-----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, JKskAiN15aRt1bod/dyJpasu+MPj2XqgUKK48UiiuQUoYd8QK+4Rh5T8fTEfLYWL mW2XC6+esxFIDYR1EDxYkQ== 0001000096-99-000203.txt : 19990416 0001000096-99-000203.hdr.sgml : 19990416 ACCESSION NUMBER: 0001000096-99-000203 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 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: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07261 FILM NUMBER: 99594843 BUSINESS ADDRESS: STREET 1: 2211 NORFOLK STREET 2: SUITE 1150 CITY: HOUSTON STATE: TX ZIP: 77098 BUSINESS PHONE: 7138077100 MAIL ADDRESS: STREET 1: 621 17TH STREET SUITE 1301 CITY: DENVER STATE: CO ZIP: 80293 10-K 1 FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________. Commission file number: 0-7261 CHAPARRAL RESOURCES, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Colorado 84-063086 - ------------------------------- ---------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2211 Norfolk, Suite 1150 Houston, Texas 77098 -------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (713) 807-7100 Securities registered pursuant to Section 12(g) of the Act: $0.10 Par Value Common Stock --------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| As of March 31, 1999, the aggregate market value of Registrant's voting stock held by nonaffiliates was $24,311,368. As of March 31, 1999, Registrant had 58,588,790, shares of its $0.10 par value common stock issued and outstanding. Total Pages ___ Exhibit Index ___ PART I ITEM 1. BUSINESS Business - -------- Chaparral Resources, Inc. ("Company"), incorporated under the laws of the state of Colorado in 1972, is an independent oil and gas exploration and production company, based in Houston, Texas. In June 1999, the Company plans to move its corporate offices to Golden, Colorado. The Company currently owns all of the outstanding common stock of Central Asian Petroleum Guernsey Limited ("CAP-G") which has a 50% interest in Karakuduk-Munay, JSC("KKM"). KKM holds 100% of the rights to develop the Karakuduk Field in Kazakhstan. The Company's business strategy is to acquire and develop oil and gas projects in emerging markets, specifically targeting fields with previously discovered reserves, which either have never been placed on production or could be materially enhanced with efficient management and technical experience provided by the Company. The Karakuduk Field ("Karakuduk Field" or "Karakuduk Project") described below is the Company's first oil field to be acquired under the Company's new corporate strategy. The Company has called for a special meeting of the Company's shareholders to approve proposals for reincorporating the Company from the state of Colorado to the state of Delaware and to effect a reverse stock split in which one new share of the Company's common stock would be exchanged for every 60 shares of common stock presently outstanding. The Company expects the special meeting to occur in late April 1999. Risks Inherent in Oil and Gas Exploration There can be no assurance that the Company will be able to discover, develop and produce sufficient reserves in the Karakuduk Field, or elsewhere. Further, there can be no assurance that the Company will recover the expenses incurred when it explores the Karakuduk Field or that it will achieve profitability. The odds against discovering commercially exploitable oil and gas reserves are always substantial and are increased as a result of the concentration of the Company's activities in areas that have not yet been significantly explored and where political or other unknown developments could adversely affect commercialization. The Company, through KKM, will be required to perform extensive geological and/or seismic surveys on its properties. Depending on the results of the surveys, only subsequent drilling at substantial cost and high risk can determine whether commercial development of the properties is feasible. Oil and gas drilling is frequently marked by unprofitable efforts, including unproductive wells, productive wells which do not produce sufficient amounts of reserves to return a profit, and developed reserves which cannot be marketed. The Company will be subject to all of the risks inherent to drilling for and producing oil and gas. These risks include blowouts, cratering, fires and accidents. Any of the risks could result in the Company being liable for damages from loss of life and property. The Company is not fully insured against these risks. Many of these risks are not insurable. Risks of Operations in Kazakhstan As a result of the Company's interest in KKM and the Karakuduk Field, it will be subject to certain risks inherent in the ownership and development of properties in Kazakhstan. The contracts that the Company has with the government of Kazakhstan may be arbitrarily cancelled or forced into renegotiation. Cancellation or renegotiation will or is likely to adversely affect the Company's ability to profitably extract oil from the Karakuduk Field. The government of Kazakhstan may impose royalty increases, tax increases and retroactive tax claims against the Company. These taxes would adversely affect the Company's ability to profitably extract oil from the Karakuduk Field because of increased expenses. Expropriation, environmental controls, and other laws and regulations may adversely affect the Company's interest in the Karakuduk Project because of increased costs, inaccessibility or delays. Due to the fact that the Company only controls a 50% interest in KKM, the Company must seek the approval of KKM's other two shareholders, KazakhOil, which is the national petroleum company for the Republic of Kazakhstan, and a private Kazakhstan joint stock company, before any major actions are taken by KKM. If the Company is unable to obtain the approval of one of KKM's remaining shareholders, the operations of KKM may come to a standstill, which could result in the loss of KKM's rights to explore and develop the Karakuduk Field. There are no practical mechanisms in the agreement with KazakhOil and the joint stock company to resolve any such stalemate. 2 The Company's operations and agreements are also governed by the laws of Kazakhstan. The Company may be subject to arbitration in Kazakhstan or to the jurisdiction of the courts in Kazakhstan. The Company may not be successful in subjecting foreign persons to the jurisdiction of courts in the United States. The Company may be hindered or prevented from enforcing its rights with respect to a government agency, instrumentality or other government entity of Kazakhstan because such entities may consider themselves immune from the jurisdiction of any court. KKM's Kazakhstan license for the Karakuduk Field includes the right to export oil produced and to establish and maintain bank accounts in U.S. dollars or other foreign currency outside of Kazakhstan. The Kazakhstan government's agreement with KKM allows KKM to maintain its books and records in U.S. dollars, but requires local Kazakh taxes be reported in tenge, the local Kazakh currency. KKM's functional currency is the U.S. dollar. Because Kazakh law prohibits the export of tenge, any payment for oil sold in tenge will be used for the payment of local costs and expenses. KKM expects that the majority of the oil it produces will be exported and sold outside of Kazakhstan and that payment will be in U.S. dollars. The U.S. dollars will be deposited in bank accounts established outside of Kazakhstan. The Company may encounter unexpected difficulties in conducting foreign operations. Although management of the Company believes that the recent and continuing political, social and economic developments in Kazakhstan have created opportunities for foreign investment, uncertainty exists about the status of Kazakhstan law, the stability of Kazakhstan and the autonomy of the parties involved with the Company in Kazakhstan. Political Risk Insurance. The Company has applied with Overseas Private Investment Corporation ("OPIC") for political risk insurance. OPIC insurance can cover the following political risks: o Currency Inconvertibility--deterioration of the investor's ability to convert profits, debt service and other remittances from local currency into U.S. dollars; o Expropriation--loss of an investment due to expropriation, nationalization or confiscation by a foreign government; o Political Violence--loss of assets or income due to war, revolution, insurrection or politically motivated civil strife, terrorism and sabotage; and o Interference With Operations--loss of assets or income due to cessation of operations lasting six months or more caused by political violence. The coverage elections for each category of insurance are computed on a ceiling and an active amount. The coverage ceiling represents the maximum insurance available for the insured investment and future earnings under an insurance contract. The premiums for each category are based on a maximum insured amount ("MIA"), a current insured amount ("CIA") and a standby amount. The MIA represents the maximum insurance available for the insured investment under an insurance contract. The CIA represents the insurance actually in force during the contract period. The CIA cannot exceed the book value of the insured assets physically in Kazakhstan. The difference between the CIA and the MIA is the standby amount. There is a charge for standby coverage. The Company has applied with OPIC for all four political risk coverages on the Company's investment in the Karakuduk Field. The Investment Committee of OPIC approved the Company's Karakuduk operations for political risk insurance coverage on December 19, 1995. The Company received an executed Letter of Commitment from OPIC on September 25, 1996, binding issuance of Political Risk Insurance for the Karakuduk Project. Currently, the Company has a standby facility for which it has made eight equal payments of $31,250 and two payments of $15,625. The Company expects to execute the actual contract offered to the Company by OPIC on or before June 30, 1999. 3 The final terms of the contract must be agreed upon at the time the contract is executed. The CIA will be equal to the book value of the Company's assets physically located in Kazakhstan. The MIA will equal the total coverage available for current and future assets placed in Kazakhstan by the Company. The MIA directly impacts both the premiums and deductible requirements in the contract. Premiums will be paid quarterly. The Company will not know the specific terms of the contract until the MIA required has been firmly established. In the event of a loss, the reimbursement by OPIC to the Company will be limited to the Company's actual loss of physical property in Kazakhstan. The maximum reimbursement cannot exceed 90% of the MIA. The Company has delayed execution of a final OPIC contract until the substantial costs of the premiums are justified by the Company's investment in the Karakuduk Field. Under the terms of OPIC's Expropriation and Interference with Operations insurance coverage, the Company must be able to transfer to OPIC the shares of beneficial interests related to the insured investment, free and clear of all encumbrances. There are certain restrictions on the transfer of shares and assignment of the Company's beneficial interests in KKM. At such time as the Company obtains coverage, the Company will seek a waiver of the transfer restrictions from the shareholders of KKM that are not affiliated with the Company. While there is no assurance the waiver will be obtained, the Company does not anticipate significant problems in obtaining the waiver, if required to secure long term financing for the benefit of KKM Markets There is substantial uncertainty as to the future prices the Company could obtain for any oil reserves produced from the Karakuduk Field. It is possible that, under the market conditions prevailing in the future, the production and sale of oil from the Karakuduk Field may not be commercially feasible. The availability of ready markets and the price obtained for oil produced depends upon numerous factors beyond the control of the Company. The current market for oil is characterized by instability, which has caused dramatic declines and increases in world oil prices in recent years. There can be no assurance of any price stability in the current, and future, oil and gas market. During 1998, the oil industry experienced major declines in oil prices worldwide. The Commonwealth of Independent States (CIS), and Kazakhstan in particular, were impacted severely, with competition increasing dramatically for limited pipeline capacity required to access the world oil market. Furthermore, instability in the economies of Russia and other CIS countries led to the devaluation of the Ruble and weakening of other regional currencies. Competition to sell oil on the world market, in exchange for more stable, western currencies (i.e. the US dollar), drove oil prices in the CIS down even farther than declines in other markets. On March 7, 1998, KKM entered into a contract with the export-import firm of Munay-Impex, a subsidiary of KazakhOil, to export up to 100,000 tons of crude oil produced by KKM to both the CIS and other countries. KKM was to supply crude oil to Munay-Impex in amounts of not less than five to 10 thousand metric tons. Munay-Impex, acting as a broker, would market KKM's crude oil production for sale on either the local or export market. KKM produced a total of 11,103 tons (81,052 barrels) of oil during 1998, which has been stored as inventory in the KazTransOil pipeline. Due to existing market conditions, however, Munay-Impex was unable to find a suitable market to sell KKM's limited crude oil production for an economical return. As a result, KKM did not sell any crude oil in 1998, and allowed the Munay-Impex contract to terminate on December 31, 1998 at the end of the contractual term. During December of 1998 and throughout the first quarter of 1999, KKM continued to attempt to sell it's crude oil production at acceptable economic terms, but was unsuccessful. On March 30, 1999, KKM entered into a contract with KazakhOil JSC, a shareholder of KKM, to export up to 19,000 tons of crude oil during April 1999. Under the contract, KazakhOil guaranteed KKM the necessary transit quota to sell to export markets outside of Kazakhstan, via the KazTansOil pipeline. As of March 31, 1999, KKM had approximately 18,000 tons of crude oil production stored in the KazTransOil pipeline, and expects to achieve 19,000 tons of cumulative production in early April 1999. KKM expects to sell the entire 19,000 tons of oil during April, with payment expected in late April or May of 1999. 4 KKM anticipates that production facilities required to process and transport larger volumes of expected future production from the Karakduk Field will be completed during 1999. The production facilities currently under construction will initially allow up to 16,000 barrels of oil per day to be transported to the KazTransOil pipeline. Until the production facilities are completed, crude oil production is being placed into storage tanks and then trucked to the pipeline. The number of crude oil trucks operating in the Karakuduk Field has been increased to facilitate 24 hours a day transportation to the pipeline, which allows increased production from existing wells. The Company's business is not seasonal, except that severe weather conditions could limit the Company's exploration and drilling activities. However, severe cold weather increases the demand for oil and natural gas, which are used for heating purposes. See also "Item 2. Properties - The Karakuduk Field." Competition Foreign oil and gas exploration and the acquisition of producing and undeveloped properties is a highly competitive and speculative business. In seeking suitable opportunities, the Company competes in all areas of the oil and gas industry with a number of other companies, including large multi-national oil and gas companies and other independent operators with greater financial resources and, in some cases, with more experience than the Company. The Company does not hold a significant competitive position in the oil and gas industry. Such competition may adversely affect the Company's ability to market its oil and/or obtain a competitive price for any oil sold. At this time, no prediction can be made as to the effect such competition will ultimately have upon the Company. Even considering the recent downturn in the oil and gas industry, the CIS is currently a primary focal point for substantial exploration and development activities. Within Kazakhstan, the Company competes with both major oil and gas companies and independent producers for, among other things, rights to develop available oil and gas properties, access to limited pipeline capacity, procurement of available materials and resources, and hiring qualified international and local personnel. Regulation General. The Company's operations may be subject to regulation by governments or other regulatory bodies governing the area in which the Company's overseas operations are located. Regulations govern such things as drilling permits, production rates, environmental protection and pollution control, royalty rates and taxation rates, among others. These regulations may substantially increase the costs of doing business and sometimes may prevent or delay the starting or continuing of any given exploration or development project. Moreover, regulations are subject to future changes by legislative and administrative action and by judicial decisions, which may adversely affect the petroleum industry in general and the Company in particular. At the present time, it is impossible to predict the effect any current or future proposals or changes in existing laws or regulations will have on the Company's operations. The Company believes that it complies with all applicable legislation and regulations in all material respects. KKM is subject to various taxes in Kazakhstan, including, but not limited to, income tax, value added tax (VAT), customs duties, excise taxes, property taxes, payroll taxes, and excess profits tax. Furthermore, payments made by KKM to the Company or its subsidiaries may also be subject to additional withholding tax depending upon the type of payment and the country of incorporation of the recipient of the payment. Without consideration of tax treaty benefits, Kazakhstan requires 15% withholding on payments for dividends and interest to foreign persons. Royalties and services are subject to a 20% withholding rate, as well. The Company and all its subsidiaries, other than CAP-G, are incorporated in the United States and enjoy the tax benefits provided by the tax treaty between the United States and Kazakhstan. Under the U.S./Kazakhstan tax treaty currently in effect, withholding rates are substantially reduced. Generally, the tax treaty rates are 5% for dividends paid to 10% or greater shareholders, 10% for interest and royalties, and no withholding on payments for services as long as a permanent residence has not been established by the foreign person. 5 CAP-G is incorporated in the Isle of Guernsey, which currently does not have a tax treaty with Kazakhstan. Under KKM's license with Kazakhstan , interest payments made by KKM to CAP-G are not subject to withholding tax. Any dividends paid by KKM to CAP-G, however, are currently subject to a withholding tax rate of 15%. Currently, and for the foreseeable future, the Company does not expect KKM to pay any income tax in Kazakhstan or to declare any dividends for the benefit of its shareholders. Environmental. Based upon a study undertaken on behalf of the Company by an unaffiliated party, the Company believes that its business operations presently meet all legally required environmental quality standards. However, compliance with foreign laws and regulations, which have been enacted or adopted regulating the discharge of materials into the environment could have an adverse effect upon the Company, the extent of which the Company is unable to assess. As is the case with other companies engaged in oil and gas exploration, production and refining, the Company faces exposure from potential claims and lawsuits involving environmental matters. These matters may involve alleged soil and water contamination and air pollution. Since inception the Company has not made any material capital expenditures for environmental control facilities and has no plans to do so. Devaluation of Currency. On April 5, 1999, the government of Kazakhstan, with the approval of the International Monetary Fund, allowed the national currency of Kazakhstan, the tenge, to float freely against the US dollar. Immediately thereafter, the official exchange rate declined from 87.5 tenge to the US dollar to 142 tenge to the US dollar. As of April 12, 1999, the exchange rate was approximately 115 tenge to the US dollar. The devaluation of the tenge significantly decreases the realizable value of tenge monetary assets, but also decreases the financial obligation of tenge denominated liabilities. The instability resulting from the tenge devaluation creates uncertainty regarding the future business climate in Kazakhstan and for the Company's investment in KKM. The Company, however, does not expect an material adverse impact to it's operations. The majority of KKM's current assets and current liabilities are denominated in US dollars and are unaffected. While statutory tax reporting is done in tenge, the Kazakh government allows revaluation adjustments to step-up the tax basis in assets to offset the effects of Kazakh deflation. KKM expects to utilize the revaluation adjustments to determine taxable income or loss reported to the Kazakh tax authorities. Expected revenue from KKM's pending sale of crude oil is denominated in US dollars, although final settlement is expected in tenge based upon the exchange rate on the date of payment. KKM expects future sales to be both denominated and settled in US dollars. Employees As of March 31,1999, the Company had 8 full-time employees and 1 part-time employee. CAP-G operates through its officers and directors and had no employees. KKM had 161 employees and retains independent contractors on an as needed basis through the Company's wholly owned subsidiary, Road Runner Service Company, Inc. ITEM 2. PROPERTIES Properties The Karakuduk Field The Karakuduk Field is located in the Mangistau Region of the Republic of Kazakhstan. KKM's license to develop the Karakuduk Field covers an area of approximately 16,922.5 acres and has been granted to KKM for a period of 25 years. The agreement granting KKM the right to develop the Karakuduk Field was approved by Kazakhstan's Ministry of Energy and Natural Resources on August 30, 1995. The Karakuduk Field is geographically located, approximately 227 miles northeast of the regional capital city of Aktau, on the Ust-Yurt Plateau. The closest settlement is the Say-Utes Railway Station approximately 51 miles southeast of the field. The ground elevation varies between 590 and 656 feet above sea level. The region has a dry, continental climate, with fewer than 10 6 inches of rainfall per year. Mean temperatures range from -25 degrees Fahrenheit in January to 100 degrees Fahrenheit in July. The operating environment is similar to that found in northern Arizona and New Mexico in the United States. The Karakuduk structure is an asymmetrical anticline located on the Aristan Uplift in the North Ustyurt Basin. Oil was discovered in the structure in 1972, when Kazakhstan was a republic of the former Soviet Union, from Jurassic age sediments between 8,500 and 10,000 feet. Twenty-two exploratory and development wells were drilled to delineate the field. However, none of the wells were ever placed on production. The productive area of the Karakuduk Field is 11,300 acres, with a minimum of seven separate productive horizons present in the Jurassic formation. Oil has been recovered in tests from seven horizons within the Jurassic formation with flow rates ranging from 3 to 966 barrels per day. The Company estimates that drilling a maximum of 80 additional oil wells and 26 water injection wells may be required to fully develop the field. Peak oil production from the field is expected to occur by 2002, although the time or amount of development or production cannot presently be assured. The planned development program for the Karakuduk Field will include a pressure maintenance operation that the Company believes could result in additional recoverable reserves. The ability of the Company to realize the carrying value of its assets is dependent on the Company being able to extract and transport hydrocarbons and finding appropriate markets for their sale. Currently, exports from Kazakhstan are dependent on limited transport routes and, in particular, access to the Russian pipeline system. Domestic markets in Kazakhstan might not permit world market price to be obtained. Management believes, however, over the life of the project, transportation restrictions will be alleviated and adequate prices will be obtained for hydrocarbons produced from the Karakuduk Field, for the Company to fully recover the the carrying value of its assets. The Karakuduk Field is approximately 18 miles north of the Mukat-Mangishlak railroad, the Mangishlak-Astrakghan water pipeline, the Beyneu-Uzen high voltage utility lines, and the Uzen-Atrau-Samara oil and gas pipelines. KKM, according to its license agreement with Kazakhstan, has a priority use of the existing pipeline network. In early 1998, KKM entered into a contract with KazTransOil JSC, the state-owned company controlling the Uzen-Atrau-Samara pipeline. The contract grants KKM rights to use the pipeline for transportation of crude oil to local and export markets, subject to transit quota restrictions, and as a temporary storage facility until the produced hydrocarbons are sold by KKM. Currently, KKM is producing oil through field separators, into storage tanks and then into crude oil trucks, for delivery to the pipeline. As of March 31, 1999, KKM had produced approximately 18,000 tons (131,000 barrels) of crude oil, which has been stored in the KazTransOil pipeline. On March 30, 1999, KKM entered into a contract with KazakhOil JSC, a shareholder of KKM, to export up to 19,000 tons of crude oil during April 1999. Under the contract, KazakhOil guaranteed KKM the necessary transit quota to sell to export markets outside of Kazakhstan, via the KazTansOil pipeline. KKM expects to achieve 19,000 tons of cumulative production in early April 1999. KKM nominated 13,000 tons for sale in early April, and expects to sell the remaining 6,000 tons of oil in late April, with payment expected in late April or May of 1999. KKM has no other existing contracts for sales of future crude oil production. Although the management of the Company believes long-term sales contracts for KKM's crude oil production will be available in the future, at terms acceptable to KKM, there is no assurance that any such agreements will ever be obtained by KKM. Because of uncertainties surrounding the Karakuduk Project, no proved reserves have been attributed to the field as of March 31, 1999. The crude oil production stored in the KazTransOil pipeline throughout 1998 was not considered commercially viable by the Company as of December 31, 1998, primarily due to the depressed crude oil prices during the fall of 1998 and early spring of 1999. The Karakuduk Project will require significant development costs for which the financing is not complete. There can be no assurances that the project will be adequately financed or that the field will be successfully developed. On December 31, 1998, the government of Kazakhstan approved KKM's request to amend KKM's license to develop the Karakuduk Field. The license, as amended, requires the KKM to meet expenditure commitments of $16.5 million by December 31, 1998 and $30 million by December 31, 1999. Expenditure commitments through December 31, 1998 exceeded the commitment requirement of $16.5 million by approximately $480,000. The excess is applicable against the expenditure commitment required as of December 31, 1999. As of March 31, 1999, KKM has 7 incurred approximately $3.5 million in expenses against its 1999 expenditure commitment. Should the license terms not be adhered to, the license may be withdrawn by the government of Kazakhstan. The Company is responsible for providing 100% of the funding necessary for the development of the Karakuduk Field, which is not provided by third-party sources. KKM plans to meet it's funding requirements through loans from CAP-G to KKM, and through proceeds from the sale of oil extracted by KKM from the Karakuduk Field. As of March 31, 1999, the Company has loaned CAP-G in excess of $25 million to fund KKM's current operations. The Company is attempting to obtain project financing for either CAP G or KKM, which may reduce the amount of loans from the Company to CAP-G. KKM first produced crude oil from the Karakuduk Field in December 1997. At present, the oil is transported by truck to the export pipeline at Say-Utes, which is approximately 51 miles from the field. By the end of the second quarter of 1999, it is anticipated that any oil produced will be transported by pipeline from the field to the pipeline terminal to be built at Railroad Station No. 6, which is approximately 18 miles from the Karakuduk Field. During 1998, KKM began construction of an 18-mile pipeline from the field to the the Station No. 6 pipeline terminal, capable of transporting up to 16,000 barrels of oil per day to the KazTransOil pipeline. Once construction is completed on the Station No. 6 terminal, allowing direct access into the export pipeline, KKM plans to complete and bring on-line the 18-mile pipeline. Until the pipeline and related production facilities are completed, daily crude oil production is being processed, placed into storage tanks, and then trucked to the Say-Utes pipeline terminal. Production placed into the pipeline is considered inventory of KKM until the production is sold. As of March 31, 1999, KKM had not recognized any revenue from the sale of oil production, but expects to complete a sale during April 1999. During 1998, KKM re-entered four of the original twenty-two wells drilled in the Karakuduk Field, establishing production from two wells. KKM plans to complete the other two workover wells in the spring of 1999. KKM began drilling the initial exploratory well No. 101, on February 14, 1999, and reached total depth in early April. KKM plans to complete Well No. 101 during April 1999. If Well No. 101 is successful, KKM expects to bring production on-line in May of 1999. KKM also plans to drill 7 new wells before December 31, 1999, in accordance with KKM's license obligation to the government of Kazakhstan. Additional field facilities are either in place or under construction to support the development and production of the wells to be drilled during 1999. KKM has constructed a base camp with living quarters for 150 men, a mini-camp for the drilling contractor and other service company personnel, storage facilities, processing facilities, warehouses, a repair shop, and other related support facilities. KKM has also completed a main road between the KazTransOil pipeline terminal at the Station No. 6 and the field. KKM is also clearing access roads and performing other required site preparation activities for other planned drilling locations. Management of the Company believes the risk-to-reward considerations involved with the development of the Karakuduk Field are very positive and may lead to substantial growth of the Company over the next several years. However, the Company can provide no assurances that the Karakuduk Field will produce oil in any specific amounts or that the Company will ever realize a profit as a result of the Company's interest in the field. KKM was re-registered on July 24, 1997, with the government of Kazakhstan. The re-registration was required as a result of new legislation in Kazakhstan. The Company believes that KKM is now in compliance with all Kazakhstan laws and regulations related to the registration requirements relating to legal entities. The current KKM shareholders' include CAP-G, KazakhOil, and a local Kazakhstan joint stock company. KazakhOil JSC, the national petroleum company of the government of Kazakhstan holds a 40% ownership interest in KKM. The private Kazakhstan joint stock company owns the remaining 10%. The permits and licenses required to develop the Karakuduk Field have been obtained. However, there is no assurance that any further permits or licenses, if required, will be obtained. Also, because of uncertainties surrounding the project and lack of proven commercial viability of crude oil production extracted during 1998 and early 1999, no proved reserves have been attributed to the Karakuduk Field. The project will require significant development costs for 8 which the financing is not in place. There can be no assurance that the project will be financed or that the Karakuduk Field will be successfully developed. Further, the Company will face all of the risks inherent in attempting to develop an oil and gas property in a foreign country. See also Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations." Reserves. The Company claims no proved reserves as of December 31, 1998. As a result of the Company recently reentering a well in the Karakuduk Field and because of the Company's future drilling plans for the Karakuduk Field, the Company expects to be able to obtain a reserve report for the Karakuduk Field during 1999. Since January 1, 1998, the Company has not filed with or included in any reports to any other federal authority or agency any estimates of total, proved net oil or gas reserves. Net Quantities of Oil and Gas Produced. The Company's net oil and gas production for each of the last three fiscal years and for the month of December 1996 (all of which prior to 1997 was from properties located in the United States) was as follows:
Year ended Year ended Month of Year ended December 31, 1998 December 31, 1997 December 1996 November 30, 1996 ----------------- ----------------- ------------- ----------------- Oil (Bbls) 81,052 Less than 1,000 -0- 1,737 Gas (Mcf) -0- -0- -0- 96,906
KKM did not sell any oil during 1998. Oil production for 1998 represents 100% of KKM's 1998 production, which was placed into the KazTransOil pipeline. While the Company, through CAP-G, owns 50% of KKM, the Company will receive the entire economic benefit from the sale of KKM's initial production. The net proceeds to be received from the sale of KKM's 1998 production will be used to partially repay CAP-G's loan to KKM and to fund KKM's ongoing operations, reducing CAP-G's funding commitment to do the same. The average sales price per barrel of oil and Mcf of gas, and average production costs per barrel of oil equivalent ("BOE") excluding depreciation, depletion and amortization were as follows:
Average Average Average Year Ended Month of Year Ended Sales Price Sales Price Production December 31, December, November 30, Oil (Bbls) Gas (Mcf) Cost Per BOE ------------ --------- ------------ ---------- --------- ------------ 1998 * * * 1997 * * * 1996 * * * 1996 $17.53 $1.17 $2.07
The above table represents activities related only to oil and gas production. *The Company did not sell any significant quantities of oil or gas during these periods. KKM did not sell any oil or gas during the years presented. Productive Wells and Acreage. As of December 31, 1998, KKM had interests in one productive oil well, one shut-in productive oil well, and no productive gas wells. As of December 31, 1998, the Company had a net 50% beneficial interest in KKM which holds a governmental license to develop the Karakuduk Field, a 16,900 acre oil field in Kazakhstan which was discovered in 1972 with the drilling of 22 exploratory and development wells by the former Soviet Union. None of these wells were produced commercially prior to 1998. 9 On December 31, 1997, KKM delivered by truck to the pipeline oil that KKM had recovered from testing Well No. 21, the first well KKM reentered in the Karakuduk Field. Well No. 21 tested on a sustained flow of 526 barrels of oil per day. The well was subsequently shut-in until additional facilities are put in place to process and transport the combined daily production from Well No. 21 and Well No. 10. In February 1998, Well No. 10 was reperforated and produced at a sustained test flow rate of 1,450 barrels of oil per day. Well No. 10 was placed on limited production to fill storage tanks and transport trucks that deliver oil to the export pipeline. In March 1999, KKM acquired additional trucks and personnel to increase the amount of daily production currently deliverable to the pipeline terminal. KKM also has begun preparations to workover Well Nos. 7 and 20 and, if the wells are productive, will place them on production at such time as the field facility construction is completed. On February 14 1999, KKM began drilling well No. 101, reaching total depth in early April. The well has not been completed as of the filing date of this report. Drilling Activity. During the last two fiscal years ended December 31, 1998, the month of December 1996 and the fiscal year ended November 30, 1996, the Company did not participate in the drilling of any productive exploratory or development wells. The Company did participate in the capital workover of four previous drilled wells, which had never been placed on production. Present Activities. As of April 13, 1999, the Company was in the process of drilling Well No. 101, reopening Well No. 21, previously shut-in during 1998, and planning the reentry of Well No. 20. Well No. 10 is currently producing approximately 1,200 barrels of oil per day. Offices. On March 1, 1999, the Company announced that it is relocating its principal office from Houston, Texas to Golden, Colorado. On this date, the Company leased office space from a related party, on 1010 Tenth Street, Suite 100, Golden, Colorado 80401. The offices consist of approximately 2,255 square feet and will be leased until August 31, 1999 at an initial rent of approximately $4,000 per month, and on a month to month basis after that. On April 1, 1999, the Company assigned its office space at 2211 Norfolk, Suite 1150, Houston, Texas 77098 to an unaffiliated third party. The Company is currently subleasing the Houston office space on a month by month basis for approximately $5,000 per month. The Company expects the relocation to be completed by the fall of 1999. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings required to be reported hereunder. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's security holders during the Company's fiscal quarter ended December 31, 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's $0.10 par value common stock is currently traded on the Nasdaq Small-Cap Market (Nasdaq) under the symbol CHAR. The Company has been advised that the Company's common stock is subject to being delisted by Nasdaq as a result of the common stock not meeting the minimum bid price requirements. The Company has scheduled a hearing with Nasdaq for April 30, 1999, to request additional time to satisfy Nasdaq's minimum bid price requirements. Additionaly, the Company has requested a special meeting of the Company's shareholder's in late April, 1999 to approve a reverse stock split in which one new share of the Company's common stock would be exchanged for every 60 shares of common stock presently outstanding. 10 As of April 7, 1999, the Company had approximately 2,022 shareholders of record of its $0.10 par value common stock. No dividend has been paid on the Company's common stock, and there are no plans to pay dividends in the foreseeable future. The following table shows the range of high, low and closing sales prices for each quarter during the Company's last two calendar years ended December 31, 1998 and December 31, 1997, as reported by the National Association of Securities Dealers, Inc. Price Range -------------------------- Fiscal Quarter Ended High Low Closing - -------------------- ---- --- ------- March 31, 1997 1 3/16 3/4 7/8 June 30, 1997 * 1 3/4 13/16 September 30, 1997 1 1/4 11/16 1 5/32 December 31, 1997 3 3/32 1 1/16 2 1/2 March 31, 1998 2 25/32 2 2 7/16 June 30, 1998 2 1/2 1 1/2 1 11/16 September 30, 1998 2 1/2 3/4 1 9/32 December 31, 1998 1 3/4 11/32 11/32 * On May 29, 1997, the Company changed its fiscal year end from November 30 to December 31. The following is information as to all securities of the Company sold by the Company since October 1, 1998, which were not registered under the Securities Act of 1933, as amended ("Securities Act"). On October 30, 1998, the Company issued warrants to purchase 200,000 shares of the Company's common stock at an exercise price of $1.00 per share as part of the settlement for a lawsuit filed against the Company and others in the District Court of Harris County, Texas, by Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. on November 14, 1997. The warrants are exercisable through January 2, 1999. The Company issued the warrants in reliance upon the exemption from registration under Section 4(2) of the Securities Act. The recipients had available all material information concerning the Company. The warrant certificates bear an appropriate restrictive legend under the Securities Act. No underwriter was involved in the transaction. During the quarter ended December 31, 1998, the Company granted 5-year options to purchase 38,500 shares of the Company's common stock to employees of, and consultants to, the Company. The Company made the grants in reliance upon the exemption from registration under Section 4(2) of the Securities Act. Such persons had available to them all material information concerning the Company. The options will have an appropriate restrictive legend under the Securities Act. No underwriter was involved in the transaction. On December 31, 1998, warrants to purchase 80,000 shares of the Company's common stock were exercised, at a price of $0.25 per share, for a total of $20,000. 11 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.
As of or for the Year As of or for the Year Ended Ended Month of ------------------------------------------- December 31 , December 31, December November 30, November 30, November 30, 1998 1997 1996 1996 1995 1994 ---- ---- ---- ---- ---- ---- Oil and gas sales (1)........... -- -- -- $ 147,000 $ 255,000 $ 374,000 Total revenues.................. -- -- -- 147,000 255,000 374,000 Noncash write-down of oil and gas properties ............. -- -- -- -- 619,000 416,000 Net income (loss)............... (4,266,000) (2,603,000) (130,000) (2,416,000) (704,000) (474,000) Net income (loss) per common share.................. (.09) (.06) (.00) (.08) (0.04) (0.02) Working capital................. (287,000) 3,356,000 * 259,000 366,000 497,000 Total assets.................... 34,324,000 23,519,000 * 14,498,000 5,595,000 2,388,000 Long-term obligations and redeemable preferred stock 5,060,000 4,710,000 * 1,491,000 461,000 Shareholders' equity............ 27,579,000 18,578,000 * 12,114,000 4,920,000 2,035,000 Other Data - ---------- Present value of proved reserves -- -- -- -- 427,000 1,084,000 Proved oil reserves (bbls) -- -- -- -- 66,185 111,690 Proved gas reserves (mcf) -- -- -- -- 3,062,417 3,294,730
(1) In 1994, the Company made a strategic decision to pursue international oil and gas projects and, by early 1997, had completely disposed of all domestic oil and gas properties. * Not applicable due to one month short period ended December 31, 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources - ------------------------------- During 1998, the Company raised additional capital to finance CAP-G's obligation for the development of the Karakuduk Field and to satisfy other working capital needs of the Company. Since January 1, 1998, the Company raised $12,500,000 through the sale of common stock and $20,000 through the exercises of common stock warrants. The Company also raised an additional $2,070,000 through various loans to the Company, of which $975,000 was outstanding as of December 31, 1998. The Company's material capital and financing transactions during 1998 were as follows: On April 3, 1998, the Company sold 1,250,000 shares of the Company's common stock for $2.00 per share for at total of $2,500,000 to a private investor. Allen & Company, Incorporated acted as placement agent in connection with the 12 sale of the 1,250,000 shares. As a result, Allen & Company, Incorporated's warrants to purchase shares of the Company's common stock, originally issued as a commission in connection with the Redeemable Preferred Stock sale on November 24, 1997, became exercisable for an additional 100,000 shares. The warrants to purchase the additional 100,000 shares of the Company's common stock are exercisable through November 25, 2002, at an exercise price of $0.01 per share. On July 28 and July 29, 1998, the Company sold 6,666,667 shares of the Company's common stock for $1.50 per share for at total of $10,000,000 to certain investors. Issuance costs incurred were approximately $50,000 and have been recorded as a reduction to the proceeds received from the sale. Allen & Company, Incorporated acted as placement agent in connection with the sale of the 6,666,667 shares. As a result, Allen & Company, Incorporated's warrants to purchase 900,000 shares of the Company's common stock, originally issued as commission in connection with the Redeemable Preferred Stock sale on November 24, 1997, became exercisable for an additional 400,000 shares of the Company's common stock. The 400,000 warrants are exercisable through November 25, 2002, at an exercise price of $0.01 per share. As of December 31, 1998, 200,000 warrants held by Allen & Company, Incorporated were unexercisable pending the performance of future services. Due to the fact, the sales price of the 6,666,667 shares was below a price of $2.00 per share, the Company was required to issue an additional 416,667 shares to the investor who purchased 1,250,000 shares of the Company's common stock for $2,500,000 in April 1998 in order to satisfy certain price protection agreements the Company has with such investor. On August 5, 1998, the Company retired two outstanding loans, totaling $1,000,000, from two related parties: Allen & Company, Incorporated ($900,000) and John McMillian, a director and current Chairman and Chief Executive Officer of the Company ($100,000). The Company borrowed the $1,000,000 on June 3, 1998, subject to a 7% interest rate. The note was payable in full, plus accrued interest, on the earlier of 180 days from the funding of the loans or upon the Company's receipt of a minimum of $10,000,000 in equity investments. In conjunction with the loans, the Company issued warrants to purchase 1,000,000 shares of the Company's common stock, at an exercise price of $3.50 per share. The Company recorded the warrants at their fair market value of $367,000, as a discount of notes payable, amortizable over the life of the loans. On July 27, 1998, the Company received $10,000,000 in equity financing and repaid the loans, recognizing an extraordinary loss on the extinguishment of debt of approximately $236,000. On July 3, 1998, the Company borrowed $975,000 from the Chase Bank of Texas (Chase). The Company subsequently amended the Chase note on December 3, 1998 and on February 28, 1999. Under the restructured terms of the note dated February 28, 1999, the loan accrues interest at an adjustable prime rate, as determined by Chase. As of December 31, 1998 the stated prime rate was 7.75%. Principal payments in the amount of $250,000, plus accrued interest, are due quarterly, beginning on August 31, 1999. The $975,000 loan is fully guaranteed with a stand-by letter of credit from Whittier Ventures, LLC, an investor in the Company. In return for issuing the loan guarantee, the Company paid the guarantor $10,000 plus related costs, issued warrants to purchase 20,000 shares of the Company's common stock, and granted the guarantor a security interest in the Company's common stock of Central Asian Petroleum (Guernsey) (CAP-G). In the event of the Company's default on the $975,000 note, the guarantor's security interest in the Company's common stock in CAP-G cannot be perfected for at least 30 days after notification of such default. In the event of default, the Company may make full payment of any outstanding principal and interest on the note plus any additional charges incurred by the guarantor to completely remove any security interest held by the guarantor. The Company may seek to obtain additional capital through debt or equity offerings, encumbering properties, entering into arrangements whereby certain costs of development will be paid by others to earn an interest in the properties, or sale of a portion of the Company's interest in the Karakuduk Field. The present environment for financing the acquisition of oil and gas properties or the ongoing obligations of the oil and gas business is uncertain due, in part, to instability in oil and gas pricing in recent years. The Company's small size and the early stage of development of the Karakuduk Field may also increase the difficulty in raising any financing that may be needed in the future. There can be no assurance that the debt or equity financing that 13 might be required to fund the Company's operations and obligations in the future will be available to the Company on economically acceptable terms if at all. During the first quarter of 1999, the Company borrowed an additional $3,800,000 from related party investors. The notes are repayable in full on August 31, 1999 and accrue interest at an 8% rate. The financing was primarily utilized to fund KKM's operations during the first quarter of 1999. The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring operating losses and has no operating assets presently generating cash to fund its operating and capital requirements. The Company does not anticipate that its current cash reserves and cash flow from operations will be sufficient to meet its capital requirements through fiscal 1999. As of December 31, 1998, substantially all of the Company's assets are invested in the development of the Karakuduk Field. The Karakuduk Field has not produced any revenues as of December 31, 1998 and is not expected to produce revenues sufficient to meet KKM's cash needs during 1999. The development of the Karakuduk Field, through KKM, will require substantial amounts of additional capital. KKM's revised license with the government required KKM to expend $10 million as of December 31, 1997 and another $16.5 million as of December 31, 1998. Total expenditure commitments, from the commencement of operations through December 31, 1998, of $26,500,000 have been satisfied by KKM. KKM has an additional expenditure commitment of $30 million for the year ending December 31, 1999, of which KKM has spent approximately $3.5 million as of April 8, 1999. The 1999 expenditure commitment is expected to be spent primarily for KKM's drilling operations and completion of the field facilities capable of sustaining expected future production from the Karakuduk Field, along with general overhead expenses. Without additional funding and significant revenues from oil sales, of which there are no assurances, the Company will not be able to provide necessary funds to KKM in order to satisfy these requirements. As a result, the Company's interest in the Karakuduk Field may be lost. The Company received an extension to June 30, 1999, from the Overseas Private Investment Corp. ("OPIC") for political risk insurance. OPIC granted the Company a binding executed letter of commitment on September 25, 1996. The Company has a standby facility for which it has made eight payments of $31,250 and another two payments of $15,625. The Company expects to execute the contract on or before June 30, 1999. Year 2000 Issue The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has addressed the availability and integrity of financial systems and the reliability of operational systems. The Company has specifically reviewed the status of readiness for the year 2000 for it's management and financial reporting systems in the U.S. and in Kazakhstan, and believes the systems are year 2000 compliant. The Company does not expect to incur any material operating expenses or be required to make significant investment in computer system improvements to become Year 2000 compliant. Third party systems that expose the Company to risk are primarily those surrounding the Company's equity investee, KKM. Management has begun communications with KKM regarding their readiness for the year 2000 and is currently assisting KKM to formalize an evaluation and assessment process. KKM has completed a partial assessment and currently believes that the computer systems it has in place are year 2000 compliant. KKM has initiated formal communication with all of its significant suppliers and large customers to determine the extent to which the Company is vulnerable to those third 14 parties failure to remediate their own year 2000 issues. In particular, it is unclear as to the extent the Kazakh government and other organizations who provide significant infrastructure services within the Kazakh Republic have addressed the year 2000 issue. Furthermore, the current crisis in Russia and the CIS could adversely affect the ability of the government and such organizations to fund adequate Year 2000 compliance programs. There is no guarantee that the systems of the government or of other organizations on which the Company and KKM rely will be timely converted and will not have an adverse effect on the Company and its systems. The most likely worst case scenario the Company can foresee from a failure of internal or third-party systems would include an inability of vendors to timely deliver required materials, supplies, or services to the Karakuduk Field necessary to conduct drilling or other field operations. In order to mitigate the possibility of timely delivery of critical materials and supplies, KKM can fully stock materials to sustain drilling operations over the transition period from December 1999 through the first quarter of the 2000. At this time, KKM will assess if any critical vendors are having difficulties due to year 2000 issues. KKM has an extensive selection of vendors for all types of materials and service needs. If certain vendors cannot perform on a timely basis, KKM will simply utilize a different service provider. Furthermore, a breakdown of the existing KazTransOil pipeline required by KKM to export oil outside of Kazakhstan would seriously delay or even halt KKM's ability to sell oil. KKM management has performed physical inspections of the KazTransOil pipeline and do not foresee any problems with placing production into the pipeline and properly recording the volumes attributable to KKM. There are no assurances, however, that problems will not occur at different points along the pipeline, inside or outside of Kazakhstan, including points of destination for the throughput. Due to the limited transportation options for marketing crude oil within Kazakhstan and the CIS, KKM will not be able to avoid the negative consequences associated with a breakdown in the export pipeline if it should occur. The management of KKM, however, considers this likelihood to be remote. Results of Operations Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Interest income increased by $763,000 from the year ended December 31, 1997 due to increased financing of 100% of KKM's operations in Kazakhstan. As of December 31, 1998, the Company held a 50% equity interest in KKM. General and administrative costs increased by $1,363,000 from the year ended December 31, 1997 due mainly to the Company's increase in compensation expense and legal fees. Compensation expense increased by $992,000, primarily due to stock based compensation granted to directors, employees, and consultants of the Company during 1998 plus amortization of prior year equity based compensation. Furthermore, the Company's cash based compensation increased due to the hiring of additional personnel required for normal business operations. Legal fees increased $125,000, primarily relating to the Heartland lawsuit, which was settled on October 30, 1998. The Company's equity loss in KKM, increased $912,000 from the year ended December 31, 1997. The increase is the result of KKM's increased operational activity in Kazakhstan. In 1998, the Company settled a lawsuit filed against the Company on November 14, 1997, for a total of $200,000 and warrants to purchase 200,000 shares of the Company's common stock at an exercise price of $1.00, exercisable through January 2, 1999. The warrants were recorded at the fair market value of the warrants (approximately $34,000). In 1998, the Company recognized a $236,000 extraordinary loss on the extinguishment of long term debt. The Company has debt obligations of $940,000 outstanding as of December 31, 1998. Inflation. The Company cannot control prices in its oil and gas sales and to the extent the Company is unable to pass on increases in operating costs, it may be affected by inflation. Results of Operations Year Ended December 31, 1997 Compared to Year Ended November 30, 1996 As mentioned above, during 1997 the Company changed from a fiscal year ended November 30 to a fiscal year ended December 31. The Company's operations during the fiscal year ended December 31, 1997, and the month ended December 31, 1996, resulted in losses before extraordinary items, if any, of $2,389,000 and $130,000, respectively, due to the Company's ongoing transition to international exploration and production operations. The Company's operational loss for 15 December 1996 consisted of miscellaneous corporate level expenses and is immaterial to the overall operational results of the Company. Results for the fiscal year ended November 30, 1996 have also been restated to reflect the equity method of accounting for the Company's investment in KKM. In 1996, the Company accounted for KKM using proportional consolidation. After adoption of the equity method, the Company's net loss for the fiscal year ended November 30, 1996, $2,416,000, remained unchanged from the amount originally reported. Oil and gas revenues and production costs decreased by $147,000 and $37,000, respectively, from the year ended November 30, 1996, due to the disposition of all of the Company's domestic oil and gas properties during the first quarter of 1997. Interest income increased by $267,000 from the year ended November 30, 1996 due to increased financing of 100% of KKM's operations in Kazakhstan. As of December 31, 1997, the Company held a 50% equity interest in KKM. General and administrative costs and interest expense increased by $186,000 and $208,000, respectively, also due to KKM's increased operational activity in Kazakhstan. The Company's equity loss in KKM, however, decreased by $139,000 from the year ended November 30, 1996 due to additional capitalization of costs directly related to development of oil and gas properties held by KKM. The Company recognized a $36,000 economic loss on the disposition of the Company's domestic properties. In 1997, the Company recognized a $214,000 extraordinary loss on the extinguishment of long term debt. The Company did not have any other debt obligations outstanding as of December 31, 1997. Inflation. The Company cannot control prices in its oil and gas sales and to the extent the Company is unable to pass on increases in operating costs, it may be affected by inflation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14(a) for a list of the Financial Statements and the supplementary financial information included in this report following the signature page. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT As of March 31, 1999, the following table sets forth the names and ages of the current directors and executive officers of the Company, the principal offices and positions with the Company held by each person and the date such person became a director or executive officer of the Company. The executive officers of the Company are elected annually by the board of directors. Executive officers serve terms of one year or until their death, resignation or removal by the board of directors. The present term of office of each director will expire at the next annual meeting of shareholders. Each executive officer will hold office until his successor duly is elected and qualified, until his resignation or until he is removed in the manner provided by the Company's Bylaws. 16
Name of Director or Officer and Director Principal Occupation Position in the Company Since Age During the last Five Years - ----------------------- ----- --- -------------------------- John G. McMillian 1997 72 Chairman Retired since 1995. Chairman, President and Chief Executive Officer of Allegheny & Western Energy Corporation, an oil and gas company, from 1987 to 1995; founder and former Chairman and Chief Executive Officer of Northwest Energy Company and owner and Chairman and Chief Executive Officer of Burger Boat Company. A director of Marker International and Excalibur Technologies. Dr. Jack A. Krug 1999 53 President and Chief Operating Officer President and Chief Operating Officer of the Company since January 1999, a director, Vice President, and former owner of Questa Engineering, LLC, prior to 1999; First Deputy Project Manager, LukOil-AIK, an oil and gas joint venture in Russia, from October 1994 to December 1998; First Deputy of Zhetaby Quest an oil and gas joint venture in the Republic of Kazakhstan, from 1993 to November, 1994. David A. Dahl 1997 37 Secretary of the Company from August 1997 to May 1998; President of Whittier Energy Company, an oil and gas exploration and production company, since 1997; President of Whittier Ventures, LLC, a private investment entity, since January 1996; Vice President of Whittier Trust Company since April 1993;, Vice President of Merus Capital Management, an investment firm, from 1990 to 1993. Ted Collins, Jr. 1997 60 President of Collins & Ware, Inc., an independent oil and gas company, since 1988. President of Enron Oil & Gas Co. from 1982 to 1988; Executive Vice President and a director of American Quasar Petroleum Co. from 1969 to 1982. Mr. Collins is a director of Hanover Compression Company, Mid Coast Energy Resources, Inc. and Queen Sand Resources, Inc. Richard L. Grant 1998 44 President of Cabot LNG Corporation, a natural gas company, since September 1998; President of Mountaineer Gas Company, the largest natural gas distribution copany in West Virginia, from 1988 to September 1998; Prior thereto, legal counsel with The Cincinnati Gas & Electric Company. James A. Jeffs 1999 46 Chief Investment Officer for the Whittier Trust Company since 1994; A director of M-D International Petroleum, Inc., an oil and gas company, since 1994; Senior Vice President of Union Bank of Los Angeles from 1993 to 1994; Chief Investment Officer for Northern Trust of California, N.A., from 1991 to 1992; President and Chief Executive Officer of TSA Capital Management and Senior Vice President of Trust Services of America, capital managem 17 Arlo G. Sorensen 1996 58 Chief Financial Officer and Principal Accounting Officer of the Company from March 1997 to June 1998; Treasurer of the Company from February 1997 to February 1998; Trustee of M.H. Whittier Corporation, a private investment entity, since 1985; Chairman of the Board and a director of Whittier Trust Company since 1988. Michael B. Young N/A 30 Treasurer and Controller Treasurer and Controller and Principal Accounting Officer of the Company since February 1998; Tax Manager in the oil & gas tax practice of Arthur Andersen LLP, an accounting firm, from June 1991 to February 1998. Alan D. Berlin 1997 58 Secretary A partner of Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP since 1995. Engaged in the private practice of law for over five years prior to joining Aitken Irvin Lewin Berlin Vrooman & Cohn LLP; Secretary of the Company from January 1996 to August 1997 and from June 1998 to the present; President of the International Division of Belco Petroleum Corp. from 1985 to 1987 and held various other positions with Belco Petroleum Corp. from 1977 to 1985; Currently a director of Belco Oil & Gas Corp.
Except as indicated in the above table, no director of the Company is a director of an entity that has its securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. In connection with the Company's acquisition of all of the stock of CAP-D in 1995, the former shareholders of CAP-D have certain rights to nominate directors of their choosing for election to the Company's Board of Directors. If by June 30, 2000, the Karakuduk Field obtains 5,000 barrels of oil production per day averaged over any sixty (60) day period, or the Company's beneficial interest in the field is sold or the Company and the former shareholders jointly participate in a new exploratory development project, the former shareholders (one of which is James A. Jeffs) have the right to cause the Company to nominate one additional director at the Company's 2000 year annual meeting of shareholders. In connection with borrowings in August 1996, the Company agreed to add two directors selected by two of the lenders, Whittier Ventures LLC and Whittier Energy Company (collectively "Whittiers"). In connection with the transactions, James A. Jeffs resigned from the Company's board of directors. At the request of the Whittiers, on December 2, 1996, Arlo G. Sorensen replaced Mr. Jeffs on the Company's board of directors and on January 3, 1997, David A. Dahl was appointed to the Company's board of directors. The Whittiers will have the right to have their two representatives nominated for directors of the Company until the Whittiers no longer have any investment in the Company. There are no other arrangements or understandings between any executive officer and any director or other person pursuant to which any person was selected as a director or an executive officer. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based solely upon a review of the Forms 3 and 4 and any amendments thereto furnished to the Company during the Company's fiscal year ended December 31, 1998 and Form 5 and amendments thereto furnished to the Company with respect to 18 such fiscal year, during the Company's fiscal year ended December 31, 1998, no persons who were directors, officers or beneficial owners of more than 10% of the Company's outstanding Common Stock during such fiscal year filed late reports on Form 3, 4, or 5. ITEM 11. EXECUTIVE COMPENSATION In May 1997, the Company changed its fiscal year end from November 30 to December 31. The following table shows all cash compensation paid by the Company for services rendered during the fiscal years ended December 31, 1998 and December 31, 1997, during the month of December 1996 and during the fiscal year ended November 30, 1996 to Howard Karren (there were no executive officers of the Company whose annual salary and bonus exceeded $100,000 during the fiscal year ended December 31, 1998).
Summary Compensation Table Long Term Compensation Annual Compensation Awards ------------------- ------ Name and Year Year Year Principal Position Ended Ended Ended Other Securities All Other ------------------ December December Month of November Annual Underlying Compen- 31, 31, December 30, Salary($) Bonus($) Compensation Options(#) tion($) --- --- -------- --------- --------- -------- ------------ ---------- ------- Howard Karren 1998 -- -- -- -- -- Chief Executive Officer and President from 1997 -- -- -- 1,025,000 -- January 1997 and February 1997, 1996 -- -- -- -- -- respectively, to 1996 -- -- $175,000(1) -- -- January 1999 1995 -- -- -- -- --
(1) In connection with Howard Karren becoming a Director and Chairman of the Company, subject to a certain contingency which was satisfied in April 1996, the Company agreed to issue 350,000 shares of the Company's restricted common stock to Howard Karren, a director of the Company, or his designees. The $175,000 represents the market value of the 350,000 shares on April 5, 1996, the date the contingency was satisfied. On January 11, 1999, the Company entered into an employment agreement with Dr. Jack A. Krug pursuant to which Dr. Krug was employed as the President and Chief Operating Officer of the Company. The employment agreement has a term of three years and is automatically extended for successive one year terms thereafter unless either the Company or Dr. Krug elects to terminate the agreement. Under the terms of the employment agreement, the Company pays Dr. Krug a salary of $250,000 and has agreed to grant Dr. Krug 200,000 shares of the Company's common stock for each year, up to a maximum of five years, of Dr. Krug's services under the agreement. The first stock grant was made on January 15, 1999. Each subsequent grant is to be made on each subsequent January 15. Option Grants in Last Fiscal Year The Company did not grant any options to Howard Karren, the former Chairman and Chief Executive Officer of the Company, during the year ended December 31, 1998. 19 Fiscal Year-End Option Values The following table sets forth information concerning unexercised options held by Howard Karren on December 31, 1998:
Number of Securities Underlying Unexercised Value of Unexercised Options as of In-the-Money Options at December 31, 1998(#) December 31, 1998($) ---------------------- --------------------- Name Exercisable/ Unexercisable Exercisable/ Unexercisable - ---- ------------ ------------- -------------------------- Howard Karren........ 1,025,000 - 0 - $ -0- - 0 -
(1) The value was determined by multiplying the number of shares underlying the warrants by the difference between the exercise price and the closing sale price of the Company's common stock on December 31, 1998. Compensation of Directors On July 17, 1997, the shareholders of the Company approved a 1997 Incentive Stock Plan pursuant to which all non-employee directors were to receive an award of 250 shares of common stock of the Company for each meeting of the board of directors attended by such director. The directors have waived their rights to receive shares for the meetings in 1997 and 1998. Also on July 17, 1997, the shareholders approved a 1997 Non-Employee Directors' Stock Option Plan pursuant to which each year each non- employee director was to receive an option to purchase 25,000 shares of common stock of the Company. The only options granted were granted effective July 17, 1997 and relate to a total of 200,000 shares that were exercisable at a price of $0.828125 per share. Both plans were terminated in June 1998. On January 23, 1998, the Board of Directors of the Company granted each director of the Company 10,000 shares of the Company's common stock for their service to the Company. There were no other standard or other arrangements for the compensation of the Company's directors in effect for the Company's fiscal year ended December 31, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth as of April 7, 1999, the number of shares of the Company's outstanding $0.10 par value common stock beneficially owned by each of the Company's current directors and the Company's executive officers named in Item 11, sets forth the number of shares of the Company's outstanding Common Stock beneficially owned by all of the Company's current directors and executive officers as a group, sets forth the number of shares of the Company's outstanding common stock owned by each person who owned of record, or was known to own beneficially, more than 5% of the Company's outstanding shares of common stock and sets forth the number of shares of the Company's outstanding common stock owned by Howard Karren. The address for all directors and executive officers of the Company is 2211 Norfolk, Suite 1150, Houston, Texas 77098-4096. 20
Amount and Nature of Percent of Beneficial Common Name of Beneficial Owner Position Ownership (1) Stock (1) - ------------------------ -------- ------------- --------- Allen & Company Incorporated -- 11,222,387 (2) 18.31% 711 Fifth Avenue New York, New York 10022 Cascade Investment, LLC -- 3,333,333 5.69% 2365 Carillon Point Kirkland, WA 98033 Whittier Ventures, LLC -- 3,373,556 (3) 5.73% 1600 Huntington Drive South Pasadena, California 91030 Jack A. Krug President and Chief Operating 200,000 (4) * Officer John G. McMillian Chairman of the Board, 250,000 (5) * Director, and Chief Executive Officer David A. Dahl Director 5,679,803 (6) 8.84% Ted Collins, Jr. Director 60,000 * James Jeffs Director 2,568,247(7) 4.38% Arlo G. Sorensen Director 96,242 (8) * Richard L. Grant Director -0- * Howard Karren Former President and Chief 1,195,000 (9) 2.00% Executive Officer All Current Directors and Executive 8,869,292 (10) 15.03% Officers as a Group (nine persons)
* Represents less than 1% of the shares of the Common Stock outstanding. (1) Beneficial ownership of the Common Stock has been determined for this purpose in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended ("Exchange Act"), under which a person is deemed to be the beneficial owner of securities if he or she has or shares voting power or investment power with respect to such securities or has the right to acquire beneficial ownership within 60 days. (2) Includes 2,697,720 shares underlying warrants to purchase shares of Common Stock. The number of warrants reflected includes 225,000 warrants that Allen & Company Incorporated ("ACI") acquired and holds for the benefit of certain of its officers, directors and employees. ACI is a wholly owned subsidiary of Allen Holding Inc. ("AHI"), and, consequently, AHI may be deemed to beneficially own the shares beneficially owned by ACI. Does not include certain shares owned directly by certain officers and stockholders of AHI and ACI with respect to which AHI and ACI disclaim beneficial ownership. Certain officers and stockholders of AHI and ACI may be deemed to beneficially own certain shares of the Common Stock reported to be beneficially owned directly by AHI and ACI. 21 (3) Includes 282,500 shares underlying currently exercisable warrants. (4) Does not include 800,000 shares that vest annually at a rate of 200,000 shares on January 15th of each year. If Dr. Krug's employment terminates, the stock award will be prorated as to that year. (5) Includes 25,000 shares underlying a currently exercisable option and 25,000 shares underlying a currently exercisable warrant. (6) Includes 75,000 shares underlying currently exercisable options owned by Mr. Dahl, 3,373,556 shares beneficially owned by Whittier Ventures LLC, 349,185 shares owned by Whittier Energy Company, 87,500 shares underlying currently exercisable warrants owned by Whittier Energy Company, 1,285,192 shares beneficially owned by Whittier Trust Company, 9,370 shares owned by Whittier Opportunity Fund and 500,000 shares underlying currently exercisable options owned by Whittier Opportunity Fund. Although Mr. Dahl has no pecuniary interest in the shares beneficially owned by Whittier Ventures LLC, Whittier Energy Company, Whittier Trust Company or Whittier Opportunity Fund, as the President of Whittier Ventures LLC and Whittier Energy Company, as the Vice President of Whittier Trust Company, and as a Manager of Whittier Opportunity Fund, Mr. Dahl has voting power and investment power over such shares and, thus, may be deemed to beneficially own such shares. (7) Includes 349,185 shares owned by Whittier Energy Company, 87,500 shares underlying currently exercisable options owned by Whittier Energy Company, 1,285,192 shares beneficially owned by Whittier Trust Company, 9,370 shares owned by Whittier Opportunity Fund and 500,000 shares underlying currently exercisable options owned by Whittier Opportunity Fund. Although Mr. Jeffs has no pecuniary interest in the shares beneficially owned by Whittier Energy Company, Whittier Trust Company and Whittier Opportunity Fund, as Vice President of Whittier Energy Company, Vice President of Whittier Trust Company and a Manger of Whittier Opportunity Fund, Mr. Jeffs has voting power and investment power over such shares and, thus, may be deemed to beneficially own such shares. Does not include 235,000 shares subject to an escrow agreement which provides that such shares will be released to Mr. Jeffs if the Company's oil and gas interests attain specified performance levels. (8) Includes 75,000 shares underlying currently exercisable options and 11,242 shares owned by Whittier 1982 Oil Trust for which Mr. Sorensen is the trustee and has voting and investment power over such shares. Mr. Sorensen is a director of Whittier Ventures LLC and Whittier Energy Company. Mr. Sorensen disclaims beneficial ownership of the shares that are owned by Whittier Ventures LLC and Whittier Energy Company. (9) Includes 1,025,000 shares underlying currently exercisable options. Mr. Karren is no longer employed by the Company. (10) Includes the shares as described in notes (4) through (8) above. Also includes (i) 20,000 shares owned by Michael B. Young, the Treasurer and Controller of the Company, and 70,000 shares underlying presently exercisable options owned by Mr. Young, and (ii) 10,000 shares owned by Mr. Berlin, the Secretary of the Company, and 25,000 shares underlying a presently exercisable option owned by Mr. Berlin. Does not include a grant for 20,000 shares that will vest with respect to 10,000 shares on each of January 30, 2000 and 2001, if Mr. Young is still employed by the Company on those dates. The shares will vest earlier if Mr. Young is terminated without due cause or if the Company is acquired or merges with another entity. 22 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP, a law firm in which Alan D. Berlin, who is currently the Secretary of the Company and who was a director of the Company from March 1997 to May 1998, is a partner, provides legal services to the Company for which the law firm charges the Company an amount not in excess of the law firm's normal billing rates. The total amount of fees that were paid by the Company to the law firm during the Company's year ended December 31, 1998, did not exceed 5% of the law firm's gross revenues for the law firm's last full fiscal year. The Company believes that the fees paid to the law firm were reasonable for the services rendered. On November 24, 1997, the Company executed a Subscription Agreement ("Agreement") with an investor, which was not affiliated with the Company. Pursuant to the Agreement, the Company sold to the investor 50,000 shares of the Company's Series A Preferred Stock, no par value, for a purchase price of $100.00 per share or an aggregate purchase price of $5,000,000. The investor also agreed to purchase an additional 25,000 shares of the Company's Series A Preferred Stock for an additional $2,500,000 and 150,000 shares of the Company's Series B and Series C Preferred Stock for $15,000,000. In March 1998, prior to the receipt of the funds for any additional purchases the investor was to make under the Agreement, the Company and the investor mutually released each other from any further obligations under the Agreement. The investor retained the initial 50,000 shares of Series A Preferred Stock that are convertible into the Company's Common Stock at $2.25 per share. The number of shares of Common Stock issuable upon conversion of each share of Series A Preferred Stock will be determined by dividing $100 by the conversion price per share. The Company is not required to issue any additional preferred stock under the Agreement and the investor has no other obligation to provide funds to the Company in exchange for such stock. The Series B Preferred Stock and Series C Preferred Stock would have been convertible at the option of the holders thereof at any time or from time to time on or prior to the redemption date into Common Stock. The conversion price of the Series B Preferred Stock was initially $3.00 per share; and the conversion price of the Series C Preferred Stock was initially $4.25 per share. The number of shares of Common Stock issuable upon conversion of each share of Series B Preferred Stock and Series C Preferred Stock would have been determined by dividing $100 by the conversion price per share. Allen & Company Incorporated ("Allen & Company") acted as placement agent in connection with the sale of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock pursuant to the Agreement. Allen & Company elected to receive its fees in the form of warrants to purchase 900,000 shares of the Company's common stock that were all originally exercisable through November 25, 2002, at an exercise price of $0.01 per share. The Company has agreed to allow Allen & Company to retain the warrants to purchase 700,000 shares of the Company's common stock related to the $17,500,000 in funds not received under the original terms of the Agreement, provided Allen & Company raises additional capital for the Company within the two year period ending November 25, 1999. Based on a subsequent agreement, the unearned warrants to purchase 700,000 shares of the Company's Common Stock held by Allen & Company are fully restricted from exercise unless Allen & Company raises additional capital for the Company that is acceptable to the Company's board of directors. For each $25 of additional capital raised, a warrant to purchase one share of common stock will be deemed to be earned. If, before November 25, 1999, Allen & Company fails to raise additional capital for the Company under terms acceptable to the Company, Allen & Company will return the unearned portion of the warrants to the Company. In April 1998, Allen & Company raised an additional $2,500,000 of capital for the Company through the sale by the Company of 1,250,000 shares of the Company's common stock at $2.00 per share. As a result, the warrants became exercisable as to an additional 100,000 shares of the Company's common stock. On January 23, 1998, the board of directors of the Company granted each then director of the Company 10,000 shares of the Company's common stock for their service to the Company. 23 In connection with his employment, the Company granted Michael B. Young a five year option to purchase 50,000 shares of the Company's common stock at an exercise price of $2.25 per share and granted Mr. Young 40,000 shares of the Company's common stock that, subject to certain conditions, vested 10,000 shares on each of January 30, 1998 and 1999 and will vest 10,000 shares on each of January 30, 2000 and 2001. All unvested shares shall vest immediately if the Company is acquired or merge with another company or if Mr. Young is termination without due cause. The Company also granted Mr. Young an option to purchase 20,000 shares of the Company's common stock at $0.75 per share, which was fully vested as of January 31, 1999. On March 10, 1999, Whittier Ventures LLC loaned the Company $500,000. On March 19, 1999, Whittier Ventures LLC loaned the Company an additional $500,000. Both loans bear interest at a rate of 8% per annum and both loans are due and payable on or before August 31, 1999. Both loans are secured by all of the issued and outstanding shares of CAP-G owned by the Company. If the Company issues convertible securities within one year after the date of each respective loan, Whittier Ventures LLC shall have the right to exchange all the outstanding principal and interest due under the loans for such convertible securities. The amount of convertible securities to be issued to Whittier Ventures LLC is determined by dividing the amount of all principal and interest outstanding under the loans into the issue price of the convertible securities. On March 31, 1999, the Company issued a promissory note in the amount of $2,769,978.08 to Allen & Company. The new promissory note superseded promissory notes dated January 12, January 19, January 26, February 4, February 11 and February 22, 1999, in the aggregate amount of $1,750,000 which represented loans that Allen & Company had previously made to the Company. The new promissory note to Allen & Company bears interest at a rate of 8% per annum and is due and payable on or before August 31, 1999. The new promissory note is secured by all of the outstanding stock of CAP-G and carries the same exchange privileges as the promissory notes issued to Whittier Ventures LLC. On January 4, 1999, Howard Karren, who was then the President and a director of the Company, advanced the Company $50,000. The Company accrues interest on the advance at an 8% annual interest rate. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. --------------------- Table of Contents Chaparral Resources, Inc. Report of Independent Auditors Consolidated Balance Sheets--As of December 31, 1998 and December 31, 1997 Consolidated Statements of Operations--Years ended December 31, 1998, December 31, 1997, November 30, 1996 and the month ended December 31, 1996 Consolidated Statements of Cash Flows--Years ended December 31, 1998, December 31, 1997, November 30, 1996 and the month ended December 31, 1996 Consolidated Statement of Changes in Stockholders' Equity--Year ended December 31, 1998, Thirteen months ended December 31, 1997 and the year ended November 30, 1996 Notes to Consolidated Financial Statements Supplemental Information - Disclosures About Oil and Gas producing Activities - Unaudited Karakuduk-Munay, JSC Report of Independent Auditors Balance Sheets--As of December 31, 1998 and 1997 Statements of Expenses and Accumulated Deficit--Years ended December 31, 1998, 1997 and 1996 24 Statements of Cash Flows--Years ended December 31, 1998, 1997 and 1996 Statements of Shareholders' Deficit Notes to the Financial Statements (a)(2) Financial Statement Schedules. ----------------------------- All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (b) Current Reports on Form 8-K: ---------------------------- The Company did not file any Current Reports on Form 8-K during the last fiscal quarter ended December 31, 1998: 25 (c) Exhibits. --------- Exhibit No. Description and Method of Filing - ----------- -------------------------------- 2.1 Stock Acquisition Agreement and Plan of Reorganization dated April 12, 1995 between Chaparral Resources, Inc., and the Shareholders of Central Asian Petroleum, Inc., incorporated by reference to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 2.2 Escrow Agreement dated April 12, 1995 between Chaparral Resources, Inc., the Shareholders of Central Asian Petroleum, Inc. and Barry W. Spector, incorporated by reference to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 2.3 Amendment to Stock Acquisition Agreement and Plan of Reorganization dated March 10, 1996 between Chaparral Resources, Inc., and the Shareholders of Central Asian Petroleum, Inc., incorporated by reference to the Company's Registration Statement No. 333-7779. 3.1 Restated Articles of Incorporation + Amendments dated September 25, 1976, incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 3.2 Articles of Amendment to the Restated Articles of Incorporation + Amendments dated April 21, 1988, incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 3.3 Articles of Amendment to the Restated Articles of Incorporation + Amendments dated April 12, 1994, incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 3.4 Articles of Amendment to the Restated Articles of Incorporation + Amendments dated June 21, 1995, incorporated by reference to Exhibit B to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 3.5 Articles of Amendment to the Restated Articles of Incorporation + Amendments dated July 17, 1996, incorporated by reference to the Company's Registration Statement No. 333-7779. 3.6 Articles of Amendment to the Restated Articles of Incorporation + Amendments dated November 25, 1997, incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated October 31, 1997. 3.7 Bylaws, as amended through October 31, 1997, incorporated by reference to Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.1 Chaparral Resources, Inc. 1989 Stock Warrant Plan effective May 1, 1989, incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 10.2 Warrant Certificate entitling Allen & Company to purchase up to 1,022,000 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 1, 1996. 26 Exhibit No. Description and Method of Filing - ----------- -------------------------------- 10.3 Amendments to Chaparral Resources, Inc. Stock Warrant Plan, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.4 Agreement dated August 30, 1995 for Exploration Development and Production of Oil in Karakuduk Oil Field in Mangistan Oblast of the Republic of Kazakhstan between Ministry of Oil and Gas Industries of the Republic of Kazakhstan for and on Behalf of the Government of the Republic of Kazakhstan and Joint Stock Company of Closed Type Karakuduk Munay Joint Venture, incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended November 3 10.5 License for the Right to Use the Subsurface in the Republic of Kazakhstan, incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.6 Subscription Agreement dated April 22, 1997 between Chaparral Resources, Inc. and Victory Ventures LLC, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.7 Warrant Certificate dated December 31, 1997 entitling Victory Ventures LLC to purchase up to 4,615,385 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.8 Form of Warrant issued to Black Diamond Partners LP, Clint D. Carlson, John A. Schneider, Victory Ventures LLC, Whittier Energy Company and Whittier Ventures LLC in connection with loans made by them to Chaparral Resources, Inc. in November and December 1996 and to Black Diamond Partners LP, Clint D. Carlson, Wittier Energy Company and Whittier Ventures LLC in July 1997 in connection with the same loans, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on quarter ended June 30, 1997. 10.9 Chaparral Resources, Inc. 1997 Incentive Stock Plan, incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.10 Amendment to Common Stock Purchase Warrant dated December 31, 1997 entitling Victory Ventures LLC to purchase up to 4,615,385 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.11 Amendment dated September 11, 1997, to License for Right to Use the Subsurface in the Republic of Kazakhstan, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.12 Warrant Certificate entitling Allen & Company Incorporated to purchase up to 900,000 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K/A dated October 31, 1997. 10.13 Form of Subscription Agreement dated November 21, 1997, incorporated by reference to Exhibit 10.19 to the Company's Current Report on Form 8-K dated October 31, 1997. 10.14 Letter dated February 4, 1998, from the Company to Michael B. Young, incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 27 Exhibit No. Description and Method of Filing - ----------- -------------------------------- 10.15 Release and Understanding with H. Guntekin Koksal, incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.16 Termination Agreement dated March 6, 1998 with Exeter Finance Group, incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.17 Agreement dated March 7, 1998, with Munay-Implex, incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.18 Agreement dated March 31, 1998, effective as of November 4, 1997, between the Company and Allen & Company Incorporated, incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.19 Subscription Agreement dated April 1, 1998 between the Company and Network Fund III, Ltd., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 3, 1998. 10.20 Form of Subscription Agreement between the Company and certain investors, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated July 28, 1998. 10.21 Subordinated Loan Agreement dated as of June 4, 1997 between the Company and Allen & Company, Incorporated, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.22 Warrants issued to Allen & Company, Incorporated and John G. McMillian, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.23 Loan agreements between the Company and Howard Karren dated May 27, 1998 and July 1, 1998, respectively, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.24 1998 Incentive and Nonstatutory Stock Option Plan 10.25 Amendment to License for the Right to Use the Subsurface in the Republic of Kazakhstan, dated December 31, 1998. 10.26 Credit Support and Pledge Agreement between Whittier Ventures, LLC and Chaparral Resources, Inc. dated July 2, 1998, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.27 Warrants issued to Whittier Ventures, LLC, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.28 Settlement Agreement and Release between Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. and Chaparral Resources, Inc., Howard Karren, Whittier Trust Company and James A. Jeffs dated October 30, 1998, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.29 Warrants issued to Heartland, Inc. of Wichita and Collins & McIlhenny, Inc., as joint tenants and to Don M. Kennedy, incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 28 Exhibit No. Description and Method of Filing - ----------- -------------------------------- 10.30 Loan Agreement between Challenger Oil Services, PLC and Chaparral Resources, Inc. dated September 10, 1998, incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.31 Promissory Note between Challenger Oil Services, PLC and Chaparral Resources, Inc. dated September 10, 1998, incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.32 International Daywork Drilling Contract - Land between Challenger Oil Services, PLC and Karakuduk-Munay, JSC, dated April 7, 1998 10.33 Amendment No. 1 to the International Daywork Drilling Contract - Land between Challenger Oil Services, PLC and Karakuduk-Munay, JSC, dated April 7, 1998 10.34 Amendment No. 2 to the International Daywork Drilling Contract - Land between Challenger Oil Services, PLC and Karakuduk-Munay, JSC, dated March 17, 1999 10.35 Letter Agreement dated March 17, 1999 between Karakuduk-Munay, JSC and Challenger Oil Services, PLC. 10.36 Letter Agreement and Restated Amendment No. 1 to Loan Agreement and Promissory Note dated March 18, 1999 between Challenger Oil Services, PLC and the Company. 21 Subsidiaries of the Registrant, incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Ernst & Young Kazakhstan 27 Financial Data Schedule 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHAPARRAL RESOURCES, INC., a Colorado corporation By /s/ Dr. Jack a. Krug ------------------------------------------- Dr. Jack A. Krug President and Chief Operating Officer By /s/ Michael B. Young ------------------------------------------- Michael B. Young, Treasurer, Controller, and Principal Accounting Officer Dated April 14, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Date Name and Title Signature April 14, 1999 Ted Collins, Jr., Director April 14, 1999 David A. Dahl, Director April 14, 1999 James A. Jeffs, Director April 14, 1999 Richard L. Grant, Director April 14, 1999 John G. McMillian, Director April 14, 1999 Arlo G. Sorensen Director April 14, 1999 *By Dr. Jack A. Krug, Attorney-in-Fact 30 Consolidated Financial Statements Chaparral Resources, Inc. Years ended December 31, 1998, December 31, 1997, and November 30, 1996 and the One Month Period ended December 31, 1996 with Reports of Independent Auditors Chaparral Resources, Inc. Consolidated Financial Statements Contents Chaparral Resources, Inc. Report of Independent Auditors .............................................1 Audited Consolidated Financial Statements Consolidated Balance Sheets ................................................2 Consolidated Statements of Operations.......................................4 Consolidated Statements of Cash Flows.......................................5 Consolidated Statements of Changes in Stockholders' Equity..................8 Notes to Consolidated Financial Statements..................................9 Supplemental Information - Disclosures About Oil and Gas Producing Activities - Unaudited........................................27 Karakuduk-Munay, JSC Report of Independent Auditors.............................................33 Audited Financial Statements Balance Sheets.............................................................34 Statements of Operations...................................................35 Statements of Cash Flows...................................................36 Statements of Shareholders' Deficit........................................37 Notes to Financial Statements..............................................38 Report of Independent Auditors The Board of Directors and Stockholders Chaparral Resources, Inc. We have audited the accompanying consolidated balance sheets of Chaparral Resources, Inc. as of December 31, 1998 and 1997 and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the two years then ended and for the one month period ended December 31, 1996 and the year ended November 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chaparral Resources, Inc. as of December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for the two years then ended and for the one month period ended December 31, 1996 and the year ended November 30, 1996 , in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred recurring operating losses and has no operating assets which are presently generating cash to fund its operating and capital requirements. The Company requires significant additional financing to meet its financial commitments and requirements through calendar year 1999. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. ERNST & YOUNG LLP Houston, Texas April 8, 1999 1
CHAPARRAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS December 31 December 31 1998 1997 ------------------------------------- Assets Current assets: Cash and cash equivalents $ 121,000 $ 3,423,000 Restricted cash (Note 3) 756,000 -- Accounts receivable 25,000 102,000 Prepaid expenses 76,000 62,000 Current portion of note receivable (Note 4) 420,000 -- ------------------------------------- Total current assets 1,398,000 3,587,000 Note receivable (Note 4) 589,000 -- Oil and gas properties and investments - full cost method Republic of Kazakhstan (Karakuduk Field)-- Not subject to depletion (Notes 5 and 6): 32,261,000 19,922,000 Furniture, fixtures and equipment 93,000 13,000 Less accumulated depreciation (17,000) (3,000) ------------------------------------- 76,000 10,000 ------------------------------------- Total assets $ 34,324,000 $ 23,519,000 ===================================== See accompanying notes 2 CHAPARRAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS December 31 December 31 1998 1997 ------------------------------------- Liabilities and stockholders' equity Current liabilities: Trade accounts payable $ 223,000 $ 177,000 Accrued liabilities: Accrued compensation 418,000 -- Accrued other 104,000 54,000 Current portion of note payable, net of discount (Note 7) 940,000 -- ------------------------------------- Total current liabilities 1,685,000 231,000 Accrued compensation (Note 13) 210,000 210,000 Redeemable preferred stock (Note 10)- cumulative, convertible, Series A, 50,000 issued and outstanding, at stated value, $5.00 cumulative annual dividend, $5,250,000 redemption value 4,850,000 4,500,000 Stock Subscription - 0 shares subscribed at December 31, 1998 175,000 shares subscribed (25,000 Series A; 75,000 Series B; 75,000 Series C) at December 31, 1997 -- -- Stockholders' equity (Note 8): Common stock - authorized, 100,000,000 shares at December 31, 1998 and December 31, 1997, of $.10 par value; issued and outstanding, 58,378,790 and 49,720,456 shares at December 31, 1998 and December 31, 1997 5,837,000 4,971,000 Capital in excess of par value 41,774,000 30,340,000 Unearned portion of restricted stock awards (56,000) (109,000) Preferred stock - 1,000,000 shares authorized, 225,000 shares designated of Series A, B, and C as per above -- -- Stock subscription receivable (Note 10) (506,000) (1,770,000) Accumulated deficit (19,470,000) (14,854,000) ------------------------------------- Total stockholders' equity 27,579,000 18,578,000 ------------------------------------- Total liabilities and stockholders' equity $ 34,324,000 $ 23,519,000 ===================================== See accompanying notes. 3
CHAPARRAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended Year Ended Month Ended Year Ended December 31 December 31 December 31 November 30 1998 1997 1996 1996 --------------------------------------------------------------------- Revenue: Oil and gas sales $ -- $ -- $ -- $ 147,000 Costs and expenses: Production costs -- -- -- 37,000 Depreciation and depletion 14,000 7,000 -- 3,000 General and administrative 3,017,000 1,654,000 118,000 1,468,000 --------------------------------------------------------------------- 3,031,000 1,661,000 118,000 1,508,000 --------------------------------------------------------------------- Loss from operations (3,031,000) (1,661,000) (118,000) (1,361,000) Other income (expense): Interest income 1,184,000 421,000 4,000 154,000 Interest expense (205,000) (298,000) (17,000) (90,000) Equity in loss from investment (Note 5, (1,744,000) (832,000) -- (971,000) Note 6, and Note 19) Legal settlement (Note 9) (234,000) -- -- -- Other, net -- (19,000) 1,000 89,000 --------------------------------------------------------------------- (999,000) (728,000) (12,000) (818,000) --------------------------------------------------------------------- Loss before extraordinary item (4,030,000) (2,389,000) (130,000) (2,179,000) Extraordinary loss on extinguishment of long-term debt (236,000) (214,000) -- (237,000) --------------------------------------------------------------------- Net loss $ (4,266,000) $ (2,603,000) $ (130,000) $ (2,416,000) ===================================================================== Basic and diluted earnings per share: Net loss per share before extraordinary item $ (.08) $ (.05) $ -- $ (.07) Extraordinary loss per share $ (.01) $ (.01) $ -- $ (.01) Loss per share $ (.09) $ (.06) $ -- $ (.08) Weighted average number of shares outstanding 53,908,649 41,561,432 37,526,517 32,081,382 See accompanying notes 4
CHAPARRAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASHFLOWS Year ended Year ended Month Ended Year Ended December 31 December 31 December 31 November 30 1998 1997 1996 1996 ------------------------------------------------------------------ Cash flows from operating activities Net loss $(4,266,000) $(2,603,000) $ (130,000) $(2,416,000) Adjustments to reconcile net loss to net cash used in operating Activities: Equity loss from investment 1,744,000 832,000 -- 971,000 Depreciation and depletion 14,000 7,000 -- 4,000 Loss on the sale of oil and gas properties -- 3,000 (3,000) -- Bad debt expense 29,000 37,000 -- -- Write-down of oil and gas properties -- 30,000 -- -- Stock issued for services and bonuses 600,000 78,000 -- -- Stock options issued for services and bonuses 113,000 117,000 -- -- Warrants issued for legal settlement 34,000 -- -- -- Amortization of note discount 154,000 198,000 -- -- Loss on extinguishment of debt 236,000 214,000 -- 237,000 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable 48,000 (129,000) 51,000 25,000 Prepaid expenses (14,000) (59,000) -- 10,000 Note receivable (1,009,000) -- -- -- Other -- 95,000 -- -- Increase (decrease) in: Accounts payable 46,000 177,000 (44,000) 108,000 Accrued liabilities other 50,000 19,000 (19,000) (317,000) Accrued compensation 418,000 -- -- 385,000 ----------------------------------------------------------------- Net cash used in operating activities $(1,803,000) $ (984,000) $ (145,000) $ (993,000) 5 CHAPARRAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASHFLOWS (CONTINUED) Cash flows from investing activities Additions to property and equipment $ (80,000) $ (6,000) $ -- $ -- Investment in and advances to foreign oil and gas properties (14,083,000) (6,504,000) (17,000) (6,936,000) Proceeds from sale of interest in oil and gas properties - domestic -- 282,000 -- 161,000 Increase in other assets -- -- -- (74,000) --------------------------------------------------------------------- Net cash used in investing activities (14,163,000) (6,228,000) (17,000) (6,849,000) Cash flows from financing activities Net proceeds from notes payable $ 2,045,000 $ 300,000 $ 500,000 $ 1,650,000 Restricted cash (756,000) -- -- -- Payable for CAP-G shares -- (744,000) -- -- Repayment of note payable (1,095,000) (450,000) (200,000) (750,000) Proceeds from warrant exercise 20,000 3,309,000 -- 316,000 Net proceeds from redeemable preferred stock issuance -- 5,000,000 -- -- Net proceeds from private placement 12,450,000 2,300,000 -- 6,907,000 ---------------------------------------------------------------------- Net cash provided by financing activities 12,664,000 9,715,000 300,000 8,123,000 ---------------------------------------------------------------------- Net increase in cash and cash equivalents (3,302,000) 2,503,000 138,000 281,000 Cash and cash equivalents at beginning of period 3,423,000 920,000 782,000 501,000 --------------------------------------------------------------------- Cash and cash equivalents at end of period $ 121,000 $ 3,423,000 $ 920,000 $ 782,000 ===================================================================== 6 CHAPARRAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASHFLOWS (CONTINUED) Supplemental cash flow disclosure Interest paid $ 58,000 $ 53,000 $ 17,000 $ 36,000 Supplemental schedule of noncash Investing and financing activities Common stock issued for acquisition of CAP-G $ -- $1,000,000 $ -- $1,833,000 Accounts payable--CAP-G shares -- -- -- 744,000 Discount recognized for note issued with detachable stock warrants 146,000 74,250 93,750 290,000 Warrants issued for common stock in conjunction with subscription and issuance of preferred stock -- 2,270,000 -- -- Common stock issued for accrued compensation -- 175,000 -- -- Common stock issued upon: Conversion of debentures -- 1,500,000 -- 264,000 Conversion of accrued interest -- 50,000 -- -- See accompanying notes. 7
CHAPARRAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Common Stock Capital in Stock Unearned -------------------------- Excess of Par Subscription Restricted Accumulated Shares Amount Value Receivable Stock Awards Deficit Total ----------------------------------------------------------------------------------------------- Balance at November 30, 1995 20,484,192 2,048,000 12,577,000 -- -- (9,705,000) 4,920,000 Warrants exercised for capital stock 857,325 86,000 230,000 -- -- -- 316,000 Conversion of debentures for capital stock 600,000 60,000 204,000 -- -- -- 264,000 Investment in affiliate 1,585,000 159,000 1,674,000 -- -- -- 1,833,000 Capital stock issued in private placement 14,000,000 1,400,000 5,507,000 -- -- -- 6,907,000 Debt issuance costs-stock warrants issued -- -- 290,000 -- -- -- 290,000 Net loss -- -- -- -- -- (2,416,000) (2,416,000) --------------------------------------------------------------------------------------------- Balance at November 30, 1996 37,526,517 3,753,000 20,482,000 -- -- (12,121,000) 12,114,000 Warrants exercised for capital stock 5,648,077 564,000 2,745,000 -- -- -- 3,309,000 Conversion of debentures for capital stock 2,169,732 216,000 1,333,000 -- -- -- 1,549,000 Capital stock issued for services 87,669 9,000 69,000 -- -- -- 78,000 Stock options issued for services -- -- 227,000 -- (109,000) -- 118,000 Capital stock issued for accrued compensation 350,000 35,000 140,000 -- -- -- 175,000 Capital stock issued for investment in affiliate 400,000 40,000 960,000 -- -- -- 1,000,000 Capital stock issued in private placement 3,538,461 354,000 1,946,000 -- -- -- 2,300,000 Debt issuance costs--stock warrants issued -- -- 168,000 -- -- -- 168,000 Preferred stock issuance and related common stock warrants -- -- 2,270,000 (1,770,000) -- -- 500,000 Net loss -- -- -- -- -- (2,733,000) (2,733,000) --------------------------------------------------------------------------------------------- Balance at December 31, 1997 49,720,456 4,971,000 30,340,000 (1,770,000) (109,000) (14,854,000) 18,578,000 Warrants exercised for capital stock 80,000 8,000 12,000 -- -- -- 20,000 Conversion of debentures for capital stock -- -- -- -- -- -- -- Capital stock issued for services 245,000 25,000 620,000 -- (45,000) -- 600,000 Stock options issued for services -- -- 34,000 -- (34,000) -- -- Stock options expired -- -- (19,000) -- 17,000 -- (2,000) Amortization of restricted stock awards -- -- -- -- 115,000 -- 115,000 Capital stock issued in private placement 8,333,334 833,000 11,617,000 -- -- -- 12,450,000 Legal Settlement warrants issued -- -- 34,000 -- -- -- 34,000 Debt issuance costs-stock warrants issued -- -- 400,000 -- -- -- 400,000 Preferred stock issuance and related common stock warrants -- -- (1,264,000) 1,264,000 -- -- -- Cumulative dividend Series A Redeemable Preferred Stock -- -- -- -- -- (250,000) (250,000) Discount accretion on redeemable preferred stock -- -- -- -- -- (100,000) (100,000) Net loss -- -- -- -- -- (4,266,000) (4,266,000) --------------------------------------------------------------------------------------------- Balance at December 31, 1998 58,378,790 5,837,000 41,774,000 (506,000) (56,000) (19,470,000) 27,579,000 ============================================================================================= See accompanying notes 8
CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies and Organization Organization, Principles of Consolidation, and Basis of Presentation Chaparral Resources, Inc. was incorporated in the state of Colorado on January 13, 1972, principally to engage in the exploration, development and production of oil and gas properties. During 1998, Chaparral Resources, Inc. focused substantially all of its efforts on the exploration and development of the Karakuduk Field, located in the central Asian Republic of Kazakhstan. The consolidated financial statements include the accounts of Chaparral Resources, Inc. and its 100% owned subsidiaries, Central Asian Petroleum (Guernsey) Limited ("CAP-G"), Road Runner Services Company ("RRSC"), and Central Asian Petroleum, Inc. (Delaware). Hereinafter, Chaparral Resources, Inc. and its wholly-owned subsidiaries are collectively referred to as "the Company". All significant intercompany transactions have been eliminated. In order to unite the reporting period of the Company with that of its subsidiaries, the fiscal year of the Company was changed to a December 31 year-end from the previous November 30 year end. This change took effect on May 29, 1997. As a result of this change, a statement of operations and cash flows for the year ended November 30, 1996 and the month ended December 31, 1996, are presented. In 1995, the Company's ownership in CAP-G increased from 25% to 45%. The Company acquired an additional 45% interest in CAP-G in 1996. In 1997, the Company concluded the acquisition of the remaining 10% minority interest in CAP-G, increasing its total ownership to 100%. CAP-G owns a 50% interest in Karakuduk-Munay, JSC. ("KKM"), a Kazakhstan joint stock company, which is a participant in an agreement for the exploration, development and production of oil in the Karakuduk Field. The Company shares control of KKM through participation on the Board and accordingly accounts for its investment using the equity method. On February 1, 1997, KKM was informed that a Kazakhstan Presidential Edict had been issued announcing the liquidation of Munaygaz, the government-owned company which held a 20% interest in KKM. As a result of this action, KKM was required to re-register as required by Kazakh regulations. KKM was re-registered on July 24, 1997, with the government of Kazakhstan. The Company believes that KKM is now in compliance with all laws and regulations related to the registration requirements relating to Kazakhstan legal entities. The re-registered KKM is owned jointly by CAP-G (50%), KazakhOil (40%) and a private Kazakhstan joint stock company (10%). KazakhOil, the national petroleum company of Kazakhstan, represents the majority of the ownership interest in KKM held by the Kazakhstan government. Cash and Cash Equivalents Cash equivalents are defined as highly liquid investments purchased with an original maturity of three months or less. Oil and Gas Property and Equipment The Company and KKM use the full cost method of accounting for their oil and gas properties. All costs incurred directly associated with the acquisition, exploration and development of oil and gas properties are capitalized in cost pools for each country in which the Company operates. The limitation on such capitalized costs is determined in accordance with rules specified by the Securities and Exchange Commission. Capitalized costs are depleted using the units of production method based on proven reserves. 9 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies and Organization (continued) Sales of Proved Oil and Gas Property Sales of oil and gas properties, whether or not being amortized currently, are accounted for as adjustments of capitalized costs, with no gain or loss recognized unless such adjustments significantly alter the relationship between capitalized costs and proved reserves of oil and gas. A significant alteration would not ordinarily be expected to occur for sales involving less than 25% of the reserve quantities of a given cost center. If gain or loss is recognized on such a sale, total capitalized costs within the cost center are allocated between the reserves sold and reserves retained on the same basis used to compute amortization, unless there are substantial economic differences between the properties sold and those retained, in which case capitalized costs are allocated on the basis of the relative fair values of the properties. Oil and Gas Properties Not Subject to Depletion Costs associated with acquisition and evaluation of unproved properties are excluded from the amortization computation until it is determined if proved reserves can be attributed to the properties. These unevaluated properties are assessed annually for possible impairment and the amount impaired, if any, is added to the amortization base. Costs of exploratory dry holes and geological and geophysical costs not directly associated with specific unevaluated properties are added to the amortization base as incurred. Revenue Recognition Revenues and their related costs are recognized upon delivery of commercial quantities of oil and gas production, in accordance with the accrual method of accounting. Losses, if any, are provided for in the period in which the loss is determined to occur. Depreciation of Other Property and Equipment Furniture, fixtures and equipment are recorded at cost and are depreciated using the straight-line method over estimated useful lives, which range from three to ten years. Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, which require that taxes be provided on the liability method based upon the tax rate at which items of income and expense are expected to be settled in the Company's tax return. Loss Per Common Share Basic loss per common share is calculated by dividing net loss, after deducting preferred stock dividends, by the aggregate of the weighted average shares outstanding during the period. Diluted loss per common share considers the dilutive effect of the average number of common stock equivalents that are outstanding during the period. 10 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Loss Per Common Share (Continued) Diluted loss per share is not presented because the exercise of 3,483,500 stock options and 4,554,500 warrants are antidilutive. In addition, the effect of the conversion of the convertible preferred stock into 2,335,178 shares of common stock is also antidilutive. The following table sets forth the computation of the numerator for purposes of determining basic and diluted loss per share.
Year ended Year ended Month Ended Year Ended December 31 December 31 December 31 November 30 1998 1997 1996 1996 ------------------------------------------------------------------- Loss before extraordinary item ($4,030,000) ($2,389,000) ($ 130,000) ($2,179,000) Cumulative annual dividend Series A Redeemable Preferred Stock (250,000) -- -- -- Discount accretion Series A Redeemable Preferred Stock (100,000) -- -- -- -------------------------------------------------------------------- Numerator for basic and diluted loss per share ($4,380,000) ($2,389,000) ($ 130,000) ($2,179,000) =========== =========== =========== ===========
Stock Based Compensation The Company follows the method of accounting for employee stock based compensation plans prescribed by APB No. 25, which is allowed by SFAS No. 123, Accounting for Stock-Based Compensation. In accordance with APB No. 25, the Company has not recognized compensation expense for stock options in situations where the exercise price of the options equals the market price of the underlying stock on the date of grant, otherwise known as the measurement date. New Accounting Standards In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. The Company adopted SFAS 132 during 1998. The impact of SFAS 132 on the Company's reporting of pension and other post retirement benefits is not material. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This standard provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. This statement is effective for years beginning after June 15, 1999. As of December 31, 1998, the Company has not adopted SFAS 133. The Company is evaluating SFAS 133 and intends to adopt the statement no later than January 1, 2000. The impact of SFAS 133 on the Company's financial position and results of operations is not expected to be material. Fair Value of Financial Instruments All of the Company's financial instruments, including cash and cash equivalents, trade receivables, notes receivable, and notes payable, have fair values which approximate their recorded values as they are either short-term in nature or carry interest rates which approximate market rates. 11 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Risks and Uncertainties The ability of KKM to realize the carrying value of its assets is dependent on being able to extract, transport and market hydrocarbons. Currently, exports from the Republic of Kazakhstan are restricted since they are dependent on limited transport routes and, in particular, access to the Russian pipeline system. Domestic markets in the Republic of Kazakhstan might not currently permit world market prices to be obtained. Management believes, however, that over the life of the project, transportation restrictions will be alleviated and prices will be achievable for hydrocarbons extracted to allow full recovery of the carrying value of its assets. 2. Going Concern The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 1998, substantially all of the Company's assets are invested in the development of the Karakuduk Field, a shut-in oil field in the central Asian Republic of Kazakhstan, which will require significant additional funding. The Company has incurred recurring operating losses and has no operating assets presently generating cash to fund its operating and capital requirements. The Company's current cash reserves and cash flow from operations will not be sufficient to meet the expenditure requirements required of KKM by its operating license through 1999. Should the Company not meet its expenditure requirements under the license agreement to develop the Karakuduk Field, the Company's rights under the agreement can be terminated (see Note 15). The Company believes that additional financing will be available; however, there is no assurance that additional financing will be available, or if available, that it is timely or on terms favorable to the Company. The Company's continued existence as a going concern is dependent upon the success of future KKM operations, which are, in the near term, dependent on the successful financing and development of the Karakuduk Field, of which there is no assurance. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. 3. Restricted Cash As of December 31, 1998, the Company held $756,000 cash on hand, as collateral for loans made by a financial institution to KKM for the acquisition of tangible equipment used in the Karakuduk Field. 12 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. Notes Receivable As of December 31, 1998, the Company has an outstanding $1,009,000 note receivable, dated September 10, 1998, from a third-party drilling contractor (Contractor). The note consists of $1,000,000 in cash advances from the Company, plus accrued interest, used by the Contractor to ready a drilling rig for use in Kazakhstan. Under the original terms of the note, the principal balance was to be repaid in twelve monthly payments of approximately $84,000, plus accrued interest, beginning on the date the first payment is made to the Contractor by KKM for use of the drilling rig. On March 17, 1999, the Company amended the terms of the note to extend the repayment period from twelve to twenty four months, beginning with the first payment to the Contractor for services provided to KKM. The Company will receive principal payments of approximately $42,000 per month, plus accrued interest, through February 2001. As of December 31, 1998, the Company recorded $420,000 as the current portion of note receivable, reflecting management's estimated repayment to be received during 1999. 5. Acquisition of CAP-G As of December 31, 1998, the Company owns 100% of the outstanding common stock of CAP-G. This wholly-owned subsidiary was acquired on a step basis. The Company acquired 45% of the outstanding stock of CAP-G prior to December 1, 1995. In January and February 1996, the Company entered into agreements to acquire, for a total of $5,850,000 cash and 1,785,000 shares of the Company's restricted common stock, the remaining 55% of the outstanding stock of CAP-G. The Company consummated the purchase of 25% of the outstanding stock of CAP-G in April 1996 by paying $2,000,000 in cash and issuing 685,000 shares of the Company's common stock. The Company acquired an additional 5% of the outstanding common stock of CAP-G in April 1996 for $250,000 cash. To acquire an additional 15% of the outstanding common stock of CAP-G, the Company agreed to pay $1,975,000 in cash and issue 900,000 shares of the Company's common stock. This purchase was consummated on March 11, 1996, when the Company paid $750,000 in cash and issued 900,000 shares of the Company's common stock. The remaining cash balance of $1,225,000 for the purchase was to be paid in four quarterly equal payments of $306,250 between June 11, 1996 and March 11, 1997. The first payment of $306,250 was paid in June 1996 and an additional $175,000 was paid in September 1996. The agreement was subsequently revised so that the Company paid $200,000 in December 1996 and the remaining balance of $543,750 in a series of payments in 1997. Finally, in 1997 the Company exercised an option to acquire the remaining 10% of the outstanding common stock of CAP-G. The Company paid $1,625,000 (which includes $800,000 of loans the Company previously made to GAP-G on behalf of the prior owner of the 10% interest) and issued 400,000 shares of common stock, which includes an additional 200,000 shares above the original agreed amount. On September 17, 1997, the Company granted an option to an investor entitling the investor to acquire 5% of the issued and outstanding shares of CAP-G on or before October 31, 1997. Upon the closing of this agreement, the investor paid the Company $450,000 of the $1.5 million purchase price, with the remaining due on or before September 30, 1997. The option agreement expired and the Company was not required to return the deposit. The Company has recorded the $450,000 deposit as a reduction in the oil and gas properties and investments in Kazakhstan. The acquisition costs exceeding the underlying net assets at the time of each acquisition of CAP-G common stock have been added to Oil and Gas Investments reflected on the balance sheet. The equity in losses for 1997 and 1996 have been recorded at the full 50% interest due to the earlier agreements to acquire the remaining shares in CAP-G and the Company financing 100% of CAP-G's operations. 13 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Oil and Gas Investments All costs capitalized related to the Karakuduk license are included in oil and gas properties not subject to depletion. Certain license acquisition costs and geological and geophysical expenditures incurred by the Company but not rebilled to KKM have been capitalized. Certain overhead costs and general administrative costs have been expensed as incurred by KKM. Costs capitalized to Oil and Gas Investments consist of: December 31, December 31, 1998 1997 ----------------------------- Oil and Gas Investments: Investments in KKM common stock $ 100,000 $ 100,000 Advances to and interest due from KKM 23,380,000 9,820,000 Acquisition costs 10,613,000 10,613,000 Other capitalizable costs 1,715,000 1,192,000 ----------------------------- Total gross oil and gas investments 35,808,000 21,725,000 Less: equity losses (3,547,000) (1,803,000) ----------------------------- Total oil and gas investment $ 32,261,000 $ 19,922,000 ============================= The condensed financial statements of KKM are as follows: December 31, December 31, 1998 1997 ----------------------------- Condensed Balance Sheet Current Assets $ 730,000 $ 796,000 Non-Current Assets (primarily oil and gas properties, full cost method) 19,130,000 7,975,000 Current Liabilities Current Loan Payable to Related Party 3,000,000 -- Other Current Liabilities 3,205,000 2,767,000 Non-Current Liabilities Loan Payable to Related Party 20,380,000 9,820,000 Other Non-Current Liabilities 578,000 -- Common stock 200,000 200,000 Accumulated Deficit 7,503,000 4,016,000 Condensed Income Statement Revenues $ -- $ -- Cost and Expenses 3,488,000 1,665,000 Net Loss $ 3,488,000 $ 1,665,000 14 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Oil and Gas Investments (Continued) The Karakuduk Field is still in a preliminary stage of development by KKM. The estimated future development expenditures in order to ascertain the quantities of proved reserves attributable to the Karakuduk Field are significant. All costs incurred related to the workover program have been capitalized as exploration costs to oil and gas properties not subject to depletion. While the future ability of the Company to export hydrocarbons and therefore realize world market prices is uncertain under current restricted transport options in the Republic of Kazakhstan, management believes that over the life of the project as a whole, future cash flows justify the carrying amount of the oil and gas properties. No impairment provision has been reflected in these financial statements. 7. Notes Payable On December 3, 1998, the Company restructured a $975,000 loan that the Company borrowed on July 3, 1998, from the Chase Bank of Texas (Chase). Under the new terms, the note accrues interest at an adjustable prime rate, as determined by Chase. As of December 31, 1998 the stated prime rate was 7.75%. Principal payments in the amount of $250,000, plus accrued interest, are due quarterly, beginning on February 28, 1999. The $975,000 loan is fully guaranteed with a stand-by letter of credit from an investor in the Company. In return for issuing the loan guarantee, the Company paid the guarantor $10,000 plus related costs, issued warrants to purchase 20,000 shares of the Company's common stock (See Note 8), and granted the guarantor a security interest in the Company's common stock of Central Asian Petroleum (Guernsey) (CAP-G). In the event of the Company's default on the $975,000 note, the guarantor's security interest in the Company's common stock in CAP-G cannot be perfected for at least 30 days after notification of such default. In the event of default, the Company may make full payment of any outstanding principal and interest on the note plus any additional charges incurred by the guarantor to completely remove any security interest held by the guarantor. 8. Common Stock 1989 Stock Warrant Plan During 1989, the Board of Directors approved a stock warrant plan for key employees and directors. The Company reserved 1,175,000 shares of its common stock for issuance under the plan. The warrants must be granted and exercised within a 10-year period ending April 30, 1999. Immediately following approval of the plan by the Board of Directors, warrants for 1,175,000 shares were granted with an exercise price of $.28 per share. Warrants for 100,000, 225,000, and 100,000 shares were exercised for values of $28,000, $63,000, and $28,000 during 1997, 1996, and 1995, respectively. 1997 Incentive Stock Plan On July 17, 1997, the shareholders of the Company approved the 1997 Incentive Stock Plan pursuant to which up to 1,000,000 shares of the Company's common stock may be granted to directors and employees of, or consultants to, the Company. On June 26, 1998, the shareholders of the Company repealed the 1997 Incentive Stock Plan and approved the 1998 Incentive and Nonstatutory Stock Option Plan, described below. No options were granted under this plan. 15 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Common Stock (Continued) 1997 Non-employee Directors' Stock Option Plan On July 17, 1997, the shareholders approved the 1997 Non-employee Directors' Stock Option Plan, which authorized granting 25,000 options annually to each non-employee director in office or elected to the Board of Directors of the Company, as of the date of the annual meeting of the Company's shareholders. On June 26, 1998, the shareholders of the Company repealed the 1997 Non-employee Directors' Stock Option Plan and approved the 1998 Incentive and Nonstatutory Stock Option Plan, described below. As of June 26, 1998, the date of termination of the plan, options for 200,000 shares with an exercise price of $.83 had been issued to non-employee directors. 1998 Incentive and Nonstatutory Stock Option Plan On June 26, 1998, the shareholders approved the 1998 Incentive and Nonstatutory Stock Option Plan (the "Plan"), pursuant to which up to 3,000,000 options to acquire the Company's common stock may be granted to officers, directors, employees, or consultants of the Company and its subsidiaries. The stock options granted under the Plan may be either incentive stock options or nonstatutory stock options. The Plan has an effective term of ten years, commencing on May 20, 1998. The Company did not grant any options under the Plan during 1998. Non-Qualified Stock Options During 1997, the Company granted five year non-qualified options, generally with vesting periods of one year, to purchase 2,885,000 restricted shares of the Company's common stock to various directors of, and consultants to, the Company. Options relating to 1,442,500 shares have an exercise price of $.75 per share and options relating to 1,442,500 shares have an exercise price of $1.50 per share. The Company issued various five-year, non-qualified stock options to employees, consultants and directors of the Company during 1997. The Company granted options to purchase 126,000 shares of the Company's common stock, at an exercise price of $.75. The Company granted options to purchase another 131,000 shares of the Company's common stock, at an exercise price of $1.50 a share. The Company has recorded the fair value of these stock options at the date of grant at $227,000. During 1998, the Company granted five-year non-qualified options to purchase 297,500 shares of the Company's common stock to various employees of, and consultants to, the Company at various exercise prices ranging between $.72 and $2.43 per share. The Company recorded the stock options granted to the consultants at their fair value of $34,000 on the date of grant. During 1998, 156,000 options to purchase the Company's common stock granted to various employees of, and consultants to, the Company expired. The options had exercise prices ranging between $.75 and $2.43 per share. Common Stock Offerings and Common Stock Warrant Issuances During 1993, the Company sold a total of 2,685,750 shares of common stock and issued 1,342,875 warrants to purchase common stock with an exercise price of $.40. An additional 105,540 warrants to acquire shares of common stock were paid as commission. Prior to 1995, 650,625 of these warrants were exercised. During 1995, 165,375 of these warrants were exercised for the purchase of shares of common stock. The exercise price was $.40 per share, for a total of $66,000. During 1996, 632,325 of these warrants were exercised at an exercise price of $.40 per share, for a total of $252,930. All warrants issued in connection with the 1993 private placement have been exercised. 16 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Common Stock (Continued) During December 1995 and January 1996, the Company borrowed $1,050,000. In connection to the loans, the Company issued 780,000 warrants to purchase common stock at an exercise price of $0.25. During 1998, 80,000 warrants were exercised at a price of $0.25 for a total of $20,000. On October 30, 1998, 200,000 warrants to purchase the Company's common stock at an exercise price of $0.25 expired. During 1996, the Company sold 14,000,000 shares of common stock in a private placement at a price of $.50 per share. In connection with the private placement, the Company issued warrants to purchase 1,022,000 shares of the Company's common stock for a total of $10.00 to the sales agent as a commission. In April 1996, private investors converted promissory notes totaling $300,000 into 600,000 shares of the Company's common stock at a conversion price of $.50 per share. During 1997, the Company entered into an agreement to allow the Company to acquire M-D, International Petroleum (MDI), a private company. Accordingly, on January 8, 1997 the Company agreed to issue 180,000 shares of the Company's common stock having a value of $90,000 to the potential joint venture partner. Simultaneously, the principal stockholders of MDI put 180,000 shares of the Company's common stock into escrow. These shares would be returned to the Company if the Company did not acquire MDI by July 7, 1997. Under the agreement, the Company was to acquire a 5% joint venture interest for the development of certain natural gas fields in Uzbekistan. The agreement of the Company to acquire MDI was contingent upon the potential joint venture partner successfully obtaining rights to develop the natural gas fields in Uzbekistan. As of July 7, 1997, the agreement with Uzbekistan to develop the natural gas fields had not been obtained. Consequently, the agreement by the Company to acquire MDI was nullified and the escrowed shares were returned to the Company and retired. During February 1997, the Company entered into a severance agreement with Paul V. Hoovler, a former Chief Executive Officer and President of the Company, pursuant to which Mr. Hoovler received warrants to purchase 100,000 shares of the Company's common stock at an exercise price of $.85 per share and warrants to purchase 100,000 shares of the Company's common stock at an exercise price of $1.25 per share. During 1997, the Company sold 3,076,923 shares of the Company's common stock for $.65 per share for a total of $2,000,000 to a private investor. In connection with the transaction, the Company also issued a warrant to the investor to purchase up to an additional 4,615,385 shares of the Company's common stock for $3,000,000 or $.65 per share. The warrant was to expire on December 31, 1997. In October and November 1997, the private investor exercised warrants to acquire 4,615,385 shares of the Company's common stock. The same party exercised another warrant for 125,000 shares of the Company's common stock exercisable at an exercise price of $0.25 per share. In April 1997, a private investor converted a $500,000 promissory note (plus $2,000 of accrued interest) that had previously been issued by the Company into 772,991 shares of the Company's common stock at a conversion price of $.65 per share. On October 28, 1997, 423,076 shares of the Company's common stock were issued to a private investor by way of a "cashless" exercise of a warrant as allowed by the warrant. This warrant was originally exercisable for 500,000 shares at a conversion price of $.25 per share. In November 1997, a private investor converted a $1,000,000 promissory note (plus $48,000 of accrued interest) that previously had been issued by the Company into 1,396,741 shares of the Company's common stock at a conversion price of $.75 per share. During 1997, the Company issued 87,669 shares of the Company's common stock to a consultant in lieu of $78,000 of accrued fees that had not been paid. As further described in Note 13, The Company issued 350,000 shares of the Company's restricted common stock to Mr. Howard Karren, former Chairman of the Board of Directors of the Company, as payment of $175,000 for services during 1996. The Company recorded accrued compensation of $175,000 in 1996, and issued the common stock in 1997. 17 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Common Stock (Continued) In December 1997, the Company exercised an option to acquire the remaining 10% of the outstanding shares of CAP-G (Note 3). As part of the consideration, the Company issued 400,000 shares valued at $1,000,000. During 1997, the Company sold 461,538 shares of the Company's common stock for $.65 per share for a total of $300,000 to a private investor. In connection with the transaction, the Company also issued warrants to the investor to purchase up to an additional 461,538 shares of the Company's common stock for $300,000 or $.65 per share. The private investor exercised a portion of the warrant on December 31, 1997, and received a total of 384,616 shares of the Company's common stock. The remaining warrants expired on the same day. On January 23, 1998, the Company, granted 90,000 shares of the Company's common stock to the directors of the Company and granted 185,000 shares of the Company's common stock to various employees of, and consultants to, the Company, of which 30,000 shares will vest with respect to 10,000 shares on each of January 30, 1999, 2000, and 2001. As a result of these transactions, the Company recognized $600,000 in 1998 compensation expense. An additional $45,000 relating to the non-vested stock grants will be amortized over the vesting period of the grants. On April 3, 1998, the Company sold 1,250,000 shares of the Company's Common stock for $2.00 per share for at total of $2,500,000 to a private investor. Allen & Company, Incorporated acted as placement agent in connection with the sale of the 1,250,000 shares. As a result, Allen & Company, Incorporated's warrants to purchase shares of the Company's common stock, originally issued as a commission in connection with the Redeemable Preferred Stock sale on November 24, 1997 (See Note 10), became exercisable for an additional 100,000 shares. The warrants to purchase the additional 100,000 shares of the Company's Common stock are exercisable through November 25, 2002, at an exercise price of $0.01 per share. In connection with the $1,000,000 loan referred to in Note 12, on June 4, 1998, the Company issued warrants to purchase 1,000,000 shares of the Company's common stock to two related parties, one of which is a director of the Company. The warrants are exercisable through November 25, 2002, at an exercise price of $3.50 per share. The Company recorded the fair market value of the warrants ($367,000) as a discount of notes payable, amortizable as interest expense over the life of the loan. The fair market value of the warrants was estimated as of June 4, 1998, using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rates of 5.53%, dividend yield of 0%, volatility factors of the expected market price of the Company's Common stock of .593, and a weighted average life expectancy of the warrants of 4.5 years. On July 3, 1998, as discussed in Note 7, the Company issued warrants to purchase 20,000 shares of the Company's Common stock at an exercise price of $.01 per share. The Company recorded the fair market value of the warrants (approximately $32,000) plus the related loan costs, as a discount of notes payable and is being amortized as additional interest expense over the life of the loan. The fair market value of the warrants was determined using the Black-Scholes option pricing model, with the following weighted average assumptions: risk free interest rate 5.53%, dividend yield of 0%, volatility factors of the Company's common stock of .644, and a weighted average life expectancy of the warrants of 5 years. On July 28 and July 29, 1998, the Company sold 6,666,667 shares of the Company's common stock for $1.50 per share for at total of $10,000,000 to certain investors. Issuance cost incurred were approximately $50,000 and has been recorded as a reduction to the proceeds received from the sale. Allen & Company, Incorporated acted as placement agent in connection with the sale of the 6,666,667 shares. As a result, Allen & Company, Incorporated's warrants to purchase 900,000 shares of the Company's common stock, originally issued as commission in connection with the Redeemable Preferred Stock sale on November 24, 1997, became exercisable for an additional 400,000 shares of the Company's common stock. The 400,000 warrants are exercisable through November 25, 2002, at an exercise price of $0.01 per share. As of December 31, 1998, 200,000 warrants held by Allen & Company were unexercisable pending the performance of future services. 18 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Common Stock (Continued) Due to the fact, the sales price of the 6,666,667 shares was below a price of $2.00 per share, the Company was required to issue an additional 416,667 shares to the investor who purchased 1,250,000 shares of the Company's common stock for $2,500,000 in April 1998 in order to satisfy certain price protection agreements the Company has with such investor. On October 30, 1998, the Company issued warrants to purchase 200,000 shares of the Company's common stock at an exercise price of $1.00, exercisable through January 02, 1999, to settle the lawsuit filed against the Company by Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. on November 14, 1997. The Company recorded legal settlement expense of $34,000, equal to the fair market value of the warrants issued on the date of grant. On January 03, 1999, the 200,000 warrants expired. See Note 9. SFAS 123 Disclosure SFAS 123 requires that pro forma information regarding net income and earnings per share be determined as if the Company had accounted for its employee stock option under the fair value method as defined in that Statement for options granted or modified after December 31, 1994. SFAS 123 requires disclosure of option plans for the previous three years, but since 1997 was the first year for stock option issuances to meet the new requirement, weighted average assumptions are calculated only for 1997 and 1998. The fair value for applicable options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1997 and 1998: risk free interest rates of 5.53%; dividend yield of 0%; volatility factors of the expected market price of the Company's common stock between 0.528 and 1.07; and a weighted average life expectancy of the options of 4.9 years The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma information follows: Year ended Year ended Month ended December 31, December 31, December 31, 1998 1997 1996 ----------------------------------------- Net Loss under APB 25 (4,616,000) (2,603,000) (130,000) Effect of FASB 123 (190,000) (525,000) -- ---------------------------------------- Pro forma Net Loss (4,806,000) (3,128,000) (130,000) ======================================== Pro forma Basic and Diluted Earnings per Share $ (0.09) $ (0.08) $ -- 19 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Common Stock (Continued) A summary of the Company's stock option activity and related information for the periods ended follows:
Shares Weighted Weighted Under Average Exercise Average Option Price Fair Value ------------------------------------------------------ Unexercised options outstanding - November 30, 1996 -- -- -- Options Granted 3,342,000 $ 1.11 $ 0.59 Options Exercised -- -- -- Options Cancelled -- -- -- Unexercised options outstanding - December 31, 1997 3,342,000 $ 1.11 -- Options Granted 297,500 $ 1.63 $ 1.09 Options Exercised -- -- -- Options Cancelled (156,000) $ 1.54 -- Unexercised options outstanding - December 31, 1998 3,483,500 $ 1.13 Price range $0.72-$1.00 (weighted-average contractual life of 4.2 years) 1,817,000 $ 0.76 Price range $1.34-$2.43 (weighted-average contractual life of 3.7 years) 1,666,500 $ 1.53 Exercisable options November 30, 1996 -- -- December 31, 1997 200,000 $ 0.83 December 31, 1998 3,297,000 $ 1.11 20
CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Common Stock (Continued) The following table summarizes all common stock purchase warrant activity for the year ended December 31, 1998:
Number of Exercise Stock Price Warrants Range ------------------------------------------------- Outstanding, November 30, 1995 2,407,325 $ 0.25 - $0.40 Granted 1,439,500 $ 0.00001 - $0.40 Exercised (857,325) $ 0.25 - $0.40 ------------------------------------------------- Outstanding, November 30, 1996 2,989,500 $ 0.00001- $0.28 Granted 6,426,923 $ 0.01 - $1.25 Exercised (5,648,077) $ 0.25 - $0.65 Expired (153,846) $ 0.25 - $0.65 ------------------------------------------------- Outstanding, December 31, 1997 3,614,500 $ 0.00001 - $1.25 Granted 1,220,000 $ .01 - $3.50 Exercised (80,000) $ 0.40 Expired (200,000) $ 0.25 ------------------------------------------------- Outstanding, December 31, 1998 4,554,500 $ 0.00001 - $3.50 =================================================
The following table summarizes the price ranges of all common stock purchase warrants outstanding as of December 31, 1998: Stock Warrants Outstanding as of December 31, 1998 Number of Warrants Exercise Price --------------------------------------------------- 1,000,000 $3.50 200,000 $1.00 100,000 $0.85 100,000 $1.25 750,000 $0.28 462,500 $0.25 920,000 $0.01 1,022,000 $.00001 ---------------------------------------------- 4,554,500 $0.00001 - $3.50 9. Legal Settlement On October 30, 1998, the Company settled the lawsuit filed against the Company and others in the District Court of Harris County, Texas, by Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. on November 14, 1997, for a total of $200,000 and warrants to purchase 200,000 shares of the Company's common stock at an exercise price of $1.00, exercisable through January 02, 1999. The lawsuit was dismissed with prejudice for all defendants involved. The Company believes the lawsuit was without merit, but a settlement was reached to avoid incurring additional legal costs. The Company recorded the fair market value of the warrants using the Black-Scholes option pricing model. On January 03, 1999, the 200,000 warrants expired. 21 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. Redeemable Preferred Stock and Related Common Stock Warrants On November 24, 1997, the Company entered into a Subscription Agreement ("Agreement") with an unaffiliated investor to purchase 225,000 shares of the Company's designated Series A, B, and C Redeemable Preferred Stock, for $100 per share. As of December 31, 1997, the investor had purchased 50,000 shares of the Company's Series A Redeemable Preferred Stock for $5,000,000. In March 1998, the Company and the investor mutually released each other from any further obligations. The Company is not required to issue any additional preferred stock under the Agreement and the investor has no obligation to provide funds to the Company in exchange for such stock. The Series A Redeemable Preferred Stock is convertible and accrues an annual, cumulative dividend of $5 per share. The dividends are payable semi-annually on May 31 and November 30, as declared by the Company's Board of Directors. As of December 31, 1998, dividends in arrears relating to the Series A Redeemable Preferred Stock were $250,000. The Company increased the carrying value of the Series A Redeemable Preferred Stock by $250,000 by accreting this amount directly to accumulated deficit. The number of shares of common stock issuable upon conversion of each share of Series A Redeemable Preferred Stock is determined by dividing $100 by the conversion price of the preferred stock. As of December 31, 1997, the conversion price was $2.25 per share. The conversion price is subject to recalculation if, and when, the Company issues additional common stock or common stock equivalents to obtain additional equity or debt financing. During 1998, the Company issued common stock and common stock warrants in both equity and debt financing transactions. Adjusted for these transactions, the conversion price as of December 31, 1998 was $2.14 per share (rounded), equivalent to 46.7 shares of common stock for each share of Series A Redeemable Preferred Stock. The Series A Redeemable Preferred Stock has voting privileges identical to the Company's common stock. The total number of votes allowed to the holders of the Series A Redeemable Preferred Stock is equal to the number of shares of common stock the Series A Redeemable Preferred Stock could be converted into on the specific date of record. As of December 31, 1998, the 50,000 shares of Series A Redeemable Preferred Stock were convertible into 2,335,178 shares of common stock. The Series A Redeemable Preferred Stock has preferential liquidation rights over the Company's common stock. In the event of liquidation or dissolution of the Company, any assets available for distribution to the Company's shareholders will first be distributed to the holders of the Series A Redeemable Preferred Stock up to each redeemable preferred share's liquidation value. The liquidation value equals $100 per share, plus all unpaid dividends in arrears. The Series A Redeemable Preferred Stock is subject to mandatory redemptions, beginning on November 30, 2002. As of December 31, 1998, the schedule of redemptions of the stated value, plus any unpaid dividends, is as follows: Year Amount --------------------------------------- 1999 - 2000 - 2001 - 2002 $1,750,000 2003 and Thereafter $3,500,000 ---------- Total $5,250,000 ========== On November 24, 1997, the Company also designated Series B and C Redeemable Preferred Stock, authorizing 75,000 shares for each class of preferred. As of December 31, 1998, none of the Series B or Series C Redeemable Preferred Stock was issued or outstanding. The conversion price of the Series B Redeemable Preferred Stock is $3.00 per share and the conversion price of the Series C Redeemable Preferred Stock is $4.25 per share and the conversion price is subject to change in a manner similar to the Series A. Except for the conversion price, the terms and conditions of both the Series B and Series C Redeemable Preferred Stock are similar in nature to the Series A Redeemable Preferred Stock. 22 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. Redeemable Preferred Stock and Related Common Stock Warrants (Continued) Allen & Company Incorporated (Allen & Company), a significant shareholder of the Company, acted as placement agent in connection with the Agreement. Allen & Company elected to receive its fees in the form of warrants to purchase 900,000 shares of the Company's common stock that were all originally exercisable through November 25, 2002, at an exercise price of $.01 per share. The warrants were recorded at their fair value. Out of the 900,000 warrants issued to Allen & Company, 200,000 directly relate to the issuance of 50,000 shares of the Series A Preferred Stock. The 200,000 warrants were recorded as issuance costs of $500,000, reducing the $5,000,000 proceeds from Series A Preferred Stock. The remaining 700,000 warrants, discussed below, were recorded as a stock subscription receivable. The basis difference of $500,000 upon issuance of the Series A Redeemable Preferred Stock is accreted directly to accumulated deficit for the period through the redemption date. During 1998, the Company increased the carrying value of the Series A Redeemable Preferred Stock by $100,000 to reflect the current year accretion. In an agreement dated March 31, 1998, the Company agreed to allow Allen & Company to retain, subject to certain performance criteria, the warrants to purchase 700,000 shares of the Company's common stock related to the subscriptions not received under the original terms of the Agreement. The unearned portion of the warrants is presented as a $1,770,000 stock subscription receivable as of December 31, 1997. The unearned warrants to purchase 700,000 shares of the Company's common stock held by Allen & Company are fully restricted from exercise unless Allen & Company assists the Company in raising additional capital on acceptable terms to the Company's Board of Directors. For each $25 of additional capital raised, a warrant to purchase one share of common stock is deemed earned by Allen & Company. During 1998, Allen & Company assisted the Company in raising an additional $12,500,000 in equity capital. As a result, 500,000 of the 700,000 warrants are no longer restricted. As of December 31, 1998, the remaining 200,000 restricted warrants are presented as a $506,000 stock subscription receivable in equity. If, before November 25, 1999, Allen & Company fails to assist the Company in raising an additional $5,000,000 in capital under acceptable terms, the unearned portion of the warrants will expire. 11. Income Taxes The following is a summary of the provision for income taxes:
One Month Year Ended Year Ended Ended Year Ended December 31, December 31, December 31, November 30, 1998 1997 1996 1996 ----------------------------------------------------------------------------- Income taxes (benefit) computed at federal statutory rate $(1,493,000) $ (910,000) $ (46,000) $ (762,000) Other 121,000 (60,000) (3,000) (86,000) Change in asset valuation Allowance 1,372,000 970,000 49,000 848,000 ---------------------------------------------------------------------------- Income taxes $ -- $ -- $ -- $ -- ============================================================================
23 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Income Taxes (Continued) The components of the Company's deferred tax assets and liabilities under FASB No. 109 are as follows:
1998 1997 1996 ----------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 6,807,000 $ 5,812,000 $ 4,958,000 Full cost pool capitalization 267,000 Valuation allowance (6,807,000) (5,812,000) (5,225,000) ----------------------------------------------------------- Deferred tax assets $ -- $ -- $ -- ===========================================================
The Company did not record any deferred tax assets or income tax benefits for net operating loss carryforwards as the future realization of the related tax benefits is not considered likely as of December 31, 1998. At December 31, 1998, the Company has tax loss carryforwards for federal income tax purposes of approximately $11,456,000 available to offset future taxable income. These carryforwards will expire at various times between 1999 and 2013. During the two years ended December 31, 1998 and 1997, respectively, the Company has issued a significant number of shares of common stock, stock warrants, and preferred stock in private equity and debt financing transactions. The Company is continuing to negotiate for additional capital, which, if obtained, may require additional shares of stock to be issued. The changes in ownership may significantly restrict the use of net operating loss carryforwards by the Company. As of December 31, 1998, unused statutory depletion carryforwards, which have unlimited duration, are approximately $567,000. The unused investment tax credit carryover was approximately $86,000 as of December 31, 1998 and expires through 2000. The loss carryforward at December 31, 1998 for financial reporting purposes is approximately $18,167,000, consisting of $13,212,000 in domestic and $4,954,000 in foreign loss carryforwards, respectively. The difference between the loss carryforward for financial reporting and income tax purposes results principally from the difference in book and tax basis of oil and gas properties and organizational costs related to foreign activities. 12. Related Party Transactions The Company paid a director $24,000 during 1995 for public relations consulting services. During 1996, the Company paid a basic consulting fee of approximately $500,000 to MDI, of which the stockholders include two directors of the Company, for assistance in seeking means for meeting the Company's funding obligation for the Karakuduk Project. During 1997, the Company paid an additional $180,000 to MDI, but terminated the agreement in the first quarter of 1997. The Company leased office space under a non-cancelable operating lease, which expired on March 31, 1997 from a related party. Beginning April 1, 1997, the Company leased office space at a rate of approximately $2,000 per month. This lease expired in November 1997, was renewed and then later canceled. In February 1998, the Company signed a new lease with an unrelated party. Rent expense was $37,000 for 1997, $46,000 for 1996, and $36,000 for 1995. The Company believes these rental expenses were at an arms length basis. On July 31, 1998, the Company retired two outstanding loans, totaling $95,000, from Howard Karren, The former Chairman and Chief Executive Officer of the Company. The Company borrowed $75,000 on May 27, 1998 and $20,000 on July 1, 1998. The notes were paid during 1998. 24 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. Related Party Transactions (Continued) On August 5, 1998, the Company retired two outstanding loans, totaling $1,000,000, from two related parties: Allen & Company, Incorporated ($900,000) and John McMillian, the current Chairman and Chief Executive Officer of the Company ($100,000). The Company borrowed the $1,000,000 on June 3, 1998, subject to a 7% interest rate. The note was payable in full, plus accrued interest, on the earlier of 180 days from the funding of the loans or upon the Company's receipt of a minimum of $10,000,000 in equity investments. In conjunction with the loans, the Company issued warrants to purchase 1,000,000 shares of the Company's Common stock, at an exercise price of $3.50 per share. The Company recorded the warrants at their fair market value of $367,000, as a discount of notes payable, amortizable over the life of the loans. On July 27, 1998, the Company received $10,000,000 in equity financing and repaid the loans, recognizing an extraordinary loss on the extinguishment of debt of approximately 236,000. 13. Accrued Compensation On August 19, 1996, the Company's Board of Directors awarded a former Chief Executive Officer and a former Vice President of the Company cash bonuses totaling $210,000 as recognition for past and present services to be used to exercise certain warrants granted in connection with the Company's 1989 Stock Warrant Plan. These bonuses will not become payable until the earlier of (i) completion of a sale or farmout by the Company of all or a portion of its interest in the Karakuduk Project, or (ii) the date when the Company makes a public disclosure of a sale or farmout of the Karakuduk Project. The Company does not expect any events to occur in the near future, therefore, the bonus payable is considered long-term in nature. In connection with the appointment of Mr. Howard Karren as the Chairman of the Board of Directors of the Company in 1996, the Company agreed to issue to Mr. Karren 350,000 shares of restricted common stock of the Company. In 1996, the Company recorded accrued compensation for this transaction in the amount of $175,000. During 1997, the common stock was issued. 14. Operating leases The Company has a noncancelable operating lease for office facilities. Approximate future minimum annual lease payments under the lease are as follows: 1999 $ 95,000 2000 99,000 2001 104,000 2002 106,000 2003 26,000 ---------------------------------- Total $ 430,000 ========= The Company's rental expense for 1998, 1997, and 1996 was approximately $87,000, $37,000, and $46,000 respectively. 15. Defined Contribution Plans The Company adopted a 401(k) plan covering all full-time employees, effective January 1, 1991. The plan was terminated as of December 31, 1997. 16. Commitments and Contingencies Under the terms of the license agreement, approved by the Ministry of Oil and Gas Industries of the Republic of Kazakhstan, granting KKM the right to develop the Karakuduk Field, KKM has committed to minimum expenditures of $30 million for the year ended December 31, 1999. The Company has excess expenditures from 1998 of $480,000, which will be applied against the 1999 commitment. The Company has no other expenditure commitments under the license after December 31, 1999. The license, as amended, also establishes a minimum work program, requiring the Company to drill 8 new wells before December 31, 1999. 25 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. Extraordinary Losses During 1997, the Company retired several notes payable totaling $1,850,000 As additional consideration for these notes, the Company issued to the note holders, warrants to purchase 462,500 shares of the Company's common stock at $.25 per share, exercisable at any time, but no later than November 30, 1999. The notes were discounted by $290,000, the estimated fair value of the warrants, with the discount being amortized over the life of the notes. If the notes were still outstanding on May 31, 1997, the Company agreed to issue 185,000 warrants as additional consideration to the holders. Furthermore, if the notes were still outstanding on November 30, 1997, the Company agreed to issue 370,000 warrants as additional consideration to the holders. Under these provisions, the Company issued 125,000 of the 185,000 warrants due to the May 31, 1997 deadline and none due to the November 30, 1997 deadline. The Company recorded debt issuance costs of $168,000 for the estimated fair value of the additional warrants issued, to be amortized over the life of the notes. On dates between May 1997 and November 1997 the notes were repaid by the Company at their face value. The Company recorded an extraordinary loss on extinguishment of debt of approximately $214,000. On August 5, 1998, the Company retired two outstanding loans, totaling $1,000,000, from two related parties: Allen & Company, Incorporated ($900,000) and John McMillian, a director of the Company ($100,000). The Company borrowed the $1,000,000 on June 3, 1998, subject to a 7% interest rate. The note was payable in full, plus accrued interest, on the earlier of 180 days from the funding of the loans or upon the Company's receipt of a minimum of $10,000,000 in equity investments. In conjunction with the loans, the Company issued warrants to purchase 1,000,000 shares of the Company's Common stock, at an exercise price of $3.50 per share. The Company recorded the warrants at their fair market value of $367,000, as a discount of notes payable, amortizable over the life of the loans. On July 27, 1998, the Company received $10,000,000 in equity financing and repaid the loans, recognizing an extraordinary loss on the extinguishment of debt of approximately $236,000. 18. Subsequent Events On January 15, 1999, the Company granted 1,000,000 shares of common stock to the Company's President and Chief Operating Officer, Dr. Jack Krug, as part of his employment contract with the Company. Of the 1,000,000 shares granted, 200,000 vested immediately. The remaining 800,000 shares vest ratably over four years, on the anniversary date of grant. On February 28, 1999, the terms relating to the note between Chase and the Company were amended. The $250,000 principal payment that was due on February 28, 1999 was deferred. Under the revised the terms, the Company is required to begin making installments in August 1999. From January 01, 1999 to March 31, 1999, the Company has borrowed approximately $3,800,000 from certain shareholders of the Company, repayable by the Company on or before August 31, 1999. The loans are subject to an 8% annual interest rate. Effective March 1, 1999, the Company announced that it is relocating its principal office from Houston, Texas to Golden, Colorado. The Company expects the relocation to be completed by the fall of 1999. Effective April 1, 1999, the Company assigned its operating lease, disclosed in Note 14, to an unaffiliated third party. On April 8, 1999, the Board of Directors has recommended for shareholder approval, a 60 to 1 reverse stock split. Management is anticipated a vote on this matter in a special meeting of the Company's shareholders, expected to occur in late April 1999. 19. Karakuduk Munai, JSC Financial Statements Due to the significance of the Company's equity investee, the Company has attached audited financial statements for KKM. Reflected in the financial statements are management fees of $1,980,000, $1,020,000, $85,000, and $1,020,000, that have been charged by the Company to KKM for the years ending December 31, 1998, December 31, 1997, and the month period ended December 31, 1996, and the year ended November 30, 1996 respectively. These amounts are exclusive of any local withholding tax, which may be accrued by KKM. Also, (for the same periods) the financial statements include interest on the note payable to the Company from KKM in the amounts $1,043,565, $389,624, $20,102, and $117,431. 26 SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES-UNAUDITED The following supplemental information regarding the oil and gas activities of the Company is presented pursuant to the disclosure requirements promulgated by the Securities and Exchange Commission and Statement of Financial Accounting Standards ("SFAS") No. 69, Disclosures About Oil and Gas Producing Activities. The Company entered into an agreement effective January 1, 1997 to sell its domestic oil and gas properties. Accordingly, the Company's domestic oil and gas properties were classified as oil and gas properties under an agreement for sale at November 30, 1996 and no disclosures for proved reserves or future cash flows have been made at November 30, 1996. The properties were sold in accordance with the above agreement. Due to the uncertainties surrounding the development of the Karakuduk Field, along with the limited amount of production established as of December 31, 1998, no proved reserves have been attributed to the field. The Company acquired no additional producing properties in 1998. Therefore, no disclosures for proved reserves or future cash flows have been made at December 31, 1998. Acquisition and exploratory costs incurred related to the Company's interest in the Karakuduk Field, however, are disclosed below. The exploration costs reflect the entire exploratory costs incurred by the Company and KKM. The following estimates of reserve quantities and related standardized measure of discounted net cash flow are estimates only, and do not purport to reflect realizable values or fair market values of the Company's reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than producing oil and gas properties. Additionally, the price of oil has been very volatile and downward changes in prices can significantly affect quantities that are economically recoverable. Accordingly, these estimates are expected to change as future information becomes available and the changes may be significant. All of the Company's proved reserves were located in the United States. Proved reserves are estimated reserves of crude oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment and operating methods. The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses. The estimated future net cash flows are then discounted using a rate of 10% a year to reflect the estimated timing of the future cash flows. 27
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES-UNAUDITED Proved Oil and Gas Reserve Quantities (All Within the United States) Oil Gas Reserves reserves (bbls.) (Mcf.) ---------------------------------- Balance November 30, 1995 66,185 3,062,417 Revisions of previous estimates (58,749) 18,703 Sales of reserves (531) (34,417) Extensions, discoveries and other additions 267 6,638 Production (1,737) (96,906) Transfer to oil and gas properties under agreement For sale (5,435) (2,956,435) Balance November 30, 1996 -- -- Revisions of previous estimates -- -- Sales of reserves -- -- Extensions, discoveries and other additions -- -- Production -- -- Balance December 31, 1997 -- -- Revisions of previous estimates -- -- Sales of reserves -- -- Extensions, discoveries and other additions -- -- Production -- -- --------------------------------- Balance December 31, 1998 -- -- ================================= 28
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES-UNAUDITED Capitalized Costs Relating to Oil and Gas Producing Activities December 31, December 31, November 30, 1998 1997 1996 --------------------------------------------- Unproved oil and gas properties in the Republic of Kazakhstan $22,696,000 $15,934,000 $12,091,000 Proved oil and gas properties -- -- -- --------------------------------------------- $22,296,000 $15,934,000 $12,091,000 --------------------------------------------- Accumulated depreciation, depletion, and amortization And valuation allowances -- -- -- --------------------------------------------- Net capitalized costs $22,296,000 $15,934,000 $12,091,000 ============================================= Company's share of equity method investee's Capitalized costs $ 9,565,000 $ 3,988,000 $ 1,143,000 ============================================= 29 SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES-UNAUDITED Costs Incurred in Oil and Gas Property Acquisition, Exploration, and Development Activities Year Ended Year Ended Year Ended December 31, December 31, November 30, 1998 1997 1996 ----------------------------------------------------- Property acquisition costs-- unproved leases: United States $ -- $ -- $ -- Republic of Kazakhstan -- 2,625,000 6,058,000 Property acquisition costs-- proved properties: United States -- -- -- Republic of Kazakhstan -- -- -- Exploration costs United States -- -- -- Republic of Kazakhstan 6,761,000 1,218,000 1,610,000 Development costs United States -- -- -- Republic of Kazakhstan -- -- -- Company's share of equity method investee's Costs of property acquisition, exploration, And development $ 5,578,000 $ 2,845,000 $ 874,000 ----------------------------------------------------- $12,339,000 $ 6,688,000 $ 8,542,000 ===================================================== 30 SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES-UNAUDITED Results of Operations for Producing Activities Year Ended Year Ended Year Ended December 31, December 31, November 30, 1998 1997 1996 ----------------------------------------------------- Revenues Sales $ -- $ -- $147,000 Transfers -- -- -- --------------------------------------------------- Total -- -- 147,000 Production Costs -- -- 37,000 Exploration Expenses -- -- -- Depreciation, depletion, and amortization and valuation provisions -- -- 3,000 -- -- 107,000 Income tax expenses -- -- -- -------------------------------------------------- Results of operations from producing Activities (excluding corporate overhead And interest costs) $ -- $ -- $107,000 ================================================== Company's share of equity method investee's Results of operations for producing Activities -- -- -- ================================================== 31 SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES-UNAUDITED Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves The following are the principal sources of changes in the standardized measure of discounted future net cash flows: Thirteen Year Ended Months ended Year Ended December 31 December 31 November 30 1998 1997 1996 ------------------------------------------------------ Beginning balance $ -- $ -- $ 27,000 Expenditures which reduced future development costs -- -- -- Acquisition of proved reserves -- -- -- Sale of proved reserves -- -- (54,000) Sales and transfers of oil and gas produced, net of production costs -- -- (110,000) Net increase (decrease) in price -- -- 860,000 Net decrease in costs -- -- -- Extensions and discoveries -- -- 17,000 Revisions of previous quantity Estimates -- -- (91,000) Accretion of discount -- -- 99,000 Effect of change in timing and other -- -- 253,000 Transfer to oil and gas properties under agreement for sale -- -- (1,401,000) ----------------------------------------------------- Ending balance $ -- $ -- $ -- ===================================================== 32
Ernst & Young Kazakhstan Tel. 7 (3272) 50 94 24 Kazakhstan 7 (3272) 50 94 25 Almaty 480009 7 (3272) 60 82 99 Prospekt Abai 153a 7 (3272) 41 48 00 Fax: 7 (3272) 50 94 27 Report of Independent Auditors The Board of Directors and Shareholders Karakuduk-Munay, JSC We have audited the accompanying balance sheets of Karakuduk-Munay, JSC ("the Company") as of December 31, 1998 and 1997, and the related statements of operations and cash flows and changes in shareholders' deficit for each of the three years ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with US generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of Karakuduk-Munay, JSC as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years ended December 31, 1998, in conformity with US generally accepted accounting principles. Without qualifying our opinion, we draw your attention to the fact that the accompanying financial statements have been prepared assuming the Company will continue as a going concern. As more fully described in Note 3 to the financial statements, the Company has incurred recurring operating losses and relies solely on the foreign shareholder to provide all funding in the form of an interest bearing loan. The Company requires significant additional financing to meet its financial commitments and requirements through calendar year 1999 as described in Note 18. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. ERNST & YOUNG KAZAKHSTAN April 8, 1999 Almaty, Kazakshtan 33 Karakuduk-Munay JSC Balance Sheets as at December 31, 1998 and 1997 (Amounts in US Dollars) December 31, December 31, 1998 1997 ------------------------------ ASSETS Cash $ 52,958 $ 414,384 Prepaid and other receivables (Note 4) 125,231 272,455 VAT receivable (Note 5) -- 109,099 Crude oil inventory (Note 6) 551,342 -- ---------------------------- Total current assets 729,531 795,938 Long term VAT receivable (Note 5) 863,077 -- Materials and supplies inventory (Note 7) 1,494,572 511,858 Property, plant and equipment, net (Note 8) 4,209,396 1,589,057 Oil and gas properties - full cost method (Note 9) 12,563,120 5,874,525 ---------------------------- TOTAL ASSETS $ 19,859,696 $ 8,771,378 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT Accounts payable (Note 11) $ 2,247,954 $ 2,100,722 Accrued liabilities (Note 12) 779,596 666,856 Current portion of loans payable to third parties (Note 13) 177,780 -- Current portion of loans payable to partner (Note 13) 3,000,000 -- ---------------------------- Current liabilities 6,205,330 2,767,578 Loans payable to third parties (Note 13) 577,775 -- Loans payable to partner (Note 13) 20,380,080 9,819,497 TOTAL LIABILITIES $ 27,163,185 $ 12,587,075 SHAREHOLDERS' DEFICIT Charter capital (Note 15) 200,000 200,000 Accumulated deficit (7,503,489) (4,015,697) ----------------------------- (7,303,489) (3,815,697) ----------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 19,859,696 $ 8,771,378 ============ ============ See accompanying notes which form an integral part of these financial statements. 34
Karakuduk-Munay JSC Statements of Operations for the years ended December 31, 1998, 1997 and 1996 (Amounts in US Dollars) December 31, December 31, December 31, 1998 1997 1996 --------------------------------------------------------- Management service fee (Note 13) $ 845,840 $ 495,000 $ 825,000 General and administrative expenses 1,297,513 836,868 909,520 Interest expense (Note 13) 508,539 155,624 137,533 Depreciation on fixed assets (Note 8) 440,901 147,660 42,709 Miscellaneous taxes 135,441 30,214 2,937 Write-down of crude oil inventory (Note 6) 192,481 -- -- Exchange loss/(gain) 67,077 (387) 24,475 ----------- ----------- ----------- Net loss 3,487,792 1,664,979 1,942,174 ============ =========== ===========
See accompanying notes which form an integral part of these financial statements. 35
Karakuduk-Munay JSC Statements of Cash Flows (Amounts in US Dollars) December 31, December 31, December 31, 1998 1997 1996 ---------------------------------------------------- Cash flows from operating activities: Net loss $ (3,487,792) $ (1,664,979) $ (1,942,174) Adjustments to reconcile net loss to net cash used by operating activities: Write-down of crude oil inventory 192,481 -- -- Depreciation of fixed assets 440,901 147,660 42,709 Changes in working capital: (Increase)/decrease in prepaid and other receivables 147,224 (255,979) 76,230 (Increase) in VAT receivable (753,978) (51,803) (57,296) (Increase) in crude oil inventory (743,823) -- -- (Increase) in materials and supplies inventory (982,714) (483,437) (28,421) Increase in accounts payable and accrued liabilities 259,972 2,022,350 146,819 Increase/(decrease) in long term payable for land usage -- (34,000) 34,000 -------------------------------------------------- Net cash used by operating activities (4,927,729) (320,188) (1,728,133) Cash flows from investing activities Purchase of fixed assets (3,061,240) (1,284,782) (464,208) Investments in oil and gas assets (net of assets contributed in-kind through Charter Fund) (6,688,595) (4,068,937) (1,237,718) Payment of signature bonus -- -- (513,000) -------------------------------------------------- Net cash used in investing activities (9,749,835) (5,353,719) (2,214,926) Cash flows from financing activities Cash contributed as charter fund -- -- 40,000 Increase in loans from third parties 800,000 -- -- Principal payments on third party loans (44,445) -- -- Increase in loan due to cash contribution 10,422,567 4,134,783 2,240,000 Increase in loans payable for management services and other expenditures 2,094,451 1,526,995 1,527,339 Increase in loans payable for interest 1,043,565 389,624 137,533 ---------------------------------------------------- Net cash provided by financing activities 14,316,138 6,051,402 3,944,872 Net increase/(decrease) in cash (361,426) 377,495 1,813 Cash at beginning of year 414,384 36,889 35,076 ---------------------------------------------------- Cash at end of year $ 52,958 $ 414,384 $ 36,889 ============ ============ ============ See accompanying notes which form an integral part of these financial statements. 36
Karakuduk-Munay JSC Statements of Shareholders' Deficit (Amounts in US Dollars) Authorized Accumulated Charter Capital Deficit Total ------------------------------------------------------- Balance at December 31,1995 $ 100,000 $ (408,544) $ (308,544) Charter capital contributions 100,000 - 100,000 Net loss for the year 1996 - (1,942,174) (1,942,174) Balance at December 31,1996 200,000 (2,350,718) (2,150,718) Net loss for the year 1997 - (1,664,979) (1,664,979) Balance at December 31,1997 200,000 (4,015,697) (3,815,697) Net loss for the year 1998 - (3,487,792) (3,487,792) ----------------------------------------------------------- Balance at December 31,1998 $200,000 $ (7,503,489) $(7,303,489) =========================================================== See accompanying notes which form an integral part of these financial statements. 37
Karakuduk-Munay JSC Notes to the Financial Statements (Amounts in US dollars unless otherwise stated) 1. Organization and Background Information Formation - --------- Karakuduk-Munay Inc. (the "Company"), a Kazakhstan Joint Stock Company of Closed Type, was founded by "Munaygaz" State Holding Company (formerly Kazakhstanmunaygaz National Petroleum Company), "Jarkin" State Holding Company (formerly PGO Mangistauneftegazgeologiya), and Korporatsiya Mangistau Terra International (formerly Korporatsiya Kramds-Mangistau Inc.), collectively the "Kazakh Shareholders", and Central Asian Petroleum (Guernsey) Limited. The Company and the Ministry of Energy and Natural Resources (formerly the Ministry of Oil and Gas) in the Republic of Kazakhstan, entered into an agreement on August 30, 1995 ("Inception") referred to as the Agreement for Exploration, Development and Production of Oil in Karakuduk Oil Field in Mangistau Oblast of the Republic of Kazakhstan (the "Agreement"). The management and operational framework within which the Company must conduct its activities are dictated by the Agreement. The Company may be terminated under certain conditions specified in the Agreement. The term of the Agreement is 25 years commencing from the date of the Company's registration. The Agreement can be extended to a date agreed between the Ministry of Energy and Natural Resources and the Company as long as production of petroleum and/or gas is continued in the Karakuduk oil field. Changes in Shareholders - ----------------------- In accordance with Edict # 410 dated March 24, 1997 and Edict # 1287 dated August 26, 1997 issued by the Government of the Republic of Kazakhstan, 40 % of the Charter Fund of the Company belonging to "Jarkin"/"Aksay" and "Munaygaz" were transferred to KazakhOil, the state owned oil and gas company. The Company and new shareholder were legally re-registered with the Ministry of Justice of the Republic of Kazakhstan on July 24, 1997. There were no shareholder changes in 1998. Principal Activity - ------------------ The Company was established for the purposes of exploring, developing, and producing oil and gas deposits in the Karakuduk Field in the Republic of Kazakhstan acting on the basis of the Agreement which the Company entered into with the Ministry of Energy and Natural Resources in the Republic of Kazakhstan on August 30, 1995. Prior to the Company entering into the Agreement, the Government of Kazakhstan drilled 22 test wells in the Karakuduk Field, establishing the existence of crude oil reserves. No additional exploration or production operations have been conducted on the Karakuduk Field. Neither were there any commercial quantities of crude oil produced from the original test wells, prior to Inception of the Agreement. In accordance with the Agreement, the Company retains the contractual rights to explore, develop, and produce the crude oil reserves, if any, underlying the Karakuduk Field. The Company's work program and minimum expenditure commitment was stipulated in License MG 249 dated June 28, 1995. These expenditure obligations were subsequently amended by Resolution P65-H of September 18, 1996, Resolution P97-H of December 8, 1997, and Decree No. 1392 of December 31, 1998. Decree No. 1392 requires the Company to meet expenditure commitments of $16.5 million by December 31, 1998 and $30 million by December 31, 1999. Expenditure commitments through December 31, 1998 exceeded the commitment requirement of $16.5 million by approximately $480,000. The excess is applicable against the expenditure commitment required as of December 31, 1999. Should the license terms not be adhered to, the License may be withdrawn by the Government of Kazakhstan. 38 Karakuduk-Munay JSC Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 1. Organization and Background Information (continued) During 1998, the Company was engaged in various exploration and appraisal activities associated with the Karakduk Field. The Company's activities included conducting capital workover operations, processing and transportation of limited crude oil production to the KazTransOil pipeline, completing construction of the field camp and main access road, beginning construction of various field facilities required to bring the Karakuduk Field onto full production, and importing a drilling rig into Kazakhstan for commencement of exploratory drilling activities in 1999. The Company's operations also included general corporate affairs, such as applying for, and obtaining, an amendment of the Company's License MG-249 with the Government of Kazakhstan as well as other general and administrative activities. The Company conducted capital workover operations on four test wells, which were drilled prior to the Company entering into the Agreement. Production was established from two of the four wells. The Company did not commence exploratory drilling operations during 1998. The Company produced limited amounts of crude oil throughout the majority of 1998. The crude oil was produced, processed, and transported to the KazTransOil pipeline by truck. As of December 31, 1998, the Company had placed 11,103 tons (81,052 barrels) of crude oil into the KazTransOil pipeline, but did not sell any of the crude oil produced during 1998. In accordance with an agreement between the Company and KazTransOil, all of the crude oil production placed into the pipeline is recorded as crude oil inventory, until formally nominated for sale by the Company. 2. Basis of Presentation The Company maintains its accounting records and prepares its financial statements in US dollars in accordance with the accounting procedures prescribed by the Agreement. The accompanying financial statements, prepared in accordance with U.S. generally accepted accounting principles, differ in minor respects (related to disclosure) from those issued for statutory purposes in Kazakhstan. The Company has reclassified some of its comparative numbers in order to be consistent with the current year classifications in the Balance Sheet and Statement of Operations. This has no impact on the results for the year or the net assets of the Company. The material accounting principles adopted by the Company are described below: Foreign Currency Translation - ---------------------------- The Company's functional currency is the US dollar. All transactions arising in currencies other than US dollars, including assets, liabilities, revenue, expenses, gains, or losses are measured and recorded into US dollars using the exchange rate in effect on the date of the transaction. Cash and other monetary assets held and liabilities denominated in currencies other than US dollars are translated to US dollars at the rates of exchange ruling as of December 31, 1998 (83.80 Kazakh Tenge per US dollar). Non-monetary assets and liabilities denominated in currencies other than US dollars have been translated at the estimated historical exchange rate prevailing on the date of the transaction. Exchange gains and losses arising from translation of non-US dollar amounts at the balance sheet date are recognized as an increase or decrease in income for the period. By using the US dollar as its reporting currency for the financial statements and by using the temporal method of translation where applicable, the effects of inflation have been taken into consideration in all material respects since movements in the exchange rate between the US dollars and Tenge during 1996 to 1998 are considered a reasonable approximation of the general price index. (See Note 19). 39 Karakuduk-Munay JSC Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 2. Basis of Presentation (continued) The Tenge is not a convertible currency outside of the Republic of Kazakhstan. The translation of Tenge denominated assets and liabilities in these financial statements does not indicate that the Company could realize or settle these assets and liabilities in dollars. As of December 31, 1998, $530,511 of net monetary assets are denominated in Tenge. Interest Capitalization - ----------------------- The Company capitalizes interest on significant construction projects for which expenditures are being made. The Company follows the full cost method of accounting. Accordingly, the Company's assets qualifying for interest capitalization include unusually significant investments in unproved properties and other major development projects that are not being depreciated, depleted, or amortized currently, provided that work is currently in progress. The Company began exploration activities in 1997. As of December 31, 1998, the Company's oil and gas investment in the Karakuduk Field is not considered a proven property and economic production has not commenced. Consequently, none of the capital costs related to the Karakuduk Field have been depreciated, depleted, or amortized during 1998. Beginning in 1997, and throughout all of 1998, the Company capitalized certain borrowing costs to significant, unproven oil and gas properties on which the Company is currently conducting exploration and appraisal activities. The Company capitalized $565,542 in 1998 and $234,000 in 1997, respectively. Other interest costs are expensed as incurred. Oil and Gas Assets Subject to Depreciation, Depletion and Amortization - ---------------------------------------------------------------------- The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs directly associated with acquisition, exploration and development of oil and gas reserves are capitalized in cost pools for each country in which the Company operates. The limitation on such capitalized costs is determined in accordance with rules specified by the Securities and Exchange Commission. Capitalized costs are depleted using the units of production method based on proven reserves. Oil and Gas Properties Not Subject to Depletion - ----------------------------------------------- Costs associated with acquisition and evaluation of unproved properties are excluded from the amortization computation until it is determined if proved reserves can be attributed to the properties. These unevaluated properties are assessed annually for possible impairment and the amount impaired, if any, is added to the amortization base. Costs of exploratory dry holes and geological and geophysical costs not directly associated with specific unevaluated properties are added to the amortization base as incurred. 40 Karakuduk-Munay JS Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 2. Basis of Presentation (continued) Depreciation of Property Plant and Equipment - -------------------------------------------- Depreciation of equipment is calculated on the straight-line method based on the estimated useful life of the assets as follows: Period ------ Office buildings and apartments 20 years Office equipment 3 years Vehicles 5 years Field buildings 15 years Field equipment up to 10 years Inventory - --------- Crude oil inventory is valued using the first-in, first-out method, at the lower of cost or net realizable value. The Company's capitalized cost of crude oil inventory is the lesser of the actual costs to produce, transport and store the crude oil in inventory, or the inventory's net realizable value. Materials and supplies inventory is valued using the first-in, first-out method and is recorded at the lower of cost or net realizable value. Certain unique items, such as drilling equipment, are valued using the specific identification method. Revenue Recognition - ------------------- Revenues and their related costs are recognized upon delivery of commercial quantities of oil and gas production, in accordance with the accrual method of accounting. Losses, if any, are provided for in the period in which the loss is determined to occur. Income Taxes - ------------ The Company accounts for income taxes under the provisions of the Statement of Financial Accounting Standards ("SFAS") 109, Accounting for Income Taxes, which require that taxes be provided on the liability method based upon the tax rate at which items of income and expense are expected to be settled in the Company's tax return. Earnings Per Common Share - ------------------------- Basic earnings (loss) and diluted earnings (loss) are not presented due to the Company being of a "closed" nature, and having no underlying shares outstanding. New Accounting Standards - ------------------------ In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This standard provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. This statement is effective for years beginning after June 15, 1999. As of December 31, 1998, the Company has not adopted SFAS 133. 41 Karakuduk-Munay JSC Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 2. Basis of Presentation (continued) The Company is evaluating SFAS 133 and intends to adopt the statement no later than January 1, 2000. The impact of SFAS 133 on the Company's financial position and results of operations is not expected to be material. Fair Value of Financial Instruments - ----------------------------------- All of the Company's financial instruments, including loans payable to partner, cash and trade receivables, have fair values which approximate their recorded values as they are either short-term in nature or carry interest rates which approximate market rates. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Leases - ------ The Company expenses rentals on operating leases over the lease term, on a straight-line basis, as the rents become payable. 3. Going Concern These financial statements have been prepared assuming that Karakuduk-Munay, JSC, will continue as a going concern. The Company has recurring operating losses and relies solely on Central Asian Petroleum (Guernsey) Limited (CAP-G) to provide all funding in the form of an interest bearing loan, as discussed in Note 13. In accordance with the license agreement, CAP-G is required to provide all funding to the Company which is not provided by self-generated income from the sale of oil and gas production or borrowed from other third-party sources. The Company does not anticipate that its current cash reserves and cash flows from operations will be sufficient to meet its capital requirements through fiscal year 1999. Should the Company not meet its capital requirements, as described in Note 18, under the license agreement to develop the Karakuduk Field, the Company's rights under the agreement may be terminated. The Company believes additional financing will be available; however there is no assurance that additional financing will be available, or if available, that it can be obtained on terms favorable or affordable to the Company. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of liabilities that may result from the outcome of this uncertainty. 42 Karakuduk-Munay JSC Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 4. Prepaid and Other Receivables As of December 31, 1998, Prepayments and Other Receivables, primarily consisted of advances to the Custom's Post for payment of VAT and custom's duties on future imported materials and supplies. As of December 31, 1997, Prepayments and Other Receivables primarily consisted of prepaid equipment, which was capitalized to plant & equipment during 1998. The breakdown of Prepaid and Other Receivables is as follows: December 31, December 31, 1998 1997 ------------------------------ Travel advances to employees $ -- $ 18,606 Import VAT, custom duties and prepaid taxes 120,631 41,256 Advance payment for oil and gas assets 4,600 212,593 --------- --------- Total $ 125,231 $ 272,455 ========= ========= 5. VAT Receivable VAT receivable is a Tenge denominated asset due from the Republic of Kazakhstan. The VAT receivable consists of VAT paid on local expenditures (Local VAT) and VAT paid on Imported goods (Import VAT). Currently, VAT is calculated as 20% of the value of goods received (Import and Local VAT) or services rendered (Local VAT only). VAT charged to the Company is recoverable in future periods as an offset against the Company's fiscal obligations. From December 31, 1997 to December 31, 1998, the Company's VAT receivable increased from $109,099 to $863,077, respectively, due to the Company's increased spending on operations. During 1998, the Company offset both the Local and Import VAT receivable against additional VAT charged on imported goods. In prior years, the Company received several refunds of VAT previously paid into the Government of Kazakhstan. The ability of the Company to obtain future refunds or to offset the VAT receivable against future Import VAT liabilities is uncertain. The Company does expect, however, to obtain full economic benefit from the VAT receivable through the Company's right of offset against future fiscal obligations, as provided for in the Agreement. 6. Crude Oil Inventory During 1998, the Company produced approximately 11,103 tons of crude oil from two capital workover wells recompleted in the Karakuduk Field in early 1998. The crude oil was produced into storage tanks, transferred to heated oil trucks, transported to the KazTransOil pipeline terminal at Say-Utes (approximately 80 kilometers), and placed into the KazTransOil pipeline. In an agreement with KazTransOil, the entity controlling the export pipeline, the Company's oil production placed into the pipeline is recorded as crude oil inventory until formally nominated for sale by the Company. As of December 31, 1998, the Company had not completed a sale of crude oil, either to the local or export markets. The Company recorded all operating (lifting) costs required to produce, transport, and store the Company's 1998 oil production as costs of crude oil inventory. As of December 31, 1998, the actual costs of the inventory, based upon year-end crude oil prices, exceeded the net realizable value (NRV) of the inventory. Therefore, the Company recognized an impairment to crude oil inventory, to properly reflect the estimated net realizable value of $551,342. The impairment, totaling $192,481, was charged directly to expense. 43 Karakuduk-Munay JSC Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 7. Materials and Supplies Inventory The categories of Materials and Supplies Inventory listed below represent plant and equipment for development activities, tangible drilling costs (drillbits, tubing, casing, wellheads, etc.) required for exploratory drilling operations, spare parts, diesel fuel, and various materials for use in oil field operations. The Inventory in Transit as of December 31, 1998 includes additional tubing and casing required for drilling planned exploratory wells in 1999. December 31, December 31, 1998 1997 -------------------------------- Inventory in-house $1,084,359 $ 224,998 Inventory in-transit 410,213 286,860 ---------- ---------- Total $1,494,572 $ 511,858 ========== ========== 8. Property, Plant and Equipment Upon full amortization of tangible assets, the right of ownership of the tangible assets shall be transferred to the Kazakhstan Ministry of Energy and Natural Resources in accordance with the Agreement. The Company is entitled to the use of the fully amortized tangible assets during the whole term of the Agreement. A summary of property, plant and equipment is provided in the table below: December 31, December 31, 1998 1998 ------------------------------- Office buildings and apartments $ 214,468 $ 67,212 Office equipment and furniture 390,671 227,318 Vehicles 1,663,364 541,479 Field buildings 2,248,920 329,936 Field equipment and furniture 323,824 169,190 Capital work-in progress -- 444,872 ----------- ----------- Total 4,841,247 1,780,007 Accumulated depreciation (631,851) (190,950) ----------- ----------- Net book value $ 4,209,396 $ 1,589,057 =========== =========== Vehicles includes both vehicles for specialized tasks (cranes, bulldozers, heavy trucks, crude oil trucks, etc.) and vehicles for personnel transport. Field buildings include the construction of the main field camp and construction of a mini-camp to house the drilling crew and service company personnel required to perform exploratory drilling operations. Field equipment and furniture includes furniture and fixtures for the field camp and other equipment. The majority of plant and equipment was placed in service in the latter part of 1998. The office and apartment buildings, office and apartment furniture and fixtures, office equipment, vehicles, field buildings, field furniture and fixtures and other equipment are all depreciated on a straight-line basis over the estimated useful life of each asset. 44 Karakuduk-Munay JSC Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 9. Oil and Gas Properties As of December 31, 1998, the Company's Oil and Gas Properties are not subject to amortization under the Full Cost method of accounting. While the Company has obtained a certain level of crude oil production in 1998, the reserves underlying the Karakuduk Field are classified as unproven until the Company can establish the commercial viability of the reserves. As of December 31, 1998, the Company's reserves are not considered commercially viable, as the production costs required to obtain the crude oil in inventory exceeded the net realizable value of the production, based upon year-end crude oil prices. Management fees related to the salary costs of individuals directly associated with exploration and appraisal activities on the Karakuduk field have been capitalized along with the license acquisition costs, geological and geophysical expenditures, and related interest costs. Other overhead and general and administrative costs have been expensed as incurred. Costs of Oil and Gas Properties excluded from the amortization consist of the following: December 31, December 31, 1998 1997 ------------------------------ Acquisition costs $ 507,870 $ 507,870 Exploration and appraisal costs 11,255,708 5,132,655 Capitalized interest 799,542 234,000 ----------- ----------- Total $12,563,120 $ 5,874,525 =========== =========== Management believes that over the life of the project, future cash flows justify the carrying amount of assets disclosed above. No impairment provision has therefore been deemed necessary in these financial statements. 10. Bonuses The Company was required to pay an unrecoverable (non-tax deductible) signature bonus to the Kazakhstan Ministry of Geology amounting to $513,000 in accordance with the Agreement. The Company capitalized the initial signature bonus to Oil and Gas Assets - Acquisition Costs (see Note 9). This amount will be amortized by the units of production method, when the Company begins producing proven reserves. Production based bonuses will be payable to the Kazakhstan Ministry of Geology amounting to $500,000 when cumulative production reaches ten million barrels and $1,200,000 when cumulative production reaches fifty million barrels. Under current Kazakhstan tax law, the production bonuses will be considered tax deductible expenditures in the calculation of profits taxes. No amounts related to the production bonuses have been achieved as of December 31, 1998. 45 Karakuduk-Munay JSC Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 11. Accounts Payable Accounts Payable as of December 31, 1998 includes payables for equipment and services required for field operations, including construction of field facilities, transportation services, catering services, mobilization of the drilling rig, project design costs of capital projects, etc. 12. Accrued Current Liabilities December 31, December 31, 1998 1997 ------------------------------ Accrued management service fee 573,750 573,750 Accrued audit fees 75,000 48,000 Accrued interest payable 3,613 -- Miscellaneous taxes payable 127,233 45,106 -------- -------- Total accrued liabilities $779,596 $666,856 ======== ======== 13. Loans Payable Loans Payable to Third Parties - ------------------------------ During 1998, the Company borrowed a total of $800,000 from the Chase Bank of Texas, N.A. (Chase), a U.S. financial institution. On March 6, 1998, the Company borrowed the initial $500,000 from Chase. The note accrues interest at a fixed, annual interest rate of 6.84% and is repayable in 18 equal, quarterly installments of $27,778, which began on December 6, 1998. The final principal payment is due on or before February 26, 2003. On June 9, 1998, the Company borrowed an additional $300,000 from Chase. The second note accrues interest at a fixed, annual interest rate of 6.875% and is repayable in 18 equal, quarterly installments of $16,667, which also began on December 6, 1998. The final principal payment is payable on or before March 6, 2003. As of December 31, 1998, the Company's outstanding principal balance on the notes totaled $755,555, of which $177,780 is due before December 31, 1999. Loans Payable to Partners - ------------------------- As discussed in Note 3, the major shareholder, Central Asian Petroleum (Guernsey) Limited bears sole financial responsibility for providing all funding for the Company, which is not generated by the Company's operations through the sale of oil and gas production or borrowed from third party sources. The various forms of funding from Central Asian Petroleum (Guernsey) Limited are treated as long term loans to the Company and bear interest at the rate of LIBOR plus 1%. The Agreement requires installment payments on the loan to be calculated and paid on a quarterly basis and to be equal to 65% of gross revenue after deduction of royalties due to the Republic of Kazakhstan. No sales of crude oil production occurred in 1998 and no payments on the loan have been made or are due as of December 31, 1998. 46 Karakuduk-Munay JSC Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 13. Loans Payable (continued) The loan is made up as follows (US dollars): December 31, --------------------------- 1998 1997 ----------- ----------- Cash funding $16,897,350 $ 6,474,783 Management services fee 4,275,000 2,295,000 Other expenditures 634,594 520,143 Accrued interest payable 1,573,136 529,571 ----------- ----------- Total interest and loan payable to partner $23,380,080 $ 9,819,497 =========== =========== Management services are provided by a subsidiary of Chaparral Resources, Inc., the parent company of Central Asian Petroleum (Guernsey) Limited. Services were provided in 1998 for a fixed fee of $140,000 per month for January and February, 1998, and $170,000 per month for the remainder of 1998. Management services were provided to the Company in the amount of $1,980,000 and $1,275,000 for the years ended December 31, 1998 and 1997, respectively. As of December 31, 1998, the Company's outstanding principal and accrued interest balance on Loans Payable to Partners totaled $23,380,080, of which $3,000,000 is due before December 31, 1999. The Company determined the current portion of Loans Payable to Partner based upon best estimates of projected 1999 sales revenue, of which 65% will be distributed to Central Asian Petroleum (Guernsey) Limited on a quarterly basis as described above. 14. Taxes The following is a summary of the provision for income taxes:
Year ended December 31 1998 1997 1996 ----------------------------------------------------------- Income taxes (benefit) computed at statutory rate $(1,046,338) $ (499,494) $ (582,652) Non-deductible expenses 347,012 -- -- Change in asset valuation allowance 699,326 499,494 582,652 ----------------------------------------------------------- Income taxes $ -- $ -- $ -- =========================================================== The components of the Company's deferred tax assets and liabilities under FASB No. 109 are as follows: Year ended December 31 1998 1997 1996 ----------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 1,904,035 $ 1,204,709 $ 705,215 Valuation allowance (1,904,035) (1,204,709) (705,215) ----------------------------------------------------------- Deferred tax assets $ -- $ -- $ -- =========================================================== 47
Karakuduk-Munay JSC Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 14. Taxes (Continued) There were no net deferred tax assets or net income tax benefits recorded in the financial statements for deductible temporary differences or net operating loss carryforwards due to the fact that the realization of the related tax benefits is not considered likely. The Agreement specifies profits taxes and other taxes applicable to the Company, which are subject to the laws of the Republic of Kazakhstan. As discussed in Note 10, the signature bonus is not recoverable or deductible in calculating income tax expense and has not been recorded as a recoverable asset for tax purposes. The Company began extracting hydrocarbons from the Karakuduk field in 1998. At December 31, 1998, the Company has tax loss carryforwards of approximately $6,346,783 available to offset against future taxable income, in accordance with the terms of the contract and legislation existing as of the date the contract was signed. There is a five-year carryforward of tax losses beginning with the first year the Company generates net income. The Company has used the best estimates available to determine the Company's deferred tax assets before consideration of the valuation allowance. Please refer to Note 16 regarding the uncertainties of taxation in the Republic of Kazakhstan. 15. Charter Capital The total Charter Fund contribution specified in the new Founders Agreement of Karakuduk-Munay (dated June 12, 1997) is $200,000. Each of the shareholder's portion of the Charter Fund and their respective participating interest in the Company is:
December 31, December 31, 1998 1997 Charter Percent Charter Percent Contribution Contribution ------------------------------------------------------------------------ KazakhOil 80,000 40 % 80,000 40 % Korporatsiya Mangistau Terra International 20,000 10 % 20,000 10 % Central Asian Petroleum (Guernsey) Limited - CAP(G) 100,000 50 % 100,000 50 % ---------------------------------------------------------- Total charter capital $200,000 100 % $200,000 100 % ======== ========
During 1997, KazakhOil as the successor to Munaygaz state holding company, contributed US $ 40,000 as Munaygaz's initial charter contribution obligation that was previously settled by CAP(G). The CAP(G) 1996 contribution has been reclassified as additional funding of the Company's operations in 1997. 48 Karakuduk-Munay JSC Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 16. Contingencies Taxation - -------- The existing legislation with regard to taxation in the Republic of Kazakhstan is constantly evolving as the Government manages the transition from a command to a market economy. Tax and other laws applicable to the Company are not always clearly written and their interpretation is often subject to the opinions of the local or main State Tax Service. Instances of inconsistent opinions between local, regional and national tax authorities are not unusual. Basis of Accounting - ------------------- The Company maintains its statutory books and records and calculates its taxable loss in accordance with U.S. generally accepted accounting principles, which it believes it may do under the terms of the Agreement. The Republic of Kazakhstan currently requires companies to comply with Kazakh accounting regulations and to calculate tax profits or losses in accordance with these regulations as well as prevailing tax law. There is currently uncertainty, therefore, as to the extent of tax losses available to the Company. 17. Current Kazakhstan Environment The ability of the Company to realize the carrying value of its assets is dependent on being able to transport hydrocarbons and finding appropriate markets for their sale. The Company has various options available to it in terms of possible exportation routes to potential markets, based on experience of other joint venture operations in the vicinity of the Company's activity. Domestic markets in the Republic of Kazakhstan currently do not permit world market prices to be obtained. 18. License Commitments and Operating Lease Commitment As specified in Note 1, under the terms of the license the Company has committed to minimum expenditures of $30 million for the year ended December 31, 1999. The Company has excess expenditures from 1998 of $480,000, which will be applied against the 1999 commitment. The Company has no other expenditure commitments under the license after December 31, 1999. The license, as amended, also establishes a minimum work program, requiring the Company to drill 8 new wells before December 31, 1999. The new wells must be between 3,250 and 3,500 meters in depth. As of December 31, 1998, the Company's only major operating contractual commitment is the drilling contract with Challenger Oil Services, PLC (Contractor) entered into on April 7, 1998. The Company mobilized the drilling rig in late 1998, but did not begin drilling operations until early 1999. The drilling contract was retroactively amended as of March 17, 1999, to reflect the current economic environment in the oil and gas industry as a whole, and specifically in the Commonwealth of Independent States (CIS). The amended contract terms are disclosed in Note 19, Subsequent Events. Any cost reductions relating to the contract amendments have been incorporated in the Company's financial statements as of December 31, 1998. The terms of the drilling contract, as amended, require the Company to minimum lease commitments for two years (1999 and 2000) of $3,102,500 per year. The original drilling contract obliged the Company to minimum lease commitments of $3,102,500 for one year only. Minimum lease payments are based upon stand-by rates without crews. 49 Karakuduk-Munay JSC Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 19. Subsequent Events Drilling contract - ----------------- As stated in Note 18, on March 17, 1999 the Company retroactively amended it's drilling contract with Challenger Oil Services, PLC, originally entered into on April 7, 1998. The Company is subject to the following terms of the amended contract: Amount ------ Operational rate $12,500/Day Stand-by-rate with crews 11,250/Day Stand-by rate without crews 8,500/Day Rig move rate 20,000/Move Rig memobilization (one time charge only) $250,000 Lease term 2 years The Company spudded the first exploratory well (#101) on February 14, 1999. Sales contract with KazakhOil - ----------------------------- On March 30, 1999, the Company entered into a contract with KazakhOil, JSC, shareholder of the Company, for the sale of 19,000 tons (138,700 barrels) of the Company's crude oil production in April 1999. Under the terms of the contract, the Company has been granted a transit quota to export 19,000 tons of crude oil to the far abroad and near abroad markets. KazakhOil will act as a broker for the sale. According to the contract, net revenue to the Company is based upon a formula indexed to the price of Brent crude on the date of sale, adjusted for transportation costs and other minor charges. The sale will occur in two batches: 13,000 tons and 6,000 tons. The Company expects the initial 13,000 tons to be nominated for sale in early April. The Company expects the remaining 6,000 tons to be nominated before April 30, 1999. Devaluation of Tenge - -------------------- On April 5, 1999, the government decided not to continue its support of the National currency, the Tenge and allowed it to float freely against the US dollar. Immediately thereafter, the official exchange rate declined from 87.5 tenge to the US dollar to 142 tenge to the US dollar. The devaluation decreases the tenge realizable value of any US dollar or other hard currency denominated monetary assets held by the Company, and increases the tenge obligation of any US dollar or other hard currency denominated monetary liabilities held by the Company. As these financial statements are denominated in US dollars, the only impact will relate to that described on Note 2 to these accounts. The net impact is not expected to be material to the Company's financial statements. 50 Karakuduk-Munay JS Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 20. Impact of Year 2000 (unaudited) The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software which is not "Year 2000 Compliant" may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities. The Company has completed an assessment and currently believes that the computer systems it has in place are Year 2000 compliant. The Company has initiated formal communication with all of its significant suppliers and large customers to determine the extent to which the Company is vulnerable to those third parties failure to remediate their own Year 2000 Issue. In particular, it is unclear as to the extent the Kazakh government and other organizations who provide significant infrastructure services within the Kazakh Republic have addressed the Year 2000 Issue. Furthermore, the current crisis in Russia and the CIS could adversely affect the ability of the government and such organizations to fund adequate Year 2000 compliance programs. There is no guarantee that the systems of the government or of other organizations on which the Company relies will be timely converted and would not have an adverse effect on the Company and its systems. The Company's financial statements as of December 31, 1998 and 1997 and for the periods then ended do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts or classifications of liabilities that may result from the outcome of this uncertainty. 51 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBITS TO FORM 10-K CHAPARRAL RESOURCES, INC. EXHIBIT INDEX Exhibit No. Description and Method of Filing - ----------- -------------------------------- 2.1 Stock Acquisition Agreement and Plan of Reorganization dated April 12, 1995 between Chaparral Resources, Inc., and the Shareholders of Central Asian Petroleum, Inc., incorporated by reference to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 2.2 Escrow Agreement dated April 12, 1995 between Chaparral Resources, Inc., the Shareholders of Central Asian Petroleum, Inc. and Barry W. Spector, incorporated by reference to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 2.3 Amendment to Stock Acquisition Agreement and Plan of Reorganization dated March 10, 1996 between Chaparral Resources, Inc., and the Shareholders of Central Asian Petroleum, Inc., incorporated by reference to the Company's Registration Statement No. 333-7779. 3.1 Restated Articles of Incorporation + Amendments dated September 25, 1976, incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 3.2 Articles of Amendment to the Restated Articles of Incorporation + Amendments dated April 21, 1988, incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 3.3 Articles of Amendment to the Restated Articles of Incorporation + Amendments dated April 12, 1994, incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 3.4 Articles of Amendment to the Restated Articles of Incorporation + Amendments dated June 21, 1995, incorporated by reference to Exhibit B to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 3.5 Articles of Amendment to the Restated Articles of Incorporation + Amendments dated July 17, 1996, incorporated by reference to the Company's Registration Statement No. 333-7779. 3.6 Articles of Amendment to the Restated Articles of Incorporation + Amendments dated November 25, 1997, incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated October 31, 1997. 3.7 Bylaws, as amended through October 31, 1997, incorporated by reference to Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.1 Chaparral Resources, Inc. 1989 Stock Warrant Plan effective May 1, 1989, incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 10.2 Warrant Certificate entitling Allen & Company to purchase up to 1,022,000 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 1, 1996. 1 Exhibit No. Description and Method of Filing - ----------- -------------------------------- 10.3 Amendments to Chaparral Resources, Inc. Stock Warrant Plan, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.4 Agreement dated August 30, 1995 for Exploration Development and Production of Oil in Karakuduk Oil Field in Mangistan Oblast of the Republic of Kazakhstan between Ministry of Oil and Gas Industries of the Republic of Kazakhstan for and on Behalf of the Government of the Republic of Kazakhstan and Joint Stock Company of Closed Type Karakuduk Munay Joint Venture, incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended November 3 10.5 License for the Right to Use the Subsurface in the Republic of Kazakhstan, incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.6 Subscription Agreement dated April 22, 1997 between Chaparral Resources, Inc. and Victory Ventures LLC, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.7 Warrant Certificate dated December 31, 1997 entitling Victory Ventures LLC to purchase up to 4,615,385 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.8 Form of Warrant issued to Black Diamond Partners LP, Clint D. Carlson, John A. Schneider, Victory Ventures LLC, Whittier Energy Company and Whittier Ventures LLC in connection with loans made by them to Chaparral Resources, Inc. in November and December 1996 and to Black Diamond Partners LP, Clint D. Carlson, Wittier Energy Company and Whittier Ventures LLC in July 1997 in connection with the same loans, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on quarter ended June 30, 1997. 10.9 Chaparral Resources, Inc. 1997 Incentive Stock Plan, incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.10 Amendment to Common Stock Purchase Warrant dated December 31, 1997 entitling Victory Ventures LLC to purchase up to 4,615,385 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.11 Amendment dated September 11, 1997, to License for Right to Use the Subsurface in the Republic of Kazakhstan, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.12 Warrant Certificate entitling Allen & Company Incorporated to purchase up to 900,000 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K/A dated October 31, 1997. 10.13 Form of Subscription Agreement dated November 21, 1997, incorporated by reference to Exhibit 10.19 to the Company's Current Report on Form 8-K dated October 31, 1997. 10.14 Letter dated February 4, 1998, from the Company to Michael B. Young, incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 2 Exhibit No. Description and Method of Filing - ----------- -------------------------------- 10.15 Release and Understanding with H. Guntekin Koksal, incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.16 Termination Agreement dated March 6, 1998 with Exeter Finance Group, incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.17 Agreement dated March 7, 1998, with Munay-Implex, incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.18 Agreement dated March 31, 1998, effective as of November 4, 1997, between the Company and Allen & Company Incorporated, incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.19 Subscription Agreement dated April 1, 1998 between the Company and Network Fund III, Ltd., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 3, 1998. 10.20 Form of Subscription Agreement between the Company and certain investors, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated July 28, 1998. 10.21 Subordinated Loan Agreement dated as of June 4, 1997 between the Company and Allen & Company, Incorporated, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.22 Warrants issued to Allen & Company, Incorporated and John G. McMillian, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.23 Loan agreements between the Company and Howard Karren dated May 27, 1998 and July 1, 1998, respectively, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.24 1998 Incentive and Nonstatutory Stock Option Plan 10.25 Amendment to License for the Right to Use the Subsurface in the Republic of Kazakhstan, dated December 31, 1998. 10.26 Credit Support and Pledge Agreement between Whittier Ventures, LLC and Chaparral Resources, Inc. dated July 2, 1998, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.27 Warrants issued to Whittier Ventures, LLC, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.28 Settlement Agreement and Release between Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. and Chaparral Resources, Inc., Howard Karren, Whittier Trust Company and James A. Jeffs dated October 30, 1998, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 3 Exhibit No. Description and Method of Filing - ----------- -------------------------------- 10.29 Warrants issued to Heartland, Inc. of Wichita and Collins & McIlhenny, Inc., as joint tenants and to Don M. Kennedy, incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.30 Loan Agreement between Challenger Oil Services, PLC and Chaparral Resources, Inc. dated September 10, 1998, incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.31 Promissory Note between Challenger Oil Services, PLC and Chaparral Resources, Inc. dated September 10, 1998, incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.32 International Daywork Drilling Contract - Land between Challenger Oil Services, PLC and Karakuduk-Munay, JSC, dated April 7, 1998 10.33 Amendment No. 1 to the International Daywork Drilling Contract - Land between Challenger Oil Services, PLC and Karakuduk-Munay, JSC, dated April 7, 1998 10.34 Amendment No. 2 to the International Daywork Drilling Contract - Land between Challenger Oil Services, PLC and Karakuduk-Munay, JSC, dated March 17, 1999 10.35 Letter Agreement dated March 17, 1999 between Karakuduk-Munay, JSC and Challenger Oil Services, PLC. 10.36 Letter Agreement and Restated Amendment No. 1 to Loan Agreement and Promissory Note dated March 18, 1999 between Challenger Oil Services, PLC and the Company. 21 Subsidiaries of the Registrant, incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Ernst & Young Kazakhstan 27 Financial Data Schedule 4 EX-10.24 2 1998 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN EXHIBIT 10.24 CHAPARRAL RESOURCES, INC. 1998 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this 1998 Incentive and Nonstatutory Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants and to promote the success of the Company's business. Options granted hereunder may be either "incentive stock options," as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or "nonstatutory stock options," at the discretion of the Board and as reflected in the terms of the written stock option agreement. 2. Definitions. As used herein, the following definitions shall apply: a. "Board" shall mean the Committee, if one has been appointed, or the Board of Directors of the Company if no Committee is appointed. b. "Code" shall mean the Internal Revenue Code of 1986, as amended. c. "Common Stock" shall mean the $0.10 par value common stock of the Company. d. "Company" shall mean Chaparral Resources, Inc., a Colorado corporation. e. "Committee" shall mean the Committee appointed by the Board in accordance with paragraph (a) of Section 4 of the Plan, if one is appointed, or the Board if no committee is appointed. f. "Consultant" shall mean any person who is engaged by the Company or by any Parent or Subsidiary to render consulting services and is compensated for such consulting services, but does not include a director of the Company who is compensated for services as a director only with the payment of a director's fee by the Company. g. "Continuous Status as an Employee" shall mean the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence approved by the Board; provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. h. "Employee" shall mean any person, including officers and directors, employed by the Company or by any Parent or Subsidiary. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. i. "Incentive Stock Option" shall mean an Option which is intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and which shall be clearly identified as such in the written Stock Option Agreement provided by the Company to each Optionee granted an Incentive Stock Option under the Plan. j. "Non-Employee Director" shall mean a director who: (i) Is not currently an officer (as defined in Section 16a-1(f) of the Securities Exchange Act of 1934, as amended) of the Company or of a Parent or Subsidiary or otherwise currently employed by the Company or by a Parent or Subsidiary. (ii) Does not receive compensation, either directly or indirectly, from the Company or from a Parent or Subsidiary, for services rendered as a Consultant or in any capacity other than as a director, except for an amount that does not exceed the dollar amount for which disclosure would be required pursuant to Item 404(a) of Regulation S-K adopted by the United States Securities and Exchange Commission. (iii) Does not possess an interest in any other transaction for which disclosure would be required pursuant to Item 404(a) of Regulation S-K adopted by the United States Securities and Exchange Commission. k. "Nonstatutory Stock Option" shall mean an Option granted under this Plan which does not qualify as an Incentive Stock Option and which shall be clearly identified as such in the written Stock Option Agreement provided by the Company to each Optionee granted a Nonstatutory Stock Option under this Plan. To the extent that the aggregate fair market value of Optioned Stock to which Incentive Stock Options granted under Options to an Employee are exercisable for the first time during any calendar year (under the Plan and all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options under the Plan. The aggregate fair market value of the Optioned Stock shall be determined as of the date of grant of each Option and the determination of which Incentive Stock Options shall be treated as qualified incentive stock options under Section 422 of the Code and which Incentive Stock Options exercisable for the first time in a particular year in excess of the $100,000 limitation shall be treated as Nonstatutory Stock Options shall be determined based on the order in which such Options were granted in accordance with Section 422(d) of the Code. 2 l. "Option" shall mean an Incentive Stock Option, a Nonstatutory Stock Option or both as identified in a written Stock Option Agreement representing such stock option granted pursuant to the Plan. m. "Optioned Stock" shall mean the Common Stock subject to an Option. n. "Optionee" shall mean an Employee or other person who is granted an Option. o. "Parent" shall mean a "parent corporation" of the Company, whether now or hereafter existing, as defined in Section 424(e) of the Code. p. "Plan" shall mean this 1998 Incentive and Nonstatutory Stock Option Plan. q. "Share" shall mean a share of the Common Stock of the Company, as adjusted in accordance with Section 11 of the Plan. r. "Stock Option Agreement" shall mean the agreement to be entered into between the Company and each Optionee which shall set forth the terms and conditions of each Option granted to each Optionee, including the number of Shares underlying such Option and the exercise price of each Option granted to such Optionee under such agreement. s. "Subsidiary" shall mean a "subsidiary corporation" of the Company, whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 11 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 3,000,000 shares of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. Administration of the Plan. a. Procedure. The Plan shall be administered by the Board or a Committee appointed by the Board consisting of two or more Non-Employee Directors to administer the Plan on behalf of the Board, subject to such terms and conditions as the Board may prescribe. 3 (i) Once appointed, the Committee shall continue to serve until otherwise directed by the Board (which for purposes of this paragraph (a)(i) of this Section 4 shall be the Board of Directors of the Company). From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. (ii) Members of the Board who are granted, or have been granted, Options may vote on any matters affecting the administration of the Plan or the grant of any Options pursuant to the Plan. b. Powers of the Board. Subject to the provisions of the Plan, the Board shall have the authority, in its discretion: (i) To grant Incentive Stock Options, in accordance with Section 422 of the Code, and Nonstatutory Stock Options or both as provided and identified in a separate written Stock Option Agreement to each Optionee granted such Option or Options under the Plan; provided however, that in no event shall an Incentive Stock Option and a Nonstatutory Stock Option granted to any Optionee under a single Stock Option Agreement be subject to a "tandem" exercise arrangement such that the exercise of one such Option affects the Optionee's right to exercise the other Option granted under such Stock Option Agreement; (ii) To determine, upon review of relevant information and in accordance with Section 8(b) of the Plan, the fair market value of the Common Stock; (iii) To determine the exercise price per Share of Options to be granted, which exercise price shall be determined in accordance with Section 8(a) of the Plan; (iv) To determine the Employees or other persons to whom, and the time or times at which, Options shall be granted and the number of Shares to be represented by each Option; (v) To interpret the Plan; (vi) To prescribe, amend and rescind rules and regulations relating to the Plan; 4 (vii) To determine the terms and provisions of each Option granted (which need not be identical) and, with the consent of the holder thereof, modify or amend each Option; (viii) To accelerate or defer (with the consent of the Optionee) the exercise date of any Option, consistent with the provisions of Section 7 of the Plan; (ix) To authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Board; and (x) To make all other determinations deemed necessary or advisable for the administration of the Plan. c. Effect of Board's Decision. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other permissible holders of any Options granted under the Plan. 5. Eligibility. a. Persons Eligible. Options may be granted to any person selected by the Board. Incentive Stock Options may be granted only to Employees. An Employee, who is also a director of the Company, its Parent or a Subsidiary, shall be treated as an Employee for purposes of this Section 5. An Employee or other person who has been granted an Option may, if he is otherwise eligible, be granted an additional Option or Options. b. No Effect on Relationship. The Plan shall not confer upon any Optionee any right with respect to continuation of employment or other relationship with the Company nor shall it interfere in any way with his right or the Company's right to terminate his employment or other relationship at any time. 6. Term of Plan. The Plan became effective on May 21, 1998. It shall continue in effect until May 20, 2008, unless sooner terminated under Section 13 of the Plan. 7. Term of Option. The term of each Option shall be 10 years from the date of grant thereof or such shorter term as may be provided in the Stock Option Agreement. However, in the case of an Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, if the Option is an Incentive Stock Option, the term of the Option shall be five years from the date of grant thereof or such shorter time as may be provided in the Stock Option Agreement. 5 8. Exercise Price and Consideration. a. Exercise Price. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board, but the per Share exercise price under an Incentive Stock Option shall be subject to the following: (i) If granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall not be less than 110% of the fair market value per Share on the date of grant. (ii) If granted to any other Employee, the per Share exercise price shall not be less than 100% of the fair market value per Share on the date of grant. b. Determination of Fair Market Value. The fair market value per Share on the date of grant shall be determined as follows: (i) If the Common Stock is listed on the New York Stock Exchange, the American Stock Exchange or such other securities exchange designated by the Board, or admitted to unlisted trading privileges on any such exchange, or if the Common Stock is quoted on a National Association of Securities Dealers, Inc. system that reports closing prices, the fair market value shall be the closing price of the Common Stock as reported by such exchange or system on the day the fair market value is to be determined, or if no such price is reported for such day, then the determination of such closing price shall be as of the last immediately preceding day on which the closing price is so reported; (ii) If the Common Stock is not so listed or admitted to unlisted trading privileges or so quoted, the fair market value shall be the average of the last reported highest bid and the lowest asked prices quoted on the National Association of Securities Dealers, Inc. Automated Quotations System or, if not so quoted, then by the National Quotation Bureau, Inc. on the day the fair market value is determined; or (iii) If the Common Stock is not so listed or admitted to unlisted trading privileges or so quoted, and bid and asked prices are not reported, the fair market value shall be determined in such reasonable manner as may be prescribed by the Board. 6 c. Consideration and Method of Payment. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of cash, check, other shares of Common Stock having a fair market value on the date of exercise equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, or any combination of such methods of payment, or such other consideration and method of payment for the issuance of Shares to the extent permitted under the Colorado Business Corporation Act. 9. Exercise of Option. a. Procedure for Exercise: Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. In the sole discretion of the Board, at the time of the grant of an Option or subsequent thereto but prior to the exercise of an Option, an Optionee may be provided with the right to exchange, in a cashless transaction, all or part of the Option for Common Stock of the Company on terms and conditions determined by the Board. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Stock Option Agreement by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment, as authorized by the Board, may consist of a consideration and method of payment allowable under Section 8(c) and this Section 9(a) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of the duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of this Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. b. Termination of Status as an Employee. In the case of an Incentive Stock Option, if any Employee ceases to serve as an Employee, he may, but only within such period of time not exceeding three months as is determined by the Board at the time of grant of the Option after the date he ceases to be an Employee of the Company, exercise his Option to the extent that he was entitled to exercise it at the date of such termination. To the extent that he was not entitled to exercise the Option at the date of such termination, or if he does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate. 7 c. Disability of Optionee. In the case of an Incentive Stock Option, notwithstanding the provisions of Section 9(b) above, in the event an Employee is unable to continue his employment with the Company as a result of his total and permanent disability (as defined in Section 22(e)(3) of the Code), he may, but only within such period of time not exceeding 12 months as is determined by the Board at the time of grant of the Option from the date of termination, exercise his Option to the extent he was entitled to exercise it at the date of such termination. To the extent that he was not entitled to exercise the Option at the date of termination, or if he does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate. d. Death of Optionee. In the case of an Incentive Stock Option, in the event of the death of the Optionee: (i) During the term of the Option if the Optionee was at the time of his death an Employee and had been in Continuous Status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised, at any time within 12 months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the right to exercise would have accrued had the Optionee continued living and remained in Continuous Status as an Employee 12 months after the date of death; or (ii) Within such period of time not exceeding three months as is determined by the Board at the time of grant of the Option after the termination of Continuous Status as an Employee, the Option may be exercised, at any time within 12 months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the right to exercise had accrued at the date of termination. 10. Nontransferability of Options. Unless permitted by the Code, in the case of an Incentive Stock Option, the Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 8 11. Adjustments Upon Changes in Capitalization or Merger. Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option, and the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of any Option, as well as the price per Share covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. In the event of the proposed dissolution or liquidation of the Company, the Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. In the event of the proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation in a transaction in which the Company is not the survivor, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. If the Board makes an Option fully exercisable in lieu of assumption or substitution in the event of such a merger or sale of assets, the Board shall notify the Optionee that the Option shall be fully exercisable for a period of 30 days from the date of such notice, and the Option will terminate upon the expiration of such period. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Board makes the determination granting such Option. Notice of the determination shall be given to each Employee or other person to whom an Option is so granted within a reasonable time after the date of such grant. Within a reasonable time after the date of the grant of an Option, the Company shall enter into and deliver to each Employee or other person granted such Option a written Stock Option Agreement as provided in Sections 2(r) and 16 hereof, setting forth the terms and conditions of such Option and separately identifying the portion of the Option which is an Incentive Stock Option and/or the portion of such Option which is a Nonstatutory Stock Option. 9 13. Amendment and Termination of the Plan. a. Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, the following revisions or amendments shall require approval of the shareholders of the Company in the manner described in Section 17 of the Plan: (i) An increase in the number of Shares subject to the Plan above 3,000,000 Shares, other than in connection with an adjustment under Section 11 of the Plan; (ii) Any change in the designation of the class of Employees eligible to be granted Incentive Stock Options; or (iii) Any material amendment under the Plan that would have to be approved by the shareholders of the Company for the Board to continue to be able to grant Incentive Stock Options under the Plan. b. Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if the Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, applicable state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of legal counsel for the Company with respect to such compliance. As a condition to the existence of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares and such other representations and warranties which in the opinion of legal counsel for the Company, are necessary or appropriate to establish an exemption from the registration requirements under applicable federal and state securities laws with respect to the acquisition of such Shares. 10 15. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's legal counsel to be necessary for the lawful issuance and sale of any Share hereunder, shall relieve the Company of any liability relating to the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 16. Stock Option Agreement. Each Option granted to an Employee or other persons shall be evidenced by a written Stock Option Agreement in such form as the Board shall approve. 17. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company on or before May 20, 1999. Such shareholder approval and any shareholder approval required under Section 13 of the Plan, may be obtained at a duly held shareholders meeting if the votes cast in favor of the approval exceed the votes cast opposing the approval, or by unanimous written consent of the shareholders in accordance with the provisions of the Colorado Business Corporation Act. 18. Information to Optionees. The Company shall provide to each Optionee, during the period for which such Optionee has one or more Options outstanding, copies of all annual reports and other information which are provided to all shareholders of the Company. The Company shall not be required to provide such information if the issuance of Options under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. 19. Gender. As used herein, the masculine, feminine and neuter genders shall be deemed to include the others in all cases where they would so apply. 20. CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS PLAN AND THE INSTRUMENTS EVIDENCING OPTIONS WILL BE GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF COLORADO. 11 IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Plan effective as of May 21, 1998. CHAPARRAL RESOURCES, INC., a Colorado corporation By: /s/ Howard Karren ------------------------------------- Howard Karren, President EX-10.25 3 AMENDMENT TO LICENSE AGREEMENT Exhibit 10.25 DECREE OF THE GOVERNMENT OF THE REPUBLIC OF KAZAKSTAN NO1392, Dated: December 31, 1998 About licensing for right of subsurface resources user, redrawing up and alteration of license, withdraw of licenses for eight of subsurface resources user. In accordance with articles 14, 23, 40 and 70 of the Republic of Kazakstan Presidents Decree # 2828 "About subsurface resources and its use", which is in legal force from January 27, 1996, (Journal of the Parliament of the Republic of Kazakstan #2,1996, article 182) the Government of the Republic of Kazakstan enacts : 1. To license the enterprises for prospecting and producing of thermal and mineral subsurface waters and medical mud according to attachment #1 2. To license the enterprises for prospecting and producing of hydrocarbon stocks and solid minerals according to attachment #2. 3. To make alteration in license for right of use of subsurface recourses according to attachment #3. 4. To reregister the licenses for right of use of subsurface resources to new subsurface resources users in connection with its transfer according to attachment #4. 5. To withdraw the previous licenses for right of use of subsurface resources in connection with breaches of the license terms and call-back of the licenses by subsurface resources user according to attachment 5. 6. To the State Commmittee of the Republic of Kazakstan on investments to take necessary measures ensuing from the Present Decree. 7. The decree will come into force from the moment of its signing Prime Minister of the Republic of Kazakstan /s/ N. Balgimbaev.
LIST of licenses for right of subsurface resources user with alternations - ------------------------------------------------------------------------------------------------------------------------------------ License Subsurface Alterations (series, No date) resources user --------------------------------------------------------------------------------------------- No Relevant Contract Name of the Prolongation of Alteration of Alteration Other authority conclusion subsurface the term of minimum of resources user license, new program geological types of branch subsurface resources use - ------------------------------------------------------------------------------------------------------------------------------------ 1 2 3 4 5 6 7 8 9 10 - ------------------------------------------------------------------------------------------------------------------------------------ 22 Series MG #249 KKM JV Minimum work from 06/28/95 program. Until 12/31/98 $16,500,000; Until 12/31/99 $30,000,000 - ------------------------------------------------------------------------------------------------------------------------------------
EX-10.32 4 CHALLENGER DRILLING CONTRACT Exhibit 10.32 INTERNATIONAL DAYWORK DRILLING CONTRACT - LAND ---------------------------------------------- THIS AGREEMENT, dated the 7th day of April, 1998, is made between Challenger Oil Services, PLC, a company organized under the laws of England, with its principal office located in London, England (hereinafter called Contractor), and Karakuduk-Munai, Inc., a corporation organized under the laws of the Republic of Kazakstan, with and office located at Microdistrict, Region 3, Building 82, Aktau, Republic of Kazakstan. (hereinafter called "Operator"). WHEREAS, Operator desires to have onshore wells drilled, produced or worked over in the Operating Area and to have performed or carried out all auxiliary operations and services as detailed in the Appendices hereto or as Operator may require, and VVHEREAS, Contractor is willing to furnish the land drilling rig Challenger No. 23, which is a Cabot 900 rig, together with drilling and other equipment (hereinafter called the "Drilling Unit"), insurance and personnel, all as detailed in the Appendices hereto for the purpose of drilling or producing said wells and performing said auxiliary operations and services for Operator. NOVV THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises and the covenants and agreements herein it is agreed as follows: ARTICLE I - INTERPRETATION 101. Definitions In this Contract, unless the context otherwise requires: (a) "Commencement Date" means the day and time within the nearest hour that the Contractor's drilling crew has arrived at Operator's first drilling location and is ready to commence the rigging up of the Drilling Unit. Operator hereby agrees to give to Contractor a written notice two weeks before the Drilling Unit is expected to arrive at the first drilling location in the Operating Area to enable Contractor to mobilize its drilling crew to the first drilling location on a timely basis, (b) "Operators Items" means the equipment, material and services owned by Operator or which are listed in Appendix D that are to be provided at the expense of Operator; (c) "Contractors Items" mean the Dulling Unit, equipment, material and services owned by Contractor or which are listed in Appendices B and D that are to be provided at expense of Contractor; (d) "Contractor's Personnel" means the personnel and subcontractors to be provided by Contractor from time to time to conduct operations hereunder as listed in Appendix C; (e) "Operator's Personnel" means the personnel and other contractors to be provided by Operator from time to time in connection with operations hereunder; (f) "Operating Area" means the area specified in Appendix A. (g) "Operating Base" means the place onshore designated by Operator and specified in Appendix A; (h) "Affiliated Company" means a company owning fifty percent (50%) or more of the stock of Operator or Contractor, a company in which Operator or Contractor own fifty percent (50%) of more of its stock, or a company fifty percent (50%) or more of whose stock is owned by the same company that owns fifty percent (50~) or more of the stock of Operator or Contractor. 102. Currency -------- In this Contract, all amounts expressed in dollars are United States dollar amounts, unless otherwise indicated in Appendix A. 103. Conflicts --------- Appendices A, B, C, D and E attached hereto are incorporated herein by reference. If any provision of the Appendices conflicts with a provision in the body hereof, the latter shall prevail. 104. Headings -------- The paragraph headings shall not be considered in interpreting the text of this Contract. 105. Further Assurances ------------------ Each party shall perform the acts and execute and deliver the documents and give the assurances necessary to give effect to the provisions of this Contract. 106. Contractor Status ----------------- Contractor in performing its obligations hereunder shall be an independent contractor. Operator may instruct and direct Contractor as to the results to be obtained from Contractor's employees, however, Contractor as an independent contractor shall have sole and complete control, supervision and direction over the Drilling Unit, its equipment and personnel, and over all operations to be carried out. This is a Contract for drilling services and shall not be construed as a charter, lease or demise of Contractor's equipment. None of Contractors employees are, nor shall be deemed to be, employees or agents of Operator. Use of subcontractors by Contractor shall not relieve Contractor from any liability or obligation under this Contract. 107. Governing Law ------------- This Contract shall be construed and the relations between the parties determined in accordance with the law designated in Appendix A, not including, however, any of its conflicts of law rules which would direct or refer to the laws of another jurisdiction. In the event any provision of this Contract is inconsistent with or contrary to any applicable law, rule or regulations, said provision shall be deemed to be modified to the extent required to comply with said law, rule or regulation, and as so modified said provision and this Contract shall continue in full force and effect. ARTICLE II - TERM 201. Effective Date --------------- The parties shall be bound by this Contract when each of them has executed it (hereinafter referred to as "Effective Date"). 202. Duration -------- This Contract shall, subject to Paragraphs 203 and 204 below, be for the term specified in Appendix A. 203. Termination ----------- This Contract shall terminate: (a) immediately if the Drilling Unit becomes an actual loss on the date Contractor's insurance surveyor determines a constructive or arranged total loss to have occurred; (b) on the later of the date specified in Appendix A or, if operations are then being conducted on a well, as soon thereafter as such operations are completed and the Drilling Unit has been safely stacked at the demobilization location specified in Appendix A, unless some other location or port is mutually agreed, and all of Operator's Items have been off loaded; (c) in accordance with Paragraph 708; (d) in accordance with Paragraph 802. 204. Option to Extend ---------------- This Contract may be renewed by Operator for an additional one year term at the same rates, terms and conditions, provided that Operator first gives to Contractor a written notice of renewal at least ninety (90) days prior to the expiration of the initial term of this Contract. 205. Continuing Obligations ---------------------- The provisions of Article ~X, Article 1304, 1305 and 1309 shall survive the termination of this Contract and the Parties shall continue to be bound thereby. 206. Return of Operator's Item --------------------------- Upon termination of operations, Contractor shall return to Operator at the last drilling location of the Drilling Unit under this Contract, or at any other location as directed by Operator at Operator's sole cost, any of Operator's Items which are at the time in Contractor's possession, Operator's Items shall be returned by Contractor in the same condition in which they were received by Contractor, normal wear and tear excepted. ARTICLE Ill - CONTRACTOR'S PERSONNEL 301. Number. Selection, Hours of Labor and Remuneration -------------------------------------------------- Except where herein otherwise provided, the number, selection, replacement, hours of labor and remuneration of Contractors Personnel shall be determined by the Contractor. Such employees or subcontractors shall be the employees or subcontractors solely of Contractor. Notwithstanding the above, minimum manning shall be as specified in Appendix C. 302. Contractor's Representative --------------------------- Contractor shall nominate one of its personnel as Contractors Representative who shall be in charge of the remainder of Contractor's Personnel and who shall have full authority to resolve all day-to-day matters which arise between Operator and Contractor. 303. Increase in Contractor's Personnel ---------------------------------- Operator may, subject to mutual agreement of the parties as to additional compensation to Contractor, require Contractor to increase the number of Contractor's Personnel. 304. Replacement of Contractor's Personnel ------------------------------------- Contractor will remove and replace at anytime any of Contractors Personnel if Operator so requests. Operator shall not exercise this right in an unreasonable or arbitrary manner and shall give to Contractor the reasons for any such request. 305. Personnel Shortages ------------------- Should Contractor, at any time during the term of this Contract, provide less than a full crew of personnel as established by the Appendices, the applicable dayrate payable to Contractor hereunder shall be reduced by an amount calculated by multiplying the applicable dayrate by a fraction, where the number of crew members absent from the Dolling Unit is the numerator and the total number of required crew members is the denominator. If at any time in Operator's opinion, Contractor's failure to provide a full crew of personnel as established in the Appendices is interfering with or delaying the conduct of its operations, and such failure continues for a period of five (5) days after written notice from Operator to Contractor, then in addition to (i) a reduction in the applicable day rate as provided herein and (ii) any other remedies the Operator may have under this Contract, the Operator may terminate this Contract. 306. Safety Measures --------------- Contractor shall, at its expense, take all measures reasonably necessary or proper to provide safe working conditions, and shall comply with Operator's safety regulations and with all safety requirements of the country of operation. Contractor shall give notice to all persons at the drill site of all safety regulations which apply to such personnel. Additionally, Contractor shall ensure that such persons are fully informed of and comply with such regulations. The Contractor shall set up and conduct monthly safety drills. ARTICLE IV - CONTRACTOR'S ITEMS 401. Obligation to Supply -------------------- Contractor shall provide Contractors Items and Personnel and perform the services to be performed by it in accordance with Appendices B, C and D. 402. Maintain Stocks --------------- Contractor shall be responsible, at its cost, for maintaining adequate stock levels of Contractor's Items and replenishing as necessary. 403. Maintain and Repair Equipment ----------------------------- Contractor shall, subject to Paragraph 901, be responsible for the maintenance and repair of all Contractor's Items and shall provide all spare parts and materials required therefor. Contractor shall, if requested by Operator, also maintain or repair any of Operator's Items in the Operating Area which Contractor is qualified to and can maintain or repair with Contractor's normal complement of personnel and equipment at the drill site, provided, however, that Operator shall at its cost provide all spare parts and materials required to maintain or repair Operator's Items, and the basic responsibility and ability for furnishing and maintaining such items shall remain in Operator. ARTICLE V - CONTRACTOR'S GENERAL OBLIGATION 501. Contractor's Standard of Performance ------------------------------------ Contractor shall carry out all its operations under this Contract on a daywork basis For purposes hereof the term "daywork basis" means Contractor shall furnish equipment, labor and perform services as herein provided, for a specified sum per day under the direction and supervision of Operator (which term is deemed to include any employee, agent, consultant of subcontractor engaged by Operator to direct drilling operations). When operating on a daywork basis, Contractor shall be fully paid at the applicable rates of payment and assumes only the obligations and liabilities stated herein. Except for such obligations and liabilities specifically assumed by Contractor, Operator shall be solely responsible and assumes liability for all consequences of operations by both parties while on a daywork basis, including results and all other risks or liabilities incurred in or incident to such operations, notwithstanding any breach of representation or warranty, either expressed or implied, or latent defects (whether or not preexisting) and any liability based on any theory of tort, breach of contract or strict liability, including defect or ruin or premises, either latent or patent. 502. Operation of Drilling Unit -------------------------- Subject to Paragraph 606, Contractor shall be responsible for the operation of the Drilling Unit, including, supervising moving operations and positioning on drilling locations as required by Operator. Operations under this Contract will be performed on a twenty-four (24) hour per day, seven (7) days a week basis. Contractor warrants that the Drilling Unit will operate efficiently and is physically capable of drilling wells to depths specified in the Appendices hereto. 503. Compliance with Operator's Instructions --------------------------------------- Contractor shall comply with all instructions of Operator consistent with the provisions of this Contract, including, without limitation, drilling, well control and safety instructions. Such instructions shall, if Contractor so requires and time permits, be confirmed in writing by the authorized representative of Operator. However, Operator shall not issue any instructions which would be inconsistent with Contractors rules, policies or procedures pertaining to the safety of its personnel, equipment or the Drilling Unit, or require Contractor to exceed the capacity of the Drilling Unit. 504. Adverse Weather --------------- Contractor, in consultation with Operator, shall decide when, in the face of impending adverse weather conditions, to institute precautionary measures in order to safeguard the well, the well equipment, the Drilling Unit and personnel to the fullest possible extent. Contractor and Operator shall each ensure that each respective senior representative will not act unreasonably in the exercise of their discretion under this Paragraph. 505. Drilling Fluids and Casing Program ---------------------------------- Contractor shall follow any of Operator's instructions with respect to the Drilling Fluid and Casing Program as may be specified by Operator. Operator shall provide Contractor with any such programs reasonably in advance of the spud date of each well to be drilled hereunder. 506. Cutting/Coring Program ---------------------- Contractor shall save and identify cuttings and cores according to Operator's instructions and place them in containers furnished by Operator. 507. Records to be Kept by Contractor ------------------------------- Contractor shall keep and furnish to Operator an accurate record of the work performed and formations drilled on the IADC-API Daily Drilling Report Form or other form acceptable to Operator. A legible copy of said form signed by Contractor's Representative shall be furnished by Contractor to Operator. 508. Difficulties During Drilling ---------------------------- In the event of any difficulty arising which precludes either drilling ahead under reasonably normal procedures or the performance of any other operations planned for a well, Contractor may suspend the work in progress and shall immediately notify the representative of Operator of the difficulty, and in the meantime exert its best efforts to overcome the difficulty. 509. Well Control Equipment ---------------------- Subject to Article IX, Contractor shall maintain its well control equipment listed in Appendices B and D in good condition at all times and shall use all reasonable means to prevent and control fires and blowouts and to protect the hole. 510. Inspection of Materials Furnished by Operator --------------------------------------------- Contractor agrees to visually inspect all materials furnished by Operator before using same and to notify Operator of any apparent defects therein. Contractor shall not be liable for any loss or damage resulting from the use of materials furnished by Operator. ARTICLE Vl - OPERATOR'S RIGHTS AND OBLIGATIONS 501. Equipment and Personnel ----------------------- Operator shall at its cost provide Operator's Items and Operator's Personnel and perform the services to be provided or performed by it according to Appendix D. ln addition to providing the initial supply of Operator's Items, Operator shall be responsible, at its cost, for maintaining adequate stock levels and replenishing as necessary. When, at Operator's request and with Contractor's agreement, the Contractor furnishes or subcontracts for certain items which Operator is required herein to provide, for purposes of this Contract said items or services shall be deemed to be Operators items or Contractors, and Operator shall not be relieved of any of its liabilities in connection therewith. For furnishing said items and services, Operator shall reimburse Contractor its entire cost plus a handling charge as specified in Appendix A. 602. Maintenance and Repair ---------------------- Operator shall be responsible, at its cost, for the maintenance and repair of all Operator's Items on the Drilling Unit which Contractor is not qualified to or cannot maintain or repair with Contractors normal complement of personnel and the equipment at the drill site. 603. Operator's Employees -------------------- Operator shall designate a senior representative to resolve day-to-day matters requiring decision by Operator who will be present at the drill site. Contractor may treat Operator's senior representative for the time being at the drill site as being in charge of all Operator Personnel. 604. Replacement of Operator's Personnel ----------------------------------- Contractor shall have the right to request in writing Operator to remove and replace any Operator Personnel at the drill site if the Contractor can show reasonable grounds for such request; however the final decision with respect to such removal shall rest with Operator. 605. Drilling Site and Access ------------------------ Operator shall be responsible for providing access to the drilling location, as well as selecting, surveying, marking and clearing the drilling locations as may be reasonably required by Contractor for location approval. Operator shall obtain and provide all required certificates, drilling permits and licenses required for the drilling operations and Dolling Unit hereunder. Operator shall notify Contractor of any impediments or hazards to operations at each drilling location or at any access routes to the drilling locations of which it has knowledge. Notwithstanding any other provision of this Contract, should there be obstructions at or within the area of the drill site and these obstructions result in damage to the Drilling Unit, Operator shall be responsible for and hold harmless and indemnify Contractor for all resulting damage, including the payment of the Standby Rate during repairs, but Operator shall receive credit for any physical damage insurance proceeds received by Contractor as a result of such damage. 606. Custom or Excise Duties, Taxes and Fees --------------------------------------- Contractor shall transport the Drilling Unit and its equipment to the port of Houston and provide Operator with information and documentation concerning the Drilling Unit and equipment which Operator may need to arrange shipment. Operator shall arrange for and pay all expenses of shipping the Drilling Unit and equipment from the Port of Houston to the Operator's first drilling location in the Operating Area, including the costs of trip insurance to cover the Drilling Unit during the transportation. After the first well has been spudded, Contractor shall pay all costs of shipping and transportation of spare parts, materials and supplies to the drill site. Operator shall be responsible for obtaining permits and licenses and clearing customs for the initial and subsequent items in the country in which the Operating Area is located, as well as all related charges such as customs duties, excise duties, sales taxes, value added taxes, clearing agent's fees, port clearances, pilotage, other similar fees, handling charges and port dues. 607. Taxes ----- Contractor shall pay any and all liabilities or claims for Profit Tax and Net Income Tax or other taxes assessed or levied on account of Contractor's earnings under this Contract which any Kazakstan taxing authority (including any political subdivision thereof claiming jurisdiction over Contractor and its performance of this Contract may assess or levy against Contractor up to the aggregate sum of $850 U.S_ Dollars per day. Operator shall assume responsibility for and pay on behalf of Contractor or reimburse to Contractor any Kazakstan taxes which exceed $850 U.S. Dollars per day on a grossed up basis, so that Contractor's maximum obligation for such Kazakstan taxes shall never exceed $850 U.S. Dollars per day. Contractor shall indemnify and hold harmless Operator from and against any personnel income taxes which may be assessed against Contractor's personnel based on tax rates, laws and regulations as they exist as of the date of this Contract. If, after the execution of this Contract, such tax rates, laws or regulations pertaining to personnel income taxes increase, then Operator shall indemnify and hold harmless Contractor from and against any such increase. Operator shall pay or reimburse Contractor for all other taxes of any kind, including but not limited to, VAT, Drilling Unit registration costs, Property taxes, Road taxes and other taxes. 608. Take Over of Work ----------------- ln the event any well drilled under this contract should blow out, catch fire or in any manner get out of control, Operator may take over complete control and supervision of the work of bringing the well under control or putting out the fire. If at any time in Operator's opinion, contractor is failing to conduct its operations in a diligent, skillful and workmanlike manner and in all respects in strict accordance with accepted good oil field practices pursuant to the terms of this contract, and such failure continues for a period of ten (10) days (or in the event such failure results in a significant safety hazard, if such failure continues for 96 hours) after notice from Operator to contractor, Operator may take over and continue the work on the well to completion or abandonment. In the event Operator takes over the work pursuant to this Article 608, Operator shall have full use of Contractor's Drilling Unit and other equipment, facilities, material, supplies and personnel at the well location, which Contractor shall continue to insure in accordance with this Contract, and Contractor shall continue to be paid the applicable day rates provided for in this Contract. During any such take over period the indemnities given by Contractor to Operator under this Contract shall be suspended and Contractor shall have no responsibility to Operator under such indemnities. when such take over period has ended, Operator shall return the Drilling Unit and all of Contractor's items to Contractor in as good condition as when the take over began, normal wear and tear excepted. 609. Operator's Well Program ----------------------- Operator shall from time to time provide Contractor with a well drilling program or programs, which shall include, but not be limited to hole sizes, casing program, mud control program and Operator's deviation policy. Operator may modify these programs while drilling is in progress. ARTICLE VII - RATES OF PAYMENT 701. Payment ------- Operator shall pay to Contractor during the term of this Contract the amounts from time to time due calculated to the nearest hour according to the rates of payment herein set forth, notwithstanding any breach of representation or warranty, either expressed or implied, or latent defects or any liability based upon any theory of tort, breach of contract or strict liability, either latent or patent. 702. Mobilization Fee ---------------- There shall be no Mobilization Fee due and payable by Operator under this Contract, except for Operator's obligations under Article 606 and 703 hereof. 703. (This article intentionally deleted and left blank) 704. Demobilization Fee ------------------ Operator shall pay Contractor a Demobilization Fee as specified in Appendix A to cover Contractor's costs of demobilizing the Dulling Unit. The Demobilization Fee shall be earned and payable on the date of termination of this Contract. Except as is provided below, Operator shall have no further demobilization obligations other than the payment of the Demobilization Fee. Operator, however, shall provide to Contractor all export documentation necessary to enable to freely export the Drilling Unit upon the termination of this Contract. lf Contractor is unable to export the Drilling Unit from Kazakstan for any cause other than the fault of Contractor within thirty (30) days after termination of this Contract, then Operator shall begin paying the Standby Rate Vathout Crews beginning on the thirty-first (31st) day and continuing until the Drilling Unit is safely exported from Kazakstan. 705. Operating Rate -------------- The Operating Rate specified in Appendix A will first become payable from the moment when the Drilling Unit has been rigged up and is ready to spud the first well under this Contract. The Operating Rate shall continue to be payable throughout the duration of the Contract, except when some other rate herein provided applies. 706. Standby Rate ------------ The Standby Rate specified in Appendix A will be payable as follows: (a) during any period of delay when Contractor is unable to proceed because of adverse weather conditions or as a direct result of an act, instruction or omission of Operator including, without limitation, the failure of any of Operator's Items, or the failure of Operator to issue instructions, provide Operator Items or furnish services; (b) from the Commencement Date until the moment when the Operating Rate first becomes payable; (c) during any period after Commencement Date that the Drilling Unit is undergoing periodic inspections required for maintenance of any Certification or Classification Certificates; (d) during any period when operations are suspended to repair the Drilling Unit or other Contractor Items due to blowout, fire, cratering, shifting or punch through at a drilling location, obstacles or obstructions or the consequences thereof; (e) during any period when operations are being conducted hereinunder to redrill or repair any well drilled hereunder which is lost or damaged as a result of Contractors sole negligence; (f) during any period when operations are suspended or are being conducted due to difficulties encountered while drilling as provided for in Article 508 hereof. 707. Rate During Repair ------------------ The Repair Rate specified in Appendix A will be payable during the first twenty-four (24) hours per month during which operations are suspended to permit necessary replacement, inspection, repair or maintenance of Contractors Items, except as provided in Paragraphs 608 and 708. Routine maintenance such as lubrication, packing of swivels, changing of pump parts, slipping lines, drill string and certification inspections, shall not be considered as maintenance for purposes of this Paragraph. 708. Force Majeure Rate ------------------ The Force Majeure Rate specified in Appendix A will be payable during any period in which operations are not being carried on because of Force Maleure as defined in Paragraph 1303, including periods required to repair damage caused by a Force Majeure event. However, should an event of Force Majeure continue in existence for a period of Ninety (90) days, then no dayrate shall be payable for the period after such 90 days and either Contractor or Operator shall have the right to terminate this Contractor at anytime. 709. Moving Rate ----------- Operator shall pay to Contractor a lump sum payment of ten ($10,000) thousand for each move of the Drilling Unit from well site to well site in the Kara~uduk Field. 710. Standby Rate without Crews -------------------------- The Standby Rate without Crews shall be the rate so stated in Appendix A 711. Additional Payments ------------------- Operator shall, in addition, pay to Contractor: (a) the cost of any overtime paid by Contractor to Contractors Personnel in respect of the maintenance or repair at the drill site of Operator's Items, if requested by Operator, or other overtime required by the Operator; (b) Contractors costs associated with waiting on Operator furnished transportation or as the result of an act, instruction or omission of Operator; (c) Contractors costs associated with evacuations and accommodations of personnel caused by hazardous conditions or circumstances at the drill site; and (d) Contractor's costs associated with moving Contractor's items and Personnel, and their personal effects, if Contractor is required to change its operating base to a new Operating Area or within the Operating Area. 712. Variation of Rates ------------------ The rates and Payment herein set forth shall be revised by the actual amount of the change in Contractor's cost if an event as described below occurs or if the cost of any of the items hereinafter listed shall increase by more than the amount indicated below from Contractor's cost thereof on the date of execution of this Contract: (a) labor costs, including all payroll burden and benefits paid by Contractor for its employees; (b) if Operator requires Contractor to increase the number of Contractor's Personnel; (c) if it becomes necessary for Contractor to change the work schedule of its personnel or change the location of its Operating Base or Operating Area; (d) in the event described in Paragraph 1102; (e) if the cost of insurance premiums increases by five percent (5%) or more; (f) if there is any change in laws, rules, regulations, or legislation, including the enforcement or interpretation thereof, that increases Contractor's financial burden; ARTICLE Vlll - INVOICES AND PAYMENTS 801. Monthly Invoices ---------------- Contractor shall bill Operator at the end of each month, or at the end of each well, if sooner, for all daily charges earned by Contractor. Other charges shall be billed as earned. Billings for daily charges will reflect details of the time spent (calculated to the nearest hour) and the rate charged for that time. Billings for other charges will be accompanied by invoices and other documentation supporting costs incurred for Operator or other substantiation as reasonably required by Operator. 802. Payment ------- Operator shall pay all invoices within thirty days after the receipt thereof except that if Operator disputes an item invoiced, Operator shall within twenty days after receipt of the invoice notify Contractor of the amount disputed, specifying the reason therefor, and payment of the disputed amount may be withheld until settlement of the dispute, but payment shall be made of any undisputed portion. Contractor shall have the right, upon ten (10) days prior written notice, to terminate this Contract if Operator fails or refuses to timely pay Contractor undisputed amounts due and owning to Contractor. 803. Manner of Payment ----------------- All payments due by Operator to Contractor hereunder shall be made by wire transfer or as otherwise agreed to Contractor's bank account which is specified in Appendix A. 804. Local Currency Expenditures --------------------------- Contractor shall have the right to specify that Operator shal[ pay Contractor in the currency of the country where the Drilling Unit is operating in amounts equal to Contractor's local currency expenditures (including those expenditures incurred locally by Contractor for the account of Operator) and as needed by Contractor. All amounts of local currency so paid Contractor during the month shall be credited against Contractor's U.S. Dollar monthly invoice for that month at the rate of exchange of U.S. Dollars for the local currency in effect on the date Contractor makes the local currency payment as published by the Central Bank of Kazakstan. ARTICLE IX - LIABILITY 901. Equipment or Property --------------------- Except as specifically provided herein to the contrary, each party hereto shall at all times be responsible for and hold harmless and indemnity the other party from and against damage to or loss of its own and its subcontractors equipment or property, except to the extent that the proceeds from Contractor's insurance as made available to Contractor do not compensate Contractor therefor: Operator shall be responsible for and shall hold harmless and indemnify Cuntractor for loss or destmcUon of or damage to Contractors drill pipe, drill collars, subs, reamers, bumper subs, stabilizers and other in-hole equipment when such equipment is being used In the hole below the rotary table, normal wear excepted. Abnormal wear and/or damage for svhich Operator shall be responsible hereunder shall include, but not be limited to, wear andlor damage resulting from the presence of H2S or other corrosive elements In the hole including thosa introduced into the drilling fluid, excessive wear caused by sandcutting, damage resulting from excessive or uncontrolled pressures such as those encountered durtng testing, blowout, or in a well out of control, excessive deviation of the hole from vemcal, dog-leg Severity, fishing, cementing or testing operations, Hnd from any unusual drilling practices employed at Operatofs request. Operators responsibility for such abnormal wear andlor damage as referred to herein shall include abnormal wear and/ar damage to Gontractofs choke hoses and manifolds. BOP and other appurtenant equipment, Operator shall pay the cost of repairing damaged equipment if repairable_ In the case of equipment lost. destroyed or damaged beyond repair, Operator shall reimburse Contractor an amouot equal to the then current replacement cost of such equipment delivered to the Drilling Unlit. 902. The Hole -------- In the event the hole should be lost or damagad, operator shall be responsible for and hold harmless and indemnify Contractor from such damage to or loss Qf the hole, including all down hole property therein, 903. Contractor's Personnel ---------------------- Contractor shall be responsible for and hold harmless and indemnify Operator from and against all claims, demands and causes of action of every kind and character arising in connection herewith in favor of Contractor's employees, or Contractor's subcontractors or their employees, or Contractor's invitees, on account of bodily injury, death or damage to property. 904. Operator's Personnel -------------------- Operator shall be responsible for and hold harmless and indemnify Contractor from and against all claims, demands, and causes of action of every kind and character arising in connection herewith in favor of Operator's employees, or Operator's other contractors (excluding Contractor hereunder) or their employees, or Operator's invitees, on account of bodily injury, death or damage to property. 905. Pollution and Contamination --------------------------- Notwithstanding anything to the contrary contained herein, the responsibility for pollution or contamination shall be as follows: (a) Contractor shall be responsible for and hold harmless and indemnify Operator for control and removal of pollution or contamination which originates above the surface of the ground from spills of fuels, lubricants, motor oils, normal water base drilling fluid and attendant cuttings, pipe dope, paints, solvents, ballast, bilge and garbage in Contractor's possession and control. (b) Operator shall be responsible for and hold harmless and indemnify Contractor against all claims, demands, and causes of action of every kind and character (including control and removal of the pollutant involved) arising directly or indirectly from all pollution or contamination, other than that described in Paragraph 905(a) above, which may occur as a result of operations hereunder, including, bit not limited to, that which may result from fire, blowout, cratering, seepage or any other uncontrolled flow of oil, gas, water or other substance, as well as the use or disposition of lost circulation and fish recovery materials and fluids, oil emulsion, oil base or chemically treated drilling fluids. and drilling fluids other than "normal water base drilling 9uid" defined in Paragraph 805(a) above. (c) ln the event a third party commits an act or omission which results in pollution or contamination for which either the Contractor or Operator for whom such party is performing work is held to be legally liable. the responsibility therefor shall be considered, as between the Contractor and Operator, to be the same as if the party for whom the work was performed had performed the same and all af the obligations and limitations set forth in Paragraphs 205(a) and (b) above, shall be specifically applied. 906. Debris Removal and Cost of Control ---------------------------------- Operator shall be responsible for and hold harmless and indemnify contractor for the cost of removal of debris including the Drilling Unit. Operator shall also be responsible for and hold harmless and indemnify Contractor for the cost of regaining control of any wild well. 907. Underground Damage ------------------ Operator shall be responsible for and hold harmless and indemnify Contractor for and and all claims resulting from operations under this Agreement on account of injury to, destruction, of, or Ioss or impairment of production or any proper right in or to oil, gas or other mineral substance or water, if at the time of the act or omission causing such injury, destruction, loss, or impairment, said substance had not been reduced to physical possession above the earth surface, and for any loss or damage to any formation, strata, or reservoir beneath the earth surface. 506. Consequential Damages --------------------- Neither party shall be liable to the other for, and each party shall hold harmless and indemnify the other against, special, indirect of consequential damages resulting from or arising out of this Contract, including, without limitation, loss of profits, loss of use or business interruptions, however same may be caused. 910. Indemnity Obligation -------------------- (a) The parties intend and agree that the phrase "be responsible for and hold harmless and indemnify" in Paragraphs 505 and 901 through 908 hereof mean that the indemnifying party shall indemnify, hold harmless and defend (including payment of reasonable attorney's fees and costs of litigation) the indemnified party from and against any and all claims, demands, causes of action, damages, judgements and awards of any kind or character, without limit and without regard to the cause or causes thereof, including pre-existing conditions, whether such conditions be patent or latent, breach of warranty (express or implied), strict liability, or the negligence of any person or persons, including that of the indemnified party, whether such negligence be sole, joint or concurrent, active, passive or gross or due to the willful misconduct of any party. (b) An indemnifying party's obligations contained in this Agreement shall also extend to the indemnified party and its Affiliated Companies and the officers, directors, employees, agents, owners, shareholders and insurers of each and to actions in rem or in personam. (c) The terms and provisions of Paragraphs 605 and 901 through 909 shall have no application to claims or causes of action asserted against Operator or Contractor by reason of any agreement of indemnity with a person or entity not a party hereto. ARTICLE X - INSURANCE 1001. Contractor's Insurance ---------------------- Contractor shall carry and maintain insurance coverage of the type and in the amounts set forth in Appendix E, All references in this Contract to "insurance" of Contractor shall mean such insurance as set forth in Appendix E. 1002. Certificates ------------ Contractor will furnish Operator, on request, with certificates indicating that the required insurance is in full force and effect and that the same shall not be canceled or materially and adversely changed without ten (10) days written notice to Operator. 1003. Subcontracts ------------ For liabilities assumed hereunder by Contractor, its insurance shall be endorsed to provide that the underwriters waive their right of subrogation against Operator, its Affiliated Companies and co-venturers, and employees of each. Operator will, as well, cause its insurer to waive subrogation against Contractor and Contractor's Affiliated Companies and employees of each for liabilities it assumes. 1004. Additional Insured ------------------ Contractor shall name Operator as additional insured, where permitted, under its policies of insurance, but only with respect to liabilities assumed by Contractor under this Contract. Operator shall name Contractor as additional insured, where permitted, under its policies of insurance, but only with respect to liabilities assumed by Operator under this Contract. ARTICLE Xl - SUBLETTING AND ASSIGNMENT 1101. Subcontracts ------------ Operator may employ other contractors to perform any of the operations or services to be provided or performed by it. Contractor may employ other contractors to perform any of the operations or services to be provided or performed by it with the prior consent of Operator. 1102. Assianment ---------- Neither party may assign this Contract to anyone other than an Affiliated company without the prior when consent of the other, and prompt notice of any such intent to assign shall be given of the other party. In the event of such assignment, the assigning party shall remain liable to the other party as a guarantor of the performance by the assignee of the terms of this Contract. If any assignment by Operator is made that increases Contractors' financial burden, except for any assignment by Contractor, Contractors compensation shall be adjusted to give effect to any increase in Contractor's operating costs or taxes. ARTICLE IX - NOTICES 1201. Notices ------- Notices, reports and other communications required or permitted by this Contract to be given or sent by one party to the other shall be delivered by hand, mailed, telexed, or telecopied to the address as specified in Appendix A. Either party may by notice to the other party change its address. Notices shall be effective upon receipt. ARTICLE Xlll - GENERAL 1301. Confidential Information ------------------------ Upon written request of Operator, all information relating to the well obtained by Contractor in the conduct of operations hereunder shall be held confidential by contractor who will use the same degree of care it uses in safeguarding its own confidential information. 1302. Attorney's Fees --------------- If this Contract is placed in the hands of an attorney for collection of any sums due hereunder, or suit is brought on same, or sums due hereunder are collected through bankruptcy or arbitration proceedings, then the prevailing party shall be entitled to recover reasonable attorney's fees and costs. 1303. Force Majeure ------------- Except as otherwise provided in this Paragraph 1303, each party to this Contract shall be excused from complying with the terms of this Contract, except for the payment of monies when due and the honoring of indemnities, if and for so long as such compliance is hindered or prevented by riots, strikes, wars (declared or undeclared), insurrection, rebellions, terrorist acts, civil disturbances, dispositions or order of governmental authority, whether such authority be actual or assumed , acts of God or adverse weather conditions, inability to obtain equipment, supplies or fuel, or by any act or cause (other than financial distress or inability to pay debts when due) which is reasonably beyond the control of such party, such cause being herein sometimes called "Force Majeure." In the event that either party hereto is rendered unable, wholly or in part, by any of these causes to carry out obligation under this Contract, such party shall give notice and details of Force Majeure in writing to the other party as promptly as possible after its occurrence. In such cases, the obligations of the party giving the notice shall be suspended during the continuance of any inability so caused except that Operator shall be obliged to pay to Contractor the Force Majeure Rate provided for in Paragraph 708. 1304. Right to Audit -------------- For a period of three years from termination of the Contract, Contractor shall keep proper books, records and accounts of operation hereunder and shall permit Operator at all reasonable times to inspect the portions thereof related to any variation of the rates hereunder or charges for reimbursable items. 1305. Compliance with Laws -------------------- Each party hereto agrees that all laws, rules and regulations of any federal, state or local government authority which are now or may become applicable to that party's operations covered by or arising out of the performance of this Contract will apply. In the event any provision of this Contract is inconsistent with or contrary to any applicable federal, state or local law, rule or regulation, said provision shall be deemed to be modified to the extent required to comply with said law, rule or regulation, and as so modified said provision and this Contract shall continue is full force and effect. If any act or omission by Contractor in response to Operator's explicit instruction violates such law, Operator shall indemnify Contractor for any consequences thereof. In no event however, will Contractor be requested or required to violate any law, rule or regulations of the United States of America. 1305. Waivers ------- lt is fully understood and agreed that none of the requirements of this Contract shall be considered as waived by either party unless the same is done in writing, and then only by the persons executing this Contract, or other duly authorized agent or representative of the party. 1307. Entire Agreement ---------------- This Contract supersedes and replaces any oral or written communications heretofore made between the parties relating to the subject matter hereof. Inurement --------- This Contract shall inure to the benefit of and be binding upon the successors and assigns of the parties. 1309. Resolution of Disputes ---------------------- Any dispute, controversy or claim arising out of or in relation to or in connection with this Agreement, including without limitation any dispute as to the construction, validity, Interpretation, enforceability or breach of this Agreement, shall be exclusively and finally settled by arbitration, and any Party may submit such a dispute, controversy or claim to arbitration. A single arbitrator shall be appointed by unanimous consent of the Parties. If the Parties, however, cannot reach agreement on an arbitrator within thirty (30) days of the submission of a Notice of Arbitration, the appointing authority shall be the American Arbitration Assoctiation, which can appoint an independent arbitrator which does have any financial interest in the dispute, controversy or claim. Unless otherwise expressly agreed in Writing by the Parties to the arbitration proceedings: (a) The arbitration proceedin9s:~hgll be hold in the Borough Of Manhatten, City of New York; (b) The arbitrator shall be and remain at all times wholly independent and impartial; (c) The arbitratlon pracE8dings shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration hssociaton then in effort; (d) Any Procedural issues not determined under the arbitrate rules selected pursuant to this Agreement shall be-determined by the low of the plea of erhtrefion other than those laws which would refer the matter to another jurisdiction: (e) Each Party shall be responsible for its own costs of the arbitration proceedings (including attorney's fees and costs); and (f) Judgement upon the award rendered by the arbitrator may be entered in any court" having jurisdiction thereof. lN WITNESS THEREOF THE PARTIES HAVE EXECUTED THIS CONTRACT ON THE DAY AND YEAR FIRST ABOVE WRlTTEN. OPERATOR: Karakuduk-Munai, Inc. WITNESS: /s/ Nicoli Klinhev BY: /s/ J. Mcgee - -------------------------- -------------------------------------- General Director TITLE: General Director CONTRACTOR: Challenger Oil Services. PC WITNESS: /s/ BY: /s/ Y.S. Tatanaki - -------------------------- -------------------------------------- TITLE: General Manager APPENDIX A Attached to and incorporated as a part of that certain Contract dated ______________________. Para Nos.: 101 (f) Operating Area: Karakuduk Field, Kazakstan 101 (g) Operating Base: Karakuduk Field, Kazakstan 102 Currency: United States Dollars 107 Governing Law: The Laws of the State of New York 202 Duration: One (1) year from Spud in date of the first well drilled under this Contract. 203 (b) Termination: One (1) year from Spud in date of the first well drilled under this Contract or after well in progress on that date. 203 (b) Demobilization Location: Operator's last well location in the Operating Area. &705 (c) 204 Option Term: One year Option Notice: Ninety (90) days before Termination of original term Deadline for Mutual Agreement: Ninety (90) days before termination of original term 503 Maximum Well Depth: 11,500 feet with 41/2 inch drill pipe. 601 Handling Charge: Ten (10%) Percent 702 Mobilization Fee: At Operators cost 704 Demobilization Fee: $250,000 705 Operating Rate: $15,056 (includes pol. risk ins.) 706 Standby Rate without Crews: $14,706 " 707 Repair Rate: $14,706 " Repair Time At Repair Rate for first twenty-four (24) hours per month, then at zero rate. 708 Force Majeure Rate: $14,706 709 Moving Rate $10,000 lump sum for each move of the Drilling Unit from well site to well site within the Karakuduk Field. 710 Standby Rate without Crews: $8,500 Interest Rate on Late Payments: One month LIBOR plus 2% per annum 803 Address for Payment (BANK) Acct, No. 201 Address for Notices: Operator: Telex: Telecopier: Attention: Contractor: Telex: Telecopier: Attention: 1305 Country of Legal Jurisdiction: Courts of the State of New York 1310 Value of Contractor's Unit and equipment: U.S.S $5,500,000. APPENDIX B DRILLING UNIT AND EQUIPMENT TO BE PROVIDED BY CONTRACTOR APPENDIX E CONTRACTOR'S INSURANCE Workers' Compensation and Employers' Liability Insurance - -------------------------------------------------------- Workers' compensation and labor liability insurance covering all Contractor's employees. in accordance with the statutory requirements of the state of hire or country in which the work is to be performed. The Employer's liability insurance shell have a limit of one million United States Dollars (U.S. $1,000,000) per occurrence. ll. Comprehensive General Liability ------------------------------- Comprehensive general liability insurance with contractual liability, products and completed operations, and broad form property damage coverage included, providing for a combined Single limit of one million United States Dollars (U.S. S1,000.000) (or personal injury. death or property damage resulting from each occurrence and covering all of Contractor's operator's under Contract. The aloresaid insurance shall cover, but not be limiteded to, loss of or damage to Operator's and to Contractor's Equipment and Personnel III. Umbrella Liability Insurance ---------------------------- Umbrella liability insurance coverage excess of !he primary coverage with a limit of no less than five million United States Rollers (U.S. $5,000,0GG) per occurrence including all areas involved in operations covered by the Contract. IV. Automobile Liability -------------------- Automobile liability insurance covering owned, non-owned and hired motor vehicles, with combined single limits of al least one million United Slates Dollars (U.S S1,000,000) for personal injury, death or property damage (resulting from each occurrence. (Subject to Confirmation With Underwriters) EX-10.33 5 AMENDMENT NO. 1 Exhibit 10.33 Amendment No. 1 to International Daywork Exploration Drilling Services Contract THIS AMENDMENT NO. 1 dated the 21st day of October, 1998, is made between Challenger Oil Services, PLC, a company organized under the lays of England and formally registered to conduct business under the laws of the Republic of Kazakstan (hereinafter called "Contractor"), and Karakudukmunay JSC, a joint-stock company organized under the laws of the Republic of Kazakstan, with an office located at District 3, Building 82, Aktau, Kazakstan (hereinafter called "Operator"). WHEREAS, Operator and contractor entered into that certain International Daywork Exploration Drilling Services contract - Land dated April 7, 1998, (hereinafter called the "Contract") providing for the furnishing by Contractor for drilling operations in the Republic of Kazakstan of a Cabot 900 drilling rig named Challenger No. 23; and WHEREAS, at Operator's request Contractor has agreed to make certain changes in the Drilling Contract and Operator and Contractor with to amend the Contract to reflect these changes; NOW, THEREFORE, in consideration of the premises and the covenants and agreements set forth below, Operator and Contractor agree as follows: 1. References in the Contract to the "Drilling Unit" shall no longer mean the Cabot 900 rig named Challenger No. 23, but shall instead refer to the Kremco 900 rig, also to be called Challenger No. 23. 2. Art. 606 of the Contract is hereby amended to change the words "Port of Houston" to read instead "Railway Station in Wola Baranowska, Poland". Ant. 606 is further amended to add the following sentence to the end of the present Art. 606: "From and after the date and time that the Drilling Unit is ready to depart the railway Station at Wola Baranowska, Poland, and both Parties agree in writing, the Operator shall pay the Contractor the sum of $4,000 per day up to the date and time the Drilling Unit actually departs the Railway Station at Wola Baranowska, Poland." 3. Art. 709 and Appendix A of the Contract are amended to change the Moving Rate to a lump sum amount of $30,112 per move within the Karakuduk field. Any delays beyond 48 hours, which are due to circumstances outside the control of the Contractor shall be charged to the Operator on a daily basis at the Stand-By Rate With Crew. 4. Contractor's dayrates are based on a cost build up for personnel assuming the use of some North American expatriates by Contractor. It is agreed that if Contractor uses non-North American personnel at any time in any position in which Contractor had originally planned to use North American personnel, and if Contractor thereby realizes a cost reduction, then one half of such cost reduction shall be credited to Operator against dayrates payable by Operator under the drilling Contract. 5. It is hereby agreed that Appendix B attached to the Contract shall be replaced for all purposed by the Appendix B, which is attached to this Amendment. 6. Art. 710 of the Contract is hereby amended to read as follows: "710 Standby Rate without Crews The Standby Rate without Crews shall be the rate so stated in Appendix A. If thirty (30) days shall elapse after the Drilling Unit has arrived at Kazakstan without Operator having given the two weeks notice provided for in Art. 101 (a) hereof, then beginning on the thirty-first (31st) day and continuing until the Drilling Rig has arrived at Operator's first drilling location and is ready to commence the rigging up, Operator shall pay to Contractor the Standby Rate without Crews." 7. The Contractor, with the written approval of the Operator, has the right under the Contract, to import into or acquire within the Republic of Kazakstan, any and all additional machinery, spare parts, and other equipment required to properly fulfill the Contractor's obligations to the Operator under the Contract, as amended. Operator shall be responsible for obtaining permits and licenses and clearing customs for such items in the country in which the Operating Area is located, as well as all related charges such as customs duties, excise duties, sales taxes, value added taxes, clearing agent's fees, port clearances, pilotage, other similar fees, handling charges and port duties. 8. Challanger Oil Services, PLC, in executing the terms of the Contract, will be acting as a subcontractor to Karakudukmunay, JSC (KKM), in accordance with Clause 9.2 (Customs) of KKM's "Agreements for Exploration, Development, and Production of Oil in Karakuduk Oil Field in Mangistau Oblast of the Republic of Kazakstan Between the Government of the Republic of Kazakstan and Karakuduk Munai, Joint Stock Company." 9. At the end of the Contract term, the Operator shall have the option to purchase the Challenger No. 23 rig at a price mutually agreed upon, in writing, by both the Contractor and the Operator. Notwithstanding any other provision included in the Contract, the purchase price of the Challenger No. 23 rig shall not be subject to or determined by any form of arbitration proceedings, but must be agreed upon solely by the Contractor and Operator in writing. IN WITNESS WHEREOF THE PARTIES HAVE EXECUTED THIS AMENDMENT NO. 1 ON THE DAY AND YEAR FIRST ABOVE WRITTEN. Karakudukmunay, Inc. By: /s/ N.D. Klinchev By: /s/ Jay McGee ------------------------------ ---------------------------- Title: General Director Title: General Director On behalf of CONTRACTOR Challenger Oil Services, PLC By: /s/ Y.S. Tatanaki - ---------------------------------- Title: General Manager EX-10.34 6 AMENDMENT NO. 2 Exhibit 10.34 Amendment No. 2 to International Daywork Drilling Contract - Land THIS AMENDMENT No. 2 dated as of the 17 day of March, 1999, is made between Challenger Oil Services, PLC, a company organized under the laws of England, Company Registration No. 3449260, with its principal office located at 72 New Bond Street, London W1Y9DD, England (hereinafter called "Contractor"), and Karakuduk-Munai, Inc., a corporation organized under the laws of the Republic of Kazakstan, with an office located at Microdistrict, Region 3, Building 82, Aktau, Kazakstan, (hereinafter called "Operator"). The Contractor and Operator are hereinafter collectively referred to as the Parties. WHEREAS, the Parties entered into that certain International Daywork Drilling Contract - Land dated April 7, 1998 (hereafter called the "Drilling Contract") providing for the furnishing by Contractor for drilling operations in the Republic of Kazakstan of a Cabot 900 drilling rig named Challenger No. 23; and WHEREAS, the Parties subsequently entered into Amendment No. 1 to International Daywork Drilling Contract - Land dated October 21, 1998 (hereafter called "Amendment No. 1") amending certain provisions of the Drilling Contract, including, inter alia, substituting a Kremco 900 rig, also to be called Challenger No. 23 for the Cabot 900 rig as the Drilling Unit in the Drilling Contract. WHEREAS, the Parties wish to further amend the Drilling Contract as amended by Amendment No. 1 to reflect certain changes agreed to by them; NOW, THEREFORE, in consideration of the premises and the covenants and agreements set forth below, Operator and Contractor agree as follows: 1. Capitalized terms used herein shall have the same meaning as in the Drilling Contract unless otherwise specified. In the event there is any conflict between the provisions of this Amendment No. 2 and the Drilling Contract and/or Amendment No.1, the provisions of this Amendment No. 2 shall govern. 2. Appendix A to the Drilling Contract is deleted and replaced by the following, effective as of January 1, 1999: APPENDIX A ---------- Para Nos.: 101 (f) Operating Area: Karakuduk Field, Kazakstan 101 (g) Operating Base: Karakuduk Field, Kazakstan 102 Currency: United States Dollars 107 Governing Law: The substantive law of the State of New York, to the exclusion of any conflicts of law rules which would refer the matter to the laws of another jurisdiction 202 Duration: Two (2) years beginning February 14, 1999; one (1) year for the second Drilling Unit from its spud date. 203 (b) Termination: February 13, 2001 or after well in progress on that date is completed or plugged and abandoned. 203 (b) Demobilization Operator's last well location in the Operating Location & 705 (c): Area. 204 Option Term: One year, by the mutual agreement of the Parties. Option Notice: Ninety (90) days before Termination of original term Deadline for Mutual Agreement: Ninety (90) days before termination of original term 503 Maximum Well Depth: 11,500 feet with 41/2 inch drill pipe. 601 Handling Charge: Ten (10%) Percent 702 Mobilization Fee: At Operator's cost 704 Demobilization Fee: US$250,000 705 Operating Rate: US$12,500 per day (includes political risk insurance) for one Drilling Unit; US$11,500 per day (includes political risk insurance) for the second Drilling Unit. (Note: all rates below include political risk insurance) 706 Standby Rate US$11,250 per day for one Drilling Unit; With Crews US$10,350 per day for the second Drilling Unit. 707 Repair Rate: US$11,250 per day for one Drilling Unit; US$10,350 per day for the second Drilling Unit. Repair Time At Repair Rate for first twenty-four (24) hours per month, then at zero cost to Operator. 708 Force Majeure Rate: At Standby Rate With Crews for ninety (90) days, and US$0 thereafter. 709 Moving Rate US$20,000 lump sum for each move of the Drilling Unit from well site to well site within the Karakuduk Field; Contractor provides and pays for all transportation and equipment, including trucks, required for all rig moves within the Karakuduk Field. (Note: see Paragraph 4 below for clarification) 2 710 Standby Rate without Crews: US$8,500 802 Interest Rate on Late Payments: One month LIBOR plus 2% per annum 803 Address for Payment Chase Bank of Texas, N.A. as Fiscal Agent 712 Main Street, 3 CBB East Houston, Texas 77002-8087 Acct. No. ---------------------------- 3. All drill stem testing operations will be conducted at the rate of US$12,500 per day pro-rated for the time actually spent conducting such drill stem test; for the second Drilling Unit, such amount shall be US$11,500 per day pro-rated for the time actually spent conducting such drill stem test 4. Article 709 and Amendment No.1 of the Drilling Contract are amended to change the Moving Rate to a "US$20,000 lump sum for each move of the Drilling Unit from well site to well site within the Karakuduk Field and Contractor provides and pays for all transportation and equipment, including trucks, required for all rig moves within the Karakuduk Field; provided, however, the Moving Rate for the first move of the Drilling Unit shall be at the Standby Rate With Crews for the time actually spent in conducting such move and KKM shall provide and pay for all transportation and equipment, including trucks, required for such first move of the Drilling Unit. All rig moves, including the first rig move shall commence during daylight hours and only with the prior written approval of the KKM Field Manager or his designee. 5. Article 801 of the Drilling Contract is amended to provide that "All invoices shall be prepared from and based solely upon the IADC Daily Drilling Report Form ("Daily Drilling Report") for each day covered by the invoice period. Prior to submission to Operator and provided that the KKM Field Manager or his designee is on the well location or in the local company office, all such invoices as well as the Daily Drilling Reports on which they are based shall be approved by the KKM Field Manager or his designee and such approval shall not be unreasonably withheld." 6. It is hereby agreed that Article 607 of the Drilling Contract is deleted and replaced with the following: 607. Taxes ----- (a) Contractor shall pay any and all tax liabilities or claims taxes assessed or levied on Contractor which any taxing authority (including any political subdivision thereof) claiming jurisdiction over Contractor and its performance of this Contract may assess or levy 3 against Contractor. Subject to the provisions of subparagraph (b) hereof, Operator shall reimburse Contractor for any income or profits tax liabilities directly and solely attributable to Contractor's revenues under this Contract, which are levied against Contractor by any applicable tax authority in the Republic of Kazakstan, in an amount equal to (i) fifty percent (50%) of the tax amount levied that is in excess of $425 U.S. Dollars per day but less than $850 U.S. Dollars per day, and (ii) one hundred percent (100%) of the tax amount levied that is in excess of $850 U.S. Dollars per day, for the number of days during the term of this Drilling Contract which fall within the applicable tax period for which such taxes are assessed. (b) Anything contained herein to the contrary notwithstanding, the Contractor is primarily responsible for the preparation, filing and payment of all required tax returns and tax payments to the applicable governmental agencies or authorities of the Republic of Kazakstan. Contractor will furnish Operator copies of all tax returns filed with any applicable government authority. Operator's liability hereunder shall be one of reimbursement only for any income or profits tax obligations levied against Contractor by any applicable tax authority in the Republic of Kazakstan, in an amount equal to (i) fifty percent (50%) of the tax amount levied that is in excess of $425 U.S. Dollars per day but less than $850 U.S. Dollars per day, and (ii) one hundred percent (100%) of the tax amount that is in excess of $850 U.S. Dollars per day, for the number of days during the term of this Drilling Contract which fall within the applicable tax period for which such taxes are assessed. Any additional tax liabilities, including penalties and interest, resulting from the failure of the Contractor to timely file all required tax returns and to timely pay all taxes due are the sole and exclusive liability and responsibility of the Contractor, and Operator shall have no obligation to pay or reimburse Contractor therefore, provided that Operator shall reimburse Contractor for any additional tax liabilities, including penalties or interest, paid by Contractor directly resulting from Operator unreasonably withholding its consent described in Article 607(c). (c) Contractor shall use due care and diligence in the preparation of its tax returns and the calculation of its tax liabilities attributable to this Drilling Contract so as to minimize, within the scope of the applicable tax law and regulations, its tax liabilities to the Republic of Kazakstan for which Operator has an obligation to reimburse Contractor hereunder. Contractor shall deliver to Operator a copy of such tax returns prior to filing and obtain Operator's consent for their filing, which consent will not be withheld unreasonably. Contractor shall make no audit settlement with any governmental tax authority in the Republic of Kazakstan for which Operator shall have responsibility to reimburse Contractor hereunder without first notifying Operator and obtaining its consent to that portion of such settlement for which Operator is obligated to reimburse Contractor hereunder. Operator shall have the right, but not the obligation, to participate at its own cost and expense in any such audit proceeding or settlement negotiations. 4 (d) Contractor shall indemnify and hold harmless Operator from and against any income or other taxes which may be assessed against Contractor's personnel based on the tax rates, laws and regulations as they exist as of the date of this Amendment No. 2 to the Drilling Contract. If, after the execution of this Amendment No. 2, such tax rates, laws or regulations pertaining to personnel income taxes increase or decrease, then the Operator shall reimburse Contractor for the actual amount of any such additional income taxes actually paid by Contractor which are directly attributable to such increase in taxes, and Contractor shall give Operator a credit for any savings in tax payments realized by Contractor. (e) Subject to the provisions of subparagraph (b) above, Operator shall reimburse Contractor for all other taxes, including but not limited to, VAT, Drilling Unit registration fees, property taxes, road taxes and other taxes, which are solely and directly attributable to Contractor's operations under this Drilling Contract. It is understood and agreed by the Parties, that Operator shall have no obligation to reimburse Contractor for any taxes levied against attributable to any activity or operations of Contractor, including without limitation, any equipment rental fees, which are not solely related to the Contractor's operations under this Drilling Contract. (f) Contractor shall invoice Operator for any taxes reimbursable to Contractor hereunder. Such invoice shall be accompanied by evidence of actual payment of such taxes by Contractor, as well as copies of any tax return, notice, demand, assessment or any other document upon which such payment was made. (g) Operator shall have the right, upon ten (10) days prior written notice to Contractor, to audit and inspect Contractor's books and records, including without limitation, Contractor's tax returns, which are related to Operator's tax reimbursement obligations to Contractor hereunder. This provision shall survive termination of the Drilling Contract. 7. It is agreed that Article 712 shall be deleted and replaced by the following: 712. Variation of Rates ------------------ The rates set forth above shall be revised by the actual amount of any increase or decrease in Contractor's cost if an event described below occurs, or if the cost of any of the items hereinafter listed shall increase or decrease from Contractor's cost thereof on the effective date of this Amendment No.2 to the Drilling Contract: (a) local labor costs, including amounts actually paid by Contractor to its employees to maintain salaries consistent with applicable industry scale (local and ex-pat), and all payroll taxes and benefits actually paid by Contractor for its employees, as a result of any changes in the laws or regulations of the Republic of Kazakstan; (b) if Operator requires Contractor to increase or decrease the number of Contractor's Personnel; 5 (c) if it becomes necessary for Contractor to change the work schedule of its personnel as a result of any change in the laws or regulations of the Republic of Kazakstan, or if the Parties agree upon a change in the location of the Operating Base or Operating Area; (d) in the case of an event described in Section 1102; (e) if the cost of insurance premiums increases or decreases by five percent (5%) or more; (f) if there is any change in law, rules, regulations, or legislation, including the enforcement or interpretation thereof, that increases or decreases Contractor's financial burden. Without limiting the effect of the obligations and rights created above, upon the occurrence of one or more of the events described above, the Parties agree to meet and discuss in good faith the amount of any increase or decrease in the rates that result from, and are directly attributable to the occurrence of such event. 8. If KKM requires a second drilling rig to work in Kazakstan during the term of the Drilling Contract, as amended, then KKM agrees to contract with Challenger for the addition of a second Drilling Unit, provided that such Drilling Unit must be acceptable to Operator in its sole discretion. The Parties hereto agree that the terms and conditions of the drilling contract for such second Drilling Unit shall be substantially the same terms and conditions as are contained in the Drilling Contract, provided that the operating rate shall be US$11,500 per day, the standby rate with crews shall be US$10,350 per day, the repair rate shall be US$10,350 per day (applicable for the first twenty four (24) hours per month, then at zero cost to the Operator), the force majeure rate shall be US$10,350 per day for ninety (90) days and US$0 thereafter, the moving rate shall be US$20,000 lump sum for each move of the drilling unit from well site to well site within the Karakuduk Field, the standby rate without crews shall be US$8,500 and the term shall be one (1) year from such Drilling Unit's spud date. In addition, Contractor shall mobilize three rig trucks, comparable to those supplied by Contractor for Challenger Rig No. 23 and one twenty ton fork lift, all as more fully described in an appendix to be added to the Drilling Contract. 9. Contractor has agreed to undertake the following: (a) Contractor will assume full responsibility for the immediate mobilization and delivery, via air freight, of the power tongs and elevators for the Drilling Unit to the Karakuduk Field. The cost of such mobilization and delivery shall be paid for by Operator, provided that prior to mobilization and delivery, Contractor shall furnish to Operator two or more written estimates for the cost of such mobilization and delivery. If Operator does not agree with such costs, it may elect to arrange for the mobilization and delivery of the power tongs and elevators, wherein Contractor shall reasonably assist Operator in such mobilization and delivery. (b) No later than 8:00 a.m. CST on March 20, 1999, provide all applicable specifications and dimensions of the three (3) Kenworth trucks, the three (3) Toyota Land Cruisers and the three (3) trailers in Egypt that are available to be shipped to the Karakuduk Field, together with 6 three (3) bids from reputable transporters/common carriers for the time and cost to move such equipment from the port of Alexandria, Egypt to the Karakuduk Field. No such equipment shall be shipped without the prior written authorization of Operator. (c) [INTENTIONALLY BLANK] (d) Within thirty (30) days after receipt of the information described in subparagraph (b) above, Operator will notify Contractor in writing of its decision as to which transporter/common carrier it wishes to use to transport the trucks and other equipment described in subparagraph (b) above from the port of Alexandria, Egypt to the Karakuduk Field. At such time, Operator shall contract with such transporter/common carrier for the immediate transport of such trucks and equipment to the Karakuduk Field. (e) Contractor will be responsible for the mobilization of the trucks and equipment referred to in subparagraph (b) above to the Karakuduk Field, however the transport routing of such trucks and equipment shall be at Operator's option. The costs of mobilization of the trucks and equipment referred to in subparagraph (b) above shall be borne by Operator, provided that Contractor shall pay all costs and expenses relating to or arising from the transport of the trucks and equipment to the port of Alexandria, Egypt. In addition, Contractor shall be responsible for, and shall pay all expenses related to, obtaining and providing to the transporter/common carrier referred to in subparagraph (d) above all documentation requested by such transporter/common carrier pertaining to (i) transporter/common carrier's receipt and/or acceptance of the trucks and equipment and (ii) the transport of the trucks and equipment to the Karakuduk Field. Operator shall be responsible for obtaining permits and licenses and clearing customs for the trucks and equipment in the Republic of Kazakstan. Contractor will assist Operator in obtaining such licenses, permits and clearing customs, but such licenses, permits and clearing customs are Operator's primary obligation and responsibility. 10. It is hereby agreed that any and all invoices issued by Contractor to Operator on and after the date of execution of this Amendment No. 2 shall charge the work, services and equipment set forth on such invoice at the new rates contained herein, regardless that such invoice period may predate the execution of this Amendment No. 2. [REMAINDER OF PAGE INTENTIONALLY BLANK] 7 IN WITNESS WHEREOF THE PARTIES HAVE EXECUTED THIS AMENDMENT NO. 2 ON THE DAY AND YEAR FIRST ABOVE WRITTEN. On behalf of OPERATOR, Karakuduk-Munai, Inc. by Chaparral Resources Inc. BY: /s/ N. Klinchev --------------------------------- TITLE: General Director On behalf of CONTRACTOR, Challenger Oil Services, PLC BY: /s/ J. Paine -------------------------------------------------- TITLE: General Manager of Challenger Oils Services PLC, signing as P.O.A. for Challenger Oil Services PLC. 8 EX-10.35 7 LETTER AGREEMENT Exhibit 10.35 LETTER AGREEMENT March 17, 1999 Karakuduk-Munai, Inc. 221 Norfolk, Suite 1150 Houston, TX 77098 Gentlemen: This letter will evidence the agreement between Karakuduk-Munai, Inc. (hereafter "KKM") and Challenger Oil Services, PLC (hereafter "Challenger"). Reference is made to that certain International Daywork Exploration Drilling Services Contract dated April 7, 1998 between KKM and Challenger, as amended by Amendment No. 1 dated October 21, 1998 (said drilling services contract, as amended, hereafter referred to as the "Drilling Contract"). Various disputes pertaining to the Drilling Contract and related documents have arisen and, as a result of recent discussions of these matters, and for valuable consideration and the mutual covenants and agreements herein contained, Challenger and KKM have agreed to settle and compromise those disputes as follows: 1. Immediately upon the execution by Challenger of (i) this Letter Agreement and (ii) the Amendment No. 2 to the International Daywork Drilling Contract - Land between KKM and Challenger dated even date herewith, KKM shall wire transfer or direct another to wire transfer on behalf of KKM to the below listed Challenger bank account the sum of Four Hundred Thousand United States Dollars ($400,000). The Challenger bank account information for this purpose is: Citibank New York Routing Code ABA021000089 A/C No. 10999217 Citibank Jersey In Favor of Challenger Oil Services PLC A/C No. 430604007 Atten: Mr. Hugo Peterson 2. The payment to Challenger of the sum specified in item 2 above shall be deemed to be in full payment and discharge of all claims (past, present or future) for all equipment, materials and services, performed or provided by or for Challenger, for or on behalf of KKM, for the period prior to January 1, 1999. For the avoidance of doubt, such payment described above shall clear any outstanding balances between Challenger, on the one hand, and KKM, on the other hand, for work performed under the Drilling Contract prior to January 1, 1999, except for the sums of money referred to in Paragraphs 3 and 4 below. 3. The payment to Challenger of the sum specified in item 2 above will not be reduced or offset by any payments made or advanced to Challenger by KKM or on behalf of KKM; provided however, it is agreed by the parties herein that the amount of US$27,915.00 has been paid or advanced by or for KKM to or for the benefit of Challenger prior to January 1, 1999, and the amount of US$10,000.00 has been paid or advanced by or for KKM to or for the benefit of Challenger after January 1, 1999, and such amounts shall remain valid and available for offset by KKM against the invoice for January 1999 services to be prepared by Challenger for standby charges pursuant to the Drilling Contract, as amended. 4. Of the payment to Challenger specified in item 2 above, the sum of $23,469.20 shall be deemed to be a prepayment in such amount towards amounts owed by KKM for the invoice of January 1999 services which Challenger will soon be issuing to KKM under the Drilling Contract, as amended. The parties hereto agree to offset such invoice for January 1999 services by this sum of $23,469.20. [REMAINDER OF PAGE INTENTIONALLY BLANK] If you agree and accept the above agreements, please indicate your acceptance and agreement in the appropriate space below. Challenger Oil Services, PLC BY: /s/ J. Paine ---------------------------------------------- TITLE: General Manager Challenger Oil Services PLC, Signing as P.O.A. for Challenger Oil Sevices PLC. Agreed & Accepted this 17 day of March, 1999 by: Karakuduk-Munai, Inc. BY: /s/ N. Klinchev ----------------------------------------------- TITLE: General Director EX-10.36 8 LETTER AGREEMENT AND RESTATED AMENDMENT NO. 1 Exhibit 10.36 Letter Agreement and Restated Amendment No. 1 to Loan Agreement and Promissory Note This Letter Agreement and Restated Amendment No. 1 dated as of the 18 day of March, 1999 (hereinafter "Restated Agreement No. 1"), is made between Challenger Oil Services, PLC, a company organized under the laws of England, Company Registration No. 3449260, with its principal office located at 72 New Bond Street, London W1Y9DD, England (hereinafter called "Challenger"), and Chaparral Resources, Inc., a Colorado corporation, with an office located at 2211 Norfolk, Suite 1150, Houston, Texas 77098, (hereinafter called "Chaparral"). Challenger and Chaparral are hereinafter collectively referred to as the "Parties". WHEREAS, the Parties have entered into a Loan Agreement and Promissory Note, both dated September 10, 1998, pursuant to which Chaparral has loaned Challenger one million, eight thousand seven hundred and sixty eight United States Dollars (US$1,008,768) (the "Principal Amount"); and WHEREAS, after the Loan Agreement and Promissory Note were executed, the Parties subsequently executed a document entitled Amendment No. 1 to the Loan Agreement which was stated to be effective as of September 10, 1998 ("Amendment No. 1"); and WHEREAS, the Parties wish to further amend the Loan Agreement and Promissory Note to reflect certain changes agreed to by them; NOW, THEREFORE, for valuable consideration and the mutual covenants and agreements set forth below, Challenger and Chaparral agree as follows: 1. Capitalized terms used herein shall have the same meaning as in the Loan Agreement unless otherwise specified. In the event there is any conflict between the provisions of this Restated Amendment No. 1 and the Loan Agreement or Promissory Note, the provisions of this Restated Amendment No. 1 shall govern. 2. This Restated Amendment No. 1 shall be substituted for and shall replace the Amendment No. 1 referred to in the preamble, which shall be null and void, ab initio, and of no further force and effect. 3. Paragraph 3.1 of the Loan Agreement is amended to read as follows: "The Parties agree that until the first payment is made by or on behalf of KKM to Challenger towards amounts owed by KKM under invoices for January 1999 services which Challenger will soon be issuing to KKM under the Drilling Contract, as amended, or March 1, 1999, whichever shall first occur ("Repayment Commencement Date"), interest on the Loan shall accrue at the Interest Rate." 4. In recognition of the change in the term of the Drilling Contract between Challenger and KKM, in which Chaparral has an indirect interest through its wholly owned subsidiary Central Asian Petroleum (Guernsey), Inc., which has an interest in KKM, the first sentence of Paragraph 3.2 of the Loan Agreement and the first sentence of Paragraph 1.1(b) of the Promissory Note are amended to provide as follows: "Beginning on the date of the first payment made by or on behalf of KKM to Challenger towards amounts owed by KKM under invoices for January 1999 services which Challenger will soon be issuing to KKM under the Drilling Contract, and on the dates of the next twenty-three monthly payments to be made by or on behalf of KKM to Challenger towards amounts arising under the next twenty-three (23) monthly invoices to be issued by Challenger to KKM under the Drilling Contract, Maker will pay to Payee the amount of forty-two thousand and thirty-two United States dollars and twenty-five cents (US$42,032.25) plus interest at the Interest Rate on the unpaid principal of the Loan Amount." 5. In recognition of the change in the term of the Drilling Contract between Challenger and KKM, in which Chaparral has an indirect interest through its wholly owned subsidiary Central Asian Petroleum (Guernsey), Inc., which has an interest in KKM, Paragraph 3.3 of the Loan Agreement is deleted and replaced with the following: "Challenger agrees that effective as of the date of the first payment made by or on behalf of KKM to Challenger towards amounts owed by KKM under invoices for January 1999 services which Challenger will soon be issuing to KKM under the Drilling Contract, it shall assign to an independent third party financial institution selected by CRI ("Fiscal Agent"), the right to receive all payments made or to be made by KKM under the Drilling Contract. CRI selects such Fiscal Agent to be Chase Bank of Texas, N.A., located at 712 Main Street, 3 CBB East, Houston, Texas 77002-8087. Upon receipt of such payments from, or made on behalf of, KKM, the Fiscal Agent shall be instructed to immediately pay to CRI the amount of forty-two thousand and thirty-two United States dollars and twenty-five cents (US$42,032.25), plus the quarterly interest payment when due and any late fees, defaults or other charges permitted to be collected by CRI hereunder (which amount shall be provided to the Fiscal Agent by CRI not later than ten (10) days prior to the end of each calendar quarter). The Fiscal Agent shall also be instructed that any amounts received by the Fiscal Agent from KKM which are in excess of the foregoing, will be promptly paid to Challenger within three (3) days after their receipt by the Fiscal Agent." 6. Except as otherwise amended herein, the Loan Agreement and Promissory Note shall remain unchanged and shall continue in full force and effect as originally written. 7. There exists in the files of Chaparral and Challenger an agreement between Challenger and Chaparral which purports to be effective as of April 7, 1998 (the "Letter of Credit Agreement") pursuant to which Chaparral is allegedly required to post a letter of credit to secure the obligations of KKM under the Drilling Contract in the event of certain changes in the executive management or control of Chaparral. It is agreed by Chaparral and Challenger that immediately upon execution of this Restated Amendment No. 1, the Letter of Credit Agreement shall be deemed to be invalid, unenforceable and void from the beginning. 8. In view of the fact that Chaparral is a publicly traded company, Challenger herein represents that neither it nor any of its affiliates has made any payment or promise to pay any funds or other offer or gift of anything of value, directly or indirectly, to or for the use or benefit of any officer or director of Chaparral in connection with the Drilling Contract or any amendments made thereto. Furthermore, Challenger shall provide to Chaparral on or before May 1, 1999, full and appropriate documentation that all proceeds of the Loan Agreement wired to Mr. Yalmez Tatanaki's personal bank accounts flowed from such personal bank accounts to either a Challenger bank account or to a creditor of Challenger in payment of a valid Challenger debt. [REMAINDER OF PAGE INTENTIONALLY BLANK] IN WITNESS WHEREOF, the Parties hereto have executed this Restated Amendment No. 1 as of the date first above written. CHAPARRAL RESOURCES, INC. CHALLENGER OIL SERVICES, PLC By: /s/ Dr. Jack Krug By: /s/ Y.S. Tatanaki ------------------------ ------------------------------- EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the 1998 Form 10-K and is qualified in its entirety by reference to such financial statements. 12-MOS 12-MOS DEC-31-1998 DEC-31-1997 DEC-31-1998 DEC-31-1997 121,000 3,423,000 0 0 445,000 102,000 0 0 0 0 1,398,000 3,587,000 32,354,000 19,935,000 17,000 3,000 34,324,000 23,519,000 1,685,000 231,000 0 0 4,850,000 4,500,000 0 0 5,837,000 4,971,000 21,742,000 13,607,000 34,324,000 23,519,000 0 0 1,184,000 421,000 0 0 3,031,000 1,661,000 1,978,000 851,000 0 0 205,000 298,000 (4,030,000) (2,389,000) 0 0 (4,030,000) (2,389,000) 0 0 (236,000) (214,000) 0 0 (4,266,000) (2,603,000) (.09) (.06) (.09) (.06)
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