-----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, L+FQbDS+I3sV45hLofPEHtZvv0htZtmv84kVoOPneTNGyVcfAWSRq0W+DLfa37t4 v7n3z3jOUso8jDkhLtrG3g== 0001021890-97-000116.txt : 19970416 0001021890-97-000116.hdr.sgml : 19970416 ACCESSION NUMBER: 0001021890-97-000116 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970415 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAPARRAL RESOURCES INC CENTRAL INDEX KEY: 0000019252 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 840630863 STATE OF INCORPORATION: CO FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07261 FILM NUMBER: 97580961 BUSINESS ADDRESS: STREET 1: 3400 BISSONNET STREET STREET 2: SUITE 135 CITY: HOUSTON STATE: TX ZIP: 77005 BUSINESS PHONE: 713-669-0932 MAIL ADDRESS: STREET 1: 621 17TH STREET SUITE 1301 CITY: DENVER STATE: CO ZIP: 80293 10-K 1 ANNUAL REPORT ON FORM 10-K--NOVEMBER 30, 1996 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended November 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . ---------------- ---------------- Commission file number: 0-7261 CHAPARRAL RESOURCES, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Colorado 84-0630863 ------------------------------ ------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 3400 Bissonnet Street, Suite 135 Houston, Texas 77005 -------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (713) 669-0932 Securities registered pursuant to Section 12(g) of the Act: $0.10 Par Value Common Stock ---------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and, (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of April 7, 1997, the aggregate market value of the Registrant's voting stock held by nonaffiliates was approximately $24,427,197. As of April 7, 1997, Registrant had 37,526,517 shares of its $0.10 par value common stock issued and outstanding. Total Pages ___ Exhibit Index ___ PART I ITEM 1. BUSINESS Chaparral Resources, Inc. ("Company"), which was incorporated under the laws of the state of Colorado in 1972, is an independent oil and gas exploration and production company that was based in Denver, Colorado, until March 1, 1997, when the Company moved its headquarters to Houston, Texas. Until 1994, the Company's oil and gas activities were concentrated solely in the United States. During early 1994, the management of the Company made a strategic decision to pursue international oil and gas projects, with initial emphasis on the Commonwealth of Independent States (the former Soviet Union) and, in early 1997, the Company divested itself of all of its remaining oil and gas properties in the United States. Karakuduk Project The Company currently owns 90% of the outstanding common stock of Central Asian Petroleum Guernsey Limited ("CAP-G") which has a 50% interest in Karakuduk-Munay, Inc. ("KKM"), which holds 100% of the right to develop the Karakuduk Oil Field Project in Kazakstan ("Karakuduk Field" or "Karakuduk Project"). The Company acquired 45% of the outstanding stock of CAP-G prior to December 1, 1995. In January and February 1996, the Company entered into agreements to acquire, for a total of $5,850,000 cash and 1,785,000 shares of the Company's restricted common stock, up to an additional 55% of the outstanding stock of CAP-G. The Company consummated the purchase of 25% of the outstanding stock of CAP-G in April 1996 by paying $2,000,000 in cash and issuing 685,000 shares of the Company's common stock. The Company acquired an additional 5% of the outstanding stock of CAP-G in April 1996 for $250,000 cash. To acquire an additional 15% of the outstanding common stock of CAP-G, the Company agreed to pay $1,975,000 in cash and issue 900,000 shares of the Company's common stock. This purchase was consummated on March 11, 1996, when the Company paid $750,000 in cash and issued 900,000 shares of the Company's common stock. The remaining cash balance of $1,225,000 for the purchase was to be paid in four quarterly equal payments of $306,250 between June 11, 1996 and March 11, 1997. The first payment of $306,250 was paid in June 1996 and an additional $175,000 was paid in September 1996. The agreement was subsequently revised so that the Company paid $200,000 in December 1996. The Company was to pay $543,750 on or before March 11, 1997. The Company is currently negotiating to obtain an extension of the due date of the remaining payment. In addition, the Company has an option to purchase the remaining 10% of the outstanding common stock of CAP-G for an additional $1,625,000 and 200,000 shares of the Company's common stock at any time following completion of the initial purchase and prior to December 11, 1997. Uzbekistan Project The Company has been negotiating an agreement pursuant to which the Company would acquire 100% of the issued and outstanding capital stock of MD International Petroleum, Inc. ("MDI"), a private company of which the shareholders include two directors of the Company (Messrs. Dilling and McGee). At the time of the acquisition, the only asset that MDI would have would be a 5% interest in a joint venture that Enron Oil & Gas Uzbekistan Ltd. is attempting to negotiate for the development of natural gas fields in Uzbekistan. It is currently contemplated that, if the agreement is consummated, the Company would issue MDI's shareholders an as of yet undetermined number of shares of the Company's restricted common stock in exchange for their MDI shares. Of these shares, the Company anticipates that a percentage of the shares would be issued at closing and the balance upon the occurrence of certain events. On January 8, 1997, the Company agreed to issue 180,000 shares of the Company's common stock to Enron Oil & Gas Uzbekistan, Ltd. ("EOGU") to obtain an option to acquire MDI. The Company also granted EOGU registration rights with respect to the 180,000 shares. In the interim, the principal shareholders of MDI, including Messrs. Dilling and McGee, have agreed that if the Company does not acquire MDI within a specified time period, the principal shareholders will transfer 180,000 shares of the Company's common stock owned by them to the Company to replace the 180,000 shares issued by the Company to EOGU. Such principal shareholders also agreed to place the 180,000 shares in escrow to ensure compliance with their obligation. There are no assurances that the Company will be able to consummate the agreement to acquire the shares of MDI or that EOGU will be able to consummate a joint venture or other arrangement for the development of the natural gas fields in Uzbekistan. Venezuela Project In January, 1997 the Company was pre-qualified by PDVSA, the Venezuelan state oil company, to submit a bid with others on certain oil fields. It is contemplated that the Company will be part of a consortium of oil and gas companies that will place a bid or bids to acquire one or more of the 21 oil fields that have been put up for auction. The auction is expected to be highly competitive and is expected to be completed by the summer of 1997. There are no assurances that the Company will be successful in joining a consortium to bid on the oil fields or that any such consortium will be a successful bidder. Risks of Foreign Operations. As a result of the Company's interest in KKM and the Karakuduk Field, the Company will be subject to certain risks inherent in the ownership and development of foreign properties, including without limitation, cancellation or renegotiation of contracts, royalty increases, tax increases, retroactive tax claims, expropriation, adverse changes in currency values, foreign exchange controls, import and export regulations, environmental controls, and other laws and regulations which may adversely affect the Company's interest in the Karakuduk Field. The Company's operations and agreements will also be governed by foreign laws. In the event of a dispute, the Company may be subject to arbitration in a foreign country or the jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the 2 jurisdiction of courts in the United States. In addition, the Company might be hindered or prevented from enforcing its rights with respect to a government instrumentality because of the doctrine of sovereign immunity. Although certain members of management of the Company have had prior experience operating in foreign countries, the Company has no prior experience operating in any foreign country, including the Republic of Kazakstan, and may encounter unexpected difficulties in conducting foreign operations. Although the recent and continuing political, social and economic upheavals in Kazakstan have created opportunities for foreign investment, substantial uncertainty exists about the stability of the central Kazakstan government, the status of Kazakstan law and the autonomy of the parties involved with the Company in Kazakstan. The Company has endeavored to protect itself against the political and commercial risks, but there is no certainty that the steps taken will provide adequate protection. In this regard, the Company has applied with Overseas Private Investment Corporation ("OPIC") for political risk insurance. OPIC insurance can cover the following political risks: o Currency Inconvertibility--deterioration of the investor's ability to convert profits, debt service and other remittances from local currency unto U.S. dollars; o Expropriation--loss of an investment due to expropriation, nationalization or confiscation by a foreign government; o Political Violence--loss of assets or income due to war, revolution, insurrection or politically motivated civil strife, terrorism and sabotage; and o Interference With Operations--loss of assets or income due to cessation of operations lasting six months or more caused by political violence. The coverage elections for each category of insurance are computed on a ceiling and an active amount. The coverage ceiling represents the maximum insurance available for the insured investment and future earnings under an insurance contract. The premiums for each category are based on a maximum insured amount ("MIA"), a current insured amount ("CIA") and a standby amount. The MIA represents the maximum insurance available for the insured investment under an insurance contract. The CIA represents the insurance actually in force during the contract period. The difference between the CIA and the MIA is the standby amount. There is a charge for standby coverage. The Company has applied with OPIC for all four political risk coverages on the Company's investment in the Karakuduk Field in western Kazakstan. The MIAs sought for each coverage range from $23.4 to $40.2 million. The estimated yearly premium amounts for the CIAs for each coverage range up to $84,000. The estimated yearly standby premiums for each coverage range up to $88,000. The 3 actual premium values may be higher or lower depending on the contract offered to the Company by OPIC. The Investment Committee of OPIC approved the Company's Karakuduk operations for political risk insurance coverage by OPIC on December 19, 1995. The Company has received an executed Letter of Commitment on September 25, 1996, from OPIC binding issuance of Political Risk Insurance for the Karakuduk project. Currently, the Company has a standby facility for which it has made three previous payments of $31,250 and has a fourth payment of $31,250 due on June 30, 1997. In July 1997, the Company expects to receive the actual contract offered to the Company by OPIC. Under the terms of OPIC's Expropriation and Interference With Operations insurance coverage, the Company must be able to transfer to OPIC the shares of beneficial interests related to the insured investment, free and clear of all encumbrances. There are certain restrictions on the transfer of shares and assignment of the Company's beneficial interests in KKM. At such time as the Company obtains coverage, the Company will seek a waiver of the transfer restrictions from the shareholders of KKM. The Company does not anticipate problems in obtaining the waiver. On February 1, 1997, the Company was informed that a Kazakstan Presidential Edict had been issued announcing the liquidation of Munaygaz, the government-owned company which holds a 20% interest in KKM. As a result of this action, KKM was unable to complete its re-registration as required by Kazakstan regulations, resulting in the risk that applicable judicial bodies could initiate legal proceedings to declare KKM invalid. On March 4, 1997, another Kazakstan Presidential Edict was issued announcing the formation of "Kazakoil," the Kazakstan National Petroleum Company, which will take over the interests of the government of Kazakstan in all hydrocarbon ventures. Kazakoil will be assigned the shares of KKM held by Munaygaz within the next few weeks. At that time, the shareholders of KKM will be complete and KKM can commence the re-registration process, thus avoiding the risk that applicable judicial bodies could initiate legal proceedings to declare KKM invalid. Management of the Company has assurances from the appropriate authorities that such action would not be taken. Markets In fiscal 1996, the only customer having purchases which accounted for 10% or more of the Company's revenue was Conoco Inc. which accounted for 32% of the Company's revenue. In early 1997, the Company divested itself of all of its remaining oil and gas properties in the United States. The Company's business is not seasonal, except that severe weather conditions could limit the Company's exploration and drilling activities. However, severe cold weather increases the demand for oil and natural gas which are used for heating purposes. 4 There is substantial uncertainty as to the prices at which any oil reserves produced by the Company from the Karakuduk Field could be sold. It is possible that, under the market conditions prevailing in the future, the production and sale of oil from the Karakuduk Field may not be commercially feasible. The availability of ready markets and the price obtained for oil produced depends upon numerous factors beyond the control of the Company. The current market for oil is characterized by instability which has caused dramatic declines as well as increases in world oil prices in recent years and there can be no assurance of any price stability. See also "Item 2. Properties--The Karakuduk Field." Competition Foreign oil and gas exploration and the acquisition of producing and undeveloped properties is a highly competitive and speculative business. In seeking suitable opportunities, the Company competes in all areas of the oil and gas industry with a number of other companies, including large multi-national oil and gas companies and other independent operators with greater financial resources and, in some cases, with more experience than the Company. The Company does not hold a significant competitive position in the oil and gas industry. Regulation General. The Company's operations may be subject to regulation by governments or other regulatory bodies governing the area in which the Company's overseas operations are located. Regulations govern such things as drilling permits, production rates, and environmental protection and pollution control, royalty rates and taxation rates among others. These regulations may substantially increase the costs of doing business and sometimes may prevent or delay the starting or continuing of any given exploration or development project. Moreover, regulations are subject to future changes by legislative and administrative action and by judicial decisions which may adversely affect the petroleum industry in general and the Company in particular. At the present time, it is impossible to predict the effect any current or future proposals or changes in existing laws or regulations will have on the Company's operations. Subject to the matter described in the next paragraph, the Company believes that it complies with all applicable legislation and regulations in all material respects. On February 1, 1997, the Company was informed that a Kazakstan Presidential Edict had been issued announcing the liquidation of Munaygaz, the government-owned company which holds a 20% interest in KKM. As a result of this action, KKM was unable to complete its re-registration as required by Kazakstan regulations, resulting in the risk that applicable judicial bodies could initiate legal proceedings to declare KKM invalid. On March 4, 1997, another Kazakstan Presidential Edict was issued announcing the formation of "Kazakoil," the Kazakstan National Petroleum Company, which will take over the interests of the government of Kazakstan in all hydrocarbon ventures. Kazakoil will be assigned the shares of KKM held by Munaygaz within the next few weeks. At that time, the shareholders of KKM will be complete and KKM can commence the re-registration process, thus avoiding the risk that applicable judicial bodies 5 could initiate legal proceedings to declare KKM invalid. Management of the Company has written assurances from the appropriate authorities that such action would not be taken. Environmental. The Company does not believe that its business operations presently impair environmental quality. However, compliance with foreign laws and regulations which have been enacted or adopted regulating the discharge of materials into the environment could have an adverse effect upon the Company, the extent of which the Company is unable to assess. Since inception the Company has not made any material capital expenditures for environmental control facilities and has no plans to do so. Employees The Company operates through its officers, directors and consultants. Such persons are not yet employees of the Company but certain of such officers, directors and consultants may become employees of the Company in the near future. The Company employs one person on a full-time basis in Kazakstan. The Company also has four part-time employees. ITEM 2. PROPERTIES The Karakuduk Field The Karakuduk Field is located in the Mangistau Region of the Republic of Kazakstan. KKM's license to develop the Karakuduk Field covers an area of approximately 16,922.5 acres and has been granted to KKM for a period of 25 years. The agreement granting KKM the right to develop the Karakuduk Field was approved by the Ministry of Oil and Gas Industries of the Republic of Kazakstan on August 30, 1995. CAP-G's share of the initial capitalization of KKM is $100,000, of which the Company's share has been paid. On February 1, 1997, the Company was informed that a Kazakstan Presidential Edict had been issued announcing the liquidation of Munaygaz, the government-owned company which holds a 20% interest in KKM. As a result of this action, KKM was unable to complete its re-registration as required by Kazakstan regulations, resulting in the risk that applicable judicial bodies could initiate legal proceedings to declare KKM invalid. On March 4, 1997, another Kazakstan Presidential Edict was issued announcing the formation of "Kazakoil," the Kazakstan National Petroleum Company, which will take over the interests of the government of Kazakstan in all hydrocarbon ventures. Kazakoil will be assigned the shares of KKM held by Munaygaz within the next few weeks. At that time, the shareholders of KKM will be complete and KKM can commence the re-registration process, thus avoiding the risk that applicable judicial bodies could initiate legal proceedings to declare KKM invalid. Management of the Company has assurances from the appropriate authorities that such action would not be taken. 6 The Karakuduk Field is geographically located, approximately 227 miles northeast of the regional capital city of Aqtau, on the Ust-Yurt Plateau. The closest settlement is the Say-Utes Railway Station approximately 38 miles southeast of the field. The ground elevation varies between 590 and 656 feet above sea level. The region has a dry, continental climate, with fewer than 10 inches of rainfall per year. Mean temperatures range from -25 degrees Fahrenheit in January to 100 degrees Fahrenheit in July. The operating environment is similar to that found in northern Arizona and New Mexico in the United States. The Karakuduk structure is an asymmetrical anticline located on the Aristan Uplift in the North Ustyurt Basin. Oil was discovered on the structure in 1972, when Kazakstan was a republic of the former Soviet Union, from Jurassic age sediments between 8,500 and 10,000 feet. Twenty-two exploratory and development wells were drilled to delineate the field, however, none of the wells was ever placed on production. The productive area of the Karakuduk Field is 11,300 acres, with a minimum of seven separate productive horizons present in the Jurassic formation. Oil has been recovered in tests from all seven horizons within the Jurassic formation with flow rates ranging from 3 to 966 barrels per day. The Company estimates that the drilling of approximately 90 additional oil wells and 26 water injection wells may be required to fully develop the field. Peak oil production from the field is expected to occur within seven years after start-up, although time or amount of development or production cannot presently be assured. In January 1995, Ryder Scott Company Petroleum Engineers ("Ryder Scott"), an internationally recognized petroleum engineering group retained by the Company, has stated that in its opinion, after review, a reserve report commissioned by the Company which estimated that the Karakuduk Field has estimated recoverable oil of 74 million barrels which could be considered proved undeveloped, is reasonable. However, neither the Ryder Scott opinion or the reserve report considered the potential adverse impact of marketability on price of any oil which might be produced due to the remote location of the field or potential political instability and, therefore, none of the reserves can presently be considered proven. The production and marketing of the oil reserves will be subject to a number of political, economic and other risks. See "--Markets and --Competition." The Karakuduk Field is approximately 18 miles north of the Mukat-Mangishlak railroad, the Mangishlak-Astraghan water pipeline, the Beyneu-Uzen high voltage utility lines, and the Uzen-Atrau-Samara oil and gas pipelines. KKM has the right of priority to use the existing oil and gas pipeline facilities to transport produced oil from the Karakuduk Field to the Baltic Sea ports of Kaliningrad and Ventspils and/or the Black Sea port of Novorsiysk, thus offering a potential world market for the produced crude oil. This priority use of existing facilities is granted within the guarantee issued by the Ministry of Oil and Gas Industry of the Republic of Kazakstan. The planned development program for the Karakuduk Field will include a secondary recovery operation that the Company believes could result in additional recoverable reserves. 7 The ability of the Company to realize the carrying value of its assets is dependent on being able to extract and transport hydrocarbons and finding appropriate markets for their sale. Currently, exports from the Republic of Kazakstan are restricted since they are dependent on limited transport routes and, in particular, access to the Russian pipeline system. Access to such routes is currently restricted. Domestic markets in the Republic of Kazakstan currently do not permit world market price to be obtained. Management believes, however, that over the life of the project, transportation restrictions will be alleviated and prices will be achievable for hydrocarbons extracted to allow full recovery of the carrying value of its assets. Because of uncertainties surrounding the Karakuduk Project, no proved reserves have been attributed to the field. The Karakuduk Project will require significant development costs for which the financing is not complete. There can be no assurance that the project will be adequately financed or that the field will be successfully developed. The license requires minimum work plans of approximately $10 million by August 31, 1997, of approximately $35 million by August 31, 1998 and of approximately $12 million by August 31, 1999. The agreement provides KKM with the right to defer the minimum work program under certain conditions. As part of the minimum work plan requirement, the Company has loaned CAP-G more than $4 million to fund KKM's current operations. KKM's 1997 budget, which has not been approved, would entail a minimum expenditure of $6 million through August 31, 1997. Subject to the receipt of additional financing by the Company, this requirement will be funded by the Company through loans by its subsidiary CAP-G to KKM. The Karakuduk Field will be developed in phases. Phase I, expected to require at least one year, began during 1996. Phase I expenditures are to include the recompletion of four existing wells. Also, subject to the receipt of additional financing by the Company, a new development well will be drilled in the Karakuduk Field during 1997. Total costs, including engineering design, well recompletions, drilling and completion costs, storage tanks and facilities, oil transport trucks, roads, camp facilities, communication facilities, field transportation, office overhead and personnel costs, for Phase I are estimated to be $8 million. Unless and until the Company exercises its option to acquire the remaining 10% of the outstanding common stock of CAP-G, the Company will be responsible for providing 90% of the funding necessary for the completion of Phase I of the development of the Karakuduk Field. If the Company exercises the option, the Company will be responsible for providing 100% of the funding. The Company anticipates that produced crude oil from Phase I development would be sold beginning within five to six months after start-up of this phase. The produced oil will be transported by pipeline from the field to a storage terminal to be built at Railroad Station #6 or to a railroad boarding facility at the same location or to both approximately 18 miles from the Karakuduk Field. The oil will be transported by railroad or via the Uzen-Atrau- Samara pipeline 8 to the Black Sea ports described above for sale to either domestic or international consumers. The Company has established oil production at a rate of approximately 400 barrels of oil per day from the first well to be re-entered in the Karakuduk Oil Field. The well is one of 22 wells drilled between 1972 and 1992 to delineate the Karakuduk Oil Field. None of such wells were then placed on production. Production now has been established from one of six zones in the first well to be reentered and the remaining five zones will be tested at a later date, when additional oil storage and upgraded workover equipment have been provided. The well is now shut in and operations have been suspended because of winter conditions and lack of ability to market the test oil. It is currently planned that recommencement of work-over operations and infrastructure construction will begin in May, 1997. Management of the Company believes the risk-to-reward considerations involved with the development of the Karakuduk Field are very positive and may lead to substantial growth of the Company over the next several years. However, the Company can provide no assurances that the Karakuduk Field will produce oil in any amounts or that the Company will ever realize a profit as a result of the Company's interest in the field. The exploration and development of the Karakuduk Field is governed by the terms of the agreements with the other shareholders in CAP-G and KKM. There can be no assurance that such shareholders, or any successor thereto, will contribute or will be in a position to contribute its proportionate share of costs and expenses for either entity for which it is responsible without raising additional capital. While a majority of the permits and licenses required to develop the Karakuduk Field are in place, there is no assurance that all of them will be obtained. Also, because of uncertainties surrounding the project, no proved reserves have been attributed to the field. The project will require significant development costs for which the financing is not in place. There can be no assurance that the project will be financed or that the Karakuduk Field will be successfully developed. Further, the Company will face all of the risks inherent in attempting to develop an oil and gas property in a foreign country. See also Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations. In the first quarter of calendar 1997, the Company disposed of all of its remaining interests in oil and gas properties in the United States. Accordingly, the following is provided for information purposes even though it relates solely to those properties. Reserves. As detailed in "Disclosures About Oil and Gas Producing Activities" following the Notes to Consolidated Financial Statements in this Annual Report on From 10- K, estimated quantities of the Company's proved oil reserves decreased 100% for the fiscal year ended November 30, 1996, as compared to the previous fiscal year and natural gas reserves decreased 100%. Reserves decreased due to production during the year, the sale of all producing 9 properties and the abandonment of certain properties which produced at uneconomic rates. The present value of the Company's proved reserves decreased 100% as of November 30, 1996, as compared to the end of the previous fiscal year, due to lower natural gas prices, production, the sale of proved reserves and abandonment of proved reserves. In January 1995, Ryder Scott Company Petroleum Engineers ("Ryder Scott"), an internationally recognized petroleum engineering group retained by the Company, has stated that in its opinion, after review, a reserve report commissioned by the Company which estimated that the Karakuduk Field has estimated recoverable oil of 74 million barrels which could be considered proved undeveloped, is reasonable. However, neither the Ryder Scott opinion or the reserve report considered the potential adverse impact of marketability on price of any oil which might be produced due to the remote location of the field or potential political instability and, therefore, none of the reserves can presently be considered proven. The production and marketing of the oil reserves will be subject to a number of political, economic and other risks. See "--Markets and --Competition." Net Quantities of Oil and Gas Produced. The Company's net oil and gas production for each of the last three years (all of which was from properties located in the United States) was as follows: Year Ended November 30, -------------------------------- 1996 1995 1994 ---- ---- ---- Oil (Bbls) ........... 1,737 8,224 11,286 Gas (Mcf) ........... 96,906 132,924 159,041 The average sales price per barrel of oil and Mcf of gas, and average production costs per barrel of oil equivalent ("BOE") excluding depreciation, depletion and amortization were as follows:
Average Average Average Year Ended Sales Price Sales Price Production November 30 Oil (Bbls) Gas (Mcf) Cost Per BOE ----------- ------------ ----------- ------------ 1996 ............... 17.53 1.17 2.07 1995 ............... 14.27 1.02 3.78 1994 ............... 12.75 1.44 6.06
The above table represents activities related only to oil and gas production. 10 Productive Wells and Acreage. As of November 30, 1996, the Company had interests in 65 gross productive oil wells (1.73 net oil wells) and 62 gross productive gas wells (4.61 net gas wells). There are no multiple completion wells. Production was from 45,775 gross (2,793) developed acres. Undeveloped Acreage. The Company on November 30, 1996, held interests in 2,500 gross (690 net) undeveloped oil and gas leases, all located within the State of Wyoming. Drilling Activity. During the last three fiscal years ended November 30, 1996, the Company participated in the drilling of the following productive exploratory and development wells in the United States. This table does not include any wells in which the Company had a carried or overriding royalty interest, nor any wells that were recompleted.
Fiscal Year Exploratory Wells Development Wells Ended ----------------------------------- --------------------------------- November 30, Productive Dry Productive Dry ------------ --------------- -------------- -------------- ------------- Gross Net Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- ----- --- 1996 ..................... 0 0 0 0 0 0 0 0 1995 ..................... 0 0 0 0 0 0 0 0 1994 ..................... 1 .11 0 0 5 .81 1 .15
Present Activities. As of April 7, 1997, the Company was not participating in the drilling of any oil or natural gas wells. Offices. The Company's offices comprise 1,746 square feet and are rented for $1,920 per month, under a lease which expires in November 1997. ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's security holders during the Company's fiscal quarter ended November 30, 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's $0.10 par value common stock is listed on the Nasdaq Small-Cap Market under the symbol CHAR. 11 At March 7, 1997, the Company had approximately 2,061 shareholders of record of its $0.10 par value common stock. No dividends have been paid on the Company's common stock and there are no plans to pay dividends in the foreseeable future. The following table shows the range of high and low "real-time" trade prices for each quarter during the Company's last two fiscal years ended November 30, 1996, as reported by the National Association of Securities Dealers, Inc.
Price Range Trading Range ------------------- Fiscal Quarter Ended High Low -------------------- ---- --- February 28, 1995................................ 23/32 5/8 May 31, 1995..................................... 7/8 21/32 August 31, 1995.................................. 11/16 15/32 November 30, 1995................................ 1 1/2 February 29, 1996................................ 1 11/32 11/16 May 31, 1996..................................... 1 11/32 1 1/32 August 31, 1995.................................. 1 3/4 1 1/16 November 30, 1996................................ 1 15/32 29/32
The following is information as to all securities of the Company sold by the Company during the fiscal year ended November 30, 1996, which were not registered under the Securities Act of 1933, as amended ("Securities Act"). Between September 13, 1994 and June 1, 1996, the Company issued 1,448,325 shares of its Common Stock to 37 persons which exercised stock purchase warrants issued by the Company in a private offering completed on May 31, 1993. The exercise price of the warrants was $0.40 per share, paid at the time of exercise. The certificates evidencing the shares issued bear appropriate restrictive legends under the Securities Act and stop transfer instructions have been placed with the Company's stock transfer agent. No underwriter was involved in the transaction. The Company issued the shares in reliance upon exemptions from registration under Section 4(2) of the Securities Act and Regulation D thereunder. All of such persons had available to them material information concerning the Company. A Form D was filed in connection with the issuances. Between March 8, 1996 and April 5, 1996, Company issued 14,000,000 shares of its Common Stock to 32 persons in a private placement. The purchase price for the shares was $0.50 per share. Allen & Company Incorporated served as placement agent in the private offering and received the compensation described below. The Company issued the shares in reliance upon exemptions from registration provided by Regulation D and Section 4(2) of the Securities Act. All of such persons had available to them material information concerning the Company. A Form D was filed in connection with the issuances. All purchasers represented that they were accredited investors as defined in Regulation D, and that the shares were being acquired for the investors' own account and not with a view to distribution. The certificates evidencing the shares issued bear appropriate 12 restrictive legends under the Securities Act and stop transfer instructions have been placed with the Company's stock transfer agent. On April 5, 1996, Company issued 600,000 shares of its Common Stock to two persons upon conversion of two outstanding unsecured promissory notes of the Company in the total principal amount of $300,000. Allen & Company Incorporated assisted the Company in connection with the conversion and received the compensation described below. The Company relied upon exemptions from registration under Section 4(2) of the Securities Act. All of such persons had available to them material information concerning the Company. Each of the persons represented that such person acquired the shares for the person's account and not with a view to distribution and that the investor is an accredited investor. The certificates evidencing the shares issued bear appropriate restrictive legends under the Securities Act and stop transfer instructions have been placed with the Company's stock transfer agent. On March 4, 1996, the Company issued 625,000 shares and on March 21, 1996, the Company issued an additional 60,000 shares to four persons in consideration for 25% of the outstanding shares of CAP-G owned by Darka Petrol Ticaret Ltd. Sti. ("DARKA"), controlled by the persons. The Company issued the shares in reliance upon the exemption from registration under Section 4(2) of the Securities Act. The persons represented to the Company that they acquired the shares for their own accounts and not with a view to distribution. Such persons had available to them material information concerning the Company. The certificates evidencing the shares issued bear appropriate restrictive legends under the Securities Act and stop transfer instructions have been placed with the Company's stock transfer agent. No underwriter was involved in the transaction. On March 6, 1996, the Company issued 900,000 shares to two persons in consideration for the acquisition by the Company of 15% of the outstanding shares of CAP-G owned by the persons. The Company issued the shares in reliance upon the exemption from registration under Section 4(2) of the Securities Act. The persons represented to the Company that they acquired the shares for their own accounts and not with a view to distribution. Such persons had available to them all material information concerning the Company. The certificates evidencing the shares issued bear appropriate restrictive legends under the Securities Act and stop transfer instructions have been placed with the Company's stock transfer agent. No underwriter was involved in the transaction. Effective April 8, 1996, the Company issued stock purchase warrants entitling the holder to purchase 1,022,000 shares of the Company's Common Stock for $10.00 consideration to Allen & Company Incorporated, the placement agent in the Company's 1996 private placement described above and as compensation for assistance by the placement agent in the conversion of $300,000 of the Company's outstanding promissory note described above. The Company issued the warrants in reliance upon the exemption from registration under Section 4(2) of the Securities Act. Allen & Company Incorporated represented to the Company that it acquired the warrants for its own account and not with a view to distribution. 13 Such person had available to it all material information concerning the Company. The certificate evidencing the warrants bears an appropriate restrictive legend under the Securities Act. No underwriter was involved in the transaction. Between December 1995 and January 1996, the Company issued stock purchase warrants entitling the holders to purchase up to 780,000 shares of the Company's Common Stock at an exercise price of $0.25 per share to one individual, one pension plan, Brae Group, Inc., and Allen & Company, Incorporated in consideration for the making of loans to the Company by the individual, the plan and Brae Group, Inc. and Allen & Company totaling $1,050,000 in November and December 1995. The Company issued the warrants in reliance upon the exemption from registration under Section 4(2) of the Securities Act. The persons represented to the Company that they acquired the warrants for their own accounts and not with a view to distribution. Such persons had available to them all material information concerning the Company. The certificates evidencing the warrants bears an appropriate restrictive legend under the Securities Act. In November and December, 1996, the Company borrowed $1,850,000 for interim financing pursuant to unsecured convertible promissory notes that bear interest at 8% per annum, which is payable monthly, and that are due and payable on or before May 29, 1998. The promissory notes are convertible into the Company's common stock at the lower of $0.75 per share or 75% of the market price of the common stock on the date of the conversion if the market price is less than $1.00 per share on such date. The proceeds from the first of such loans was received on November 22, 1996. In connection with such borrowings, the Company issued the lenders stock purchase warrants that terminate on November 30, 1999, to purchase a total of 462,500 shares of the Company's common stock at $0.25 per share. The Company further agreed that the Company would issue the lenders warrants to purchase an additional 185,000 shares of the Company's common stock if the promissory notes are not paid or converted by May 29, 1997, and warrants to purchase an additional 370,000 shares of the Company's common stock if the promissory notes are not paid or converted by November 30, 1997. Such warrants would be exercisable for a period of three years at $0.25 per share. The Company issued the notes and warrants in reliance upon the exemption from registration under Section 4(2) of the Securities Act. The persons represented to the Company that they acquired the notes and warrants for their own accounts and not with a view to distribution. Such persons had available to them all material information concerning the Company. The certificates evidencing the notes and warrants bear an appropriate restrictive legend under the Securities Act. ITEM 6. SELECTED FINANCIAL DATA The following is selected consolidated financial information concerning the Company. This information should be read in conjunction with the Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K. 14
November 30, --------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Oil and gas sales ............................. $ 147,000 $ 255,000 $ 374,000 $ 414,000 $ 492,000 Total revenues* ............................... 147,000 255,000 374,000 414,000 492,000 Noncash write-down of oil and gas properties .......................... --- 619,000 416,000 230,000 --- Loss before extraordinary item ................ (2,179,000) --- --- --- --- Net loss per share before extraordinary item ........................................ (0.07) --- --- --- --- Net (loss) .................................... (2,416,000) (704,000) (474,000) (123,000) (121,000) Net (loss) per common share ................... (0.08) (0.04) (0.02) (0.01) (0.01) Working capital ............................... 52,000 366,000 497,000 709,000 357,000 Total assets .................................. 14,760,000 5,595,000 2,388,000 2,597,000 2,292,000 Long-term obligations ......................... 1,106,000 461,000 -- 115,000 135,000 Stockholders' equity .......................... 12,114,000 4,920,000 2,035,000 2,167,000 1,880,000 Present value of proved reserves .............. -0-** 427,000 1,084,000 1,360,000 1,429,000 Proved oil reserves (bbls) .................... -0-** 66,185 111,690 141,748 105,973 Proved gas reserves (mcf) ..................... -0-** 3,062,417 3,294,730 2,305,142 1,485,556 - -------------------
*Certain reclassifications have been made to conform prior years' information with the current year presentation. **Reflects the divestiture by the Company of all of its remaining oil and gas properties in the United States in early 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Until 1996, the Company's primary source of capital historically had been from oil and gas sales. The Company had working capital of approximately $52,000 at November 30, 1996. Total current assets were $1,207,000 and total current liabilities were $1,155,000 for a working capital ratio of approximately 1.05 to 1. Net cash and cash equivalents increased by $299,000 from November 30, 1995 to November 30, 1996, primarily due to funds received from the completion of a private placement of 14,000,000 shares of the Company's common stock for gross proceeds of $7,000,000 in April, 1996. The Company currently owns 90% of the outstanding common stock of Central Asian Petroleum Guernsey Limited ("CAP-G") which has a 50% interest in Karakuduk-Munay, Inc. ("KKM"), which holds 100% of the right to develop the Karakuduk Field. The Company acquired 45% of the outstanding stock of CAP-G prior to December 1, 1995. In January and February 1996, the Company entered into agreements to acquire, for a total of $5,850,000 cash and 1,785,000 shares of the Company's restricted common stock, up to an additional 55% of the 15 outstanding stock of CAP-G. The Company consummated the purchase of 25% of the outstanding stock of CAP-G in April 1996 by paying $2,000,000 in cash and issuing 685,000 shares of the Company's common stock. The Company acquired an additional 5% of the outstanding stock of CAP-G in April 1996 for $250,000 cash. To acquire an additional 15% of the outstanding common stock of CAP-G, the Company agreed to pay $1,975,000 in cash and issue 900,000 shares of the Company's common stock. This purchase was consummated on March 11, 1996, when the Company paid $750,000 in cash and issued 900,000 shares of the Company's common stock. The remaining cash balance of $1,225,000 for the purchase was to be paid in four quarterly equal payments of $306,250 between June 11, 1996 and March 11, 1997. The first payment of $306,250 was paid in June 1996 and an additional $175,000 was paid in September 1996. The agreement was subsequently revised so that the Company paid $200,000 in December 1996. The Company was to pay $543,750 on or before March 11, 1997. The Company is currently negotiating to obtain an extension of the due date of the remaining payment. In addition, the Company has an option to purchase the remaining 10% of the outstanding common stock of CAP-G for an additional $1,625,000 and 200,000 shares of the Company's common stock at any time following completion of the initial purchase and prior to December 11, 1997. The Company does not have any income producing properties and the Karakuduk Oil Field is substantially undeveloped. The Karakuduk Project will require significant development costs for which the financing is not complete. There can be no assurance that the project will be adequately financed or that the field will be successfully developed. The license requires minimum work plans of approximately $10 million by August 31, 1997, of approximately $35 million by August 31, 1998 and of approximately $12 million by August 31, 1999. The agreement provides KKM with the right to defer the minimum work program under certain conditions. As part of the minimum work plan requirement, the Company has loaned CAP-G $4 million to fund KKM's current operations. KKM's 1997 budget, which has not been approved, would entail a minimum expenditure of $6 million through August 31, 1997. Subject to the receipt of additional financing by the Company, this requirement will be funded by the Company through loans by its subsidiary CAP-G to KKM. The Company has applied with Overseas Private Investment Corporation ("OPIC") for four political risk coverages on the Company's investment in the Karakuduk Field in western Kazakstan. The maximum insured amounts sought for each coverage range from $23.4 to $40.2 million. The estimated yearly premium amounts for the current insured amounts for each coverage range up to $84,000. The estimated yearly standby premiums for each coverage range up to $88,000. The actual premium values may be higher or lower depending on the contract offered to the Company by OPIC. The Investment Committee of OPIC approved the Company's Karakuduk operations for political risk insurance coverage by OPIC on December 19, 1995. The Company has received an executed Letter of Commitment on September 25, 1996, from OPIC binding issuance of Political Risk Insurance for the Karakuduk 16 project. Currently, the Company has a standby facility for which it has made three previous payments of $31,250 and has a fourth payment of $31,250 due on June 30, 1997. In July 1997, the Company expects to receive the actual contract offered to the Company by OPIC. The Company completed a private placement of 14,000,000 shares of the Company's common stock for gross proceeds of $7,000,000 in April, 1996. To date, the Company has used the approximately $6,907,000 of net proceeds from the private placement to complete the acquisition of the additional 55% of CAP-G, to repay borrowings, to pay CAP-G's share of the second quarter budget and third quarter budget for the Karakuduk Field, for working capital and for other corporate purposes. In November and December, 1996, the Company borrowed $1,850,000 for interim financing pursuant to unsecured convertible promissory notes that bear interest at 8% per annum, which is payable monthly, and that are due and payable on or before May 29, 1998. The promissory notes are convertible into the Company's common stock at the lower of $0.75 per share or 75% of the market price of the common stock on the date of the conversion if the market price is less than $1.00 per share on such date. The proceeds from the first of such loans was received on November 22, 1996. The Company used the funds from the loans primarily for the Company's obligations to provide financing for the Company's Karakuduk Project in Kazakstan and to make a payment of $200,000 due in connection with the Company's previous purchase of 15% of the outstanding shares of CAP-G. Without additional financing, the Company's present cash and other capital resources are not sufficient to fund the obligations of CAP-G to pay the Karakuduk Field development expenses incurred by KKM for the balance of 1997, to make the balance of the payments to complete the purchase of 15% of the CAP-G stock and to provide working capital for the Company. The Company has raised capital to finance a portion of its obligations in connection with the acquisition of its interest in CAP-G and the development of the Karakuduk Field and to satisfy working capital needs in the short term. The Company plans to meet its additional capital needs through debt or equity offerings, encumbering properties, entering into arrangements whereby certain costs of development will be paid by others to earn an interest in the properties, or sale of a portion of the Company's interests in the Karakuduk Field. The present environment for financing the acquisition of oil and gas properties or the ongoing obligations of the oil and gas business is uncertain due, in part, to instability in oil and gas pricing in recent years. The Company's small size and the early stage of development of the Karakuduk Field may also increase the difficulty in raising needed financing. There can be no assurance that debt or equity financing anticipated to be necessary to continue to fund the Company's operations and obligations will be available to the Company on economically acceptable terms, if at all. If sufficient funds cannot be raised to meet the continuing obligations with respect to the Karakuduk Field development, the Company's interest in such property may be lost. Also, if 17 sufficient funds cannot be raised to provide additional working capital, it is likely that the Company will not be able to continue operations. The Company has no other material commitments for cash outlay and capital expenditures other than for normal operations. Results of Operations Fiscal 1996 Compared with Fiscal 1995 The Company's operations during fiscal 1996 resulted in a loss before extraordinary item of $2,179,000 primarily due to the move from domestic operations into an international operation. Production costs were down from $115,000 in 1995 to $37,000 in 1996 as a result of continued decreased production from the Company's domestic operations. General and administrative expenses increased from $166,000 in 1995 to $2,336,000 in 1996 as a result of consulting fees to MDI of approximately $500,000, additional compensation recorded of approximately $385,000, consisting of $210,000 for bonuses to the former Chief Executive Officer and the former Chief Financial Officer of the Company and $175,000 for compensation related to 350,000 shares of the Company's common stock granted to the Chairman of the Board of the Company, and additional expenses for start-up costs in Kazakstan relating to the proportionate consolidation of KKM into the Company, which began in 1996. Interest expense also increased in relation to the financing of the projects. In 1996, there was no write down of oil and gas properties as there had been in 1995 which had totaled $619,000. The result of these changes was a loss of $2,416,000 or $0.08 per share for 1996 as compared to a loss of $704,000 or $0.04 per share for 1995, before extraordinary loss. For 1996, there was a $237,000 or $0.01 extraordinary per share loss on the extinguishment of long term debt which resulted in a net loss of $2,416,000 or $0.08 per share for 1996. Results of Operations Fiscal 1995 Compared with Fiscal 1994 The Company's operations during fiscal 1995 resulted in a loss of $719,000 primarily due to a noncash write-down of oil and gas properties of $619,000 for fiscal 1995. Due to the noncash write-down, the net loss for fiscal 1995 was $704,000 compared to a net loss of $474,000 during fiscal 1994. The noncash write-down was primarily the result of the decreased value of estimated future net values of proved reserves due to lower gas prices during the fourth quarter of fiscal 1995 and the sale of proved reserves during 1995. Revenue from oil and gas sales decreased $119,000 or 31.8% from $374,000 in fiscal 1994 due to lower production, lower crude oil and natural gas prices and sale or abandonment of certain producing properties. Costs and expenses increased $91,000, or 20.4% during fiscal 1995, excluding the noncash write-down of oil and gas properties. Production costs decreased by 50.4% to $115,000 in fiscal 1995 due to the sale of certain properties and shut-in of certain properties due to lower natural gas prices. Depreciation and depletion also decreased by 38.3% to $74,000 for the same 18 reasons that production decreased. General and administrative expenses increased $72,000, or 76.6% in fiscal 1995 due to the costs related to the acquisition and operation of the Company's interest in the Karakuduk Field. Inflation. The Company cannot control prices in its oil and gas sales and to the extent the Company is unable to pass on increases in operating costs, it may be affected by inflation. Management's Discussion of Changes in Standardized Measure Standardized measure of discounted future net cash flows decreased 100% in fiscal 1996 as compared to fiscal 1995. This decrease was the result of production in 1996, lower oil and gas prices, the sale of proved reserves, and the abandonment of proved reserves during the year. The forward-looking statements herein are based on current expectations that involve a number of risks and uncertainties. Such forward-looking statements are based on assumptions that the Company 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 the Company's operations or business. The foregoing assumptions are based on judgment with respect to, among other things, oil and natural gas reserve information available to the Company, 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 the Company's control. Accordingly, although the Company believes 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. There are a number of other risks presented by the Company's business and operations which could cause the Company's 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 periodic revisions must be made to reflect actual conditions and business developments, the impact of which may cause the Company to alter its capital investment and other expenditures, which may also adversely affect the Company's results of operations. In light of significant uncertainties inherent in forward-looking information included in this Annual Report on Form 10-K, the inclusion of such information should not be regarded as a representation by the Company or any other person that the Company's objectives or plans will be achieved. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14(a) for a list of the Financial Statements and the supplementary financial information included in this report following the signature page. 19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On January 16, 1997, the Company engaged Ernst & Young LLP as the Company's principal independent accountant in place of Grant Thornton LLP. On July 23, 1996, the Company requested and received the resignation of Grant Thornton LLP. There were no disagreements during the Company's two fiscal years ended November 30, 1995, or any interim period subsequent thereto between the Company and Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of Grant Thornton LLP, would have caused Grant Thornton LLP to make reference in its reports to the subject matter of such disagreements. The opinions of Grant Thornton LLP on the Company's financial statements for the fiscal years ended November 30, 1995 and 1994, contain no adverse opinion or disclaimer of opinion, nor were such opinions qualified as to uncertainty, audit scope or accounting principles, except that the opinion on the Company's financial statements for the fiscal year ended November 30, 1995, raised substantial doubt about the Company's ability to continue as a going concern. The decision to change accountants was approved by the Company's Board of Directors. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The name, position with the Company, age of each director and executive officer and the period during which each director and executive officer of the Company has served are as follows:
Name of Director and Executive Director Principal Occupation Officer and Position, in the Company Since Age During the last Five Years - ------------------------------------ -------- --- -------------------------- Howard Karren....................... 1996 66 Chairman of the Board of the Company since 1996; Chief Executive Officer of the Company since January 1997 and President since February 1997. Senior Advisor to the Chairman and Chief Executive Officer of Enron Oil & Gas Co., an oil and gas company, from 1994 to 1996. President and Vice Chairman of Enron Oil & Gas International Co. from 1984 until 1994. 20 Name of Director and Executive Director Principal Occupation Officer and Position, in the Company Since Age During the last Five Years - ------------------------------------ -------- --- -------------------------- Peter G. Dilling.................... 1995 47 Vice Chairman of the Board of the Company since March 1997; President and a director of M-D International Petroleum, Inc., an oil and gas company, since September 1994. A partner of M-D International, an unincorporated oil and gas business, from March 1993 to the present. Jay W. McGee........................ 1995 49 Executive Vice President of Exploration and Production of the Company since March 1997; Director of M-D International Petroleum, Inc., an oil and gas company, since September 1994. Manager of M-D International, an unincorporated oil and gas entity, from March 1993 to the present. Vice President of Anglo Suisse L.P., an oil and gas company, from September 1990 to February 1993. Prior thereto, Director of Exploration of Anglo Suisse, Inc., an oil and gas company. Alan D. Berlin...................... 1997 57 A partner of Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP since 1995. Engaged in the private practice of law for over five years prior to joining Aitken Irvin Lewin Berlin Vrooman & Cohn LLP. A director of Belco Oil & Gas Corp. David A. Dahl....................... 1997 35 President of Whittier Energy Company, an oil and gas exploration and production company, since 1997, President of Whittier Ventures, LLC, a private investment entity, since January 1996, and a Vice President of Whittier Trust Company, a trust company, since April 1993, a Vice President of Merus Capital Management, an investment manager, from 1990 to 1993. Arlo G. Sorensen.................... 1996 56 Chief Financial Officer and Principal Accounting Officer of the Company since March 1997. Trustee of M.H. Whittier Corporation, a private investment entity, since 1985. Chairman of the Board and a director of Whittier Trust Company, a trust company since 1988. 21 Name of Director and Executive Director Principal Occupation Officer and Position, in the Company Since Age During the last Five Years - ------------------------------------ -------- --- -------------------------- Charles P. Karren................... -- 30 Vice President of Business Development of the Company since March 1997; Consultant to the Company from May 1996 to March 1997; Consultant to M-D International Petro- leum, Inc., an oil and gas company, since May 1996; employed in various capacities with Enron Development Corp., an energy development company, from 1992 to 1996; Associate with Hill Samuel-Middle East, an English merchant bank, from 1990 to 1992.
Howard Karren and Charles P. Karren are father and son. The present term of office of each director will expire at the next annual meeting of shareholders. Each executive officer will hold office until his successor duly is elected and qualified, until his resignation or until he is removed in the manner provided by the Company's Bylaws. In connection with the Company's acquisition of all of the stock of Central Asian Petroleum, Inc. ("CAP-D") in 1994, the former shareholders of CAP-D acquired certain rights to nominate directors of their choosing for election to the Company's Board of Directors. Pursuant to these rights, the former CAP-D shareholders caused the nomination of Jay W. McGee, who was elected a director at the 1995 annual meeting of shareholders. If by June 30, 2000, the Karakuduk Field obtains 5,000 barrels of oil production per day averaged over any sixty (60) day period, or the Company's beneficial interest in the field is sold or the Company and the former shareholders jointly participate in a new exploratory development project, the former shareholders have the right to cause the Company to nominate one additional director at the Company's 2000 annual meeting of shareholders. In connection with a loan to the Company from the Brae Group, Inc. ("Brae"), in November 1995, the Company was required to appoint Messrs. Karren and Dilling as directors of the Company and to appoint Mr. Karren as Chairman of the Board of Directors of the Company. The Company borrowed $750,000 represented by an unsecured promissory note with interest at 8% per annum. The note was repaid on April 30, 1996. As a result of the repayment of the note, the Company is no longer required to continue to nominate such persons as directors. 22 In connection with borrowings in August 1996, the Company agreed to add two directors selected by two of the lenders, Whittier Ventures LLC and Whittier Energy Company (collectively "Whittiers"). In connection with the transactions, James A. Jeffs resigned from the Company's Board of Directors. At the request of the Whittiers, on December 2, 1996, Arlo G. Sorensen replaced Mr. Jeffs on the Company's Board of Directors and on January 3, 1997, David A. Dahl was appointed to the Company's Board of Directors. The Whittiers will have the right to have their two representatives nominated for directors of the Company until the later of the date their promissory notes are paid in full or the date the Whittiers no longer have any investment in the Company. There are no other arrangements or understandings between any executive officer and any director or other person pursuant to which any person was selected as a director or an executive officer. Except as set forth above, no director of the Company is a director of an entity that has its securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. Section 16(a) Beneficial Ownership Reporting Compliance Based solely upon a review of the Forms 3 and 4 and any amendments thereto furnished to the Company during the Company's fiscal year ended November 30, 1996, and Form 5 and amendments thereto furnished to the Company with respect to such fiscal year, during the Company's fiscal year ended November 30, 1996, no persons who were directors, officers or beneficial owners of more than 10% of the Company's outstanding Common Stock during such fiscal year filed late reports on Form 3, 4, or 5 except for Howard Karren, Peter G. Dilling and James A. Jeffs who did not timely file their Forms 3 during the fiscal year ended November 30, 1996, Howard Karren and Peter G. Dilling who have not yet filed needed amendments to their Forms 3, and Jay W. McGee who did not timely file his Form 3 during the fiscal year ended November 30, 1995. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth for the Company's last three fiscal years ended November 30, 1996, 1995 and 1994, the compensation paid by the Company for services rendered in all capacities to the Company by Paul V. Hoovler, who was the chief executive officer of the Company during the Company's three fiscal years ended November 30, 1996. No other person who served as an executive officer of the Company during the Company's fiscal year ended November 30, 1996 received total annual salary and bonus in excess of $100,000 from the Company during the Company's fiscal year ended November 30, 1996: 23
SUMMARY COMPENSATION TABLE Long Term Compensation Annual Compensation Awards ----------------------------------------- ------------ Year Other Ended Annual Securities All Other Name and November Compen- Underlying Compen- Principal Position 30, Salary($) Bonus($) sation($) Options(#) sation($) - ------------------ -------- -------- ------- -------- ---------- -------- Paul V. Hoovler .............. 1996 .......... $60,000(1) -- $ 4,937(2) -- $40,000(3) Chief Executive 1995 .......... $60,000 -- $ 4,413(2) -- $40,000(3) Officer and Presi- 1994 .......... $60,000 -- $ 3,518 (2) -- $40,000(3) dent until January 1997 and February 1997, respectively - ---------------------
(1) In addition, on August 19, 1996, the Company's board of directors awarded Mr. Hoovler a cash b nus of $140,000 as recognition of past and present services to the Company to be used by Mr. Hoovler to exercise certain warrants, granted to Mr. Hoovler pursuant to the Company's 1989 Stock Warrant Plan, to purchase 500,000 shares of the Company's common stock at an exercise price of $0.28 per share. This bonus will not become payable until receipt of notice from Mr. Hoovler, which notice may not be given and shall not be effective, until the earlier of (i) completion of a sale or farmout by the Company of all or a portion of its interest in the Karakuduk Project, or (ii) the date when the Company makes a public disclosure of a sale or farmout of the Karakuduk Project. At its sole option and discretion, the Company may, in lieu of making payment of such bonus to Mr. Hoovler, use all or a portion of such bonus as a direct offset to Mr. Hoovler's obligation to make any payment due to the Company upon exercise of the warrant. Anything mentioned above to the contrary notwithstanding, in the event Mr. Hoovler has exercised and paid for the warrant prior to the date the bonus becomes payable, the Company shall pay such bonus directly to Mr. Hoovler, but only upon completion of a sale or farmout of all or a portion of its interest in the Karakuduk Project. (2) Represents the amounts distributed pursuant to a royalty participation plan to Paul V. Hoovler. (3) The Company has a Deferred Compensation and Death Benefit Plan for Paul V. Hoovler. The plan allows for Mr. Hoovler to continue in active employment of the Company until age 70.5. The Company pays Mr. Hoovler $40,000 annually from this plan. If Mr. Hoovler voluntarily terminates his employment prior to his retirement, disability, or death, he or his estate will receive the remaining residual funds to be disbursed from the plan. If Mr. Hoovler dies prior to retirement or other termination of employment, Mr. Hoovler's estate will receive the remaining residual funds to be disbursed from the plan. The plan is funded by a life insurance policy on the life of Mr. Hoovler which provides for the major portion of any costs 24 to the Company. The plan was fully funded when the Company paid, during the Company's fiscal year ended November 30, 1991, the final payment of a premium of $18,000 on a life insurance policy insuring the life of Paul V. Hoovler. See "Termination of Employment Arrangements." Option Grants in Fiscal Year Ended November 30, 1996 No options were granted by the Company to Paul V. Hoovler during the Company's fiscal year ended November 30, 1996. FISCAL YEAR-END OPTION VALUES The following table sets forth information concerning unexercised options (warrants) held by Paul V. Hoovler at November 30, 1996:
Number of Securities Underlying Unexercised Value of Unexercised Options as of In-the-Money Options at November 30, 1996(#) November 30, 1996($) --------------------------- -------------------------- Name Exercisable/ Unexercisable Exercisable/ Unexercisable - ---- ----------- ------------- ----------- ------------- Paul V. Hoovler ............. 500,000 - 0 - $406,875(1) - 0 - - -----------------------
(1) The value was determined by multiplying the number of shares underlying the warrants by the difference between the exercise price and the closing sale price of the Company's Common Stock on November 30, 1996. No options (warrants) were exercised by Paul V. Hoovler during the Company's fiscal year ended November 30, 1996. Compensation of Directors There were no standard or other arrangements for the compensation of the Company's directors in effect for the Company's fiscal year ended November 30, 1996. The Board of Directors also agreed to pay to Frank H. Gower, Jr., who served as a director of the Company from 1972 to 1997, a cash bonus of $28,000 that was paid in July 1996 and was used by Mr. Gower to purchase 100,000 shares of the Company's Common Stock upon exercise of a stock purchase warrant held by him. There are no employment contracts between the Company and any executive officer. Termination of Employment Arrangements Paul V. Hoovler, the former Chief Executive Officer and President of the Company, entered into a severance agreement ("Agreement") with the Company effective February 12, 1997. Pursuant to the Agreement, Mr. Hoovler receives his salary and unpaid vacation time accrued through February 12, 1997. Also, the 25 Company agreed to amend the Company's 1989 Stock Warrant Plan to enable Mr. Hoovler to transfer the warrants granted to him in 1996 to a member of his family or a trust created by him. Further, Mr. Hoovler was granted warrants to purchase 100,000 shares of the Company's common stock at an exercise price of $0.85 per share, for a period of four years and warrants to purchase 100,000 shares of the Company's common stock at an exercise price of $1.25 per share that become exercisable on January 1, 1998, and remain exercisable for a period of four years from such date. Also, pursuant to the Agreement, the Company agreed to assign to Mr. Hoovler, or an entity controlled by Mr. Hoovler, the existing overriding royalty interest ("ORRI") that the Company holds in approximately 89 wells. Such assignment will be for a three-year period. In exchange for the assignment, Mr. Hoovler agreed to pay a former employee of the Company ten percent (10%) of the net revenues received from such ORRI during the three-year period. In addition, upon Mr. Hoovler's request, the Company agreed to assign its interest in the Company's royalty participation plan to Mr. Hoovler or an entity controlled by Mr. Hoovler. The Company also agreed to assign to Mr. Hoovler the Company's ownership interest in two life insurance policies that the Company held on Mr. Hoovler's life. Finally, pursuant to the Agreement, Mr. Hoovler was allowed to bid on or retain certain office furniture and equipment of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following persons are the only persons known to the Company who on April 2, 1997, owned beneficially 5% or more of the Company's 37,526,517 outstanding shares of $0.10 par value common stock:
Name and Address of Beneficial Owner Amount and Nature of Percent or Name of Officer or Director Beneficial Ownership(1) of Class - ------------------------------------ ---------------------- -------- Drake and Company .................................................... 3,000,000 8.0% Citibank Performance Portfolio A.A. c/o Citibank, N.A. 153 E. 53rd Street, 21st Floor New York, New York 10043 Allen & Company Incorporated ......................................... 2,962,000(2) 7.7% 711 Fifth Avenue New York, New York 10022 Crescent Investment .................................................. 2,000,000 5.3% 865 Figueroa Street, Suite 1500 Los Angeles, California 90017 26 Name and Address of Beneficial Owner Amount and Nature of Percent or Name of Officer or Director Beneficial Ownership(1) of Class - ------------------------------------ ---------------------- -------- Whittier Ventures, LLC ............................................... 3,187,000(3) 8.2% 1600 Huntington Drive So. Pasadena, California 91030 Howard Karren ........................................................ 350,000(4) 0.9% Peter G. Dilling ..................................................... 753,000(5) 2.0% Jay W. McGee ......................................................... 930,678(6) 2.5% Alan D. Berlin ....................................................... -0- -- David A. Dahl ........................................................ 3,582,833(7) 9.2% Arlo G. Sorensen ..................................................... 11,242(8) 0.03% Charles P. Karren .................................................... 75,000 0.2% All Directors and Officers as a Group (seven persons) ............................................................. 5,702,753(9) 14.9% - ----------------------
(1) To the knowledge of the Company's management, the beneficial owners listed have sole voting and investment power with respect to the shares shown unless otherwise indicated. (2) Includes 1,022,000 shares underlying unexercised warrants. (3) Includes 1,000,000 shares underlying a convertible note and 187,500 shares underlying unexercised warrants. Does not include shares underlying additional warrants that will be issued if the debt to Whittier Ventures, LLC is not repaid by May 31, 1997 or by November 30, 1997. (4) The 350,000 shares are reserved to be issued to Mr. Karren. See "Certain Relationships and Related Transactions." (5) All 753,000 shares are owned directly by Spectrum Development, Inc. which is controlled by Mr. Dilling, and the 753,000 shares include 301,618 of a total of 1,250,000 shares being held in escrow in connection with the acquisition of Central Asian Petroleum, Inc. as described under "Certain Relationships and Related Transactions." (6) Includes 272,205 of a total of 1,250,000 shares being held in escrow in connection with the acquisition of Central Asian Petroleum, Inc. as described under "Certain Relationships and Related Transactions." Also includes 2,589 shares owned in Mr. McGee's Individual Retirement Account and 2,589 shares owned by Mr. McGee's wife. 27 (7) Includes the shares beneficially owned by Whittier Ventures LLC and includes 333,333 shares underlying a convertible note and 62,500 shares underlying unexercised warrants owned by Whittier Energy Company. David A. Dahl has no pecuniary interest in such shares but, as the President of each, Mr. Dahl has voting power and investment power over such shares and, thus, may be deemed to beneficially own such shares pursuant to Rule 13d-3 adopted under the Securities Exchange Act of 1934, as amended. Does not include shares underlying additional warrants that will be issued if the debt to Whittier Ventures, LLC and Whittier Energy Company is not repaid by May 29, 1997 or by November 30, 1997. (8) The 11,242 shares are owned by Whittier 1982 Oil Trust for which Mr. Sorensen is the trustee and has voting and investment power over such shares. (9) Includes the shares as described in notes (2) through (8) above. There are presently no arrangements of any kind which may at a subsequent date result in a change in control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In early September 1994, the Company signed a letter of intent with Central Asian Petroleum, Inc., a Delaware corporation ("CAP-D"), and Overseas Consulting Services Company, Inc. ("OCSCO"), both private companies based in Houston, Texas, to jointly pursue the registration and development of the Karakuduk Field, a shut-in oil field in the central Asian Republic of Kazakstan, that was discovered in the early 1970s but never placed on production. In mid-September 1994, the Company acquired a 25% interest in Central Asian Petroleum (Guernsey) Limited ("CAP-G"), with headquarters in Ankara, Turkey, which holds a 50% interest in KKM. In April 1995, the Company acquired all of the stock of CAP-D, which also owned an interest in CAP-G. Following the acquisition of CAP-D, the Company's beneficial interest in CAP-G increased to 45%, giving the Company a 22.5% beneficial interest in KKM and the Karakuduk Field. Under terms of the acquisition, the former shareholders of CAP-D have certain rights to cause the Company to nominate persons selected by the former shareholders to the Company's Board of Directors. Jay W. McGee, a former shareholder of CAP-D, was first elected at the 1995 Company's Annual Meeting of Shareholders under the arrangement. Additionally, in connection with the acquisition, the Company may be required to pay a brokerage fee to Mr. McGee in the amount of up to $175,000. The Company paid Mr. McGee $50,000 in 1995 and the balance is payable upon the occurrence of certain milestones in development of the Karakuduk Field. The Company issued 4,250,000 shares of restricted common stock for CAP-D which will be held in escrow and released to the former 28 shareholders of CAP-D, including Messrs. McGee and Dilling, or affiliates of them, from time to time in connection with development of the Karakuduk Field. Of the shares held in escrow, 3,000,000 shares have been released and delivered to the former shareholders of CAP-D. The Company has agreed to issue a minimum of 350,000 shares of the Company's restricted common stock to Howard Karren, a director of the Company, or his designee at a future date selected by Mr. Karren. The Company is negotiating to acquire MDI, and has issued 180,000 shares of the Company's restricted common stock to Enron to facilitate the participation of MDI in the Uzbekistan Project. See "Business." The Company paid Mr. Karren a fee of $4,000 per month for the four month period ending August 31, 1996, for office expenses and travel expenses in connection with the Company's efforts to satisfy its funding obligations for the Karakuduk Project. Beginning in May 1996 through February 1997, the Company paid a base consulting fee of $60,000 per month to MDI for assistance by MDI in seeking means for meeting the Company's funding obligations for the Karakuduk Project. The Company also assumed obligations of MDI to pay up to $42,000 during the six month period ending September 30, 1996 to two other unaffiliated consultants engaged to assist MDI and the Company to acquire and review oil and natural gas exploration or development projects in countries of the former Soviet Union. Commencing in March 1997, the Company began to reimburse MDI for MDI's expenses incurred in connection with the Karakuduk Project. On April 5, 1996, the Company completed a private placement of 14,000,000 shares of the Company's common stock at $0.50 a share for gross proceeds of $7,000,000. In connection with the private placement, the Company issued a five year warrant to purchase 1,022,000 shares of the Company's common stock for, a nominal amount, to Allen & Company Incorporated ("Allen") and paid $21,849 of Allen's expenses. The Company paid additional miscellaneous expenses related to the offering of $71,363. Allen also purchased shares of the Company's common stock in the private placement on the same terms and conditions as other purchasers thereof. The Company also issued Allen a three year warrant to purchase 200,000 shares of the Company's common stock at $0.25 per share, in connection with the $750,000 loan referred to above. Drake and Company, Crescent Investment and Whittier Ventures, LLC also purchased shares of the Company's common stock, in the above described private placement on the same terms and conditions as other purchasers thereof. See "Security Ownership of Certain Beneficial Owners and Management." In November and December, 1996, the Company borrowed $1,850,000 for interim financing pursuant to unsecured convertible promissory notes that bear interest at 8% per annum, which is payable monthly, and that are due and payable on or before May 29, 1998. The promissory notes are convertible into the Company's common stock at the lower of $0.75 per share or 75% of the market price of the common stock on the date of the conversion if the market price is less than $1.00 per share on such date. The proceeds from the first of such loans was 29 received on November 22, 1996. Whittier Ventures, LLC and Whittier Energy Company loaned $1,000,000 of the $1,850,000 that was loaned to the Company. In connection with such borrowings, the Company agreed to issue the lenders warrants that terminate on November 30, 1999, to purchase a total of 462,500 shares of the Company's common stock at $0.25 per share and agreed to add two directors selected by two of the lenders, Whittier Ventures LLC and Whittier Energy Company, to the Company's Board of Directors. See "Item 10. Directors and Executive Officers of the Registrant." The Company further agreed that the Company would issued the lenders warrants to purchase an additional 185,000 shares of the Company's common stock if the promissory notes are not paid or converted by May 31, 1997, and warrants to purchase an additional 370,000 shares of the Company's common stock if the promissory notes are not paid or converted by November 30, 1997. Such warrants would be exercisable for a period of three years at $0.25 per share. Matthew R. Hoovler, the former Vice President and Treasurer of the Company, was awarded on August 19, 1996 a cash bonus of $70,000 as recognition for past and present services to the Company to be used solely and exclusively by Mr. Hoovler to exercise certain warrants granted to him pursuant to the Company's 1989 Stock Warrant Plan, to purchase 250,000 shares of the Company's common stock at an exercise price of $0.28 per share. The bonus will not become payable until receipt of notice from Mr. Hoovler, which notice may not be given and shall not be effective until the earlier of (i) completion of a sale or farmout by the Company of all or a portion of its interest in the Karakuduk Project, or (ii) the date when the Company makes a public disclosure of a sale or farmout of the Karakuduk Project. At its sole option and discretion, the Company may, in lieu of making payment of such bonus to Mr. Hoovler, use all or a portion of such bonus as a direct offset to Mr. Hoovler's obligation to make any payment due to the Company upon exercise of the Warrant. Anything mentioned above to the contrary notwithstanding, in the event Mr. Hoovler has exercised and paid for the warrant prior to the date the bonus becomes payable, Chaparral will pay such bonus directly to Mr. Hoovler, but only upon completion of a sale or farmout of all or a portion of its interest in the project. The Company amended its 1989 Stock Warrant Plan to enable Mr. Hoovler to transfer the warrants granted to him in 1996 to a member of his family or a trust created by him. See "Termination Arrangements with Previous Officers and Directors" set forth in Item 11 for a description of the termination agreement between the Company and Paul V. Hoovler. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. Table of Contents Reports of Independent Auditors Balance Sheets--As of November 30, 1996 and 1995 30 Consolidated Statements of Operations--Years ended November 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows--Years ended November 30, 1996, 1995, and 1994 Consolidated Statements of Changes in Stockholders' Equity--Years ended November 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Supplemental Information Disclosures About Oil and Gas Producing Activities (Unaudited) (a)(2) Financial Statement Schedules. None. (b) Current Reports on Form 8-K: The Company filed no reports on Form 8-K during the last fiscal quarter ended November 30, 1996: (c) Exhibits. 2.1 Stock Acquisition Agreement and Plan of Reorganization dated April 12, 1995 between Chaparral Resources, Inc., and the Shareholders of Central Asian Petroleum, Inc., incorporated by reference to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 2.2 Escrow Agreement dated April 12, 1995 between Chaparral Resources, Inc., the Shareholders of Central Asian Petroleum, Inc. and Barry W. Spector, incorporated by reference to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 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. 3.1 Restated Articles of Incorporation and Amendments, incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 3.2 Articles of Amendment to the Restated Articles of Incorporation dated April 20, 1988, incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 3.3 Bylaws, as amended through January 3, 1997. 31 3.4 Articles of Amendment to the Restated Articles of Incorporation and Amendments dated June 21, 1995, incorporated by reference to Exhibit B to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 3.5 Articles of Amendment to the Restated Articles of Incorporation and Amendments dated July 17, 1996, incorporated by reference to Exhibit 3.5 to the Company's Registration Statement No. 333-7779. 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. 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 From 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 From 10-K for the fiscal year ended November 30, 1995. 32 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 Exhibit 10.10 to the Company's Registration Statement No. 333-7779. 10.11 Promissory Notes and Modification of Promissory Notes 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. 10.13 Severance Agreement dated February 12, 1997 between the Company and Paul V. Hoovler. 10.14 Severance Agreement dated February 12, 1997 between the Company and Matthew R. Hoovler. 10.15 Purchase and Sale Agreement effective January 1, 1997 between the Company and Conoco Inc.* 10.16 Amendments to Chaparral Resources, Inc. Stock Warrant Plan. 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. 10.18 License for the Right to Use the Subsurface in the Republic of Kazakhstan. 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 List of Subsidiaries of the Registrant. 23.1 Consent of Grant Thornton LLP for S-8. 33 23.2 Consent of Ernst & Young LLP for S-8. 27 Financial Data Schedule. *The Exhibits to the Purchase and Sale Agreement have been omitted and will be provided to the United States Securities and Exchange Commission upon request. 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHAPARRAL RESOURCES, INC. a Colorado corporation By /s/ Howard Karren ---------------------------------------- Howard Karren, President, Principal Executive Officer By /s/ Arlo G. Sorensen ---------------------------------------- Arlo G. S rensen, Chief Financial Officer and Principal Accounting Officer Dated: April 11, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Date Name and Title Signature April 11, 1997 Howard Karren, /s/ Howard Karren Director -------------------------- April 11, 1997 Peter G. Dilling, Director April 11, 1997 Jay W. McGee, /s/ Jay W. McGee Direct -------------------------- April 11, 1997 Alan D. Berlin, /s/ Alan D. Berlin Director -------------------------- April 11, 1997 David A. Dahl, /s/ David A. Dahl Director -------------------------- April 11, 1997 Arlo G. Sorensen, /s/ Arlo G. Sorensen Director -------------------------- Contents Reports of Independent Auditors ...............................................1 Audited Consolidated Financial Statements Consolidated Balance Sheets ...................................................3 Consolidated Statements of Operations..........................................5 Consolidated Statements of Cash Flows..........................................6 Consolidated Statements of Changes in Stockholders' Equity.....................8 Notes to Consolidated Financial Statements.....................................9 Supplemental Information - Disclosures About Oil and Gas Producing Activities - Unaudited...........................................24 Report of Independent Auditors The Board of Directors and Stockholders Chaparral Resources, Inc. We have audited the accompanying consolidated balance sheet of Chaparral Resources, Inc. as of November 30, 1996, and the related consolidated statements of operations, cash flows and changes in stockholders' equity for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chaparral Resources, Inc. as of November 30, 1996, and the consolidated results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred recurring operating losses and has no operating assets which are presently generating cash to fund its operating and capital requirements. The Company requires significant additional financing to meet its financial requirements through fiscal 1997. In addition, as discussed in Note 2, the Company's investee, Karakuduk-Munay, Inc. (KKM), has been unable to reregister with the Republic of Kazakstan, which may cause KKM to be declared invalid and be liquidated. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP ERNST & YOUNG LLP Denver, Colorado April 8, 1997 1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders Chaparral Resources, Inc. We have audited the accompanying consolidated balance sheet of Chaparral Resources, Inc. as of November 30, 1995, and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the two years in the period ended November 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chaparral Resources, Inc. as of November 30, 1995, and the consolidated results of its operations and its cash flows for each of the two years in the period ended November 30, 1995, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As shown in the financial statements, the Company incurred a net loss of $704,000 during the year ended November 30, 1995. As discussed in Note 2 to the financial statements, the Company requires significant additional financing to meet its financial requirements. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Grant Thornton LLP GRANT THORNTON LLP Denver, Colorado January 19, 1996 2
Chaparral Resources, Inc. Consolidated Balance Sheets November 30 ------------------------------------- 1996 1995 ------------------------------------- Assets Current assets: Cash and cash equivalents ............................. $ 800,000 $ 501,000 Accounts receivable: Joint interest participants ......................... 8,000 31,000 Oil and gas purchasers .............................. 53,000 46,000 Prepaid expenses ...................................... 40,000 2,000 Oil and gas properties under agreement for sale ....... 306,000 -- ------------ ----------- Total current assets ..................................... 1,207,000 580,000 Property and equipment--at cost: Oil and gas properties--full cost: United States: Subject to depletion .............................. -- 16,149,000 Not subject to depletion .......................... -- 40,000 Republic of Kazakstan (Karakuduk Field)-- not subject to depletion .......................... 11,189,000 -- Less accumulated depletion and depreciation and impairment .................................... -- (15,722,000) ------------ ----------- 11,189,000 467,000 Furniture, fixtures and equipment ..................... 441,000 197,000 Less accumulated depreciation ......................... (198,000) (177,000) ------------ ----------- 243,000 20,000 ------------ ----------- 11,432,000 487,000 Other assets: Investment in and advances to affiliates .............. -- 4,507,000 Cash value of insurance and annuities ................. 8,000 8,000 Due from Karakuduk-Munay, Inc. ........................ 2,012,000 -- Equipment inventory ................................... 27,000 13,000 Other ................................................. 74,000 -- ------------ ----------- 2,121,000 4,528,000 ------------ ----------- Total assets ............................................. $ 14,760,000 $ 5,595,000 ============ =========== 3 November 30 ------------------------------- 1996 1995 ------------------------------- Liabilities and stockholders' equity Current liabilities: Accounts payable: Trade .............................................................. $ 278,000 $ 102,000 Joint interest participants--revenue ............................... 42,000 26,000 Accrued liabilities .................................................. 91,000 86,000 Accounts payable--CAP-G shares ....................................... 744,000 -- ------------ ----------- Total current liabilities ............................................... 1,155,000 214,000 Long-term obligations: Notes payable (including $1,000,000 to related party) ............................................................. 1,106,000 461,000 Accrued compensation ................................................. 385,000 -- Stockholders' equity: Common stock - authorized, 100,000,000 shares and 25,000,000 shares at November 30, 1996 and 1995, respectively, of $.10 par value; issued and outstanding, 37,526,517 and 20,484,192 shares at November 30, 1996 and 1995, respectively ................................................. 3,753,000 2,048,000 Capital in excess of par value ....................................... 20,482,000 12,577,000 Preferred stock - authorized, 1,000,000 shares, no shares issued or outstanding ........................... -- -- Retained earnings (deficit) .......................................... (12,121,000) (9,705,000) ------------ ----------- Total stockholders' equity .............................................. 12,114,000 4,920,000 ------------ ----------- Total liabilities and stockholders' equity .............................. $ 14,760,000 $ 5,595,000 ============ ===========
See accompanying notes. 4
Chaparral Resources, Inc. Consolidated Statements of Operations Year ended November 30 ------------------------------------------------------------ 1996 1995 1994 ------------------------------------------------------------ Revenue: Oil and gas sales ....................................... $ 147,000 $ 255,000 $ 374,000 Costs and expenses: Production costs ........................................ 37,000 115,000 232,000 Write-down of oil and gas properties .................... -- 619,000 416,000 Depreciation and depletion .............................. 25,000 74,000 120,000 General and administrative .............................. 2,336,000 166,000 94,000 ------------ ---------- ------------ 2,398,000 974,000 862,000 ------------ ---------- ------------ Loss from operations ....................................... (2,251,000) (719,000) (488,000) Other income (expense): Interest income ......................................... 85,000 25,000 13,000 Interest expense ........................................ (90,000) (17,000) (4,000) Exchange loss ........................................... (12,000) -- -- Other, net .............................................. 89,000 7,000 5,000 ------------ ---------- ------------ 72,000 15,000 14,000 ------------ ---------- ------------ Loss before extraordinary item ............................. (2,179,000) (704,000) (474,000) Extraordinary loss on extinguishment of long-term debt .......................................... (237,000) -- -- ------------ ---------- ------------ Net loss ................................................... $ (2,416,000) $ (704,000) $ (474,000) ============ ========== ============ Net loss per share before extraordinary item .................................................... $ (.07) $ (.04) $ (.02) Extraordinary loss per share ............................... $ (.01) $ -- $ -- Net loss per share ......................................... $ (.08) $ (.04) $ (.02) Weighted average number of shares outstanding ............................................. 32,081,382 18,865,454 15,064,856
See accompanying notes. 5
Chaparral Resources, Inc. Consolidated Statements of Cash Flows Year ended November 30 ------------------------------------------------------- 1996 1995 1994 ------------------------------------------------------- Cash flows from operating activities Net loss ......................................................... $(2,416,000) $ (704,000) $ (474,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and depletion .................................. 25,000 74,000 120,000 Decrease in deferred compensation ........................... -- -- (40,000) Write-down of oil and gas properties ........................ -- 619,000 416,000 Stock issued for services and bonuses ....................... -- 27,000 8,000 Amortization of note discount ............................... -- 17,000 -- Loss on extinguishment of debt .............................. 237,000 -- -- Changes in assets and liabilities: (Increase) decrease in: Accounts receivable ..................................... 16,000 218,000 22,000 Prepaid expenses ........................................ 10,000 -- -- Increase (decrease) in: Accounts payable ........................................ 108,000 (64,000) 47,000 Accrued liabilities ..................................... (355,000) (59,000) (9,000) Accrued compensation .................................... 385,000 -- -- ----------- ---------- ----------- Net cash provided by (used in) operating activities .................................................... (1,990,000) 128,000 90,000 Cash flows from investing activities Additions to property and equipment .............................. (208,000) (86,000) (255,000) Additions to oil and gas properties .............................. (652,000) -- -- Acquisition of additional interest in CAP-G, net of cash acquired ................................... (3,269,000) -- -- Investment in foreign oil and gas properties ..................... -- (1,088,000) (256,000) Proceeds from sale of interest in oil and gas properties .................................................... 161,000 41,000 71,000 Decrease in cash value of insurance and annuities ................................................. -- 40,000 40,000 Decrease in minority interest .................................... -- (16,000) (1,000) (Increase) decrease in equipment inventory ....................... (14,000) 1,000 -- Sale (purchase) of bonds ......................................... -- 299,000 (299,000) Advances to Karakuduk-Munay, Inc. ................................ (1,778,000) -- -- Redemption of certificates of deposit ............................ -- 20,000 146,000 Increase in other assets ......................................... (74,000) -- -- ----------- ---------- ----------- Net cash used in investing activities ............................ (5,834,000) (789,000) (554,000) 6 Chaparral Resources, Inc. Consolidated Statements of Cash Flows (continued) Year ended November 30 ----------------------------------------------------------- 1996 1995 1994 ----------------------------------------------------------- Cash flows from financing activities Proceeds from notes payable ................................. $ 1,650,000 $ 750,000 $ -- Repayment of note payable ................................... (750,000) -- -- Proceeds from warrant exercise .............................. 316,000 -- -- Proceeds from issuance of capital stock ..................... -- 94,000 260,000 Net proceeds from private placement ......................... 6,907,000 -- -- ----------- ---------- ----------- Net cash provided by financing activities ............................................... 8,123,000 844,000 260,000 ----------- ---------- ----------- Net increase (decrease) in cash and cash equivalents ......................................... 299,000 183,000 (204,000) Cash and cash equivalents at beginning of year .................................................. 501,000 318,000 522,000 ----------- ---------- ----------- Cash and cash equivalents at end of year .................... $ 800,000 $ 501,000 $ 318,000 =========== ========== =========== Supplemental cash flow disclosure Interest paid ............................................ $ 36,000 $ 5,000 $ 4,000 Supplemental schedule of noncash investing and financing activities Common stock issued for acquisition of CAP-G ............................................. $ 1,833,000 $ -- $ -- Accounts payable--CAP-G shares ......................... 744,000 -- -- Common stock issued for investment in affiliate ......................................... -- 3,162,000 -- Discount recognized for note issued with detachable stock warrants ....................... 290,000 306,000 -- Common stock issued upon conversion of debentures ............................. 264,000 -- 75,000
See accompanying notes. 7
Chaparral Resources, Inc. Consolidated Statements of Changes in Stockholders' Equity Capital Common Stock in Excess Retained ---------------------------- of Par Earnings Shares Amount Value (Deficit) Total -------------------------------------------------------------------------------- Balance at November 30, 1993 ................ 14,923,625 $ 1,492,000 $ 9,202,000 $ (8,527,000) $ 2,167,000 Warrants exercised for capital stock .................................... 650,625 65,000 195,000 -- 260,000 Conversion of debentures for capital stock ............................ 200,067 20,000 55,000 -- 75,000 Capital stock issued for services ........... 8,000 1,000 6,000 -- 7,000 Net loss .................................... -- -- -- (474,000) (474,000) ------------ ----------- ----------- ------------ ----------- Balance at November 30, 1994 ................ 15,782,317 1,578,000 9,458,000 (9,001,000) 2,035,000 Warrants exercised for capital stock .................................... 265,375 27,000 67,000 -- 94,000 Capital stock issued for investment in affiliate .................. 4,400,000 440,000 2,722,000 -- 3,162,000 Capital stock issued for services ........... 12,500 1,000 9,000 -- 10,000 Capital stock issued for employee and director bonuses ............ 24,000 2,000 15,000 -- 17,000 Debt issuance costs--stock warrants issued .......................... -- -- 306,000 -- 306,000 Net loss .................................... -- -- -- (704,000) (704,000) ------------ ----------- ----------- ------------ ----------- Balance at November 30, 1995 ................ 20,484,192 2,048,000 12,577,000 (9,705,000) 4,920,000 Warrants exercised for capital stock .................................... 857,325 86,000 230,000 -- 316,000 Conversion of debentures for capital stock ............................ 600,000 60,000 204,000 -- 264,000 Capital stock issued for acquisition of additional interest in CAP-G ........................ 1,585,000 159,000 1,674,000 -- 1,833,000 Capital stock issued in private placement ................................ 14,000,000 1,400,000 5,507,000 -- 6,907,000 Debt issuance costs--stock warrants issued .......................... -- -- 290,000 -- 290,000 Net loss .................................... -- -- -- (2,416,000) (2,416,000) ------------ ----------- ----------- ------------ ----------- Balance at November 30, 1996 ................ 37,526,517 $ 3,753,000 $ 20,482,000 $(12,121,000) $ 12,114,000 ============ =========== =========== ============ ===========
See accompanying notes. 8 Chaparral Resources, Inc. Notes to Consolidated Financial Statements November 30, 1996 1. Summary of Significant Accounting Policies Organization Chaparral Resources, Inc. was incorporated in the state of Colorado on January 13, 1972, principally to engage in the exploration, development and production of oil and gas properties. During 1996, Chaparral Resources, Inc. focused substantially all of its efforts on the exploration and development of the Karakuduk Field, located in the central Asian Republic of Kazakstan. Principles of Consolidation and Basis of Presentation The November 30, 1996 consolidated financial statements include the accounts of Chaparral Resources, Inc. and its 90% owned subsidiary, Central Asian Petroleum (Guernsey) Limited ("CAP-G") (see Note 3). Hereinafter, Chaparral Resources, Inc. and CAP-G are collectively referred to as "the Company." CAP-G has a fiscal year end of December 31. All significant intercompany transactions have been eliminated. In 1995, the Company's ownership in CAP-G increased from 25% to 45%. The Company accounted for its investment in CAP-G on the equity method in the 1994 and 1995 financial statements. CAP-G owns a 50% interest in Karakuduk-Munay, Inc. ("KKM"), a Kazakstan Joint Stock Company, which is a participant in an agreement for the exploration, development and production of oil in the Karakuduk Field. CAP-G, and therefore the Company, beginning in 1996 when the Company's ownership in CAP-G exceeded 50%, accounts for its investment in KKM using proportionate consolidation. The 1994 consolidated financial statements include the accounts of Chaparral Resources, Inc. and its 87% owned joint venture, Reservoir Creek Gathering System. All significant intercompany transactions have been eliminated. On April 15, 1995, Chaparral Resources, Inc. sold its 87% interest in this joint venture. Cash and Cash Equivalents Cash equivalents are defined as highly liquid investments purchased with an original maturity of three months or less. 9 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Oil and Gas Property and Equipment The Company uses the full cost method of accounting for its oil and gas properties. All costs incurred directly associated with the acquisition, exploration and development of oil and gas properties are capitalized in cost pools for each country in which the Company operates. The limitation on such capitalized costs is determined in accordance with rules specified by the Securities and Exchange Commission. Capitalized costs are depleted using the units of production method. Sales of Proved Oil and Gas Property Sales of oil and gas properties, whether or not being amortized currently, are accounted for as adjustments of capitalized costs, with no gain or loss recognized unless such adjustments significantly alter the relationship between capitalized costs and proved reserves of oil and gas. A significant alteration would not ordinarily be expected to occur for sales involving less than 25% of the reserve quantities of a given cost center. If gain or loss is recognized on such a sale, total capitalized costs within the cost center are allocated between the reserves sold and reserves retained on the same basis used to compute amortization, unless there are substantial economic differences between the properties sold and those retained, in which case capitalized costs are allocated on the basis of the relative fair values of the properties. Oil and Gas Properties Not Subject to Depletion Costs associated with acquisition and evaluation of unproved properties are excluded from the amortization computation until it is determined if proved reserves can be attributed to the properties. These unevaluated properties are assessed annually for possible impairment and the amount impaired, if any, is added to the amortization base. Costs of exploratory dry holes and geological and geophysical costs not directly associated with specific unevaluated properties are added to the amortization base as incurred. Sales of Unproved Properties Proceeds received from drilling arrangements are credited to the appropriate cost center and recognized as a lower amortization provision as reserves are produced. 10 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Depreciation of Other Property and Equipment Furniture, fixtures and equipment are depreciated using the straight-line method over estimated useful lives which range from three to ten years. Administrative Overhead Reimbursement The Company, as operator of drilling and/or producing properties, was reimbursed by the nonoperators for administration, supervision, office services and warehousing costs on an annually adjusted fixed rate basis per well per month. These charges are applied as a reduction of general and administrative expenses for purposes of the statement of operations. Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") Statement No. 109, Accounting for Income Taxes, which require that taxes be provided on the liability method based upon the tax rate at which items of income and expense are expected to be settled in the Company's tax return. Earnings Per Common Share Earnings (loss) per common and common equivalent share is based on the weighted average number of shares outstanding. Fully diluted earnings per share are not presented because the exercise of stock warrants would be antidilutive. New Accounting Standards In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets to be disposed of. The Company will adopt Statement No. 121 in the first quarter of 1997 and, based on current circumstances, does not believe the effect of adoption will be material. 11 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based Compensation. Statement No. 123 is applicable for fiscal years beginning after December 15, 1995 and gives the option to follow either fair value accounting or Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related Interpretations. The Company has elected to continue to follow APB 25 and related Interpretations in accounting for outstanding stock options. Under APB 25, because the exercise price of the Company's stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation is recognized. However, the Company will be required to provide fair value disclosures relating to stock options effective with the year ending November 30, 1997. Fair Value of Financial Instruments All of the Company's financial instruments, including cash and cash equivalents, trade receivables, notes receivable, and notes payable, have fair values which approximate their recorded values as they are either short-term in nature or carry interest rates which approximate market rates. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Risks and Uncertainties The ability of KKM to realize the carrying value of its assets is dependent on being able to extract, transport and market hydrocarbons. Currently, exports from the Republic of Kazakstan are restricted since they are dependent on limited transport routes and, in particular, access to the Russian pipeline system. Access to such routes is currently restricted. Domestic markets in the Republic of Kazakstan currently do not permit world market price to be obtained. Management believes, however, that over the life of the project, transportation restrictions will be alleviated and prices will be achievable for hydrocarbons extracted to allow full recovery of the carrying value of its assets. 12 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 2. Going Concern The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of November 30, 1996, substantially all of the Company's assets are invested in the development of the Karakuduk Field, a shut-in oil field in the central Asian Republic of Kazakstan, which will require significant additional funding. The Company has incurred recurring operating losses and has no operating assets which are presently generating cash to fund its operating and capital requirements. The Company does not anticipate that its current cash reserves and cash flow from operations will be sufficient to meet its capital requirements through fiscal 1997. Should the Company not meet its capital requirements under the license agreement to develop the Karakuduk Field, the Company's rights under the agreement may be terminated. The Company believes that additional financing will be available; however, there is no assurance that additional financing will be available, or if available, that it can be obtained on terms favorable or affordable to the Company. The Company has a 45% beneficial interest in KKM, which owns 100% of the right to develop the Karakuduk Field (Note 4). The Company's continued existence as a going concern is dependent upon the success of future operations, which is, in the near term, dependent on the successful financing and development of the Karakuduk Field, of which there is no assurance. On February 1, 1997, KKM was informed that a Kazakstan Presidential Edict had been issued announcing the liquidation of Munaygaz, the government-owned company which holds a 20% interest in KKM. As a result of this action, KKM was unable to complete its re-registration as required by Kazakstan regulations, resulting in the risk that applicable judicial bodies could initiate legal proceedings to declare KKM invalid, which could lead to liquidation. Management of the Company believes, based on verbal assurances from Kazakstan authorities, the Kazakstan government will allow the assignment of the Munaygaz interests and allow the re-registration to occur and that KKM will not be declared invalid. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. 13 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 3. Acquisition of Additional Interest in CAP-G In September 1994, the Company acquired a 25% interest in CAP-G, with headquarters in Ankara, Turkey. CAP-G has a 50% interest in KKM, which owns 100% of the right to develop the Karakuduk Field. In April 1995, the Company acquired all of the stock of Central Asian Petroleum, Inc. ("CAP-D"), in exchange for 4,400,000 shares of the Company's common stock. Of the 4,400,000 shares issued, 4,250,000 shares were to be held in escrow and released from time to time in connection with the development of the Karakuduk Field. Of the shares held in escrow, 3,000,000 shares have been released and delivered. As a result of the acquisition, the Company's beneficial interest in CAP-G increased to 45%. During 1996, the Company acquired an additional 45% interest in CAP-G from various entities, increasing the Company's ownership interest in CAP-G to 90% and its beneficial interest in KKM to 45%. Total consideration for this acquisition was approximately $6,058,000, consisting of $3,481,000 in cash, $1,833,000 from the issuance of 1,585,000 shares of its common stock and a purchase commitment for the remaining $744,000. The Company paid $200,000 of this commitment in December 1996. The Company was to pay the remaining amount on or before March 11, 1997. The Company is currently negotiating to obtain an extension of the due date of the remaining payment. The Company has accounted for this increase in ownership percentage in CAP-G under the purchase method of accounting, and has allocated substantially all the purchase price to the Karakuduk Field. The Company has the option to acquire the remaining 10% interest of CAP-G shares for an additional $1,625,000 and 200,000 shares of the Company's common stock at any time following completion of the initial purchase, and prior to December 11, 1997. 4. Oil and Gas Properties--Full Cost KKM has undertaken certain appraisal and feasibility work in 1996 in order to ascertain the most appropriate future development and drilling program for the Karakuduk Field in Kazakstan. The results are still being analyzed. Until the future program has been agreed upon, no additional development work or hydrocarbon production will occur. The estimated future development expenditure is significant in order to ascertain the quantities of proved reserves attributable to the Karakuduk Field. All costs capitalized related to the Karakuduk license are included in oil and gas properties not subject to depletion. 14 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 4. Oil and Gas Properties--Full Cost (continued) Management fees related to salary costs of individuals directly associated with exploration activity on the Karakuduk Field have been capitalized along with the license acquisition costs and geological and geophysical expenditures. No basis for allocation of other overhead costs has been developed by the management of KKM and hence such overhead costs are expensed as incurred. While the future ability of the Company to export hydrocarbons and therefore realize world market prices is uncertain under current restricted transport options in the Republic of Kazakstan, management believes that over the life of the project as a whole, future cash flows justify the carrying amount of the oil and gas properties. Therefore, no impairment provision has been reflected in these financial statements. 5. Long-Term Debt Long-term obligations at November 30, 1996 consisted of convertible notes payable to private corporations and individuals in the amount of $1,350,000. Of the $1,350,000, $1,000,000 was received from two private companies, one of which is a beneficial owner of over 5% of the outstanding common stock of the Company. Under the terms of the notes, the Company agreed to add two directors selected by the private companies to the Company's Board of Directors. The notes are due on the earlier of May 31, 1998 or the third business day following the receipt by the Company of any proceeds from one of the following sources: (1) the sale or issuance of its securities, or (2) any debt financing provided or guaranteed by the Overseas Private Investment Corporation or other governmental entity. Interest is payable monthly at a rate of 8%. As additional consideration for these notes, the Company issued to the holders, warrants to purchase 337,500 shares of the Company's common stock at $.25 per share, exercisable at any time, but no later than November 30, 1999. The notes have been discounted by the fair value of the warrants. The discount will be amortized over the life of the notes. The following is a summary of the notes payable at November 30, 1996: Notes payable $1,350,000 Less unamortized discount 244,000 ---------- $1,106,000 ========== 15 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 5. Long-Term Debt (continued) The notes are subject to a provision whereby, if they are not repaid by May 31, 1997, the Company will issue 135,000 additional warrants to the holders. Furthermore, if the notes are not repaid before November 30, 1997, the Company is required to issue 270,000 additional warrants to the holders. Aggregate maturities of long-term debt as of November 30, 1996 are as follows: 1997 $ -- 1998 1,350,000 During 1995, the Company issued a note payable to a private corporation in the amount of $750,000. As additional consideration for this note, the Company issued to the holder warrants to purchase 500,000 shares of the Company's common stock, and to a private corporation, as a finder's fee, warrants to purchase 200,000 shares, at $.25 per share, exercisable at any time, but no later than October 30, 1998. The note was discounted by the difference between the market value of the Company's common stock on the date of issuance and the exercise price of the warrants. During 1996, the note was repaid by the Company at the face value of $750,000. The Company has recorded an extraordinary loss on extinguishment of debt for the unamortized discount of approximately $237,000. 6. Common Stock and Stock Warrants Stock Warrant Plan During 1989, the Board of Directors approved a stock warrant plan for key employees and directors. The Company has reserved 1,175,000 shares of its common stock for issuance under the plan. Warrants must be granted and exercised within a 10-year period ending April 30, 1999. The exercise price must be at least equal to the fair market value of the Company's common stock on the date of grant. Immediately following approval of the plan by the Board of Directors, warrants for 1,175,000 shares were granted with an exercise price of $.28 per share. The plan was approved in 1990 by the Company's stockholders. Warrants for 225,000 and 100,000 shares were exercised for values of $63,000 and $28,000 during 1996 and 1995, respectively. 16 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 6. Common Stock and Stock Warrants (continued) Stock Offering During 1994, 650,625 of the warrants issued in the Company's 1993 private placement were exercised for the purchase of shares of common stock. The exercise price was $.40 per share, for a total of $260,000. During 1995, 165,375 of the warrants issued in the private placement were exercised for the purchase of shares of common stock. The exercise price was $.40 per share, for a total of $66,000. During 1996, 632,325 of the warrants issued in the private placement were exercised at an exercise price of $.40 per share, for a total of $252,930. As of November 30, 1996, all warrants issued in connection with the 1993 private placement have been exercised. During 1996, the Company sold 14,000,000 shares of common stock in a private placement at a price of $.50 per share. In connection with the private placement, the Company issued warrants to purchase 1,022,000 shares to the sales agent as a commission, at an exercise price of $.25 per share. As of November 30, 1996, no warrants have been exercised. The following table summarizes all stock purchase warrant activity for the year ended November 30, 1996:
Number of Exercise Stock Price Warrants Range ---------------------------- Outstanding, November 30, 1995 ............. 2,407,325 $.25 - $.40 Granted .................................... 1,439,500 $.25 - $.40 Exercised .................................. (857,325) $.28 - $.40 ---------- ---------- Outstanding, November 30, 1996 ............. 2,989,500 $.25 - $.28 ========== ==========
17 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 7. Income Taxes The following is a summary of the provision for income taxes:
Year ended November 30 ------------------------------------- 1996 1995 1994 ------------------------------------- Income taxes (benefit) computed at federal statutory rate .......... $(762,000) $(241,000) $(161,000) Change in asset valuation allowance .......................... 848,000 298,000 256,000 Other ................................ (86,000) (57,000) (95,000) --------- -------- --------- Income taxes ......................... $ -- $ -- $ -- ========= ======== =========
The components of the Company's deferred tax assets and liabilities under FASB No. 109 are as follows:
Year ended November 30 ------------------------------------- 1996 1995 1994 ------------------------------------- Deferred tax assets: Net operating loss carryforwards ................ $ 4,958,000 $ 4,131,000 $ 3,934,000 Full cost pool capitalization ... 267,000 246,000 145,000 Valuation allowance ............. (5,225,000) (4,377,000) (4,079,000) ----------- ---------- ---------- Deferred tax assets ............... $ -- $ -- $ -- =========== ========== ==========
There were no deferred tax assets or income tax benefits recorded in the financial statements for net deductible temporary differences or net operating loss carryforwards due to the fact that the realization of the related tax benefits is not considered likely. At November 30, 1996, the Company has tax loss carryforwards of approximately $14,500,000 available to offset future taxable income. These carryforwards will expire at various times between 1997 and 2011. The Company has issued a significant number of shares of common stock during the year ended November 30, 1996 and has also issued warrants. The Company is also currently negotiating for additional capital which, if successful, will require additional shares of stock to be issued. The changes in ownership may significantly restrict the use of net operating loss carryforwards. At November 30, 1996, unused statutory depletion 18 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 7. Income Taxes (continued) carryforwards, which have unlimited duration, are approximately $567,000. The unused investment tax credit carryover was approximately $86,000 at November 30, 1996 and expires through 2000. The loss carryforward at November 30, 1996 for financial reporting purposes is approximately $11,264,000. The difference between the loss carryforward for financial reporting and income tax purposes results principally from the difference in book and tax basis of oil and gas properties. 8. Related Party Transactions The Company paid a director $24,000 during 1995 and 1994 for public relations consulting services. During 1996, the Company paid a basic consulting fee of approximately $500,000 to MD Petroleum ("MDI"), a private company of which the stockholders include two directors of the Company, for assistance in seeking means for meeting the Company's funding obligation for the Karakuduk Project. The Company leased office space under a noncancelable operating lease which expired on March 31, 1997. Beginning April 1, 1997, the Company leases office space with MDI at a rate of approximately $2,000 per month. This lease expires in November 1997. Net rent expense was $46,000 for 1996, $36,000 for 1995, and $37,000 for 1994. Related party sublease income included in rent expense was $6,000 for 1994. There was no sublease income in 1995 or 1996. 9. Major Customers The Company is presently engaged in exploration for and development of oil and gas. The Company sells its production under contracts with various purchasers, with certain domestic purchasers accounting for sales of 10% or more per year as follows: 1996 32% 1995 16% 1994 15%, 13% and 11% 19 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 10. Royalty Participation Plan During 1982, the Company adopted a Royalty Participation Plan for the employees of the Company. Under the plan, the Company may contribute to a trust fund, royalty interests acquired by the Company together with any proceeds of production received by the Company which are attributable to such royalty interests. The net income of the trust fund will be distributed yearly to the participants based on years of service and position in the Company. Distributions were $12,000 for 1996, $12,000 for 1995 and $10,000 for 1994. In February 1997, as part of the severance agreement with the former Chief Executive Officer of the Company (see Note 14), the Company assigned its interest in the Royalty Participation Plan to the former Chief Executive Officer. 11. Accrued Compensation On August 19, 1996, the Company's Board of Directors awarded the former Chief Executive Officer and the former Vice President of the Company cash bonuses totaling $210,000 as recognition for past and present services to be used to exercise certain warrants granted in connection with the Company's 1989 Stock Warrant Plan. These bonuses will not become payable until the earlier of (i) completion of a sale or farmout by the Company of all or a portion of its interest in the Karakuduk Project, or (ii) the date when the Company makes a public disclosure of a sale or farmout of the Karakuduk Project. In connection with the appointment of Mr. Howard Karren as the Chairman of the Board of Directors of the Company during fiscal 1996, the Company agreed to transfer to Mr. Karren, or his designee, 350,000 shares of restricted stock of the Company at a future date selected by Mr. Karren. The Company has recorded accrued compensation for this transaction in the amount of $175,000. 12. Defined Contribution Plans Effective December 31, 1990, the Company adopted a new defined contribution plan (the "Plan") which covers all full-time eligible employees. Contributions are determined as a percent of each covered employee's salary and are funded as accrued. Plan contributions for the Company were $27,000 in 1995 and $26,000 in 1994, of which $20,000 in 1995 and $20,000 in 1994 was attributable to the President of the Company. 20 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 12. Defined Contribution Plans (continued) The Company also adopted a 401(k) plan covering all full-time employees, effective January 1, 1991. Employee contributions are in the form of salary reductions up to the maximum percentage allowable under the Internal Revenue Code. There are no employer matching contributions. During 1996, the Plan merged into the 401(k) plan; as such, there were no contributions made by the Company during 1996. 13. Commitments and Contingencies Under the terms of the license agreement, approved by the Ministry of Oil and Gas Industries of the Republic of Kazakstan, granting KKM the right to develop the Karakuduk Field, KKM has committed to minimum capital expenditures of approximately $10 million by August 31, 1997, $35 million by August 31, 1998 and $12 million by August 31, 1999. 14. Subsequent Events Issuance of Note Payable On December 6, 1996, the Company entered into a $500,000 note payable agreement with a private company. The note is due by May 29, 1998, or the third business day following the Company's receipt of a minimum of $1,850,000 from one of the following sources: (1) the sale or issuance of its securities; (2) any debt financing provided or guaranteed by the Overseas Private Investment Corporation or other governmental entity; (3) the sale or farmout of assets for cash; or (4) any other form of financing. Interest is payable monthly at a rate of 8%. In connection with the issuance of this note, the Company issued warrants to purchase 125,000 shares of the Company's common stock to the holder. The exercise price of the warrants is $.25 per share, exercisable at any time, but no later than November 30, 1999. The note is also subject to a provision whereby, if the note is not repaid by May 31, 1997 and November 30, 1997, the Company is required to issue 50,000 and 100,000 additional warrants, respectively, to the holder. Severance Agreement Paul V. Hoovler, the former Chief Executive Officer and President of the Company, entered into a severance agreement ("Agreement") with the Company effective February 12, 1997. Pursuant to the Agreement, Mr. Hoovler receives his salary and unpaid vacation time accrued through February 12, 1997. Also, the 21 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 14. Subsequent Events (continued) Company agreed to amend the Company's 1989 Stock Warrant Plan to enable Mr. Hoovler to transfer the warrants granted to him in 1996 to a member of his family or a trust created by him. Further, Mr. Hoovler was granted warrants to purchase 100,000 shares of the Company's common stock at an exercise price of $.85 per share, for a period of four years, and warrants to purchase 100,000 shares of the Company's common stock at an exercise price of $1.25 per share that become exercisable on January 1, 1998, and remain exercisable for a period of four years from such date. Also, pursuant to the Agreement, the Company agreed to assign to Mr. Hoovler, or an entity controlled by Mr. Hoovler, the existing overriding royalty interest ("ORRI") that the Company holds in approximately 89 wells. Such assignment will be for a three-year period. In exchange for the assignment, Mr. Hoovler agreed to pay a former employee of the Company 10% of the net revenues received from such ORRI during the three-year period. Uzbekistan Project The Company has been negotiating an agreement pursuant to which the Company would acquire 100% of the issued and outstanding capital stock of MDI. At the time of the acquisition, the only asset that MDI would have would be a 5% interest in a joint venture that Enron Oil & Gas Uzbekistan, Ltd. is attempting to negotiate for the development of natural gas fields in Uzbekistan. It is currently contemplated that if the agreement is consummated, the Company would issue MDI's stockholders an as of yet undetermined number of shares of the Company's common stock in exchange for their MDI shares. On January 8, 1997, the Company agreed to issue 180,000 shares of the Company's common stock in consideration for the exclusive right, until July 7, 1997, to acquire MDI. The Company also granted Enron Oil & Gas Uzbekistan, Ltd. registration rights with respect to the 180,000 shares. In the interim, the principal shareholders of MDI have agreed that if the Company does not acquire MDI by July 7, 1997, the principal stockholders will transfer 180,000 shares of the Company's common stock owned by them to the Company to replace the 180,000 shares issued by the Company to Enron Oil & Gas Uzbekistan, Ltd. 22 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 14. Subsequent Events (continued) Sale of Domestic Oil and Gas Properties Effective January 1, 1997, the Company entered into an agreement to sell its domestic oil and gas properties for a sales price of approximately $270,000. Accordingly, the Company's domestic oil and gas properties have been classified as oil and gas properties under agreement for sale in the balance sheet at November 30, 1996. 23 Supplemental Information - Disclosures About Oil and Gas Producing Activities - Unaudited The following supplemental information regarding the oil and gas activities of the Company is presented pursuant to the disclosure requirements promulgated by the Securities and Exchange Commission and Statement of Financial Accounting Standards ("SFAS") No. 69, Disclosures About Oil and Gas Producing Activities. As discussed in Note 14, the Company entered into an agreement effective January 1, 1997 to sell its domestic oil and gas properties. Accordingly, the Company's domestic oil and gas properties have been classified as oil and gas properties under an agreement for sale at November 30, 1996 and no disclosures for proved reserves or future cash flows have been made at November 30, 1996. In addition, because of the uncertainties surrounding the development of the Karakuduk Field, no proved reserves have been attributed to the field. The following estimates of reserve quantities and related standardized measure of discounted net cash flow are estimates only, and do not purport to reflect realizable values or fair market values of the Company's reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Additionally, the price of oil has been very volatile and downward changes in prices can significantly affect quantities that are economically recoverable. Accordingly, these estimates are expected to change as future information becomes available and the changes may be significant. All of the Company's proved reserves are located in the United States. Proved reserves are estimated reserves of crude oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment and operating methods. The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses. The estimated future net cash flows are then discounted using a rate of 10% a year to reflect the estimated timing of the future cash flows. 24 Supplemental Information - Disclosures About Oil and Gas Producing Activities - Unaudited (continued)
Proved Oil and Gas Reserve Quantities (All Within the United States) Oil Gas reserves reserves (bbls.) (Mcf.) ----------------------- Balance November 30, 1993 .......................... 141,748 2,305,142 Revisions of previous estimates .................... (125) (455,946) Sales of reserves .................................. (20,392) (95,714) Extensions, discoveries and other additions ........ 1,745 1,700,289 Production ......................................... (11,286) (159,041) ---------- ---------- Balance November 30, 1994 .......................... 111,690 3,294,730 Revisions of previous estimates .................... (1,438) (98,536) Sales of reserves .................................. (36,425) (10,228) Extensions, discoveries and other additions ........ 582 9,375 Production ......................................... (8,224) (132,924) ---------- ---------- Balance November 30, 1995 .......................... 66,185 3,062,417 Revisions of previous estimates .................... (58,749) 18,703 Sales of reserves .................................. (531) (34,417) Extensions, discoveries and other additions ........ 267 6,638 Production ......................................... (1,737) (96,906) Transfer to oil and gas properties under agreement for sale ........................................ (5,435) (2,956,435) ---------- ---------- Balance November 30, 1996 .......................... -- -- ========== ========== Proved developed reserves: November 30, 1994 ............................... 52,740 1,103,203 November 30, 1995 ............................... 7,235 870,890 November 30, 1996 ............................... -- --
25 Supplemental Information - Disclosures About Oil and Gas Producing Activities - Unaudited (continued)
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves Year ended November 30 ----------------------------------------- 1996 1995 1994 ----------------------------------------- Future cash inflows .............. $ -- $ 3,449,000 $ 5,041,000 Future production and development costs ......................... -- (2,478,000) (3,051,000) Future income tax expenses ....... -- -- -- ----------- ---------- ---------- Future net cash flows ............ -- 971,000 1,990,000 10% annual discount for estimated timing of cash flows .......... -- (544,000) (907,000) ----------- ---------- ---------- Standardized measure of discounted future net cash flows ......... $ -- $ 427,000 $ 1,083,000 =========== ========== ==========
The following are the principal sources of changes in the standardized measure of discounted future net cash flows:
Year ended November 30 ---------------------------------------- 1996 1995 1994 ---------------------------------------- Beginning balance .................. $ 427,000 $ 1,084,000 $ 1,360,000 Expenditures which reduced future development costs ............... -- (3,000) (146,000) Acquisition of proved reserves ..... -- -- -- Sale of proved reserves ............ (54,000) (81,000) (102,000) Sales and transfers of oil and gas produced, net of production costs (110,000) (140,000) (143,000) Net increase (decrease) in price ... 860,000 (593,000) (568,000) Net decrease in costs .............. -- 247,000 3,000 Extensions and discoveries ......... 17,000 165,000 526,000 Revisions of previous quantity estimates ....................... (91,000) (38,000) (214,000) Accretion of discount .............. 99,000 108,000 136,000 Effect of change in timing and other 253,000 (322,000) 232,000 Transfer to oil and gas properties under agreement for sale ........ (1,401,000) -- -- ----------- ---------- ---------- Ending balance ..................... $ -- $ 427,000 $ 1,084,000 =========== ========== ==========
26 Supplemental Information - Disclosures About Oil and Gas Producing Activities - Unaudited (continued)
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves (continued) Year ended November 30 -------------------------------------- 1996 1995 1994 -------------------------------------- Costs Incurred Property acquisition costs-- unproved leases .................... $ -- $ -- $ 7,000 Property acquisition costs-- proved properties .................. -- 30,000 37,000 Exploration costs ..................... -- -- Development costs ..................... -- 30,000 146,000 Production Costs Lease operating expense ............... $ 26,000 $ 95,000 $ 176,000 Production tax ........................ 11,000 20,000 56,000 ----------- ---------- ----------- $ 37,000 $ 115,000 $ 232,000 =========== ========== =========== Other Information Net revenue (revenue less production costs, ad valorem and severance taxes) ............................. $ 110,000 $ 140,000 $ 142,000 Amortization per equivalent barrel of production* ..................... 1.40 2.33 3.18 Price per bbl. (oil) .................. 17.53 14.27 12.75 Production cost per bbl. (oil) ........ 2.13 6.34 8.21 Price per Mcf. (gas) .................. 1.17 1.02 1.44 Production cost per Mcf. (gas) ........ .34 .47 .86 Price per net equivalent bbl.* ........ 8.22 8.33 9.86 Production cost per net equivalent bbl 2.07 3.78 6.06
* Natural gas converted to equivalent barrels using conversion ratio of 6:1. 27 Supplemental Information - Disclosures About Oil and Gas Producing Activities - Unaudited (continued)
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves (continued) Year ended November 30 -------------------------------------- 1996 1995 1994 -------------------------------------- Present value of proved reserves: Proved developed ...................... $ -- $ 266,000 $ 650,000 Proved undeveloped .................... -- 161,000 433,000 ---------- --------- --------- Total ................................. $ -- $ 427,000 $1,083,000 ========== ========= ========= Future net revenues of proved reserves: Proved developed .................... $ -- $ 383,000 $ 950,000 Proved undeveloped .................. -- 588,000 1,040,000 ---------- --------- ---------- Total ............................... $ -- $ 971,000 $1,990,000 ========== ========= ==========
28 EXHIBIT INDEX Exhibit Description Page No. - ------- ----------- -------- 2.1 Stock Acquisition Agreement and Plan of Reorganization dated N/A April 12, 1995 between Chaparral Resources, Inc., and the Shareholders of Central Asian Petroleum, Inc., incorporated by reference to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 2.2 Escrow Agreement dated April 12, 1995 between Chaparral N/A Resources, Inc., the Shareholders of Central Asian Petroleum, Inc. and Barry W. Spector, incorporated by reference to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 2.3 Amendment to Stock Acquisition Agreement and Plan of N/A Reorganization dated March 10, 1996 between Chaparral Resources, Inc., and the Shareholders of Central Asian Petroleum, Inc. 3.1 Restated Articles of Incorporation and Amendments, incorporated N/A by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 3.2 Articles of Amendment to the Restated Articles of Incorporation N/A dated April 20, 1988, incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1993. 3.3 Bylaws, as amended through January 3, 1997. 3.4 Articles of Amendment to the Restated Articles of Incorporation N/A and Amendments dated June 21, 1995, incorporated by reference to Exhibit B to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 3.5 Articles of Amendment to the Restated Articles of Incorporation N/A and Amendments dated July 17, 1996, incorporated by reference to Exhibit 3.5 to the Company's Registration Statement No. 333-7779. 10.1 Royalty Participation Plan dated June 15, 1982, incorporated by N/A 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 N/A 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 N/A 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 N/A 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, N/A 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 N/A 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 N/A 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 From 10-K for the fiscal year ended November 30, 1995. 10.8 Amendment, effective March 4, 1996, to the Letter Agreement N/A 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 From 10-K for the fiscal year ended November 30, 1995. 10.9 Warrant Certificate entitling Allen & Company to purchase up to N/A 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 N/A Petroleum, Inc., incorporated by reference to Exhibit 10.10 to the Company's Registration Statement No. 333-7779. 10.11 Promissory Notes and Modification of Promissory Notes N/A 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. 10.13 Severance Agreement dated February 12, 1997 between the Company and Paul V. Hoovler. 10.14 Severance Agreement dated February 12, 1997 between the Company and Matthew R. Hoovler. 10.15 Purchase and Sale Agreement effective January 1, 1997 between the Company and Conoco Inc.* 10.16 Amendments to Chaparral Resources, Inc. Stock Warrant Plan. 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. 10.18 License for the Right to Use the Subsurface in the Republic of Kazakhstan. 16 Letter dated July 23, 1996 from Grant Thornton LLP confirming the N/A 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 List of Subsidiaries of the Registrant. 23.1 Consent of Grant Thornton LLP for S-8. 23.2 Consent of Ernst & Young LLP for S-8. 27 Financial Data Schedule. EX-3.3 2 BYLAWS, AS AMENDED As Amended January 3, 1997 BYLAWS OF CHAPARRAL RESOURCES, INC. ARTICLE Offices The principal office of the corporation shall be designated from time to time by the corporation and may be within or outside of Colorado. The corporation may have such other offices, either within or outside Colorado, as the board of directors may designate or as the business of the corporation may require from time to time. The registered office of the corporation required by the Colorado Business Corporation Act to be maintained in Colorado may be, but need not be, identical with the principal office, and the address of the registered office may be changed from time to time by the board of directors. ARTICLE I Shareholders Section 1. Annual Meeting. The annual meeting of the shareholders shall be held each year on a date and at a time fixed by the board of directors of the corporation (or by the chairman of the board or the president in the absence of action by the board of directors), for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the election of directors is not held on the day fixed as provided herein for any annual meeting of the shareholders, or any adjournment thereof, the board of directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as it may conveniently be held. A shareholder may apply to the district court in the county in Colorado where the corporation's principal office is located or, if the corporation has no principal office in Colorado, to the district court of the county in which the corporation's registered office is located to seek an order that a shareholder meeting be held (i) if an annual meeting was not held within six months after the close of the corporation's most recently ended fiscal year or fifteen months after its last annual meeting, whichever is earlier, or (ii) if the shareholder participated in a proper call of or proper demand for a special meeting and notice of the special meeting was not given within thirty days after the date of the call or the date the last of the demands necessary to require calling of the meeting was received by the corporation, or the special meeting was not held in accordance with the notice. Section 2. Special Meetings. Unless otherwise prescribed by statute, special meetings of the shareholders may be called for any purpose by the chairman of the board, by the president or by the board of directors. The president shall call a special meeting of the shareholders if the corporation receives one or more written demands for the meeting, stating the purpose or purposes for which it is to be held, signed and dated by holders of shares representing at least ten percent of all the votes entitled to be cast on any issue proposed to be considered at the meeting. Section 3. Place of Meeting. The board of directors may designate any place, either within or outside Colorado, as the place for any annual meeting or any special meeting called by the board of directors. A waiver of notice signed by all shareholders entitled to vote at a meeting may designate any place, either within or outside Colorado, as the place for such meeting. If no designation is made, or if a special meeting is called other than by the board, the place of meeting shall be the principal office of the corporation. Section 4. Notice of Meeting. Written notice stating the place, date, and hour of the meeting shall be given not less than ten nor more than sixty days before the date of the meeting, except that (i) if the number of authorized shares is to be increased, at least thirty days' notice shall be given, or (ii) any other longer notice period is required by the Colorado Business Corporation Act. Notice of a special meeting shall include a description of the purpose or purposes of the meeting. Notice of an annual meeting need not include a description of the purpose or purposes of the meeting except the purpose or purposes shall be stated with respect to (i) an amendment to the articles of incorporation of the corporation, (ii) a merger or share exchange in which the corporation is a party and, with respect to a share exchange, in which the corporation's shares will be acquired, (iii) a sale, lease, exchange or other disposition, other than in the usual and regular course of business, of all or substantially all of the property of the corporation or of another entity which this corporation controls, in each case with or without the goodwill, (iv) a dissolution of the corporation, or (v) any other purpose for which a statement of purpose is required by the Colorado Business Corporation Act. Notice shall be given personally or by mail, private carrier, telegraph, teletype, electronically transmitted facsimile or other form of wire or wireless communication by or at the direction of the president, the secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed and if in a comprehensible form, such notice shall be deemed to be given and effective when deposited in the United States mail, addressed to the shareholder at his address as it appears in the corporation's current record of shareholders, with postage prepaid. If notice is given other than by mail, and provided that such notice is in a comprehensible form, the notice is given and effective on the date received by the shareholder. If requested by the person or persons lawfully calling such meeting, the secretary shall give notice thereof at corporate expense. No notice need be sent to any shareholder if three successive notices mailed to the last known address of such shareholder have been returned as undeliverable until such time as another address for such shareholder is made known to the corporation by such shareholder. In order to be entitled to receive notice of any meeting, a shareholder shall advise the corporation in writing of any change in such shareholder's mailing address as shown on the corporation's books and records. - 2 - When a meeting is adjourned to another date, time or place, notice need not be given of the new date, time or place if the new date, time or place of such meeting is announced before adjournment at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which may have been transacted at the original meeting. If the adjournment is for more than 120 days, or if a new record date is fixed for the adjourned meeting, a new notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting as of the new record date. A shareholder may waive notice of a meeting before or after the time and date of the meeting by a writing signed by such shareholder. Such waiver shall be delivered to the corporation for filing with the corporate records. Further, by attending a meeting either in person or by proxy, a shareholder waives objection to lack of notice or defective notice of the meeting unless the shareholder objects at the beginning of the meeting to the holding of the meeting or the transaction of business at the meeting because of lack of notice or defective notice. By attending the meeting, the shareholder also waives any objection to consideration at the meeting of a particular matter not within the purpose or purposes described in the meeting notice unless the shareholder objects to considering the matter when it is presented. Section 5. Fixing of Record Date. For the purpose of determining shareholders entitled to (i) notice of or vote at any meeting of shareholders or any adjournment thereof, (ii) receive distributions or share dividends, or (iii) demand a special meeting, or to make a determination of shareholders for any other proper purpose, the board of directors may fix a future date as the record date for any such determination of shareholders, such date in any case to be not more than seventy days, and, in case of a meeting of shareholders, not less than ten days, prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed by the directors, the record date shall be the date on which notice of the meeting is mailed to shareholders, or the date on which the resolution of the board of directors providing for a distribution is adopted, as the case may be. When a determination of shareholders entitled to vote at any meeting of shareholders is made as provided in this Section, such determination shall apply to any adjournment thereof unless the board of directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. Notwithstanding the above, the record date for determining the shareholders entitled to take action without a meeting or entitled to be given notice of action so taken shall be the date a writing upon which the action is taken is first received by the corporation. The record date for determining shareholders entitled to demand a special meeting shall be the date of the earliest of any of the demands pursuant to which the meeting is called. - 3 - Section 6. Voting Lists. The secretary shall make, at the earlier of ten days before each meeting of shareholders or two business days after notice of the meeting has been given, a complete list of the shareholders entitled to be given notice of such meeting or any adjournment thereof. The list shall be arranged by voting groups and within each voting group by class or series of shares, shall be in alphabetical order within each class or series, and shall show the address of and the number of shares of each class or series held by each shareholder. For the period beginning the earlier of ten days prior to the meeting or two business days after notice of the meeting is given and continuing through the meeting and any adjournment thereof, this list shall be kept on file at the principal office of the corporation, or at a place (which shall be identified in the notice) in the city where the meeting will be held. Such list shall be available for inspection on written demand by any shareholder (including for the purpose of this Section 6 any holder of voting trust certificates) or his agent or attorney during regular business hours and during the period available for inspection. The original stock transfer books shall be prima facie evidence as to the shareholders entitled to examine such list or to vote at any meeting of shareholders. Any shareholder, his agent or attorney may copy the list during regular business hours and during the period it is available for inspection, provided (i) the shareholder has been a shareholder for at least three months immediately preceding the demand or holds at least five percent of all outstanding shares of any class of shares as of the date of the demand, (ii) the demand is made in good faith and for a purpose reasonably related to the demanding shareholder's interest as a shareholder, (iii) the shareholder describes with reasonable particularity the purpose and the records the shareholder desires to inspect, (iv) the records are directly connected with the described purpose, and (v) the shareholder pays a reasonable charge covering the costs of labor and material for such copies, not to exceed the estimated cost of production and reproduction. Section 7. Recognition Procedure for Beneficial Owners. The board of directors may adopt by resolution a procedure whereby a shareholder of the corporation may certify in writing to the corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified person or persons. The resolution may set forth (i) the types of nominees to which it applies, (ii) the rights or privileges that the corporation will recognize in a beneficial owner, which may include rights and privileges other than voting, (iii) the form of certification and the information to be contained therein, (iv) if the certification is with respect to a record date, the time within which the certification must be received by the corporation, (v) the period for which the nominee's use of the procedure is effective, and (vi) such other provisions with respect to the procedure as the board deems necessary or desirable. Upon receipt by the corporation of a certificate complying with the procedure established by the board of directors, the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the registered holders of the number of shares specified in place of the shareholder making the certification. Section 8. Quorum and Manner of Acting. One-third of the votes entitled to be cast on a matter by a voting group shall constitute a quorum of that voting group for action on the matter. If less than one-third of such votes are represented at a meeting, a majority of the votes so represented may adjourn the meeting from time to time without further notice, for a period not to exceed 120 days for any one adjournment. If a quorum is present at such adjourned meeting, any business may be transacted which might have been transacted at the meeting - 4 - as originally noticed. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, unless the meeting is adjourned and a new record date is set for the adjourned meeting. If a quorum exists, action on a matter other than the election of directors by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless the vote of a greater number or voting by classes is required by law or the articles of incorporation. Section 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy by signing an appointment form or similar writing, either personally or by his duly authorized attorney-in-fact. A shareholder may also appoint a proxy by transmitting or authorizing the transmission of a telegram, teletype, or other electronic transmission providing a written statement of the appointment to the proxy, a proxy solicitor, proxy support service organization, or other person duly authorized by the proxy to receive appointments as agent for the proxy, or to the corporation. The transmitted appointment shall set forth or be transmitted with written evidence from which it can be determined that the shareholder transmitted or authorized the transmission of the appointment. The proxy appointment form or similar writing shall be filed with the secretary of the corporation before or at the time of the meeting. The appointment of a proxy is effective when received by the corporation and is valid for eleven months unless a different period is expressly provided in the appointment form or similar writing. Any complete copy, including an electronically transmitted facsimile, of an appointment of a proxy may be substituted for or used in lieu of the original appointment for any purpose for which the original appointment could be used. Revocation of a proxy does not affect the right of the corporation to accept the proxy's authority unless (i) the corporation had notice that the appointment was coupled with an interest and notice that such interest is extinguished is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment, or (ii) other notice of the revocation of the appointment is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment. Other notice of revocation may, in the discretion of the corporation, be deemed to include the appearance at a shareholders' meeting of the shareholder who granted the proxy and his voting in person on any matter subject to a vote at such meeting. The death or incapacity of the shareholder appointing a proxy does not affect the right of the corporation to accept the proxy's authority unless notice of the death or incapacity is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment. - 5 - The corporation shall not be required to recognize an appointment made irrevocable if it has received a writing revoking the appointment signed by the shareholder (including a shareholder who is a successor to the shareholder who granted the proxy) either personally or by his attorney-in-fact, notwithstanding that the revocation may be a breach of an obligation of the shareholder to another person not to revoke the appointment. Subject to Section 11 and any express limitation on the proxy's authority appearing on the appointment form, the corporation is entitled to accept the proxy's vote or other action as that of the shareholder making the appointment. Section 10. Voting of Shares. Each outstanding share, regardless of class, shall be entitled to one vote, except in the election of directors, and each fractional share shall be entitled to a corresponding fractional vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class or classes are limited or denied by the articles of incorporation as permitted by the Colorado Business Corporation Act. Cumulative voting shall not be permitted in the election of directors or for any other purpose. Each record holder of stock shall be entitled to vote in the election of directors and shall have as many votes for each of the shares owned by him as there are directors to be elected and for whose election he has the right to vote. At each election of directors, that number of candidates equaling the number of directors to be elected, having the highest number of votes cast in favor of their election, shall be elected to the board of directors. Except as otherwise ordered by a court of competent jurisdiction upon a finding that the purpose of this Section would not be violated in the circumstances presented to the court, the shares of the corporation are not entitled to be voted if they are owned, directly or indirectly, by a second corporation, domestic or foreign, and the first corporation owns, directly or indirectly, a majority of the shares entitled to vote for directors of the second corporation except to the extent the second corporation holds the shares in a fiduciary capacity. Redeemable shares are not entitled to be voted after notice of redemption is mailed to the holders and a sum sufficient to redeem the shares has been deposited with a bank, trust company or other financial institution under an irrevocable obligation to pay the holders the redemption price on surrender of the shares. Section 11. Corporation's Acceptance of Votes. If the name signed on a vote, consent, waiver, proxy appointment, or proxy appointment revocation corresponds to the name of a shareholder, the corporation, if acting in good faith, is entitled to accept the vote, consent, waiver, proxy appointment or proxy appointment revocation and give it effect as the act of the shareholder. If the name signed on a vote, consent, waiver, proxy appointment or proxy appointment revocation does not correspond to the name of a shareholder, the corporation, if acting in good faith, is nevertheless entitled to accept the vote, consent, waiver, proxy appointment or proxy appointment revocation and to give it effect as the act of the shareholder if: - 6 - (i) the shareholder is an entity and the name signed purports to be that of an officer or agent of the entity; (ii) the name signed purports to be that of an administrator, executor, guardian or conservator representing the shareholder and, if the corporation requests, evidence of fiduciary status acceptable to the corporation has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (iii) the name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the corporation requests, evidence of this status acceptable to the corporation has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (iv) the name signed purports to be that of a pledgee, beneficial owner or attorney-in-fact of the shareholder and, if the corporation requests, evidence acceptable to the corporation of the signatory's authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (v) two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-tenants or fiduciaries, and the person signing appears to be acting on behalf of all the co-tenants or fiduciaries; or (vi) the acceptance of the vote, consent, waiver, proxy appointment or proxy appointment revocation is otherwise proper under rules established by the corporation that are not inconsistent with this Section 11. The corporation is entitled to reject a vote, consent, waiver, proxy appointment or proxy appointment revocation if the secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the shareholder. Neither the corporation nor its officers nor any agent who accepts or rejects a vote, consent, waiver, proxy appointment or proxy appointment revocation in good faith and in accordance with the standards of this Section is liable in damages for the consequences of the acceptance or rejection. Section 12. Informal Action by Shareholders. Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting if a written consent (or counterparts thereof) that sets forth the action so taken is signed by all of the shareholders entitled to vote with - 7 - respect to the subject matter thereof and received by the corporation. Such consent shall have the same force and effect as a unanimous vote of the shareholders and may be stated as such in any document. Action taken under this Section 12 is effective as of the date the last writing necessary to effect the action is received by the corporation, unless all of the writings specify a different effective date, in which case such specified date shall be the effective date for such action. If any shareholder revokes his consent as provided for herein prior to what would otherwise be the effective date, the action proposed in the consent shall be invalid. The record date for determining shareholders entitled to take action without a meeting is the date the corporation first receives a writing upon which the action is taken. Any shareholder who has signed a writing describing and consenting to action taken pursuant to this Section 12 may revoke such consent by a writing signed by the shareholder describing the action and stating that the shareholder's prior consent thereto is revoked, if such writing is received by the corporation before the effectiveness of the action. Section 13. Meetings by Telecommunication. Any or all of the shareholders may participate in an annual or special shareholders' meeting by, or the meeting may be conducted through the use of, any means of communication by which all persons participating in the meeting may hear each other during the meeting. A shareholder participating in a meeting by this means is deemed to be present in person at the meeting. ARTICLE II Board of Directors Section 1. General Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of its board of directors, except as otherwise provided in the Colorado Business Corporation Act or the articles of incorporation. Section 2. Number, Qualifications and Tenure. The number of directors of the corporation shall be six. A director shall be a natural person who is eighteen years of age or older. A director need not be a resident of Colorado or a shareholder of the corporation. Directors shall be elected at each annual meeting of shareholders. Each director shall hold office until the next annual meeting of shareholders following his election and thereafter until his successor shall have been elected and qualified. Directors shall be removed in the manner provided by the Colorado Business Corporation Act. Section 3. Vacancies. Any director may resign at any time by giving written notice to the corporation. Such resignation shall take effect at the time the notice is received by the corporation unless the notice specifies a later effective date. Unless otherwise specified in the notice of resignation, the corporation's acceptance of such resignation shall not be necessary to make it effective. Any vacancy on the board of directors may be filled by the affirmative vote of a majority of the shareholders or the board of directors. If the directors remaining in office constitute fewer than a quorum of the board, - 8 - the directors may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. If elected by the directors, the director shall hold office until the next annual shareholders' meeting at which directors are elected. If elected by the shareholders, the director shall hold office for the unexpired term of his predecessor in office; except that, if the director's predecessor was elected by the directors to fill a vacancy, the director elected by the shareholders shall hold office for the unexpired term of the last predecessor elected by the shareholders. Section 4. Regular Meetings. A regular meeting of the board of directors shall be held without notice immediately after and at the same place as the annual meeting of shareholders. The board of directors may provide by resolution the time and place, either within or outside Colorado, for the holding of additional regular meetings without other notice. Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president or any two directors. The person or persons authorized to call special meetings of the board of directors may fix any place, either within or outside Colorado, as the place for holding any special meeting of the board of directors called by them, provided that no meeting shall be called outside the state of Colorado unless a majority of the board of directors has so authorized. Section 6. Notice. Notice of any special meeting shall be given at least two days prior to the meeting by written notice either personally delivered or mailed to each director at his business address, or by notice transmitted by telegraph, telex, electronically transmitted facsimile or other form of wire or wireless communication. If mailed, such notice shall be deemed to be given and to be effective on the earlier of (i) three days after such notice is deposited in the United States mail, properly addressed, with postage prepaid, or (ii) the date shown on the return receipt, if mailed by registered or certified mail return receipt requested. If notice is given by telex, electronically transmitted facsimile or other similar form of wire or wireless communication, such notice shall be deemed to be given and to be effective when sent, and with respect to a telegram, such notice shall be deemed to be given and to be effective when the telegram is delivered to the telegraph company. If a director has designated in writing one or more reasonable addresses or facsimile numbers for delivery of notice to him, notice sent by mail, telegraph, telex, electronically transmitted facsimile or other form of wire or wireless communication shall not be deemed to have been given or to be effective unless sent to such addresses or facsimile numbers, as the case may be. A director may waive notice of a meeting before or after the time and date of the meeting by a writing signed by such director. Such waiver shall be delivered to the corporation for filing with the corporate records. Further, a director's attendance at or participation in a meeting waives any required notice to him of the meeting unless at the beginning of the meeting, or promptly upon his later arrival, the director objects to holding the meeting or transacting business at the meeting because of lack of notice or defective notice and does not thereafter vote for or assent to action taken at the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. - 9 - Section 7. Quorum. A majority of the number of directors fixed by the board of directors pursuant to Section 2 or, if no number is fixed, a majority of the number in office immediately before the meeting begins, shall constitute a quorum for the transaction of business at any meeting of the board of directors. If less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, for a period not to exceed sixty days at any one adjournment. Section 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. Section 9. Compensation. By resolution of the board of directors, any director may be paid any one or more of the following: his expenses, if any, of attendance at meetings, a fixed sum for attendance at each meeting, a stated salary as director, or such other compensation as the board of directors and the director may reasonably agree upon. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 10. Presumption of Assent. A director of the corporation who is present at a meeting of the board of directors or committee of the board at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless (i) the director objects at the beginning of the meeting, or promptly upon his arrival, to the holding of the meeting or the transaction of business at the meeting and does not thereafter vote for or assent to any action taken at the meeting, (ii) the director contemporaneously requests that his dissent or abstention as to any specific action taken be entered in the minutes of the meeting, or (iii) the director causes written notice of his dissent or abstention as to any specific action to be received by the presiding officer of the meeting before its adjournment or by the corporation promptly after the adjournment of the meeting. A director may dissent to a specific action at a meeting, while assenting to others. The right to dissent to a specific action taken at a meeting of the board of directors or a committee of the board shall not be available to a director who voted in favor of such action. Section 11. Committees. By resolution adopted by a majority of all the directors in office when the action is taken, the board of directors may designate from among its members an executive committee and one or more other committees, and appoint one or more members of the board of directors to serve on them. To the extent provided in the resolution, each committee shall have all the authority of the board of directors, except that no such committee shall have the authority to (i) authorize distributions, (ii) approve or propose to - 10 - shareholders actions or proposals required by the Colorado Business Corporation Act to be approved by shareholders, (iii) fill vacancies on the board of directors or any committee thereof, (iv) amend articles of incorporation, (v) adopt, amend or repeal the bylaws, (vi) approve a plan of merger not requiring shareholder approval, (vii) authorize or approve the reacquisition of shares unless pursuant to a formula or method prescribed by the board of directors, or (viii) authorize or approve the issuance or sale of shares, or contract for the sale of shares or determine the designations and relative rights, preferences and limitations of a class or series of shares, except that the board of directors may authorize a committee or officer to do so within limits specifically prescribed by the board of directors. The committee shall then have full power within the limits set by the board of directors to adopt any final resolution setting forth all preferences, limitations and relative rights of such class or series and to authorize an amendment of the articles of incorporation stating the preferences, limitations and relative rights of a class or series for filing with the Secretary of State under the Colorado Business Corporation Act. Sections 4, 5, 6, 7, 8 and 12 of Article III, which govern meetings, notice, waiver of notice, quorum, voting requirements and action without a meeting of the board of directors, shall apply to committees and their members appointed under this Section 11. Neither the designation of any such committee, the delegation of authority to such committee, nor any action by such committee pursuant to its authority shall alone constitute compliance by any member of the board of directors or a member of the committee in question with his responsibility to conform to the standard of care set forth in Article III, Section 14 of these bylaws. Section 12. Informal Action by Directors. Any action required or permitted to be taken at a meeting of the directors or any committee designated by the board of directors may be taken without a meeting if a written consent (or counterparts thereof) that sets forth the action so taken is signed by all of the directors entitled to vote with respect to the action taken. Such consent shall have the same force and effect as a unanimous vote of the directors or committee members and may be stated as such in any document. Unless the consent specifies a different effective date, action taken under this Section 12 is effective at the time the last director signs a writing describing the action taken, unless, before such time, any director has revoked his consent by a writing signed by the director and received by the president or the secretary of the corporation. Section 13. Telephonic Meetings. The board of directors may permit any director (or any member of a committee designated by the board) to participate in a regular or special meeting of the board of directors or a committee thereof through the use of any means of communication by which all directors participating in the meeting can hear each other during the meeting. A director participating in a meeting in this manner is deemed to be present in person at the meeting. Section 14. Standard of Care. A director shall perform his duties as a director, including without limitation his duties as a member of any committee of the board, in good faith, in a manner he reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. In - 11 - performing his duties, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by the persons herein designated. However, he shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause such reliance to be unwarranted. A director shall not be liable to the corporation or its shareholders for any action he takes or omits to take as a director if, in connection with such action or omission, he performs his duties in compliance with this Section 14. The designated persons on whom a director is entitled to rely are (i) one or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented, (ii) legal counsel, public accountant, or other person as to matters which the director reasonably believes to be within such person's professional or expert competence, or (iii) a committee of the board of directors on which the director does not serve if the director reasonably believes the committee merits confidence. ARTICLE III Officers and Agents Section 1. General. The officers of the corporation shall be a president, a secretary and a treasurer, each of whom shall be a natural person eighteen years of age or older. The board of directors or an officer or officers authorized by the board may appoint such other officers, assistant officers, committees and agents, assistant secretaries and assistant treasurers, as they may consider necessary. The board of directors or the officer or officers authorized by the board shall from time to time determine the procedure for the appointment of officers, their term of office, their authority and duties and their compensation. One person may hold more than one office. In all cases where the duties of any officer, agent or employee are not prescribed by the bylaws or by the board of directors, such officer, agent or employee shall follow the orders and instructions of the president of the corporation. Section 2. Appointment and Term of Office. The officers of the corporation shall be appointed by the board of directors at each annual meeting of the board held after each annual meeting of the shareholders. If the appointment of officers is not made at such meeting or if an officer or officers are to be appointed by another officer or officers of the corporation, such appointments shall be made as soon thereafter as conveniently may be. Each officer shall hold office until the first of the following occurs: his successor shall have been duly appointed and qualified, his death, his resignation, or his removal in the manner provided in Section 3. Section 3. Resignation and Removal. An officer may resign at any time by giving written notice of resignation to the corporation. The resignation is effective when the notice is received by the corporation unless the notice specifies a later effective date. - 12 - Any officer or agent may be removed at any time with or without cause by the board of directors or an officer or officers authorized by the board or by the shareholders. Such removal does not affect the contract rights, if any, of the corporation or of the person so removed. The appointment of an officer or agent shall not in itself create contract rights. Section 4. Vacancies. A vacancy in any office, however occurring, may be filled by the board of directors, or by the officer or officers authorized by the board, for the unexpired portion of the officer's term. If an officer resigns and his resignation is made effective at a later date, the board of directors, or officer or officers authorized by the board, may permit the officer to remain in office until the effective date and may fill the pending vacancy before the effective date if the board of directors or officer or officers authorized by the board provide that the successor shall not take office until the effective date. In the alternative, the board of directors, or officer or officers authorized by the board of directors, may remove the officer at any time before the effective date and may fill the resulting vacancy. Section 5. Chairman of the Board. The chairman of the board of directors, if elected and if available, or if not elected or not available, the president, shall preside at all meetings of the stockholders and of the board of directors. Section 6. President. Subject to the direction and supervision of the board of directors, the president shall have general and active control of the corporation's affairs and business and general supervision of its officers, agents and employees. Unless otherwise directed by the board of directors, the president shall attend in person or by substitute appointed by him, or shall execute on behalf of the corporation written instruments appointing a proxy or proxies to represent the corporation, at all meetings of the stockholders of any other corporation in which the corporation holds any stock. On behalf of the corporation, the president may in person or by substitute or by proxy execute written waivers of notice and consents with respect to any such meetings. At all such meetings and otherwise, the president, in person or by substitute or proxy, may vote the stock held by the corporation, execute written consents and other instruments with respect to such stock, and exercise any and all rights and powers incident to the ownership of said stock, subject to the instructions, if any, of the board of directors. The president shall have custody of the treasurer's bond, if any. Section 7. Vice Presidents. If elected, the vice presidents shall assist the chairman of the board and the president and shall perform such duties as may be assigned to them by the chairman of the board and the president or by the board of directors. In the absence of the chairman of the board and the president, the vice president, if any (or, if more than one, the vice presidents in the order designated by the board of directors, or if the board makes no such designation, then the vice president designated by the chairman of the board or by the president, or if neither the board, the chairman of the board nor the president makes any such designation, the senior vice president as determined by first election to that office), shall have the powers and perform the duties of the chairman of the board and the president. Section 8. Secretary. The secretary shall (i) prepare and maintain as permanent records the minutes of the proceedings of the shareholders and the board of directors, a record of all actions taken by the shareholders or board - 13 - of directors without a meeting, a record of all actions taken by a committee of the board of directors in place of the board of directors on behalf of the corporation, and a record of all waivers of notice of meetings of shareholders and of the board of directors or any committee thereof, (ii) see that all notices are duly given in accordance with the provisions of these bylaws and as required by law, (iii) serve as custodian of the corporate records and of the seal of the corporation and affix the seal to all documents when authorized by the board of directors, (iv) keep at the corporation's registered office or principal place of business a record containing the names and addresses of all shareholders in a form that permits preparation of a list of shareholders arranged by voting group and by class or series of shares within each voting group, that is alphabetical within each class or series and that shows the address of, and the number of shares of each class or series held by, each shareholder, unless such a record shall be kept at the office of the corporation's transfer agent or registrar, (v) maintain at the corporation's principal office the originals or copies of the corporation's articles of incorporation, bylaws, minutes of all shareholders' meetings and records of all action taken by shareholders without a meeting for the past three years, all written communications within the past three years to shareholders as a group or to the holders of any class or series of shares as a group, a list of the names and business addresses of the current directors and officers, a copy of the corporation's most recent corporate report filed with the Secretary of State, and financial statements showing in reasonable detail the corporation's assets and liabilities and results of operations for the last three years, (vi) have general charge of the stock transfer books of the corporation, unless the corporation has a transfer agent, (vii) authenticate records of the corporation, and (viii) in general, perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the president or by the board of directors. Assistant secretaries, if any, shall have the same duties and powers, subject to supervision by the secretary. The directors and/or shareholders may however respectively designate a person other than the secretary or assistant secretary to keep the minutes of their respective meetings. Any books, records, or minutes of the corporation may be in written form or in any form capable of being converted into written form within a reasonable time. Section 9. Treasurer. The treasurer shall be the principal financial officer of the corporation, shall have the care and custody of all funds, securities, evidences of indebtedness and other personal property of the corporation and shall deposit the same in accordance with the instructions of the board of directors. He shall receive and give receipts and acquittances for money paid in on account of the corporation, and shall pay out of the corporation's funds on hand all bills, payrolls and other just debts of the corporation of whatever nature upon maturity. He shall perform all other duties incident to the office of the treasurer and, upon request of the board, shall make such reports to it as may be required at any time. He shall, if required by the board, give the corporation a bond in such sums and with such sureties as shall be satisfactory to the board, conditioned upon the faithful performance of his duties and for the restoration to the corporation of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. He shall have such other powers and perform such other duties as may from time to time be prescribed by the board of directors or the president. The assistant treasurers, if any, shall have the same powers and duties, subject to the supervision of the treasurer. - 14 - The treasurer shall also be the principal accounting officer of the corporation. He shall prescribe and maintain the methods and systems of accounting to be followed, keep complete books and records of account as required by the Colorado Business Corporation Act, prepare and file all local, state and federal tax returns, prescribe and maintain an adequate system of internal audit and prepare and furnish to the president and the board of directors statements of account showing the financial position of the corporation and the results of its operations. ARTICLE IV Stock Section 1. Certificates. The board of directors shall be authorized to issue any of its classes of shares with or without certificates. The fact that the shares are not represented by certificates shall have no effect on the rights and obligations of shareholders. If the shares are represented by certificates, such shares shall be represented by consecutively numbered certificates signed, either manually or by facsimile, in the name of the corporation by the president and secretary or by one or more other persons designated by the board of directors. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, such certificate may nonetheless be issued by the corporation with the same effect as if he were such officer at the date of its issue. Certificates of stock shall be in such form and shall contain such information consistent with law as shall be prescribed by the board of directors. If shares are not represented by certificates, within a reasonable time following the issue or transfer of such shares, the corporation shall send the shareholder a complete written statement of all of the information required to be provided to holders of uncertificated shares by the Colorado Business Corporation Act. Section 2. Consideration for Shares. Certificated or uncertificated shares shall not be issued until the shares represented thereby are fully paid. The board of directors may authorize the issuance of shares for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed or other securities of the corporation. Future services shall not constitute payment or partial payment for shares of the corporation. The promissory note of a subscriber or an affiliate of a subscriber shall not constitute payment or partial payment for shares of the corporation unless the note is negotiable and is secured by collateral, other than the shares being purchased, having a fair market value at least equal to the principal amount of the note. For purposes of this Section 2, "promissory note" means a negotiable instrument on which there is an obligation to pay independent of collateral and does not include a non-recourse note. - 15 - Section 3. Lost Certificates. In case of the alleged loss, destruction or mutilation of a certificate of stock, the board of directors may direct the issuance of a new certificate in lieu thereof upon such terms and conditions in conformity with law as the board may prescribe. The board of directors may in its discretion require an affidavit of lost certificate and/or a bond in such form and amount and with such surety as it may determine before issuing a new certificate. Section 4. Transfer of Shares. Upon surrender to the corporation or to a transfer agent of the corporation of a certificate of stock duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, and receipt of such documentary stamps as may be required by law and evidence of compliance with all applicable securities laws and other restrictions, the corporation shall issue a new certificate to the person entitled thereto, and cancel the old certificate. Every such transfer of stock shall be entered on the stock books of the corporation which shall be kept at its principal office or by the person and the place designated by the board of directors. Except as otherwise expressly provided in Article II, Sections 7 and 11, and except for the assertion of dissenters' rights to the extent provided in Article 113 of the Colorado Business Corporation Act, the corporation shall be entitled to treat the registered holder of any shares of the corporation as the owner thereof for all purposes, and the corporation shall not be bound to recognize any equitable or other claim to, or interest in, such shares or rights deriving from such shares on the part of any person other than the registered holder, including without limitation any purchaser, assignee or transferee of such shares or rights deriving from such shares, unless and until such other person becomes the registered holder of such shares, whether or not the corporation shall have either actual or constructive notice of the claimed interest of such other person. Section 5. Transfer Agent, Registrars and Paying Agents. The board may at its discretion appoint one or more transfer agents, registrars and agents for making payment upon any class of stock, bond, debenture or other security of the corporation. Such agents and registrars may be located either within or outside Colorado. They shall have such rights and duties and shall be entitled to such compensation as may be agreed. ARTICLE V Indemnification of Certain Persons Section 1. Indemnification. For purposes of Article VI, a "Proper Person" means any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether formal or informal, by reason of the fact that he is or was a director, officer, employee, fiduciary or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary or agent of any foreign or domestic profit or nonprofit corporation or of any partnership, joint venture, trust, profit or nonprofit unincorporated association, limited liability company, or other enterprise or employee benefit plan. The corporation shall indemnify any Proper Person against reasonably incurred expenses (including attorneys' fees), judgments, penalties, fines (including any excise - 16 - tax assessed with respect to an employee benefit plan) and amounts paid in settlement reasonably incurred by him in connection with such action, suit or proceeding if it is determined by the groups set forth in Section 4 of this Article that he conducted himself in good faith and that he reasonably believed (i) in the case of conduct in his official capacity with the corporation, that his conduct was in the corporation's best interests, or (ii) in all other cases (except criminal cases), that his conduct was at least not opposed to the corporation's best interests, or (iii) in the case of any criminal proceeding, that he had no reasonable cause to believe his conduct was unlawful. A Proper Person will be deemed to be acting in his official capacity while acting as a director, officer, employee or agent on behalf of this corporation and not while acting on this corporation's behalf for some other entity. No indemnification shall be made under this Article VI to a Proper Person with respect to any claim, issue or matter in connection with a proceeding by or in the right of a corporation in which the Proper Person was adjudged liable to the corporation or in connection with any proceeding charging that the Proper Person derived an improper personal benefit, whether or not involving action in an official capacity, in which he was adjudged liable on the basis that he derived an improper personal benefit. Further, indemnification under this Section in connection with a proceeding brought by or in the right of the corporation shall be limited to reasonable expenses, including attorneys' fees, incurred in connection with the proceeding. Section 2. Right to Indemnification. The corporation shall indemnify any Proper Person who was wholly successful, on the merits or otherwise, in defense of any action, suit, or proceeding as to which he was entitled to indemnification under Section l of this Article VI against expenses (including attorneys' fees) reasonably incurred by him in connection with the proceeding without the necessity of any action by the corporation other than the determination in good faith that the defense has been wholly successful. Section 3. Effect of Termination of Action. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the person seeking indemnification did not meet the standards of conduct described in Section l of this Article VI. Entry of a judgment by consent as part of a settlement shall not be deemed an adjudication of liability, as described in Section 2 of this Article VI. Section 4. Groups Authorized to Make Indemnification Determination. Except where there is a right to indemnification as set forth in Sections 1 or 2 of this Article or where indemnification is ordered by a court in Section 5, any indemnification shall be made by the corporation only as authorized in the specific case upon a determination by a proper group that indemnification of the Proper Person is permissible under the circumstances because he has met the applicable standards of conduct set forth in Section l of this Article. This determination shall be made by the board of directors by a majority vote of those present at a meeting at which a quorum is present, which quorum shall consist of directors not parties to the proceeding ("Quorum"). If a Quorum cannot be obtained, the determination shall be made by a majority vote of a committee of the board of directors designated by the board, which committee shall consist of two or more directors not parties to the proceeding, except that directors who are parties to the proceeding may participate in the - 17 - designation of directors for the committee. If a Quorum of the board of directors cannot be obtained and the committee cannot be established, or even if a Quorum is obtained or the committee is designated and a majority of the directors constituting such Quorum or committee so directs, the determination shall be made by (i) independent legal counsel selected by a vote of the board of directors or the committee in the manner specified in this Section 4 or, if a Quorum of the full board of directors cannot be obtained and a committee cannot be established, by independent legal counsel selected by a majority vote of the full board (including directors who are parties to the action) or (ii) a vote of the shareholders. Section 5. Court-Ordered Indemnification. Any Proper Person may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction for mandatory indemnification under Section 2 of this Article, including indemnification for reasonable expenses incurred to obtain court-ordered indemnification. If the court determines that such Proper Person is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not he met the standards of conduct set forth in Section l of this Article or was adjudged liable in the proceeding, the court may order such indemnification as the court deems proper except that if the Proper Person has been adjudged liable, indemnification shall be limited to reasonable expenses incurred in connection with the proceeding and reasonable expenses incurred to obtain court-ordered indemnification. Section 6. Advance of Expenses. Reasonable expenses (including attorneys' fees) incurred in defending an action, suit or proceeding as described in Section 1 may be paid by the corporation to any Proper Person in advance of the final disposition of such action, suit or proceeding upon receipt of (i) a written affirmation of such Proper Person's good faith belief that he has met the standards of conduct prescribed by Section l of this Article VI, (ii) a written undertaking, executed personally or on the Proper Person's behalf, to repay such advances if it is ultimately determined that he did not meet the prescribed standards of conduct (the undertaking shall be an unlimited general obligation of the Proper Person but need not be secured and may be accepted without reference to financial ability to make repayment), and (iii) a determination is made by the proper group (as described in Section 4 of this Article VI) that the facts as then known to the group would not preclude indemnification. Determination and authorization of payments shall be made in the same manner specified in Section 4 of this Article VI. Section 7. Witness Expenses. The sections of this Article VI do not limit the corporation's authority to pay or reimburse expenses incurred by a director in connection with an appearance as a witness in a proceeding at a time when he has not been made a named defendant or respondent in the proceeding. Section 8. Report to Shareholders. Any indemnification of or advance of expenses to a director in accordance with this Article VI, if arising out of a proceeding by or on behalf of the corporation, shall be reported in writing to the shareholders with or before the notice of the next shareholders' meeting. If - 18 - the next shareholder action is taken without a meeting at the instigation of the board of directors, such notice shall be given to the shareholders at or before the time the first shareholder signs a writing consenting to such action. ARTICLE VI Provision of Insurance By action of the board of directors, notwithstanding any interest of the directors in the action, the corporation may purchase and maintain insurance, in such scope and amounts as the board of directors deems appropriate, on behalf of any person who is or was a director, officer, employee, fiduciary or agent of the corporation, or who, while a director, officer, employee, fiduciary or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary or agent of any other foreign or domestic corporation or of any partnership, joint venture, trust, profit or nonprofit unincorporated association, limited liability company or other enterprise or employee benefit plan, against any liability asserted against, or incurred by, him in that capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of Article VI or applicable law. Any such insurance may be procured from any insurance company designated by the board of directors of the corporation, whether such insurance company is formed under the laws of Colorado or any other jurisdiction of the United States or elsewhere, including any insurance company in which the corporation has an equity interest or any other interest, through stock ownership or otherwise. ARTICLE VII Miscellaneous Section 1. Seal. The corporate seal of the corporation shall be circular in form and shall contain the name of the corporation and the words, "Seal, Colorado." Section 2. Fiscal Year. The fiscal year of the corporation shall be as established by the board of directors. Section 3. Amendments. The board of directors shall have power, to the maximum extent permitted by the Colorado Business Corporation Act, to make, amend and repeal the bylaws of the corporation at any regular or special meeting of the board unless the shareholders, in making, amending or repealing a particular bylaw, expressly provide that the directors may not amend or repeal such bylaw. The shareholders also shall have the power to make, amend or repeal the bylaws of the corporation at any annual meeting or at any special meeting called for that purpose. - 19 - Section 4. Gender. The masculine gender is used in these bylaws as a matter of convenience only and shall be interpreted to include the feminine and neuter genders as the circumstances indicate. Section 5. Conflicts. In the event of any irreconcilable conflict between these bylaws and either the corporation's articles of incorporation or applicable law, the latter shall control. Section 6. Definitions. Except as otherwise specifically provided in these bylaws, all terms used in these bylaws shall have the same definition as in the Colorado Business Corporation Act. - 20 - EX-10.12 3 AMENDMENT TO PURCHASE AGREEMENT AMENDMENT TO PURCHASE AGREEMENT This Amendment to the Purchase Agreement is made effective this 6th day of December, 1996, between Chaparral Resources, Inc. ("Chaparral") and Guntekin Koksal ("Shareholder"). WHEREAS, Chaparral and Shareholder entered into the Purchase Agreement ("Agreement") dated January 12, 1996 for the purchase by Chaparral of certain shares of Central Asian Petroleum (Guernsey) Limited ["CAP(G)"] stock owned by Shareholder; WHEREAS, Chaparral and Shareholder desire to amend the first sentence of Section 1.c. of the Agreement; NOW, THEREFORE, Chaparral and Shareholder agree that the first sentence of Section 1.c. of the Agreement is deleted in its entirety and replaced by the following revised first sentence for Section 1.c.: 1.c. Following the Closing A, Chaparral paid to Shareholder $306,250 on June 11, 1996 and $175,000 on September 11, 1996. On December 11, 1996 Chaparral shall pay the balance of the September 11, 1996 payment of $131,250 and $68,750 of the $306,250 payment due to Shareholder. The balance of the December payment of $237,500 will be paid to Shareholder on the fifth business day following completion of interim financing by Chaparral, if so directed by Chaparral's Board of Directors, but in any event no later than March 11, 1997. On March 11, 1997, Chaparral shall pay Shareholder the regular installment of $306,250 due on that date and additionally, the payment of $237,500 (should said payment still be outstanding as of that date); (each such payment referred to here as "Installment Payment"). This Amendment may be executed in one or more counterparts each or which shall be deemed an original, but all of which together shall constitute one and the same instrument; and shall only be binding upon the full execution by the parties. IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first set forth above. CHAPARRAL RESOURCES, INC. /s/Paul V. Hoovler - ------------------------------------ Paul V. Hoovler, President SHAREHOLDER /s/Guntekin Koksal - ------------------------------------ Guntekin Koksal EX-10.13 4 SEVERANCE AGREEMENT--PAUL V. HOOVLER SEVERANCE AGREEMENT This Severance Agreement is entered into as of the 12th day of February, 1997, by and among Chaparral Resources, Inc. ("Chaparral"), a Colorado corporation, and Paul V. Hoovler ("Hoovler"). Chaparral and Hoovler are hereinafter jointly referred to as the Parties. For good and valuable consideration, including the promises and mutual general releases contained herein, the Parties hereby agree as follows: 1. Approval and Effective Date This Agreement shall be effective as of February 12, 1997 ("Effective Date") and will become binding on the Parties upon its ratification and approval by the Chaparral Board of Directors. 2. Salary and Benefits This agreement will be effective as of February 12, 1997. Hoovler will receive his salary and unpaid vacation pay accrued through February 12, 1997. Hoovler may request that Chaparral transfer to him, in accordance with the plan's terms, the vested portion of his 401K plan account. 3. Warrants 3.1 On August 19, 1996, the Chaparral Board of Directors awarded Hoovler a cash bonus of $140,000 as recognition of past and present services to the company; said bonus to be used by Hoovler to exercise certain Warrants, granted to Hoovler pursuant to the company's 1989 Stock Warrant Plan (the "Plan"), to purchase 500,000 shares of Chaparral common stock at an exercise price of $0.28 per share. This bonus will not become payable until receipt of notice from Hoovler, which notice may not be given and shall not be effective until the earlier of a) completion of a sale or farmout by Chaparral of all or a portion of its interest in the Karakuduk Oil Field Development Project (the "Project"), or b) the date when Chaparral makes a public disclosure of a sale or farmout of the Project. At its sole option and discretion, Chaparral may, in lieu of making payment of such bonus to Hoovler, use all or a portion of such bonus as a direct offset to Hoovler's obligation to make any payment due to Chaparral upon exercise of the Warrant. Anything contained in the foregoing provisions of this paragraph to the contrary notwithstanding, in the event Hoovler has exercised and paid for the Warrant prior to the date the bonus becomes payable, Chaparral shall pay such bonus directly to Hoovler, but only upon completion of a sale or farmout of all or a portion of its interest in the Project, Chaparral shall use its reasonable best efforts, consistent with its past policy and practice, to continue to maintain the registration statement registering the shares underlying the Warrant until the date that the Warrant is either exercised or expires, whichever shall first occur; provided, however, that Chaparral shall not be required to take any action or make any filing with the Securities and Exchange Commission that, in the sole discretion of the Board of Directors of Chaparral, is not in the best interest of the company. Chaparral shall amend the Plan to permit Hoovler to transfer the Warrant to a member of his family or to a trust created by Hoovler. For purposes of this Agreement, the term family shall mean a parent, child, grandchild or spouse. 3.2 On or before March 15, 1997, Chaparral will cause a certificate to be delivered to Hoovler representing the warrants to purchase 100,000 shares of Chaparral common stock at an exercise price of $0.85 per share, for a period of four (4) years from the date of such grant that were granted to Hoovler on February 12, 1997. The warrant shall be in form and substance similar in all material respects to the Warrant issued to Hoovler under the Plan, and shall permit Hoovler to assign the warrant on terms and conditions similar to those stated in Section 3.1 above. The shares underlying these warrants will be registered by Chaparral when it next amends its current registration statement. 3.3 On or before March 15, 1997, Chaparral will cause a certificate to be delivered to Hoovler representing the warrants to purchase 100,000 shares of Chaparral common stock at an exercise price of $1.25 per share that were granted to Hoovler on February 12, 1997. Such warrants shall not be exercisable prior to January 1, 1998, and shall remain exercisable for a period of four (4) years from such date. The warrant shall be in form and substance similar in all material respects to the Warrant issued to Hoovler under the Plan, and shall permit Hoovler to assign the warrant on terms and conditions similar to those stated in Section 3.1 above. 4. ORRI Chaparral will assign to Hoovler, or to an entity controlled by Hoovler, the existing ORRI that Chaparral holds in approximately 89 wells. Such assignment shall be for a three (3) year period, at the end of which Hoovler will reassign the ORRI to Chaparral. Hoovler agrees to pay ten percent (10%) of the net revenues received from such ORRI during this three (3) year period to Jan Podoll, and acknowledges that Chaparral has agreed to such assignment in reliance upon Hoovler's promise to make such payment. Hoovler also agrees to execute the reassignment at the same time that the assignment is entered into, with the understanding that such reassignment will be held in escrow by Alan D. Berlin, Esq. during the three year term of the assignment. 5. Road Runner At Hoovler's request, Chaparral will assign its interest in Road Runner, Ltd .to Hoovler, or to an entity controlled by Hoovler. 6. Insurance Chaparral will assign to Hoovler its ownership interest in two life insurance policies that it currently holds on Hoovler's life. The Parties acknowledge that such policies currently have a combined cash surrender value of approximately $32,000. -2- 7. Office Equipment Hoovler understands that Chaparral intends to sell certain office furniture, equipment and supplies, and that if Hoovler so desires, Hoovler may bid for these items. Hoovler also understand that the furniture and equipment presently located in his office will be given to him by Chaparral. 8. Resignation Hoovler will resign, as of the Effective Date, as an officer of Chaparral and as an officer and director of its subsidiaries and affiliates. A copy of Hoovler's resignation is attached hereto. Hoovler will continue as a director of Chaparral until the next annual shareholders meeting. 9. General Release by Hoovler Hoovler, his successors, heirs and assigns (the "Releasors") fully and forever release and discharge Chaparral, its subsidiaries and related companies, their officers, directors, employees, shareholders, agents, representatives, attorneys, accountants, predecessors, successors and assigns (the "Releasees") from any and all actions, causes of action, suits, debts, claims, promises and demands, other than those specifically stated in this Severance Agreement, or any claim by Hoovler for indemnification against claims of others for actions or matters which occurred while Hoovler was an officer, director or employee of Chaparral and for which he would have been entitled to indemnification by Chaparral under Chaparral's Certificate of Incorporation, By-laws or policies as in effect on February 12, 1997, whether in law or equity which the Releasors ever had now have or hereafter can, shall or may have against Releasees, which are based upon or arise out of Hoovler's employment with Chaparral, including without limitation, his service as a member of the Board of Directors of Chaparral, as a shareholder of Chaparral, or his execution of this Severance Agreement, other than any action, claim or proceeding to enforce his rights under this Severance Agreement. 10. General Release by Chaparral Chaparral, its subsidiaries and related companies, their officers, directors, employees, shareholders, agents, representatives, attorneys, accountants, predecessors, successors and assigns (the "Releasors") fully and forever release and discharge Hoovler, his successors, heirs or assigns (the "Releasees") from any and all actions, causes of action, suits, debts, claims, promises and demands, other than those specifically stated in this Severance Agreement, whether in law or equity which the Releasors ever had now have or hereafter can, shall or may have against Releasees, which are based upon or arise out of Hoovler's employment with Chaparral, including without limitation, his service as a member of the Board of Directors of Chaparral or as a shareholder of Chaparral. 11. Covenant Not to Sue The Parties agree not to commence, directly or indirectly cause the commencement of, or cause or attempt to cause any third party to commence, any suit, arbitration or proceeding to enforce any claim or other matter released under this Severance Agreement. 12. Severability If any provision of this Agreement or the application thereof to any Party or circumstance shall be determined by any court of competent -3- jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such Party or circumstance, other than those as to which it was so determined to be invalid or unenforceable, shall not be affected thereby, and each provision thereof shall be valid and shall be enforced to the fullest extent permitted by law. 13 Applicable Law This Agreement shall be construed and enforced in accordance with the laws of the State of Colorado, without giving effect to the provisions or principals thereof relating to choice or conflict of laws. 14. Section Headings Section titles and headings are for descriptive purposes only and shall not control or alter the meaning of this Agreement as set forth in the text. Reference to the singular includes a reference to the plural and vice versa. Reference to any gender includes a reference to all other genders. 15. Counterparts This Agreement may be executed in several counterparts, all of which together shall constitute one agreement binding on all parties hereto notwithstanding that all the parties have not signed the same counterpart. IN WITNESS WHEREOF, the Parties have executed this Severance Agreement as of the date first written above. CHAPARRAL RESOURCES, INC. PAUL V. HOOVLER By:/s/Arlo G. Sorensen /s/Paul V. Hoovler ----------------------------------- ----------------------- Arlo G. Sorensen, Chairman Board of Directors Severance Committee -4- EX-10.14 5 SEVEREANCE AGREEMENT--MATTHEW R. HOOVLER SEVERANCE AGREEMENT This Severance Agreement is entered into as of the 12th day of February, 1997, by and among Chaparral Resources, Inc. ("Chaparral"), a Colorado corporation, and Matthew R. Hoovler ("Hoovler"). Chaparral and Hoovler are hereinafter jointly referred to as the Parties. For good and valuable consideration, including the promises and mutual general releases contained herein, the Parties hereby agree as follows: 1. Approval and Effective Date This Agreement shall be effective as of February 12, 1997 ("Effective Date") and will become binding on the Parties upon its ratification and approval by the Chaparral Board of Directors. 2. Salary and Benefits Hoovler will receive his salary and unpaid vacation pay accrued through the Effective Date. Hoovler may request that Chaparral transfer to him, in accordance with the plan's terms, the vested portion of his 401K plan account . 3. Warrants On August 19, 1996, the Chaparral Board of Directors awarded Hoovler a cash bonus of $70,000 as recognition of past and present services to the company; said bonus to be used solely and exclusively by Hoovler to exercise certain Warrants, granted to Hoovler pursuant to the company's 1989 Stock Warrant Plan (the "Plan"), to purchase 250,000 shares of Chaparral common stock at an exercise price of $0.28 per share. This bonus will not become payable until receipt of notice from Hoovler, which notice may not be given and shall not be effective until the earlier of a) completion of a sale or farmout by Chaparral of all or a portion of its interest in the Karakuduk Oil Field Development Project (the "Project"), or b) the date when Chaparral makes a public disclosure of a sale or farmout of the Project. At its sole option and discretion, Chaparral may, in lieu of making payment of such bonus to Hoovler, use all or a portion of such bonus as a direct offset to Hoovler's obligation to make any payment due to Chaparral upon exercise of the Warrant. Anything contained in the foregoing provisions of this paragraph to the contrary notwithstanding, in the event Hoovler has exercised and paid for the Warrant prior to the date the bonus becomes payable, Chaparral shall pay such bonus directly to Hoovler, but only upon completion of a sale or farmout of all or a portion of its interest in the Project, Chaparral shall use its reasonable best efforts, consistent with its past policy and practice, to continue to maintain the registration statement registering the shares underlying the Warrant until the date that the Warrant is either exercised or expires, whichever shall first occur; provided, however, that Chaparral shall not be required to take any action or make any filing with the Securities and Exchange Commission that, in the sole discretion of the Board of Directors of Chaparral, is not in the best interest of the company. Chaparral shall request the Board of Directors to amend the Plan to permit Hoovler to transfer the Warrant to a member of his family or to a trust created by Hoovler. For purposes of this Agreement, the term family shall mean a parent, child, grandchild or spouse. 4. Office Equipment Hoovler understands that Chaparral intends to sell certain office furniture, equipment and supplies, and that if Hoovler so desire, Hoovler may bid for these items. The furniture presently located in Hoovler's office will be given to Hoovler by Chaparral as well as any of the computers in his office that Chaparral does not want. 5. Resignation Hoovler will resign, as of the Effective Date, as an officer and director of Chaparral and its subsidiaries and affiliates. A copy of Hoovler's resignation is attached hereto. 6. General Release by Hoovler Hoovler, his successors, heirs and assigns (the "Releasors") fully and forever release and discharge Chaparral, its subsidiaries and related companies, their officers, directors, employees, shareholders, agents, representatives, attorneys, accountants, predecessors, successors and assigns (the "Releasees") from any and all actions, causes of action, suits, debts, claims, promises and demands, other than those specifically stated in this Severance Agreement, or any claim by Hoovler for indemnification against claims of others for actions or matters which occurred while Hoovler was an officer, director or employee of Chaparral and for which he would have been entitled to indemnification by Chaparral under Chaparral's Certificate of Incorporation, By-laws or policies as in effect on February 12, 1997, whether in law or equity which the Releasors ever had now have or hereafter can, shall or may have against Releasees, which are based upon or arise out of Hoovler's employment with Chaparral, including without limitation, his service as a member of the Board of Directors of Chaparral, as a shareholder of Chaparral, or his execution of this Severance Agreement, other than any action, claim or proceeding to enforce his rights under this Severance Agreement. 7. General Release by Chaparral Chaparral, its subsidiaries and related companies, their officers, directors, employees, shareholders, agents, representatives, attorneys, accountants, predecessors, successors and assigns (the "Releasors") fully and forever release and discharge Hoovler, his successors, heirs or assigns (the "Releasees") from any and all actions, causes of action, suits, debts, claims, promises and demands, other than those specifically stated in this Severance Agreement, whether in law or equity which the Releasors ever had now have or hereafter can, shall or may have against Releasees, which are based upon or arise out of Hoovler's employment with Chaparral, including without limitation, his service as a member of the Board of Directors of Chaparral or as a shareholder of Chaparral. 8. Covenant Not to Sue The Parties agree not to commence, directly or indirectly cause the commencement of, or cause or attempt to cause any third party to commence, any suit, arbitration or proceeding to enforce any claim or other matter released under this Severance Agreement. -2- 9 Severability If any provision of this Agreement or the application thereof to any Party or circumstance shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such Party or circumstance, other than those as to which it was so determined to be invalid or unenforceable, shall not be affected thereby, and each provision thereof shall be valid and shall be enforced to the fullest extent permitted by law. 10. Applicable Law This Agreement shall be construed and enforced in accordance with the laws of the State of Colorado, without giving effect to the provisions or principals thereof relating to choice or conflict of laws. 11. Section Headings Section titles and headings are for descriptive purposes only and shall not control or alter the meaning of this Agreement as set forth in the text. Reference to the singular includes a reference to the plural and vice versa. Reference to any gender includes a reference to all other genders. 12. Counterparts This Agreement may be executed in several counterparts, all of which together shall constitute one agreement binding on all parties hereto notwithstanding that all the parties have not signed the same counterpart. IN WITNESS WHEREOF, the Parties have executed this Severance Agreement as of the date first written above. CHAPARRAL RESOURCES, INC. MATTHEW R. HOOVLER By:/s/Arlo G. Sorensen /s/Matthew R. Hoovler ----------------------------------- -------------------------- Arlo G. Sorensen, Chairman Board of Directors Severance Committee -3- EX-10.15 6 PURCHASE AND SALE AGREEMENT PURCHASE AND SALE AGREEMENT This Purchase and Sale Agreement (the "Agreement"), effective 7:00 a.m., M.S.T., January 1, 1997 (the "Effective Date"), is between CHAPARRAL RESOURCES, INC. a Colorado corporation, (hereinafter collectively referred to as "SELLER"), and CONOCO INC., a Delaware corporation ("BUYER"). RECITALS: SELLER owns certain oil and gas properties located in Rio Blanco County, Colorado, and related contractual rights and desires to sell these properties and transfer these contractual rights. BUYER desires to purchase these properties from SELLER and acquire these contractual rights. Accordingly, in consideration of the mutual promises contained in this Agreement, BUYER and SELLER agree as follows: ARTICLE 1. PURCHASE AND SALE 1.1 The Property. Subject to the terms of this Agreement, SELLER agrees to sell and assign to BUYER and BUYER agrees to purchase and acquire from SELLER all of SELLER's right and title to, and interest in, the following (collectively the "Property"): 1.1.1 The oil, gas and mineral lease(s) and other interests in oil and gas described in Exhibit A and all rights, privileges and obligations appurtenant to the leases INSOFAR AND ONLY INSOFAR AS the leases cover and include the lands, depths and rights described in Exhibit A ("Leases"); 1.1.2 All rights in any unit in which the Leases are included, to the extent that these rights arise from and are associated with the Leases, including without limitation all rights derived from any unitization, pooling, operating, communitization or other agreement or from any declaration or order of any governmental authority; 1.1.3 All of SELLER'S rights and interests in and to producing, non-producing, shut-in, and abandoned oil, gas and condensate wells, water source, water injection and other injection or disposal wells and associated facilities located on the Leases or lands unitized or pooled with the Leases; 1.1.4 All equipment, facilities and other personal property on the Leases used in developing or operating the Leases or producing, treating, storing, gathering, compressing, processing or transporting hydrocarbons on or from the Leases.; 1.1.5 All easements, rights-of-way, licenses, permits, servitudes and similar interests applicable to or used in operating the Leases or the personal property described above; 1.1.6 All contracts and contractual rights, obligations and interests relating to the Leases, including without limitation unit agreements, farmout agreements, farmin agreements, operating agreements, and hydrocarbon sales, purchase, gathering, transportation, treating, marketing, exchange, processing and fractionating agreements ("Related Contracts"), including without limitation those Related Contracts described in Exhibit A; and 1.2 Exclusions. The Property sold and assigned under this Agreement does not include: 1.2.1 SELLER's intellectual property used in developing or operating the Property, including without limitation proprietary computer software, patents, trade secrets, copyrights, names, marks and logos, all of which SELLER will remove before or as soon as possible after Closing; 1.2.2 Trade credits, accounts and notes receivable, and adjustments or refunds (including without limitation transportation tariff refunds, take-or-pay claims, and audit adjustments) attributable to the Property with respect to any period before the Effective Date; 1 1.3 Ownership of Production from the Property. 1.3.1 Production Before the Effective Date. SELLER owns all merchantable oil, gas, condensate and distillate ("Hydrocarbons") produced from the Property before the Effective Date. If Hydrocarbons produced from the Property before the Effective Date are stored in the Lease stock tanks on the Effective Date ("Stock Tank Oil"), BUYER shall purchase the Stock Tank Oil above pipeline connections in the stock tanks from SELLER at the prevailing market value in the area, adjusted for grade and gravity and less taxes. BUYER will pay SELLER for the Stock Tank Oil by upward adjustment to the Purchase Price, as provided in Section 6.5.3.1. SELLER and BUYER shall accept the Lease operator's tank gauge readings or other inventory records of the Stock Tank Oil. 1.3.2 Production After the Effective Date. BUYER owns all Hydrocarbons produced from the Property on and after the Effective Date. SELLER will sell on BUYER's behalf all Hydrocarbons produced from the Property between the Effective Date and the Closing Date. SELLER will credit BUYER for the proceeds of these sales as a downward adjustment to the Purchase Price, as provided in Section 6.5.3.2. Subject to any continuing sale obligations under the Related Contracts, BUYER may sell Hydrocarbons produced from the Property on and after the Closing Date as it deems appropriate. ARTICLE 2. PURCHASE PRICE 2.1 Purchase Price. BUYER shall pay SELLER a purchase price for the Property of $270,000 ("Purchase Price"), allocated $27,000 to depreciable assets and $243,000 to nondepreciable assets, subject to any adjustments to the Purchase Price made at Closing or in the post-closing final settlement. ARTICLE 3. REPRESENTATIONS AND WARRANTIES 3.1 Reciprocal Representations and Warranties. SELLER and BUYER each represent and warrant to the other that as of the Effective Date and the Closing Date: 3.1.1 Corporate Authority. It is a corporation duly organized and in good standing under the laws of its state of incorporation, is duly qualified to carry on its business in the state where the Property is located, and has all the requisite power and authority to enter into and perform this Agreement. 3.1.2 Requisite Approvals. It has taken all necessary actions pursuant to its Articles of Incorporation, By-laws and other governing documents to fully authorize it to consummate the transaction contemplated by this Agreement. 3.1.3 Validity of Obligation. This Agreement and all documents it is to execute and deliver on or before the Closing Date have been duly executed by its appropriate officials and constitute valid and legally binding obligations, enforceable against it in accordance with the terms of this Agreement and such documents. 3.1.4 Impediments to Consummation of Agreement. Its executing, delivering and performing this Agreement does not conflict with or violate any agreement or instrument to which it is a party, or any law, rule, regulation, ordinance, judgment, decree or order to which it is subject. 3.1.5 Bankruptcy. There are no bankruptcy, reorganization or receivership proceedings pending, being contemplated by, or to its actual knowledge, threatened against it. 3.2 BUYER's Representations and Warranties. BUYER represents and warrants to SELLER that as of the Effective Date and the Closing Date: 3.2.1 Independent Evaluation. BUYER is an experienced and knowledgeable investor in the oil and gas business. BUYER has been advised by and has relied solely on its own expertise and legal, tax, reservoir engineering and other professional counsel concerning this transaction. 3.2.2 Qualification. BUYER is now or at Closing will be, and thereafter will continue to be, qualified to own and operate federal and State of Colorado oil, gas and mineral leases, including meeting all bonding requirements. 2 Consummating the transaction contemplated in this Agreement will not cause BUYER to be disqualified or to exceed any acreage limitation imposed by law, statute or regulation. 3.2.3 Securities Laws. BUYER has complied with all federal and state securities laws applicable to the sale of the Property and will comply with such laws if it subsequently disposes of all or any part of the Property. 3.3 SELLER's Representations and Warranties. SELLER represents and warrants to BUYER that as of the Effective Date and the Closing Date: 3.3.1 Lawsuits and Claims. SELLER has not been notified of any action, suit, proceeding, claim or investigation by any person, entity, administrative agency or governmental body pending or threatened in writing against SELLER that may adversely affect title to any of the Property or the value thereof or otherwise hinder operations on the Property and, to the best of SELLER's knowledge, there is no reasonable basis for any such action, suit, proceeding, claim or investigation. 3.3.2 Environmental Proceedings. SELLER has not been notified that the Property is the subject of any pending environmental enforcement proceeding, investigation, inquiry or claim of noncompliance by any governmental agency or private party and, except as disclosed to BUYER in writing, there is no reasonable basis to the best of SELLER's knowledge, for any such proceeding, investigation, inquiry or claim. 3.3.3 Leases and Contracts. The Leases and Related Contracts are in full force and effect, and SELLER has made all payments (including royalties, minimum royalties, delay rentals and shut-in payments) due thereunder or required to be made to maintain the leases and other agreements in effect. To the best of SELLER's knowledge, all unrecorded agreements to which the Property is subject are described in Exhibit A. 3.3.4 Sales Agreements. Crude oil , condensate, and/or natural gas production from the Property is not subject to any sale or exchange contracts or arrangements, a "take or pay" arrangement, production payment or any other arrangement to deliver hydrocarbons that cannot be terminated at any time after the Effective Date, without breach or penalty, upon 60 days' notice. SELLER further represents that production from the Property is not subject to any call on production or preferential right to purchase the production by any party. 3.3.5 Adverse Changes. To the best of SELLER's knowledge, since the Effective Date, there has been no material adverse change in the physical condition of, or title to the Property, except depletion through normal production, and depreciation of equipment through ordinary wear and tear. 3.4 Notice. SELLER and BUYER shall each give the other prompt written notice of any matter materially affecting any of its representations or warranties under this Article 3 or rendering any such warranty or representation untrue. ARTICLE 4. WARRANTIES 4.1 Title and Encumbrances. SELLER SELLS AND TRANSFERS THE PROPERTY TO BUYER SUBJECT TO ALL ROYALTIES, OVERRIDING ROYALTIES, BURDENS AND ENCUMBRANCES, AND WITHOUT WARRANTY OF TITLE, EXPRESS, STATUTORY, OR IMPLIED, PROVIDED, HOWEVER, SELLER SHALL AGREE TO DEFEND THE TITLE TO THE PROPERTY AGAINST THE LAWFUL CLAIMS AND DEMANDS OF ALL PERSONS OR ENTITIES CLAIMING THE SAME OR ANY PART THEREOF BY, THROUGH OR UNDER SELLER, BUT NOT OTHERWISE. 4.2 Information About the Property. SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS, STATUTORY OR IMPLIED, AS TO (i) THE ACCURACY, COMPLETENESS, OR MATERIALITY OF ANY DATA, INFORMATION OR RECORDS FURNISHED TO BUYER IN CONNECTION WITH THE PROPERTY; (ii) THE QUALITY AND QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE PROPERTY; (iii) THE ABILITY OF THE PROPERTY TO PRODUCE HYDROCARBONS, INCLUDING WITHOUT LIMITATION PRODUCTION RATES, DECLINE RATES AND RECOMPLETION OPPORTUNITIES; (iv) ALLOWABLES OR OTHER REGULATORY MATTERS, OR (v) THE PRESENT OR FUTURE VALUE OF THE ANTICIPATED INCOME, COSTS OR PROFITS, IF ANY, TO BE DERIVED FROM THE PROPERTY. ANY AND ALL DATA, INFORMATION OR OTHER RECORDS FURNISHED BY SELLER ARE PROVIDED TO BUYER AS A CONVENIENCE AND BUYER'S RELIANCE ON OR USE OF THE SAME IS AT BUYER'S SOLE RISK. 3 ARTICLE 5. TITLE EXAMINATION AND PHYSICAL INSPECTION 5.1 Information and Access. Prior to Closing, to allow BUYER to confirm SELLER's title to the Property, SELLER shall give BUYER and BUYER's authorized representatives, during normal business hours, the right to examine all contract, land and lease records, to the extent such data and records are in SELLER's possession and relate to the Property. BUYER may photocopy such records at its sole expense. BUYER shall keep confidential all information made available to BUYER until Closing. 5.2 Preferential Rights and Consents to Assign. 5.2.1 If any of the Property is subject to preferential purchase rights, rights of first refusal, or similar rights (collectively, "Preferential Rights"), or consents to assign, lessor's approvals or similar rights (collectively, "Consents"), SELLER shall (i) notify the holders of the Preferential Rights and Consents that it intends to sell the Property to BUYER, (ii) provide them with any information about the sale of the Property to which they are entitled, and (iii) in the case of Consents, ask the holders of the Consents to consent to the assignment of the affected Property to BUYER. SELLER shall promptly notify BUYER whether Preferential Rights are exercised, waived or deemed waived, or if any Consents are denied. SELLER will not be liable to BUYER if any Preferential Rights are exercised, or any Consents are denied. 5.2.2. If SELLER is unable before Closing to obtain the required Consents (other than Consents ordinarily obtained after Closing) and waivers of all Preferential Rights, at the option of the BUYER, that portion of the Property affected by the unwaived Preferential Rights or Consents will be excluded from the transaction under this Agreement, and the Purchase Price will be adjusted by the Allocated Value of the affected Property listed in Exhibit "D" to this Agreement (the "Allocated Value"), and proceed with Closing. 5.3 Title Pending Governmental Consents. Until SELLER and BUYER obtain federal and state approval of the sale and assignment of Leases requiring such approval, SELLER will continue to hold record title to such Leases as nominee for BUYER. Until the required approvals are obtained, SELLER will act only upon and in accordance with BUYER's specific written instructions and will have no authority, responsibility or discretion to perform any tasks with respect to such Leases other than purely administrative or ministerial tasks, unless otherwise specifically requested and authorized by BUYER in writing. If any required approval is finally denied, SELLER shall refund to BUYER the Allocated Value of the Leases and other Property affected and BUYER shall immediately reassign such Leases and other Property to SELLER. 5.4 Title Defects 5.4.1 BUYER will review title to the Property prior to Closing and notify SELLER in writing of any title defect it discovers as soon a reasonably practicable after its discovery, but in no event less than three business days prior to the Closing Date. BUYER will be deemed to have conclusively waived any title defect about which it fails to notify SELLER in writing at least three business days prior to the Closing Date. 5.4.2 If BUYER properly notifies SELLER of any title defect, BUYER shall have the option to either (i) waive the title defect and close, (ii) request SELLER to cure the title defect, but SELLER will have no obligation to cure any title defects in the Property, or (iii) if SELLER declines to cure a material title defect, exclude the portion of the Property affected by the title defect from the transaction under this Agreement, in which case the Purchase Price will be reduced by the Allocated Value of the excluded Property. If BUYER asks SELLER to cure a material title defect, and SELLER agrees to attempt to cure the title defect, SELLER will have 180 days after the Closing Date to correct the title defect. With respect to all material title defects that SELLER fails to cure by 180 days after the Closing Date, BUYER may rescind its purchase of that portion of the Property affected by those title defects, after which SELLER shall refund the Allocated Value of the affected Property to BUYER, and BUYER (at SELLER's sole option) shall immediately reassign the affected Property to SELLER. 5.5 Inspection; Assumption of Risk. Promptly after the execution of this Agreement and until Closing, SELLER, at times approved by SELLER, shall allow BUYER and its representatives, at their sole risk and expense, to conduct reasonable inspections of the Property. 4 ARTICLE 6. CLOSING AND FINAL SETTLEMENT 6.1 Closing Date. Unless BUYER and SELLER otherwise agree, the closing of this purchase and sale ("Closing") will occur on or before February 28, 1997 (the actual date on which Closing occurs being the "Closing Date") in SELLER's offices in Denver, Colorado. If SELLER and BUYER agree to close the purchase and sale of the Property by mail rather than in person, the Closing Date of this purchase and sale will be the date on which SELLER receives payment of the Purchase Price. 6.2 Conditions to Closing. BUYER or SELLER are not obligated to close the transaction that is the subject of this Agreement if: 6.2.1 Any matter represented or warranted by the other party in this Agreement is not true, or is misleading in any material respect, as of the Closing Date or any obligation of the other party before the Closing Date is not satisfied on the Closing Date. 6.2.2 Any suit or other proceeding is pending or threatened before any court or governmental agency seeking to restrain, prohibit, or declare illegal, or seeking substantial damages in connection with, the transaction that is the subject of this Agreement, or there is reasonable basis for any such suit or other proceeding. 6.2.3 Any necessary waivers of Preferential Rights and Consents (other than Consents typically obtained after Closing) have not been secured. 6.3 Preliminary Settlement. At Closing, BUYER and SELLER shall execute a settlement statement (the "Preliminary Settlement Statement") prepared by SELLER, subject to the approval of BUYER, which shall set forth adjustments (as set forth in this paragraph) to the Purchase Price to be paid by BUYER at Closing. At least three days prior to Closing, SELLER agrees to furnish BUYER the Preliminary Settlement Statement for BUYER's review. 6.3.1 Increase to Purchase Price. The Purchase Price to be paid by BUYER to SELLER at Closing shall be increased by: (i) The amount of lease operating expenses which accrued to the Property from operations, and under the Joint Operating Agreement subsequent to the Effective Date and which have been paid by SELLER. (ii) An amount equal to the market value of the Stock Tank Oil above the pipeline connection as measured on the Effective Date. (iii) An amount equal to the estimated value of underproduced oil and/or gas production from the Property on the Effective Date. 6.3.2 Decrease Purchase Price. The Purchase Price to be paid by BUYER to SELLER shall be decreased by: (i) The amount of capital expenditures (including without limitation, drilling costs, completion costs, equipment, and construction costs) and lease operating expenses which accrued to the Property prior to the Effective Date which have not been paid by SELLER. (ii) An amount equal to all estimated and unpaid ad valorem, property, production, severance and similar taxes and assessments based upon or measured by the ownership of the Property or the production of hydrocarbons or the receipt of proceeds therefrom accruing to the Property prior to the Effective Date. (iii) An amount equal to the Allocated Value for that portion of the Property not conveyed as a result of the exercising of Preferential Rights or denial of Consents to Assign pursuant to Section 5.2. (iv) An amount equal to any title defects as set forth in Section 5.4. (v) An amount equal to the estimated value of overproduced oil and/or gas production from the Property on the Effective Date; 5 6.4 Closing. SELLER and BUYER have the following obligations at Closing: 6.4.1 SELLER's Obligations. At Closing, SELLER shall deliver to BUYER: (i) An executed and acknowledged Assignment and Bill of Sale (in sufficient counterparts for recording) in the form of Exhibit B (the "Assignment and Bill of Sale"); and (ii) Any other appropriate instruments necessary to effect or support the transaction contemplated in this Agreement, including, without limitation, any lease assignment forms or other forms or filings required by federal or state agencies to transfer ownership of the Property. 6.4.2 BUYER's Obligations. At Closing, BUYER shall: (i) Pay SELLER the Purchase Price, as adjusted under Section 6.3, either by cashier's check or wire transfer of immediately available funds into an account designated by SELLER in accordance with SELLER's instructions; (ii) Furnish fully executed change of operator notices, which BUYER shall file with the appropriate regulatory authorities, if BUYER becomes operator; and (iii) Any ratification and joinder instruments required to transfer the SELLER's rights, obligations and interests in the Related Contracts and other Property. 6.5 Post-Closing Obligations. SELLER and BUYER have the following post-closing obligations: 6.5.1 Property Records. At or as soon as possible after Closing, SELLER shall deliver to BUYER the originals of all lease, contract or well records (excluding any internal valuation or interpretive data or documentation) relating to the Property (the "Property Records"), at a location designated by BUYER. 6.5.2 Recording and Filing. BUYER, within a reasonable time after Closing, shall (i) record the Assignment and Bill of Sale and all other instruments that must be recorded to effectuate the transfer of the Property; and (ii) file for approval with the applicable government agencies all state and federal transfer and assignment documents for the Property. BUYER shall provide SELLER a recorded copy of the Assignment and Bill of Sale and other recorded instruments, and approved copies of the state and federal transfer and assignment documents as soon as they are available. 6.5.3 Settlement Statement. SELLER shall use its best efforts to deliver to BUYER, within 90 days after the Closing Date, a final settlement statement that will adjust the Purchase Price as follows; however, SELLER's failure to deliver the final settlement statement within 90 days will not constitute a waiver of any right to an adjustment otherwise due. 6.5.3.1 The Purchase Price will be adjusted upward by the amount of: (i) All actual production expenses, operating expenses, overhead under the applicable operating agreements, and capital expenditures (including without limitation royalties, minimum royalties, rentals, and prepaid charges) paid or incurred by SELLER and attributable to operation of the Property on and after the Effective Date; (ii) The actual value of the Stock Tank Oil from any proceeds received by BUYER for the sale of production from the Property before the Effective Date; and (iii) Any other amounts to which SELLER is entitled under this Agreement that are not paid as part of the Purchase Price at Closing. 6.5.3.2 The Purchase Price will be adjusted downward by the amount of: (i) Any proceeds received by SELLER for production from the Property on and after the Effective Date, as provided in Section 1.3.2 of this Agreement; (ii) Any other amounts to which BUYER is entitled under this Agreement that are not paid or reimbursed at Closing. 6.5.4 Final Settlement. The parties will attempt to agree to the final settlement statement within 30 days after its delivery to BUYER, and settlement will be made (taking into account adjustment for the estimate made under Section 6.3 and deducted from the Purchase Price under Section 6.4.2(i) by company check, or wire transfer, at the receiving party's option, within 15 days after agreement. Thereafter, 6 if SELLER or BUYER receives additional proceeds or pays additional expenses for or on behalf of the other party, they shall promptly invoice the other party for expenses paid or remit to the other party any proceeds received. 6.5.5 Further Assurances. BUYER and SELLER agree to execute and deliver from time to time such further instruments and do such other acts as may be reasonably necessary to effectuate the purposes of this Agreement. ARTICLE 7. ASSUMPTION OF OBLIGATIONS 7.1 Ownership and Operations. Except as provided in Section 10.1, upon and after Closing, BUYER shall assume and perform all the rights, duties, obligations and liabilities of ownership and operation of the Property, including without limitation: (i) all of SELLER's express and implied obligations and covenants under the terms of the Leases, the Related Contracts and all other orders and contracts to which the Property is subject; (ii) responsibility for all royalties, overriding royalties, production payments, net profits obligations, rentals, shut-in payments and other burdens or encumbrances to which the Property is subject accruing after the Effective Date; (iii) responsibility for compliance with all applicable laws, ordinances, rules and regulations pertaining to the Property, and the procurement and maintenance of all permits required by public authorities in connection with the Property; and (iv) all other obligations assumed by BUYER under this Agreement. With respect to (i) any part of the Property for which BUYER is not duly elected operator, or (ii) any non-operating interests in the Property being transferred to BUYER under this Agreement, BUYER shall assume full responsibility and liability for that portion of the foregoing rights, duties, obligations and liabilities for which non-operators are responsible. SELLER will remain responsible for all costs, expenses and liabilities incurred by SELLER in connection with the ownership or operation of the Property before the Effective Date, except those for which BUYER indemnifies SELLER, or which BUYER assumes in the Agreement. 7.2 Plugging and Abandonment Obligations. From and after the Effective Date, BUYER assumes full responsibility and liability for the following obligations related to the Property ("Plugging and Abandonment Obligations"): (i) plugging, replugging and abandoning all wells on the Property plugged after the Effective Date; (ii) removing and disposing of all structures and equipment located on or comprising part of the Property; (iii) the necessary and proper capping and burying of all associated flow lines located on or comprising part of the Property; (iv) restoring the leasehold premises of the Property, both surface and subsurface, to the condition they were in before commencement of oil and gas operations, as may be required by applicable laws, regulation or contract; and (v) any necessary disposal of Property contaminated by naturally occurring radioactive material ("NORM"). BUYER shall conduct all plugging, replugging, abandonment, removal, disposal and restoration operations in a good and workmanlike manner and in compliance with all applicable laws and regulations. With respect to any non-operating interests in the Property being transferred to BUYER under this Agreement, BUYER shall assume full responsibility and liability, from and after the Effective Date, for that portion of the Plugging and Abandonment Obligations for which non-operators are responsible. 7.3 Environmental Obligations. BUYER assumes full responsibility and liability for the following occurrences, events and activities on or related to the Property ("Environmental Obligations") whether arising before or after the Effective Date: (i) environmental pollution or contamination, including pollution of the soil, groundwater or air; (ii) underground injection activities and waste disposal onsite; (iii) clean-up responses, and the cost of remediation, control or compliance with respect to surface and subsurface pollution caused by spills, pits, ponds or lagoons; (iv) failure to comply with applicable land use, surface disturbance, licensing or notification requirements; and (v) violation of environmental or land use rules, regulations, demands or orders of appropriate state or federal regulatory agencies. With respect to any non-operating interests in the Property being transferred to BUYER under this Agreement, BUYER agrees to assume full responsibility and liability, from and after the Effective Date, for that portion of the Environmental Obligations for which non-operators are responsible. ARTICLE 8. INDEMNITIES 8.1 Definition of Claims. As used in this Agreement, the term "Claims" means any and all losses, liabilities, damages, obligations, expenses, fines, penalties, costs, claims, causes of action and judgments for (i) breaches of contract; (ii) loss or damage to property; and (iii) violations of applicable laws, rules, regulations, orders or any other legal right or duty actionable at law or equity. The term "Claims" also includes attorneys fees and court costs resulting from the defense of any claim or cause of action within the scope of the indemnities in this Agreement. 7 8.2 Application of Indemnities. Unless this Agreement expressly provides to the contrary, the indemnities set forth in this Agreement apply regardless of whether: (i) the indemnified party (or its employees, agents, contractors, successors or assigns) causes, in whole or part, an indemnified Claim; (ii) an indemnified Claim arises out of or results from the indemnified party's (or its employees', agents', contractors', successors' or assigns') sole or concurrent negligence; (iii) the indemnified party (or its employees, agents, contractors, successors or assigns) is deemed to be strictly liable, in whole or part, for an indemnified Claim; or (iv) any part of an indemnified Claim is the result of the imposition of punitive damages. All indemnities set forth in this Agreement extend to the officers, directors, employees and affiliates of the party indemnified, and cover the acts and omissions of the officers, directors, employees, contractors, successors and assigns of the indemnifying party. 8.3 BUYER's Indemnity. BUYER shall indemnify, defend and hold SELLER harmless from and against any and all Claims caused by, resulting from or incidental to: (i) BUYER's ownership or operation of the Property after the Effective Date, including without limitation the obligations assumed by BUYER in Section 7.1; (ii) all Plugging and Abandonment Obligations arising after the Effective Date; (iii) all Environmental Obligations, whether arising before or after the Effective Date; (iv) BUYER's disbursement of production proceeds from the Property accruing after the Effective Date, including funds in any suspense accounts received from SELLER; (v) any obligations for broker's fees incurred by BUYER in connection with the purchase of the Property; (vi) BUYER'S acts or omissions; (vii) any failure by BUYER to comply with applicable laws, ordinances, rules and regulations pertaining to the Property, and procure and maintain permits required by public authorities in connection with the Property; (viii) any violation by BUYER of state or federal securities laws, or BUYER's dealings with its partners, investors, financial institutions and other third parties with respect to this Agreement; and (ix) SELLER's operation of the Property under Article 10, if applicable, except to the extent caused by SELLER's gross negligence or willful misconduct. BUYER further agrees to indemnify, defend and hold SELLER harmless from and against any and all claims for personal injury, illness, disease and wrongful death which arise or are asserted after the Effective Date and which are attributable to the ownership and operation of the Property by BUYER, including without limitation, any interest, penalty, reasonable attorney's fees and other costs and expenses incurred in connection therewith or the defense thereof. 8.4 SELLER's Indemnity. SELLER shall indemnify, defend and hold BUYER harmless from and against any and all Claims caused by, resulting from or incidental to: (i) SELLER's ownership or operation of the Property before the Effective Date, except to the extent such obligations are assumed by BUYER in Section 8.3; (ii) SELLER's disbursement of production proceeds from the Property accruing before the Effective Date; (iii) any failure by SELLER to comply with applicable laws, ordinances, rules and regulations pertaining to the Property, or to procure and maintain permits required by public authorities in connection with the Property; (iv) any violation by SELLER of state or federal securities laws, or SELLER's dealings with its partners, investors, financial institutions and other third parties with respect to this Agreement; and (v) SELLER's operation of the Property under Article 10, if applicable, to the extent caused by SELLER's gross negligence or willful misconduct. SELLER further agrees to indemnify, defend and hold BUYER harmless from and against any and all claims for personal injury, illness, disease, and wrongful death which arise or are asserted prior to the Effective Date or are asserted after Effective Date and are solely attributable to the ownership and operation of the Property by SELLER prior to the Effective Date, including without limitation, any interest, penalty, reasonable attorney's fees, and other costs and expenses in connection therewith or in defense thereof. It is understood and agreed that SELLER's indemnity under this Section is limited to claims against BUYER by third parties, including government agencies. 8.5 NORM. BUYER ACKNOWLEDGES THAT IT HAS BEEN INFORMED THAT OIL AND GAS PRODUCING FORMATIONS CAN CONTAIN NATURALLY OCCURRING RADIOACTIVE MATERIAL. SOME OR ALL OF THE EQUIPMENT, MATERIALS AND OTHER PROPERTY SUBJECT TO THIS AGREEMENT MAY HAVE LEVELS OF NORM ABOVE BACKGROUND LEVELS. A HEALTH HAZARD MAY EXIST IN CONNECTION WITH THIS EQUIPMENT, MATERIALS AND OTHER PROPERTY. THEREFORE, BUYER MAY NEED TO FOLLOW SAFETY PROCEDURES WHEN HANDLING THIS EQUIPMENT, AND OTHER PROPERTY. ARTICLE 9. TAXES AND EXPENSES. 9.1 Recording Expenses. BUYER shall pay the cost of recording and filing the Assignment and Bill of Sale for the Property, all state and federal transfer and assignment documents, and all other instruments. 9.2 Ad Valorem, Real Property and Personal Property Taxes. Unless paid pursuant to Article 6.3, all Ad Valorem Taxes, Real Property Taxes, Personal Property Taxes, and similar obligations ("Property Taxes") on the Property are SELLER's obligation for periods before the Effective Date and BUYER's obligation for periods after the Effective Date. 8 9.3 Severance Taxes. SELLER shall bear and pay all severance or other taxes measured by Hydrocarbon production from the Property, or the receipt of proceeds therefrom, to the extent attributable to production from the Property before the Effective Date. BUYER shall bear and pay all such taxes on production from the Property on and after the Closing Date. 9.4 Sales Taxes. SELLER shall remit on behalf of BUYER all state and county sales taxes due on the Property, using the Allocated Values listed in Exhibit D. BUYER will reimburse SELLER at Closing for all sales taxes paid on behalf of BUYER. ARTICLE 10. INTERIM OPERATION OF THE PROPERTY 10.1 Operations by SELLER. If SELLER is operator of the Property, SELLER shall continue to operate the Property during the period between the Effective Date and 7:00 a.m., local time where the Property is located, on the first day of the month following the month in which Closing occurs, or such later date to which SELLER and BUYER agree in writing ("Interim Period"), but SELLER has no obligation to operate the Property after the Interim Period. SELLER shall operate the Property during the Interim Period in a prudent manner consistent with generally accepted industry practices and standards, applicable laws and regulations, and all applicable lease and other agreement terms. SELLER is entitled to retain any overhead payments received and attributable to operations during the Interim Period. SELLER makes no representation or warranty that BUYER will become operator of any portion of the Property, as that matter is controlled by the applicable operating agreements and governmental regulatory requirements. 10.2 Marketing of Production. If SELLER continues to operate the Property after the Closing Date under this Article 10, SELLER and BUYER will agree on continued marketing of production, disbursement of proceeds of production, billing and collection of amounts due from the nonoperating interest owners, and payment of all delay rentals, minimum royalties, shut-in royalties and other lease payments until BUYER begins operating the Property. ARTICLE 11. MISCELLANEOUS 11.1 Purchase and Sale/Qualified Intermediary. Subject to the terms and conditions of this Agreement, SELLER agrees to sell and convey to BUYER, and BUYER agrees to purchase, pay for and receive the Assets and to assume the obligations as provided herein. SELLER and BUYER hereby agree that BUYER, in lieu of the purchase of the Assets from SELLER for the cash consideration provided herein, shall have the right at any time prior to Closing to assign all or a portion of its rights under this Agreement to a Qualified Intermediary (as that term is defined in Section 1.1031(k)- 1(g)(4)(v) of the Treasury Regulations) in order to accomplish the transaction in a manner that will comply, either in whole or in part, with the requirements of a like-kind exchange pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended, ("Code"). Likewise, SELLER shall have the right at any time prior to Closing to assign all or a portion of its rights under this Agreement to a Qualified Intermediary for the same purpose. In the event either Party assigns its rights under this Agreement pursuant to this Section 11.1, such Party agrees to notify the other Party in writing of such assignment at or before Closing. If SELLER assigns its rights under this Agreement for this purpose, BUYER agrees to (i) consent to SELLER's assignment of its rights in this Agreement in the form attached hereto as Exhibit "E-1", and (ii) pay the Purchase Price into a qualified escrow or qualified trust account at Closing as directed in writing. If BUYER assigns its rights under this Agreement for this purpose, SELLER agrees to (i) consent to BUYER's assignment of its rights in this Agreement in the form of Exhibit "E-2", (ii) and accept the Purchase Price from the qualified escrow or qualified trust account at Closing, and (iii) at Closing, convey and assign directly to BUYER the Assets which are the subject of this Agreement upon satisfaction of the other conditions to Closing and other terms and conditions hereof. SELLER and BUYER acknowledge and agree that any assignment of this Agreement to a Qualified Intermediary shall not release either Party from any of their respective liabilities and obligations to each other under this Agreement, and that neither Party represents to the other that any particular tax treatment will be given to either Party as a result thereof. 11.2 Broker's Fees. Each party represents that it has not incurred any obligation for brokers, finders or similar fees for which the other party would be liable. 11.3 Press Releases. After Closing, either BUYER or SELLER may make a statement to the press concerning this transaction, provided such statement shall not make reference to the Purchase Price or consideration paid. 9 11.4 Notices. All notices under this Agreement must be in writing. Any notice under this Agreement may be given by personal delivery, facsimile transmission, U.S. mail (postage prepaid), or commercial delivery service, and will be deemed duly given when received by the party charged with such notice and addressed as follows: SELLER: CHAPARRAL RESOURCES, INC. BUYER: CONOCO INC. - ------ ----- 3400 Bissonnet, Suite 135 10 Desta Drive, Suite 100W Houston, TX 77005 Midland, TX 79705-4500 Howard Karren Attn: Division Manager FAX: (713) 669-0994 FAX: (915) 686-5422 Any party, by written notice to the other, may change the address or the individual to which or to whom notices are to be sent under this Agreement. 11.5 Assignment. Neither party may assign its rights or obligations under this Agreement without the prior written consent of the other, unless the assignment occurs by merger, reorganization or sale of all of a party's assets. 11.6 Entirety of Agreement; Amendment. This Agreement constitutes the entire understanding between the parties with respect to the subject matter hereof, superseding all negotiations, prior discussions, representations, and prior agreements and understandings relating to such subject matter. This Agreement may be amended, modified, and supplemented only in a writing duly executed by BUYER and SELLER. 11.7 Successors and Assigns. This Agreement binds and inures to the benefit of the parties hereto their respective permitted successors and assigns, and nothing contained in this Agreement, express or implied, is intended to confer upon any other person or entity any benefits, rights, or remedies. 11.8 Governing Law. This Agreement is governed by and must be construed in accordance with the laws of the State of Colorado, excluding any conflicts-of-law rule or principle that might apply the law of another jurisdiction. 11.9 Survival. All of the representations, warranties, and agreements of or by the parties to this Agreement survive the execution and delivery of the Assignment and Bill of Sale and the transfer of the Property to BUYER. 11.10 Exhibits. The Exhibits attached to this Agreement are incorporated into and made a part of this Agreement. In the event of a conflict between the provisions of the Exhibits or the executed Assignment and Bill of Sale and the foregoing provisions of this Agreement, the provisions of the Exhibits and the executed Assignment and Bill of Sale take precedence over the foregoing provisions of this Agreement. In the event of a conflict between the provisions of the pro forma Assignment and Bill of Sale attached to this Agreement as Exhibit B and the executed Assignment and Bill of Sale, the provisions of the executed Assignment and Bill of Sale take precedence. This instrument may be executed in any number of counterparts, each of which shall be considered an original for all purposes. The authorized representatives of SELLER and BUYER sign below indicating their agreement to the terms of this Agreement. SELLER: BUYER: CHAPARRAL RESOURCES, INC. CONOCO INC. By: By: --------------------------------------- --------------------------------- Name: Howard Karren Name: ------------------------------------ ------------------------------- Title: Chairman & Chief Executive Officer Title: ------------------------------------ ------------------------------- Date: Date: ------------------------------------ ------------------------------- 10 EXHIBIT B FORM OF ASSIGNMENT AND BILL OF SALE STATE OF COLORADO ss. ss. COUNTY OF RIO BLANCO ss. CHAPARRAL RESOURCES, INC., a Colorado corporation ("SELLER"), in consideration of the agreements set forth herein, hereby sells and assigns to CONOCO INC., a Delaware corporation ("BUYER"), all of SELLER's right, title and interest in and to the Property described in this Assignment and Bill of Sale ("Assignment"), subject to the terms of this Assignment, effective as of January 1, 1997 (the "Effective Date"). This Assignment relates to the Purchase and Sale Agreement, effective January 1, 1997 between SELLER and BUYER (the "Agreement"). ARTICLE 1. PURCHASE AND SALE 1.1 The Property. Subject to the terms of this Assignment, SELLER agrees to sell and assign to BUYER and BUYER agrees to purchase and acquire from SELLER all of SELLER's right and title to, and interest in, the following (collectively the "Property"): 1.1.1 The oil, gas and mineral lease(s) and other interests in oil and gas described in Attachment 1 and all rights, privileges and obligations appurtenant to the leases INSOFAR AND ONLY INSOFAR AS the leases cover and include the lands, depths and rights described in Attachment 1 ("Leases"); 1.1.2 All rights in any unit in which the Leases are included, to the extent that these rights arise from and are associated with the Leases, including without limitation all rights derived from any unitization, pooling, operating, communitization or other agreement or from any declaration or order of any governmental authority; 1.1.3 All of SELLER'S rights and interest in and to producing, non-producing, shut-in, and abandoned oil, gas, and condensate wells, water source, water injection and other injection or disposal wells and associated facilities located on or from the Leases; 1.1.4 All equipment, facilities and other personal property on the Leases used in developing or operating the Leases or producing, treating, storing, gathering, compressing, processing or transporting hydrocarbons on or from the Leases; 1.1.5 All easements, rights-of-way, licenses, permits, servitudes and similar interests applicable to or used in operating the Leases or the personal property described above; and 1.1.6 All contracts and contractual rights, obligations and interests relating to the Leases, including without limitation unit agreements, farmout agreements, farmin agreements, operating agreements, and hydrocarbon sales, purchase, gathering, transportation, treating, marketing, exchange, processing and fractionating agreements ("Related Contracts"), including without limitation those Related Contracts described in Attachment 1. 1.2 Exclusions. The Property sold and assigned under this Assignment does not include: 1.2.1 SELLER's intellectual property used in developing or operating the Property, including without limitation proprietary computer software, patents, trade secrets, copyrights, names, marks and logos; 1.2.2 Trade credits, accounts and notes receivable, and adjustments or refunds (including without limitation transportation tariff refunds, take-or-pay claims, and audit adjustments) attributable to the Property with respect to any period before the Effective Date; 1 ARTICLE 2. WARRANTIES 2.1 Title; Encumbrances. SELLER SELLS AND TRANSFERS THE PROPERTY TO BUYER SUBJECT TO ALL ROYALTIES, OVERRIDING ROYALTIES, BURDENS AND ENCUMBRANCES, AND WITHOUT WARRANTY OF TITLE, EXPRESS, STATUTORY, OR IMPLIED, PROVIDED, HOWEVER, SELLER SHALL AGREE TO DEFEND THE TITLE TO THE PROPERTY AGAINST THE LAWFUL CLAIMS AND DEMANDS OF ALL PERSONS OR ENTITIES CLAIMING THE SAME OR ANY PART THEREOF BY, THROUGH OR UNDER SELLER, BUT NOT OTHERWISE. 2.2 Information About the Property. SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS, STATUTORY OR IMPLIED, AS TO (i) THE ACCURACY, COMPLETENESS, OR MATERIALITY OF ANY DATA, INFORMATION OR RECORDS FURNISHED TO BUYER IN CONNECTION WITH THE PROPERTY; (ii) THE QUALITY AND QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE PROPERTY; (iii) THE ABILITY OF THE PROPERTY TO PRODUCE HYDROCARBONS, INCLUDING WITHOUT LIMITATION PRODUCTION RATES, DECLINE RATES AND RECOMPLETION OPPORTUNITIES; (iv) ALLOWABLES OR OTHER REGULATORY MATTERS, OR (v) THE PRESENT OR FUTURE VALUE OF THE ANTICIPATED INCOME, COSTS OR PROFITS, IF ANY, TO BE DERIVED FROM THE PROPERTY. ANY AND ALL DATA, INFORMATION OR OTHER RECORDS FURNISHED BY SELLER ARE PROVIDED TO BUYER AS A CONVENIENCE AND BUYER'S RELIANCE ON OR USE OF THE SAME IS AT BUYER'S SOLE RISK. ARTICLE 3. ASSUMPTION OF OBLIGATIONS 3.1 Ownership and Operations. Except as provided in Section 5.1, upon and after Closing, BUYER shall assume and perform all the rights, duties, obligations and liabilities of ownership and operation of the Property, including without limitation: (i) all of SELLER's express and implied obligations and covenants under the terms of the Leases, the Related Contracts and all other orders and contracts to which the Property is subject; (ii) responsibility for all royalties, overriding royalties, production payments, net profits obligations, rentals, shut-in payments and other burdens or encumbrances to which the Property is subject accruing after the Effective Date; (iii) responsibility for compliance with all applicable laws, ordinances, rules and regulations pertaining to the Property, and the procurement and maintenance of all permits required by public authorities in connection with the Property; and (iv) all other obligations assumed by BUYER under this Assignment. With respect to (i) any part of the Property for which BUYER is not duly elected operator, or (ii) any non-operating interests in the Property being transferred to BUYER under this Agreement, BUYER shall assume full responsibility and liability for that portion of the foregoing rights, duties, obligations and liabilities for which non-operators are responsible. SELLER will remain responsible for all costs, expenses and liabilities incurred by SELLER in connection with the ownership or operation of the Property before the Effective Date, except those for which BUYER indemnifies SELLER, or which BUYER assumes in the Agreement. 3.2 Plugging and Abandonment Obligations. From and after the Effective Date, BUYER assumes full responsibility and liability for the following obligations related to the Property ("Plugging and Abandonment Obligations"): (i) plugging, replugging and abandoning all wells on the Property plugged after the Effective Date; (ii) removing and disposing of all structures and equipment located on or comprising part of the Property; (iii) the necessary and proper capping and burying of all associated flow lines located on or comprising part of the Property; (iv) restoring the leasehold premises of the Property, both surface and subsurface, to the condition they were in before commencement of oil and gas operations, as may be required by applicable laws, regulation or contract; and (v) any necessary disposal of Property contaminated by naturally occurring radioactive material ("NORM"). BUYER shall conduct all plugging, replugging, abandonment, removal, disposal and restoration operations in a good and workmanlike manner and in compliance with all applicable laws and regulations. With respect to any non-operating interests in the Property being transferred to BUYER under this Agreement, BUYER shall assume full responsibility and liability, from and after the Effective Date, for that portion of the Plugging and Abandonment Obligations for which non-operators are responsible. 3.3 Environmental Obligations. BUYER assumes full responsibility and liability for the following occurrences, events and activities on or related to the Property ("Environmental Obligations") whether arising before or after the Effective Date: (i) environmental pollution or contamination, including pollution of the soil, groundwater or air; (ii) underground injection activities and waste disposal onsite; (iii) clean-up responses, and the cost of remediation, control or compliance with respect to surface and subsurface pollution caused by spills, pits, ponds or lagoons; (iv) failure to comply with applicable land use, surface disturbance, licensing or notification requirements; and (v) violation of environmental or land use rules, regulations, demands or orders of appropriate state or federal regulatory agencies. With respect to any non-operating interests in the Property being transferred to BUYER under this Assignment, BUYER agrees to assume full responsibility and liability, from and after the Effective Date, for that portion of the Environmental Obligations for which non-operators are responsible. 2 ARTICLE 4. INDEMNITIES 4.1 Definition of Claims. As used in this Assignment, the term "Claims" means any and all losses, liabilities, damages, obligations, expenses, fines, penalties, costs, claims, causes of action and judgments for (i) breaches of contract; (ii) loss or damage to property; and (iii) violations of applicable laws, rules, regulations, orders or any other legal right or duty actionable at law or equity. The term "Claims" also includes attorneys fees and court costs resulting from the defense of any claim or cause of action within the scope of the indemnities in this Assignment 4.2 Application of Indemnities. Unless this Assignment expressly provides to the contrary, the indemnities set forth in this Assignment apply regardless of whether: (i) the indemnified party (or its employees, agents, contractors, successors or assigns) causes, in whole or part, an indemnified Claim; (ii) an indemnified Claim arises out of or results from the indemnified party's (or its employees', agents', contractors', successors' or assigns') sole or concurrent negligence; (iii) the indemnified party (or its employees, agents, contractors, successors or assigns) is deemed to be strictly liable, in whole or part, for an indemnified Claim; or (iv) any part of an indemnified Claim is the result of the imposition of punitive damages. All indemnities set forth in this Assignment extend to the officers, directors, employees and affiliates of the party indemnified, and cover the acts and omissions of the officers, directors, employees, contractors, successors and assigns of the indemnifying party. 4.3 BUYER's Indemnity. BUYER shall indemnify, defend and hold SELLER harmless from and against any and all Claims caused by, resulting from or incidental to: (i) BUYER's ownership or operation of the Property after the Effective Date, including without limitation the obligations assumed by BUYER in Section 3.1; (ii) all Plugging and Abandonment Obligations arising after the Effective Date; (iii) all Environmental Obligations, whether arising before or after the Effective Date; (iv) BUYER's disbursement of production proceeds from the Property accruing after the Effective Date, including funds in any suspense accounts received from SELLER; (v) any obligations for broker's fees incurred by BUYER in connection with the purchase of the Property; (vi) BUYER'S acts or omissions; (vii) any failure by BUYER to comply with applicable laws, ordinances, rules and regulations pertaining to the Property, and procure and maintain permits required by public authorities in connection with the Property; (viii) any violation by BUYER of state or federal securities laws, or BUYER's dealings with its partners, investors, financial institutions and other third parties with respect to this Agreement; and (ix) SELLER's operation of the Property under Article 10, if applicable, except to the extent caused by SELLER's gross negligence or willful misconduct. BUYER further agrees to indemnify, defend and hold SELLER harmless from and against any and all claims for personal injury, illness, disease and wrongful death which arise or are asserted after the Effective Date and which are attributable to the ownership and operation of the Property by BUYER, including without limitation, any interest, penalty, reasonable attorney's fees and other costs and expenses incurred in connection therewith or the defense thereof. 4.4 SELLER's Indemnity. SELLER shall indemnify, defend and hold BUYER harmless from and against any and all Claims caused by, resulting from or incidental to: (i) SELLER's ownership or operation of the Property before the Effective Date, except to the extent such obligations are assumed by BUYER in Section 4.3; (ii) SELLER's disbursement of production proceeds from the Property accruing before the Effective Date; (iii) any failure by SELLER to comply with applicable laws, ordinances, rules and regulations pertaining to the Property, or to procure and maintain permits required by public authorities in connection with the Property; (iv) any violation by SELLER of state or federal securities laws, or SELLER's dealings with its partners, investors, financial institutions and other third parties with respect to this Agreement; and (v) SELLER's operation of the Property under Article 5, if applicable, to the extent caused by SELLER's gross negligence or willful misconduct. SELLER further agrees to indemnify, defend and hold BUYER harmless from and against any and all claims for personal injury, illness, disease, and wrongful death which arise or are asserted prior to the Effective Date or are asserted after Effective Date and are solely attributable to the ownership and operation of the Property by SELLER prior to the Effective Date, including without limitation, any interest, penalty, reasonable attorney's fees, and other costs and expenses in connection therewith or in defense thereof. It is understood and agreed that SELLER's indemnity under this Section is limited to claims against BUYER by third parties, including government agencies. 3 4.5 NORM. BUYER ACKNOWLEDGES THAT IT HAS BEEN INFORMED THAT OIL AND GAS PRODUCING FORMATIONS CAN CONTAIN NATURALLY OCCURRING RADIOACTIVE MATERIAL. SOME OR ALL OF THE EQUIPMENT, MATERIALS AND OTHER PROPERTY SUBJECT TO THIS ASSIGNMENT MAY HAVE LEVELS OF NORM ABOVE BACKGROUND LEVELS. A HEALTH HAZARD MAY EXIST IN CONNECTION WITH THIS EQUIPMENT, MATERIALS AND OTHER PROPERTY. THEREFORE, BUYER MAY NEED TO FOLLOW SAFETY PROCEDURES WHEN HANDLING THIS EQUIPMENT, AND OTHER PROPERTY. ARTICLE 5. INTERIM OPERATION OF THE PROPERTY 5.1 Operations by SELLER. If SELLER is the operator of the Property, SELLER shall continue to operate the Property during the period between the Effective Date and 7:00 a.m., local time, where the Property is located, on the Closing Date, or such later date to which SELLER and BUYER agree in writing (the "Interim Period"), but SELLER has no obligation to operate the Property after the Interim Period. SELLER shall operate the Property during the Interim Period in a prudent manner consistent with generally accepted industry practices and standards, applicable laws and regulations, and all applicable lease and other agreement terms. SELLER is entitled to retain any overhead payments received and attributable to operations during the Interim Period. SELLER makes no representation or warranty that BUYER will become operator of any portion of the Property, as that matter is controlled by the applicable operating agreements and governmental regulatory requirements. 5.2 Marketing of Production. If SELLER continues to operate the Property after the Closing Date under this Article 5, SELLER and BUYER will agree on continued marketing of production, disbursement of proceeds of production, billing and collection of amounts due from the nonoperating interest owners, and payment of all delay rentals, minimum royalties, shut-in royalties and other lease payments until BUYER begins operating the Property. ARTICLE 6. TAXES AND EXPENSES 6.1 Recording Expenses. BUYER shall pay all costs of recording and filing the Assignment and Bill of Sale for the Property, all state and federal transfer and assignment documents, and all other instruments. 6.2 Ad Valorem, Real Property and Personal Property Taxes. Except as adjusted pursuant to the terms of the Agreement, all Ad Valorem Taxes, Real Property Taxes, Personal Property Taxes, and similar obligations ("Property Taxes") on the Property are SELLER's obligation for periods before the Effective Date and BUYER's obligation for periods after the Effective Date. 6.3 Severance Taxes. SELLER shall bear and pay all severance or other taxes measured by production from the Property, or the receipt of proceeds therefrom, to the extent attributable to production from the Property before the Effective Date. BUYER shall bear and pay all such taxes on production from the Property on and after the Closing Date. 6.4 Sales Taxes. SELLER shall remit on behalf of BUYER all state and county sales taxes due on the Property, using the allocated values listed in Exhibit D of the Agreement. BUYER will reimburse SELLER at Closing for all sales taxes paid on behalf of BUYER. ARTICLE 7. MISCELLANEOUS 7.1 Covenant Running With the Land. This Assignment and all of its rights, reservations, and covenants are covenants running with the land and inure to and are binding upon the parties hereto, their heirs, successors, and assigns. BUYER shall make any transfer or encumbrance of any of the Property expressly subject to this Assignment and the assignee or transferee must assume all obligations set forth herein. 4 7.2 Purchase and Sale Agreement. The terms of the Agreement are incorporated by reference in this Assignment. In the event of a conflict between the provisions of this Assignment and the provisions of the Agreement, the provisions of this Assignment prevail. The authorized representatives of SELLER and BUYER sign below indicating their agreement to the terms of this Assignment. SELLER: BUYER: CHAPARRAL RESOURCES, INC. CONOCO INC. By: By: --------------------------------------- --------------------------------- Name: Howard Karren Name: ------------------------------------ ------------------------------- Title: Chairman & Chief Executive Officer Title: ------------------------------------ ------------------------------- Date: Date: ------------------------------------ ------------------------------- [Add Appropriate Acknowledgment Forms] 5
- ----------------------------------------------------------------------------------------------------------------------- PROPERTY NAME COUNTY STATE OPERATOR GWI NRI ALLOCATED VALUE - ----------------------------------------------------------------------------------------------------------------------- SDC #6 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.106876 $5,000.00 - ----------------------------------------------------------------------------------------------------------------------- SDC #1-B Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.107509 $11,100.00 - ----------------------------------------------------------------------------------------------------------------------- SDC #22 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $13,200.00 - ----------------------------------------------------------------------------------------------------------------------- SDC #23 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $15,500.00 - ----------------------------------------------------------------------------------------------------------------------- Superior Fee #1-18 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.107510 $6,500.00 - ----------------------------------------------------------------------------------------------------------------------- SDC Fee #20 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.111708 $1,000.00 - ----------------------------------------------------------------------------------------------------------------------- SDC #16 Rio Blanco CO Chaparral Resources, Inc. 0.300000 0.223417 $8,600.00 - ------------------------------------------------------------------------------------------------------------------------ SDC #13 Rio Blanco CO Chaparral Resources, Inc. 0.300000 0.225000 combined with SDC #16 - ------------------------------------------------------------------------------------------------------------------------ SDC #31 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $200.00 - ------------------------------------------------------------------------------------------------------------------------ SDC #10 Rio Blanco CO Chaparral Resources, Inc. 0.300000 0.227219 $300.00 - ------------------------------------------------------------------------------------------------------------------------ SDC #7 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.106875 $6,200.00 - ------------------------------------------------------------------------------------------------------------------------ SDC #25 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $44,700.00 - ------------------------------------------------------------------------------------------------------------------------ SDC #26 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $7,500.00 - ------------------------------------------------------------------------------------------------------------------------ SDC #21 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $9,900.00 - ------------------------------------------------------------------------------------------------------------------------ SDC #24 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $13,500.00 - ------------------------------------------------------------------------------------------------------------------------ Tipperary #7-3 Rio Blanco CO Chaparral Resources, Inc. 0.135000 0.105469 $23,400.00 - ------------------------------------------------------------------------------------------------------------------------ SDC #17-2 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.112500 $1,500.00 - ------------------------------------------------------------------------------------------------------------------------ SDC #29 Rio Blanco CO Chaparral Resources, Inc. 0.211100 0.151464 $29,500.00 - ------------------------------------------------------------------------------------------------------------------------ Fuelco #7-4 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.123750 $16,900.00 - ------------------------------------------------------------------------------------------------------------------------ SDC Fee #15 Rio Blanco CO Chaparral Resources, Inc. 0.300000 0.228573 $300.00 - ------------------------------------------------------------------------------------------------------------------------ SDC #12 Rio Blanco CO Chaparral Resources, Inc. 0.300000 0.220500 $300.00 - ------------------------------------------------------------------------------------------------------------------------ SDC #30 Rio Blanco CO Chaparral Resources, Inc. 0.150000 0.107510 $800.00 - ------------------------------------------------------------------------------------------------------------------------ Superior #12-1 Rio Blanco CO Chaparral Resources, Inc. 0.221250 0.166055 $300.00 - ------------------------------------------------------------------------------------------------------------------------ SDC #14 Rio Blanco CO Chaparral Resources, Inc. 0.300000 0.241266 $300.00 - ------------------------------------------------------------------------------------------------------------------------ Government 32-3 Rio Blanco CO Chaparral Resources, Inc. 0.300000 0.236250 $15,800.00 - ------------------------------------------------------------------------------------------------------------------------ SDC #1M-34 Rio Blanco CO Chaparral Resources, Inc. 0.168750 0.134531 $200.00 - ------------------------------------------------------------------------------------------------------------------------ Undeveloped Acreage Rio Blanco CO Chaparral Resources, Inc. $37,500.00 - ------------------------------------------------------------------------------------------------------------------------ TOTAL $270,000.00 ---------------------------------------------
Rio Blanco County, Colorado Oil and Gas Leases/Surface Leases/Mineral Interests Lessor Lessee Description Date Exp. Gross Ac. Hill Foundation F.S. Di Grappa T4S-R102W 8/8/75 HBP 320.000 Sec 12: S/2SW/4 Sec 13: E/2W/2 Sec 24: E/2NW/4 Robert M. Allan III F.S. Di Grappa T4S-R102W 8/1/75 HBP Sec 12: S/2SW/4 Sec 13: E/2W/2 Sec 24: E/2NW/4 Gerald Buckles et al F.S. Di Grappa T4S-R102W 8/12/75 HBP Sec 12: S/2SW/4 Sec 13: E/2W/2 Sec 24: E/2NW/4 Ruth Mayes Guardian F.S. Di Grappa T4S-R102W 8/1/75 HBP Sec 12: S/2SW/4 Sec 13: E/2W/2 Sec 24: E/2NW/4 The Superior Oil Co Cities Service Oil Co T4S-R102W 4/15/64 HBP 320.000 Sec 1: SE/4SW/4 Sec 12: E1/2NW1/4, SW1/4NE1/4, NE1/4SW1/4, N1/2SE1/4 T4S-R101W Sec 7: NW1/4SW1/4 From the surface to 100' below the base of the Entrada. Frances M Spence J.R. Williams T4S-R102W 9/10/56 HBP 40.000 Sec 12: SW/4SW/4 Lillian D. McCowan J.R. Williams T4S-R102W 9/10/56 HBP Sec 12: SW/4SW/4 M.J. Mayes Cities Service Oil Co T4S-R102W 2/5/62 HBP Sec 12: SW/4SW/4 T.H. Hammett Cities Service Oil Co T4S-R102W 2/23/62 HBP Sec 12: SW/4SW/4 First National Bank Cities Service Oil Co T4S-R102W 2/23/62 HBP Sec 12: SW/4SW/4 Robert M. Allan III Cities Service Oil Co T4S-R102W 2/5/62 HBP Sec 12: SW/4SW/4 Lynn Allan Barr Cities Service Oil Co T4S-R102W 2/5/62 HBP Sec 12: SW/4SW/4 Virginia M. Colvin Cities Service Oil Co T4S-R102W 4/12/62 HBP Sec 12: SW/4SW/4 Lou L. Powell Cities Service Oil Co T4S-R102W 3/20/63 HBP Sec 12: SW/4SW/4 Lorraine L. Winterer Cities Service Oil Co T4S-R102W 3/21/63 HBP Sec 12: SW/4SW/4 Ralph E. Smith Cities Service Oil Co T4S-R102W 3/22/63 HBP Sec 12: SW/4SW/4 Ray E. Jensen Cities Service Oil Co T4S-R102W 3/22/63 HBP Sec 12: SW/4SW/4 Albert C. Kirby C.B. Exploration Co T4S-R102W 7/8/71 HBP 320.000 Sec 12: S/2SW/4 Sec 13: E/2W/2 Sec 24: E/2NW/4 R.W. Pendleton Tst F.S. Di Grappa T4S-R102W 12/8/75 HBP Sec 12: S/2SW/4 Sec 13: E/2W/2 Sec 24: E/2NW/4 Virginia M. Colvin F.S. Di Grappa T4S-R102W 8/1/75 HBP Sec 12: S/2SW/4 Sec 13: E/2W/2 Sec 24: E/2NW/4 Edward Juhan et al F.S. Di Grappa T4S-R102W 8/1/75 HBP Sec 12: S/2SW/4 Sec 13: E/2W/2 Sec 24: E/2NW/4 Lorraine L. Winterer F.S. Di Grappa T4S-R102W 8/1/75 HBP Sec 12: S/2SW/4 Sec 13: E/2W/2 Sec 24: E/2NW/4 Ray E. Jensen F.S. Di Grappa T4S-R102W 8/13/75 HBP Sec 12: S/2SW/4 Sec 13: E/2W/2 Sec 24: E/2NW/4 Ralph E. Smith F.S. Di Grappa T4S-R102W 8/1/75 HBP Sec 12: S/2SW/4 Sec 13: E/2W/2 Sec 24: E/2NW/4 John R. Anderson F.S. Di Grappa T4S-R102W 8/12/75 HBP 320.000 Resurvey Tract 37 comprising parts of Sections 2, 3, 10 & 11 Albert G. Kirby Cities Service Oil Co T4S-R102W 3/22/75 HBP Resurvey Tract 37 comprising parts of Sections 2, 3, 10 & 11 David D. Robinson Cities Service Oil Co T4S-R102W 3/22/75 HBP Resurvey Tract 37 comprising parts of Sections 2, 3, 10 & 11 Max B. Lewis Cities Service Oil Co T4S-R102W 8/12/75 HBP Resurvey Tract 37 comprising parts of Sections 2, 3, 10 & 11 First Congregational Cities Service Oil Co T4S-R102W 3/10/74 HBP Church of Grand Resurvey Tract 37 Junction comprising parts of Sections 2, 3, 10 & 11 Marguerite B. Smith Lawrence Barker T4S-R102W 1/1/78 HBP 200.000 Sec 12: SE/4SW/4 Sec 13: E1/2W1/2 Sec 24: E/2NW/4 C-03997 Cascade Land T4S-101W 6/1/68 HBP 640.000 Leasing Co Sec 3: N/2 Sec 4: S/2 C-03638 Cascade Land T4S-R101 Leasing Co Sec 9: SW/4, NE/4SE/4, W/2SE/4 5/1/68 HBP 280.000 C-0121361 Walter Duncan T3S-R102W 5/1/64 HBP 2,240.000 Sec 27: ALL Sec 28: ALL Sec 33: ALL Sec 34: N/2 C-2864 Robert L. Milkulich T3S-R101W 12/1/67 HBP 640.000 Sec 32: ALL C-03961 J. Pelham Johnston T4S-R102W 4/1/52 HBP 1,403.780 Sec 1: Lots 5-8, S/2N/2, SE/4, N/2SW/4, SW/4SW/4 Sec 2: Lots 5-10, S/2N/2, N/2S/2, S/2SE/4 Sec 3: Lots 5,6,9, S/2NE/4, N/2SE/4 C-03286 Preston Oil Co T4S-R101W 9/1/51 HBP 280.000 Sec 11: NW/4SE/4, E/2SE/4 Sec 11: NE/4 C-03955 Cities Service Oil Co T4S-R102W 4/1/52 HBP 1,800.000 Sec 12: SE/4NE/4, NW/4SW/4, S/2SE/4, N1/2NE1/4 Sec 13: E/2, W1/2W1/2 Sec 14: ALL Sec 15: N/2, N/2SE/4, SE/4SE/4 C-12755 Cascade Land T4S-R101W 6/1/71 HBP 1,044.190 Leasing Co Sec 5: W/2SE/4 Sec 7: S1/2SW1/4, NE1/4SW1/4, SE1/4 Sec 8: Lots 1,2, W/2NE/4, NW/4 Sec 17: Lots 1,2, W/2NE/4, NW1/4 C-03967 Carol Miller T4S-R101W 4/1/52 HBP 1,160.520 Sec 5: Lots 5-10, SW/4NE/4, S/2NW/4, SW/4 Sec 6: Lots 8-11, S/2N/2, S/2 (ALL) C-03286-B Preston Oil Co T4S-R101W 9/1/51 HBP 40.000 Sec 11: SW/4SE/4 C-25358 John H. Brunel T4S-R101W 6/1/77 HBP 200.000 Sec 9: SE/4SE/4 Sec 16: W/2NE/4, E/2SE/4 C-03963 J. Pelham Johnston T4S-R102W 4/1/52 HBP 754.100 Sec 10: Lots 1-6, 8, 9, N1/2NW1/4, SW1/4NW1/4, SE1/4SE1/4 Sec 11: Lots 1,2,3, SE/4NW/4, SW/4 Sec 12: W/2NW/4 C-12754 Raymond Chorney T4S-R101W 4/15/64 HBP 160.000 Sec 7: NW1/4 Twin Buttes Land Teton Energy Co. T4S-R102W Company Sec 10: SE1/4NW1/4 Sec 13: NE1/4SW1/4 Surface Access Agreement Chaparral Resources, T4S-R102W Inc. Sec 12: S1/2SW/4 Sec 13: E1/2W1/2 Sec 24: E1/2NW1/4 2/100ths mineral interest TOTALS 12,162.590 Rio Blanco County, Colorado Related Contracts Effective Date Contract Description 7/8/63 Operating Agreement South Douglas Creek Unit and Unit Operating Agreement 11/20/75 Operating Agreement Cities Service Agreement 6/1/76 Operating Agreement Mountain Fuel Agreement 11/3/76 Operating Agreement Tipperary Agreement 9/1/77 Operating Agreement Superior Agreement 4/18/84 Operating Agreement Joint Operating Agreement (individual well) 6/21/84 Operating Agreement Joint Operating Agreement (individual well) 11/1/75 Farmout Farmout Agreement between Cities Service and Frank DiGrappa 6/1/76 Letter Agreement Letter Agreement between Mountain Fuel and Frank DiGrappa 7/19/76 Agreement Agreement between Norris Oil Co. and Frank DiGrappa 9/23/76 Farmout Farmout Agreement between Teton and Tipperary 6/3/77 Farmout Superior - Teton Farmout Agreement 1/1/95 Marketing Marketing Agreement between Conoco Inc. and Chaparral Resources, et al 11/1/96 Marketing Marketing Agreement between Wasatch Oil & Gas and Chaparral Res., et al EXHIBIT C FORM OF NONFOREIGN AFFIDAVIT Exemption from Withholding of Tax For Dispositions of U.S. Real Property Interests Section 1445 of the Internal Revenue Code provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person. To inform Conoco Inc. that withholding of tax is not required upon the disposition of a U.S. real property interest by -------------------------, the undersigned hereby certifies the following: 1. ---------------------- is not a nonresident alien, foreign corporation, foreign partnership, foreign trust, or foreign estate for purposes of U.S. income taxation. 2. ------------------------ taxpayer identifying number is ------------------. 3. --------------------------- office address is --------------. - ----------------- understands that this certification may be disclosed to the Internal Revenue Service by ------------------ and that any false statement contained herein could be punished by fine, imprisonment, or both. Under penalties of perjury, I declare that I have examined this certification and, to the best of my knowledge and belief, it is true, correct, and complete, and I further declare I have authority to sign this document. By: -------------------------------- Title: ----------------------------- SUBSCRIBED AND SWORN TO by the said ------------------------------------- - ------------------------------------, --------------------------------------- of - ---------------, before me this ---- day of --------, 199-, to certify which witness my hand and seal of office. My commission expires on the ----- day of ----------, 19--. --------------------------------- NOTARY PUBLIC in and for THE STATE OF ------------------ EXHIBIT E-1 SELLER'S ASSIGNMENT NOTICE February 28, 1997 Conoco Inc. 10 Desta Drive, Suite 100W Midland, TX 79705-4500 Re: Notice of Assignment of Purchase and Sale Agreement dated February ---, 1997, Effective January 1, 1997 between Chaparral Resources, Inc. and Conoco Inc. Chaparral Resources, Inc. ("Seller") hereby notifies Conoco Inc. ("Buyer") that Seller has assigned all of its rights under the Purchase and Sale Agreement dated February ---, 1997, effective January 1, 1997, between Seller and Buyer ("Purchase and Sale Agreement") to ------------------------, a qualified intermediary (as that term is defined in Section 1.1031(k)- 1(g)(4)(v) of the Treasury Regulations), as provided in Section 11.1 of the Purchase and Sale Agreement. The assignment of the Purchase and Sale Agreement is effective February ---, 1997. Seller makes this assignment of the Purchase and Sale Agreement solely for the purpose of completing the transaction contemplated by the Purchase and Sale Agreement as a like-king exchange of property under Section 1031 of the Internal Revenue Code of 1986, as amended. Nothing in this letter will be deemed to evidence and release of either Seller or Buyer from any of their respective liabilities and obligations to each other under the Purchase and Sale Agreement. Sincerely Yours, CHAPARRAL RESOURCES, INC. - ------------------------------ BUYER'S ACKNOWLEDGEMENT OF NOTIFICATION Buyer hereby acknowledges receipt of notification to Buyer as required by Treasury Regulation Section 1.1031(k)-1(g)(4)(v) and Buyer's signature hereon shall constitute acceptance of such notification. Buyer's acceptance of this notification shall in no way be deemed to release Seller or Buyer from any of their agreements, representations, warranties and/or indemnifications set forth in the Purchase and Sale Agreement, nor shall the assignment of the Purchase and Sale Agreement be deemed to enlarge the rights, duties or obligations of any party under the Purchase and Sale Agreement. CONOCO INC. - ------------------------------ EXHIBIT E-2 BUYER'S ASSIGNMENT NOTICE February 28, 1997 Chaparral Resources, Inc. 3400 Bissonnet, Suite 135 Houston, TX 77005 Re: Notice of Assignment of Purchase and Sale Agreement dated February ---, 1997, Effective January 1, 1997 between Conoco Inc. and Chaparral Resources, Inc. Conoco Inc. ("Buyer") hereby notifies Chaparral Resources, Inc. ("Seller") that Buyer has assigned all of its rights under the Purchase and Sale Agreement dated February ----, 1997, effective January 1, 1997, between Seller and Buyer ("Purchase and Sale Agreement") to Petroleum Strategies, Inc., a qualified intermediary (as that term is defined in Section 1.1031(k)-1(g)(4)(v) of the Treasury Regulations), as provided in Section 11.1 of the Purchase and Sale Agreement. The assignment of the Purchase and Sale Agreement is effective February ----, 1997. Buyer makes this assignment of the Purchase and Sale Agreement solely for the purpose of completing the transaction contemplated by the Purchase and Sale Agreement as a like-king exchange of property under Section 1031 of the Internal Revenue Code of 1986, as amended. Nothing in this letter will be deemed to evidence and release of either Seller or Buyer from any of their respective liabilities and obligations to each other under the Purchase and Sale Agreement. Sincerely Yours, CONOCO INC. - ------------------------- SELLER'S ACKNOWLEDGEMENT OF NOTIFICATION Seller hereby acknowledges receipt of notification to Seller as required by Treasury Regulation Section 1.1031(k)-1(g)(4)(v) and Seller's signature hereon shall constitute acceptance of such notification. Seller's acceptance of this notification shall in no way be deemed to release Seller or Buyer from any of their agreements, representations, warranties and/or indemnifications set forth in the Purchase and Sale Agreement, nor shall the assignment of the Purchase and Sale Agreement be deemed to enlarge the rights, duties or obligations of any party under the Purchase and Sale Agreement. CHAPARRAL RESOURCES, INC. - ------------------------------ EX-10.16 7 AMENDMENTS TO STOCK WARRANT PLANT AMENDMENTS TO CHAPARRAL RESOURCES, INC. 1989 STOCK WARRANT PLAN RESOLVED, that Section 6(g) of the Company's 1989 Stock Warrant Plan (the "Plan") is hereby amended to provide that upon termination of employment by a Warrant Holder who is not a director of the Company, the Board of Directors shall have the option, in its sole discretion, to extend the expiration date of any Warrant previously granted to a Warrant Holder for a period of up to nine (9) months following the date of termination of the Warrant Holder's employment with the Company. RESOLVED, that Section 8 of the Company's 1989 Stock Warrant Plan (the "Plan") is hereby amended to provide that a Warrant granted under the Plan may be assigned by a Warrant Holder to a Warrant Holder's family member or to a charitable trust created by the Warrant Holder. For purposes of this Section and the Plan, the term family member means a parent, child, grandparent or spouse. EX-10.17 8 AGREEMENT FOR EXPLORATION DEVELOPMENT & PRODUCTION AGREEMENT FOR EXPLORATION, DEVELOPMENT AND PRODUCTION OF OIL IN KARAKUDUK OIL FIELD IN MANGISTAU 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 ALMATY - 1995
CONTENTS SUBJECT OF THE AGREEMENT......................................................................................1 SECTION 1. Definitions.......................................................................................2 SECTION 2. Ownership Rights..................................................................................6 SECTION 3. Duration of the Agreement and Termination.........................................................7 3.1. Duration.....................................................................7 3.2. Exploration Phase............................................................7 3.3. Development and Production Phase.............................................8 3.4. Termination..................................................................8 SECTION 4. Principle Rights and Obligations of the Contractor and Investor.................................................................9 4.1. Rights of the Contractor and Investor........................................9 4.2. Obligations of the Contractor...............................................12 SECTION 5. Assistance and the Support of the Authorized Body........................................................................14 SECTION 6. Board of Directors...............................................................................15 SECTION 7. Operational and Financial Requirements and Budget.............................................................................15 7.1. Exploration.................................................................15 7.2. Development and Production..................................................16 7.3. Procedural and Approval Method of the Operational Documents.................................................17 SECTION 8. Expenditures and Compensation....................................................................19 SECTION 9. Commercial and Financial Terms and Conditions....................................................19 9.1. Financial Matters...........................................................19 9.2. Customs.....................................................................20 9.3. Taxes and Payments..........................................................20 9.4. Compensation................................................................26 9.5. Accounting Procedures and Auditing..........................................26 SECTION 10. Protection of Subsurface Resources, Natural Environment and Labor and Population Safety............................................27 SECTION 11. Other Legal Issues..............................................................................28 11.1. Transfer and Assignment of Rights..........................................28 11.2. Payments Related with Field Allocation and Usage Right......................................................28 11.3. Insurance..................................................................28 11.4. Legal Adjustments in Relation with Working Conditions...................................................29 11.5. Force Majeure..............................................................29 11.6. Local Consumption..........................................................29 11.7. Amendments to the Terms and Conditions of the Agreement.....................................................30 11.8. Confidentiality............................................................30 11.9. Settlement of Disputes.....................................................31 11.10. Waiver....................................................................31 11.11. Correspondence............................................................32 11.12. Headings..................................................................32
SUBJECT OF AGREEMENT This agreement (hereinafter referred to as "Agreement") is prepared and signed on "30" August 1995 by and between the Ministry of Oil and Gas Industry of the Republic of Kazakhstan, (hereinafter referred to as "Authorized Body") acting for and on behalf of and representing the Government of Republic of Kazakhstan in accordance with the legislation of the Republic of Kazakhstan and Joint Stock Company of closed type "Karakuduk-Munay Inc." Joint Venture, established and operating in accordance with and under the existing Laws of Republic of Kazakhstan, (hereinafter referred to as "Contractor"); and having the following shareholders: PGO "Mangistauneftegazgeologiya" with its new name GHK Zharkyn, "Kazakhstanmunaygaz" National Petroleum Company with its new name GHK Munaygaz and "Korporatsiya KRAMDS-Mangistau" Inc. which is owned by Korporatsiya Mangistau Terra International, by assignment of shares, established and operating under the laws of the Republic of Kazakhstan, hereinafter collectively referred to as "Shareholders of Kazakhstan Side" and Central Asian Petroleum (Guernsey) Limited, established and operating under the laws of Island of Guernsey, (hereinafter referred to as "Investor"). The Authorized Body and the Contractor are sometimes referred to individually as "Party" and collectively as "Parties" hereinafter in this Agreement. WHEREAS; as a result of the transfer of some of the rights and shares of the Contractor to the Investor in accordance with the Clauses 4.1.9. and 11.1.1, the parties to that certain agreement dated 1st of July 1993 between the Authorized Body and the Contractor, signed in accordance with the Decree of the Cabinet of Ministers of the Republic of Kazakhstan No: 498 dated June 11, 1993. Thus, by execution of this Agreement, the 1st of July 1993 dated agreement, as amended by this Agreement, is superseded by this Agreement and now this Agreement shall be in full force and valid. WHEREAS; the Contractor has been formed with the re-registration of the Articles of Association of joint stock company of closed type Karakuduk-Munay Inc. Joint Venture (hereinafter referred to as the "Articles"); by the Registrar Office of Economical Corporations, Incorporated Partnerships and Companies of Financial Directorate of Mangistau Province No. 23625 dated March 1, 1995; and by the National Agency of Foreign Investments No. 2262 dated April 27, 1995. WHEREAS; the usage right of the Subsurface Resources of the Field of 68.4 sq.km. in the Town of Mangistau of Mangistau Region of which the Geographical Coordinates are given herein below in drawing number L-39-xx, and whereas the Observation Map is provided as Enclosure-I to this Agreement; has been given to joint stock Company of closed type Karakuduk-Munay Inc. Joint Venture, for a period of 30 (thirty) years, for exploration, development, production, treatment, storage, refining, transporting and sales including export of hydrocarbons from Karakuduk oil field; 44o51'43" North Parallel 53o52'30" East Meridian 44o52'20" North Parallel 53o54'08" East Meridian 44o52'10" North Parallel 53o59'10" East Meridian 44o49'10" North Parallel 54o02'50" East Meridian 44o48'13" North Parallel 53o57'10" East Meridian 44o49'40" North Parallel 53o53'17" East Meridian WHEREAS; the Contractor shall have the obligation to conduct the Work Program in accordance with the terms and conditions of this Agreement by taking into consideration the License for the Right to Use Natural Deposits (hereinafter referred to as "License") issued by the Government of Republic of Kazakhstan on June 28, 1995 with the serial number MG No:249 Oil. SECTION-1 DEFINITIONS Unless otherwise specifically referred to in this Agreement, any singular word may define the plural and any plural word may define the singular. 1.1. "Agreement" means this Agreement signed by and between the Ministry of Oil and Gas Industry of the Republic of Kazakhstan and joint stock company of closed type Karakuduk-Munay Inc. Joint Venture for the implementation of the Petroleum Activities. 1.2. "Petroleum Activities" means as foreseen in the Agreement; geological research, development, production, treatment and purification (treatment and drying process for the natural gas and the separation of it in different elements from petroleum), refining, storage, pipeline transportation and marketing and sales activities in local and international markets of the hydrocarbons and any other preparation and sub-activities associated with. 1.3. "Expenditures for Petroleum Activities" means all types of costs and expenditures incurred by the Contractor for the Petroleum Activities in accordance with the Agreement i.e. (expenditures related with well and equipment, maintenance, construction, subsurface and earth studies, repairs, chemicals, oils and lubricants, spare parts, labor force, required services for operations, catering and accommodation, management and administration, personnel training and the preparation and issue of project-budget documentation and other related documentation as well as removing the remaining). 1.4. "Authorized Body" means the Ministry of Oil and Gas Industry of the Republic of Kazakhstan who is acting for and on behalf of the Government of the Republic of Kazakhstan and legally empowered to conduct Petroleum Activities. 2 1.5. "Contractor" means joint stock company of closed type Karakuduk-Munay Inc. Joint Venture whose Shareholders are; GHK Zharkyn with 20% (twenty percent) share, GHK Munaygaz with 20% (twenty percent) share, Korporatsiya Mangistau Terra International with 10% (ten percent) share and the Investor, Central Asian Petroleum (Guernsey) Limited with 50% (fifty percent) share. 1.6. "Sub-Contractor" means any private and/or juridical person who is used by the Contractor for the supply of required equipment, material and services in the required and demanded quality in order to fulfill the requirements of the Agreement. 1.7. "Agreement Field" means Karakuduk Oil Field allocated for Petroleum Activities, as defined in the Subject of the Agreement Section of this Agreement and as shown in geographic coordinates in Enclosure-I. During the course of the Petroleum Activities, in case the geographic settlement borders of the Oil and Gas fields are determined to be extended the borders of the field defined in the Subject of the Agreement Section of this Agreement and in Enclosure-I; issue of expanding the "Agreement Field" shall be resolved by the Parties through mutual negotiations. 1.8. "Commercial Disclosure" or "Commercial Exploration" means the exploration of the Hydrocarbon reserves in the Agreement Field of which their operation is found economical and where the income to be obtained from their production shall meet with the operation and production expenditures and shall generate the profit to be found appropriate and reasonable by the Parties. In such a case, the field is considered productive for the purpose of operation. 1.9. "Field" means one or more natural accumulation of Hydrocarbons, which are deposited in the Agreement Field one over the other either in connected or isolated levels or reservoirs, within one or several interconnected geological traps in vertical form and considered as the whole for the purpose of the operations. 1.10. "Hydrocarbons" means Crude Oil, Condensate, Natural Gas, natural gas liquids and any other associated substances found during the production of those. Natural gas liquid is the Hydrocarbons where the Natural Gas and Associated Gas is turning into liquid in a different environment than normal conditions. 1.11. "Petroleum" or "Crude Oil" means; asphalt bithium and liquid Hydrocarbons that are also known as "Distillate" or "Condensate" and obtained from the wells in the form of liquid under normal heat and pressure without being dependent upon their density by densing Natural Gas that can also easily be steamed. 1.12. "Gas" or "Natural Gas" means the gas which is not Hydrocarbon but obtained from the wells with the Hydrocarbons in the form of gas liquid and Gas remains after densing different type of Hydrocarbons and elements, sulfur, carbonic acid, helium (excluding densed gasses that can become liquid), greasy mineral gas, dry mineral gas, Associated Gas and Hydrocarbons, under normal heat and pressure. 3 1.13. "Associated Gas" means the gas comes out during the production of the Petroleum which is mixed with Crude Oil or accumulated in the Gas cap. 1.14. "Subordinate Petroleum Components" means various mineral and other elements. 1.15. "Work Program" means all programs that are prepared and issued for the implementa- tion of the Petroleum Activities in accordance with the License and the terms and conditions of the Agreement. 1.16. "Investment" means all amounts required for the Petroleum Operations including properties, rights on properties and intellectual rights. 1.17. "Effective Date" means the date when this Agreement is signed by the Parties. 1.18. "Commencement Date of the Productive Production" means the date when the income achieved from the sale of the Petroleum becomes in excess of the expenditures made for the production and sales of the same. 1.19. "Payout" means the date when Contractor has repaid Investor the Investment. 1.20. "Shareholders Of The Kazakhstan Side Profit" means the amount of the Shareholders of the Kazakhstan Side are collectively entitled to as their share of the distributable profit of Contractor. Such amount shall be calculated and distributed on a quarterly basis, unless the Board of Directors determines otherwise, and shall be equal to 50% (fifty percent) of the amount of Contractor cash flow remaining after subtracting from Contractor's gross revenue for the quarter: Royalty, Investment Recovery, all operating expenditures, Fiscal Obligations as required pursuant to this Agreement, any other actual expenditures made by Contractor during the quarter. 1.21. "License" means a permission granted by the Government of the Republic of Kazakhstan to the Contractor for conducting exploration and production activities for a period of 25 (twenty five) years within the Agreement Field. 1.22. "Delivery Point" means the point where the link is established to the existing pipeline for the further transportation of the product. Such point is determined with the mutual agreement of the Parties and shall be placed either within the boundaries of the Agreement Field or outside of such boundaries, in the most economical point for the transportation of the product. 4 1.23. "Force-Majeure" means any occurrence that can not be predicted by and outside the reasonable control of the Parties preventing or delaying any of the Parties' timely performance of obligations. (Such as riot or civil commotion, declared or undeclared war, hostilities, actions of not being compliant with the law, terrorism, natural hazards and disasters, decisions issued by the Government Authorities, etc.). 1.24. "Investor" means Central Asian Petroleum (Guernsey) Limited who possesses the 50% (fifty percent) shares of closed type Karakuduk Munay Inc. Joint Venture or any other juridical body that its shares are transferred and/or assigned to. The priority for the assignment of the shares is given to the Shareholders of the Kazakhstan Side. 1.25. "Investment Recovery" means the amount of each installment Investor is entitled to receive as partial repayment of the Investment from the Contractor, inclusive of interest at the rate of Libor plus 1% (one percent). Such installments shall be calculated and paid on a quarterly basis and shall be equal to 65% (sixty-five percent) of Contractor's gross revenues after deduction of Royalty (State Share). Any amount of Investment, plus interest, remaining unpaid after each quarterly installment shall be carried forward to the next quarter until the full amount of the Investment, plus interest, is repaid. The Investment Recovery shall be exempt from all Fiscal Obligations. 1.26. "Investor Profit" means the amount the Investor is entitled to as its share of the dividend (distributable profit) of Contractor. Such amount shall be calculated and distributed on a quarterly basis, unless the Board of Directors determines otherwise, and shall be equal to 50% (fifty percent) of the amount of Contractor cash flow remaining after subtracting from Contractor's gross revenue for the quarter. Royalty, Investment Recovery, all operating expenditures, Fiscal Obligations as required pursuant to this Agreement, and any other actual expenditures made by Contractor during the quarter. 1.27. "Libor" means the annual interest rate on US Dollars ("US$") for one night offered to the leading banks of the London Interbank by Citibank N.A., London Branch on the 15th day of each month at 11:00 hr. and published by the Financial Times Journal in London/United Kingdom. In case the 15th day of the month is a holiday then the immediately subsequent working day shall be accepted as the base date for the purpose of such calculation. 1.28. "Royalty (State Share)" means the percentages of the gross production of the Contractor as shown in Clause 9.3.1. hereinbelow. 1.29. "Board of Directors" means the highest Executive Committee of Karakuduk Munay Inc. (Contractor) consisting of 8 (eight) members, 4 (four) members each assigned by Shareholders of the Kazakhstan Side including the Authorized Body and by the Investor. 1.30. "Fiscal Obligations" means without limitations: all taxes, royalties, levies, imposts, fees, fines, withholdings, forced savings, mandatory funds, escrow's, accounting or valuation procedures which impact the timing or magnitude of Shareholders Of the Kazakhstan Side Profit, Investor's Profit, or 5 Investment Recovery or any other amounts to be received by the shareholders of the Contractor. SECTION - 2 OWNERSHIP RIGHTS 2.1. The Contractor, as a result of the expenditures incurred and due to the obligations undertaken, has the exclusive right to perform any type of activities to conduct research, exploration, development, operations, production, sales activities, transportation, export, and any other related activities or sub-activities regarding any, and all, Hydrocarbon (hereinafter referred to as "HC") reserves within the boundaries of the Agreement Field, for the full term of this Agreement. Republic of Kazakhstan has the authority to protect the ownership right of earth and subsurface. Contractor is not the owner of natural resources in the Agreement Field and can only demand the HC produced in accordance with the terms and conditions of this Agreement. 2.2. Contractor receives the ownership to all HC produced from the Agreement Field at the point of severance from the wellhead, free of any debts or financial obligations except as may be provided for in this Agreement. 2.3. If the Government of the Republic of Kazakhstan elects to take Royalty in kind as provided in Clause 9.3.1. then any such amount of HC shall be brought to the Point of Delivery by the Contractor and shall be transported by the Authorized Body on behalf of the Government of the Republic of Kazakhstan promptly without any delay. Contractor can transport and sell the HC share of the Government if the Parties so agree. In such a case, Contractor has the authority to buy and sell the HC share of the Government. If the Government intends to raise a demand to have its own share partially or wholly sold by the Contractor, then Government shall notify the Contractor in written form 3 (three) months before the end of each calendar year and semi-annual year and shall reach an agreement with the Contractor about the terms and conditions and time period for the sale of its own HC share by the Contractor. Contractor can be compensated as a result of performing such services. This compensation should be equal to transportation and marketing expenses. Therefore, the amount received by the Government out of this HC shall equal to the amount obtained out of sale after deduction of the mentioned compensation. In case the Contractor wishes to buy the HC share of the Government, then sales price shall be determined in accordance with Clause 9.4.2. In such a case, the payment shall take place on monthly basis. (Within 30 (thirty) days commencing from the end of the month that the HC share of the Government is sold.) 2.4. Contractor shall bear the ownership of the tangible assets in the Agreement Field after the execution of the Assignment/Delivery Certificate of the 6 Karakuduk Field in accordance with the balance sheet of the Ministry of Geology and Preservation of Underground Resources (GHK Zharkyn). The right of ownership of the tangible assets shall be transferred to the Authorized Body after the completion of the amortization. Contractor shall be entitled to use these amortized tangible assets during the whole term of the Contract free of charge. 2.5. Contractor possesses all and every type of rights on any type of geological and other information received in relation to the Field Assignment/Delivery Certificate of the Karakuduk and on any type of geological, geophysical, technical and other information obtained by the Contractor during the course of Petroleum Activities. Contractor, during the term of the Agreement shall give all obtained information related with the subsurface to the Ministry of Geology and Preservation of Underground Resources of the Republic of Kazakhstan in accordance with clause 3.37 of the Law of "Subsurface Resources and Raw-Material Operation" subject to and without prejudice to its right of bearing ownership on this information. SECTION - 3 DURATION OF THE AGREEMENT AND TERMINATION 3.1. Duration 3.1.1. Duration of the Agreement is continuous 30 (thirty) years commencing from the date of the execution of this Agreement and later on can be extended to a date to be mutually agreed between the Parties as long as Productive Production of Petroleum and/or Gas is continued in the Agreement Field. 3.1.2. The information regarding the necessary funding/financing, as convincing evidence shall be submitted to the Authorized Body prior to the operations. 3.1.3. Contractor, prior to Field research and operation activities, shall include the assets in the Field and the geological and geophysical data related to the Agreement Field to its own balance sheet in accordance with the issued Assignment/Delivery Certificates. 3.2. Exploration Phase Exploration activities in the Field shall start within 1 (one) month commencing from the date of the execution of this Agreement, and/or as indicated in Clause 9.1.5. hereinbelow, to conduct the project studies and field seismic surveys, 7 preparation and operation of temporary production projects, the evaluation of HC reserves by determining the geological-mining characteristics and the production capacity of the Field, preparation and completion of the technology and project documentation needed for the industrial usage of the Field and finally to secure the necessary permissions and the required funding/financing. The Petroleum produced (which cannot exceed 100,000 (one hundred thousand) tons during the full exploration phase) from the exploration and development wells during the testing of the wells, will belong to the Contractor and will be utilized to cover the expenditures incurred for the Petroleum Activities. The exploration phase will be 3 (three) years. The forgoing shall not in any way diminish Contractor's exclusive right, even after the initial 3 (three) year exploration phase, to conduct exploration, development, production and other related activities in all areas within the Agreement Field for the full term of this Agreement, as provided in Clause 3.1. 3.3. Development and Production Phase 3.3.1. Operation Activities of the Agreement Field shall be started within 6 (six) months following the approval of Technology and Project Documentation in the required order. Within the capacity of this operation, completion of the exploration and the construction as required for the production wells as indicated in the Project Documents and the disposal of water and/or the application and realization of other technologies as necessary to obtain maximum Petroleum, are included. For the purpose of all permits and licenses required for development of the Hydrocarbon reserves in the Agreement Field, the entire Agreement Field shall be considered a single Field for such purpose, and such permits and licenses shall permit development of any and all Hydrocarbon reserves within the Agreement Field for the full term of this Agreement. 3.3.2. Petroleum development, production and sales activities may start before, but shall start no later than upon the conclusion of the initial exploration phase and Contractor's obtaining of the permits and licenses to develop the Agreement Field. 3.4. Termination 3.4.1. Contractor may terminate this Agreement by serving 60 (sixty) days written notice to the Authorized Body without any cause at any time. Termination shall not exempt the Contractor from its obligations which were due but not fulfilled prior to the Contractor's written notice in this respect. Provided, however, that should at the time such obligations are due to be performed and Contractor terminates this Agreement: (i) a reasonable dependable means of export, or authority to export from applicable government authorities, to export the reasonably projected production capacity are unavailable to Contractor; or, (ii) the available means of export become uneconomic; then Contractor shall be exempt from such obligation. 8 3.4.2. If the Contractor commits a material breach of the Agreement and/or the License, the Authorized Body shall have the right to demand that such breach be remedied within a reasonable period of time. If such breach is not remedied within such period of time reasonably requested, by the Contractor to remedy such breach, the Authorized Body shall have the right to notify the Contractor of termination of this Agreement and such termination shall become effective 90 (ninety) days after such written notice, unless, Contractor dispute such material breach, or such remedy of same. If Contractor disputes such material breach or such remedy of same, then the matter shall be determined by arbitration in accordance with Clause 11.9. 3.4.3. In case of the termination of the Contract; Contractor can receive back all of its assets existing in the Agreement Field of which their cost has not been fully amortized before termination. Amortized assets are the property of the Authorized Body but nevertheless can be used by the Contractor during the term of the Agreement. In case of termination, Contractor shall hand-over and deliver the Agreement Field to the related State Authorities in the condition as required by the principles of mining and health, and of the protection of subsurface resources and natural environment. SECTION - 4 PRINCIPLE RIGHTS AND OBLIGATIONS OF THE CONTRACTOR AND THE INVESTOR 4.1. Rights of the Contractor and the Investor Contractor has the following rights and authority: 4.1.1. The exclusive right of conducting Petroleum Activities in the Agreement Field in accordance with the provisions of this Agreement. 4.1.2. Right of entry to the Agreement Field and to the other fields in order to conduct Petroleum Activities. 4.1.3. Right for the utilization of local and world-wide known most effective methods and technologies in order to conduct the Petroleum Activities. 4.1.4. Right for selecting any type of activity form and administrative organization structure within the boundaries of the purpose defined in the Agreement. 4.1.5. Right to construct and equip industrial and social facilities in the Agreement Field and to use public facilities and communication systems in or outside of the Agreement Field provided that an agreement is reached with the possessors of such facilities in that respect in order to maintain the activities under normal and standard conditions. 9 4.1.6. Right of utilizing the services of local and/or foreign Sub-Contractors who have required technical facilities and experience, in case of necessity during the implementation of the Petroleum Activities. 4.1.7. Right of using own Petroleum Profit and the related products in the way as desired. 4.1.8. Right of participating in the Petroleum Activities and in any type of other activities conducted in other fields either within the lands or outside the lands of the Republic of Kazakhstan and opening branch offices and liaison offices thereof. 4.1.9. Right to assign and transfer wholly and/or partially its own rights, priorities and benefits to third parties or to authorize those by another method provided that practice of such right shall be compliant with the provisions of the Agreement and shall be notified to the Authorized Body in written form. Such notification shall contain, as being completely compliant to this Agreement, all changes, amendments and additions implemented prior to delivery for the purpose of identifying assignee and/or authorized party as the case may be. 4.1.10. Right of submitting applications to the Government and/or to the Authorized Body for the re-negotiation of the License and the contractual terms and conditions in the case of occurrences outside the contractual terms and conditions after the execution of the Agreement. 4.1.11. Right of priority in the case of extension of the term of the existing License and Agreement and/or executing a new agreement in the Agreement Field. 4.1.12. Right to relinquish a portion of the Field in accordance with the conducted program studies or relinquishing a portion of the Fields before completing such studies. Nevertheless, the relinquished portion of the Field shall be in the simple geometric shape when it is divided from the Agreement Field by straight or cracked line. 4.1.13. Right to export, and the right to receive export quotas and export licenses for the full production capacity of HC from the Agreement Field. Additionally, the right, but not the obligation, to negotiate Contractor's own quota with other related countries authorized bodies and establishments, and to have the Republic of Kazakhstan recognize and grant export quotas and export licenses in regard to any such quota. 10 4.1.14. Right to use the existing Pipeline for the purpose of transferring the produced Hydrocarbons to the Baltic Sea, Kainingrad and Vendspils ports and/or to Black Sea, Novorosiysk Port. And the right of priority to use all other available means of transportation, storage, and marine terminals. The transportation fees and tariffs charged to the Contractor shall be no more than those paid by any other transporter. 4.1.15. Right to unobstructed use of the surface of the Agreement Field in conjunction with Petroleum Activities, and the right to water necessary for Petroleum Activities. 4.1.16. Right to keep hard currency proceeds of HC sales, free of mandatory currency conversions in accordance with the laws of the Republic of Kazakhstan. 4.1.17. Right to have a hard currency bank account within the Republic of Kazakhstan and hard currency bank accounts outside of Republic of Kazakhstan as Contractor may deem appropriate, in accordance with the laws of the Republic of Kazakhstan. 4.1.18. Right to import and export same as that provided to Foreign Contractor and Foreign Contractor's personnel pursuant to Clause 9.2. 4.1.19. Right to defer the work obligations of the Contractor as mentioned in the License, in case of inability for the exportation of Hydrocarbons, for the same period. 4.1.20. Investor possesses the following rights: o Right to Investment Recovery and Investor Profit; o Right of having been exempted from every type of Fiscal Obligations on the Investment Recovery; o Right to export, and the right to receive export quotas and export licenses for all Crude Oil taken in kind by the Investor pursuant to this Agreement. Additionally, the right, but not the obligation, to negotiate Investor's own quota with other related countries authorized bodies and establishments and to have the Republic of Kazakhstan, recognize and grant export quotas and export licenses in regard to any such quota; o Right to use the existing Pipeline for the purpose of transferring the produced Hydrocarbon to the Baltic Sea, Kainingrad and Vendspils ports and/or to Black Sea, Novorosiysk Port. And the right of priority to use all other available means of transportation, storage, and marine terminals. The transportation fees and tariffs charged to the Investor shall be no more than those paid by any other transporter; 11 o Right to market and sell any, or all, Crude Oil taken in kind to any purchaser within or without the Republic of Kazakhstan; o Right to retain export proceeds outside of Kazakhstan without any obligation to return same to Kazakhstan after fulfilling the Fiscal Obligations mentioned in this Agreement; o Right to export all Investment Recovery, Investors Profit and all other amounts due Investor pursuant to this Agreement; o Right to keep foreign currency and to exchange Republic of Kazakhstan currency for hard currency and the right to exchange hard currency for the Republic of Kazakhstan currency at the most favorable rate available in the Republic of Kazakhstan in accordance with the laws of the Republic of Kazakhstan; and o Right to import and export same as that provided to Foreign Contractor and Foreign Contractor's personnel pursuant to Clause 9.2.. 4.2. Obligations of the Contractor Obligations of the Contractor during the implementation of the Agreement are as follows: 4.2.1. Using the Agreement Field only for the purposes defined in the Agreement. 4.2.2. Detailed geological studies and investigations of the subsurface resources as well as supply of the Markschader service and to guarantee that all the reports issued about the product and the associated products are true and correct. 4.2.3. In case of deficiencies in the legislation of the Republic of Kazakhstan with reference to the Petroleum Activities, for the cases mentioned herein below, Contractor shall follow and practice the International Principles: o Field usage o Proper implementation of the Petroleum Activities for the security of personnel and population. o To protect subsurface resources, air, earth, forestry, water, zoological animates and other facilities from harmful effects arising from the Petroleum Activities. Nevertheless, Contractor shall have no responsibility for the damages given to the natural environment prior to the effectively of the Agreement. 12 o To protect places and areas with historical and cultural value. o To indemnify the nature and lands damaged during the course of the Petroleum Activities at its own cost for the purpose of future utilization. 4.2.4. To permit all types of activities and studies for the research, exploration, operation and production of other natural resources, excluding HC, to be conducted by other persons including giving permission for the usage and utilization of the communication facilities and other public facilities provided that such activities shall not effect and prevent the Petroleum Activities in the Agreement Field. 4.2.5. To be compliant with the technological schedules, drawings and projects approved within the scope of the current mining study norms related to the conduct of Petroleum Activities. 4 2.6. To give priority to the equipment, materials and products manufactured locally in the Republic of Kazakhstan as long as these are competitive in terms of quality, price, working capacity and delivery terms. 4.2.7. To give preference to the services of Kazakh Entities and Organizations such as airways, railways, hydraulic works, etc. including the usage and utilization of motor vehicles to be used during the course of Petroleum Activities, as long as these local services are competitive in terms of price, effectively, and quality. 4.2.8. To give priority to the work-force of the Republic of Kazakhstan during the course of the Petroleum Activities by employing required qualified engineers and technical team and where there is a shortage or insufficiency, to provide training and education opportunities to these staff at the account of the Contractor in accordance with the agreed program. 4.2.9. To submit to the Board of Directors; the program of determined studies, and every type of information obtained during the implementation of those of those (geological, industrial, statistical, etc. account reports in force) in accordance with the standards. 4.2.10. To give permission to the Auditing Organs of the Republic of Kazakhstan for free entry and visit the work-place, to provide them with all necessary documentation and appropriate conditions for the purpose of enabling these units to perform their duties properly. 4.2.11. In case of a necessity, to provide the information obtained during the course of the Petroleum Activities to the third parties, provided that a mutual agreement is reached by the Parties in this respect. 13 4.2 12. To effectuate tax payments and other payments as provided in the existing legislation of the Republic of Kazakhstan. 4.2.13. In case of a cease the rights on the Agreement Field, or partial relinquishment in accordance with Clause 4.1.12 hereinabove, the Contractor, shall rearrange the land by clearing and removing all mass and garbage occurred as a result of the Petroleum Activities related with the Agreement at its own cost, in compliance with the instructions of State Mining, Health, Subsurface Resources and Natural Environment Protection Organs. 4.2.14. During the term of the Agreement it is expected that the total financial requirements will reach to an aggregate amount of US $ 216,000,000 (two hundred sixteen million US Dollars). SECTION - 5 ASSISTANCE AND SUPPORT OF THE AUTHORIZED BODY 5.1. Authorized Body, where necessary, shall provide help and assistance to the Contractor for the following matters: o Within and outside the boundaries of the Republic of Kazakhstan; to obtain all required licenses and permits necessary for the transportation of products, raw-materials and consignment. o The application and usage of the latest techniques, technology and equipment. o During the purchase of foreign technology and equipment, to prepare and issue customs permissions and to provide foreign currency. o To provide all required permissions and licenses to open Foreign Currency Bank Accounts within and outside the boundaries of the Republic of Kazakhstan. o To obtain every type of geological, geophysical, etc. data belonging to entities and/or organizations related or not related with the Agreement field but can be used for an efficient Petroleum Activity. o To apply to obtain the approval of the Cabinet of Ministers of the Republic of Kazakhstan regarding the exemption of the export duty for the exportation of the HC. 14 5.2. Authorized Body, by furnishing the Contractor with the authority of conducting Petroleum Activities within the boundaries of the Agreement Field, is deemed to be having delivered the authority and duty of auditing the realization of the Petroleum Activities to the Board of Directors in accordance with Section 6 hereto. SECTION - 6 BOARD OF DIRECTORS 6.1. In order to realize this Agreement, the Board of Directors of the Contractor should be established within 30 (thirty) days commencing from the execution date of this Agreement. Board of Directors shall realize the general management and control of the Petroleum Activities including the approval of Working Program, Budget, and Work and Project Documentation. 6.2. Board of Directors shall consist of 8 (eight) members (referred to here as "Members"), 4 (four) members each assigned by Shareholders Of The Kazakhstan Side including the Authorized Body and by the Investor. Voting shall be conducted in accordance with the Articles. 6 3. All other items which are not provided otherwise in this Agreement related to the rights, obligations and authorities of the Directors or Board of Directors will be applicable as mentioned in the Articles. SECTION - 7 OPERATIONAL AND FINANCIAL REQUIREMENTS AND THE BUDGET 7.1. Exploration The project related to the research, exploration, seismic operations and trial production of the wells drilled in the Field shall be prepared in accordance with the principles and the instructions in force related with and applicable for geological exploration and petroleum production activities for the protection of subsurface resources and the population; providing all geological investigations, natural environment and other operational buildings, facilities and equipment from the harmful effects of the activities and studies conducted. The project, as required, shall be confirmed and attested by the authorities of state mining control, subsurface resources, economical and biological resources and hygienic and public health control. Geological and geophysical working plans shall be approved by the Board of Directors, in accordance with the current practices. 15 The following issues shall be confirmed for the field trial operation project: o The quantity and the location of the exploration and production wells. o Geological, mining, geophysical and laboratory studies and investigations conducted for the determination of the physical and hydrodynamic characteristics, of petroleum stratum particularities and productive stratum and of the production possibilities in the wells. o Predictions for Petroleum and Gas production levels and when necessary predictions for water pumping capacity during the trial production. o Evaluation and the confirmation of the ecological payments and of the activities for the protection of subsurface resources and natural environment and for the supply of safety and security during the Petroleum Activities in the Field and the construction of drainage. On the basis of the trial study approved by the Board of Directors, field-arrangement, project-account documentation containing the issues of Petroleum Gas and Condensate and drainage usage shall be prepared and issued within the trial production period. 7.2 Development and Production 7.2.1. Preparation of the project documentation and the conduct of the design works for the Field and to put the Field into the operation, can only be realized following the trail production by the state reserves commission at the reserves recognized by the international standards in accordance with the Petroleum production and the "Principles of Operating Petroleum and Gas Fields." The project documentation (Field operation technical chart) shall be prepared and issued in accordance with the provisions of by-laws in force related with the protection of sub-surface resources, natural environment, health and mining. The organization of production of Petroleum from the Field as an industrial product shall be realized in accordance with the project budget that has been prepared in compliance with the field operations technical chart, approved and attested by Board of Directors. Project documents related with the Petroleum Activities shall include the following items; o Determination of the production targets, method of starting the operation, selection of the stimulation methods to be applied to the wells, o Determination of the production wells, 16 o Production dynamics of the Petroleum, Gas and liquids in the wells, injection of chemicals, o Demands and recommendations about the program of the well and the drilling activities, selection of well location, o Recommendation for drilling operation, equipment and materials used on the surface and in the well, o Recommendation for the production of the wells and the demands for collection system (including the collection and the usage of the associated gas and the water), proposals for the motor vehicles, machinery-equipment and their locations related with the Petroleum production, storage and transportation, o Proposals for the supply of materials and equipment for the usage of production and other services, in order to realize the principles of the capital investment and the petroleum production, o Proposals for the actual period for the field operation phases, necessary expenditures, evaluation of the capital investment, o Determination of the types and the quantities of all activities and studies needed for the exploration of the Field and the principles of operating a petroleum and gas field as well as the determination of the rules and principles for the protection of the sub-surface and natural environment, job-safety, health and appropriate fire and security rules. 7.2.2 Production of Associated Gas The Associated Gas, being produced together with the Petroleum shall be used in line with the needs of the Contractor (heating, product heating, etc.). The usage of the Associated Gas shall be made in accordance with the project technical documentation. In case there is an impossibility for the usage of the Associated Gas (this will be confirmed on the basis of project and technological requirements), the Associated Gas shall be flared, with the permission of the Ministry of Environment. 7.3. Procedures and Approval Method of the Operational Documentation Project documentation related with the research, exploration, development and production activities defined in clauses 7.1 and 7.2 shall be prepared and issued by the Contractor in accordance with the determined and agreed principles and procedures (or state control shall be applied to those documentation in terms of being compliant with working conditions, job safety, technology, 17 ecology and health regulations) and shall be submitted to the Board of Directors for investigation and approval. Such documentation shall receive approval or disapproval within 30 (thirty) days, commencing from the date of delivery to the Board. In case of a requirement by the Authorized Body for a change and/or modification to the project documentation, following the receipt of the notification by the Parties containing changes and the modifications required to be conducted by the Contractor, the Board shall meet to discuss such issue within 15 (fifteen) days commencing from the date of the receipt of such notification. Changes and modifications agreed by the Parties and incorporated to the project documentation shall be deemed to be accepted and approved. Any of the Parties who could not reach an agreement about the project shall present the case to an industrial specialist (expert) to resolve the disputes. Contractor not accepting the project is not obliged to finance the studies and the activities and shall be reimbursed the cost of all Petroleum Activities already conducted by the Contractor. Following the acceptance of the project documentation related with the Petroleum Activities at every stage, Contractor, at the soonest time possible and prior to the first month of the each calendar year, shall prepare and issue the detailed plan and budget of the works for the subsequent year and shall submit it to the Board of Directors for review and approval. Contractor at any time may submit budget changes and modifications to the Board of Directors about research, exploration, operation and production. All changes and modifications shall be prepared and issued in accordance with the principles and procedures defined in Section-6 hereto. As a result of the additional information obtained during the course of the Petroleum Activities, in case the Agreement Field is determined as larger or smaller than previously considered, then such field shall be expanded or reduced to the previously considered magnitude of the Agreement Field. Agreement Field shall be extended as required with the execution of an amendment to the previous Agreement. Contractor shall prepare a general plan for the purpose of improving working conditions for the subsequent calendar year in accordance with the principles of job-safety and technical safety and security applicable in the Region and following having those confirmed by the organs of Gosgortehnadzor in line with the procedural applications shall present to the Board of Directors for approval. 7.4. Petroleum Activities are conducted in accordance with the Work Program and the Budget (referred to here as "Budget") approved by the Board of Directors. The General Manager and the Assistant General Manager of the Contractor shall jointly prepare and submit the Work Program and the Budget for the subsequent year, 3 (three) months prior to the start of that program year for the approval of the Board of Directors. Any changes and/or amendments to be made to the Work Program and to the Budget within the year shall also be submitted for the approval of the Board of Directors separately. 18 SECTION - 8 EXPENDITURES AND COMPENSATION 8.1 Payment of Expenditures Investor shall provide the Investment to the Contractor excluding cash requirements which cannot be met by the self generated income of the Contractor, as Contractor may determine pursuant to the Articles, excluding any amounts Contractor may wish to borrow from third parties. All such amounts provided as the Investment by the Investor to Contractor, shall be repaid by the Contractor to the Investor as Investment Recovery. SECTION - 9 COMMERCIAL AND FINANCIAL TERMS AND CONDITIONS 9.1 Financial Matters 9.1.1. All calculations to be made between the Parties in relation with the Agreement shall be made in Tenge and US$. 9.1.2. The price for Hydrocarbons voluntarily marketed by the Contractor in the local market within the boundaries of the Republic of Kazakhstan shall be freely decided by the Contractor. 9.1.3. Foreign currency exchange transactions to be carried out by the Contractor shall be in compliance with the laws and regulation in force in the Republic of Kazakhstan. Contractor is free to use the foreign currency obtained out of the Petroleum Activities within or outside the boundaries of the Republic of Kazakhstan. All foreign currency transactions related with the Petroleum Activities shall be carried out in US$ or in any other convertible currency depending upon the mutual agreement between the Parties. 9.1.4. Re-exportation of the foreign currency brought into the Republic of Kazakhstan by the foreign sub-contractors for the implementation of the Petroleum Activities shall be realized in accordance with the laws and regulations of the Republic of Kazakhstan. 9.1.5. Financing of the Petroleum Activities has to start within 6 (six) months following the secure of the License for the Land defined in this Agreement (Land allocated for the Petroleum Activities). 19 9.2. Customs 9.2.1. In case of a requirement for the services of a foreign Contractor in order to fulfill the obligations and terms and conditions of this Agreement, the foreign SubContractor can import all equipment, machinery, vehicle, work-shop, material, spare parts related with the Petroleum Activities and its own goods into the Republic of Kazakhstan free of custom duties and funds without any prohibition. The above mentioned consignment includes, without any limitation, mobile dwelling units, equipment, raw-materials, sub-materials, convenient products, mobile offices, office equipment and stationary, furniture, audio and video equipment, communication equipment (including satellite communication), medical and educational equipment, hobby and sports facilities and every type of educational and information containing press and books provided that these are not prohibited by the laws of the Republic of Kazakhstan. The machinery and equipment to be brought shall be fully compliant to the laws and regulations of the Republic of Kazakhstan in terms of technical security and safety, health and hygiene norms, protection of subsurface and natural environment. 9.2.2. The personnel of the Foreign Sub-Contractors dealing with the Petroleum Activities can import into the Republic of Kazakhstan their own private property and goods as well as house-hold goods with the exemption of taxes in order to meet with their own and family needs, provided that it is not against the laws and regulations of the Republic of Kazakhstan. 9.2.3. Any goods and property imported to the Republic of Kazakhstan in accordance with clauses 9.2.1 and 9.2.2 is exempted from custom duties and taxes during exportation. 9.3. Taxes and Payments 9.3.1. Fiscal Obligations: Contractor and Investor shall have the obligation to pay the Fiscal Obligations, as mentioned in this Clause 9.3.1. Any other Fiscal Obligation applicable to Contractor shall be subject to tax stabilization as mentioned in Clause 9.3.1(H) hereinbelow. A) Contractor shall pay the following nation wide taxes in accordance with the existing tax law: o Income Tax at the rate of 30% (thirty percent); 20 o Dividend tax deductions: The shareholders of the Contractor shall be subject to a 15% (fifteen percent) Dividend tax on the distributed dividends of the shareholders. The Contractor shall be obliged to withhold such tax on distributions to Investor (Investors Profit) or to Shareholders of Kazakhstan Side (Shareholders of Kazakhstan Side Profit); o Value Added Tax at the rate of 20% (twenty percent) applied to expenditures made locally in the territory of the Republic of Kazakhstan as mentioned in the existing tax law. In case of sales of Hydrocarbons through exportation, if the paid Value Added Tax is more than the collected Value Added Tax during any period, then the Contractor shall be entitled to be reimbursed either by payment by the Republic of Kazakhstan or by crediting the amount against its Fiscal Obligations. In case of no reimbursement through direct payment or crediting against Fiscal obligations within 10 (ten) days following the application of the Contractor then the Contractor will be entitled to receive interest on the late reimbursement in accordance with the tax laws of the Republic of Kazakhstan; and o If applicable, tax on securities transactions accordance with the existing laws of the Republic of Kazakhstan. No income or gain shall be recognized by the Contractor on the creation of or transfer of an interest in the Agreement. B) Contractor shall pay the following special taxes and payments as mineral resources user: o An Excess Profits Tax may be required to be paid by the Contractor on the basis of the Real Internal Rate of Return (hereinafter referred to as "RIRR") of the Contractor, calculated at the end of each calendar year staring from the effective date of this Agreement. The RIRR shall be determined after discounting the Contractor's annual net cash flow (hereinafter referred to as "NCFs") for inflation on a compound basis from the effective date of this Agreement. NCF shall be calculated after reducing Royalty, operating expenses, other payments, amortized amount of the capital expenditures and Fiscal Obligations, from the gross revenues of the Contractor. The inflation rate used for this purpose shall be the World Consumer Price Index set out in "Interna- tional Financial Statistics" published by the International Monetary Fund for each applicable year. If any such calculation at the end of any calendar year (excluding Excess Profit Tax for such calendar year but including Excess Profit Tax paid in all prior years) produces an RIRR in excess of 23% (twenty three percent), the Contractor shall pay an Excess Profit Tax on the Contractor's NCF for that calendar year as follows: 21 (i) an Excess Profit Tax of 10% (ten percent) shall be applied to that portion of the difference between the NCF corresponding an original RIRR in excess of 23% (twenty three percent) but less than 25% (twenty five percent) and the NCF corresponding the recalculated RIRR of 23% (twenty three percent). (ii) if the original RIRR is greater than 25% (twenty five percent), then the RIRR shall be recalculated after subtracting the Excess Profit Tax from the NCF as calculated pursuant to (i) above. If after such recalculation the RIRR continues to be greater than 25% (twenty five percent), then in addition to (i) above, an Excess Profit Tax of 20% (twenty percent) shall be applied to that portion of the difference between such NCF corresponding an original RIRR in excess of 25% (twenty five percent) but less than or equal to 30% (thirty percent) and the NCF corresponding the recalculated RIRR of 25% (twenty five percent). (iii) if the original RIRR is greater than 30% (thirty percent), then the RIRR shall be recalculated after subtracting the Excess Profit Tax from the NCF as calculated pursuant to (ii) above. If after such recalculation the RIRR continues to be greater than 30% (thirty percent), then in addition to (ii) above, an Excess Profit Tax of 30% (thirty percent) shall be applied to that portion of the difference between such NCF corresponding an original RIRR in excess of 30% (thirty percent) but less than or equal to 35% (thirty five percent) and the NCF corresponding the recalculated RIRR of 30% (thirty percent). (iv) if the original RIRR is greater than 35% (thirty five percent), then the RIRR shall be recalculated after subtracting the Excess Profit Tax from the NCF as calculated pursuant to (iii) above. If after such recalculation the RIRR continues to be greater than 35% (thirty five percent), then in addition to (iii) above, an Excess Profit Tax of 40% (forty percent) shall be applied to that portion of the difference between such NCF corresponding an original RIRR in excess of 35% (thirty five percent) but less than or equal to 40% (forty percent) and the NCF corresponding the recalculated RIRR of 35% (thirty five percent). (v) if the original RIRR is greater than 40% (forty percent), then the RIRR shall be recalculated after subtracting the Excess Profit Tax from the NCF as calculated pursuant to (iv) above. If after such 22 recalculation the RIRR continues to be greater than 40% (forty percent), then in addition to (iv) above, an Excess Profit Tax of 50% (fifty percent) shall be applied to that portion of the difference between such NCF corresponding an original RIRR in excess of 40% (forty percent) and the NCF corresponding the recalculated RIRR of 40% (forty percent). o Royalty. The Contractor will give 8% (eight percent) of the gross production as Royalty. The authorized authorities may elect to take Royalty either in cash or in kind; and o Bonuses. Contractor shall pay US $513,000 (five hundred thirteen thousand US Dollars) within 7 (seven) months in equal monthly installments starting from the end of the 5th (fifth) month following the registration of this Agreement with the Ministry of Geology and Preservation of Underground Resources, as an unrecoverable signature bonus; and Contractor will pay US $500,000 (five hundred US dollars) when the cumulative production reaches to 10,000,000 (ten million) barrels and US $1,200,000 (one million two hundred US Dollars) when the cumulative production reaches to 50,000,000 (fifty million) barrels as one time production bonus. The Royalty and Production Bonuses will be considered as tax deductible expenditures for the calculation of the income tax and the excess profit tax. C) Contractor shall pay the following local taxes and fees: o Rental for the Agreement Field as agreed with the local authorities, in accordance with the existing legislation of the Republic of Kazakhstan. The calculation of the Rental shall be same as applied to other petroleum companies working in Mangistau Region; o Property Tax at the rate of 0,5% (half percent) applied to depreciated value of the capital goods and non productive assets (non material assets excluded) every year; o Vehicle tax according to the existing legislation; o Fee for the registration of the Contractor according to applicable legislation; 23 o Fee for the licenses for certain activities according to the applicable legislation; and o Fee on auction sales if applicable according to the existing applicable legislation. D) Contractor will be obliged to make the following payments and deductions: o The contractor is obliged to withhold the income tax for the local and foreign personnel working for the Contractor in accordance with the existing tax law. The foreign personnel of the Contractor will be subject to 0,1% (zero point one percent) property tax on the properties they own in the Republic of Kazakhstan; o Deduction of 2% (two percent) for Employment Development Fund from the Kazakhstan national personnel salaries; o Local taxes for the usage of water and the forestry resources as mentioned in the legislation and the payments for the protection of the environment in accordance with the provisions of the existing legislation; o Payment for the additional and special services rendered by the authorized governmental organizations in the Republic of Kazakhstan, if applicable to all other citizens and enterprises of the Republic of Kazakhstan; and o Deductions for the state social insurance in regard to the Contractor personnel salaries. E) Transfer Pricing If the Contractor applies in its commercial or financial transactions with a related party prices which differ from prices applied between independent enterprises, the Tax Service shall adjust the taxpayer's income by the price difference for taxation purposes, if one of the parties non-resident of the Republic of Kazakhstan, or enterprise entitled to tax preferences. The tax service, when effecting such actions, may redefine the given transactions for the purpose of determining their actual nature and imposing sanctions. 24 F) General Tax Liability The activities of the Contractor which are not related to the Petroleum Activities will be taxed according to the existing legislation. G) Sub-Contractors and affiliates of the Contractor The Contractor is obliged to inform its Sub-Contractors and affiliates for their tax liabilities according to the existing legislation. H) Tax Stabilization The Parties hereto agree that this Contract has been negotiated and agreed upon, based upon the tax structure set forth herein and the laws of the Republic of Kazakhstan as the date of the execution hereof. The Government of Republic of Kazakhstan expressly agrees that any changes to tax laws of the Republic of Kazakhstan occurring after the date of this Agreement shall not affect the tax obligations of the Contractor or the Investor, save and except where such change is in the nature of a substitution for a tax identified herein and does not cause an increase in the rate for that tax as of the date of this Agreement. In case of any deterioration in the position of either Party, or the Investor, resulting from a change in legislation or any superseding international treaty which occurs subsequent to the execution date of this Agreement, the Parties shall meet promptly and shall agree on such amendments to this Agreement as are necessary to restore the economic balance of the Parties, or the Investor, as applicable. I) Payment The Royalty, bonuses and excess profit tax will be paid by the Contractor to an account notified by the chief tax inspector of the Ministry of Finance. All other taxes and fees will be paid to the authorities shown in the laws and the state budget of the Republic of Kazakhstan. The fines and penalties, incurred because of the delayed payments and wrong calculation of the taxable income will be paid in accordance with the existing state budget and tax laws. J) Audit right of the tax authorities The tax authorities are entitled to audit the accounts, foreign banks inclusive, all bank accounts and the Contractor agreed to provide to the tax authorities, all related information and documentation. 25 9.4 Compensation 9.4.1 Contractor and Investor may take and freely export its own share of the HC produced in accordance with the terms and conditions of this Agreement. 9.4.2 The Shareholders of the Kazakhstan Side may elect to take Shareholders of the Kazakhstan Side Profit in kind. The Authorized Body may elect to take Royalty in kind. Investor may elect to take Investors Profit and Investment Recovery in kind. For the valuation of Hydrocarbons for the purpose of calculating amounts of Hydrocarbons taken in kind and for all purposes pursuant to this Agreement, the price applicable shall be determined by a separate agreement of the Parties, taking into account Hydrocarbon quality and prevailing market prices in effect during the period in question at the locations where the Contractor has been making Hydrocarbon sales, as well as applicable transportation and marketing costs at the market prices in effect during the period in question. 9.5 Accounting Procedures and Auditing 9.5.1 The Board of Directors shall approve an accounting procedure to be applicable to this Agreement and to the Contractor. The expenditures of the Contractor will be calculated in US Dollars during the whole term of the Contract in order to calculate the Investment Recovery and the Contractors Profit. Such accounting procedure shall: o provide for accounting in US dollars for all purposes and calculations pursuant to this Agreement and also a Tenge account for the purpose of the inspection of the tax auditors; o provide for accounting in accordance with internationally accepted and recognized accounting systems and consistent with the standard practice of the international petroleum industry as well as the provisions of the Agreement, the Articles and the Standard Oil and Gas Accounting Systems of the Republic of Kazakhstan; o provide for depreciation schedules and for the option of expensing capital expenditures; o provide for the entire Agreement Field to be considered as a single area for the purposes of the calculation of Fiscal Obligations; and o provide for Contractor income subject to Income Tax and to be calculated by deducting from gross revenues from the Agreement Field all Royalties, all other Fiscal Obligations which the Contractor is subject to in accordance with this Agreement, contributions to the reserve fund, and all direct and indirect costs reasonably necessary for conduct of Contractor's business. 26 9.5.2. Auditing of the Contractor's financial activities shall be conducted by the related authorized State Organ. In case it is needed, Contractor may invite any Organization as Auditor. 9.5.3. Status of the accounting records, correct filing of the financial results, effectuation of the payment transferred to the budget shall be made completely and on time, and other issues related with the taxation shall be followed by the State Tax Office of the Republic of Kazakhstan. SECTION - 10 PROTECTION OF SUBSURFACE RESOURCES, NATURAL ENVIRONMENT AND LABOR AND POPULATION SAFETY Field research, exploration and development activities shall be conducted in accordance with the laws and regulations of the Republic of Kazakhstan, with technical principles, and the principles for the protection of job safety and natural environment and finally in accordance with the precautions for the protection of all subsurface, earth, hydraulic resources, atmosphere, zoological and vegetal life, historical and cultural properties, and with the precautions for security and health protection in the Agreement field. Contractor shall conduct the following activities during the design and construction studies of the auxiliary buildings: . Using advanced local and international techniques and technologies for the purpose of preventing any waste and to obtain the maximum production in order to obtain the maximum benefit. . To minimize the harmful effects given to the natural environment and to prevent the destruction and uninhabitance of the lands including technical and biological recultivation. . To protect subsurface and earth hydraulic resources from pollution and loss. . To protect air from every type of harmful substances including facilitated (such as heating rooms, deposed petroleum production points containing Hydrocar- bon, Gas and etc.) and unfacilitated (such as diesel units of the drainage equipment, vehicles, tractors, etc.) pollution resources. . To protect the zoological and vegetal life and historical and cultural properties covered by the RED BOOK of the Republic of Kazakhstan. 27 . To provide safe and healthy working conditions, to organize the control of job safety status and to convey the information on these issues to the employees on time. During the implementation of the Petroleum Activities, continuous official and industrial ecological control for the protection of natural environment, ecological monitoring shall be supplied in the Agreement Field. During the trial production project stage, ecological investigations of the wells, well surroundings in the Agreement Field shall be made and the areas needs to be paid exclusive attention shall be determined. In addition, possibility of potential accident cases shall be analyzed and plans containing these studies to be applied and the programs for the normalization of the region for ecological purposes shall be prepared. Funds allocated for the Contractor's activities to inspect and analyze the ecological status of the lands, to organize and realize environment protection activities shall be deposited in the account of nature protection payments. SECTION - 11 OTHER LEGAL ISSUES 11.1. Transfer and Assignment of the Rights 11.1.1. Contractor may transfer and/or assign its rights, liabilities, obligations or shares related with the Agreement wholly or partially to the third parties. 11.1.2. In case of any transfer and/or assignment of rights partially, the Contractor shall be jointly and severally liable along with the assignee in connection with the Agreement. 11.2. Payment Related with Field Allocation and Usage Right In case of an allocation of a land belonging to any other real and/or juridical body for the realization of the Petroleum Activities, Contractor shall make payment to the landlord or to the person who possesses the usage right on the land, since the usage of such land is limited because of the Petroleum Activities. 11.3. Insurance Contractor is obliged to insure its assets in compliance with the legislation of the Republic of Kazakhstan and in accordance with the recognized world standards, norms and customer practices. 28 11.4. Legal Adjustments In Relation With Working Conditions Employment, redundancy, resignation, salary, work and leave status, social indemnity and social security of the citizens of the Republic of Kazakhstan employed by the Contractor shall be dealt with in accordance with the legislation and communiques in force in the Republic of Kazakhstan and with recognized world norms and standards. Unless otherwise indicated by the international treaty signed between the Republic of Kazakhstan and the country of the foreign subcontractor, for the foreign personnel employed by the Contractor; laws and regulations of the Republic of Kazakhstan is applicable. 11.5. Force-Majeure 11.5.1. In case one of the Parties do not fulfill its obligations due to any Force-Majeure condition, then such Party shall notify the other Party in written form about the commencement date of such Force-Majeure condition within a reasonable time period. 11.5.2. Within the defined time period, the obligations of the Party directly effected by loss shall be frozen during the existence of the Force-Majeure conditions. 11.5.3. Term of the Agreement, shall be extended automatically as long as the Force-Majeure case lasts in equal time period including the time for the repair of equipment and technology. 11.5.4. Force-Majeure conditions are not accepted as valid excuses for the Parties not to fulfill their financial liabilities and obligations. 11.6. Local Consumption 11.6.1. In case of a declaration of an extra-ordinary status by the Government and/or a decision that the Petroleum need in the local market is not met during the term of the Agreement, then, Authorized Body can demand the HC share of the Contractor for the local market. Such demand shall be notified to the Contractor in written form 100 (hundred) days before and a separate agreement shall be executed in that respect. 11.6.2. Maximum amount of HC given by the Contractor to meet with the requirement of the local market in accordance with Clause 11.6.1 herein above shall be equal to the shortage in the local market and to the shares given by other contractors equipped with production rights by the Republic of Kazakhstan. 11.6.3. In case the Contractor delivers its own share in accordance with Clause 11.6.1 herein above to meet with the requirements of the local market, the payment to be made to the Contractor, shall not be less than the prices agreed between the Contractor and the buyers and shall also include the penalty and the termination fee payable by the Contractor for its failure in meeting its commitments as a practical result of the Clause 11.6. 29 11.6.4. When Contractor markets its own HC share in the world market, then Authorized Body shall not intercept to such HC share to meet with the requirements of the local market. However, in case of such interception, Authorized Body shall pay to the Contractor on the basis of world market prices in foreign currency for its HC share and the penalty and termination fee Contractor shall be liable to pay as a result of its failure in meeting with its commitments to the buyers. 11.6.5. In case the payment for the delivery made by the Contractor in accordance with Clause 11.6 herein above is not effectuated within 30 (thirty) days commencing from the date of loading, then Contractor, as being compliant to this Agreement, shall have the right of receiving back and market the Crude Oil to be delivered to the Authorized Body in the amount which enables the Contractor to fulfill its commitments and liabilities. 11.7. Amendments to the Terms and Conditions of the Agreement 11.7.1. All terms and conditions stated in the Agreement can only be amended with the mutual agreement of the Parties. In case of an amendment to this Agreement, it shall be effective with the execution of a written protocol or an agreement. 11.7.2. Clause 3.4 herein above shall be applicable for the termination of this Agreement. 11.8 Confidentiality 11.8.1. Except the conditions stated herein below, any type of information obtained and/or purchased by the Parties related with the Agreement and needed for the fulfillment of the terms and conditions of the Agreement shall be kept confidential. 11.8.2. As an exception to the rule referred in clause 11.8.1. herein above, the Parties can use every type of information for the preparation of the reports and documentation required by law. 11.8.3. Parties, jointly or severally can publish every type of scientific and geological information related or unrelated with the Agreement Field but directly related with the Petroleum Activities, provided that such information shall not create any negative effect on the Petroleum Activities. 30 11.8.4. Contractor can not disclose any information obtained out of the Agreement to the third parties without the permission of the Board of Directors. In the following cases, Contractor can disclose such information and data: a) to judicial organ according to the laws and regulations applicable to the Contractor, b) to any financial organ and/or authority, its own branches and technical consultants and to the potential assignee of the Agreement for the purpose of enabling the Contractor to fulfill its commitments and obligations arising out of the Agreement, c) to the Sub-Contractors and to the third parties for the implementation of the Petroleum Activities, and d) in the cases of exchange of information. 11.8.5. The terms and conditions referred in Clause 11.8 herein above shall be in force and effect after the termination of the Contract as well. 11.9. Settlement of Disputes In case of any disagreement involving this Agreement and License that cannot be settled, such disagreement shall be resolved by an arbitration to be established on the basis of the arbitral rules of the International Chamber of Commerce (ICC) at Zurich, Switzerland. Any procedural issues not determined under such arbitral rules shall be determined in accordance with the laws and legislation of Switzerland, other than any such law which would refer the matter to another jurisdiction. The governing law for the interpretation of this Agreement shall be the law of Switzerland, and the arbitration should be conducted in English language. The decision of the arbitration shall be final and binding. The English version of this Agreement shall control in the event of any discrepancy between the English version and any other language version. This Agreement shall control in the event of any discrepancy between this Agreement and the Articles. Investor is a third party beneficiary of this Agreement and Contractor agrees to act on behalf of Investor in regard to any dispute Investor may have regarding the implementation of this Agreement. 11.10. Waiver To be effective, any waiver must be in writing and signed by the Party to be charged. 31 11.11. Correspondences 11.11.1. Any type of communication, demand, request etc. delivered and/or transmitted via courier, post, telegraph, telex or facsimile in written form appropriate for the terms and conditions of the Agreement to the below mentioned address shall be deemed to be delivered. a) Authorized Body 480091; Almaty Bogenbay Batyra Str.142 Ministry of Oil and Gas Industries Phone: 3272 - 62 60 80 Fax : 8 3272 - 69405 Telex: 251238 KURS SU b) Contractor 426200 Aktau 4 Mikrorayan Building No. 10 Block A Phone: 51 46 62 Fax : 8 37922 514639 11.11.2. Any Party may change its address by a written notice to the other Party. 11.12. Headings The headings of the Clauses used in this Agreement are only for the purpose of the references and will not effect the interpretation of the provisions. This Agreement is prepared and executed in 3 (three) copies each both in English and Russian language with the same power and effect. AUTHORIZED BODY CONTRACTOR Republic of Kazakhstan Karakuduk-Munay Inc. Ministry of Oil and Gas Industry - ------------------------------ ---------------------------------- N.U.Balgim U.B.Hairoy 32 MAP GOES ON THIS PAGE EX-10.18 9 LICENSE FOR THERIGHT TO USE SUBSURFACE Attachment 6 to the License MG #249 (oil) as of June 28, 1995 RESOLUTION # P 65-H September 18, 1996 Concerning Amending License Terms LICENSE: License MG #249 (oil) dated 28.06.95 LICENSEE: "Karakudukmunay" Joint-Stock Company MINISTRY OF GEOLOGY AND SUBSURFACE PROTECTION OF THE REPUBLIC OF KAZAKSTAN pursuant to the resolution of the Cabinet of Ministers of the Republic of Kazakstan #882 as of 27.06.95 and following the Letter # 2-03-1845 as of 10.08.96 of the Ministry of Oil and Gas Industry of the Republic of Kazakstan (Authorized Body) Hereby introduces the following amendments to the license terms: Clause 8.2 Minimum Work Program: 8.2.1 Evaluation Stage: 1. Drilling of Pilot Wells: Between 01.09.1996 - 31.08.1997 - 2 wells 3250 m deep and re-entry of 4 exploration wells. Between 01.09.1997 - 31.08.1998 - 6 wells 3250-3500 m deep. 3D Seismic is not recommended by the resolution of the State Reserves Committee and therefore it is suggested to resolve this issue separately based upon geological results of drilling of first production wells. 8.2.2 First 3 year Development Stage: Between 01.09.1996 - 31.08.1997 - 5 000 000 US Dollars Between 01.09.1997 - 31.08.1998 - 25 000 000 US Dollars Between 01.09.1998 - 31.08.1999 - 12 000 000 US Dollars Total financial obligations specified in Clause 8.2.1 and Clause 8.2.2 are: Up to 31.08.1997 - 10 000 000 US Dollars Up to 31.08.1998 - 34 500 000 US Dollars Up to 31.08.1997 - 12 000 000 US Dollars Minister S.Zh.Daukeev Amendments to the license terms of Clauses 8.2.1 and 8.2.2. Agreed upon by Licensee: Klinchev N. D. Director General KarakudukmunayJSC Certificate Goes on this Page LICENSE for the right to use the subsurface in the Republic of Kazakhstan Issued by the Government of the Republic of Kazakhstan to Karakuduk Munay Joint Stock Company Joint Venture for exploration and production of hydrocarbons at Karakuduk oilfield in Mangystau Oblast. June 28, 1995 Series MG #249 (oil) On behalf of the Government of the Republic of Kazakhstan First Deputy Prime Minister [signature, seal] V.L. Mette Exhibit 1 to License Series MG #249 (oil) To the Government of the Republic of Kazakhstan RESOLUTION regarding the issue of the license for the use of the subsurface The Ministry of Geology and Protection of the Subsurface has reviewed the application of Karakuduk Munay Joint Stock Company Joint Venture for geological exploration and production of hydrocarbons at Karakuduk oilfield in Mangystau Oblast. Based on Claim LTs-233 dated 04.21.95 published on 04.28.95 in the Legal Information Bulletin # 4 (7) 1995, Resolution of the Cabinet of Ministers of the Republic of Kazakhstan On the execution of the contract for exploration, development and oil production at Karakuduk oil field under production sharing arrangements with Karakuduk Munay Joint Stock Company Joint Venture # 498 dated 06.11.1993, and submitted materials, as follows: Certificate of the State Registration of a Business #23625 dated 03.01.1995; Foundation Agreement of 10.26.1994; Bylaws of Karakuduk Munay Joint Stock Company Joint Venture; Contract made by and between the Ministry of Energy and Fuels and Karakuduk Munay Joint Stock Company Joint Venture executed on 07.01.1993; Certificate of Geological Exploration Rights #4 issued by West Kazakhstan Territorial Administration on 02.16.1995; Certificate of Production Rights # 30 of 04.12.1995 issued by the Ministry of Oil and Gas Industry; and Minutes of Interdepartmental Commission # 7 dated 05.19.1995, Karakuduk Munay Closed Joint Stock Company Joint Venture has been granted the License for the right to use the subsurface for exploration and production of hydrocarbons at Karakuduk oilfield in Mangystau Oblast. The License is forwarded to the Government of the Republic of Kazakhstan for ratification. [seal, signature] S.Zh. Daukeev Exhibit 2 to License series MG#249 (oil) Hereby the Government of the Republic of Kazakhstan grants the License series MG #249 (oil) for the right to use the subsurface for geological exploration and production of hydrocarbons. CONTENTS OF THE LICENSE 1. License holder data 1.1 Name: Karakuduk Munay Closed Joint Stock Company Joint Venture (SP AO KKM). 1.2 Address: 466200 Republic of Kazakhstan, Mangystau Oblast, City of Aktau, 4th district, building 10, unit A. 1.3 Type of ownership: mixed 1.4 Founders: Munaygaz State Holding Company, Zharkyn Limited Liability Company, Mangystau Terra International Corporation, Guernsey LTD Central Asian Oil Company. 1.5 Date of Incorporation: Government Registration Certificate # 23625 dated 03.01.1995 issued by Oblast Finance Administration. 1.6 Management: Interim General Director - Khairov U.B. Deputy General Director - Rza Yurttutan 1.7 Main line of business: exploration, production, processing and transportation of hydrocarbons and processed products. 1.8 Types of performed petroleum operations: Petroleum operations related to develop- ment and operation of oil and gas fields. 2. Purpose of operations pertaining to certain types of the use of the subsurface. 2.1 Purpose of operations: Geological exploration and production of hydrocar- bons. 2.2 Hydrocarbons deposits: Karakuduk oilfield with the following reserves by categories as of 01.01.1995: A+B+C 25,547,000 tonnes - in place 9,774,000 tonnes - recoverable C2 9,593,000 tonnes - in place 3,265,000 tonnes - recoverable and average recovery factor of 0.33. 3. Spatial coordinates of the allotted area of the subsurface 3.1 Geographical coordinates: Shown in Geological Allotment (Exhibit 3). 3.2 Depth of stratigraphic range. Down to absolute elevation of minus 3,320 m. 4. Effective date of the License: Date issued. 5. Term of the License: 25 years. 5.1 Evaluation stage: 3 years. 5.2 Development stage: Pursuant to development plan. 5.3 Production stage: 22 years including construction stage. 6. Conditions for extension of the License: The License may be extended only by the resolution of the Licensor. 7. Authorized agency to enter into an Agreement on behalf of the Government of the Republic of Kazakhstan. The Contract is made by and between the Ministry of Energy and Fuels of the Republic of Kazakhstan and Karakuduk Munay Joint Stock Company Joint Venture and executed on 07.01.1993. 8. Mandatory pre-requisites 8.1 Timing of Contract execution and registration with the Ministry of Geology. The contract must be registered no later than within 30 days of the issuance of the License. 8.2 Minimum work program. 8.2.1 Evaluation stage: 1. 3D Sesmics 1996, 15 km with processing = 500,000 US dollars. 2. Drilling of pilot production wells: 1996 - 3 wells, 3,250 m deep = 4,500,000 US dollars. 1997 - 6 wells, 3,250 to 3,500 m deep = 9,500,000 US dollars 8.2.2 Development stage, first 3 years 1996 = 5,000,000 US dollars 1997 = 25,000,000 US dollars 1998 = 12,000,000 US dollars 8.2.3. Production stage: Pursuant to field development plan. 8.3 Land release: Shown in Geological allotment (Exhibit 3). 8.4 Timing for field development plan approval: Within 6 months of the date of approval of Karakuduk field reserves by the State Commission on Mineral Reserves (GKZ) of the Ministry of Geology and Protection of the Subsurface of the Republic of Kazakhstan. 8.5 Commencement of operations at the oilfield: Within 3 months of the date the License is issued. 8.6 Property rights pertaining to data on the subsurface: Available information will be transferred under a separate agreement with Geoinform department. Rights of ownership pertaining to mineral data acquired in the course of petroleum operations shall be held by Karakuduk Munay Joint Stock Company Joint Venture. Upon expiration of the License term all original geological-geophysical data shall be transferred to the Republic of Kazakhstan and shall become its property. 8.7 Submission of geological information. Copies of geological information shall be transferred annually to the Geoinform Department of the Ministry of Geology and Protection of the Subsurface. Reports on completion of work programs and budgets shall be submitted quarterly to the Authorized Agency and the Main Department of Mineral Resources of the Ministry of Geology. Reports on reserve variations (Form 6-GR) shall be sent to the Ministry of Geology on February 15 of each year. 9. Contract terms. 9.1 Use of Kazakhstan contractors: Only Kazakhstan contractors shall be used. Foreign subcontractors will be employed, if necessary. 9.2 Use of local labor. Local labor shall be used. 9.3 Training of Kazakhstan specialists: No less than 1% of the annual oilfield budget shall be allocated for the training of Kazakhstan specialists. 9.4 Payments related to the use of subsurface and land plots: Pursuant to the Laws of the Republic of Kazakhstan and the Contract. 9.5 Production or profit sharing: Pursuant to the Contract. 10. Obligations pertaining to the rational use of the subsurface, protection of the subsurface and the environment, and safe operations, including the study of technogenic earthquakes. Work plans related to the use of the subsurface must provide measures for rational use and protection of the subsurface and the environment, safe operations, as well as forecast of technogenic earthquakes. 11. Control procedures. The use of the subsurface shall be controlled by state regulatory agencies pursuant to the Laws of the Republic of Kazakhstan. 12. Other terms. License terms shall be strictly adhered to and shall apply to all modifications and addenda to the Contract. The License may be revoked for violation of License terms. Exhibit 3 to License series MG #249 (oil) KAZAKHSTAN MINISTRY OF GEOLOGY - CENTRAL DEPARTMENT OF MINERAL RESOURCES GEOLOGICAL ALLOTMENT Granted to Karakuduk Munay Joint Stock Company Joint Venture for the use of the subsurface for the purpose of geological exploration and production within Karakuduk oilfield. Geological allotment is located within Mangystau Region of Mangystau Oblast and has corner point coordinates shown on attached topographic map: 1. 44o 51'43" N, 53o 52'30" E 2. 44o 52'20" N, 53o 54'08" E 3. 44o 52'10" N, 53o 59'10" E 4. 44o 49'10" N, 54o 02'50" E 5. 44o 48'13" N, 53o 57'10" E 6. 44o 49'48" N, 53o 53'17" E and extends vertically down to minus 3,320 m absolute elevation. The surface area of the geological allotment marked by the corner points on the topographic map is 68.4 km2 (sixty eight thousand square kilometers [Translator's note: as in the original]. Land return Upon completion of the evaluation stage, 100% of the land located outside the oilfield boundary, in the sanitary protection zone, shall be returned. If the oil field is found to have no commercial importance, then Karakuduk oilfield shall be returned to the Republic of Kazakhstan. June 28, 1995 Director, Central Department of Mineral Resources, Kazakhstan Ministry of Geology O. M. Tyugay [signature, seal] City of Almaty Karakuduk Oilfield Map Goes on this Page EX-21 10 LIST OF SUBSIDIARIES LIST OF SUBSIDIARIES
State or Other Jurisdiction of Name Under Which Subsidiary Organization Business Done - ---------- --------------- ---------------- Central Asian Petroleum, Inc. Delaware Central Asian Petroleum, Inc. Central Asian Petroleum Guernsey Central Asian (Guernsey) Limited Petroleum (Guernsey) Limited Karakuduk-Munay, Inc. Kazakstan Karakuduk-Munay, Inc. Road Runner Service Colorado Road Runner Company, Inc. Service Company, Inc.
EX-23.1 11 CONSENT OF GRANT THORNTON LLP FOR S-8 Consent of Independent Certified Public Accountants We have issued our reports dated January 19, 1996, accompanying the consolidated financial statements incorporated by reference or included in the Annual Report of Chaparral Resources, Inc. and subsidiary (the Company) on Form 10-K for the year ended November 30, 1996. We consent to the incorporation by reference in the Company's Registration Statement on Form S-8 of the aforementioned reports. /s/ Grant Thornton LLP GRANT THORNTON LLP Denver, Colorado April 8, 1997 EX-23.2 12 CONSENT OF ERNST & YOUNG LLP FOR S-8 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement on Form S-8 pertaining to the Chaparral Resources, Inc. 1989 Stock Warrant Plan of our report dated April 8, 1997, with respect to the consolidated financial statements of Chaparral Resources, Inc. included in the Annual Report (Form 10-K) for the year ended November 30, 1996. /s/ Ernst & Young LLP ERNST & YOUNG LLP Denver, Colorado April 11, 1997 EX-27 13 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS NOV-30-1996 NOV-30-1996 800 0 61 0 27 1,207 11,189 (198) 14,760 1,155 1,106 0 0 3,753 8,361 14,760 147 147 37 2,398 12 0 90 (2,251) 0 (2,251) 0 (237) 0 (2,417) (.08) (.08)
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