-----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, IA2QPkP9Ku+CzK+JIDnhXPqMA5tI5aEan6jLPBP5B4M6tbPph2VvAjA3NbF5lACV 8VD5ljRgPzveZvOVi2UmYQ== 0001000096-98-000571.txt : 19980924 0001000096-98-000571.hdr.sgml : 19980924 ACCESSION NUMBER: 0001000096-98-000571 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19980922 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAPARRAL RESOURCES INC CENTRAL INDEX KEY: 0000019252 STANDARD INDUSTRIAL CLASSIFICATION: 1311 IRS NUMBER: 840630863 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-51327 FILM NUMBER: 98713146 BUSINESS ADDRESS: STREET 1: 2211 NORFOLK STREET 2: SUITE 1150 CITY: HOUSTON STATE: TX ZIP: 77098 BUSINESS PHONE: 7138077100 MAIL ADDRESS: STREET 1: 621 17TH STREET SUITE 1301 CITY: DENVER STATE: CO ZIP: 80293 S-3 1 FORM S-3 As Filed with the Securities and Exchange Commission on September 22, 1998. Registration No. 333-51327 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM S-3 AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- CHAPARRAL RESOURCES, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Colorado 84-0630863 ------------------------------ ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) HOWARD KARREN 2211 Norfolk, Suite 1150 2211 Norfolk, Suite 1150 Houston, Texas 77098 Houston, Texas 77098 (713) 807-7100 (713) 807-7100 - - ---------------------------------------- ------------------------------ (Address, including zip code, (Name, address, including zip and telephone number, including area code, and telephone number, ode, of registrant's principal executive including area code, of agent offices) for service) With Copies to: Thomas S. Smith, Esq. Smith McCullough, P.C. 4643 South Ulster Street, Suite 900 Denver, Colorado 80237 (303) 221-6000 Approximate date of proposed sale to the public: As soon as practicable following the date on which the Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. |_| If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reimbursement plans, check the following box. |X| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE ======================================================================================================================== Proposed Maximum Proposed Maximum Amount of Title of Each Class of Amount to be Offering Price Aggregate Registration Securities to be Registered Registered(1) Per Share Offering Price Fee - - --------------------------- ------------------ ---------------- ---------------- ---------------- Common Stock ....................... 11,969,174 Shares(2) $ 2.03125(6) $ 24,312,385 $ 7,172.15(6) Common Stock ....................... 7,083,334 Shares(2) $ 1.3125(5) $ 9,296,876 $ 2,742.58(5) Common Stock Underlying Warrants.... 3,330,720 Shares(3) $ 2.03125(6) $ 6,765,525 $ 1,995.83(6) Common Stock Underlying Convertible Preferred Stock .................. 2,222,222 Shares(4) $ 2.03125(6) $ 4,513,889 $ 1,331.60(6) Total 24,605,450 Shares XXX XXX $13,242.16(7) ========================================================================================================================
(1) In accordance with Rule 416, there are hereby being registered an indeterminate number of additional shares of Common Stock which may be issued as a result of the anti-dilution provisions of the Warrants and of the Series A Preferred Stock or as a result of any future stock split or stock dividend. (2) The 11,969,174 shares and 7,083,334 shares consist of shares of Common Stock previously issued in private placements or upon exercise of warrants issued in private placements. (3) Registered for resale upon exercise of outstanding Warrants. (4) Registered for resale upon conversion of outstanding Series A Preferred Stock. (5) The registration fee that is being paid herewith was calculated in accordance with Rule 457 (c) and is based on the average of the high and low prices of Registrant's Common Stock, as reported on the Nasdaq SmallCap Market on September 17, 1998. (6) These registration fees were paid by the Registrant upon filing of this Registration Statement on Form S-1 on July 8, 1998. The Registrant paid a registration fee of $7,172.15 for the registration of 11,969,174 shares of Common Stock, a registration fee of $1,995.83 for the registration of 3,330,720 shares of Common Stock Underlying Warrants and a registration fee of $1,331.60 for the registration of 2,222,222 shares of Common Stock Underlying Convertible Preferred Stock. (7) $10,499.50 of this registration fee was paid by the Registrant upon filing of this Registration Statement on Form S-1 on July 8, 1998. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ii
CHAPARRAL RESOURCES, INC. Cross Reference Sheet PART I INFORMATION REQUIRED IN THE PROSPECTUS Item Number Form S-3 Item Number Caption or Location in Prospectus - - ------ -------------------- --------------------------------- 1. Forepart of the Registration Statement and Front of Registration Statement and Outside Front Cover of Prospectus Outside Front Cover of Prospectus 2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of Prospectus Prospectus 3. Summary Information, Risk Factors and Ratio of Prospectus Summary and Risk Factors Earnings to Fixed Charges 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Not Applicable 6. Dilution Not Applicable 7. Selling Security Holders Selling Securityholders 8. Plan of Distribution Plan of Distribution 9. Description of Securities to be Registered Front of Registration Statement, Outside Front Cover of Prospectus and Description of Securities 10. Interests of Named Experts and Counsel Not Applicable 11. Material Changes Not Applicable 12. Experts Experts 13. Incorporation of Certain Information by Reference Incorporation of Certain Information by Reference 14. Disclosure of Commission Position on Description of Securities Indemnification for Securities Act Liabilities iii
PROSPECTUS CHAPARRAL RESOURCES, INC. 24,605,450 Shares of Common Stock This Prospectus describes the offer for resale by the holders (the "Selling Securityholders") of up to 24,605,450 shares of the $0.10 par value common stock ("Common Stock") of Chaparral Resources, Inc. ("Us" or "We"). 19,052,508 of these shares offered for resale are currently issued and outstanding, 3,330,720 are issuable upon the exercise of outstanding warrants ("Warrants") to purchase shares of Common Stock and 2,222,222 shares are issuable upon conversion of outstanding Series A Preferred Stock ("Preferred Stock") into shares of Common Stock. We have issued or will be issuing, in private transactions, the shares of Common Stock offered by the Selling Securityholders for resale and the shares of Common Stock issuable upon exercise of the Warrants and upon conversion of the Preferred Stock. See "Plan of Distribution" and "Selling Securityholders." We will not receive any proceeds from the sale of Common Stock by the Selling Securityholders or upon conversion of the Preferred Stock. If all of the Warrants are exercised, we will receive proceeds of approximately $614,635. We do not know if any or all of the Warrants will be exercised, but the holders of the Warrants will have to exercise the Warrants in order to publicly sell the underlying shares of Common Stock that are offered for resale in this Prospectus. The Common Stock is quoted for trading on the Nasdaq SmallCap Market under the symbol "CHAR." For information concerning certain factors which should be considered by purchasers of the Common Stock offered hereby, see "Risk Factors" commencing on page 4 of this Prospectus. Neither the Securities and Exchange Commission ("Commission") nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. The date of this Prospectus is ___________, 1998 PROSPECTUS SUMMARY This entire summary is qualified by the more detailed information and financial statements and related notes incorporated by reference into, or appearing elsewhere in, this Prospectus. Chaparral Resources, Inc. We were incorporated under the laws of the state of Colorado in 1972. We are an independent oil and gas exploration and production company. We were based in Denver, Colorado, until March 1, 1997, when we moved our headquarters to Houston, Texas. We began by producing and selling crude oil and natural gas to oil and gas purchasers in the Rocky Mountain and Western states of the United States. During early 1994, we made a strategic decision to pursue international oil projects and began exploration in the Commonwealth of Independent States (part of the former Soviet Union). In early 1997, we sold all of our remaining oil properties in the United States. Our strategy is to obtain development rights to oil fields located outside the United States where oil has been discovered by other companies and our tests indicate oil reserves remain underground, but the fields have either never been placed on production or we believe that we could enhance production with our management and technical experience. We acquired an interest in the Karakuduk Oil Field Project ("Karakuduk Field" or "Karakuduk Project") described below as the first oil field acquired under our new corporate strategy. We have a net 50% beneficial interest in Karakuduk-Munay, Inc. ("KKM"), a Kazakhstan joint stock company which holds a governmental license to develop the Karakuduk Field. The Karakuduk Field is a 16,900 acre oil field in the Republic of Kazakhstan. The government of the former Soviet Union discovered the Karakuduk Field in 1972 and drilled 22 exploratory and development wells. These wells were not produced commercially. In December 1997, KKM delivered oil from the first well that KKM had reentered in the Karakuduk Field. We plan to further develop and commercially produce the oil reserves in the Karakuduk Field. Our address is 2211 Norfolk, Suite 1150, Houston, Texas 77098. Our telephone number is (713) 807-7100. ORGANIZATIONAL CHART This page contains a chart setting forth the relationship between Chaparral Resources, Inc. and the companies that we own, or, in other words, our subsidiaries. The following is a description of the chart: At the top, or first level, of the chart is a box containing our name "Chaparral Resources, Inc." This box contains a footnote which reads: "Chaparral Resources, Inc. was incorporated in Colorado in 1972 and our current strategy is to obtain development rights to, and develop our existing, oil and gas fields located outside of the United States." Dropping down from the box on the first level are lines connected to three boxes on the second level and one box on the third level. The boxes on the 2 second level represent our wholly-owned subsidiaries. The first of the three boxes on the second level contains the name "Road Runner Service Company, Inc." This box has a line dropping down from it, with the word "services" on it, to the fourth level to a box containing the name "Karakuduk-Munay, Inc." This first box on the second level also contains a footnote which reads: "Road Runner Service Company, Inc. was incorporated in Colorado and provides personnel services to Karakuduk-Munay, Inc. in Kazakhstan." The second box on the second level contains the name "Central Asian Petroleum (Delaware), Inc." This box has a line with the figure "20%" on it dropping down from it to the third level to a box containing the name "Central Asian Petroleum (Guernsey) Limited." Additionally, this second box on the second level contains a footnote which reads: "Central Asian Petroleum (Delaware), Inc. was incorporated in Delaware and owns 20% of Central Asian Petroleum (Guernsey) Limited." The third box on the second level contains the name "Chaparral Acquisition Corp." with a footnote, which reads: "Chaparral Acquisition Corp. was incorporated in Delaware and has no operations." On the third level is the box with a line dropping into it from the first level box with the figure "80%" on it and a line with the figure "50%" on it dropping down to the box on the fourth level containing the name "Karakuduk-Munay, Inc." The box on the third level contains a footnote which reads: "Central Asian Petroleum (Guernsey) Limited was incorporated on the Isle of Guernsey, is 80% owned by us and 20% owned by our subsidiary Central Asian Petroleum (Delaware), Inc. Central Asian Petroleum (Guernsey) Limited owns 50% of Karakuduk-Munay, Inc." On the fourth level is a box which contains the name "Karakuduk-Munay, Inc." This box, in addition to the line dropping down to it from the third level, contains two lines extending from it in a lateral direction, one with the figure "40%" on it and one with the figure "10%" on it. The box on the fourth level contains a footnote which reads: "Karakuduk-Munay, Inc. is a Kazakhstan joint stock company which holds a governmental license to develop the Karakuduk Field." The first lateral box on the fourth level, with the figure "40%" on its line, contains the name "KazakhOil" and a footnote, which reads: "This is the national petroleum company for Kazakhstan, which owns 40% of Karakuduk-Munay, Inc." The second lateral box on the fourth level, with the figure "10%" on its line, contains the name "Korporatsiya Mangistau Terra International" and contains a footnote, which reads "Korporatsiya Mangistau Terra International is a Kazakhstan joint stock company and owns 10% of Karakuduk-Munay, Inc." 3
The Offering Common Stock Outstanding Before the Offering..................... 58,298,790 shares which do not include 30,000 shares granted subject to vesting requirements. Total Possible Shares of Common Stock Outstanding After the Offering................................... 63,851,732 shares which include 5,552,942 shares issuable upon the exercise of various outstanding Warrants and the conversion of outstanding Series A Preferred Stock. See "Description of Securities--Preferred Stock." The 63,851,732 shares do not include any shares issuable upon the exercise of outstanding options. Use of Proceeds ................................................. We will use the proceeds from any exercise of Warrants for general corporate purposes. Securities Being Offered for Resale by Selling Securityholders ................................................. 19,052,508 shares of Common Stock and 5,552,942 shares of Common Stock issuable upon the exercise of outstanding Warrants and the conversion of outstanding Series A Preferred Stock. See "Description of Securities--Preferred Stock." NASDAQ Symbol ................................................... CHAR for Common Stock. - - ------------- The securities offered in this Prospectus involve a high degree of risk and you should consider buying them only if you can afford to lose your entire investment. See "Risk Factors." RISK FACTORS An investment in our Common Stock is speculative and involves a high degree of risk. You should purchase the Common Stock only if you are sophisticated in financial matters and business investments. You should carefully consider the following factors, in addition to those discussed in certain documents incorporated in this Prospectus by reference, before purchasing our Common Stock. See "Incorporation of Certain Information by Reference." 4
1. Financial Condition and Possible Need for Additional Financing. We have incurred operating losses for each of our last five fiscal years. We incurred a net loss of approximately $2,603,000 for the fiscal year ended December 31, 1997. We also incurred a net loss of approximately $1,939,000 for the six months ended June 30, 1998. As of June 30, 1998, we had an accumulated deficit of $16,843,000. As of September 15, 1998, we have an outstanding loan of $975,000. We have pledged substantially all of our assets as collateral for the loan. We can repay the loan at any time without a prepayment penalty and remove the security interest in our assets. As a result of such losses and other factors, the opinion on our audited financial statements for the fiscal year ended December 31, 1997 contains an explanatory paragraph regarding our ability to continue as a going concern. At the end of December 1997, we first delivered oil from one well located in the Karakuduk Field. However, the Karakuduk Field is substantially undeveloped and we will require substantial amounts of additional capital for further development. Under the terms of our license, through KKM, we must establish a minimum work plan. The work plan must be carried out unless we obtain waivers or deferrals from the licensing authority. We must provide funds to KKM for KKM to satisfy the work plan in order to maintain our interest in the Karakuduk Project. In July 1998, we received approximately $10,000,000 from the sale of 6,666,669 shares of our Common Stock. With this cash investment, as of September 15, 1998, we had unrestricted cash available for operations of approximately $6,000,000. We cannot assure you that we will have the financial resources to meet our expected cash requirements for 1998. We will be required to raise additional capital to finance the obligations under the license for the Karakuduk Project and to satisfy working capital needs. We may seek to raise additional capital through debt or equity offerings, encumbering properties or entering into arrangements in which certain costs of exploration or development will be paid by others to earn an interest in the properties. In part because of substantial instability in oil prices in recent years, the present environment for financing of small oil companies is uncertain. We cannot guarantee that the additional debt or equity financing that might be required in the future to fund our operations and obligations will be available to us on economically acceptable terms. We may lose our interest in the Karakuduk Project if sufficient funds are not available to meet our obligations with respect to the Karakuduk Project. 2. Risks Inherent in Oil and Gas Exploration. We cannot guarantee that we will be able to discover, develop and produce sufficient reserves in the Karakuduk Field, or elsewhere. Further, we cannot guarantee that we will recover the expenses incurred when we explore the Karakuduk Field or that we will achieve profitability. The odds against discovering commercially exploitable oil reserves are always substantial. The odds against us will be increased as a result of the concentration of our activities in areas that have not yet been significantly explored and where political or other unknown developments could adversely affect commercialization. We, through KKM, will be required to perform expensive geological and/or seismic surveys on our properties. Depending on the results of our surveys, only subsequent drilling at substantial cost and high risk can determine whether commercial development of the properties is feasible. Oil drilling is frequently marked by unprofitable efforts from unproductive wells, from productive wells which do not produce sufficient amounts of oil to 5 return a profit and from developed oil reserves which cannot be marketed. We will be subject to all of the risks normally incident to drilling for and producing oil. These risks include blowouts, cratering, fires and accidents. Any of the risks could result in us being liable for damages from loss of life and property. We are not fully insured against these risks. Many of these risks are not insurable. 3. Risks Inherent in Operations in Kazakhstan. We will be subject to certain risks inherent in the ownership and development of properties in Kazakhstan. The contracts that we have with the government of Kazakhstan may be arbitrarily cancelled or forced into renegotiation. Cancellation or renegotiation is likely to adversely affect our ability to profitably extract oil from the Karakuduk Field. The government of Kazakhstan may impose royalty increases, tax increases and retroactive tax claims against us. These taxes would adversely affect our ability to profitably extract oil from the Karakuduk Field because of increased expenses. Expropriation, import and export regulations, environmental controls, and other laws and regulations may adversely affect our interest in the Karakuduk Project because of increased costs, inaccessibility or delays. Our operations and agreements will also be governed by the laws of Kazakhstan. We may be subject to arbitration in Kazakhstan or to the jurisdiction of the courts of Kazakhstan. We may not be successful in subjecting foreign persons to the jurisdiction of courts in the United States. We may be hindered or prevented from enforcing our rights against a government agency, instrumentality or other government entity of Kazakhstan because these entities may consider themselves immune from the jurisdiction of any court. Although certain members of our management have had prior experience operating in foreign countries, we are not experienced in operating in any foreign country, including Kazakhstan. We may encounter unexpected difficulties in conducting foreign operations. Although we believe that the recent and continuing political, social and economic developments in Kazakhstan have created opportunities for foreign investment, uncertainty exists about the status of Kazakhstan law, the stability of Kazakhstan and the autonomy of the parties involved with us in Kazakhstan. We have obtained a commitment for political risk insurance against certain political and commercial events. We have not yet purchased the insurance. Even if we purchase the insurance, we cannot guarantee that the insurance will adequately protect our endeavors in Kazakhstan. 4. Risks of Joint Ventures; Risks Associated With Indirect Investments. The terms of an agreement (the "1995 Agreement") between KKM and the Ministry of Oil and Gas Industry for Kazakhstan, a license issued June 28, 1995, as amended, to KKM (the "Kazakhstan License") from Kazakhstan, and the terms of a joint venture agreement between Central Asian Petroleum (Guernsey) Limited ("CAP-G") and KKM govern the exploration and development of the Karakuduk Field. CAP-G has a 50% interest in KKM. We own all of CAP-G. The shareholders of KKM also include KazakhOil, the national petroleum company for the Republic of Kazakhstan, and a private Kazakhstan joint stock company. KazakhOil holds a 40% interest in KKM and the private Kazakh joint stock company holds the remaining 10%. The government of Kazakhstan indirectly owns 40% of KKM through KazakhOil's direct ownership interest. The 1995 Agreement requires KKM to borrow all of the money required for development of the Karakuduk Field. The joint venture agreement 6 requires CAP-G to loan funds to KKM, which KKM does not borrow from other parties. The funds will be used to pay for the development of the Karakuduk Field. 5. Requirements to Maintain License. The 1995 Agreement and the Kazakhstan License include numerous requirements, which must be met to maintain KKM's interest in the Karakuduk Field, including the investment of certain amounts of funds. The 1995 Agreement is KKM's contract with Kazakhstan. It grants KKM rights to develop the Karakuduk Field. The 1995 Agreement specifies the rights and obligations of KKM and KKM's investors regarding the development of the Karakuduk Field and conducting business operations in Kazakhstan. Additionally, KKM obtained the Kazakhstan License to legally conduct petroleum activities in the Karakuduk Field. The Kazakhstan License specifies KKM's minimum work program and capital spending requirements regarding the Karakuduk Field. If KKM fails to meet either the minimum work program or financial commitment requirements, KKM may lose all rights to develop the Karakuduk Field. The minimum work program requires KKM to drill 8 new wells and 4 workover wells by December 31, 1999. The new wells must be between 3,250 and 3,500 meters in depth. The field infrastructure and equipment necessary for processing and transferring production from the initial 12 wells must also be completed by December 31, 1999. KKM has conducted all 4 well workovers, establishing production from 2 wells. The other two workover wells will be completed when additional field facilities are in place. KKM has also contracted for a development drilling rig and is expecting to begin drilling operations in October or November of 1998. KKM does not expect any difficulty in drilling 8 new wells before December 31, 1999. Additional field facilities are either in place or in construction to support the development and production of the wells in the first phase work program. KKM has constructed a base camp with living quarters for 50 men, storage facilities, processing facilities, warehouses, a repair shop, and other related facilities. KKM has also completed a main road between the export pipeline and the field and is clearing roads to other planned drilling locations. KKM is constructing an 18-mile pipeline from the field to an export pipeline. The pipeline will enable up to 12,000 barrels of oil per day to be transferred to the export terminal. Finally, KKM is expanding the base camp to support additional personnel required for expanded drilling and production operations. The Kazakhstan License requires a minimum financial commitment of approximately $10 million by December 31, 1997, of approximately $34.5 million by December 31, 1998 and of approximately $12 million by December 31, 1999. KKM fulfilled the $10 million commitment as of December 31, 1997. KKM has not met the commitments for either December 31, 1998 or December 31, 1999. KKM may not be able to satisfy the commitment for December 31, 1998. KKM may request a deferral of part of the commitment for 1998 until December 31, 1999. While KKM was previously permitted to defer the original financial commitments under the License, there is no assurance that KKM will receive permission for any future deferrals. If KKM is unable to satisfy its commitment and is unable to obtain a deferral, KKM likely would lose the Kazakhstan license. 7 6. Competition. Foreign oil and gas exploration and the acquisition of producing and undeveloped properties is a highly competitive and speculative business. We compete in all areas of the oil and gas industry with a number of other companies. These companies include large multi-national oil and gas companies and other independent operators which might have greater financial resources and more experience than us. We do not hold a significant competitive position in the oil and gas industry. The Commonwealth of Independent States ("CIS") is currently a primary focal point of the oil and gas industry for exploration and development activities. We compete with both major oil and gas companies and independent producers for rights to develop available oil and gas properties, access to limited pipeline capacity, procurement of available materials and resources, and hiring qualified international and local personnel. 7. Unstable Market Prices. We are uncertain about the prices at which we can sell any oil produced by us. Under the market conditions prevailing in the future, the production and sale of oil from the Karakuduk Field may not be commercially feasible. The availability of ready markets and the price obtained for oil produced depends on numerous factors beyond our control. Domestic markets in Kazakhstan might not mirror world market prices. The current market for oil is characterized by instability. This instability has caused fluctuations in world oil prices in recent years. There can be no assurance of any price stability. If we produce oil in the future, our estimated future net revenue will be highly dependent on the price of oil. The energy market makes it difficult to estimate future prices of oil. Various factors beyond our control affect prices of oil, including worldwide and domestic supplies of, and demand for, oil, the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls, political instability or armed conflict in oil-producing regions, the price of foreign imports, the level of consumer demand, the price and availability of alternative fuels, the availability of pipeline capacity and changes in existing federal regulation and price controls. As in the past, it is likely that oil prices will continue to fluctuate in the future. This may adversely affect our business. 8. Limited Transportation Routes. Our ability to maximize the value of our assets depends on our ability to extract and transport oil and find appropriate markets for its sale. Exports from Kazakhstan depend on limited transportation routes and, in particular, access to the Russian pipeline system. We believe, however, that over the life of the Karakuduk Project, these transportation restrictions will be eased. If so, we may be able to export oil less expensively and maximize the value of our assets. KKM has entered into a tentative agreement with the entity that operates the KazTrans Oil pipeline to enter into a contract to provide KKM access to the pipeline. This access will allow KKM to export oil to markets outside of Kazakhstan. On March 7, 1998, KKM also entered into a contract ("Munay-Impex Contract") with the export-import firm of Munay-Impex, a subsidiary of Kazakh Oil, to export up to 100,000 tons of crude oil produced by KKM to both the Commonwealth of Independent States and other countries according to the schedule of shipment of Kazakhstan oil during 1998. KKM will supply crude oil to Munay-Impex in amounts of not less than five to 10 thousand metric tons. 8 KKM anticipates that production facilities will be completed during the fourth quarter of 1998. The production will initially allow up to 12,000 barrels of oil per day to be transported to the main pipeline terminal. Until the production facilities are completed, any produced oil will first be placed into storage tanks and then trucked to the KazTrans Oil pipeline. Production entered into the pipeline is considered inventory of KKM until the five to 10 thousand metric ton minimum volume requirement has been met. Then the production will be sold under the terms of the Munay-Implex Contract. KKM expects to record revenues from the sale of crude oil only when KKM places the minimum of 5,000 tons of oil production in the pipeline. We believe this will occur by the end of the third quarter of 1998. 9. No Proven Reserves. Estimated quantities of our proven oil and natural gas reserves decreased 100% for the fiscal year ended November 30, 1996, as compared to the previous fiscal year. Reserves decreased due to the sale of certain producing properties and the abandonment of other properties which produced oil at uneconomic rates. The present value of our proven reserves decreased 100% as of November 30, 1996, as compared to the end of the previous fiscal year, due to the sale and abandonment of proven reserves. We currently claim no proven reserves. We currently have production from the J-1 Lower sand. We will transfer the reserves to proved developed and proved undeveloped when we have the necessary field facilities and associated transportation pipeline to allow sustained commercial production. We expect to be able to obtain an updated reserve report for the Karakuduk Field in late 1998 or early 1999. 10. Government Regulation and Environmental Risks. Our operations may be subject to regulation by governments or other regulatory bodies governing the area in which our overseas operations are located. Regulations govern such things as drilling permits, production rates, environmental protection and pollution control, royalty rates and taxation rates. Drilling permits could be difficult to obtain or prohibitably expensive. Production rates could be set so low that they would make production unprofitable. Environmental protection and pollution control could be so restrictive as to make production unprofitable. Royalty and taxation rates could be set so high as to make production unprofitable. These regulations may substantially increase the costs of doing business and may prevent or delay the starting or continuation of any given exploration or development project. Regulations are subject to future changes by legislative and administrative action and by judicial decisions which may adversely affect the petroleum industry in general and us in particular. It is impossible to predict the effect any current or future proposals or changes in existing laws or regulations will have on our operations. We believe that we are in compliance with all applicable legislation and regulations in all material respects. Based on a study undertaken on our behalf by an unaffiliated party, we do not believe that our business operations presently create any environmental liabilities. However, compliance with foreign laws and regulations which regulate the discharge of materials into the environment could have an adverse effect on us. We cannot assess the extent of any such effect. We have not made any material capital expenditures for environmental control facilities and have no plans to do so. 11. Dependence On Management. We depend on the expertise and abilities of our current officers. The loss of the services of any one of our officers could adversely affect our business until a replacement could be found. We do not hold life insurance policies on our officers. 9 12. Currency Risks. KKM's Kazakhstan License for the Karakuduk Field includes the right to export the oil that it produces and to establish and maintain bank accounts in dollars or other foreign currency of Kazakhstan. The 1995 Agreement allows KKM to maintain it's books and records in U.S. dollars. It requires local Kazakh taxes be reported in Tenge, the local Kazakh currency. KKM's functional currency is the U.S. dollar. Due to current limited production from the Karakuduk Field, KKM plans to sell all of the oil that it produces in 1998 to Munay-Impex, a subsidiary of KazakhOil. KKM will receive payment for oil sold under the Munay-Impex contract in Tenge. Because Kazakh law prohibits the export of Tenge, all of the current proceeds will be used for the payment of local costs and expenses. When the volume of production of oil increases, we expect that the oil will be exported and sold outside of Kazakhstan and payment will be in U.S. dollars. The U.S. dollars will be deposited in bank accounts established outside Kazakhstan. We expect the majority of KKM's transactions will be in U.S. dollars. 13. Taxes. KKM is subject to various taxes in Kazakhstan, including, but not limited to, income tax, value added tax, customs duties, excise taxes, property taxes, payroll taxes, and excess profits tax. Payments made by KKM to us or our subsidiaries may also be subject to additional withholding tax depending upon the type of payment and the country of incorporation of the entity which receives the payment. We and our subsidiaries (other than CAP-G) are incorporated in the United States and enjoy all tax benefits provided by the tax treaty between the United States and Kazakhstan. CAP-G is incorporated in the Isle of Guernsey. The Isle of Guernsey does not have a tax treaty with Kazakhstan. Payments of interest and dividends to a non-resident are subject to a 15% withholding tax. Under the 1995 Agreement, interest payments made by KKM to CAP-G are not subject to withholding tax. Any dividends paid by KKM to CAP-G are currently subject to a withholding tax rate of 15%. We do not expect KKM to pay any income tax in Kazakhstan nor to declare any dividends for the benefit of its shareholders in the foreseeable future. 14. No Dividends. We have paid no cash dividends on our Common Stock. We do not anticipate paying any dividends on our Common Stock in the foreseeable future. Our decision whether to pay future dividends will depend on our earnings, if any, dividend payments that we will have to make on any outstanding preferred stock and our other financial requirements. 15. Possible Ownership Interest Dilution. As of September 15, 1998, we had outstanding warrants and options entitling the holders to purchase a total of 4,634,500 and 3,456,000 shares of our Common Stock, respectively. The exercise prices of the outstanding warrants and options currently range from less than $0.01 per share to $3.50 per share. The holders of the outstanding warrants and options might have the opportunity to profit from a rise in the market price (of which there is no assurance) of the shares of our Common Stock underlying the warrants and options. Also, the exercise of such warrants and options may dilute the ownership interest in us held by other shareholders. 3,330,720 shares of Common Stock underlying outstanding warrants have been registered for resale. Resales of Common Stock issued upon exercise of warrants and options could adversely affect the market price for the Common Stock. 16. Required Redemption of Preferred Stock. We currently have outstanding 50,000 shares of our Series A Preferred Stock which have a liquidation preference over the Common Stock of $5,000,000. Further, the holders of shares 10 of the Series A Preferred Stock may convert them into shares of Common Stock at any time. The conversion price of the Series A Preferred Stock is initially $2.25 per share. The number of shares of Common Stock issuable upon conversion of each share of Series A Preferred Stock is determined by dividing $100 by the conversion price per share. The holders of shares of the Series A Preferred Stock are entitled to receive cumulative dividends at the annual rate of $5.00 per share and may redeem their shares for $100.00 per share plus any unpaid dividends. After November 30, 2002, we must redeem the Series A Preferred Stock to the extent of the lesser of (i) the number of shares of Series A Preferred Stock outstanding on each scheduled redemption date or (ii) one-third of the largest number of shares of Series A Preferred Stock outstanding at any time before the scheduled redemption date. We have the right to redeem all or any portion of any shares of Series A Preferred Stock before any mandatory redemption. Each holder of shares of Series A Preferred Stock is entitled to the same number of votes on any matter as the largest number of full shares of Common Stock into which all shares of the holder's Series A Preferred Stock are convertible. The shares of Common Stock that are underlying the Series A Preferred Stock are registered for resale. The holders of the outstanding Series A Preferred Stock have the opportunity to profit from a rise in the market price of the shares of Common Stock into which the shares of the Series A Preferred Stock are convertible. The Series A Preferred Stock conversion may dilute the ownership interest in us held by other shareholders of the Common Stock. Resales of shares of Common Stock issued upon conversion of the Series A Preferred Stock could adversely affect the market price of the Common Stock. 17. Additional Preferred Stock. Our Board of Directors has the power, without further action by the holders of the Common Stock, to designate the relative rights and preferences of the remaining authorized but unissued shares of our preferred stock, when and if issued. The rights and preferences could include preferences as to liquidation, redemption and conversion rights, voting rights, dividends or other preferences, any of which may dilute the issued and outstanding Common Stock. The ability of the Board of Directors to issue shares of preferred stock and determine the rights, preferences, privileges, designations and limitations of the stock, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption and other terms and conditions, could make it more difficult for a person to engage in, or discourage a person from engaging in, a change in control transaction without cooperation of our management. 18. Risks Associated With Forward Looking Statements. This Prospectus, and the documents incorporated in this Prospectus by reference, contain certain forward looking statements within the meaning of Private Securities Litigation Reform Act of 1995. We intend that such forward looking statements be subject to the safe harbors provided under this act. Our forward looking statements include our plans and objectives for future operations, including plans and objectives 11 relating to the Karakuduk Project and our future performance. The forward looking statements and associated risks described in this Prospectus and the documents incorporated by reference include or relate to (i) our success in developing, producing and selling expected reserves of oil in the Karakuduk Field, (ii) our success in raising required financing to meet the funding obligations of KKM, (iii) our success in producing and marketing proven oil and natural gas reserves and (iv) our success in improving our overall financial operating results. The forward looking statements in this Prospectus are based on current expectations that involve a number of risks and uncertainties. These forward looking statements are based on assumptions that we will have adequate financial resources to fund the development of the Karakuduk Field, that significant reserves of oil will be developed in the Karakuduk Field which can be readily and profitably marketed and that there will be no material adverse change in our operations or business. These assumptions are based on our judgment with respect to, among other things, oil and natural gas reserve information available to us, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Accordingly, although we believe that the assumptions underlying the forward looking statements are reasonable, any such assumption could prove to be inaccurate and, therefore, there can be no assurance that the results contemplated in forward looking statements will be realized. In addition, as disclosed elsewhere in this "Risk Factors" section, there are a number of other risks presented by our business and operations which could cause our financial performance to vary markedly from prior results or results contemplated by the forward looking statements. Management decisions, including budgeting, are subjective in many respects and we must periodically revise our decisions to reflect actual conditions and business developments. The impact of these decisions may cause us to alter our capital investment and other expenditures, which may also adversely affect our results of operations. In light of significant uncertainties inherent in forward looking information, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. USE OF PROCEEDS We intend to use the net proceeds, if any, from exercise of the Warrants for general corporate purposes. It is uncertain when, if ever, we will receive proceeds from exercise of the Warrants. See "Selling Securityholders," "Description of Securities" and "Plan of Distribution." SELLING SECURITYHOLDERS The following table sets forth certain information regarding the shares of Common Stock beneficially owned as of September 15, 1998, by each Selling Securityholder herein as adjusted to reflect the sale by all Selling Securityholders of the shares of Common Stock offered hereby by each Selling Securityholder. This list indicates any position, office or other material relationship with us that the Selling Securityholder had within the past three years, the number of shares of Common Stock owned by such Selling Securityholder prior to the offering, the maximum number of shares of Common Stock to be offered for such Selling Securityholder's account and the amount and the percentage (if one percent or more) of the shares of Common Stock to be owned by 12 the Selling Securityholder after completion of the offering (assuming the Selling Securityholder sells the maximum number of shares of Common Stock). The Selling Securityholders are not required, and may choose not, to sell any of their shares of Common Stock. Further, certain of the Selling Securityholders may have already sold their shares of Common Stock prior to the date hereof.
Shares Owned Shares Percent of Prior to Being Shares Owned Shares Owned Name Offering Offered After Offering After Offering - - ---- -------- ------- -------------- -------------- Agassi, Andre ............................... 106,712 106,712 0 Agassi, Mike ............................... 234 234 0 Allen & Company Incorporated(1).................. 9,031,107 7,291,107 1,740,000 2.725% Allen, A. Clinton ............................... 937 937 0 Allen, Lawson P. ............................... 468 468 0 Ardizzone, Ramon D............................... 2,399 2,399 0 Bailey, Clarke H. ............................... 49,362 49,362 0 Bailey, Higgins D................................ 492 492 0 Bailey, Scott H. ............................... 984 984 0 Barron, Thomas A. 937 937 0 Berrard, Steven R. Revocable Trust............... 79,983 79,983 0 Black Diamond Partners LP(2)..................... 52,500 52,500 0 Brady, Pat ............................... 47,019 47,019 0 Brennan, Bernadette.............................. 1,200 1,200 0 Brenner, Karen ............................... 3,999 3,999 0 Brookings Group LLC, The......................... 1,600 1,600 0 Buelter, H. Tom TTE, U/A/D 08/19/96.............. 15,997 15,997 0 Carlson, Clint D.(3)............................. 188,334 188,334 0 Cascade Investments, LLC......................... 3,333,333 3,333,333 0 CNA Trust Corporation............................ 7,998 7,998 0 Cuccia, Frederick J.............................. 281 281 0 Cyrk Foundation, The............................. 2,342 2,342 0 Cyrk, Inc. ............................... 19,675 19,675 0 Cyrk International Foundation.................... 2,342 2,342 0 Darijac Corporation.............................. 500,000 500,000 0 13 Shares Owned Shares Percent of Prior to Being Shares Owned Shares Owned Name Offering Offered After Offering After Offering - - ---- -------- ------- -------------- -------------- Denman, Robert and Beckie........................ 7,998 7,998 0 Dewey, Robert M., Jr............................. 19,996 19,996 0 DiMartino, Joseph S.............................. 39,992 39,992 0 Drazan, Jeffrey M................................ 164,651 164,651 0 Drazan, Sandra Living Trust...................... 7,998 7,998 0 Drutman, Richard A............................... 99 99 0 Egan, Robert L. ............................... 5,999 5,999 0 Elsener, Charles, Jr............................. 17,871 17,871 0 Elsener, Charles, Sr............................. 272,399 272,399 0 Elsener, Paul ............................... 27,994 27,994 0 Encore Company, Inc.............................. 468 468 0 Enron Oil & Gas Uzbekistan, Ltd.................. 180,000 180,000 0 EPC PSP ............................... 295 295 0 Exeter Finance Group, Inc.(4).................... 2,222,222 2,222,222 0 Faber, Timothy B. 19,996 19,996 0 Farrell, Vincent D., Jr.......................... 10,341 10,341 0 Friedman, Herbert M.............................. 2,868 2,868 0 Genesi, Bob ............................... 7,998 7,998 0 Goldfaden, Jeffrey G............................. 799 799 0 Hackett, Montague H., Jr......................... 39,992 39,992 0 Harman Investments, LP........................... 9,370 9,370 0 Hart, M. Leo ............................... 201,957 201,957 0 Hayes, Francis G. ............................... 1,600 1,600 0 Hicks, Thomas O. 159,966 159,966 0 Holmes, Gail E. ............................... 166,668 166,668 0 Hoovler, M.R.(5) 607,457 250,000 357,457 0.560% Hoovler, P.V.(6) ............................... 1,489,522 700,000 789,522 1.236% Keller, William(7) .............................. 802,750 40,000 762,750 1.195% Keough, Clark ............................... 100,000 100,000 0 Keough, Michael L................................ 7,998 7,998 0 14 Shares Owned Shares Percent of Prior to Being Shares Owned Shares Owned Name Offering Offered After Offering After Offering - - ---- -------- ------- -------------- -------------- Kouris, Jim ............................... 1,200 1,200 0 L'Esperance, Dr. Francis A., Jr.................. 23,995 23,995 0 Lewis, Sherman R., Jr............................ 27,994 27,994 0 Limit & Co. ............................... 239,949 239,949 0 Lively, Keith R. ............................... 15,997 15,997 0 Lufkin, Dan W. ............................... 39,992 39,992 0 Maasbach, Ruth ............................... 15,997 15,997 0 Massachusetts Mutual Life Insurance Company...... 46,261 46,261 0 MassMutual Corporate Investors................... 9,838 9,838 0 MassMutual Participation Investors............... 2,460 2,460 0 Moyers, Edward L. 1,874 1,874 0 Murphy, Tom G., Pension Plan(8) ................. 40,000 40,000 0 Network Fund III, Ltd.(9)........................ 1,666,667 1,666,667 0 Newman, Harold J. 239,949 239,949 0 Newman, Paul L. ............................... 468 468 0 Pascal, Donald T. ............................... 4,380 4,380 0 Purdue, Cheryl ............................... 295 295 0 Raptor Global Fund, L.P.......................... 221,333 221,333 0 Raptor Global Fund Ltd........................... 630,700 630,700 0 Rawn, Carol Lee ............................... 6,887 6,887 0 Rawn, James D. ............................... 6,887 6,887 0 Rawn, Robert S. ............................... 6,887 6,887 0 Rawn, Stanley R., Jr............................. 151,641 151,641 0 Reed Hobe Sound Trust U/A Dtd. 12/16/64 19,996 19,996 0 FBO Samuel P. Reed .............................. Reiss, James J., Jr.............................. 9,838 9,838 0 Reynolds, Eric ............................... 1,279 1,279 0 Saltz, Jack ............................... 846,154 846,154 0 Schneider, John A.(10)........................... 235,000 35,000 200,000 0.313% Schwab, David ............................... 11,998 11,998 0 15 Shares Owned Shares Percent of Prior to Being Shares Owned Shares Owned Name Offering Offered After Offering After Offering - - ---- -------- ------- -------------- -------------- Seefurth, Thomas ............................... 984 984 0 Shlopak, Gregory P............................... 47,019 47,019 0 Spencer, John ............................... 4,468 4,468 0 Swiss Army Brands, Inc........................... 87,634 87,634 0 Task (USA), Inc. ............................... 90,586 90,586 0 The 1990 Wendell Trust........................... 39,992 39,992 0 Triangle Bridge Group, L.P....................... 39,992 39,992 0 Truman, James ............................... 7,998 7,998 0 Tudor Arbitrage Partners, L.P.................... 68,000 68,000 0 Tudor BVI Futures Ltd............................ 413,300 413,300 0 Warburg Pincus Post-Venture Capital Fund......... 333,333 333,333 0 Warburg Pincus Trust, Inc. Postventure Capital 166,667 166,667 0 Portfolio ............................... Warburg Pincus Emerging Growth Fund.............. 833,333 833,333 0 Weinberg, John L. 39,992 39,992 0 West, Kathy J., TTEE U/A Dtd. 12/06/96........... 3,999 3,999 0 Whittier Energy Company(11)...................... 436,685 436,685 0 Whittier Opportunity Fund I LLC.................. 9,370 9,370 0 Whittier Ventures LLC(12)........................ 3,233,556 1,233,556 2,000,000 3.13% Win Com, Inc. ............................... 984 984 0 Wolf, G. Theodore, II............................ 937 937 0 Wolf, G. Thomas ............................... 937 937 0 Young, Michael B.(13)............................ 60,000 10,000 50,000 .078% ZD Air, Inc. ............................... 11,998 11,998 0
- - ---------------------- (1) The shares owned include 1,828,720 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. (2) Represents 52,500 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. 16 (3) The shares owned include 35,000 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. (4) Represents shares of Common Stock into which Series A Preferred Stock is convertible. (5) Matthew R. Hoovler is one of our former officers and directors. The shares include 250,000 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. The shares owned include shares owned by Mr. Hoovler's wife and children and the shares being offered include shares being offered by Mr. Hoovler and his wife. (6) Paul V. Hoovler is one of our former officers and directors. The shares include 700,000 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. The shares owned include 576,000 shares owned by the PVH Family Limited Partnership of which Mr. Hoovler is the General Partner. (7) Includes 40,000 shares underlying exercisable Warrants, all of which shares have been registered for resale upon exercise of the Warrants. (8) Includes 40,000 shares underlying exercisable Warrants, all of which shares have been registered for resale upon exercise of the Warrants. (9) We have agreed that, if at any time by March 31, 1999, we issue additional shares of our Common Stock at a price of less than $2.00 per share, Network Fund III, Ltd will receive an additional number of shares of Common Stock which when added to its original purchase of 1,250,000 shares divided by $2,500,000 is equal to the price at which the additional shares are sold. Pursuant to this agreement, we have issued an additional 416,667 shares of Common Stock due to the July 1998 purchases of 6,666,667 shares of Common Stock at a price of $1.50 per share. Further, we have agreed that if, by March 31, 1999, we issue or sell convertible securities (i.e., securities directly or indirectly convertible into or exchangeable for common stock), other than as a dividend or other distribution on any class of stock, Network Fund III, Ltd. is entitled to exchange the 1,250,000 shares for the convertible securities. The amount of convertible securities to be issued to Network Fund III, Ltd. is to be determined by dividing the market price of the common stock into the issue price of such convertible securities. (10) Includes 35,000 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. (11) Includes 87,500 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. (12) Includes 262,000 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. 17 (13) Michael B. Young is one of our officers. The shares include 50,000 shares underlying a presently exercisable option. Does not include a grant for 30,000 shares that will vest with respect to 10,000 shares on each of January 30, 1999, 2000 and 2001, if Mr. Young is still employed by us on those dates. The shares will vest earlier if Mr. Young is terminated without due cause or if we are bought or merge with another company. LIMITATION OF LIABILITY AND INDEMNIFICATION Certain Provisions of Restated Articles of Incorporation + Amendments Our Restated Articles of Incorporation + Amendments contain a provision, authorized under Colorado law, which limits the liability of our directors for monetary damages for breach of fiduciary duty as an officer or director other than for intentional misconduct, fraud or a knowing violation of law or for payment of a dividend in violation of Colorado law. Such provision limits recourse for money damages which might otherwise be available to us or our shareholders for negligence by individuals while acting as our officers. Although this provision would not prohibit injunctive or similar actions against our directors, the practical effect of such relief would be limited. This limitation of liability under state law does not apply to any liabilities which may exist under federal securities laws. Indemnification and Insurance Provisions We have officer and director liability insurance and our Restated Articles of Incorporation + Amendments and bylaws provide that we shall indemnify our directors and officers to the fullest extent permitted by Colorado law. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. Transfer Agent American Securities Transfer & Trust, Inc., Denver, Colorado, is the transfer agent for our Common Stock. PLAN OF DISTRIBUTION We are registering the shares of Common Stock on behalf of the Selling Securityholders. As used herein, "Selling Securityholders" includes donees and pledgees selling shares of Common Stock received from a named Selling Securityholder after the date of this Prospectus. All costs, expenses and fees in connection with the registration of the shares of Common Stock offered hereby will be borne by us. Brokerage commissions and similar selling expenses, if any, attributable to the sale of shares of Common Stock will be borne by the Selling Securityholders. Sales of shares of Common Stock may be effected by Selling Securityholders from time to time in one or more types of transactions (which may include block transactions), in the over-the-counter market, in negotiated 18 transactions, through put or call option transactions relating to the shares of Common Stock, through short sales of shares of Common Stock, or a combination of such methods of sale, at market prices prevailing at the time of sale, or at negotiated prices. Such transactions may or may not involve brokers or dealers. We have not been advised by the Selling Securityholders that they have entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their shares of Common Stock, nor that there is an underwriter or coordinating broker acting in connection with the proposed sale of shares of Common Stock by the Selling Securityholders. The Selling Securityholders may effect such transactions by selling shares of Common Stock directly to purchasers or to or through broker-dealers, which may act as agents or principals. Such broker-dealers may receive compensation in the form of discounts, concessions, or commissions from the Selling Securityholders and/or the purchasers of shares of Common Stock for whom such broker-dealers may act as agents or to whom they sell as principal, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions). The Selling Securityholders and any broker-dealers that act in connection with the sale of shares of Common Stock might be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act of 1933, as amended, and any commissions received by such broker-dealers and any profit on the resale of the shares of Common Stock sold by them while acting as principals might be deemed to be underwriting discounts or commissions under the Securities Act of 1933, as amended. The Selling Securityholders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares of Common Stock against certain liabilities, including liabilities arising under the Securities Act of 1933, as amended. Because Selling Securityholders may be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act of 1933, as amended, the Selling Securityholders will be subject to the prospectus delivery requirements of the Securities Act of 1933, as amended. Selling Securityholders also may resell all or a portion of the shares of Common Stock in transactions in reliance upon Rule 144 or Regulation S under the Securities Act of 1933, as amended, provided they meet the criteria and conform to the requirements of such Rule or Regulation. Upon us being notified by a Selling Securityholder that any material arrangement has been entered into with a broker-dealer for the sale of shares of Common Stock through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this Prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act of 1933, as amended, disclosing (i) the name of each such selling shareholder and of the participating broker-dealer(s), (ii) the number of shares of Common Stock involved, (iii) the price at which such shares of Common Stock were sold, (iv) the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by 19 reference in this Prospectus and (vi) other facts material to the transaction. In addition, upon us being notified by a Selling Securityholder that a donee or pledgee intends to sell more than 500 shares of Common Stock, we will file a supplement to this Prospectus. EXPERTS The consolidated financial statements of the Company included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, have been audited by Ernst & Young LLP, independent auditors, and for the year ended November 30, 1995, by Grant Thornton LLP, independent auditors, as set forth in their respective reports thereon (each of which contains an explanatory paragraph describing conditions that raise substantial doubt about the Company's ability to continue as a going concern as described in Note 2 to the consolidated financial statements). Such consolidated financial statements are incorporated herein by reference in reliance upon such reports given upon the authority of such firms as experts in accouunting and auditing. The financial statements of KKM included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, have been audited by Ernst & Young-Kazakhstan, independent auditors, as set forth in their report thereon (which contains an explanatory paragraph describing conditions that raise substantial doubt about KKM's ability to continue as a going concern as described in Note 3 to the financial statements). Such financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The following documents of ours are specifically incorporated by reference into this Prospectus: Annual Report on Form 10-K for the fiscal year ended December 31, 1997; Current Report on Form 8-K dated April 3, 1998; Form 12b-25 for the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998; Quarterly Report on Form 10-Q for the quarter ended March 31, 1998; Definitive Proxy Materials on Form 14A dated May 28, 1998; Current Report on Form 8-K dated July 28, 1998; Form 12b-25 for the Quarterly Report on Form 10-Q for the quarter ended June 30, 1998; 20 Quarterly Report on Form 10-Q for the quarter ended June 30, 1998; Amendment to Annual Report on Form 10-K for the fiscal year ended December 31, 1997. All documents subsequently filed by us pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to termination of the offering shall be deemed incorporated by reference herein. We will provide to each person, including any beneficial owner, to whom this Prospectus is delivered, a copy of any and all of the information that has been incorporated by reference in this Prospectus but not delivered with this Prospectus. We will provide this information upon written or oral request at no cost to the requester. Requests for information should be directed to our Treasurer at 2211 Norfolk, Suite 1150, Houston, Texas 77098. Our telephone number is 713-807-7100. We are subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance with the Exchange Act, we file periodic reports with the Commission. Such reports include Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. We also file proxy materials with the Commission. Such reports and proxy materials filed by us with the Commission can be read and copied at the Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D. C. 20549. Information about the operation of the Commission's Public Reference Room can be obtained by calling 1-800-SEC-0330. The Commission maintains a Web site that contains reports, proxy and information statements and other information about us. The address of such site is http://www.sec.gov. Our Internet address is http://chaparralresources.com. 21 ======================================= ===================================== CHAPARRAL RESOURCES, INC. No person has been authorized to give any information or to make any representation in connection with the Offering being made hereby not contained in this Prospectus, and, if given or made, such information or representation 24,605,450 Shares must not be relied upon as having been of Common Stock authorized. This Prospectus does not constitute an offer to sell or solicitation of an offer to buy any of the Common Stock offered hereby in any jurisdiction in which it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create an implication that information contained herein is correct as of any time subsequent to the date hereof. ------------- ----------------- PROSPECTUS Page No. ------------------ PROSPECTUS SUMMARY................ 2 RISK FACTORS...................... 3 USE OF PROCEEDS................... 10 SELLING SECURITYHOLDERS........... 10 LIMITATION OF LIABILITY AND INDEMNIFICATION................. 16 PLAN OF DISTRIBUTION.............. 16 EXPERTS........................... 17 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE........ 17 September___, 1998 ====================================== ======================================= PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution. -------------------------------------------- Expenses payable by us in connection with the issuance and distribution of the securities being registered hereby are as follows: SEC Registration Fee..................................$13,242.16 Accounting Fees and Expense...........................$ 50,000* Legal Fees and Expenses...............................$ 30,000* Blue Sky Fees and Expenses............................$ 0* Printing, Freight and Engraving.......................$ 1,000* Miscellaneous.........................................$ 0* Total........................................$94,242.16* - - ------------------- *Estimated. Item 15. Indemnification of Directors and Officers. ------------------------------------------ We have a $2,000,000 directors and officers liability insurance policy. This insurance policy insures the past, present and our future officers and directors, with certain exceptions, from claims arising out of any actual or alleged act, error, omission, misstatement, misleading statement or breach of duty by such officer or director in his or her capacity as such. Section 7-109-102 of the Colorado Business Corporation Act permits a Colorado corporation to indemnify any director against liability if such person acted in good faith and, in the case of conduct in an official capacity with the corporation, that the director's conduct was in the corporation's best interests and, in all other cases, that the director's conduct was at least not opposed to the best interests of the corporation or, with regard to criminal proceedings, the director had no reasonable cause to believe the director's conduct was unlawful. Article Twelfth of our Restated Articles of Incorporation + Amendments, as amended, filed as Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6 provides that we shall indemnify each director and each officer, and the heirs, executors and administrators of each director and each officer, against expenses reasonably incurred or liability incurred by such person in connection with any action, suit or proceeding to which such person may be made a party by reason of such person being or having been our director or officer, except in relation to matters as to which such person shall be finally adjudged in such action, suit or proceeding to be liable for fraud or misconduct, which right of indemnification shall not exclude other rights to which such person may be entitled. II-1 Article Fifteenth of our Restated Articles of Incorporation + Amendments, as amended, filed as Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6 provides that a our directors shall not be personally liable to us or our shareholders for monetary damages for breach of fiduciary duty as a director; except that the provision shall not eliminate or limit the liability of our director or our shareholders for monetary damages for: (i) any breach of the director's duty of loyalty to us or its shareholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; (iii) acts involving unlawful distributions as specified in the Colorado Business Corporation Act; or (iv) any transaction from which the director derived an improper personal benefit. Further, Article Fifteenth states that any repeal or modification of the foregoing by the our shareholders shall not adversely affect any right or protection of our director existing at the time of such repeal or modification. Article V of our Bylaws, filed as Exhibit 3.7 hereto, includes provisions requiring us to indemnify any person who was or is a party or is threatening to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether formal or informal, by reason of the fact that such person is or was our director, officer, employee, fiduciary or agent, or is or was serving at our request as a director, officer, partner, trustee, employee, fiduciary or agent of any foreign or domestic profit or nonprofit corporation or of any partnership, joint venture, trust, profit or nonprofit unincorporated association, limited liability company or other enterprise or an employee benefit plan against reasonably incurred expenses (including attorneys' fees), judgments, penalties, fines (including any excise tax assessed with respect to an employee benefit plan) and amounts paid in settlement reasonably incurred by such person in connection with such action, suit or proceeding if it is determined by disinterested directors that such person conducted himself or herself in good faith and that such person reasonably believed (i) in the case of conduct in such person's official capacity with us, that such person's conduct was in our best interest, or (ii) in all other cases (except criminal cases) that such person's conduct was at least not opposed to our best interest, or (iii) in the case of any criminal proceeding, that such person had no reasonable cause to believe such person's conduct was unlawful. No indemnification shall be made with respect to any claim, issue or matter in connection with a proceeding by or in the our right in which the person being indemnified is adjudged liable to us or in connection with any proceeding charging that the person being indemnified derived an improper personal benefit, whether or not involving acting in an official capacity, in which such person was adjudged liable on the basis that such person derived an improper personal benefit. Further, indemnification in connection with a proceeding brought by or in our right shall be limited to reasonable expenses, including attorneys' fees, incurred in connection with the proceeding. Reasonable expenses (including attorneys' fees) incurred in defending an action, suit or proceeding) may be paid by us to any person being indemnified in advance of the final disposition of the action, suit or proceeding upon receipt of (i) a written affirmation by the person being indemnified as to such person's good faith and belief that such person met the standards of conduct described by the Bylaws, (ii) a written undertaking, executed personally or on behalf of the person being indemnified, to repay such advances if it is ultimately determined that such person did not meet the prescribed standards of conduct, and (iii) a determination is made by our disinterested director (as described in the Bylaws) that the facts then known to a disinterested director would not preclude indemnification. The Bylaws II-2 require that we report in writing to shareholders with or before notice of the next meeting of shareholders of any indemnification of or advance of expenses to any director under the indemnification provisions of the Bylaws. Item 16. Exhibits. --------- The following is a list of all exhibits filed as part of this Registration Statement or, as noted, incorporated by reference to this Registration Statement: Exhibit No. Description and Method of Filing ----------- -------------------------------- 2.1 Stock Acquisition Agreement and Plan of Reorganization dated April 12, 1995 between Chaparral Resources, Inc., and the Shareholders of Central Asian Petroleum, Inc., incorporated by reference to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 2.2 Escrow Agreement dated April 12, 1995 between Chaparral Resources, Inc., the Shareholders of Central Asian Petroleum, Inc. and Barry W. Spector, incorporated by reference to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 2.3 Amendment to Stock Acquisition Agreement and Plan of Reorganization dated March 10, 1996 between Chaparral Resources, Inc., and the Shareholders of Central Asian Petroleum, Inc., incorporated by reference to the Company's Registration Statement No. 333-7779. 3.1 Restated Articles of Incorporation + Amendments dated September 25, 1976, incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 5.1 Opinion of Smith McCullough, P.C. on legality of shares of Common Stock. 10.1 Royalty Participation Plan dated June 15, 1982, incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 10.2 Chaparral Resources, Inc. 1989 Stock Warrant Plan effective May 1, 1989, incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 10.3 Target Benefit Plan effective December 1, 1990 incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1991. 10.4 Deferred Compensation and Death Benefit Plan as amended November 15, 1991, incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1991. II-3 Exhibit No. Description and Method of Filing ----------- -------------------------------- 10.5 Promissory Note dated November 1, 1995 from Chaparral Resources, Inc. to Brae Group, Inc., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated November 1, 1995. 10.6 Purchase Agreement, dated effective January 12, 1996, between the Company and Guntekin Koksal (purchase of CAP-G shares) incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1995. 10.7 Letter Agreement, dated January 3, 1996, between the Company and certain stockholders of Darka Petrol Ticaret Ltd. Sti., together with Exhibits A--E, incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1995. 10.8 Amendment, effective March 4, 1996, to the Letter Agreement revising the terms pursuant to which the Company is to acquire all shares of CAP(G) stock owned by Darka Petrol Ticaret Ltd. Sti., incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1995. 10.9 Warrant Certificate entitling Allen & Company to purchase up to 1,022,000 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 1, 1996. 10.10 Consulting Agreement dated May 14, 1996 with M-D International Petroleum, Inc., incorporated by reference to the Company's Registration Statement No. 333-7779. 10.11 Promissory Notes and Modifications of Promissory incorporated by reference to Exhibit (3) to the Company's Current Report on Form 8-K dated November 22, 1996. 10.12 Amendment effective December 6, 1996 to Purchase Agreement dated effective January 12, 1996 between the Company and Guntekin Koksal, incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.13 Severance Agreement dated February 12, 1997 between the Company and Paul V. Hoovler, incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. II-4 Exhibit No. Description and Method of Filing - - ----------- -------------------------------- 10.14 Severance Agreement dated February 12, 1997 between the Company and Matthew R. Hoovler, incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.15 Purchase and Sale Agreement effective January 1, 1997 between the Company and Conoco Inc., incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.16 Amendments to Chaparral Resources, Inc. Stock Warrant Plan, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.17 Agreement dated August 30, 1995 for Exploration Development and Production of Oil in Karakuduk Oil Field in Mangistan Oblast of the Republic of Kazakhstan between Ministry of Oil and Gas Industries of the Republic of Kazakhstan for and on Behalf of the Government of the Republic of Kazakhstan and Joint Stock Company of Closed Type Karakuduk Munay Joint Venture, incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.18 License for the Right to Use the Subsurface in the Republic of Kazakhstan, incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.19 Amendment dated April 14, 1997 to Purchase Agreement dated effective January 12, 1996, between the Company and Guntekin Koksal, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997. 10.20 Subscription Agreement dated April 22, 1997 between Chaparral Resources, Inc. and Victory Ventures LLC, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.21 Warrant Certificate dated December 31, 1997 entitling Victory Ventures LLC to purchase up to 4,615,385 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. II-5 Exhibit No. Description and Method of Filing - - ----------- -------------------------------- 10.22 Form of Warrant issued to Black Diamond Partners LP, Clint D. Carlson, John A. Schneider, Victory Ventures LLC, Whittier Energy Company and Whittier Ventures LLC in connection with loans made by them to Chaparral Resources, Inc. in November and December 1996 and to Black Diamond Partners LP, Clint D. Carlson, Wittier Energy Company and Whittier Ventures LLC in July 1997 in connection with the same loans, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.23 Chaparral Resources, Inc. 1997 Incentive Stock Plan, incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 10.24 Chaparral Resources, Inc. 1997 Nonemployee Directors' Stock Option, incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.25 Amendment to Common Stock Purchase Warrant dated December 31, 1997 entitling Victory Ventures LLC to purchase up to 4,615,385 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.26 Amendment dated September 11, 1997, to License for Right to Use the Subsurface in the Republic of Kazakhstan, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.27 Warrant Certificate entitling Allen & Company Incorporated to purchase up to 900,000 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K/A dated October 31, 1997. 10.28 Form of Subscription Agreement dated November 21, 1997, incorporated by reference to Exhibit 10.19 to the Company's Current Report on Form 8-K dated October 31, 1997. 10.29 Letter dated February 4, 1998, from the Company to Michael B. Young, incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.30 Release and Understanding with H. Guntekin Koksal, incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. II-6 Exhibit No. Description and Method of Filing - - ----------- -------------------------------- 10.31 Termination Agreement dated March 6, 1998 with Exeter Finance Group, incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.32 Agreement dated March 7, 1998, with Munay-Implex, incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.33 Agreement dated March 31, 1998, effective as of November 4, 1997, between the Company and Allen & Company Incorporated, incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.34 Subscription Agreement dated April 1, 1998 between the Company and Network Fund III, Ltd., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 3, 1998. 10.35 Form of Subscription Agreement between the Company and certain investors, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated July 28, 1998. 10.36 Subordinated Loan Agreement dated as of June 4, 1997 between the Company and Allen & Company, Incorporated, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.37 Warrants issued to Allen & Company, Incorporated and John G. McMillian, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.38 Loan agreements between the Company and Howard Karren dated May 27, 1998 and July 1, 1998, respectively, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.39 1998 Incentive and Nonstatutory Stock Option Plan 16 Letter dated July 23, 1996 from Grant Thornton LLP confirming the circumstances pursuant to which Grant Thornton resigned as Registrant's principal independent accountants, incorporated by reference to Exhibit 16 to the Company's Current Report on Form 8-K dated July 23, 1996. 21 Subsidiaries of the Registrant, incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Ernst & Young Kazakhstan II-7 Exhibit No. Description and Method of Filing - - ----------- -------------------------------- 23.3 Consent of Grant Thornton LLP. 23.4 Consent of Smith McCullough, P.C. (included in Exhibit 5.1). 24 Powers of Attorney. 27 Financial Data Schedule (Not required). Item 17. Undertakings ------------ The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1993; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change in such information in the registration statement. (2) That, for the purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by II-8 reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-9 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas on September 21, 1998. CHAPARRAL RESOURCES, INC. By: /s/ Howard Karren --------------------------------------------- Howard Karren, President and Chief Executive Officer By: /s/ Michael B. Young --------------------------------------------- Michael B. Young, Treasurer, Controller and Principal Accounting Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated: Signature Title Date - - --------- ----- ---- /s/ Ted Collins, Jr.* - - --------------------------------------- Ted Collins, Jr. Director September 21, 1998 /s/ David A. Dahl* - - --------------------------------------- David A. Dahl Director September 21, 1998 /s/ Howard Karren - - --------------------------------------- Howard Karren Director September 21, 1998 /s/ J. Michael Muckleroy* - - --------------------------------------- J. Michael Muckleroy Director September 21, 1998 *By /s/Howard Karren - - --------------------------------------- Howard Karren, Attorney-in-Fact September 21, 1998 II-10 EXHIBIT INDEX Exhibit No. Description and Method of Filing ----------- -------------------------------- 2.1 Stock Acquisition Agreement and Plan of Reorganization dated April 12, 1995 between Chaparral Resources, Inc., and the Shareholders of Central Asian Petroleum, Inc., incorporated by reference to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 2.2 Escrow Agreement dated April 12, 1995 between Chaparral Resources, Inc., the Shareholders of Central Asian Petroleum, Inc. and Barry W. Spector, incorporated by reference to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 2.3 Amendment to Stock Acquisition Agreement and Plan of Reorganization dated March 10, 1996 between Chaparral Resources, Inc., and the Shareholders of Central Asian Petroleum, Inc., incorporated by reference to the Company's Registration Statement No. 333-7779. 3.1 Restated Articles of Incorporation + Amendments dated September 25, 1976, incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 5.1 Opinion of Smith McCullough, P.C. on legality of shares of Common Stock. 10.1 Royalty Participation Plan dated June 15, 1982, incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 10.2 Chaparral Resources, Inc. 1989 Stock Warrant Plan effective May 1, 1989, incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 10.3 Target Benefit Plan effective December 1, 1990 incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1991. 10.4 Deferred Compensation and Death Benefit Plan as amended November 15, 1991, incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1991. 10.5 Promissory Note dated November 1, 1995 from Chaparral Resources, Inc. to Brae Group, Inc., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated November 1, 1995. Exhibit No. Description and Method of Filing - - ----------- -------------------------------- 10.6 Purchase Agreement, dated effective January 12, 1996, between the Company and Guntekin Koksal (purchase of CAP-G shares) incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1995. 10.7 Letter Agreement, dated January 3, 1996, between the Company and certain stockholders of Darka Petrol Ticaret Ltd. Sti., together with Exhibits A--E, incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1995. 10.8 Amendment, effective March 4, 1996, to the Letter Agreement revising the terms pursuant to which the Company is to acquire all shares of CAP(G) stock owned by Darka Petrol Ticaret Ltd. Sti., incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1995. 10.9 Warrant Certificate entitling Allen & Company to purchase up to 1,022,000 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 1, 1996. 10.10 Consulting Agreement dated May 14, 1996 with M-D International Petroleum, Inc., incorporated by reference to the Company's Registration Statement No. 333-7779. 10.11 Promissory Notes and Modifications of Promissory incorporated by reference to Exhibit (3) to the Company's Current Report on Form 8-K dated November 22, 1996. 10.12 Amendment effective December 6, 1996 to Purchase Agreement dated effective January 12, 1996 between the Company and Guntekin Koksal, incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.13 Severance Agreement dated February 12, 1997 between the Company and Paul V. Hoovler, incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.14 Severance Agreement dated February 12, 1997 between the Company and Matthew R. Hoovler, incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. Exhibit No. Description and Method of Filing - - ----------- -------------------------------- 10.15 Purchase and Sale Agreement effective January 1, 1997 between the Company and Conoco Inc., incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.16 Amendments to Chaparral Resources, Inc. Stock Warrant Plan, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.17 Agreement dated August 30, 1995 for Exploration Development and Production of Oil in Karakuduk Oil Field in Mangistan Oblast of the Republic of Kazakhstan between Ministry of Oil and Gas Industries of the Republic of Kazakhstan for and on Behalf of the Government of the Republic of Kazakhstan and Joint Stock Company of Closed Type Karakuduk Munay Joint Venture, incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.18 License for the Right to Use the Subsurface in the Republic of Kazakhstan, incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.19 Amendment dated April 14, 1997 to Purchase Agreement dated effective January 12, 1996, between the Company and Guntekin Koksal, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997. 10.20 Subscription Agreement dated April 22, 1997 between Chaparral Resources, Inc. and Victory Ventures LLC, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.21 Warrant Certificate dated December 31, 1997 entitling Victory Ventures LLC to purchase up to 4,615,385 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. Exhibit No. Description and Method of Filing - - ----------- -------------------------------- 10.22 Form of Warrant issued to Black Diamond Partners LP, Clint D. Carlson, John A. Schneider, Victory Ventures LLC, Whittier Energy Company and Whittier Ventures LLC in connection with loans made by them to Chaparral Resources, Inc. in November and December 1996 and to Black Diamond Partners LP, Clint D. Carlson, Wittier Energy Company and Whittier Ventures LLC in July 1997 in connection with the same loans, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.23 Chaparral Resources, Inc. 1997 Incentive Stock Plan, incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 10.24 Chaparral Resources, Inc. 1997 Nonemployee Directors' Stock Option, incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.25 Amendment to Common Stock Purchase Warrant dated December 31, 1997 entitling Victory Ventures LLC to purchase up to 4,615,385 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.26 Amendment dated September 11, 1997, to License for Right to Use the Subsurface in the Republic of Kazakhstan, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.27 Warrant Certificate entitling Allen & Company Incorporated to purchase up to 900,000 shares of Common Stock of Chaparral Resources, Inc., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K/A dated October 31, 1997. 10.28 Form of Subscription Agreement dated November 21, 1997, incorporated by reference to Exhibit 10.19 to the Company's Current Report on Form 8-K dated October 31, 1997. 10.29 Letter dated February 4, 1998, from the Company to Michael B. Young, incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.30 Release and Understanding with H. Guntekin Koksal, incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. Exhibit No. Description and Method of Filing - - ----------- -------------------------------- 10.31 Termination Agreement dated March 6, 1998 with Exeter Finance Group, incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.32 Agreement dated March 7, 1998, with Munay-Implex, incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.33 Agreement dated March 31, 1998, effective as of November 4, 1997, between the Company and Allen & Company Incorporated, incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 10.34 Subscription Agreement dated April 1, 1998 between the Company and Network Fund III, Ltd., incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 3, 1998. 10.35 Form of Subscription Agreement between the Company and certain investors, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated July 28, 1998. 10.36 Subordinated Loan Agreement dated as of June 4, 1997 between the Company and Allen & Company, Incorporated, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.37 Warrants issued to Allen & Company, Incorporated and John G. McMillian, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.38 Loan agreements between the Company and Howard Karren dated May 27, 1998 and July 1, 1998, respectively, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.39 1998 Incentive and Nonstatutory Stock Option Plan 16 Letter dated July 23, 1996 from Grant Thornton LLP confirming the circumstances pursuant to which Grant Thornton resigned as Registrant's principal independent accountants, incorporated by reference to Exhibit 16 to the Company's Current Report on Form 8-K dated July 23, 1996. 21 Subsidiaries of the Registrant, incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Ernst & Young Kazakhstan Exhibit No. Description and Method of Filing - - ----------- -------------------------------- 23.3 Consent of Grant Thornton LLP. 23.4 Consent of Smith McCullough, P.C. (included in Exhibit 5.1). 24 Powers of Attorney. 27 Financial Data Schedule (Not required). 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 Chaparral Resources, Inc. January 13, 1995 Page 5 area is structurally high relative to the proved portion of the formation; (d) reserves obtainable by improved recovery where an improved recovery program, that has yet to be established through repeated economically successful operations, is planned but is not yet in operation and a successful pilot test has not been performed, but reservoir and formation characteristics appear favorable for its success; and (e) reserves in the same reservoir as proved reserves that would be recoverable if a more efficient primary recovery mechanism develops than was assumed in estimating the proved reserves. General - - ------- Neither Ryder Scott not any of its employees has any interest in the subject properties and neither the employment to do this work nor the compensation is contingent on our estimates of reserves for the properties which were reviewed. This report was prepared for the exclusive use of Chaparral Resources, Inc. The work papers used in the preparation of this report are available for examination by Authorized parties in our office. Please contact us if we can be of further service. Very truly yours, RYDER SCOTT COMPANY PETROLEUM ENGINEERS Larry T. Nelms Group Vice President 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 from Karakuduk #12 J1 8441-8448' -(7839-7846') 7' WATER 12.6 upper zones of J1 Karakuduk #13 J1 8520-8533' -(7912-7925') 13' OIL 4.4 -- 1.0236 Karakuduk #20 J1 8464-8507' -(7840-7883') 43' OIL 122.6 Karakuduk #20 J1 8464-8507' -(7840-7883') 43' OIL 20.1 -- Nautral flow Karakuduk #21 J1 8425-8458' -(7839-7872') 33' OIL 452.9 384879 0.2756 850 Karakuduk #21 J1 OIL 364.8 300135 0.1968 823 Karakuduk #22 J1 8618-8635' -(8017-8039') 17' OIL W/GAS ? ? ? Gas out oil Karakuduk #22 J1 8618-8635' -(8017-8034') 17' OIL W/WTR ? ? ? Karakuduk #22 J1 8543-8727' -(7942-8126') 84' OIL W/GAS ? ? ? Karakuduk #23 J1 8514-8681' -(7928-8095') 167' WTR W/GAS ? ? ? Karakuduk #4 J2 8737-8760' -(8145-8168') 23' OIL 7.5 ? 1.0236 Karakuduk #7 J2 8556-8760' -(7955-8159') 204' OIL 3.1 ? 1.0236 Karakuduk #10 J2 8652-8681' -(8057-8086') 29' OIL & GAS 385 533181 0.2756 1385 Karakuduk #7 J3 8865-8901' -(8264-8300') 36' OIL 20.1 1.0236 Karakuduk #21 J3 8865-8878' -(8279-8312') 33' OIL 88.1 ? ? Rowing 8901-8920' -(8321-8334') 13' OIL W/WTR 3.0 ? ? Karakuduk #7 J4 9025-9035' -(8425-8435') 10') 9045-9068' -(8444-8467') 23') OIL 287.5 497871 0.4724 1732 9084-9094' -(8484-8494') 10') Karakuduk #21 J4 8996-8029' -(8410-8443') 33' OIL W/WTR 1.6 ? ? Karakuduk #21 J4 9071-9081' -(8485-8495') 10' OIL 1.9 ? ? Karakuduk #21 J5 9153-9249' -(8567-8663') 96' OIL & GAS 900 971025 ? 1079 Karakuduk #21 J7 9524-9563' -(8938-8977') 39' OIL & WTR ? ? ? Karakuduk #7 J8 9652-9731' -(9051-9130') 79' OIL 283.1 198442 0.2756 701 Karakuduk #21 J8 9665-9731' -(9079-9145') 66' OIL W/GAS 283 459030 ? 1622 Karakuduk #21 J9 9839-9905' -(9253-0319') 66' OIL W/GAS 546 688545 0.3543 1261 Karakuduk #21 66' OIL W/GAS 425 582615 0.2756 1370 Karakuduk #21 J9 9915-9947' -(9372-9361') 29' OIL W/GAS 437 730917 ? 1672
EX-5.1 2 EXHIBIT 5.1 EXHIBIT 5.1 SMITH McCULLOUGH, P.C. Lynne M. Hanson Thomas S. Smith Garrett M. Tuttle Kim I. McCullough 4643 South Ulster Street, Suite 900 Mark A. Meyer Douglas R. Ferguson Denver, Colorado 80237-2866 Kevin J. Kanouff Jeffrey J. Cowman Harold R. Bruno, III (303) 221-6000 Of Counsel Telecopy (303) 221-6001 Stephen G. Petrucci Theresa M. Mehringer September 21, 1998 Chaparral Resources, Inc. 2211 Norfolk, Suite 1150 Houston, Texas 77098 Gentlemen: You have requested our opinion as to certain matters under the Colorado Business Corporation Act that relate to the 19,052,508 issued and outstanding shares of $0.10 par value common stock ("Common Stock") of Chaparral Resources, Inc. ("Company"), the 3,330,720 shares of Common Stock issuable upon exercise of outstanding warrants ("Warrants") of the Company and the 2,222,222 shares of Common Stock issuable upon conversion of the Company's outstanding Series A Preferred Stock ("Preferred Stock"), all of which are described on the cover page of the Registration Statement on Form S-3 that the Company plans to file with the United States Securities and Exchange Commission. We have reviewed the Restated Articles of Incorporation + Amendments, as amended, of the Company, the minutes of the meetings of the board of directors and of the shareholders of the Company and such other documents we considered necessary in order to render this opinion. As a result of our review, we are of the opinion that the 19,052,508 shares of outstanding Common Stock of the Company being registered are validly issued, fully paid and nonassessable under the Colorado Business Corporation Act and that, assuming the exercise price of the Warrants is paid for upon the exercise thereof, the 3,330,720 shares of Common Stock underlying the Warrants, when issued, will be validly issued, fully paid and nonassessable under the Colorado Business Corporation Act, and that, assuming conversion of the Preferred Stock, the 2,222,222 shares of Common Stock underlying the Preferred Stock, when issued, will be validly issued, fully paid and nonassessable under the Colorado Business Corporation Act. This opinion is limited to the applicability of the Colorado Business Corporation Act to the shares of Common Stock. This opinion does not cover or in any way relate to the applicability of, or compliance by the Company with, any other law, including any federal or state securities laws, any state common law, or any other federal law. We consent to you describing this firm as having issued this opinion in the Prospectus which is a part of the Registration Statement referenced above. SMITH McCULLOUGH, P.C. EX-10.39 3 EXHIBIT 10.39 EXHIBIT 10.39 CHAPARRAL RESOURCES, INC. 1998 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this 1998 Incentive and Nonstatutory Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants and to promote the success of the Company's business. Options granted hereunder may be either "incentive stock options," as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or "nonstatutory stock options," at the discretion of the Board and as reflected in the terms of the written stock option agreement. 2. Definitions. As used herein, the following definitions shall apply: a. "Board" shall mean the Committee, if one has been appointed, or the Board of Directors of the Company if no Committee is appointed. b. "Code" shall mean the Internal Revenue Code of 1986, as amended. c. "Common Stock" shall mean the $0.10 par value common stock of the Company. d. "Company" shall mean Chaparral Resources, Inc., a Colorado corporation. e. "Committee" shall mean the Committee appointed by the Board in accordance with paragraph (a) of Section 4 of the Plan, if one is appointed, or the Board if no committee is appointed. f. "Consultant" shall mean any person who is engaged by the Company or by any Parent or Subsidiary to render consulting services and is compensated for such consulting services, but does not include a director of the Company who is compensated for services as a director only with the payment of a director's fee by the Company. g. "Continuous Status as an Employee" shall mean the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence approved by the Board; provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. h. "Employee" shall mean any person, including officers and directors, employed by the Company or by any Parent or Subsidiary. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. i. "Incentive Stock Option" shall mean an Option which is intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and which shall be clearly identified as such in the written Stock Option Agreement provided by the Company to each Optionee granted an Incentive Stock Option under the Plan. j. "Non-Employee Director" shall mean a director who: (i) Is not currently an officer (as defined in Section 16a-1(f) of the Securities Exchange Act of 1934, as amended) of the Company or of a Parent or Subsidiary or otherwise currently employed by the Company or by a Parent or Subsidiary. (ii) Does not receive compensation, either directly or indirectly, from the Company or from a Parent or Subsidiary, for services rendered as a Consultant or in any capacity other than as a director, except for an amount that does not exceed the dollar amount for which disclosure would be required pursuant to Item 404(a) of Regulation S-K adopted by the United States Securities and Exchange Commission. (iii) Does not possess an interest in any other transaction for which disclosure would be required pursuant to Item 404(a) of Regulation S-K adopted by the United States Securities and Exchange Commission. k. "Nonstatutory Stock Option" shall mean an Option granted under this Plan which does not qualify as an Incentive Stock Option and which shall be clearly identified as such in the written Stock Option Agreement provided by the Company to each Optionee granted a Nonstatutory Stock Option under this Plan. To the extent that the aggregate fair market value of Optioned Stock to which Incentive Stock Options granted under Options to an Employee are exercisable for the first time during any calendar year (under the Plan and all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options under the Plan. The aggregate fair market value of the Optioned Stock shall be determined as of the date of grant of each Option and the determination of which Incentive Stock Options shall be treated as qualified incentive stock options under Section 422 of the Code and which Incentive Stock Options exercisable for the first time in a particular year in excess of the $100,000 limitation shall be treated as Nonstatutory Stock Options shall be determined based on the order in which such Options were granted in accordance with Section 422(d) of the Code. 2 l. "Option" shall mean an Incentive Stock Option, a Nonstatutory Stock Option or both as identified in a written Stock Option Agreement representing such stock option granted pursuant to the Plan. m. "Optioned Stock" shall mean the Common Stock subject to an Option. n. "Optionee" shall mean an Employee or other person who is granted an Option. o. "Parent" shall mean a "parent corporation" of the Company, whether now or hereafter existing, as defined in Section 424(e) of the Code. p. "Plan" shall mean this 1998 Incentive and Nonstatutory Stock Option Plan. q. "Share" shall mean a share of the Common Stock of the Company, as adjusted in accordance with Section 11 of the Plan. r. "Stock Option Agreement" shall mean the agreement to be entered into between the Company and each Optionee which shall set forth the terms and conditions of each Option granted to each Optionee, including the number of Shares underlying such Option and the exercise price of each Option granted to such Optionee under such agreement. s. "Subsidiary" shall mean a "subsidiary corporation" of the Company, whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 11 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 3,000,000 shares of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. Administration of the Plan. a. Procedure. The Plan shall be administered by the Board or a Committee appointed by the Board consisting of two or more Non-Employee Directors to administer the Plan on behalf of the Board, subject to such terms and conditions as the Board may prescribe. 3 (i) Once appointed, the Committee shall continue to serve until otherwise directed by the Board (which for purposes of this paragraph (a)(i) of this Section 4 shall be the Board of Directors of the Company). From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. (ii) Members of the Board who are granted, or have been granted, Options may vote on any matters affecting the administration of the Plan or the grant of any Options pursuant to the Plan. b. Powers of the Board. Subject to the provisions of the Plan, the Board shall have the authority, in its discretion: (i) To grant Incentive Stock Options, in accordance with Section 422 of the Code, and Nonstatutory Stock Options or both as provided and identified in a separate written Stock Option Agreement to each Optionee granted such Option or Options under the Plan; provided however, that in no event shall an Incentive Stock Option and a Nonstatutory Stock Option granted to any Optionee under a single Stock Option Agreement be subject to a "tandem" exercise arrangement such that the exercise of one such Option affects the Optionee's right to exercise the other Option granted under such Stock Option Agreement; (ii) To determine, upon review of relevant information and in accordance with Section 8(b) of the Plan, the fair market value of the Common Stock; (iii) To determine the exercise price per Share of Options to be granted, which exercise price shall be determined in accordance with Section 8(a) of the Plan; (iv) To determine the Employees or other persons to whom, and the time or times at which, Options shall be granted and the number of Shares to be represented by each Option; (v) To interpret the Plan; (vi) To prescribe, amend and rescind rules and regulations relating to the Plan; 4 (vii) To determine the terms and provisions of each Option granted (which need not be identical) and, with the consent of the holder thereof, modify or amend each Option; (viii) To accelerate or defer (with the consent of the Optionee) the exercise date of any Option, consistent with the provisions of Section 7 of the Plan; (ix) To authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Board; and (x) To make all other determinations deemed necessary or advisable for the administration of the Plan. c. Effect of Board's Decision. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other permissible holders of any Options granted under the Plan. 5. Eligibility. a. Persons Eligible. Options may be granted to any person selected by the Board. Incentive Stock Options may be granted only to Employees. An Employee, who is also a director of the Company, its Parent or a Subsidiary, shall be treated as an Employee for purposes of this Section 5. An Employee or other person who has been granted an Option may, if he is otherwise eligible, be granted an additional Option or Options. b. No Effect on Relationship. The Plan shall not confer upon any Optionee any right with respect to continuation of employment or other relationship with the Company nor shall it interfere in any way with his right or the Company's right to terminate his employment or other relationship at any time. 6. Term of Plan. The Plan became effective on May 21, 1998. It shall continue in effect until May 20, 2008, unless sooner terminated under Section 13 of the Plan. 7. Term of Option. The term of each Option shall be 10 years from the date of grant thereof or such shorter term as may be provided in the Stock Option Agreement. However, in the case of an Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, if the Option is an Incentive Stock Option, the term of the Option shall be five years from the date of grant thereof or such shorter time as may be provided in the Stock Option Agreement. 5 8. Exercise Price and Consideration. a. Exercise Price. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board, but the per Share exercise price under an Incentive Stock Option shall be subject to the following: (i) If granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall not be less than 110% of the fair market value per Share on the date of grant. (ii) If granted to any other Employee, the per Share exercise price shall not be less than 100% of the fair market value per Share on the date of grant. b. Determination of Fair Market Value. The fair market value per Share on the date of grant shall be determined as follows: (i) If the Common Stock is listed on the New York Stock Exchange, the American Stock Exchange or such other securities exchange designated by the Board, or admitted to unlisted trading privileges on any such exchange, or if the Common Stock is quoted on a National Association of Securities Dealers, Inc. system that reports closing prices, the fair market value shall be the closing price of the Common Stock as reported by such exchange or system on the day the fair market value is to be determined, or if no such price is reported for such day, then the determination of such closing price shall be as of the last immediately preceding day on which the closing price is so reported; (ii) If the Common Stock is not so listed or admitted to unlisted trading privileges or so quoted, the fair market value shall be the average of the last reported highest bid and the lowest asked prices quoted on the National Association of Securities Dealers, Inc. Automated Quotations System or, if not so quoted, then by the National Quotation Bureau, Inc. on the day the fair market value is determined; or (iii) If the Common Stock is not so listed or admitted to unlisted trading privileges or so quoted, and bid and asked prices are not reported, the fair market value shall be determined in such reasonable manner as may be prescribed by the Board. 6 c. Consideration and Method of Payment. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of cash, check, other shares of Common Stock having a fair market value on the date of exercise equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, or any combination of such methods of payment, or such other consideration and method of payment for the issuance of Shares to the extent permitted under the Colorado Business Corporation Act. 9. Exercise of Option. a. Procedure for Exercise: Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. In the sole discretion of the Board, at the time of the grant of an Option or subsequent thereto but prior to the exercise of an Option, an Optionee may be provided with the right to exchange, in a cashless transaction, all or part of the Option for Common Stock of the Company on terms and conditions determined by the Board. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Stock Option Agreement by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment, as authorized by the Board, may consist of a consideration and method of payment allowable under Section 8(c) and this Section 9(a) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of the duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of this Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. b. Termination of Status as an Employee. In the case of an Incentive Stock Option, if any Employee ceases to serve as an Employee, he may, but only within such period of time not exceeding three months as is determined by the Board at the time of grant of the Option after the date he ceases to be an Employee of the Company, exercise his Option to the extent that he was entitled to exercise it at the date of such termination. To the extent that he was not entitled to exercise the Option at the date of such termination, or if he does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate. 7 c. Disability of Optionee. In the case of an Incentive Stock Option, notwithstanding the provisions of Section 9(b) above, in the event an Employee is unable to continue his employment with the Company as a result of his total and permanent disability (as defined in Section 22(e)(3) of the Code), he may, but only within such period of time not exceeding 12 months as is determined by the Board at the time of grant of the Option from the date of termination, exercise his Option to the extent he was entitled to exercise it at the date of such termination. To the extent that he was not entitled to exercise the Option at the date of termination, or if he does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate. d. Death of Optionee. In the case of an Incentive Stock Option, in the event of the death of the Optionee: (i) During the term of the Option if the Optionee was at the time of his death an Employee and had been in Continuous Status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised, at any time within 12 months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the right to exercise would have accrued had the Optionee continued living and remained in Continuous Status as an Employee 12 months after the date of death; or (ii) Within such period of time not exceeding three months as is determined by the Board at the time of grant of the Option after the termination of Continuous Status as an Employee, the Option may be exercised, at any time within 12 months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the right to exercise had accrued at the date of termination. 10. Nontransferability of Options. Unless permitted by the Code, in the case of an Incentive Stock Option, the Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 8 11. Adjustments Upon Changes in Capitalization or Merger. Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option, and the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of any Option, as well as the price per Share covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. In the event of the proposed dissolution or liquidation of the Company, the Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. In the event of the proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation in a transaction in which the Company is not the survivor, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. If the Board makes an Option fully exercisable in lieu of assumption or substitution in the event of such a merger or sale of assets, the Board shall notify the Optionee that the Option shall be fully exercisable for a period of 30 days from the date of such notice, and the Option will terminate upon the expiration of such period. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Board makes the determination granting such Option. Notice of the determination shall be given to each Employee or other person to whom an Option is so granted within a reasonable time after the date of such grant. Within a reasonable time after the date of the grant of an Option, the Company shall enter into and deliver to each Employee or other person granted such Option a written Stock Option Agreement as provided in Sections 2(r) and 16 hereof, setting forth the terms and conditions of such Option and separately identifying the portion of the Option which is an Incentive Stock Option and/or the portion of such Option which is a Nonstatutory Stock Option. 9 13. Amendment and Termination of the Plan. a. Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, the following revisions or amendments shall require approval of the shareholders of the Company in the manner described in Section 17 of the Plan: (i) An increase in the number of Shares subject to the Plan above 3,000,000 Shares, other than in connection with an adjustment under Section 11 of the Plan; (ii) Any change in the designation of the class of Employees eligible to be granted Incentive Stock Options; or (iii) Any material amendment under the Plan that would have to be approved by the shareholders of the Company for the Board to continue to be able to grant Incentive Stock Options under the Plan. b. Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if the Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, applicable state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of legal counsel for the Company with respect to such compliance. As a condition to the existence of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares and such other representations and warranties which in the opinion of legal counsel for the Company, are necessary or appropriate to establish an exemption from the registration requirements under applicable federal and state securities laws with respect to the acquisition of such Shares. 10 15. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's legal counsel to be necessary for the lawful issuance and sale of any Share hereunder, shall relieve the Company of any liability relating to the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 16. Stock Option Agreement. Each Option granted to an Employee or other persons shall be evidenced by a written Stock Option Agreement in such form as the Board shall approve. 17. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company on or before May 20, 1999. Such shareholder approval and any shareholder approval required under Section 13 of the Plan, may be obtained at a duly held shareholders meeting if the votes cast in favor of the approval exceed the votes cast opposing the approval, or by unanimous written consent of the shareholders in accordance with the provisions of the Colorado Business Corporation Act. 18. Information to Optionees. The Company shall provide to each Optionee, during the period for which such Optionee has one or more Options outstanding, copies of all annual reports and other information which are provided to all shareholders of the Company. The Company shall not be required to provide such information if the issuance of Options under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. 19. Gender. As used herein, the masculine, feminine and neuter genders shall be deemed to include the others in all cases where they would so apply. 20. CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS PLAN AND THE INSTRUMENTS EVIDENCING OPTIONS WILL BE GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF COLORADO. 11 IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Plan effective as of May 21, 1998. CHAPARRAL RESOURCES, INC., a Colorado corporation By: /s/ Howard Karren ------------------------------------- Howard Karren, President EX-23.1 4 EXHIBIT CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-3 No. 333-51327) and related Prospectus of Chaparral Resources, Inc. for the registration of 24,605,450 shares of its common stock and to the incorporation by reference therein of our report dated March 13, 1998, (except for Note 7, as to which the date is March 31, 1998), with respect to the consolidated financial statements of Chaparral Resources, Inc. included in its Annual Report (Form 10-K) for the year ended December 31, 1997, filed with the Securities and Exchange Commission. Ernst & Young LLP Houston, Texas September 18, 1998 EX-23.2 5 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-3 No. 333-51327) and related Prospectus of Chaparral Resources, Inc. for the registration of 24,605,450 shares of its common stock and to the incorporation by reference therein of our report dated March 13, 1998, with respect to the financial statements of Karakuduk-Munay, Inc. included in the Chaparral Resources, Inc. Annual Report (Form 10-K) for the year ended December 31, 1997, filed with the Securities and Exchange Commission. Ernst & Young-Kazakhstan Almaty, Kazakhstan September 18, 1998 EX-23.3 6 EXHIBIT 23.3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our reports dated January 19, 1996 accompanying the consolidated financial statements included in the Annual Report of Chaparral Resources, Inc. and subsidiary (the Company) on Form 10-K for the year ended December 31, 1997. We consent to the incorporation by reference in the Company's Registration Statement on Amendment No. 1 on Form S-3 to Form S-1 of the aforementioned report. /s/ Grant Thornton, LLP ------------------------------------- Grant Thornton, LLP Denver, Colorado September 18, 1998 EX-24 7 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY The person whose signature appears below constitutes and appoints Howard Karren his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him in his name, place and stead, in his capacity as an officer, director, or both of Chaparral Resources, Inc., a Colorado corporation ("Company"), to sign the Company's Registration Statement on Form S-1 or Form S-3, whichever is applicable, and any and all amendments thereto (including posteffective amendments), and to file the same with the United States Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact or agent or his substitute or substitutes, may do or cause to be done by virtue hereof. Date: August 24, 1998 /s/ Ted Collins, Jr. ---------------------------------- Ted Collins, Jr. POWER OF ATTORNEY The person whose signature appears below constitutes and appoints Howard Karren his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him in his name, place and stead, in his capacity as an officer, director, or both of Chaparral Resources, Inc., a Colorado corporation ("Company"), to sign the Company's Registration Statement on Form S-1 or Form S-3, whichever is applicable, and any and all amendments thereto (including posteffective amendments), and to file the same with the United States Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact or agent or his substitute or substitutes, may do or cause to be done by virtue hereof. Date: August 24, 1998 /s/ David A. Dahl --------------------------------- David A. Dahl POWER OF ATTORNEY The person whose signature appears below constitutes and appoints Howard Karren his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him in his name, place and stead, in his capacity as an officer, director, or both of Chaparral Resources, Inc., a Colorado corporation ("Company"), to sign the Company's Registration Statement on Form S-1 or Form S-3, whichever is applicable, and any and all amendments thereto (including posteffective amendments), and to file the same with the United States Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact or agent or his substitute or substitutes, may do or cause to be done by virtue hereof. Date: August 24, 1998 /s/ J. Michael Muckleroy -------------------------------- J. Michael Muckleroy -----END PRIVACY-ENHANCED MESSAGE-----