-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Of1gjMhqUElDzRrrGE/TcJQpvvGa94d7wW1pdeLB9mTN42WLGlGJo+MpxkmbuBNv l3CCxdNkIbEwJbpDquMscQ== 0000918402-96-000020.txt : 19960315 0000918402-96-000020.hdr.sgml : 19960315 ACCESSION NUMBER: 0000918402-96-000020 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960314 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAPARRAL RESOURCES INC CENTRAL INDEX KEY: 0000019252 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 840630863 STATE OF INCORPORATION: CO FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-07261 FILM NUMBER: 96534910 BUSINESS ADDRESS: STREET 1: 621 17TH ST STE 1301 CITY: DENVER STATE: CO ZIP: 80293 BUSINESS PHONE: 3032932340 MAIL ADDRESS: STREET 1: 621 17TH STREET SUITE 1301 CITY: DENVER STATE: CO ZIP: 80293 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended November 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________. Commission file number: 0-7261 CHAPARRAL RESOURCES, INC. (Exact name of registrant as specified in its charter) Colorado 84-0630863 ------------------------------ ------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 621 Seventeenth Street, Suite 1301 Denver, Colorado 80293 (Address of principal executive offices) Registrant's telephone number, including area code: (303) 293-2340 Securities registered pursuant to Section 12(g) of the Act: $0.10 Par Value Common Stock (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and, (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 8, 1996, the aggregate market value of the Registrant's voting stock held by nonaffiliates was $23,783,000. As of March 8, 1996, Registrant had 24,009,192 shares of its $0.10 par value common stock issued and outstanding. Total Pages ___ - 1 - PART I ITEM 1. BUSINESS Chaparral Resources, Inc. ("Company"), which was incorporated under the laws of the state of Colorado in 1972, is an independent oil and gas exploration and production company based in Denver, Colorado. Historically, the Company has produced and sold crude oil and natural gas to oil and gas purchasers in the immediate area where the oil and gas is produced. The Company owns, acquires and sells oil and gas leases and other mineral interests and drills and participates with others in drilling and operating oil and gas fields and wells. The Company attempts to obtain outside development capital on a joint venture basis and to share the risk of its drilling with others engaged in the oil and gas business by arranging farmouts to and from others. Most of the wells from which the Company currently is receiving production are owned only partially by the Company. Until 1994, the Company's oil and gas activities were concentrated solely in the United States and the Company's remaining working interest property in the United States is in the South Douglas Creek Field in the Piceance Creek Basin of western Colorado, an area of multi-pay natural gas production. During early 1994, the management of the Company made a strategic decision to pursue international oil and gas projects, with initial emphasis on the Commonwealth of Independent States (the former Soviet Union). Due to its involvement in the Karakuduk Oil Field Project ("Karakuduk Field" or "Karakuduk Project") described below, the Company divested its domestic working interest oil and gas properties other than the South Douglas Creek Field located in the Piceance Creek Basin of western Colorado. The Company will continue to operate the South Douglas Creek Field, incurring revenue and operating expenses, and will continue to receive revenue from producing wells. The South Douglas Creek Field contains 26 producing wells. During 1995 the combined flow rate of these wells has averaged 2,232 MCF of natural gas per day. The Company operates the 11,000 acre South Douglas Creek Field and has an average of fifteen percent (15%) working interest in the field area. The Company expects the South Douglas Creek Field to continue to be a major area for development for the Company with more than 60 additional locations in 10 sections (approximately 6,400 acres) identified for possible drilling on 160-acre spacing. Drilling and gas gathering line construction are limited to summer and fall months due to the rugged topography and high ground elevations. Major natural gas pipeline systems are in place in the field and multiple gas marketing opportunities exist to sell new production. The Company also holds overriding royalty interests ranging from 0.03% to 10% in 85 producing wells located in Colorado, North Dakota and Wyoming, from which some revenue will be anticipated. See "Business--Markets." Karakuduk Project The Company has assembled a team familiar with international oil and gas matters to assist in the review and acquisition of international oil and gas projects. In early September 1994, the Company signed a letter of intent with Central Asian Petroleum, Inc., a Delaware corporation ("CAP-D"), and Overseas Consulting Services Company, Inc. ("OCSCO"), both private companies based in Houston, Texas, to jointly pursue the registration and development of the Karakuduk Field, a shut-in oil field in the central Asian Republic of Kazakstan, discovered in the early 1970s but never placed in production. In mid-September 1994, the Company acquired a 25% interest in Central Asian Petroleum Guernsey Limited ("CAP-G"), with headquarters in Ankara, Turkey. CAP-G has a 50% interest in Karakuduk Munay, Inc. ("KKM"), which holds 100% of the right to develop the Karakuduk Field. As a result of the acquisition of the 25% interest in CAP-G, the Company has a 12.5% beneficial interest in KKM and the Karakuduk Field. The Company paid $150,000 and agreed to issue 200,000 shares of restricted common stock, of which 150,000 shares have been issued, for this interest. In April 1995, the Company acquired all of the stock of CAP-D, which also owned an interest in CAP-G, in exchange for 4,250,000 shares of the - 2 - Company's Common Stock, which are held in an escrow account to be released from time to time through June 30, 2000, upon the occurrence of certain events related to development of the Karakuduk Field. As a result of the acquisition of CAP-D, the Company's beneficial interest in CAP-G increased to 45%, giving the Company a 22.5% beneficial interest in KKM and the Karakuduk Field. Under terms of the acquisition of CAP-D, the former shareholders of CAP-D have certain rights to cause the Company to nominate persons selected by the former shareholders to the Company's Board of Directors. The first director, Jay W. McGee, was elected at the 1995 annual meeting. See "Item 10. Directors and Executive Officers of the Registrant." Additionally, in connection with the acquisition, the Company may be required to pay a brokerage fee to Mr. McGee in the amount of $175,000 of which $50,000 has been paid and the balance of which is payable as KKM meets milestones in connection with development of the Karakuduk Field. See "Item 13. Certain Relationships and Related Transactions." In January and February 1996, the Company entered into agreements to acquire, for a total of $5,850,000 cash and 1,785,000 shares of the Company's restricted common stock, up to an additional 55% interest in CAP-G. If consummated, the acquisitions will increase the Company's ownership in CAP-G to 100%, thus increasing to 50% the Company's beneficial ownership in KKM and the Karakuduk Field. The other 50% ownership in the Karakuduk Field is held by a Kazakstan regional government group. The additional 55% of CAP-G is to be acquired in three separate transactions, the first two of which include the purchase of all of the CAP-G shares owned by a private Turkish company ("Darka") and by an individual CAP-G shareholder ("Koksal"), each of which owns 25% of the CAP-G shares outstanding. The Company must pay $2,000,000 in cash plus issue 685,000 shares of the Company's Common Stock to Darka for all of Darka's CAP-G shares. The Company paid $600,000 of the cash purchase price and delivered 625,000 shares of Company stock on March 8, 1996, with the balance of cash and stock due on April 1, 1996. The Company must pay $1,975,000 in cash and issue 900,000 shares of the Company's Common Stock to Koksal for 60% of Koksal's CAP-G shares (15% of CAP-G) with an option, after completion of the initial purchase, to purchase the remaining 40% of his CAP-G shares for an additional $1,625,000 and 200,000 shares of the Company's Common Stock. The initial purchase from Koksal was consummated on March 11, 1996 when $750,000 cash and 900,000 shares of the Company's Common Stock were delivered to Koksal. The remaining cash balance of $1,225,000 for the initial purchase will be paid in four equal quarterly payments of $306,250 between June 11, 1996 and March 11, 1997. The Company has the option to purchase the remaining 40% of Koksal's CAP-G shares (10% of CAP-G) at any time following completion of the initial purchase and prior to December 11, 1997. Under the third agreement, the Company intends to acquire the remaining 5% of the outstanding CAP-G shares from a private U.S. corporation for $250,000 cash to be paid on or before April 14, 1996. Uzbekistan Project The Company has been negotiating an agreement pursuant to which the Company would acquire 100% of the issued and outstanding capital stock of MD International Petroleum, Inc. ("MDI"), a private company of which the shareholders include or will include four directors of the Company (Messrs. Karren, Dilling, Jeffs and McGee). At the time of the acquisition, the only asset that MDI would have would be a 2% to 5% interest in a joint venture that Enron Oil & Gas Uzbekistan Inc. is attempting to negotiate for the development of natural gas fields in Uzbekistan. It is currently contemplated that, if the agreement is consummated, the Company would issue MDI's shareholders approximately 6,400,000 shares of the Company's restricted common stock in exchange for their MDI shares. Of these shares, the Company anticipates that approximately 1,000,000 shares would be issued at closing and the balance over a four to five year period, depending upon the occurrence of certain events. There are no assurances that the Company will be able to consummate the agreement to acquire the shares of MDI or that Enron Oil & Gas Uzbekistan Inc. will be able to consummate a joint venture or other arrangement for the natural gas fields in Uzbekistan. - 3 - Risks of Foreign Operations. Because of the Company's interest in KKM and the Karakuduk Field, the Company will be subject to certain risks inherent in the ownership and development of foreign properties, including without limitation, cancellation or renegotiation of contracts, royalty increases, tax increases, retroactive tax claims, expropriation, adverse changes in currency values, foreign exchange controls, import and export regulations, environmental controls, and other laws and regulations which may adversely affect the Company's interest in the Karakuduk Field. The Company's operations and agreements will also be governed by foreign laws. In the event of a dispute, the Company may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of courts in the United States. In addition, the Company might be hindered or prevented from enforcing its rights with respect to a government instrumentality because of the doctrine of sovereign immunity. The Company has no prior experience operating in any foreign country, including the Republic of Kazakstan, and may encounter unexpected difficulties in conducting foreign operations. Although the recent and continuing political, social and economic upheavals in Kazakstan have created opportunities for foreign investment, substantial uncertainty exists about the stability of the central Kazakstan government, the status of Kazakstan law and the autonomy of the parties involved with the Company in Kazakstan. The Company has endeavored to protect itself against the political and commercial risks, but there is no certainty that the steps taken will provide adequate protection. In this regard, the Company has applied with Overseas Private Investment Corporation ("OPIC") for political risk insurance. OPIC insurance can cover the following political risks: o Currency Inconvertibility--deterioration of the investor's ability to convert profits, debt service and other remittances from local currency unto U.S. dollars; o Expropriation--loss of an investment due to expropriation, nationalization or confiscation by a foreign government; o Political Violence--loss of assets or income due to war, revolution, insurrection or politically motivated civil strife, terrorism and sabotage; and o Interference With Operations--loss of assets or income due to cessation of operations lasting six months or more caused by political violence. The coverage elections for each category of insurance are computed on a ceiling and an active amount. The coverage ceiling represents the maximum insurance available for the insured investment and future earnings under an insurance contract. The premiums for each category are based on a maximum insured amount ("MIA"), a current insured amount ("CIA") and a standby amount. The MIA represents the maximum insurance available for the insured investment under an insurance contract. The CIA represents the insurance actually in force during the contract period. The difference between the CIA and the MIA is the standby amount. There is a charge for standby coverage. The Company has applied with OPIC for all four political risk coverages on the Company's investment in the Karakuduk Field in western Kazakstan. The MIAs sought for each coverage range from $23.4 to $40.2 million. The estimated yearly premium amounts for the CIAs for each coverage range up to $84,000. The estimated yearly standby premiums for each coverage range up to $88,000. The actual premium values may be higher or lower depending on the contract offered to the Company by OPIC. The Investment Committee of OPIC approved the Company's Karakuduk operations for political risk insurance coverage by OPIC on December 19, 1995. The Company expects to receive the actual Contract of Insurance issued by OPIC to the Company in April 1996. - 4 - 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. The Company is seeking a waiver of the transfer restrictions from the shareholders of KKM and does not anticipate problems in obtaining the waiver. Markets Domestic Production. The availability of ready markets for oil and gas and the prices obtained for production depend upon a number of factors beyond the Company's control. Such factors include the extent of domestic production and imports of oil and natural gas, weather conditions, the availability of pipelines and other means of transportation and federal and state regulations of the production, transport and sale of oil and gas. The Company and other producers are experiencing pipeline curtailment of gas production due to natural gas prices and demand for natural gas. In fiscal 1995, the only customer having purchases which accounted for 10% or more of the Company's revenues was Conoco Inc. which accounted for 16.5% of the Company's revenue. 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. Foreign Production. There is substantial uncertainty as to the prices at which any oil reserves produced by the Company from the Karakuduk Field could be sold. It is possible that, under the market conditions prevailing in the future, the production and sale of oil from the Karakuduk Field may not be commercially feasible. The availability of ready markets and the price obtained for oil produced depends upon numerous factors beyond the control of the Company. The current market for oil is characterized by instability which has caused dramatic declines in world oil prices in recent years and there can be no assurance of any price stability. See also "Item 2. Properties--The Karakuduk Field." Competition Both foreign and domestic 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 either the foreign or domestic oil and gas industry. Regulation General. All aspects of the oil and gas industry are extensively regulated by federal, state and local governments in areas in which the Company has operations, and the Company's foreign operations may be subject to regulation by foreign governments or other regulatory bodies governing the area in which the Company's overseas operations are located. Regulations govern such things as drilling permits, production rates, and environmental protection and pollution control, royalty rates and taxation rates among others. These regulations may substantially increase the costs of doing business and sometimes may prevent or delay the starting or continuing of any given exploration or development project. Moreover, regulations are subject to future changes by legislative and administrative action and by judicial decisions which may adversely affect the petroleum industry in general and the Company in particular. At the present time, it is impossible to predict the effect any - 5 - 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. Environmental. The Company does not believe that its business operations presently impair environmental quality. However, compliance with federal, state and local regulations which have been enacted or adopted regulating the discharge of materials into the environment could have an adverse effect upon the Company, the extent of which the Company is unable to assess. Since inception the Company has not made any material capital expenditures for environmental control facilities and has no plans to do so. Employees The Company employs five persons on a full-time basis. ITEM 2. PROPERTIES The Karakuduk Field The Karakuduk Field is located in the Mangistau Region of the Republic of Kazakstan. KKM's license to develop the Karakuduk Field covers an area of approximately 16,922.5 acres and has been granted to KKM for a period of 25 years. The agreement granting KKM the right to develop the Karakuduk Field was approved by the Ministry of Oil and Gas Industries of the Republic of Kazakstan on August 30, 1995. CAP-G's share of the initial capitalization of KKM is $100,000, of which the Company's share has been paid. The Karakuduk Field is geographically located, approximately 227 miles northeast of the regional capital city of Aqtau, on the Ust-Yurt Plateau. The closest settlement is the Say-Utes Railway Station approximately 38 miles southeast of the field. The ground elevation varies between 590 and 656 feet above sea level. The region has a dry, continental climate, with fewer than 10 inches of rainfall per year. Mean temperatures range from -25 degrees Fahrenheit in January to 100 degrees Fahrenheit in July. The operating environment is similar to that found in northern Arizona and New Mexico in the United States. The Karakuduk structure is an asymmetrical anticline located on the Aristan Uplift in the North Ustyurt Basin. Oil was discovered on the structure in 1972, when Kazakstan was a republic of the former Soviet Union, from Jurassic age sediments between 8,500 and 10,000 feet. Twenty-two exploratory and development wells were drilled to delineate the field, however, none of the wells was ever placed on production. The productive area of the Karakuduk Field is 11,300 acres, with a minimum of seven separate productive horizons present in the Jurassic formation. Oil has been recovered in tests from all seven horizons within the Jurassic formation with flow rates ranging from 3 to 966 barrels per day. The Company estimates that the drilling of approximately 90 additional oil wells and 26 water injection wells will be required to fully develop the field. Peak oil production from the field is expected to occur within seven years after start-up, although time or amount of development or production cannot presently be assured. Ryder Scott Company Petroleum Engineers ("Ryder Scott"), an internationally recognized petroleum engineering group retained by the Company, has stated that in its opinion, after review, a reserve report commissioned by the Company which estimated that the Karakuduk Field has estimated original oil in place of 74 million barrels which could be considered proved undeveloped, is reasonable. However, neither the Ryder Scott opinion or the reserve report considered the potential adverse impact of marketability on price of any oil which might be produced due to the remote location of the field or potential political instability and, therefore, none of the reserves can presently be considered proven. The production and marketing of the oil reserves will be subject to a number of political, economic and other risks. See "--Foreign Operations, --Markets and --Competition." - 6 - The Karakuduk Field is approximately 19 miles north of the Mukat-Mangishlak railroad, the Mangishlak- Astraghan water pipeline, the Beyneu-Uzen high voltage utility lines, and the Uzen-Atrau-Samara oil and gas pipelines. KKM has the right of priority to use the existing oil and gas pipeline facilities to transport produced oil from the Karakuduk Field to the Baltic Sea ports of Kainingrad and Vendsplis and/or the Black Sea port of Novorsiysk, thus offering a potential world market for the produced crude oil. This priority use of existing facilities is granted within the guarantee issued by the Ministry of Oil and Gas Industry of the Republic of Kazakstan. The planned development program for the Karakuduk Field will include a secondary recovery operation that the Company believes could result in additional recoverable reserves. Because of uncertainties surrounding the prospect, no proved reserves have been attributed to the field. The Karakuduk Project will require significant development costs for which the financing is not complete. There can be no assurance that the project will be adequately financed or that the field will be successfully developed. The license requires a minimum work plan of approximately $10 million in 1996, $34 million in 1997 and $12 million in 1998. The agreement provides KKM with the right to defer the minimum work program under certain conditions. As part of the minimum work plan requirement, the Company is committed to loan CAP-G sufficient funds up to a total amount of $4 million to enable CAP-G to loan KKM sufficient funds to place existing wells in the Karakuduk Field on production. The initial operating budget for KKM was approved in September 1995, and the Company paid $320,000 as its share for the remainder of calendar year 1995. In January 1996, the Board of Directors of KKM approved the KKM operating budget for the first half of 1996, of which the Company's share is approximately $864,650, and of which the Company has paid $150,000. KKM will notify the Company of KKM's additional capital requirements on an as needed basis. The Karakuduk Field will be developed in phases. Phase I, expected to require at least one year, is scheduled to begin during 1996. Because of the uncertainty of the conditions of the existing wells, Phase I expenditures are to include the recompletion of seven existing wells or if, after recompletion of three wells, it is determined that well conditions are unfavorable for additional recompletions, a new development well will be drilled in the Karakuduk Field. The estimated costs for Phase I are as follows: Option I: Recomplete seven existing wells. Total costs, including engineering design, well recompletions, storage tanks and facilities, oil transport trucks, roads, camp facilities, communications facilities, field transportation, office overhead and personnel costs, are estimated to be $3.01 million. Option I: Recomplete three existing wells and drill one development well. Total costs for Option II, including engineering design, well recompletions, drilling and completion costs, storage tanks and facilities, oil transport trucks, roads, camp facilities, communication facilities, field transportation, office overhead and personnel costs, are estimated to be $3.60 million. The Company will be responsible for providing all of the funding necessary for the completion of Option I or Option II under Phase I of the development of the Karakuduk Field. If the estimated costs under Phase I exceed $4,000,000, any additional costs will be paid by the Company, assuming the Company consummates the acquisitions of the additional interests in CAP-G described above. If not, the Company's share of expenditures after Phase I would be 45%. The Company anticipates that produced crude oil from Phase I development would be sold beginning within two to three months after start-up of this phase. The produced oil will be transported by tanker trucks over existing roads to the pumping station at Beiman approximately 85 miles east of the - 7 - Karakuduk Field. The oil would probably either be sold to private international companies at this station or transported via the Uzen-Atrau- Samara pipeline to world markets. Management of the Company believes the risk-to-reward considerations involved with the development of the Karakuduk Field are very positive and may lead to substantial growth of the Company over the next several years. However, the Company can provide no assurances that the Karakuduk Field will produce oil in any amounts or that the Company will ever realize a profit as a result of the Company's interest in the field. The exploration and development of the Karakuduk Field is governed by the terms of the agreements with the other shareholders in CAP-G and KKM. There can be no assurance that such shareholders, or any successor thereto, will contribute or will be in a position to contribute its proportionate share of costs and expenses for either entity for which it is responsible without raising additional capital. Thus, in the event a joint venture partner cannot finance its obligations, the Company may be required to assume its financing obligations or risk the forfeiture of the property. In addition, the Company's ability to utilize any revenue generated by the successful development of the Karakuduk Field held indirectly by the Company through CAP-G and KKM may be limited. Such limitations may result from governmental restrictions which may prevent or inhibit the distribution of funds from KKM to CAP-G or from CAP-G to the Company. All of the permits and licenses required to develop the field are not yet in place and there is no assurance they will be obtained. Also, because of uncertainties surrounding the project, no proved reserves have been attributed to the field. The project will require significant development costs for which the financing is not in place. There can be no assurance that the project will be financed or that the 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. As detailed in "Disclosures About Oil and Gas Producing Activities" following the Notes to Consolidated Financial Statements in this report, estimated quantities of the Company's proved oil reserves decreased 40.7% for the fiscal year ended November 30, 1995, as compared to the previous fiscal year and natural gas reserves decreased 7.1%. Reserves decreased due to production during the year, the sale of certain producing properties and the abandonment of certain properties which produced at uneconomic rates. The present value of the Company's proved reserves decreased 60.6% at the fiscal year end November 30, 1995, as compared to the end of the previous fiscal year, due to lower natural gas prices, production, the sale of proved reserves and abandonment of proved reserves. Production. The Company's production for the fiscal year ended November 30, 1995 was 8,224 barrels of oil and 132,924 MCF of natural gas. Oil production decreased 27.1% from that during the fiscal year ended November 30, 1994. Natural gas production decreased 16.4% from the previous fiscal year. Productive Wells and Acreage. As of November 30, 1995, the Company had interests in 65 gross productive oil wells (1.73 net oil wells) and 62 gross productive gas wells (4.61 net gas wells). There are no multiple completion wells. Production was from 45,775 gross (2,793 net) developed acres. Undeveloped Acreage. The Company on November 30, 1995, held interests in 2,500 gross (690 net) undeveloped oil and gas leases, all located within the State of Wyoming. Drilling Activity. All of the Company's drilling activity has been in the United States. During the last three fiscal years ended November 30, 1995, the Company participated in the drilling of the following productive exploratory and development wells. This table does not include any wells in which the Company had a carried or overriding royalty interest, nor any wells that were recompleted. - 8 -
Fiscal Year Exploratory Wells Development Wells Ended ------------------------------- --------------------------------- November 30, Productive Dry Productive Dry ------------ ------------- -------------- -------------- -------------- Gross Net Gross Net Gross Net Gross Net ----- ---- ----- --- ----- --- ----- --- 1995.............. 0 0 0 0 0 0 0 0 1994.............. 0 0 0 0 5 .81 1 .15 1993.............. 1 .11 0 0 3 .34 0 0
Present Activities. As of March 13, 1996, the Company was not participating in the drilling of any oil or natural gas wells. Offices. The Company's offices comprise 3,906 square feet and are rented for $2,767 per month, under a lease which expires in March of 1997. ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's security holders during the Company's fiscal quarter ended November 30, 1995. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's $0.10 par value common stock trades on the Nasdaq Small-Cap Market under the symbol CHAR. At March 8, 1996, the Company had approximately 2,100 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 and low "real-time" trade prices for each quarter during the Company's last two fiscal years ended November 30, 1995, as reported by the National Association of Securities Dealers, Inc.
Price Range Trading Range ------------------- Fiscal Quarter Ended High Low - -------------------- ---- ------ February 28, 1994........................................ 11/32 1/4 May 31, 1994............................................. 9/32 1/4 August 31, 1994.......................................... 15/32 9/32 November 30, 1994........................................ 29/32 11/32 February 28, 1995........................................ 23/32 5/8 May 31, 1995............................................. 7/8 21/32 August 31, 1995.......................................... 11/16 15/32 November 30, 1995........................................ 1 1/2
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.
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Oil and gas sales....................... $ 255,000 $ 374,000 $ 414,000 $ 492,000 $ 523,000 Total revenues*......................... 255,000 374,000 414,000 492,000 607,000 Noncash write-down of oil and gas properties.................... 619,000 416,000 230,000 -- -- Net income (loss)....................... (704,000) (474,000) (123,000) (121,000) (154,000) Net income (loss) per common share.......................... (0.04) (0.02) (0.01) (0.01) (0.01) Working capital......................... 366,000 497,000 709,000 357,000 323,000 Total assets............................ 5,595,000 2,388,000 2,597,000 2,292,000 2,537,000 Long-term obligations and deferred terms....................... 461,000 -- 115,000 135,000 135,000 Shareholders' equity.................... 4,920,000 2,035,000 2,167,000 1,880,000 2,001,000 Present value of proved reserves........ 427,000 1,084,000 1,360,000 1,429,000 1,643,000 Proved oil reserves (bbls).............. 66,185 111,690 141,748 105,973 209,136 Proved gas reserves (mcf)............... 3,062,417 3,294,730 2,305,142 1,485,556 1,321,377 - -------------------
*Certain reclassifications have been made to conform prior years' information with the current year presentation. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Company's primary source of capital is from oil and gas sales. The Company's working capital position was positive at November 30, 1995. Total current assets were $580,000 and total current liabilities were $214,000 for a working capital ratio of 2.7 to 1. Net cash and cash equivalents increased $183,000 during fiscal 1995. The increase was due to receipt of proceeds from a private unsecured loan represented by a note payable in the amount of $750,000 (see Note E, Notes to Consolidated Financial Statements) and proceeds from the issuance of $93,000 in capital Stock (see Note F, Notes to Consolidated Financial Statements). In mid-September 1994, the Company acquired a 25% interest in CAP-G. CAP-G has a 50% interest in Karakuduk Munay, Inc. ("KKM"), which owns 100% of the right to develop the Karakuduk Field. In April 1995, the Company acquired all of the stock of Central Asian Petroleum, Inc. ("CAP-D"), which also owned an interest in CAP-G, in exchange for up to 4,250,000 shares of the Company's Common Stock which are held in escrow to be delivered from time to time through June 1, 2000, upon the occurrence of certain events in connection with the development of the Karakuduk Field. 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 - 9 - Common Stock, an additional 55% interest in CAP-G. If consummated, the acquisitions would increase the Company's ownership in CAP-G to 100%, thus increasing to 50% the Company's beneficial ownership in KKM and the Karakuduk Field. The other 50% ownership in the Karakuduk Field is held by a Kazakstan regional government group. As of March 11, 1996, $1,350,000 of such amount had been paid and 625,000 of such shares had been issued, with $1,680,000 of the balance due in April 1996 and $1,225,000 of the balance payable in four equal quarterly payments beginning June 11, 1996. The Company does not have significant income-producing properties and the Karakuduk Field is substantially undeveloped. The development of the Karakuduk Field through KKM will require substantial amounts of additional capital, in addition to the significant cash portion of the purchase price which remains to be paid for the CAP-G shares. The Company's share for the 1996 budget for the Karakuduk Field development is anticipated to be at least $4,000,000, of which approximately $150,000 has been paid and $760,000 is due by April 1996. The terms of the KKM license from the Republic of Kazakstan requires a 1996 work plan of approximately $10,000,000, a portion of which can be deferred by KKM under certain conditions. KKM will notify the Company of KKM's additional capital requirements on an as needed basis. The Company has incurred operating losses for each of its last three fiscal years. The Company will be required to raise substantial additional capital to finance its obligations in connection with the acquisition of its interest in and the development of the Karakuduk Field, and to satisfy working capital needs. The Company plans to seek to raise this additional capital through debt or equity offerings, encumbering properties or entering into arrangements whereby certain costs of exploration will be paid by others to earn an interest in the properties. The present environment for financing the acquisition of oil and gas properties or the ongoing obligations of an oil and gas business is uncertain due, in part, to the substantial instability in oil and gas prices in recent years. There can be no assurance that the debt or equity financing expected to be necessary to fund the Company's operations and obligations will be available to the Company on economically acceptable terms. If sufficient funds cannot be raised to meet the Company's obligations with respect to the Karakuduk Field, its interest in such property might be adversely affected. See Notes B, D and N, Notes to Consolidated Financial Statements and Report of Independent Certified Public Accountants. The Company has no other material commitments for cash outlay and capital expenditures other then normal operations. Results of Operations Fiscal 1995 Compared with Fiscal 1994 The Company's operations during fiscal 1995 resulted in a loss of $719,000 primarily due to a noncash write-down of oil and gas properties of $619,000 for fiscal 1995. Due to the noncash write-down, the net loss for fiscal 1995 was $704,000 compared to a net loss of $474,000 during fiscal 1994. The noncash write-down was primarily the result of the decreased value of estimated future net values of proved reserves due to lower gas prices during the fourth quarter of fiscal 1995 (see Note M, Notes to Consolidated Financial Statements), and the sale of proved reserves during 1995. Revenue from oil and gas sales decreased $119,000 or 31.8% from $374,000 in fiscal 1994 due to lower production, lower crude oil and natural gas prices and sale or abandonment of certain producing properties. Costs and expenses increased $91,000, or 20.4% during fiscal 1995, excluding the noncash write-down of oil and gas properties. Production costs decreased by 50.4% to $115,000 in fiscal 1995 due to the sale of certain properties and shut-in of certain properties due to lower natural gas prices. Depreciation and depletion also decreased by 38.3% to $74,000 for the same reasons that production decreased. General and administrative expenses increased $72,000, or 76.6% in fiscal 1995 due to the costs related to the acquisition and operation of the Company's interest in the Karakuduk Field. - 10 - Results of Operations Fiscal 1994 Compared with Fiscal 1993 The Company's operations resulted in a loss of $488,000 in fiscal 1994 due to a noncash write-down of oil and gas properties of $416,000 for fiscal 1994. Due to the noncash write-down, the net loss for fiscal 1994 was $474,000 compared to a net loss of $123,000 for fiscal 1993. The noncash write-down was primarily the result of the decreased value of estimated future net values of proved reserves due to lower gas prices during the fourth quarter of fiscal 1994. The charge will reduce future depletion expenses. Revenues from oil and gas sales in fiscal 1994 decreased by $40,000 or 9.7% from $414,000 in fiscal 1993 due to lower crude oil and natural gas prices. In fiscal 1994 costs and expenses increased by $42,000, or 10.4% excluding the $416,000 noncash write-down of oil and gas properties. Production costs increased by 25.4% to $232,000 in fiscal 1994 due to additional production taxes as a result of a federal audit and new wells placed on production. Depreciation and depletion decreased by 4.0% to $120,000 in fiscal 1994 due to the abandonment of certain producing oil and gas properties, sale of certain producing oil and gas properties and the noncash write-down of oil and gas properties. General and administrative expenses remained the same., Inflation. The Company cannot control prices in its oil and gas sales and to the extent the Company is unable to pass on increases in operating costs, it may be affected by inflation. Management's Discussion of Changes in Standardized Measure Standardized measure of discounted future net cash flows decreased 60.6% in fiscal 1995 as compared to fiscal 1994. This decrease was the result of production in 1995, lower oil and gas prices, the sale of proved reserves, and the abandonment of proved reserves during the year. 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 There were no changes in the Company's independent accountants during the Company's last two fiscal years ended November 30, 1995. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The name, position with the Company, age of each director and executive officer and the period during which each director and executive officer of the Company has served are as follows: - 11 -
Name of Director and Executive Director Principal Occupation Officer and Position, in the Company Since Age During the last Five Years - ------------------------------------ ------- --- -------------------------- Paul V. Hoovler............................. 1972 68 President, Chief Executive Officer and director (President and Chief Executive of the Company since 1972. Officer since 1972) Matthew R. Hoovler.......................... 1987 43 Vice President of the Company since 1980; (Vice President since 1980 and Treasurer since 1982. Treasurer since 1982) Frank H. Gower, Jr.......................... 1972 72 Director of the Company since 1972. Mr. Gower and his wife are the sole owners of Gower Oil Company, Denver, Colorado. Barry W. Spector............................ 1995 44 Secretary of the Company since 1995. Attorney (Secretary since 1995) engaged in the practice of law as a sole practi- tioner emphasizing oil and gas and business law since 1979. Peter G. Dilling............................ 1995 46 President and a director of M-D International Petroleum, Inc., an oil and gas company, since September 1994. A partner of M-D Interna- tional, an unincorporated oil and gas business, from March 1993 to the present. James A. Jeffs.............................. 1995 45 Chief Investment Officer for the Whittier Trust Company since 1994. A director of M-D Inter- national Petroleum, Inc., an oil and gas compa- ny, since 1994. Senior Vice President of Union Bank of Los Angeles from 1993 to 1994. Chief Investment Officer for Northern Trust of Cali- fornia, N.A., from 1991 to 1992. President and chief executive officer of TSA Capital Manage- ment, and Senior Vice President of Trust Services of America, Capital Managemeent Companies, from 1988 to 1991. Howard Karren............................... 1995 65 A consultant to Enron Oil & Gas International Co., an oil and gas company, since 1994. President and Vice Chairman of Enron Oil & Gas International Co. from 1984 until 1994. Jay W. McGee................................ 1995 48 Director of M-D International Petroleum, Inc., an oil and gas company, since September 1994. Manager of M-D International, an unincorporat- ed oil and gas entity, from March 1993 to the present. Vice President of Anglo Suisse L.P., an oil and gas company, from September 1990 to February 1993. Prior thereto, Director of Exploration of Anglo Suisse, Inc., an oil and gas company.
- 12 - The present term of office of each director will expire at the next annual meeting of shareholders. Each executive officer will hold office until his successor duly is elected and qualified, until his resignation or until he is removed in the manner provided by the Company's Bylaws. In connection with the Company's acquisition of all of the stock of CAP-D, the former shareholders of CAP-D have certain rights to nominate directors of their choosing for election to the Company's Board of Directors. Pursuant to these rights, the former CAP-D shareholders caused the nomination of Jay W. McGee, who was elected a director at the 1995 annual meeting of shareholders. The Company has also agreed in principle that such former shareholders will have the right to nominate another director at the Company's 1996 annual meeting of shareholders. If by June 30, 2000, the Karakuduk Field obtains 5,000 barrels of oil production per day averaged over any sixty (60) day period, or the Company's beneficial interest in the field is sold or the Company and the former shareholders jointly participate in a new exploratory development project, the former shareholders have the right to cause the Company to nominate one additional director at the Company's 2000 annual meeting of shareholders. In connection with the Company's loan from the Brae Group, Inc. ("Brae"), in November 1995, the Company was required to appoint Messrs. Karren, Dilling and Jeffs as directors of the Company and to appoint Mr. Karren as Chairman of the Board of Directors of the Company. The Company borrowed $750,000 represented by an unsecured promissory note which bears interest at 8% per annum and is due and payable on April 30, 1997. The Company is required to continue to nominate such persons as directors until the note is paid in full. If one or more of such persons ceases to serve as a director, then until such time as the note is paid in full, Brae may designate another person to serve on the Company's Board of Directors in place of such person. 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. Matthew R. Hoovler is the son of Paul V. Hoovler. With this exception, there are no family relationships among the officers or directors. 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. Paul V. Hoovler is the President and a shareholder of The Minnelusa Company ("Minnelusa"), a privately held Florida corporation, the sole business of which is the operation of Deep Lagoon Marina located in Fort Myers, Florida. Minnelusa filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code on January 18, 1994. The primary reason for the bankruptcy petition was the filing of a lawsuit by three of the individual Minnelusa shareholders who demanded payment on promissory notes made by Minnelusa to purchase their Minnelusa stock. Prior to the filing of the bankruptcy, it was determined that the acquisition of their stock, which placed Minnelusa in insolvency, was an illegal transaction under the laws of Florida. Frank H. Gower, Jr., a director of the Company and a director and officer of Minnelusa, also filed personal bankruptcy in August 1994, as Mr. Gower had personally guaranteed these same Minnelusa notes. A Plan of Reorganization for Minnelusa was filed with the court in Florida and this plan was approved at a confirmation hearing in February 1995, in the District Court in Fort Myers, Florida. In March 1995 Minnelusa emerged from bankruptcy. As a part of the Plan of Reorganization for Minnelusa, Minnelusa agreed to pay the claims of the three individual Minnelusa shareholders who originally filed a lawsuit ("claimants") against Minnelusa, on or before March 13, 1998. Mr. Gower also settled with the claimants and agreed to pay any amount due to the claimants that is not timely paid by Minnelusa. Based solely upon a review of the Forms 3 and 4 and any amendments thereto furnished to the Company during the Company's fiscal year ended November 30, 1995, and Form 5 and amendments thereto furnished to the Company with respect to such fiscal year, during the Company's fiscal year ended November 30, - 13 - 1995, 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 The following table sets forth for the Company's last three fiscal years ended November 30, 1995, 1994 and 1993, the compensation paid by the Company for services rendered in all capacities to the Company to Paul V. Hoovler, who was the chief executive officer of the Company during the Company's three fiscal years ended November 30, 1995. No person who served as an executive officer of the Company during the Company's fiscal year ended November 30, 1995 received total annual salary and bonus in excess of $100,000 from the Company during the Company's fiscal year ended November 30, 1995:
SUMMARY COMPENSATION TABLE Long Term Compensation Annual Compensation Awards --------------------------------------------------- ------------- Other Year Annual Securities All Other Name and Ended Compen- Underlying Compensa- Principal Position November 30, Salary($) Bonus($) sation($) Options(#) tion($) - ------------------ ----------- --------- -------- ---------- ----------- ---------- Paul V. Hoovler........ 1995......... $60,000 -- $ 4,413(1) -- $40,000(3) President and 1994......... $60,000 -- $ 3,518(1) -- (2) $40,000(3) Chief Executive 1993......... $60,000 -- $ 5,620(1) 37,500(2) $40,000(3) Officer - ---------------------
(1) The Company has a Royalty Participation Plan which is intended to provide incentive for the Company's employees and to enable the Company to attract, motivate and retain in its employ key employees. Each employee of the Company becomes a participant in the plan upon expiration of a 90-day probationary period after the date of employment. The Company contributes to the plan certain oil, gas and other nonproducing hydrocarbon royalty interests and the proceeds from production received by the Company which are attributable to the royalty interests. On the last day of the plan year, the Committee, which currently consists of all of the directors of the Company, allocated the net income of the plan for the plan year among those participants employed by the Company on the last day of the plan year, together with those participants whose interests are vested. The net income of the plan is allocated by assigning each participant to a group and by assigning a "multiplier" factor to each group. Each participant is then assigned a percentage of division within the group. The determination of the Committee as to placing participants in a particular group and the multiplier to be assigned to each group is solely within the discretion of the Committee. The amount allocated to non-management employees vests during the fiscal year after 60 months of employment and the amount allocated to management employees vests during the fiscal year after 37 months of employment. The plan has been extended by the Board of Directors to December 31, 1997, and thereafter will be evaluated for continuance on an annual basis. Paul V. Hoovler was distributed $4,413 from the plan for the plan year ended December 31, 1995. (2) Represents warrants to purchase 37,500 shares of the Company's common stock that were acquired by Mr. Hoovler from the Company in March, 1993. The warrants were exercisable at a price of $.40 per share and were acquired in a private offering by the Company on the same terms as persons who were not affiliated with the Company acquired warrants. On October 11, 1994, Mr. Hoovler exercised the warrants (37,500 shares) at $.40 per share for a total sum of $15,000. - 14 - (3) The Company has a Deferred Compensation and Death Benefit Plan for Paul V. Hoovler. The plan allows for Mr. Hoovler to continue in active employment of the Company until age 70.5. The Company pays Mr. Hoovler $40,000 annually from this plan. If Mr. Hoovler voluntarily terminates his employment prior to his retirement, disability, or death, he or his estate will receive the remaining residual funds to be disbursed from the plan. If Mr. Hoovler dies prior to retirement or other termination of employment, Mr. Hoovler's estate will receive the remaining residual funds to be disbursed from the plan. The plan is funded by a life insurance policy on the life of Mr. Hoovler which provides for the major portion of any costs to the Company. The plan was fully funded when the Company paid, during the Company's fiscal year ended November 30, 1991, the final payment of a premium of $18,000 on a life insurance policy insuring the life of Paul V. Hoovler. Option Grants in Fiscal Year Ended November 30, 1995 No options were granted by the Company to Paul V. Hoovler during the Company's fiscal year ended November 30, 1995. Fiscal Year-End Option Values The following table sets forth information concerning unexercised options (warrants) held by Paul V. Hoovler at November 30, 1995:
Number of Securities Underlying Unexercised Value of Unexercised Options as of In-the-Money Options at November 30, 1995(#) November 30, 1995($) --------------------------------- -------------------------- Name Exercisable/ Unexercisable Exercisable/ Unexercisable Paul V. Hoovler............ 500,000 - 0 - $274,062.50 - 0 -
- ----------------------- (1) The value was determined by multiplying the number of shares underlying the warrants by the difference between the exercise price and the average of the closing bid and asked prices of the Company's Common Stock on November 30, 1995. No options (warrants) were exercised by Paul V. Hoovler during the Company's fiscal year ended November 30, 1995. There were no standard or other arrangements for the compensation of the Company's directors in effect for the Company's fiscal year ended November 30, 1995. There are no employment contracts between the Company and any executive officer. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following persons are the only persons known to the Company who on March 8, 1996, owned beneficially 5% or more of the Company's 24,009,192 outstanding shares of $0.10 par value common stock:
Amount and Nature of Percent Name and Address of Beneficial Owner Beneficial Ownership(1) of Class - ------------------------------------ ----------------------- -------- Paul V. Hoovler......................... 1,590,952(2) 6.5% 621 17th St., Suite 1301 Denver, Colorado 80293 - -------------------
- 15 - (1) The beneficial owner listed above has sole voting and investment power with respect to the shares shown unless otherwise indicated. (2) The 1,590,952 shares include 500,000 shares underlying unexercised warrants and 365,466 shares held in the Company's 401(k) Plan & Trust. Paul V. Hoovler is the trustee of the 401(k) Plan & Trust and has sole voting and investment power over the total 365,466 shares which are owned by the employees of the Company, including Paul V. Hoovler who beneficially owns 95,582 of the shares. The following table shows as of March 8, 1996, the shares of the Company's $0.10 par value common stock beneficially owned by each director of the Company, by Paul V. Hoovler, who is the Company's President and Chief Executive Officer, and by all of the directors and executive officers of the Company as a group:
Amount and Nature of Percent Name and Address of Beneficial Owner Beneficial Ownership(1) of Class - ------------------------------------ ---------------------- -------- Paul V. Hoovler........................... 1,590,952(2) 6.5% Matthew R. Hoovler........................ 536,049(3) 2.2% Barry W. Spector.......................... 56,250(4) 0.23% Peter G. Dilling.......................... -0- 0.0% Frank H. Gower, Jr........................ 593,080(5) 2.5% James A. Jeffs............................ 925,500(6) 3.9% Howard Karren............................. 350,000(7) 1.4% Jay W. McGee.............................. 930,678(6) 3.9% All Directors and Executive Officers as a Group (eight persons).................. 4,982,509 19.8% - -------------------
(1) The beneficial owners listed have sole voting and investment power with respect to the shares shown unless otherwise indicated. (2) The 1,590,952 shares include 725,485 shares and 500,000 shares underlying unexercised warrants owned by Paul V. Hoovler and 365,466 shares held in trust in the Company's 401(k) Plan & Trust. Paul V. Hoovler, trustee of the 401(k) Plan & Trust, has sole voting and investment power over the total 365,466 shares which are owned by the employees of the Company, including Paul V. Hoovler, who beneficially owns 95,582 of the shares. (3) The 536,049 shares include 52,000 shares and 250,000 shares underlying unexercised warrants owned by Matthew R. Hoovler, 131,049 shares owned jointly by Mr. Hoovler and his wife, 97,000 shares owned by Mr. Hoovler's wife and 6,000 shares owned by his daughter over all of which shares Mr. Hoovler may be deemed to have shared voting and investment power. Not included are 105,607 shares beneficially owned by Matthew R. Hoovler but held in trust in the Company's 401(k) Plan & Trust. Paul V. Hoovler, trustee of the 401(k) Plan & Trust, has sole voting and investment power over these shares. (4) The 56,250 shares include 37,500 shares owned by Barry W. Spector and 18,750 shares owned by his minor children over all of which shares Mr. Spector may be deemed to have sole voting and investment power. (5) The 593,000 shares include 224,608 shares and 100,000 shares underlying unexercised warrants owned by Mr. Gower, 250,000 shares owned by Gower Oil Company and 18,472 shares owned by Mr. Gower's wife, over all of which shares Mr. Gower may be deemed to have shared voting and investment power. - 16 - (6) Includes 925,500 of a total of 4,250,000 shares being held in escrow in connection with the acquisition of CAP-D as described in "Item 1. Business," above, and 5,178 shares owned jointly with his wife. (7) The 350,000 shares are to be issued to Mr. Karren either directly or in connection with the acquisition by the Company of MD International Petroleum, Inc. ("MDI"). See "Item 13. Certain Relationships and Related Transactions." Except to the extent the agreement relating to the acquisition of the outstanding shares of CAP-D as described in "Item 1--Business" could result in a change in control, there are presently no arrangements of any kind which may at a subsequent date result in a change in control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has agreed to issue a minimum of 350,000 shares of the Company's restricted common stock to Howard Karren, a director of the Company. Mr. Karren is or will be a shareholder and principal of MDI, a private corporation which holds certain rights in a joint venture that is attempting to negotiate for the development of natural gas fields in Uzbekistan (see "Item 1--Business" above). The Company is negotiating to acquire MDI. If a satisfactory acquisition of MDI is consummated by the Company, the Company would issue up to 6,400,000 shares of its restricted common stock to the shareholders of MDI, including the 350,000 shares to Mr. Karren. If the transaction is not consummated, the Company will issue the shares to Mr. Karren or persons he designates. Mr. Karren was appointed a director and chairman of the board of the Company's Board of Directors, along with James A. Jeffs and Peter G. Dilling, in connection with the Company's loan of $750,000 received from Brae in November 1995. The Company is required to keep Messrs. Karren, Jeffs and Dilling as directors until the loan is paid in full. If one or more of them ceases to serve as a director, then until such time as the loan is paid in full, Brae may designate another person to serve on the Company's Board of Directors. In connection with the acquisition of CAP-D by the Company, the Company may be required to pay a brokerage fee of up to $175,000 to Jay W. McGee, who became a director of the Company in connection with that acquisition. The Company paid to Mr. McGee $50,000 in 1995 and the balance is payable upon the occurrence of certain milestones in development of the Karakuduk Field. Under the terms pursuant to which CAP-D was acquired, the Company issued 4,500,000 shares of restricted common stock which will be held in escrow and released to the former shareholders of CAP-D, including Messrs. Jeffs, McGee and Dilling, or affiliates of them, from time to time in connection with development of the Karakuduk Field. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. Table of Contents Report of Independent Certified Public Accountants Balance Sheets--As of November 30, 1995 and 1994 Consolidated Statements of Operations--Years ended November 30, 1995, 1994 and 1993 Consolidated Statements of Cash Flows--Years ended November 30, 1995, 1994, and 1993 Consolidated Statement of Changes in Stockholders' Equity--Years ended November 30, 1995, 1994 and 1993 Notes to Consolidated Financial Statements Disclosure About Oil and Gas producing Activities (unaudited) - 17 - (a)(2) Financial Statement Schedules. None. (b) Current Reports on Form 8-K: The Company filed the following reports on Form 8-K during the last fiscal quarter ended November 30, 1995: Current Report on Form 8-K dated November 1, 1995 (November 7, 1995). Current Report on Form 8-K/A dated November 1, 1995 (November 13, 1995). (c) Exhibits. 2.1 Stock Acquisition Agreement and Plan of Reorganization dated April 12, 1995 between Chaparral Resources, Inc., and the Shareholders of Central Asian Petroleum, Inc., incorporated by reference to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 2.2 Escrow Agreement dated April 12, 1995 between Chaparral Resources, Inc., the Shareholders of Central Asian Petroleum, Inc. and Barry W. Spector, incorporated by reference to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 3.1 Restated Articles of Incorporation and Amendments, incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 3.2 Articles of Amendment to the Restated Articles of Incorporation dated April 20, 1988, incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 3.3 Bylaws, as amended through December 5, 1995. 3.4 Articles of Amendment to the Restated Articles of Incorporation and Amendments dated June 21, 1995, incorporated by reference to Exhibit B to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 10.1 Royalty Participation Plan dated June 15, 1982, incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 10.2 Chaparral Resources, Inc. 1989 Stock Warrant Plan effective May 1, 1989, incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 10.3 Target Benefit Plan effective December 1, 1990 incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1991. 10.4 Deferred Compensation and Death Benefit Plan as amended November 15, 1991 incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1991. - 18 - 10.5 Promissory Note dated November 1, 1995 from Chaparral Resources, Inc., to Brae Group, Inc., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated November 1, 1995. 10.6 Purchase Agreement, dated effective January 12, 1996, between the Company and Guntekin Koksal (purchase of CAP-G shares). 10.7 Letter Agreement, dated January 3, 1996, between the Company and certain stockholders of Darka Petrol Ticaret Ltd. Sti., together with Exhibits A--E. 10.8 Amendment, effective March 4, 1996, to the Letter Agreement revising the terms pursuant to which the Company is to acquire all shares of CAP(G) stock owned by Darka Petrol Ticaret Ltd. Sti. 21 Subsidiaries of the Registrant. 23 Consent of Grant Thornton for S-8. 24 Power of Attorney. 27 Financial Data Schedule. - 19 - 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/ Paul V. Hoovler ------------------------------- Paul V. Hoovler, President, Principal Executive Officer By /s/ Matthew R. Hoovler ------------------------------- Matthew R. Hoovler, Chief Financial Officer, and Principal Accounting Officer Dated March 14, 1996 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 March 14, 1999 Paul V. Hoovler /s/ Paul V. Hoovler Director ------------------------ March 14, 1996 Matthew R. Hoovler Director March 14, 1996 Frank H. Gower, Jr. Director March 14, 1996 Peter G. Dilling Director March 14, 1996 James A. Jeffs Director March 14, 1996 Howard Karren Director March 14, 1996 Jay W. McGee Director March 14, 1996 By /s/ Paul V. Hoovler --------------------- Paul V. Hoovler Attorney-in-Fact - 20 - FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS CHAPARRAL RESOURCES, INC. AND SUBSIDIARY November 30, 1995, 1994 and 1993 C O N T E N T S Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ............................................... F- 2 FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS ............................... F- 3 CONSOLIDATED STATEMENTS OF OPERATIONS ..................... F- 5 CONSOLIDATED STATEMENTS OF CASH FLOWS ..................... F- 6 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY .................................... F- 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................ F- 9 SUPPLEMENTARY INFORMATION DISCLOSURE ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED .................................. F-24 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders Chaparral Resources, Inc. and Subsidiary We have audited the accompanying consolidated balance sheets of Chaparral Resources, Inc. and Subsidiary as of November 30, 1995 and 1994, and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the three years in the period ended November 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chaparral Resources, Inc. and Subsidiary as of November 30, 1995 and 1994, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended November 30, 1995 in conformity with generally accepted accounting principles. F-2 The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As shown in the financial statements, the Company incurred a net loss of $704,000 during the year ended November 30, 1995. As discussed in note B to the financial statements, the Company requires significant additional financing to meet its financial requirements through fiscal 1996. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. GRANT THORNTON LLP Denver, Colorado January 19, 1996 (except for note N, as to which the date is March 8, 1996) F-3
Chaparral Resources, Inc. and Subsidiary CONSOLIDATED BALANCE SHEETS November 30, 1995 1994 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents .................. $ 501,000 $ 318,000 Certificates of deposit .................... -- 20,000 Investments in U.S. Treasury securities (at cost) ................................ -- 199,000 Accounts receivable Joint interest participants .............. 31,000 231,000 Oil and gas purchasers ................... 46,000 64,000 Prepaid expenses ........................... 2,000 2,000 ------------ ------------ Total current assets ....... 580,000 834,000 PROPERTY AND EQUIPMENT - AT COST Oil and gas properties - full cost United States Subject to depletion ................... 16,149,000 16,115,000 Not subject to depletion ............... 40,000 40,000 Less accumulated depletion and depreciation and impairment .............. (15,722,000) (15,032,000) ------------ ------------ 467,000 1,123,000 Furniture, fixtures and equipment .......... 197,000 337,000 Less accumulated depreciation .............. (177,000) (324,000) ------------ ------------ 20,000 13,000 ------------ ------------ 487,000 1,136,000 OTHER ASSETS Investment in and advances to affiliate .... 4,507,000 256,000 Long-term investments in U.S. .............. Treasury securities (at cost) ............ -- 100,000 Cash value of insurance and annuities ................................ 8,000 48,000 Equipment inventory ........................ 13,000 14,000 ------------ ------------ 4,528,000 418,000 ------------ ------------ $ 5,595,000 $ 2,388,000 ============ ============ The accompanying notes are an integral part of these statements. F-4 Chaparral Resources, Inc. and Subsidiary CONSOLIDATED BALANCE SHEETS (CONTINUED) November 30, 1995 1994 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable Trade ....................................... $ 102,000 $ 151,000 Joint interest participants - revenue ....... 26,000 41,000 Accrued liabilities ........................... 86,000 145,000 ------------ ------------ Total current liabilities ................ 214,000 337,000 LONG-TERM OBLIGATIONS Note payable ................................ 461,000 -- MINORITY INTEREST IN JOINT VENTURE ............ -- 16,000 STOCKHOLDERS' EQUITY Common stock - authorized, 50,000,000 shares and 25,000,000 shares at November 30, 1995 and 1994, respectively, of $.10 par value; issued and outstanding, 20,484,192 and 15,782,317 and shares at November 30, 1995 and 1994, respectively ................................ 2,048,000 1,572,000 Capital in excess of par value ................ 12,577,000 9,464,000 Preferred stock - authorized, 1,000,000 shares, no shares issued or outstanding ..... -- -- Retained earnings (deficit) ................... (9,705,000) (9,001,000) ------------ ------------ 4,920,000 2,035,000 ------------ ------------ $ 5,595,000 $ 2,388,000 ============ ============
The accompanying notes are an integral part of these statements. F-5
Chaparral Resources, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS Years ended November 30, 1995 1994 1993 ---------- ---------- --------- Revenue Oil and gas sales ........... $ 255,000 $ 374,000 $ 414,000 Costs and expenses Production costs ............ 115,000 232,000 185,000 Write down of oil and gas properties ............... 619,000 416,000 230,000 Depreciation and depletion . . 74,000 120,000 125,000 General and administrative ... 166,000 94,000 94,000 ------------ ------------ ------------ 974,000 862,000 634,000 ------------ ------------ ------------ (Loss) from operations ......... (719,000) (488,000) (220,000) Other income (expense) Interest income .............. 25,000 13,000 20,000 Interest expense ............. (17,000) (4,000) (8,000) Other - net .................. 7,000 5,000 85,000 ------------ ------------ ------------ 15,000 14,000 97,000 ------------ ------------ ------------ NET (LOSS) ..................... $ (704,000) $ (474,000) $ (123,000) ============ ============ ============ Net (loss) per share ........... $ (.04) $ (.02) $ (.01) Weighted average number of shares outstanding ............ 18,865,454 15,064,856 13,319,893
The accompanying notes are an integral part of these statements. F-6
Chaparral Resources, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended November 30, 1995 1994 1993 --------- --------- --------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities Net (loss) ................................. $ (704,000) $ (474,000) $ (123,000) Adjustments to reconcile net (loss) to net cash provided by operating activities Depreciation and depletion ............. 74,000 120,000 125,000 (Decrease) in deferred compensation ......................... -- (40,000) (20,000) Write down of oil and gas property ......................... 619,000 416,000 230,000 Stock issued for services and bonuses .......................... 27,000 8,000 -- Amortization of note discount .......... 17,000 -- -- Changes in assets and liabilities (Increase) decrease in Accounts receivable ................ 218,000 22,000 (165,000) Prepaid expenses ................... -- -- (1,000) Increase (decrease) in Accounts payable ................... (64,000) 47,000 62,000 Accrued liabilities ................ (59,000) (9,000) (27,000) ----------- ----------- ----------- Net cash provided by operating activities ............. 128,000 90,000 81,000 Cash flows from investing activities Additions to property and equipment ........ (86,000) (255,000) (310,000) Investment in foreign oil and gas properties ............................... (1,088,000) (256,000) -- Proceeds from sale of interest in oil and gas properties ................ 41,000 71,000 2,000 Decrease in cash value of insurance and annuities .................. 40,000 40,000 39,000 Increase (decrease) in minority interest ................................. (16,000) (1,000) 1,000 Decrease in equipment inventory ............ 1,000 -- -- Sale (purchase) of bonds ................... 299,000 (299,000) -- Redemption of certificates of deposit ...... 20,000 146,000 -- Purchase of certificates of deposit ........ -- -- (2,000) ----------- ----------- ----------- Net cash provided by (used in) investing activities ............. (789,000) (554,000) (270,000) The accompanying notes are an integral part of these statements. F-7 Chaparral Resources, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended November 30, 1995 1994 1993 --------- --------- --------- Cash flows from financing activities Proceeds from note payable ............... $ 750,000 $ -- $ -- Proceeds from issuance of capital stock .......................... 94,000 260,000 410,000 ----------- ----------- ---------- Net cash provided by (used in) financing activities ....................... 844,000 260,000 410,000 ----------- ----------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ...................... 183,000 (204,000) 221,000 Cash and cash equivalents at beginning of year .......................... 318,000 522,000 301,000 ----------- ----------- ---------- Cash and cash equivalents at end of year ................................ $ 501,000 $ 318,000 $ 522,000 =========== =========== =========== Supplemental cash flow disclosures Cash paid during the year Interest ................................. $ 5,000 $ 4,000 $ 8,000 Income taxes ............................. -- -- -- Supplemental schedules of noncash investing and financing activities Common stock issued for investment in affiliate ................ $ 3,162,000 $ -- $ -- Discount recognized for note issued with detachable stock warrants ............................... 306,000 -- -- Common stock issued upon conversion of debentures ............... -- 75,000 --
The accompanying notes are an integral part of these statements. F-8
Chaparral Resources, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended November 30, 1995, 1994 and 1993 Capital Common stock in excess Retained --------------------------- of par earnings Shares Amount value (deficit) ----------- ----------- ----------- ------------- Balance at November 30, 1992 .................................. $ 12,237,875 $ 1,223,000 $ 9,061,000 $(8,404,000) Issuance of capital stock .................................. 2,685,750 269,000 141,000 -- Net loss ................................. -- -- -- (123,000) ----------- ----------- ----------- ---------- Balance at November 30, 1993.................................. 14,923,625 1,492,000 9,202,000 (8,527,000) Warrants exercised for capital stock .......................... 650,625 65,000 195,000 -- Conversion of debentures for capital stock ...................... 200,067 20,000 55,000 -- Capital stock issued for services ............................... 8,000 1,000 6,000 -- Net loss ................................. -- -- -- (474,000) ----------- ----------- ----------- ----------- Balance at November 30, 1994.................................. 15,782,317 1,578,000 9,458,000 (9,001,000) Warrants exercised for capital stock .......................... 265,375 27,000 67,000 -- Capital stock issued for investment in affiliate .............................. 4,400,000 440,000 2,722,000 -- Capital stock issued for services ............................... 12,500 1,000 9,000 -- Capital stock issued for employee and director bonuses ................................ 24,000 2,000 15,000 -- Debt issuance costs - stock warrants issued ................................ -- -- 306,000 -- Net loss ................................. -- -- -- (704,000) ----------- ----------- ----------- ----------- Balance at November 30, 1995.................................. 20,484,192 $ 2,048,000 $ 12,577,000 $(9,705,000) =========== =========== =========== ===========
The accompanying notes are an integral part of these statements. F-9 Chaparral Resources, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The summary of significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows: 1. History and Business Activity 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. 2. Principles of Consolidation The November 30, 1994 consolidated financial statements include the accounts of the Company and its 87% owned joint venture, Reservoir Creek Gathering System. Hereinafter, Chaparral Resources, Inc. and Reservoir Creek Gathering System are collectively referred to as the Company. All significant intercompany transactions have been eliminated. On April 15, 1995, the Company sold its 87% ownership interest in this joint venture. 3. Cash Equivalents For purposes of the statement of cash flows, cash equivalents are defined as highly liquid investments purchased with an original maturity of three months or less. 4. Investments in Debt and Equity Securities The Company accounts for investments in debt and equity securities under the provision of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement requires that, at acquisition, the Company classify debt and equity securities into one of three categories: held-to-maturity, available-for-sale, or trading. At each reporting date, the appropriateness of the classification shall be reassessed. F-10 Chaparral Resources, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 5. Oil and Gas Property and Equipment The Company uses the full cost method of accounting for its oil and gas properties. All costs incurred in the acquisition, exploration and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry hole costs, geological and geophysical costs and overhead related to exploration and development activities) are capitalized on a country by country basis. 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. All of the Company's proved reserves are in the United States. 6. 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. 7. Costs 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. F-11 Chaparral Resources, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 8. Sales of Unproved Properties Proceeds received from drilling arrangements are credited to the appropriate cost center and recognized as a lower amortization provision as reserves are produced. 9. Other Property and Equipment Furniture, fixtures and equipment are depreciated using straight-line and accelerated methods over estimated useful lives which range from three to ten years. Gains or losses on sales of property and equipment, other than oil and gas exploration and development costs, are recognized as part of operations. Expenditures for renewals and betterments are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred. 10. Administrative Overhead Reimbursement The Company, as operator of drilling and/or producing properties, is reimbursed by the nonoperators for administration, supervision, office services and warehousing costs on an annually adjusted fixed rate basis per well per month. These charges are applied as a reduction of general and administrative expenses for purposes of the statement of operations. 11. Income Taxes The Company accounts for income taxes under the provisions of FAS 109, 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. 12. (Loss) Per Common Share Earnings (loss) per common and common equivalent share is based on the weighted average number of shares outstanding. The potential dilution from the exercise of stock warrants is not material. F-12 Chaparral Resources, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 13. 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 and 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. 14. Reclassifications Certain reclassifications have been made to conform prior years information with the current year presentation. NOTE B - 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. The Company has over 80% of its assets invested in entities that are pursuing the development of the Karakuduk Field, a shut in oil field in the central Asian Republic of Kazakstan, which will require significant additional funding (note D). The Company has commenced a private placement of common stock (note N). However, the Company does not anticipate that the net proceeds from the sale of the shares offered, together with the Company's current cash reserves and cash flow from operations, will be sufficient to meet the Company's capital requirements through fiscal 1996. While the Company believes that additional funds will be available from additional financing, there can be no assurance that such will be the case. There is also no assurance that additional financing, if available, can be obtained on terms favorable or affordable to the Company. The Company's continued existence as a going concern in its present form is dependent upon the success of future operations, which is, in the near term, dependent on the successful financing and development of the Karakuduk Field, of which there is no assurance. F-13 Chaparral Resources, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE C - INVESTMENTS IN DEBT AND EQUITY SECURITIES The Company classifies its investments in U.S. Treasury securities as held-to-maturity securities. Held-to-maturity securities are carried at amortized cost. As of November 30, 1995, the Company did not own any investments in debt and equity securities. The amortized cost, unrealized gains and losses, and fair values of the Company's held-to-maturity securities held at November 30, 1994 are summarized as follows:
Gross Gross Amortized unrealized unrealized Fair cost gains losses value --------- ---------- ---------- --------- U.S. government securities ........... $299,000 $ 4,000 $-- $303,000 ======== ======== ==== ========
The following table lists the maturities of debt securities held at November 30, 1994 classified as held-to-maturity.
Within One to five More than one year years five years Total --------- ---------- --------- --------- Held-to-maturity securities ....................... $199,000 $100,000 $-- $299,000 ======== ======== ==== ========
NOTE D - INVESTMENT IN AND ADVANCES TO AFFILIATE In September, 1994, the Company acquired a 25% interest in Central Asian Petroleum Guernsey Limited ("CAP-G"), with headquarters in Ankara, Turkey. CAP-G has a 50% interest in Karakuduk Munay, Inc. ("KKM"), which owns 100% of the right to develop the Karakuduk Field, a shut-in oil field in the central Asian Republic of Kazakstan. As a result of the acquisition of the 25% interest in CAP-G, the Company had a 12.5% beneficial interest in KKM and the Karakuduk Field. In April, 1995, the Company acquired all of the stock of Central Asian Petroleum, Inc. ("CAP-D"), in exchange for shares of the Company's common stock (note F - shares in escrow). As a result of the acquisition, the Company's beneficial interest in CAP-G increased to 45%, giving the Company a 22.5% beneficial interest in KKM and the Karakuduk Field (see note N). F-14 Chaparral Resources, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE D - INVESTMENT IN AND ADVANCES TO AFFILIATE (CONTINUED) Since the Company and its affiliates are in the acquisition and evaluation phase related to the Karakuduk Field, all costs incurred by the Company related to the Field have been capitalized and are not subject to depletion. All of the permits and licenses required to develop the field are not yet in place and there is no assurance that they will be obtained. Because of uncertainties surrounding the prospect, no proved reserves have been attributed to the field. The project will require significant development costs for which the financing is not complete. There can be no assurance that the project will be adequately financed or that the field will be successfully developed. The license requires a minimum work plan of approximately $10,000,000 in 1996, $34,000,000 in 1997 and $12,000,000 in 1998. The agreement provides KKM with the right to defer the minimum work program under certain conditions. As part of the minimum workplan, Chaparral is committed to loan CAP-G sufficient funds up to a total amount of $4,000,000 to enable CAP-G to loan KKM sufficient funds to place existing wells in the Karakuduk Field on production. In addition to the normal risks associated with domestic oil and gas exploration and development, this project is subject to other risks such as political instability, war, expropriation, language barriers, government bureaucracy, uncertain markets, fluctuation in currency exchange rates, limitations on currency repatriation, foreign taxes, duties and tariffs, renegotiation or modification of contracts and the availability of oil gathering systems and pipelines. F-15 Chaparral Resources, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE E - LONG-TERM DEBT Long-term obligations at November 30, 1995 consisted of a note payable to a private corporation in the amount of $750,000. The note is due on the earlier of April 30, 1997 or the third business day following the receipt by Chaparral of any proceeds from one of the following sources: 1) the sale or issuance of its securities, or 2) any debt financing provided or guaranteed by the Overseas Private Investment Corporation or other governmental entity. Interest is payable monthly at a rate of 8%. As additional consideration for this note, Chaparral issued to the holder warrants to purchase 500,000 shares of Chaparral's common stock, and to a private corporation, as a finders fee, warrants to purchase 200,000 shares, at $0.25 per share, exercisable at any time, but no later than October 30, 1998. The note has been discounted by the difference between the market value of the Company's common stock on the date of issuance and the exercise price of the warrants. The discount will be amortized over the life of the note (18 months). The following is a summary of the note payable at November 30, 1995:
Note payable .................................. $ 750,000 Less unamortized discount based on imputed interest rate of 24% ................................. (289,000) --------- $ 461,000 =========
Under the terms of the note, Chaparral was required to elect three people affiliated with the holder to its Board of Directors, with one of these people being named the Chairman of the Board. The note is subject to a provision whereby, if the note is not repaid by specific dates (before April 30, 1997), Chaparral will issue additional warrants to the holder. Aggregate maturities of long-term debt as of November 30, 1995 are as follows:
1996 ................... $ -- 1997 ................... 750,000
F-16 Chaparral Resources, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE F - COMMON STOCK AND STOCK WARRANTS Stock Warrant Plan During 1989, the Board of Directors approved a stock warrant plan for key employees and directors. The Company has reserved 1,175,000 shares of its common stock for issuance under the plan. Warrants must be granted and exercised within a 10 year period ending April 30, 1999. The exercise price must equal the fair market value of the Company's common stock on the date of grant. Immediately following approval of the plan by the Board of Directors, warrants for 1,175,000 shares were granted with an exercise price of $.28 per share. The plan was approved in 1990 by the Company's shareholders. During 1995, 100,000 of the warrants were exercised for the purchase of common stock. The exercise price was $.28 per share for a total of $28,000. Stock Offering During 1993, the Company sold a total of 1,790.5 units in a private placement consisting of 2,685,750 shares of common stock and 1,342,875 warrants to purchase stock with an exercise price of $.40. An additional 105,540 warrants were paid as commission. During 1994, 650,625 of the warrants issued in the private placement were exercised for the purchase of shares of common stock. The exercise price was $.40 per share for a total of $260,000. During 1995, 165,375 of the warrants issued in the private placement were exercised for the purchase of shares of common stock. The exercise price was $.40 per share for a total of $66,000. Stock Warrants Related to Debt Issuance (note E) As consideration for the issuance of a $750,000 note, the Company issued warrants for a total of 700,000 shares of the Company's common stock, at $.25 per share, exercisable at any time, but no later than October 30, 1998. F-17 Chaparral Resources, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE F - COMMON STOCK AND STOCK WARRANTS (CONTINUED) Shares in Escrow The Company issued 4,400,000 shares of common stock to acquire an interest in CAP-G (see note D). 150,000 of these shares were issued during the year ended November 30, 1995 for the first 25% interest. For the remaining 20% interest, 4,250,000 shares were held in escrow at the date of this transaction with delivery authorized upon the occurrence of several events. The first 1,000,000 shares were delivered in September, 1995 upon registration of the Karakuduk Munay Agreement by the governmentof the Republic of Kazakstan. Additional shares will be delivered based upon future events including completion of financing for the Karakuduk field, minimum production quantities and project financing. NOTE G - INCOME TAXES The following is a summary of the provision for income taxes:
Year ended November 30, ----------------------------------------- 1995 1994 1993 --------- --------- --------- Income taxes (benefit) computed at Federal statutory rate ............... $(241,000) $(161,000) $ (42,000) Change in asset valuation allowance .................... 298,000 256,000 65,000 Other .......................... (57,000) (95,000) (23,000) --------- --------- --------- Income taxes ................... $ -- $ -- $ -- ========= ========= ========= F-18 Chaparral Resources, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE G - INCOME TAXES (CONTINUED) The components of the Company's deferred tax assets and liabilities under SFAS No. 109 are as follows: Year ended November 30, --------------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Deferred tax assets Net operating loss carryforwards ........... $ 4,131,000 $ 3,934,000 $ 3,777,000 Full cost pool capitalization .......... 246,000 145,000 46,000 Valuation allowance ......... (4,377,000) (4,079,000) (3,823,000) ----------- ----------- ----------- Deferred tax assets ......... $ -- $ -- $ -- =========== =========== ===========
There were no deferred tax assets or income tax benefits recorded in the financial statements for net deductible temporary differences or net operating loss carryforwards due to the fact that the realization of the related tax benefits is not considered likely. At November 30, 1995, the Company has tax loss carryforwards of approximately $12,149,000 available to offset future taxable income. These carryforwards will expire at various times between 1996 and 2011. The Company has issued a significant number of shares of common stock during the year ended November 30, 1995 and has also issued warrants. The Company is also currently negotiating for the infusion of additional capital which, if successful, will require additional shares of stock to be issued. The changes in ownership may significantly restrict the use of net operating loss carryforwards. At November 30, 1995, unused statutory depletion carryforwards, which have unlimited duration, are approximately $567,000. The unused investment tax credit carryover was approximately $86,000 at November 30, 1995 and expires through 2000. The loss carryforward at November 30, 1995 for financial reporting purposes is approximately $11,264,000. The difference between the loss carryforward for financial reporting and income tax purposes results principally from the difference in book and tax basis of oil and gas properties. F-19 Chaparral Resources, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE H - RELATED PARTY TRANSACTIONS The Company paid a director $24,000 during 1995 and 1994 and $20,000 during 1993, for public relations consulting services. NOTE I - MAJOR CUSTOMERS The Company is presently engaged in exploration for and development of oil and gas. The Company sells its production under contracts with various purchasers, with certain domestic purchasers accounting for sales of 10% or more per year as follows: 1995 16% 1994 15%, 13% and 11% 1993 13%, 11% and 11% NOTE J - LEASE The Company leases office space under a noncancellable operating lease, expiring in March, 1997. The following is a schedule of future minimum rental payments: Year ending November 30, 1996 $ 33,000 1997 11,000 ------ $ 44,000 ====== Net rent expense was $36,000 for 1995, $37,000 for 1994, and $34,000 for 1993. Related party sublease income included in rent expense was $6,000 for 1994 and 1993, there was no sublease income in 1995. NOTE K - DEFERRED COMPENSATION PLANS Royalty Participation Plan During 1982, the Company adopted a Royalty Participation Plan for the employees of the Company. Under the plan, the Company may contribute to a trust fund, royalty interests acquired by the Company together with any proceeds of production received by the Company which are attributable to such royalty interests. The net income of the trust fund will be distributed yearly to the participants based on years of service and position in the Company. Distributions were $12,000 for 1995, $10,000 for 1994 and $10,000 for 1993. F-20 Chaparral Resources, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE K - DEFERRED COMPENSATION PLANS (CONTINUED) Deferred Compensation Agreement In 1991, the Company amended its deferred compensation plan for its president to provide for payments of $20,000 annually for 5 years, a total of $100,000, beginning in 1991. Prior to the amendment, the plan called for payments of $18,000 annually, a total of $180,000, for 10 years beginning upon termination. At November 30, 1994, the Company has no remaining obligation under the Plan. NOTE L - DEFINED CONTRIBUTION PLANS Effective December 31, 1990, the Company adopted a new defined contribution plan which covers all full-time eligible employees. Contributions are determined as a percent of each covered employee's salary and are funded as accrued. Plan contributions for the Company were $27,000 in 1995, $26,000 in 1994, and $29,000 in 1993, of which $20,000 in 1995, $20,000 in 1994, and $23,000 in 1993 was attributable to the president of the Company. The Company also adopted a 401(k) plan covering all full time employees, effective January 1, 1991. Employee contributions are in the form of salary reductions up to the maximum percentage allowable under IRS codes. There are no employer matching contributions. NOTE M - FOURTH QUARTER ADJUSTMENTS During the fourth quarter of the year ended November 30, 1995, the Company recognized a write down of its oil and gas properties of $619,000, as a result of a full cost ceiling limitation. F-21 Chaparral Resources, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE N - SUBSEQUENT EVENTS 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 common stock, an additional 55% interest in CAP-G. If consummated, the acquisitions would increase the Company's ownership in CAP-G to 100%, thus increasing to 50% the Company's beneficial ownership of KKM and the Karakuduk Field. The additional 55% of CAP-G is to be acquired in three separate transactions, the first two of which include the purchase of all of the CAP-G shares owned by a private Turkish company ("Darka") and by an individual CAP-G shareholder ("K`ksal"), each of which owns 25% of the CAP-G shares outstanding. The Company would pay $2,000,000 in cash plus issue 685,000 shares of the Company's common stock to Darka for all of its CAP-G shares. The cash payment includes an initial $300,000 paid by the Company on March 4, 1996, following the Company's review of Darka. An additional $300,000 and 625,000 shares of Company stock were delivered March 8, 1996, with the balance of cash and stock due at closing on April 1, 1996. The Company would pay $1,975,000 in cash and issue 900,000 shares of the Company's common stock to K`ksal for 60% of K`ksal's CAP-G shares, with an option, after completion of the initial purchase, to purchase the remaining 40% of his CAP-G shares for an additional $1,625,000 and 200,000 shares of the Company's common stock. The cash payment on the initial purchase from K`ksal includes $150,000 paid by the Company into an escrow account during the Company's 60-day due diligence review. If the initial purchase is consummated from K`ksal, the escrowed funds would be released and an additional $600,000 cash and 900,000 shares of the Company's common stock delivered to K`ksal on or before March 11, 1996. The remaining cash balance of $1,225,000 for the initial purchase will be paid in four equal quarterly payments of $306,250 between June 11, 1996 and March 11, 1997. The Company has the option to acquire the remaining 40% of K`ksal's CAP-G shares at any time following completion of the initial purchase and prior to December 11, 1997. Under a third agreement, the Company would acquire the remaining 5% of the outstanding CAP-G shares from a private corporation ("OCSCO") for $250,000 to be paid at the earlier of April 14, 1996 or 15 days after completion of a private placement of common stock described below. F-22 Chaparral Resources, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE N - SUBSEQUENT EVENTS In March, 1996, the Company commenced a private offering of common stock, whereby the Company is offering 12,000,000 shares at $.50 per share. The Company reserved the right to increase the offering to 14,000,000 shares. There is no minimum amount in the offering, and proceeds from the sale of the shares will be used by the Company as subscriptions are accepted without any escrow. If all shares offered are sold, the net proceeds from the offering are estimated to be approximately $5,500,000 after deducting Placement Agent fees and estimated offering expenses of $500,000. F-23 SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED The following estimates of proved and unproved developed reserve quantities and related standardized measure of discounted net cash flow are estimates only, and do not purport to reflect realizable values or fair market values of the Company's reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Additionally, the price of oil has been very volatile and downward changes in prices can significantly effect 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 reserves are located in the United States. Proved reserves are estimated reserves of crude oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment and operating methods. The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses. The estimated future net cash flows are then discounted using a rate of 10% a year to reflect the estimated timing of the future cash flows. F-24
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED (CONTINUED) PROVED OIL AND GAS RESERVE QUANTITIES (All within the United States) Oil Gas reserves reserves (bbls.) (Mcf.) -------- --------- Balance December 1, 1992 ................. 105,973 1,485,556 Revisions of previous estimates ...... (10,970) (200,049) Extensions, discoveries and other additions .................... 59,193 1,175,421 Production ........................... (12,448) (155,786) --------- ---------- Balance November 30, 1993 ................ 141,748 2,305,142 Revisions of previous estimates ...... (125) (455,946) Sales of reserves .................... (20,392) (95,714) Extensions, discoveries and other additions .................... 1,745 1,700,289 Production ........................... (11,286) (159,041) -------- --------- Balance November 30, 1994 ................ 111,690 3,294,730 Revisions of previous estimates ...... (1,438) (98,536) Sales of reserves .................... (36,425) (10,228) Extensions, discoveries and other additions .................... 582 9,375 Production ........................... (8,224) (132,924) ------- --------- Balance November 30, 1995 ................ 66,185 3,062,417 ========= ========= Proved developed reserves November 30, 1993 .................... 82,798 1,155,946 November 30, 1994 .................... 52,740 1,103,203 November 30, 1995 .................... 7,235 870,890
F-25
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED (CONTINUED) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES Year ended November 30, ----------------------------------------- 1995 1994 1993 ----------- ------------ --------- Future cash inflows ................................................. $ 3,449,000 $ 5,041,000 $ 4,980,000 Future production and development costs ................................................. (2,478,000) (3,051,000) (2,661,000) Future income tax expenses .......................................... -- -- -- ----------- ----------- ----------- Future net cash flows ............................................... 971,000 1,990,000 2,319,000 10% annual discount for estimated timing of cash flows ............................................................. (544,000) (907,000) (959,000) ----------- ----------- ----------- Standardized measure of discounted future net cash flows ............................................................. $ 427,000 $ 1,083,000 $ 1,360,000 =========== ========== ========== The following are the principal sources of changes in the standardized measure of discounted future net cash flows: Year ended November 30, ---------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Beginning balance ................................................... $ 1,084,000 $ 1,360,000 $ 1,429,000 Expenditures which reduced future development costs ......................................... (3,000) (146,000) (67,000) Acquisition of proved reserves ..................................... -- -- -- Sale of proved reserves ............................................ (81,000) (102,000) -- Sales and transfers of oil and gas produced, net of production costs .................................................. (140,000) (143,000) (229,000) Net increase (decrease) in price ............................................................. (593,000) (568,000) (485,000) Net (increase) decrease in costs ............................................................. 247,000 3,000 94,000 Extensions and discoveries .......................................... 165,000 526,000 631,000 Revisions of previous quantity estimates ................................................ (38,000) (214,000) (140,000) Accretion of discount ............................................... 108,000 136,000 143,000 Effect of change in timing and other ......................................................... (322,000) 231,000 (16,000) --------- ---------- ---------- Ending balance ...................................................... $ 427,000 $ 1,083,000 $ 1,360,000 =========== ========== ========== F-26 SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED (CONTINUED) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES (CONTINUED) Costs Incurred Year ended November 30, -------------------------------------- 1995 1994 1993 ---------- ---------- ---------- Property acquisition costs - unproved leases ............................................................ $ -- $ 7,000 $ 12,000 Property acquisition costs - proved properties .......................................................... 30,000 37,000 228,000 Exploration costs ............................................................ -- -- 2,000 Development costs ............................................................ 30,000 146,000 67,000 (1) Net of lease sale proceeds of $169,000. Production Costs Year ended November 30, ---------------------------------------- 1995 1994 1993 ----------- ----------- ---------- Lease operating expense ...................................................... $ 95,000 $ 176,000 $ 155,000 Production tax ............................................................... 20,000 56,000 30,000 ----------- ----------- ----------- $ 115,000 $ 232,000 $ 185,000 =========== =========== =========== Other Information Year ended November 30, -------------------------------------- 1995 1994 1993 ----------- ----------- --------- Net revenue (revenue less production costs, ad valorem and severance taxes) ..................................................................... $ 140,000 $ 142,000 $ 299,000 Amortization per equivalent barrel of production* ............................................................. 2.33 3.18 3.14 Price per bbl. (oil) ......................................................... 14.27 12.75 14.09 Production cost per bbl. (oil) ............................................... 6.34 8.21 7.91 Price per Mcf. (gas) ......................................................... 1.02 1.44 1.52 Production cost per Mcf. (gas) ............................................... .47 .86 .55 Price per net equivalent bbl.* ............................................... 8.33 9.86 10.74 Production cost per net equivalent bbl.* ..................................... 3.78 6.06 4.81 * Natural gas converted to equivalent barrels using conversion ratio of 6:1. F-27 SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED (CONTINUED) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES (CONTINUED) Year ended November 30, ------------------------------------ 1995 1994 1993 --------- ------------ --------- Present value of proved reserves Proved developed ......................................................... $ 266,000 $ 650,000 $ 785,000 Proved undeveloped ....................................................... 161,000 433,000 575,000 ----------- ----------- ---------- Total ...................................................................... $ 427,000 $ 1,083,000 $1,360,000 ========== =========== ========= Future net revenues of proved reserves Proved developed ......................................................... $ 383,000 $ 950,000 $1,129,000 Proved undeveloped ....................................................... 588,000 1,040,000 1,190,000 ---------- ---------- --------- Total ...................................................................... $ 971,000 $ 1,990,000 $2,319,000 ========== ========== ==========
F-28 EXHIBIT INDEX Exhibit Description Page No. - ------- ------------ -------- 2.1 Stock Acquisition Agreement and Plan of Reorganization dated N/A April 12, 1995 between Chaparral Resources, Inc., and the Shareholders of Central Asian Petroleum, Inc., incorporated by reference to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 2.2 Escrow Agreement dated April 12, 1995 between Chaparral N/A Resources, Inc., the Shareholders of Central Asian Petroleum, Inc. and Barry W. Spector, incorporated by reference to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 3.1 Restated Articles of Incorporation and Amendments, N/A 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 N/A Incorporation dated April 20, 1988, incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 3.3 Bylaws, as amended through December 5, 1995. 3.4 Articles of Amendment to the Restated Articles of N/A Incorporation and Amendments dated June 21, 1995, incorporated by reference to Exhibit B to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 10.1 Royalty Participation Plan dated June 15, 1982, incorporated N/A by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 10.2 Chaparral Resources, Inc. 1989 Stock Warrant Plan effective N/A May 1, 1989, incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 10.3 Target Benefit Plan effective December 1, 1990 incorporated N/A by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1991. 10.4 Deferred Compensation and Death Benefit Plan as amended N/A November 15, 1991 incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1991. 10.5 Promissory Note dated November 1, 1995 from Chaparral N/A Resources, Inc., to Brae Group, Inc., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated November 1, 1995. 10.6 Purchase Agreement, dated effective January 12, 1996, between the Company and Guntekin Koksal (purchase of CAP-G shares). 10.7 Letter Agreement, dated January 3, 1996, between the Company and certain stockholders of Darka Petrol Ticaret Ltd. Sti., together with Exhibits A--E. 10.8 Amendment, effective March 4, 1996, to the Letter Agreement revising the terms pursuant to which the Company is to acquire all shares of CAP(G) stock owned by Darka Petrol Ticaret Ltd. Sti. 21 Subsidiaries of the Registrant. 23 Consent of Grant Thornton for S-8. 24 Power of Attorney. 27 Financial Data Schedule. EX-1 2 EXHIBIT 3.3 As Amended December 5, 1995 BYLAWS OF CHAPARRAL RESOURCES, INC. ARTICLE Offices The principal office of the corporation shall be designated from time to time by the corporation and may be within or outside of Colorado. The corporation may have such other offices, either within or outside Colorado, as the board of directors may designate or as the business of the corporation may require from time to time. The registered office of the corporation required by the Colorado Business Corporation Act to be maintained in Colorado may be, but need not be, identical with the principal office, and the address of the registered office may be changed from time to time by the board of directors. ARTICLE I Shareholders Section 1. Annual Meeting. The annual meeting of the shareholders shall be held each year on a date and at a time fixed by the board of directors of the corporation (or by the chairman of the board or the president in the absence of action by the board of directors), for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the election of directors is not held on the day fixed as provided herein for any annual meeting of the shareholders, or any adjournment thereof, the board of directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as it may conveniently be held. A shareholder may apply to the district court in the county in Colorado where the corporation's principal office is located or, if the corporation has no principal office in Colorado, to the district court of the county in which the corporation's registered office is located to seek an order that a shareholder meeting be held (i) if an annual meeting was not held within six months after the close of the corporation's most recently ended fiscal year or fifteen months after its last annual meeting, whichever is earlier, or (ii) if the shareholder participated in a proper call of or proper demand for a special meeting and notice of the special meeting was not given within thirty days after the date of the call or the date the last of the demands necessary to require calling of the meeting was received by the corporation, or the special meeting was not held in accordance with the notice. Section 2. Special Meetings. Unless otherwise prescribed by statute, special meetings of the shareholders may be called for any purpose by the chairman of the board, by the president or by the board of directors. The president shall call a special meeting of the shareholders if the corporation receives one or more written demands for the meeting, stating the purpose or purposes for which it is to be held, signed and dated by holders of shares representing at least ten percent of all the votes entitled to be cast on any issue proposed to be considered at the meeting. Section 3. Place of Meeting. The board of directors may designate any place, either within or outside Colorado, as the place for any annual meeting or any special meeting called by the board of directors. A waiver of notice signed by all shareholders entitled to vote at a meeting may designate any place, either within or outside Colorado, as the place for such meeting. If no designation is made, or if a special meeting is called other than by the board, the place of meeting shall be the principal office of the corporation. Section 4. Notice of Meeting. Written notice stating the place, date, and hour of the meeting shall be given not less than ten nor more than sixty days before the date of the meeting, except that (i) if the number of authorized shares is to be increased, at least thirty days' notice shall be given, or (ii) any other longer notice period is required by the Colorado Business Corporation Act. Notice of a special meeting shall include a description of the purpose or purposes of the meeting. Notice of an annual meeting need not include a description of the purpose or purposes of the meeting except the purpose or purposes shall be stated with respect to (i) an amendment to the articles of incorporation of the corporation, (ii) a merger or share exchange in which the corporation is a party and, with respect to a share exchange, in which the corporation's shares will be acquired, (iii) a sale, lease, exchange or other disposition, other than in the usual and regular course of business, of all or substantially all of the property of the corporation or of another entity which this corporation controls, in each case with or without the goodwill, (iv) a dissolution of the corporation, or (v) any other purpose for which a statement of purpose is required by the Colorado Business Corporation Act. Notice shall be given personally or by mail, private carrier, telegraph, teletype, electronically transmitted facsimile or other form of wire or wireless communication by or at the direction of the president, the secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed and if in a comprehensible form, such notice shall be deemed to be given and effective when deposited in the United States mail, addressed to the shareholder at his address as it appears in the corporation's current record of shareholders, with postage prepaid. If notice is given other than by mail, and provided that such notice is in a comprehensible form, the notice is given and effective on the date received by the shareholder. If requested by the person or persons lawfully calling such meeting, the secretary shall give notice thereof at corporate expense. No notice need be sent to any shareholder if three successive notices mailed to the last known address of such shareholder have been returned as undeliverable until such time as another address for such shareholder is made known to the corporation by such - 2 - shareholder. In order to be entitled to receive notice of any meeting, a shareholder shall advise the corporation in writing of any change in such shareholder's mailing address as shown on the corporation's books and records. When a meeting is adjourned to another date, time or place, notice need not be given of the new date, time or place if the new date, time or place of such meeting is announced before adjournment at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which may have been transacted at the original meeting. If the adjournment is for more than 120 days, or if a new record date is fixed for the adjourned meeting, a new notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting as of the new record date. A shareholder may waive notice of a meeting before or after the time and date of the meeting by a writing signed by such shareholder. Such waiver shall be delivered to the corporation for filing with the corporate records. Further, by attending a meeting either in person or by proxy, a shareholder waives objection to lack of notice or defective notice of the meeting unless the shareholder objects at the beginning of the meeting to the holding of the meeting or the transaction of business at the meeting because of lack of notice or defective notice. By attending the meeting, the shareholder also waives any objection to consideration at the meeting of a particular matter not within the purpose or purposes described in the meeting notice unless the shareholder objects to considering the matter when it is presented. Section 5. Fixing of Record Date. For the purpose of determining shareholders entitled to (i) notice of or vote at any meeting of shareholders or any adjournment thereof, (ii) receive distributions or share dividends, or (iii) demand a special meeting, or to make a determination of shareholders for any other proper purpose, the board of directors may fix a future date as the record date for any such determination of shareholders, such date in any case to be not more than seventy days, and, in case of a meeting of shareholders, not less than ten days, prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed by the directors, the record date shall be the date on which notice of the meeting is mailed to shareholders, or the date on which the resolution of the board of directors providing for a distribution is adopted, as the case may be. When a determination of shareholders entitled to vote at any meeting of shareholders is made as provided in this Section, such determination shall apply to any adjournment thereof unless the board of directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. Notwithstanding the above, the record date for determining the shareholders entitled to take action without a meeting or entitled to be given notice of action so taken shall be the date a writing upon which the action is taken is first received by the corporation. The record date for determining shareholders entitled to demand a special meeting shall be the date of the earliest of any of the demands pursuant to which the meeting is called. Section 6. Voting Lists. The secretary shall make, at the earlier of ten days before each meeting of shareholders or two business days after notice - 3 - of the meeting has been given, a complete list of the shareholders entitled to be given notice of such meeting or any adjournment thereof. The list shall be arranged by voting groups and within each voting group by class or series of shares, shall be in alphabetical order within each class or series, and shall show the address of and the number of shares of each class or series held by each shareholder. For the period beginning the earlier of ten days prior to the meeting or two business days after notice of the meeting is given and continuing through the meeting and any adjournment thereof, this list shall be kept on file at the principal office of the corporation, or at a place (which shall be identified in the notice) in the city where the meeting will be held. Such list shall be available for inspection on written demand by any shareholder (including for the purpose of this Section 6 any holder of voting trust certificates) or his agent or attorney during regular business hours and during the period available for inspection. The original stock transfer books shall be prima facie evidence as to the shareholders entitled to examine such list or to vote at any meeting of shareholders. Any shareholder, his agent or attorney may copy the list during regular business hours and during the period it is available for inspection, provided (i) the shareholder has been a shareholder for at least three months immediately preceding the demand or holds at least five percent of all outstanding shares of any class of shares as of the date of the demand, (ii) the demand is made in good faith and for a purpose reasonably related to the demanding shareholder's interest as a shareholder, (iii) the shareholder describes with reasonable particularity the purpose and the records the shareholder desires to inspect, (iv) the records are directly connected with the described purpose, and (v) the shareholder pays a reasonable charge covering the costs of labor and material for such copies, not to exceed the estimated cost of production and reproduction. Section 7. Recognition Procedure for Beneficial Owners. The board of directors may adopt by resolution a procedure whereby a shareholder of the corporation may certify in writing to the corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified person or persons. The resolution may set forth (i) the types of nominees to which it applies, (ii) the rights or privileges that the corporation will recognize in a beneficial owner, which may include rights and privileges other than voting, (iii) the form of certification and the information to be contained therein, (iv) if the certification is with respect to a record date, the time within which the certification must be received by the corporation, (v) the period for which the nominee's use of the procedure is effective, and (vi) such other provisions with respect to the procedure as the board deems necessary or desirable. Upon receipt by the corporation of a certificate complying with the procedure established by the board of directors, the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the registered holders of the number of shares specified in place of the shareholder making the certification. Section 8. Quorum and Manner of Acting. One-third of the votes entitled to be cast on a matter by a voting group shall constitute a quorum of that voting group for action on the matter. If less than one-third of such votes are represented at a meeting, a majority of the votes so represented may adjourn the - 4 - meeting from time to time without further notice, for a period not to exceed 120 days for any one adjournment. If a quorum is present at such adjourned meeting, any business may be transacted which might have been transacted at the meeting as originally noticed. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, unless the meeting is adjourned and a new record date is set for the adjourned meeting. If a quorum exists, action on a matter other than the election of directors by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless the vote of a greater number or voting by classes is required by law or the articles of incorporation. Section 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy by signing an appointment form or similar writing, either personally or by his duly authorized attorney-in-fact. A shareholder may also appoint a proxy by transmitting or authorizing the transmission of a telegram, teletype, or other electronic transmission providing a written statement of the appointment to the proxy, a proxy solicitor, proxy support service organization, or other person duly authorized by the proxy to receive appointments as agent for the proxy, or to the corporation. The transmitted appointment shall set forth or be transmitted with written evidence from which it can be determined that the shareholder transmitted or authorized the transmission of the appointment. The proxy appointment form or similar writing shall be filed with the secretary of the corporation before or at the time of the meeting. The appointment of a proxy is effective when received by the corporation and is valid for eleven months unless a different period is expressly provided in the appointment form or similar writing. Any complete copy, including an electronically transmitted facsimile, of an appointment of a proxy may be substituted for or used in lieu of the original appointment for any purpose for which the original appointment could be used. Revocation of a proxy does not affect the right of the corporation to accept the proxy's authority unless (i) the corporation had notice that the appointment was coupled with an interest and notice that such interest is extinguished is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment, or (ii) other notice of the revocation of the appointment is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment. Other notice of revocation may, in the discretion of the corporation, be deemed to include the appearance at a shareholders' meeting of the shareholder who granted the proxy and his voting in person on any matter subject to a vote at such meeting. The death or incapacity of the shareholder appointing a proxy does not affect the right of the corporation to accept the proxy's authority unless notice of the death or incapacity is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment. - 5 - The corporation shall not be required to recognize an appointment made irrevocable if it has received a writing revoking the appointment signed by the shareholder (including a shareholder who is a successor to the shareholder who granted the proxy) either personally or by his attorney-in-fact, notwithstanding that the revocation may be a breach of an obligation of the shareholder to another person not to revoke the appointment. Subject to Section 11 and any express limitation on the proxy's authority appearing on the appointment form, the corporation is entitled to accept the proxy's vote or other action as that of the shareholder making the appointment. Section 10. Voting of Shares. Each outstanding share, regardless of class, shall be entitled to one vote, except in the election of directors, and each fractional share shall be entitled to a corresponding fractional vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class or classes are limited or denied by the articles of incorporation as permitted by the Colorado Business Corporation Act. Cumulative voting shall not be permitted in the election of directors or for any other purpose. Each record holder of stock shall be entitled to vote in the election of directors and shall have as many votes for each of the shares owned by him as there are directors to be elected and for whose election he has the right to vote. At each election of directors, that number of candidates equaling the number of directors to be elected, having the highest number of votes cast in favor of their election, shall be elected to the board of directors. Except as otherwise ordered by a court of competent jurisdiction upon a finding that the purpose of this Section would not be violated in the circumstances presented to the court, the shares of the corporation are not entitled to be voted if they are owned, directly or indirectly, by a second corporation, domestic or foreign, and the first corporation owns, directly or indirectly, a majority of the shares entitled to vote for directors of the second corporation except to the extent the second corporation holds the shares in a fiduciary capacity. Redeemable shares are not entitled to be voted after notice of redemption is mailed to the holders and a sum sufficient to redeem the shares has been deposited with a bank, trust company or other financial institution under an irrevocable obligation to pay the holders the redemption price on surrender of the shares. Section 11. Corporation's Acceptance of Votes. If the name signed on a vote, consent, waiver, proxy appointment, or proxy appointment revocation corresponds to the name of a shareholder, the corporation, if acting in good faith, is entitled to accept the vote, consent, waiver, proxy appointment or proxy appointment revocation and give it effect as the act of the shareholder. If the name signed on a vote, consent, waiver, proxy appointment or proxy appointment revocation does not correspond to the name of a shareholder, the corporation, if acting in good faith, is nevertheless entitled to accept the - 6 - vote, consent, waiver, proxy appointment or proxy appointment revocation and to give it effect as the act of the shareholder if: (i) the shareholder is an entity and the name signed purports to be that of an officer or agent of the entity; (ii) the name signed purports to be that of an administrator, executor, guardian or conservator representing the shareholder and, if the corporation requests, evidence of fiduciary status acceptable to the corporation has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (iii) the name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the corporation requests, evidence of this status acceptable to the corporation has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (iv) the name signed purports to be that of a pledgee, beneficial owner or attorney-in-fact of the shareholder and, if the corporation requests, evidence acceptable to the corporation of the signatory's authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (v) two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-tenants or fiduciaries, and the person signing appears to be acting on behalf of all the co-tenants or fiduciaries; or (vi) the acceptance of the vote, consent, waiver, proxy appointment or proxy appointment revocation is otherwise proper under rules established by the corporation that are not inconsistent with this Section 11. The corporation is entitled to reject a vote, consent, waiver, proxy appointment or proxy appointment revocation if the secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the shareholder. Neither the corporation nor its officers nor any agent who accepts or rejects a vote, consent, waiver, proxy appointment or proxy appointment revocation in good faith and in accordance with the standards of this Section is liable in damages for the consequences of the acceptance or rejection. Section 12. Informal Action by Shareholders. Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting if a written consent (or counterparts thereof) that sets forth the action so taken is signed by all of the shareholders entitled to vote with respect to the subject matter thereof and received by the corporation. Such - 7 - consent shall have the same force and effect as a unanimous vote of the shareholders and may be stated as such in any document. Action taken under this Section 12 is effective as of the date the last writing necessary to effect the action is received by the corporation, unless all of the writings specify a different effective date, in which case such specified date shall be the effective date for such action. If any shareholder revokes his consent as provided for herein prior to what would otherwise be the effective date, the action proposed in the consent shall be invalid. The record date for determining shareholders entitled to take action without a meeting is the date the corporation first receives a writing upon which the action is taken. Any shareholder who has signed a writing describing and consenting to action taken pursuant to this Section 12 may revoke such consent by a writing signed by the shareholder describing the action and stating that the shareholder's prior consent thereto is revoked, if such writing is received by the corporation before the effectiveness of the action. Section 13. Meetings by Telecommunication. Any or all of the shareholders may participate in an annual or special shareholders' meeting by, or the meeting may be conducted through the use of, any means of communication by which all persons participating in the meeting may hear each other during the meeting. A shareholder participating in a meeting by this means is deemed to be present in person at the meeting. ARTICLE II Board of Directors Section 1. General Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of its board of directors, except as otherwise provided in the Colorado Business Corporation Act or the articles of incorporation. Section 2. Number, Qualifications and Tenure. The number of directors of the corporation shall be eight. A director shall be a natural person who is eighteen years of age or older. A director need not be a resident of Colorado or a shareholder of the corporation. Directors shall be elected at each annual meeting of shareholders. Each director shall hold office until the next annual meeting of shareholders following his election and thereafter until his successor shall have been elected and qualified. Directors shall be removed in the manner provided by the Colorado Business Corporation Act. Section 3. Vacancies. Any director may resign at any time by giving written notice to the corporation. Such resignation shall take effect at the time the notice is received by the corporation unless the notice specifies a later effective date. Unless otherwise specified in the notice of resignation, the corporation's acceptance of such resignation shall not be necessary to make it effective. Any vacancy on the board of directors may be filled by the affirmative vote of a majority of the shareholders or the board of directors. If - 8 - the directors remaining in office constitute fewer than a quorum of the board, the directors may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. If elected by the directors, the director shall hold office until the next annual shareholders' meeting at which directors are elected. If elected by the shareholders, the director shall hold office for the unexpired term of his predecessor in office; except that, if the director's predecessor was elected by the directors to fill a vacancy, the director elected by the shareholders shall hold office for the unexpired term of the last predecessor elected by the shareholders. Section 4. Regular Meetings. A regular meeting of the board of directors shall be held without notice immediately after and at the same place as the annual meeting of shareholders. The board of directors may provide by resolution the time and place, either within or outside Colorado, for the holding of additional regular meetings without other notice. Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president or any two directors. The person or persons authorized to call special meetings of the board of directors may fix any place, either within or outside Colorado, as the place for holding any special meeting of the board of directors called by them, provided that no meeting shall be called outside the state of Colorado unless a majority of the board of directors has so authorized. Section 6. Notice. Notice of any special meeting shall be given at least two days prior to the meeting by written notice either personally delivered or mailed to each director at his business address, or by notice transmitted by telegraph, telex, electronically transmitted facsimile or other form of wire or wireless communication. If mailed, such notice shall be deemed to be given and to be effective on the earlier of (i) three days after such notice is deposited in the United States mail, properly addressed, with postage prepaid, or (ii) the date shown on the return receipt, if mailed by registered or certified mail return receipt requested. If notice is given by telex, electronically transmitted facsimile or other similar form of wire or wireless communication, such notice shall be deemed to be given and to be effective when sent, and with respect to a telegram, such notice shall be deemed to be given and to be effective when the telegram is delivered to the telegraph company. If a director has designated in writing one or more reasonable addresses or facsimile numbers for delivery of notice to him, notice sent by mail, telegraph, telex, electronically transmitted facsimile or other form of wire or wireless communication shall not be deemed to have been given or to be effective unless sent to such addresses or facsimile numbers, as the case may be. A director may waive notice of a meeting before or after the time and date of the meeting by a writing signed by such director. Such waiver shall be delivered to the corporation for filing with the corporate records. Further, a director's attendance at or participation in a meeting waives any required notice to him of the meeting unless at the beginning of the meeting, or promptly upon his later arrival, the director objects to holding the meeting or transacting business at the meeting because of lack of notice or defective notice and does not thereafter vote for or assent to action taken at the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. - 9 - Section 7. Quorum. A majority of the number of directors fixed by the board of directors pursuant to Section 2 or, if no number is fixed, a majority of the number in office immediately before the meeting begins, shall constitute a quorum for the transaction of business at any meeting of the board of directors. If less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, for a period not to exceed sixty days at any one adjournment. Section 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. Section 9. Compensation. By resolution of the board of directors, any director may be paid any one or more of the following: his expenses, if any, of attendance at meetings, a fixed sum for attendance at each meeting, a stated salary as director, or such other compensation as the board of directors and the director may reasonably agree upon. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 10. Presumption of Assent. A director of the corporation who is present at a meeting of the board of directors or committee of the board at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless (i) the director objects at the beginning of the meeting, or promptly upon his arrival, to the holding of the meeting or the transaction of business at the meeting and does not thereafter vote for or assent to any action taken at the meeting, (ii) the director contemporaneously requests that his dissent or abstention as to any specific action taken be entered in the minutes of the meeting, or (iii) the director causes written notice of his dissent or abstention as to any specific action to be received by the presiding officer of the meeting before its adjournment or by the corporation promptly after the adjournment of the meeting. A director may dissent to a specific action at a meeting, while assenting to others. The right to dissent to a specific action taken at a meeting of the board of directors or a committee of the board shall not be available to a director who voted in favor of such action. Section 11. Committees. By resolution adopted by a majority of all the directors in office when the action is taken, the board of directors may designate from among its members an executive committee and one or more other committees, and appoint one or more members of the board of directors to serve on them. To the extent provided in the resolution, each committee shall have all the authority of the board of directors, except that no such committee shall have the authority to (i) authorize distributions, (ii) approve or propose to shareholders actions or proposals required by the Colorado Business Corporation Act to be approved by shareholders, (iii) fill vacancies on the board of - 10 - directors or any committee thereof, (iv) amend articles of incorporation, (v) adopt, amend or repeal the bylaws, (vi) approve a plan of merger not requiring shareholder approval, (vii) authorize or approve the reacquisition of shares unless pursuant to a formula or method prescribed by the board of directors, or (viii) authorize or approve the issuance or sale of shares, or contract for the sale of shares or determine the designations and relative rights, preferences and limitations of a class or series of shares, except that the board of directors may authorize a committee or officer to do so within limits specifically prescribed by the board of directors. The committee shall then have full power within the limits set by the board of directors to adopt any final resolution setting forth all preferences, limitations and relative rights of such class or series and to authorize an amendment of the articles of incorporation stating the preferences, limitations and relative rights of a class or series for filing with the Secretary of State under the Colorado Business Corporation Act. Sections 4, 5, 6, 7, 8 and 12 of Article III, which govern meetings, notice, waiver of notice, quorum, voting requirements and action without a meeting of the board of directors, shall apply to committees and their members appointed under this Section 11. Neither the designation of any such committee, the delegation of authority to such committee, nor any action by such committee pursuant to its authority shall alone constitute compliance by any member of the board of directors or a member of the committee in question with his responsibility to conform to the standard of care set forth in Article III, Section 14 of these bylaws. Section 12. Informal Action by Directors. Any action required or permitted to be taken at a meeting of the directors or any committee designated by the board of directors may be taken without a meeting if a written consent (or counterparts thereof) that sets forth the action so taken is signed by all of the directors entitled to vote with respect to the action taken. Such consent shall have the same force and effect as a unanimous vote of the directors or committee members and may be stated as such in any document. Unless the consent specifies a different effective date, action taken under this Section 12 is effective at the time the last director signs a writing describing the action taken, unless, before such time, any director has revoked his consent by a writing signed by the director and received by the president or the secretary of the corporation. Section 13. Telephonic Meetings. The board of directors may permit any director (or any member of a committee designated by the board) to participate in a regular or special meeting of the board of directors or a committee thereof through the use of any means of communication by which all directors participating in the meeting can hear each other during the meeting. A director participating in a meeting in this manner is deemed to be present in person at the meeting. Section 14. Standard of Care. A director shall perform his duties as a director, including without limitation his duties as a member of any committee of the board, in good faith, in a manner he reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent - 11 - person in a like position would exercise under similar circumstances. In performing his duties, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by the persons herein designated. However, he shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause such reliance to be unwarranted. A director shall not be liable to the corporation or its shareholders for any action he takes or omits to take as a director if, in connection with such action or omission, he performs his duties in compliance with this Section 14. The designated persons on whom a director is entitled to rely are (i) one or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented, (ii) legal counsel, public accountant, or other person as to matters which the director reasonably believes to be within such person's professional or expert competence, or (iii) a committee of the board of directors on which the director does not serve if the director reasonably believes the committee merits confidence. ARTICLE III Officers and Agents Section 1. General. The officers of the corporation shall be a president, a secretary and a treasurer, each of whom shall be a natural person eighteen years of age or older. The board of directors or an officer or officers authorized by the board may appoint such other officers, assistant officers, committees and agents, assistant secretaries and assistant treasurers, as they may consider necessary. The board of directors or the officer or officers authorized by the board shall from time to time determine the procedure for the appointment of officers, their term of office, their authority and duties and their compensation. One person may hold more than one office. In all cases where the duties of any officer, agent or employee are not prescribed by the bylaws or by the board of directors, such officer, agent or employee shall follow the orders and instructions of the president of the corporation. Section 2. Appointment and Term of Office. The officers of the corporation shall be appointed by the board of directors at each annual meeting of the board held after each annual meeting of the shareholders. If the appointment of officers is not made at such meeting or if an officer or officers are to be appointed by another officer or officers of the corporation, such appointments shall be made as soon thereafter as conveniently may be. Each officer shall hold office until the first of the following occurs: his successor shall have been duly appointed and qualified, his death, his resignation, or his removal in the manner provided in Section 3. Section 3. Resignation and Removal. An officer may resign at any time by giving written notice of resignation to the corporation. The resignation is effective when the notice is received by the corporation unless the notice specifies a later effective date. Any officer or agent may be removed at any time with or without cause by the board of directors or an officer or officers authorized by the board or - 12 - by the shareholders. Such removal does not affect the contract rights, if any, of the corporation or of the person so removed. The appointment of an officer or agent shall not in itself create contract rights. Section 4. Vacancies. A vacancy in any office, however occurring, may be filled by the board of directors, or by the officer or officers authorized by the board, for the unexpired portion of the officer's term. If an officer resigns and his resignation is made effective at a later date, the board of directors, or officer or officers authorized by the board, may permit the officer to remain in office until the effective date and may fill the pending vacancy before the effective date if the board of directors or officer or officers authorized by the board provide that the successor shall not take office until the effective date. In the alternative, the board of directors, or officer or officers authorized by the board of directors, may remove the officer at any time before the effective date and may fill the resulting vacancy. Section 5. Chairman of the Board. The chairman of the board of directors, if elected and if available, or if not elected or not available, the president, shall preside at all meetings of the stockholders and of the board of directors. Section 6. President. Subject to the direction and supervision of the board of directors, the president shall have general and active control of the corporation's affairs and business and general supervision of its officers, agents and employees. Unless otherwise directed by the board of directors, the president shall attend in person or by substitute appointed by him, or shall execute on behalf of the corporation written instruments appointing a proxy or proxies to represent the corporation, at all meetings of the stockholders of any other corporation in which the corporation holds any stock. On behalf of the corporation, the president may in person or by substitute or by proxy execute written waivers of notice and consents with respect to any such meetings. At all such meetings and otherwise, the president, in person or by substitute or proxy, may vote the stock held by the corporation, execute written consents and other instruments with respect to such stock, and exercise any and all rights and powers incident to the ownership of said stock, subject to the instructions, if any, of the board of directors. The president shall have custody of the treasurer's bond, if any. Section 7. Vice Presidents. If elected, the vice presidents shall assist the chairman of the board and the president and shall perform such duties as may be assigned to them by the chairman of the board and the president or by the board of directors. In the absence of the chairman of the board and the president, the vice president, if any (or, if more than one, the vice presidents in the order designated by the board of directors, or if the board makes no such designation, then the vice president designated by the chairman of the board or by the president, or if neither the board, the chairman of the board nor the president makes any such designation, the senior vice president as determined by first election to that office), shall have the powers and perform the duties of the chairman of the board and the president. Section 8. Secretary. The secretary shall (i) prepare and maintain as permanent records the minutes of the proceedings of the shareholders and the board of directors, a record of all actions taken by the shareholders or board - 13 - of directors without a meeting, a record of all actions taken by a committee of the board of directors in place of the board of directors on behalf of the corporation, and a record of all waivers of notice of meetings of shareholders and of the board of directors or any committee thereof, (ii) see that all notices are duly given in accordance with the provisions of these bylaws and as required by law, (iii) serve as custodian of the corporate records and of the seal of the corporation and affix the seal to all documents when authorized by the board of directors, (iv) keep at the corporation's registered office or principal place of business a record containing the names and addresses of all shareholders in a form that permits preparation of a list of shareholders arranged by voting group and by class or series of shares within each voting group, that is alphabetical within each class or series and that shows the address of, and the number of shares of each class or series held by, each shareholder, unless such a record shall be kept at the office of the corporation's transfer agent or registrar, (v) maintain at the corporation's principal office the originals or copies of the corporation's articles of incorporation, bylaws, minutes of all shareholders' meetings and records of all action taken by shareholders without a meeting for the past three years, all written communications within the past three years to shareholders as a group or to the holders of any class or series of shares as a group, a list of the names and business addresses of the current directors and officers, a copy of the corporation's most recent corporate report filed with the Secretary of State, and financial statements showing in reasonable detail the corporation's assets and liabilities and results of operations for the last three years, (vi) have general charge of the stock transfer books of the corporation, unless the corporation has a transfer agent, (vii) authenticate records of the corporation, and (viii) in general, perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the president or by the board of directors. Assistant secretaries, if any, shall have the same duties and powers, subject to supervision by the secretary. The directors and/or shareholders may however respectively designate a person other than the secretary or assistant secretary to keep the minutes of their respective meetings. Any books, records, or minutes of the corporation may be in written form or in any form capable of being converted into written form within a reasonable time. Section 9. Treasurer. The treasurer shall be the principal financial officer of the corporation, shall have the care and custody of all funds, securities, evidences of indebtedness and other personal property of the corporation and shall deposit the same in accordance with the instructions of the board of directors. He shall receive and give receipts and acquittances for money paid in on account of the corporation, and shall pay out of the corporation's funds on hand all bills, payrolls and other just debts of the corporation of whatever nature upon maturity. He shall perform all other duties incident to the office of the treasurer and, upon request of the board, shall make such reports to it as may be required at any time. He shall, if required by the board, give the corporation a bond in such sums and with such sureties as shall be satisfactory to the board, conditioned upon the faithful performance of his duties and for the restoration to the corporation of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. He shall have such other powers and - 14 - perform such other duties as may from time to time be prescribed by the board of directors or the president. The assistant treasurers, if any, shall have the same powers and duties, subject to the supervision of the treasurer. The treasurer shall also be the principal accounting officer of the corporation. He shall prescribe and maintain the methods and systems of accounting to be followed, keep complete books and records of account as required by the Colorado Business Corporation Act, prepare and file all local, state and federal tax returns, prescribe and maintain an adequate system of internal audit and prepare and furnish to the president and the board of directors statements of account showing the financial position of the corporation and the results of its operations. ARTICLE IV Stock Section 1. Certificates. The board of directors shall be authorized to issue any of its classes of shares with or without certificates. The fact that the shares are not represented by certificates shall have no effect on the rights and obligations of shareholders. If the shares are represented by certificates, such shares shall be represented by consecutively numbered certificates signed, either manually or by facsimile, in the name of the corporation by the president and secretary or by one or more other persons designated by the board of directors. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, such certificate may nonetheless be issued by the corporation with the same effect as if he were such officer at the date of its issue. Certificates of stock shall be in such form and shall contain such information consistent with law as shall be prescribed by the board of directors. If shares are not represented by certificates, within a reasonable time following the issue or transfer of such shares, the corporation shall send the shareholder a complete written statement of all of the information required to be provided to holders of uncertificated shares by the Colorado Business Corporation Act. Section 2. Consideration for Shares. Certificated or uncertificated shares shall not be issued until the shares represented thereby are fully paid. The board of directors may authorize the issuance of shares for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed or other securities of the corporation. Future services shall not constitute payment or partial payment for shares of the corporation. The promissory note of a subscriber or an affiliate of a subscriber shall not constitute payment or partial payment for shares of the corporation unless the note is negotiable and is secured by collateral, other than the shares being purchased, having a fair market value at least equal to the principal amount of the note. For purposes of this Section 2, "promissory note" means a negotiable instrument on which there is an obligation to pay independent of collateral and does not include a non-recourse note. Section 3. Lost Certificates. In case of the alleged loss, destruction or mutilation of a certificate of stock, the board of directors may direct the - 15 - issuance of a new certificate in lieu thereof upon such terms and conditions in conformity with law as the board may prescribe. The board of directors may in its discretion require an affidavit of lost certificate and/or a bond in such form and amount and with such surety as it may determine before issuing a new certificate. Section 4. Transfer of Shares. Upon surrender to the corporation or to a transfer agent of the corporation of a certificate of stock duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, and receipt of such documentary stamps as may be required by law and evidence of compliance with all applicable securities laws and other restrictions, the corporation shall issue a new certificate to the person entitled thereto, and cancel the old certificate. Every such transfer of stock shall be entered on the stock books of the corporation which shall be kept at its principal office or by the person and the place designated by the board of directors. Except as otherwise expressly provided in Article II, Sections 7 and 11, and except for the assertion of dissenters' rights to the extent provided in Article 113 of the Colorado Business Corporation Act, the corporation shall be entitled to treat the registered holder of any shares of the corporation as the owner thereof for all purposes, and the corporation shall not be bound to recognize any equitable or other claim to, or interest in, such shares or rights deriving from such shares on the part of any person other than the registered holder, including without limitation any purchaser, assignee or transferee of such shares or rights deriving from such shares, unless and until such other person becomes the registered holder of such shares, whether or not the corporation shall have either actual or constructive notice of the claimed interest of such other person. Section 5. Transfer Agent, Registrars and Paying Agents. The board may at its discretion appoint one or more transfer agents, registrars and agents for making payment upon any class of stock, bond, debenture or other security of the corporation. Such agents and registrars may be located either within or outside Colorado. They shall have such rights and duties and shall be entitled to such compensation as may be agreed. ARTICLE V Indemnification of Certain Persons Section 1. Indemnification. For purposes of Article VI, a "Proper Person" means any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether formal or informal, by reason of the fact that he is or was a director, officer, employee, fiduciary or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary or agent of any foreign or domestic profit or nonprofit corporation or of any partnership, joint venture, trust, profit or nonprofit unincorporated association, limited liability company, or other enterprise or employee benefit plan. The corporation shall indemnify any Proper Person against reasonably incurred expenses (including attorneys' fees), judgments, penalties, fines - 16 - (including any excise tax assessed with respect to an employee benefit plan) and amounts paid in settlement reasonably incurred by him in connection with such action, suit or proceeding if it is determined by the groups set forth in Section 4 of this Article that he conducted himself in good faith and that he reasonably believed (i) in the case of conduct in his official capacity with the corporation, that his conduct was in the corporation's best interests, or (ii) in all other cases (except criminal cases), that his conduct was at least not opposed to the corporation's best interests, or (iii) in the case of any criminal proceeding, that he had no reasonable cause to believe his conduct was unlawful. A Proper Person will be deemed to be acting in his official capacity while acting as a director, officer, employee or agent on behalf of this corporation and not while acting on this corporation's behalf for some other entity. No indemnification shall be made under this Article VI to a Proper Person with respect to any claim, issue or matter in connection with a proceeding by or in the right of a corporation in which the Proper Person was adjudged liable to the corporation or in connection with any proceeding charging that the Proper Person derived an improper personal benefit, whether or not involving action in an official capacity, in which he was adjudged liable on the basis that he derived an improper personal benefit. Further, indemnification under this Section in connection with a proceeding brought by or in the right of the corporation shall be limited to reasonable expenses, including attorneys' fees, incurred in connection with the proceeding. Section 2. Right to Indemnification. The corporation shall indemnify any Proper Person who was wholly successful, on the merits or otherwise, in defense of any action, suit, or proceeding as to which he was entitled to indemnification under Section l of this Article VI against expenses (including attorneys' fees) reasonably incurred by him in connection with the proceeding without the necessity of any action by the corporation other than the determination in good faith that the defense has been wholly successful. Section 3. Effect of Termination of Action. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the person seeking indemnification did not meet the standards of conduct described in Section l of this Article VI. Entry of a judgment by consent as part of a settlement shall not be deemed an adjudication of liability, as described in Section 2 of this Article VI. Section 4. Groups Authorized to Make Indemnification Determination. Except where there is a right to indemnification as set forth in Sections 1 or 2 of this Article or where indemnification is ordered by a court in Section 5, any indemnification shall be made by the corporation only as authorized in the specific case upon a determination by a proper group that indemnification of the Proper Person is permissible under the circumstances because he has met the applicable standards of conduct set forth in Section l of this Article. This determination shall be made by the board of directors by a majority vote of those present at a meeting at which a quorum is present, which quorum shall consist of directors not parties to the proceeding ("Quorum"). If a Quorum cannot be obtained, the determination shall be made by a majority vote of a committee of the board of directors designated by the board, which committee - 17 - shall consist of two or more directors not parties to the proceeding, except that directors who are parties to the proceeding may participate in the designation of directors for the committee. If a Quorum of the board of directors cannot be obtained and the committee cannot be established, or even if a Quorum is obtained or the committee is designated and a majority of the directors constituting such Quorum or committee so directs, the determination shall be made by (i) independent legal counsel selected by a vote of the board of directors or the committee in the manner specified in this Section 4 or, if a Quorum of the full board of directors cannot be obtained and a committee cannot be established, by independent legal counsel selected by a majority vote of the full board (including directors who are parties to the action) or (ii) a vote of the shareholders. Section 5. Court-Ordered Indemnification. Any Proper Person may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction for mandatory indemnification under Section 2 of this Article, including indemnification for reasonable expenses incurred to obtain court-ordered indemnification. If the court determines that such Proper Person is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not he met the standards of conduct set forth in Section l of this Article or was adjudged liable in the proceeding, the court may order such indemnification as the court deems proper except that if the Proper Person has been adjudged liable, indemnification shall be limited to reasonable expenses incurred in connection with the proceeding and reasonable expenses incurred to obtain court-ordered indemnification. Section 6. Advance of Expenses. Reasonable expenses (including attorneys' fees) incurred in defending an action, suit or proceeding as described in Section 1 may be paid by the corporation to any Proper Person in advance of the final disposition of such action, suit or proceeding upon receipt of (i) a written affirmation of such Proper Person's good faith belief that he has met the standards of conduct prescribed by Section l of this Article VI, (ii) a written undertaking, executed personally or on the Proper Person's behalf, to repay such advances if it is ultimately determined that he did not meet the prescribed standards of conduct (the undertaking shall be an unlimited general obligation of the Proper Person but need not be secured and may be accepted without reference to financial ability to make repayment), and (iii) a determination is made by the proper group (as described in Section 4 of this Article VI) that the facts as then known to the group would not preclude indemnification. Determination and authorization of payments shall be made in the same manner specified in Section 4 of this Article VI. Section 7. Witness Expenses. The sections of this Article VI do not limit the corporation's authority to pay or reimburse expenses incurred by a director in connection with an appearance as a witness in a proceeding at a time when he has not been made a named defendant or respondent in the proceeding. Section 8. Report to Shareholders. Any indemnification of or advance of expenses to a director in accordance with this Article VI, if arising out of a proceeding by or on behalf of the corporation, shall be reported in writing to - 18 - the shareholders with or before the notice of the next shareholders' meeting. If the next shareholder action is taken without a meeting at the instigation of the board of directors, such notice shall be given to the shareholders at or before the time the first shareholder signs a writing consenting to such action. ARTICLE VI Provision of Insurance By action of the board of directors, notwithstanding any interest of the directors in the action, the corporation may purchase and maintain insurance, in such scope and amounts as the board of directors deems appropriate, on behalf of any person who is or was a director, officer, employee, fiduciary or agent of the corporation, or who, while a director, officer, employee, fiduciary or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary or agent of any other foreign or domestic corporation or of any partnership, joint venture, trust, profit or nonprofit unincorporated association, limited liability company or other enterprise or employee benefit plan, against any liability asserted against, or incurred by, him in that capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of Article VI or applicable law. Any such insurance may be procured from any insurance company designated by the board of directors of the corporation, whether such insurance company is formed under the laws of Colorado or any other jurisdiction of the United States or elsewhere, including any insurance company in which the corporation has an equity interest or any other interest, through stock ownership or otherwise. ARTICLE VII Miscellaneous Section 1. Seal. The corporate seal of the corporation shall be circular in form and shall contain the name of the corporation and the words, "Seal, Colorado." Section 2. Fiscal Year. The fiscal year of the corporation shall be as established by the board of directors. Section 3. Amendments. The board of directors shall have power, to the maximum extent permitted by the Colorado Business Corporation Act, to make, amend and repeal the bylaws of the corporation at any regular or special meeting of the board unless the shareholders, in making, amending or repealing a particular bylaw, expressly provide that the directors may not amend or repeal such bylaw. The shareholders also shall have the power to make, amend or repeal the bylaws of the corporation at any annual meeting or at any special meeting called for that purpose. - 19 - Section 4. Gender. The masculine gender is used in these bylaws as a matter of convenience only and shall be interpreted to include the feminine and neuter genders as the circumstances indicate. Section 5. Conflicts. In the event of any irreconcilable conflict between these bylaws and either the corporation's articles of incorporation or applicable law, the latter shall control. Section 6. Definitions. Except as otherwise specifically provided in these bylaws, all terms used in these bylaws shall have the same definition as in the Colorado Business Corporation Act. - 20 - EX-2 3 EXHIBIT 10.6 PURCHASE AGREEMENT This purchase agreement ("Purchase Agreement"), is effective January 12, 1996 ("Effective Date") and is by and between Chaparral Resources Inc. ("Chaparral") and Guntekin Koksal ("Shareholder") for the purchase by Chaparral of certain shares of Central Asian Petroleum (Guernsey) Limited ["CAP(G)"] stock owned by Shareholder as described below. 1. Purchase of 75,000 shares ("Stock A") Chaparral shall purchase all of Shareholder's right, title and interest in and to 75,000 shares of CAP(G) stock ("Stock A") in return for (i) U.S. $1,975,000, plus (ii) 900,000 shares of restricted common stock of Chaparral. The purchase price shall be paid as follows: a. Chaparral shall deposit U.S. $150,000.00 ("Escrow Funds") with the escrow agent pursuant to the escrow agreement ("Escrow Agreement") (attached hereto and incorporated by this reference as Exhibit A to this Purchase Agreement) in cash or other immediately available funds on or before January 19, 1996. Such amount shall be paid to Shareholder upon "Closing A" (the closing to occur on or before March 11, 1996 and as further described in this Purchase Agreement), or shall be otherwise disposed of under the terms of the Escrow Agreement. Should Chaparral fail to Close for reasons other than (i) the failure of Shareholder to Close, (ii) the material failure of any of Shareholder's representations herein to be true and accurate or the material breach by Shareholder of its warranties hereunder, or (iii) the discovery of any material adverse effects during Chaparral's due diligence review under Clause 3(b) below, then the escrowed funds shall be paid to Shareholder as Shareholder's full and exclusive remedy for Chaparral's failure to Close; b. Chaparral shall pay U.S. $600,000.00 to the Shareholder, and deliver 900,000 shares of restricted common stock of Chaparral to Shareholder as directed in writing by the Shareholder, at Closing A; and c. Provided that Closing A has occurred, Chaparral shall pay U.S. $1,225,000 to Shareholder in four payments of $306,250 each on or before: June 11, 1996, September 11, 1996, December 11, 1996 and March 11, 1997, respectively (each such payment referred to here as "Installment Payment"). In such case Chaparral shall either: (i) Put in place a bank guarantee, performance bond or bank letter of credit ("Security") acceptable to Shareholder (and Shareholder may not unreasonably withhold such acceptance) for the benefit of Shareholder for the purpose of securing Shareholder's right to receive such U.S. $1,225,000 pursuant to the payment schedule described above (which Security shall provide for subject amount to decline in accordance with payments made according to such payment schedule); or (ii) Not provide Security, in which case Shareholder shall have a lien on Stock A, and Clause 1(d) shall become applicable. d. If Chaparral has not put in place Security pursuant to Clause 1(c)(i), and if Chaparral also fails to pay any one of the Installment Payments pursuant to the payment schedule described in Clause 1(c) above, then the ownership of Stock A shall be deemed to have reverted to Shareholder, and Chaparral shall take all steps necessary to immediately deliver Stock A to Shareholder. In such a case, Chaparral shall also become obligated to pay Shareholder interest on the amount associated with such missed installment payment, and the amount of any of the Installment Payments which subsequently may become due (beginning on the respective due date of any such Installment Payment) compounded on a monthly basis, at the rate per annum equal to the one (1) month term, LIBOR rate for U.S. dollar deposits, as published by The Wall Street Journal or if not published, then by the Financial Times of London, plus five percent, applicable on the first Business Day prior to the due date of such unpaid Installment Payment, and thereafter on the first Business Day of each succeeding one (1) month term ("Agreed Interest Rate"). Chaparral shall have the right to mitigate such interest by making payments to Shareholder at any time. During such 180 day period Chaparral shall have the right to participate in the marketing of Stock A, at Chaparral's sole cost. Shareholder shall sell Stock A, subject to the rights of the other CAP(G) Members [including Chaparral and CAP(D)] to purchase such Stock A pursuant to the CAP(G) Articles of Association, to any buyer which Chaparral may designate [including either Chaparral or CAP(D)] and pursuant to terms as Chaparral may designate, provided that such terms provide for full payment to be completed within such 180 day period. The proceeds of any such sale of Stock A shall be allocated: (i) first to Shareholder in satisfaction of any unpaid Installment Payments (inclusive of any Installment Payments not yet due), plus applicable interest (less any amounts paid by Chaparral in order to mitigate interest); and (ii) second, should there be any surplus, to Chaparral. In the event that there continues to be, upon the conclusion of any such sale, any amount owing by Chaparral to Shareholder as provided above, then Shareholder may take advantage of all remedies available to it in order to recover any such deficiency. e. If, at the end of such 180 day period, no sale has been made as described in Clause l(d) above, then Chaparral, at Chaparral's sole cost, shall provide for an auction (to occur on or before the date 45 days after the end of such 180 day period) wherein Shareholder shall sell Stock A to the highest cash bidder [including either Chaparral or CAP(D)] without any obligation to obtain the approval of Chaparral, subject to the rights of the other CAP(G) Members [including Chaparral and CAP(D)] to purchase such Stock A pursuant to the CAP(G) Articles of Association. The proceeds of any such sale of Stock A shall be allocated: (i) first to Shareholder in satisfaction of any unpaid Installment Payments (inclusive of any Installment Payments not yet due), plus applicable interest (less any amounts paid by Chaparral in order to mitigate interest); and (ii) second, should there be any surplus, to Chaparral. In the event that there continues to be, upon the conclusion of any such sale, any amount owing by Chaparral to Shareholder as provided above, then Shareholder may take advantage of all remedies available to it in order to recover any such deficiency. 2. Option for 50.000 shares ("Stock B") a. Upon Closing A having occurred, and Chaparral having discharged any obligations as may have accrued pursuant to 1(c) above, Chaparral shall have the option ("Option"), until the earliest of either: (i) December 11, 1997; or (ii) any share assignment pursuant to Paragraph 9 of that certain September 16, 1994 Protocol among the Members of CAP(G); to purchase, and take delivery of (in accordance with Chaparral's written instructions), all of Shareholder's right, title and interest in and to 50,000 shares of CAP(G) ("Stock B") in return for U.S. $1,625,000 and 200,000 of restricted common stock of Chaparral, and any such exercise of option shall be referred to as "Closing B". On the date of Closing B Chaparral shall transfer such 200,000 shares of restricted common stock of Chaparral to Shareholder (in accordance with Shareholder's written instructions). Chaparral shall also have the obligation to either: (iii) pay such U.S. $1,625,000 to Shareholder at Closing B; or (iv) at any time prior to December 11, 1997, pay Shareholder such U.S.$1,625,000 with interest at the Agreed Interest Rate beginning on the date of Closing B. In the event that Chaparral opts to pay Shareholder pursuant to (iv) above, then Chaparral shall have the option to either: (v) Provide for Security acceptable to Shareholder (and Shareholder may not unreasonably withhold such acceptance) for the benefit of Shareholder for the purpose of securing Shareholder's right to receive such U.S. $1,625,000 plus applicable interest on or before December 11, 1997, or (vi) Not provide such Security, in which case Shareholder shall have a lien on Stock B, and Clause 2(b) shall become applicable. b. If Chaparral has not put in place Security pursuant to Clause 2(a)(v), and if Chaparral also fails to pay such U.S. $1,625,000 plus applicable interest on or before December 11, 1997, then the ownership of Stock B shall be deemed to have reverted to Shareholder, and Chaparral shall take all steps necessary to immediately deliver Stock B to Shareholder. Chaparral shall have the right to mitigate applicable interest by making payments to Shareholder at any time. During such 180 day period Chaparral shall have the right to participate in the marketing of Stock B, at Chaparral's sole cost. Shareholder shall sell Stock B, subject to the rights of the other CAP(G) Members [including Chaparral and CAP(D)] to purchase such Stock B pursuant to the CAP(G) Articles of Association, to any buyer which Chaparral may designate [including either Chaparral or CAP(D)] and pursuant to terms as Chaparral may designate, provided that such terms provide for full payment to be completed within such 180 day period. The proceeds of any such sale of Stock B shall be allocated: (i) first to Shareholder in satisfaction of the unpaid U.S. $1,625,000 plus applicable interest (less any amounts paid by Chaparral in order to mitigate interest); and (ii) second, should there be any surplus, to Chaparral. In the event that there continues to be, upon the conclusion of any such sale, any amount owing by Chaparral to Shareholder as provided above, then Shareholder may take advantage of all remedies available to it in order to recover any such deficiency. c. If, at the end of such 180 day period, no sale has been made as described in Clause 2(b) above, then Chaparral, at Chaparral's sole cost, shall provide for an auction (to occur on or before the date 45 days after the end of such 180 day period) wherein Shareholder shall sell Stock B to the highest cash bidder [including either Chaparral or CAP(D)] (without any obligation to obtain the approval of Chaparral), subject to the rights of the other CAP(G) Members [including Chaparral and CAP(D)] to purchase such Stock B pursuant to the CAP(G) Articles of Association. The proceeds of any such sale of Stock B shall be allocated: (i) first to Shareholder in satisfaction of the unpaid U.S. $1,625,000 plus applicable interest (less any amounts paid by Chaparral in order to mitigate interest), and (ii) second, should there be any surplus, to Chaparral. In the event that there continues to be, upon the conclusion of any such sale, any amount owing by Chaparral to Shareholder as provided above, then Shareholder may take advantage of all remedies available to it in order to recover any such deficiency. 3. Conditions a. Shareholder shall be entitled to all the benefits and receipts and shall be liable for all costs, charges, expenses, liabilities and obligations in respect of the Stock A and/or Stock B, respectively (other than those which may be specifically excluded from Shareholder's representations and warranties), which accrue or relate to any period before Closing A or Closing B, respectively. Shareholder shall reimburse and indemnify Chaparral against any such costs, charges, expenses, liabilities and obligations which are paid by Chaparral. Chaparral shall be entitled to all the benefits and receipts and shall be liable for all costs, charges, expenses, liabilities and obligations in respect of Stock A and/or Stock B, respectively (other than those which Shareholder have represented and warranted against by virtue of this Purchase Agreement) which accrue or relate to any period after Closing A and/or Closing B, respectively. Chaparral shall reimburse and indemnify Shareholder against any such costs, charges, expenses, liabilities and obligations which are paid by Shareholder. b. Chaparral shall conduct a due diligence review to confirm the accuracy of the representations contained herein, and to verify the accuracy of the information and data supplied and to be supplied by Shareholder to Chaparral, and to determine the existence of any adverse conditions or circumstances pertaining to Stock A and Stock B, as applicable. Shareholder agrees that it shall give Chaparral reasonable access to the records and files of Shareholder as required to complete its due diligence review before Closing A and/or Closing B, as applicable. Chaparral agrees to keep all information provided by Shareholder regarding Stock A and Stock B confidential. c. Should there be, at the time of Closing A, in the reasonable discretion of Chaparral, a material inconsistency or breach in respect of the representations or warranties given by Shareholder in or pursuant to this Purchase Agreement, or a material adverse condition pertaining to Stock A and/or Stock B, then, at Chaparral's option: (i) this Purchase Agreement and the Escrow Agreement may be terminated and the parties shall have no further obligations to one another, or (ii) the parties shall nevertheless proceed to Closing A. Notwithstanding the foregoing, however, if there are material inconsistencies or breaches due to the intentional or reckless acts or omissions of Shareholder, then Chaparral may seek whatever remedies and compensation from Shareholder that may be available to it regardless of whether or not Chaparral elects to proceed to Closing A. 4. Representations and Warranties Shareholder represents and warrants to Chaparral as follows, which representations and warranties shall be deemed repeated at Closing A and Closing B, respectively, and which shall survive Closing A and Closing B, respectively: a. Shareholder has good and marketable title to Stock A and Stock B, free and clear of all liens, encumbrances and adverse claims of any nature; and there are no facts known to Shareholder which are likely to prejudice or endanger Stock A or Stock B. b. Shareholder have the full power and authority to enter into and perform the transactions hereunder, and do not require the consent of any other persons, firms or entities, and no person, firm or entity has any preferential purchase right with respect to any portion of Stock A and/or Stock B, nor is any portion of Stock A or Stock B subject to any pending or existing agreement to sell to any party. c. Shareholder has the sole legal and beneficial ownership of Stock A and Stock B, as applicable, in the aggregate representing twenty five percent (25%) of the outstanding stock of CAP(G), and Shareholder has no obligations to any third party with respect to any such stock. d. Shareholder shall ensure that the representations and warranties above shall be true and accurate. However, if notwithstanding the efforts of Shareholder, any matter or thing occurs of which any Shareholder is aware and which would be inconsistent with or in breach of any of those representations and warranties then that Shareholder shall promptly notify Chaparral thereof in writing. 5. Closing A At Closing A: a. Chaparral shall direct the "Escrow Agent" (as that term is defined in the Escrow Agreement) to deliver the Escrow Funds to Shareholder, b. Chaparral shall pay U.S. $600,000 to Shareholder in immediately available funds, c. Chaparral shall deliver 900,000 shares of restricted common stock in Chaparral to the Shareholder in accordance with Shareholder's written instructions; and d. Shareholder shall deliver all certificates representing Stock A to Chaparral, together with executed stock powers and such other instruments as may be required to vest complete ownership of Stock A in Chaparral. 6. Closing B At Closing B: a. Shareholder shall deliver all certificates representing Stock B to Chaparral, together with executed stock powers and such other instruments as may be required to vest complete ownership of Stock B in Chaparral. b. Chaparral shall deliver 200,000 shares of restricted common stock in Chaparral to the Shareholder in accordance with Shareholder's written instructions (Chaparral shall pay U.S. $1,625,00.00 to Shareholder in accordance with Clause 2 above). 7. Undertaking by Chaparral and Central Asian Petroleum (Delaware) Guernsey Chaparral, and Chaparral's wholly-owned subsidiary, Central Asian Petroleum (Delaware) Guernsey ["CAP(D)] covenant that during the period of the Option they shall not exercise their respective votes as Members of CAP(G) to cause any assignment of CAP(G) shares to Chaparral or any Affiliate of Chaparral pursuant to Paragraph 9 of that certain September 16, 1994 Protocol among the Members of CAP(G). For this purpose "Affiliate" means a legal entity that: (i) controls; (ii) is controlled by; or (iii) is controlled by an entity which controls, Chaparral. For this purpose "Control" means the right to exercise, directly or indirectly, at least 50% of the voting rights in a legal entity. 8. Shareholder's Undertakings a. Shareholder shall not solicit, directly or indirectly, any other party, nor negotiate with any other party, for the sale of any portion of Stock A or Stock B until the failure of Closing A and/or Closing B, as applicable. b. Shareholder shall immediately notify Chaparral of any information Shareholder may obtain regarding third parties which may be interested in purchasing CAP(G) stock. 9. Appointment of Alternate Director a. Shareholder has executed and delivered the Appointment of Alternate Director of CAP(G) (appointing Matthew R. Hoovler) attached hereto and incorporated by reference as Exhibit B, contemporaneously with this Purchase Agreement, and Shareholder also hereby covenants that he shall not: i. attend any future meetings of the CAP(G) Board as a member of the CAP(G) Board of Directors, or in any way exercise his vote as a Director of CAP(G); ii. remove Matthew R. Hoovler, as the case may be, from office as alternate Director; iii. appoint any other alternate Director; or iv. resign as Director before March 11, 1996, or at all should Closing A occur. 10. CAP(G) Board Chaparral and Shareholder undertake that they shall not participate in any CAP(G) Members' meeting, vote or agreement of any kind in conjunction with a change of the CAP(G) Directors until March 12, 1996, or Closing A, whichever comes first. 11. KKM Board After Closing A Chaparral and CAP(D) shall initiate a CAP(G) Board meeting or agreement wherein they shall vote to cause Guntekin Koksal to become a CAP(G) appointed KKM board member, subject to Chaparral's and CAP(D)'s right subsequently to exercise their CAP(G) Board authority, according to their complete discretion to change the composition of the CAP(G) appointed KKM board members. 12. Confidentiality a. Seller shall keep all information regarding this Purchase Agreement confidential for a period of three (3) years from the Effective Date and shall not disclose any such information to any person or entity not a Party to this Purchase Agreement, except: (1) to an affiliate of Shareholder, provided such Shareholder maintains confidentiality as provided in this Clause 10; (2) to the extent such information is required to be furnished in compliance with any applicable laws or regulations, or pursuant to any legal proceedings or because of any order of any court binding upon Shareholder; (3) to the extent such information must be disclosed pursuant to any rules or requirements of any government or stock exchange having jurisdiction over Shareholder, or any of its affiliates; (4) to its employees, subject to taking customary precautions to ensure such data and information is kept confidential; (5) any such information which, through no fault of a Party, becomes a part of the public domain. (b) Disclosure pursuant to Clause 11 (a)(1) and Clause 11 (a)(4) shall not be made unless prior to such disclosure the disclosing Party has obtained a written undertaking from the recipient party to keep the data and information strictly confidential. 13. Applicable Law And Dispute Settlement a. This Agreement shall be governed by, construed, interpreted and enforced in accordance with the substantive laws of Switzerland, to the exclusion of any conflicts of law rules which would refer the matter to the laws of another jurisdiction. b. Any dispute, controversy or claim arising out of or in relation to or in connection with this Agreement or the operations carried out under this Agreement, including without limitation any dispute as to the existence, construction, validity, interpretation, enforceability, termination or breach of this Agreement, shall be exclusively and finally settled by international arbitration, and any Party may submit such a dispute, controversy or claim to international arbitration. c. A single arbitrator shall be appointed by unanimous consent of the Parties. If the Parties, however, cannot reach agreement on an arbitrator within 15 days of the submission of a notice of arbitration, then the appointing authority for the implementation of such procedure shall be the International Chamber of Commerce's International Court of Arbitration, who shall appoint an independent arbitrator who does not have any financial interest in the dispute, controversy or claim. d. Unless otherwise expressly agreed in writing by the Parties to the arbitration proceedings: (1) The arbitration proceedings shall be held in Geneva, Switzerland. (2) The arbitration proceedings shall be conducted in the English language and the arbitrator(s) shall be fluent in the English language; (3) The arbitrator shall be and remain at all times wholly independent and impartial; (4) The arbitration proceedings shall be conducted in accordance with the Arbitration Rules of UNCITRAL ("Rules"), in effect on the Effective Date, which Rules are deemed incorporated by reference into this clause. (5) The costs of the arbitration proceedings (including attorneys' fees and costs) shall be borne in the manner determined by the arbitrator; (6) The decision of the sole arbitrator shall be: reduced to writing and state the reasons upon which it is based; final and binding without the right of appeal; the sole and exclusive remedy regarding any claims, counterclaims, issues or accounting presented to the arbitrator; carried out without delay and without recourse to any judicial proceedings in any jurisdiction whatsoever seeking annulment, setting aside, modification or any diminution or impairment of its terms or effect; any cash awards shall be made and promptly paid in U.S. dollars free of any deduction or offset; any costs or fees incident to enforcing the award, shall to the maximum extent permitted by law, be charged against the Party resisting such enforcement; (7) The arbitrator shall neither have nor exercise any power to act as amicable compositeur or ex aequo et bono; or to award special, indirect, consequential, punitive or other similar damages; provided, however, that the award may include appropriate punitive damages where a Party has engaged in delaying and dilatory actions; the arbitrator may also award interim relief and grant specific performance. (8) Any cash award shall include interest from the date of any breach or violation of this Agreement, as determined by the arbitral award, and from the date of the award until paid in full, with interest at commercial rates to be determined by the arbitrator. (9) Any Party to this Covenant which is not initially a Party to an arbitration commenced pursuant to this Paragraph 8 consents to being made a party thereto following such commencement at the instance of any party to such arbitration, and is itself entitled to become a party thereto at its own instance. Every Part,v to this Covenant shall be bound by an award issued in any arbitration pursuant to this Paragraph 8 regardless of whether or not it participated in such arbitration, so long as it was duly notified of such arbitration. (10) Judgment upon the award may be entered in any court having jurisdiction over the person or the assets of the Party owing the judgment or application may be made to such court for a judicial acceptance of the award and an order of enforcement, as the case may be, and (11) The arbitrator shall not be of the same nationality as any of the Parties or their ultimate parent entities. 14. Severance of Invalid Provisions If and as for so long as any provision of this Purchase Agreement shall be deemed to be judged invalid for any reason whatsoever, such invalidity shall not affect the validity or operation of any other provision of this Purchase Agreement except only so far as shall be necessary to give effect to the construction of such invalidity, and any such invalid provision shall be deemed severed from this Purchase Agreement without affecting the validity of the balance of this Purchase Agreement. 15. Entire Agreement This Agreement is the entire agreement of the Parties and supersedes all prior agreements, rights and/or obligations, understandings and/or negotiations of the Parties regarding Stock A and/or Stock B. CHAPARRAL RESOURCES, INC. /s/ Paul V. Hoovler - ------------------------- By Paul V. Hoovler CENTRAL ASIAN PETROLEUM (DELAWARE) LIMITED (for the purpose of Clauses 3, 12 and 13 only) /s/ Paul V. Hoovler - ------------------------ By Paul V. Hoovler /s/ Guntekin Koksal - ------------------------ Guntekin Koksal EX-3 4 EXHIBIT 10.7 January 3, 1996 Mr. Okan Ozdemir Mr. Dursun Acikbas Mr. Cetin Berkmen Mr. Tugay Ince Mr. Gazanfer Ugural Darka Petrol Ticaret Ltd. Sti. Dear Sirs: Chaparral Resources, Inc., ("Chaparral") is pleased to present this offer to you as shareholders ("Shareholders") of Darka Petrol Ticaret Ltd. Sti., ("Darka"), to purchase all of the issued and outstanding capital stock of Darka, ("Stock"). Note that this offer has already been signed by Chaparral and by Barry W. Spector (as escrow agent). Central Asian Petroleum (Delaware) Limited ["CAP(D)"] will fax you a version signed by CAP(D) under separate cover. Two signed duplicate "hard copies" of the entire Letter Agreement, along with a third signed version of the Escrow Agreement, are being couriered to you. Upon the full execution of this facsimile Letter Agreement by all of the Shareholders [and by Darka and CAP(D), for purposes of Paragraph 3(f) only], including full execution of Exhibits A-E by the relevant parties, and upon: (i) receipt by Chaparral of facsimile transmission of such executed Letter Agreement and Exhibits A-E; and (ii) receipt by Escrow Agent (as described in the Escrow Agreement attached hereto and incorporated by this reference as Exhibit A to this Letter Agreement) of facsimile transmission of Exhibit B prior to 4:00 p.m., United States Mountain Time, on January 4, 1996, this Letter Agreement shall constitute a binding contract, effective as of January 4, 1996 ("Effective Date") among the parties as to the following terms and conditions: 1. The purchase price for all of Shareholders' right, title and interest in and to the Stock shall be (i) $2,000,000.00 U.S., plus (ii) 625,000 shares of restricted common stock of Chaparral. The purchase price shall be paid as follows: a. $300,000.00 shall be deposited with the escrow agent pursuant to the Escrow Agreement in cash or other immediately available funds on January 5, 1996, to be paid to Shareholders upon Closing, or as otherwise disposed of under the terms of the Escrow Agreement. Should Chaparral fail to Close for reasons other than (i) the failure of Shareholders to Close, (ii) the material failure of any of Shareholders' representations herein to be true and accurate or the material breach by Shareholders of their warranties hereunder, or (iii) the discovery of any material adverse effects during Chaparral's due diligence review under Section 3, below, then the escrowed funds shall be paid to Shareholders as Shareholders' full and exclusive remedy for Chaparral's failure to Close; and, b. The balance, being $1,700,000.00 shall be paid to Shareholders, at Closing, and the 625,000 shares of restricted common stock of Chaparral shall be delivered at Closing to the Shareholders as directed in writing by the Shareholders. 2. Closing will occur, pursuant to the conditions hereof, within 60 days following the Effective Date of this Letter Agreement. 3. Chaparral's offer is made subject to the following: a. Shareholders shall terminate all employees of Darka, pay all termination benefits or other obligations of Darka to such employees, and pay or otherwise discharge all other obligations of Darka to third parties, all on or before closing. b. Shareholders shall be entitled to all the benefits and receipts and shall be liable for all costs, charges, expenses, liabilities and obligations in respect of the Stock and Darka (other than those which may be specifically excluded from Shareholders' representations and warranties) which accrue or relate to any period before Closing. Shareholders shall reimburse and indemnify Chaparral against any such costs, charges, expenses, liabilities and obligations which are paid by Chaparral. Chaparral shall be entitled to all the benefits and receipts and shall be liable for all costs, charges, expenses, liabilities and obligations in respect of the Stock and Darka (other than those which Shareholders have represented and warranted against by virtue of this Letter Agreement) which accrue or relate to any period after Closing. Chaparral shall reimburse and indemnify Shareholders against any such costs, charges, expenses, liabilities and obligations which are paid by Shareholders. c. Chaparral shall conduct a due diligence review to confirm the accuracy of the representations contained herein, and to verify the accuracy of the information and data supplied and to be supplied by Shareholders to Chaparral, and to determine the existence of any adverse conditions or circumstances pertaining to the Stock or Darka. Shareholders agree that they shall give Chaparral access to the records and files of Darka as required to complete its due diligence review. Chaparral agrees to keep all information provided by Shareholders or by Darka regarding the Stock or regarding Darka confidential. d. Should there be, at the time of Closing, in the reasonable discretion of Chaparral, a material inconsistency or breach in respect of the representations or warranties given by Shareholders in or pursuant to this Letter Agreement, or a material adverse condition pertaining to the Stock or to Darka, then, at Chaparral's option, (i) this Letter Agreement and the Escrow Agreement may be terminated and the parties shall have no further obligations to one another, or (ii) the parties shall nevertheless proceed to Closing. Notwithstanding the foregoing, however, if there are material inconsistencies or breaches due to the intentional or reckless acts or omissions of Shareholders, then Chaparral may seek whatever remedies and compensation from Shareholders that may be available to it regardless of whether or not Chaparral elects to proceed to Closing. e. The Shareholders covenant that they shall suspend until the date 60 days after the Effective Date any and all claims of default or forfeiture by Chaparral with respect to payments required of Chaparral to CAP(G) on December 1, 1995, as asserted in Darka's letter to Mr. Murat Yazici dated December 12, 1995. f. Darka, Chaparral and CAP(D) covenant that they shall not initiate, attend, vote or otherwise participate in any CAP(G) Members meetings, voting, or agreements of any kind until the date 60 days after the Effective Date, or Closing, whichever comes first. g. Chaparral shall sell the fixed assets of Darka to Shareholders for U.S. $20,000 on the date of Closing. 4. Shareholders represent and warrant to Chaparral as follows, which representations and warranties shall be deemed repeated at Closing and which shall survive Closing: a. Shareholders have good and marketable title to the Stock, and Darka has good and marketable title to all of its assets and properties, free and clear of all liens, encumbrances and adverse claims of any nature; Darka is not subject to any liens, judgments, decrees, encumbrances, debts or adverse claims of any nature; and there are no facts known to Shareholders which are likely to prejudice or endanger the Stock, Darka or the assets and properties of Darka. b. With respect to any contracts pertaining to Darka, Darka, to the best of Shareholders' knowledge, is not in material violation or breach of any of the terms or conditions stated therein, nor does Darka have any outstanding obligations in connection with any such contracts. c. Shareholders have the full power and authority to enter into and perform the transactions hereunder, and do not require the consent of any other persons, firms or entities, and no person, firm or entity has any preferential purchase right with respect to any portion of the Stock, nor is any portion of the Stock subject to any pending or existing agreement to sell any portion of the Stock. d. The undersigned are the sole and exclusive shareholders of all authorized, issued and outstanding capital stock or other rights of ownership of Darka. e. Darka has the sole legal and beneficial ownership of 125,000 shares of Central Asian Petroleum (Guernsey) Limited stock, representing twenty five percent (25%) of the outstanding stock of Central Asian Petroleum (Guernsey) Limited, (herein "CAP(G)"), and Darka has no obligations to any third party with respect to that stock. f. Shareholders shall ensure that the representations and warranties above shall be true and accurate. However, if notwithstanding those efforts of Shareholders, any matter or thing occurs of which any Shareholder is aware and which would be inconsistent with or in breach of any of those representations and warranties, then that Shareholder shall promptly notify Chaparral thereof in writing. 5. a. Messrs. Okan Ozdemir and Dursun Acikbas have executed and delivered the respective Appointments of Alternate Director of CAP(G) (appointing, respectively, Mr. Frank C. Alexander, Jr. and Mr. Jay W. McGee) attached hereto and incorporated by reference as Exhibit B and C, contemporaneously with this Letter Agreement, and each of them also hereby covenants that he shall not: i. attend any future meetings of the CAP(G) Board as a member of the CAP(G) Board of Directors, or in any way exercise his vote as a Director of CAP(G); ii. remove Mr. Frank C. Alexander, Jr., or Mr. Jay McGee, as the case may be, from office as alternate Director; or iii. appoint any other alternate Directors for a period of 60 days following the Effective Date, or at all should Closing occur. b. Messrs. Okan Ozdemir and Dursun Acikbas have executed and delivered the respective Exclusive Proxies [appointing Mr. Paul Hoovler and Mr. Jay McGee, respectively, as their exclusive proxies to vote in their place as CAP(G) appointed KKM Board Members], attached hereto and incorporated by reference as Exhibits D and E, contemporaneously with this Letter Agreement, and each of them also hereby covenants that he shall not: i. attend any future meetings of the KKM Board as a member of the KKM Board of Directors, or in any way exercise his vote as a Director of KKM; ii. revoke the respective Exclusive Proxies to Messrs. Hoovler and McGee; or iii. provide such proxies to any other persons; for a period of 60 days following the Effective Date, or at all should Closing occur. 6. Closing shall occur at the offices of Chaparral, and at Closing: a. Chaparral shall direct the Escrow Agent to deliver the Escrow Funds to Shareholders; b. Chaparral shall pay $1,700,000 to Shareholders in immediately available funds; c. Chaparral shall deliver 625,000 shares of restricted common stock in Chaparral to the Shareholders in accordance with their written instructions; and d. Shareholders shall deliver all certificates representing the Stock to Chaparral, together with executed stock powers and such other instruments as may be required to vest complete ownership of the Stock and of Darka in Chaparral. 7. Upon Closing, Shareholders shall be deemed to have waived, any and all rights and claims of any nature, whether accruing before or after Closing, under any Member Agreements, Protocols, Minutes or agreements of any nature, pertaining to CAP(G), Chaparral and/or CAP(D). 8. This Letter Agreement shall be construed in accordance with the laws of the State of Colorado, United States of America. Any and all disputes arising hereunder which cannot be resolved by good faith negotiation shall be submitted to binding arbitration to be conducted by the American Arbitration Association (AAA) in accordance with its Commercial Arbitration Rules. All arbitration hearings shall be conducted in Denver, Colorado. 9. This offer will remain open through 4:00 p.m., Mountain Time, on January 4, 1996, unless rejected in writing by Shareholders prior to that time, upon which rejection this offer will be deemed revoked by Chaparral. By accepting this Letter Agreement Shareholders covenant to immediately courier to Chaparral and to Escrow Agent, respectively, fully executed "hard copies" of the respective documents as described in the first paragraph of this Letter Agreement. 10. Upon your acceptance of this offer, you agree not to solicit, directly or indirectly, any other party, nor to negotiate with any other party for the sale of any portion of the Stock for a period of 60 days after the Effective Date. This Letter Agreement may be executed in any number of counterparts and each such counterpart shall be deemed an original Agreement for all purposes; provided no party shall be bound by the terms of this Agreement unless and until all parties have executed a counterpart. For purposes of assembling all counterparts into one document, Chaparral is authorized to detach the signature page from one or more counterparts and, after signing by the respective party, attach each signed signature page to a counterpart. In the event that you wish to contact Chaparral with respect to this offer, please contact Mr. Paul V. Hoovler at (303) 293-2340. Very truly yours, CHAPARRAL RESOURCES, INC. /s/ Paul V. Hoovler - ------------------------------ Paul V. Hoovler, President SHAREHOLDERS /s/ Ikan Ozdemir - ------------------------------ Okan Ozdemir /s/ Dursan Acikbas - ------------------------------ Dursan Acikbas /s/ Cetin Berkmen - ------------------------------ Cetin Berkmen /s/ Tugay Ince - ------------------------------ Tugay Ince /s/ Gazanger ugural - ------------------------------ Gazanger Ugural Darka Petrol Ticaret Ltd. Sti. [for purposes of Paragraph 3(f) only] /s/ Okan Ozdemir - ------------------------------ by: Okan Ozdemir, President Central Asian Petroleum (Delaware) Limited [for purposes of Paragraph 3(f) only] /s/ Paul V. Hoovler - ------------------------------ by: Paul V. Hoovler, President EXHIBIT A ESCROW AGREEMENT This ESCROW AGREEMENT entered this 4th day of January, 1996, by and among the undersigned shareholders of Darka Petrol Ticaret Ltd. Sti., (collectively "Shareholders") and CHAPARRAL RESOURCES, INC., ("Chaparral") and Barry W. Spector ("Escrow Agent"). IN CONSIDERATION of the mutual covenants and agreements contained herein, the parties agree as follows: 1.1. This Escrow Agreement is entered into to provide for the deposit of earnest money required under the terms of that certain Letter Agreement between Shareholders and Chaparral effective January 4, 1996 (the "Letter Agreement"). 2. Upon the execution hereof, Chaparral shall deposit the sum of $300,000.00 U.S., ("Escrow Funds") in escrow with Escrow Agent, to be held in accordance with the terms of this Agreement. Disbursement of the Escrow Funds and delivery of the Resignations shall be in accordance with the following: (a) Should Escrow Agent receive a written certificate sworn to by Shareholders stating (i) that the Letter Agreement has expired or otherwise been terminated, (ii) that Chaparral is in default of its obligations to Close thereunder, and (iii) that a copy of such certificate has been delivered to Chaparral, then, if Escrow Agent does not receive a written objection thereto from Chaparral within 15 days following Escrow Agent's receipt of the certificate, Escrow Agent shall disburse the Escrow Funds to the Shareholders. (b) Should Escrow Agent receive a written certificate sworn to by the President of Chaparral stating (i) that the Letter Agreement has expired or otherwise been terminated, (ii) that the conditions of Closing thereunder were not met or satisfied by Shareholders, and (iii) that a copy of such certificate has been delivered to Shareholders, then, if Escrow Agent does not receive a written objection thereto from Shareholders within 15 days following Escrow Agent's receipt of the certificate, Escrow Agent shall disburse the Escrow Funds to Chaparral. (c) Should the Escrow Agent receive joint written instructions from Chaparral and Shareholders that Closing has occurred, Escrow Agent shall disburse the Escrow Funds to Shareholders. (d) Should Escrow Agent receive a timely, written objection, concerning the certificates referred to in (a) and (b), above, Escrow Agent shall continue to hold the Escrow Funds until it receives written instructions executed by both Shareholders and Chaparral, or until it receives a valid court order affecting the Escrow Funds. 3. In consideration of the acceptance of this escrow by the Escrow Agent, the parties agree to indemnify and hold the Escrow Agent harmless from and against any liability by it incurred to any other person or corporation because of its having accepted the deposits hereunder, or in connection herewith, and to reimburse it for all its expenses, including, among other things, counsel fees and court costs incurred in connection with this. 4. The Escrow Agent is authorized and directed to comply with and obey any orders, judgments, or decrees of any court related to this Agreement, whether or not in conformance with the instructions of the parties, and in case the Escrow Agent obeys or complies with any such order, judgment or decree of any court, it shall not be liable to any of the parties hereto or to any other person, firm or corporation due to such compliance. 5. The Escrow Agent shall not be personally liable for any act it may do or omit to do hereunder as Escrow Agent while acting in good faith, and in the exercise of its own best judgment in any act done or omitted by it pursuant to the advice of its own attorney shall be conclusive evidence of that good faith. 6. These instructions may be altered, amended, modified or revoked by writing only, signed by all of the parties hereto, and approved by the Escrow Agent, upon payment of all fees, costs and expenses incident hereto. 7. No assignment, transfer, conveyance or hypothecation of any right, title or interest in and to the subject matter of this Escrow shall be binding upon the Escrow Agent unless written notice of it shall be served upon the Escrow Agent and all fees, costs and expenses incident to such transfer of interest shall have been paid. 8. Any notice required or desired to be given by the Escrow Agent to any other party to this Escrow may be given by mailing the same to such party at the address noted below, and notice so mailed shall, for all purposes hereof, be as effectual as though served upon that party in person at the time of depositing that notice in the mail. 9. The Escrow Agent shall have no duty to know or determine the performance or nonperformance of any provision of any agreement between the other parties hereto, and the original or a copy of any such agreement deposited with the Escrow Agent shall not bind said Agent in any manner. The Escrow Agent assumes no responsibility for the validity or sufficiency of any documents or papers or payments deposited or called for hereunder, except as may be expressly and specifically set forth in these instructions. 10. In the event of any dispute with respect to the disposition of property hereunder, the Escrow Agent may, in its sole and absolute discretion, deposit the property described herein, or so much thereof as remains in its hands, with any court of competent jurisdiction, and interplead the parties hereto; and upon so depositing such property and filing its Complaint in Interpleader, it shall be relieved of all liabilities under the terms hereof as to the property so deposited; and, furthermore, the parties hereto, for themselves, their heirs, legal representatives, successors and assigns do hereby submit themselves to the jurisdiction of said court, and do hereby appoint the then Clerk, or acting Clerk of said Court as their Agent for the service of all process in connection with those proceedings. The institution of any such interpleader action shall not impair the rights of the Escrow Agent. 11. The Escrow Agent may resign at any time by giving written notice by Certified Mail, Return Receipt Requested, to all of the parties hereto, to be effective thirty (30) days after that notice has been deposited into the U.S. Mail. If a successor Agent has not been appointed within thirty (30) days after the giving of such notice of resignation, the Escrow Agent may petition any court of competent jurisdiction for the appointment of a successor Escrow Agent. 12. Any notice required or desired to be given by the Escrow Agent to any other party to this Escrow Agreement may be given by mailing to the address noted below. 13. THE PARTIES ACKNOWLEDGE THAT THE ESCROW AGENT, BARRY W. SPECTOR, IS COUNSEL FOR CHAPARRAL RESOURCES, INC., AND THAT HE HAS REPRESENTED CHAPARRAL IN CONNECTION WITH THE LETTER AGREEMENT AND THIS ESCROW AGREEMENT, AND WILL CONTINUE TO REPRESENT CHAPARRAL IN THOSE MATTERS. THE PARTIES HERETO EXPRESSLY CONSENT TO BARRY W. SPECTOR CONTINUING IN THOSE CAPACITIES AS WELL AS ESCROW AGENT HEREUNDER. IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. CHAPARRAL RESOURCES, INC. /s/ Paul V. Hoovler - --------------------------- Paul V. Hoovler, President SHAREHOLDERS /s/ Okan Ozdemir - ------------------------------ Okan Ozdemir /s/ Dursan Acikbas - ------------------------------ Dursan Acikbas /s/ Cetin Berkmen - ------------------------------ Cetin Berkmen /s/ Tugay Ince - ------------------------------ Tugay Ince /s/ Gazanger Ugural - ------------------------------ Gazanger Ugural /s/ Dursun Acikbas - ------------------------------ Dursun Acikbas ESCROW AGENT /s/ Barry W. Spector - ----------------------------- Barry W. Spector, Escrow Agent EX-4 5 EXHIBIT 10.8 AMENDMENT This Amendment ("Amendment"), effective March 4, 1996 ("Effective Date"), is between Chaparral Resources, Inc. ("Chaparral"), shareholders ("Shareholders") of Darka Petrol Ticaret Ltd. Sti. ("Darka"), Darka and Central Asian Petroleum (Delaware) Limited ("CAP (D)"). Chaparral, Shareholders, Darka and CAP (D) are singly referred to herein as "Party" and collectively as "Parties". WHEREAS the Parties signed a certain letter agreement ("Agreement") dated January 3, 1996 which provides for Chaparral to purchase the stock of Darka from the Shareholders. WHEREAS, as provided in the CAP(G) Members' Agreement dated January 11, 1996, the shareholders of Central Asian Petroleum (Guernsey) Limited ("CAP(G)"), as applicable, have waived their respective preferential rights to acquire shares of CAP(G) in connection with a transfer of such shares from Darka to Chaparral such as the transfer as is contemplated in this Amendment. NOW THEREFORE: The Parties agree as follows: 1. Chaparral shall not purchase the stock of Darka. Instead, Chaparral shall purchase from Darka all of Darka's right, title and interest in and to 125,000 shares of CAP(G) stock, representing 25% of the outstanding stock of CAP(G) ("Stock"). The Shareholders shall receive, on behalf of Darka, compensation for the Stock totalling: (i) $ 2,000,000 and (ii) 685,000 shares of restricted common stock of Chaparral ("Chaparral Stock"). This transaction shall be according to the same terms (as applicable) as the transaction described in the Agreement, except as otherwise provided in this Amendment. 2. The Closing shall be April 1, 1996, and all of the conditions applied to the sale of the Darka stock as provided in the Agreement shall be applicable to the sale of the Stock. 3. Darka and the Shareholders represent and warrant that the representations and warranties described in Clause 4 (c), (e) and (f), as applied to the Stock, are true and correct and shall be applied again on March 4, 1996 and at Closing. 4. On March 4, 1996 Chaparral and the Shareholders shall provide, as provided in Clause 2(c) of that certain Escrow Agreement dated January 4, 1996 (Exhibit A to the Agreement), joint written instructions for the Escrow Agent to disburse the "Escrow Funds" ($ 300,000.00 U.S.) to the Shareholders. All of the conditions, as applicable, applied to the sale of Darka stock as provided in the Agreement shall be applicable to the sale of the stock, and this payment of $300,000.00 U.S. 5. On March 8, 1996 Chaparral shall pay Shareholders irrevocable $300.000 U.S. and shall also transfer to the Shareholders of 625.000 Chaparral Stock, as directed in writing by the Stockholders, All of the conditions, as applicable, applied to the sale of the Darka stock as provided in the Agreement shall be applicable to the sale of the Stock, and this transfer of the Chaparral Stock. 6. At Closing Chaparral shall pay Shareholders $ 1,400,000.00 U.S. and shall also transfer of 60.000 Chaparral Stock, as directed in writing by the Shareholders. All of the conditions, as applicable, applied to the sale of the Darka stock as provided in the Agreement shall be applicable to the sale of the Stock, and to this payment of $ 1,400,000.00 U.S. 7. Clauses 3(a) shall not be applicable, as Chaparral shall not be purchasing the stock of Darka. 8. Clause 3 (e) shall not be applicable, as all CAP(G) shareholders permanently waived all such rights pursuant to the CAP(G) Members' Agreement dated January 11, 1996. 9. Clause 3(g) shall not be applicable, as Chaparral shall not be purchasing the stock of Darka. 10. Clauses 3 (f), 5(a) and (b) shall be effective through April 1, 1996. 11. At Closing Darka shall deliver all certificates representing the Stock to Chaparral, together with executed stock powers and such other instruments as may be required to vest complete ownership of the Stock in Chaparral. 12. Upon Closing, Shareholders and Darka shall be deemed to have waived, any and all rights and claims of any nature, whether accruing before or after Closing, under any Member Agreements, Protocols, Minutes or Agreements of any nature, pertaining to CAP(G), Chaparral, and/or CAP(D). This Amendment may be executed in any number of counterparts and each such counterpart shall be deemed an original Agreement for all purposes, provided no party shall be bound by the terms of this Agreement unless and until all parties have executed a counterpart. For purposed of assembling all counterparts into one document, Chaparral is authorised to detach the signature page from one or more counterparts and, after signing by the respective party, attach signed signature page to the counterpart. CHAPARRAL RESOURCES , INC. /s/ Paul V. Hoovler - ------------------------------ Paul V. Hoovler, President SHAREHOLDERS /s/ Okan Ozdemir - ------------------------------ Okan Ozdemir /s/ Dursun Acykbap - ------------------------------ Dursun Acykbap /s/ Cetin Berkmen - ------------------------------ Cetin Berkmen /s/ Tugay Ynce - ------------------------------ Tugay Ynce /s/ Gazenfer Uoural - ------------------------------ Gazenfer Uoural Darka Petrol Ticaret Ltd. Sti. /s/ Okan Ozdemir - ------------------------------ by: Okan Ozdemir, President Central Asian Petroleum (Delaware) Limited /s/ Paul V. Hoovler - ------------------------------ by: Paul V. Hoovler EX-5 6 EXHIBIT 21 LIST OF SUBSIDIARIES State or Other Name Under Jurisdiction of Which Subsidiary Organization Business Done - ----------- --------------- ------------- Central Asian Petroleum, Inc...... Delaware CAP-D EX-6 7 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Chaparral Resources, Inc. We have issued our reports dated January 19, 1996 (except for note N, as to which the date is March 8, 1996) accompanying the financial statements of Chaparral Resources, Inc. ("Company") appearing in the 1995 Annual Report of the Company to its shareholders included in the Annual Report on Form 10-K for the year ended November 30, 1995. We consent to the incorporation by reference in the Company's Registration Statement on Form S-8 of the aforementioned reports. GRANT THORNTON Denver, Colorado March 13, 1996 EX-7 8 EXHIBIT 24 POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Paul V. Hoovler, Matthew R. Hoovler, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him in his name, place and stead, in his capacity as an officer, director or both of Chaparral Resources, Inc., a Colorado corporation ("Chaparral"), to sign the Annual Report on Form 10-K Report of Chaparral for the year ended November 30, 1995, and any and all amendments thereto, and to file the same with all exhibits thereto and other documents in connection therewith, with the United States Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Signature Title Date - --------- ----- ---- /s/ Howard Karren Chairman of the March 14, 1996 Howard Karren Board and Director /s/ Paul V. Hoovler Principal Executive March 14, 1996 Paul V. Hoovler Officer, President and Director /s/ Matthew R. Hoovler Vice President, March 14, 1996 Matthew R. Hoovler Treasurer and Director /s/ Barry W. Spector Secretary and March 14, 1996 Barry W. Spector Director Director Peter G. Dilling /s/ Frank H. Gower, Jr. Director March 14, 1996 Frank H. Gower, Jr. Director James A. Jeffs /s/ Jay w. McGee Director March 14, 1996 Jay W. McGee Exhibit 24 ---------- EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS NOV-30-1995 NOV-30-1995 501 0 77 0 13 580 664 (177) 5,595 214 0 0 0 20,484 2,872 5,595 255 255 115 115 0 0 17 (719) 0 (704) 0 0 0 (704) (.04) (.03)
EX-9 10 CORRESP HOPPER AND KANOUFF, P.C. 1610 Wynkoop Street, Suite 200 Denver, Colorado 80202-1196 (303) 892-6000 March 14, 1996 OFIS Filer Support SEC Operations Center 6432 General Green Way Alexandria Virginia 22312-2413 Re: Chaparral Resources, Inc. Annual Report on Form 10-K405 Ladies and Gentlemen: Enclosed pursuant to Rule 901(d) of Regulation S-T is a copy of the Annual Report on Form 10-K405 of Chaparral Resources, Inc., which we are filing through EDGAR. The fee has been paid on March 13, 1996 to: Mellon Bank Account No. 9108739/RE Reference 1401 Sincerely, /s/ Alan W. Peryam Alan W. Peryam TSS:blk Enc. cc: Chaparral Resources, Inc. Grant Thornton LLP -----END PRIVACY-ENHANCED MESSAGE-----