipping the Drilling Unit
and equipment from the Port of Houston to the Operator's first drilling location
in the Operating Area, including the costs of trip insurance to cover the
Drilling Unit during the transportation. After the first well has been spudded,
Contractor shall pay all costs of shipping and transportation of spare parts,
materials and supplies to the drill site. Operator shall be responsible for
obtaining permits and licenses and clearing customs for the initial and
subsequent items in the country in which the Operating Area is located, as well
as all related charges such as customs duties, excise duties, sales taxes, value
added taxes, clearing agent's fees, port clearances, pilotage, other similar
fees, handling charges and port dues.
<PAGE>
607. Taxes
-----
Contractor shall pay any and all liabilities or claims for Profit Tax and
Net Income Tax or other taxes assessed or levied on account of Contractor's
earnings under this Contract which any Kazakstan taxing authority (including any
political subdivision thereof claiming jurisdiction over Contractor and its
performance of this Contract may assess or levy against Contractor up to the
aggregate sum of $850 U.S_ Dollars per day. Operator shall assume responsibility
for and pay on behalf of Contractor or reimburse to Contractor any Kazakstan
taxes which exceed $850 U.S. Dollars per day on a grossed up basis, so that
Contractor's maximum obligation for such Kazakstan taxes shall never exceed $850
U.S. Dollars per day.
Contractor shall indemnify and hold harmless Operator from and against any
personnel income taxes which may be assessed against Contractor's personnel
based on tax rates, laws and regulations as they exist as of the date of this
Contract. If, after the execution of this Contract, such tax rates, laws or
regulations pertaining to personnel income taxes increase, then Operator shall
indemnify and hold harmless Contractor from and against any such increase.
Operator shall pay or reimburse Contractor for all other taxes of any kind,
including but not limited to, VAT, Drilling Unit registration costs, Property
taxes, Road taxes and other taxes.
608. Take Over of Work
-----------------
ln the event any well drilled under this contract should blow out, catch
fire or in any manner get out of control, Operator may take over complete
control and supervision of the work of bringing the well under control or
putting out the fire. If at any time in Operator's opinion, contractor is
failing to conduct its operations in a diligent, skillful and workmanlike manner
and in all respects in strict accordance with accepted good oil field practices
pursuant to the terms of this contract, and such failure continues for a period
of ten (10) days (or in the event such failure results in a significant safety
hazard, if such failure continues for 96 hours) after notice from Operator to
contractor, Operator may take over and continue the work on the well to
completion or abandonment. In the event Operator takes over the work pursuant to
this Article 608, Operator shall have full use of Contractor's Drilling Unit and
other equipment, facilities, material, supplies and personnel at the well
location, which Contractor shall continue to insure in accordance with this
Contract, and Contractor shall continue to be paid the applicable day rates
provided for in this Contract. During any such take over period the indemnities
given by Contractor to Operator under this Contract shall be suspended and
Contractor shall have no responsibility to Operator under such indemnities. when
such take over period has ended, Operator shall return the Drilling Unit and all
of Contractor's items to Contractor in as good condition as when the take over
began, normal wear and tear excepted.
609. Operator's Well Program
-----------------------
Operator shall from time to time provide Contractor with a well drilling
program or programs, which shall include, but not be limited to hole sizes,
casing program, mud control program and Operator's deviation policy. Operator
may modify these programs while drilling is in progress.
<PAGE>
ARTICLE VII - RATES OF PAYMENT
701. Payment
-------
Operator shall pay to Contractor during the term of this Contract the
amounts from time to time due calculated to the nearest hour according to the
rates of payment herein set forth, notwithstanding any breach of representation
or warranty, either expressed or implied, or latent defects or any liability
based upon any theory of tort, breach of contract or strict liability, either
latent or patent.
702. Mobilization Fee
----------------
There shall be no Mobilization Fee due and payable by Operator under this
Contract, except for Operator's obligations under Article 606 and 703 hereof.
703. (This article intentionally deleted and left blank)
704. Demobilization Fee
------------------
Operator shall pay Contractor a Demobilization Fee as specified in Appendix
A to cover Contractor's costs of demobilizing the Dulling Unit. The
Demobilization Fee shall be earned and payable on the date of termination of
this Contract. Except as is provided below, Operator shall have no further
demobilization obligations other than the payment of the Demobilization Fee.
Operator, however, shall provide to Contractor all export documentation
necessary to enable to freely export the Drilling Unit upon the termination of
this Contract. lf Contractor is unable to export the Drilling Unit from
Kazakstan for any cause other than the fault of Contractor within thirty (30)
days after termination of this Contract, then Operator shall begin paying the
Standby Rate Vathout Crews beginning on the thirty-first (31st) day and
continuing until the Drilling Unit is safely exported from Kazakstan.
705. Operating Rate
--------------
The Operating Rate specified in Appendix A will first become payable from
the moment when the Drilling Unit has been rigged up and is ready to spud the
first well under this Contract. The Operating Rate shall continue to be payable
throughout the duration of the Contract, except when some other rate herein
provided applies.
706. Standby Rate
------------
The Standby Rate specified in Appendix A will be payable as follows:
(a) during any period of delay when Contractor is unable to proceed
because of adverse weather conditions or as a direct result of an act,
instruction or omission of Operator including, without limitation, the
failure of any of Operator's Items, or the failure of Operator to
issue instructions, provide Operator Items or furnish services;
(b) from the Commencement Date until the moment when the Operating Rate
first becomes payable;
(c) during any period after Commencement Date that the Drilling Unit is
undergoing periodic inspections required for maintenance of any
Certification or Classification Certificates;
<PAGE>
(d) during any period when operations are suspended to repair the Drilling
Unit or other Contractor Items due to blowout, fire, cratering,
shifting or punch through at a drilling location, obstacles or
obstructions or the consequences thereof;
(e) during any period when operations are being conducted hereinunder to
redrill or repair any well drilled hereunder which is lost or damaged
as a result of Contractors sole negligence;
(f) during any period when operations are suspended or are being conducted
due to difficulties encountered while drilling as provided for in
Article 508 hereof.
707. Rate During Repair
------------------
The Repair Rate specified in Appendix A will be payable during the first
twenty-four (24) hours per month during which operations are suspended to permit
necessary replacement, inspection, repair or maintenance of Contractors Items,
except as provided in Paragraphs 608 and 708. Routine maintenance such as
lubrication, packing of swivels, changing of pump parts, slipping lines, drill
string and certification inspections, shall not be considered as maintenance for
purposes of this Paragraph.
708. Force Majeure Rate
------------------
The Force Majeure Rate specified in Appendix A will be payable during any
period in which operations are not being carried on because of Force Maleure as
defined in Paragraph 1303, including periods required to repair damage caused by
a Force Majeure event. However, should an event of Force Majeure continue in
existence for a period of Ninety (90) days, then no dayrate shall be payable for
the period after such 90 days and either Contractor or Operator shall have the
right to terminate this Contractor at anytime.
709. Moving Rate
-----------
Operator shall pay to Contractor a lump sum payment of ten ($10,000)
thousand for each move of the Drilling Unit from well site to well site in the
Kara~uduk Field.
710. Standby Rate without Crews
--------------------------
The Standby Rate without Crews shall be the rate so stated in Appendix A
711. Additional Payments
-------------------
Operator shall, in addition, pay to Contractor:
(a) the cost of any overtime paid by Contractor to Contractors Personnel
in respect of the maintenance or repair at the drill site of
Operator's Items, if requested by Operator, or other overtime required
by the Operator;
(b) Contractors costs associated with waiting on Operator furnished
transportation or as the result of an act, instruction or omission of
Operator;
(c) Contractors costs associated with evacuations and accommodations of
personnel caused by hazardous conditions or circumstances at the drill
site; and
(d) Contractor's costs associated with moving Contractor's items and
Personnel, and their personal effects, if Contractor is required to
change its operating base to a new Operating Area or within the
Operating Area.
<PAGE>
712. Variation of Rates
------------------
The rates and Payment herein set forth shall be revised by the actual
amount of the change in Contractor's cost if an event as described below occurs
or if the cost of any of the items hereinafter listed shall increase by more
than the amount indicated below from Contractor's cost thereof on the date of
execution of this Contract:
(a) labor costs, including all payroll burden and benefits paid by
Contractor for its employees;
(b) if Operator requires Contractor to increase the number of Contractor's
Personnel;
(c) if it becomes necessary for Contractor to change the work schedule of
its personnel or change the location of its Operating Base or
Operating Area;
(d) in the event described in Paragraph 1102;
(e) if the cost of insurance premiums increases by five percent (5%) or
more;
(f) if there is any change in laws, rules, regulations, or legislation,
including the enforcement or interpretation thereof, that increases
Contractor's financial burden;
ARTICLE Vlll - INVOICES AND PAYMENTS
801. Monthly Invoices
----------------
Contractor shall bill Operator at the end of each month, or at the end of
each well, if sooner, for all daily charges earned by Contractor. Other charges
shall be billed as earned. Billings for daily charges will reflect details of
the time spent (calculated to the nearest hour) and the rate charged for that
time. Billings for other charges will be accompanied by invoices and other
documentation supporting costs incurred for Operator or other substantiation as
reasonably required by Operator.
802. Payment
-------
Operator shall pay all invoices within thirty days after the receipt
thereof except that if Operator disputes an item invoiced, Operator shall within
twenty days after receipt of the invoice notify Contractor of the amount
disputed, specifying the reason therefor, and payment of the disputed amount may
be withheld until settlement of the dispute, but payment shall be made of any
undisputed portion. Contractor shall have the right, upon ten (10) days prior
written notice, to terminate this Contract if Operator fails or refuses to
timely pay Contractor undisputed amounts due and owning to Contractor.
803. Manner of Payment
-----------------
All payments due by Operator to Contractor hereunder shall be made by wire
transfer or as otherwise agreed to Contractor's bank account which is specified
in Appendix A.
804. Local Currency Expenditures
---------------------------
Contractor shall have the right to specify that Operator shal[ pay
Contractor in the currency of the country where the Drilling Unit is operating
in amounts equal to Contractor's local currency expenditures (including those
expenditures incurred locally by Contractor for the account of Operator) and as
needed by Contractor. All amounts of local currency so paid Contractor during
the month shall be credited against Contractor's U.S. Dollar monthly invoice for
that month at the rate of exchange of U.S. Dollars for the local currency in
effect on the date Contractor makes the local currency payment as published by
the Central Bank of Kazakstan.
<PAGE>
ARTICLE IX - LIABILITY
901. Equipment or Property
---------------------
Except as specifically provided herein to the contrary, each party hereto
shall at all times be responsible for and hold harmless and indemnity the other
party from and against damage to or loss of its own and its subcontractors
equipment or property, except to the extent that the proceeds from Contractor's
insurance as made available to Contractor do not compensate Contractor therefor:
Operator shall be responsible for and shall hold harmless and indemnify
Cuntractor for loss or destmcUon of or damage to Contractors drill pipe, drill
collars, subs, reamers, bumper subs, stabilizers and other in-hole equipment
when such equipment is being used In the hole below the rotary table, normal
wear excepted. Abnormal wear and/or damage for svhich Operator shall be
responsible hereunder shall include, but not be limited to, wear andlor damage
resulting from the presence of H2S or other corrosive elements In the hole
including thosa introduced into the drilling fluid, excessive wear caused by
sandcutting, damage resulting from excessive or uncontrolled pressures such as
those encountered durtng testing, blowout, or in a well out of control,
excessive deviation of the hole from vemcal, dog-leg Severity, fishing,
cementing or testing operations, Hnd from any unusual drilling practices
employed at Operatofs request. Operators responsibility for such abnormal wear
andlor damage as referred to herein shall include abnormal wear and/ar damage to
Gontractofs choke hoses and manifolds. BOP and other appurtenant equipment,
Operator shall pay the cost of repairing damaged equipment if repairable_ In the
case of equipment lost. destroyed or damaged beyond repair, Operator shall
reimburse Contractor an amouot equal to the then current replacement cost of
such equipment delivered to the Drilling Unlit.
902. The Hole
--------
In the event the hole should be lost or damagad, operator shall be
responsible for and hold harmless and indemnify Contractor from such damage to
or loss Qf the hole, including all down hole property therein,
903. Contractor's Personnel
----------------------
Contractor shall be responsible for and hold harmless and indemnify
Operator from and against all claims, demands and causes of action of every kind
and character arising in connection herewith in favor of Contractor's employees,
or Contractor's subcontractors or their employees, or Contractor's invitees, on
account of bodily injury, death or damage to property.
904. Operator's Personnel
--------------------
Operator shall be responsible for and hold harmless and indemnify
Contractor from and against all claims, demands, and causes of action of every
kind and character arising in connection herewith in favor of Operator's
employees, or Operator's other contractors (excluding Contractor hereunder) or
their employees, or Operator's invitees, on account of bodily injury, death or
damage to property.
905. Pollution and Contamination
---------------------------
Notwithstanding anything to the contrary contained herein, the
responsibility for pollution or contamination shall be as follows:
(a) Contractor shall be responsible for and hold harmless and indemnify
Operator for control and removal of pollution or contamination which
originates above the surface of the ground from spills of fuels,
lubricants, motor oils, normal water base drilling fluid and attendant
cuttings, pipe dope, paints, solvents, ballast, bilge and garbage in
Contractor's possession and control.
(b) Operator shall be responsible for and hold harmless and indemnify
Contractor against all claims, demands, and causes of action of every
kind and character (including control and removal of the pollutant
involved) arising directly or indirectly from all pollution or
contamination, other than that described in Paragraph 905(a) above,
which may occur as a result of operations hereunder, including, bit
not limited to, that which may result from fire, blowout, cratering,
seepage or any other uncontrolled flow of oil, gas, water or other
substance, as well as the use or disposition of lost circulation and
fish recovery materials and fluids, oil emulsion, oil base or
chemically treated drilling fluids. and drilling fluids other than
"normal water base drilling 9uid" defined in Paragraph 805(a) above.
<PAGE>
(c) ln the event a third party commits an act or omission which results in
pollution or contamination for which either the Contractor or Operator
for whom such party is performing work is held to be legally liable.
the responsibility therefor shall be considered, as between the
Contractor and Operator, to be the same as if the party for whom the
work was performed had performed the same and all af the obligations
and limitations set forth in Paragraphs 205(a) and (b) above, shall be
specifically applied.
906. Debris Removal and Cost of Control
----------------------------------
Operator shall be responsible for and hold harmless and indemnify
contractor for the cost of removal of debris including the Drilling Unit.
Operator shall also be responsible for and hold harmless and indemnify
Contractor for the cost of regaining control of any wild well.
907. Underground Damage
------------------
Operator shall be responsible for and hold harmless and indemnify
Contractor for and and all claims resulting from operations under this Agreement
on account of injury to, destruction, of, or Ioss or impairment of production or
any proper right in or to oil, gas or other mineral substance or water, if at
the time of the act or omission causing such injury, destruction, loss, or
impairment, said substance had not been reduced to physical possession above the
earth surface, and for any loss or damage to any formation, strata, or reservoir
beneath the earth surface.
506. Consequential Damages
---------------------
Neither party shall be liable to the other for, and each party shall hold
harmless and indemnify the other against, special, indirect of consequential
damages resulting from or arising out of this Contract, including, without
limitation, loss of profits, loss of use or business interruptions, however same
may be caused.
910. Indemnity Obligation
--------------------
(a) The parties intend and agree that the phrase "be responsible for and
hold harmless and indemnify" in Paragraphs 505 and 901 through 908
hereof mean that the indemnifying party shall indemnify, hold harmless
and defend (including payment of reasonable attorney's fees and costs
of litigation) the indemnified party from and against any and all
claims, demands, causes of action, damages, judgements and awards of
any kind or character, without limit and without regard to the cause
or causes thereof, including pre-existing conditions, whether such
conditions be patent or latent, breach of warranty (express or
implied), strict liability, or the negligence of any person or
persons, including that of the indemnified party, whether such
negligence be sole, joint or concurrent, active, passive or gross or
due to the willful misconduct of any party.
(b) An indemnifying party's obligations contained in this Agreement shall
also extend to the indemnified party and its Affiliated Companies and
the officers, directors, employees, agents, owners, shareholders and
insurers of each and to actions in rem or in personam.
(c) The terms and provisions of Paragraphs 605 and 901 through 909 shall
have no application to claims or causes of action asserted against
Operator or Contractor by reason of any agreement of indemnity with a
person or entity not a party hereto.
<PAGE>
ARTICLE X - INSURANCE
1001. Contractor's Insurance
----------------------
Contractor shall carry and maintain insurance coverage of the type and in
the amounts set forth in Appendix E, All references in this Contract to
"insurance" of Contractor shall mean such insurance as set forth in Appendix E.
1002. Certificates
------------
Contractor will furnish Operator, on request, with certificates indicating
that the required insurance is in full force and effect and that the same shall
not be canceled or materially and adversely changed without ten (10) days
written notice to Operator.
1003. Subcontracts
------------
For liabilities assumed hereunder by Contractor, its insurance shall be
endorsed to provide that the underwriters waive their right of subrogation
against Operator, its Affiliated Companies and co-venturers, and employees of
each. Operator will, as well, cause its insurer to waive subrogation against
Contractor and Contractor's Affiliated Companies and employees of each for
liabilities it assumes.
1004. Additional Insured
------------------
Contractor shall name Operator as additional insured, where permitted,
under its policies of insurance, but only with respect to liabilities assumed by
Contractor under this Contract. Operator shall name Contractor as additional
insured, where permitted, under its policies of insurance, but only with respect
to liabilities assumed by Operator under this Contract.
ARTICLE Xl - SUBLETTING AND ASSIGNMENT
1101. Subcontracts
------------
Operator may employ other contractors to perform any of the operations or
services to be provided or performed by it. Contractor may employ other
contractors to perform any of the operations or services to be provided or
performed by it with the prior consent of Operator.
1102. Assianment
----------
Neither party may assign this Contract to anyone other than an Affiliated
company without the prior when consent of the other, and prompt notice of any
such intent to assign shall be given of the other party. In the event of such
assignment, the assigning party shall remain liable to the other party as a
guarantor of the performance by the assignee of the terms of this Contract. If
any assignment by Operator is made that increases Contractors' financial burden,
except for any assignment by Contractor, Contractors compensation shall be
adjusted to give effect to any increase in Contractor's operating costs or
taxes.
ARTICLE IX - NOTICES
1201. Notices
-------
Notices, reports and other communications required or permitted by this
Contract to be given or sent by one party to the other shall be delivered by
hand, mailed, telexed, or telecopied to the address as specified in Appendix A.
Either party may by notice to the other party change its address. Notices shall
be effective upon receipt.
<PAGE>
ARTICLE Xlll - GENERAL
1301. Confidential Information
------------------------
Upon written request of Operator, all information relating to the well
obtained by Contractor in the conduct of operations hereunder shall be held
confidential by contractor who will use the same degree of care it uses in
safeguarding its own confidential information.
1302. Attorney's Fees
---------------
If this Contract is placed in the hands of an attorney for collection of
any sums due hereunder, or suit is brought on same, or sums due hereunder are
collected through bankruptcy or arbitration proceedings, then the prevailing
party shall be entitled to recover reasonable attorney's fees and costs.
1303. Force Majeure
-------------
Except as otherwise provided in this Paragraph 1303, each party to this
Contract shall be excused from complying with the terms of this Contract, except
for the payment of monies when due and the honoring of indemnities, if and for
so long as such compliance is hindered or prevented by riots, strikes, wars
(declared or undeclared), insurrection, rebellions, terrorist acts, civil
disturbances, dispositions or order of governmental authority, whether such
authority be actual or assumed , acts of God or adverse weather conditions,
inability to obtain equipment, supplies or fuel, or by any act or cause (other
than financial distress or inability to pay debts when due) which is reasonably
beyond the control of such party, such cause being herein sometimes called
"Force Majeure." In the event that either party hereto is rendered unable,
wholly or in part, by any of these causes to carry out obligation under this
Contract, such party shall give notice and details of Force Majeure in writing
to the other party as promptly as possible after its occurrence. In such cases,
the obligations of the party giving the notice shall be suspended during the
continuance of any inability so caused except that Operator shall be obliged to
pay to Contractor the Force Majeure Rate provided for in Paragraph 708.
1304. Right to Audit
--------------
For a period of three years from termination of the Contract, Contractor
shall keep proper books, records and accounts of operation hereunder and shall
permit Operator at all reasonable times to inspect the portions thereof related
to any variation of the rates hereunder or charges for reimbursable items.
1305. Compliance with Laws
--------------------
Each party hereto agrees that all laws, rules and regulations of any
federal, state or local government authority which are now or may become
applicable to that party's operations covered by or arising out of the
performance of this Contract will apply. In the event any provision of this
Contract is inconsistent with or contrary to any applicable federal, state or
local law, rule or regulation, said provision shall be deemed to be modified to
the extent required to comply with said law, rule or regulation, and as so
modified said provision and this Contract shall continue is full force and
effect. If any act or omission by Contractor in response to Operator's explicit
instruction violates such law, Operator shall indemnify Contractor for any
consequences thereof. In no event however, will Contractor be requested or
required to violate any law, rule or regulations of the United States of
America.
1305. Waivers
-------
lt is fully understood and agreed that none of the requirements of this
Contract shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Contract, or other duly
authorized agent or representative of the party.
<PAGE>
1307. Entire Agreement
----------------
This Contract supersedes and replaces any oral or written communications
heretofore made between the parties relating to the subject matter hereof.
Inurement
---------
This Contract shall inure to the benefit of and be binding upon the
successors and assigns of the parties.
1309. Resolution of Disputes
----------------------
Any dispute, controversy or claim arising out of or in relation to or in
connection with this Agreement, including without limitation any dispute as to
the construction, validity, Interpretation, enforceability or breach of this
Agreement, shall be exclusively and finally settled by arbitration, and any
Party may submit such a dispute, controversy or claim to arbitration.
A single arbitrator shall be appointed by unanimous consent of the Parties.
If the Parties, however, cannot reach agreement on an arbitrator within thirty
(30) days of the submission of a Notice of Arbitration, the appointing authority
shall be the American Arbitration Assoctiation, which can appoint an independent
arbitrator which does have any financial interest in the dispute, controversy or
claim. Unless otherwise expressly agreed in Writing by the Parties to the
arbitration proceedings:
(a) The arbitration proceedin9s:~hgll be hold in the Borough Of Manhatten,
City of New York;
(b) The arbitrator shall be and remain at all times wholly independent and
impartial;
(c) The arbitratlon pracE8dings shall be conducted in accordance with the
Commercial Arbitration Rules of the American Arbitration hssociaton
then in effort;
(d) Any Procedural issues not determined under the arbitrate rules
selected pursuant to this Agreement shall be-determined by the low of
the plea of erhtrefion other than those laws which would refer the
matter to another jurisdiction:
(e) Each Party shall be responsible for its own costs of the arbitration
proceedings (including attorney's fees and costs); and
(f) Judgement upon the award rendered by the arbitrator may be entered in
any court" having jurisdiction thereof.
lN WITNESS THEREOF THE PARTIES HAVE EXECUTED THIS CONTRACT ON THE DAY AND
YEAR FIRST ABOVE WRlTTEN.
OPERATOR: Karakuduk-Munai, Inc.
WITNESS:
/s/ Nicoli Klinhev BY: /s/ J. Mcgee
- -------------------------- --------------------------------------
General Director TITLE: General Director
CONTRACTOR: Challenger Oil Services. PC
WITNESS:
/s/ BY: /s/ Y.S. Tatanaki
- -------------------------- --------------------------------------
TITLE: General Manager
<PAGE>
APPENDIX A
Attached to and incorporated as a part of that certain Contract dated
______________________.
Para Nos.:
101 (f) Operating Area: Karakuduk Field, Kazakstan
101 (g) Operating Base: Karakuduk Field, Kazakstan
102 Currency: United States Dollars
107 Governing Law: The Laws of the State of New York
202 Duration: One (1) year from Spud in date of
the first well drilled under this
Contract.
203 (b) Termination: One (1) year from Spud in date of
the first well drilled under this
Contract or after well in progress
on that date.
203 (b) Demobilization Location: Operator's last well location in the Operating
Area.
&705 (c)
204 Option Term: One year
Option Notice: Ninety (90) days before Termination
of original term
Deadline for Mutual
Agreement: Ninety (90) days before termination
of original term
503 Maximum Well Depth: 11,500 feet with 41/2 inch drill pipe.
601 Handling Charge: Ten (10%) Percent
702 Mobilization Fee: At Operators cost
704 Demobilization Fee: $250,000
705 Operating Rate: $15,056 (includes pol. risk ins.)
706 Standby Rate without Crews: $14,706 "
707 Repair Rate: $14,706 "
<PAGE>
Repair Time At Repair Rate for first twenty-four
(24) hours per month, then at zero rate.
708 Force Majeure Rate: $14,706
709 Moving Rate $10,000 lump sum for each move of the
Drilling Unit from well site to well
site within the Karakuduk Field.
710 Standby Rate without Crews: $8,500
Interest Rate on Late
Payments: One month LIBOR plus 2% per annum
803 Address for Payment (BANK)
Acct, No.
201 Address for Notices:
Operator:
Telex:
Telecopier:
Attention:
Contractor:
Telex:
Telecopier:
Attention:
1305 Country of Legal
Jurisdiction: Courts of the State of New York
1310 Value of Contractor's Unit and equipment: U.S.S $5,500,000.
<PAGE>
APPENDIX B
DRILLING UNIT AND EQUIPMENT TO BE PROVIDED BY CONTRACTOR
<PAGE>
APPENDIX E
CONTRACTOR'S INSURANCE
Workers' Compensation and Employers' Liability Insurance
- --------------------------------------------------------
Workers' compensation and labor liability insurance covering all Contractor's
employees. in accordance with the statutory requirements of the state of hire or
country in which the work is to be performed. The Employer's liability insurance
shell have a limit of one million United States Dollars (U.S. $1,000,000) per
occurrence.
ll. Comprehensive General Liability
-------------------------------
Comprehensive general liability insurance with contractual liability,
products and completed operations, and broad form property damage coverage
included, providing for a combined Single limit of one million United
States Dollars (U.S. S1,000.000) (or personal injury. death or property
damage resulting from each occurrence and covering all of Contractor's
operator's under Contract. The aloresaid insurance shall cover, but not be
limiteded to, loss of or damage to Operator's and to Contractor's Equipment
and Personnel
III. Umbrella Liability Insurance
----------------------------
Umbrella liability insurance coverage excess of !he primary coverage with a
limit of no less than five million United States Rollers (U.S. $5,000,0GG)
per occurrence including all areas involved in operations covered by the
Contract.
IV. Automobile Liability
--------------------
Automobile liability insurance covering owned, non-owned and hired motor
vehicles, with combined single limits of al least one million United Slates
Dollars (U.S S1,000,000) for personal injury, death or property damage
(resulting from each occurrence.
(Subject to Confirmation With Underwriters)
Exhibit 10.33
Amendment No. 1 to
International Daywork Exploration Drilling Services Contract
THIS AMENDMENT NO. 1 dated the 21st day of October, 1998, is made between
Challenger Oil Services, PLC, a company organized under the lays of England and
formally registered to conduct business under the laws of the Republic of
Kazakstan (hereinafter called "Contractor"), and Karakudukmunay JSC, a
joint-stock company organized under the laws of the Republic of Kazakstan, with
an office located at District 3, Building 82, Aktau, Kazakstan (hereinafter
called "Operator").
WHEREAS, Operator and contractor entered into that certain International Daywork
Exploration Drilling Services contract - Land dated April 7, 1998, (hereinafter
called the "Contract") providing for the furnishing by Contractor for drilling
operations in the Republic of Kazakstan of a Cabot 900 drilling rig named
Challenger No. 23; and
WHEREAS, at Operator's request Contractor has agreed to make certain changes in
the Drilling Contract and Operator and Contractor with to amend the Contract to
reflect these changes;
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements set forth below, Operator and Contractor agree as follows:
1. References in the Contract to the "Drilling Unit" shall no longer mean the
Cabot 900 rig named Challenger No. 23, but shall instead refer to the
Kremco 900 rig, also to be called Challenger No. 23.
2. Art. 606 of the Contract is hereby amended to change the words "Port of
Houston" to read instead "Railway Station in Wola Baranowska, Poland". Ant.
606 is further amended to add the following sentence to the end of the
present Art. 606:
"From and after the date and time that the Drilling Unit is
ready to depart the railway Station at Wola Baranowska,
Poland, and both Parties agree in writing, the Operator shall
pay the Contractor the sum of $4,000 per day up to the date
and time the Drilling Unit actually departs the Railway
Station at Wola Baranowska, Poland."
3. Art. 709 and Appendix A of the Contract are amended to change the Moving
Rate to a lump sum amount of $30,112 per move within the Karakuduk field.
Any delays beyond 48 hours, which are due to circumstances outside the
control of the Contractor shall be charged to the Operator on a daily basis
at the Stand-By Rate With Crew.
4. Contractor's dayrates are based on a cost build up for personnel assuming
the use of some North American expatriates by Contractor. It is agreed that
if Contractor uses non-North American personnel at any time in any position
in which Contractor had originally planned to use North American personnel,
and if Contractor thereby realizes a cost reduction, then one half of such
cost reduction shall be credited to Operator against dayrates payable by
Operator under the drilling Contract.
<PAGE>
5. It is hereby agreed that Appendix B attached to the Contract shall be
replaced for all purposed by the Appendix B, which is attached to this
Amendment.
6. Art. 710 of the Contract is hereby amended to read as follows:
"710 Standby Rate without Crews
The Standby Rate without Crews shall be the rate so stated in Appendix A.
If thirty (30) days shall elapse after the Drilling Unit has arrived at
Kazakstan without Operator having given the two weeks notice provided for
in Art. 101 (a) hereof, then beginning on the thirty-first (31st) day and
continuing until the Drilling Rig has arrived at Operator's first drilling
location and is ready to commence the rigging up, Operator shall pay to
Contractor the Standby Rate without Crews."
7. The Contractor, with the written approval of the Operator, has the right
under the Contract, to import into or acquire within the Republic of
Kazakstan, any and all additional machinery, spare parts, and other
equipment required to properly fulfill the Contractor's obligations to the
Operator under the Contract, as amended. Operator shall be responsible for
obtaining permits and licenses and clearing customs for such items in the
country in which the Operating Area is located, as well as all related
charges such as customs duties, excise duties, sales taxes, value added
taxes, clearing agent's fees, port clearances, pilotage, other similar
fees, handling charges and port duties.
8. Challanger Oil Services, PLC, in executing the terms of the Contract, will
be acting as a subcontractor to Karakudukmunay, JSC (KKM), in accordance
with Clause 9.2 (Customs) of KKM's "Agreements for Exploration,
Development, and Production of Oil in Karakuduk Oil Field in Mangistau
Oblast of the Republic of Kazakstan Between the Government of the Republic
of Kazakstan and Karakuduk Munai, Joint Stock Company."
9. At the end of the Contract term, the Operator shall have the option to
purchase the Challenger No. 23 rig at a price mutually agreed upon, in
writing, by both the Contractor and the Operator. Notwithstanding any other
provision included in the Contract, the purchase price of the Challenger
No. 23 rig shall not be subject to or determined by any form of arbitration
proceedings, but must be agreed upon solely by the Contractor and Operator
in writing.
IN WITNESS WHEREOF THE PARTIES HAVE EXECUTED THIS AMENDMENT NO. 1 ON THE
DAY AND YEAR FIRST ABOVE WRITTEN.
Karakudukmunay, Inc.
By: /s/ N.D. Klinchev By: /s/ Jay McGee
------------------------------ ----------------------------
Title: General Director Title: General Director
On behalf of CONTRACTOR
Challenger Oil Services, PLC
By: /s/ Y.S. Tatanaki
- ----------------------------------
Title: General Manager
Exhibit 10.34
Amendment No. 2 to
International Daywork Drilling Contract - Land
THIS AMENDMENT No. 2 dated as of the 17 day of March, 1999, is made between
Challenger Oil Services, PLC, a company organized under the laws of England,
Company Registration No. 3449260, with its principal office located at 72 New
Bond Street, London W1Y9DD, England (hereinafter called "Contractor"), and
Karakuduk-Munai, Inc., a corporation organized under the laws of the Republic of
Kazakstan, with an office located at Microdistrict, Region 3, Building 82,
Aktau, Kazakstan, (hereinafter called "Operator"). The Contractor and Operator
are hereinafter collectively referred to as the Parties.
WHEREAS, the Parties entered into that certain International Daywork Drilling
Contract - Land dated April 7, 1998 (hereafter called the "Drilling Contract")
providing for the furnishing by Contractor for drilling operations in the
Republic of Kazakstan of a Cabot 900 drilling rig named Challenger No. 23; and
WHEREAS, the Parties subsequently entered into Amendment No. 1 to International
Daywork Drilling Contract - Land dated October 21, 1998 (hereafter called
"Amendment No. 1") amending certain provisions of the Drilling Contract,
including, inter alia, substituting a Kremco 900 rig, also to be called
Challenger No. 23 for the Cabot 900 rig as the Drilling Unit in the Drilling
Contract.
WHEREAS, the Parties wish to further amend the Drilling Contract as amended by
Amendment No. 1 to reflect certain changes agreed to by them;
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements set forth below, Operator and Contractor agree as follows:
1. Capitalized terms used herein shall have the same meaning as in the
Drilling Contract unless otherwise specified. In the event there is any
conflict between the provisions of this Amendment No. 2 and the Drilling
Contract and/or Amendment No.1, the provisions of this Amendment No. 2
shall govern.
2. Appendix A to the Drilling Contract is deleted and replaced by the
following, effective as of January 1, 1999:
APPENDIX A
----------
Para Nos.:
101 (f) Operating Area: Karakuduk Field, Kazakstan
101 (g) Operating Base: Karakuduk Field, Kazakstan
102 Currency: United States Dollars
<PAGE>
107 Governing Law: The substantive law of the State of New
York, to the exclusion of any conflicts
of law rules which would refer the
matter to the laws of another
jurisdiction
202 Duration: Two (2) years beginning February 14,
1999; one (1) year for the second
Drilling Unit from its spud date.
203 (b) Termination: February 13, 2001 or after well in
progress on that date is completed or
plugged and abandoned.
203 (b) Demobilization Operator's last well location in the
Operating Location & 705 (c): Area.
204 Option Term: One year, by the mutual agreement of the
Parties.
Option Notice: Ninety (90) days before Termination of
original term
Deadline for Mutual
Agreement: Ninety (90) days before termination of
original term
503 Maximum Well Depth: 11,500 feet with 41/2 inch drill pipe.
601 Handling Charge: Ten (10%) Percent
702 Mobilization Fee: At Operator's cost
704 Demobilization Fee: US$250,000
705 Operating Rate: US$12,500 per day (includes political
risk insurance) for one Drilling Unit;
US$11,500 per day (includes political
risk insurance) for the second Drilling
Unit. (Note: all rates below include
political risk insurance)
706 Standby Rate US$11,250 per day for one Drilling Unit;
With Crews US$10,350 per day for the second
Drilling Unit.
707 Repair Rate: US$11,250 per day for one Drilling Unit;
US$10,350 per day for the second
Drilling Unit.
Repair Time At Repair Rate for first twenty-four
(24) hours per month, then at zero cost
to Operator.
708 Force Majeure Rate: At Standby Rate With Crews for ninety
(90) days, and US$0 thereafter.
709 Moving Rate US$20,000 lump sum for each move of the
Drilling Unit from well site to well
site within the Karakuduk Field;
Contractor provides and pays for all
transportation and equipment, including
trucks, required for all rig moves
within the Karakuduk Field. (Note: see
Paragraph 4 below for clarification)
2
<PAGE>
710 Standby Rate without Crews: US$8,500
802 Interest Rate on Late
Payments: One month LIBOR plus 2% per annum
803 Address for Payment Chase Bank of Texas, N.A. as Fiscal
Agent 712 Main Street, 3 CBB East
Houston, Texas 77002-8087
Acct. No.
----------------------------
3. All drill stem testing operations will be conducted at the rate of
US$12,500 per day pro-rated for the time actually spent conducting such
drill stem test; for the second Drilling Unit, such amount shall be
US$11,500 per day pro-rated for the time actually spent conducting such
drill stem test
4. Article 709 and Amendment No.1 of the Drilling Contract are amended to
change the Moving Rate to a "US$20,000 lump sum for each move of the
Drilling Unit from well site to well site within the Karakuduk Field and
Contractor provides and pays for all transportation and equipment,
including trucks, required for all rig moves within the Karakuduk Field;
provided, however, the Moving Rate for the first move of the Drilling Unit
shall be at the Standby Rate With Crews for the time actually spent in
conducting such move and KKM shall provide and pay for all transportation
and equipment, including trucks, required for such first move of the
Drilling Unit. All rig moves, including the first rig move shall commence
during daylight hours and only with the prior written approval of the KKM
Field Manager or his designee.
5. Article 801 of the Drilling Contract is amended to provide that "All
invoices shall be prepared from and based solely upon the IADC Daily
Drilling Report Form ("Daily Drilling Report") for each day covered by the
invoice period. Prior to submission to Operator and provided that the KKM
Field Manager or his designee is on the well location or in the local
company office, all such invoices as well as the Daily Drilling Reports on
which they are based shall be approved by the KKM Field Manager or his
designee and such approval shall not be unreasonably withheld."
6. It is hereby agreed that Article 607 of the Drilling Contract is deleted
and replaced with the following:
607. Taxes
-----
(a) Contractor shall pay any and all tax liabilities or claims taxes
assessed or levied on Contractor which any taxing authority (including
any political subdivision thereof) claiming jurisdiction over
Contractor and its performance of this Contract may assess or levy
3
<PAGE>
against Contractor. Subject to the provisions of subparagraph (b)
hereof, Operator shall reimburse Contractor for any income or profits
tax liabilities directly and solely attributable to Contractor's
revenues under this Contract, which are levied against Contractor by
any applicable tax authority in the Republic of Kazakstan, in an
amount equal to (i) fifty percent (50%) of the tax amount levied that
is in excess of $425 U.S. Dollars per day but less than $850 U.S.
Dollars per day, and (ii) one hundred percent (100%) of the tax amount
levied that is in excess of $850 U.S. Dollars per day, for the number
of days during the term of this Drilling Contract which fall within
the applicable tax period for which such taxes are assessed.
(b) Anything contained herein to the contrary notwithstanding, the
Contractor is primarily responsible for the preparation, filing and
payment of all required tax returns and tax payments to the applicable
governmental agencies or authorities of the Republic of Kazakstan.
Contractor will furnish Operator copies of all tax returns filed with
any applicable government authority. Operator's liability hereunder
shall be one of reimbursement only for any income or profits tax
obligations levied against Contractor by any applicable tax authority
in the Republic of Kazakstan, in an amount equal to (i) fifty percent
(50%) of the tax amount levied that is in excess of $425 U.S. Dollars
per day but less than $850 U.S. Dollars per day, and (ii) one hundred
percent (100%) of the tax amount that is in excess of $850 U.S.
Dollars per day, for the number of days during the term of this
Drilling Contract which fall within the applicable tax period for
which such taxes are assessed. Any additional tax liabilities,
including penalties and interest, resulting from the failure of the
Contractor to timely file all required tax returns and to timely pay
all taxes due are the sole and exclusive liability and responsibility
of the Contractor, and Operator shall have no obligation to pay or
reimburse Contractor therefore, provided that Operator shall reimburse
Contractor for any additional tax liabilities, including penalties or
interest, paid by Contractor directly resulting from Operator
unreasonably withholding its consent described in Article 607(c).
(c) Contractor shall use due care and diligence in the preparation of its
tax returns and the calculation of its tax liabilities attributable to
this Drilling Contract so as to minimize, within the scope of the
applicable tax law and regulations, its tax liabilities to the
Republic of Kazakstan for which Operator has an obligation to
reimburse Contractor hereunder. Contractor shall deliver to Operator a
copy of such tax returns prior to filing and obtain Operator's consent
for their filing, which consent will not be withheld unreasonably.
Contractor shall make no audit settlement with any governmental tax
authority in the Republic of Kazakstan for which Operator shall have
responsibility to reimburse Contractor hereunder without first
notifying Operator and obtaining its consent to that portion of such
settlement for which Operator is obligated to reimburse Contractor
hereunder. Operator shall have the right, but not the obligation, to
participate at its own cost and expense in any such audit proceeding
or settlement negotiations.
4
<PAGE>
(d) Contractor shall indemnify and hold harmless Operator from and against
any income or other taxes which may be assessed against Contractor's
personnel based on the tax rates, laws and regulations as they exist
as of the date of this Amendment No. 2 to the Drilling Contract. If,
after the execution of this Amendment No. 2, such tax rates, laws or
regulations pertaining to personnel income taxes increase or decrease,
then the Operator shall reimburse Contractor for the actual amount of
any such additional income taxes actually paid by Contractor which are
directly attributable to such increase in taxes, and Contractor shall
give Operator a credit for any savings in tax payments realized by
Contractor.
(e) Subject to the provisions of subparagraph (b) above, Operator shall
reimburse Contractor for all other taxes, including but not limited
to, VAT, Drilling Unit registration fees, property taxes, road taxes
and other taxes, which are solely and directly attributable to
Contractor's operations under this Drilling Contract. It is understood
and agreed by the Parties, that Operator shall have no obligation to
reimburse Contractor for any taxes levied against attributable to any
activity or operations of Contractor, including without limitation,
any equipment rental fees, which are not solely related to the
Contractor's operations under this Drilling Contract.
(f) Contractor shall invoice Operator for any taxes reimbursable to
Contractor hereunder. Such invoice shall be accompanied by evidence of
actual payment of such taxes by Contractor, as well as copies of any
tax return, notice, demand, assessment or any other document upon
which such payment was made.
(g) Operator shall have the right, upon ten (10) days prior written notice
to Contractor, to audit and inspect Contractor's books and records,
including without limitation, Contractor's tax returns, which are
related to Operator's tax reimbursement obligations to Contractor
hereunder. This provision shall survive termination of the Drilling
Contract.
7. It is agreed that Article 712 shall be deleted and replaced by the following:
712. Variation of Rates
------------------
The rates set forth above shall be revised by the actual amount of any
increase or decrease in Contractor's cost if an event described below
occurs, or if the cost of any of the items hereinafter listed shall
increase or decrease from Contractor's cost thereof on the effective date
of this Amendment No.2 to the Drilling Contract:
(a) local labor costs, including amounts actually paid by Contractor to
its employees to maintain salaries consistent with applicable industry
scale (local and ex-pat), and all payroll taxes and benefits actually
paid by Contractor for its employees, as a result of any changes in
the laws or regulations of the Republic of Kazakstan;
(b) if Operator requires Contractor to increase or decrease the number of
Contractor's Personnel;
5
(c) if it becomes necessary for Contractor to change the work schedule of
its personnel as a result of any change in the laws or regulations of
the Republic of Kazakstan, or if the Parties agree upon a change in
the location of the Operating Base or Operating Area;
(d) in the case of an event described in Section 1102;
(e) if the cost of insurance premiums increases or decreases by five
percent (5%) or more;
(f) if there is any change in law, rules, regulations, or legislation,
including the enforcement or interpretation thereof, that increases or
decreases Contractor's financial burden.
Without limiting the effect of the obligations and rights created above,
upon the occurrence of one or more of the events described above, the
Parties agree to meet and discuss in good faith the amount of any increase
or decrease in the rates that result from, and are directly attributable to
the occurrence of such event.
8. If KKM requires a second drilling rig to work in Kazakstan during the term
of the Drilling Contract, as amended, then KKM agrees to contract with
Challenger for the addition of a second Drilling Unit, provided that such
Drilling Unit must be acceptable to Operator in its sole discretion. The
Parties hereto agree that the terms and conditions of the drilling contract
for such second Drilling Unit shall be substantially the same terms and
conditions as are contained in the Drilling Contract, provided that the
operating rate shall be US$11,500 per day, the standby rate with crews
shall be US$10,350 per day, the repair rate shall be US$10,350 per day
(applicable for the first twenty four (24) hours per month, then at zero
cost to the Operator), the force majeure rate shall be US$10,350 per day
for ninety (90) days and US$0 thereafter, the moving rate shall be
US$20,000 lump sum for each move of the drilling unit from well site to
well site within the Karakuduk Field, the standby rate without crews shall
be US$8,500 and the term shall be one (1) year from such Drilling Unit's
spud date. In addition, Contractor shall mobilize three rig trucks,
comparable to those supplied by Contractor for Challenger Rig No. 23 and
one twenty ton fork lift, all as more fully described in an appendix to be
added to the Drilling Contract.
9. Contractor has agreed to undertake the following:
(a) Contractor will assume full responsibility for the immediate
mobilization and delivery, via air freight, of the power tongs and
elevators for the Drilling Unit to the Karakuduk Field. The cost of
such mobilization and delivery shall be paid for by Operator, provided
that prior to mobilization and delivery, Contractor shall furnish to
Operator two or more written estimates for the cost of such
mobilization and delivery. If Operator does not agree with such costs,
it may elect to arrange for the mobilization and delivery of the power
tongs and elevators, wherein Contractor shall reasonably assist
Operator in such mobilization and delivery.
(b) No later than 8:00 a.m. CST on March 20, 1999, provide all applicable
specifications and dimensions of the three (3) Kenworth trucks, the
three (3) Toyota Land Cruisers and the three (3) trailers in Egypt
that are available to be shipped to the Karakuduk Field, together with
6
<PAGE>
three (3) bids from reputable transporters/common carriers for the
time and cost to move such equipment from the port of Alexandria,
Egypt to the Karakuduk Field. No such equipment shall be shipped
without the prior written authorization of Operator.
(c) [INTENTIONALLY BLANK]
(d) Within thirty (30) days after receipt of the information described in
subparagraph (b) above, Operator will notify Contractor in writing of
its decision as to which transporter/common carrier it wishes to use
to transport the trucks and other equipment described in subparagraph
(b) above from the port of Alexandria, Egypt to the Karakuduk Field.
At such time, Operator shall contract with such transporter/common
carrier for the immediate transport of such trucks and equipment to
the Karakuduk Field.
(e) Contractor will be responsible for the mobilization of the trucks and
equipment referred to in subparagraph (b) above to the Karakuduk
Field, however the transport routing of such trucks and equipment
shall be at Operator's option. The costs of mobilization of the trucks
and equipment referred to in subparagraph (b) above shall be borne by
Operator, provided that Contractor shall pay all costs and expenses
relating to or arising from the transport of the trucks and equipment
to the port of Alexandria, Egypt. In addition, Contractor shall be
responsible for, and shall pay all expenses related to, obtaining and
providing to the transporter/common carrier referred to in
subparagraph (d) above all documentation requested by such
transporter/common carrier pertaining to (i) transporter/common
carrier's receipt and/or acceptance of the trucks and equipment and
(ii) the transport of the trucks and equipment to the Karakuduk Field.
Operator shall be responsible for obtaining permits and licenses and
clearing customs for the trucks and equipment in the Republic of
Kazakstan. Contractor will assist Operator in obtaining such licenses,
permits and clearing customs, but such licenses, permits and clearing
customs are Operator's primary obligation and responsibility.
10. It is hereby agreed that any and all invoices issued by Contractor to
Operator on and after the date of execution of this Amendment No. 2 shall
charge the work, services and equipment set forth on such invoice at the
new rates contained herein, regardless that such invoice period may predate
the execution of this Amendment No. 2.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
7
<PAGE>
IN WITNESS WHEREOF THE PARTIES HAVE EXECUTED THIS AMENDMENT NO. 2 ON THE DAY AND
YEAR FIRST ABOVE WRITTEN.
On behalf of OPERATOR,
Karakuduk-Munai, Inc. by
Chaparral Resources Inc.
BY: /s/ N. Klinchev
---------------------------------
TITLE: General Director
On behalf of CONTRACTOR,
Challenger Oil Services, PLC
BY: /s/ J. Paine
--------------------------------------------------
TITLE: General Manager of Challenger Oils Services PLC,
signing as P.O.A. for Challenger Oil Services PLC.
8
Exhibit 10.35
LETTER AGREEMENT
March 17, 1999
Karakuduk-Munai, Inc.
221 Norfolk, Suite 1150
Houston, TX 77098
Gentlemen:
This letter will evidence the agreement between Karakuduk-Munai, Inc.
(hereafter "KKM") and Challenger Oil Services, PLC (hereafter "Challenger").
Reference is made to that certain International Daywork Exploration Drilling
Services Contract dated April 7, 1998 between KKM and Challenger, as amended by
Amendment No. 1 dated October 21, 1998 (said drilling services contract, as
amended, hereafter referred to as the "Drilling Contract"). Various disputes
pertaining to the Drilling Contract and related documents have arisen and, as a
result of recent discussions of these matters, and for valuable consideration
and the mutual covenants and agreements herein contained, Challenger and KKM
have agreed to settle and compromise those disputes as follows:
1. Immediately upon the execution by Challenger of (i) this Letter Agreement
and (ii) the Amendment No. 2 to the International Daywork Drilling Contract
- Land between KKM and Challenger dated even date herewith, KKM shall wire
transfer or direct another to wire transfer on behalf of KKM to the below
listed Challenger bank account the sum of Four Hundred Thousand United
States Dollars ($400,000). The Challenger bank account information for this
purpose is:
Citibank New York
Routing Code ABA021000089
A/C No. 10999217 Citibank Jersey
In Favor of Challenger Oil Services PLC
A/C No. 430604007
Atten: Mr. Hugo Peterson
<PAGE>
2. The payment to Challenger of the sum specified in item 2 above shall be
deemed to be in full payment and discharge of all claims (past, present or
future) for all equipment, materials and services, performed or provided by
or for Challenger, for or on behalf of KKM, for the period prior to January
1, 1999. For the avoidance of doubt, such payment described above shall
clear any outstanding balances between Challenger, on the one hand, and
KKM, on the other hand, for work performed under the Drilling Contract
prior to January 1, 1999, except for the sums of money referred to in
Paragraphs 3 and 4 below.
3. The payment to Challenger of the sum specified in item 2 above will not be
reduced or offset by any payments made or advanced to Challenger by KKM or
on behalf of KKM; provided however, it is agreed by the parties herein that
the amount of US$27,915.00 has been paid or advanced by or for KKM to or
for the benefit of Challenger prior to January 1, 1999, and the amount of
US$10,000.00 has been paid or advanced by or for KKM to or for the benefit
of Challenger after January 1, 1999, and such amounts shall remain valid
and available for offset by KKM against the invoice for January 1999
services to be prepared by Challenger for standby charges pursuant to the
Drilling Contract, as amended.
4. Of the payment to Challenger specified in item 2 above, the sum of
$23,469.20 shall be deemed to be a prepayment in such amount towards
amounts owed by KKM for the invoice of January 1999 services which
Challenger will soon be issuing to KKM under the Drilling Contract, as
amended. The parties hereto agree to offset such invoice for January 1999
services by this sum of $23,469.20.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
<PAGE>
If you agree and accept the above agreements, please indicate your
acceptance and agreement in the appropriate space below.
Challenger Oil Services, PLC
BY: /s/ J. Paine
----------------------------------------------
TITLE: General Manager Challenger Oil Services PLC,
Signing as P.O.A. for Challenger Oil Sevices PLC.
Agreed & Accepted this 17 day of March, 1999 by:
Karakuduk-Munai, Inc.
BY: /s/ N. Klinchev
-----------------------------------------------
TITLE: General Director
Exhibit 10.36
Letter Agreement and Restated Amendment No. 1 to
Loan Agreement and Promissory Note
This Letter Agreement and Restated Amendment No. 1 dated as of the 18 day
of March, 1999 (hereinafter "Restated Agreement No. 1"), is made between
Challenger Oil Services, PLC, a company organized under the laws of England,
Company Registration No. 3449260, with its principal office located at 72 New
Bond Street, London W1Y9DD, England (hereinafter called "Challenger"), and
Chaparral Resources, Inc., a Colorado corporation, with an office located at
2211 Norfolk, Suite 1150, Houston, Texas 77098, (hereinafter called
"Chaparral"). Challenger and Chaparral are hereinafter collectively referred to
as the "Parties".
WHEREAS, the Parties have entered into a Loan Agreement and Promissory
Note, both dated September 10, 1998, pursuant to which Chaparral has loaned
Challenger one million, eight thousand seven hundred and sixty eight United
States Dollars (US$1,008,768) (the "Principal Amount"); and
WHEREAS, after the Loan Agreement and Promissory Note were executed, the
Parties subsequently executed a document entitled Amendment No. 1 to the Loan
Agreement which was stated to be effective as of September 10, 1998 ("Amendment
No. 1"); and
WHEREAS, the Parties wish to further amend the Loan Agreement and
Promissory Note to reflect certain changes agreed to by them;
NOW, THEREFORE, for valuable consideration and the mutual covenants and
agreements set forth below, Challenger and Chaparral agree as follows:
1. Capitalized terms used herein shall have the same meaning as in the Loan
Agreement unless otherwise specified. In the event there is any conflict
between the provisions of this Restated Amendment No. 1 and the Loan
Agreement or Promissory Note, the provisions of this Restated Amendment No.
1 shall govern.
2. This Restated Amendment No. 1 shall be substituted for and shall replace
the Amendment No. 1 referred to in the preamble, which shall be null and
void, ab initio, and of no further force and effect.
3. Paragraph 3.1 of the Loan Agreement is amended to read as follows:
"The Parties agree that until the first payment is made by or on behalf of
KKM to Challenger towards amounts owed by KKM under invoices for January
1999 services which Challenger will soon be issuing to KKM under the
Drilling Contract, as amended, or March 1, 1999, whichever shall first
occur ("Repayment Commencement Date"), interest on the Loan shall accrue at
the Interest Rate."
<PAGE>
4. In recognition of the change in the term of the Drilling Contract between
Challenger and KKM, in which Chaparral has an indirect interest through its
wholly owned subsidiary Central Asian Petroleum (Guernsey), Inc., which has
an interest in KKM, the first sentence of Paragraph 3.2 of the Loan
Agreement and the first sentence of Paragraph 1.1(b) of the Promissory Note
are amended to provide as follows:
"Beginning on the date of the first payment made by or on behalf of KKM to
Challenger towards amounts owed by KKM under invoices for January 1999
services which Challenger will soon be issuing to KKM under the Drilling
Contract, and on the dates of the next twenty-three monthly payments to be
made by or on behalf of KKM to Challenger towards amounts arising under the
next twenty-three (23) monthly invoices to be issued by Challenger to KKM
under the Drilling Contract, Maker will pay to Payee the amount of
forty-two thousand and thirty-two United States dollars and twenty-five
cents (US$42,032.25) plus interest at the Interest Rate on the unpaid
principal of the Loan Amount."
5. In recognition of the change in the term of the Drilling Contract between
Challenger and KKM, in which Chaparral has an indirect interest through its
wholly owned subsidiary Central Asian Petroleum (Guernsey), Inc., which has
an interest in KKM, Paragraph 3.3 of the Loan Agreement is deleted and
replaced with the following:
"Challenger agrees that effective as of the date of the first payment made
by or on behalf of KKM to Challenger towards amounts owed by KKM under
invoices for January 1999 services which Challenger will soon be issuing to
KKM under the Drilling Contract, it shall assign to an independent third
party financial institution selected by CRI ("Fiscal Agent"), the right to
receive all payments made or to be made by KKM under the Drilling Contract.
CRI selects such Fiscal Agent to be Chase Bank of Texas, N.A., located at
712 Main Street, 3 CBB East, Houston, Texas 77002-8087. Upon receipt of
such payments from, or made on behalf of, KKM, the Fiscal Agent shall be
instructed to immediately pay to CRI the amount of forty-two thousand and
thirty-two United States dollars and twenty-five cents (US$42,032.25), plus
the quarterly interest payment when due and any late fees, defaults or
other charges permitted to be collected by CRI hereunder (which amount
shall be provided to the Fiscal Agent by CRI not later than ten (10) days
prior to the end of each calendar quarter). The Fiscal Agent shall also be
instructed that any amounts received by the Fiscal Agent from KKM which are
in excess of the foregoing, will be promptly paid to Challenger within
three (3) days after their receipt by the Fiscal Agent."
6. Except as otherwise amended herein, the Loan Agreement and Promissory Note
shall remain unchanged and shall continue in full force and effect as
originally written.
7. There exists in the files of Chaparral and Challenger an agreement between
Challenger and Chaparral which purports to be effective as of April 7, 1998
(the "Letter of Credit Agreement") pursuant to which Chaparral is allegedly
required to post a letter of credit to secure the obligations of KKM under
the Drilling Contract in the event of certain changes in the executive
management or control of Chaparral. It is agreed by Chaparral and
Challenger that immediately upon execution of this Restated Amendment No.
1, the Letter of Credit Agreement shall be deemed to be invalid,
unenforceable and void from the beginning.
8. In view of the fact that Chaparral is a publicly traded company, Challenger
herein represents that neither it nor any of its affiliates has made any
payment or promise to pay any funds or other offer or gift of anything of
value, directly or indirectly, to or for the use or benefit of any officer
or director of Chaparral in connection with the Drilling Contract or any
amendments made thereto. Furthermore, Challenger shall provide to Chaparral
on or before May 1, 1999, full and appropriate documentation that all
proceeds of the Loan Agreement wired to Mr. Yalmez Tatanaki's personal bank
accounts flowed from such personal bank accounts to either a Challenger
bank account or to a creditor of Challenger in payment of a valid
Challenger debt.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Restated
Amendment No. 1 as of the date first above written.
CHAPARRAL RESOURCES, INC. CHALLENGER OIL SERVICES, PLC
By: /s/ Dr. Jack Krug By: /s/ Y.S. Tatanaki
------------------------ -------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the 1998
Form 10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 121,000 3,423,000
<SECURITIES> 0 0
<RECEIVABLES> 445,000 102,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,398,000 3,587,000
<PP&E> 32,354,000 19,935,000
<DEPRECIATION> 17,000 3,000
<TOTAL-ASSETS> 34,324,000 23,519,000
<CURRENT-LIABILITIES> 1,685,000 231,000
<BONDS> 0 0
4,850,000 4,500,000
0 0
<COMMON> 5,837,000 4,971,000
<OTHER-SE> 21,742,000 13,607,000
<TOTAL-LIABILITY-AND-EQUITY> 34,324,000 23,519,000
<SALES> 0 0
<TOTAL-REVENUES> 1,184,000 421,000
<CGS> 0 0
<TOTAL-COSTS> 3,031,000 1,661,000
<OTHER-EXPENSES> 1,978,000 851,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 205,000 298,000
<INCOME-PRETAX> (4,030,000) (2,389,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,030,000) (2,389,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (236,000) (214,000)
<CHANGES> 0 0
<NET-INCOME> (4,266,000) (2,603,000)
<EPS-PRIMARY> (.09) (.06)
<EPS-DILUTED> (.09) (.06)
</TABLE>
