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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 1997
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.
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(Exact name of registrant as specified in its charter)
Colorado 84-0630863
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2211 Norfolk, Suite 1150
Houston, Texas 77098
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(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 807-7100
Securities registered pursuant to Section 12(g) of the Act:
$0.10 Par Value Common Stock
----------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and, (2) has been subject to such filing requirements
for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
As of March 27, 1998, the aggregate market value of the Registrant's voting
stock held by nonaffiliates was $87,020,964
As of March 27, 1998, Registrant had 49,720,456 shares of its $0.10 par
value common stock issued and outstanding.
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. Historically, the
Company produced and sold crude oil and natural gas to oil and gas purchasers in
the Rocky Mountain and Western states of 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). The Company's
strategy is to obtain development rights to oil and gas fields located outside
the United States where discoveries have been made and the Company estimates
there are oil reserves, but the fields have either never been placed on
production or the Company believes that the fields could be enhanced with
efficient management and technical experience provided by the Company. The
Karakuduk Oil Field Project ("Karakuduk Field" or "Karakuduk Project") described
below is the Company's first oil field to be acquired under the Company's new
corporate strategy. The Company divested its domestic working interest oil and
gas properties in early 1997, including the Company's South Douglas Creek
interest.
Karakuduk Project
The Company currently owns all of the outstanding common stock of Central
Asian Petroleum Guernsey Limited ("CAP-G") which has a 50% interest in
Karakuduk-Munay, Inc. ("KKM"), which holds 100% of the right to develop
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 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 has now
paid the $543,750 balance of the purchase price. In addition, in December 1997
the Company acquired the remaining 10% of the outstanding common stock of CAP-G
for which the Company paid $1,625,000 (which includes $800,000 of costs the
Company previously paid on behalf of the prior owner of the 10% interest) and
issued 400,000 shares of Common Stock.
Markets
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 changes in world
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oil prices in recent months and there can be no assurance of any future price
stability.
KKM has entered into a protocol of intentions whereby the entity that
operates the KazTrans Oil pipeline and KKM have undertaken to conclude a
contract which will give KKM access to the pipeline. This access will allow KKM
to ship oil to export markets. In addition to this protocal, on March 7, 1998
KKM signed a contract with the export-import firm of Munay-Impex, a subsidiary
of KazakhOil, to export crude oil produced by KKM to both the Commonwealth of
Independent States (CIS) and other countries in the amount up to 100,000 (one
hundred thousand) metric tons according to the schedule of shipment of
Kazakhstan oil during 1998. KKM will supply crude oil to Munay-Impex in amounts
of not less than 5-10 thousand tons.
The ability of the Company to realize the carrying value of its assets is
dependent on the Company being able to extract and transport hydrocarbons and
finding appropriate markets for their sale. Currently, exports from the Republic
of Kazakhstan are dependent on limited transport routes and, in particular,
access to the Russian pipeline system. Domestic markets in the Republic of
Kazakhstan might not permit world market 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 the Company full recovery of the carrying value of its
assets. In this regard, KKM has entered into a contract with Munay-Impex which
is referenced above for export of crude oil of up to 100,000 metric tons during
1998. The contract was signed on March 7, 1998. Currently, oil is being produced
through the field separators into storage tanks or directly into oil transport
trucks for delivery to the pipeline under the terms of the contract.
The Company's business is not seasonal, except that severe weather
conditions could limit the Company's exploration and drilling activities.
However, severe cold weather increases the demand for oil and natural gas which
are used for heating purposes.
See also "Item 2. Properties--The Karakuduk Field."
Competition
Foreign oil and gas exploration and the acquisition of producing
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, in some cases with
greater financial resources and with more experience than the Company. The
Company does not hold a significant competitive position in either the foreign
or domestic oil and gas industry.
Regulation
General. The Company's operations may be subject to regulation by foreign
governments or other regulatory bodies governing the area in which the Company's
overseas operations are located. Regulations govern such things as drilling
permits, production rates, environmental protection, pollution control, royalty
rates and taxation rates among others. These regulations may substantially
increase the costs of doing business and sometimes may prevent or delay the
starting or continuing of any given exploration or development project.
Moreover, regulations are subject to future changes by legislative and
administrative action and by judicial decisions which may adversely affect the
petroleum industry in general and the Company in particular. At the present
time, it is impossible to predict the effect any current or future proposals or
changes in existing laws or regulations will have on the Company's operations.
The Company believes that it complies with all applicable legislation and
regulations in all material respects.
Subsequent to December 31, 1997, the Kazakhstan government tax authority
began conducting an audit of KKM. The Company believes that as of December 31,
1997, KKM has adequately provided for any potential tax liabilities which may
exist.
Environmental. Based upon a study undertaken on behalf of the Company by an
unaffiliated party, the Company does not believe that its business operations
foreign and domestic presently impair environmental quality. However, compliance
with foreign and domestic 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. KKM removed all
material left in the Karakuduk Field by the Soviet drillers and the Company
believes that Karakuduk Field is in compliance with all applicable environmental
standards.
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Employees
As of March 27, 1998, the Company had 7 full-time employees and one
part-time employee. CAP-G operates through its officers and directors and has no
employees. KKM has 80 employees and retains independent contractors on an as
needed basis through the Company's wholly owned subsidiary Road Runner Services
Company.
ITEM 2. PROPERTIES
The Karakuduk Field
The Karakuduk Field is located in the Mangistau Region of the Republic of
Kazakhstan. KKM's license to develop the Karakuduk Field covers an area of
approximately 16,922.5 acres and has been granted to KKM for a period of 25
years. The agreement granting KKM the right to develop the Karakuduk Field was
approved by the Ministry of Oil and Gas Industries of the Republic of Kazakhstan
on August 30, 1995.
The Karakuduk Field is geographically located approximately 227 miles
northeast of the regional capital city of Aktau, on the Ust-Yurt Plateau. The
closest settlement is the Say-Utes Railway Station approximately 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 Kazakhstan was a republic of the former Soviet Union, from Jurassic age
sediments between 8,500 and 10,000 feet. Twenty-two exploratory and development
wells were drilled to delineate the field; however, none of the wells were ever
placed on production. The productive area of the Karakuduk Field is 11,300
acres, with a minimum of seven separate productive horizons present in the
Jurassic formation. Oil has been recovered in tests from all seven horizons
within the Jurassic formation with flow rates ranging from 3 to 966 barrels per
day. The Company estimates that drilling a maximum 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 by 2001, although the time or
amount of development or production cannot presently be assured.
Although the Company has a reserve report on the Karakuduk Field that was
commissioned by the Company and that was reviewed by a petroleum engineering
group retained by the Company, the reserve report is over three years old and
did not consider the potential adverse impact of marketability on price of any
oil which might be produced. Therefore, the Company does not claim that any of
the reserves specified in the reserve report are proven. As a result of the
Company recently reentering a well in the Karakuduk Field and because of the
Company's future drilling plans for the Karakuduk Field, the Company expects to
be able to obtain an updated reserve report for the Karakuduk Field in late 1998
or early 1999.
The Karakuduk Field is approximately 18 miles north of the Mukat-Mangishlak
railroad, the Mangishlak-Astrakghan water pipeline, the Beyneu-Uzen high voltage
utility lines, and the Uzen-Atrau-Samara oil and gas pipelines. KKM has entered
into a protocol of intentions whereby the entity that operates the KazTrans Oil
pipeline and KKM have undertaken to conclude a contract which will give KKM
access to the pipeline. This access will allow KKM to ship oil to export
markets. In addition to this protocol, on March 7, 1998, KKM signed a contract
-4-
with the export-import firm of Munay-Impex, a subsidiary of KazakhOil, to export
crude oil produced by KKM to both the Commonwealth of Independent States (CIS)
and other countries in the amount up to 100,000 (one hundred thousand) metric
tons according to the schedule of shipment of Kazakhstan oil during 1998. KKM
will supply crude oil to Munay-Impex in amounts of not less than 5-10 thousand
tons. The planned development program for the Karakuduk Field will include a
pressure maintenance operation that the Company believes could result in
additional recoverable reserves.
The ability of the Company to realize the carrying value of its assets is
dependent on being able to extract and transport hydrocarbons and finding
appropriate markets for their sale. Currently, exports from the Republic of
Kazakhstan are dependent on limited transport routes and, in particular, access
to the Russian pipeline system. Domestic markets in the Republic of Kazakhstan
might not permit world market 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 the
Company full recovery of the carrying value of its assets. KKM, according to its
license agreement with the Government of Kazkhstan, has a priority use of the
existing pipeline network. In this regard, KKM has entered into a contract with
Munay-Impex, which is referenced above, for export of crude oil of up to 100,000
metric tons during 1998. The contract was signed on March 7, 1998. Currently,
oil is being produced through the field separators into storage tanks or
directly into oil transport trucks for delivery to the pipeline under the terms
of the contract.
Because of uncertainties surrounding the prospect, no proved reserves have
been attributed to the Karakuduk Field. The Karakuduk Project will require
significant development costs for which the financing is not complete. There can
be no assurance that the project will be adequately financed or that the field
will be successfully developed. The license requires a minimum work plan of
approximately $10 million by December 31, 1997 (which has been satisfied), an
additional $34.5 million by December 31, 1998 and $12 million by December 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 $12 million to fund KKM's current
operation. KKM's 1998 budget of $34 million has been approved by the KKM Board
of Directors through December 31, 1998. It is planned that this requirement will
be funded by the Company through loans by its subsidiary, CAP-G, to KKM and by
the sale of oil by KKM. In addition, the Company is attempting to obtain limited
or non-recourse project financing for KKM, which may reduce the amount of loans
from CAP-G.
The Karakuduk Field will be developed in phases. Phase I, expected to
require at least one to two years, began during 1996. Phase I expenditures are
to include the recompletion of four existing wells. Also, it is planned that a
development well program in the Karakuduk Field will commence in the second half
of 1998 as a part of Phase II Development.
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 $10 to $12 million.
The Company currently is responsible for providing 100% of the balance of
the funding necessary for the completion of the development of the Karakuduk
Field.
The Company first produced crude oil from the Karakuduk Field in December
1997. The produced oil is transported by truck to the export pipeline of
Say-Utes, which is 38 miles from the field. By the second quarter of 1998, it is
planned that any oil produced will be transported using several options: by
pipeline from the field to a pipeline terminal to be built at Railroad Station
#6, which is apaproximately 18 miles from the Karakuduk Field, or to a railroad
boarding facility at the same location or both. The oil will be transported by
railroad or via the Uzen-Atrau-Samara pipeline to the Black Sea ports described
above for sale to international consumers.
The first two workover wells reentered in the Karakuduk Field were tested
by KKM at a combined sustained flow rate of approximately 2,000 barrels of oil
per day. The wells, #21 and #10, are two of twenty-two wells drilled between
1972 and 1992 to delineate the Karakuduk Oil Field. None of such wells were
placed on production when originally drilled. Well #21 and well #10 currently
have been placed on production to fill storage tanks and transport trucks that
deliver oil to the export pipeline. Workover completions are underway on well #7
and well #20. Production has been established from the two uppermost
oil-producing zones in the field. The additional zones will be brought on
production in subsequent wells.
-5-
Management of the Company believes the risk-to-reward considerations
involved with the development of the Karakuduk Field are very positive and may
lead to substantial growth of the Company over the next several years. However,
the Company can provide no assurances that the Karakuduk Field will produce oil
in any specific amounts or that the Company will ever realize a profit as a
result of the Company's interest in the field.
KKM was re-registered on July 24, 1997, with the government of Kazakhstan.
The re-registration was required as a result of new legislation in Kazakhstan.
The Company believes that KKM is now in compliance with all Kazakhstan laws and
regulations related to the registration requirements relating to legal entities.
The re-registered KKM includes as a shareholder Kazakh Oil, the national
petroleum company which holds the majority of the interest of the government of
Kazakhstan in KKM. The balance is owned by a private Kazakhstan joint stock
company.
The permits and licenses required to develop the Karakuduk Field have been
obtained. However, there is no assurance that any further permits or licenses,
if required, will be obtained. Also, because of uncertainties surrounding the
project, 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.
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.
See also Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Reserves. As detailed in "Disclosures About Oil and Gas Producing
Activities" following the Notes to Consolidated Financial Statements in this
report, estimated quantities of the Company's proved oil and natural gas
reserves both decreased 100% for the fiscal year ended November 30, 1996, as
compared to the previous fiscal year. Reserves decreased due to production
during the year, the sale of certain producing properties and the abandonment of
certain properties which produced at uneconomic rates. The present value of the
Company's proved reserves decreased 100% at the fiscal year end 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. The Company claims no proved reserves as of December 31, 1997.
Although the Company has a reserve report on the Karakuduk Field that was
commissioned by the Company and that was reviewed by a petroleum engineering
group retained by the Company, the reserve report is over three years old and
did not consider the potential adverse impact of marketability on price of any
oil which might be produced. Therefore, the Company does not claim that any of
the reserves specified in the reserve report are proven. As a result of the
Company recently reentering a well in the Karakuduk Field and because of the
Company's future drilling plans for the Karakuduk Field, the Company expects to
be able to obtain an updated reserve report for the Karakuduk Field in late 1998
or early 1999.
Since January 1, 1997, the Company has not filed with or included in any
reports to any other Federal authority or agency any estimates of total, proved
net oil or gas reserves.
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Net Quantities of Oil and Gas Produced. The Company's net oil and gas
production for each of the last three fiscal years and for the month of December
1996 (all of which prior to 1997 was from properties located in the United
States) was as follows:
Year Ended November 30,
Year Ended Month of -----------------------
December 31, 1997 December 1996 1996 1995
----------------- ------------- ---- ----
Oil (Bbls) Less than 1,000 -0- 1,737 8,224
Gas (Mcf) -0- -0- 96,906 132,924
The average sales price per barrel of oil and Mcf of gas, and average
production costs per barrel of oil equivalent ("BOE") excluding depreciation,
depletion and amortization were as follows:
Average Average Average
Year Ended Month of Year Ended Sales Price Sales Price Production
December 31, December November 30 Oil (Bbls) Gas (Mcf) Cost Per BOE
------------ -------- ----------- ----------- ---------- ------------
1997 * * *
1996 * * *
1996 17.53 1.17 2.07
1995 14.27 1.02 3.78
* The Company did not sell any significant quantities of oil and gas during
these periods.
The above table represents activities related only to oil and gas
production.
Productive Wells and Acreage. As of December 31, 1997, the Company had
interests in one productive oil well and no productive gas wells. As of December
31, 1997, the Company had a net 50% beneficial interest in KKM which holds a
governmental license to develop the Karakuduk Field, a 16,900 acre oil field in
the Republic of Kazakhstan which was discovered in 1972 with the drilling of 22
exploratory and development wells by the former Soviet Union. These wells were
not produced commercially. On December 31, 1997, KKM delivered by truck to the
pipeline oil that KKM had recovered from testing well #21, the first well
reentered in the Karakuduk Field. Well #21 tested on a sustained flow of 526
barrels of oil per day. The well was subsequently shut-in until installation of
a transfer system and a laboratory at Say-Utes was completed in February 1998.
The well produces oil periodically to fill storage and/or transport trucks that
deliver oil to the export pipeline. As of March 23, 1998 Well #10 has been
reperforated and well #10 was produced at a sustained test flow rate with a 1/2"
choke of 1,450 barrels of oil per day.
Drilling Activity. During the last fiscal year ended December 31, 1997, the
month of December 1996 and the previous two fiscal years ended November 30,
1996, the Company did not participate in the drilling of any productive
exploratory and development wells. The Company did participate in the reentry of
one previous oil well which had never been placed on production.
Present Activities. As of March 23, 1998, the Company was in the process of
reentering well #20 and well #7. Well #10 was reperforated and flowed 1,450
barrels of oil per day through a 1/2 choke.
Offices. On March 16, 1998, the Company relocated its offices to 2211
Norfolk, Suite 1150, Houston, Texas 77098. The new office is comprised of
approximately 5,570 square feet and will be leased for a five year term at an
initial rental of approximately $7,891 per month.
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ITEM 3. LEGAL PROCEEDINGS
On November 14, 1997, Heartland, Inc. of Wichita and Collins & McIlhenny,
Inc. ("Plaintiffs") filed a lawsuit against the Company, Howard Karren, Whittier
Trust Company and James A. Jeffs in the District Court of Harris County, Texas.
The Company was served with the Complaint on December 3, 1997. Plaintiffs claim
that the Company breached an alleged agreement with them whereby Plaintiffs were
to raise capital for the Company through a private placement of the Company's
securities, that the Company and Mr. Karren made false representations in
connection with the alleged contract and that Whittier Trust Company and James
A. Jeffs interfered with the Company's performance of the alleged contract.
Plaintiffs are seeking actual damages of $3,435,000 and exemplary damages of
$25,000,000 from each defendant, plus attorneys' fees. A motion for a summary
judgment filed by the Plaintiff was denied by the Court.
The defendants believe the allegations are without merit and intend to
vigorously defend the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during
the Company's fiscal quarter ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's $0.10 par value common stock trades on the Nasdaq Small-Cap
Market under the symbol CHAR.
At March 24, 1998, the Company had approximately 2,032 shareholders of
record of its $0.10 par value common stock. No dividend has been paid on the
Company's common stock, and there are no plans to pay dividends in the
foreseeable future.
-8-
The following table shows the range of high, low and closing sales prices
for each quarter during the Company's last two calendar years ended December 31,
1997, as reported by the National Association of Securities Dealers, Inc.
Trading Range Price Range
Fiscal Quarter Ended High Low Closing
-------------------- ---- --- -------
March 31, 1996 1 11/32 11/16 1 3/16
June 30, 1996 1 21/32 1 1/32 1 3/8
September 30, 1996 1 3/4 1 3/16 1 5/16
December 31, 1996 1 13/32 3/4 29/32
March 31, 1997 1 3/16 3/4 7/8
June 30, 1997* 1 3/4 13/16
September 30, 1997 1 1/4 11/16 1 5/32
December 31, 1997 3 3/32 1 1/16 2 1/2
* On May 29,1997, the Company changed its fiscal year end from November 30 to
December 31.
The following is information as to all securities of the Company sold by the
Company since November 30, 1996, which were not registered under the Securities
Act of 1933, as amended ("Securities Act").
In November and December, 1996, the Company borrowed $1,850,000 for interim
financing pursuant to unsecured convertible promissory notes that bore interest
at 8% per annum, which was payable monthly, and that were due and payable on or
before May 29, 1998. The promissory notes were 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 was 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 issued the promissory notes 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
promissory notes for their own accounts and not with a view to distribution.
Such persons had available to them all material information concerning the
Company. The promissory notes bear an appropriate restrictive legend under the
Securities Act. No underwriter was involved in the transaction.
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
were 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
were not paid or converted by November 30, 1997. Of the warrants to purchase
185,000 shares, the Company was required to issue warrants to purchase 125,000
shares. Such warrants are exercisable for a period of three years at $0.25 per
share. As of November 30, 1997, $1,500,000 of the notes had been converted into
the Company's Common Stock and the remaining notes were completely paid off by
the Company. 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
bore an appropriate restrictive legend under the Securities Act. No underwriter
was involved in the transaction.
The Company attempted to negotiate an agreement pursuant to which the
Company would acquire 100% of the issued and outstanding capital stock of M-D
International Petroleum, Inc. ("MDI"), a private company. 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 issued the shares in reliance upon the exemption from registration
under Section 4(2) of the Securities Act. EOGU had available all material
information concerning the Company. The certificate evidencing the shares bears
an appropriate restrictive legend under the Securities Act. No underwriter was
involved in the transaction.
-9-
On February 12, 1997, the Company entered into a Severance Agreement with
Paul V. Hoovler pursuant to which Mr. Hoovler received warrants to purchase
100,000 shares of the Company's Common Stock at an exercise price of $0.85 per
share and warrants to purchase 100,000 shares of the Company's Common Stock at
an exercise price of $1.25 per share. The Company issued the warrants in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act. Mr. Hoovler had available to him all material information
concerning the Company. The warrants have and the certificates evidencing the
shares underlying the warrants will bear an appropriate restrictive legend under
the Securities Act. No underwriter was involved in the transaction.
On April 22, 1997, the Company sold 3,076,923 shares of the Company's
Common Stock for $0.65 per share for a total of $2,000,000 to a private
investor. In connection with the transaction, the Company also issued a warrant
to the investor to purchase up to an additional 4,615,385 shares of the
Company's Common Stock for $3,000,000 or $0.65 per share. The warrant was to
expire on December 31, 1997, if not previously exercised. In October, 1997, the
private investor exercised a portion of the warrant by purchasing 2,307,692
shares of the Company's Common Stock. At the same time, the Company agreed to
extend the expiration date of the remaining portion of the warrant to December
31, 1998. In November, 1997, the private investor exercised the remaining
portion of the warrant by purchasing 2,307,693 shares of the Company's Common
Stock and exercised another warrant that the private investor had received in
connection with a loan made by the private investor in December, 1996, to the
Company. The warrant related to 125,000 shares of the Company's Common Stock and
was exercisable at a price of $0.25 per share. In April 1997, the private
investor also converted a $500,000 promissory note (plus $2,000 of accrued
interest) that had previously been issued by the Company to it into 772,991
shares of the Company's Common Stock at a conversion price of $0.65 per share.
The Company issued the shares and the warrant in reliance upon the exemption
from registration under Section 4(2) of the Securities Act. The investor had
available to the investor all material information concerning the Company. The
certificates evidencing the shares and the warrant bear an appropriate
restrictive legend under the Securities Act. No underwriter was involved in the
transaction.
On July 17, 1997, the shareholders of the Company approved a 1997 Incentive
Stock Plan pursuant to which all non-employee directors were to receive an award
of 250 shares of Common Stock of the Company for each meeting of the board of
directors attended by such director. The directors have waived their rights to
receive shares for the meetings in 1997. Also on July 17, 1997, the shareholders
approved a 1997 Non-Employee Directors' Stock Option Plan pursuant to which each
year each non-employee director will receive an option to purchase 25,000 shares
of Common Stock of the Company. The first options relating to a total of 200,000
shares that are exercisable at a price of $0.83 per share were received
effective July 17, 1997.
On September 2, 1997, the Company agreed to issue 87,669 shares of the
Company's Common Stock to Charles P. Karren in lieu of $78,000 of accrued salary
that had not been paid to Mr. Karren. The Company issued the shares in reliance
upon the exemption from registration under Section 4(2) of the Securities Act.
Mr. Karren had available to him all material information concerning the Company.
The certificate evidencing the shares bears an appropriate restrictive legend
under the Securities Act. No underwriter was involved in the transaction.
On September 2, 1997, the Company granted five year options to purchase
2,885,000 shares of the Company's Common Stock to various directors of, and
consultants to, the Company. Options relating to 1,442,500 shares have an
exercise price of $0.75 per share and options relating to 1,442,500 shares have
an exercise price of $1.50 per share. The Company issued the options in reliance
upon the exemption from registration under Section 4(2) of the Securities Act.
Such persons had available to them all material information concerning the
Company. The options have and the certificates evidencing the shares underlying
the options will bear an appropriate restrictive legend under the Securities
Act. No underwriter was involved in the transaction.
-10-
On September 3, 1997, the Company sold 461,538 shares of the Company's
Common Stock for $0.65 per share for a total of $300,000 to a private investor.
In connection with the transaction, the Company also issued a warrant to the
investor to purchase up to an additional 461,538 shares of the Company's Common
Stock for $300,000 or $0.65 per share. The warrant was to expire on December 31,
1997, if not previously exercised. The private investor exercised a portion of
the warrant on December 31, 1997, and received a total of 384,616 shares of the
Company's Common Stock. The Company issued the shares and the warrant in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act. The investor had available to the investor all material
information concerning the Company. The certificates evidencing the shares bear
an appropriate restrictive legend under the Securities Act. No underwriter was
involved in the transaction.
On November 24, 1997, the Company executed a Subscription Agreement
("Agreement") with an investor, which was not affiliated with the Company.
Pursuant to the Agreement, the investor purchased 50,000 shares of the Company's
Series A Preferred Stock, no par value, for a purchase price of $100.00 per
share or an aggregate purchase price of $5,000,000.
The Series A Preferred Stock is convertible at the option of the holder
thereof at any time or from time to time on or prior to the redemption date into
Common Stock. The conversion price of the Series A Preferred Stock is $2.25 per
share. The number of shares of Common Stock issuable upon conversion of each
share of Series A Preferred Stock is determined by dividing $100 by the
conversion price per share.
Allen & Company Incorporated acted as placement agent in connection with
the sale of the Series A Preferred Stock. Allen & Company Incorporated elected
to receive its fees in the form of warrants to purchase 900,000 shares of the
Company's Common Stock that were originally exercisable through November 25,
2002, at an exercise price of $0.01 per share. Due to the fact that the investor
did not purchase additional shares of preferred stock pursuant to the Agreement,
Allen & Company Incorporated has agreed that warrants to purchase 700,000 of the
shares of the Company's Common Stock will only be exercisable if Allen & Company
Incorporated finds alternative funding acceptable to the Company by November 25,
1999.
The Company issued the shares of Series A Preferred Stock and the warrants
in reliance upon the exemption from registration under Section 4(2) of the
Securities Act. The investor represented to the Company that the investor
acquired the shares for the investor's own account and not with a view to
distribution. The investor had available to the investor all material
information concerning the Company. The certificates evidencing the shares and
the warrants bear an appropriate restrictive legend under the Securities Act.
In December 1997, the Company exercised an option to acquire 10% of the
outstanding shares of CAP-G owned by one person. As a part of the consideration,
the Company issued 400,000 shares of Common Stock to such person. The Company
issued the shares in reliance upon the exemption from registration under Section
4(2) of the Securities Act. Such person had available to him all material
information concerning the Company. The certificates evidencing the shares
issued bear an appropriate restrictive legend under the Securities Act and stop
transfer instructions have been and will be placed with the Company's stock
transfer agent. No underwriter was involved in the transaction.
On January 23, 1998, the Company ratified the grants of options to purchase
257,000 shares of the Company's Common Stock to various employees of, and
consultants to, the Company, granted options to purchase 693,000 shares of the
Company's Common Stock to various employees of, and consultants to, the Company,
granted (subject to shareholder ratification) 90,000 shares of the Company's
Common Stock to the directors of the Company and granted 190,000 shares of the
Company's Common Stock to various employees of, and consultants to, the Company.
The Company made the grants in reliance upon the exemption from registration
under Section 4(2) of the Securities Act. Such persons had available to them all
material information concerning the Company. The options have and the
certificates evidencing the shares underlying the options and representing the
shares granted will bear an appropriate restrictive legend under the Securities
Act. No underwriter was involved in the transaction.
-11-
ITEM 6. SELECTED FINANCIAL DATA
The following is selected consolidated financial information concerning the
Company. This information should be read in conjunction with the Consolidated
Financial Statements appearing elsewhere in this Annual Report on Form 10-K.
Year Ended Month of Year Ended
December 31, December November 30, November 30, November 30, November 30,
------------ ---------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993
Oil and gas sales............... -- -- $ 147,000 $ 255,000 $ 374,000 $ 414,000
Total revenues*................. -- -- 147,000 255,000 374,000 414,000
Noncash write-down of oil
and gas properties............ -- -- -- 619,000 416,000 230,000
Net income (loss)............... (2,603,000) (130,000) (2,416,000) (704,000) (474,000) (123,000)
Net income (loss) per
common share.................. (.06) (.00) (.08) (0.04) (0.02) (0.01)
Working capital................. 3,356,000 * 259,000 366,000 497,000 709,000
Total assets.................... 23,519,000 * 14,498,000 5,595,000 2,388,000 2,597,000
Long-term obligations and
redeemable preferred stock .. 4,710,000 * 1,491,000 461,000 -- 115,000
Shareholders' equity............ 18,578,000 * 12,114,000 4,920,000 2,035,000 2,167,000
Present value of proved reserves -- -- -- 427,000 1,084,000 1,360,000
Proved oil reserves (bbls)...... -- -- -- 66,185 111,690 141,748
Proved gas reserves (mcf)....... -- -- -- 3,062,417 3,294,730 2,305,142
- -------------------
* Not applicable due to one month short period ended December 31, 1996
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
Previously, the Company's primary source of capital was from oil and gas
sales from domestic properties. All domestic properties have been sold or
otherwise disposed. The only oil and gas interest of the Company at this time is
as a result of the Company's investment in KKM through CAP-G. KKM is a closed
joint stock company in Kazakhstan.
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.
Since January 1, 1997, the Company raised $2,300,000 through the sale of Common
Stock, $3,309,000 through the exercises of warrants and $5,000,000 through the
sale of Series A Preferred Stock. The Company may seek to obtain additional
capital through debt or equity offerings, encumbering properties, entering into
arrangements whereby certain costs of development will be paid by others to earn
an interest in the properties, or sale of a portion of the Company's interest in
the Karakuduk Field. The present environment for financing the acquisition of
oil and gas properties or the ongoing obligations of the oil and gas business is
uncertain due, in part, to instability in oil and gas pricing in recent years.
The Company's small size and the early stage of development of the Karakuduk
Field may also increase the difficulty in raising any financing that may be
needed in the future. There can be no assurance that the debt or equity
financing that might be required to fund the Company's operations and
-12-
obligations in the future will be available to the Company on economically
acceptable terms if at all.
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred recurring operating losses and has no operating assets presently
generating cash to fund its operating and capital requirements. The Company does
not anticipate that its current cash reserves and cash flow from operations will
be sufficient to meet its capital requirements through fiscal 1998.
In December 1997 the Company exercised an option to acquire the remaining
10% of CAP-G. The Company now owns all of CAP-G, providing a 50% beneficial
interest in the Karakuduk Field. The Company was required to pay $1,625,000
(which includes $800,000 of costs the Company previously paid on behalf of the
prior owner of the 10% interest) and issue 400,000 shares of Common Stock for
the remaining 10% of CAP-G. The other 50% of the Karakuduk Field is owned by
KazakhOil, the national oil company, and a private Kazakhstan joint stock
company.
As of December 31, 1997, substantially all of the Company's assets are
invested in the development of the Karakuduk Field, a shut-in oil field in the
central Asian Republic of Kazakhstan. Since the Karakuduk Field is in the early
stage of development, the Karakuduk Field does not currently produce revenues
sufficient to meet its cash outflow needs. The development of the Karakuduk
Field, through KKM, will require substantial amounts of additional capital. The
terms of the KKM revised license require a work plan from the commencement of
operations through December 31, 1997, of at least $10,000,000, which has been
satisfied. Additional requirements of $34.5 million and $12 million exist for
the years ending December 31, 1998 and 1999, respectively. Without additional
funding and significant revenues from oil sales, of which there are no
assurances, the Company will not be able to provide sufficient funds to satisfy
these requirements and the Company's interest in the Karakuduk Field may be
lost.
The Company received an extension to June 30, 1998, from the Overseas
Private Investment Corp. ("OPIC") for political risk insurance. OPIC granted the
Company a binding executed letter of commitment on September 25, 1996. The
Company has a standby facility for which it has made six payments of $31,250
with another payment due on or before April 1, 1998. The Company expects to
execute the contract on or before June 30, 1998.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company does not expect to
incur any material operating expenses or be required to invest heavily in
computer system improvements to be Year 2000 compliant.
The Company has no other material commitments for cash outlay and capital
expenditures other then normal operations.
-13-
Change in Fiscal Year End
In order to unite the reporting period of the Company with that of its
subsidiaries, the fiscal year of the Company was changed to a December 31 year
end from the previous November 30 year end. This change took effect on May 29,
1997. As a result of this change, year to date data is as of December 31 for
1997 and as of November 30 for 1996 and 1995. The activity for December 1996
only includes corporate activity and is immaterial.
Results of Operations Year Ended December 31, 1997 Compared with Year Ended
November 30, 1996.
As mentioned above, during 1997 the Company changed from a fiscal year
ended November 30 to a fiscal year ended December 31. The Company's operations
during the fiscal year ended December 31, 1997, and the month ended December 31,
1996, resulted in losses before extraordinary items, if any, of $2,389,000 and
$130,000, respectively, due to the Company's ongoing transition to international
exploration and production operations. The Company's operational loss for
December 1996 consisted of miscellaneous corporate level expenses and is
immaterial to the overall operational results of the Company.
Results for the fiscal year ended November 30, 1996 have also been restated
to reflect the equity method of accounting for the Company's investment in KKM.
In 1996, the Company accounted for KKM using proportional consolidation. After
adoption of the equity method, the Company's net loss for the fiscal year ended
November 30, 1996, $2,416,000, remained unchanged from the amount originally
reported.
Oil and gas revenues and production costs decreased by $147,000 and
$37,000, respectively, from the year ended November 30, 1996, due to the
disposition of all of the Company's domestic oil and gas properties during the
first quarter of 1997. Interest income increased by $267,000 from the year ended
November 30, 1996 due to increased financing of 100% of KKM's operations in
Kazakhstan. As of December 31, 1997, the Company held a 50% equity interest in
KKM.
General and administrative costs and interest expense increased by $341,000
and $225,000, respectively, also due to KKM's increased operational activity in
Kazakhstan. The Company's equity loss in KKM, however, decreased by $139,000
from the year ended November 30, 1996 due to additional capitalization of costs
directly related to development of oil and gas properties held by KKM. The
Company recognized a $36,000 economic loss on the disposition of the Company's
domestic properties.
In 1997, the Company recognized a $214,000 extraordinary loss on the
extinguishment of long term debt. The Company did not have any other debt
obligations outstanding as of December 31, 1997.
Results of Operations Year Ended November 30, 1996 Compared with Year Ended
November 30, 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 fiscal 1995 to $37,000 in fiscal 1996 as a result of continued
decreased production from the Company's domestic operations. General and
administrative expenses increased from $166,000 in fiscal 1995 to $2,336,000 in
fiscal 1996 as a result of consulting fees to M-D International Petroleum, Inc.
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 Kazakhstan. Interest expense also increased in relation to the
financing of the projects. In fiscal 1996, there was no write down of oil and
gas properties as there had been in fiscal 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 fiscal 1995, before
extraordinary loss.
For fiscal 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.
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.
-14-
Management's Discussion of Changes in Standardized Measure
Standardized measure of discounted future net cash flows remained unchanged
from the fiscal year ended November 30, 1996 and decreased 100% in the year
ended November 30, 1996 as compared to the year ended November 30, 1995 due to
the withdrawal of the Company from domestic operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for a list of the Financial Statements and the supplementary
financial information included in this report following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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
opinion of Grant Thornton LLP on the Company's financial statements for the
fiscal years ended November 30, 1995 contained no adverse opinion or disclaimer
of opinion, nor was such opinion 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 following table sets forth the names and ages of the current directors
and executive officers of the Company, the principal offices and positions with
the Company held by each person and the date such person became a director or
executive officer of the Company. The executive officers of the Company are
elected annually by the board of directors. Executive officers serve terms of
one year or until their death, resignation or removal by the board of directors.
Name of Director or Officer and Director Principal Occupation
Position, in the Company Since Age During the last Five Years
------------------------------- ------ --- --------------------------
Howard Karren 1996 67 Chairman of the Board of the Company since
Chairman of the Board, 1996; Chief Executive Officer of the Company
President and Chief since January 1997 and President of the
Executive Officer Company 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.
-15-
Name of Director or Officer and Director Principal Occupation
Position, in the Company Since Age During the last Five Years
-------------------------------- ----- --- --------------------------
Arlo G. Sorensen 1996 57 Chief Financial Officer and Principal Chief
Financial Officer Accounting Officer of the
Company since March 1997. Treasurer of the
Company from February 1997 to February 1998.
Trustee of M.H. Whittier Corporation, a
private investment entity, since 1985.
Chairman of the Board and a director of
Whittier Trust Company, trust company since
1988.
David A. Dahl 1997 36 Secretary of the Company since August 1997;
Secretary 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.
Alan D. Berlin 1997 58 A partner of Aitken Irvin Lewin Berlin
Vrooman & Cohn, LLP since 1995. Engaged in
the private practice of law for over five
years prior to joining Aitken Irvin Lewin
Berlin Vrooman & Cohn LLP. Secretary of the
Company from January 1996 to August 1997;
President of the International Division of
Belco Petroleum Corp. from 1985 to 1987 and
held various other positions with Belco
Petroleum Corp. from 1977 to 1985. Currently
a director of Belco Oil & Gas Corp.
Walter A. Carozza 1997 42 President of Victory Ventures LLC, a private
equity reinvestment firm, since 1997.
Manager of and investor in East River
Ventures, LP, and M3 Partners, LC, venture
capital funds, since 1996 and 1994,
respectively. Involved in the financing and
management of companies since 1986. A
director of ETEX, Inc., Caring Technologies,
Inc., Interlink Health Services, Inc. and The
Rock Island Group, Inc.
Ted Collins, Jr. 1997 59 President of Collins & Ware, Inc., an
independent oil and gas company, since 1988.
President of Enron Oil & Gas Co., an oil and
gas company, from 1982 to 1988; Executive
Vice President and a director of American
Quasar Petroleum Co. from 1969 to 1982. Mr.
Collins is a director of Hanover Compression
Company, Mid Coast Energy Resources, Inc. and
Queen Sand Resources, Inc.
Peter G. Dilling 1995 47 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.
Vice Chairman of the Board of the Company
from March 1997 to August 1997.
-16-
Name of Director or Officer and Director Principal Occupation
Position, in the Company Since Age During the last Five Years
------------------------------- ----- --- --------------------------
John G. McMillian 1997 71 Retired since 1995. Chairman, President and
Chief Executive Officer of Allegheny &
Western Energy Corporation, an oil and gas
company, from 1987 to 1995; founder and
former Chairman and Chief Executive Officer
of Northwest Energy Company and owner and
Chairman and Chief Executive Officer of
Burger Board Company. A director of Marker
International and Excalibur Technologies.
Michael J. Muckleroy 1997 67 Independent oil operator since 1994.
Chairman and Chief Executive Officer of Enron
Liquid Fuels, a subsidiary of Enron Corp.
which is engaged in the processing and
marketing and trading of oil and gas from
1984 to 1994.
Michael B. Young N/A 29 Treasurer and Controller of the Company since
Treasurer and Controller February 1998; Tax
Manager in the Oil & Gas Tax Practice of
Arthur Andersen LLP, an accounting firm, from
June 1991 to February 1998.
Except as indicated in the above table, no director of the Company is a
director of an entity that has its securities registered pursuant to Section 12
of the Securities Exchange Act of 1934.
The present term of office of each director will expire at the next annual
meeting of shareholders. Each executive officer will hold office until his
successor duly is elected and qualified, until his resignation or until he is
removed in the manner provided by the Company's Bylaws.
In connection with the Company's acquisition of all of the stock of CAP-D
in 1995, the former shareholders of CAP-D have certain rights to nominate
directors of their choosing for election to the Company's Board of Directors.
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. Mr. McGee subsequently resigned as a director and officer of the
Company to become Co-Managing Director of KKM in Aktau, Kazakhstan. 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
year annual meeting of shareholders.
In connection with borrowings in August 1996, the Company agreed to add two
directors selected by two of the lenders, Whittier Ventures LLC and Whittier
Energy Company (collectively "Whittiers"). In connection with the transactions,
James A. Jeffs resigned from the Company's board of directors. At the request of
the Whittiers, on December 2, 1996, Arlo G. Sorensen replaced Mr. Jeffs on the
Company's board of directors and on January 3, 1997, David A. Dahl was appointed
to the Company's board of directors. The Whittiers will have the right to have
their two representatives nominated for directors of the Company until the
Whittiers no longer have any investment in the Company.
-17-
There are no other arrangements or understandings between any executive
officer and any director or other person pursuant to which any person was
selected as a director or an executive officer.
SECTION 16(a) BENEFICAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of the Forms 3 and 4 and any amendments thereto
furnished to the Company during the Company's fiscal year ended December 31,
1997 and Form 5 and amendments thereto furnished to the Company with respect to
such fiscal year, during the Company's fiscal year ended December 31, 1997, 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 Walter A. Carozza who did not timely file
his Form 3, and failed to file a Form 5 reporting one transaction during the
fiscal year ended December 31, 1997, Peter G. Dilling who failed to file three
Forms 4 reporting a total of seven transactions and a Form 5 reporting three
transactions during the fiscal year ended December 31, 1997 and Howard Karren
who did not timely file a Form 5 reporting three transactions during the fiscal
year ended December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
In May 1997, the Company changed its fiscal year end from November 30
to December 31. The following table shows all cash compensation paid by the
Company for services rendered during the fiscal years ended December 31, 1997,
during the month of December 1996 and during the fiscal years ended November 30,
1996 and November 30, 1995 to Howard Karren and to Paul V. Hoovler (there were
no executive officers of the Company whose annual salary and bonus exceeded
$100,000 during the fiscal year ended December 31, 1997).
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
------------------------------------ ----------
Year Year
Ended Ended Other Securities All Other
Name and December Month of November Annual Underlying Compen-
Principal Position 31, December 30, Salary ($) Bonus($) Compensation ($) Options(#) sation
------------------ -------- --------- -------- --------- -------- ---------------- ---------- ----------
Howard Karren 1997 -- -- -- 1,025,000 --
Chief Executive Officer 1996 -- -- -- -- --
and President since 1996 -- -- $175,000(1) -- --
January 1997 and February 1995 -- -- -- -- --
1997, respectively --
Paul V. Hoovler 1997 $12,408 -- -- --
Chief Executive
1996 $ 5,000 $12,500 -- 200,000(4) --
1996 $60,000(2) -- $4,937(3) -- $40,000(5)
Officer and President 1995 $60,000 -- $4,413(3) -- $40,000(5)
until January 1997 and
February 1997,
respectively
-18-
- ---------------------
(1) In connection with Howard Karren becoming a Director and Chairman of the
Company of the Company, subject to a certain contingency which was
satisfied in April 1996, the Company agreed to issue 350,000 shares of the
Company's restricted common stock to Howard Karren, a director of the
Company, or his designees. The $175,000 represents the fair market value of
the 350,000 shares on April 5, 1996, the date the contingency was
satisfied.
(2) In addition, on August 19, 1996, the Company's board of directors awarded
Mr. Hoovler a cash bonus 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
Oil Field in Kazakhstan, ("Karakuduk Field") or (ii) the date when the
Company makes a public disclosure of a sale or farmout of the Karakuduk
Field. 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 warrants. Anything mentioned above
to the contrary notwithstanding, in the event Mr. Hoovler has exercised and
paid for the warrants 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 Field.
(3) Represents the amounts distributed pursuant to a royalty participation plan
to Paul V. Hoovler.
(4) Represents shares underlying warrants that were received by Mr. Hoovler as
a part of a severance agreement with the Company. See "Executive
Compensation--Termination of Employment Agreements."
(5) The Company had a Deferred Compensation and Death Benefit Plan for Paul V.
Hoovler. The Company paid Mr. Hoovler $40,000 annually from this plan until
Mr. Hoovler voluntarily terminated his employment in February 1997 at which
time he received the life insurance policy on his life which previously
provided for the major portion of any costs to the Company. The plan was
fully funded when the Company paid, during the Company's fiscal year ended
November 30, 1991, the final payment of a premium of $18,000 on the life
insurance policy.
-19-
Option Grants in Last Fiscal Year
The following table sets forth information concerning options
(warrants) granted by the Company to Howard Karren and Paul V. Hoovler from
December 1, 1996 through December 31, 1997.
Number of
Securities
Underlying % of Total Options
Options (Warrants) Granted to Market Price
(Warrants) Employees Exercise or Expiration on Date of
Name Granted During Period Base Price Date Grant (1)
- ---- ---------- ------------------ ----------- ---------- -------------
Howard Karren 25,000 Shares 1.9% $0.828125 7/16/2007 $0.82812
500,000 Shares 36.6% $0.75 9/1/2002 $0.8125
500,000 Shares 36.6% $1.50 9/1/2002 $0.8215
Paul V. Hoovler 100,000 Shares (2) 7.5% $0.85 2/12/2001 $0.828125
100,000 Shares (2) 7.5% $1.25 1/1/2002 $0.828125
(1) The market price on the date of grant is based on the mean between the
closing bid and asked prices of the Company's Common Stock on the date of
grant or on the next day before the date of grant on which there were
reported bid and asked prices of the Company's Common Stock.
(2) Mr. Hoovler's warrants were received as a part of a severance agreement
with the Company. See "Executive Compensation--Termination of Employment
Agreements."
Fiscal Year-End Option Values
The following table sets forth information concerning unexercised options
(warrants) held by Howard Karren and by Paul V. Hoovler at December 31, 1997:
-20-
Number of Securities
Underlying Unexercised Value of Unexercised
Options as of In-the-Money Options at
December 31, 1997(#) December 31, 1997($)
---------------------------- -----------------------------
Name Exercisable/ Unexercisable Exercisable/ Unexercisable
- ---- ----------- ------------- ----------- -------------
Howard Karren........... 1,025,000 - 0 - $1,379,180(1) - 0 -
Paul V. Hoovler......... 600,000 100,000 $1,285,000(1) $125,000
- -----------------------
(1) The value was determined by multiplying the number of shares underlying the
warrants by the difference between the exercise price and the closing sale
price of the Company's Common Stock on December 31, 1997.
Compensation of Directors
On July 17, 1997, the shareholders of the Company approved a 1997 Incentive
Stock Plan pursuant to which all non-employee directors were to receive an award
of 250 shares of Common Stock of the Company for each meeting of the board of
directors attended by such director. The directors have waived their rights to
receive shares for the meetings in 1997. Also on July 17, 1997, the shareholders
approved a 1997 Non-Employee Directors' Stock Option Plan pursuant to which each
year each non-employee director will receive an option to purchase 25,000 shares
of Common Stock of the Company.
On January 23, 1998, the Board of Directors of the Company, subject to
ratification of the grants by the shareholders of the Company at the next Annual
Meeting of Shareholders, granted each director of the Company 10,000 shares of
the Company's Common Stock for their service to the Company. There were no other
standard or other arrangements for the compensation of the Company's directors
in effect for the Company's fiscal year ended December 31, 1997.
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 received his
salary and unpaid vacation time accrued through February 12, 1997. Also, the
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 became 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.
-21-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of March 24, 1998, the number of shares
of the Company's outstanding Common Stock beneficially owned by each of the
Company's current directors and executive officers, sets forth the number of
shares of the Company's outstanding Common Stock beneficially owned by all of
the Company's current directors and executive officers as a group and sets forth
the number of shares of the Company's outstanding Common Stock owned by each
person who owned of record, or was known to own beneficially, more than 5% of
the Company's outstanding shares of Common Stock:
Name and Address of Beneficial Owner Amount and Nature of Percent
or Name of Executive Officer or Director Beneficial Ownership(1) of Class
- ---------------------------------------- ----------------------- --------
Allen & Company Incorporated................. 8,331,107(2) 16.4%
711 Fifth Avenue
New York, New York 10022
Drake and Company............................ 2,490,000 5.0%
Citibank Performance Portfolio A.A.
c/o Citibank, N.A.
153 E. 53rd Street, 21st Floor
New York, New York 10043
Whittier Ventures, LLC....................... 3,233,556(3) 6.5%
1600 Huntington Drive
South Pasadena, California 91030
Howard Karren................................ 1,175,000(4) 2.3%
David A. Dahl................................ 5,019,803(5) 10.1%
Alan D. Berlin............................... 25,000(6) *
Walter A. Carozza............................ 25,000(7) *
Ted Collins, Jr.............................. 100,000 *
Peter G. Dilling............................. 626,618(8) 1.3%
John G. McMillian............................ 425,000(9) *
Michael J. Muckleroy......................... 10,000 *
Arlo G. Sorensen............................. 86,242(10) *
Michael B. Young............................. 60,000(11) *
All Directors and Officers
as a Group (ten persons).................. 7,552,663(12) 14.7%
* Less than 1%.
(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. The shares shown do not include any shares that
any directors are entitled to receive pursuant to the 1997 Incentive Stock
Plan for meetings held in 1998. The shares shown do not include 10,000
shares granted to each director subject to shareholder ratification. See
"Executive Compensation-Compensation of Directors."
-22-
(2) Based on Amendment No. 1 to Schedule 13D. Includes 1,128,720 shares
underlying presently exercisable warrants. Does not include 700,000 shares
underlying a warrant that is not exercisable.
(3) Includes 262,500 shares underlying presently exercisable warrants.
(4) Includes 1,025,000 shares underlying presently exercisable options. Does
not include 285,000 shares underlying an option granted to Mr. Karren and
does not include 10,000 shares granted to Mr. Karren in January 1998
because the directors are still discussing the terms of such grants.
(5) Includes 75,000 shares underlying presently exercisable options owned by
David A. Dahl, the 3,233,556 shares beneficially owned by Whittier Ventures
LLC, 349,185 shares owned by Whittier Energy Company, 87,500 shares
underlying presently exercisable warrants owned by Whittier Energy Company
and 1,274,562 shares beneficially owned by Whittier Trust Company. David A.
Dahl has no pecuniary interest in the shares beneficially owned by Whittier
Ventures LLC, Whittier Energy Company or Whittier Trust Company but, as the
President of Whittier Ventures LLC and Whittier Energy Company and as the
Vice President of Whittier Trust Company, 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. Mr. Dahl's address is the same as the
address of Whittier Ventures, LLC.
(6) Includes 25,000 shares underlying a presently exercisable option.
(7) Includes 25,000 shares underlying a presently exercisable option.
(8) Includes 25,000 shares underlying presently exercisable options. 601,618
shares are owned directly by Spectrum Development, Inc. which is controlled
by Mr. Dilling, and the 601,618 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. Does not include 400,000 shares underlying an
option that is not currently exercisable.
(9) Includes 25,000 shares underlying a presently exercisable option.
(10) Includes 75,000 shares underlying presently exercisable options and 11,242
shares owned by Whittier 1982 Oil Trust for which Mr. Sorensen is the
trustee and has voting and investment power over such shares. Mr. Sorensen
is a director of Whittier Ventures LLC and Whittier Energy Company.
However, Mr. Sorensen disclaims beneficial ownership of the shares that are
owned by Whittier Ventures LLC and Whittier Energy Company.
(11) Includes 50,000 shares underlying a presently exercisable option. Does not
include a grant for 30,000 shares that will vest with respect to 10,000
shares on each of January 30, 1999, 2000 and 2001, if Mr. Young is still
employed by the Company on those dates. The shares will vest earlier if Mr.
Young is terminated without cause or if the Company is bought or merges
with another company.
(12) Includes the shares as described in notes (5) through (12) above.
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 field in the central Asian Republic of Kazakhstan, that was
discovered in the early 1970s but never placed on production
In mid-September 1994, the Company acquired a 25% interest in CAP-G. 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
-23-
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 Stockholders under the arrangement. Mr. McGee
resigned as a director of the Company on October 1, 1997, and became the
Co-Managing Director of CAP-G. 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 were placed in escrow and are to be released to the former
shareholders of CAP-D, including Messrs. Dilling and McGee and James A. Jeffs, a
director of the Company until November 1996, or their affiliates, from time to
time in connection with development of the Karakuduk Field. Of the 4,250,000
shares originally placed in escrow, 3,000,000 shares have been released and
delivered to the former shareholders of CAP-D. The additional 55% interest in
CAP-G was acquired by the Company from nonaffiliated parties.
The previous management of the Company had been negotiating an agreement
pursuant to which the Company would have acquired 100% of the issued and
outstanding capital stock of MDI, a private company of which the shareholders
include a director of the Company, Mr. Dilling, and two former directors of the
Company, Messrs. Jeffs and McGee. At the time of the acquisition, the only asset
that MDI would have had would have been a 5% interest in a joint venture that
Enron Oil and Gas Uzbekistan, Ltd.("EOGU") was negotiating for the development
of natural gas fields in the Republic of Uzbekistan. The agreement with MDI was
not consummated. On January 8, 1997, the Company agreed to issue 180,000 shares
of the Company's Common Stock to 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, Jeffs and McGee, agreed that if the Company did not acquire MDI within
a specified time period, the principal shareholders would 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. Because such acquisition did not
occur within the specified time period, such principal shareholders transferred
the 180,000 shares to the Company and the shares were cancelled. The Company is
no longer pursuing the acquisition of MDI.
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 certain 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 the former Soviet Union. From March 1997
to August, 1997, the Company reimbursed MDI for MDI's expenses incurred in
connection with the Karakuduk Project. Currently there are no transactions
contemplated between the Company and MDI.
In November and December, 1996, the Company borrowed $1,850,000 for interim
financing pursuant to unsecured convertible promissory notes that bore interest
at 8% per annum, which was payable monthly, and that were due and payable on or
before May 29, 1998. The promissory notes were 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 were
received on November 22, 1996. Whittier Ventures, LLC, Whittier Energy Company
and Victory Ventures LLC loaned $1,500,000 of the $1,850,000 that was loaned to
the Company. Whittier Ventures, LLC, Whittier Energy Company and Victory
Ventures LLC subsequently converted their loans into the Company's Common Stock
as described below.
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. The Company further agreed
that the Company would issue the lenders warrants to purchase an additional
-24-
185,000 shares of the Company's Common Stock if the promissory notes were 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 were not
paid or converted by November 30, 1997. Just prior to November 30, 1997, the
Company offered to repay the then outstanding promissory notes, including the
promissory notes to Whittier Ventures LLC and Whittier Energy Company. The
lenders advised the Company that they were considering whether or not to convert
their promissory notes into shares of the Company's Common Stock and requested
the Company to not repay the promissory notes by November 30, 1997. In
connection with such requests, the lenders agreed that the lenders would not
receive any of the warrants to purchase an additional 370,000 of the Company's
Common Stock if the promissory notes were not paid or converted by November 30,
1997. The warrants that were issued are exercisable for a period of three years
at $0.25 per share. Effective November 30, 1997, Whittier Ventures LLC and
Whittier Energy Company converted the principal and accrued interest in their
promissory notes into 1,047,556 shares and 349,185 shares, respectively, of the
Company's Common Stock.
Walter A. Carozza, a director of the Company, is the President of Victory
Ventures LLC. On April 22, 1997, the Company sold 3,076,923 shares of the
Company's Common Stock for $0.65 per share for a total of $2,000,000 to Victory
Ventures LLC. In connection with the transaction, the Company also issued a
warrant to Victory Ventures LLC to purchase up to an additional 4,615,385 shares
of the Company's Common Stock for $3,000,000 or $0.65 per share. In October,
1997, Victory Ventures LLC exercised a portion of the warrant by purchasing
2,307,692 shares of the Company's Common Stock. At the same time, the Company
agreed to extend the expiration date of the remaining portion of the warrant to
December 31, 1998. In November, 1997, Victory Ventures LLC exercised the
remaining portion of the warrant by purchasing 2,307,693 shares of the Company's
Common Stock and exercised another warrant that Victory Ventures LLC had
received in connection with a loan made by Victory Ventures LLC in December,
1996, to the Company. The warrant related to 125,000 shares of the Company's
Common Stock was exercisable at a price of $0.25 per share. Victory Ventures LLC
subsequently distributed to its members or sold to various persons all of the
Company's Common Stock owned by Victory Ventures LLC so that, as of the date
hereof, Victory Ventures LLC no longer owns any shares of the Company's Common
Stock.
In April, 1997, Victory Ventures LLC also converted a $500,000 promissory
note (plus $2,000 of accrued interest) that had previously been issued by the
Company to Victory Ventures LLC in December 1996 into 772,308 shares of the
Company's Common Stock at a conversion price of $0.65 per share.
On August 29, 1997, Whittier Ventures LLC loaned the Company $100,000. The
loan was repaid on December 4, 1997, with interest at a rate of 1% per month.
The loan was unsecured. On October 9, 1997, Whittier Ventures LLC loaned the
Company an additional $200,000. The loan was repaid on December 4, 1997, with
interest at a rate of 1% per month. The loan was unsecured. In September 1997,
Howard Karren advanced $61,000 to CAP-G which was repaid by CAP-G to Mr. Karren
without interest in December 1997. Mr. Karren also personally guaranteed
payments to various suppliers.
Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP, a law firm in which Alan D.
Berlin, a director of the Company, is a partner, provides legal services to the
Company for which the law firm charges the Company an amount not in excess of
the law firm's normal billing rates. The total amount of fees that were paid by
the Company to the law firm during the Company's year ended December 31, 1997,
did not exceed 5% of the law firm's gross revenues for the law firm's last full
fiscal year.
On November 24, 1997, the Company executed a Subscription Agreement
("Agreement") with an investor, which was not affiliated with the Company.
Pursuant to the Agreement, the Company sold to the investor 50,000 shares of the
Company's Series A Preferred Stock, no par value, for a purchase price of
$100.00 per share or an aggregate purchase price of Five Million Dollars
($5,000,000). The investor also agreed to purchase an additional 25,000 shares
of the Company's Series A Preferred Stock for an additional $2,500,000 and
150,000 shares of the Company's Series B and Series C Preferred Stock for
$15,000,000.
-25-
In March 1998, prior to the receipt of the funds for any additional
purchases the investor was to make under the agreement, the Company and the
investor mutually released each other from any further obligations under the
Agreement. The investor retained the initial 50,000 shares of Series A Preferred
Stock that are convertible into the Company's Common Stock at $2.25 per share.
The number of shares of Common Stock issuable upon conversion of each share of
Series A Preferred Stock will be determined by dividing $100 by the conversion
price per share. The Company is not required to issue any additional preferred
stock under the Agreement and the investor has no other obligation to provide
funds to the Company in exchange for such stock.
The Series B Preferred Stock and Series C Preferred Stock would have been
convertible at the option of the holders thereof at any time or from time to
time on or prior to the redemption date into Common Stock. The conversion price
of the Series B Preferred Stock was initially $3.00 per share; and the
conversion price of the Series C Preferred Stock was initially $4.25 per share.
The number of shares of Common Stock issuable upon conversion of each share of
Series B Preferred Stock and Series C Preferred Stock would have been determined
by dividing $100 by the conversion price per share.
Allen & Company Incorporated (Allen & Company) acted as placement agent in
connection with the sale of the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock pursuant to the Agreement. Allen & Company
elected to receive its fees in the form of warrants to purchase 900,000 shares
of the Company's Common Stock that were all originally exercisable through
November 25, 2002, at an exercise price of $0.01 per share.
The Company has agreed to allow Allen & Company to retain the warrants to
purchase 700,000 shares of the Company's Common Stock related to the $17,500,000
in funds not received under the original terms of the Agreement, provided Allen
& Company raises additional capital for the Company within the two year period
ending November 25, 1999. Based on a subsequent agreement, the unearned warrants
to purchase 700,000 shares of the Company's Common Stock held by Allen & Company
are fully restricted from exercise unless Allen & Company raises additional
capital for the Company that is acceptable to the Company's Board of Directors.
For each $25 of additional capital raised, a warrant to purchase one share of
Common Stock will be deemed to be earned. If, before November 25, 1999, Allen &
Company fails to raise additional capital for the Company under terms acceptable
to the Company, Allen & Company will return the unearned portion of the warrants
to the Company.
On July 17, 1997, the shareholders of the Company approved a 1997 Incentive
Stock Plan pursuant to which all non-employee directors were to receive an award
of 250 shares of Common Stock of the Company for each meeting of the board of
directors attended by such director. The directors have waived their rights to
receive shares for the meetings in 1997. Also on July 17, 1997, the shareholders
approved a 1997 Non-Employee Directors' Stock Option Plan pursuant to which each
year each non-employee director will receive an option to purchase 25,000 shares
of Common Stock of the Company. The first options relating to a total of 200,000
shares that are exercisable at a price of $0.83 per share were received
effective July 17, 1997.
On January 23, 1998, the Board of Directors of the Company, subject to
ratification of the grants by the shareholders of the Company at the next Annual
Meeting of Shareholders, granted each director of the Company 10,000 shares of
the Company's Common Stock for their service to the Company.
In connection with his employment, the Company granted Michael B. Young a five
year option to purchase 50,000 shares of the Company's Common Stock at an
exercise price of $2.25 per share and granted Mr. Young 40,000 shares of the
Company's Common Stock that, subject to certain conditions, will vest 10,000
shares on each of January 30, 1998, 1999, 2000, and 2001. All unvested shares
shall vest immediately if the Company is bought or merges with another company
or if Mr. Young is terminated without cause.
-26-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
---------------------
Table of Contents
Chaparral Resources, Inc.
-------------------------
Report of Independent
Consolidated Balance Sheets--As of December 31, 1997 and November 30, 1996
Consolidated Statements of Operations--Years ended December 31, 1997,
November 1996 and November 1995, and the month ended, December 31,1996.
Consolidated Statements of Cash Flows--Years ended December 31, 1997,
November 1996 and November 1995, and the month ended December 31, 1996.
Consolidated Statement of Changes in Stockholders' Equity--Thirteen months
ended December 31, 1997 and the years ended November 1996 and
November 1995.
Notes to Consolidated Financial Statements
Supplemental Information - Disclosure About Oil and Gas producing
Activities - Unaudited
Karakuduk-Munay, Inc.
---------------------
Report of Independent Auditors
Balance Sheets - As of December 31, 1997 and 1996
Statements of Expenses and Accumulated Deficit - Years ended December 31,
1997, 1996 and 1995
Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1996
Notes to the Financial Statements
(a)(2) Financial Statement Schedules.
------------------------------
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have
been omitted.
(b) Current Reports on Form 8-K:
----------------------------
The Company filed the following Current Reports on Form 8-K during the last
fiscal quarter ended December 31, 1997:
Current Report on Form 8-K dated November 6, 1997 (Item 7).
Current Report on Form 8-K/A dated October 31, 1997 (Items 5 and 7).
Current Report on Form 8-K dated October 31, 1997 (Items 5 and 7).
Current Report on Form 8-K/A dated December 3, 1997 (Item 5).
(c) Exhibits.
---------
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
2.1 Stock Acquisition Agreement and Plan of Reorganization dated
April 12, 1995 between Chaparral Resources, Inc., and the
Shareholders of Central Asian Petroleum, Inc., incorporated by
reference to Exhibit 2.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 1995.
2.2 Escrow Agreement dated April 12, 1995 between Chaparral
Resources, Inc., the Shareholders of Central Asian Petroleum,
Inc. and Barry W. Spector, incorporated by reference to Exhibit
2.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1995.
2.3 Amendment to Stock Acquisition Agreement and Plan of
Reorganization dated March 10, 1996 between Chaparral Resources,
Inc., and the Shareholders of Central Asian Petroleum, Inc.,
incorporated by reference to the Company's Registration Statement
No. 333-7779.
-27-
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
3.1 Restated Articles of Incorporation + Amendments dated September
25, 1976, incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1993.
3.2 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated April 21, 1988, incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1993.
3.3 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated April 12, 1994.
3.4 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated June 21, 1995, incorporated by reference to
Exhibit B to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1995.
3.5 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated July 17, 1996, incorporated by reference to the
Company's Registration Statement No. 333-7779.
3.6 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated November 25, 1997, incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K dated
October 31, 1997.
3.7 Bylaws, as amended through October 31, 1997, incorporated by
reference to Exhibit 3(ii) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10.1 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 Form 10-K for the fiscal year
ended November 30, 1995.
10.8 Amendment, effective March 4, 1996, to the Letter Agreement
revising the terms pursuant to which the Company is to acquire
all shares of CAP(G) stock owned by Darka Petrol Ticaret Ltd.
Sti., incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the fiscal year ended November 30,
1995.
-28-
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.9 Warrant Certificate entitling Allen & Company to purchase up to
1,022,000 shares of Common Stock of Chaparral Resources, Inc.,
incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated April 1, 1996.
10.10 Consulting Agreement dated May 14, 1996 with M-D International
Petroleum, Inc., incorporated by reference to the Company's
Registration Statement No. 333-7779. 1
10.11 Promissory Notes and Modifications of Promissory incorporated by
reference to Exhibit (3) to the Company's Current Report on Form
8-K dated November 22, 1996.
10.12 Amendment effective December 6, 1996 to Purchase Agreement dated
effective January 12, 1996 between the Company and Guntekin
Koksal, incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1996.
10.13 Severance Agreement dated February 12, 1997 between the Company
and Paul V. Hoovler, incorporated by reference to Exhibit 10.13
to the Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1996.
10.14 Severance Agreement dated February 12, 1997 between the Company
and Matthew R. Hoovler, incorporated by reference to Exhibit
10.14 to the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1996.
10.15 Purchase and Sale Agreement effective January 1, 1997 between the
Company and Conoco Inc., incorporated by reference to Exhibit
10.15 to the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1996.
10.16 Amendments to Chaparral Resources, Inc. Stock Warrant Plan,
incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the fiscal year ended November 30,
1996.
10.17 Agreement dated August 30, 1995 for Exploration Development and
Production of Oil in Karakuduk Oil Field in Mangistan Oblast of
the Republic of Kazakhstan between Ministry of Oil and Gas
Industries of the Republic of Kazakhstan for and on Behalf of the
Government of the Republic of Kazakhstan and Joint Stock Company
of Closed Type Karakuduk Munay Joint Venture, incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on Form