-----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, VmMMfUCbLQxPxxpGlcI6p3UCYaJhMRdofl2eP79za4Kgl9Rlanjn6J3HdiXbgp6f M10Fq6gbWHVTHThRBDfbTw== 0001000096-00-000266.txt : 20000331 0001000096-00-000266.hdr.sgml : 20000331 ACCESSION NUMBER: 0001000096-00-000266 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07261 FILM NUMBER: 588553 BUSINESS ADDRESS: STREET 1: 2211 NORFOLK STREET 2: SUITE 1150 CITY: HOUSTON STATE: TX ZIP: 77098 BUSINESS PHONE: 2818777100 MAIL ADDRESS: STREET 1: 16945 NORTHCHASE STREET 2: SUITE 1440 CITY: HOUSTON STATE: TX ZIP: 77060 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, 1999. Commission file number: 0-7261 CHAPARRAL RESOURCES, INC. ------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 84-0630863 - ------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 16945 Northchase Drive, Suite 1620 Houston, Texas 77060 -------------------------------------- (Address of Principal Executive Offices) Registrant's telephone number, including area code: (281) 877-7100 Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.0001 Per Share ---------------------------------------- (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 (or for such shorter period that the registrant was required to file such reports), 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 15, 2000, the aggregate market value of registrant's voting common stock, par value $.0001 per share, held by nonaffiliates was $9,314,570. As of March 15, 2000, registrant had 980,481 shares of its common stock, par value $.0001 per share, issued and outstanding. The following documents have been incorporated by reference into the Parts of this Form 10-K: Certain sections of the registrant's definitive proxy statement for the registrant's 2000 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120 days of the registrant's fiscal year ended December 31, 1999 are incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. BUSINESS Our Business - ------------ Chaparral Resources, Inc. is an independent oil and gas exploration and production company. Our strategy is to acquire and develop foreign oil and gas projects in emerging markets, specifically targeting fields with previously discovered reserves, which have never been commercially produced or could be materially enhanced by our management team and technical expertise. Through a subsidiary, we own a 50% interest in Closed Type JSC Karakudukmunay ("KKM"), a Kazakh joint stock company that holds a governmental license (the "License") to develop the Karakuduk Oil Field (the "Karakuduk Field"). The Karakuduk Field is a 16,900 acre oil field in the Republic of Kazakhstan. The government of the former Soviet Union discovered the Karakuduk Field in 1972 and drilled 22 exploratory and development wells, none of which were produced commercially. KKM has re-established oil production from some of the existing wells previously drilled in the Karakuduk Field, as well as initiating its own drilling program. KKM began commercial oil production from the Karakuduk Field as of November 1, 1999. Our business strategy is to fully develop and commercially produce the oil reserves in the Karakuduk Field. Currently, the Karakuduk Field is our only oil field. We are in the process of identifying and evaluating other oil fields for possible acquisition and development. Corporate Information - --------------------- Chaparral was incorporated under the laws of the State of Colorado in 1972. In April 1999, Chaparral completed a 60 for 1 reverse stock split and reincorporated under the laws of the State of Delaware. Our address is 16945 Northchase Drive, Suite 1620, Houston, Texas 77060, and our telephone number is (281) 877-7100. Special Note Regarding Forward-Looking Statements - ------------------------------------------------- Some of the statements in this Annual Report on Form 10-K constitute "forward-looking statements". Forward-looking statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "estimates," "believes," "predicts," "potential," "likely," or "continue," or by the negative of such terms or comparable terminology. Forward-looking statements are predictions based on current expectations that involve a number of risks and uncertainties. Actual events may differ materially. In evaluating forward-looking statements, you should consider various factors, including the risks outlined under "Risk Factors." These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that these statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and you are encouraged to exercise caution in considering such forward-looking statements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. We are not under any duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform these statements to actual results. Risks Related to Our Business - ----------------------------- We have sustained significant operating losses in recent years, and we may fail as an operating company. We have incurred significant operating losses for each of our last five fiscal years. We had an accumulated deficit of $24,983,000 as of December 31, 1999. Currently, there is substantial doubt about our ability to continue as a going concern. Our auditors have included a "going concern" explanatory paragraph in their report on our consolidated financial statements for the year ended December 31, 1999. See "Item 8 - Financial Statements and Supplemental Data." We are substantially leveraged which limits our ability to raise additional financing. We have entered into a loan agreement (the "Loan") with Shell Capital Limited ("Shell Capital"), to provide up to $24,000,000 of financing for the development of the Karakuduk Field. The Loan subjects us to a significant number of restrictions, including the pledge of the majority of our assets to Shell Capital and the inability to pay dividends, borrow additional indebtedness, or issue stock without Shell Capital's approval. The terms of the Loan are described in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations." We have also issued approximately $13,340,000 through March 24, 2000, in unsecured 8% Non-negotiable Convertible Promissory Notes, (the "Notes") in order to fund our operations and meet certain conditions required to draw funds under the Loan. The Notes are convertible into shares of our common stock at $1.86 per share, subject to the approval of our stockholders. If the Notes are not converted into our common stock, the Notes will accrue interest at the lesser of 25% or the highest rate allowed by law and are repayable on October 31, 2001. The Notes are fully subordinated to the Loan. We cannot repay the Notes before fully repaying the Loan. Our outstanding indebtedness is significant. A substantial portion of our future cash flow from operations will be required for debt service and may not be available for other purposes. Our ability to obtain additional debt or equity financing in the future for working capital, capital expenditures, or acquisitions is restricted, as well as our ability to acquire or dispose of significant assets or investments. These restrictions may make us more vulnerable and less able to react to adverse economic conditions. If we are unable to fulfill the requirements to maintain our License to operate in the Karakuduk Field, we will be unable to continue our operations in the Karakuduk Field. KKM's License from the government of the Republic of Kazakhstan allows KKM to explore and develop the Karakuduk Field. The License establishes minimum work thresholds and capital spending requirements that KKM must meet in order to maintain its interest in the Karakuduk Field. As of March 24, 2000, KKM is required to drill 6 additional new wells and invest an additional $13,500,000 in the development of the Karakuduk Field by June 30, 2000, unless we obtain waivers or deferrals from the licensing authority. We are required to provide funds necessary for KKM to enable it to satisfy the work plan and maintain our interest in the Karakuduk Field. If necessary, KKM will request a deferral of these financial commitments; however, there is no guarantee that the licensing authority will grant a deferral. KKM's failure to satisfy the conditions under the License could cause the licensing authority to cancel the License. If the License is cancelled, we will be unable to develop and sell oil produced from the Karakuduk Field, and we will have no other source of revenues. Our efforts to develop, produce, and market oil reserves may be unsuccessful. The development of oil reserves is a high risk endeavor and is frequently marked by unprofitable efforts, such as: o drilling unproductive wells; 2 o drilling productive wells which do not produce sufficient amounts of oil to return a profit; and o production of developed oil reserves which cannot be marketed or cannot be sold for adequate market prices. We cannot guarantee that we will be able to successfully develop, produce, and market the oil reserves underlying the Karakuduk Field or elsewhere. The development of oil reserves inherently involves a high degree of risk, even though the reserves are proven. Our risks are increased because our activities are concentrated in areas where political or other unknown developments could adversely affect commercial development of the reserves. Costs necessary to acquire, explore, and develop oil reserves are substantial. We cannot guarantee that we will recover the costs incurred to acquire and develop the Karakuduk Field and if the costs incurred exceed our revenues, then our operations will not be profitable. If we fail to generate sufficient cash flow from operations to repay the Loan, we may lose our entire investment in the Karakuduk Field pledged as collateral to Shell Capital. We may be unable to compete effectively with larger, well-capitalized or more experienced companies in the oil & gas industry. We compete in all areas of the exploration and production segment of the oil and gas industry with a number of other companies. These companies include large multinational oil and gas companies and other independent operators with greater financial resources and more experience than us. We do not hold a significant competitive position in the oil industry. Within Kazakhstan alone, we compete both with major oil and gas companies and with independent producers for, among other things, rights to develop oil and gas properties, access to limited pipeline capacity, procurement of available materials and resources, and hiring qualified local and international personnel. The oil market is unstable. The current market for oil is characterized by instability. This instability has caused fluctuations in world oil prices in recent years and there can be no assurance of any price stability in the future. The production and sale of oil from the Karakuduk Field may not be commercially feasible under market conditions prevailing in the future. The price we receive for our oil may not be sufficient to generate revenues in excess of our costs of production or sufficient cash flow to service our debt obligations. If so, we will be unable to generate profits and could default on our Loan. We are uncertain about the prices at which we will be able to sell oil that we produce. Our estimated future net revenue from oil sales is highly dependent on the price of oil, as well as the amount of oil produced. The energy market makes it difficult to estimate future prices of oil. Various factors beyond our control affect these prices. These factors include: o domestic and worldwide supplies of oil; o the ability of the members of the Organization of Petroleum Exporting Countries, or OPEC, to agree to and maintain oil price and production controls; o political instability or armed conflict in oil-producing regions; o the price of foreign imports; o the level of consumer demand; o the price and availability of alternative fuels; o the availability of pipeline capacity; and o changes in existing federal regulation and price controls. It is likely that oil prices will continue to fluctuate as they have in the past. Current oil prices are not representative of oil prices in either the near or short-term. We do not expect oil prices to maintain current price levels and do not base our capital spending decisions on current market prices. 3 We have hedged a significant portion of our future oil production. In February 2000, we purchased, for $4,000,000, hedges (put contracts) for a total of 1,562,250 barrels of North Sea Brent crude oil. The exercise prices of the hedges range from $22.35 to $17.25 per barrel, with monthly expiration dates beginning in October 2000 and ending December 2002. Given the volatile nature of prices for oil, it is possible that all or a significant portion of the hedges could reach maturity with oil prices in excess of the applicable strike prices, rendering the hedges worthless. If so, our entire hedge investment could be lost or significantly impaired. We cannot sell or terminate the hedges without the approval of Shell Capital, which may prevent us from taking advantage of changes in oil prices, which might increase the value of all or part of the hedges. See "Item 7A - Quantitative and Qualitative Disclosure About Market Risk." We may face liability for risks associated with drilling for and producing oil and gas. There are many risks incident to drilling for and producing oil and gas. These risks include blowouts, cratering, fires, equipment failure and accidents. Any of these events could result in personal injury, loss of life and environmental and/or property damage. If such an event does occur, we may be held liable, and we are not fully insured against these risks. In fact, many of these risks are not insurable. The occurrence of such events that are not fully covered by insurance may require us to pay damages, which would reduce our profits. Because we do not entirely own and control KKM, we must obtain the consent of other KKM stockholders in order to take actions, or operations may come to a standstill. Through a subsidiary, we own a 50% interest in KKM. The other stockholders of KKM are KazakhOil, the national petroleum company of the Republic of Kazakhstan ("KazakhOil"), and a private Kazakhstan joint stock company. KazakhOil owns a 40% interest in KKM and the private Kazakh joint stock company owns the remaining 10%. The government of Kazakhstan indirectly owns 40% of KKM through KazakhOil's direct ownership interest. Because we only control a 50% interest in KKM, we must seek the approval of one of the other two stockholders before KKM can take any major action. If we are unable to obtain the approval of one of these stockholders, the operations of KKM may come to a standstill. There are no practical mechanisms in the agreements among the KKM stockholders to effectively resolve deadlocks. A deadlock could halt KKM's operations and ultimately result in the loss of KKM's rights to explore and develop the Karakuduk Field. We may have to file for bankruptcy if we do not achieve profits and/or cannot find additional sources of capital. We have failed to achieve a profit for the last five fiscal years. If we continue to incur operating losses and are unable to raise sufficient capital to satisfy our financial commitments and repay our indebtedness, we may be forced to file for protection against our creditors under federal bankruptcy laws. If we file for such protection, our creditors will be paid prior to you, our stockholders. We are restricted from raising additional financing without the consent of Shell Capital, our largest creditor. In addition, if we file for bankruptcy protection, the market for our common stock may no longer exist. Risks Related to Operating in Kazakhstan - ---------------------------------------- Our contracts with Kazakh agencies may be arbitrarily cancelled or re-negotiated by the government of the Republic of Kazakhstan. Our ability to develop the Karakuduk Field is dependent on fundamental contracts that we have with governmental agencies in Kazakhstan, including the License. The government of Kazakhstan may arbitrarily cancel our contracts or may force them into re-negotiation. Cancellation or re-negotiation of contracts could result in less favorable terms for us and could reduce or eliminate revenues. While we have political risk insurance coverage, there is no assurance that such a cancellation or re-negotiation would be recoverable under the political risk policy or any proceeds received would be sufficient to satisfy our losses incurred or to repay our outstanding indebtedness. 4 The environmental regulations to which we are subject may become more numerous, and compliance with them may become more expensive. We must comply with Kazakh laws and international requirements that regulate the discharge of materials into the environment. Environmental protection and pollution control could, in the future, become so restrictive as to make production unprofitable. Furthermore, we may be exposed to potential claims and lawsuits involving such environmental matters as soil and water contamination and air pollution. We are currently in compliance with all local and international environmental requirements and are closely monitored by the Kazakh environmental authorities. We have not made any material capital expenditures for environmental control facilities and have no plans to do so in the foreseeable future. Other government regulations may make our operations in Kazakhstan less profitable. Our operations may be subject to other regulations by the government of the Republic of Kazakhstan or other regulatory bodies responsible for the area in which the Karakuduk Field is located. In addition to taxation, customs declarations and environmental controls, regulations may govern such things as drilling permits and production rates. Drilling permits could become difficult to obtain or prohibitively expensive. Production rates could be set so low that they would make production unprofitable. These regulations may substantially increase the costs of doing business and may prevent or delay the starting or continuation of any given exploration or development project. All regulations are subject to future changes by legislative and administrative action and by judicial decisions. Such changes could adversely affect the petroleum industry in general, and us in particular. It is impossible to predict the effect that any current or future proposals or changes in existing laws or regulations will have on our operations. If disputes arise, we may be unable to enforce our rights. The laws of the Republic of Kazakhstan govern our operations and a number of our significant agreements. As a result, we may be subject to arbitration in Kazakhstan or to the jurisdiction of the Kazakh courts. Even if we seek relief in the courts of the United States, we may not be successful in subjecting foreign persons to the jurisdiction of those courts. In addition, we may be prevented from enforcing our rights with respect to government agencies, regulatory bodies, or other entities of Kazakhstan because they may consider themselves immune from the jurisdiction of any court. The Republic of Kazakhstan currency may devalue and may decrease the worth of our investments in Kazakhstan. The devaluation of the tenge, the currency of the Republic of Kazakhstan, could significantly decrease the value of the monetary assets that we hold in Kazakhstan as well as our assets in that country that are based on the tenge. Devaluation could also create uncertainty with respect to the future business climate in Kazakhstan and to our investment in that country. We may encounter difficulty in conducting operations in the Karakuduk Field due to social, political and economic instability in the region. We may encounter unexpected difficulties in conducting operations in Kazakhstan. Kazakhstan is a relatively new country and there is uncertainty as to the status of Kazakh law, the stability of the country and the region, and the autonomy of the parties involved with us in Kazakhstan. In order to counteract some of these potential difficulties, we obtained political risk insurance through the Overseas Private Investment Corporation ("OPIC"), covering 90% of the book value of our investment in KKM up to a maximum of $50,000,000. Our OPIC policy provides coverage for certain acts, which could be committed against us by the government of the Republic of Kazakhstan or other parties in times of severe political instability. The OPIC policy generally provides the following types of risk coverage: o Currency Inconvertibility. Certain currency restrictions, which might be imposed by the government of the Republic of Kazakhstan to prevent or defer our recovery of our investment in the Karakuduk Field, including revoking KKM's right to retain U.S. dollar proceeds from oil sales outside of Kazakhstan or to convert local currency into U.S. dollars for repayment of our investment; 5 o Expropriation. Acts attributable to the government of the Republic of Kazakhstan that are violations of international law or an abrogation, repudiation or material breach of our agreements with the government. To qualify for coverage, the act of expropriation must continue without interruption for at least six months and prevent us from exercising our fundamental rights under our agreements, exercising control over our investment the Karakuduk Field, or recovering our investment in the Karakuduk Field; o Political Violence. The loss or impairment of our investment due to certain politically motivated violent acts, including war, revolution, insurrection, or politically motivated civil strife, terrorism and sabotage; and o Interference with Operations. The loss or impairment of our investment due to political violence lasting more than six months. While the OPIC policy provides significant political risk coverage, it does not address political risks outside of the Republic of Kazakshtan or cover every contingency within Kazakhstan. The OPIC policy does not cover commercial risks, whatsoever. If social, political, or economic strife in the region hinder KKM or our operations in a manner that is not covered by our OPIC policy, we will bear the full burden of any resulting loss or damage. If we do have a future claim under the OPIC policy, we may be required to assign all or a portion of our rights to the Karakuduk Field to OPIC before any insurance payments will be made. The OPIC policy only covers 90% of our book value of our investment in KKM, but there is no assurance any proceeds received will cover 90% of our actual losses incurred or be sufficient to cover our outstanding indebtedness repayable to our creditors. Our limited access to transportation routes to markets may hinder our attempts to sell our oil. To maximize the value of our assets in Kazakhstan, we must not only extract oil, but we must also transport it to appropriate markets for sale. The exportation of oil from Kazakhstan depends on access to transportation routes, particularly the Russian pipeline system. Transportation routes are limited in number and access to them is restricted. If any of our agreements relating to oil transportation or marketing are breached, or if we are unable to renew such agreements upon their expiration, we may be unable to transport or market our oil. Also, a breakdown of the Kazakhstan or Russian pipeline systems could seriously delay or even halt our ability to sell oil. Any such event would result in reduced revenues. In November 1999, KKM entered into a long-term crude oil sale agreement (the "Crude Oil Sales Agreement") with Shell Trading International Limited ("STASCO"), an affiliate of Shell Capital, for the sale of 100% of KKM's oil production on the export market. STASCO will take title of KKM's crude oil at various delivery points outside of Kazakhstan. Under the terms of the Crude Oil Sales Agreement, KKM is responsible for obtaining export quotas and all other permissions from Kazakhstan, Russia, or other relevant jurisdictions, necessary to transport and deliver KKM's oil production to STASCO. The Loan requires KKM to sell all of its oil production to STASCO, unless otherwise approved by STASCO and Shell Capital. See "Item 7 - Management's Discussion and Analysis of Financial Conditions and Results of Operations." In January 2000, KKM entered into a marketing services agreement (the "Marketing Agreement") with KazakhOil. Under the terms of the Marketing Agreement, KazakhOil will assist KKM with export oil sales under the Crude Oil Sales Agreement, including obtaining export quotas from the government of the Republic of Kazakhstan, consulting on procedures required for the nomination and delivery of oil sales, obtaining other necessary approvals and permissions, and preparation of relevant documentation. See "Item 7 - Management's Discussion and Analysis of Financial Conditions and Results of Operations." Obtaining the necessary quotas and permissions to export production through the Russian pipeline system can be extremely difficult, if not impossible in certain circumstances. Although our agreements with the government of the Republic of Kazakhstan grant us the right to export, and to receive export quota, we cannot provide any assurances that we will receive export quota or any other approvals required to export and deliver our production according to the terms of the Crude Oil Sales Agreement. 6 Furthermore, the government of the Republic of Kazakhstan has recently stated they may require all oil and gas producers within Kazakhstan to supply some portion of year 2000 production to local Kazakh refineries to meet domestic energy needs. The inability of KKM to sell all or part of its oil production to STASCO could result in a loss of revenue and default of the Loan. Severe weather conditions may impede our operations in the Karakuduk Field. Although our business is not seasonal, severe weather conditions could impede our drilling and exploration activities. Any inability to conduct such activities could delay our discovery and production of oil. Employees - --------- As of March 24, 2000, we had 7 full-time employees and one part-time employee. KKM had 161 employees and retains independent contractors on an as needed basis through us. We believe that our relationship with our employees and consultants is good. ITEM 2. PROPERTIES Properties - ---------- The Karakuduk Field The Karakuduk Field is located in the Mangistau Region of the Republic of Kazakhstan. The License to develop the Karakuduk Field covers an area of approximately 16,900 acres and has been granted to KKM for a period of 25 years. KKM obtained approval to develop the Karakuduk Field from Kazakhstan's Ministry of Energy and Natural Resources in August 1995. We own a 50% interest in KKM. 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 inches of rainfall per year. Mean temperatures range from minus 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 Field 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. The former Soviet Union drilled 22 exploratory and development wells to delineate the Karakuduk Field, discovering the presence of recoverable oil reserves. The productive area of the Karakuduk Field is approximately 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. None of the original wells were ever placed on commercial production prior to KKM obtaining the rights to the Karakuduk Field. As of December 31, 1999, the Karakuduk Field has estimated proven reserves of approximately 67.58 million barrels, net of government royalty. The reserve estimates are supported by a reserve study conducted in 1995, which was reviewed by the Ryder Scott Company Petroleum Engineers ("Ryder Scott"), an internationally recognized petroleum engineering firm. Ryder Scott issued an opinion letter dated October 8, 1999, supporting the reasonableness of the reserve estimates based upon their review of the original reserve report and supporting reservoir data. Ryder Scott also considered all actual data available since 1995. We have not previously disclosed proven reserves from the Karakuduk Field because of the necessary financing required to develop the Karakuduk Field. We are 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 its funding requirements through loans from us and through proceeds from the sale of oil extracted from the Karakuduk Field. As of 24, 2000, we have loaned KKM in excess of $35 million to fund KKM's operations. While we have invested significant amounts of capital into the Karakuduk Field, the funds necessary to complete the field infrastructure and execute a practical drilling 7 program have not been readily available to us prior to executing the Loan with Shell Capital. The Loan, and other related equity commitments it requires, allows us to develop the underlying reserves, making the Karakuduk Field commercially viable. The Karakuduk Field is approximately 18 miles north of the main utility corridor, which includes 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 (the "Export Pipeline"). KKM, according to its agreements with Kazakhstan, has a right to use the existing Export Pipeline and related utilities. KKM also has a contract with KazTransOil JSC, the state-owned company controlling the Export Pipeline. The contract grants KKM rights to use the Export 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. As of March 24, 2000, the Karakuduk Field has produced approximately 525,000 barrels of crude oil from three producing wells. Prior to the Loan, KKM sold 324,650 barrels of test production on both the local and export markets. The remaining production has been stored as crude oil inventory in the Export Pipeline, pending KKM's first sale to STASCO under the terms of the Crude Oil Sales Agreement. KKM's sale of test production during 1999 generated $1,019,000, net of transportation and production costs. Related production and marketing, costs were approximately $1,254,000. KKM recorded the sale of test production as cost recovery and did not record any revenues in 1999. KKM has nominated approximately 226,500 barrels of crude oil for April 2000 delivery to STASCO at the port of Odessa. KKM is currently awaiting final confirmation of its export quota for the year 2000 from the government of the Republic of Kazakhstan, but has already obtained approval for export quota for the April 2000 nomination. During 1999, KKM drilled and successfully completed Well #101, and continued to produce from two re-completions of previously existing wells worked over in 1998. KKM suspended drilling activities for the majority of 1999 due to a dispute with the drilling contractor and the lack of financing required to obtain another drilling rig. In the fourth quarter of 1999, KKM entered into a second drilling contract with KazakhOil Drilling Service Company, a subsidiary of KazakhOil and spudded Well #102 on December 31, 1999. Well #102 has been successfully completed, and is undergoing post-completion production tests. Drilling of Well #103 should commence on or before March 31, 2000. In 2000, we expect to drill up to 15 wells and re-complete at least 4 previously drilled wells using a workover rig. To complete the drilling program, an additional developmental drilling rig will be required. KKM has located a second rig and is currently in negotiations to place it under contract. Workover rigs are available within Kazakhstan and are currently being sourced for either lease or purchase. We estimate that drilling a maximum of 71 additional oil wells and 24 water injection wells may be required to fully develop the Karakuduk Field. Peak oil production from the field is expected to occur by the end of 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 our management believes could result in additional recoverable reserves. Additional field facilities are either in place or under construction to support the current drilling and development program. KKM has previously constructed a base camp with living quarters for 150 people, 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 Export Pipeline and the field. KKM is also clearing access roads and performing other required site preparation activities for other planned drilling locations. Currently, crude oil production is being processed at a pilot facility and then trucked to the Export Pipeline terminal at Say-Utes, which is approximately 51 miles southeast of the Karakuduk Field. KKM has been constructing another Export Pipeline terminal, which is only 18 miles from the Karakuduk Field. KKM also began construction of an 18-mile pipeline in 1998, capable of transporting up to 18,000 barrels of oil per day from the Karakuduk Field to the Export Pipeline terminal. The completion of the pipeline was delayed due to our lack of sufficient financial resources in 1999. We anticipate the pipeline will be operational by June 30, 2000. 8 The License establishes minimum work thresholds and capital spending requirements that KKM must meet in order to maintain its interest in the Karakuduk Field. As of March 24, 2000, KKM is required to drill 6 additional new wells and invest an additional $13.5 million in the development of the Karakuduk Field by June 30, 2000, unless we obtain waivers or deferrals from the licensing authority. We are required to provide funds necessary for KKM to enable it to satisfy the work plan and maintain our interest in the Karakuduk Field. If necessary, KKM will request a deferral of these financial commitments; however, there is no guarantee that the licensing authority will grant a deferral. KKM's failure to satisfy the conditions under the License could cause the licensing authority to cancel the License. If the License is cancelled, we will be unable to develop and sell oil produced from the Karakuduk Field, and we will have no other source of revenues. See also "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations." Reserves. --------- As of December 31, 1999, we have a proportional equity interest in approximately 33.79 million barrels of estimated total proven reserves, net of government royalty, based upon our 50% equity interest in KKM. The reserve estimates are supported by a reserve study of the Karakuduk Field conducted in 1995, which was reviewed by Ryder Scott. Ryder Scott issued an opinion letter dated October 8, 1999, supporting the reasonableness of the reserve estimates based upon their review of the original reserve report and supporting reservoir data. Ryder Scott also considered all actual data available since 1995. We have not previously disclosed proven reserves from our interest in the Karakuduk Field because of the necessary financing required to develop the Karakuduk Field. We are responsible for providing 100% of the funding necessary for the development of the Karakuduk Field, which is not provided by third-party sources. While we have invested significant amounts of capital into the Karakuduk Field, the funds necessary to complete the field infrastructure and execute a practical drilling program have not been readily available to us prior to the Loan with Shell Capital. The Loan, along with the other related equity commitments it requires, are expected to alleviate our past inability to finance the development of the underlying reserves. No reserve estimates have been filed with any Federal authority or other agency since January 1, 1999. Net Quantities of Oil and Gas Produced. --------------------------------------- Our net oil and gas production for each of the last three fiscal years was as follows: As of the Year Ended December 31, ------------------------------------------------------------- 1997* 1998* 1999 ----- ----- ---- Oil (Bbls) Less than 1,000 0 29,625 Gas (Mcf) 0 0 0 * Does not include our cumulative net share of test production totaling 188,296 barrels. Oil production for 1999 represents our 50% equity interest in KKM's production from November 1, 1999, the date the reserves underlying the Karakuduk Field were determined to be commercially viable. Our net share of 1999 production does not reflect our right under the agreement with the government of the Republic of Kazakhstan to receive 65% of KKM's cash flow from oil sales, net of royalty, on a quarterly basis until our loan to KKM has been fully repaid. The remaining 35% of net cash flows will be used by KKM to meet capital and operating expenditures. We may waive receipt of quarterly loan repayments, in whole or in part, to provide KKM with additional working capital. 9 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 are not presented because KKM did not sell any significant quantities of oil or gas production from proven properties during these periods. KKM's test production prior to the commercial viability of our investment in the Karakuduk Field is not reported as part of the required disclosures for the Statement of Financial Accounting Standards No. 69 ("SFAS 69"), Disclosures About Oil and Gas Producing Activities, and is not included in the table above. Our share of KKM's sales of test production during 1999 totaled 162,325 barrels of oil, which were accounted for on a cost recovery basis. The average sales price per barrel received by KKM was $7.00, net of transportation costs. The average production costs per barrel was $3.86. Productive Wells and Acreage. ----------------------------- As of December 31, 1999, we had interests in 3 gross productive oil wells (1.5 net oil wells), and no producing gas wells. There were no multiple completion wells. Production was from 16,900 gross acres and 11,300 developed acres. Undeveloped Acreage. -------------------- As of December 31, 1999, we had no interests in undeveloped acreage. Drilling Activity. ------------------ During the last three fiscal years ended December 31, 1999, our net interests in exploratory and development wells drilled were as follows: Year Ended Exploratory Wells, Net Development Wells, Net December 31, -------------------------- -------------------------- Productive Dry Productive Dry ---------- --- ---------- --- 1997 0 0 0 0 1998* 1.0 0 0 0 1999 .5 0 0 0 All wells are located in the Republic of Kazakhstan. * Includes re-completions of delineation wells drilled prior to KKM obtaining its interest in the Karakuduk Field. Does not include activity on 2 existing wells in 1998, which KKM plans to re-complete during 2000. Present Activities. ------------------- As of March 24, 2000, KKM had successfully completed development Well #102 and is in the process of performing post-completion production tests on the well. KKM expects to spud a second development well (Well #103) shortly. We have a net 50% interest in each well. During remainder of 2000, we expect to drill 15 gross development wells (7.5 net), including Well #102, and re-complete at least 4 existing delineation wells using a workover rig. To complete the drilling program, an additional developmental drilling rig will be required. KKM has located a second rig and is currently in negotiations to place it under contract. Workover rigs are widely available within Kazakhstan and are currently being sourced for either lease or purchase by KKM. 10 ITEM 3. LEGAL PROCEEDINGS In April 1999, the owner of the drilling rig operated by Challenger Oil Services, PLC ("Challenger") in the Karakuduk Field, Oil & Gas Exploration Cracow, Ltd. ("OGECC"), terminated its contract with Challenger. As a result of the termination of the contract between Challenger and OGECC, KKM terminated the drilling contract between KKM and Challenger, and arbitration proceedings were instituted in accordance with the terms of such drilling contract. In the arbitration, Challenger claimed that it was entitled to $9,800,000 in damages. In February 2000, Chaparral, KKM, Challenger, and OGECC reached a mutual settlement and release for all parties involved. The settlement requires KKM to pay outstanding accrued liabilities to Challenger for prior work performed totaling $1,336,000. We also agreed to fully discharge a note receivable from Challenger in the amount of $1,009,000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of our security holders during the fiscal quarter ended December 31, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is currently traded on the Nasdaq Small-Cap Market ("Nasdaq") under the symbol "CHAR". As of March 15, 2000, we had 1880 stockholders of record of our common stock. No dividend has been paid on our common stock, and there are no plans to pay dividends in the foreseeable future. Furthermore, the Loan with Shell Capital places certain restrictions on us regarding the future payment of dividends. Specifically, KKM cannot pay dividends prior to Project Completion (as defined in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations"), and then only subject to certain restrictions. We cannot pay any dividends without Shell Capital's consent while the Loan is outstanding. The following table shows the range of high and low sales prices for each quarter during our last two calendar years ended December 31, 1999 and 1998, as reported by the National Association of Securities Dealers, Inc. Price Range ----------- Fiscal Quarter Ended High Low - -------------------- ---- --- March 31, 1998 167.530 120.482 June 30, 1998 150.602 90.361 September 30, 1998 150.602 45.181 December 31, 1998 75.301 20.723 March 31, 1999 58.373 22.590 June 30, 1999 45.500 11.000 September 30, 1999 35.000 9.250 December 31, 1999 35.000 4.000 The following is information as to all securities sold since October 1, 1999, which were not registered under the Securities Act of 1933, as amended ("Securities Act"). Effective as of September 30, 1999, we issued to Dr. Jack A. Krug, our former President and Chief Operating Officer, an additional 2,361 shares of common stock pursuant to his employment agreement. We issued the common stock in reliance upon the exemption from registration under Section 4(2) of the Securities Act. Dr. Krug had available all material information concerning Chaparral. 11 During the fourth quarter of 1999, we issued a total of $10,040,000 of our Notes to various related parties and other non-affiliated investors. Notes issued to related parties totaled $8,290,000, including $5,827,000 from Allen, $2,051,000 from Whittier, and $412,000 from John G. McMillian, our Co-Chairman and Chief Executive Officer. In exchange for the Notes, we received $4,750,000 in cash and canceled $5,290,000 in promissory notes issued by us previously in 1999, plus accrued interest thereon, to Allen ($3,827,000), Whittier ($1,051,000), and Mr. McMillian ($412,000). The Notes, plus accrued interest, are convertible into our common stock at a conversion price of $1.86 per share, subject to the approval of our stockholders. We issued the Notes in reliance upon the exemption from registration under Section 4(2) of the Securities Act. The holders of the Notes had available all material information concerning Chaparral. We issued an additional $3,300,000 of our Notes during January and February 2000 to various related parties and other non-affiliated investors. Additional Notes issued to related parties totaled $2,400,000, including $2,000,000 to Allen, $250,000 to Mr. McMillian, and $150,000 to a relative of Jim Jeffs, our Co-Chairman. We issued the Notes in reliance upon the exemption from registration under Section 4(2) of the Securities Act. The holders of the Notes had available all material information concerning Chaparral. In connection with finalizing the Loan, we issued to Shell Capital a warrant to purchase up to 15% of our outstanding common stock (the "Shell Warrant") in February 2000. The Shell Warrant is non-transferable and will be exercisable on the earlier of Project Completion or June 30, 2001. The Shell Warrant contains certain registration rights and is subject to certain anti-dilution provisions. The Shell Warrant's exercise price is $15.45 per share. We issued the Notes in reliance upon the exemption from registration under Section 4(2) of the Securities Act. The holders of the Notes had available all material information concerning Chaparral. ITEM 6. SELECTED FINANCIAL DATA
As of or for the Year Month of As of or for the Year Ended --------------------- --------- --------------------------- Ended November 30 December December 31 ----------------- --------- ----------- 1995 1996 1996 1997 1998 1999 -------------------------------------------------------------------------------- Oil and gas sales (1)........... $ 255,000 $ 147,000 -- -- -- -- Total revenues.................. 255,000 147,000 -- -- -- -- Noncash write-down of oil and gas properties.................. 619,000 -- -- -- -- -- Net loss........................ (704,000) (2,416,000) $ (130,000) $ (2,603,000) $ (4,266,000)$ (5,163,000) Net loss per common share.................. (2.24) (4.52) (.21) (3.76) (4.75) (5.28) Working capital (deficit)....... 366,000 259,000 * 3,356,000 (287,000) (2,941,000) Total assets.................... 5,595,000 14,498,000 * 23,519,000 34,324,000 41,303,000 Long-term obligations and redeemable preferred stock... 461,000 1,491,000 * 4,710,000 5,060,000 14,776,000 Stockholders' equity............ 4,920,000 12,114,000 * 18,578,000 27,579,000 22,851,000 Other Data ---------- Present value of proved reserves 427,000 -- -- -- -- 177,680,000 Proven oil reserves (bbls)...... 66,185 -- -- -- -- 33,788,822 Proven gas reserves (mcf)....... 3,062,417 -- -- -- -- --
(1) In 1994, we made a strategic decision to pursue international oil and gas projects, and, by early 1997, we completely disposed of all domestic oil and gas properties through sales to third parties. * Not applicable due to one month short period ended December 31, 1996. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1. Liquidity and Capital Resources. - ----------------------------------- General Liquidity Considerations. - --------------------------------- Our financial statements have been presented on the basis we are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We are responsible for providing 100% of the funding for the development of the Karakuduk Field not provided from oil sales or third party sources. The Karakuduk Field will require significant additional funding in order to obtain levels of production that would generate sufficient cash flows to meet future capital and operating spending requirements. We have recognized recurring operating losses and have a working capital deficiency as of December 31, 1999. In addition, there are uncertainties relating to Chaparral's and KKM's ability to meet commitments under KKM's License, and all expenditure and cash flow requirements through fiscal year 2000. KKM's agreements with the government of the Republic of Kazakhstan require KKM to meet certain expenditure and work commitments on or before June 30, 2000. If KKM fails to meet these commitments, KKM's right to develop the Karakuduk Field may be terminated and our investment in the Karakuduk Field may be lost. These conditions raise substantial doubt about our 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 these uncertainties. Management' has taken the following actions, to address the substantial doubt with respect to our ability to remain a going concern and enhance our short and long-term liquidity: o Shell Capital Loan. In November 1999, we entered into the Loan with Shell Capital, to provide up to $24,000,000 in financing for the development of the Karakuduk Field. The consummation of the Loan was subject to a number of significant conditions, which were subsequently fulfilled in February 2000. As of March 24, 2000, we have borrowed a total of $13,800,000 under the Loan. o Rights Offering. As a condition to the Loan, we must utilize our best efforts to complete a rights offering to our stockholders to acquire not less than $6,000,000 of Chaparral's common stock on or before June 30, 2000 (the "Rights Offering"). Two of Chaparral's related party stockholders, Allen & Company, Inc. ("Allen") and Whittier Ventures, LLC ("Whittier"), have each undertaken to exercise their full pro-rata share of the Rights Offering and, if the Rights Offering is not concluded on or before June 30, 2000, to each contribute $2,000,000 to Chaparral for either our common stock or indebtedness (the "Equity Support Agreement"). o Development of KKM's Proven Reserves. KKM has approximately 67.58 million barrels of estimated proven oil reserves, net of government royalty. As of March 24, 2000, KKM has produced approximately 525,000 barrels of crude oil, of which 325,000 barrels of test production was sold in 1999 for total proceeds of $1,019,000, net of transportation and production costs. As of March 24, 1999, KKM had approximately 200,000 barrels of crude oil in inventory and was producing approximately 1,100 barrels of oil per day. Capital spending for the development of the Karakuduk Field is expected to materially increase KKM's extraction of its proven reserves, generating significant cash flows from future oil sales to fund KKM's operations and repay our outstanding advances to KKM. o Crude Oil Sales Agreement. In November 1999, KKM entered into the Crude Oil Sales Agreement with STASCO, an affiliate of Shell Capital, for the purchase of 100% of the oil production from the Karakuduk Field on the export market for world market oil prices. KKM has currently nominated approximately 226,500 barrels of crude oil for April 2000 delivery to STASCO under the terms of the Crude Oil Sales Agreement. We expect KKM to obtain a substantially higher return from oil sales under the Crude Oil Sales Agreement than would otherwise be received from oil sales in Kazakhstan's local market. 13 Our considerations for addressing our going concern uncertainty is partially based upon forward-looking events, which have yet to occur, including the successful consummation of the Rights Offering and the successful development, production, and sales of crude oil from the Karakuduk Field. Expected funding requirements necessary for development of the Karakuduk Field through December 31, 2000 are partially based upon future cash flows from the sale of KKM's crude oil production. These risks are partially mitigated by the current funding available under the Loan, along with the Equity Support Agreement for a $4,000,000 capital infusion into Chaparral in the event the Rights Offering is not completed by June 30, 2000. Other risks and considerations also impact our short and long-term liquidity, including the result of the proposed conversion of our Notes into our common stock, KKM's ability to successfully develop and increase production from the Karakuduk Field, KKM's ability to obtain export oil quota and physically deliver its production to the export market, volatility of oil prices on the world market, our oil production hedge arrangements, and the impact of KKM's License commitments to the government of the Republic of Kazakhstan. 1999 Activity. - -------------- During 1999, we raised additional capital to finance the development of the Karakuduk Field, meet other working capital needs, and pay off a $975,000 loan from the Chase Bank of Texas, N.A. by issuing a total of $10,040,000 of our Notes to various related parties and other non-affiliated investors. Notes issued to related parties totaled $8,290,000, including $5,827,000 from Allen, $2,051,000 from Whittier, and $412,000 from John G. McMillian, our Co-Chairman and Chief Executive Officer. In exchange for the Notes, we received $4,750,000 in cash and canceled $5,290,000 in promissory notes issued previously in 1999, plus accrued interest thereon, issued by us to Allen ($3,827,000), Whittier ($1,051,000), and Mr. McMillian ($412,000). We issued an additional $3,300,000 of our Notes during January and February 2000 to various related parties and other non-affiliated investors. Additional Notes issued to related parties totaled $2,400,000, including $2,000,000 to Allen, $250,000 to Mr. McMillian, and $150,000 to a relative of Jim Jeffs, our Co-Chairman. The Notes, plus accrued interest, are convertible into our common stock at a conversion price of $1.86 per share, subject to the approval of our stockholders of Chaparral. The Notes bear interest at an annual rate of 8% until our stockholders vote on the conversion of the Notes. If the conversion feature is approved, the Notes will convert into the equivalent shares of our common stock within 10 business days following the stockholder vote. The failure of the stockholders to approve the conversion provision of the Notes will result in an immediate increase of the annual interest rate payable to the lesser of 25% or the maximum rate allowed by applicable law. We expect to submit the vote on conversion of the Notes to our stockholders in the second quarter of fiscal year 2000. The Notes have a stated maturity date of October 31, 2001, but are unsecured and fully subordinated to the Loan. The holders of the Notes have no rights to receive any principal or interest payments prior to full repayment of the Loan, under its terms, and have executed subordination agreements to that effect. Shell Capital Loan. - ------------------- We entered into the Loan with Shell Capital on November 1, 1999, to provide up to $24,000,000 of financing for the development of the Karakuduk Field. The consummation of the Loan was subject to a number of significant conditions, including, without limitation: (i) an equity infusion of at least $9,000,000, (ii) obtaining political risk insurance, (iii) Shell Capital or Chaparral obtaining transportation risk insurance, (iv) the hedging of a significant portion of our future oil production, and (v) the retirement, conversion, or full subordination of all of the outstanding indebtedness of Chaparral and KKM, excluding current payables. On February 14, 2000, we fully satisfied all of the outstanding conditions and drew down a total of $8,300,000 from the Loan. The $9,000,000 equity infusion was partially satisfied by our issuance of Notes totaling $5,050,000 for cash from November 11, 1999 through February 10, 2000. The remaining shortfall will be met through the Rights Offering and/or the Equity Support Agreement. 14 On January 31, 2000, we obtained binding political risk insurance coverage from OPIC. We paid the initial insurance premium of $157,500, providing a total of $30,000,000 of political risk coverage for our investment in the Karakuduk Field through April 30, 2000. The OPIC policy's maximum coverage amount available is $50,000,000, which would require a quarterly premium of $262,500. We are required to maintain political risk insurance until the Loan is fully repaid. On February 11, 2000, we paid $4,000,000 for put contracts to sell a total of 1,562,250 barrels of North Sea Brent crude (the "Hedge Agreement"). The exercise prices of the various put contracts range from $22.35 to $17.25 per barrel, with monthly expiration dates beginning in October 2000 and ending in December 2002. The contracts are evenly spread between October 2000 to December 2001 (62,750 barrels per month) and between January 2002 to December 2002 (51,750 barrels per month). In March 2000, we paid Shell Capital a total of $750,000 for a beneficial interest in Shell Capital's policy for transportation risk insurance (the "Transportation Risk Insurance"), covering certain circumstances whereby KKM would be unable to export crude oil production outside of the Republic of Kazakhstan through the existing pipeline routes currently available. In the event coverage under Shell Capital's policy is triggered, proceeds from the policy would go to the benefit of Chaparral for use in making principal and interest payments required under the Loan. The $750,000 payment for the beneficial interest in Shell Capital's Transportation Risk Insurance covers the life of the Loan (discussed below). We are allowed to drawdown the principal balance of the Loan in minimum increments of $2,000,000. Loan advances will be used to meet the capital and operational requirements of KKM, up-front fees and future finance costs required under the Loan, make payments for premiums due under the OPIC and Transportation Risk Insurance policies, and make payments required under the Hedge Agreement. The Loan is available for drawdown until the earlier of September 30, 2001 or project completion. Project completion occurs when various conditions are met by us and KKM, including, but not limited to: (i) receipt by Shell Capital of an independent engineer's reserve report evidencing proven developed reserves of at least 30 million barrels in the Karakuduk Field, (ii) sustaining average production of 13,000 barrels of oil per day from the Karakuduk Field for a period of 45 consecutive days, (iii) sustaining water injection at an average rate of 15,000 barrels per day over 45 consecutive days, (iv) injection of lift gas into one well over a 24 hour period, and (v) various other financial and technical milestones ("Project Completion"). Prior to Project Completion, any borrowed amounts accrue interest at an annual rate of LIBOR plus 17.75%, compounding quarterly. The annual interest rate is reduced to LIBOR plus 12.75% after Project Completion. Prior to Project Completion, an interest amount, equal to annual rate of LIBOR plus .50%, is payable quarterly to Shell Capital, along with a commitment fee equal to an annual rate of 1.5% of the undrawn portion of the $24,000,000 debt facility. The remaining unpaid interest is capitalized to the Loan at the end of each quarter. After Project Completion, all quarterly interest on the outstanding Loan is fully due and payable at the end of each calendar quarter. Principal payments, including any capitalized interest, are due on quarterly reduction dates ("Reduction Date"), beginning with the first calendar quarter ending on the earlier of 60 days following Project Completion or December 31, 2001. Minimum principal payments, based upon percentages of the principal outstanding as of Project Completion, are set out in the Loan and ensure full settlement of the Loan by September 30, 2004, the final maturity date. Mandatory prepayments of principal outstanding are required on each Reduction Date out of any excess cash flow available after consideration of Chaparral's and KKM's permitted budgeted expenditures for the following 45 days and all fees, interest, and principal payments scheduled on such Reduction Date. In connection with finalizing the Loan, we issued the Shell Warrant to Shell Capital to purchase up to 15% of our outstanding common stock. The Shell Warrant is non-transferable and will be exercisable on the earlier of Project Completion or June 30, 2001. The Shell Warrant contains certain registration rights and is subject to certain anti-dilution provisions. The Shell Warrant's exercise price is $15.45 per share. 15 The Loan subjects us to a significant number of restrictions, including various representations and warranties, positive and negative covenants, and events of default. These restrictions include, but are not limited to, the following: o Pledge of Assets. We pledged substantially all of our assets to Shell Capital, including our interest in the Karakuduk Field. If an event of default occurs under the Loan and is not timely cured, Shell Capital is entitled to certain remedies, including the right to accelerate repayment of the loan and obtain our rights to the Karakuduk Field. o Business Alteration. We cannot engage in any other business except the ownership of KKM and the operation of the Karakuduk Field without the prior consent of Shell Capital. o Rights Offering. We must use our best efforts to complete the Rights Offering on or before June 30, 2000. Allen and Whittier have provided the Equity Support Agreement to exercise their full pro-rata share of the Rights Offering or, if the Rights Offering is not completed, to each contribute $2,000,000 to Chaparral in exchange for our equity securities or indebtedness. o Change in Control. We cannot enter into any transaction whereby a "group" as defined in the Securities Act of 1934 acquires or otherwise gains control of 20% or more of our outstanding shares of voting stock. Certain transactions are exempt from this restriction, including, the conversion of our Notes, the Rights Offering, the Equity Support Agreement, conversion of our outstanding Series A Preferred Stock, the exercise of the Shell Warrant, and a grant of non-statutory or statutory options to purchase up to 15% of our outstanding common stock to our officers, directors, employees, and consultants (subject to certain anti-dilution provisions). Furthermore, Allen and Whittier, have agreed not to sell or otherwise transfer any of our common stock on or before June 30, 2000, and at no time let their ownership in us fall below 20%, unless otherwise agreed with Shell Capital. o Charged Accounts. We must retain all cash receipts from oil sales, proceeds from the Loan, and any other funds raised through approved equity or debt offerings in pledged bank accounts (the "Charged Accounts"). The Charged Accounts are controlled by Shell Capital. We retain title to the Charged Accounts, but Shell Capital directs all cash movements at our request. On a monthly basis, we request transfers of funds from the Charged Accounts into certain operating accounts controlled directly by us or by KKM, respectively. 16 o Cash Expenditures. We must expend funds in accordance with capital and operating budgets approved by Shell Capital on an annual basis, unless otherwise approved by Shell Capital. o Project Completion. KKM must reach Project Completion on or before September 30, 2001. o Share Capital. We cannot purchase, issue, or redeem any of our share capital without the prior approval of Shell Capital. o Future Indebtedness. We cannot borrow money, other than trade debt, without the approval of Shell Capital. o Sale of Significant Assets. We cannot dispose of any significant assets, including capital stock in our subsidiaries, without the approval of Shell Capital. o Leases. Without Shell Capital's approval, KKM cannot enter into any lease or license arrangement with annual payments in excess of $1,000,000 and we will not enter into any lease or license arrangement with annual payments in excess of $200,000. o Dividends. KKM cannot pay dividends prior to Project Completion, and then only subject to certain restrictions. We cannot pay any dividends without Shell Capital's consent. o OPIC Insurance. We must maintain OPIC political risk insurance throughout the duration of the Loan. o Hedge Agreement. We will not cancel or terminate the hedging contracts entered into as part of the Loan or enter into any other hedging transaction without Shell Capital's consent. The terms and conditions and related financing costs of the Loan are significant. A substantial portion of our future cash flow from operations will be required for debt service and may not be available for other purposes. Our ability to obtain additional debt or equity financing in the future for working capital, capital expenditures, or acquisitions is also restricted, as well as our ability to acquire or dispose of significant assets or investments. These restrictions may make us more vulnerable and less able to react to adverse economic conditions. The failure of Chaparral to meet the terms of the Loan could result in an event of default and the loss of our investment in the Karakuduk Field. 17 The Loan prohibits us from paying dividends to our stockholders without Shell Capital's consent. We have not paid dividends in the past and have no expectations to do so in the future. As of March 24, 2000, we have borrowed $13,800,000 under the Loan. The Loan Proceeds were utilized to pay $2,225,000 in outstanding debt issuance costs, $4,000,000 for the Hedge Agreement, $750,000 for Transportation Risk Insurance, $157,500 for the initial OPIC insurance premium, $6,000,000 for KKM's operations, and $667,500 for our corporate overhead. Other Sources of Liquidity and Capital Resources. - ------------------------------------------------- We expect to draw additional funds from the Loan to support KKM's development of the Karakuduk Field. The costs required to develop the Karakuduk Field are significant and will not be fully covered by the available financial resources under the Loan. We are currently pursuing additional sources of liquidity, which we believe will satisfy both the short and long-term liquidity requirements of both Chaparral and KKM, including the conversion of the Notes into our common stock, the Rights Offering, and the sale of oil under the Crude Oil Sales Agreement. We are currently preparing a proxy statement to our stockholders, including a proposal to approve the conversion of the Notes into shares of our common stock at $1.86 per share. The conversion of the Notes would decrease our indebtedness by $13,339,789, plus accrued interest. If the Notes are not converted, they will accrue interest at an annual rate equal to the lesser of 25% or the maximum rate allowed by law. The Notes are fully subordinated to the Loan, and cannot be repaid until we have fully repaid the Loan. Our board of directors has approved a Rights Offering for 5,300,000 shares of our common stock convertible at $1.86 per share, or $9,858,000. The board of directors set the record date after the date of our Annual Meeting in order to permit the holders of the Notes to participate in the Rights Offering. Under the terms of the Equity Support Agreement, Allen and Whittier have undertaken to exercise their full pro-rata share of the Rights Offering, which will be approximately $6,660,000, assuming conversion of the Notes, plus accrued interest, into our common stock. If the Rights Offering is not completed prior to June 30, 2000, Allen and Whittier will contribute an aggregate of $4,000,000 in exchange for our equity securities or indebtedness. KKM has nominated its first sale under the Crude Oil Sales Agreement for approximately 226,500 barrels of oil. Delivery is expected in April, with payment received in May 2000. Based on current market prices, net proceeds from the sale would equal approximately $4,000,000 to KKM. Additional oil sales are expected on at least a quarterly basis, as KKM works to increase production. While we fully expect to realize material cash benefits from some, or all, of the above transactions, we can provide no assurances that the Rights Offering, Equity Support Agreement, conversion of the Notes, or sales under the Crude Oil Sales Agreement will be consummated. If we fail to raise additional financial resources in the short term, through internal or external means, we may be unable to meet operational cash flow requirements or meet the terms of the Loan. If so, we may lose our investment in KKM and the Karakuduk Field. Capital Commitments - ------------------- Under the terms of the License from the government of the Republic of Kazakhstan, KKM was committed to minimum expenditures of $30,000,000 for the year ended December 31, 1999. The License also establishes a minimum work program requiring KKM to drill 8 new wells during 1999. In August 1999, we received a letter from the State Investment Agency of the Republic of Kazakhstan (the "SIA Letter"), extending the period for completion of the minimum work program and expenditure commitments to June 30, 2000. The SIA Letter is not a formal amendment to the License. 18 As of March 24, 2000, KKM will need to drill an additional 6 new wells and invest an additional $13,500,000 prior to June 30, 2000 to satisfy the terms of the SIA Letter. KKM has one rig running currently and is expecting to place a second rig under contract in the near future. There is a possibility, however, that KKM will not meet the work commitment to drill 6 additional wells before June 30, 2000. If KKM fails to satisfy the work or capital commitment under the License or SIA Letter, the licensing authority could cancel or suspend the License. If the License is cancelled, we will be unable to develop and sell oil produced from the Karakuduk Field, and we will have no other source of oil revenue. We believe the licensing authority will not suspend or cancel the License, but we can provide no assurances that the License would not be revoked or suspended if the License requirements are not satisfied. KKM can request a deferral of the License commitments, but there is no guarantee that the licensing authority will grant a deferral. Commodity Prices for Oil - ------------------------ Our revenues, profitability, growth and value are highly dependent upon the price of oil. Market conditions make it difficult to estimate prices of oil or the impact of inflation on such prices. Oil prices have been volatile, and it is likely they will continue to fluctuate in the future. Various factors beyond our control affect prices for oil, including supplies of oil available worldwide and in Kazakhstan, the ability of OPEC to agree to maintain oil prices and production controls, political instability or armed conflict in Kazakhstan or other oil producing regions, the price of foreign imports, the level of consumer demand, the price and availability of alternative fuels, the availability of transportation routes and pipeline capacity, and changes in applicable laws and regulations. Inflation - --------- We cannot control prices received from our oil sales and to the extent we are unable to pass on increases in operating costs, we may be affected by inflation. On April 5, 1999, the government of the Republic of Kazakhstan discontinued its support of 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, but was relatively stable for the remainder of 1999. The devaluation decreased the US dollar realizable value of any tenge denominated monetary assets held by KKM, and decreased the US dollar obligation of any tenge denominated monetary liabilities held by KKM. KKM maintains its financial statements in U.S. dollars and the impact of the devaluation is not considered to be material at this time. Year 2000 Update - ---------------- There were no significant disruptions in either Chaparral's or KKM's operations due to the Year 2000 date change. We are not aware of any material problems resulting from Year 2000 issues, either with our operations or the products and services of third parties. We will continue to monitor our computer applications and those of our suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters are addressed promptly. 19 2. Results from Operations We account for our investment in KKM using the equity method. In 1999, the FASB released EITF 99-10, Percentage Used to Determine the Amount of Equity Method Losses, which requires investors to recognize equity method losses beyond their percentage of investee common stock to the extent of their adjusted basis in the investee's common stock and other loans/advances made to the investee. Future equity method gains, if any, would be recaptured by the investor to the extent disproportionate equity method losses were recognized in prior periods. EITF 99-10 is effective for interim and annual periods beginning after September 23, 1999. We have elected to apply EITF 99-10 prospectively beginning in the quarter ended December 31, 1999. As a result, we recognized an additional equity loss of $683,000 in 1999 due to the application of EITF 99-10. See Note 5 to our consolidated financial statement for the year ended December 31, 1999. The conversion feature of the Notes represent a "beneficial conversion feature" as addressed in EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios. Under EITF 98-5, a portion of the proceeds received from the Notes is allocable to the conversion feature contained therein. The value assigned to the conversion feature is determined as the difference between the market price of our common stock and the conversion price multiplied by the number of shares to be received upon conversion. As the conversion price contained in the Notes is substantially below the market price, the value under the above formula as of December 31, 1999 significantly exceeds the net carrying value of the Notes. Under EITF 98-5, the portion of the proceeds allocable to the conversion feature is limited to the total proceeds received. Accordingly, upon approval of the conversion by the stockholders, we will record total additional debt discount equal to: $12,876,000, which is equal to the Notes carrying value as of December 31, 1999 and the $3,300,000 in Notes issued in January and February of 2000. The entire discount will be immediately charged to interest expense upon conversion of the Notes. Results of Operations Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 - ------------------------------------------------------------------------- Our operations during 1999, resulted in a net loss of $5,163,000, compared to a net loss of $4,266,000 for 1998. Interest income increased by $262,000 from 1998 due to increased financing of 100% of KKM's operations in Kazakhstan. Interest expense increased $318,000 in 1999 due to additional borrowings to support our corporate overhead and KKM's operations. General and administrative costs decreased by $625,000 from 1998 primarily due to a decrease in compensation expense from a reduction in stock based compensation and the reversal of accrued compensation which was contingent on the sale of our interest in KKM. Our equity loss in KKM increased by $859,000 from, of which $683,000 was due to the increased amount of equity losses recorded from the application of EITF 99-10 beginning in the fourth quarter of 1999. In the fourth quarter of 1999, KKM stopped capitalizing interest expense and began amortization of its oil and gas properties. In 1999, we recorded a $1,060,000 loss from a settlment with Challenger. Chaparral, KKM, Challenger, and OGECC reached a full and final settlement in February of 2000, whereby we will not recover the note receivable from Challenger. We recorded the charge on the settlement of this dispute as of December 31, 1999. In 1998, we settled a lawsuit filed against Chaparral for a total of $200,000 and warrants to purchase 3,333 shares of the our common stock at an exercise price of $60 per share, exercisable through January 2, 1999. The warrants were recorded at the fair market value (approximately $34,000). In 1998, we also recognized a $236,000 extraordinary loss on the extingushment of long-term debt. 20 Results of Operations Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 - ------------------------------------------------------------------------- Our operations during 1998, resulted in a net loss of $4,266,000, compared to a net loss of $2,603,000 for 1997. Interest income increased by $436,000 from 1997 due to increased financing of 100% of KKM's operations in Kazakhstan. General and administrative costs increased by $1,363,000 from 1997 due mainly to an increase in compensation expense and legal fees. Compensation expense increased by $992,000, primarily due to stock based compensation granted to our directors, employees, and consultants during 1998 plus amortization of prior year equity based compensation. Furthermore, our cash based compensation increased due to the hiring of additional personnel required for normal business operations. Legal fees increased $125,000, primarily relating to a lawsuit, which was settled in 1998. Our equity loss in KKM, increased $585,000 from 1997. These increases are the result of KKM's increased operational activity in Kazakhstan. In 1998, we settled a lawsuit filed against Chaparral for a total of $200,000 and warrants to purchase 3,333 shares of our common stock at an exercise price of $60 per share, exercisable through January 2, 1999. The warrants were recorded at the fair market value (approximately $34,000). In 1998, we recognized a $236,000 extraordinary loss on the extingushment of long-term debt. In 1997, we recognized a $214,000 extraordinary loss on the extingushment of short-term debt. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of December 31, 1999, our only outstanding market risk sensitive instruments were total aggregate Notes outstanding of $10,040,000. The Notes accrue interest at 8% and are convertible into our common stock upon stockholder approval at a conversion price of $1.86 per share. The Notes were issued in the fourth quarter of 1999 and are recorded at their fair value. On February 11, 2000, we entered the Hedge Agreement, paying $4.0 million for put contracts to sell a total of 1,562,250 barrels of North Sea Brent crude. The exercise prices of the various put contracts range from $22.35 to $17.25 per barrel, with monthly expiration dates beginning in October 2000 and ending in December 2002. The contracts are evenly spread between October 2000 to December 2001 (62,750 barrels per month) and between January 2002 to December 2002 (51,750 barrels per month). 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. 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item as to the directors and executive officers of are incorporated by reference to such information appearing under the captions "Election of Directors" and "Executive Officers" in our definitive proxy statement for our 2000 Annual Meeting of Stockholders and is to be filed with the Securities and Exchange Commission ("Commission") pursuant to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on December 31, 1999. ITEM 11. EXECUTIVE COMPENSATION The information required by this item as to the management is hereby incorporated by reference to such information appearing under the caption "Executive Compensation" in our definitive proxy statement for our 2000 Annual Meeting of Stockholders and is to be filed with the Commission pursuant to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on December 31, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item as to the ownership by management and others of securities is hereby incorporated by reference to such information appearing under the caption "Nominees for Director" and "Certain Stockholders" in our definitive proxy statement for our 2000 Annual Meeting of Stockholders and is to be filed with the Commission pursuant to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on December 31, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item as to certain business relationships and transactions with management and other related parties is hereby incorporated by reference to such information appearing under the caption "Certain Transactions" in our definitive proxy statement for our 2000 Annual Meeting of Stockholders and is to be filed with the Commission pursuant to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on December 31, 1999. 22 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. --------------------- Table of Contents Page Chaparral Resources, Inc. ------------------------- Report of Independent Auditors..................................................................... 1 Consolidated Balance Sheets--As of December 31, 1999 and December 31, 1998 ........................ 2 Consolidated Statements of Operations--Years ended December 31, 1999, 1998, and 1997............................................................................ 4 Consolidated Statements of Cash Flows--Years ended December 31, 1999, 1998, and 1997............................................................................ 5 Consolidated Statement of Changes in Stockholders' Equity--Years ended December 31, 1999and 1998, and the 11 months ended December 31, 1997......................................................... 7 Notes to Consolidated Financial Statements......................................................... 8 Supplemental Information - Disclosures About Oil and Gas Producing Activities - Unaudited.......... 32 Closed Type JSC Karakudukmunay. Report of Independent Auditors .................................................................... 35 Balance Sheets--As of December 31, 1999 and 1998 .................................................. 36 Statements of Expenses and Accumulated Deficit--Years ended December 31, 1999, 1998 and 1997.......................................................... 37 Statements of Cash Flows--Years ended December 31, 1999, 1998 and 1997............................. 38 Statements of Stockholders' Deficit................................................................ 39 Notes to the Financial Statements ................................................................. 40 Supplemental Information - Disclosures About Oil and Gas Producing Activities - Unaudited.......... 54
(a)(2) Financial Statement Schedules. ------------------------------ All schedules for which a 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. ----------------------------- We filed a Current Report on Form 8-K, dated October 25, 1999 to report the sale of our 8% Non-Negotiable Convertible Subordinated Notes and announce execution of our loan agreement with Shell Capital Limited and certain other lenders. (c) Exhibits. -------- 23 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 Chaparral Resources, Inc'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 Chaparral Resources, Inc.'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 Chaparral Resources, Inc.'s Registration Statement No. 333-7779. 3.1 Certificate of Incorporation, dated April 21, 1999, incorporated by reference to to Chaparral Resources, Inc.'s Notice and Definitive Schedule 14Adated April 21, 1999. 3.2 Bylaws, dated April 21, 1999, incorporated by reference to Annex IV to our Notice and Definitive Schedule 14Adated April 21, 1999. 4.1* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $101,400, to Allen & Company Incorporated. 4.2* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $182,680, to Allen & Company Incorporated. 4.3* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $2,613,097, to Allen & Company Incorporated. 4.4* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $929,984, to Allen & Company Incorporated. 4.5* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $103,332, to John G. McMillian. 4.6* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $20,298, to John G. McMillian. 4.7* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $288,019, to John G. McMillian. 4.8* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $524,986, to Whittier Ventures. 4.9* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $525,973, to Whittier Ventures, LLC. 4.10 8% Non-Negotiable Convertible Subordinated Promissory Note, dated December 10, 1999, principal amount $150,000, to Cord Family Exempt Trust, incorporated by reference to Exhibit 10.40 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.11 8% Non-Negotiable Convertible Subordinated Promissory Note, dated February 10, 2000, principal amount $1,250,000, to Allen & Company Incorporated, incorporated by reference to Exhibit 10.51 to Chaparral Resources, Inc. Current Report on 8-K dated March 22, 2000. 4.12 8% Non-Negotiable Convertible Subordinated Promissory Note, dated February 9, 2000, principal amount $100,000, to Helen Jacobs Strauss Trust, incorporated by reference to Exhibit 10.50 to Chaparral Resources, Inc. Current Report on 8-K dated March 22, 2000. 24 Exhibit No. Description and Method of Filing ----------- -------------------------------- 4.13 8% Non-Negotiable Convertible Subordinated Promissory Note, dated February 9, 2000, principal amount $100,000, to EcoTels International Limited, incorporated by reference to Exhibit 10.49 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.14 8% Non-Negotiable Convertible Subordinated Promissory Note, dated January 27, 2000, principal amount $750,000, to Allen & Company Incorporated, incorporated by reference to Exhibit 10.48 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.15 8% Non-Negotiable Convertible Subordinated Promissory Note, dated January 21, 2000, principal amount $250,000, to Helen Jacobs Strauss Trust, incorporated by reference to Exhibit 10.47 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.16 8% Non-Negotiable Convertible Subordinated Promissory Note, dated January 19, 2000, principal amount $200,000, to Akin, Gump, Strauss, Hauer & Feld, incorporated by reference to Exhibit 10.46 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.17 8% Non-Negotiable Convertible Subordinated Promissory Note, dated January 19, 2000, principal amount $250,000, to John G. McMillian, incorporated by reference to Exhibit 10.45 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.18 8% Non-Negotiable Convertible Subordinated Promissory Note, dated January 14, 2000, principal amount $250,000, to Capco Energy, Inc., incorporated by reference to Exhibit 10.44 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.19 8% Non-Negotiable Convertible Subordinated Promissory Note, dated January 7, 2000, principal amount $150,000, Rose Dosti IRA UTA Charles Schwab Inc. Contributory DTD, incorporated by reference to Exhibit 10.43 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.20 8% Non-Negotiable Convertible Subordinated Promissory Note, dated December 15, 1999, principal amount $500,000, to Capco Energy, Inc., incorporated by reference to Exhibit 10.42 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.21 8% Non-Negotiable Convertible Subordinated Promissory Note, dated December 10, 1999, principal amount $100,000, to Cord Capital, LLC, incorporated by reference to Exhibit 10.41 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.22 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 12, 1999, principal amount $1,000,000, to Whittier Ventures, LLC, incorporated by reference to Exhibit 4.9 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 4.23 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $100,000, to Marathon Special Opportunity Fund, LLC, incorporated by reference to Exhibit 4.8 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 4.24 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $100,000, to Patrick McGee, incorporated by reference to Exhibit 4.7 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 25 Exhibit No. Description and Method of Filing ----------- -------------------------------- 4.25 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $100,000, to Duncan A. Lee, incorporated by reference to Exhibit 4.6 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 4.26 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $125,000, to William Keller, incorporated by reference to Exhibit 4.5 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 4.27 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $125,000, to Thomas G. Murphy, incorporated by reference to Exhibit 4.4 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 4.28 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $200,000, to Pecos Joint Venture, incorporated by reference to Exhibit 4.3 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 4.29 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $250,000, to Global Undervalued Securities Fund, LP, incorporated by reference to Exhibit 4.2 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 4.30 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $2,000,000, to Allen & Company Incorporated, incorporated by reference to Exhibit 4.1 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 10.1 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 Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.2 License for the Right to Use the Subsurface in the Republic of Kazakhstan, incorporated by reference to Exhibit 10.18 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.3 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 Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.4 Amendment to License for the Right to Use the Subsurface in the Republic of Kazakhstan, dated December 31, 1998, incorporated by reference to Exhibit 10.25 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10.5* Letter from the Agency of the Republic of Kazakhstan on Investments to Central Asian Petroleum (Guernsey) Limited dated July 28, 1999 regarding License for Right to Use the Subsurface in the Republic of Kazakhstan. 10.6 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 Chaparral Resources, Inc.'s Current Report on Form 8-K dated April 1, 1996. 26 Exhibit No. Description and Method of Filing ----------- -------------------------------- 10.7 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, Whittier Energy Company and Whittier Ventures LLC in July 1997 in connection with the same loans, incorporated by reference to Exhibit 10.3 to Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.8 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 Chaparral Resources, Inc.'s Current Report on Form 8-K/A dated October 31, 1997. 10.9 Agreement dated March 31, 1998, effective as of November 4, 1997, between Chaparral Resources, Inc. and Allen & Company Incorporated, incorporated by reference to Exhibit 10.33 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.10 Warrants issued to Allen & Company, Incorporated and John G. McMillian, incorporated by reference to Exhibit 10.2 to Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.11 1998 Incentive and Nonstatutory Stock Option Plan, incorporated by reference to Exhibit 10.24 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10.12 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 Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.13 Warrants issued to Whittier Ventures, LLC, incorporated by reference to Exhibit 10.2 to Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.14 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 Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.15 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 Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.16 Loan Agreement between Challenger Oil Services, PLC and Chaparral Resources, Inc. dated September 10, 1998, incorporated by reference to Exhibit 10.5 to Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.17 Promissory Note between Challenger Oil Services, PLC and Chaparral Resources, Inc. dated September 10, 1998, incorporated by reference to Exhibit 10.6 to Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 27 Exhibit No. Description and Method of Filing ----------- -------------------------------- 10.18 International Daywork Drilling Contract - Land between Challenger Oil Services, PLC and Karakuduk-Munay, JSC, dated April 7, 1998, incorporated by reference to Exhibit 10.32 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10.19 Amendment No. 1 to the International Daywork Drilling Contract - Land between Challenger Oil Services, PLC and Karakuduk-Munay, JSC, dated April 7, 1998, incorporated by reference to Exhibit 10.33 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10.20 Amendment No. 2 to the International Daywork Drilling Contract - Land between Challenger Oil Services, PLC and Karakuduk-Munay, JSC, dated March 17, 1999, incorporated by reference to Exhibit 10.34 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10.21 Letter Agreement dated March 17, 1999 between Karakuduk-Munay, JSC and Challenger Oil Services, PLC, incorporated by reference to Exhibit 10.35 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10.22 Letter Agreement and Restated Amendment No. 1 to Loan Agreement and Promissory Note dated March 18, 1999 between Challenger Oil Services, PLC and Chaparral Resources, Inc., incorporated by reference to Exhibit 10.36 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10.23 $24,000,000 Loan Agreement dated as of November 1, 1999, incorporated by reference to Exhibit 10.1 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 10.24 Supplemental Agreement, dated February 10, 2000, among Shell Capital Limited, Shell Capital Services Limited, Chaparral Resources, Inc., Central Asian Petroleum (Guernsey) Limited, Closed Type JSC Karakudukmunay and Central Asian Petroleum, Inc., incorporated by reference to Exhibit 10.19 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.25 CRI-CAP(G) Loan Agreement, dated February 7, 2000, between Chaparral Resources, Inc. and Central Asian Petroleum (Guernsey) Limited, incorporated by reference to Exhibit 10.13 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.26 CAP(G)-KKM Loan Agreement, dated February 7, 2000, between Closed Type JSC Karakudukmunay and Central Asian Petroleum (Guernsey) Limited, incorporated by reference to Exhibit 10.16 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.27 Accounts Agreement, dated February 8, 2000, among Chaparral Resources, Inc., Central Asian Petroleum (Guernsey) Limited, Closed Type JSC Karakudukmunay, Shell Capital Services Limited, ABN Amro Bank N.V., London Branch and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.1 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.28 Security Trust Deed, dated February 7, 2000, among Chaparral Resources, Inc., Central Asian Petroleum (Guernsey) Limited, Central Asian Petroleum, Inc., Closed Type JSC Karakudukmunay, Shell Capital Services Limited and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.17 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 28 Exhibit No. Description and Method of Filing ----------- -------------------------------- 10.29 CRI Accounts Assignment, dated February 7, 2000, between Chaparral Resources, Inc. and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.2 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.30 CAP(G) Accounts Assignment, dated February 7, 2000, between Chaparral Resources, Inc. and The Law Debenture Trust Corporation, p.l.c., incorporated by reference to Exhibit 10.3 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.31 KKM Accounts Assignment, dated February 7, 2000, between Closed Type JSC Karakudukmunay and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.4 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.32 CRI-CAP(D) Pledge Agreement, dated February 7, 2000, between Chaparral Resources, Inc. and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.11 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.33 CRI-CAP(G) Charge Over Shares, dated February 7, 2000, between Chaparral Resources, Inc. and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.14 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.34 CAP(D)-CAP(G) Charge Over Shares, dated February 7, 2000, between Central Asian Petroleum, Inc. and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.15 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.35 KKM Pledge Agreement, dated February 7, 2000, between Central Asian Petroleum (Guernsey) Limited and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.12 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.36 CRI Assignment, dated February 8, 2000, between Chaparral Resources, Inc. and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.5 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.37 CAP(G) Assignment, dated February 7, 2000, between Central Asian Petroleum (Guernsey) Limited and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.6 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.38 KKM Assignment, dated February 7, 2000, between Closed Type JSC Karakudukmunay and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.7 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.39 Assignment of Insurance Proceeds, dated February 7, 2000, between Chaparral Resources, Inc. and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.8 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.40 KKM Assignment of Insurances, dated February 7, 2000, between Closed Type JSC Karakudukmunay and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.9 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 29 Exhibit No. Description and Method of Filing ----------- -------------------------------- 10.41 Assignment of Reinsurance, dated February 8, 2000, among Closed Type JSC Karakudukmunay, Kazakinstrakh JSC, Schwarzmeer und Ostsee Insurance Co. Limited (Sovag) U.K. and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.10 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.42 Warrant Agreement, dated February 8, 2000, between Chaparral Resources, Inc. and Shell Capital Limited, incorporated by reference to Exhibit 10.18 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.43 Technical Services Agreement, dated February 8, 2000, Shell Capital Services Limited and Closed Type JSC Karakudukmunay, incorporated by reference to Exhibit 10.20 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.44 Contract of Insurance No. 158, dated December 29, 1999, between the Overseas Private Investment Corporation and Chaparral Resources, Inc., incorporated by reference to Exhibit 10.21 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.45 Amendment No. 1 to Contract of Insurance No. F158, dated as of February 4, 2000, between the Overseas Private Investment Corporation and Chaparral Resources, Inc., incorporated by reference to Exhibit 10.22 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.46 Trade Confirmation, dated February 11, 2000, between Deutsche Bank AG New York and Chaparral Resources, Inc., incorporated by reference to Exhibit 10.23 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.47 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Patrick McGee, incorporated by reference to Exhibit 10.24 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.48 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Whittier Ventures, LLC., incorporated by reference to Exhibit 10.25 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.49 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Pecos Joint Venture, incorporated by reference to Exhibit 10.26 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.50 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Thomas G. Murphy, incorporated by reference to Exhibit 10.27 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.51 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Duncan Lee, incorporated by reference to Exhibit 10.28 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.52 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Marathon Special Opportunity Fund, incorporated by reference to Exhibit 10.29 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 30 Exhibit No. Description and Method of Filing ----------- -------------------------------- 10.53 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and William Keller, incorporated by reference to Exhibit 10.30 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.54 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Global Undervalued Securities Fund, LP, incorporated by reference to Exhibit 10.31 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.55 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Cord Family Exempt Trust, incorporated by reference to Exhibit 10.32 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.56 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Cord Capital, LLC, incorporated by reference to Exhibit 10.33 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.57 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Capco Energy, Inc, incorporated by reference to Exhibit 10.34 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.58 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Rose Dosti IRA UTA Charles Schwab Inc Contributory DTD, incorporated by reference to Exhibit 10.35 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.59 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and John G. McMillian, incorporated by reference to Exhibit 10.36 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.60 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Akin, Gump, Strauss, Hauer & Feld, L.L.P., incorporated by reference to Exhibit 10.37 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.61 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Helen Jacobs Strauss Trust, incorporated by reference to Exhibit 10.38 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.62 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Allen & Company Incorporated, incorporated by reference to Exhibit 10.39 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.63* Subordination Agreement, dated February 8, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and EcoTels International Limited. 10.64 Crude Oil Sale and Purchase Agreement dated as of November 1, 1999, between Closed Type JSC Karakuduk Munay and Shell Trading International Limited, incorporated by reference to Exhibit 10.1 to Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. 10.65* Daywork Drilling Contract Land between KazakhOil Drilling Service Company and Closed Type Karakudukmunay, JSC, dated October 10, 1999. 31 Exhibit No. Description and Method of Filing ----------- -------------------------------- 10.66* Transportation Contract between KazakhOil and Closed Type Karakudukmunay, JSC, dated January 31, 2000. 10.67* Commercial Services Agreement between Shell Trading International Limited and Closed Type Karakudukmunay, JSC, dated November 1, 1999. 10.68* Letter from Ryder Scott Company Petroleum Engineers to Chaparral Resources, Inc. regarding review of reserve estimates of the Karakuduk Field, dated January 13, 1995. 10.69* Letter from Ryder Scott Company Petroleum Engineers to Chaparral Resources, Inc. regarding review of reserve estimates of the Karakuduk Field, dated October 8, 1999. 21 Subsidiaries of the Registrant, incorporated by reference to Exhibit 21 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 23.1* Consent of Ryder Scott Company Petroleum Engineers. 27* Financial Data Schedule. * Filed herewith. 32 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 Delaware corporation By /s/ John G. McMillian -------------------------------------------- John G. McMillian Co-Chairman and Chief Executive Officer (Principal Executive Officer) By /s/ Michael B. Young -------------------------------------------- Michael B. Young, Treasurer and Controller (Principal Financial and Accounting Officer) Dated March 28, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Date Name and Title Signature - ---- -------------- --------- March 28, 2000 Ted Collins, Jr., Director /s/ Ted Collins, Jr. --------------------- March 28, 2000 David A. Dahl, Director /s/ David A. Dahl --------------------- March 28, 2000 James A. Jeffs, Co-Chairman /s/ James A. Jeffs --------------------- March 28, 2000 Richard L. Grant, Director /s/ Richard L. Grant --------------------- March 28, 2000 John G. McMillian, Co-Chairman and /s/ John G. McMillian Chief Executive Officer --------------------- 33 Consolidated Financial Statements Chaparral Resources, Inc. Years ended December 31, 1999, December 31, 1998, and December 31, 1997 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....................7 Notes to Consolidated Financial Statements....................................8 Supplemental Information - Disclosures About Oil and Gas Producing Activities - Unaudited..........................................32 Closed Type JSC Karakudukmunay Report of Independent Auditors...............................................35 Audited Financial Statements Balance Sheets...............................................................36 Statements of Operations.....................................................37 Statements of Cash Flows.....................................................38 Statements of Stockholders' Deficit..........................................39 Notes to Financial Statements................................................40 Supplemental Information - Disclosures About Oil and Gas Producing Activities - Unaudited..........................................54 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, 1999 and 1998, and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred recurring operating losses and has a working capital deficiency as of December 31, 1999. In addition, there are uncertainties relating to the Company and its equity method investees' ability to meet their commitments under a license agreement and ability to meet all expenditure/cash flow requirements through 2000. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans and other factors 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 these uncertainties. ERNST & YOUNG LLP Houston, Texas March 17, 2000 1
CHAPARRAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS December 31 1999 1998 --------------------------------------- Assets Current assets: Cash and cash equivalents $ 23,000 $ 121,000 Restricted cash (Note 3) 578,000 756,000 Accounts receivable 23,000 25,000 Prepaid expenses 111,000 76,000 Current portion of note receivable (Note 4) - 420,000 --------------------------------------- Total current assets 735,000 1,398,000 Note receivable (Note 4) - 589,000 Oil and gas properties and investments - full cost method Republic of Kazakhstan (Karakuduk Field)-- Not subject to depletion (Note 5): - 32,261,000 Subject to depletion (Note 5) 38,151,000 - Furniture, fixtures and equipment 100,000 93,000 Less accumulated depreciation (39,000) (17,000) --------------------------------------- 61,000 76,000 --------------------------------------- Deferred debt issuance cost (Note 6) 2,356,000 - --------------------------------------- Total assets $ 41,303,000 $ 34,324,000 ======================================= See accompanying notes. 2 CHAPARRAL RESOURCES, INC. CONSOLIDATED BALANCE SHEETS December 31 1999 1998 --------------------------------------- Liabilities and stockholders' equity Current liabilities: Accounts payable $ 1,045,000 $ 223,000 Accrued liabilities: Accrued compensation 458,000 418,000 Accrued debt issuance cost 1,934,000 - Accrued other 239,000 104,000 Short-term note payable, net of discount (Note 7) - 940,000 --------------------------------------- Total current liabilities 3,676,000 1,685,000 Note payable, net of discount (Note 7) 9,576,000 Accrued compensation (Note 13) - 210,000 Redeemable preferred stock (Note 10)- cumulative, convertible, Series A 75,000 designated, 50,000 issued and outstanding, at stated value, $5.00 cumulative annual dividend, $5,500,000 redemption value 5,200,000 4,850,000 Stockholders' equity (Note 8): Common stock - authorized, 100,000,000 shares of $0.0001 par value; issued and outstanding, 980,314 and 972,980 shares at December 31, 1999 and 1998 - - Capital in excess of par value 47,857,000 47,611,000 Unearned portion of restricted stock awards (23,000) (56,000) Preferred stock - 1,000,000 shares authorized, 925,000 shares undesignated. Issued and outstanding - none - - Stock subscription receivable (Note 10) - (506,000) Accumulated deficit (24,983,000) (19,470,000) --------------------------------------- Total stockholders' equity 22,851,000 27,579,000 --------------------------------------- Total liabilities and stockholders' equity $ 41,303,000 $ 34,324,000 ======================================= See accompanying notes. 3 CHAPARRAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 1999 1998 1997 --------------------------------------------------- Revenue $ - $ - $ - Costs and expenses: Depreciation and depletion 31,000 14,000 7,000 General and administrative 2,392,000 3,017,000 1,654,000 ---------------------------------------------------- 2,423,000 3,031,000 1,661,000 ---------------------------------------------------- Loss from operations (2,423,000) (3,031,000) (1,661,000) Other income (expense): Interest income 924,000 662,000 226,000 Interest expense (523,000) (205,000) (298,000) Equity in loss from investment (Notes 5 and 17) (2,081,000) (1,222,000) (637,000) Legal settlement (Note 9) - (234,000) - Write-off of note receivable (Note 4) (1,060,000) - - Other - - (19,000) ---------------------------------------------------- (2,740,000) (999,000) (728,000) ---------------------------------------------------- Loss before extraordinary item (5,163,000) (4,030,000) (2,389,000) Extraordinary loss on extinguishment of long-term debt (Note 16) - (236,000) (214,000) ---------------------------------------------------- Net loss $ (5,163,000) $ (4,266,000) $ (2,603,000) ==================================================== Cumulative annual dividend accrued Series A Redeemable Preferred Stock (250,000) (250,000) - Discount accretion Series A Redeemable Preferred Stock (100,000) (100,000) - ==================================================== Net loss available to common stockholders $ (5,513,000) $ (4,616,000) $ (2,603,000) ==================================================== Basic and diluted earnings per share: Loss per share before extraordinary item $ (5.28) $ (4.49) $ (3.45) Extraordinary loss per share $ - $ (.26) $ (.31) Net loss per share $ (5.28) $ (4.75) $ (3.76) Weighted average number of shares outstanding (basic and diluted) 978,391 898,477 692,691 See accompanying notes. 4 CHAPARRAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 1999 1998 1997 ------------------------------------------------------- Cash flows from operating activities Net loss $ (5,163,000) $ (4,266,000) $ (2,603,000) Adjustments to reconcile net loss to net cash provided (used) in operating activities: Write-off of note receivable 1,060,000 - - Equity loss from investment 2,081,000 1,222,000 637,000 Reversal of long term accrued compensation (210,000) - - Depreciation and depletion 31,000 14,000 7,000 Loss on the sale of oil and gas properties - - 3,000 Provision for doubtful accounts 16,000 29,000 37,000 Write-down of oil and gas properties - - 30,000 Stock issued for services and bonuses 270,000 600,000 78,000 Stock options issued for services and bonuses 9,000 113,000 117,000 Warrants issued for legal settlement - 34,000 - Amortization of note discount 77,000 154,000 198,000 Loss on extinguishment of debt - 236,000 214,000 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (14,000) 48,000 (129,000) Prepaid expenses (35,000) (14,000) (59,000) Note and related accrued interest receivable (51,000) (1,009,000) - Accrued interest on advances to KKM (854,000) (522,000) (195,000) Other - - 95,000 Increase in: Accounts payable 822,000 46,000 177,000 Accrued debt issuance cost 1,934,000 - - Accrued other 135,000 50,000 19,000 Accrued compensation 40,000 418,000 - ------------------------------------------------------- Net cash provided (used) in operating activities 148,000 (2,847,000) (1,374,000) Cash flows from investing activities Additions to furniture, fixtures and equipment $ (7,000) $ (80,000) $ (6,000) Investment in and advances to oil and gas properties (7,126,000) (13,039,000) (6,114,000) Proceeds from sale of interest in oil and gas properties - domestic - - 282,000 ------------------------------------------------------- Net cash used in investing activities (7,133,000) (13,119,000) (5,838,000) 5 CHAPARRAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 1999 1998 1997 ------------------------------------------------------- Cash flows from financing activities Net proceeds from notes payable $ 10,040,000 $ 2,045,000 $ 300,000 Repayment of notes payable (975,000) (1,095,000) (450,000) Debt issuance cost (2,356,000) - - Restricted cash 178,000 (756,000) - Payable for CAP-G shares - - (744,000) Proceeds from warrant exercise - 20,000 3,309,000 Net proceeds from redeemable preferred stock issuance - - 5,000,000 Net proceeds from private placement - 12,450,000 2,300,000 ------------------------------------------------------- Net cash provided by financing activities 6,887,000 12,664,000 9,715,000 ------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (98,000) (3,302,000) 2,503,000 Cash and cash equivalents at beginning of period 121,000 3,423,000 920,000 ======================================================= Cash and cash equivalents at end of period $ 23,000 $ 121,000 $ 3,423,000 ======================================================= Supplemental cash flow disclosure Interest paid $ 68,000 $ 58,000 $ 53,000 Income taxes paid 23,000 Supplemental schedule of non-cash investing and financing activities Common stock issued for acquisition of CAP-G $ - $ - $ 1,000,000 Discount recognized for note issued with detachable stock warrants 506,000 146,000 74,250 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 Conversion of accrued interest - - 50,000 See accompanying notes. 6 CHAPARRAL RESOURCES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Capital in Common Stock Excess of Stock Unearned --------------- Par Subscription Restricted Accumulated Shares Amount Value Receivable Stock Awards Deficit Total -------------------------------------------------------------------------------------------- Balance at November 30, 1996 625,442 -- 24,235,000 -- -- (12,121,000) 12,114,000 Warrants exercised for capital stock 94,135 -- 3,309,000 -- -- -- 3,309,000 Conversion of debentures for capital stock 36,162 -- 1,549,000 -- -- -- 1,549,000 Capital stock issued for services 1,461 -- 78,000 -- -- -- 78,000 Stock options issued for services -- -- 227,000 -- (109,000) -- 118,000 Capital stock issued for accrued compensation 5,833 -- 175,000 -- -- -- 175,000 Capital stock issued for investment in affiliate 6,667 -- 1,000,000 -- -- _ 1,000,000 Capital stock issued in private placement 58,974 -- 2,300,000 -- -- -- 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 828,674 -- 35,311,000 (1,770,000) (109,000) (14,854,000) 18,578,000 Warrants exercised for capital stock 1,333 -- 20,000 -- -- -- 20,000 Capital stock issued for services 4,084 -- 645,000 -- (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 138,889 -- 12,450,000 -- -- -- 12,450,00 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 972,980 -- 47,611,000 (506,000) (56,000) (19,470,000) 27,579,000 Capital stock issued 5,861 -- 246,000 -- (246,000) -- -- for services Amortization of restricted stock awards -- -- -- -- 279,000 -- 279,000 Capital stock issued for fractional shares after reverse stock split 1,473 -- -- -- -- -- -- Warrants earned -- -- -- 506,000 -- -- 506,000 Cumulative dividend Series A Redeemable Preferred Stock -- -- -- -- -- (250,000) (250,000) Discount accretion on redeemable preferred stock -- -- -- -- -- (100,000) (100,000) Net loss -- -- -- -- -- (5,163,000) (5,163,000) ---------------------------------------------------------------------------------------------- Balance at December 31, 980,314 -- 47,857,000 -- (23,000) (24,983,000) 22,851,000 ============================================================================================== See accompanying notes. 7
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. ("Chaparral") 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. On April 21, 1999, the Company's stockholders approved the reincorporation of Chaparral from Colorado to Delaware. Chaparral focuses substantially all of its efforts on the exploration and development of the Karakuduk Field, an oilfield located in the Central Asian Republic of Kazakhstan. The consolidated financial statements include the accounts of Chaparral and its 100% owned subsidiaries, Central Asian Petroleum (Guernsey) Limited ("CAP-G"), Road Runner Services Company ("RRSC"), Chaparral Acquisition Corporation ("CAC"), and Central Asian Petroleum, Inc. ("CAP-D"). Chaparral owns 80% of the common stock of CAP-G directly and indirectly through CAP-D, which owns the remaining 20%. Hereinafter, Chaparral and its 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, the consolidated statement of changes in stockholders' equity for the thirteen months ended December 31, 1997 is presented. CAP-G owns a 50% interest in Closed Type JSC Karakudukmunay ("KKM"), a Kazakhstan joint stock company, which holds the rights for the exploration, development and production of oil in the Karakuduk Field. KKM is owned jointly by CAP-G (50%), KazakhOil JSC ("KazakhOil") (40%) and a private Kazakhstan joint stock company (10%). KazakhOil, the national petroleum company of Kazakhstan, is owned by the Government of the Republic of Kazakhstan. The Company shares control of KKM through participation on KKM's Board of Directors. On April 21, 1999, the Company's stockholders approved and effected a sixty for one reverse stock split. Accordingly, all historical weighted average share and per share amounts have been restated to reflect the reverse stock split. Reclassifications Certain reclassifications have been made in the 1998 and 1997 financial statements to conform to the 1999 presentation. Cash and Cash Equivalents Cash equivalents consist of highly liquid investments purchased with an original maturity of three months or less. Oil and Gas Properties and Investments The Company and KKM use the full cost method of accounting for their oil and gas properties. All costs 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 total proven reserves. The Company accounts for its investment in KKM using the equity method. 8 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies and Organization (continued) Sales of Proven Oil and Gas Properties 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 proven 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 a 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 unproven properties are excluded from the amortization computation until it is determined if proven 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 produced from proven reserves, 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. During 1999, KKM sold approximately 325,000 barrels of crude oil in the local Kazakhstan and export markets and realized approximately $1,019,000, net of related production and transportation costs. These sales resulted from placing accumulations of crude oil production resulting from the initial work associated with the early phases of the Karakuduk Field development plan. The proceeds from these placements were not considered revenues, as volumes delivered were not commercially viable or attributable to proven reserves. KKM has accordingly accounted for these proceeds as cost recovery by reducing its net carrying value of oil and gas properties by the amount of net proceeds received. Depreciation of Furniture, Fixtures 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 seven years. Loss Per Common Share Basic loss per common share is calculated by dividing net loss, after deducting preferred stock dividends and discount on Redeemable Preferred Stock that is accreted directly to the accumulated deficit, 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. 9 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies and Organization (continued) Loss Per Common Share (continued) Diluted loss per share is not presented because the exercise of stock options and stock warrants, and the effect of the conversion of the Company's Redeemable Preferred Stock of 32,367, 52,575, and 152,978 for the years 1999, 1998, and 1997, respectively, into shares of the Company's common stock are antidilutive. Stock Based Compensation In accordance with the provision SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to follow the Accounting Principles Board's Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations ("APB 25") in accounting for its employee stock-based compensation plans. Under APB 25, if the exercise price of the Company's employee stock options equals or exceeds the fair value of the underlying stock on the date of grant as determined by the Company's Board of Directors, no compensation expense is recognized. 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, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. As of December 31, 1999, the Company has not adopted SFAS 133. The Company is evaluating this pronouncement and intends to adopt the statement no later than January 1, 2001. The impact of SFAS 133 on the Company's financial position and results of operations is not expected to be material. In 1999, the FASB released EITF 99-10, Percentage Used to Determine the Amount of Equity Method Losses, which requires investors to recognize equity method losses beyond their percentage of investee common stock to the extent of their adjusted basis in the investee's common stock and other loans/advances made to the investee. Future equity method gains, if any, would be recaptured by the investor to the extent disproportionate equity method losses were recognized in prior periods. EITF 99-10 is effective for interim and annual periods beginning after September 23, 1999. The Company has elected to apply EITF 99-10 prospectively beginning in the quarter ended December 31, 1999. The Company recognized an additional equity loss of $683,000 in 1999 due to the application of EITF 99-10. Fair Value of Financial Instruments All of the Company's financial instruments, including cash and cash equivalents, accounts receivable, notes receivable, and notes payable, have fair values which approximate their recorded values as they are either short-term in nature or carry interest rates which approximate market rates. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 10 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies and Organization (continued) Risks and Uncertainties The ability of KKM to realize the carrying value of its assets is dependent on being able to develop, 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 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. The Company is responsible for providing 100% of the funding for the development of the Karakuduk Field not provided from oil sales or third party sources. The Karakuduk Field will require significant additional funding in order to obtain levels of production that would generate sufficient cash flows to meet future capital and operating spending requirements. The Company has recognized recurring operating losses and has a working capital deficiency as of December 31, 1999. In addition, there are uncertainties relating to the Company and KKM's ability to meet commitments under KKM's license agreement and all expenditure and cash flow requirements through fiscal year 2000. As described in Note 15, KKM's agreements with the government of the Republic of Kazakhstan require KKM to meet certain expenditure and work commitments on or before June 30, 2000. If KKM fails to meet these commitments, KKM's right to develop the Karakuduk Field may be terminated and the Company's investment in the Karakuduk Field may be lost. 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 these uncertainties. Management's plan to address these uncertainties include: o Shell Capital Loan. As discussed in Note 6, on November 1, 1999, the Company entered a loan agreement (the "Loan") with Shell Capital Limited ("Shell Capital"), to provide up to $24,000,000 in financing for the development of the Karakuduk Field. The consummation of the Loan was subject to a number of significant conditions, which were subsequently fulfilled in February 2000. As of March 24, 2000, the Company has borrowed a total of $13,800,000 under the Loan. o Rights Offering. As a condition to the Loan, the Company will utilize its best efforts to issue to its stockholders rights to acquire not less than $6,000,000 of the Company's common stock on or before June 30, 2000 (the "Rights Offering"). Two of the Company's related party stockholders, Allen & Company, Inc. ("Allen") and Whittier Ventures, LLC ("Whittier"), have each undertaken to exercise their full pro-rata share of the Rights Offering and, if the Rights Offering is not concluded on or before June 30, 2000, to each contribute $2,000,000 into the Company for the Company's common stock or other indebtedness (the "Equity Support Agreement"). 11 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. Going Concern (Continued) o Development of KKM's Proven Reserves. KKM has approximately 67.58 million barrels of estimated proven oil reserves, net of government royalty. As of December 31, 1999, KKM has produced approximately 436,000 barrels of crude oil, of which 325,000 barrels were sold in 1999 for a total proceeds of $1,019,000, net of transportation and production costs. As of December 31, 1999, KKM had approximately 111,000 barrels of crude oil in inventory and was producing approximately 1,100 barrels of oil per day. o Crude Oil Sales Agreement. On November 1, 1999, KKM entered into a Crude Oil Sale and Purchase Agreement (the "Crude Oil Sales Agreement") with Shell Trading International Limited ("STASCO"), an affiliate of Shell Capital, for the purchase of 100% of the oil production from the Karakuduk Field on the export market for world market oil prices. The Company expects KKM to obtain a substantially higher return from oil sales under the Crude Oil Sales Agreement than would otherwise be obtainable from oil sales in Kazakhstan's local market. The Crude Oil Sales Agreement became effective upon the consummation of the Loan and KKM expects to begin placing oil under the agreement in April 2000. Management's plans for addressing the above uncertainties are partially based upon forward looking events, which have yet to occur, including the successful consummation of the Rights Offering and/or the Equity Support Agreement and the successful development, production, and sales of crude oil from the Karakuduk Field, as to which there is no assurance. Expected funding requirements necessary for development of the Karakuduk Field through December 31, 2000 are also partially based upon future cash flows from the sale of KKM's crude oil production. It is management's belief, however, that these risks will be mitigated by the funding available under the Loan, along with the Equity Support Agreement in the event the Rights Offering is not successful. 3. Restricted Cash As of December 31, 1999, the Company held restricted cash of $578,000 as collateral for loans made by the Chase Bank of Texas, N.A. ("Chase") to KKM for the acquisition of tangible equipment used in the Karakuduk Field. KKM fully repaid the loans in January 2000, and the collateral was released. 4. Notes Receivable In September 1998, the Company advanced $1,009,000 to a third-party drilling contractor, Challenger Oil Services, PLC ("Challenger") to ready a drilling rig for use by KKM in the Karakuduk Field. In April 1999, the owner of the drilling rig operated by Challenger, Oil & Gas Exploration Company Cracow, Ltd. ("OGECC"), terminated its contract with Challenger. As a result of the termination of the contract between Challenger and OGECC, KKM terminated the drilling contract between KKM and Challenger, and arbitration proceedings were instituted in accordance with the terms of the drilling contract. In February 2000, the Company, KKM, Challenger, and OGECC reached a mutual settlement and release (the "Settlement") for all parties involved. The Settlement requires KKM to pay outstanding accrued liabilities to Challenger for prior work performed totaling $1,336,000 The Company also agreed to fully discharge the note receivable from Challenger to the Company. Due to the Settlement, the Company fully impaired the note, plus accrued interest of $51,000, as of December 31, 1999. 12 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Oil and Gas Properties and Investments The Company's oil and gas properties and investments are comprised of investments in KKM's common stock, advances to KKM, acquisition costs for CAP-G, and other capitalizable costs allowed under the full cost method of accounting. Accumulated equity losses in KKM and accumulated depletion have been netted against the gross capitalized costs. The Company is currently depleting costs associated with its acquisition costs and other capitalizable costs (the "Company's Depletable Costs") under the units-of-production method. The rate used for depletion reflects the ratio of KKM's current period production divided by KKM's total proven reserves. Although the Company follows the equity method of accounting, Management has determined that these amounts represent the Company's costs incurred for acquiring the right to develop the oil and gas reserves underlying the Company's equity interest in KKM and accordingly should be depleted as the reserves are produced. Advances to and interest due from KKM are to be recovered through payments resulting from KKM's anticipated sales of future crude oil production. KKM's agreement with the government of the Republic of Kazakhstan provides for quarterly repayments equal to 65% of gross revenues, net of government royalties. The Company, at its own discretion, may defer receipt of quarterly repayments to maintain working capital within KKM. On November 1, 1999, KKM classified approximately 67.58 million barrels of oil reserves as proven, net of government royalty, based on the signing of the Loan with Shell Capital, to provide up to $24,000,000 in financing for the development of the Karakuduk Field. Prior to the Loan, all of KKM's reserves were considered unproven as the reserves were not considered commercially viable due to the lack of financing necessary to develop the Karakuduk Field. With the change in the status of KKM's reserves, the Company's Depletable Costs became subject to depletion and the Company began recording depletion expense. As of December 31, 1999, the Company recognized $9,000 of depletion. As discussed on Note 1, the Company's share of KKM's equity losses has been increased by $683,000 to reflect the adoption of EITF 99-10 in the fourth quarter of 1999. In addition, the Company's share of equity losses for 1999 and 1998 has been reduced by $854,000 and $522,000, respectively, to reflect the elimination of the Company's 50% share of interest charged to KKM by CAP-G. 13 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Oil and Gas Properties and Investments (Continued) Costs capitalized to Oil and Gas Properties and Investments consist of:
December 31, 1999 1998 ------------------------------------- Oil and Gas Properties and Investments: Investments in KKM common stock $ 100,000 $ 100,000 Advances to and interest due from KKM 31,232,000 22,595,000 Acquisition costs 10,613,000 10,613,000 Other capitalizable costs 1,057,000 1,715,000 ------------------------------------- Total gross oil and gas investments 43,002,000 35,023,000 ------------------------------------- Less: Equity losses (4,842,000) (2,762,000) Depletion (9,000) - ------------------------------------- Total oil and gas properties and investment $ 38,151,000 $ 32,261,000 ===================================== The condensed financial statements of KKM are as follows: December 31, 1999 1998 -------------------------------------- Condensed Balance Sheet Current Assets $ 653,000 $ 730,000 Non-Current Assets (primarily oil and gas properties, full cost method) 25,000,000 19,130,000 Current Liabilities Current Loan Payable to Related Party - 3,000,000 Other Current Liabilities 4,589,000 3,205,000 Non-Current Liabilities Loan Payable to Related Party 32,871,000 20,380,000 Other Non-Current Liabilities - 578,000 Common stock 200,000 200,000 Accumulated Deficit 12,007,000 7,503,000 Condensed Income Statement Revenues $ - $ - Cost and Expenses 4,504,000 3,488,000 Net Loss $ 4,504,000 $ 3,488,000
14 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Shell Capital Loan On November 1, 1999, the Company entered into the Loan with Shell Capital, to provide up to $24,000,000 of financing for the development of the Karakuduk Field. CAP-D, CAP-G, and KKM also signed the Loan as co-obligors. The Company and KKM are hereafter referred to as the "Borrowers". The consummation of the Loan was subject to a number of significant conditions, including, without limitation: (i) an equity infusion of at least $9,000,000, (ii) obtaining political risk insurance, (iii) Shell or the Company obtaining transportation risk insurance, (iv) the hedging of a significant portion of the Company's future oil production, and (v) the retirement, conversion, or full subordination of all of the outstanding indebtedness of the Company and KKM, excluding current trade payables. On February 14, 2000, the Company fully satisfied all of the outstanding conditions. The $9,000,000 equity infusion was partially satisfied by the Company's issuance of 8% Non-negotiable Convertible Promissory Notes (the "Notes") totaling $5,050,000 for cash from November 11, 1999 through February 10, 2000. The Notes are convertible upon stockholder approval. The remaining infusion should be met through the Rights Offering and/or proceeds from the Equity Support Agreement. On January 31, 2000, the Company obtained binding political risk insurance coverage from the Overseas Private Investment Corporation ("OPIC"). The Company paid the initial insurance premium of $157,500, providing a total of $30,000,000 of political risk coverage for the Company's investment in the Karakuduk Field through April 30, 2000. The OPIC policy's maximum coverage amount electable by the Company is $50,000,000, which would require a quarterly premium of $262,500. The Company is required to maintain political risk insurance until the Loan is fully repaid. On February 11, 2000, the Company purchased for $4,000,000 put contracts to sell 1,562,250 barrels of North Sea Brent crude (the "Hedge Agreement"). The exercise prices of the various put contracts in the Hedge Agreement range from $22.35 to $17.25 per barrel, with monthly expiration dates beginning in October 2000 and ending in December 2002. The contracts are evenly spread between October 2000 to December 2001 (62,750 barrels per month) and between January 2002 to December 2002 (51,750 barrels per month). In March 2000, the Company paid Shell Capital a total of $750,000 for a beneficial interest in Shell Capital's policy for transportation risk insurance (the "Transportation Risk Insurance"), covering certain circumstances whereby KKM would be unable to export crude oil production outside of the Republic of Kazakhstan through the existing pipeline routes currently available. In the event coverage under Shell Capital's policy is triggered, proceeds from the policy would go to the benefit of the Company for use in making principal and interest payments required under the Loan. The $750,000 payment for the beneficial interest in Shell Capital's Transportation Risk Insurance covers the life of the Loan. Additionally, KKM entered into a technical service agreement directly with Shell Capital, granting Shell Capital, at their own discretion, the right to bring in technical consultants to work on the Karakuduk Field on a cost only basis. The Company is allowed to drawdown the principal balance of the Loan in minimum increments of $2,000,000. Loan advances will be used to meet the capital and operational requirements of KKM, up-front fees and future finance costs required under the Loan, make payments for premiums due under the OPIC and Transportation Risk Insurance policies, and make payments required under the Hedge Agreement. The Loan is available for drawdown until the earlier of September 30, 2001 or project completion. 15 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Shell Capital Loan (Continued) Project completion occurs when various conditions are met by the Company and KKM, including, but not limited to: (i) receipt by Shell Capital of an independent engineer's reserve report evidencing proven developed reserves of at least 30,000,000 barrels in the Karakuduk Field, (ii) sustaining average production of 13,000 barrels of oil per day from the Karakuduk Field for a period of 45 consecutive days, (iii) sustaining water injection at an average rate of 15,000 barrels per day over 45 consecutive days, (iv) injection of lift gas into one well over a 24 hour period, and (v) various other financial and technical milestones ("Project Completion"). Prior to Project Completion, any borrowed amounts accrue interest at an annual rate of LIBOR plus 17.75%, compounding quarterly. The annual interest rate is reduced to LIBOR plus 12.75% after Project Completion. Prior to Project Completion, an interest amount, equal to annual rate of LIBOR plus .50%, is payable quarterly to Shell Capital, along with a commitment fee equal to an annual rate of 1.5% of the undrawn portion of the $24,000,000 debt facility. The remaining unpaid interest is capitalized to the Loan at the end of each quarter. After Project Completion, all quarterly interest on the outstanding Loan is fully due and payable by the Company at the end of each calendar quarter. Principal payments, including any capitalized interest, are due on quarterly reduction dates ("Reduction Date"), beginning with the first calendar quarter ending on the earlier of 60 days following Project Completion or December 31, 2001. Minimum principal payments, based upon percentages of the principal outstanding as of Project Completion, are set out in the Loan and ensure full settlement of the Loan by September 30, 2004, the final maturity date. Mandatory prepayments of principal outstanding are required on each Reduction Date out of any excess cash flow available after consideration of the Company's and KKM's permitted budgeted expenditures for the following 45 days and all fees, interest, and principal payments scheduled on such Reduction Date. In connection with finalizing the Loan, the Company issued to Shell Capital a warrant to purchase up to 15% of the Company's outstanding common stock (the "Shell Warrant"). The warrant is non-transferable and will be exercisable on the earlier of Project Completion or June 30, 2001. The warrant contains certain registration rights and is subject to certain anti-dilution provisions. The warrant's exercise price is $15.45 per share. The Loan subjects the Company to a significant number of restrictions, including various representations and warranties, positive and negative covenants, and events of default. The Loan restrictions include, but are not limited to, the following: o Pledge of Assets. Shell Capital holds a security interest in substantially all of the Company's assets, including its interest in the Karakuduk Field. KKM also pledged certain security interests in its receivables and insurances. Consequently, if an event of default occurs under the Loan and such event of default is not timely cured, Shell Capital is entitled to certain remedies, including the right to accelerate repayment of the Loan and obtain possession of the assets over which it has a security interest. o Business Alteration. The Company cannot engage in any other business except the ownership of KKM and the operation of the Karakuduk Field without the prior consent of Shell Capital. 16 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Shell Capital Loan (Continued) o Rights Offering. The Company must use its best efforts to complete the Rights Offering on or before June 30, 2000. Allen and Whittier have executed the Equity Support Agreement, whereby they will exercise their full pro-rata share of the Rights Offering or, if the Rights Offering is not completed, to each contribute $2,000,000 to the Company in exchange for the Company's equity securities or indebtedness. o Change in Control. The Company cannot enter into any transaction whereby a "group" as defined in the Securities Act of 1934 acquires or otherwise gains control of 20% or more of the outstanding shares of the Company's voting stock. Certain transactions currently proposed by the Company are exempt from this restriction, including: the conversion of the Company's Notes, the Rights Offering, the Equity Support Agreement, the exercise of the Shell Warrant, and a grant of non-statutory or statutory options to purchase up to 15% of the Company's outstanding common stock to our officers, directors, employees, or consultants (subject to certain anti-dilution provisions). Furthermore, Allen and Whittier have agreed not to sell or otherwise transfer any of the Company's common stock on or before June 30, 2000, and at no time let their ownership in the Company fall below 20%, unless otherwise agreed with Shell Capital. o Charged Accounts. The Borrowers must retain all cash receipts from oil sales, drawdowns from the Loan, and any other funds raised by the Company through approved equity or debt offerings in pledged bank accounts ("Charged Accounts") controlled by Shell Capital. The Borrowers retain title to their respective Charged Accounts, but Shell Capital directs all cash movements at the request of the Borrowers. On a monthly basis, the Borrowers request transfers of funds from the Charged Accounts into certain operating accounts controlled directly by Chaparral and KKM, respectively. o Cash Expenditures. The Borrowers must expend funds in accordance with capital and operating budgets approved by Shell Capital on an annual basis, unless otherwise approved by Shell Capital. o Project Completion. KKM must reach Project Completion on or before September 30, 2001. o Share Capital. The Borrowers cannot purchase, issue, or redeem any of its share capital without the prior approval of Shell Capital. o Future Indebtedness. The Borrowers cannot incur financial indebtedness, other than trade debt, without the approval of Shell Capital. o Sale of Significant Assets. The Borrowers cannot dispose of any significant assets, including capital stock in subsidiaries, without the approval of Shell Capital. 17 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Shell Capital Loan (Continued) o Leases. Without Shell Capital's approval, KKM cannot enter into any lease or license arrangement with annual payments in excess of $1,000,000 and the Company will not enter any lease or license arrangement with annual payments in excess of $200,000. o Dividends. KKM cannot pay dividends prior to the Project Completion, and then only subject to certain restrictions. The Company cannot pay any dividends without Shell Capital's consent. o OPIC Insurance. The Company must maintain OPIC political risk insurance throughout the duration of the Loan. Annual premiums for $50,000,000 of maximum coverage allowed under the OPIC policy are approximately $1,050,000, paid on a quarterly basis. o Hedge Agreement. The Company cannot cancel or terminate the Hedge Agreement or enter into any other hedging transaction without Shell Capital's consent. As of December 31, 1999, the Company has recognized $2,356,000 in deferred debt issuance costs associated with the Loan. Debt issuance costs are comprised of up-front fees payable to Shell Capital, legal fees of Shell Capital and the Borrowers, and miscellaneous financing fees and set-up charges. The debt issuance costs will be recorded as a discount and amortized over the life of the Loan, beginning February 14, 2000. As of March 22, 2000, the Company has borrowed $13,800,000 from the Loan. The proceeds were utilized to pay $2,225,000 in outstanding debt issuance costs, $4,000,000 for the Hedge Agreement, $750,000 for Transportation Risk Insurance, $157,000 for the initial OPIC insurance premium, $6,000,000 for KKM's operations, and $667,500 for Chaparral's corporate overhead. 7. Notes Payable In November 1999, the Company repaid the $975,000 note to Chase, originally issued by the Company in July 1998. The Chase note was collateralized by a $1,000,000 stand-by letter of credit put in place by Whittier in exchange for a senior security interest in the Company's capital stock of CAP-G. Upon repayment of the Chase note, the stand-by letter of credit was cancelled and Whittier's security interest was fully released. During the fourth quarter of 1999, the Company issued a total of $10,040,000 of the Company's Notes to various related parties and other non-affiliated investors. The Company recorded the Notes net of discount of $464,000. Notes issued to related parties totaled $8,290,000, including $5,827,000 from Allen, $2,051,000 from Whittier, and $412,000 from John G. McMillian, the Chairman and Chief Executive Officer of the Company. In exchange for the Notes, the Company received $4,750,000 in cash and canceled $5,290,000 in promissory notes issued previously in 1999, plus accrued interest thereon, issued by the Company to Allen ($3,827,000), Whittier ($1,051,000), and Mr. McMillian ($412,000). As of December 31, 1999, the Company had $126,000 in accrued interest on the Notes, of which $109,000 related to Notes issued to related parties. 18 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. Notes Payable (Continued) The Notes, plus accrued interest, are convertible into the Company's common stock at a conversion price of $1.86 per share, subject to the approval of the Company's stockholders. The Notes bear interest at an annual rate of 8% until the Company's stockholders vote on the conversion of the Notes. If the conversion feature is approved, the Notes will convert into the equivalent shares of the Company's common stock within 10 business days following the stockholder vote. The failure of the stockholders to approve the conversion provision of the Notes will result in an immediate increase of the annual interest rate payable to the lesser of 25% or the maximum rate allowed by applicable law. Management expects to submit the vote on conversion of the Notes to the Company's stockholders in the second quarter of 2000. The Notes have a stated maturity date of October 31, 2001, but are unsecured and fully subordinated to the Loan. The holders of the Notes have no rights to receive any principal or interest payments prior to full repayment of the Loan, under its terms, and have executed subordination agreements to that effect. The Company issued an additional $3,300,000 of the Company's Notes during January and February 2000 to various related parties and other non-affiliated investors. Additional Notes issued to related parties totaled $2,400,000, including $2,000,000 to Allen, $250,000 to Mr. McMillian, and $150,000 to a relative of Jim Jeffs, the Co-Chairman of the Company. The conversion feature of the Notes represent a "beneficial conversion feature" as addressed in EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios. Under EITF 98-5, a portion of the proceeds received from the Notes is allocable to the conversion feature contained therein. The value assigned to the conversion feature is determined as the difference between the market price of the Company's common stock and the conversion price multiplied by the number of shares to be received upon conversion. As the conversion price contained in the Notes is substantially below the market price, the value under the above formula as of December 31, 1999 significantly exceeds the net carrying value of the Notes. Under EITF 98-5, the portion of the proceeds allocable to the conversion feature is limited to the total proceeds received. Accordingly, upon approval of the conversion by the stockholders, the Company will record total additional debt discount equal to: $12,876,000, which is equal to the Notes carrying value as of December 31, 1999 and the $3,300,000 in Notes issued in January and February of 2000. The entire discount will be immediately charged to interest expense upon conversion of the Notes. 8. Common Stock General On April 21, 1999, the Company's stockholders approved and effected a sixty for one reverse stock split to stockholders of record as of April 7, 1999. All commitments concerning stock options and other commitments payable in shares of the Company's common stock were effected for the reverse stock split, including the exercise prices of all outstanding stock options and warrants and the number of shares to be received upon exercising the respective agreements. The effect of the reverse stock split has been retroactively reflected as of December 31, 1999, 1998, and 1997 in the consolidated balance sheet, consolidated statement of operations, and statements of changes in stockholders' equity. All references to the number of common shares and per share amounts elsewhere in the consolidated financial statements and related footnotes have been restated as appropriate to reflect the effects of the reverse stock split for all periods presented. Fractional shares that resulted from the reverse stock split were rounded upward to the nearest whole share. As a result, the Company issued 1,473 additional shares of common stock. 19 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Common Stock (Continued) In connection with the reverse stock split, the Company's stockholders also approved the Plan and Agreement of Merger whereby the Company was reincorporated from a Colorado to a Delaware corporation. The Plan was effected by exchanging one share of the Company's $0.10 par value common stock for one share of the new $.0001 par value common stock. The effect of the reincorporation has also been retroactively reflected in the consolidated balance sheet and statements of changes in stockholders' equity. 1989 Stock Warrant Plan During 1989, the Board of Directors approved a stock warrant plan for key employees and directors. The Company reserved 19,583 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 19,583 shares were granted with an exercise price of $16.80 per share. Warrants for 1,667, 3,750, and 1,667 shares were exercised for values of $28,000, $63,000, and $28,000 during 1997, 1996, and 1995, respectively. The remaining 12,500 warrants expired on April 30, 1999. 1997 Incentive Stock Plan On July 17, 1997, the stockholders of the Company approved the 1997 Incentive Stock Plan pursuant to which up to 16,667 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 stockholders 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. 1997 Non-employee Directors' Stock Option Plan On July 17, 1997, the stockholders approved the 1997 Non-employee Directors' Stock Option Plan, which authorized granting 417 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 stockholders. On June 26, 1998, the stockholders of the Company repealed the 1997 Non-employee Directors' Stock Option Plan and approved the 1998 Incentive and Non-statutory Stock Option Plan, described below. As of June 26, 1998, the date of termination of the plan, options for 3,333 shares with an exercise price of $49.80 had been issued to non-employee directors. 1998 Incentive and Non-statutory Stock Option Plan On June 26, 1998, the stockholders approved the 1998 Incentive and Non-statutory Stock Option Plan (the "1998 Plan"), pursuant to which up to 50,000 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 1998 Plan may be either incentive stock options or nonstatutory stock options. The 1998 Plan has an effective term of ten years, commencing on May 20, 1998. The Company did not grant any options under the 1998 Plan during 1998 or 1999. 2000 Incentive and Non-statutory Stock Option Plan On November 2, 1999, the Company's Board of Directors approved the formation of an employee stock option plan, which will allow the Board's Compensation Committee to grant qualified and/or non-qualified stock options to the directors, employees, and consultants of the Company. The employee stock option plan would allow the issuance of option grants to acquire up to 15% of the Company's outstanding common stock, after giving effect to any changes in the capital stock of the Company contemplated by the conditions necessary to obtain funding under the Loan. As of December 31, 1999, the plan had not been ratified by the stockholders of the Company. 20 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Common Stock (Continued) Non-Qualified Stock Options During 1997, the Company granted five-year non-qualified options, generally with vesting periods of one year, to purchase 52,367 restricted shares of the Company's common stock to various employees and directors of, and consultants to, the Company. Options relating to 26,142 shares have an exercise price of $45 per share and options relating to 26,225 shares have an exercise price of $90 per share. The Company has recorded these stock options at their fair value on the date of grant of $227,000. During 1998, the Company granted five-year non-qualified options to purchase 4,958 shares of the Company's common stock to various employees of, and consultants to, the Company at various exercise prices ranging between $43.20 and $145.80 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, options to purchase 2,600 shares of the Company's common stock granted to various employees of, and consultants to, the Company expired. The expired options had exercise prices ranging between $45 and $145.80 per share. During 1999, 542 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 $60 and $90 per share. Common Stock Offerings and Common Stock Warrant Issuances During 1995 and 1996, the Company borrowed $1,050,000. In connection with the loans, the Company issued 13,000 warrants to purchase common stock at an exercise price of $15. During 1998, 1,333 warrants were exercised at a price of $15 for a total of $20,000. On October 30, 1998, 3,333 warrants to purchase the Company's common stock at an exercise price of $15 expired. During 1996, in connection with a private placement, the Company issued warrants to purchase 17,033 shares of the Company's common stock for a total of $10.00 to the sales agent as a commission. During late 1996, the Company issued notes totaling $1,850,000 to various investors. In connection with the notes, the Company issued 5,625 warrants to purchase shares of the Company's common stock at an exercise price of $15 per share. The Company committed to issue up to 3,083 warrants at an exercise price of $15 per share if the notes were still outstanding as of May 31, 1997. Accordingly, the Company issued 2,083 additional warrants on May 31, 1997 to the investors. The 5,625 warrants issued in 1996 expired during 1999. The remaining 2,083 warrants will expire on May 31, 2000. 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 1,667 shares of the Company's common stock at an exercise price of $51 per share and warrants to purchase 1,667 shares of the Company's common stock at an exercise price of $75 per share. 21 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Common Stock (Continued) During 1997, the Company sold 51,282 shares of the Company's common stock for $39 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 76,923 shares of the Company's common stock for $3,000,000 or $39 per share. The warrant was to expire on December 31, 1997. In October and November 1997, the private investor exercised warrants to acquire 76,923 shares of the Company's common stock. The same party exercised another warrant for 2,083 shares of the Company's common stock with an exercise price of $15 per share. The 2,083 warrant was originally granted in connection with the issuance of a $500,000 promissory note on December 6, 1996. 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 12,883 shares of the Company's common stock at a conversion price of $39 per share. On October 28, 1997, 7,051 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 8,333 shares at a conversion price of $15 per share. The difference of 1,282 shares of the Company's common stock underlying the warrant expired upon the cashless exercise of the warrant. 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 23,279 shares of the Company's common stock at a conversion price of $45 per share. During 1997, the Company issued 1,461 shares of the Company's common stock to a consultant in lieu of $78,000 of accrued fees that had not been paid. The Company issued 5,833 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. In December 1997, the Company exercised an option to acquire the remaining 10% of the outstanding shares of CAP-G. As part of the consideration, the Company issued 6,667 shares valued at $1,000,000. During 1997, the Company sold 7,692 shares of the Company's common stock for $39 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 7,692 shares of the Company's common stock for $300,000 or $39 per share. The private investor exercised a portion of the warrant on December 31, 1997, and received a total of 6,410 shares of the Company's common stock. The remaining 1,282 warrants expired on the same day. On January 23, 1998, the Company, granted 1,500 shares of the Company's common stock to the directors of the Company and granted 3,084 shares of the Company's common stock to various employees of, and consultants to, the Company, of which 500 shares will vest with respect to 167 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 is being amortized over the vesting period of the grants. On April 3, 1998, the Company sold 20,833 shares of the Company's Common stock for $120 per share for at total of $2,500,000 to a private investor. Allen acted as placement agent in connection with the sale of the 20,833 shares. As a result, Allen's exiting warrants to purchase 15,000 shares of the Company's common stock, issued in 1997, became exercisable for an additional 1,667 shares. The warrants to purchase the additional 1,667 shares of the Company's common stock are exercisable through November 25, 2002, at an exercise price of $0.60 per share. 22 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Common Stock (Continued) On June 4, 1998, the Company borrowed $1,000,000 from two related parties, one of which is a director of the Company. In conjunction with the loans, the Company issued warrants to purchase 16,667 shares of the Company's common stock. The warrants are exercisable through November 25, 2002, at an exercise price of $210 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, the Company borrowed $975,000 from Chase. The loan was 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 and issued warrants to purchase 333 shares of the Company's Common stock at an exercise price of $0.60 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 was 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 111,111 shares of the Company's common stock for $90 per share for $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 acted as placement agent in connection with the sale of the 111,111 shares. As a result, Allen's existing warrants to purchase 15,000 shares of the Company's common stock, issued in 1997, became exercisable for an additional 6,667 shares of the Company's common stock. The 6,667 warrants are exercisable through November 25, 2002, at an exercise price of $0.60 per share. Due to the sales price of the 111,111 shares being below a price of $120 per share, the Company was required to issue an additional 6,944 shares to the investor who purchased 20,833 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 3,333 shares of the Company's common stock at an exercise price of $60, 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 3,333 warrants expired. Pursuant to the terms of the employment agreement between the Company and Dr. Jack A. Krug, the former President and Chief Operating Officer of the Company, Dr. Krug received 3,333 shares on January 15, 1999. Effective as of September 30, 1999, the Company issued Dr. Krug an additional 2,361 shares of the Company's common stock pursuant to his resignation from the Company. The Company recorded the grants at their intrinsic value of $246,000. In connection with the Notes issued to Allen in exchange for $5,827,000, Allen's existing warrants to purchase 15,000 shares of the Company's common stock, issued in 1997, became exercisable for an additional 3,333 shares of the Company's common stock. The warrants to purchase the additional 3,333 shares of the Company's common stock are exercisable through November 25, 2002 at an exercise price of $0.60 per share. The Company recorded the fair market value of the warrants (approximately $506,000) as a discount of notes payable, which is amortized as interest expense over the life of the Notes. 23 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Common Stock (Continued) 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 options under the fair value method as defined in SFAS 123 for options granted or modified after December 31, 1994. 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: 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 that 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 December 31, 1999 1998 1997 ----------------------------------------- Net Loss under APB 25 $(5,163,000) $(4,266,000) $(2,603,000) Effect of SFAS 123 (108,000) (190,000) (525,000) ----------------------------------------- Pro forma Net Loss $(5,271,000) $(4,456,000) $(3,128,000) ========================================= Pro forma Basic and Diluted Earnings per Share $ (5.39) $ (4.96) $ (4.52) 24 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 55,700 $66.60 $35.40 ---------------------------------------------------- Unexercised options outstanding - December 31, 1997 55,700 $66.60 Options Granted 4,958 $97.80 $65.40 Options Cancelled (2,600) $92.40 ---------------------------------------------------- Unexercised options outstanding - December 31, 1998 58,058 $67.80 Options Cancelled (542) $83.80 ---------------------------------------------------- Unexercised options outstanding - December 31, 1999 57,516 $67.73 Price range $123.00-$145.80 (Average life of 3.15 years) 1,342 $132.16 Price range $80.40-$90.00 (Average life of 2.70 years) 26,016 $89.82 Price range $43.20-$60.00 (Average life of 2.68 years) 30,158 $45.81 Exercisable options December 31, 1997 3,333 $49.80 December 31, 1998 54,950 $66.60 December 31, 1999 57,309 $67.64 25
CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Common Stock (Continued) The following table summarizes all common stock purchase warrant activity: Number of Exercise Stock Price Warrants Range ----------------------------------- Outstanding, November 30, 1996 49,825 $ 0.0006- $16.80 Granted 107,115 $ 0.60 - $75 Exercised (94,135) $ 15 - $39 Expired (2,564) $ 15 - $39 ----------------------------------- Outstanding, December 31, 1997 60,241 $ 0.0006 - $75 Granted 20,333 $ 0.60 - $210 Exercised (1,333) $ $24 Expired (3,333) $ $15 ----------------------------------- Outstanding, December 31, 1998 75,908 $ 0.0006 - $210 Expired (21,459) $ 15 - $60 =================================== Outstanding, December 31, 1999 54,449 $ 0.0006 - $210 =================================== The following table summarizes the price ranges of all con stock purchase warrants outstanding as of December 31, 1999: Number of Warrants Exercise Price -------------------------------------- 16,667 $210.00 1,667 $75.00 1,667 $51.00 2,082 $15.00 15,333 $ 0.60 17,033 $ 0.0006 --------------------------------------- 54,449 $0.0006 - $210 9. Legal Settlement On October 30, 1998, the Company settled the lawsuit filed against the Company and others by Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. on November 14, 1997, for a total of $200,000 and warrants to purchase 3,333 shares of the Company's common stock at an exercise price of $60, exercisable through January 02, 1999. 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 ($34,000) using the Black-Scholes option pricing model. On January 03, 1999, the 3,333 warrants expired. 26 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, 1999, dividends in arrears relating to the Series A Redeemable Preferred Stock were $500,000. The Company has increased the carrying value of the Series A Redeemable Preferred Stock by $500,000 by accreting $250,000 in 1999 and 1998 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. 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, 1999 was $128.47 per share (rounded), equivalent to .77839 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, 1999, the 50,000 shares of Series A Redeemable Preferred Stock were convertible into 38,920 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 stockholders 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, 1999, the schedule of redemptions of the stated value, plus any unpaid dividends, is as follows: Year Amount -------------------------------------- 2000 - 2001 - 2002 $1,833,333 2003 $1,833,333 2004 and Thereafter $1,833,334 ----------- Total $5,500,000 =========== 27 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. Redeemable Preferred Stock and Related Common Stock Warrants (Continued) 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 Company's stockholders cancelled the Series B and C Redeemable Preferred Stock on April 21, 1999. Allen, a significant stockholder of the Company, acted as placement agent in connection with the Agreement. Allen elected to receive its fees in the form of warrants to purchase 15,000 shares of the Company's common stock that were all originally exercisable through November 25, 2002, at an exercise price of $0.60 per share. The 15,000 warrants were recorded at their fair value of $2,270,000. Out of the 15,000 warrants issued to Allen, 3,333 directly relate to the issuance of 50,000 shares of the Series A Redeemable Preferred Stock. The 3,333 warrants were recorded as issuance costs of $500,000, reducing the $5,000,000 proceeds from Series A Redeemable Preferred Stock. The remaining 11,667 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 being accreted directly to accumulated deficit for the period through the redemption date. The Company increased the carrying value of the Series A Redeemable Preferred Stock by $100,000 in 1998 and 1999, respectively, to reflect the accretion of the issuance costs. In an agreement dated March 31, 1998, the Company agreed to allow Allen to retain, subject to certain performance criteria, the warrants to purchase 11,667 shares of the Company's common stock related to the subscriptions not received under the original terms of the Agreement. Accordingly, the unearned warrants held by Allen were fully restricted from exercise unless Allen assisted the Company in raising $17,500,000 in additional capital or alternative financing on acceptable terms to the Company on or before November 25, 1999. For each $1,500 of additional capital raised, a warrant to purchase one share of common stock is deemed earned by Allen. During 1998, Allen assisted the Company in raising an additional $12,500,000 in equity capital. As a result, 8,334 of the 11,667 warrants became unrestricted and $1,264,000 was transferred from stock subscription receivable to additional paid-in-capital. During 1999, Allen contributed an additional $5,827,000 in exchange for the Company's Notes, earning the final 3,333 in restricted warrants. The Company recognized the remaining stock subscription receivable of $506,000 as discount of long-term notes payable as of December 31, 1999, which is being amortized over the term of the Notes. 11. Income Taxes The following is a summary of the provision for income taxes:
Year Ended December 31, 1999 1998 1997 ---------------------------------------------------- Income tax benefit computed at federal statutory rate $ (1,807,000) $ (1,493,000) $ (910,000) Other 442,000 121,000 (60,000) Change in asset valuation allowance 1,365,000 1,372,000 970,000 ---------------------------------------------------- Income taxes $ - $ - $ - ====================================================
28 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Income Taxes (Continued) The components of the Company's deferred tax assets and liabilities are as follows:
Year Ended December 31, 1999 1998 1997 ----------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 8,172,000 $ 6,807,000 $ 5,812,000 Valuation allowance (8,172,000) (6,807,000) (5,812,000) ----------------------------------------------------- Deferred tax assets $ - $ - $ - =====================================================
As of December 31, 1999, the Company has estimated tax loss carryforwards of $22,710,000, of which $16,106,000 are domestic losses for federal income tax purposes and $6,604,000 are foreign losses related to the Company's investment in KKM. These carryforwards will expire at various times between 2000 and 2019. The Company also has unused statutory depletion carryforwards, which have an unlimited duration, of approximately $639,000. The differences between the income tax benefit calculation of the statutory and effective rate are due to miscellaneous permanent book/tax differences, including stock compensation and disallowance of meals and entertainment expenses. The Company has cumulative book losses of $24,983,000. Cumulative book/tax differences of approximately $2,224,000 primarily relate to accrued dividends and discount accretion of the Company's Series A Redeemable Preferred Stock booked directly to retained earnings, stock based compensation, and expired tax net operating losses from prior periods. The Company did not record any deferred tax assets or income tax benefits for net operating losses as of December 31, 1999. The Company's only significant asset is its 50% interest in KKM, which has generated recurring net operating losses since inception. Therefore, the Company has taken a 100% valuation allowance against any resulting deferred tax asset due to such carryforwards. The Company has effected or proposed significant equity transactions for the year ending December 31, 2000, including the issuance of a common stock warrant to Shell Capital, conversion of existing Notes into the Company's common stock, and consummation of the Rights Offering. These transactions may significantly restrict the use of net operating loss carryforwards by the Company in the future. 12. Other Related Party Transactions During 1997, the Company paid consulting fees of approximately $180,000 to McGee-Dilling, International ("MDI") for assistance in raising capital to meet the Company's financial obligations for the Karakuduk Field. Two of the Company's directors on the Board during 1997 were also stockholders of MDI. The Company terminated the consulting agreement with MDI in the first quarter of 1997. In 1998, the Company borrowed and repaid two loans, totaling $95,000, from Howard Karren, the former Chairman and Chief Executive Officer of the Company. 29 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. Other Related Party Transactions (Continued) Effective March 1, 2000, the Company sold overriding royalty interests in certain domestic oil and gas properties for $75,000 to a former Chairman and Chief Executive Officer of the Company. In February 1997, the Company had assigned the overriding royalty interests to the same individual as part of a severance agreement. 13. Long-Term 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 services and, to be used to exercise certain warrants granted in connection with the Company's 1989 Stock Warrant Plan. These bonuses were to become payable on the earlier of (i) completion of a sale or farmout by the Company of all or a portion of its interest in the Karakuduk Field, or (ii) the date when the Company makes a public disclosure of a sale or farmout of the Karakuduk Field. Due to the recent Loan entered into with Shell Capital for the development of the Karakuduk Field, the Company considers a possible sale or farmout of the Company's interests in the Karakuduk Field to be remote. Therefore, the Company reversed the $210,000 accrual during the fourth quarter of 1999. 14. Operating Leases During 1999, the Company relocated its offices within the Houston area. The Company assigned and was fully released from its existing obligations under the non-cancelable operating lease in effect as of December 31, 1998. The Company entered into a short-term sublease extending from September 1, 1999 through March 31, 2000. The Company prepaid all lease payments under the sublease, and had no outstanding rental obligations as of December 31, 1999. The Company's rental expense for 1999, 1998, and 1997, was approximately $93,000, $87,000, and $37,000, respectively. 15. Commitments and Contingencies Under the terms of License MG 249, as amended, (the "Petroleum License"), KKM was committed to minimum expenditures of $30,000,000 for the year ended December 31, 1999. The Petroleum License also establishes a minimum work program requiring KKM to drill eight new wells during 1999. In August 1999, the Company received a letter from the State Investment Agency of the Republic of Kazakhstan, extending the period for completion of the minimum work program and expenditure commitments to June 30, 2000. The letter is not a formal amendment of KKM's Petroleum License. As of December 31, 1999, KKM was drilling the second well under the work commitment and had spent approximately $10,400,000 under the expenditure commitment. 16. 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 7,708 shares of the Company's common stock at $15 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. 30 CHAPARRAL RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. Extraordinary Losses (Continued) If the notes were still outstanding on May 31, 1997, the Company agreed to issue 3,083 warrants as additional consideration to the holders. Furthermore, if the notes were still outstanding on November 30, 1997, the Company agreed to issue 6,167 warrants as additional consideration to the holders. Under these provisions, the Company issued 2,083 of the 3,083 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 ($900,000) and Mr. McMillian, the current Co-Chairman and Chief Executive Officer and a director of the Company at the time of the loan ($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 16,667 shares of the Company's common stock, at an exercise price of $210 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. 17. KKM 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 $2,040,000, $1,980,000, and $1,020,000, that have been charged by the Company to KKM for the years ending December 31, 1999, 1998, and 1997, 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 $1,708,246, $1,043,565, and $389,624. 31 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 disclosure requirements promulgated by the Securities and Exchange Commission and SFAS No. 69, Disclosures About Oil and Gas Producing Activities. The Company entered into an agreement effective January 1, 1997 to sell its remaining domestic oil and gas properties. Accordingly, no disclosure for domestic proven reserves has been made for any year presented as the Company has not acquired any additional domestic oil and gas properties since the January 1, 1997 disposition. Due to the lack of financing necessary to develop the Karakuduk Field, no proven reserves were attributed to the Karakuduk Fields as of December 31, 1998 and 1997. As discussed in Note 5, KKM recorded approximately 67.58 million barrels of proven oil reserves attributable to the Karakuduk Field on November 1, 1999. The following estimates of reserve quantities and related standardized measure of discounted net cash flows are estimates only, and do not purport to reflect realizable values or fair market values of the Company's proportional interest in KKM's oil 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. As discussed in Note 1, KKM sold approximately 325,000 barrels of crude oil in the local Kazakhstan and export markets during 1999. The prices received on these sales were substantially lower than world oil prices prevailing at the time. Year-end prices used in the following standardized measure of discounted net cash flows reflect the assumption of 100% of KKM's future production being sold at world prices as outlined in the Crude Oil Sales Agreement discussed in Note 2. In the event KKM was required to sell its crude oil production in the local Kazakhstan market, the Company would more than likely receive a net oil price that would be substantially lower than world market prices prevailing at the time. As discussed in Note 17, the Company has attached the audited financial statements of KKM. Those financial statements should be reviewed in conjunction with the following disclosures with respect to the Company's proportionate interest in KKM's oil and gas producing activities. 32 SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES-UNAUDITED Proven Oil and Gas Reserve Quantities (All within the Republic of Kazakhstan) Oil Gas Reserves Reserves (bbls.) (Mcf.) ------------------------ Company's proportional interest in KKM's proven developed and undeveloped reserves Balance December 31, 1999 33,788,822 - ======================== Capitalized Costs Relating to Oil and Gas Producing Activities (All within the Republic of Kazakhstan)
Year Ended December 31, 1999 1998 1997 -------------------------------------------------------- Unproven oil and gas properties $ - $ 35,023,000 $21,725,000 Proven oil and gas properties - - 43,002,000 --------------------------------------------------------- 35,023,000 21,725,000 43,002,000 Accumulated depletion - - (9,000) Equity Losses (4,842,000) (2,762,000) (1,803,000) ------------------------------------------------------- (4,851,000) (2,762,000) (1,803,000) Net capitalized cost $ 38,151,000 $ 32,261,000 $ 19,922,000 ======================================================== Company's share of equity method Investees' net capitalized cost $ 12,165,000 $ 9,134,000 $ 3,988,000 ========================================================
33 SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES-UNAUDITED Cost Incurred in Oil and Gas Property Acquisition, Exploration, and Development Activities (All within the Republic of Kazakhstan)
Year Ended December 31, 1999 1998 1997 ------------------------------------------------------ Acquisition costs of CAP-G $ - $ - $ 1,332,000 Net advances to KKM 7,980,000 13,560,000 5,797,000 Other capitalizable costs - 523,000 391,000 Company's share of equity method Investees costs of property acquisition, exploration, and development $ 3,738,000 $ 3,344,000 $ 2,034,000 Standardized Measure of Discounted Future Net Cash Flows The following are the principal sources of changes in the standardized measure of discounted future net cash flows: Year Ended December 31, 1999 1998 1997 ------------------------------------------------------- Company's share of equity method investees' standardized measure of discounted future cash flows $ 177,680,000 $ -- $ -- =======================================================
34 p Ernst & Young Kazakhstan p 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 Stockholders Closed Type JSC Karakudukmunay We have audited the accompanying balance sheets of Closed Type JSC Karakudukmunay ("the Company") as of December 31, 1999 and 1998, and the related statements of operations, cash flows and stockholders' deficit for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Closed Type JSC Karakudukmunay at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 3, the Company has incurred recurring operating losses and has a working capital deficiency as of December 31, 1999. In addition, there are uncertainties relating to the Company's ability to meet its commitments under its license agreement and ability to meet all expenditure/cash flow requirements through 2000. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans and other factors in regard to these matters are also described in Note 3. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties. ERNST & YOUNG KAZAKHSTAN March 15, 2000 Almaty 35
Closed Type JSC Karakudukmunay Balance Sheets as of December 31, (Amounts in US Dollars) 1999 1998 ------------ ------------ ASSETS Cash $ 86,084 $ 52,958 Prepaid and other receivables (Note 4) 68,783 125,231 Crude oil inventory (Note 5) 497,702 551,342 ------------ ------------ Total current assets 652,569 729,531 Long term VAT receivable (Note 6) 670,914 863,077 Materials and supplies (Note 7) 1,136,418 1,494,572 Property, plant and equipment, net (Note 8) 4,318,290 4,209,396 Oil and gas properties (Note 9) 18,874,551 12,563,120 ------------ ------------ TOTAL ASSETS $ 25,652,742 $ 19,859,696 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Accounts payable $ 3,138,761 $ 2,247,954 Accrued liabilities (Note 11) 872,291 779,596 Current portion of long-term debt (Note 12) 577,778 3,177,780 ------------ ------------ Current liabilities 4,588,830 6,205,330 Long-term debt (Note 12) 32,871,339 20,957,855 ------------ ------------ TOTAL LIABILITIES 37,460,169 27,163,185 ------------ ------------ STOCKHOLDERS' DEFICIT Charter capital (Note 14) 200,000 200,000 Accumulated deficit (12,007,427) (7,503,489) ------------ ------------ (11,807,427) (7,303,489) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 25,652,742 $ 19,859,696 ============ ============ See accompanying notes which form an integral part of these financial statements. 36 Closed Type JSC Karakudukmunay Statements of Operations for the years ended December 31, (Amounts in US Dollars) 1999 1998 1997 ----------- ----------- ----------- Management service fee (Note 12) $ 594,079 $ 845,840 $ 495,000 General and administrative expenses 1,618,526 1,297,513 836,868 Interest expense (Note 12) 1,100,570 508,539 155,624 Depreciation expense (Note 8) 744,064 440,901 147,660 Miscellaneous taxes 230,023 135,441 30,214 Write-down of crude oil inventory (Note 5) -- 192,481 -- Exchange loss/(gain) 216,676 67,077 (387) ----------- ----------- ----------- Net loss $ 4,503,938 $ 3,487,792 $ 1,664,979 =========== =========== =========== See accompanying notes which form an integral part of these financial statements. 37 Closed Type JSC Karakudukmunay Statements of Cash Flows for the years ended December 31, (Amounts in US Dollars) 1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities: Net loss $ (4,503,938) $ (3,487,792) $ (1,664,979) Adjustments to reconcile netloss to net cash Provided (used) by operating activities: Write-down of crude oil inventory -- 192,481 -- Depreciation and depletion 890,575 440,901 147,660 Changes in working capital: (Increase)/decrease in prepaid and other receivables 56,448 147,224 (255,979) (Increase)/decrease in crude oil inventory 53,640 (743,823) -- (Increase)/decrease in VAT receivable 192,163 (753,978) (51,803) (Increase)/decrease in materials and supplies inventory 358,154 (982,714) (483,437) Increase in accounts payable and accrued liabilities 983,502 259,972 2,022,350 Decrease in long term payable for land usage -- -- (34,000) Increase in accrued interest payable to partner 1,708,245 1,043,565 389,624 ------------ ------------ ------------ Net cash used by operating activities (261,211) (3,884,164) 69,436 Cash flows from investing activities Purchase of property, plant and equipment (852,958) (3,061,240) (1,284,782) Investments in oil and gas properties (7,476,647) (6,688,595) (4,068,937) Net proceeds from sales of non-commercial crude oil 1,018,705 -- -- ------------ ------------ ------------ Net cash used in investing activities (7,310,900) (9,749,835) (5,353,719) Cash flows from financing activities Increase in loans from banks -- 800,000 -- Principal payments on banks loans (177,777) (44,445) -- Increase in loan payable to partner due to cash contribution, 7,783,014 12,517,018 5,661,778 for management services and other expenditures ------------ ------------ ------------ Net cash provided by financing activities 7,605,237 13,272,573 5,661,778 Net increase/(decrease) in cash 33,126 (361,426) 377,495 Cash at beginning of year 52,958 414,384 36,889 ------------ ------------ ------------ Cash at end of year $ 86,084 $ 52,958 $ 414,384 ============ ============ ============ Supplemental cash flow disclosure Interest paid $ 88,949 $ 30,516 $ -- See accompanying notes which form an integral part of these financial statements. 38
Closed Type JSC Karakudukmunay Statement of Stockholders' Deficit (Amounts in US Dollars) Authorized Accumulated Charter Capital Deficit Total -------------------------------------------- As at December 31,1996 $ 200,000 $ (2,350,718) $ (2,150,718) Net loss for the year 1997 -- (1,664,979) (1,664,979) ------------ ------------ ------------ As at December 31,1997 200,000 (4,015,697) (3,815,697) Net loss for the year 1998 -- (3,487,792) (3,487,792) ------------ ------------ ------------ As at December 31,1998 200,000 (7,503,489) (7,303,489) Net loss for the year 1999 -- (4,503,938) (4,503,938) ============ ============ ============ As at December 31,1999 $ 200,000 $(12,007,427) $(11,807,427) ============ ============ ============ See accompanying notes which form an integral part of these financial statements. 39 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 1. Organization and Background Information Closed Type JSC Karakudukmunay. (the "Company"), a Kazakhstan Joint Stock Company of Closed Type, was formed to engage in the exploration, development, and production of oil and gas properties in the Republic of Kazakhstan. The Company's only significant investment is in the Karakuduk Field, an onshore oil field in the Mangistau Oblast region of the Republic of Kazakhstan. On August 30, 1995, the Company entered into the Agreement with the Ministry of Energy and Natural Resources for Exploration, Development and Production of Oil in the Karakuduk Oil Field in the Mangistau Oblast of the Republic of Kazakhstan (the "Agreement"). The Company's rights and obligations regarding the exploration, development, and production of underlying hydrocarbons in the Karakuduk Field are determined by the Agreement. The Company's rights to the Karakuduk Field 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. 2. Basis of Presentation The Company maintains its accounting records and prepares its financial statements in US dollars in accordance with the terms of the Agreement. The accompanying financial statements were prepared in accordance with U.S. generally accepted accounting principles (US GAAP). Certain reclassifications have been made in the 1998 and 1997 financial statements to conform to the 1999 presentation. 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 at exchange rates prevailing as of the balance sheet date (138.20 and 83.80 Kazakh Tenge per US dollar as of December 31, 1999 and 1998, respectively ). 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. 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 US dollars. 40 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 2. Basis of Presentation (continued) On April 5, 1999, the Government discontinued 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, but was relatively stable for the remainder of 1999. The devaluation decreased the US dollar realizable value of any Tenge denominated monetary assets held by the Company, and decreased the US dollar obligation of any Tenge denominated monetary liabilities held by the Company. As of December 31, 1999, $201,077 of net monetary assets were denominated in Tenge. Interest Capitalization - ----------------------- The Company capitalized interest on significant construction projects for which expenditures are being made. Assets qualifying for interest capitalization include 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. On November 1, 1999, the Company ceased capitalization of interest when it was determined that the Karakuduk Field was commercially viable and oil and gas properties became subject to depletion. The Company capitalized interest of $696,625, $565,542, and $234,000 in 1999, 1998, and 1997, respectively. All other interest costs are expensed as incurred. Oil and Gas Properties 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 unproven properties are excluded from the amortization computation until it is determined if proven reserves can be attributed to the properties. These unevaluated properties are assessed periodically for possible impairment and the amount impaired, if any, is added to the amortization base. Costs of exploratory dry holes and geological and geophysical costs not directly associated with specific unevaluated properties are added to the amortization base as incurred. Property, Plant and Equipment - ----------------------------- Property, plant and equipment are valued at historical cost and are depreciated on a straight line basis over the estimated useful lives 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 41 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 2. Basis of Presentation (continued) 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 production produced from proven reserves, 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. During 1999, the Company sold approximately 324,650 barrels of crude oil in the local Kazakhstan and export markets and realized approximately $1,018,705, net of related production and transportation costs. These sales resulted from placing accumulations of initial crude oil production into the pipeline. The proceeds from these placements were not considered revenues, as volumes delivered were not commercially viable or attributable to proven reserves. The Company has accounted for these proceeds as cost recovery by reducing its net carrying value of oil and gas properties by the amount of net proceeds received. 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, as amended by SFAS No. 137, is effective for years beginning after June 15, 2000. As of December 31, 1999, the Company has not adopted SFAS 133. The Company is evaluating SFAS 133 and intends to adopt the statement no later than January 1, 2001. The impact of SFAS 133 on the Company's financial position and results of operations is not expected to be material. 42 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 2. Basis of Presentation (continued) 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. 3. 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 satisfaction of liabilities in the normal course of business. The Company has incurred recurring operating losses and has a working capital deficiency as of December 31, 1999. In addition, there are uncertainties relating to the Company's ability to meet its commitments under the terms of License MG 249, as amended, (the "License) and its ability to meet all expenditure and cash flow requirements through fiscal year 2000. As more fully described in Note 17, the Company's agreements with the government of the Republic of Kazakhstan require the Company to meet certain expenditure and work commitments on or before June 30, 2000. Should the Company not meet its capital requirements by June 30, 2000, the Company's rights under the Agreement may be terminated. 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 these uncertainties. Management's plans to address these uncertainties include: o Shell Capital Loan. As discussed in Note 12, on November 1, 1999, the parent company of Central Asian Petroleum (Guernsey) Limited ("CAP-G"), Chaparral Resources, Inc. ("Chaparral"), entered into a loan agreement (the "Loan") with Shell Capital Limited ("Shell Capital") to provide up to $24,000,000 in financing for the development of the Karakuduk Field. The conditions required to obtain funding under the Loan were consummated in February 2000, providing Chaparral, and therefore CAP-G, substantial financial resources to continue funding the development of the Karakuduk Field. o Development of the Company's Proven Reserves. The Company has approximately 67.58 million barrels of estimated proven oil reserves, net of government royalty. As of December 31, 1999, KKM has produced 435,840 barrels of crude oil, of which 324,650 barrels were sold in 1999 for approximately $1,019,000, net of transportation and production costs. As of December 31, 1999, KKM had approximately 111,000 barrels of crude oil in inventory and was producing approximately 1,100 barrels of oil per day. 43 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 3. Going Concern (Continued) o Crude Oil Sales Agreement. On November 1, 1999, the Company entered into the Crude Oil Sale and Purchase Agreement (the "Crude Oil Sales Agreement") with Shell Trading International Limited ("STASCO"), an affiliate of Shell Capital, for the purchase of 100% of the oil production from the Karakuduk Field on the export market for world market oil prices. The Company expects to obtain a substantially higher return from oil sales under the Crude Oil Sales Agreement than would otherwise be obtainable from oil sales on Kazakhstan's local market. The Crude Oil Sales Agreement became effective upon the consummation of the Loan. The Company expects to begin placing oil under the agreement in April 2000. Management's plans for addressing the above uncertainties are partially based upon forward looking events, which have yet to occur, including the successful development, production, and sales of crude oil from the Karakuduk Field, as to which there is no assurance. Expected funding requirements necessary for development of the Karakuduk Field through December 31, 2000 are partially based upon future cash flows from the sale of the Company's crude oil production. 4. Prepaid and Other Receivables Prepayments and Other Receivables primarily consisted of advances to the Custom's Post for payment of VAT and customs duties on future imported materials and supplies. The breakdown of Prepaid and Other Receivables is as follows: December 31, December 31, 1999 1998 ---------- --------- Travel advances to employees $ 73 $ - Custom duties and prepaid taxes 54,952 120,631 Advance payment for oil and gas assets 13,758 4,600 ========== ========== Total $ 68,783 $ 125,231 ========== ========== 5. Crude Oil Inventory Crude oil inventory represents all production costs associated with lifting and transporting crude oil from the Karakuduk Field to the KazTransOil pipeline ("KTO Pipeline"), including depreciation, depletion, and amortization associated with the production. Crude oil placed into the KTO Pipeline is held as inventory on behalf of the Company until formally nominated for sale. During 1999, the Company produced 352,012 barrels of crude oil and had approximately 111,189 barrels in inventory as of December 31, 1999. As discussed in Note 2, crude oil production of 324,650 barrels was sold on local Kazakhstan and export markets in 1999. The inventory balance as of December 31, 1998 is net of an impairment of $192,481 to reflect the net realizable value of the inventory at that date. 44 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 6. Long term 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, 1998 to December 31, 1999, the Company's VAT receivable decreased from $863,077 to $670,914, respectively, due to the Company's offset of VAT payable on sales and due to the devaluation of the Tenge. During 1999, 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 as are the actual timings of such refunds and offsets. The Company expects 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. 7. Materials and Supplies Materials and Supplies represent plant and equipment for development activities, tangible drilling costs (drill bits, tubing, casing, wellheads, etc.) required for development drilling operations, spare parts, diesel fuel, and various materials for use in oil field operations. December 31, December 31, 1999 1998 ---------- ----------- Inventory in-house $1,136,418 $1,084,359 Inventory in-transit - 410,213 ---------- ---------- Total $1,136,418 $1,494,572 ========== ========== 45 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 8. Property, Plant and Equipment Upon full amortization of tangible assets, the right of ownership of the tangible assets shall be transferred to the Republic of Kazakhstan 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, 1999 1998 ----------- ------------ Office buildings and apartments $ 236,701 $ 214,468 Office equipment and furniture 480,362 390,671 Vehicles 1,708,420 1,663,364 Field buildings 2,874,753 2,248,920 Field equipment and furniture 393,969 323,824 ----------- ----------- Total Cost 5,694,205 4,841,247 Accumulated depreciation (1,375,915) (631,851) =========== =========== Net book value $ 4,318,290 $ 4,209,396 =========== =========== 9. Oil and Gas Properties The Company has capitalized all direct costs associated with acquisition, exploration, and development of the Karakuduk Field. These costs include geological and geophysical expenditures, license acquisition costs, tangible and intangible drilling costs, production facilities, pipelines and related equipment, access roads, gathering systems, management fees related to the salary costs of individuals directly associated with exploration and development activities, and related interest costs prior to commercial production. Overhead and general and administrative costs have been expensed as incurred. As of November 1, 1999, the Company's unproven Oil and Gas Properties have been reclassified as proven properties and transferred into the amortizable base. The reclassification directly relates to the commercial viability of the Company based upon the Loan entered into with Shell Capital on that same date. The Loan will provide the Company, through its investor CAP-G, with the capital necessary to develop the proven reserves underlying the Karakuduk Field. The Company calculates depreciation, depletion, and amortization of oil and gas properties using the units-of-production method. The provision is computed by multiplying the unamortized costs of proven oil and gas properties by a production rate calculated by dividing the physical units of oil and gas produced during the relevant period by the total estimated proven reserves. The unamortized costs of proven oil and gas properties includes all capitalized costs, less accumulated amortization, estimated future costs to develop proven reserves, and estimated dismantlement and abandonment costs. Total 1999 amortization of $146,511 was calculated using production from November 1, 1999 through the balance sheet date, and represents $2.47 per barrel produced. The Company has accounted for 1999 amortization as a component of crude oil inventory. 46 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 9. Oil and Gas Properties (continued) The composition of Oil and Gas Properties is as follow: December 31, December 31, 1999 1998 ------------ ------------- Acquisition costs $ 507,870 $ 507,870 Exploration and appraisal costs 11,255,708 11,255,708 Development cost 6,780,022 -- Capitalized interest 1,496,167 799,542 ------------ ------------ Total Cost 20,039,767 12,563,120 Accumulated depletion (146,511) -- Net proceeds from sales of non-commercial crude oil (1,018,705) -- ============ ============ Net book value $ 18,874,551 $ 12,563,120 ============ ============ Management believes that over the life of the project, future cash flows support the carrying amount of the assets disclosed above, therefore no impairment provision has been made. 10. Bonuses 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. These amounts will be accrued as production accumulates. 11. Accrued Liabilities December 31, December 31, 1999 1998 --------- --------- Accrued management service fee 573,750 573,750 Accrued audit fees 75,000 75,000 Accrued interest payable 3,439 3,613 Miscellaneous taxes payable 220,102 127,233 --------- --------- Total accrued liabilities $ 872,291 $ 779,596 ========= ========= 47 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 12. Long-term Debt December 31, December 31, 1999 1998 ----------- ----------- Loans payable to banks $ 577,778 $ 755,555 Loans payable to partner 32,871,339 23,380,080 ----------- ----------- 33,449,117 24,135,635 Less current portion (577,778) (3,177,780) ----------- ----------- Total long-term debt $32,871,339 $20,957,855 =========== =========== Loans Payable to Banks - ---------------------- 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, 1999, the Company's outstanding principal balance on the notes totaled $577,778. The notes were fully repaid on January 21, 2000. Loans Payable to Partner - ------------------------ The Company's stockholder, CAP-G bears sole financial responsibility for providing all funding for the Company, which is not generated by the Company's operations or borrowed from third party sources. The various forms of funding from CAP-G 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 revenues after deduction of royalties due to the Republic of Kazakhstan. CAP-G, at its own discretion, may waive receipt of quarterly repayments to maintain working capital within the Company. The loan is made up as follows: December 31, December 31, 1999 1998 ------------ ----------- Cash funding $ 20,671,850 $16,897,350 Management services fee 6,315,000 4,275,000 Other expenditures 2,603,107 634,594 Accrued interest payable 3,281,382 1,573,136 ------------ ----------- Total interest and loan payable to partner $ 32,871,339 $23,380,080 ============ =========== 48 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 12. Long-Term Debt (continued) On November 1, 1999, CAP-G's parent company, Chaparral, entered into the $24,000,000 Loan with Shell Capital. CAP-G and the Company signed the Loan as "co-obligors," assuming certain obligations and commitments to Shell Capital and to Chaparral, as the borrower. The proceeds from the Loan, net of certain financing and other related costs, are required to be used for the funding of CAP-G's financial commitment to the Company to develop the Karakuduk Field. The Company will continue to borrow funds from CAP-G in accordance with the terms of the Agreement. As a condition of the Loan, on November 1, 1999, the Company entered into the Crude Oil Sales Agreement with STASCO for the purchase of 100% of the Company's oil production from the Karakuduk Field on the export market. The Loan requires the Company to sell all of its net oil production to STASCO, unless otherwise agreed by STASCO and Shell Capital. As a co-obligor of the Loan, the Company has made certain other commitments to Shell Capital, including, but not limited to, the following pledges, covenants, and other restrictions: (i) A pledge of the Company's receivables, including proceeds from the sale of crude oil, to Shell Capital in the event of default of the Loan; (ii) A pledge of the Company's right to insurance proceeds to Shell Capital in the event of default of the Loan; (iii) Agreement to recognize and register CAP-G's pledge of its 50% ownership in the Company to Shell Capital, which may be transferrable in the event of a default of the Loan. (iv) A representation to reach project completion ("Project Completion") on or before September 30, 2001. Project Completion occurs when: o an independent engineer certifies that the proven developed reserves of the Karakuduk Field are at least 30 million barrels; o average daily oil production from the Karakuduk Field is at least 13,000 barrels for 45 consecutive days; o average daily water injection at the Karakuduk Field is at least 15,000 barrels for 45 consecutive days; and o a gas lift system is successfully implemented for one well over a 24-hour period. (v) Enter into a technical service agreement directly with Shell Capital, granting Shell Capital, at their own discretion, the right to bring in technical consultants to work on the development of the Karakuduk Field on a cost only basis. Management services are provided by a subsidiary of Chaparral. Services were provided in 1999 for a fixed fee of $170,000 per month. Management services were provided to the Company in the amount of $2,040,000 and $1,980,000 for the years ended December 31, 1999 and 1998, respectively. As of December 31, 1999, the Company's outstanding principal and accrued interest balance on Loans Payable to Partners totaled $32,871,339, all of which is classified as long-term due to the expected working capital needs of the Company. On February 14, 2000, Chaparral, CAP-G, and the Company completed all terms and conditions required for Chaparral to draw from the Loan. 49 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 13. Taxes The Company is subject to corporate income tax at the prevailing statutory rate of 30%. The following is a summary of the provision for income taxes: Year ended December 31 1999 1998 1997 ----------- ----------- ----------- Income taxes (benefit) computed at statutory rate $(1,351,181) $(1,046,338) $ (499,494) Non-deductible expenses 846,831 347,012 -- Change in asset valuation allowance 504,350 699,326 499,494 ----------- ----------- ----------- Income taxes $ -- $ -- $ -- =========== =========== =========== The components of the Company's deferred tax assets and liabilities are as follows: Year ended December 31 1999 1998 1997 ----------- ----------- ----------- Deferred tax assets: Fixed assets $ 733,514 $ -- $ -- Net operating loss carryforwards 1,653,884 1,904,035 1,204,709 Valuation allowance (2,387,398) (1,904,035) (1,204,709) ----------- ----------- ----------- Deferred tax assets $ -- $ -- $ -- =========== =========== =========== 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 will not be considered likely until the Company generates significant income. The Agreement specifies profits taxes and other taxes applicable to the Company, which are subject to the laws of the Republic of Kazakhstan. The Company began extracting hydrocarbons from the Karakuduk field in 1998. At December 31, 1999, the Company has tax loss carryforwards of approximately $ 5,512,947 available to offset against future taxable income, in accordance with the terms of the Agreement and legislation existing as of the date the Agreement was signed. The tax loss carryforwards are Tenge denominated. From December 31, 1998 to December 31, 1999, the Company's tax loss carryforwards decreased from $ 6,346,783 to $ 5,512,947, respectively, primarily due to the devaluation of the Tenge. There is a five-year carryforward of tax losses. The Company has used the best estimates available to determine the Company's deferred tax assets before consideration of the valuation allowance. Refer to Note 15 regarding the uncertainties of taxation in the Republic of Kazakhstan. 50 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 14. Charter Capital The total Charter Fund contribution specified in the new Founders Agreement of KKM is $200,000. Each of the stockholders' portion of the Charter Fund and their respective participating interest in the Company is:
December 31, December 31, 1999 1998 ------------------------------------------------------- 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 % ======== ========
* See Note 12 relating to pledge of the interest of CAP-G in the Company. KazakhOil JSC ("KazakhOil") is the national petroleum company of the Republic of Kazakhstan. Under the terms of the Loan, the Company may not declare a dividend prior to Project Completion as defined in Note 12. Any dividend distributions following Project Completion remain subject to certain other conditions stated in the Loan. 15. 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 in accordance with U.S. generally accepted accounting principles and calculates taxable income or loss using the existing Kazakh tax legislation in effect on August 30, 1995, the date the Agreement was signed. The Company considers these accounting methods correct 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 the prevailing tax law. There is currently uncertainty as to the extent of tax losses available to the Company. The potential effect of the uncertainty is not quantifiable. 51 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 16. 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. Domestic markets in the Republic of Kazakhstan currently do not permit world market prices to be obtained. On November 1, 1999, the Company entered into the Crude Oil Sales Agreement with STASCO for the purchase of 100% of the oil production, less royalty in kind, from the Karakuduk Field on the export market. It is a condition of the Loan that all produced oil must be sold to STASCO through the six nominated outlets in the contract. Prior agreement of both parties is required if sales are to be made to any other destination or buyer. The Company retains full responsibility for obtaining export quotas and finalizing access routes through the KazTransOil pipeline and onward through the Russian pipeline system to various agreed points of delivery, all of which are outside of the Republic of Kazakhstan. The Company has a right to export, and receive export quota for, 100% of the production from the Karakuduk Field. The Government of the Republic of Kazakhstan has recently stated they may require all oil and gas producers within Kazakhstan to supply some portion of year 2000 production to local Kazakh refineries to meet domestic energy needs. The Company is currently awaiting confirmation of its export quota for the year 2000 from the Ministry of Energy, Trade and Industry of the Republic of Kazakhstan. 17. License Commitments and Other Capital Commitments License Commitments - ------------------- Under the License, the Company was committed to minimum expenditures of $30,000,000 for the year ended 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. In 1999 the Company received a letter from the State Investment Committee (the "SIA Letter") extending the period for completion of the minimum work program and expenditure commitment to June 30, 2000. The SIA Letter is not a formal amendment of the License. As of December 31, 1999, the Company has spent $10,400,000 towards fulfilling its financial obligations under the License. If the Company fails to satisfy the work or capital commitment under the License or the SIA Letter, the licensing authority could cancel or suspend the License. If the License is cancelled, the Company will be unable to develop and sell oil produced from the Karakuduk Field. The Company can request a deferral of the License commitments, but there is no guarantee that the license committee will grant a deferral. 52 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 17. License Commitments and Other Capital Commitments (continued) Other Capital Commitments - ------------------------- The Company cancelled its contract with Challenger Oil Services, PLC ("Challenger") in April 1999. The Company entered into a second drilling contract with Kazakhoil Drilling Services Company, an affiliate of KazakhOil , during the fourth quarter of 1999. Under the terms of the contract, the operating rate (that includes both rig and crews) is $12,100 per day with a two year contractual commitment. The Company prepaid $200,000 in drilling costs and paid a $20,000 rig mobilization fee in December 1999. The Company began drilling well #102 in late December 1999. The Company has a contract in place with Geotex Geophysical Services ("Geotex"), to acquire and process approximately 100 square kilometers of 3D seismic over the Karakuduk field. The value of the contract and associated interpretation is approximately $2,000,000. While some preliminary costs of approximately $65,000 were paid to Geotex in 1999, the reminder will be payable in the year 2000. The Company has no other significant commitments other than those incurred during the normal performance of the work program to develop the Karakuduk field. 18. Related Party Transactions In March 1999, the Company sold approximately 98,000 barrels of crude oil to KazakhOil for approximately $850,000, net of transportation costs. Net proceeds include a $39,000 marketing fee paid directly to KazakhOil. The Company entered into a marketing services agreement with KazakhOil on January 31, 2000, whereby KazakhOil will assist the Company in expediting export oil sales under the Crude Oil Sales Agreement with STASCO. Other related party transactions are disclosed on the face of the balance sheet. Stockholders and their respective holdings in the Company are disclosed in Note 14 and CAP-G related party transactions are referenced in Note 12 to the financial statements. 19. Subsequent Events During 1999, KKM terminated the contract for drilling services with Challenger. The termination led to all parties attending a mediation to resolve any outstanding issues and financial matters relating to the work done prior to the termination. In February 2000, a full and final settlement was reached and approved by all parties in the presence of an independent mediator and the legal representation of all parties. A sum of $1,336,000 was agreed as the amount payable by the Company to fully and finally settle all outstanding liabilities under the contract with Challenger. The Company accrued an amount of $1,400,000 in 1999 with respect to the drilling services performed under the contract prior to termination. The settlement amount will be paid in the first quarter 2000. The Company has no other obligations with regard to the Challenger contract. 53 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) 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. Due to the previous uncertainties surrounding the development of the Karakuduk Field no proven reserves were attributed to the Karakuduk Field as of December 31, 1998 and 1997. KKM recorded approximately 67.58 million barrels of proven oil reserves attributable to the Karakuduk Field on November 1, 1999. The disclosures below reflect the Company's proven reserves as of December 31, 1999. The following estimates of reserve quantities and related standardized measure of discounted net cash flows 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. As discussed on Note 2, the Company sold 324,650 barrels of crude oil an the local Kazakhstan and export market during 1999. Prices received on these sales were substantially lower than world market prices prevailing at that time. Year-end prices used for the standardized measure of discounted net cash flows reflect the assumption of 100% of the Company's production being sold at world prices as outlined in the Company's Crude Oil Sales Agreement with STASCO. In the event the Company was required to sell a portion of its production in the local Kazakhstan market, the Company would more than likely receive a net oil price that would be substantially lower than world market prices. Proven 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. Proven 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 proven oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proven 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. 54 Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES-UNAUDITED Proven Oil and Gas Reserve Quantities (All within the Republic of Kazakhstan) Oil Gas Reserves Reserves (bbls.) (Mcf.) ------------------------- Proven developed and undeveloped reserves: Balance December 31, 1998 -- -- Extensions, discoveries and other additions 67,636,892 -- Production (59,249) -- ------------ ---------- Balance December 31, 1999 67,577,643 -- ============ ========== Proven Developed Reserves: Balance December 31, 1999 1,233,059 -- ============ ========== Capitalized Costs Relating to Oil and Gas Producing Activities (All within the Republic of Kazakhstan)
Year Ended December 31, 1999 1998 1997 -------------------------------------------------- Unproven oil and gas properties $ -- $ 18,898,939 $ 8,166,390 Proven oil and gas properties 25,851,685 -- -- ------------ ------------ ------------ Accumulated depreciation and depletion (1,522,426) (631,851) (190,950) ------------ ------------ ------------ Net capitalized cost $ 24,329,259 $ 18,267,088 $ 7,975,440 ============ ============ ============
55
Closed Type JSC Karakudukmunay Notes to the Financial Statements - (Continued) (Amounts in US dollars unless otherwise stated) SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES-UNAUDITED Cost Incurred in Oil and Gas Property Acquisition, Exploration, and Development Activities (All within the Republic of Kazakhstan) Year Ended December 31, 1999 1998 1997 --------------- ----------------- ----------------- Acquisition costs $ -- $ -- $ -- Exploration and appraisal costs -- 6,688,595 4,068,937 Development costs 7,476,647 -- -- =============== ================= ================= $ 7,476,647 $ 6,688,595 $ 4,068,937 =============== ================= ================= Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proven Oil and Gas Reserves (All within the Republic of Kazakhstan) Year Ended December 31, 1999 1998 1997 --------------- ----------------- ----------------- Future cash inflows $ 1,304,730,000 $ -- $ -- Future development costs (148,390,000) Future production costs (78,280,000) Future income tax expenses (311,620,000) --------------- ----------------- ----------------- Future net cash flows 766,440,000 -- -- 10% annual discount for estimated timing of cash flows (411,080,000) =============== ================= ================= Standardized measure of discounted net cash flows $ 355,360,000 $ -- $ -- =============== ================= ================= Principal sources of change in the standardized measure of discounted future net cash flows Beginning balance $ -- $ -- $ -- Extensions and discoveries 355,360,000 =============== ================= ================= Ending balance $ 355,360,000 $ -- $ -- =============== ================= =================
56 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 Chaparral Resources, Inc'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 Chaparral Resources, Inc.'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 Chaparral Resources, Inc.'s Registration Statement No. 333-7779. 3.1 Certificate of Incorporation, dated April 21, 1999, incorporated by reference to to Chaparral Resources, Inc.'s Notice and Definitive Schedule 14Adated April 21, 1999. 3.2 Bylaws, dated April 21, 1999, incorporated by reference to Annex IV to our Notice and Definitive Schedule 14Adated April 21, 1999. 4.1* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $101,400, to Allen & Company Incorporated. 4.2* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $182,680, to Allen & Company Incorporated. 4.3* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $2,613,097, to Allen & Company Incorporated. 4.4* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $929,984, to Allen & Company Incorporated. 4.5* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $103,332, to John G. McMillian. 4.6* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $20,298, to John G. McMillian. 4.7* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $288,019, to John G. McMillian. 4.8* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $524,986, to Whittier Ventures. 4.9* 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 2, 1999, principal amount $525,973, to Whittier Ventures, LLC. 4.10 8% Non-Negotiable Convertible Subordinated Promissory Note, dated December 10, 1999, principal amount $150,000, to Cord Family Exempt Trust, incorporated by reference to Exhibit 10.40 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.11 8% Non-Negotiable Convertible Subordinated Promissory Note, dated February 10, 2000, principal amount $1,250,000, to Allen & Company Incorporated, incorporated by reference to Exhibit 10.51 to Chaparral Resources, Inc. Current Report on 8-K dated March 22, 2000. 4.12 8% Non-Negotiable Convertible Subordinated Promissory Note, dated February 9, 2000, principal amount $100,000, to Helen Jacobs Strauss Trust, incorporated by reference to Exhibit 10.50 to Chaparral Resources, Inc. Current Report on 8-K dated March 22, 2000. Exhibit No. Description and Method of Filing ----------- -------------------------------- 4.13 8% Non-Negotiable Convertible Subordinated Promissory Note, dated February 9, 2000, principal amount $100,000, to EcoTels International Limited, incorporated by reference to Exhibit 10.49 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.14 8% Non-Negotiable Convertible Subordinated Promissory Note, dated January 27, 2000, principal amount $750,000, to Allen & Company Incorporated, incorporated by reference to Exhibit 10.48 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.15 8% Non-Negotiable Convertible Subordinated Promissory Note, dated January 21, 2000, principal amount $250,000, to Helen Jacobs Strauss Trust, incorporated by reference to Exhibit 10.47 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.16 8% Non-Negotiable Convertible Subordinated Promissory Note, dated January 19, 2000, principal amount $200,000, to Akin, Gump, Strauss, Hauer & Feld, incorporated by reference to Exhibit 10.46 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.17 8% Non-Negotiable Convertible Subordinated Promissory Note, dated January 19, 2000, principal amount $250,000, to John G. McMillian, incorporated by reference to Exhibit 10.45 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.18 8% Non-Negotiable Convertible Subordinated Promissory Note, dated January 14, 2000, principal amount $250,000, to Capco Energy, Inc., incorporated by reference to Exhibit 10.44 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.19 8% Non-Negotiable Convertible Subordinated Promissory Note, dated January 7, 2000, principal amount $150,000, Rose Dosti IRA UTA Charles Schwab Inc. Contributory DTD, incorporated by reference to Exhibit 10.43 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.20 8% Non-Negotiable Convertible Subordinated Promissory Note, dated December 15, 1999, principal amount $500,000, to Capco Energy, Inc., incorporated by reference to Exhibit 10.42 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.21 8% Non-Negotiable Convertible Subordinated Promissory Note, dated December 10, 1999, principal amount $100,000, to Cord Capital, LLC, incorporated by reference to Exhibit 10.41 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 4.22 8% Non-Negotiable Convertible Subordinated Promissory Note, dated November 12, 1999, principal amount $1,000,000, to Whittier Ventures, LLC, incorporated by reference to Exhibit 4.9 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 4.23 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $100,000, to Marathon Special Opportunity Fund, LLC, incorporated by reference to Exhibit 4.8 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 4.24 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $100,000, to Patrick McGee, incorporated by reference to Exhibit 4.7 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. Exhibit No. Description and Method of Filing ----------- -------------------------------- 4.25 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $100,000, to Duncan A. Lee, incorporated by reference to Exhibit 4.6 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 4.26 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $125,000, to William Keller, incorporated by reference to Exhibit 4.5 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 4.27 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $125,000, to Thomas G. Murphy, incorporated by reference to Exhibit 4.4 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 4.28 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $200,000, to Pecos Joint Venture, incorporated by reference to Exhibit 4.3 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 4.29 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $250,000, to Global Undervalued Securities Fund, LP, incorporated by reference to Exhibit 4.2 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 4.30 8% Non-Negotiable Convertible Subordinated Promissory Note, dated October 25, 1999, principal amount $2,000,000, to Allen & Company Incorporated, incorporated by reference to Exhibit 4.1 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 10.1 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 Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.2 License for the Right to Use the Subsurface in the Republic of Kazakhstan, incorporated by reference to Exhibit 10.18 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.3 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 Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.4 Amendment to License for the Right to Use the Subsurface in the Republic of Kazakhstan, dated December 31, 1998, incorporated by reference to Exhibit 10.25 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10.5* Letter from the Agency of the Republic of Kazakhstan on Investments to Central Asian Petroleum (Guernsey) Limited dated July 28, 1999 regarding License for Right to Use the Subsurface in the Republic of Kazakhstan. 10.6 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 Chaparral Resources, Inc.'s Current Report on Form 8-K dated April 1, 1996. Exhibit No. Description and Method of Filing ----------- -------------------------------- 10.7 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, Whittier Energy Company and Whittier Ventures LLC in July 1997 in connection with the same loans, incorporated by reference to Exhibit 10.3 to Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.8 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 Chaparral Resources, Inc.'s Current Report on Form 8-K/A dated October 31, 1997. 10.9 Agreement dated March 31, 1998, effective as of November 4, 1997, between Chaparral Resources, Inc. and Allen & Company Incorporated, incorporated by reference to Exhibit 10.33 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.10 Warrants issued to Allen & Company, Incorporated and John G. McMillian, incorporated by reference to Exhibit 10.2 to Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.11 1998 Incentive and Nonstatutory Stock Option Plan, incorporated by reference to Exhibit 10.24 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10.12 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 Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.13 Warrants issued to Whittier Ventures, LLC, incorporated by reference to Exhibit 10.2 to Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.14 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 Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.15 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 Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.16 Loan Agreement between Challenger Oil Services, PLC and Chaparral Resources, Inc. dated September 10, 1998, incorporated by reference to Exhibit 10.5 to Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. 10.17 Promissory Note between Challenger Oil Services, PLC and Chaparral Resources, Inc. dated September 10, 1998, incorporated by reference to Exhibit 10.6 to Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. Exhibit No. Description and Method of Filing ----------- -------------------------------- 10.18 International Daywork Drilling Contract - Land between Challenger Oil Services, PLC and Karakuduk-Munay, JSC, dated April 7, 1998, incorporated by reference to Exhibit 10.32 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10.19 Amendment No. 1 to the International Daywork Drilling Contract - Land between Challenger Oil Services, PLC and Karakuduk-Munay, JSC, dated April 7, 1998, incorporated by reference to Exhibit 10.33 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10.20 Amendment No. 2 to the International Daywork Drilling Contract - Land between Challenger Oil Services, PLC and Karakuduk-Munay, JSC, dated March 17, 1999, incorporated by reference to Exhibit 10.34 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10.21 Letter Agreement dated March 17, 1999 between Karakuduk-Munay, JSC and Challenger Oil Services, PLC, incorporated by reference to Exhibit 10.35 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10.22 Letter Agreement and Restated Amendment No. 1 to Loan Agreement and Promissory Note dated March 18, 1999 between Challenger Oil Services, PLC and Chaparral Resources, Inc., incorporated by reference to Exhibit 10.36 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10.23 $24,000,000 Loan Agreement dated as of November 1, 1999, incorporated by reference to Exhibit 10.1 to Chaparral Resources, Inc.'s Current Report on 8-K dated November 17, 1999. 10.24 Supplemental Agreement, dated February 10, 2000, among Shell Capital Limited, Shell Capital Services Limited, Chaparral Resources, Inc., Central Asian Petroleum (Guernsey) Limited, Closed Type JSC Karakudukmunay and Central Asian Petroleum, Inc., incorporated by reference to Exhibit 10.19 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.25 CRI-CAP(G) Loan Agreement, dated February 7, 2000, between Chaparral Resources, Inc. and Central Asian Petroleum (Guernsey) Limited, incorporated by reference to Exhibit 10.13 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.26 CAP(G)-KKM Loan Agreement, dated February 7, 2000, between Closed Type JSC Karakudukmunay and Central Asian Petroleum (Guernsey) Limited, incorporated by reference to Exhibit 10.16 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.27 Accounts Agreement, dated February 8, 2000, among Chaparral Resources, Inc., Central Asian Petroleum (Guernsey) Limited, Closed Type JSC Karakudukmunay, Shell Capital Services Limited, ABN Amro Bank N.V., London Branch and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.1 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.28 Security Trust Deed, dated February 7, 2000, among Chaparral Resources, Inc., Central Asian Petroleum (Guernsey) Limited, Central Asian Petroleum, Inc., Closed Type JSC Karakudukmunay, Shell Capital Services Limited and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.17 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. Exhibit No. Description and Method of Filing ----------- -------------------------------- 10.29 CRI Accounts Assignment, dated February 7, 2000, between Chaparral Resources, Inc. and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.2 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.30 CAP(G) Accounts Assignment, dated February 7, 2000, between Chaparral Resources, Inc. and The Law Debenture Trust Corporation, p.l.c., incorporated by reference to Exhibit 10.3 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.31 KKM Accounts Assignment, dated February 7, 2000, between Closed Type JSC Karakudukmunay and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.4 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.32 CRI-CAP(D) Pledge Agreement, dated February 7, 2000, between Chaparral Resources, Inc. and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.11 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.33 CRI-CAP(G) Charge Over Shares, dated February 7, 2000, between Chaparral Resources, Inc. and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.14 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.34 CAP(D)-CAP(G) Charge Over Shares, dated February 7, 2000, between Central Asian Petroleum, Inc. and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.15 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.35 KKM Pledge Agreement, dated February 7, 2000, between Central Asian Petroleum (Guernsey) Limited and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.12 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.36 CRI Assignment, dated February 8, 2000, between Chaparral Resources, Inc. and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.5 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.37 CAP(G) Assignment, dated February 7, 2000, between Central Asian Petroleum (Guernsey) Limited and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.6 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.38 KKM Assignment, dated February 7, 2000, between Closed Type JSC Karakudukmunay and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.7 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.39 Assignment of Insurance Proceeds, dated February 7, 2000, between Chaparral Resources, Inc. and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.8 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.40 KKM Assignment of Insurances, dated February 7, 2000, between Closed Type JSC Karakudukmunay and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.9 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. Exhibit No. Description and Method of Filing ----------- -------------------------------- 10.41 Assignment of Reinsurance, dated February 8, 2000, among Closed Type JSC Karakudukmunay, Kazakinstrakh JSC, Schwarzmeer und Ostsee Insurance Co. Limited (Sovag) U.K. and The Law Debenture Trust Corporation p.l.c., incorporated by reference to Exhibit 10.10 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.42 Warrant Agreement, dated February 8, 2000, between Chaparral Resources, Inc. and Shell Capital Limited, incorporated by reference to Exhibit 10.18 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.43 Technical Services Agreement, dated February 8, 2000, Shell Capital Services Limited and Closed Type JSC Karakudukmunay, incorporated by reference to Exhibit 10.20 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.44 Contract of Insurance No. 158, dated December 29, 1999, between the Overseas Private Investment Corporation and Chaparral Resources, Inc., incorporated by reference to Exhibit 10.21 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.45 Amendment No. 1 to Contract of Insurance No. F158, dated as of February 4, 2000, between the Overseas Private Investment Corporation and Chaparral Resources, Inc., incorporated by reference to Exhibit 10.22 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.46 Trade Confirmation, dated February 11, 2000, between Deutsche Bank AG New York and Chaparral Resources, Inc., incorporated by reference to Exhibit 10.23 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.47 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Patrick McGee, incorporated by reference to Exhibit 10.24 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.48 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Whittier Ventures, LLC., incorporated by reference to Exhibit 10.25 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.49 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Pecos Joint Venture, incorporated by reference to Exhibit 10.26 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.50 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Thomas G. Murphy, incorporated by reference to Exhibit 10.27 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.51 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Duncan Lee, incorporated by reference to Exhibit 10.28 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.52 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Marathon Special Opportunity Fund, incorporated by reference to Exhibit 10.29 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. Exhibit No. Description and Method of Filing ----------- -------------------------------- 10.53 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and William Keller, incorporated by reference to Exhibit 10.30 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.54 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Global Undervalued Securities Fund, LP, incorporated by reference to Exhibit 10.31 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.55 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Cord Family Exempt Trust, incorporated by reference to Exhibit 10.32 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.56 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Cord Capital, LLC, incorporated by reference to Exhibit 10.33 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.57 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Capco Energy, Inc, incorporated by reference to Exhibit 10.34 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.58 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Rose Dosti IRA UTA Charles Schwab Inc Contributory DTD, incorporated by reference to Exhibit 10.35 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.59 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and John G. McMillian, incorporated by reference to Exhibit 10.36 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.60 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Akin, Gump, Strauss, Hauer & Feld, L.L.P., incorporated by reference to Exhibit 10.37 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.61 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Helen Jacobs Strauss Trust, incorporated by reference to Exhibit 10.38 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.62 Subordination Agreement, dated January 28, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Allen & Company Incorporated, incorporated by reference to Exhibit 10.39 to Chaparral Resources, Inc.'s Current Report on 8-K dated March 22, 2000. 10.63* Subordination Agreement, dated February 8, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and EcoTels International Limited. 10.64 Crude Oil Sale and Purchase Agreement dated as of November 1, 1999, between Closed Type JSC Karakuduk Munay and Shell Trading International Limited, incorporated by reference to Exhibit 10.1 to Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. 10.65* Daywork Drilling Contract Land between KazakhOil Drilling Service Company and Closed Type Karakudukmunay, JSC, dated October 10, 1999. Exhibit No. Description and Method of Filing ----------- -------------------------------- 10.66* Transportation Contract between KazakhOil and Closed Type Karakudukmunay, JSC, dated January 31, 2000. 10.67* Commercial Services Agreement between Shell Trading International Limited and Closed Type Karakudukmunay, JSC, dated November 1, 1999. 10.68* Letter from Ryder Scott Company Petroleum Engineers to Chaparral Resources, Inc. regarding review of reserve estimates of the Karakuduk Field, dated January 13, 1995. 10.69* Letter from Ryder Scott Company Petroleum Engineers to Chaparral Resources, Inc. regarding review of reserve estimates of the Karakuduk Field, dated October 8, 1999. 21 Subsidiaries of the Registrant, incorporated by reference to Exhibit 21 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 23.1* Consent of Ryder Scott Company Petroleum Engineers. 27* Financial Data Schedule. * Filed herewith. EX-4.1 2 NOTE Exhibit 4.1 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE November 2, 1999 US$101,400.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of Allen & Company Incorporated ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") ONE HUNDRED ONE THOUSAND FOUR HUNDRED DOLLARS (US$101,400.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price). Payment shall be made be delivering such shares to Payee at 711 Fifth Avenue, New York, New York 10022, or at such other place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum rate allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated by the SEC under the Securities Act of 1933 as amended (the "Act"). Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under any state securities laws and may not be sold, pledged, transferred, assigned or otherwise disposed of except in accordance with such Act and the rules and regulations thereunder and in accordance with applicable state securities laws. The Maker will transfer such securities only upon receipt of evidence satisfactory to the Maker, which may include an opinion of counsel, that the registration provisions of such Act have been compiled with or that such registration is not required and that such transfer will not violate any applicable state securities laws." 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer 3 by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 4 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall 5 mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 6 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 7 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Service Limited ("Shell") in connection with the contemplated Loan Agreement among Maker, Shell, Central Asia Petroleum (Guernsey) Limited, Central Asia Petroleum Inc., Karakuduk-Munay, Inc. and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 8 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ James A. Jeffs ------------------ 9 EX-4.2 3 NOTE Exhibit 4.2 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE November 2, 1999 US$182,680.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of Allen & Company Incorporated ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") ONE HUNDRED EIGHTY-TWO THOUSAND SIX HUNDRED EIGHTY DOLLARS (US$182,680.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price). Payment shall be made be delivering such shares to Payee at 711 Fifth Avenue, New York, New York 10022, or at such other place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum rate allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated by the SEC under the Securities Act of 1933 as amended (the "Act"). Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under any state securities laws and may not be sold, pledged, transferred, assigned or otherwise disposed of except in accordance with such Act and the rules and regulations thereunder and in accordance with applicable state securities laws. The Maker will transfer such securities only upon receipt of evidence satisfactory to the Maker, which may include an opinion of counsel, that the registration provisions of such Act have been compiled with or that such registration is not required and that such transfer will not violate any applicable state securities laws." 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer 3 by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 4 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall 5 mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 6 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 7 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Service Limited ("Shell") in connection with the contemplated Loan Agreement among Maker, Shell, Central Asia Petroleum (Guernsey) Limited, Central Asia Petroleum Inc., Karakuduk-Munay, Inc. and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 8 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ James A. Jeffs ------------------ 9 EX-4.3 4 NOTE Exhibit 4.3 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE November 2, 1999 US$2,613,097.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of Allen & Company Incorporated, a corporation organized under the laws of New York ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") of TWO MILLION SIX HUNDRED THIRTEEN NINETY-SEVEN DOLLARS (US$2,613,097.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price"). Payment shall be made by delivering such shares to Payee at 711 Fifth Avenue, New York, NY 10022, or at such other place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum note allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated by the SEC under the Securities Act of 1933 as amended (the "Act"). Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under any state securities laws and may not be sold, pledged, transferred, assigned or otherwise disposed of except in accordance with such Act and the rules and regulations thereunder and in accordance with applicable state securities laws. The Maker will transfer such securities only upon receipt of evidence satisfactory to the Maker, which may include an opinion of counsel, that the registration provisions of such Act have been compiled with or that such registration is not required and that such transfer will not violate any applicable state securities laws." 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer 3 by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 4 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall 5 mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 6 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 7 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Service Limited ("Shell") in connection with the contemplated Loan Agreement among Maker, Shell, Central Asia Petroleum (Guernsey) Limited, Central Asia Petroleum Inc., Karakuduk-Munay, Inc. and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 8 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ James A. Jeffs ------------------ 9 EX-4.4 5 NOTE Exhibit 4.4 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE November 2, 1999 US$929,984.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of Allen & Company Incorporated ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") NINE HUNDRED TWENTY-NINE THOUSAND NINE HUNDRED EIGHTY-FOUR DOLLARS (US$929,984.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price). Payment shall be made be delivering such shares to Payee at 711 Fifth Avenue, New York, New York 10022, or at such other place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum rate allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated by the SEC under the Securities Act of 1933 as amended (the "Act"). Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under any state securities laws and may not be sold, pledged, transferred, assigned or otherwise disposed of except in accordance with such Act and the rules and regulations thereunder and in accordance with applicable state securities laws. The Maker will transfer such securities only upon receipt of evidence satisfactory to the Maker, which may include an opinion of counsel, that the registration provisions of such Act have been compiled with or that such registration is not required and that such transfer will not violate any applicable state securities laws." 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer 3 by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 4 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall 5 mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 6 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 7 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Service Limited ("Shell") in connection with the contemplated Loan Agreement among Maker, Shell, Central Asia Petroleum (Guernsey) Limited, Central Asia Petroleum Inc., Karakuduk-Munay, Inc. and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 8 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ James A. Jeffs ------------------ 9 EX-4.5 6 NOTE Exhibit 4.5 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE November 2, 1999 US$103,332.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of John G. McMillian ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") ONE HUNDRED THREE THOUSAND THREE HUNDRED THIRTY-TWO DOLLARS (US$103,332.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price). Payment shall be made be delivering such shares to Payee at 322 Centennial Circle, Park City, UT 84060, or at such other place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum rate allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated by the SEC under the Securities Act of 1933 as amended (the "Act"). Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under any state securities laws and may not be sold, pledged, transferred, assigned or otherwise disposed of except in accordance with such Act and the rules and regulations thereunder and in accordance with applicable state securities laws. The Maker will transfer such securities only upon receipt of evidence satisfactory to the Maker, which may include an opinion of counsel, that the registration provisions of such Act have been compiled with or that such registration is not required and that such transfer will not violate any applicable state securities laws." 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer 3 by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 4 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall 5 mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 6 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 7 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Service Limited ("Shell") in connection with the contemplated Loan Agreement among Maker, Shell, Central Asia Petroleum (Guernsey) Limited, Central Asia Petroleum Inc., Karakuduk-Munay, Inc. and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 8 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ James A. Jeffs ------------------ 9 EX-4.6 7 NOTE Exhibit 4.6 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE November 2, 1999 US$20,298.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of John G. McMillian ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") TWENTY THOUSAND TWO HUNDRED NINETY-EIGHT DOLLARS (US$20,298.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price). Payment shall be made be delivering such shares to Payee at 322 Centennial Circle, Park City, UT 84060, or at such other place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum rate allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated by the SEC under the Securities Act of 1933 as amended (the "Act"). Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under any state securities laws and may not be sold, pledged, transferred, assigned or otherwise disposed of except in accordance with such Act and the rules and regulations thereunder and in accordance with applicable state securities laws. The Maker will transfer such securities only upon receipt of evidence satisfactory to the Maker, which may include an opinion of counsel, that the registration provisions of such Act have been compiled with or that such registration is not required and that such transfer will not violate any applicable state securities laws." 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer 3 by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 4 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall 5 mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 6 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 7 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Service Limited ("Shell") in connection with the contemplated Loan Agreement among Maker, Shell, Central Asia Petroleum (Guernsey) Limited, Central Asia Petroleum Inc., Karakuduk-Munay, Inc. and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 8 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ James A. Jeffs ------------------ 9 EX-4.7 8 NOTE Exhibit 4.7 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE November 2, 1999 US$288,019.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of John G. McMillian ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") TWO HUNDRED EIGHTY-EIGHT THOUSAND NINETEEN DOLLARS (US$288,019.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price). Payment shall be made be delivering such shares to Payee at 322 Centennial Circle, Park City, UT 84060, or at such other place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum rate allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated by the SEC under the Securities Act of 1933 as amended (the "Act"). Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under any state securities laws and may not be sold, pledged, transferred, assigned or otherwise disposed of except in accordance with such Act and the rules and regulations thereunder and in accordance with applicable state securities laws. The Maker will transfer such securities only upon receipt of evidence satisfactory to the Maker, which may include an opinion of counsel, that the registration provisions of such Act have been compiled with or that such registration is not required and that such transfer will not violate any applicable state securities laws." 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer 3 by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 4 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall 5 mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 6 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 7 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Service Limited ("Shell") in connection with the contemplated Loan Agreement among Maker, Shell, Central Asia Petroleum (Guernsey) Limited, Central Asia Petroleum Inc., Karakuduk-Munay, Inc. and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 8 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ James A. Jeffs ------------------ 9 EX-4.8 9 NOTE Exhibit 4.8 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE November 2, 1999 US$524,986.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of Whittier Ventures, LLC ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") FIVE HUNDRED TWENTY-FOUR THOUSAND NINE HUNDRED EIGHTY SIX DOLLARS (US$524,986.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price). Payment shall be made be delivering such shares to Payee at 1600 Huttington Drive, South Pasadena, CA 91030, or at such other place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum rate allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated by the SEC under the Securities Act of 1933 as amended (the "Act"). Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under any state securities laws and may not be sold, pledged, transferred, assigned or otherwise disposed of except in accordance with such Act and the rules and regulations thereunder and in accordance with applicable state securities laws. The Maker will transfer such securities only upon receipt of evidence satisfactory to the Maker, which may include an opinion of counsel, that the registration provisions of such Act have been compiled with or that such registration is not required and that such transfer will not violate any applicable state securities laws." 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer 3 by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 4 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall 5 mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 6 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 7 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Service Limited ("Shell") in connection with the contemplated Loan Agreement among Maker, Shell, Central Asia Petroleum (Guernsey) Limited, Central Asia Petroleum Inc., Karakuduk-Munay, Inc. and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 8 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young -------------------- 9 EX-4.9 10 NOTE Exhibit 4.9 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE November 2, 1999 US$525,973.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of Whittier Ventures, LLC ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") FIVE HUNDRED TWENTY-FIVE THOUSAND NINE HUNDRED SEVENTY-THREE DOLLARS (US$525,973.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price). Payment shall be made be delivering such shares to Payee at 1600 Huttington Drive, South Pasadena, CA 91030, or at such other place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum rate allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated by the SEC under the Securities Act of 1933 as amended (the "Act"). Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under any state securities laws and may not be sold, pledged, transferred, assigned or otherwise disposed of except in accordance with such Act and the rules and regulations thereunder and in accordance with applicable state securities laws. The Maker will transfer such securities only upon receipt of evidence satisfactory to the Maker, which may include an opinion of counsel, that the registration provisions of such Act have been compiled with or that such registration is not required and that such transfer will not violate any applicable state securities laws." 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer 3 by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 4 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall 5 mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 6 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 7 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Service Limited ("Shell") in connection with the contemplated Loan Agreement among Maker, Shell, Central Asia Petroleum (Guernsey) Limited, Central Asia Petroleum Inc., Karakuduk-Munay, Inc. and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 8 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young -------------------- 9 EX-10.5 11 LETTER FROM THE AGENCY Exhibit 10.5 Translation Agency of the Republic of Kazakstan on Investments Central Asian Petroleum (Guernsey) Limited 2211 Norfolk, Suite 1150 Houston TX 77098 Copy: Shell Capital Services Ltd. Attn: Mr. Mark L.G. Turner Having considered your letter dated 21.07.99 regarding funding the Karakuduk project, the Agency of the Republic of Kazakstan on Investments confirms that if "Karakudukmunai" LLP will not perform licensing obligations on investing USD 30,000,000 before 31.12.99, the License of "Karakudukmunai" LLP will not be recalled and the penalties will not be imposed, under condition that such nonperformance of obligations will not last more than till 30.06.2000. Chairman (signature) A. Saidenov EX-10.63 12 SUBORDINATION AGREEMENT Exhibit 10.63 SUBORDINATION AGREEMENT This SUBORDINATION AGREEMENT (this "Agreement") is entered into on the 9th day of February 2000 among Chaparral Resources, Inc. ("Borrower"), Shell Capital Services Limited (the "Facility Agent"), and EcoTels International Limited ("Junior Entity"). RECITALS: WHEREAS, the Borrower and the Facility Agent are, inter alia, parties to the Loan Agreement (as defined herein); and WHEREAS, as a condition to funding under the Loan Agreement, the Borrower, the Facility Agent and the Junior Entity must enter into this Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of covenants herein contained, the parties agree as follows: 1. Definitions and Interpretation. (a) "Loan Agreement" means the loan agreement dated 1 November 1999 between Borrower, Central Asian Petroleum (Guernsey) Limited, Closed Type JSC Karakudukmunay and Central Asian Petroleum, Inc., as Co-Obligors, Shell Capital Limited, Shell Capital Services Limited and the Lenders (as defined in the Loan Agreement). "Preferred Obligations" means all obligations of the Borrower, the Co-Obligors, or any of them, to any of the Finance Parties whether now existing or arising in the future and whether fixed, prospective or contingent under or in respect of any of the Finance Documents whether for principal outstanding, interest, fees, costs, expenses, indemnities or otherwise. "Junior Obligations" means all obligations of the Junior Entity to the Borrower (including, without limitation, in respect of the CRI Bridge Notes and the CRI Existing Notes) whether now existing or arising in the future and whether fixed, prospective or contingent, whether for principal outstanding, interest, fees, costs, expenses, indemnities or otherwise. (b) Capitalized terms used and not defined herein are used with the meaning assigned to such term in the Loan Agreement. (c) Any reference in this Agreement to: (i) a statute shall be construed as a reference to such statute as from time to time amended or re-enacted; (ii) a person includes its permitted successors and assigns; (iii) a Finance Document or any other agreement or document shall be construed as a reference to that Finance Document or, as the case may be, such other agreement or document, as the same may have been, or may from time to time be, amended, novated or supplemented; and (iv) the singular includes the plural and vice versa. 2. The payment of the Junior Obligations is expressly made subordinate and subject in right of payment and in liquidation to the prior payment in full of the Preferred Obligations. 3. Until the date of irrevocable final repayment, in full, of the Preferred Obligations and termination of all commitments in respect thereof, the Borrower undertakes not to pay or repay and the Junior Entity undertakes not to claim, recover, retain or receive (or seek to claim, recover, retain or receive) any amount whatsoever in relation to any Junior Obligation (including, without limitation, any recovery, payment or repayment arising out of any claim under a guarantee) or to any interest or other amount payable by the Borrower in respect thereof, or to any other indebtedness of the Borrower to any Junior Entity. 4. If: (i) there is any distribution of all or any part of the assets of the Borrower including, without limitation, by reason of the liquidation, dissolution or other insolvency proceeding, or assignment for the benefit of creditors; or (ii) the Borrower goes into liquidation or becomes subject to any insolvency or rehabilitation proceeding, administration, or voluntary arrangement, then until the date of final irrevocable repayment in full of the Preferred Obligations any payment or distribution of any kind or character and all and any rights in respect thereof payable or deliverable to the Junior Entity with respect to the Junior Obligations or any part thereof by the liquidator, administrator, administrative receiver or receiver (or the equivalent thereof) of the Borrower will forthwith be paid or delivered to the Facility Agent for application to the Preferred Obligations in accordance with the terms of the Finance Documents. 5. Following the occurrence of any Event of Default, the Junior Entity will irrevocably authorise and empower the Facility Agent to demand, sue and prove for, collect and receive every payment or distribution referred to in Section 4 and give good discharge therefor and to file claims and take such other proceedings, in the Facility Agent's name, the name of the Junior Entity or otherwise, as the Facility Agent may deem necessary or advisable for the enforcement of the payment of debts in accordance with the priority set out in Section 2. 6. The Junior Entity will, at all times, following the occurrence of any Event of Default, and for so long as such Event of Default is continuing, execute or procure the execution of and deliver to the Facility Agent such proxies, -2- powers of attorney, assignments or other instruments as may be requested by it in order to enable the Facility Agent to vote and/or enforce any and all claims upon or with respect to the Junior Obligations or any part thereof and to collect and receive any and all payments or distributions which may be payable or deliverable to the Facility Agent at any time upon or with respect to the Junior Obligations or any part thereof. 7. A liquidator or other insolvency representative of the Borrower or the Junior Entity will be authorised, to the maximum extent permitted by applicable law, to apply any assets or moneys it receives in accordance with the order of priority referred to in Section 2. 8. If any amounts are received by the Junior Entity or any person acting on its behalf with respect to the Junior Obligations or any part thereof whether in cash or in kind or by way of set-off, combination of accounts or otherwise, the Junior Entity (or person acting on its behalf as aforesaid) agrees that an amount equal to the amount so received by the relevant Junior Entity shall be held on trust for the Facility Agent and shall forthwith be paid to the Facility Agent for application to the Preferred Obligations in accordance with the terms of the Finance Documents and that any failure to make such payment shall be a breach of its obligations under this Agreement. 9. (a) Unless otherwise agreed by the Facility Agent, the Junior Entity will waive, and undertake that it will not seek to obtain payment of any Junior Obligation, in whole or in part, by exercising any right of set-off it may have with respect to any Junior Obligation, whether created by contract, statute or otherwise. (b) Until the date of irrevocable final repayment, in full, of the Preferred Obligations and termination of all commitments in respect thereof the Facility Agent may (subject to the provisions of the Finance Documents), unless and until such moneys or distributions in the aggregate are sufficient to bring about the irrevocable final repayment, in full, of the Preferred Obligations (if applied to repayment of the Preferred Obligations), (i) apply any moneys or property received under this Agreement from the Borrower, the Junior Entity or any other person against the Preferred Obligations in such order as it thinks fit; and (ii) hold in a suspense account any moneys or distributions received under this Agreement. 10. The Junior Entity will not be entitled without the consent of the Facility Agent to accelerate any Junior Obligation (or any portion thereof). The Facility Agent shall have complete discretion as to the granting of such consent. 11. The Junior Entity will not under any circumstances, prior to the irrevocable final repayment, in full, of the Preferred Obligations, be subrogated to any of the rights of the Finance Parties or any security arising under the Finance Documents. 12. This Agreement and the subordination provisions contained herein will terminate on the date of irrevocable final repayment, in full, of the Preferred Obligations, and termination of all commitments in respect thereof. -3- 13. Unless otherwise agreed by the Facility Agent, the Junior Entity undertakes not to commence, or join with any other creditor or creditors of the Borrower in commencing, any bankruptcy, insolvency or rehabilitation proceeding, administration or other voluntary arrangement against or in respect of the Borrower prior to irrevocable final repayment, in full, of the Preferred Obligations. 14. This Agreement constitutes the entire agreement between the parties and supersedes all prior oral or written agreements, understandings, representations, warranties and course of conduct and dealings between the parties on the subject matter hereof. 15. Time is of the essence of each party's obligations under this Agreement but no failure to exercise, nor any delay in exercising, on the part of the Facility Agent, any right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise thereof or the exercise of any other right or remedy. The rights and remedies contained in this Agreement are cumulative and not exclusive of any rights or remedies provided by law. 16. If, at any time, any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Agreement under the law of that jurisdiction nor the legality, validity or enforceability of that or any other provision of this Agreement under the law of any other jurisdiction shall in any way be affected or impaired thereby unless the effect of the foregoing would be substantially to alter the rights and obligations of the parties originally agreed. 17. This Agreement shall bind the parties and each of their respective successors and assignees. 18. Neither the Borrower nor the Junior Entity will assign or otherwise transfer any of its rights or obligations under this Agreement. The Facility Agent is permitted to transfer its rights and/or obligations under this Agreement. 19. (a) All notices or other communications to Borrower or the Facility Agent shall be given in writing addressed to the relevant party at its address specified in Clause 29.2 of the Loan Agreement. All notices or other communications to the Junior Entity shall be given in writing at its address set forth in the signature page of this Agreement. A written notice includes a notice by facsimile transmission (b) Any such notice shall be deemed to be given: (i) if by personal delivery or letter, when delivered; and (iii) if by facsimile, when the answerback is received. (c) However, a notice given in accordance with the above but received on a non-working day or after business hours in the place of receipt shall only be deemed to be given on the next working day in that place. -4- 20. Each communication and document made or delivered by one party to another pursuant to this Agreement shall be in the English language or accompanied by a translation into English certified (by an officer of the person making or delivering the same) as being a true and accurate translation thereof. 21. This Agreement may not be amended except by an instrument in writing signed by each of the parties. 22. This Agreement shall be governed by English law. 23. (a) For the exclusive benefit of the Facility Agent, each of the Borrower and the Junior Entity irrevocably agrees that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement and that accordingly any suit, action or proceedings (together in this Section 23 referred to as "proceedings") arising out of or in connection with this Agreement may be brought in such courts, subject to the option referred to in Section 26. (b) Each of the Borrower and the Junior Entity irrevocably waives and agrees not to raise any objection which it may have now or hereafter to the laying of the venue of any proceedings in any such court as is referred to in this Section 23 and any claim that any such proceedings have been brought in an inconvenient or inappropriate forum and further irrevocably agrees that a judgement in any proceedings brought in the English courts shall be conclusive and binding upon each Borrower and the Junior Entity and may be enforced in the courts of any other jurisdiction. (c) Nothing contained in this Section 23 shall limit the right of the Facility Agent to take proceedings against the Borrower or the Junior Entity in any other court of competent jurisdiction, nor shall the taking of proceedings in one or more jurisdictions preclude the taking of proceedings in any other jurisdiction, whether concurrently or not. 24. To the extent that the Borrower or the Junior Entity may now or hereafter be entitled, in any jurisdiction in which proceedings may at any time be commenced with respect to this Agreement, to claim for itself or any of its undertaking, properties, assets or revenues present or future any immunity (sovereign or otherwise) from suit, jurisdiction of any court, attachment prior to judgement, attachment in aid of execution of a judgement, execution of a judgement or from set-off, banker's lien, counterclaim or any other legal process or remedy with respect to its obligations under this Agreement and to the extent that in any such jurisdiction there may be attributed to the Borrower or the Junior Entity any such immunity (whether or not claimed), each of the Borrower and the Junior Entity hereby to the fullest extent permitted by applicable law irrevocably agrees not to claim, and hereby to the fullest extent permitted by applicable law waives, any such immunity. 25. Each of the Borrower and the Junior Entity consents generally in respect of any proceedings to the giving of any relief or the issue of any process in connection with such proceedings including the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) of any order or judgement which may be made or given in such proceedings. -5- 26. If any dispute arises in relation to this Agreement, including any questions as to existence, validity or termination, such dispute shall, at the option only of the Facility Agent, be referred to and finally resolved by arbitration under the rules of the London Court of International Arbitration which are applicable at the time of reference to the arbitration and are deemed to be incorporated by reference into this Section 26. Such arbitration shall take place in London, England and shall be conducted by three arbitrators, one of whom shall be nominated by the Borrower, one by the Facility Agent and the third to be agreed between the two arbitrators so nominated and in default he shall be nominated by the President of the London Court of International Arbitration. The language in which such arbitration shall be conducted shall be English. Any award rendered shall be final and binding on the parties thereto and may be entered into any court having jurisdiction or application may be made to such court for an order of enforcement as the case may require. No party may appeal to any court from any award or decision of the arbitral tribunal and, in particular, but without limitation, no applications may be made under section 45 of the Arbitration Act 1996 and no appeal may be made under section 69 of that Act. 27. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. -6- IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young ---------------------------------- Name: Michael B. Young Title: Treasurer SHELL CAPITAL SERVICES LIMITED By: /s/ Mark L.G. Turner ---------------------------------- Name: Mark L.G. Turner Title: Attorney-in-fact EcoTels International Limited By: /s/ G. Todd Gremillion --------------------------------- Name: G. Todd Gremillion Title: Address: Telephone: Facsimile: -7- EX-10.65 13 DAYWORK DRILLING CONTRACT Exhibit 10.65 DAYWORK DRILLING CONTRACT-LAND This International Daywork Drilling Contract-Land (this "Contract"), dated the 10th day of October 1999, is made by and between Closed Type JSC Karakudukmunay, residing at Microdistrict 3 Building 82 Aktau, Republic of Kazakhstan (hereinafter referred to as "Operator") and Drilling Service Company "Kazakhoil Drilling" Ltd., residing at 466412, Atyrau, Birlik village (hereinafter referred to as "Contractor"). Hereinafter the Contractor and the Operator may individually be referred to as a "Party" and collectively as "Parties." RECITALS: WHEREAS, Operator desires to have onshore wells drilled, produced or worked over in the Mangistau region of the Republic of Kazakhstan, as specified by Operator and to have performed or carried out all auxiliary operations and services as detailed in the Appendices hereto or as Operator may require (hereinafter referred to as "Work"); and WHEREAS, Contractor is willing to furnish the land drilling rig which is a Kremco 900 Rig (or a substantially similar land drilling rig), together with drilling and other equipment (hereinafter called the "Drilling Unit"), insurance and personnel, all as detailed in the Appendices hereto. AGREEMENT: NOW THEREFORE, in consideration of the premises and the covenants and agreements herein, the Parties agree as follows: ARTICLE I INTERPRETATION 1.1 Definitions In this Contract, unless the context otherwise requires: (a) "Commencement Date" means the day and time within the nearest hour that Operator's first well is spudded within the Operating Area. (b) "Operator's Items" mean 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) "Contractor's Items" mean the Drilling 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" meansF 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 an entity owning fifty percent (50%) or more of the voting stock or similar equity interests of Operator or Contractor, an entity in which Operator or Contractor own fifty percent (50%) or more of its voting stock or similar equity interests, or an entity fifty percent (50%) or more of whose voting stock or similar equity interests is owned by the same entity that owns fifty percent (50%) or more of the voting stock or similar equity interests of Operator or Contractor. 1.2 Currency In this Contract, all amounts expressed in dollars are United States dollar amounts. 1.3 Conflicts Appendices A, B, C, D, E and F attached hereto are incorporated herein by this reference. If any provision of the Appendices conflicts with a provision in the body of this Contract hereof, the body of this Contract shall prevail. 1.4 Headings The paragraph headings shall not be considered in interpreting the text of this Contract. 1.5 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. 1.6 Contractor's 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. None of Contractor's employees are, nor shall be deemed to be, employees or agents of Operator; provided, however, Operator's supervisory personnel shall be in charge of Contractor's Personnel and Contractor's Personnel shall take their instructions and work assignments solely from Operator's supervisory personnel. 1.7 Governing Law This Contract shall be construed and 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. If this Contract is translated into another language, the English version of this Contract shall be controlling for all purposes. 2 ARTICLE II TERM 2.1 Effective Date The Parties shall be bound by this Contract from the date last signed by a Party (hereinafter referred to as "Effective Date"). 2.2 Duration This Contract shall, subject to Paragraphs 2.3 and 2.4, be for the term specified in Appendix A. 2.3 Termination This Contract shall terminate: (a) immediately if the Drilling Unit becomes a 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 3.5(b); (d) in accordance with Paragraph 7.6; or (e) in accordance with Paragraph 8.2. 2.4 Option to Extend This Contract may be renewed by Operator beyond its initial term as specified in Appendix A, provided that Operator and Contractor mutually agree upon the appropriate rates, terms and conditions. 2.5 Continuing Obligations The provisions of Article IX and Paragraphs 1.3, 1.6, 1.7, 2.3, 2.5, 2.6, 13.1, 13.4, 13.5, 13.6, 13.7, 13.9 and 13.11 shall survive the termination of this Contract and the Parties shall continue to be bound thereby. 2.6 Return of Operator's Item Upon termination of operations, Contractor shall return to Operator at the last drilling location for the Drilling Unit under this Contract, or at any other location as directed by Operator at the 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. 3 ARTICLE III CONTRACTOR'S PERSONNEL 3.1 Number, Selection, Hours of Labor and Remuneration Except where herein otherwise provided, the number, selection, replacement, hours of labor and remuneration of Contractor's Personnel shall be determined by the Contractor upon the requisites of the Work. Such employees or subcontractors shall be the employees or subcontractors solely of Contractor. Notwithstanding the foregoing, minimum manning shall be as specified in Appendix C, and the Contractor undertakes to provide personnel of first class international quality who have an appropriate technical background and experience to perform the Work and to provide Contractor's Personnel who have certification as required by Kazakh laws. Contractor's Personnel shall be certified as required by Kazakh law and have work permits as so required by Kazakh law. 3.2 Contractor's Representative Contractor shall nominate one of Contractor's Personnel, if possible the office manager of Contractor Aktau, as Contractor's 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. Contractor shall inform the Operator in a written form, if such representative is replaced. All matters that cannot be resolved by Contractor's representative and Operator's representative will be resolved in accordance with Paragraph 13.9. 3.3 Increase in Contractor's Personnel Operator may, subject to mutual agreement of the Parties, require Contractor to increase the number of Contractor's Personnel, subject to additional payment by the Operator in accordance with the rates in Appendix F or as mutually agreed between the Parties. 3.4 Replacement of Contractor's Personnel Contractor will remove and replace at anytime any of Contractor's Personnel if Operator so requests. Operator shall give to Contractor the reasons for any such request. 3.5 Personnel Shortages (a) If at any time during the term of this Contract, less than a full crew of personnel as listed in Appendix C is utilized for any reason, the applicable day rate payable to Contractor hereunder shall be reduced by an amount calculated by multiplying the applicable day rate payable to Contractor hereunder by a fraction, where the number of crew members absent from the Drilling Unit is the numerator and the total number required crew members is the denominator. The day-rate and hourly rates for the crew are defined in Appendix F. (b) If at any time, in the Operator's opinion, Contractor's failure to provide a full crew of personnel as established in this Contract is interfering with or delaying the conduct of Operator's operations, and such failure continues for a period of five (5) days after 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. 4 3.6 Safety Measures Contractor shall, at its sole expense, take all measures necessary or proper to provide safe working conditions, proper safety clothing and supplies to its personnel in accordance with international safety regulations and standards and with all safety requirements of the Republic of Kazakhstan and general safety measures applied by the Contractor in its other similar businesses. 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 weekly safety drills. Attendance at these meetings of Contractor's Personnel shall be obligatory. Operator shall have the right to hold additional meetings and best operations practices at its own discretion. ARTICLE IV CONTRACTOR'S ITEMS 4.1 Obligation to Supply Contractor shall provide Contractor's Items and Personnel and perform the services to be performed by it in accordance with Appendices B, C and D. Each of Contractor's Items (including the Drilling Unit) shall be subject to inspection and approval of Operator prior to such Items being placed into service. 4.2 Maintain Stocks Contractor shall be responsible, at its cost, for maintaining adequate stock levels of Contractor's Items and replenishing them as necessary. 4.3 Maintain and Repair Equipment Contractor shall, subject to Paragraph 9.1, be responsible for the maintenance and repair of all Contractor's Items (including the Drilling Unit) 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 the ability for furnishing and maintaining such items shall remain with the Operator. In the event Contractor does not fully carry out its maintenance and repair obligations set forth above on a timely basis, Operator may elect to perform or have performed such maintenance and repair activities and the costs incurred by Operator thereby may be deducted by Operator from any amounts due to Contractor under this Contract or otherwise. 4.4 Additional Items Contractor agrees and undertakes to provide additional equipment upon the requirement of Operator. Such additional equipment shall be provided by the Contractor on a cost basis plus handling charges, if applicable. 5 ARTICLE V CONTRACTOR'S GENERAL OBLIGATION 5.1 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. 5.2 Operation of Drilling Unit 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 (without modification, upgrade or enhancement) will operate efficiently and is physically capable of drilling wells to depths specified in this Contract and complies fully with the technical documentation described in Appendix B. 5.3 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 authorised representative of Operator. However, Operator shall not issue any instructions which would be inconsistent with Contractor's rules, policies or procedures pertaining to the safety of the Contractor's Personnel, the Operator's Personnel, equipment or, the Drilling Unit, or require Contractor to exceed the capacity of the Drilling Unit. 5.4 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 Contractor's Personnel or Operator's 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 5.4. 5.5 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 the Operator. Operator shall provide Contractor with any such programs reasonably in advance of the spud date of each well to be drilled under this Contract. 5.6 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 in writing the representative of Operator of the difficulty, and during such period exert its best efforts to overcome the difficulty. 6 5.7 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 its best efforts to prevent and control fires and blowouts and to protect the hole. 5.8 Inspection of Materials Furnished by Operator Contractor agrees to visually inspect all materials furnished by Operator before using same and notify Operator in writing of any apparent defects therein. Contractor shall not be liable for any loss or damage resulting from the use of materials furnished by Operator, unless Contractor fails to properly inspect the materials in accordance with this Paragraph 5.8. 5.9 Cutting/Coring Program Contractor shall save and identify cuttings and cores according to Operator's instructions and place them in containers furnished by the Operator. 5.10 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 representatives shall be furnished by Contractor to Operator. ARTICLE VI OPERATOR'S RIGHTS AND OBLIGATIONS 6.1 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. In 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 Operator's Items, 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. 6.2 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 Contractor's normal complement of personnel and the equipment at the drill site. 6.3 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 7 as being in charge of all Operator Personnel. Operator shall inform the Contractor in a written form, in case such representative is replaced. Operator's representative shall at all times have access to the Drilling Unit and may, among other things, observe tests, check and control the implementation of the mud program, examine cuttings and cores, inspect the Work or examine the records kept on the Drilling Unit by Contractor. 6.4 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. Contractor shall obtain and provide all required certificates, Drilling Unit and expatriate personnel permits and licenses required for the drilling operations and Drilling 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 actual 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 direct damage, including the payment of the applicable Standby Rate during repairs, but Operator shall receive credit for any physical damage insurance proceeds received by Contractor as a result of such damage. 6.5 Custom or Excise Duties, Taxes and Fees (a) Contractor, with the help of the Operator, shall be responsible and hold harmless and indemnify Operator for the current customs clearance and changes to the "consignee" documentation to reflect the transfer of the Drilling Unit into ownership of the Contractor in Kazakhstan. Thereafter the Contractor will be responsible for importation of any subsequent Contractor Items into the Operating Area as required, including but not limited to spare parts, consumables, additional equipment and chemicals as needed for the operation of the Drilling Unit. (b) Notwithstanding anything mentioned in Paragraph 6.5(a), Operator shall be solely responsible for all custom matters connected with Operator's contract with Challenger Oil Services Plc. (c) Notwithstanding any of the foregoing, Contractor shall pay all taxes that may be assessed by the Republic of Kazakhstan against Contractor as a result of the performance of this Contract inclusive of the payroll taxes for its personnel, customs duties, local taxes and VAT excises, sales and other such taxes as may arise in conducting Contractor's business. 6.6 Take Over of Work In the event any well drilled under this Contract should blow out, catch fire or in any manner get out of control, Operator may assume complete control and supervision of the Work of bringing the well under control, putting out the fire and take such other measures as Operator deems appropriate. If Contractor (a) is insolvent, (b) is on the verge of becoming insolvent or (c) fails to make timely payments to Contractor's subcontractors as permitted under Paragraph 11.1 of this Contract, Operator may (i) take over and continue the Work on the well to completion or abandonment and (ii) make payments to third parties on behalf of Contractor that Operator, in its sole discretion, deems necessary or appropriate. In this context, Contractor will be deemed to be insolvent, or on the verge of becoming insolvent, if a reasonable basis exists for Operator to believe that Contractor is unable, or with the passage of time alone will be 8 unable, to pay its bills or discharge its financial obligations as they come due. If at any time in Operator's opinion, Contractor is failing to conduct its operations under this Contract in a diligent, prudent, skillful and workmanlike manner and in all respects in strict accordance with all applicable laws and with accepted good oil field practices, standards, methods 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 Paragraph 6.6, 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 less any payments made by Operator on behalf of Contractor in accordance with this Paragraph 6.6. During any such take over period the indemnities given by Contractor to Operator under this Contract shall be suspended, excluding the due indemnifications until such time and Contractor shall have no responsibility to Operator under such circumstances. When such take over period has ended, Operator shall return the Drilling Unit and all of Contractor's Items to Contractor in as good conditions as when the take over began, normal wear and tear excepted. 6.7 Operator's Well Program Operator shall 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 7.1 Payment Operator shall pay to Contractor during the term of this Contract the amounts due on monthly basis as calculated to the nearest hour according to the rates of payment herein set forth in accordance with Article VIII. No other payment shall be due from Operator, unless specifically provided for in this Contract or agreed to in writing by the Parties. 7.2 Mobilization/Demobilization Fee (a) Operator shall pay Contractor the Mobilization Fee specified in Appendix A on the Effective Date (the "Mobilization Fee") which shall be applied in accordance with Paragraph 8.5(b). (b) Operator shall pay Contractor a Demobilization Fee as specified in Appendix A to cover all Contractor's costs of demobilizing the Drilling Unit. 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. If Contractor is unable to export the Drilling Unit from the Republic of Kazakhstan, due to any act or omission of Operator, within thirty (30) days after termination of this Contract, then Operator shall begin paying the Standby Rate Without Crews beginning on the thirty-first (31st) day and continuing until the Drilling Unit is safely exported from the Republic of Kazakhstan. The foregoing notwithstanding, the Demobilization Fee shall not be payable (i) in the event of any breach of this Contract by Contractor or (ii) the Drilling Unit is demobilized to any location other than directly to Poland upon the termination of this Contract. 9 7.3 Operating Rate The Operating Rate specified in Appendix A will first become payable on the Commencement Date. The Operating Rate shall continue to be payable during the term of this Contract, except when some other rate herein provided applies. However the Operator shall not continue to pay the Operating Rate in the case that the Republic (of Kazakhstan) Technical Inspection Board shuts the Drilling Unit for safety or similar reasons. 7.4 Standby Rate With Crews The Standby Rate With Crews specified in Appendix A will be payable as follows: (a) during any period of delay when Contractor is unable to perform its obligations under this Contract because of adverse weather conditions or as a direct result of an act, instructions 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) 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 Operator's sole negligence; and (c) during any period when operations are suspended or are being conducted due to difficulties encountered as provided for in Paragraph 5.6. (d) during any period after the Commencement Date that the Drilling Unit is undergoing periodic inspections required for the maintenance of any Certification or Classification Certificates. If the delay is of such length that the drilling crew is demobilized, the Standby Rate Without Crew provided in Paragraph 7.8 shall apply from such date of demobilization. 7.5 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 of maintenance of Contractor's Items. 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 7.5. Contractor will use due diligence in effecting such repairs, replacements or maintenance in a good and workmanlike manner and will use its best efforts to familiarize itself with the location of rentable replacements for Contractor's Items. 7.6 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 Majeure as defined in Paragraph 13.3, 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 day rate shall be payable for the period after such ninety (90) days and either Contractor or Operator shall have the right to terminate this Contract at any time thereafter. 10 7.7 Moving Rate Contractor shall be paid a Moving Lump Sum amount as per Appendix A for each move of the Drilling Unit from one well to another, provided that the well site is prepared and ready and the following equipment is provided by Contractor to assist in the Drilling Unit move: 2 cranes (minimum lifting capacity of 40 tons each), 2 cranes (minimum lifting capacity of 16 tons each), 3 trailers of which at least one has a minimum hauling capacity of 50 tons. In case this equipment is not provided by Contractor, Operator shall procure the same, deduct any costs and expenses associated therewith from the Moving Lump Sum, and pay the remainder to Contractor for each move of the Drilling Unit from one well to another. This clause applies to the first rig move from its current location to the first well, as well as all subsequent rig moves. 7.8 Standby Rate Without Crews The Standby Rate Without Crews shall be the rate so stated in Appendix A. The Standby Rate Without Crews will be payable when: (a) during any period after the Commencement Date that the Drilling Unit is undergoing periodic inspections required for the maintenance of any Certification or Classification Certificates, but only from the date the drilling crew has been demobilized; and (b) during any period when operations are suspended to repair the Drilling Unit or other Contractor's Items due to blow out, fire, cratering, shifting or punch through at a drilling location, obstacles or obstructions or the consequences thereof, but only from the date the drilling crew has been demobilized. 7.9 Additional Equipment and Tools Rental Rates As specified in Appendix D, Contractor shall provide fishing, casing handling, and other tools and Operator shall pay to Contractor a daily rate when such tools are used by Operator on a Standby or Operating Rate basis. The daily Standby and Operating Rates are specified in Appendix A. Appendix D also includes various additional items of equipment and rental tools to be provided by Contractor and paid for by the Operator. The provision of such items is subject to the written agreement of the Operator based upon quotations supplied by the Contractor. ARTICLE VIII PAYMENTS 8.1 Monthly Invoices Subject to Paragraph 8.5, Contractor shall bill Operator at the end of each month, for all daily charges and other charges earned by Contractor during such month. 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. The VAT shall be charged in accordance with the taxation laws of the Republic of Kazakstan. 11 8.2 Payment Operator shall pay all invoices within thirty (30) days after the receipt thereof except that if Operator disputes an item invoiced, Operator shall within twenty (20) 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 owing to Contractor. Such termination by Contractor shall not change Operator's obligation to pay to Contractor any amounts of money already due, as well as the appropriate demobilization fee under this Contract. 8.3 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. Notwithstanding anything to the contrary in this Contract, including this Article 8.3, Contractor may by written instruction direct payments to be made by Operator pursuant to this Contract to third parties, including, without limitation, Contractor's subcontractors. 8.4 Currency All payments will be made in U.S. dollars, unless otherwise mutually agreed by the Parties. 8.5 Payment Security (a) Notwithstanding anything in Paragraphs 8.1 and 8.2 to the contrary, for a period of one year after the Commencement Date, Contractor may bill Operator on the first and fifteenth day of every month, for all daily charges and other charges earned by Contractor during such period. Operator shall pay all such bills within five (5) days after the receipt thereof except that if Operator disputes an item billed, Operator shall within three (3) days after receipt of the bill 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; provided, however, any such charges billed above the operating rate (or applicable standby rate) shall be subject to the standard thirty (30) day payment terms as set forth in Paragraph 8.2. (b) Six (6) months after the Commencement Date, the Mobilization Fee shall be off-set and recovered from any invoices or billings delivered by Contractor after such date. For the avoidance of doubt, all invoice and billings delivered during such six month (6) period will be paid on a timely basis in accordance with this Article VIII, and only after the expiration of said six (6) month period will invoices and billings be off-set and recovered from the Mobilization Fee. (c) Nothing in this Paragraph 8.5 shall be construed or interpreted so as to negate Operator's right to dispute all or any portion of any invoice or billing delivered by Contractor under this Contract. ARTICLE IX LIABILITY 9.1 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 indemnify the other Party from and against damage to or loss of its own and its subcontractor's equipment 12 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 Contractor for loss or destruction of or damage to Contractor's 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 which Operator shall be responsible hereunder shall include, but not be limited to, wear and/or damage resulting from the presence of H2S or other corrosive elements in the hole including those introduced into the drilling fluid, excessive wear caused by sandcutting, damage resulting from excessive or uncontrolled pressure such as those encountered during testing, blow-out, or in a well out of control, excessive deviation of the hole from vertical, dog-leg severity, fishing, cementing or testing operations, and from any unusual drilling practices employed at Operator's request. Operator's responsibility for such abnormal wear and/or damage as referred to herein shall include abnormal wear and/or damage to Contractor's choke hoses and manifolds, blow-out prevention 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 amount equal to the then current replacement cost of such equipment delivered to the Drilling Unit. 9.2 The Hole In the event a hole is lost or damaged from causes other than the gross negligence of Contractor, Operator shall be responsible for and hold harmless and indemnify Contractor from such damage to or loss of the hole, including all downhole property therein. 9.3 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. 9.4 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. 9.5 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, including, without limitation, spills of fuels, lubricants, motor oils, water base drilling fluid and attendant cuttings, pipe dope, paints, solvents, ballast, bilge and garbage. 13 (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 from all pollution or contamination, other than that described in Paragraph 9.5 (a), which may occur from the negligence of Contractor or as a result of operations hereunder, including, but not limited to, that which may result from fire, blow-out, 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 other than water base drilling fluid. (c) In 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 of the obligations and limitations set forth in Paragraphs 9.5 (a) and (b), shall be specifically applied. 9.6 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, unless caused by gross negligence of the Contractor, in which case the Contractor is fully responsible. 9.7 Underground Damage Operator shall be responsible for and hold harmless and indemnify Contractor for any and all claims resulting from operations under this Contract on account of injury to, destruction of, or loss or impairment of production or any property 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's surface, and for any loss or damage to any formation, strata, or reservoir beneath the earth's surface. 9.8 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; provided, however, the forgoing limitations shall not apply to any Party that breaches this Contract. 9.9 Indemnity Obligation (a) The Parties intend and agree that the phrase "be responsible for and hold harmless and indemnify" in Paragraphs 6.5 and this Article IX 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 or passive. 14 (b) The indemnifying Party's obligations contained in this Contract 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 6.5 and this Article IX 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 10.1 Contractor's Insurance Contractor shall carry and maintain insurance coverage of the type and in the amounts set forth in Appendix E at the sole cost of Contractor. All references in this Contract to "insurance" of Contractor shall mean such insurance as set forth in Appendix E. Furthermore, Contractor will be liable for the statutory insurance levied in the Republic of Kazakhstan and for the insurance premiums for its personnel. 10.2 Certificates Contractor will furnish Operator within ten (10) days after this Contract is signed with certificates indicating that the required insurances is in full force and effect and that the same shall not be cancelled or materially and adversely changed without ten (10) days written notice to Operator. 10.3 Subrogation For liabilities assumed hereunder by Contractor, its insurance shall be endorsed to provide that the underwriters waive their right of subrogation against Operator, Operator's client pursuant to any binding contract, agreement or understanding between Operator and its client, and its or their Affiliated Companies and co-venturers, representatives, agents, officers, directors and employees of each of the foregoing. 10.4 Additional Insured Contractor shall name Operator and Operator's client pursuant to any binding contract, agreement or understanding between Operator and its client as an additional insured, where permitted, under its policies of insurance, but only with respect to liabilities assumed by Contractor under this Contract. ARTICLE XI SUBLETTING AND ASSIGMENT 11.1 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 15 performed by it with the prior written consent of Operator. Use of subcontractors by Contractor shall not relieve Contractor from any liability or obligation under this Contract. 11.2 Assignment Neither Party may assign this Contract to anyone without the prior written consent of the other Party, and prompt written notice of any such intent to assign shall be given to 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 Contractors' operating costs or taxes. ARTICLE XII NOTICES 12.1 Notices Notices, reports and other communications required 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. Notice shall be effective upon receipt. ARTICLE XIII GENERAL 13.1 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. 13.2 Attorney's Fees If this Contract is placed in the hands of 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 winning Party shall be entitled to recover reasonable attorney's fees and costs. 13.3 Force Majeure Except as otherwise provided in this Paragraph 13.3, 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 or injunctions of any 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 its obligations under this Contract, such Party shall give notice and details of Force Majeure in 16 writing to the other Party as promptly as possible after occurrence. In such cases, the obligations of the Party giving 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 7.6. 13.4 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 and charges for reimbursable items. 13.5 Compliance with Laws Each Party hereto agrees that all conventions, treaties, laws, statutes, rules, regulations and ordinances of any foreign, federal, state or local government or quasi-governmental 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 treaty law, rule, regulation or ordinance, said provision shall be modified to the extent required to comply with said treaty law, rule, regulation or ordinance upon mutual signing of the Parties, 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 either Contractor or Operator be requested or required to violate any treaty law, rule, regulation or ordinance of their respective countries of incorporation or organisation. 13.6 Waivers It 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 by writing, and then only by the persons executing this Contract, or other duly authorised agent or representative of the Party. 13.7 Entire Agreement This Contract supersedes and replaces any oral or written communications heretofore made between the Parties relating to the subject matter hereof. 13.8 Inurement This Contract shall inure to the benefit of and be binding upon the successors and assignees of the Parties. 13.9 Resolution of the Disputes Any dispute, controversy or claim arising out of or in relation to or in connection with this Contract, including, without limitation, any dispute as to the construction, interpretation, enforceability, validity or breach of this Contract shall be executed and finally settled by arbitration, and any Party must submit such a dispute, controversy, or claim to arbitration. Any single arbitrator shall be appointed by unanimous consent of the Parties, if the Parties, however cannot reach an agreement on an arbitrator within thirty (30) days of the submission of a Notice of Arbitration, the appointing authority 17 shall be the International Chamber of Commerce, London, the United Kingdom, which shall appoint an independent arbitrator who does not 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 proceedings shall be held in London, the United Kingdom; (b) the arbitrator shall be and remain all times wholly and impartial; and (c) the arbitration proceedings shall be conducted in accordance with the International Chamber of Commerce procedural rules then in effect. (d) Any procedural issues not determined under the arbitral rules selected pursuant to this Contract shall be determined by the laws of England, 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 fees and costs). (f) Judgement upon the award rendered by the arbitrator may be entered in any court having jurisdiction hereof. 13.10 Labor Practices/Health and Safety Guidelines Contractor shall not take any actions to prevent its employees from lawfully exercising their right of association and their right to organize and bargain collectively. Contractor shall not interfere with or coerce any of its employees on the basis of trade union activities or membership. Contractor shall not take any action on the basis of such activities or membership which may result in the termination, suspension, demotion, or transfer of said employee. Contractor shall perform all Work in accordance with occupational health and safety standards that meet or exceed the World Bank Environment, Health and Safety Guidelines for Onshore Oil and Gas Development, dated May 12, 1994 ("World Bank Guidelines"). Contractor shall allow its employees to avoid or remove themselves from dangerous work situations without jeopardy to continued employment. Contractor shall observe applicable laws relating to a minimum age for employment of children, acceptable conditions of work with respect to minimum wages, hours of work, and occupational health and safety, and not to use forced labor. 13.11 Environmental Compliance Contractor represents and warrants that the Work shall be performed in compliance, in all material respects, with the more stringent of the regulations of the Republic of Kazakhstan or the World Bank Guidelines. In addition, Contractor shall: (a) deliver to Operator, within forty five (45) days following the end of any well drilled hereunder, reports summarizing the environmental performance of all Work pertaining to such well. Such reports shall provide Operator with sufficient information to evaluate the performance of such Work with respect to environmental protection and shall include summaries of the following: 18 (i) the result of environmental monitoring or sampling activity, (ii) accidents impacting the environment or resulting in the loss of life, and (iii) environmental deficiencies identified by the local environmental regulatory authorities and any remedial actions taken; (b) comply and cause all subcontractors and other authorized persons performing Work or having access to the drill site to comply with and implement, in all material respects, the wellfield practices and mitigation measures specified in the "Environmental Impact Assessment," dated October 30, 1995, which will be provided by Operator to the Contractor; and (c) submit to Operator any material environmental reports or documents concerning the Work that are prepared under the Contractor's direction. The environmental reports submitted to Operator under this requirement shall include, but shall not be limited to the following: (i) results of any environmental audits, (ii) a final version of the emergency response/spill contingency plans, and (iii) any supplemental environmental studies completed in order to satisfy the regulatory requirements of the Republic of Kazakhstan. IN WITNESS THEREOF THE PARTIES HAVE EXECUTED THIS CONTRACT ON THE DAY AND YEAR FIRST ABOVE WRITTEN. OPERATOR: CLOSED TYPE JSC KARAKUDUKMUNAY WITNESS: /s/ Richard J. Moore --------------------------------------- BY: /s/ Nikolai D. Klinchev --------------------------------------- TITLE: General Director 19 CONTRACTOR: DRILLING SERVICE COMPANY "KAZAKHOIL DRILLING" LTD. WITNESS: - ----------------------------------------- BY: Amangeldy Tlegenov ----------------------------------------- TITLE: 20 APPENDIX A Para Nos.: 1.1(f) Operating Area: Mangistau Region, Republic of Kazakhstan 1.1(g) Operating Base: Mangistau Region, Republic of Kazakhstan 1.7 Governing Law: The Laws of England. 2.2 Duration: Two (2) years from Commencement Date under this Contract. 2.3(a) Termination: Two (2) years from Commencement Date under this Contract or on completion of any well in progress on that date. 2.3(b) Demobilization Location: Operator's last well location in the Operating Area. 2.4 Option Term: Well-by-well or yearly basis, at the agreement of the Operator and the Contractor. Renewal Notice: Ninety (90) days before termination of the initial term Deadline for Mutual Agreement: Forty Five (45) days before termination of initial term 5.3 Maximum Well Depth: 3,200 meters with 41/2 inch drill pipe; provided, however, deeper wells can be drilled using 3 1/2 inch drill pipe. 6.1 Handling Charge: Seven and a half (7.5%) Percent, payable with respect to equipment only 7.2(a) Mobilization Fee: $ 200,000 7.2(b) Demobilization Fee: $ 250,000 7.3 Operating Rate: $ 12,100 per day 7.4 Standby Rates With Crews: $ 12,100 per day 7.5 Repair Rate: $ 12,100 per day, payable for the first 24 hrs, only in any month in which the Drilling Rig is being repaired 7.6 Force Majeure Rate: $ 9,000 per day 7.7 Moving Lump Sum Amount $ 40,000 7.8 Standby Rates Without Crews: $ 5,000 per day up to 60 days $ 7,500 per day from 60 to 120 days. $ 9,500 per day from and after 121 days A-1 7.9 Fishing Tools Daily Rate: Standby Rate $100 per day; Operating Rate $250 per day Other tools and equipment including but not limited to Spider, Elevators, spare slips and ECCEL Tong Daily Rate according to the list agreed upon by the Parties 8.2 Interest Rate on Late Payments LIBOR plus 2%. 8.3 Address for Payment Account No. 467677 RNN 151000018644 MFO 191201601 Corresponding account 600641101 Code 600164601 Narodny Bank, Atyrau 12.1 Address for Notices: Operator: JSC KARAKUDUKMUNAY Microdistrict 3 Building 82 Aktau, Republic of Kazakhstan Contractor: Drilling Service Company "Kazakhoil Drilling" Ltd., 466412, Atyrau, Birlik village 13.5 Country of Legal Jurisdiction: England 13.10 Value of Contractor's Unit and equipment: U.S.$ 5,500,000 A-2 APPENDIX B DRILLING UNIT AND EQUIPMENT TO BE PROVIDED BY CONTRACTOR 1. GENERAL 1.1. DRAWWORKS Make KREMCO Nominal Rating 900 hp Depth rating 10,500' (4 1/2 D.P.) Drilling Line 1-1/8" Sandline NIL Drive (2) CATERPILLAR 3408 Catheads VARCO Auxiliary Brake DRECO SR 23 Brake Cooling System Closed loop with antifreeze fluid Crown Saver Yes Automatic Driller NIL 1.2. ENGINE GENERATOR Quantity 2 Make CATERPILLAR Model 3412 Horsepower Rating 950 hp Speed 1,500 rpm B-1 1.3. AC GENERATOR Quantity 2 Make CATERPILLAR (KATO) Model SR-4 Amperes 1162 A Voltage 600 V KW, per unit 350 kW 1.4. MAST Make KREMCO Model K-1 18-370 Height 118 ft Base Height 10 ft Rated Hook Load 370,000 Ibs on 10 lines Casing Stabbing Board Yes Wireline Anchor DRECO D45 Racking Boards Height 54' 1.5. CROWNBLOCK Make KREMCO Model 5407-1034 Capacity 370,000 Ibs on 10 lines No. Of Sheaves x Dia. 5x30" - 1 x36" - 1 x20" Grooved for Line 1-1/8" B-2 1.6. SUBSTRUCTURE Make KREMCO Model 16-370 Nominal Height 16' Casing Capacity 350,000 lbs. Setback Capacity 350,000 IBS 1.7. HOOK BLOCKS Make NATIONAL OILWELL Model 540-G-250-8C Load Rating 250 ton No. Of Sheaves x Dia. 5x40" Grooved for Line 1-1/8" 1.8. CARIER Make KREMCO Model K-1000 Drive (2) CATERPILLAR 3408 diesel engine Transmission (2) ALLISON CLT -5961 Leveling Jacks (2) Hydraulic 1.9. ROTARY TABLE Make NATIONAL OILWELL Model C-275 B-3 Static Load rating 500 ton Table opening 27-1/2" Max. Rec. Table Speed 150 RPM 1.10. KELLY BUSHING Make VARCO Model square Size 4 1 /4" Kelly 4 1 /4" 1.11. SWIVEL Make NATIONAL Model P-200 Comparative Bead Load rating 200 ton Maximum W. P. 5,000 psi 1.12. KELLY SPINNER Make WEATHERFORD Model KS 1500 AB Continuous Torque 825 ft - Ibs Speed 160 rpm 1.13. PIPE SPINNER Make WEATHERFORD Model 550A (pneumatic) Max. Torque 600 - 1250 ft - Ibs B-4 1.14. WATER TANK Quantity 1 Capacity 300 bbl Pumps (2) MISSION MAGNUM 3x2x13 (13") 1.15. FUEL TANK Quantity 1 Capacity 12,000 gal Pumps (2) HALCO 1.16. AIR COMPRESSORS Quantity 2 Make INERSOLL - RAND Model 300/30T Working Pressure 120 PSI Powered by 50 hp electronic motor 1.17. AIR COMPRESSOR (COLD START) Quantity 1 Make INERSOLL - RAND Model 7100/30T Working Pressure 120 PSI Powered by LISTER - PETTER diesel motor B-5 2. MUD SYSTEM 2.1. SHALE SHAKER TANK Dimensions LxWxH 36'x9'x6.6' Capacity 315 bbl Agitators (2) BRANDT MA-15 Driven by 15 hp electric motor 2.2 INTERMEDIATE TANK Dimensions LxWxH 36'x9'x6.6' Capacity 315 bbl Agitators (3) BRANDT MA-15 Driven by 15 hp electric motor 2.3. SUCTION TANK Dimensions LxWxH 36'x9'x6.6' Capacity 315 bbl Agitators (2) BRANDT MA-15 Driven by 15 hp electric motor B-6 2.4. TRIP TANK Dimensions LxWxH 16'x8'x5' Capacity 120 bbl Pump (1) MISSION MAGNUM 3x2x13 2.5. SHALE SHAKER Quantity 1 Make BRANDT Model DUAL TANDEM Screens set 2.6. DESANDER Quantity 1 Make BRANDT Model SRC-2 Cones 2x12" 2.7. MUD CLEANER Quantity 1 Make BRANDT Model MC-12 Cones 12X4" 2.8. DEGASSER Make BRANDT Model DG-10 B-7 2.9. MUD PUMPS Quantity 2 Make NATIONAL OILWELL Model A-850 PT Nominal Rating 850 hp Type Triplex Liner Size 5" - 7 3/4" Stroke 9" - 150 SPM max Pulsation Dampener HYDRIL K20-5000 Working Pressure 5,000 psi Relief Valve OTECO 2" Pumps Supercharge (2) MISSION MAGNUM 6x5x14 (11-1/2") Pump Drive (2) CATERPILLAR 3512 diesel engine 2.10. MUD LINES HIGH PRESSURE Discharge Vibrator Hose TAURUS 4" Kelly Hose 3" Standpipe Manifold (1) Working Pressure 5,000 Test Pressure 7,500 B-8 2.11. MUD MIX SKID Location Mixers 2 Pumps (2) MISSION MAGNUM 6x5x14 2.12. TUBULARS 4 1/2" drill string 450 JTS (350 jts G + 100 jts E) 5" HWDP 8 JTS 9 1/2" D.C. 6 ea. 8" D.C. 12 ea. 6 1/2" D.C. 40 ea. 2.13. CROSS OVERS 4" I F x box 4 1 /2" I F 5 6 5/8" Reg x box 4" I F 3 7 5/8" Reg x box 6 5/8" Reg 3 7 5/8" Reg x box 7 5/8" Reg 3 6 5/8" Reg x box 6 5/8" Reg 3 4 1 /2" Reg x box 4" I F 3 4 1/2" IFxbox4"IF 2 6 5/8" Reg x box 4 1 /2" I F 2 4"IFxbox4"IF 2 B-9 2.14. ELEVATORS 4 1 /2' D P. 3 sets 6 1 /2" DC 3 sets 8" DC 2 sets 9 1 /2" DC 2 sets 2.15. SLIPS 4 1/2' DP 3 sets 6 1 /2" DC 3 sets 8" DC 2 sets 9 1 /2" DC 2 sets 2.16. FISHING TOOLS Complimentary of over shots according to specification 2.20. INSIDE BOP Full opening x 4 1/2" DP 2 Float Type x 4 1/2" DP 2 2.17. BOP EQUIPMENT Annular preventer 13 5/8 x 5000 PSI Double RAM (Pipe & Blind) 13 5/8 x 5000 PSI Mud Cross 13 5/8 x 5000 PSI Choke Line w/HCR valve B-10 Manual valve F/Choke Line Manual valve F/Kill Line Closing Unit (6 station) Choke manifold 2.19. Company Man Office - 40' 1 Toolpusher Office - 40' 1 Shift Changing Room - 20' 1 B-11 2.20 LIST OF FISHING TOOLS - -------------------------------------------------------------------------------- No FISHING TOOLS - -------------------------------------------------------------------------------- 1 BOWEN Overshot 7-3/4" OD, w/c 4-1/2" IF 1 set With: 6-3/8" OD Spiral Grapples 1 pc 6-3/8" OD Type A Packers 1 pc 6-5/8" OD Spiral Grapples 1 pc 6-5/8" OD Type A Packers 1 pc 6-1/2" OD Spiral Grapples 1 pc 6-1/2" OD Type A Packers 1 pc 6-1/4" OD Spiral Grapples 1 pc 6-1/4" OD Type A Packers 1 pc Spiral Grapple Controls 1 pc 5" OD Basket Grapples 1 pc 5" OD Mill Control Panel 1 pc 5" Inner Seal 1 pc 5" Outer Seal 1 pc 4-1/2" OD Basket Grapples 1 pc 4-1/2" OD Mill Control Panel 1 pc 4-1/2" Inner Seal 1 pc 4-1/2" Outer Seal 1 pc 2 BOWEN Oil Jar,,Z" 6-1/4" OD, w/c 4-1/2 IF 1 pc 3 BOWEN Intensifire 6-1/4" OD, w/c 4-1/2 IF 1 pc 4 BOWEN Fishing Bumper Sub 6-1/4" OD, w/c 4-1/2 IF 1 pc 5 Junk Basket for 12-1/4" well, w/c 6-5/8" Reg 1 pc 6 Junk Basket for 7-7/8" well, w/c 4-1/2" IF 1 pc 7 Taper Tap 3" - 4-3/4" OD, w/c 6-5/8" Reg 1 pc 8 Taper Tap 3-1/4" - 4-3/4" OD w/c 4-1/2" IF 1 pc 9 Taper Tap 2-3/16" - 3-11/16" OD, w/c 3-1/2" IF 1 pc 10 Junk Mill for 7-7/8" well, w/c 4-1/2" Reg 1 pc 11 Junk Mill for 12-1/4" well, w/c 6-5/8" Reg 1 pc 12 Junk Mill for 17-1/2" well, w/c 6-5/8" Reg 1 pc - -------------------------------------------------------------------------------- B-12 2.21 FORKLIFT Made CATERPILLAR Capacity 20 000 Ibs B-13
APPENDIX C PERSONNEL TO BE PROVIDED BY CONTRACTOR POSITION NATIONALITY ON/OFF TOTAL ROTATION Rig or office Manager Ex-Pat 1/1 2 35/35 Tool pusher Ex-Pat 1/1 2 35/35 Tower pusher Ex-Pat 1/1 2 35/35 Driller Ex-Pat 2/2 4 35/35 Mechanic Ex-Pat 1/1 2 35/35 Electrician Ex-Pat 1/1 2 35/35 Office Personnel Kazakstan as necessary
- ----------------------------------------------------- -------------- ----------- Position Nationality On/Off Total Rotation - -------------------------------------------------------------------------------- KO-D Representative Kazakstan 1/1 2 16/16 - -------------------------------------------------------------------------------- Assistant Driller Kazakstan 4/4 8 16/16 - -------------------------------------------------------------------------------- Derrick Man Kazakstan 2/2 4 16/16 - -------------------------------------------------------------------------------- Floor Man Kazakstan 2/2 4 16/16 - -------------------------------------------------------------------------------- Roustabout Kazakstan 4/4 8 16/16 - -------------------------------------------------------------------------------- Forklift Operator Kazakstan 1/1 2 16/16 - -------------------------------------------------------------------------------- Mechanic Kazakstan 1/1 2 16/16 - -------------------------------------------------------------------------------- Motor Man Kazakstan 2/2 4 16/16 - -------------------------------------------------------------------------------- Electrician Kazakstan 1/1 2 16/16 - -------------------------------------------------------------------------------- Welder Kazakstan 1/1 2 16/16 - -------------------------------------------------------------------------------- TOTAL 19/19 38 - ------------------------------------------------------------------------------- Please note: Job descriptions are for guidance. All rig workers will be deployed to assist in rig operations as necessary and as designated by the Drilling Manager of KKM. C-1 APPENDIX D EQUIPMENT, CONSUMABLES, SERVICES AND PERSONNEL FURNISHED BY CONTRACTOR OR OPERATOR The equipment, machinery, tools, materials supplies, instruments, services and labor listed as follows and designated with the following numbers, denote which party to contract shall provide such items on location and at their expense. Category Provided by CONTRACTOR; paid for by CONTRACTOR 1 Provided by CONTRACTOR; paid for by OPERATOR plus handling charge 2 (Handling charge is schedule in Appendix A Provided by CONTRACTOR; paid for by OPERATOR without handling charge 3 Provided by OPERATOR paid for by OPERATOR 4 Items provided by Contractor at the expense of Operator shall be reimbursed at landed costs on location, upon receipt at Contractor's warehouse plus the handling charge where applicable. The provision of such items are subject to the written agreement of the Operator based upon quotations supplied by the Contractor.
- ---------- ------------------------------------------------------------------------------------------ --------------- Description Supplied by Item - ---------- ------------------------------------------------------------------------------------------ --------------- 1 Contractor's Equipment as set forth in Appendix B 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 2 Except as otherwise specified, maintenance and repair, including repair and including 1 repair parts, of Contractor's Equipment - ---------- ------------------------------------------------------------------------------------------ --------------- 3 Blow-out preventer spare parts and consumable rubber products 3* - ---------- ------------------------------------------------------------------------------------------ --------------- 4 Choke manifold spare parts and consumable rubber products 3* - ---------- ------------------------------------------------------------------------------------------ --------------- 5 Shale shaker screens 3* - ---------- ------------------------------------------------------------------------------------------ --------------- 6 Fishing tools and replacements 3* - ---------- ------------------------------------------------------------------------------------------ --------------- 7 Desander consumables 3* - ---------- ------------------------------------------------------------------------------------------ --------------- 8 Desilter consumables 3* - ---------- ------------------------------------------------------------------------------------------ --------------- 9 Required licenses, permits and clearances to enter upon and depart from Area of 4 Operations. - ---------- ------------------------------------------------------------------------------------------ --------------- 10 Fuel for Contractor's and Operator's equipment 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 11a Grease, cleaning solvents, and hydraulic fluid for Contractor's equipment 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 11b Lubricants and Oil. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 12 Casing & tubing thread lubricants, oils, greases, lubricants and hydraulic fluid for 4 Operator's equipment - ---------- ------------------------------------------------------------------------------------------ --------------- 13 Drill pipe thread dope BOP control fluid 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 14 Rubber drill pipe casing protectors, if required by the Operator 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 15 Drill pipe wipers 1 - ---------- ------------------------------------------------------------------------------------------ --------------- D-1 16 Drilling bits 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 17 Reamer and H.O. Cutter and Stabilizer blades, drilling safety joints, drilling jars, 4 including replacement parts - ---------- ------------------------------------------------------------------------------------------ --------------- 18 Core heads, core barrels, handling tools and coring services 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 19 Swab rubbers and swab tubing 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 20 Cement and additives 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 21 Mud products 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 22 Chemicals 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 23 Storage house items 20,21 and 22 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 24 a Additional equipment like casing, handling equipment for 2-7/8 inch tubing, cementing 2/4** heads for casing program , power tong - ---------- ------------------------------------------------------------------------------------------ --------------- 24 b Welding consumables as used on Contractor's equipment 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 25 Casing, liner, accessories and casing running services 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 26 Tubing and accessories 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 27 Drinking water. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 28 Drill the water well for industrial water and water lines including required permits. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 29 Maintenance of water well and pump, if required 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 30 Other material specifically required by th Operator 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 31 Routine loading/unloading of Contractor's equipment and consumables at Worksite. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 32 Transport of Operator's equipment and consumables within the Karakuduk Field... 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 33 Transport of Contractor's equipment and consumables from suppliers to Aktau 3 - ---------- ------------------------------------------------------------------------------------------ --------------- 34 Transportation from Contractor's Warehouse to Worksite 3 - ---------- ------------------------------------------------------------------------------------------ --------------- 35 Transport of Operator's personnel and personnel of Operator's other Contractors between 4 Aktau and well location - ---------- ------------------------------------------------------------------------------------------ --------------- 36 Transport of Contractor's personnel, equipment, spare parts, and consumables between 1 point of origin and Aktau, after initial mobilization period - ---------- ------------------------------------------------------------------------------------------ --------------- 37 Transportation for all rig moves within the Operating Area by Contractor. 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 38 Operator's office at the location. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 39 Contractor's operation base in the Operating Area 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 40 Surveying service to mark drilling location 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 41 Leveling, earthwork, foundations for camp and drilling rigs. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 42 Construct and maintain access roads and locations. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 43 Restore road and location 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 44 Dispose of drilling fluid, cuttings, refill and reserve pit. 4 - --------- ------------------------------------------------------------------------------------------ --------------- 45 Site preparation 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 46 Contractors radio communication services and telephone at Operator's Operation Base and 4 drilling unit. - ---------- ------------------------------------------------------------------------------------------ --------------- 47 Permits for Contractor's radio communication services and telephone at Operation Base 4 and drilling unit. - ---------- ------------------------------------------------------------------------------------------ --------------- 48 Wellhead installation services 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 49 Welding 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 50 Welding of Casing Head 2,4 - ---------- ------------------------------------------------------------------------------------------ --------------- 51 Contractor's personnel, as set forth in Schedule C, including replacement, subsistence, 1 insurance, wages, benefits and all other costs included taxes related hereto. - ---------- ------------------------------------------------------------------------------------------ --------------- D-2 - ---------- ------------------------------------------------------------------------------------------ --------------- 52 Extra personnel in excess of the complement of personnel set forth in Schedule C when 3 requested in writing by Operator. - ---------- ------------------------------------------------------------------------------------------ --------------- 53 Overtime, beyond normal work schedule for Contractor's personnel when requested in 3 writing by Operator - ---------- ------------------------------------------------------------------------------------------ --------------- 54 Food and Lodging for the Contractor's personnel included as part of the day rate 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 55 Handling of all items on the Worksite limited to the equipment Contractor has available 1,4 at the well location. - ---------- ------------------------------------------------------------------------------------------ --------------- 56 Electrical supply for Contractor's equipment at the well location. 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 57 Initial inspection of Contractor's drill pipe, drill collars and other in -hole 1 equipment according to API-IADCRP-7G standards - ---------- ------------------------------------------------------------------------------------------ --------------- 58 Inspection of Contractor's drill pipe, drill collars and other in-hole equipment 3 according to API-IADCRP-7G standards, after operation commence under this Contract at reasonable intervals requested by Operator. - ---------- ------------------------------------------------------------------------------------------ --------------- 59 Inclination surveys equipment and services during vertical drilling (TOTCO). 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 60 Mud logging unit with related equipment and services 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 61 Wireline logging unit with related equipment services. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 62 Drilling jars Supply and services 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 63 Drill stem test equipment and services. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 64 Wireline formation testing and wall sampling equipment and services 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 65 Cementing unit and services 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 66 Geological Laboratory with related equipment and services 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 67 Mud laboratory unit with related equipment and services 4 - --------- ------------------------------------------------------------------------------------------ --------------- 68 Distribution networks for above units, limited to Contractor's items as provided in 4 Contractor's Equipment Inventory: - Potable water (all units) - Industrial water (where applicable) - Fuel (all units) - Intercoms (all units) - mud (unit 1) - ---------- ------------------------------------------------------------------------------------------ --------------- 69 Trucking and transportation of equipment from Operator's storage yard to the Operation 4 Area - ---------- ------------------------------------------------------------------------------------------ --------------- 70 Drill pad or well site island 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 71 Meals and accommodations for Contractor's personnel. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 72 On site Doctor. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 73 Communication facilities in the Field 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 74 Diesel fuel for rig and moving equipment 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 75 Drill water. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 76 Left blank deliberately. D-3 - ---------- ------------------------------------------------------------------------------------------ --------------- 77 Temporary accommodation in Aktau, for rig crew due to flight or any other operational 4 necessities. - ---------- ------------------------------------------------------------------------------------------ --------------- 78 Equipment inspections requested by Operator. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 79 Covered warehouse for Contractor's spare parts. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 80 All export documentation for rig at contract termination. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 81 Rotation cost for all expatriate personnel to Aktau airport. 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 82 All payroll taxes benefits and personnel insurance including Medivac for Contractor's 1 personnel in Kazakhstan. - ---------- ------------------------------------------------------------------------------------------ --------------- 83 Rig supply and repairs 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 84 Air freight on parts and supplies to Aktau airport or port. 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 85 Rotation cost for all Kazakh personnel 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 86 Rig insurance. 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 87 One 40-ton crane and one 16-ton crane provided by Operator, additional rig move 4 equipment - ---------- ------------------------------------------------------------------------------------------ --------------- 88 Lubricants for rig. 4 - ---------- ------------------------------------------------------------------------------------------ --------------- 89 Lubricants for Contractor's trucks. 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 90 All communication and administration expenses in Contractor's office 1 - ---------- ------------------------------------------------------------------------------------------ --------------- 91 All Contractor's personnel travelling/rotation expenses 1 - ---------- ------------------------------------------------------------------------------------------ --------------- * After initial inspection by Operator ** Prices shall be agreed upon by the Parties D-4
APPENDIX E CONTRACTOR'S INSURANCE REQUIREMENTS 1. Worker's Compensation and Employer's Liability Insurance Worker's compensation and labor liability insurance covering all Contractor's employees in accordance with statutory requirements of the country in which the work is to be performed and the country of hire. The Employer's liability insurance shall have a limit of $1,000,000 USD per occurrence. 2. Comprehensive General Liability Comprehensive General Liability insurance with contractual liability, products and completed operations and broad form property damage coverage including, providing for a combination single limit of $1,000,000 USD for personal injury, death or property damage resulting from each occurrence and covering all of Contractor's operations under this Contract. The aforesaid insurance shall cover, but not be limited to loss or damage to the Contractor's Equipment and Personnel. 3. Umbrella Liability Insurance Umbrella Liability insurance coverage in excess of the primary coverage with the limit of no less than five million US dollars per occurrence including all areas involved in operations under this contract. 4. War, Expropriation, Nationalization, and Confiscation Insurance 5. Contractor shall arrange for, or cause to be provided, insurance throughout the term of this Contract, covering the risks of war, expropriation, nationalization, and confiscation, if the exportation of the Drilling Unit is effectively prohibited from leaving Kazakhstan as the result of an action by the government of the Republic of Kazakhstan. Such insurance shall have limits of $5,500,000 and shall name Operator and others as required by written contract, as additional assured. Further, such insurance shall provide a waiver of subrogation in favor of operator and others as required by written contract. E-2 APPENDIX F PERSONNEL CREW RATES Position Day rate ($) Overtime rate ($) - ------------------------ ------------------------- ----------------------------- Toolpusher 300 37 Towerpusher 280 35 Driller 250 30 Mechanic 250 30 Electrician 250 30 F-1 EX-10.66 14 TRANSPORTATION CONTRACT Exhibit 10.66 TRANSPORTATION CONTRACT Astana January 31, 2000 PREAMBLE JSC NOC KazakhOil, hereinafter referred to as the "Company", in the person of Executive Marketing Director Ms. A. M. Rakhimbekov, acting on the basis of the Power of Attorney (1) 1-13 dated January 3, 2000, on the one side and JSC Karakudukmunay, hereinafter referred to as the "Principal" in the person of General Director Mr. N. D. Klinchev and Financial Director Mr. R. Moore, acting on the basis of the Charter, on the other side, collectively referred to as the "Parties", have entered into this Transportation Contract (the "Contract") and hereby agree as follows: 1. SUBJECT OF THE CONTRACT 1.1 The Company, at the expense and on the instructions of the Principal, shall arrange transportation for export in batches to the far abroad of crude oil ("Commodity") belonging to the Principal and shall provide such other services in connection therewith as are provided in this Contract. 1.2 The volume of a batch of Commodity transported hereunder shall be determined in accordance with the monthly schedules of transit and distribution of Kazakhstany oil. 2. DEFINITIONS AND INTERPRETATION 2.1 As used in the Contract, the following terms have the meanings indicated: "Buyer" means STASCO in its capacity as Buyer under the Offtake Agreement and any other person in its capacity as buyer under any Other Agreement. "Commodity" is defined in item 1.1. "Company" is defined in the Preamble to this Contract. "Contract" is defined in the Preamble to this Contract. "CPC Blend" means the blend of crude oil generally available at the CPC Terminal that complies with minimum specifications agreed by the Principal and STASCO pursuant to the Offtake Agreement. "CPC Pipeline" means the pipeline being constructed by the Caspian Pipeline Consortium from the Tengiz field to Novorossiysk. "CPC Pipeline Operational Date" means the last day of the month in which (i) the CPC Pipeline is completed, (ii) the Karakuduk Field is so connected with the CPC Pipeline (via pipeline, rail link, or otherwise) that Karakuduk Crude Oil can and will be evacuated to the CPC Terminal via the CPC Pipeline, (iii) the CPC Pipeline commences pumping commercial quantities of crude oil as determined by the Principal and STASCO pursuant to the Offtake Agreement, and (iv) if the CPC Pipeline is only transporting Commodity on a blend (as opposed to batch) basis, the Principal and STASCO have agreed on the specifications for CPC Blend pursuant to the Offtake Agreement. "CPC Terminal" means the single buoy-mooring terminal being built by the Caspian Pipeline Consortium near Novorossiysk. "DAF" has the meaning given to "delivered at frontier" in the Incoterms 1990. "Delivery Basis" means (i) during the "Principal Period", delivery of Commodity on terms of DAF Adamovo, DAF Fenyeshlitke, DAF Budkovce, FOB sea-port Odessa, FOB sea-port Novorossiysk, or FOB sea-port Ventspils, as applicable, and (ii) during the "Secondary Period", delivery of Commodity on terms of FOB CPC Terminal, in each case in accordance with the route indicated in the monthly delivery schedules of the Company. "Delivery Date" for a batch of Commodity means the date of execution of the last acceptance-delivery act/bill of lading for that batch of Commodity in accordance with item 4.1.vii. "Delivery Month" means the period for delivery under the Offtake Agreement or the Other Agreement, as applicable. "Effective Date" means the date of actual execution of this Contract by the Parties. "FOB" has the meaning given to "free on board" in the Incoterms 1990. "Initial Term" means the period commencing on the Effective Date and concluding on the last day of the month in which the fifth anniversary of the Offtake Agreement Effective Date falls. "Karakuduk Crude Oil" means Commodity produced from the Karakuduk Field or from such other field as the Principal and the Company may agree. "Karakuduk Field" means the Karakuduk oil field in the Mangistau Oblast of the Republic of Kazakhstan as more particularly described in the Petroleum Contract and the License. "Offtake Agreement" means that certain Crude Oil Sale and Purchase Agreement between the Principal and STASCO dated 1 November 1999. "Offtake Agreement Effective Date" means the "effective date" of and as defined in the Offtake Agreement. "Other Agreement" means any agreement other than the Offtake Agreement pursuant to which the Principal sells Karakuduk Crude Oil. "Parties" is defined in the Preamble to this Contract. "Petroleum Contract" means that certain Agreement for Exploration, Development and Production of Oil in Karakuduk Oil Field in Mangistau Oblast of the Republic of Kazakhstan between the Ministry of Oil and Gas Industries of the Republic of Kazakhstan for and on behalf of the Government of the Republic of Kazakhstan and the Principal. "License" means License No. MG#249 (Oil) dated 25 June 1995 (as subsequently amended) granted to the Principal by the Government of the Republic of Kazakhstan. "Principal" is defined in the Preamble to this Contract. "Principal Period" means the period from the Effective Date to the CPC Pipeline Operational Date. "REBCO" means Commodity that satisfies the specifications of TU-39-1623-93 "Russian oil delivered for export; Specifications" for export to the far abroad. 2 "Secondary Period" means the period from the CPC Pipeline Operational Date to the date of termination of this Contract (inclusive). "STASCO" means Shell Trading International Limited acting through its agent Shell International Trading and Shipping Company Limited. "Tenge" means official currency of the Republic of Kazakhstan. 2.2 In this Contract, unless the context otherwise requires: i. Headings are used for convenience only and do not affect the interpretation of this Contract; ii. any expression, which means individual, includes any company, Partnership, trust, joint venture, association, corporation, or other corporate organization and vice versa; iii. references to Articles and Sections, unless otherwise expressly provided in this Contract, are references to articles and sections of this Contract; iv. except as otherwise expressly provided, any reference to a document includes an amendment or supplement to, or replacement or renovation of, that document; v. a reference to any Party to this Agreement and to any other document includes that Party's legal successors and assigns; vi. words, which mean the singular, also include the plural and vice versa; vii. the word "including" means "including without limitation"; viii. a "business day" means a day (other than a Saturday or a Sunday) on which banks are open for ordinary banking business in London; ix. "tonne" is a metric ton; and x. a "year" means a calendar year, a "quarter" means a calendar quarter, and a "month" means a calendar month. 3. QUALITY 3.1 Unless otherwise agreed by the Parties, the Principal shall at all times deliver to the Company Karakuduk Commodity pursuant to this Contract. The Company shall ensure that (i) during the Principal Period, the quality of Commodity delivered at the relevant delivery point shall be REBCO, and (ii) during the Secondary Period, the quality of Commodity delivered at the CPC Terminal shall be Karakuduk Commodity for segregated batch deliveries or shall be CPC Blend for deliveries for which segregated batch delivery is not available. 4. OBLIGATIONS OF THE PARTIES 4.1 At all times during the term of this Contract, the Company shall: (i) Assist in obtaining required official export permissions (certificate of origin of the Commodity at place the load output, customs declaration on Commodity output) for release of the batch of Commodity being delivered from the customs territory of the Republic of Kazakhstan; 3 (ii) accept Karakuduk Commodity from the Principal at Metering Point 719 (PSP Samara of the Western branch office of KazTransOil) and arrange its transportation for export in accordance with the Delivery Basis; (iii) execute all customs formalities to carry out transit transportation of the batch of Commodity through the territory of Russian Federation and the countries of the C.I.S.; (iv) procure sending of a route telegram to AK Transneft; (v) procure delivery of the indicated Commodity to the Buyer on the Delivery Basis, less operating losses in transportation of the Commodity, that are charged to the Principal's account; (vi) procure berthing for the Buyer's tanker and delivery of the batch of Commodity to such tanker through the Company's agents in the relevant port; (vii) timely present to the Principal the Acts of acceptance-delivery of the Commodity (oil)/Bills of Lading executed at the Delivery Basis. (During the Principal Period, Acts of acceptance-delivery executed on the DAF basis (Adamovo, Fenyeshlitke or Budkovce) shall be presented in one copy, Bills of Lading and sets of shipping documents attached to them executed on the FOB basis (Odessa, Novorossiysk or Ventspils) shall be presented in the number of copies specified in the Buyer's instructions, and during the Secondary Period, such documents as may be required at that time executed on the FOB CPC Terminal basis shall be presented according to the list and in the number of copies as it would be agreed between Principal, Company and CPC; (viii) provide the Principal with information on the status of execution of this Contract; (ix) on the Principal's request, prepare analyses of the Buyer's calculations of prices; (x) cooperate with the Principal, to render, if possible, such assistance that can prove necessary for the Principal to perform its obligations under the Offtake Agreement or any other contract with the Buyer regarding Commodity; and (xi) during the term of this Contract, observe all provisions of this Contract and other terms and conditions agreed upon with the Principal. 4.2 At all times during the term of this Contract, the Principal shall: (i) Deliver Karakuduk Commodity to the Company at Metering Point 719 (PSP Samara of the Western branch office of KazTransOil) in the amount determined in accordance with item 1.2 of this Agreement; (ii) independently conclude contracts with the Buyer on selling Crude Oil for export and submit a copy of each such contract with the Buyer to the Company 5 days before the beginning of the relevant Delivery Month; (iii) obtain, at its own expense, required official export permissions (certificate of origin of the Commodity at place of the load output, customs declaration on Commodity output) for release of the batch of Commodity being delivered from the customs territory of the Republic of Kazakstan and deliver them before the 5th day of the Delivery Month; (iv) if the Delivery Basis is DAF, provide the Company before the 5th day of the Delivery Month with a copy of confirmation from AK Transneft on its readiness to accept the agreed batch of Commodity from coordinators at the relevant directions; 4 (v) if the Delivery Basis is FOB, to provide the Company and the Company's agent in the relevant port 5 days before the agreed upon loading period (Laycan) with the Buyer's instructions on filling in the shipping documents, including name of the vessel, its characteristics, loading period (Laycan), lay time and other necessary data; (vi) make a 100% pre-payment for transportation of the batch of Commodity through the territory of Russian Federation and the CIS countries, in accordance with the Payment Order of AK Transneft; (vii) pay the additional expenses if the transport tariffs are increased, providing the Company presents the appropriate documents; (viii) reimburse the Company for the cost of execution of the customs declaration at the Energy customs office of the RF in accordance with the Company's invoice; (ix) reimburse the Company for all expenses reasonably incurred in connection with the performance by the Company of its obligations under this Contract within 30 (thirty) days of delivery to the Principal of proper invoices and other supporting documents for such expenses; (x) pay the Company's fee for the services rendered under Article 5 hereof, in accordance with the invoice and tax invoice; (xi) provide copies of all payment documents; (xii) pay all transportation and other expense of KazTransOil on the territory of Kazakhstan under its contract with KazTransOil; (xiii) to make all necessary payments to the budget of the Republic of Kazakhstan related to excise taxes, VAT and other obligatory payments to the budget in accordance with the tax legislation (xiv) during the term of this Contract, observe all provisions of this Contract and other terms and conditions agreed upon with the Company. 5. COMPANY'S FEE AND PAYMENT TERMS 5.1 The Principal shall pay the Company a fee of $1.00 (one dollar), inclusive of VAT, per one net tonne of Commodity shipped pursuant to this Contract. 5.2 The Principal shall pay the commission fee for each delivered batch of Commodity to the Company's account within 30 (thirty) banking days after the Delivery Date. 5.3 The payment shall be made in accordance with the invoice presented by the Company and the tax invoice (original or a fax copy) in Tenge at the official exchange rate of the National Bank of the Republic of Kazakhstan effective on the Delivery Date in accordance with item 4.1.vii. 6. PERIOD AND TERMS OF LOADING 6.1 Commodity will be shipped by the Company in batches during the period from the Effective Date through the term of this Contract subject to (i) the Principal having the requisite supplies of Commodity and (ii) the Principal having entered into the Offtake Agreement or another Agreement with the Buyer. 5 6.2 The Company shall have a right to deliver Commodity to the Buyer with a permissible +/-5% deviation from the number of batches of Commodity. 7. OWNERSHIP RIGHT AND RISK OF ACCIDENTAL LOSS 7.1 Ownership right and risk of loss with respect to all Commodity transported under this Contract, shall remain with the Principal at all times prior to transfer of the ownership right and risk of loss with respect to such Commodity to the Buyer in accordance with the Delivery Basis. At no time shall the Company have the ownership right to any Commodity transported under this Contract. 7.2 At any time in accordance with reasonable requirements of the Principal, the Company shall confirm the Principal's ownership rights to Commodity, transported under this Contract. 7.3 At any time the Principal may insure this Contract at his own expense, and the Company shall render feasible assistance to the Principal in this case. 8. LIABILITY; INDEMNITY 8.1 The Parties shall be liable for non-execution and/or improper execution of their obligations under this Agreement in accordance with the legislation of the Republic of Kazakstan. 8.2 In case if the Principal violates the conditions of this Contract, and such violation entails infringement of the Off-take Agreement conditions by the Principal, then the Principal shall be solely liable in front of the Purchaser for such violations. In addition, the Company shall not be liable in front of the Principal or the Purchaser hereunder. 8.3 In case if violation by the Principal of the Off-take Agreement conditions takes place due to infringement by the Company of its liabilities in front of the Principal under this Contract, the Company shall be soley liable in front of the Principal for such losses resulting from such violation , evidenced and supported by confirming documents .. 9. TERM OF THE CONTRACT 9.1 In accordance with items 9.3, 9.4, and 10.3, this Contract shall come into force on the Effective Date, remain effective throughout the Initial Term, and be prolonged, or further extended automatically for a period of 12 months, each such extension commencing at the end of the last day of the Initial Term or the relevant anniversary thereof, unless either Party serves written notice of termination on the other Party at least 65 days prior to the end of the Initial Term, or any subsequent extension. 9.2 Any notice of termination served by any Party with violation of the period of notice required by item 9.1 shall be invalid and of no effect whatsoever. 9.3 If the Company fails to perform within 30 days upon notice from the Principal on nonperformance by the Company of any of its obligations under this Contract, and keeps non-performing it, then the Principal may upon expiry of the indicated 30 day period, terminate this Contract, with obligatory accounts settling. 6 9.4 If the Principal fails to perform within 30 days upon notice from the Company on nonperformance by the Principal of any of its obligations under this Contract, and keeps non-performing it, then the Company is entitled, upon expiry of such 30 day period, to terminate this Contract, with obligatory accounts settling. 10. FORCE-MAJEURE 10.1 Except for the obligations to make any payment, required by this Contract (which shall not be subject to relief under this item), a Party shall not be in breach of this Contract and liable to the other Party for any failure to fulfil any obligation under this Contract to the extent any fulfillment has been interfered with, hindered, delayed, or prevented by any circumstance whatsoever, which is not reasonably within the control of and is unforeseeable by such Party and if such Party exercised due diligence, including acts of God, fire, flood, freezing, landslides, lightning, earthquakes, fire, storm, floods, washouts, and other natural disasters, wars (declared or undeclared), insurrections, riots, civil disturbances, epidemics, quarantine restrictions, blockade, embargo, strike, lockouts, labor disputes, or restrictions imposed by any government. 10.2 The Party affected by the indicated circumstances shall be excused from performance or accurate performance, as the case may be, of such obligation for so long as such circumstance continues to exist. The Party affected shall promptly, at any rate, within twenty-four (24) hours from the receipt of information about the occurrence of such event must notify the other Party on the occurrence of such circumstances and on the obligations affected. 10.3 If performance of the obligations by any Party under this Contract have been delayed for a period of 3 months, the other Party shall be entitled to terminate this Contract thereafter by giving notice to that effect to the Party claiming relief under Section 10, with obligatory accounts settling. 10.4 No circumstance described in item 10.1 shall result in prolongation of the validity term of this Contract. 11. SETTLEMENT OF DISPUTES AND APPLICABLE LAW 11.1 In the event of any disputes arousal under this Contract, the Parties shall exercise all reasonable efforts to resolve them by negotiations. 11.2 In the event that resolution of the disputes by negotiations is impossible, they shall be subject to court consideration at the defendant's location. 11.3 Effective legislation of the Republic of Kazakhstan shall apply to any relations of the Parties arising out of this Contract. 12. MISCELLANEOUS TERMS AND CONDITIONS 12.1 Neither Party shall be entitled to assign any of its rights or duties hereunder to any third parties without a written consent of the other Party thereto. 7 12.2 Any amendments or alterations to this Contract shall be considered valid only if executed in writing and signed by the authorized representatives of the Company and the Principal. Usage of facsimile communication for signing the above mentioned amendments and alterations shall be acceptable. 12.3 From and after the Effective Date, all prior negotiations and correspondence pertinent to the Contract shall have no legal force. 12.4 In all other matters not stipulated in this Contract, relations of the Parties shall be governed by the legislation of the Republic of Kazakhstan in force. 12.5 The Parties shall guarantee observance of confidentiality in respect to any information and documentation received hereunder; provided, that nothing in this item shall restrict either Party from disclosing details of or relating to this Contract information (i) to any shareholder of such Party, (ii) to any creditor to such Party, (iii) to any person considering to become a shareholder of or creditor to such Party, (iv) to the extent necessary to comply with any laws or regulations applicable to such Party. 12.6 Any attachments to this Contract shall be an integral part hereof. 12.7 This Contract has been executed in 2 (two) original copies in both the Russian language and the English language, one copy in each language for each of the Parties, in addition, the Russian text of the Contract has priority. 13. REPRESENTATIONS 13.1 Each Party represents to the other Party that: i. It is duly organized and validly existing under the laws of the jurisdiction of its incorporation or registration and, if provided under such laws, in good standing; ii. it has the power to sign and deliver this Contract and has undertaken all necessary measures to authorize such signing, delivery and execution; iii. such signing and delivery do not violate or conflict with any law applicable to it, any provisions of its constitutional documents, any orders or judgements of any court or another agency of government applicable to it or any of its assets or any contractual restrictions binding on or affecting it or any of its assets; iv. all governmental and other permits which are required to have been obtained by it with respect to this Contract, have been obtained and have full legal force; and all conditions of any such permits have been complied with; and v obligations of such Party under this Contract constitute its legal, valid and binding obligations, enforceable in accordance with its respective terms (subject to applicable bankruptcy, re-organization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to the enforceability, to equitable principles of general application (regardless of whether enforcement on execution of this Contract is sought in a proceeding in equity or under law)). 8 14. MISCELLANEOUS 14.1 This Contract constitutes the entire agreement of the Parties with respect to the subject matter of this Contract and the Parties acknowledge that they do not enter into this Contract regardless of any previous contacts between the Parties or their affiliates. 14.2 Any amendments or alterations to any of the terms of this Contract shall be effective unless they are registered in writing and signed by or on behalf of each of the Parties; no waiver of any provision hereof shall be effective unless it is in writing and signed by the Party, against which such waiver is sought to be enforced. 14.3 Except as expressly provided herein, the rights, authorities and remedies, provided in this Contract, are cumulative and not exclusive of any rights, authorities and remedies provided by the law. 14.4 Except as expressly provided herein no delay or omission on the part of either Party in exercising any rights, authorities or remedies, provided by law or under this Contract, nor any indulgence granted by any Party to another Party, shall impair such rights, authorities or remedies, or be construed as a waiver thereof; moreover, no single or partial exercise of any right, power or remedy provided by law or under this Contract shall hinder other or further exercise thereof, as well as exercise of any other right, power or remedy. 14.5 This Contract does not confer rights or remedies upon any person other than the Principal and the Company. 15. LEGAL ADDRESSES AND PROPS OF THE PARTIES COMPANY: PRINCIPAL JSC NOC KazakhOil JSC Karakudukmunay 473000, Republic of Kazakhstan, Astana, 466200, Aktau, Mangistau oblast 60, Republic avenue District 3, Building 82 Tel.: (3172) 280609, fax 327724 Tel.: (3292) 513795, fax 518336 TRN 600700150675 TRN 430600001175 Bank props: Bank props: Tenge account (1) 000467052 AB Neftebank, Aktau in Akmola affiliate of Tenge account (1) 609614 JSC "Almaty trade and finance bank", Astana IAT 195301730 IAT 192901705 /s/ Amangeldy Tlegenov /s/ Nikolai D. Klinchev - -------------------------------------------- ------------------------------- A.M. Rakhimbekov Nikolai Klinchev /s/ Richard J. Moore ------------------------------- Richard Moore 9 EX-10.67 15 COMMERCIAL SERVICES AGREEMENT Exhibit 10.67 Dated: 1st November,1999 Commercial Services Agreement ----------------------------- Shell Trading International Limited and Close Type JSC Karakudukmunay Inc. THIS COMMERCIAL SERVICES AGREEMENT is made the 1st day of November, 1999 BETWEEN: (1) SHELL TRADING INTERNATIONAL LIMITED, a company incorporated under the laws of England and having its principal office at Shell Centre London SE1 7NA ("STIL"), acting through its agent SHELL INTERNATIONAL TRADING AND SHIPPING COMPANY LIMITED, a company incorporated under the laws of England, and having its principal office at Shell-Mex House, Strand, London WC2R OZA (hereinafter referred to as "STASCO"). and (2) CLOSE TYPE JSC KARAKUDUKMUNAY INC. a company incorporated under the laws of the Republic of Kazakhstan,and having its principal office at Microregion 3, Building 82, Aktau 466200 Kazakhstan (hereinafter referred to as "KKM"). (STASCO and KKM may be referred to herein individually as a "Party" and collectively as the "Parties".) WHEREAS: A. KKM is the lawful holder of the Petroleum Licence No. MG #249(Oil) dated 25 June 1995 (as subsequently amended) granted to KKM by the Government of the Republic of Kazakhstan. B. STASCO provides to its Affiliates certain services relating to the sale and marketing of crude oils and KKM wishes to receive similar services more particularly described herein in relation to its business activities undertaken pursuant to the Petroleum Licence. C. KKM and STIL, acting through its agent, STASCO, are parties to a crude oil sale and purchase agreement even dated herewith regarding the sale and purchase of crude oil being, or being equivalent to, the total quantity of exportable Karakuduk Crude Oil (the "Crude Oil Sale and Purchase Agreement") and the Crude Oil Sale and Purchase Agreement shall only become effective, inter alia, upon the execution and delivery of this agreement. THEREFORE IT IS AGREED AS FOLLOWS:- ARTICLE 1 - DEFINITIONS ----------------------- 1.1 In this Agreement and the recitals hereto, save as set out in Article 1.2 below, or unless the context otherwise requires, any term which is defined in the Crude Oil Sale and Purchase Agreement shall have the same meaning when used herein as is ascribed to it in the Crude Oil Sale and Purchase Agreement. 1.2 The following terms shall have the meaning set out below, unless the context otherwise requires: "Agreement" means this agreement. "Confidential Information" means any knowledge, data and information at any time disclosed to one Party ('the receiving Party') by or on behalf of the other Party ('the disclosing Party') in writing, in drawings, in computer programs, or in any other way, or acquired directly or indirectly by the receiving Party from the disclosing Party. "Crude Oil Sale and Purchase Agreement" shall have the meaning ascribed to it in Recital C hereto. "Effective Date" shall have the meaning ascribed to it in Article 2.1. "Fee" shall have the meaning ascribed to it in Article 5.1. "First Annual Fee" shall have the meaning ascribed to it in Article 5.1. "Gross Negligence or Wilful Misconduct" means any act or omission done or omitted to be done intentionally or with deliberate or reckless disregard for the reasonably foreseeable consequences of such act or omission, but does not include any good faith error of judgement or mistake. "Services" shall have the meaning set out in Article 4.1. 1.3 In this Agreement, unless the context otherwise requires: (a) headings are for convenience only and do not affect the interpretation of this Agreement; (b) an expression importing a natural person includes any company, partnership, trust, joint venture, association, corporation or other body corporate and vice versa; (c) references to Articles, unless the context otherwise requires, are references to articles of this Agreement; (d) except as otherwise provided, a reference to a document includes an amendment or supplement to, or replacement or novation of, that document, but disregarding any amendment, supplement, replacement or novation made in breach of this Agreement; (e) a reference to a Party to this Agreement and to any other document includes that Party's successors and permitted assigns; (f) words importing the singular include the plural and vice versa; (g) the word "including" means "including without limitation"; (h) a "business day" means a day (other than Saturday or Sunday) on which banks are open for ordinary banking business in London; (i) a "year" means a calendar year, a "quarter" means a calendar quarter and a "month" means a calendar month. ARTICLE 2: - CONDITIONS PRECEDENT --------------------------------- 2.1 The provisions of this Agreement other than this Article 2.1, Article 5.1 and Article 6.1 shall only come into effect on the date (the "Effective Date") when: (a) disbursement of the first advance under the Loan Agreement shall have occurred; (b) the Crude Oil Sale and Purchase Agreement shall have been executed and delivered by the parties thereto; and (c) the payment required by Article 5.1 shall have been made by KKM to STASCO in accordance with Article 6.1 whereupon this Agreement shall have full force and effect. In the event that the Effective Date does not occur prior to 31st January 2000, this Agreement may be terminated forthwith by Buyers with immediate effect. ARTICLE 3: - TERM OF AGREEMENT ------------------------------ 3.1 Subject to Articles 2.1 and 10, this Agreement shall be effective for the duration of the Crude Oil Sale and Purchase Agreement and subject to earlier termination pursuant to Articles 2.1 and 10 shall only terminate upon the termination of the said Crude Oil Sale and Purchase Agreement. 3.2 Termination of this Agreement pursuant to Article 3.1 shall not create any obligation on either Party to pay any compensation in respect of such termination. 3 ARTICLE 4: - SERVICES --------------------- 4.1 Subject to Article 4.4, STASCO shall provide the services set out in Article 4.2 (the "Services") to KKM. 4.2 The Services shall comprise: (a) The provision of information regarding international crude oil markets to assist KKM gain a better understanding of international crude oil markets and how REBCO, Karakuduk Crude Oil or CPC Blend (as the case may be) is placed against the competitors. This information may either be of a general nature or specific to a particular area or market environment. (b) The preparation and delivery of presentations (not exceeding two per year) at the request of KKM on international crude oil markets to the government departments, the national oil company and other official entities in the Republic of Kazakhstan. (c) The provision (to the extent STASCO is free to disclose the same) of information pertaining to meetings and contacts with members of the oil industry around OPEC meetings. (d) If requested by KKM, the provision of advice to KKM on ways and means to upgrade crude oil deliverability (cargo size, timing) by KKM of crude oil to be supplied under the Crude Oil Sale and Purchase Agreement. (e) If requested by KKM, the provision of assistance to obtain access to public country data (including competitor information, if available) and crude evaluation of the different crudes produced in the Republic of Kazakhstan. (f) If requested by KKM, the review of crudes oil grades that compete with REBCO, Karakuduk Crude Oil or CPC Blend (as the case may be) and their pricing range vis-a-vis REBCO, Karakuduk Crude Oil or CPC Blend (as the case may be). (g) If requested, the provision of information to independent market assessors (e.g. Platts, Argus) regarding the true and fair value of REBCO, Karakuduk Crude Oil or CPC Blend (as the case may be). (h) The provision of the services of a "non-dedicated" account manager to assist with the marketing and sale of Karakuduk Crude Oil to such extent as STASCO considers to be appropriate and reasonable which shall include not more than two visits per year to KKM in the Republic of Kazakhstan by the STASCO account manager (the total aggregate duration of which shall not exceed six working days), save in the first year of this Agreement in which no more than five visits shall be made to KKM in the Republic of Kazakhstan by the STASCO account manager (i) The provision (to the extent STASCO is free to disclose the same) of information pertaining to meetings and contacts made at international oil industry meetings (e.g. IP, API, APEC) in so far as it relates to the marketing of REBCO, Karakuduk Crude Oil or CPC Blend (as the case may be). 4.3 The Services may be varied by the mutual agreement of the parties. 4.4 STASCO shall use its reasonable endeavours to fulfil its obligations and discharge its responsibilities hereunder with all due care and in accordance with good commercial practice but always subject to the provisions of Article 9. ARTICLE 5: - REMUNERATION AND EXPENSES -------------------------------------- 5.1 In consideration of the provision of the Services, KKM shall pay an annual fee (the "Fee") to STASCO of $100,000 in respect of the period from the date hereof until 31st December 2000 (the "First Annual Fee") and thereafter $50,000 in respect of each year (or part thereof) during the term of this Agreement. 4 5.2 Save as set out in Article 5.1, all costs and expenses incurred in relation to the provision of the Services shall be solely for the account of STASCO. ARTICLE 6: - TERMS OF PAYMENT ----------------------------- 6.1 KKM shall pay the First Annual Fee upon the execution of this Agreement and the Fee in respect of each year after the year 2000, shall be paid by 31 December each year for the following year. 6.2 STASCO shall invoice KKM for the First Annual Fee and the Fee for each year including and after the year 2000 and any value added tax payable thereon and KKM shall pay each invoice free of charges and without asserting at the time for payment, any set-off, counterclaim or right to withhold whatsoever, in Dollars in New York to STASCO's account number 9492604708 with Chase Manhattan Bank, New York . For Further Credit to STASCO USD Receipt Account. SWIFT address CHASUS33 or CHIPS Participant Number 0002 or Fed Wire Routing Number 021000021 (or to such other bank account as may be advised by STASCO to KKM from time to time) quoting STASCO's invoice number and KKM's name. 6.3 All payment under this Agreement will be made without any deduction or withholding for or on account of any tax, levies or impost whatsoever unless such deduction or withholding is required by any applicable law in which case KKM shall pay in addition to the payment to which STASCO are otherwise entitled under this Agreement such additional amount as is necessary to ensure that the net amount actually received by STASCO will equal the full amount that STASCO would have received had no such deduction or withholding been required. 6.4 Unless otherwise agreed in writing any amount due from KKM under this Agreement which is not paid by the due date shall bear simple interest accruing on a daily basis commencing on the day immediately after the date on which it became due up to and including the date of payment at the rate calculated for each Month on the basis of an annual rate (360 day year basis) of three percent plus the one Month London Interbank Offered Rate as quoted by the National Westminster Bank PLC at the 11.00 a.m. fixing on the first London banking day for each Month in which the amount due from KKM remains unpaid. The foregoing shall not be construed as an indication of any willingness on the part of STASCO to provide extended credit as a matter of course and shall be without prejudice to any rights and remedies which STASCO may have under this agreement or otherwise. 6.5 Where the due day for payment falls on a Saturday or on a weekday other than Monday which is not a banking day in New York or at such other place as may be designated by STASCO for payment, then any such payment shall be made on the nearest preceding banking day. Where the last day for payment falls on a Sunday or a Monday which is not a banking day in New York or at such other place so designated, then any such payment shall be made on the next following banking day. ARTICLE 7: - RELATIONSHIP BETWEEN THE PARTIES --------------------------------------------- 7.1 In performing its obligations under this Agreement STASCO is an independent contractor to KKM. STASCO shall make it clear in all dealings that it is not an agent of KKM and unless expressly authorised in writing by KKM, STASCO shall have no authority whatsoever to make any legally binding commitment on behalf of KKM. 7.2 Nothing herein shall be construed as creating a partnership or trust or an agency between KKM and STASCO. 7.4 Nothing in this Agreement shall prevent STASCO from providing services of a similar nature as the Services to any other party whether or not an Affiliate of STASCO. 5 ARTICLE 8: - EXCLUSIVITY AND CONFLICT OF INTERESTS -------------------------------------------------- 8.1 During the term of this Agreement, KKM shall not procure services of a similar or comparable nature to the Services from any of STASCO's major oil company competitors in the business of international trading of crude oil and petroleum products. 8.2 Title and access to, copyright and all intellectual property rights to (including the right to patent any new invention), the right to possession of and the free right of use of all things created under or arising out of the Services shall be retained or shall vest immediately in (as the case may be) STASCO. ARTICLE 9: - LIABILITY AND INDEMNITY ------------------------------------ 9.1 Except as provided in Article 9.5, neither STASCO, nor any of its Affiliates, nor any person appointed by or acting on behalf of STASCO, shall have any liability to KKM whatsoever (whether or not arising from the negligence of STASCO, any of its Affiliates or any person appointed by or acting on behalf of STASCO) for any loss, liability, damages, costs or expenses whatsoever suffered or incurred by KKM arising out of or connected with the performance, non-performance or mis-performance of STASCO's obligations and duties hereunder except in respect of any loss, liability, damages, costs or expenses suffered or incurred by KKM as a direct result of STASCO's Gross Negligence or Wilful Misconduct. 9.2 In no case whatsoever shall STASCO be responsible for any indirect, special or consequential losses or damages, including in respect of loss of production, loss of profit, business interruption, field shut in or damage to the Field. 9.3 KKM shall indemnify and hold STASCO, any of its Affiliates, their respective directors, officers and employees and any person appointed by or acting on behalf of STASCO harmless against all actions, proceedings, claims, demands, losses, fines, damages, settlements, expenses and liabilities whatsoever (including those arising out of or connected with the negligence of STASCO, any of its Affiliates, their respective directors, officers and employees and any person appointed by or acting on behalf of STASCO) suffered or incurred by STASCO, any of their Affiliates, their respective directors, officers and employees and any person appointed by or acting on behalf of STASCO arising out of or connected with the performance, non-performance or mis-performance of STASCO's obligations and duties hereunder except (i) in respect of any such actions, proceeding, claims, demands, losses, fines, damages, settlements, expenses and liabilities that directly result from STASCO's Gross Negligence or Wilful Misconduct; and (ii) as provided in Article 9.5. 9.4 For the purpose of obtaining the benefit of this Article 9, STASCO contracts as agents of or trustees for any of its Affiliates, their respective directors, officers and employees and any person appointed by or acting on behalf of STASCO. 9.5 STASCO represents, warrants and covenants that it has all necessary right, title and authority to provide the Services to KKM, and to deliver to KKM any information, data and analyses provided or to be provided as a part of the Services. STASCO shall indemnify and hold harmless KKM, any of its Affiliates, their respective directors, officers and employees and any person appointed by or acting on behalf of KKM against any liability arising out of or connected with any breach of the representation, warranty and covenant set out in the first sentence of this Article 9.5 ARTICLE 10: - EARLY TERMINATION ------------------------------- 10.1 If KKM: (a) during the term of this Agreement without the written agreement of STASCO enters into any agreement or understanding with any third party for the procurement of services of a similar or comparable nature to the Services from any of STASCO's major oil company competitors in the business of international trading of crude oil and petroleum products; 6 (b) fails to pay on written demand by STASCO any amounts that are then due to STASCO pursuant to this Agreement; (c) purports to sell, transfer or assign its rights or duties under this Agreement in breach of Article 13; or (d) undergoes a Change of Control STASCO may forthwith terminate this Agreement by serving written notice of termination on KKM. 10.2 If either Party should go into liquidation (other than voluntary liquidation for the purpose of corporate reconstruction), or if a receiver, administrator or sequestration of the undertaking and assets (or any part thereof) of either Party should be appointed, or if either Party should become bankrupt or insolvent, should enter into a deed of arrangement or a composition for the benefit of their creditors, or should do or suffer any equivalent act or thing under any applicable law, the other Party may terminate the Agreement forthwith by notice to the other Party. 10.3 STASCO may terminate this Agreement forthwith by written notice to KKM if: (a) the Loan Agreement shall terminate, other than upon payment of all sums payable thereunder having been duly paid, or Shell Capital Services Limited through assignment, transfer or otherwise has no remaining interest in, or is no longer a party to, the Loan Agreement; or (b) the Crude Oil Sale and Purchase Agreement shall terminate. 10.4 In the event that all sums payable under the Loan Agreement have been duly paid, either Party may terminate this Agreement forthwith by serving written notice on the other Party. 10.5 This Article 10 is not intended to be an exhaustive list of circumstances in which either Party shall be entitled to terminate this Agreement and is without prejudice to either Party's other rights of termination under this Agreement or at law. 10.6 No termination of this Agreement shall prejudice any rights or remedies under this Agreement relating to any period prior to such termination or accrued before, at, or in consequence of the termination, or any proceedings (including arbitration) for determination or enforcement of any rights or remedies. ARTICLE 11: CONFIDENTIALITY --------------------------- 11.1 Subject to the further provisions of this Article 11, each Party shall use its best efforts to maintain in confidence any Confidential Information supplied to it pursuant to the terms hereof. 11.2 Notwithstanding Article 11.1, the receiving Party may disclose Confidential Information if and to the extent: (a) required by law; (b) required by any securities exchange or regulatory or governmental body to which such Party is subject or submits, wherever situated, whether or not such requirement for information has the force of law; (c) disclosed to the legal advisers or auditors of such Party provided that such Party procures that such persons protect such Confidential Information on the same terms as, and agrees to be bound as if it were a Party to, this Article 11 or are otherwise bound to maintain the confidentiality of the Confidential Information by applicable standards of professional responsibility; (d) the Confidential Information is already in the public domain through no fault of such Party; 7 (e) the disclosing Party has given prior written approval to the disclosure; (f) it is disclosed to any Affiliate of the receiving Party provided that such Party procures that the Affiliate protects such Confidential Information on the same terms as, and agrees to be bound as if it were a Party to, this Article 11; (g) the information was lawfully, validly and properly received by the receiving Party, whether through any licence or permission granted by the disclosing Party, or otherwise and disclosure of such information is permitted pursuant to such licence or permission. 11.3 The receiving Party shall: (a) procure that Confidential Information is not disclosed to any of its employees, officers or agents by any persons other than personnel employed by it or acting on its behalf who are required to have access to such information in order to enable this Agreement to be carried into effect; (b) be liable for and shall indemnify the disclosing Party against any losses or damages suffered by the disclosing Party arising from any of the receiving Party's employees, officers and agents to whom such Confidential Information is or has been disclosed disclosing or using any such Confidential Information contrary to the requirements of this Article; and (c) not at any time make or assist any other person whatsoever to make any unauthorised disclosure or use of any such Confidential Information and will procure and ensure that every person who, as its employee, officer or agent or otherwise, through or from it, acquires or receives any Confidential Information at any time, shall not make or assist any other person whomsoever to make any unauthorised disclosure or use of that information. 11.4 The receiving Party may not use Confidential Information for any purpose other than in direct connection with the performance of its obligations and exercise of its rights hereunder or under the Crude Oil Sale and Purchase Agreement. 11.5 The direct or indirect disclosure by STASCO of any Confidential Information or other information shall not be construed as granting to KKM any rights therein or any licence under any patents or industrial property right or any application for a patent or industrial property right which STASCO or its Affiliates may now or hereinafter own in any country or under which STASCO or its Affiliates may hereinafter hold licensing rights. 11.6 The Confidential Information shall remain the property of the disclosing Party and that party may demand the return thereof at any time upon giving written notice to the receiving Party. Within 30 days of receipt of such notice, the receiving Party shall return all of the original Confidential Information and shall destroy all copies and reproductions (both written and electronic) in its possession. ARTICLE 12: - FORCE MAJEURE --------------------------- 12.1 Except in respect of the obligation to make any payment as required by this Agreement (which shall not be subject to relief under this Article 12.1), a Party shall not be in breach of this Agreement or liable to the other Party for any failure to fulfil any obligation under this Agreement to the extent any fulfilment has been interfered with, hindered, delayed or prevented by any circumstance whatsoever which is not reasonably within the control of and is unforeseeable by such Party and if such Party exercised due diligence. 12.2 The Party affected shall be excused from the performance or punctual performance, as the case may be, of such obligation for so long as such circumstance continues to exist. The Party affected shall promptly and at any rate, within twenty-four (24) hours of the occurrence of the event notify the other Party of the occurrence of the circumstance and of the obligation affected. 12.3 No circumstance described in Article 12.1 shall operate to extend the term of this Agreement. 8 ARTICLE 13: - ASSIGNMENT ------------------------ 13.1 Subject to Article 13.2, KKM may not sell, transfer or assign its rights or duties under this Agreement or its interest in this Agreement to any other person except with the prior written approval of STASCO and any such purported sale, transfer or assignment without the approval of STASCO shall be invalid and not binding on STASCO. 13.2 Notwithstanding Article 13.1, KKM may transfer or assign its rights under or interest in this Agreement to the Lenders by way of a security interest in this Agreement for the benefit of the Lenders. 13.3 Subject to Article 13.4, STASCO may not sell, transfer or assign its rights or duties under this Agreement or its interest in this Agreement to any other person except with the prior written approval of KKM and any such purported sale, transfer or assignment without the approval of KKM shall be invalid and not binding on KKM. 13.4 Notwithstanding Article 13.3, STASCO may delegate any or all of its duties or obligations under this Agreement to any of its Affiliates but it shall retain responsibility to KKM for the proper performance of such duties and obligations so delegated. ARTICLE 14: NOTICES. -------------------- 14.1 All notices or other communications shall be given in writing or by telex or facsimile. Any such notice shall be deemed to be given as follows: (a) if in writing, when delivered; (b) if by telex, when despatched, but only if, at the time of transmission, the correct answerback appears at the start and end of the sender's copy of the notice; and (c) if by facsimile, when the answerback is received. However, a notice given in accordance with the above but received on a non-working day or after business hours in the place of receipt shall only be deemed to be given on the next working day in that place. If such notice is to Sellers, to: Shell International Trading and Shipping Company Limited Shell Mex House Strand London. WC2R 0ZA Telephone : 44 171 546 5000 Facsimile : 44 171 546 4448 Telex : SHELL LONDON 919651 Attention ; General Manager, Government Accounts If such notice is to Buyers, to: Closed Type JSC Karakudukmunay Inc. Microregion 3 Building 82, Aktau 466200 Kazakhstan Telephone: 7 3292 514814 Facsimile: 7 3292 518336 Telex: To be advised Attention: Nikolai Klinchev, Director General 9 With a copy to: Chaparral Resources, Inc. 16945 Northcase Drive Suite 1440 Houston, Texas 77060 USA Telephone: 1 281 877 7100 Facsimile: 1 281 877 0985 Telex: To be advised Attention: Mike Young, KKM Notices ARTICLE 15: REPRESENTATIONS --------------------------- 15.1 Each Party represents to the other Party that: (a) it is duly organised and validly existing under the laws of the jurisdiction of its organisation or incorporation and, if relevant under such laws, in good standing; (b) it has the power to execute and deliver this Agreement and has taken all necessary action to authorise such execution, delivery and performance; (c) such execution and delivery do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgement of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets; (d) all governmental and other consents which are required to have been obtained by it with respect to this Agreement, have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and (e) its obligations under this Agreement constitute its legal, valid and binding obligations, enforceable in accordance with its respective terms (subject to applicable bankruptcy, re-organisation, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to the enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)). ARTICLE 16: MISCELLANEOUS ------------------------- 16.1 This Agreement constitutes the entire agreement of the Parties with respect to the subject matter of this Agreement and the Parties acknowledge that they do not enter into this Agreement relying on any of the previous communications between the Parties or their Affiliates 16.2 No variation of or amendment to any of the terms of this Agreement shall be effective unless it is in writing and signed by or on behalf of each of the Parties and no waiver of any provision hereof shall be effective unless it is in writing and signed by the Party against whom such waiver is sought to be enforced. 16.3 Except as expressly provided herein, the rights, powers and remedies provided in this Agreement are cumulative and not exclusive of any rights, powers and remedies provided by law. 16.4 No delay or omission on the part of either Party in exercising any right, power or remedy provided by law or under this Agreement, nor any indulgence granted by any Party to any other Party, shall impair such right, power or remedy, or be construed as a waiver thereof, nor shall the single or partial exercise of any right, power or remedy provided by law or under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 10 16.5 Nothing in this Agreement shall constitute or be deemed to constitute a partnership, trust or agency. The Parties shall not, and shall procure that their directors, officers and employees, in that capacity, shall not, represent themselves or otherwise hold themselves out as an agent or other representative of the other Party or otherwise hold themselves out as having any authority to bind the other unless such person is validly authorised in writing to do so. 16.6 In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable, this Agreement shall terminate forthwith without obligation on either Party to pay any compensation in respect of such termination; except that KKM shall be entitled to a pro-rata (based on actual days remaining in the relevant year) refund of Fees for the year of termination. 16.7 Each Party acknowledges and agrees to the tape or electronic recording of conversations between them pursuant to this Agreement, whether by one or other or both of them, and that any such recordings may be submitted in evidence in any proceedings relating to the agreement. 16.8 All exchange of correspondence between the Parties shall be in English. 16.9 This Contract shall be signed in three originals in the Russian language and three originals in the English language, the English language version shall be the authoritative text. 16.10 This Agreement does not confer rights or remedies upon any person other than KKM and STASCO. ARTICLE 17: GOVERNING LAW AND ARBITRATION ----------------------------------------- 17.1 The proper law of this agreement is English Law and English Law shall be used for interpreting the agreement and for resolving all claims or disputes arising out of or in connection with the agreement (whether based in contract in tort or on any other legal doctrine). Any such claim or dispute not settled by negotiation shall be settled by arbitration in London before a single arbitrator agreed upon by both parties or if not so agreed appointed in accordance with the Arbitration Act 1996 as amended from time to time. The arbitration shall be conducted in English, in accordance with the provisions of the Arbitration Act 1996 as amended from time to time, the seat of the arbitration shall be England and the arbitration award shall be final and binding without appeal to the Courts. 17.2 KKM hereby appoint Law Debenture Corporation PLC of Princes House, Gresham Street, London, EC2 as its agents in London for the service of process to accept service of process on its behalf in connection with proceedings in the English Courts. KKM may only dismiss its process agents or change the process agent with the prior consent of STASCO (which shall not be unreasonably withheld or delayed). 11 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be signed by their duly authorised representatives on the dates shown below. SIGNED by for and on behalf of SHELL INTERNATIONAL TRADING AND SHIPPING COMPANY LIMITED as agents for SHELL TRADING INTERNATIONAL LIMITED By : ----------------------------- Name: ----------------------------- Title : ----------------------------- Date : ----------------------------- SIGNED by for and on behalf of CLOSE TYPE JSC KARAKUDUKMUNAY INC. By : ------------------------------ Name: ------------------------------ Title : ------------------------------ Date : ------------------------------ By : ------------------------------ Name: ------------------------------ Title : ------------------------------ Date : ------------------------------ 12 EX-10.68 16 LETTER Exhibit 10.68 January 13, 1995 Chaparral Resources, Inc. 621 Seventeenth Street, Suite 1301 Denver, Colorado 80293 Attention: Paul V. Hoovler Gentlemen: At your request, Ryder Scott Company Petroleum Engineers (Ryder Scott) has reviewed the reserve estimates prepared by P & M Petroleum Management (P & M) of the Karakuduk Field located in The Republic of Kazakhstan. The summary table below presents a comparison of the estimated recoverable reserves as prepared by P & M with Ryder Scott's estimates. Comparison Estimated Gross Undeveloped Reserves Attributable to the Karakuduk Field P & M Ryder Scott Formation (Thousand bbls) (Thousand bbls) ----------------------------------- Proved J1 Lower 64,207 61,786 J2 357 257 J4 521 500 J5 1,639 1,199 J8 7,360 9,198 J9 881 950 ------ ------ Total 74,965 73,890 Chaparral Resources, Inc. January 13, 1995 Page 2 P & M Ryder Scott Formation (Thousand bbls) (Thousand bbls) --------------------------------- Probable --------------------------------- J1 Lower 32,104 (1) 30,893 (1) J1 Upper 2,893 2,777 J2 3,668 3,606 J3 7,526 7,225 J4 4,729 4,540 J8 3,680 (1) 4,599 (1) ----- ------ Total 54,600 53,640 (1) Pressure Maintenance - Water injection reserves Review Procedure and Opinion - ---------------------------- In performing our review, we have relied on the data furnished by P & M and Chaparral Resources, Inc. These data were accepted as authentic and sufficient for determining the reserves. In our opinion, P & M's estimates of future proved undeveloped reserves were prepared in accordance with generally accepted procedures for the estimation of future reserves, and we found no bias in the utilization and analysis of the data in estimates of reserves for the properties. In general, Ryder Scott was in agreement with the use of the data that was available. The isopach maps of net pay reflect a reasonable and consistent use of the available data. In certain reservoirs where test data was limited, the assignment of proved reserves for limited areas of the reservoir was reasonable and appropriate. Porosity values utilized for making the estimate of original oil in place were based on available core data and the average values selected by P & M are very reasonable, based on data which was available for our review. Water saturation, the other key parameter in volumetric calculations, was more difficult to estimate. Because of the uncalibrated nature of resistivity logs and the lack of porosity logs, water saturation values could not be calculated. A large number of successful well tests have been conducted in the various members of the Jurassic formation. These tests have indicated limited water production and based on the overall results of these tests, P & M assigned an average water saturation of 35 percent. Empirical correlations available in the literature which relates porosity, permeability and water saturation indicate that 35 percent assigned by P & M is reasonable and possibly high. Chaparral Resources, Inc. January 13, 1995 Page 3 P & M utilized the results of a laboratory PVT analysis of a bottom hole sample for fluid properties for the J1 through the J5 members of the Jurassic. Test data indicated higher GOR performances from the J8 and J9 reservoirs. P & M utilized Standing correlations for developing fluid properties for these members of the Jurassic. Checking the results of the PVT analysis with available correlations, Ryder Scott accepted the fluid properties utilized by P & M as reasonable. In summary, it is Ryder Scott's opinion that the estimates of original oil in place prepared by P & M are reasonable. In some instances minor adjustments were made to the P & M estimates due to small differences in the pay counts. For assignment of primary reserves, P & M utilized a recovery efficiency of 20 percent. In addition, they assigned an additional 10 percent incremental probable reserves for pressure maintenance water injection in the J1 Lower and J8 reservoirs. Ryder Scott utilized the API correlation for recovery in solution gas drive reservoirs to estimate a recovery efficiency of 19.2 percent for the J1 through J5 members and 25.2 percent for the J8 and J9. It was our opinion that the secondary to primary ratio of .5 utilized by P & M to assign pressure maintenance water injection reserves was reasonable and utilized this same ratio in assigning incremental probable reserves to the J1 Lower and J8. Reserves Estimate - ----------------- The original reserve estimates were based on a volumetric analysis and assignment of recover factors for primary and incremental pressure maintenance reserves. The reserves presented herein, as estimated by P & m and reviewed by Ryder Scott, are estimates only and should not be construed as being exact quantities. Moreover, estimates of reserves may increase or decrease as a result of future operations. The proved and probable reserves, which are attributable to the wells and locations reviewed by Ryder Scott, conform to the definitions approved by the Society of Petroleum Engineers and The Society of Petroleum Evaluation Engineers, except that no economic evaluations have been performed by either P & M or Ryder Scott at this time. It is assumed, based on current development activity in Kazakhstan, that economic development of these reserves can be achieved. Our definitions of proved and probable reserves follows. Proved reserves of crude oil, natural gas, or natural gas liquids are estimated quantities that geological and engineering data demonstrate with reasonable certainty to be recoverable in the future from known reservoirs. Reservoirs are considered probed if economic productibility is supported by actual production or formation tests. In certain instances, proved reserves may be assigned on the basis of a combination of core analysis and electrical and Chaparral Resources, Inc. January 13, 1995 Page 4 other type logs which indicate the reservoirs are analogous to reservoirs in the same field which are producing or have demonstrated the ability to produce on a formation test. The area of a reservoir considered proved includes (1) that portion delineated by drilling and defined by fluids contacts, if any, and (2) the adjoining portions not yet drilled that can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of data on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. Proved reserves are estimates of hydrocarbons to be recovered from a given date forward. They may be revised as hydrocarbons are produced and additional data become available. Reserves that can be produced economically through the application of established improved recovery techniques are included in the proved classification when these qualifications are met: (1) successful testing by a pilot project or the operation of an installed program in the reservoir, or one in the immediate area with similar rock and fluid properties, provides support for the engineering analysis on which the project or program was based, and (2) it is reasonably certain the project will proceed. Reserves to be recovered by improved recovery techniques that have yet to be established through repeated economically successful applications are included in the proved category only after successful testing by a pilot project or after the operation of an installed program in the reservoir provides support for the engineering analysis on which the project or program was based. Improved recovery includes all methods for supplementing natural reservoir forces and energy, or otherwise increasing ultimate recovery from a reservoir, including (1) pressure maintenance, (2) cycling, and (3) secondary recovery in its original sense. Improved recovery also includes the enhanced recovery methods of thermal, chemical flooding, and the use of miscible and immiscible displacement fluids. Estimates of proved reserves do not include crude oil, natural gas, or natural gas liquids being held in underground or surface storage. Probable reserves are the estimated quantities of recoverable hydrocarbons which are based on engineering and geological data similar to those used in the estimates of proved reserves but, for various reasons, these data lack the certainty required to classify the reserves as proved. Probable reserves include, without limitation: (a) reserves that apparently exist a reasonable distance beyond the proved limits of productive reservoirs where water contacts have not been determined and proved limits are established by the lowest datum at which proved reserves exist; (b) reserves in formations that appear to be productive from log characteristics only, but lack definitive tests or core analysis data; (c) reserves in a portion of a formation that has been proved productive in other areas in a field but is separated from the proved area by sealing faults, provided that the geologic interpretation indicates the probable area is structurally high relative to the proved portion of the formation; (d) Chaparral Resources, Inc. January 13, 1995 Page 5 reserves obtainable by improved recovery where an improved recovery program, that has yet to be established through repeated economically successful operations, is planned but is not yet in operation and a successful pilot test has not been performed, but reservoir and formation characteristics appear favorable for its success; and (e) reserves in the same reservoir as proved reserves that would be recoverable if a more efficient primary recovery mechanism develops than was assumed in estimating the proved reserves. General - ------- Neither Ryder Scott not any of its employees has any interest in the subject properties and neither the employment to do this work nor the compensation is contingent on our estimates of reserves for the properties which were reviewed. This report was prepared for the exclusive use of Chaparral Resources, Inc. The work papers used in the preparation of this report are available for examination by Authorized parties in our office. Please contact us if we can be of further service. Very truly yours, RYDER SCOTT COMPANY PETROLEUM ENGINEERS Larry T. Nelms Group Vice President December 8, 1994 Mr. Paul V. Hoovler, President Chaparral Resources, Inc. 621 17th Street, Suite 1301 Denver, CO 80293 Dear Mr. Hoovler: As per your request, I am enclosing a copy of my engineering report of the estimated recoverable oil reserves for the Karakuduk Field located in the western portion of the Republic of Kazakhstan. These reserves, from the Jurassic formation, have been determined using generally accepted petroleum engineering practices. The geologic and engineering data for the most part was supplied by the Mangistau Regional Geologic Section. This entity would be comparable to the Oil and Gas Commission for the state of Colorado. The oil reserves are defined in two categories, (1) Proved Undeveloped Reserves, and (2) Probable Reserves. The two classifications are described below as general definitions adopted by The Society of Petroleum Evaluation Engineers: Proved Undeveloped Reserves: Oil reserves in which the proven commercial producibility is supported by a number of wells that have been drilled and from which actual oil production or positive formation tests were achieved. The area of the reservoir considered as proved has been delineated from information obtained by drilling and the determination of oil/water contacts defining the parameters of the reservoir are reasonably judged as being commercially productive on the basis of available geologic and engineering information derived from the existing wells. The reserves are classified as proved undeveloped in the areas where interpretation of data from the tested wells is laterally continuous and the formations contain commercially recoverable oil reserves on locations beyond the direct offsets to the existing wells. Probable Reserves: Oil reserves that are less certain than proved reserves but can be estimated to exist with a degree of certainty. Such reserves based on the available geologic and engineering data in the probable productive area indicate that such reserves may be recovered. This includes oil or gas reserves from formations that appear to be productive by log characteristics, but lack definite core data, drillstem test data or production testing. This category also includes oil reserves that may be recoverable through enhanced recovery methods. As an example, a limited project or pilot program for secondary and/or tertiary recovery that is planned but has not been implemented or placed into operation but the reservoir characteristics appear favorable for such adaptation leading to commercial production. Mr. Paul V. Hoovler Chaparral Resources, Inc. December 8, 1994 Page Two of Two The Karakuduk Field, located in the Mangistau Region of western Kazakhstan, appears to be a very good candidate for an extensive development drilling program. Most of the wells that have been previously drilled were production tested through casing or formation tested. The clastic sandstones within the Jurassic formation should be receptive to stimulation by acidizing or fracture treatment. Daily production rates from this development program should be significantly increased by such stimulation. This should also increase recoverable oil reserves. As development drilling takes place, additional reservoir data will increase or decrease the estimated ultimate recoverable reserves from these multiple sand reservoir within the Jurassic formation. As an aside and beyond the scope of this study, the Karakuduk #20 well, drilled into the next lower formation, although not tested, appears to have very thick productive porosity zone within the Triassic section. Other fields within the general area proven this formation productive and if exploration within the Karakuduk Field finds these same reservoir characteristics, it should add substantially to future recoverable reserves. In summary, I believe the Karakuduk Field offers an excellent opportunity for a small independent oil company to drill and develop significant low risk oil reserves. I don't know of any other province in North American that this type of opportunity exists. Topographic conditions are very favorable for development and the field is located within twenty miles of a major pipeline that has deliveries to the Black Sea ports. Access to local roads and the major railroad in this part of Kazakhstan all lie within thirty miles. I also believe that as the development project gets underway, there will be substantial improvements over the drilling operations, completions and production methods previously utilized. This should significantly enhance daily oil flows and ultimate reserves. The reserve report has not taken into consideration any cash flow forecasts or time schedules as to the development of the project. I am not privy to the parameters of the Agreement between Chaparral Resources, Inc. and the Karakuduk Munay Joint Stock Company, nor am I aware of any agreements that could affect Chaparral's ultimate reserves in this field. This study simply defines the recoverable reserves for the field. Best regards, Robert W. Peterson KARAKUDUK OIL FIELD ESTIMATED OIL RESERVES PREPARED FOR CHAPARRAL RESOURCES, INC. P&M PETROLEUM MANAGEMENT DECEMBER, 1994 KARAKUDUK OIL FIELD ESTIMATED OIL RESERVES The Karakuduk Oil Field is located in the Republic of Kazakhstan, 227 miles northeast of the city of Aktau. The oil reservoir was originally drilled because seismic data showed a geological subsurface structure at this location. The first well was drilled in 1972 and found oil production in the Jurassic Age formations. A total of 22 wells have been drilled on this geological structure by the Russians. Ten of these wells encountered oil sands. Some of the wells were drill stem tested and other wells were production tested. The first well was drilled 1972 and the last four wells were drilled since 1991. The Kazkhstans did not furnish us with any data showing which wells had casing run in them and which wells they thought the casing would be satisfactory to place the wells on production. The wells reportedly were plugged by placing cement plugs inside the casing. The Turkish Petoil personnel stated that the #20 and #21 Karakuduk wells ere the only wells that had casing that could be re-entered for sure. Five other wells could possibly be re-entered. The Jurassic formation is approximately 2300' thick and has been divided into 15 porous sand sections divided by continuous shale beds. The producing sands are described generally as fine to medium grained sandstone and coarse grained siltstone. The porosities from core analysis average 15 percent. In some of the reserves, the Russians used up to 17 percent porosity and the Petoil personnel prefer this figure. The Jurassic sand sections are identified as J1, J2, J3, etc. Listed below is a brief description of the oil potential of each sand. J1: This sand section consist of two sand beds that I have identified as the J1 upper and the J1 lower. These two sand beds are continuous over the structure and the J1 lower has been tested in 14 wells. The sands are very easy to identify on the open hole logs. And oil-water contact has not been definitely established. Some production and drill stem tests in J1 have recovered only a small amount of water of no fluid recovery could be from formation damage. According to the information we received from geologist and engineers in Turkey with Petoil and a very competent consultant who has thoroughly studied this oil reservoir, the Russians used no drilling solids, mud weight, water loss, or formation damage. The mud weight was much higher than the formation pressure when the sand beds were drilled so you would expect high damage. The intervals tested by perforating were not stimulated in any way to the best of our knowledge. The J1 upper sand averages about 6 feet thick and J1 lower sand averages about 35 feet thick. The J1 upper sand has not been production tested adequately by itself to determine whether it is definitely oil productive or not. The J1 lower sand has produced oil over 100 bbls/day in nine wells and possibly ten (well #22). We don't have the production rate form Karakuduk #22 but the Petoil people indicated it produced over 100 bbls/day from the lower J1 sand. I have given the J1 lower sand 517,800 acre feet of reservoir and 64,207,000 barrels of proved undeveloped reserves. By pressure maintenance from water injection they should recover at least and additional 32,104,000 barrels of probable reserves. I have reduced the areal extent of the J1 upper sand and have calculated a reservoir volume of 23,332 acre feet for it and assigned it 2,893,000 barrels of probable reserves. The J1 upper sand and the J1 lower sand are separated by a consistent shale bed about 16 feet thick. J2: The J2 section consists of three sand. Oil production has been tested in wells #4, #7, and #10 in the J2 sands. The production rate from the #10 well was 385 barrels of oil and 533 mcf of gas. This reservoir has oil-water contact at - -8074 feet. I have isopached this J2 oil sand and calculated an oil reservoir of 32,456 acre feet and proved undeveloped reserves of 357,000 barrels and 2,893,000 barrels probable reserves due to the thin sand thickness in the rest of the wells. A small amount of oil was also tested from the #4 well but the sand is lower structurally from the main reservoir and is located over one mile west of the main reservoirs. J3: The J3 section consists of two sand beds. The #7 wsell tested 20 bbls/day of oil from 36 feet of perforations. This sand section has an oil-water contact at - -8321'. The sands cover an area of 5,043 acres and the oil reservoir is 60,693 acre feet with oil reserves of 7,526.000 barrels. These oil reserves are classified as probable reserves since only one well has been production tested but it was determined to be uneconomical. J4: The J4 sand beds flowed 288 barrels of oil and 498 mcf/day gas in the #7 well. The #20 and the #21 wells also have porpous sands above the oil-water contact of -8465' datum. The oil reservoir has a volume of 42,336 acre feet. I have assigned 524,000 barrels of proved undeveloped reserves for well #7. I have also assigned 4,729,000 barrels of probable reserves because well #7 is the only well that tested oil flow rates at near commercial rates. J5: The #7 well was perforated 9124-9140' and recovered oil and was perforated 9140-9157' and recovered oil and water with no fluid recovery amounts recorded. The feasibility study shows only one fluid recovery at 936 bbls/day oil and 971 mch/day gas but it does not name the well. Presumably the oil production is from the upper perforations of the #7 well at 9124-9140'. They also list an oil-water contact of -8513' which matches the #7 log. To complicate the information the #21 well tested 900 bbls/day oil and 971 mcf/day gas from perforations 9153-9249' and the lower perforations are at -8663' datum which is 150' below the previous stated oil-water contact without recovering any water. Based on 120 acre spacing, I have given wells #7, #20, and #21 1,639,000 barrels of primary proved undeveloped reserves. Since it is difficult to understand what is going on in this reservoir I haven't assigned any other reserves although it is very possible there are some in the structurally lower parts of the J5 sand reservoir. J6: No reserves. J7: No reserves. J8: The J8 sand section is a thick sand with up to 66' of porous sand in well #7 and 63" in well #21. The isopack of the J8 sand calculates 72,867 acre feet of volume and 7,360,000 barrels of proved undeveloped reserves for the J8 sand and 3,680,000 barrels of probable reserves for pressure maintenance by water injection. J9: The #21 is the only well that has penetrated this interval that has recovered oil production. Although Petoil personnel say oil was recovered in the #22 well the records we received don't verify this. The #21 was perforated 9918-9947' and recovered oil at the rate of 562 bbls/day and gas at the rate of 837 mcf/day. The interval 9839-9904' was also perforated and tested 543 bbls/day oil and 684 mcf/day gas. The proved undeveloped reserves calculated to this well based on 120 acre spacing are 881,000 barrels. The total reserves calculated for this field are 74,965,000 barrels of proven undeveloped reserves and 54,600,000 barrels of probable reserves for a total of 129,565,000 barrels. The size of the reservoir is easily determined for the J1 sands since they are uniform in thickness in all the wells that penetrated it. Due to the poor logging tools and capabilities of the Russian logging equipment and the lack of information supplied with the open hole logs it is impossible to calculate the porosity or water saturations from logs. The information that was valuable were the well test listed on Table I. The limited core data was also helpful. The oil reserves assigned in this report were calculated using data supplied by the Russian and Kazakhstan government personnel. The reservoir data supplied ranged from poor to good. The poor data in general were from the open hole Russian logs and the good data from the wells tests. In general I thought the data was better than normal in attempting to determine the feasibility of developing a field of this size and complexity due to the multitude of producing sands. The Russian open hole logs are poor for quantitative data for determining porosity, water saturation, and shaliness of the producing wells. The Russian logs don't have any calibration data or drilling mud or filtrate data. The only open hole porosity logs are the micro-log and single detector neutron logs which neither are good for porosity calculations. The micro-log is good for permeable sand thickness determinations. The resistivity logs are lateral type logs which aren't good for thin bed water saturations and without mud filtrate and calibration data are not good for calculating reservoir water saturations. The gamma ray logs were not calibrated in standard API counts so they have limited use for reservoir shaliness. The reproduction of some of the open hole logs was so poor they were not legible so that further detracted from their usefulness. The Russians did run some DST's and cased hole tests of perforated sands which were very useful. Also a lot of cores were taken and were analyzed in a laboratory. Some of this data was available. The cores data showed an average sand porosity of 15.1 percent for the J1 lower sand so I used 15 percent although Karakuduk Oil Field Production Feasibility used 15,16, and 17 percent porosities in their studies. I used a water saturation of 35 percent in the reserve calculations. I though that 35 percent water saturation was near the upper limit of saturation that could be in place without producing free water from the higher permeability zones flowing oil at high rates. The water saturations could be considerably lower, also, so I though this was a good conservative compromise. The Kazakhstan's did use water saturations from 45 to 50 percent in their study. The formation volume factor of 1.22 was determined by the Kazakhstan laboratory in Aktau. I used a primary oil recovery of 20 percent for the proved undeveloped reserves and an additional 10 percent oil recovery for pressure maintenance by water injection for probable reserves. The Kazakhstans used an oil recovery factor of 40 percent of the original-in-place for primary recovery with water injection for pressure maintenance. The Petoil personnel stated that a large field to the south producing from the same Jurassic sands is going to recover 43 percent of the oil-in-place with water injection for pressure maintenance. I have used the data available to attempt to arrive at the best conclusion to the oil reserves of the Karakuduk Field using accepted engineering practices. Due to the limited amount of engineering data available, the data being generated in a foreign country by personnel not familiar with our standards or using our quality of equipment, and also due tot he complexity of the reservoir, the results of this report could vary considerably from other reports or the actual future oil recoveries. This report has been prepared utilizing methods and procedures regularly used by petroleum engineers to estimate oil and gas reserves for properties of this type and character. The recovery of oil reserves and projection of producing rates are dependent upon many variable factors. These include, among others, prudent operation, compression of gas when needed, market demand, installation of lifting equipment, and remedial work when required. Reserves included in this report have been based upon the assumption that all wells will be operated in a prudent manner by responsible parties. The basic data used to prepare this report has been retained in our files and is available for review by appropriate parties. P&M PETROLEUM MANAGEMENT ----------------------------- Robert W. Peterson Petroleum Engineer
KARAKUDUK FIELD WELL TESTS GEOLOGICAL TEST INTERVAL NET PAY FLUID GAS FLOW CHOKE SIZE GOR WELL SECTION DEPTH-FT DATUM-FT FT REC BBLS/DAY CU FT/DAY INCHES CU FT/BBL COMMENTS - ------------------------------------------------------------------------------------------------------------------------------------ Karakuduk #1 J1 8546-8563' -(7920-7936') 16' OIL 151 -- 0.1959 Karakuduk #4 J1 8596-8612' -(8004-8020') 16' WATER 2.5 -- Karakuduk #5 J1 8543-8559' -(7921-7937') 16' OIL 19.5 706 With compressor Karakuduk #6 J1 8550-8573' -(7943-7966') 23' OIL 236 49434 0.2756 209 Karakuduk #7 J1 8435-8471' -(7834-7870') 36' OIL 446.6 564960 0.3150 1265 Karakuduk #8 J1 8481-8994' -(7869-7882') 13' OIL 90.6 ? ? Karakuduk #8 J1 8481-8994' -(7869-7882') 13' OIL 15.1 ? 1.0236 Natural flow Karakuduk #10 J1 8517-8537' -(7922-7942') 20' OIL 289.4 529650 0.2756 1832 Gas out oil Karakuduk #10 J1 8537-8553' -(7942-7958') 16' OIL 966.2 600270 0.3543 621 Gas out oil Karakuduk #11 J1 8474-8491' -(7873-7890') 17' OIL 162.9 -- -- Karakuduk #11 J1 8474-8491' -(7873-7891') 17' OIL 2.8 1.0236 Natural flow Karakuduk #12 J1 8458-8484' -(7856-7882') 26' OIL 132.1 ? ? Water comes Karakuduk #12 J1 8441-8448' -(7839-7846') 7' WATER 12.6 upper zones of Karakuduk #13 J1 8520-8533' -(7912-7925') 13' OIL 4.4 -- 1.0236 Karakuduk #20 J1 8464-8507' -(7840-7883') 43' OIL 122.6 Karakuduk #20 J1 8464-8507' -(7840-7883') 43' OIL 20.1 -- Nautral flow Karakuduk #21 J1 8425-8458' -(7839-7872') 33' OIL 452.9 384879 0.2756 850 Karakuduk #21 J1 OIL 364.8 300135 0.1968 823 Karakuduk #22 J1 8618-8635' -(8017-8039') 17' OIL W/GAS ? ? ? Gas out oil Karakuduk #22 J1 8618-8635' -(8017-8034') 17' OIL W/WTR ? ? ? Karakuduk #22 J1 8543-8727' -(7942-8126') 84' OIL W/GAS ? ? ? Karakuduk #23 J1 8514-8681' -(7928-8095') 167' WTR W/GAS ? ? ? Karakuduk #4 J2 8737-8760' -(8145-8168') 23' OIL 7.5 ? 1.0236 Karakuduk #7 J2 8556-8760' -(7955-8159') 204' OIL 3.1 ? 1.0236 Karakuduk #10 J2 8652-8681' -(8057-8086') 29' OIL & GAS 385 533181 0.2756 1385 Karakuduk #7 J3 8865-8901' -(8264-8300') 36' OIL 20.1 1.0236 Karakuduk #21 J3 8865-8878' -(8279-8312') 33' OIL 88.1 ? ? Rowing 8901-8920' -(8321-8334') 13' OIL W/WTR 3.0 ? ? Karakuduk #7 J4 9025-9035' -(8425-8435') 10') 9045-9068' -(8444-8467') 23') OIL 287.5 497871 0.4724 1732 Karakuduk #21 J4 8996-8029' -(8410-8443') 33' OIL W/WTR 1.6 ? ? Karakuduk #21 J4 9071-9081' -(8485-8495') 10' OIL 1.9 ? ? Karakuduk #21 J5 9153-9249' -(8567-8663') 96' OIL & GAS 900 971025 ? 1079 Karakuduk #21 J7 9524-9563' -(8938-8977') 39' OIL & WTR ? ? ? Karakuduk #7 J8 9652-9731' -(9051-9130') 79' OIL 283.1 198442 0.2756 701 Karakuduk #21 J8 9665-9731' -(9079-9145') 66' OIL W/GAS 283 459030 ? 1622 Karakuduk #21 J9 9839-9905' -(9253-0319') 66' OIL W/GAS 546 688545 0.3543 1261 Karakuduk #21 66' OIL W/GAS 425 582615 0.2756 1370 Karakuduk #21 J9 9915-9947' -(9372-9361') 29' OIL W/GAS 437 730917 ? 1672 KARAKUDUK FIELD SUMMARY OF OIL RESERVES PRIMARY RESERVES ADD'TL PROBABLE RESERVES ---------------------- ------------------------------ TOTAL WATER INJECT'N-PRESSURE TOTAL RESERVES PRIMARY PROVED UNDEV MAINTENANCE PROBABLE RESERV PROVED UND AREA VOLUME POROSITY WATER RECOV 124 BPAF PROBABLE --------------------- --------------- & PROBABLE RESERVOIR -ACRES AC FT % SATURAT'N% FVF % OF OIP BBLS BBLS % OF OIP BBLS BBLS BBLS - --------- ------ ------- -------- ---------- ---- ------- ------------ --------- -------- ----------- --------------- ----------- J1 Lower 15,092 517,800 15.0 35.0 1.22 20 64,207,000 10 32,104,000 32,104,000 96,311,000 J1 Upper 10,199 23,332 15.0 35.0 1.22 20 2,893,000 10 --- 2,893,000 2,893,000 J2 4,217 32,456 15.0 35.0 1.22 20 357,000 3,668,000 10 --- 3,668,000 4,025,000 J3 5,043 60,693 15.0 35.0 1.22 20 7,526,000 10 7,526,000 7,526,000 J4 2,776 42,335 15.0 35.0 1.22 20 521,000 4,729,000 10 4,729,000 5,250,000 J5 360 13,224 15.0 35.0 1.22 20 1,639,000 10 1,639,000 J8 2,851 72,867 15.0 35.0 1.22 20 7,360,000 --- 10 3,680,000 3,680,000 11,040,000 J9 120 15.0 35.0 1.22 20 661,000 --- 10 --- --- 661,000 ---------- ---------- ------------ --------------- ----------- TOTAL RESERVES 74,965,000 18,816,000 35,784,000 54,600,000 129,565,000
EX-10.69 17 LETTER Exhibit 10.69 [RYDER SCOTT COMPANY PETROLEUM ENGINEERS LETTERHEAD] October 8, 1999 ABM AMRO Bank NV Oil and Gas Group 101 Moorgate London EC2M 6SB United Kingdom Attn: Mr. Paul Matthews Shell Capital Services Limited Shell Centre London SE1 7NA United Kingdom Attn: Mr. Mark Turner Gentlemen: At your request, Ryder Scott Company, L.P. has prepared an update to the reserve estimates we prepared in 1995 for the Karakuduk Field located in The Republic of Kazakhstan. This estimate incorporates additional data that has been developed since our original estimate. It is our opinion that none of this additional data provides a basis for either increasing or decreasing our original estimate. A summary of our reserve estimates are presented in the following tables. Estimated Gross Reserves Attributable to the Karakuduk Field Proved Formation (M bbls) ---------------------- -------------------- J1 Lower 61,786 J2 257 J4 500 J5 1,199 J8 9,198 J9 950 ------ Total 73,890 Probable Formation (M bbls) ---------------------- -------------------- J1 Lower 30,893(1) J1 Upper 2,777 J2 3,606 J3 7,225 J4 4,540 J8 4,599(1) ------ Total 53,640 (1) Pressure Maintenance-Water injection reserves Chaparral Resources, Inc. October 8, 1999 Page 2 Review Procedure - ---------------- The first step was to review our 1995 analysis. At that point, the following additional data was reviewed. Production data from well #10, #21 and #101 Well log data from well #101 Pressure build-up test and analysis from well #10 and well #101 Production log (spinner survey) from well #10 The log data from new well #101 was reviewed for both formation tops and pay thickness. This was then compared to the geologic interpretation that was used as a basis for my volumetric calculations. In my opinion, the differences were not significant enough to warrant a revision to the geology at this time. This data plus a review of the other data listed above was not sufficient to warrant a revision, either upward or downward to our prior estimates. It should be noted that as of October 1, 1999, the cumulative production from the field is 352.1 thousand barrels. The pressure build-up on well #101 shows significant damage and when funds are available, a stimulation treatment should yield a productive increase. Well #21 appears to be damaged but a pressure build-up test cannot be run because of wellhead problems. Reserve Estimates - ----------------- The original reserve estimates of January 13, 1995 were based on a volumetric analysis and assignment of recover factors for primary and incremental pressure maintenance reserves and have not changed. A copy of this letter is attached. The data and assumptions utilized in these calculations were contained in that letter. The reserves presented herein are estimates only and should not be construed as being exact quantities. Moreover, estimates of reserves may increase of decrease as a result of future operations. The proved and probable reserves, which are attributable to the wells and locations reviewed by Ryder Scott, conform to the definitions approved by the Society of Petroleum Engineers and the World Petroleum Congress, except that no economic evaluations have been performed at this time. It is assumed, based on current development activity in Kazakhstan, that economic development of these reserves can be achieved. Our definitions of proved and probable reserves follows. PROVED RESERVES - --------------- Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating methods, and government regulations. Proved reserves can be categorized as developed or undeveloped. Chaparral Resources, Inc. October 8, 1999 Page 3 If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimate. Establishment of current economic conditions should include relevant historical petroleum prices and associated costs and may involve an averaging period that is consistent with the purpose of the reserve estimate, appropriate contract obligations, corporate procedures, and government regulations involved in reporting these reserves. In general, reserves are considered proved if the commercial producibility of the reservoir is supported by actual production or formation tests. In this context, the term proved refers to the actual quantities of petroleum reserves and not just the productivity of the well or reservoir. In certain cases, proved reserves may be assigned on the basis of well logs and/or core analysis that indicate the subject reservoir is hydrocarbon bearing and is analogous to reservoirs in the same area that are producing or have demonstrated the ability to produce on formation tests. The area of the reservoir considered as proved includes (1) the area delineated by drilling and defined by fluid contacts, if any, and (2) the undrilled portions of the reservoir that can reasonably be judged as commercially productive on the basis of available geological and engineering data. In the absence of data on fluid contacts, the lowest known occurrence of hydrocarbons controls the proved limit unless otherwise indicated by definitive geological, engineering or performance data. Reserves may be classified as proved if facilities to process and transport those reserves to market are operational at the time of the estimate or there is a reasonable expectation that such facilities will be installed. Reserves in undeveloped locations may be classified as proved undeveloped provided (1) the locations are direct offsets to wells that have indicated commercial production in the objective formation, (2) it is reasonably certain such locations are within the known proved productive limits of the objective formation, (3) the locations conform to existing well spacing regulations where applicable, and (4) it is reasonably certain the locations will be developed. Reserves from other locations are categorized as proved undeveloped only where interpretations of geological and engineering data from wells indicate with reasonable certainty that the objective formation is laterally continuous and contains commercially recoverable petroleum at locations beyond direct offsets. Reserves which are to be produced through the application of established improved recovery methods are included in the proved classification when (1) successful testing by a pilot project or favorable response of an installed program in the same or an analogous reservoir with similar rock and fluid properties provides support for the analysis on which the project was based, and (2) it is reasonably certain that the project will proceed. Reserves to be recovered by improved recovery methods that have yet to be established through commercially successful applications are included in the proved classification only (1) after a favorable production response from the subject reservoir from either (a) a representative pilot or (b) an installed program where the response provides support for the analysis on which the project is based and (2) it is reasonably certain the project will proceed. Probable Reserves - ----------------- Probable reserves are those unproved reserves which analysis of geological and engineering data suggests are more likely than not to be recoverable. In this context, when probabilistic methods are used, there should be at least a 50 percent probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable reserves. Chaparral Resources, Inc. October 8, 1999 Page 4 In general, probable reserves may include (1) reserves anticipated to be proved by normal step-out drilling where sub-surface control is inadequate to classify these reserves as proved, (2) reserves in formations that appear to be productive based on well log characteristics but lack core data or definitive tests and which are not analogous to producing or proved reserves in the area, (3) incremental reserves attributable to infill drilling that could have been classified as proved if closer statutory spacing had been approved at the time of the estimate, (4) reserves attributable to improved recovery methods that have been established by repeated commercially successful applications when (a) a project or pilot is planned but not in operation and (b) rock, fluid, and reservoir characteristics appear favorable for commercial application, (5) reserves in an area of the formation that appears to be separated from the proved area by faulting and the geologic interpretation indicates the subject area is structurally higher than the proved area, (6) reserves attributable to a future workover, treatment, re-treatment, change of equipment, or other mechanical procedures, where such procedure has not been proved successful in wells which exhibit similar behavior in analogous reservoirs, and (7) incremental reserves in proved reservoirs where an alternative interpretation of performance or volumetric data indicates more reserves than can be classified as proved. General - ------- Neither we nor any of our employees have any interest in the subject properties and neither the employment to make this study nor the compensation is contingent on our estimates of reserves for the properties which were reviewed. This report was prepared for the exclusive use and sole benefit of ABM AMRO Bank NV, Shell Capital Services Limited and Chaparral Resources, Inc. The data, work papers, and maps used in the preparation of this report are available for examination by authorized parties in our offices. Please contact us if we can be of further service. Very truly yours, RYDER SCOTT COMPANY, L.P. /s/ Larry T. Nelms ---------------------------------- Larry T. Nelms Senior Vice President Cc: Chaparral Resources, Inc. LTN:ph EX-23.1 18 CONSENT Exhibit 23.1 [RYDER SCOTT COMPANY PETROLEUM ENGINEERS LETTERHEAD] CONSENT OF INDEPENDENT PETROLEUM ENGINEERS To Chaparral Resources, Inc: We consent to the incorporation by reference of our reserve report and all supporting schedules, exhibits, and attachments thereto, into Chaparral Resources, Inc.'s Registration Statement on Form S-3 filed in March 2000, including all future amendments to such Form S-3. /s/ Ryder Scott Company L P ------------------------------------------- Ryder Scott Company L P Denver, Colorado March 14, 2000 EX-27 19 FINANCIAL DATA SCHEDULE
5 12-MOS 12-MOS DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998 23,000 121,000 0 0 23,000 445,000 0 0 0 0 735,000 1,398,000 38,251,000 32,354,000 39,000 17,000 41,303,000 34,324,000 3,676,000 1,685,000 0 0 5,200,000 4,850,000 0 0 0 0 22,851,000 27,579,000 41,303,000 34,324,000 0 0 924,000 662,000 0 0 (2,423,000) (3,031,000) (3,141,000) (1,456,000) 0 0 (523,000) (205,000) (5,163,000) (4,030,000) 0 0 (5,163,000) (4,030,000) 0 0 0 (236,000) 0 0 (5,163,000) (4,266,000) (5.28) (4.75) (5.28) (4.75)
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