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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, 2001.
Commission file number: 0-7261
CHAPARRAL RESOURCES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-0630863
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16945 Northchase Drive, Suite 1620
Houston, Texas 77060
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (281) 877-7100
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.0001 Per Share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
As of April 1, 2002, the aggregate market value of registrant's voting
common stock, par value $.0001 per share, held by non-affiliates was $5,992,083.
As of April 1, 2002, registrant had 14,283,801 shares of its common stock,
par value $.0001 per share, issued and outstanding.
PART I
ITEM 1. BUSINESS
Our Business
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Chaparral Resources, Inc. is an independent oil and gas exploration and
production company. Our strategy is to acquire and develop foreign oil and gas
projects in emerging markets, specifically targeting fields with previously
discovered reserves, which have never been commercially produced or could be
materially enhanced by our management team and technical expertise.
Through two of our significant subsidiaries, Central Asian Petroleum
(Guernsey), Ltd., a Guernsey company ("CAP-G"), and Central Asian Petroleum,
Inc., a Delaware company ("CAP-D"), we own a 50% interest in Closed Type JSC
Karakudukmunay ("KKM"), a Kazakh joint stock company that holds a governmental
license to develop the Karakuduk Oil Field. Shell Capital, Incorporated ("Shell
Capital"), Chaparral's primary creditor, owns a 40% interest in the
distributable profits of CAP-G. All references to "Chaparral," "we," "us," and
"our" refer to Chaparral Resources, Inc., its subsidiaries, and its 50% interest
in KKM, unless indicated otherwise.
Since 1995, the business of Chaparral has been the development of the
Karakuduk Field, a 16,900 acre oil field in the Republic of Kazakhstan. The
domestic oil and gas assets of Chaparral were divested during 1996 and 1997 to
help fund the development of the Karakuduk Field. The government of the former
Soviet Union discovered the Karakuduk Field in 1972 and drilled 22 exploratory
and development wells, none of which were produced commercially. KKM began to
aggressively develop the Karakuduk Field in early 2000, re-establishing oil
production from a majority of the existing wells and drilling a total of 23 new
wells through September 2001. KKM intends to fully develop and commercially
produce the oil reserves in the Karakuduk Field.
The other stockholders of KKM are KazakhOil, the national petroleum company
of the Republic of Kazakhstan, and a private Kazakhstan joint stock company.
KazakhOil owns a 40% interest in KKM and the private Kazakh joint stock company
owns the remaining 10%. The government of Kazakhstan indirectly owns 40% of KKM
through KazakhOil's direct ownership interest. Because we only control a 50%
interest in KKM, we must seek the approval of one of the other two stockholders
before KKM can take any major action, such as approving KKM's annual budget and
work program, employing experts, appointing and removing KKM's management, and
approving KKM's material operations and activities. If we are unable to obtain
the approval of one of these stockholders, the operations of KKM may come to a
standstill.
Currently, the Karakuduk Field is our only oil field. We have no other
significant subsidiaries besides CAP-G and CAP-D.
Crude Oil Sales
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We derive all of our revenue through the production and sale of crude oil
from the Karakuduk Field. We are in the early stages of development and only
began generating revenue from the sale of crude oil during 2000. Crude oil
production and related sales, however, have increased materially from 2000 to
2001. KKM recognized $36.57 million in revenue in 2001 from the sale of
approximately 2.18 million barrels of crude oil. In 2000, KKM recorded $16.97
million in revenue based upon sales of approximately 765,000 barrels of crude
oil. Our financial information relating to operations in the Karakuduk Field is
disclosed in the financial statements for KKM and the consolidated financial
statements for Chaparral, both of which are included as part of this Annual
Report on Form 10-K.
KKM sells the majority of its crude oil on the export market to Shell
Trading International Limited ("STASCO"), an affiliate of Shell Capital. STASCO
is responsible for approximately 90% of KKM's oil sales revenue in 2001. KKM has
a long-term crude oil sales agreement with STASCO for the sale of 100% of KKM's
oil production on the export market. STASCO accepts title of KKM's crude oil at
various delivery points outside of Kazakhstan. KKM is responsible for obtaining
export quotas and all other permissions from Kazakhstan, Russia, or other
relevant jurisdictions necessary to transport and deliver KKM's oil production
to STASCO. STASCO is responsible for nominating and coordinating an oil tanker,
if necessary, and arranging for the resale/marketing of the crude oil purchased.
The crude oil sales agreement with STASCO is effective through 2004, and is
renewable thereafter for successive 12-month periods. STASCO may terminate the
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crude oil sales agreement if KKM does not nominate a sale for six consecutive
months, KKM enters into a sales agreement with a third-party, we cease to own at
least 50% of KKM, or the loan with Shell Capital is terminated or repaid. KKM
may terminate the crude oil sales agreement if the loan is repaid in full or
STASCO fails to pay amounts due to KKM.
The sales price to be received by KKM under the crude oil sales agreement
are based upon various factors, including the point of delivery, current market
oil prices, the volume and quality of the crude oil delivered, the size and type
of tanker utilized (if any), and applicable flat tanker rates (if any). KKM pays
STASCO a commission on each oil sale, calculated on a sliding scale based upon
total annual crude oil quantities delivered: $0.15 per barrel up to 5 million
barrels, $0.10 per barrel from 5 to 10 million barrels, and $0.05 per barrel
beyond 10 million barrels. All other prices/costs utilized in the sales price
formula are from published sources or are actual costs incurred.
There are six delivery points under the crude oil sales agreement,
including three preferred port facilities on the Black Sea (Novorossiisk,
Odessa, and Ventspills) and three onshore pipeline facilities (Dudkovce,
Feyeshlitke, and Adamovo). KKM must use its best efforts to deliver crude oil to
one of the three port locations. All of KKM's export oil sales to date have been
delivered to the Ukranian port of Odessa. The minimum deliverable quantity is
approximately 460,000 barrels of crude oil for the port locations and 22,000
barrels for the pipelines. KKM has a contractual right to deliver undersized
cargoes to the port facilities, subject to additional freight charges, if a
tanker is loaded below its tonnage capacity. Third-party sellers, however, may
offset capacity shortages in the tanker, with STASCO's approval.
Sales prices at the port locations are based upon quoted Urals crude oil
prices from Platt's Crude Oil Marketwire, net of published freight charges
published in both Platt's Dirty Tanker Wire and the Worldscale Tanker Nominal
Freight Scale. Payment is made by STASCO within 30 days of receipt of the final
bill of lading and KKM's invoice for the sale, unless otherwise agreed by both
parties. Sales prices received from pipeline deliveries equal the sales price
received by STASCO from their third party buyers of KKM's crude oil. STASCO
negotiates the best price possible and passes on the proceeds, net of their
applicable sales commission and incidental expenses, to KKM. Payment for onshore
pipeline sales is made on the earlier of 45 days or the date STASCO agrees to a
sales price with the third party buyer.
Shell Capital Services Limited, acting as facility agent, has notified us
that Shell Capital's loan with Chaparral is in default, demanded Chaparral
accelerate the repayment of the loan, and has initiated legal proceedings
against Chaparral and CAP-G to enforce Shell Capital's rights under the loan,
which Chaparral and CAP-G are contesting. See Item 3 - Legal Proceedings. KKM,
however, has continued to sell its crude oil on the export market to STASCO per
the terms of the crude oil sales agreement. If Chaparral is able to refinance
the loan with a third-party, the crude oil sales agreement may be terminated by
either KKM or STASCO.
The government of the Republic of Kazakhstan requires oil producers within
Kazakhstan to supply a portion of their crude oil production to the local market
to meet domestic energy needs. Local market oil prices are significantly lower
than prices obtainable on the export market. In 2001, the government required
KKM to sell approximately 375,000 barrels of crude oil, or 17% of its total oil
sales, to the local market, compared to 161,000 barrels, or 21%, during 2000.
Local market prices obtained by KKM are approximately $7 to $10 per barrel below
export market prices, net of transportation costs. We have attempted to effect
the 100% export of all hydrocarbons produced from the Karakuduk Field through
informal discussions with the government of Kazakhstan. While we have been
successful in lowering the quantities of local sales required, we have been
unable to entirely eliminate our local market obligation. We plan to continue to
work with the government to minimize or eliminate KKM's future local sales
requirements. If we are unsuccessful, however, we may be required to initiate
legal proceedings within Kazakhstan or make a claim under our political risk
insurance policy for the breach of our agreement by the government of
Kazakhstan. We can provide no assurances that legal proceedings within
Kazakhstan would be successful, or that any potential insurance proceeds
available under the political risk policy would fully offset losses incurred due
to additional local sales requirements. Additionally, the initiation of formal
legal proceedings could lead to more material restrictions of our contractual
rights, including our right to develop the Karakuduk Field or sell any of our
crude oil production on the export market. The future loss of revenue from local
sales may be significant enough to prevent us from generating a profit from the
Karakuduk Field or generate enough cash flow to meet our working capital needs.
See Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
2
Risks of Oil and Gas Activities
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The current market for oil is characterized by instability. This
instability has caused fluctuations in world oil prices in recent years and
there is no assurance of any price stability in the future. The production and
sale of oil from the Karakuduk Field may not be commercially feasible under
market conditions prevailing in the future. The price we receive for our oil may
not be sufficient to generate revenues in excess of our costs of production or
provide sufficient cash flow to meet our working capital requirements.
We are uncertain about the prices at which we will be able to sell oil that
we produce. Our estimated future net revenue from oil sales is highly dependent
on the price of oil, as well as the amount of oil produced. The volatility of
the energy market makes it difficult to estimate future prices of oil. Various
factors beyond our control affect these prices. These factors include:
o domestic and worldwide supplies of oil;
o the ability of the members of the Organization of Petroleum Exporting
Countries, or OPEC, to agree to and maintain oil price and production
controls;
o political instability or armed conflict in oil-producing regions;
o the price of foreign imports;
o the level of consumer demand;
o the price and availability of alternative fuels;
o the availability of pipeline capacity; and
o changes in existing federal regulation and price controls.
It is likely that oil prices will continue to fluctuate as they have in the
past. Current oil prices are not representative of oil prices in either the near
or long-term. We do not expect oil prices to maintain current price levels and
do not base our capital spending decisions on current market prices.
No assurances can be given that we will be able to successfully develop,
produce, and market the oil reserves underlying the Karakuduk Field or
elsewhere. The development of oil reserves inherently involves a high degree of
risk, even though the reserves are proved. Our risks are increased because our
activities are concentrated in areas where political or other unknown
circumstances could adversely affect commercial development of the reserves.
Costs necessary to acquire, explore, and develop oil reserves are substantial.
No assurances can be given we will recover the costs incurred to acquire and
develop the Karakuduk Field. If the costs incurred exceed our revenues, our
operations will not be profitable. Furthermore, if we fail to generate
sufficient cash flow from operations to meet our working capital requirements or
other long-term debt obligations, we may lose our entire investment in the
Karakuduk Field, which is currently pledged as collateral to Shell Capital under
the terms of the loan. See Item 3 - Legal Proceedings.
The development of oil reserves is a high risk endeavor and is frequently
marked by unprofitable efforts, such as:
o drilling unproductive wells;
o drilling productive wells which do not produce sufficient amounts of
oil to return a profit; and
o production of developed oil reserves which cannot be marketed or
cannot be sold for adequate market prices.
There are many additional risks incident to drilling for and producing oil
and gas. These risks include blowouts, cratering, fires, equipment failure and
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accidents. Any of these events could result in personal injury, loss of life and
environmental and/or property damage. If such an event does occur, we may be
held liable and we are not fully insured against these risks. In fact, many of
these risks are not insurable. The occurrence of such events that are not fully
covered by insurance may require us to pay damages, which would reduce our
profits. As of April 1, 2002, we have not experienced any material losses due to
these events.
Risks of Foreign Operations
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Our ability to develop the Karakuduk Field is dependent on fundamental
contracts with governmental agencies in Kazakhstan, including KKM's "Agreement
with the Ministry of Energy and Natural Resources for Exploration, Development,
and Production of Oil in the Karakuduk Oil Field" and KKM's petroleum license
with the government allowing KKM to operate and develop the Karakuduk Field.
Kazakhstan is a relatively new country and, as is inherent in such developing
markets, there is some uncertainty as to the status of Kazakh law and the
stability of the country and the region.
The laws of the Republic of Kazakhstan govern our operations and a number
of our significant agreements. As a result, we may be subject to arbitration in
Kazakhstan or to the jurisdiction of the Kazakh courts. Even if we seek relief
in the courts of the United States, we may not be successful in subjecting
foreign persons to the jurisdiction of those courts.
The exportation of oil from Kazakhstan depends on access to transportation
routes, particularly the Russian pipeline system. Transportation routes are
limited in number, and access to them is regulated and restricted. If any of our
agreements relating to oil transportation or marketing are breached, or if we
are unable to renew such agreements upon their expiration, we may be unable to
transport or market our oil. Also, a breakdown of the Kazakhstan or Russian
pipeline systems could delay or even halt our ability to sell oil. Any such
event would result in reduced revenues.
Obtaining the necessary quotas and permissions to export production through
the Russian pipeline system can be extremely difficult, if not impossible in
some circumstances. Our agreements with the government of the Republic of
Kazakhstan grant us the right to export, and to receive export quota. However,
we cannot provide any assurances that we will receive export quota or any other
approvals required to export and deliver our production in the future.
KKM has entered into marketing service agreements with KazakhOil and
KazTransOil JSC, the state owned pipeline transportation company, whereby
KazakhOil and/or KazTransOil will assist KKM with export oil sales under the
crude oil sales agreement. The services provided include assistance in obtaining
export quotas from the government of the Republic of Kazakhstan, consulting on
procedures required for the nomination and delivery of oil sales, obtaining
other necessary approvals and permissions, and preparation of relevant
documentation. KKM utilized the services of KazTransOil to facilitate export oil
sales during 2001 and expects to continue to do so in the future. In February
2002, KazakhOil and KazTransOil merged into a new government owned entity,
KazMunayGaz.
Political Risk Insurance
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In order to counteract some of these potential difficulties, we obtained
political risk insurance through the Overseas Private Investment Corporation
("OPIC"), covering 90% of the book value of our investment in KKM up to a
maximum of $50.0 million. The annual premium for the maximum OPIC coverage
available to Chaparral is $1.05 million, payable in quarterly installments. Our
OPIC policy provides coverage for acts, which could be committed against us by
the government of the Republic of Kazakhstan or other parties in times of severe
political instability. The OPIC policy generally provides the following types of
risk coverage:
o Currency Inconvertibility. Currency restrictions, which might be
imposed by the government of the Republic of Kazakhstan to prevent or
defer our recovery of our investment in the Karakuduk Field, including
revoking KKM's right to retain U.S. dollar proceeds from oil sales
outside of Kazakhstan or to convert local currency into U.S. dollars
for repayment of our investment;
o Expropriation. Acts attributable to the government of the Republic of
Kazakhstan that are violations of international law or an abrogation,
repudiation or material breach of our agreements with the government.
In order to qualify for coverage, the act of expropriation must
continue without interruption for at least six months and prevent us
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from exercising our fundamental rights under our agreements,
exercising control over our investment the Karakuduk Field, or
recovering our investment in the Karakuduk Field;
o Political Violence. The loss or impairment of our investment due to
politically motivated violent acts, including war, revolution,
insurrection, or politically motivated civil strife, terrorism and
sabotage; and
o Interference with Operations. The loss or impairment of our investment
due to political violence lasting more than six months.
While the OPIC policy provides significant political risk coverage, it does
not address political risks outside of the Republic of Kazakhstan or cover every
contingency within Kazakhstan. The OPIC policy does not cover commercial risks,
whatsoever. If social, political, or economic strife in the region hinder KKM or
our operations in a manner that is not covered by our OPIC policy, we will bear
the full burden of any resulting loss or damage. If we do have a future claim
under the OPIC policy, we may be required to assign all or a portion of our
rights to the Karakuduk Field to OPIC before any insurance payments will be
made. The OPIC policy only covers 90% of our book value of our investment in
KKM, but there is no assurance any proceeds received will cover 90% of our
actual losses incurred or be sufficient to cover our outstanding indebtedness
repayable to our creditors.
Environmental Regulations
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We must comply with laws of the Republic of Kazakhstan and international
requirements that regulate the discharge of materials into the environment.
Furthermore, both our loan and our OPIC political risk insurance policy require
that we comply with the World Bank's environment, health, and safety guidelines
for onshore oil and gas development. Environmental protection and pollution
control could, in the future, become so restrictive as to make production
unprofitable. Furthermore, we may be exposed to potential claims and lawsuits
involving such environmental matters as soil and water contamination and air
pollution. We are currently in compliance with all local and international
environmental requirements and are closely monitored by the environmental
authorities of the Republic of Kazakhstan. We have not made any material capital
expenditures for environmental control facilities and have no plans to do so in
the foreseeable future.
Competition
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We compete in all areas of the exploration and production segment of the
oil and gas industry with a number of other companies. These companies include
large multinational oil and gas companies and other independent operators with
greater financial resources and more experience than Chaparral. We do not hold a
significant competitive position in the oil industry. We compete both with major
oil and gas companies and with independent producers for, among other things,
rights to develop oil and gas properties, access to limited pipeline capacity,
procurement of available materials and resources, and hiring qualified local and
international personnel.
Employees
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As of April 1, 2002, Chaparral had 6 full-time employees. KKM had 170
employees and retains independent contractors on an as needed basis through
Chaparral. We believe that our relationship with our employees and consultants
is good.
Corporate Information
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Chaparral was incorporated under the laws of the State of Colorado in 1972.
In 1999, Chaparral completed a 60 to 1 reverse stock split and reincorporated
under the laws of the State of Delaware.
Our address is 16945 Northchase Drive, Suite 1620, Houston, Texas 77060,
and our telephone number is (281) 877-7100.
Special Note Regarding Forward-Looking Statements
- -------------------------------------------------
Some of the statements in this Annual Report on Form 10-K constitute
"forward-looking statements." Forward-looking statements relate to future events
or our future financial performance. In some cases, you can identify
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forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "estimates," "believes," "predicts," "potential," "likely,"
or "continue," or by the negative of such terms or comparable terminology.
Forward-looking statements are predictions based on current expectations that
involve a number of risks and uncertainties. Actual events may differ
materially. In evaluating forward-looking statements, you should consider
various factors, including the risks discussed above in "Risks of Oil and Gas
Activities" and "Risks of Foreign Operations." These factors may cause our
actual results to differ materially from any forward-looking statement.
Although we believe that these statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements, and
you are encouraged to exercise caution in considering such forward-looking
statements. Unless otherwise required by law, we are not under any duty to
update any of the forward-looking statements after the date of this Annual
Report on Form 10-K to conform these statements to actual results.
ITEM 2. PROPERTIES
Properties
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The Karakuduk Field is located in the Mangistau Region of the Republic of
Kazakhstan. The license to develop the Karakuduk Field covers an area of
approximately 16,900 acres and is effective for a 25 year term, which may be
extended by production. KKM entered an agreement to develop the Karakuduk Field
with Kazakhstan's Ministry of Energy and Natural Resources in 1995.
The Karakuduk Field is geographically located, approximately 227 miles
northeast of the regional capital city of Aktau, on the Ust-Yurt Plateau. The
closest settlement is the Say-Utes Railway Station approximately 51 miles
southeast of the field. The ground elevation varies between 590 and 656 feet
above sea level. The region has a dry, continental climate, with fewer than 10
inches of rainfall per year. Mean temperatures range from minus 25 degrees
Fahrenheit in January to 100 degrees Fahrenheit in July. The operating
environment is similar to that found in northern Arizona and New Mexico in the
United States.
The Karakuduk Field structure is an asymmetrical anticline located on the
Aristan Uplift in the North Ustyurt Basin. Oil was discovered in the structure
in 1972, when Kazakhstan was a republic of the former Soviet Union, from
Jurassic age sediments between 8,500 and 10,000 feet. The former Soviet Union
drilled 22 exploratory and development wells to delineate the Karakuduk Field,
discovering the presence of recoverable oil reserves. The productive area of the
Karakuduk Field is estimated to contain a minimum of eight separate productive
horizons present in the Jurassic formation. None of the original wells were ever
placed on commercial production prior to KKM obtaining the rights to the
Karakuduk Field.
The Karakuduk Field is approximately 18 miles north of the main utility
corridor, which includes the Makat-Mangishlak railroad, the
Mangishlak-Astrakghan water pipeline, the Beyneu-Uzen high voltage utility
lines, and the Uzen-Atrau-Samara oil and gas pipelines. KKM, according to its
agreements with the Republic of Kazakhstan, has a right to use the existing oil
export pipeline and related utilities. KKM also has a contract with KazTransOil
granting KKM the right to use the export pipeline for transportation of crude
oil to local and export markets, subject to transit quota restrictions, and as a
temporary storage facility until the produced hydrocarbons are sold by KKM.
As of April 1, 2002, KKM has 36 productive wells in the Karakuduk Field,
including 23 new wells and 13 re-completions of previously existing delineation
wells. The 36 wells include 29 wells currently producing approximately 7,300
barrels of oil per day and 7 which are shut-in for various reasons, including
the installation of additional gathering lines and well equipment and additional
workover and stimulation operations. Another shut-in well is being considered
for future use as an injection well for a pilot waterflood project. KKM
implemented an aggressive drilling program during 2000, drilling a total of 12
development wells and re-completing 4 delineation wells using a combination of
two drilling rigs and a workover rig. During 2001, KKM drilled an additional 10
development wells and re-completed 7 delineation wells. An additional
exploratory well and 2 re-completions were conducted prior to 2000. KKM has
successfully completed every well drilled to date. Oil has been recovered from
the originally identified J-1, J-2, J-4, J-8, and J-9 formations, along with new
discoveries in the J-6, J-7 and J-10 horizons.
KKM's daily oil production has been limited due to various facility
constraints and lack of working capital to fund field operations. KKM is working
to alleviate all facility constraints through expansion of its oil storage
capacity, installation of additional gathering and processing facilities,
commissioning of the oil sales pipeline and completion of the central processing
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facility. Crude oil production is currently being processed at a pilot facility
and trucked to the KKM pump station adjacent to the export pipeline. The pump
station is approximately 18 miles from the Karakuduk Field and was placed in
service in April 2000. KKM has finished construction of an 18-mile pipeline,
capable of transporting up to 18,000 barrels of oil per day to the export
pipeline terminal. Test production was successfully delivered through the
pipeline to the export pipeline pumping station in April 2002. The pipeline is
currently being commissioned and is expected to be operational by mid-2002.
Until the pipeline is fully operational, KKM will continue to truck oil
production to the pump station at the export pipeline. Maximum crude oil
trucking capacity has been approximately 8,500 barrels of oil per day. KKM also
expects to commission its central processing unit by mid-2002, with further
expansion through 2003 in order to improve its produced water processing
capability in the field.
KKM currently has one workover rig operating in the Karakuduk Field. KKM
had two drilling rigs in operation in 2001, one of which was released in April
2001 and the other in October 2001. KKM expects to renew its drilling program in
the latter part of 2002 if Chaparral is able to refinance its loan with Shell
Capital and adequate financial resources are available to continue the
development of the Karakuduk Field. The workover rig is expected to continue
operations throughout 2002, performing standard well maintenance, re-completions
of existing wells, and down-hole pump installations. We estimate up to 71 new
wells will be required to fully develop the Karakuduk Field, of which 20 would
eventually be converted into water injection wells. The planned development
program includes a pressure maintenance operation that our management believes
will enhance ultimate recovery.
KKM completed a 3-D seismic study in early 2001, which we have, and will
continue, to use to optimize location of wells (both producers and injectors)
and further define the possible total productive capacity of the Karakuduk
Field.
Chaparral has pledged its investment in KKM and the Karakuduk Field as
collateral for its loan with Shell Capital. Shell Capital Services Limited,
acting as facility agent, has notified us that the loan with Shell Capital is in
default, demanded Chaparral accelerate the repayment of the loan, and has
initiated legal proceedings against Chaparral and CAP-G to enforce Shell
Capital's rights under the loan, which Chaparral and CAP-G are contesting. See
Item 3 - Legal Proceedings.
See also Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Reserves
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As of December 31, 2001, the Karakuduk Field has total estimated proved
reserves of approximately 29.92 million barrels, net of government royalty, of
which we have a proportional equity interest in approximately 14.96 million
barrels, based upon our 50% equity interest in KKM. The reserve disclosure is
based upon a reserve study of the Karakuduk Field conducted by Ryder Scott,
including data available subsequent to December 31, 2001.
No reserve estimates have been filed with any Federal authority or other
agency since January 1, 2001.
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Net Quantities of Oil and Gas Produced
- --------------------------------------
The following table summarized sales volumes, sales prices and production
cost information for our net oil and gas production for each of the three years
ended December 31, 2001:
As of the Year Ended December 31,
-------------------------------------
1999 2000 2001
---- ---- ----
Net sales volumes
Oil (bbls) 29,625 382,500 1,092,000
Gas (mcf) -- -- --
Average sales price
Oil (per bbl) $ -- $ 22.18 $ 16.75
Gas (per mcf) $ -- $ -- $ --
Average production cost (per bbl) $ -- $ 4.81 $ 2.40
KKM did not sell any commercial quantities of crude oil prior to 2000.
Average sales revenue, net of transportation costs, was approximately $17.98 and
$12.95 per barrel for the years ended December 31, 2000 and 2001, respectively.
For the same periods, the average transportation costs per barrel were
approximately $4.20 and $3.80, respectively.
Net oil production represents our 50% equity interest in KKM's production,
but does not reflect our right under the agreement with the government of the
Republic of Kazakhstan to receive 65% of KKM's cash flow from oil sales, net of
royalty, on a quarterly basis until our loan to KKM has been fully repaid. The
remaining 35% of net cash flows is used by KKM to meet capital and operating
expenditures. We may waive receipt of quarterly loan repayments, in whole or in
part, to provide KKM with additional working capital.
KKM sold some quantities of test production prior to the commercial
viability of our investment in the Karakuduk Field, which are not reported as
part of the required disclosures for the Statement of Financial Accounting
Standards No. 69 ("SFAS 69"), Disclosures About Oil and Gas Producing
Activities, or included in the table above. Our share of KKM's sales of test
production during 1999 totaled 162,325 barrels of oil, which were accounted for
on a cost recovery basis. The average sales price per barrel received by KKM was
$7.00, net of transportation costs.
Productive Wells and Acreage
----------------------------
As of December 31, 2001, we had interests in 36 gross productive oil wells
(18 net oil wells), and no producing gas wells. There were no multiple
completion wells. Production was from 16,900 gross acres, of which 5,000 acres
are developed (2,500 net developed acres).
Undeveloped Acreage
-------------------
As of December 31, 2001, 5,000 acres in the Karakuduk Field are undeveloped
(2,500 net undeveloped acres).
8
Drilling Activity
- -----------------
During the three years ended December 31, 2001, our net interests in
exploratory and development wells drilled were as follows:
Year Ended Exploratory Wells, Net Development Wells, Net
December 31, ---------------------- ----------------------
Productive Dry Productive Dry
---------- --- ---------- ---
1999 .5 -- -- --
2000 1.5 -- 6.5 --
2001 .5 -- 8.0 --
All wells are located in the Republic of Kazakhstan.
Present Activities
------------------
KKM is not currently engaged in drilling activities, but expects to renew
its drilling program during the latter part of 2002 if it can resolve its
current legal dispute with Shell Capital and obtain the working capital
necessary to renew drilling operations. See Item 3 - Legal Proceedings.
ITEM 3. LEGAL PROCEEDINGS
On January 15, 2002, Shell Capital Services Limited, acting as facility
agent, initiated proceedings against Chaparral in the United Kingdom with the
High Court of Justice, Queen's Bench Division. Shell Capital Services alleges in
its lawsuit that Chaparral is liable to Shell Capital in the amount of
approximately $37.31 million, including accrued and unpaid interest under the
terms of the loan. Shell Capital Services further alleges that Chaparral is in
default of the loan for the following: failure to pay outstanding principal and
interest due on the bridge loan totaling $3.34 million on or before September
30, 2001, failure to achieve project completion by September 30, 2001, failure
to settle certain accounts payable within 90 days, failure to maintain listing
of Chaparral's common stock on the Nasdaq SmallCap Market, failure to pay
approximately $1.68 million in interest and $1.0 million in principal due on the
loan as of December 31, 2001, and failure to pay a $24,000 agency fee due to
Shell Capital Services on January 1, 2002. As a result of the foregoing alleged
defaults, Shell Capital Services claims that the entire outstanding principal
balance of the loan, plus accrued interest, fees and other costs associated with
the loan is due and payable. Chaparral has filed a notice of its intention to
defend the proceedings in the High Court of Justice. Shell Capital Services
filed a motion for summary judgment on March 1, 2002, which has tentatively been
scheduled for a July 8, 2002 hearing date with the High Court of Justice.
On February 7, 2002, Shell Capital Services filed an application in the
Royal Court of Guernsey Ordinary Court for the compulsory winding up of CAP-G
pursuant to Section 94 of the Companies (Guernsey) Law, 1994. Shell Capital
Services alleges that CAP-G owes Shell Capital approximately $37.31 million as a
co-obligor with Chaparral under the terms of Chaparral's loan with Shell
Capital. Shell Capital Services' claims in the Guernsey proceeding are the same
as those alleged in the English proceeding against Chaparral, discussed above.
CAP-G has filed a response to the Application for Winding Up and has requested
the Royal Court to defer the winding up proceedings pending resolution of the
proceedings filed by Shell Capital Services against Chaparral in the High Court
of Justice in England, on the grounds that CAP-G is a guarantor rather than a
co-obligor so that any liability it may have is derivative from that of
Chaparral. A hearing has yet to be scheduled in the Royal Court of Guernsey
regarding CAP-G's request for deferral of the winding up application.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the fiscal
quarter ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently quoted on the OTC Bulletin Board under the
symbol "CHAR.ob". As of April 1, 2002, we had 1,822 stockholders of record of
our common stock. No dividend has been paid on our common stock, and there are
no plans to pay dividends in the foreseeable future.
The following table shows the range of high and low bid prices for each
quarter during our last two calendar years ended December 31, 2001 and 2000, as
reported by the National Association of Securities Dealers, Inc.:
Price Range
-----------
Fiscal Quarter Ended High Low
-------------------- ---- ---
March 31, 2000 $15.19 $8.00
June 30, 2000 9.00 5.88
September 30, 2000 10.50 3.38
December 31, 2000 8.13 3.25
March 31, 2001 4.50 2.81
June 30, 2001 3.30 2.00
September 30, 2001 2.50 1.10
December 31, 2001 2.15 1.50
In August 2001, our common stock was delisted from the Nasdaq SmallCap
Market for failure to comply with Nasdaq Marketplace Rules 4350(i)(1)(A),
4350(i)(1)(B) and 4350(i)(1)(D)(ii), which required Chaparral obtain stockholder
approval prior to the conversion of its 8% Non-Negotiable Subordinated
Convertible Promissory Notes, or notes, into 11,690,259 shares of its common
stock on September 21, 2000 and the issuance of 1,612,903 shares of common stock
on October 30, 2000. Nasdaq also cited a violation of its annual meeting
requirement. The Nasdaq Listing Qualifications Panel did not, however, cite any
public interest concerns as a basis for its determination.
Chaparral's common stock is also subject to the rules and regulations of
the SEC concerning "penny stocks." The SEC's rules and regulations generally
define a penny stock to be an equity security that is not listed on Nasdaq or a
national securities exchange and that has a market price of less than $5.00 per
share, subject to certain exceptions. The SEC's rules and regulations require
broker-dealers to deliver to a purchaser of penny stock a disclosure schedule
explaining the penny stock market and the risks associated with it. Various
sales practice requirements are also imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, broker-dealers must provide the customer
with current bid and offer quotations for the penny stock, the compensation of
the broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account.
We did not sell any securities since October 1, 2001, which were not
registered under the Securities Act of 1933, as amended.
10
ITEM 6. SELECTED FINANCIAL DATA
As of or for the Year Ended
---------------------------
December 31,
------------
(In Thousands of US Dollars)
-----------------------------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------------------------
Oil and gas sales ....................... -- -- -- -- --
Total revenues .......................... -- -- -- -- --
Equity in income (loss) from
investment ........................... $ 4,616 $ 2,827 $ (1,849) $ (1,222) $ (832)
Net loss ................................ (16,215) (26,803) (5,163) (4,266) (2,603)
Net loss per
common share .......................... (1.16) (6.01) (5.63) (5.14) (3.76)
Working capital (deficit) ............... (39,357) (601) (2,941) (287) 3,356
Total assets ............................ 69,037 70,156 41,303 34,324 23,519
Long-term obligations and
redeemable preferred stock ........... 3,900 26,528 14,776 5,060 4,710
Stockholders' equity .................... 25,361 41,926 22,851 27,579 18,578
Other Data
----------
Present value of proved reserves ........ 40,344 70,281 61,312 -- --
Proved oil reserves (bbls) .............. 14,961 16,523 10,071 -- --
Proved gas reserves (mcf) ............... -- -- -- -- --
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1. Liquidity and Capital Resources
- ----------------------------------
General Liquidity Considerations
- --------------------------------
Going Concern
- -------------
Our financial statements have been presented on the basis Chaparral is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. We are responsible for providing
100% of the funding for the development of the Karakuduk Field not provided from
oil sales or third party sources. We have recognized recurring operating losses,
have a working capital deficiency as of December 31, 2001, and there are
uncertainties relating to our ability to meet projected cash flow requirements
through 2002. In addition, Shell Capital Services Limited, acting as facility
agent, has notified Chaparral that it is in default under its loan with Shell
Capital and has issued a notice of acceleration demanding that Chaparral repay
the outstanding principal balance, plus all interest and other fees, payable
under the loan. Shell Capital Services Limited also initiated legal proceedings
against both Chaparral and CAP-G, which both Chaparral and CAP-G are defending.
If we are unable to successfully defend against the legal actions of Shell
Capital Services Limited or raise the capital necessary to refinance the loan,
the result will most likely be the loss of our investment in the Karakuduk
Field.
We are seeking to alleviate these conditions through the restructuring of
Chaparral and refinancing of the loan with Shell Capital. In April 2002,
Chaparral executed a letter of intent with Central Asian Industrial Holdings,
N.V., or CAIH, regarding a possible $12 million capital investment into
Chaparral and an amount of debt that is to be determined, in exchange for
approximately 60% of Chaparral's common stock. The transaction is subject to a
number of conditions precedent, including the approval of Shell Capital, the
negotiation and execution of a definitive agreement with CAIH, and the approval
of the boards of directors and shareholders of both companies. Chaparral plans
to use the capital infusion and debt from CAIH to restructure the loan. The
terms of the restructuring would include the cancellation of the common stock
warrants held by Shell Capital, CAP-G's reacquisition of the 40% net profits
interest held by Shell Capital, waiver of all outstanding defaults including
project completion, and adjusting the interest rate on the restructured loan to
an undetermined rate below the current interest rate being charged by Shell
Capital. Chaparral and CAP-G will continue to contest the legal actions of Shell
Capital Services Limited unless and until such time as a transaction with CAIH
can be consummated. We cannot provide any assurance, however, that the loan with
Shell Capital will be refinanced with CAIH or any other party and, if so,
whether the loan would be refinanced on terms and conditions favorable to
Chaparral.
Liquidity and Capital Resources
- -------------------------------
We are presently engaged in the development of the Karakuduk Field, which
requires substantial cash expenditures for drilling costs, well completions,
workovers, oil storage and processing facilities, pipelines, gathering systems,
plant and equipment (generators, pumps, communications, etc.) and other field
facilities. We have invested approximately $60.0 million in the development of
the Karakuduk Field and have drilled or re-completed 36 productive wells,
including 17 wells during 2001. Total capital expenditures for 2001 were
approximately $24.85 million in comparison to total capital expenditures of
$28.38 million incurred in 2000. Capital expenditures are estimated to be at
least $60.0 to $80.0 million for the period from 2002 through 2005, including
drilling approximately 37 more wells through this time period.
We expect to finance the continued development of the Karakuduk Field
primarily through cash flows from the sale of crude oil. During the twelve
months ended December 31, 2001, KKM sold approximately 2.18 million barrels of
crude oil for $28.28 million, net of transportation costs. As of April 1, 2002,
daily production, net of royalty, is approximately 7,300 barrels per day from 29
of the 36 productive wells in the field. The remaining 7 wells are shut-in for
various reasons, including installation of additional gathering lines and well
equipment and additional workover and well stimulation operations to bring wells
on to primary production. Another shut-in well is being considered for future
use as an injection well for a pilot waterflood project.
12
KKM's maximum daily production is also restrained by certain field facility
constraints, which KKM is attempting to alleviate through the expansion of oil
storage capacity, installation of additional gathering and processing
facilities, commissioning of an oil sales pipeline, installation of down hole
pumps for artificial lift, and completion of the central processing facility.
Crude oil production is currently being processed at a pilot facility and
trucked to the KKM pump station adjacent to the export pipeline. The pump
station is approximately 18 miles from the Karakuduk Field and was placed in
service in April 2000. KKM has finished constructing an 18-mile pipeline,
capable of transporting up to 18,000 barrels of oil per day to the export
pipeline terminal. Test production was successfully delivered through the
pipeline to the export pipeline pumping station in April 2002. The pipeline is
currently being commissioned and is expected to be operational by mid-2002.
Until the pipeline is fully operational, KKM will continue to truck oil
production to the pump station at the export pipeline. Maximum crude oil
trucking capacity has been approximately 8,500 barrels of oil per day. KKM also
expects to commission its central processing unit by mid-2002, with further
expansion through 2003 in order to improve its produced water processing
capability in the field.
In the short-term, we expect to maintain net daily production of
approximately 7,300 barrels of oil per day through the second quarter of 2002 as
these various restrictions are addressed. No assurances may be provided,
however, that production constraints will be alleviated as expected, due to
potential factors such as delays in obtaining necessary regulatory approvals,
inaccessibility of contractors and materials needed for construction, and
adequate working capital to timely fund field operations.
Our highest operational priority in the short-term is to refinance the loan
with Shell Capital and obtain additional working capital necessary to alleviate
production constraints in order to obtain a level of operational cash flow
sufficient to fund our future cash requirements. We anticipate up to $8.5
million in additional working capital will be necessary to achieve this
objective. Chaparral and KKM have also initiated cost reduction measures to
avoid incurring any unnecessary overhead or operating expenses. Primarily, KKM
has suspended drilling operations as of October 2001 to allow the development of
the facilities program to continue in order to process current and future
productive capacity. This will also allow further analysis of available
geological data to most efficiently complete the development of the Karakuduk
Field. Subject to refinancing the loan with Shell Capital (see below), we expect
drilling operations to resume in the latter part of 2002.
Our short and long-term operational liquidity is also impacted by local oil
sales obligations, imposed by the government of Kazakhstan on oil and gas
producers to supply local energy needs. Under the terms of our agreement with
the government, KKM has a right to export, and receive export quota for, 100% of
the production from the Karakuduk Field. However, in 2001, the government
required KKM to sell approximately 375,000 barrels of crude oil, or 17% of its
total oil sales, to the local market, compared to 161,000 barrels, or 21%,
during 2000. Local market prices obtained by KKM are approximately $7 to $10 per
barrel below export market prices, net of transportation costs. We have
attempted to effect the 100% export of all hydrocarbons produced from the
Karakuduk Field through informal discussions with the government of Kazakhstan.
While we have been successful in lowering the quantities of local sales
required, we have been unable to entirely eliminate our local market obligation.
We plan to continue to work with the government to minimize or eliminate KKM's
future local sales requirements. If we are unsuccessful, however, we may be
required to initiate legal proceedings within Kazakhstan or make a claim under
our political risk insurance policy for the breach of our agreement by the
government of Kazakhstan. We can provide no assurances that legal proceedings
within Kazakhstan would be successful, or that any potential insurance proceeds
available under the political risk policy would fully offset losses incurred due
to additional local sales requirements. Additionally, the initiation of formal
legal proceedings could lead to more material restrictions of our contractual
rights, including our right to develop the Karakuduk Field or sell any of our
crude oil production on the export market. The future loss of revenue from local
sales may be significant enough to prevent us from generating a profit from the
Karakuduk Field or generate enough cash flow to meet our working capital needs.
Shell Capital loan
- ------------------
As of April 1, 2002, our most significant outstanding indebtedness is our
loan with Shell Capital. We entered into the loan in November 1999, to provide
us with up to $24.0 million of financing for the development of the Karakuduk
Field. Chaparral borrowed $21.5 million under the loan as of December 31, 2000
and the remaining $2.5 million as of May 2001.
The loan accrues interest at an annual rate of LIBOR plus 17.75%,
compounding quarterly prior to project completion, which consists of various
financial and technical milestones in the development of the Karakuduk Field.
13
Prior to project completion, an interest amount, equal to an annual rate of
LIBOR plus .50%, is payable quarterly to Shell Capital. The annual interest rate
is reduced to LIBOR plus 12.75% after project completion. The remaining unpaid
interest is added to the loan balance at the end of each quarter. After project
completion, all quarterly interest on the outstanding loan is fully due and
payable at the end of each calendar quarter.
In May 2001, the loan was amended to provide Chaparral with up to $8.0
million in uncommitted working capital as a bridge loan, which could be drawn
down in increments of $250,000 through August 31, 2001, at the sole discretion
of Shell Capital. We borrowed a total of $3.15 million under the bridge loan
through August 31, 2001. The principal borrowed under the bridge loan accrues
interest at LIBOR plus 17.75% and is subject to an arrangement fee of 2%.
Interest payments in the amount of LIBOR plus .50% are due at the end of each
month the bridge loan is outstanding. All unpaid interest is added to the
outstanding principal balance on each repayment date. The outstanding principal
of the bridge loan, plus all accrued interest, was due on or before September
30, 2001.
As an incentive for Chaparral to repay the bridge loan or refinance the
entire loan (including the bridge loan), Chaparral's board of directors approved
CAP-G's issuance of Series A Preferred shares to Shell Capital. Per the terms of
the amendment, if Chaparral failed to repay or refinance the bridge loan on or
before September 30, 2001, the Series A Preferred shares automatically convert
and entitle Shell Capital to 40% of the distributable profits of CAP-G. CAP-G
did not have any distributable profits as of April 1, 2002.
Chaparral did not reach project completion on or before September 30, 2001.
Chaparral had previously requested that Shell Capital waive or revise the
project completion definition due to our belief that the production levels and
certain technical requirements of project completion were unattainable and not
necessary or prudent in the time frame specified under the loan. Shell Capital,
however, refused to waive or revise the project completion definition. As a
result of Chaparral's failure to timely repay the bridge loan, Shell Capital's
Series A Preferred shares in CAP-G converted as of October 1, 2001, entitling
Shell Capital to 40% of the distributable profits of CAP-G.
In October 2001, Chaparral received a notice of default from Shell Capital,
notifying us that the following events of default had occurred under the loan:
failure to pay outstanding principal and interest due on the bridge loan
totaling $3.34 million on or before September 30, 2001, failure to pay interest
due on the loan totaling approximately $189,000 on September 28, 2001, failure
to achieve project completion by September 30, 2001, failure to settle certain
accounts payable within 90 days, KKM's failure to obtain Shell Capital's
approval prior to entering a short-term debt arrangement, and failure to
maintain listing of Chaparral's common stock on one of the major stock exchanges
(i.e. Nasdaq, NYSE, or AMEX). Chaparral subsequently repaid the default interest
as of September 30, 2001 on both the loan and the bridge loan, and KKM repaid
the short-term indebtedness obtained without Shell Capital's approval.
In January 2002, Chaparral received a second notice of default under the
loan, along with a notice accelerating the payment of $37.29 million in
outstanding principal, interest, and other fees and expenses due under our
existing loans with Shell Capital. Shell Capital Services Limited, as facility
agent, also initiated legal proceedings against Chaparral in the United Kingdom
and against CAP-G in the Isle of Guernsey to enforce Shell Capital's rights
under the loan. Chaparral and CAP-G are contesting the actions of Shell Capital
in their respective jurisdictions. See Item 3 - Legal Proceedings.
The second default notice stipulated various events of default in addition
to those previously disclosed above, including the Company's failure to pay
approximately $1.68 million in interest and $1.0 million in principal due on the
loan as of December 31, 2001, failure to pay a $24,000 agency fee due to Shell
Capital Services Limited on January 1, 2002, Chaparral's failure to pay
franchise taxes due on or before December 1, 2001, and KKM's failure to timely
pay local salaries due in Kazakhstan. The franchise taxes and KKM local salaries
were subsequently paid.
The acceleration notice demands that Chaparral immediately pay the entire
outstanding principal amount plus all interest and other fees payable under the
loan, or Shell Capital Services Limited, as facility agent, will pursue
available remedies under the loan. Such remedies include taking ownership of
Chaparral's investment in the Karakuduk Field. Furthermore, Shell Capital has
applied the default interest rate allowed under the loan of LIBOR plus 19.75%,
compounded daily, against the principal and interest due for the bridge loan as
of September 30, 2001, and the principal and interest payments due on the loan
as of January 1, 2002. The remaining balance of the loan accrued interest at
LIBOR plus 17.75% through January 14, 2002 and began accruing interest at the
default rate of LIBOR plus 19.75%, compounded on a daily basis, thereafter.
14
In April 2002, Chaparral executed a letter of intent with CAIH regarding a
possible $12 million capital investment into Chaparral and an amount of debt
that is to be determined, in exchange for approximately 60% of our common stock.
The transaction is subject to a number of conditions precedent, including the
approval of Shell Capital, the negotiation and execution of a definitive
agreement with CAIH, and the approval of the boards of directors and
shareholders of both companies. Chaparral plans to use the capital infusion and
debt from CAIH to restructure the loan. The terms of the restructuring would
include the cancellation of the common stock warrants held by Shell Capital,
CAP-G's reacquisition of the 40% net profits interest held by Shell Capital,
waiver of all outstanding defaults including project completion, and adjusting
the interest rate on the restructured loan to an undetermined rate below the
current interest rate being charged by Shell Capital. Chaparral and CAP-G are
contesting the legal actions of Shell Capital Services Limited unless and until
such time as a transaction with CAIH can be consummated. We cannot provide any
assurance, however, that the loan with Shell Capital will be refinanced with
CAIH or any other party and, if so, the loan would be refinanced on terms and
conditions favorable to Chaparral.
The failure of Chaparral to refinance the loan, including the waiver of all
existing defaults and the re-acquisition of Shell Capital's 40% interest in
CAP-G, will most likely result in the loss or significant impairment of our
investment in the Karakuduk Field.
Capital Commitments and Other Contingencies
- -------------------------------------------
Our operations may be subject to other regulations by the government of the
Republic of Kazakhstan or other regulatory bodies responsible for the area in
which the Karakuduk Field is located. In addition to taxation, customs
declarations and environmental controls, regulations may govern such things as
drilling permits and production rates. Drilling permits could become difficult
to obtain or prohibitively expensive. Production rates could be set so low that
they would make production unprofitable. These regulations may substantially
increase the costs of doing business and may prevent or delay the starting or
continuation of any given exploration or development project.
All regulations are subject to future changes by legislative and
administrative action and by judicial decisions. Such changes could adversely
affect the petroleum industry in general, and us in particular. It is impossible
to predict the effect that any current or future proposals or changes in
existing laws or regulations will have on our operations.
Commodity Prices for Oil
- ------------------------
Our revenues, profitability, growth and value are highly dependent upon the
price of oil. Market conditions make it difficult to estimate prices of oil or
the impact of inflation on such prices. Oil prices have been volatile, and it is
likely they will continue to fluctuate in the future. Various factors beyond our
control affect prices for oil, including supplies of oil available worldwide and
in Kazakhstan, the ability of OPEC to agree to maintain oil prices and
production controls, political instability or armed conflict in Kazakhstan or
other oil producing regions, the price of foreign imports, the level of consumer
demand, the price and availability of alternative fuels, the availability of
transportation routes and pipeline capacity, and changes in applicable laws and
regulations.
Inflation
- ---------
We cannot control prices received from our oil sales and to the extent we
are unable to pass on increases in operating costs, we may be affected by
inflation. The devaluation of the tenge, the currency of the Republic of
Kazakhstan, can significantly decrease the value of the monetary assets that we
hold in Kazakhstan as well as our assets in that country that are based on the
tenge. KKM retains the majority of cash and cash equivalents in U.S. dollars in
an offshore bank account outside of Kazakhstan, but KKM's statutory tax basis in
its assets, tax loss carryforwards, and VAT receivables are all denominated in
tenge and subject to the effects of devaluation. Local tax laws allow basis
adjustments to offset the impact of inflation on statutory tax basis assets, but
there is no assurance that any adjustments will be sufficient to offset the
effects of inflation in whole or in part. If not, KKM may be subject to much
higher income tax liabilities within Kazakhstan due to inflation and or
devaluation of the local currency. Additionally, devaluation may create
uncertainty with respect to the future business climate in Kazakhstan and to our
investment in that country. As of December 31, 2001, the exchange rate was
150.20 tenge per U.S. dollar.
15
Critical Accounting Policies
- ----------------------------
Application of generally accepted accounting principles requires the use of
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements and revenues and
expenses during the reporting period. In addition, alternatives can exist among
various accounting methods. In such cases, the choice of accounting method can
also have a significant impact on reported amounts.
Our determination of proved oil and gas reserve quantities, the application
of the full cost method of accounting for KKM's exploration and production
activities, and the application of standards of accounting for derivative
instruments and hedging activities require management to make numerous estimates
and judgments.
Investment in KKM and Other Oil and Gas Property Costs - Chaparral accounts
for its investment in KKM using the equity method. We follow the full cost
method of accounting for oil and gas properties. Accordingly, all costs
associated with the acquisition, exploration and development of oil and gas
properties, including directly related overhead costs, are capitalized.
All capitalized costs of oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized on the unit-of-production
method using estimated proved reserves. Investments in unproved properties and
major development projects are not amortized until proved reserves associated
with the projects can be determined or until impairment occurs. If the results
of an assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized cost to be amortized.
In addition, the capitalized costs are subject to a "ceiling test," which
basically limits such costs to the aggregate of the "estimated present value,"
discounted at a 10-percent interest rate of the future net cash flows from
proved reserves, based on current economic and operating conditions, plus the
lower of cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized costs
with no loss recognized.
Reserves - Estimates of our proved oil and gas reserves are prepared by
Ryder Scott, an independent petroleum engineering firm, in accordance with
guidelines established by the SEC. Those guidelines require that reserve
estimates be prepared under existing economic and operating conditions with no
provisions for increases in commodity prices, except by contractual arrangement.
Estimation of oil and gas reserve quantities is inherently difficult and is
subject to numerous uncertainties. Such uncertainties include the projection of
future rates of production and the timing of development expenditures. The
accuracy of the estimates depends on the quality of available geological and
geophysical data and requires interpretation and judgment. Estimates may be
revised either upward or downward by results of future drilling, testing or
production. In addition, estimates of volumes considered to be commercially
recoverable fluctuate with changes in commodity prices and operating costs. Our
estimates of reserves are expected to change as additional information becomes
available.
Derivative Financial Instruments and Hedging Activities - We account for
our investment in derivative financial instruments in accordance with SFAS 133,
Accounting for Derivative Financial Instruments and Hedging Activities, as
amended. As a result, we recognize all derivative financial instruments in our
financial statements at fair value, regardless of the purpose or intent for
holding the instrument. Changes in the fair value of derivative financial
instruments are recognized periodically in income or in shareholders' equity as
a component of comprehensive income depending on whether the derivative
financial instrument qualifies for hedge accounting, and if so, whether it
qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair
values of derivatives accounted for as fair value hedges are recorded in income
along with the portions of the changes in the fair values of the hedged items
that relate to the hedged risks. Changes in fair values of derivatives accounted
for as cash flow hedges, to the extent they are effective as hedges, are
recorded in other comprehensive income net of deferred taxes. Changes in fair
values of derivatives not qualifying as hedges are reported in income.
16
2. Results from Operations
Results of Operations Year Ended December 31, 2001 Compared to
Year Ended December 31, 2000
- --------------------------------------------------------------------------------
We account for our investment in KKM using the equity method.
Our operations for the year ended December 31, 2001 resulted in a net loss
of $16.22 million compared to a net loss of $26.80 million as of December 31,
2000. The $10.58 million decrease in our loss from operations primarily relates
to decreases in interest charges from non-recurring transactions incurred during
2000 in our attempt to finance the development of the Karakuduk Field, net of
associated increases in general and administrative costs and the impact of the
adoption of FSAS 133, Accounting for Derivative Instruments and Hedging
Activities during 2001. Equity income from our investment in KKM increased by
$1.79 million due to KKM's increase in the production and sale of crude oil
during the period.
Interest expense decreased from $27.03 million in 2000 to $14.45 million in
2001. Interest expense for the current period reflects $10.01 million recognized
on our loan with Shell Capital, including $6.91 million in interest on
outstanding principal and $3.10 million in discount amortization, of which $2.42
million was expensed in the fourth quarter of 2001 upon the receipt of notices
of default and acceleration from Shell Capital. Additionally, we recognized
$4.37 million in interest expense due to the transfer of a 40% interest in the
distributable profits of CAP-G to Shell Capital for failure to repay the bridge
loan to Shell Capital on or before September 30, 2001. Comparatively, during
2000, we incurred $5.29 million in interest expense on the loan and $909,000 in
amortization of associated debt issuance costs. Approximately $3.48 million was
reclassified to the principal balance of the loan as of December 31, 2000. See
Note 7 to our consolidated financial statements for the year ended December 31,
2001.
Interest expense for the period ended December 31, 2000 also reflects a
non-recurring, non-cash interest charge of approximately $20.34 million
recognized upon the conversion of $20.85 million of notes into 11,690,259 shares
of our common stock at a conversion price of $1.86 per share. The conversion
feature of the notes was a "beneficial conversion feature" as addressed in EITF
98-5, Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios. EITF 98-5 required the recognition
of additional interest expense equal to the face value of the notes, net of
original discount of $506,000, upon conversion. See Note 8 to our consolidated
financial statements for the year ended December 31, 2001.
As a result of the adoption of SFAS 133, we recognized a loss of $2.52
million as a cumulative effect of change in accounting principal and an
additional loss of $237,000 for the year ended December 31, 2001 to record the
derivatives at their fair value as of the end of the period. See Note 5 to our
consolidated financial statements for the year ended December 31, 2001.
Interest income decreased $478,000 to $1.45 million in 2001, compared to
$1.93 million in 2000. The decrease was primarily due to lower interest rates
during 2001. The loan with KKM accrues interest at an annual rate of LIBOR plus
1%. The average interest rate charged during 2000 was approximately 7.3%
compared to approximately 5.1% during 2001.
General and administrative costs increased from $3.69 million as of
December 31, 2000 to $4.33 million as of December 31, 2001. The $637,000 change
was principally due to an approximate $682,000 increase in insurance expense
including additional OPIC political risk insurance premiums of $271,000, and
additional amortization of transportation risk insurance of $411,000, which was
fully amortized during the fourth quarter of 2001 due to the current status of
the Shell Capital loan. See Notes 6 and 7 to our consolidated financial
statements for the year ended December 31, 2001.
Depreciation and depletion expense increased $332,000 from $421,000 in 2000
to $753,000 in 2001, due to additional depletion of acquisition costs of our
investment in KKM. Our depletion expense was $730,000 in 2001 compared to
$403,000 in 2000, resulting from increased production from the Karakuduk Field.
17
Our equity income from investment was $4.62 million in 2001, compared to
$2.83 million in 2000. The net change of $1.79 million was the result of
increased crude oil production and sales by KKM during 2001, partially offset by
a decrease in crude oil prices during the same period. KKM sold 2.18 million
barrels of crude oil in 2001, generating revenues of $36.58 million, or $16.75
per barrel, compared to sales of approximately 765,000 barrels of crude oil in
2000, generating $16.97 million, or $22.18 per barrel. From 2000 to 2001, KKM
increased crude oil sales by 185%, generating a corresponding increase in oil
sales revenue of 116%. Transportation costs were $8.30 million in 2001, or $3.80
per barrel, compared to $3.21 million in 2000, or $4.20 per barrel, reflecting a
decrease of transportation costs on a per barrel basis of approximately 9.5%.
Operating costs increased in aggregate from 2000 to 2001, with current year
operating costs of $5.25 million, or $2.40 per barrel, compared to $3.68
million, or $4.81 per barrel, in the prior period. The approximate 50% decrease
in operating cost per barrel is due to the significant increase in crude oil
production during the period in relation to field level operating costs
necessary to achieve such production increases. Our equity income from
investment also reflects the elimination of $1.45 million of intercompany
interest income on the loan to KKM. See Notes 4 and 15 to our consolidated
financial statements for the year ended December 31, 2001.
Results of Operations Year Ended December 31, 2000 Compared to
Year Ended December 31, 1999
- --------------------------------------------------------------------------------
We account for our investment in KKM using the equity method.
Our operations for the year ended December 31, 2000 resulted in a net loss
of $26.80 million compared to a net loss of $5.16 million as of December 31,
1999. The $21.64 million increase in net loss relates to interest charges and
associated increases in general and administrative costs incurred in 2000 in our
efforts to finance the development of the Karakuduk Field. As a partial offset
to these additional expenses, we recognized equity income from our investment in
KKM due to KKM's significant increase in the production and sale of crude oil
during the year.
Interest expense increased from $523,000 in 1999 to $27.03 million in 2000,
primarily due to interest charges on our convertible notes and financing costs
of our loan with Shell Capital. Approximately $20.34 million of interest expense
was a non-cash charge recognized upon the September 2000 conversion of $20.85
million of notes into 11,690,259 shares of our common stock at a conversion
price of $1.86 per share. The conversion feature of the notes was a "beneficial
conversion feature" as addressed in EITF 98-5, whereby a portion of the proceeds
received from the notes was allocable to the conversion feature contained
therein. The value assigned to the conversion feature was determined as the
difference between the market price of our common stock on the date of issuance
and the conversion price, multiplied by the number of shares to be received upon
conversion, which was approximately $120 million. As the conversion price
contained in the notes was substantially below the market price, the value under
the above formula significantly exceeded the net proceeds from the notes. Under
EITF 98-5, the discount assigned to the conversion feature is limited to the
total proceeds allocated to the convertible instrument. Accordingly, upon
conversion of the notes, we recorded additional interest expense and additional
paid in capital equal to $20.34 million, the face amount of the notes net of
original discount. An additional $1.24 million in interest expense was incurred
on the notes in 2000, from discount amortization and accrued interest on the
notes through the date of conversion. We had accrued a total of $126,000 in
interest expense on the notes as of December 31, 1999. See Note 8 to our
consolidated financial statements for the year ended December 31, 2001.
During 2000, we borrowed $21.50 million under our Shell Capital loan,
recognizing $4.38 million in interest expense on the loan and $909,000 in
amortization of associated debt issuance costs. Approximately $3.48 million was
reclassified to the principal balance of the loan as of December 31, 2000. We
did not have any interest charges associated with the loan during 1999. See Note
7 to our consolidated financial statements for the year ended December 31, 2001.
Interest income increased $1.24 million to $1.93 million in 2000, compared
to $692,000 in 1999. The increase was primarily due to additional financing of
KKM's operations in Kazakhstan and recognition of additional interest income of
$232,000 from the application of EITF 99-10, Percentage Used to Determine the
Amount of Equity Method Losses.
General and administrative costs increased from $2.39 million as of
December 31, 1999 to $3.69 million as of December 31, 2000. The $1.3 million
increase was due to approximately $1.0 million in insurance expense from
premiums on our OPIC political risk insurance policy and amortization of
transportation risk insurance required by Shell Capital as part of the loan.
Both the OPIC and transportation risk insurance policies were executed in 2000.
18
The remaining increase in general and administrative costs was associated with
maintaining the Shell Capital loan and heightened operational activity in the
Karakuduk Field. See Note 6 to our consolidated financial statements for the
year ended December 31, 2001.
Depreciation and depletion expense increased $390,000 from $31,000 in 1999
to $421,000 in 2000, due to additional depletion of acquisition costs of our
investment in KKM. Our depletion expense was $403,000 in 2000 compared to $9,000
in 1999, based on the increase in oil production from the Karakuduk Field.
Our equity income from investment was $2.83 million in 2000, compared to an
equity loss of $1.85 million in 1999. The net change of $4.68 million was the
result of several factors. During 2000, KKM sold approximately 765,000 barrels
of crude oil, recognizing $16.97 million, or $22.18 per barrel, in revenue.
Transportation costs associated with 2000 sales were $3.21 million, or $4.20 per
barrel. Operating costs associated with 2000 sales were $3.68 million, or $4.81
per barrel. KKM did not have any commercial oil sales prior to 2000, therefore
there are no comparable oil sales revenue or operating costs from prior periods.
We recognized $683,000 of additional equity losses during 1999 due to the
application of EITF 99-10. All of these losses were recaptured during 2000. Our
equity income from investment also reflects the elimination of $1.44 million of
intercompany interest income on the loan to KKM. See Note 4 to our consolidated
financial statements for the year ended December 31, 2001.
During 2000, we paid $4.0 million for put contracts to sell 1,562,250
barrels of North Sea Brent crude. We amortized the hedge contracts ratably over
the period the underlying contracts expire, recognizing $482,000 in hedging
losses as of December 31, 2000. See Note 5 to our consolidated financial
statements for the year ended December 31, 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to various market risks, including interest rate risk and
commodity price risk.
Shell Capital Services Limited, acting as facility agent, has notified
Chaparral that it is in default under its loan with Shell Capital and has issued
a notice of acceleration as of January 14, 2002, demanding that Chaparral
immediately repay the outstanding principal balance, plus all interest and other
fees, payable under the loan. Shell Capital Services Limited also initiated
legal proceedings against both Chaparral and CAP-G, which both Chaparral and
CAP-G are defending. If we are unable to successfully defend against the legal
actions of Shell Capital Services Limited or raise the capital necessary to
refinance the loan, the result will most likely be the loss of our investment in
the Karakuduk Field. See Item 3 - Legal Proceedings.
The loan is subject to a variable default interest rate based upon LIBOR
plus 19.75%. As of December 31, 2001, the outstanding loan balance subject to
interest was approximately $34.90 million. During 2001, the high, low, and
average interest rates applicable against the loan were 24.27%, 20.34%, and
22.25%, respectively. The loan is more fully described under "Item 7. Management
Discussion and Analysis of Financial Condition and Results of Operations - Shell
Capital Loan."
To partially hedge the risk of a drop in commodity prices, we entered the
hedge agreement as part of the loan, paying $4.0 million for put contracts to
sell approximately 1.56 million barrels of North Sea Brent crude in February
2000. We had remaining put contracts to sell approximately 1.37 million barrels
of North Sea Brent crude as of December 31, 2000, 753,000 which expired ratably
during 2001 at a rate of 62,750 barrels per month at a weighted average exercise
price of $19.54 per barrel. The remaining 621,000 barrels expire ratably from
January 2002 through December 2002 at a rate of 51,750 barrels per month at a
weighted average exercise price of $17.68 per barrel. During 2001, the high,
low, and average price of the hedge agreement was $762,000, $234,000, and
$475,000, respectively. As of December 31, 2001, the put contracts had a fair
market value of $762,000. We do not expect to recover any material future
economic value from the hedge contracts before the put contracts expire as of
December 31, 2002, based on the current market price of crude oil in comparison
to the strike price of the outstanding put contracts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for a list of the Financial Statements and the supplementary
financial information included in this report following the signature page.
19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of April 1, 2002, the following table sets forth the names and ages of
our directors and executive officers of Chaparral, the principal offices and
positions with Chaparral held by each person and the date such person became a
director or executive officer. The executive officers are elected annually by
the board of directors. Executive officers serve terms of one year or until
their death, resignation or removal by the board of directors. The present term
of office of each director will expire at the next annual meeting of
stockholders. 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 our bylaws.
Name of Director or Officer and
Position in Chaparral Since Age Principal Occupation During the Last 5 Years
--------------------- ----- --- --------------------------------------------
John G. McMillian 1997 75 Mr. McMillian has served as the Chairman of the Board of Chaparral and
Co-Chairman and Chief Executive Officer since January 1999 and Co-Chairman of the Board
Chief Executive Officer since May 1999. From May 1997 to January 1999, Mr. McMillian served as a
director of Chaparral. Mr. McMillian served as the Chairman, President, and
Chief Executive Officer of Allegheny & Western Energy Corporation, an oil
and gas company, from 1987 to 1995. Mr. McMillian founded Northwest Energy
Company, a major supplier of natural gas, and served as its Chairman and
Chief Executive Officer from 1973 to 1983. From 1986 to 1989, Mr. McMillian
was the owner, Chairman and Chief Executive Officer of Burger Boat Company,
a boat manufacturing company. McMillian has served as a director of
Excalibur Technologies and as a member of its Audit Committee since 1996.
James A. Jeffs 1999 50 Mr. Jeffs has served as the Co-Chairman of the Board of Chaparral since May
1999. Since 1994, Mr. Jeffs has served as Managing Director and the Chief
Investment Officer for The Whittier Trust Company, a trust and investment
management company, with substantial oil and gas interests. From 1993 to
1994, Mr. Jeffs was a Senior Vice President of Union Bank of California.
Mr. Jeffs was the Chief Investment Officer of Northern Trust of California,
N.A., a trust and investment management company, from 1992 to 1993. Mr.
Jeffs was Chief Investment Officer and Senior Vice President of Trust
Services of America, a trust and investment management company, from 1988
to 1992 and served as President and Chief Executive Officer of TSA Capital
Management, an institutional investment management company, during that
period.
20
David A. Dahl 1997 40 Mr. Dahl served as Secretary of Chaparral from August 1997 until May 1998.
Director Currently, Mr. Dahl is the President of Whittier Energy Company, an oil and
gas exploration and production company, a position that he has held since
1997. Since 1996, Mr. Dahl has also served as the President of Whittier
Ventures, LLC, a private investment entity. Since 1993, Mr. Dahl has been a
Vice President of Whittier Trust Company, an investment management trust
company.
Ted Collins, Jr. 1997 63 Mr. Collins has been the President of Collins & Ware Investments Company, a
Director private investment company, since June 2000. From 1988 to 2000, Mr. Collins
was the President of Collins & Ware, Inc., an independent oil and gas
company. From 1982 to 1988, Mr. Collins was the President of Enron Oil &
Gas Co., an oil and gas company. Beginning in 1969 and until 1982, Mr.
Collins was an Executive Vice President and director of American Quasar
Petroleum Co., an oil and gas company. Mr. Collins also serves on the Board
of Directors of Hanover Compression Company and Encore Acquisition Company.
Richard L. Grant 1998 47 Mr. Grant is the President and Chief Executive Officer of Tractebel LNG
Director LLC, an importer of liquefied natural gas, a position he has held since
September 2000. Since September 1998, Mr. Grant has served as the President
of the same Company. Mr. Grant served in various capacities at Mountaineer
Gas Company, the largest natural gas distribution company in West Virginia,
including President, from September 1988 to August 1998, and Executive Vice
President and General Counsel, from 1986 to 1988. Mr. Grant was an engineer
and legal counsel for the Cincinnati Gas & Electric Company from 1980 to
1986.
Michael B. Young 1998 33 Mr. Young has been the Treasurer, Controller and Principal Financial and
Treasurer and Controller Accounting Officer of Chaparral since February 1998. From June 1991 to
February 1998, he was a Tax Manager in the oil and gas tax practice of
Arthur Andersen LLP, an accounting firm.
Alan D. Berlin 1997 61 Since 1995, Mr. Berlin has been a partner of the law firm Aitken Irvin
Secretary Berlin & Vrooman, LLP. He was engaged in the private practice of law for
over five years prior to joining Aitken Irvin. Mr. Berlin was the Secretary
of Chaparral from January 1996 to August 1997 and, since June 1998, has
served the Company in the same position. From 1985 to 1987, Mr. Berlin was
the President of the International Division of Belco Petroleum Corp. and
held various other positions with Belco Petroleum Corp. from 1977 to 2001.
21
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of the Forms 3 and 4 and any amendments
furnished to Chaparral during our fiscal year ended December 31, 2001, and Form
5 and any amendments furnished to Chaparral with respect to the same fiscal
year, we believe that our directors, officers, and greater than 10% beneficial
owners complied with all applicable Section 16 filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation paid by Chaparral for services
rendered by Mr. McMillian who is currently the Chief Executive Officer and
Co-Chairman of the Board, Mr. Jeffs who is currently Co-Chairman of the Board,
and Mr. Young, who is the Treasurer, Controller, and Principal Financial and
Accounting Officer of Chaparral. There were no other executive officers of
Chaparral whose annual salary and bonus exceeded $100,000 during the fiscal year
ended December 31, 2001.
Summary Compensation Table.
----------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
----------------------------------- -------------------------------------------------
Awards Payouts
------------------------------------ ------------
Name and Other Restricted Securities
Annual Annual Stock Awards Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation ($) Options/SARs (#) Payouts ($) Compensation
------------------ ---- ------ ----- ------------ --- ---------------- ---------- -------------
John G. McMillian 2001 $162,000(1) -- -- -- -- -- --
Chief Executive 2000 $137,500 -- -- -- -- -- --
Officer (1/99 to
Present)
James A. Jeffs 2001 $162,000(2) -- -- -- -- -- --
Co-Chairman
(1/99 to Present)
Michael B. Young 2001 $162,000 -- -- -- -- -- --
Treasurer and 2000 $150,000 -- -- -- -- -- --
Controller 1999 $ 89,167 $42,500(3) -- -- -- -- --
1. Mr. McMillian received cash compensation of $114,750 in December 31, 2001.
The remaining $47,250 has been recorded in Chaparral's financial statements
as accrued compensation.
2. Mr. Jeffs' did not receive any cash compensation during the year 2001. The
outstanding balance of $162,000 has been recorded in Chaparral's financial
statements as accrued compensation.
3. Mr. Young received $42,500 in cash bonuses during 1999.
Options/SAR Grants.
For the fiscal year ended December 31, 2001, we did not grant any options.
Aggregated Option/SAR Exercises and Year-End Option/SAR Value Table.
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options/SARs at Options/SARs at
December 31, 2001 December 31, 2001
------------------------------------- -----------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------- -----------------------------------------------
Michael B. Young 1,167 -- -- --
Additionally, no options were exercised in fiscal year 2001.
Director Interlocks.
During our last fiscal year, Messrs. Jeffs, who is the Co-Chairman of the
Board, and Dahl served on the Compensation Committee of the Board and acted as
officers or directors to Whittier Ventures or one of its affiliates. Mr. Jeffs
is a Vice President of Whittier Ventures and a Director of Whittier Energy
Company. Mr. Dahl is President of both Whittier Ventures and Whittier Energy
22
Company. Whittier Ventures currently owns approximately 16.23% of the
outstanding common stock.
Compensation of Directors.
During the fiscal year ended December 31, 2001, Chaparral implemented a
standard compensation arrangement for its directors, including providing $1,500
in compensation to each director for each board or committee meeting attended
and paying each director $2,500 quarterly for serving on Chaparral's board.
Stock Performance Graph
Comparison of Five Year Cumulative Total Return
- -----------------------------------------------
The following line graph compares the total returns (assuming reinvestment
of dividends) of common stock, the Nasdaq Market Index and the SIC Code Index
for the five year period ending December 31, 2001.
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
CHAPARRAL RESOURCES, INC. 100.00 228.56 31.43 12.00 5.52 2.30
SIC CODE INDEX 100.00 101.56 81.35 99.37 126.24 115.83
NASDAQ MARKET INDEX 100.00 122.04 172.13 303.59 190.82 152.11
Board Compensation Committee Report on Executive Compensation
Insider Participation In Compensation Decisions
And Compensation Committee
Report On Executive Compensation
The Compensation Committee of our board of directors determines the
compensation of the executive officers named in the Summary Compensation Table
included as part of "Item 11 - Executive Compensation." The Compensation
Committee will furnish the following report on executive compensation in
connection with the Annual Meeting:
Compensation Philosophy
- -----------------------
As members of the Compensation Committee, it is our duty to administer the
executive compensation program for Chaparral. The Compensation Committee is
responsible for establishing appropriate compensation goals for the executive
officers of Chaparral, evaluating the performance of such executive officers in
meeting such goals and making recommendations to the Board with regard to
23
executive compensation. Chaparral's compensation philosophy is to ensure that
executive compensation be directly linked to continuous improvements in
corporate performance, achievement of specific operations, financial and
strategic objectives, and increases in shareholder value. The Compensation
Committee regularly reviews the compensation packages of Chaparral's executive
officers, taking into account factors which it considers relevant, such as
business conditions within and outside the industry, Chaparral's financial
performance, the market composition for executives of similar background and
experience, and the performance of the executive officer under consideration.
The particular elements of Chaparral's compensation programs for executive
officers are described below.
Compensation Structure
- ----------------------
The base compensation for the executive officers of Chaparral named in the
Summary Compensation Table is intended to be competitive with that paid in
comparable situated industries, taking into account the scope of
responsibilities and internal relationships. The goals of the Compensation
Committee in establishing Chaparral's executive compensation program are:
o to compensate the executive officers of Chaparral fairly for their
contributions to Chaparral's short-term and long-term performance; and
o to allow Chaparral to attract, motivate and retain the management personnel
necessary to Chaparral's success by providing an executive compensation
program comparable to that offered by companies with which Chaparral
competes for management personnel.
The elements of Chaparral's executive compensation program are annual base
salaries, annual bonuses and equity incentives. The Compensation Committee bases
its decisions on the scope of the executive's responsibilities, a subjective
evaluation of the executive's performance and the length of time the executive
has been in the position.
In June 2001, Chaparral's stockholders approved the 2001 Stock Incentive
Plan, which sets aside 2.14 million shares of Chaparral's common stock for
issuance to Chaparral's officers, directors, employees, and consultants.
Chaparral has not made any grants under the 2001 Stock Incentive Plan as of
December 31, 2001.
Executive Compensation Deductibility
- ------------------------------------
Chaparral intends that amounts paid under Chaparral's compensation plans
generally will be deductible compensation expenses. The Compensation Committee
does not currently anticipate that the amount of compensation paid to executive
officers will exceed the amounts specified as deductible according to Section
162(m) of the Internal Revenue Code of 1986.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
No executive officer or director of Chaparral serves as an executive
officer, director, or member of a compensation committee of any other entity,
for which an executive officer, director, or member of such entity is a member
of the Board or the Compensation Committee of the Board. There are no other
interlocks.
Compensation Committee
of the Board of Directors,
Richard L. Grant, Chairman
James A. Jeffs
David A. Dahl
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of April 1, 2002, with
respect to our directors, named executive officers and each person who is known
by us to own beneficially more than 5% of our common stock, and with respect to
shares owned beneficially by all of our directors and executive officers as a
group. The address for all of our directors and executive officers of Chaparral
is 16945 Northchase Drive, Suite 1620, Houston, Texas 77060.
Amount and Nature of Percent of
Beneficial Ownership Common
Name of Beneficial Owner Position (1) Stock (1)
- --------------------------------------- ----------------------------------- ---------------------- ------------
Allen & Company Incorporated -- 5,732,823(2) 40.00%
711 Fifth Avenue
New York, New York 10022
Whittier Ventures, LLC -- 2,319,169(3) 16.23%
1600 Huntington Drive
South Pasadena, California 91030
Capco Resources, Ltd. -- 1,612,903 11.29%
444 5th Avenue SW
Suite 2240
Calgary, Alberta
Canada T2P2T8
Shell Capital Incorporated -- 1,785,455(4) 11.11%
910 Louisiana
Suite 500
Houston, Texas 77002
John G. McMillian Co-Chairman of the Board and 386,303(5) 2.70%
Chief Executive Officer
James A. Jeffs Co-Chairman of the Board 2,329,498(6) 16.30%
David A. Dahl Director 2,320,587(7) 16.24%
Ted Collins, Jr. Director -- *
Richard L. Grant Director -- *
Judge Burton B. Roberts Former Director --(8) *
Michael B. Young Treasurer & Controller 1,835(9) *
All current directors and executive -- 2,722,306(10) 19.02%
officers as a group (eight persons)
- ---------
* Represents less than 1% of the shares of Common Stock outstanding.
25
(1) Beneficial ownership of common stock has been determined for this purpose
in accordance with Rule 13d-3 under the Exchange Act, under which a person
is deemed to be the beneficial owner of securities if such person has or
shares voting power or investment power with respect to such securities,
has the right to acquire beneficial ownership within 60 days or acquires
such securities with the purpose or effect of changing or influencing the
control of Chaparral.
(2) In accordance with Rule 13d-3(d)(1)(i)(A), includes 48,284 shares
underlying warrants to purchase shares of Common Stock. Allen & Company is
a wholly owned subsidiary of Allen Holding Inc., and, consequently, Allen
Holding may be deemed to beneficially own the shares beneficially owned by
Allen & Company. Does not include shares owned directly by officers and
stockholders of Allen Holding and Allen & Company with respect to which
Allen Holding and Allen & Company disclaim beneficial ownership. Officers
and stockholders of Allen Holding and Allen & Company may be deemed to
beneficially own shares of the common stock reported to be beneficially
owned directly by Allen Holding and Allen & Company.
(3) In accordance with Rule 13d-3(d)(1)(i)(A), includes 334 shares underlying
currently exercisable warrants and 8,334 shares underlying a currently
exercisable option.
(4) In accordance with Rule 13d-3(d)(1)(i)(A), includes 1,785,455 shares
underlying a warrant.
(5) In accordance with Rule 13d-3(d)(1)(i)(A), includes 417 shares underlying a
currently exercisable option and 417 shares underlying a currently
exercisable warrant.
(6) In accordance with Rule 13d-3(d)(1)(i)(A), includes 2,304,523 shares
beneficially owned by Whittier Ventures, 334 shares underlying currently
exercisable warrants owned by Whittier Ventures, 5,820 shares owned by
Whittier Energy Company, 158 shares owned by Whittier Opportunity Fund, and
8,334 shares underlying currently exercisable options owned by Whittier
Opportunity Fund. Mr. Jeffs has no pecuniary interest in the shares
beneficially owned by Whittier Ventures, Whittier Energy Company, and
Whittier Opportunity Fund, however, as Vice President of Whittier Ventures,
and Director of Whittier Energy Company, Mr. Jeffs has voting power and
investment power over such shares and, thus, may be deemed to beneficially
own such shares.
(7) In accordance with Rule 13d-3(d)(1)(i)(A), includes 1,251 shares underlying
currently exercisable options owned by Mr. Dahl, 2,304,523 includes shares
beneficially owned by Whittier Ventures, 334 shares underlying currently
exercisable warrants owned by Whittier Ventures, 5,820 shares owned by
Whittier Energy Company, 158 shares owned by Whittier Opportunity Fund and
8,334 shares underlying currently exercisable options owned by Whittier
Opportunity Fund. Mr. Dahl has no pecuniary interest in the shares
beneficially owned by Whittier Ventures, Whittier Energy Company, or
Whittier Opportunity Fund, however, as the President of Whittier Ventures
and Whittier Energy Company, Mr. Dahl has voting power and investment power
over such shares and, thus, may be deemed to beneficially own such shares.
(8) Judge Roberts resigned as a director of Chaparral effective January 18,
2002.
(9) Includes 668 shares owned by Mr. Young and 1,167 shares underlying
currently exercisable options.
(10) Includes the shares as described in Notes (5) through (8) above. In
addition, it includes 167 shares owned by Alan D. Berlin, the Secretary of
Chaparral and 417 shares underlying a presently exercisable option owned by
Mr. Berlin.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 2001, Chaparral's loan with Shell Capital was amended to provide
Chaparral with up to $8.0 million in uncommitted working capital as a bridge
loan, which could be drawn down in increments of $250,000 through August 31,
2001, at the sole discretion of Shell Capital. We borrowed a total of $3.15
million under the bridge loan through August 31, 2001. The principal borrowed
under the bridge loan accrues interest at LIBOR plus 17.75% and is subject to an
arrangement fee of 2%. Interest payments in the amount of LIBOR plus .50% are
due at the end of each month the bridge loan is outstanding. All unpaid interest
is added to the outstanding principal balance on each repayment date. The
outstanding principal of the bridge loan, plus all accrued interest, was due on
or before September 30, 2001.
As an incentive for Chaparral to repay the bridge loan or refinance the
entire loan (including the bridge loan), Chaparral's board of directors approved
CAP-G's issuance of Series A Preferred shares to Shell Capital. Per the terms of
the amendment, if Chaparral failed to repay or refinance the bridge loan on or
before September 30, 2001, the Series A Preferred shares automatically convert
and entitle Shell Capital to 40% of the distributable profits of CAP-G. CAP-G
did not have any distributable profits as of April 1, 2002.
Chaparral did not reach project completion on or before September 30, 2001.
Chaparral had previously requested that Shell Capital waive or revise the
project completion definition due to our belief that the production levels and
certain technical requirements of project completion were unattainable and not
necessary or prudent to perform in the time frame specified under the loan.
Shell Capital, however, refused to waive or revise the project completion
definition. As a result of Chaparral's failure to timely repay the bridge loan,
Shell Capital's Series A Preferred shares in CAP-G converted as of October 1,
2001, entitling Shell Capital to 40% of the distributable profits of CAP-G.
In October 2001, Chaparral received a notice of default from Shell Capital,
notifying us that the following events of default had occurred under the loan:
failure to pay outstanding principal and interest due on the bridge loan
totaling $3.34 million on or before September 30, 2001, failure to pay interest
due on the loan totaling approximately $189,000 on September 28, 2001, failure
to achieve project completion by September 30, 2001, failure to settle certain
26
accounts payable within 90 days, KKM's failure to obtain Shell Capital's
approval prior to entering a short-term debt arrangement, and failure to
maintain listing of Chaparral's common stock on one of the major stock exchanges
(i.e. Nasdaq, NYSE, or AMEX). Chaparral subsequently repaid the default interest
as of September 30, 2001 on both the loan and the bridge loan, and KKM repaid
the short-term indebtedness obtained without Shell Capital's approval.
In January 2002, Chaparral received a second notice of events of default
under the loan, along with a notice accelerating the payment of $37.29 million
in outstanding principal, interest, and other fees and expenses due under our
existing loans with Shell Capital. Shell Capital Services Limited, as facility
agent, also initiated legal proceedings against Chaparral in the United Kingdom
and against CAP-G in the Isle of Guernsey to enforce Shell Capital's rights
under the loan. Chaparral and CAP-G are contesting the actions of Shell Capital
in their respective jurisdictions.
The second default notice stipulated various events of default in addition
to those previously disclosed above, including the Company's failure to pay
approximately $1.68 million in interest and $1.0 million in principal due on the
loan as of December 31, 2001, failure to pay a $24,000 agency fee due to Shell
Capital Services Limited on January 1, 2002, Chaparral's failure to pay
franchise taxes due on or before December 1, 2001, and KKM's failure to timely
pay local salaries due in Kazakhstan. The franchise taxes and KKM local salaries
were subsequently paid.
The acceleration notice demands that Chaparral immediately pay the entire
outstanding principal amount plus all interest and other fees payable under the
loan, or Shell Capital Services Limited, as facility agent, will pursue
available remedies under the loan. Such remedies include taking ownership of
Chaparral's investment in the Karakuduk Field. Furthermore, Shell Capital has
applied the default interest rate allowed under the loan of LIBOR plus 19.75%,
compounded daily, against the principal and interest due for the bridge loan as
of September 30, 2001, and the principal and interest payments due as of January
1, 2002. The remaining balance of the loan accrued interest at LIBOR plus 17.75%
through January 14, 2002 and began accruing interest at the default rate of
LIBOR plus 19.75%, compounded on a daily basis, thereafter.
During the year ended December 31, 2001, Chaparral paid Shell Capital
approximately $986,000 in interest out of a total of $6.91 million interest
accrued on the principal balance of the loan during the same period.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
--------------------
Table of Contents
Page
----
Chaparral Resources, Inc.
-------------------------
Report of Independent Auditors..................................... F-1
Consolidated Balance Sheets--As of December 31, 2001
and December 31, 2000 ...........................................F-2
Consolidated Statements of Operations--Years ended
December 31, 2001, 2000, and 1999................................F-4
Consolidated Statements of Cash Flows--Years ended
December 31, 2001, 2000, and 1999................................F-5
Consolidated Statement of Changes in Stockholders'
Equity--Years ended December 31, 2001, 2000, and 1999............F-7
Notes to Consolidated Financial Statements..........................F-8
Supplemental Information - Disclosures About Oil and
Gas Producing Activities - Unaudited............................F-27
Supplemental Information - Selected Quarterly
Financial Data - Unaudited......................................F-30
Closed Type JSC Karakudukmunay
------------------------------
Report of Independent Auditors ....................................F-32
Balance Sheets--As of December 31, 2001 and 2000...................F-33
Statements of Expenses and Accumulated Deficit--Years ended
December 31, 2001, 2000 and 1999................................F-34
Statements of Cash Flows--Years ended
December 31, 2001, 2000, and 1999...............................F-35
Statements of Stockholders' Deficit................................F-36
Notes to the Financial Statements .................................F-37
Supplemental Information - Disclosures About Oil and
Gas Producing Activities - Unaudited............................F-50
Supplemental Information - Selected Quarterly
Financial Data - Unaudited......................................F-54
(a)(2) Financial Statement Schedules
-----------------------------
All schedules for which a provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
(b) Current Reports on Form 8-K
---------------------------
No reports on Form 8-K were filed by Chaparral Resources, Inc. for the
quarter ended December 31, 2001.
(c) Exhibits.
---------
28
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.
*2.2 Escrow Agreement dated April 12, 1995 between Chaparral Resources,
Inc., the Shareholders of Central Asian Petroleum, Inc. and Barry W.
Spector.
*2.3 Amendment to Stock Acquisition Agreement and Plan of Reorganization
dated March 10, 1996 between Chaparral Resources, Inc., and the
Shareholders of Central Asian Petroleum, Inc.
3.1 Certificate of Incorporation, dated April 21, 1999, incorporated by
reference to Chaparral Resources, Inc.'s Notice and Definitive
Schedule 14A dated April 21, 1999.
3.2 Bylaws, dated April 21, 1999, incorporated by reference to Annex IV to
our Notice and Definitive Schedule 14Adated April 21, 1999.
4.1 Written Resolutions of the Shareholders of Central Asian Petroleum
(Guernsey) Limited dated May 30, 2001, authorizing the issuance of
Series A Preferred Shares in Central Asian Petroleum (Guernsey)
Limited, incorporated by reference to Exhibit 4.1 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001, filed with Securities and Exchange Commission on August
14, 2001.
10.1 Agreement dated August 30, 1995 for Exploration Development and
Production of Oil in Karakuduk Oil Field in Mangistan Oblast of the
Republic of Kazakhstan between Ministry of Oil and Gas Industries of
the Republic of Kazakhstan for and on Behalf of the Government of the
Republic of Kazakhstan and Joint Stock Company of Closed Type
Karakuduk Munay Joint Venture, incorporated by reference to Exhibit
10.17 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for
the fiscal year ended November 30, 1996, filed with the Securities and
Exchange Commission on April 15, 1997.
10.2 License for the Right to Use the Subsurface in the Republic of
Kazakhstan, incorporated by reference to Exhibit 10.18 to Chaparral
Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended
November 30, 1996, filed with the Securities and Exchange Commission
on April 15, 1997.
10.3 Amendment dated September 11, 1997, to License for Right to Use the
Subsurface in the Republic of Kazakhstan, incorporated by reference to
Exhibit 10.2 to Chaparral Resources, Inc.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, filed with the
Securities and Exchange Commission on November 7, 1997.
10.4 Amendment to License for the Right to Use the Subsurface in the
Republic of Kazakhstan, dated December 31, 1998, incorporated by
reference to Exhibit 10.25 to Chaparral Resources, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, filed
with the Securities and Exchange Commission on April 15, 1999.
10.5 Letter from the Agency of the Republic of Kazakhstan on Investments to
Central Asian Petroleum (Guernsey) Limited dated July 28, 1999
regarding License for Right to Use the Subsurface in the Republic of
Kazakhstan, incorporated by reference to Exhibit 10.5 to Chaparral
Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, filed with the Securities and Exchange Commission
on March 30, 2000.
*10.6 Warrant Certificate entitling Allen & Company to purchase up to
1,022,000 shares of Common Stock of Chaparral Resources, Inc.
29
Exhibit
No. Description and Method of Filing
- ------- --------------------------------
10.7 Form of Warrant issued to Black Diamond Partners LP, Clint D. Carlson,
John A. Schneider, Victory Ventures LLC, Whittier Energy Company and
Whittier Ventures LLC in connection with loans made by them to
Chaparral Resources, Inc. in November and December 1996 and to Black
Diamond Partners LP, Clint D. Carlson, Whittier Energy Company and
Whittier Ventures LLC in July 1997 in connection with the same loans,
incorporated by reference to Exhibit 10.3 to Chaparral Resources,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30,
1997, filed with the Securities and Exchange Commission on August 15,
1997.
10.8 Warrant Certificate entitling Allen & Company Incorporated to purchase
up to 900,000 shares of Common Stock of Chaparral Resources, Inc.,
incorporated by reference to Exhibit 10.1 to Chaparral Resources,
Inc.'s Current Report on Form 8-K/A dated October 31, 1997, filed with
the Securities and Exchange Commission on December 9, 1997.
10.9 Agreement dated March 31, 1998, effective as of November 4, 1997,
between Chaparral Resources, Inc. and Allen & Company Incorporated,
incorporated by reference to Exhibit 10.33 to Chaparral Resources,
Inc.'s Annual Report on Form 10-K for the fiscal year ended December
31, 1997, filed with the Securities and Exchange Commission on April
6, 1998.
10.10 Warrants issued to Allen & Company, Incorporated and John G.
McMillian, incorporated by reference to Exhibit 10.2 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998, filed with the Securities and Exchange Commission on
August 19, 1998.
10.11 1998 Incentive and Non-statutory Stock Option Plan, incorporated by
reference to Exhibit 10.24 to Chaparral Resources, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, filed
with the Securities and Exchange Commission on April 15, 1999.
10.12 Credit Support and Pledge Agreement between Whittier Ventures, LLC and
Chaparral Resources, Inc. dated July 2, 1998, incorporated by
reference to Exhibit 10.1 to Chaparral Resources, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, filed
with the Securities and Exchange Commission on November 19, 1998.
10.13 Warrants issued to Whittier Ventures, LLC, incorporated by reference
to Exhibit 10.2 to Chaparral Resources, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998, filed with the
Securities and Exchange Commission on November 19, 1998.
10.14 $24,000,000 Loan Agreement dated as of November 1, 1999, incorporated
by reference to Exhibit 10.1 to Chaparral Resources, Inc.'s Current
Report on 8-K dated October 25, 1999, filed with the Securities and
Exchange Commission on November 17, 1999.
10.15 Supplemental Agreement, dated February 10, 2000, among Shell Capital
Limited, Shell Capital Services Limited, Chaparral Resources, Inc.,
Central Asian Petroleum (Guernsey) Limited, Closed Type JSC
Karakudukmunay and Central Asian Petroleum, Inc., incorporated by
reference to Exhibit 10.19 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the Securities and
Exchange Commission on March 22, 2000.
10.16 CRI-CAP(G) Loan Agreement, dated February 7, 2000, between Chaparral
Resources, Inc. and Central Asian Petroleum (Guernsey) Limited,
incorporated by reference to Exhibit 10.13 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
30
Exhibit
No. Description and Method of Filing
- ------- --------------------------------
10.17 CAP(G)-KKM Loan Agreement, dated February 7, 2000, between Closed Type
JSC Karakudukmunay and Central Asian Petroleum (Guernsey) Limited,
incorporated by reference to Exhibit 10.16 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.18 Accounts Agreement, dated February 8, 2000, among Chaparral Resources,
Inc., Central Asian Petroleum (Guernsey) Limited, Closed Type JSC
Karakudukmunay, Shell Capital Services Limited, ABN Amro Bank N.V.,
London Branch and The Law Debenture Trust Corporation p.l.c.,
incorporated by reference to Exhibit 10.1 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.19 Security Trust Deed, dated February 7, 2000, among Chaparral
Resources, Inc., Central Asian Petroleum (Guernsey) Limited, Central
Asian Petroleum, Inc., Closed Type JSC Karakudukmunay, Shell Capital
Services Limited and The Law Debenture Trust Corporation p.l.c.,
incorporated by reference to Exhibit 10.17 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.20 CRI Accounts Assignment, dated February 7, 2000, between Chaparral
Resources, Inc. and The Law Debenture Trust Corporation p.l.c.,
incorporated by reference to Exhibit 10.2 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.21 CAP(G) Accounts Assignment, dated February 7, 2000, between Chaparral
Resources, Inc. and The Law Debenture Trust Corporation, p.l.c.,
incorporated by reference to Exhibit 10.3 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.22 KKM Accounts Assignment, dated February 7, 2000, between Closed Type
JSC Karakudukmunay and The Law Debenture Trust Corporation p.l.c.,
incorporated by reference to Exhibit 10.4 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.23 CRI-CAP(D) Pledge Agreement, dated February 7, 2000, between Chaparral
Resources, Inc. and The Law Debenture Trust Corporation p.l.c.,
incorporated by reference to Exhibit 10.11 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.24 CRI-CAP(G) Charge Over Shares, dated February 7, 2000, between
Chaparral Resources, Inc. and The Law Debenture Trust Corporation
p.l.c., incorporated by reference to Exhibit 10.14 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February 14, 2000, filed
with the Securities and Exchange Commission on March 22, 2000.
10.25 CAP(D)-CAP(G) Charge Over Shares, dated February 7, 2000, between
Central Asian Petroleum, Inc. and The Law Debenture Trust Corporation
p.l.c., incorporated by reference to Exhibit 10.15 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February 14, 2000, filed
with the Securities and Exchange Commission on March 22, 2000.
31
Exhibit
No. Description and Method of Filing
- ------- --------------------------------
10.26 KKM Pledge Agreement, dated February 7, 2000, between Central Asian
Petroleum (Guernsey) Limited and The Law Debenture Trust Corporation
p.l.c., incorporated by reference to Exhibit 10.12 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February 14, 2000, filed
with the Securities and Exchange Commission on March 22, 2000.
10.27 CRI Assignment, dated February 8, 2000, between Chaparral Resources,
Inc. and The Law Debenture Trust Corporation p.l.c., incorporated by
reference to Exhibit 10.5 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the Securities and
Exchange Commission on March 22, 2000.
10.28 CAP(G) Assignment, dated February 7, 2000, between Central Asian
Petroleum (Guernsey) Limited and The Law Debenture Trust Corporation
p.l.c., incorporated by reference to Exhibit 10.6 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February 14, 2000, filed
with the Securities and Exchange Commission on March 22, 2000.
10.29 KKM Assignment, dated February 7, 2000, between Closed Type JSC
Karakudukmunay and The Law Debenture Trust Corporation p.l.c.,
incorporated by reference to Exhibit 10.7 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.30 Assignment of Insurance Proceeds, dated February 7, 2000, between
Chaparral Resources, Inc. and The Law Debenture Trust Corporation
p.l.c., incorporated by reference to Exhibit 10.8 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February 14, 2000, filed
with the Securities and Exchange Commission on March 22, 2000.
10.31 KKM Assignment of Insurances, dated February 7, 2000, between Closed
Type JSC Karakudukmunay and The Law Debenture Trust Corporation
p.l.c., incorporated by reference to Exhibit 10.9 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February 14, 2000, filed
with the Securities and Exchange Commission on March 22, 2000.
10.32 Assignment of Reinsurance, dated February 8, 2000, among Closed Type
JSC Karakudukmunay, Kazakinstrakh JSC, Schwarzmeer und Ostsee
Insurance Co. Limited (Sovag) U.K. and The Law Debenture Trust
Corporation p.l.c., incorporated by reference to Exhibit 10.10 to
Chaparral Resources, Inc.'s Current Report on 8-K dated February 14,
2000, filed with the Securities and Exchange Commission on March 22,
2000.
10.33 Warrant Agreement, dated February 8, 2000, between Chaparral
Resources, Inc. and Shell Capital Limited, incorporated by reference
to Exhibit 10.18 to Chaparral Resources, Inc.'s Current Report on 8-K
dated February 14, 2000, filed with the Securities and Exchange
Commission on March 22, 2000.
10.34 Technical Services Agreement, dated February 8, 2000, Shell Capital
Services Limited and Closed Type JSC Karakudukmunay, incorporated by
reference to Exhibit 10.20 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the Securities and
Exchange Commission on March 22, 2000.
10.35 Contract of Insurance No. 158, dated December 29, 1999, between the
Overseas Private Investment Corporation and Chaparral Resources, Inc.,
incorporated by reference to Exhibit 10.21 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
32
Exhibit
No. Description and Method of Filing
- ------- --------------------------------
10.36 Amendment No. 1 to Contract of Insurance No. F158, dated as of
February 4, 2000, between the Overseas Private Investment Corporation
and Chaparral Resources, Inc., incorporated by reference to Exhibit
10.22 to Chaparral Resources, Inc.'s Current Report on 8-K dated
February 14, 2000, filed with the Securities and Exchange Commission
on March 22, 2000.
10.37 Trade Confirmation, dated February 11, 2000, between Deutsche Bank AG
New York and Chaparral Resources, Inc., incorporated by reference to
Exhibit 10.23 to Chaparral Resources, Inc.'s Current Report on 8-K
dated February 14, 2000, filed with the Securities and Exchange
Commission on March 22, 2000.
10.38 Crude Oil Sale and Purchase Agreement dated as of November 1, 1999,
between Closed Type JSC Karakuduk Munay and Shell Trading
International Limited, incorporated by reference to Exhibit 10.1 to
Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, filed with the Securities and
Exchange Commission on November 19, 1999.
10.39 Commercial Services Agreement between Shell Trading International
Limited and Closed Type Karakudukmunay, JSC, dated November 1, 1999,
incorporated by reference to Exhibit 10.67 to Chaparral Resources,
Inc.'s Annual Report on Form 10-K for the fiscal year ended December
31, 1999, filed with the Securities and Exchange Commission on March
30, 2000.
10.40** Letter from Ryder Scott Company Petroleum Engineers to Chaparral
Resources, Inc. regarding reserve estimates of the Karakuduk Field as
of December 31, 2001, dated April 10, 2001.
10.41 Amended and Restated Warrant Agreement, dated April 18, 2001, between
Chaparral Resources, Inc. and Shell Capital Limited, incorporated by
reference to Exhibit 10.1 to Chaparral Resources, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001, filed with
the Securities and Exchange Commission on May 15, 2001.
10.42 Amendment Agreement between Chaparral Resources, Inc. Central Asian
Petroleum (Guernsey) Limited, Closed Type JSC Karakudukmunay, Central
Asian Petroleum, Inc., Shell Capital Services Limited, and Shell
Capital Inc., dated May 31, 2001, incorporated by reference to Exhibit
10.1 to Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001, filed with the Securities and
Exchange Commission on August 14, 2001.
10.43** 2001 Stock Incentive Plan approved by the stockholders of Chaparral
Resources, Inc. on June 21, 2001.
21 Subsidiaries of the Registrant, incorporated by reference to Exhibit
21 to Chaparral Resources, Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, filed with the Securities and
Exchange Commission on April 6, 1998.
* These exhibits, previously incorporated by reference to Chaparral's reports
under file number 0-7261, have now been on file with the Commission for more
than 5 years and are not filed with this Annual Report. We agree to furnish
these documents to the Commission upon request.
** Filed herewith.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHAPARRAL RESOURCES, INC.,
a Delaware corporation
By /s/ John G. McMillian
---------------------------------------------------
John G. McMillian
Co-Chairman and Chief Executive Officer
(Principal Executive Officer)
By /s/ Michael B. Young
---------------------------------------------------
Michael B. Young
Treasurer and Controller
(Principal Financial and Accounting Officer)
Dated: April 15, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Date Name and Title Signature
- ---- -------------- ---------
April 15, 2002 Ted Collins, Jr., Director /s/ Ted Collins, Jr.
------------------------
April 15, 2002 David A. Dahl, Director /s/ David A. Dahl
------------------------
April 15, 2002 James A. Jeffs, Co-Chairman /s/ James A. Jeffs
------------------------
April 15, 2002 Richard L. Grant, Director /s/ Richard L. Grant
------------------------
April 15, 2002 John G. McMillian, Co-Chairman and Chief /s/ John G. McMillian
Executive Officer ------------------------
34
Consolidated Financial Statements
Chaparral Resources, Inc.
For the Three Years ended December 31, 2001 with
Reports of Independent Auditors
Chaparral Resources, Inc.
Consolidated Financial Statements
Contents
Chaparral Resources, Inc.
Report of Independent Auditors .............................................F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets ................................................F-2
Consolidated Statements of Operations.......................................F-4
Consolidated Statements of Cash Flows.......................................F-5
Consolidated Statements of Changes in Stockholders' Equity..................F-7
Notes to Consolidated Financial Statements..................................F-8
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited......................................F-27
Supplemental Information - Selected Quarterly
Financial Data - Unaudited............................................F-30
Closed Type JSC Karakudukmunay
Report of Independent Auditors.............................................F-32
Audited Financial Statements
Balance Sheets.............................................................F-33
Statements of Operations...................................................F-34
Statements of Cash Flows...................................................F-35
Statements of Stockholders' Deficit........................................F-36
Notes to Financial Statements..............................................F-37
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited......................................F-50
Supplemental Information - Selected Quarterly
Financial Data - Unaudited............................................F-54
Report of Independent Auditors
The Board of Directors and Stockholders
Chaparral Resources, Inc.
We have audited the accompanying consolidated balance sheets of Chaparral
Resources, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of operations, cash flows, and changes in stockholders' equity for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chaparral
Resources, Inc. at December 31, 2001 and 2000, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company has incurred recurring operating losses, has a working capital
deficiency as of December 31, 2001, and there are uncertainties relating to the
Company and its equity investee's ability to meet projected cash flow
requirements through 2002. In addition, the Company's primary creditor has
notified the Company that it is in default of their loan and has issued a notice
of acceleration thereby demanding immediate repayment of all outstanding
principal and accrued interest. Furthermore, the creditor has initiated legal
proceedings against the Company for the purposes of obtaining control over the
Company's interest in its equity method investee, the Company's primary asset.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans and other factors in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
/s/ Ernst & Young LLP
----------------------------------------
Ernst & Young LLP
Houston, Texas
April 12, 2002
F-1
CHAPARRAL RESOURCES, INC
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
2001 2000
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 174 $ 604
Accounts receivable -- 30
Receivable from affiliate (Note 12) -- 265
Prepaid expenses 245 202
-------- --------
Total current assets 419 1,101
Investment in KKM and other oil and gas
property costs - full cost method
Republic of Kazakhstan (Note 4): 67,806 64,902
Furniture, fixtures and equipment 109 91
Less: accumulated depreciation (64) (41)
-------- --------
45 50
-------- --------
Other Assets
Hedge agreement (Note 5) 762 3,518
Other (Note 6) 5 585
-------- --------
Total other assets 767 4,103
-------- --------
Total assets $ 69,037 $ 70,156
======== ========
See accompanying notes.
F-2
CHAPARRAL RESOURCES, INC
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
2001 2000
-------- --------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 536 $ 243
Accrued liabilities:
Accrued compensation 449 346
Other accrued liabilities 144 181
Redeemable preferred stock, current portion (Note 10) 2,000 --
Accrued interest payable 1,745 32
Shell Capital loan, current portion (Note 7) 34,902 900
-------- --------
Total current liabilities 39,776 1,702
Shell Capital loan, net of discount (Note 7) -- 20,978
Redeemable preferred stock (Note 10)- cumulative, convertible,
Series A 75,000 designated, 50,000 issued
and outstanding, at stated value,
$5.00 cumulative annual
dividend, $6,000,000 redemption value 3,900 5,550
Stockholders' equity (Note 9):
Common stock - authorized, 100,000,000 shares of
$0.0001 par value; issued and outstanding,
14,283,801 and 14,283,634 shares as of
December 31, 2001 and 2000, respectively 1 1
Capital in excess of par value 94,061 94,061
Preferred stock - 1,000,000 shares authorized,
925,000 shares undesignated. Issued and
outstanding - none -- --
Accumulated deficit (68,701) (52,136)
-------- --------
Total stockholders' equity 25,361 41,926
-------- --------
Total liabilities and stockholders' equity $ 69,037 $ 70,156
======== ========
See accompanying notes.
F-3
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
Year Ended December 31,
2001 2000 1999
------------ ------------ ------------
Revenue $ -- $ -- $ --
Costs and expenses:
Depreciation and depletion 753 421 31
General and administrative 4,330 3,693 2,392
------------ ------------ ------------
5,083 4,114 2,423
------------ ------------ ------------
Loss from operations (5,083) (4,114) (2,423)
Other income (expense):
Interest income 1,454 1,932 692
Interest expense (14,446) (27,031) (523)
Write-off of note receivable (Note 3) -- -- (1,060)
Equity in income (loss) from investment
(Notes 4 and 15) 4,616 2,827 (1,849)
Hedge losses (Note 5) (237) (482) --
Other -- 65 --
------------ ------------ ------------
(8,613) (22,689) (2,740)
------------ ------------ ------------
Loss before cumulative effect of change in
accounting principle (13,696) (26,803) (5,163)
Cumulative effect of change in accounting
principle (2,519) -- --
------------ ------------ ------------
Net loss $ (16,215) $ (26,803) $ (5,163)
============ ============ ============
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock (250) (250) (250)
Discount accretion
Series A Redeemable Preferred Stock (100) (100) (100)
------------ ------------ ------------
Net loss available to common stockholders $ (16,565) $ (27,153) $ (5,513)
============ ============ ============
Basic and diluted earnings per share:
Loss per share before cumulative
effect of change in accounting principle $ (0.98) $ (6.01) $ (5.63)
Cumulative effect of change in
accounting principle $ (0.18) $ -- $ --
Net loss per share $ (1.16) $ (6.01) $ (5.63)
Weighted average number of shares
outstanding (basic and diluted) 14,283,788 4,516,032 978,391
See accompanying notes.
F-4
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Cash flows from operating activities
Net loss $(16,215) $(26,803) $ (5,163)
Adjustments to reconcile net loss to
net cash used in operating activities:
Equity loss (income) from investment (4,616) (2,827) 1,849
Depreciation, depletion, and amortization 1,333 591 31
Gain on the sale of oil and gas properties -- (75) --
Loss on disposition of furniture and fixtures -- 8 --
Provision for doubtful accounts -- -- 16
Write-off of note receivable -- -- 1,060
Hedge losses 237 482 --
Reversal of long term accrued compensation -- -- (210)
Stock issued for services and bonuses -- 23 270
Stock options issued for services and bonuses -- -- 9
Interest expense from transfer of net profits
interest 4,369 -- --
Interest expense attributable to beneficial
conversion -- 20,340 --
Interest expense converted into capital stock -- 898 --
Amortization of debt issuance cost 3,102 909 --
Amortization of note discount -- 464 77
Cumulative effect of change in accounting principal 2,519 -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 295 (272) (14)
Prepaid expenses (43) (91) (35)
Note and related accrued interest receivable -- -- (51)
Accrued interest on advances to KKM (1,452) (1,904) (622)
Interest payments from KKM 5,799 -- --
Hedge agreement -- (4,000) --
Other -- (753) --
Increase (decrease) in:
Accounts payable 293 (802) 822
Accrued interest and other liabilities 1,676 (26) 135
Accrued compensation 103 (112) 40
Interest expense reclassified as principal
on the Shell Capital loan 4,272 3,481 --
-------- -------- -------
Net cash provided/(used) in operating activities 1,672 (10,469) (1,786)
-------- -------- -------
See accompanying notes.
F-5
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Cash flows from investing activities
Additions to furniture, fixtures and equipment $ (18) $ (18) $ (7)
Investment in and advances to KKM and other oil and
gas property costs (7,734) (22,422) (7,126)
Proceeds from sale of interest in oil and gas
properties - domestic -- 75 --
-------- -------- --------
Net cash used in investing activities (7,752) (22,365) (7,133)
-------- -------- --------
Cash flows from financing activities
Net proceeds from notes payable $ -- $ 10,806 $ 10,040
Net proceeds from Shell Capital loan 5,650 21,500 --
Repayment of notes payable -- -- (975)
Debt issuance cost -- (2,415) (422)
Restricted cash -- 578 178
Net proceeds from private placement -- 2,946 --
-------- -------- --------
Net cash provided by financing activities 5,650 33,415 8,821
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (430) 581 (98)
Cash and cash equivalents at beginning
of period 604 23 121
-------- -------- --------
Cash and cash equivalents at end of period $ 174 $ 604 $ 23
======== ======== ========
Supplemental cash flow disclosure
Interest paid $ 986 $ 888 $ 68
Income taxes paid -- -- 23
Supplemental schedule of non-cash
investing and financing activities
Principal of notes converted into capital stock $ -- $ 20,846 $ --
Discount recognized on loan for
issuance of stock warrant to Shell Capital -- 1,175 --
Discount recognized for note issued
with detachable stock warrants -- -- 506
See accompanying notes.
F-6
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
Common Stock Capital in Stock Unearned
------------------- Excess of Par Subscription Restricted Accumulated
Shares Amount Value Receivable Stock Awards Deficit Total
------- --------- ----------- ----------- ------------ ------------ ----------
Balance at December 31, 1998 972,980 $ -- $ 47,611 $ (506) $ (56) $ (19,470) $ 27,579
Capital stock issued for services 5,861 -- 246 -- (246) -- --
Amortization of restricted stock
awards -- -- -- -- 279 -- 279
Capital stock issued for
fractional shares after 1,473 -- -- -- -- -- --
reverse stock split
Warrants earned -- -- -- 506 -- -- 506
Cumulative dividend Series A
Redeemable Preferred Stock -- -- -- -- -- (250) (250)
Discount accretion on
redeemable preferred stock -- -- -- -- -- (100) (100)
Net loss -- -- -- -- -- (5,163) (5,163)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 980,314 -- 47,857 -- (23) (24,983) 22,851
---------- ---------- ---------- ---------- ---------- ---------- ----------
Adjustment of capital stock
outstanding (9) -- -- -- -- -- --
Capital stock issued for services 167 -- -- -- -- -- --
Capital stock issued in private
placement 1,612,903 -- 2,946 -- -- -- 2,946
Amortization of restricted stock
awards -- -- -- -- 23 -- 23
Conversion of debentures into
capital stock 11,207,187 1 20,845 -- -- -- 20,846
Conversion of accrued interest
into capital stock 483,072 -- 898 -- -- -- 898
Interest expense attributable to
beneficial conversion -- -- 20,340 -- -- -- 20,340
Shell warrants issued -- -- 1,175 -- -- -- 1,175
Cumulative Dividend Series A
Redeemable Preferred Stock -- -- -- -- -- (250) (250)
Discount accretion on
redeemable preferred stock -- -- -- -- -- (100) (100)
Net loss -- -- -- -- -- (26,803) (26,803)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 14,283,634 1 94,061 -- -- (52,136) 41,926
---------- ---------- ---------- ---------- ---------- ---------- ----------
Capital stock issued for services 167 -- -- -- -- -- --
Cumulative dividend Series A -- -- -- -- -- (250) (250)
Redeemable Preferred Stock
Discount accretion on -- -- -- -- -- (100) (100)
redeemable preferred stock
Net loss -- -- -- -- -- (16,215) (16,215)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 14,283,801 $ 1 $ 94,061 $ -- $ -- $ (68,701) $ 25,361
========== ========== ========== ========== ========== ========== ==========
See accompanying notes.
F-7
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies and Organization
Organization, Principles of Consolidation, and Basis of Presentation
Chaparral Resources, Inc. ("Chaparral") was incorporated in the state of
Colorado on January 13, 1972, principally to engage in the exploration,
development and production of oil and gas properties. Chaparral focuses
substantially all of its efforts on the exploration and development of the
Karakuduk Field, an oilfield located in the Central Asian Republic of
Kazakhstan. In 1999, Chaparral reincorporated from Colorado to Delaware.
The consolidated financial statements include the accounts of Chaparral and its
100% owned subsidiaries, Central Asian Petroleum (Guernsey) Limited ("CAP-G"),
Road Runner Services Company ("RRSC"), Chaparral Acquisition Corporation
("CAC"), and Central Asian Petroleum, Inc. ("CAP-D"). Chaparral owns 80% of the
common stock of CAP-G directly and 20% indirectly through CAP-D. As discussed in
Note 7, Shell Capital Incorporated ("Shell Capital") owns a 40% interest in the
distributable profits of CAP-G. Hereinafter, Chaparral and its subsidiaries are
collectively referred to as "the Company." All significant intercompany
transactions have been eliminated.
CAP-G owns a 50% interest in Closed Type JSC Karakudukmunay ("KKM"), a
Kazakhstan joint stock company, which holds the rights for the exploration,
development and production of oil in the Karakuduk Field in Western Kazakhstan.
KKM is owned jointly by CAP-G (50%), KazakhOil JSC ("KazakhOil") (40%) and a
private Kazakhstan joint stock company (10%). KazakhOil, the national petroleum
company of Kazakhstan, is owned by the Government of the Republic of Kazakhstan.
The Company shares control of KKM through participation on KKM's Board of
Directors.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments purchased with an original
maturity of three months or less.
Investment in KKM and Other Oil and Gas Property Costs
The Company accounts for its investment in KKM using the equity method. The
Company follows the full cost method of accounting for oil and gas properties.
Accordingly, all costs associated with the acquisition, exploration, and
development of oil and gas reserves, including directly related overhead costs,
are capitalized.
All capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, are amortized on the unit-of-production method
using estimated proved reserves. Investments in unproved properties and major
development projects are not amortized until proved reserves associated with the
projects can be determined or until impairment occurs. If the results of an
assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized cost to be amortized.
F-8
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
In addition, the capitalized costs are subject to a "ceiling test," which
basically limits such costs to the aggregate of the "estimated present value,"
discounted at a 10-percent interest rate of the future net revenues from proved
reserves, based on current economic and operating conditions, plus the lower of
cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized costs
with no loss recognized.
Beginning in the fourth quarter of 1999, the Company began applying EITF 99-10,
Percentage Used to Determine the Amount of Equity Method Losses, to determine
equity method income and losses recognized from it's investment in KKM. The
Company's policy is to recognize equity losses based on its applicable ownership
level in KKM's common stock, advances, interest receivable, and other
investments to which the equity method losses are being applied. Future equity
income, if any, is recaptured by the Company to the extent disproportionate
equity method losses were recognized in prior periods. The Company recognized
approximately $683,000 in additional equity losses during 1999 due to the
application of EITF 99-10, all of which were recaptured as additional equity
income during 2000.
Revenue Recognition
Revenues and their related costs are recognized upon delivery of commercial
quantities of oil production produced from proved reserves, in accordance with
the accrual method of accounting. Losses, if any, are provided for in the period
in which the loss is determined to occur.
Depreciation of Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are recorded at cost and are depreciated using
the straight-line method over estimated useful lives, which range from three to
seven years.
Loss Per Common Share
Basic loss per common share is calculated by dividing net loss, after deducting
preferred stock dividends and discount on Redeemable Preferred Stock that is
accreted directly to the accumulated deficit, by the aggregate of the weighted
average shares outstanding during the period. Diluted loss per common share
considers the dilutive effect of the average number of common stock equivalents
that are outstanding during the period.
F-9
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
Loss Per Common Share (continued)
Diluted loss per share is not presented because the exercise of "in the money"
stock options and stock warrants, and the effect of the conversion of the
Company's Redeemable Preferred Stock, into the Company's common stock are
anti-dilutive. The Company had 32,367 "in the money" stock warrants convertible
into the Company's common stock for each of the three years ended December 31,
2001.
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. This statement, as amended by SFAS No. 137 and 138, is
effective for years beginning after June 15, 2000. The Company adopted SFAS 133
on January 1, 2001.
As a result of adoption of SFAS 133, the Company recognizes all derivative
financial instruments in the consolidated financial statements at fair value
regardless of the purpose or intent for holding the instrument. Changes in the
fair value of derivative financial instruments are recognized periodically in
income or in shareholders' equity as a component of comprehensive income
depending on whether the derivative financial instrument qualifies for hedge
accounting, and if so, whether it qualifies as a fair value hedge or cash flow
hedge. Generally, changes in fair values of derivatives accounted for as fair
value hedges are recorded in income along with the portions of the changes in
the fair values of the hedged items that relate to the hedged risks. Changes in
fair values of derivatives accounted for as cash flow hedges, to the extent they
are effective as hedges, are recorded in other comprehensive income net of
deferred taxes. Changes in fair values of derivatives not qualifying as hedges
are reported in income. The Company's put contracts entered into as part of the
loan agreement (the "Loan") with Shell Capital, do not qualify for hedge
accounting under SFAS 133. Therefore, effective January 1, 2001, the Company
adjusted the carrying value of the contracts to their fair value of $999,000,
recognizing a loss from the cumulative effect of adoption of approximately $2.52
million. See Note 5.
During 2001, the FASB issued the following pronouncements, which have potential
future accounting implications for the Company:
SFAS 141, Accounting for Business Combinations, requires the use of the purchase
method of accounting for all business combinations and provides new criteria to
determine whether an acquired intangible asset should be recognized. SFAS 141
applies to all business combinations initiated after June 30, 2001 and to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001.
SFAS 142, Accounting for Goodwill and Intangible Assets, requires that goodwill
as well as other intangible assets with indefinite lives be tested annually for
impairment. SFAS 142 is effective for fiscal years beginning after December 15,
2001.
SFAS 143, Accounting for Asset Retirement Obligations, requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred and a corresponding increase in the carrying
amount of the related long-lived asset. SFAS 143 is effective for fiscal years
beginning after June 15, 2002.
SFAS 141 and 142 will not apply to the Company unless it enters into a future
business combination. The Company is currently assessing the impact of SFAS 143
on its financial condition and results of operations and is unsure if the effect
of the future adoption of SFAS 143, if any, will be material to the Company's
financial results.
F-10
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value of Financial Instruments
All of the Company's financial instruments, including cash and cash equivalents,
accounts receivable, notes receivable, and notes payable, have fair values which
approximate their recorded values as they are either short-term in nature or
carry interest rates which approximate market rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Risks and Uncertainties
The ability of KKM to realize the carrying value of its assets is dependent on
being able to develop, transport and market hydrocarbons. Currently, exports
from the Republic of Kazakhstan are restricted since they are dependent on
limited transport routes and, in particular, access to the Russian pipeline
system. Domestic markets in the Republic of Kazakhstan do not permit world
market prices to be obtained. Management believes, however, that over the life
of the project, transportation restrictions will be alleviated and prices will
be achievable for hydrocarbons extracted to allow full recovery of the carrying
value of its assets.
2. Going Concern
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has incurred recurring
operating losses in previous years, has a working capital deficiency as of
December 31, 2001, and there are uncertainties relating to the Company and KKM's
ability to meet projected cash flow requirements through 2002. In addition,
Shell Capital Services Limited, acting as facility agent, has notified the
Company that it is in default of the Loan and has issued a notice of
acceleration demanding that the Company immediately repay the outstanding
principal balance, plus all interest and other fees, payable under the Loan.
Shell Capital Services Limited has also initiated legal proceedings against both
Chaparral and CAP-G, which both Chaparral and CAP-G are defending. If the
Company is unable to defend against the legal actions of Shell Capital Services
Limited or raise the capital necessary to refinance the Loan, the results will
most likely be the loss of the Company's investment in the Karakuduk Field. See
Note 7 regarding the status of the Loan.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
F-11
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Going Concern (continued)
The Company is attempting to alleviate these issues through the restructuring of
the Company and refinancing of the Loan with Shell Capital. In April 2002, the
Company executed a letter of intent with Central Asian Industrial Holdings N.V.
("CAIH") regarding a possible $12 million capital investment into the Company
and an amount of debt that is to be determined, in exchange for approximately
60% of the Company's common stock. The transaction is subject to a number of
conditions precedent, including the approval of Shell Capital, the negotiation
and execution of a definitive agreement with CAIH, and the approval of the
boards of directors and shareholders of both companies. The Company plans to use
the capital infusion and debt from CAIH to restructure the Loan. The terms of
the proposed restructuring would include the cancellation of the Shell Warrant,
CAP-G's re-acquisition of the 40% net profits interest held by Shell Capital,
waiver of all outstanding defaults including project completion, and adjusting
the interest rate on the restructured Loan to an undetermined rate below the
current interest rate being charged by Shell Capital. The Company and CAP-G will
continue to contest the legal actions of Shell Capital Services Limited unless
and until a transaction with CAIH can be consummated.
3. Notes Receivable
In September 1998, the Company advanced $1.01 million to a third-party drilling
contractor, Challenger Oil Services, PLC ("Challenger") to ready a drilling rig
for use by KKM in the Karakuduk Field. In April 1999, the owner of the drilling
rig operated by Challenger, Oil & Gas Exploration Company Cracow, Ltd.
("OGECC"), terminated its contract with Challenger. As a result of the
termination of the contract between Challenger and OGECC, KKM terminated the
drilling contract between KKM and Challenger, and arbitration proceedings were
instituted in accordance with the terms of the drilling contract.
In February 2000, the Company, KKM, Challenger, and OGECC reached a mutual
settlement and release (the "Settlement") for all parties involved. The
Settlement required KKM to pay outstanding accrued liabilities to Challenger for
prior work performed totaling $1.34 million. The Company also agreed to fully
discharge the note receivable from Challenger to the Company. Due to the
Settlement, the Company fully impaired the note, plus accrued interest of
$51,000, during the fourth quarter of 1999.
4. Investment in KKM and Other Oil and Gas Property Costs
The Company's oil and gas properties and investments include investments in
KKM's common stock, advances to KKM, acquisition costs for CAP-G, and other
capitalizable costs allowed under the full cost method of accounting.
Accumulated depletion has been netted against the gross capitalized costs, along
with accumulated equity income or loss from investment.
The Company is currently depleting costs associated with its acquisition costs
and other capitalizable costs under the units-of-production method. The rate
used for depletion reflects the ratio of KKM's current period production divided
by KKM's total proved reserves. These amounts represent the Company's costs to
acquire the right to develop the oil and gas reserves underlying the Company's
equity interest in KKM and, accordingly, are depleted as the reserves are
produced.
Advances to and interest due from KKM are to be recovered through payments
resulting from KKM's sale of future crude oil production. KKM's agreement with
the government of the Republic of Kazakhstan provides for quarterly repayments
equal to 65% of gross revenues, net of government royalties. The Company, at its
own discretion, may defer receipt of quarterly repayments to maintain working
capital within KKM. During 2001, the Company received $5.8 million in investment
recovery from KKM.
KKM began commercial production of its crude oil reserves in November 1999, upon
the Company's execution of the Loan with Shell Capital. Consequently, the
Company recorded it's equity interest in KKM's proved reserves and began
recording depletion expense on it's depletable acquisition costs in 1999. The
Company recognized $730,000, $403,000, and $9,000 in depletion expense for the
years ended December 31, 2001, 2000, and 1999, respectively.
F-12
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Investment in KKM and Other Oil and Gas Property Costs (Continued)
Costs capitalized to Oil and Gas Properties and Investments consist of:
December 31,
2001 2000
-------- --------
Investment in KKM and Other Oil and Gas Property Costs:
Investments in KKM common stock $ 100 $ 100
Advances to and interest due from KKM 58,674 55,292
Acquisition costs 6,244 10,613
Other capitalizable costs 1,097 1,092
-------- --------
Total gross oil and gas investments 66,115 67,097
-------- --------
Equity income (loss) 2,833 (1,783)
Accumulated depletion (1,142) (412)
-------- --------
Total oil and gas properties and investment $ 67,806 $ 64,902
======== ========
The condensed financial statements of KKM are as follows:
December 31,
2001 2000
-------- --------
Condensed balance sheet
Current assets $ 4,331 $ 5,237
Non-current assets (primarily oil and gas properties,
full cost method) 67,117 52,773
Current liabilities 15,589 9,721
Non-current liabilities
Loan payable to related party 58,438 58,605
Other non-current liabilities 1,496 86
Charter capital 200 200
Accumulated deficit (4,275) (10,602)
Condensed income statement
Revenues $ 36,575 $ 16,968
Other costs and expenses (30,248) (15,563)
-------- --------
Net income $ 6,327 $ 1,405
======== ========
F-13
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Hedge Agreement
As a condition of the Loan, the Company paid $4 million for put contracts to
sell approximately 1.56 million barrels of North Sea Brent crude (the "Hedge
Agreement") to hedge price risk of future sales of oil production from the
Karakuduk Field. The exercise prices of the various put contracts in the Hedge
Agreement range from $22.35 to $17.25 per barrel, with monthly expiration dates
beginning in October 2000 and ending in December 2002. The contracts are evenly
spread between October 2000 to December 2001 (62,750 barrels per month) and
between January 2002 to December 2002 (51,750 barrels per month). During 2000,
the Company amortized the Hedge Agreement ratably over the period the underlying
contracts expired, recognizing $482,000 in hedging losses as of December 31,
2000.
As discussed in Note 1, the Company adopted SFAS 133 on January 1, 2001, which
requires derivative financial instruments to be recorded at their fair value.
Accordingly, the Company recognized a $2.52 million loss from the cumulative
effect of change in accounting principle upon adoption. In addition, the Company
recognized $237,000 in losses for the twelve months ended December 31, 2001 to
record the Hedge Agreement at its fair value as of that date in accordance with
SFAS 133. As of December 31, 2001 the market value of the Hedge Agreement was
$762,000.
6. Other Assets
In March 2000, the Company paid $750,000 to Shell Capital for a beneficial
interest in Shell Capital's policy for transportation risk insurance, covering
certain circumstances whereby KKM would be unable to export crude oil production
outside of the Republic of Kazakhstan through the existing pipeline routes
currently available. In the event coverage under Shell Capital's policy is
triggered, proceeds from the policy would go to the benefit of the Company for
use in making principal and interest payments required under the Loan. The
Company recognized $580,000 and $170,000 in amortization relating to the
transportation risk insurance premium for the periods ended December 31, 2001
and 2000, respectively. The Company fully recognized the unamortized balance in
2001 due to the default status of the Loan and the Company's receipt of an
acceleration notice for the Loan from Shell Capital in January 2002. See Note 7
for further discussion regarding the Loan.
7. Shell Capital Loan
The Company's Loan with Shell Capital consists of the following:
December 31,
2001 2000
-------- --------
Principal drawdowns under the Loan $ 24,000 $ 21,500
Principal drawdowns under the Bridge Loan 3,150 --
Interest expense capitalized as principal 7,752 3,480
Unamortized debt issuance costs -- (3,102)
-------- --------
Total Shell Capital Loan $ 34,902 $ 21,878
======== ========
Shell Capital Loan, current portion $ 34,902 $ 900
======== ========
Shell Capital Loan, long-term portion $ -- $ 20,978
======== ========
F-14
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Shell Capital Loan (continued)
Accrued interest payable to Shell Capital as of December 31, 2001 is $1.75
million. Interest expense for the twelve months ended December 31, 2001 totaled
$10.01 million, including $6.91 million of interest on outstanding principal and
$3.10 million in discount amortization. Interest expense for the twelve months
ended December 31, 2000 totaled $5.29 million, including $909,000 in discount
amortization.
In November 1999, the Company entered into the Loan with Shell Capital, to
provide up to $24 million of financing to partially fund the development of the
Karakuduk Field. CAP-D, CAP-G, and KKM signed the Loan as co-obligors, assuming
certain obligations to Shell Capital and to Chaparral, as the borrower. The
Company had borrowed the entire $24 million available under the Loan as of May
2001, including $21.5 million borrowed during the year ended December 31, 2000.
The Loan accrues interest at an annual rate of the London Interbank Offered Rate
("LIBOR") plus 17.75%, compounding quarterly prior to project completion, which
consists of various financial and technical milestones in the development of the
Karakuduk Field ("Project Completion"). Prior to Project Completion, an interest
amount, equal to annual rate of LIBOR plus .50%, is payable quarterly to Shell
Capital. The annual interest rate is reduced to LIBOR plus 12.75% after Project
Completion. The remaining unpaid interest is added to the Loan balance at the
end of each quarter. After the deadline for Project Completion, all quarterly
interest on the outstanding Loan is fully due and payable by the Company at the
end of each calendar quarter.
In May 2001, the Loan was amended to provide the Company with up to $8.0 million
in uncommitted working capital, which could be drawn down in increments of
$250,000 through August 31, 2001, at the sole discretion of Shell Capital (the
"Bridge Loan"). The Company borrowed a total of $3.15 million under the Bridge
Loan through August 31, 2001. The principal borrowed under the Bridge Loan
accrues interest at LIBOR plus 17.75% and is subject to an arrangement fee of
2%. Interest payments in the amount of LIBOR plus .50% are due at the end of
each month the Bridge Loan is outstanding. All unpaid interest is added to the
outstanding principal balance on each repayment date. The outstanding principal
of the Bridge Loan, plus all accrued interest, was due on or before September
30, 2001.
The Company incurred $4.01 million in debt issuance costs related to the Loan,
comprised of up-front fees paid to Shell Capital, legal fees of Shell Capital
and the Company, the value of the Shell Warrant on the date of grant, and
miscellaneous financing fees and set-up charges. The Company recorded the debt
issuance costs as a discount to the Loan, amortizable over the life of the Loan.
As an incentive for the Company to repay the Bridge Loan or refinance the entire
Loan (including the Bridge Loan), Chaparral's board of directors approved
CAP-G's issuance of Series A Preferred shares to Shell Capital. Per the terms of
the amendment, if the Company failed to repay or refinance the Bridge Loan on or
before September 30, 2001, the Series A Preferred shares automatically convert
and entitle Shell Capital to 40% of the distributable profits of CAP-G.
The Company did not reach Project Completion on or before September 30, 2001.
The Company had previously requested that Shell Capital waive or revise the
Project Completion definition due to the Company's belief that the production
levels and certain technical requirements of Project Completion were
unattainable and not necessary or prudent in the time frame specified under the
Loan. Shell Capital, however, refused to waive or revise the Project Completion
definition.
F-15
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Shell Capital Loan (continued)
In October 2001, the Company received a notice of default from Shell Capital,
stipulating that the following events of default had occurred under the Loan:
failure to pay outstanding principal and interest due on the Bridge Loan
totaling $3.34 million on or before September 30, 2001, failure to pay interest
due on the Loan totaling approximately $189,000 on September 28, 2001, failure
to achieve Project Completion by September 30, 2001, failure to settle certain
accounts payable within 90 days, KKM's failure to obtain Shell Capital's
approval prior to entering a short-term debt arrangement, and failure to
maintain listing of the Company's common stock on one of the major stock
exchanges (i.e. Nasdaq, NYSE, or AMEX). The Company subsequently repaid the
default interest as of September 30, 2001 on both the Loan and the Bridge Loan,
and KKM repaid the short-term indebtedness obtained without Shell Capital's
approval.
As a result of the Company's failure to timely repay the Bridge Loan, Shell
Capital's Series A Preferred shares in CAP-G converted as of October 1, 2001,
entitling Shell Capital to 40% of the distributable profits of CAP-G. The
Company recorded an additional loan discount of $4.37 million, equal to 40% of
the Company's unamortized costs of acquiring its equity interest in CAP-G, which
is estimated to approximate the fair value of the net profits interest
transferred to Shell Capital. The discount was fully recognized as interest
expense on September 30, 2001, the maturity date of the Bridge Loan. The Company
did not record an expense during 2001 related to Shell Capital's 40% net profits
interest, as CAP-G did not have any distributable net profits as of December 31,
2001.
In January 2002, the Company received a second notice of events of default under
the Loan, along with a notice accelerating the payment of $37.29 million in
outstanding principal, interest, and other fees and expenses due under the
Company's existing loans with Shell Capital. Shell Capital Services Limited, as
facility agent, also initiated legal proceedings against the Company in the
United Kingdom and against CAP-G in the Isle of Guernsey to enforce Shell
Capital's rights under the Loan. Chaparral and CAP-G are contesting the actions
of Shell Capital in their respective jurisdictions.
The second default notice stipulated various events of default in addition to
those disclosed above, including the Company's failure to pay approximately
$1.68 million in interest and $1.0 million in principal due on the Loan as of
December 31, 2001, failure to pay a $24,000 agency fee due to Shell Capital
Services Limited on January 1, 2002, the Company's failure to pay franchise
taxes due on or before December 1, 2001, and KKM's failure to timely pay local
salaries due in Kazakhstan. The franchise taxes and KKM local salaries were
subsequently paid.
The acceleration notice demands that the Company immediately pay the entire
outstanding principal amount plus all interest and other fees payable under the
Loan, or Shell Capital Services Limited, as facility agent, will pursue
available remedies under the Loan. Such remedies include taking ownership of the
Company's investment in the Karakuduk Field. Furthermore, Shell Capital has
applied the default interest rate allowed under the Loan of LIBOR plus 19.75%,
compounded daily, against the principal and interest due for the Bridge Loan as
of September 30, 2001, and the principal and interest payments due on the Loan
as of January 1, 2002. The remaining balance of the Loan accrued interest at
LIBOR plus 17.75% through January 14, 2002 and began accruing interest at the
default rate of LIBOR plus 19.75%, compounded on a daily basis, thereafter.
Due to the outstanding notices of default and acceleration notice from Shell
Capital, the Company has recorded the entire outstanding principal balance of
the Loan as a current liability in the Company's financial statements for the
year ended December 31, 2001. Furthermore, the Company expensed the unamortized
balance of debt issuance costs relating to the Loan, totaling $2.42 million,
during the fourth quarter of 2001.
F-16
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Shell Capital Loan (continued)
In April 2002, the Company executed a letter of intent with CAIH regarding a
possible $12 million capital investment into the Company and an amount of debt
that is to be determined, in exchange for approximately 60% of the Company's
common stock. The transaction is subject to a number of conditions precedent,
including the approval of Shell Capital, the negotiation and execution of a
definitive agreement with CAIH, and the approval of the boards of directors and
shareholders of both companies. The Company plans to use the capital infusion
and debt from CAIH to restructure the Loan. The terms of the proposed
restructuring would include the cancellation of the Shell Warrant, CAP-G's
re-acquisition of the 40% net profits interest held by Shell Capital, waiver of
all outstanding defaults including Project Completion, and adjusting the
interest rate on the restructured Loan to an undetermined rate below the current
interest rate being charged by Shell Capital. The Company and CAP-G are
contesting the legal actions of Shell Capital Services Limited and will continue
to do so unless and until such time as a transaction with CAIH can be
consummated.
8. Notes Payable
In September 2000, the Company converted 8% Non-negotiable Convertible
Subordinated Promissory Notes (the "Notes") with an aggregate principal amount
of $20.85 million, plus accrued interest of $898,000, into 11,690,259 shares of
the Company's common stock at a conversion price of $1.86 per share. Prior to
conversion, the Notes carried an unamortized discount of $281,000. Originally,
the conversion provision of the Notes was subject to shareholder approval, but
the Company's board of directors authorized management to obtain approval from
the holders of the Notes to amend the terms of the Notes to allow immediate
conversion into the Company's common stock. The Company obtained approval from
such holders and the Notes were converted on September 21, 2000. The board of
directors decision to amend the terms of the Notes to allow immediate conversion
was based upon several factors, including funding the working capital
requirements of the Company and to comply with the requirements of the Loan.
The Notes consisted of $10.04 million of the Company's Notes issued during the
fourth quarter of 1999 and $10.81 million issued during 2000, including Notes
totaling $3.3 million in January and February, $3.0 million in August, and $4.51
million in September 2000, respectively. The Notes were issued to various
related parties and other non-affiliated investors. Notes issued to related
parties totaled $14.69 million, including $9.83 million to Allen & Company,
Incorporated ("Allen"), $4.05 million to Whittier Ventures, LLC ("Whittier),
$662,000 to Mr. John McMilllian, the Co-Chairman and Chief Executive Officer of
the Company, and $150,000 to a relative of Mr. James Jeffs, the Co-Chairman of
the Company.
In exchange for the Notes, the Company received $15.56 million in cash and
canceled $5.29 million in promissory notes issued previously in 1999, plus
accrued interest thereon, to Allen ($3.83 million), Whittier ($1.05 million),
and Mr. McMillian ($412,000).
The conversion feature of the Notes was a "beneficial conversion feature" as
addressed in EITF 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, whereby a
portion of the proceeds received from the Notes is allocable to the conversion
feature contained therein. The value assigned to the conversion feature is
determined as the difference between the market price of the Company's common
stock on the date of issuance and the conversion price, multiplied by the number
of shares to be received upon conversion, which was approximately $120.0
million. As the conversion price contained in the Notes was substantially below
the market price, the value under the above formula significantly exceeds the
net proceeds from the Notes. Under EITF 98-5, the discount assigned to the
conversion feature is limited to the total proceeds allocated to the convertible
instrument. Accordingly, upon conversion of the Notes, the Company recorded
additional interest expense and additional paid in capital equal to $20.34
million, the face amount of the Notes net of original discount.
The $10.04 million in Notes outstanding as of December 31, 1999 were recorded
net of a $464,000 unamortized discount.
F-17
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Notes Payable (continued)
In August 2001, the Company's common stock was delisted from the Nasdaq SmallCap
Market for failure to comply with Nasdaq Marketplace Rules 4350(i)(1)(A),
4350(i)(1)(B) and 4350(i)(1)(D)(ii), which required the Company to obtain
stockholder approval prior to the conversion of its Notes into 11,690,259 shares
of its common stock in September 2000 and the issuance of 1,612,903 shares of
common stock in October 2000. Nasdaq also cited a violation of its annual
meeting requirement. The Nasdaq Listing Qualifications Panel did not, however,
cite any public interest concerns as a basis for its determination. The
Company's common stock is being traded on the OTC Bulletin Board.
9. Common Stock
General
1989 Stock Warrant Plan
During 1989, the Board of Directors approved a stock warrant plan for key
employees and directors. The Company reserved 19,583 shares of its common stock
for issuance under the plan. The warrants must be granted and exercised within a
10-year period ending April 30, 1999. Immediately following approval of the plan
by the Board of Directors, warrants for 19,583 shares were granted with an
exercise price of $16.80 per share. Warrants for 1,667, 3,750, and 1,667 shares
were exercised for values of $28,000, $63,000, and $28,000 during 1997, 1996,
and 1995, respectively. The remaining 12,500 warrants expired on April 30, 1999.
1998 Incentive and Non-statutory Stock Option Plan
On June 26, 1998, the stockholders approved the 1998 Incentive and Non-statutory
Stock Option Plan (the "1998 Plan"), pursuant to which up to 50,000 options to
acquire the Company's common stock may be granted to officers, directors,
employees, or consultants of the Company and its subsidiaries. The stock options
granted under the 1998 Plan may be either incentive stock options or
nonstatutory stock options. The 1998 Plan has an effective term of ten years,
commencing on May 20, 1998. The Company has not granted any options under the
1998 Plan as of December 31, 2001.
2001 Stock Incentive Plan
In June 2001, the Company's stockholders approved the 2001 Stock Incentive Plan,
which sets aside a total of 2.14 million shares of the Company's common stock
for issuance to the Company's officers, directors, employees, and consultants.
The Company has not made any grants under the 2001 Stock Incentive Plan as of
December 31, 2001.
Non-Qualified Stock Options
During 1999, stock options to purchase 542 shares of the Company's common stock
granted to various employees and consultants of the Company expired. The expired
options had exercise prices ranging between $60 and $90 per share.
Common Stock Offerings and Common Stock Warrant Issuances
During late 1996, the Company issued notes totaling $1.85 million to various
investors. In connection with the notes, the Company issued a total of 7,708
warrants to purchase shares of the Company's common stock at an exercise price
of $15 per share. The Company issued 5,626 warrants upon issuance of the notes.
An additional 2,082 warrants were issued on May 31, 1997, when the notes were
not repaid on or before such date. The 5,625 warrants issued in 1996 expired
during 1999. The remaining 2,082 warrants expired on May 31, 2000.
F-18
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Common Stock (Continued)
During February 1997, the Company entered into a severance agreement with Paul
V. Hoovler, a former Chief Executive Officer and President of the Company,
pursuant to which Mr. Hoovler received warrants to purchase 1,667 shares of the
Company's common stock at an exercise price of $51 per share and warrants to
purchase 1,667 shares of the Company's common stock at an exercise price of $75
per share. The 3,334 warrants expired on February 2001.
In January 1998, the Company, granted 500 shares of the Company's common stock
to an employee of the Company, which 500 shares vested ratably on January 30,
1999, 2000, and 2001, respectively. The Company recognized $45,000 as
compensation expense, amortized over the vesting period of the grants.
On October 30, 1998, the Company issued warrants to purchase 3,334 shares of the
Company's common stock at an exercise price of $60, exercisable through January
02, 1999, to settle the lawsuit filed against the Company by Heartland, Inc. of
Wichita and Collins & McIlhenny, Inc. on November 14, 1997. The Company recorded
legal settlement expense of $34,000, equal to the fair market value of the
warrants issued on the date of grant. On January 3, 1999, the 3,334 warrants
expired.
Pursuant to the terms of the employment agreement between the Company and Dr.
Jack A. Krug, the former President and Chief Operating Officer of the Company,
Dr. Krug received 3,333 shares on January 15, 1999. Effective as of September
30, 1999, the Company issued Dr. Krug an additional 2,361 shares of the
Company's common stock pursuant to his resignation from the Company. The Company
recorded the grants at their intrinsic value of $246,000.
The conversion of the Company's Notes in September 2000 resulted in the issuance
of 11,690,259 shares of the Company's common stock (see Note 8), a portion of
which were issued to certain affiliates of the Company who were holders of the
Notes. Affiliates receiving shares as a result of the conversion include Allen
(5,561,166 shares), Whittier (2,255,004 shares), Mr. McMillian (378,364 shares),
and a relative of Mr. Jeffs (85,140 shares).
In October 2000, the Company issued 1,612,903 shares of the Company's common
stock to Capco Resources, Ltd. ("Capco") in exchange for $3.0 million, or $1.86
per share. Shell Capital approved the transaction. Capco Energy, Inc., an
affiliate of Capco, was also a holder of two of the Company's Notes with an
aggregate principal amount of $750,000, which were converted, along with accrued
interest thereon, into 427,113 shares of the Company's common stock in September
2000. The Company recorded the stock issuance net of issuance costs of $54,000,
or $2.95 million.
In connection with finalizing the Loan, the Company issued to Shell Capital a
warrant to purchase up to 15% of the Company's outstanding common stock (the
"Shell Warrant"), subject to certain anti-dilution provisions. The Shell Warrant
is exercisable for a period of 5 years beginning on the earlier of Project
Completion or September 30, 2001. Furthermore, the Shell Warrant is
non-transferable and contains certain registration rights. On the date of grant,
the Shell Warrant represented 147,072 shares of the Company's common stock at an
exercise price of $15.45 per share. The fair market value of the Shell Warrant
on the date of grant, $1.18 million, was recorded as a discount of the Loan,
amortizable as interest expense over the life of the Loan. The fair market value
of the Shell Warrant was estimated as of February 14, 2000, the date of initial
drawdown under the Loan, using the Black-Scholes option pricing model with the
following weighted average assumptions: risk free interest rate of 6.61%,
dividend yield of 0%, volatility factors of the expected market price of the
Company's common stock of 1.27, and a weighted average life expectancy of the
warrants of 3.5 years. After consideration of the conversion of the Company's
Notes on September 21, 2001 and the issuance of the Company's common stock to
Capco, both dilutive events, the Shell Warrant represents 1,785,455 shares of
the Company's common stock at an exercise price of $9.79 per share.
F-19
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Common Stock (Continued)
SFAS 123 Disclosure. SFAS 123 requires that pro forma information regarding net
income and earnings per share be determined as if the Company had accounted for
its employee stock options under the fair value method as defined in SFAS 123.
The fair value for the options issued during is estimated at the date of grant
using the Black-Scholes option pricing model by using weighted average
assumptions, volatility factors of the expected market price of the Company's
common stock, and the weighted average life expectancy of the options. The
Company did not issue any options during 1999, 2000, or 2001.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows:
Year Ended December 31,
2001 2000 1999
---------------------------------------
Net loss under APB 25 $(16,215) $(26,803) $ (5,163)
Effect of SFAS 123 -- -- (108)
-------- -------- --------
Pro forma net loss $(16,215) $(26,803) $ (5,271)
======== ======== ========
Pro forma basic and diluted
Earnings per share $ (1.16) $ (6.01) $ (5.75)
F-20
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Common Stock (Continued)
A summary of the Company's stock option activity and related information for the
periods ended follows:
Shares Weighted Weighted
Under Average Exercise Average
Option Price Fair Value
------------------------------------------------------------------------
Unexercised options outstanding -
December 31, 1998 58,058 $67.80 -
Options Cancelled (542) $83.80 -
------------------------------------------------------------------------
Unexercised options outstanding -
December 31, 1999 57,516 $67.73 -
Options Cancelled -
------------------------------------------------------------------------
Unexercised options outstanding -
December 31, 2000 57,516 $67.73 -
Options Cancelled -
------------------------------------------------------------------------
Unexercised options outstanding -
December 31, 2001 57,516 $67.73 -
Price range $123.00-$145.80
(Average life of 1.15 years) 1,342 $132.16
Price range $80.40-$90.00
(Average life of 0.69 years) 26,016 $89.82
Price range $43.20-$60.00
(Average life of 0.68 years) 30,158 $45.81
Exercisable options
December 31, 1999 57,309 $67.64
December 31, 2000 57,516 $67.73
December 31, 2001 57,516 $67.73
F-21
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Common Stock (Continued)
The following table summarizes all common stock purchase warrant activity:
Number of Exercise
Stock Price
Warrants Range
----------------------- --------------------
Outstanding, December 31, 1998 75,908 $ 0.0006 - $210
Expired (21,459) $ 15 - $60
----------------------- --------------------
Outstanding, December 31, 1999 54,449 $ 0.0006 - $210
Granted 1,785,455 $ 9.79
Expired (2,082) $ 15
----------------------- --------------------
Outstanding, December 31, 2000 1,837,822 $ 0.0006 - $210
Expired (3,334) $ 51 - $75
----------------------- --------------------
Outstanding, December 31, 2001 1,834,488 $ 0.0006 - $210
======================= ====================
The following table summarizes the price ranges of all common stock purchase
warrants outstanding as of December 31, 2001:
Number of Warrants Exercise Price
----------------------------------------------
16,667 $ 210.00
1,785,455 $ 9.79
15,333 $ 0.60
17,033 $ 0.0006
----------------------------------------------
1,834,488 $0.0006 - $210
10. Redeemable Preferred Stock and Related Common Stock Warrants
In November 1997, the Company entered into a Subscription Agreement
("Agreement") with an unaffiliated investor to purchase 225,000 shares of the
Company's designated Series A, B, and C Redeemable Preferred Stock, for $100 per
share. As of December 31, 1997, the investor had purchased 50,000 shares of the
Company's Series A Redeemable Preferred Stock for $5 million. In March 1998, the
Company and the investor mutually released each other from any further
obligations. The Company is not required to issue any additional preferred stock
under the Agreement and the investor has no obligation to provide funds to the
Company in exchange for such stock.
The Series A Redeemable Preferred Stock is convertible and accrues an annual,
cumulative dividend of $5 per share. The dividends are payable semi-annually on
May 31 and November 30, as declared by the Company's Board of Directors. As of
December 31, 2001, dividends in arrears relating to the Series A Redeemable
Preferred Stock were $1 million. The Company has increased the carrying value of
the Series A Redeemable Preferred Stock by $1 million by accreting $250,000 in
2001, 2000, 1999, and 1998, respectively, directly to accumulated deficit.
F-22
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Redeemable Preferred Stock and Related Common Stock Warrants (Continued)
The number of shares of common stock issuable upon conversion of each share of
Series A Redeemable Preferred Stock is determined by dividing $100 by the
conversion price of the preferred stock. The conversion price is subject to
recalculation if, and when, the Company issues additional common stock or common
stock equivalents to obtain additional equity or debt financing. The Company has
issued common stock and common stock warrants in both equity and debt financing
transactions. Adjusted for these transactions, the conversion price as of
December 31, 2001 was $10.55 per share (rounded), equivalent to 9.48 shares of
common stock for each share of Series A Redeemable Preferred Stock.
The Series A Redeemable Preferred Stock has voting privileges identical to the
Company's common stock. The total number of votes allowed to the holders of the
Series A Redeemable Preferred Stock is equal to the number of shares of common
stock the Series A Redeemable Preferred Stock could be converted into on the
specific date of record. As of December 31, 2001, the 50,000 shares of Series A
Redeemable Preferred Stock were convertible into 473,890 shares of common stock.
The Series A Redeemable Preferred Stock has preferential liquidation rights over
the Company's common stock. In the event of liquidation or dissolution of the
Company, any assets available for distribution to the Company's stockholders
will first be distributed to the holders of the Series A Redeemable Preferred
Stock up to each redeemable preferred share's liquidation value. The liquidation
value equals $100 per share, plus all unpaid dividends in arrears.
The Series A Redeemable Preferred Stock is subject to mandatory redemptions,
beginning on November 30, 2002. As of December 31, 2001, the schedule of
redemptions of the stated value, plus any unpaid dividends, is as follows:
Year Amount
2002 $2,000,000
2003 $2,000,000
2004 $2,000,000
-----------
Total $6,000,000
===========
Allen, a significant stockholder of the Company, acted as placement agent in
connection with the Agreement. Allen elected to receive its fees in the form of
warrants to purchase 15,000 shares of the Company's common stock that were all
originally exercisable through November 25, 2002, at an exercise price of $0.60
per share. The 15,000 warrants were recorded at their fair value of $2.27
million. Out of the 15,000 warrants issued to Allen, 3,333 directly relate to
the issuance of 50,000 shares of the Series A Redeemable Preferred Stock. The
3,333 warrants were recorded as issuance costs of $500,000, reducing the $5.0
million proceeds from Series A Redeemable Preferred Stock. The remaining 11,667
warrants, discussed below, were recorded as a stock subscription receivable. The
basis difference of $500,000 upon issuance of the Series A Redeemable Preferred
Stock is being accreted directly to accumulated deficit for the period through
the redemption date. The Company increased the carrying value of the Series A
Redeemable Preferred Stock by $100,000 in 2001, 2000, 1999, and 1998,
respectively, to reflect the accretion of the issuance costs.
F-23
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Redeemable Preferred Stock and Related Common Stock Warrants (Continued)
In an agreement dated March 31, 1998, the Company agreed to allow Allen to
retain, subject to certain performance criteria, the warrants to purchase 11,667
shares of the Company's common stock related to the subscriptions not received
under the original terms of the Agreement. Accordingly, the unearned warrants
held by Allen were fully restricted from exercise unless Allen assisted the
Company in raising $17.5 million in additional capital or alternative financing
on acceptable terms to the Company on or before November 25, 1999. For each
$1,500 of additional capital raised, a warrant to purchase one share of common
stock is deemed earned by Allen.
During 1998, Allen assisted the Company in raising an additional $12.5 million
in equity capital. As a result, 8,334 of the 11,667 warrants became unrestricted
and $1.26 million was transferred from stock subscription receivable to
additional paid-in-capital. During 1999, Allen contributed an additional $5.83
million in exchange for the Company's Notes, earning the final 3,333 in
restricted warrants. The Company recognized the remaining stock subscription
receivable of $506,000 as a discount to the Company's Notes issued in 1999.
If the Company completes the transaction with CAIH, it is anticipated that the
Company will fully redeem the Series A Preferred Stock currently outstanding.
11. Income Taxes
The following is a summary of the provision for income taxes:
Year Ended December 31,
2001 2000 1999
----------------------------------
Income tax benefit computed
at federal statutory rate $(5,675) $(9,381) $(1,807)
Non-deductible interest associated
with convertible notes -- 7,551 --
Expiration of NOL carryforwards 663 518 330
Other 7 90 112
Change in asset valuation
allowance 5,005 1,222 1,365
------- ------- -------
Income taxes $ -- $ -- $ --
======= ======= =======
F-24
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Income Taxes (continued)
The components of the Company's deferred tax assets and liabilities are as
follows:
Year Ended December 31,
------------------------
2001 2000
------------------------
Deferred tax assets:
Oil and gas assets $ 400 $ 141
Amortization of derivatives 1,133 --
Compensation and accrued expenses 786 --
Capital loss on transfer of net profits interest 1,529 --
Net operating loss carryforwards 10,550 9,253
Valuation allowance (14,398) (9,394)
-------- --------
Deferred tax assets $ -- $ --
======== ========
As of December 31, 2001, the Company has estimated tax loss carryforwards of
$29.5 million of which $27.35 million are domestic losses for federal income tax
purposes and $2.15 million are foreign losses related to the Company's
investment in KKM. These carryforwards will expire at various times between 2002
and 2020. The Company also has unused statutory depletion carryforwards, which
have an unlimited duration, of approximately $639,000. The 2000 difference
between the income tax benefit calculation of the statutory and effective rate
is primarily due to the disallowance of interest expense associated with the
Company's Notes converted in September 2000, including a $20.34 million interest
charge due to the application of EITF 98-5. Other permanent book/tax differences
for the years 2001, 2000, and 1999 include expiration of net operating loss
carryforwards, adjustments for stock compensation and disallowance of meals and
entertainment expenses.
The Company has cumulative book losses of $68.70 million. Cumulative book/tax
differences of approximately $39.2 million primarily relates to the disallowance
of $21.58 million in interest expense incurred on the Company's Notes, $1.4
million in accrued dividends and discount accretion of the Company's Series A
Redeemable Preferred Stock booked directly to retained earnings, $1.14 million
in disallowed depletion expense, $3.24 million in disallowed amortization on
derivatives, and $4.37 million on disallowed interest expense on the transfer of
the 40% net profits interest to Shell Capital. The remaining difference relates
to adjustments for stock based compensation, meals & entertainment, and expired
tax net operating losses from prior periods.
The conversion of the Company's Notes during 2000 into common stock resulted in
an ownership change under Section 382 of the Internal Revenue Code, which may
significantly limit the Company's use of its net operating tax loss
carryforwards.
The Company did not record any deferred tax assets or income tax benefits for
net operating losses as of December 31, 2001. The Company's only significant
asset is its 50% interest in KKM. Therefore, the Company has taken a 100%
valuation allowance against any resulting deferred tax asset due to such
carryforwards.
12. Other Related Party Transactions
Effective January 1, 2000, Chaparral entered into an agreement to provide
management services to KKM for a fee of $170,000 per month, to be recovered from
KKM on a current basis from proceeds from oil sales. The receivable from
affiliate represents 100% of accrued management fees and reimbursable expenses,
net of payments received from KKM through December 31, 2000. The reimbursable
expenses include costs paid by the Company on behalf of KKM.
F-25
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Operating Leases
During 1999, the Company relocated its offices within the Houston area. The
Company assigned and was fully released from its existing obligations under the
non-cancelable operating lease in effect as of December 31, 1998. The Company
entered into a short-term sublease extending from September 1, 1999 through
March 31, 2000.
The Company entered into a new sublease agreement extending from March 2000
through November 2003. The Company's future minimum annual lease payments
through the term of the lease are as follows:
Year Amount
------------------------------
2002 $ 60,000
2003 $ 55,000
2004 $ -
2005 $ -
The Company's rental expense for 2001, 2000, and 1999, was approximately
$77,000, $60,000, and $93,000, respectively.
14. Commitments and Contingencies
In January 2000, the Company obtained binding political risk insurance coverage
from the Overseas Private Investment Corporation ("OPIC"). The OPIC policy's
maximum coverage amount electable by the Company is $50.0 million, which
requires a quarterly premium of $262,500. The Company is required to maintain
political risk insurance until the Loan is fully repaid. As of December 31,
2001, the Company has paid a total of $1.92 million in premiums and had bound
OPIC coverage of $50 million through January 30, 2002.
15. KKM Financial Statements
Due to the significance of the Company's equity investee, the Company has
attached audited financial statements for KKM. Reflected in the financial
statements are management fees of $2.04 million charged by the Company to KKM
for each of the three years ended December 31, 2001. These amounts are exclusive
of any local withholding tax, which may be accrued by KKM. Also, the financial
statements include interest on the note payable to the Company from KKM in the
amounts $2.90 million, $3.35 million, and $1.71 million for the years ended
December 31, 2001, 2000, and 1999, respectively.
F-26
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
The following supplemental information regarding the oil and gas activities of
the Company is presented pursuant to the disclosure requirements promulgated by
the Securities and Exchange Commission (the "SEC") and Statement of Financial
Accounting Standards ("SFAS") No. 69, Disclosures About Oil and Gas Producing
Activities.
The following estimates of reserve quantities and related standardized measure
of discounted net cash flows are estimates only, and are not intended to reflect
realizable values or fair market values of the Company's reserves. The Company
emphasizes that reserve estimates are inherently imprecise and that estimates of
new discoveries are more imprecise than producing oil and gas properties.
Additionally, the price of oil has been very volatile and downward changes in
prices can significantly affect quantities that are economically recoverable.
Accordingly, these estimates are expected to change as future information
becomes available and these changes may be significant.
KKM sold 2.18 million barrels of crude oil in 2001, of which 375,000 barrels
were sold on the local market. Prices received on local market sales were
substantially lower than world market prices prevailing at that time. KKM has an
existing agreement to sell 100% of its production on the export market for world
market prices and a right to export 100% of its production under the terms of
agreement with the government. However, the Company expects the government to
continue to require KKM to sell up to 20% of its future crude oil production to
the local market. Therefore, year-end prices used for the standardized measure
of discounted net cash flows for 1999, 2000, and 2001 reflect the assumption
that 20% of KKM's production will be sold on the local market for a
substantially lower net oil price.
Proved reserves are estimated reserves of crude oil and natural gas that
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those expected to be
recovered through existing wells, equipment and operating methods.
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses. The estimated future net
cash flows are then discounted using a rate of 10% a year to reflect the
estimated timing of the future cash flows.
As discussed in Note 14, the Company has attached the audited financial
statements of KKM. Those financial statements should be reviewed in conjunction
with the following disclosures with respect to the Company's proportionate
interest in KKM's oil and gas producing activities.
F-27
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(IN THOUSANDS)
Proven Oil and Gas Reserve Quantities
(All within the Republic of Kazakhstan)
Oil Gas
Reserves Reserves
(bbls.) (Mcf.)
-------- --------
Company's proportional interest in KKM's proved
developed and undeveloped reserves
Balance December 31, 1999 10,071 --
====== =======
Balance December 31, 2000 16,523 --
====== =======
Balance December 31, 2001 14,961 --
====== =======
Capitalized Costs Relating to Oil and Gas Producing Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2001 2000 1999
-------------------------------------------------
Company's share of equity method
investee's net capitalized cost $33,530 $25,894 $12,165
======= ======= =======
Cost Incurred in Oil and Gas Property Acquisition,
Exploration, and Development Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2001 2000 1999
--------------------------------------------------
Company's share of equity method
investee's costs of property acquisition,
exploration, and development $12,446 $13,602 $ 3,738
======= ======= =======
F-28
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
Results of operations for producing activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2001 2000 1999
--------------------------------------------------
Company's share of equity method
investee's results from operations
for producing activities $ 6,090 $ 3,241 $ --
======== ======= ========
Standardized Measure of Discounted Future Net Cash Flows
The following are the principal sources of changes in the standardized measure
of discounted future net cash flows:
Year Ended December 31,
2001 2000 1999
--------------------------------------------------
Company's share of equity
method investee's standardized
measure of discounted future
cash flows $ 40,344 $ 70,281 $ 61,312
======== ======== ========
F-29
SUPPLEMENTAL INFORMATION - SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(All Amounts in Thousands)
2001 Quarterly Information
For the Three Months Ended Total as of
------------------------------------------------------------- -------------
March 31, June 30, September 30, December 31, December 31,
2001 2001 2001 2001 2001
------------------------------------------------------------ --------------
Operating expenses $ (1,134) $ (1,368) $ (1,190) $ (1,391) $ (5,083)
Other income (loss) (565) (75) (4,575) (3,398) (8,613)
----------------------------------------------------------------------------
Loss before cumulative effect of change in
accounting principle (1,699) (1,443) (5,765) (4,789) (13,696)
Cumulative effect of change in accounting
principle (2,519) -- -- -- (2,519)
----------------------------------------------------------------------------
Net loss $ (4,218) $ (1,443) $ (5,765) $ (4,789) $ (16,215)
----------------------------------------------------------------------------
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock (63) (62) (63) (62) (250)
Discount accretion
Series A Redeemable Preferred Stock (25) (25) (25) (25) (100)
----------------------------------------------------------------------------
Net loss available to common stockholders $ (4,306) $ (1,530) $ (5,853) $ (4,876) $ (16,565)
============================================================================
Basic and diluted earnings per share:
Loss per share before cumulative $ (0.12) $ (0.11) $ (0.41) $ (0.34) $ (0.98)
effect of change in accounting principle
Cumulative effect of change in $ (0.18) $ -- $ -- $ -- $ (0.18)
accounting princip
Net loss per share $ (0.30) $ (0.11) $ (0.41) $ (0.34) (1.16)
Weighted average number of shares
outstanding (basic and diluted) 14,283,746 14,283,801 14,283,801 14,283,801 14,283,788
F-30
SUPPLEMENTAL INFORMATION - SELECTED QUARTERLY FINANCIAL DATA
UNAUDITED
(All Amounts in Thousands)
2000 Quarterly Information
For the Three Months Ended Total as of
------------------------------------------------------------ --------------
March 31, June 30, September 30, December 31, December 31,
2000 2000 2000 2000 2000
------------------------------------------------------------ --------------
Operating expenses $ (802) $ (778) $ (1,170) $ (1,364) $ (4,114)
Other income (loss) (1,389) (368) (21,856) 924 (22,689)
------------------------------------------------------------ ------------
Net loss (2,191) (1,146) (23,026) (440) (26,803)
Cumulative annual dividend accrued on
Series A Preferred Stock (63) (62) (63) (62) (250)
Discount accretion on
Series A Preferred Stock (25) (25) (25) (25) (100)
------------------------------------------------------------ ------------
Net loss available to common stockholders $ (2,279) $ (1,233) $ (23,114) $ (527) $ (27,153)
============================================================ ============
Basic and diluted earnings per share:
Net loss per share $ (2.32) $ (1.26) $ (10.88) $ (0.04) $ (6.01)
Weighted average number of shares
outstanding (basic and diluted) 980,427 980,481 2,124,083 13,775,218 4,516,032
F-31
Report of Independent Auditors
The Board of Directors and Stockholders
Closed Type JSC Karakudukmunay
We have audited the accompanying balance sheets of Closed Type JSC
Karakudukmunay ("the Company") as of December 31, 2001 and 2000, and the related
statements of operations, cash flows and stockholders' deficit for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Closed Type JSC Karakudukmunay
at December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 3, the
Company has a working capital deficiency as of December 31, 2001 and there are
uncertainties relating to the Company's ability to meet its expenditure/cash
flow requirements through 2002. In addition, the Company's principal investor
has been notified that it is in default of its loan agreement with its primary
creditor and the primary creditor has initiated legal proceedings for purposes
of obtaining control of the principal investor's interest in the Company. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans and other factors in regard to these matters
are also described in Note 3. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
/s/ Ernst & Young Kazakhstan
----------------------------------------
Ernst & Young Kazakhstan
April 2, 2002
Almaty, Kazakhstan
F-32
Closed Type JSC Karakudukmunay
Balance Sheets as of
December 31,
(In Thousands of US Dollars)
2001 2000
--------- --------
ASSETS
Current assets:
Cash $ 556 $ 51
Trade receivables -- 680
Prepaid and other receivables (Note 4) 1,705 1,251
Crude oil inventory 145 155
Current VAT receivable (Note 5) 1,925 3,100
-------- --------
Total current assets 4,331 5,237
Deferred tax assets (Note 11) 58 --
Long term VAT receivable (Note 5) -- 985
Materials and supplies 2,809 3,800
Property, plant and equipment, net (Note 6) 4,741 4,682
Oil and gas properties, full cost (Note 7)
Properties subject to depletion 42,336 22,779
Properties not subject to depletion 17,173 20,527
-------- --------
59,509 43,306
-------- --------
TOTAL ASSETS $ 71,448 $ 58,010
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 9,914 $ 8,926
Accrued liabilities (Note 8) 675 795
Current portion of loans payable
to partner (Note 10) 5,000 --
-------- --------
Total current liabilities 15,589 9,721
Long-term debt (Note 10) 58,438 58,605
Other long-term liabilities (Note 9) 276 86
Deferred tax liability (Note 11) 1,220 --
Stockholders' deficit:
Charter capital (Note 12) 200 200
Accumulated deficit (4,275) (10,602)
-------- --------
(4,075) (10,402)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 71,448 $ 58,010
======== ========
See accompanying notes.
F-33
Closed Type JSC Karakudukmunay
Statements of Operations for the years ended December 31,
(In Thousands of US Dollars)
2001 2000 1999
-------------------------------------------------------
Revenues:
Oil sales $ 36,575 $ 16,968 $ --
Costs and expenses:
Transportation costs 8,297 3,213 --
Operating expenses 5,246 3,676 --
Depreciation and depletion 9,479 3,598 744
Management service fee 620 454 594
General and administrative 3,753 2,316 1,849
------------------------------------------------------
Total cost and expenses 27,395 13,257 3,187
------------------------------------------------------
Income (loss) from operations 9,180 3,711 (3,187)
Other (income) expense:
Interest income (14) (51) --
Interest expense 1,847 2,245 1,101
Currency exchange (gain)/loss (258) 54 216
Other 116 58 --
------------------------------------------------------
Income (loss) before income taxes $ 7,489 $ 1,405 $ (4,504)
======================================================
Income tax expense 1,162 -- --
------------------------------------------------------
Net income / (loss) $ 6,327 $ 1,405 $ (4,504)
======================================================
See accompanying notes.
F-34
Closed Type JSC Karakudukmunay
Statements of Cash Flows for the years ended December 31,
(In Thousands of US Dollars)
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ 6,327 $ 1,405 $ (4,504)
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Depreciation and depletion 9,479 3,598 744
Loss from sale and disposition of fixed assets 116 58 --
Management service fees 362 -- 594
Accrued production bonus 190 86 --
Deferred income taxes 1,162 -- --
Changes in working capital:
(Increase)/decrease in prepaid and other receivables 227 (1,862) 56
(Increase)/decrease in crude oil inventory (3) 272 201
(Increase)/decrease in materials and supplies inventory 991 (2,664) 358
(Increase)/decrease in VAT receivable 2,160 (3,414) 192
Increase in accounts payable and accrued liabilities 868 5,710 984
Increase/(decrease) in accrued interest payable to partner (2,897) 3,346 1,708
-------- -------- --------
Net cash provided by operating activities 18,982 6,535 333
Cash flows from investing activities:
Purchase of property, plant and equipment (980) (1,178) (853)
Investments in oil and gas properties (23,911) (27,205) (6,031)
Proceeds from sale of fixed assets 45 3 --
Net proceeds from sales of non-commercial crude oil -- -- 1,019
-------- -------- --------
Net cash used in investing activities (24,846) (28,380) (5,865)
Cash flows from financing activities:
Increase in loan payable to bank 1,600 -- --
Principal payments on bank loan (1,600) (578) (178)
Increase in loan payable to partner due to cash contributions
and other contributions 6,369 22,388 5,743
-------- -------- --------
Net cash provided by financing activities 6,369 21,810 5,565
Net increase/(decrease) in cash 505 (35) 33
Cash at beginning of year 51 86 53
-------- -------- --------
Cash at end of year $ 556 $ 51 $ 86
======== ======== ========
Supplemental cash flow disclosure:
Interest paid to non-related parties $ 14 $ 33 $ 89
Supplemental schedule of non-cash
investing and financing activities:
Increase in accrued management service fees $ 1,360 $ -- $ 2,040
See accompanying notes.
F-35
Closed Type JSC Karakudukmunay
Statement of Stockholders' Deficit
(In Thousands of US Dollars)
Authorized Accumulated
Charter Capital Deficit Total
--------------- ----------- --------
As of December 31,1998 200 (7,503) (7,303)
Net loss for the year 1999 -- (4,504) (4,504)
-------- -------- --------
As of December 31,1999 200 (12,007) (11,807)
Net income for the year 2000 -- 1,405 1,405
-------- -------- --------
As of December 31, 2000 200 (10,602) (10,402)
Net income for the year 2001 -- 6,327 6,327
-------- -------- --------
As of December 31, 2001 $ 200 $ (4,275) $ (4,075)
======== ======== ========
See accompanying notes.
F-36
Closed Type JSC Karakudukmunay
Notes to the Financial Statements
(Amounts in thousands of US dollars unless otherwise stated)
1. Organization and Background Information
Closed Type JSC Karakudukmunay. (the "Company"), a Kazakhstan Joint Stock
Company of Closed Type, was formed to engage in the exploration, development,
and production of oil and gas properties in the Republic of Kazakhstan. The
Company's only significant investment is in the Karakuduk Field, an onshore oil
field in the Mangistau Oblast region of the Republic of Kazakhstan. On August
30, 1995, the Company entered into an agreement with the Ministry of Oil and Gas
Industry for Exploration, Development and Production of Oil in the Karakuduk Oil
Field in the Mangistau Oblast of the Republic of Kazakhstan (the "Agreement").
The Company's rights and obligations regarding the exploration, development, and
production of underlying hydrocarbons in the Karakuduk Field are determined by
the Agreement.
The Company's rights to the Karakuduk Field may be terminated under certain
conditions specified in the Agreement. The term of the Agreement is 25 years
commencing from the date of the Company's registration. The Agreement can be
extended to a date agreed between the Ministry of Energy and Mineral Resources
and the Company as long as production of petroleum and/or gas is continued in
the Karakuduk Field.
2. Basis of Presentation
The Company maintains its accounting records and prepares its financial
statements in US dollars in accordance with the terms of the Agreement. Certain
reclassifications have been made in the financial statements for 2000 and 1999
to conform to the 2001 presentation.
The material accounting principles adopted by the Company are described below:
Foreign Currency Translation
- ----------------------------
The Company's functional currency is the US dollar. All transactions arising in
currencies other than US dollars, including assets, liabilities, revenue,
expenses, gains, or losses are measured and recorded into US dollars using the
exchange rate in effect on the date of the transaction.
Cash and other monetary assets held and liabilities denominated in currencies
other than US dollars are translated at exchange rates prevailing as of the
balance sheet date (150.20 and 144.50 Kazakh Tenge per US dollar as of December
31, 2001 and 2000, respectively). Non-monetary assets and liabilities
denominated in currencies other than US dollars have been translated at the
estimated historical exchange rate prevailing on the date of the transaction.
Exchange gains and losses arising from translation of non-US dollar amounts at
the balance sheet date are recognized as an increase or decrease in income for
the period.
The Tenge is not a convertible currency outside of the Republic of Kazakhstan.
The translation of Tenge denominated assets and liabilities in these financial
statements does not indicate the Company could realize or settle these assets
and liabilities in US dollars.
F-37
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in thousands of US dollars unless otherwise stated)
2. Basis of Presentation (continued)
The Company had $6.57 million of net monetary liabilities denominated in Tenge
as of December 31, 2001 and $1.67 million net monetary liabilities denominated
in Tenge as of December 31, 2000.
Interest Capitalization
- -----------------------
The Company capitalizes interest on significant construction projects. Assets
qualifying for interest capitalization include significant investments in
unproved properties and other major development projects that are not being
depreciated, depleted, or amortized, provided that work is in progress at that
time. The Company had interest expense of $2.92 million, $3.38 million, and
$1.80 million for the years ended December 2001, 2000, and 1999, respectively.
For the same periods, the Company capitalized interest totaling $1.07 million,
$1.13 million, and $697,000, respectively.
Oil and Gas Properties - Full Cost Method
- ---------------------- ------------------
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with the acquisition, exploration,
and development of oil and gas reserves, including directly related overhead
costs, are capitalized.
All capitalized costs of proved oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized on the unit-of-production
method using estimated proved reserves. Investments in unproved properties and
major development projects are not amortized until proved reserves associated
with the projects can be determined or until impairment occurs. If the results
of an assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized cost to be amortized.
In addition, the capitalized costs are subject to a "ceiling test," which
basically limits such costs to the aggregate of the "estimated present value,"
discounted at a 10-percent interest rate of the future net revenues from proved
reserves, based on current economic and operating conditions, plus the lower of
cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized costs
with no loss recognized.
F-38
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in thousands of US dollars unless otherwise stated)
2. Basis of Presentation (continued)
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are valued at historical cost and are depreciated
on a straight line basis over the estimated useful lives of the assets as
follows:
Description Period
----------- ------
Office buildings and apartments 20 years
Office equipment 3 years
Vehicles 5 years
Field buildings 15 years
Field equipment Up to 10 years
Inventory
- ---------
Crude oil inventory is valued using the first-in, first-out method, at the lower
of cost or net realizable value. Crude oil inventory represents production costs
associated with lifting and transporting crude oil from the Karakuduk Field to
the KazTransOil pipeline. Crude oil placed into the KazTransOil Pipeline is held
as inventory until formally nominated and delivered for sale. Crude oil
inventory as of December 31, 2001 and 2000 represented approximately 24,000 and
19,000 barrels of crude oil, respectively.
Materials and supplies inventory is valued using the first-in, first-out method
and is recorded at the lower of cost or net realizable value. Certain unique
items, such as drilling equipment, are valued using the specific identification
method. Materials and supplies represent plant and equipment for development
activities, tangible drilling costs (drill bits, tubing, casing, wellheads,
etc.) required for development drilling operations, spare parts, diesel fuel,
and various materials for use in oil field operations.
Revenue Recognition
- -------------------
Revenues and their related costs are recognized upon delivery of commercial
quantities of oil production produced from proved reserves, in accordance with
the accrual method of accounting. Losses, if any, are provided for in the period
in which the loss is determined to occur.
Revenue is presented gross of transportation expenses in accordance with EITF
00-10, Accounting for Shipping and Handling Fees and Costs.
Earnings Per Common Share
- -------------------------
Basic earnings (loss) and diluted earnings (loss) are not presented due to the
Company being of a "closed" nature, and having no underlying shares outstanding.
F-39
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in thousands of US dollars unless otherwise stated)
2. Basis of Presentation (continued)
New Accounting Standards
- ------------------------
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS 133, as amended by SFAS No. 137 and 138, is effective
for years beginning after June 15, 2000. The Company adopted SFAS 133 on January
1, 2001. As a result of adoption of SFAS 133, the Company recognizes all
derivative financial instruments in the financial statements at fair value
regardless of the purpose or intent for holding the instrument. Changes in the
fair value of derivative financial instruments are recognized periodically in
income or in stockholders' equity as a component of comprehensive income
depending on whether the derivative financial instrument qualifies for hedge
accounting, and if so, whether it qualifies as a fair value hedge or cash flow
hedge. Generally, changes in fair values of derivatives accounted for as fair
value hedges are recorded in income along with the portions of the changes in
the fair values of the hedged items that relate to the hedged risks. Changes in
fair values of derivatives accounted for as cash flow hedges, to the extent they
are effective as hedges, are recorded in other comprehensive income net of
deferred taxes. Changes in fair values of derivatives not qualifying as hedges
are reported in income. The Company has not identified any derivative financial
instruments, which could be designated as fair value or cash flow hedges under
SFAS 133 as of December 31, 2001.
During 2001, the FASB issued the following pronouncements, which have potential
future accounting implications for the Company:
SFAS 141, Accounting for Business Combinations, requires the use of the purchase
method of accounting for all business combinations and provides new criteria to
determine whether an acquired intangible asset should be recognized. SFAS 141
applies to all business combinations initiated after June 30, 2001 and to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001.
SFAS 142, Accounting for Goodwill and Intangible Assets, requires that goodwill
as well as other intangible assets with indefinite lives be tested annually for
impairment. SFAS 142 is effective for fiscal years beginning after December 15,
2001.
SFAS 143, Accounting for Asset Retirement Obligations, requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred and a corresponding increase in the carrying
amount of the related long-lived asset. SFAS 143 is effective for fiscal years
beginning after June 15, 2002.
SFAS 141 and 142 will not apply to the Company unless it enters into a future
business combination. The Company is currently assessing the impact of SFAS 143
on its financial condition and results of operations and is unsure if the effect
of the future adoption of SFAS 143, if any, will be material to the Company's
financial results.
Fair Value of Financial Instruments
- -----------------------------------
All of the Company's financial instruments, including loans payable to partner,
cash and trade receivables have fair values which approximate their recorded
values as they are either short-term in nature or carry interest rates which
approximate market rates.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-40
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in thousands of US dollars unless otherwise stated)
3. Going Concern
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has a working capital
deficiency as of December 31, 2001 and there are uncertainties relating to the
Company's ability to meet all expenditure and cash flow requirements through
fiscal year 2002. In addition, Chaparral Resources, Inc. ("Chaparral"), the
parent company of the Company's principal investor, Central Asian Petroleum
(Guernsey) Limited ("CAP-G"), has been notified by Shell Capital Services
Limited, acting as facility agent, that it is in default of its loan agreement
(the "Loan") with Shell Capital Inc. ("Shell Capital"), and Shell Capital
Services Limited has initiated legal proceedings against both Chaparral and
CAP-G. See Note 13 regarding the status of the Loan.
These conditions raise doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of these uncertainties. The Company is seeking to alleviate these conditions
through increased production and related sale of oil from the Karakuduk Field
and elimination or minimization of local oil sales requirements imposed upon the
Company by the Government. See Note 14 regarding the Company's local market
requirements.
4. Prepaid and Other Receivables
The breakdown of Prepaid and Other Receivables is as follows:
December 31, December 31,
Description 2001 2000
----------- ------------ -----------
Advanced payment for oil and gas assets $ -- $ 189
Advanced payments for materials and supplies 588 --
VAT receivable from drilling contractor -- 651
Prepaid transportation costs 959 291
Other prepaid expenses 158 120
------ ------
Total $1,705 $1,251
====== ======
Advanced payment for materials and supplies represents prepayments for general
materials and supplies to be used in the development of the Karakuduk Field.
Advanced payments for oil and gas assets represents prepaid drilling costs,
which were fully recovered during 2001 through reduction of monthly charges from
the Company's drilling contractor, KazakhOil Drilling Services Company ("KODS"),
an affiliate of KazakhOil JSC. The VAT receivable from the drilling contractor
represents import VAT paid by the Company on behalf of KODS, which was offset
against drilling invoices charged to the Company in 2001. Prepaid transportation
costs represent the prepayment of export tariffs necessary to sell oil on the
export market, which is expensed in the period the related oil revenue is
recognized.
5. VAT Receivable
The VAT receivable is a Tenge denominated asset due from the Republic of
Kazakhstan. The VAT receivable consists of VAT paid on local expenditures and
imported goods. Under the Company's Agreement, VAT charged to the Company is
recoverable in future periods as either cash refunds or offsets against the
Company's fiscal obligations, including future income tax liabilities.
Periodically, the Company reviews it outstanding VAT receivable for possible
impairment. During 2001, the Company received VAT refunds of approximately $5.94
million.
F-41
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in thousands of US dollars unless otherwise stated)
6. Property, Plant and Equipment
Upon full amortization of tangible assets, the right of ownership of the
tangible assets shall be transferred to the Republic of Kazakhstan in accordance
with the Agreement. The Company is entitled to the use of the fully amortized
tangible assets during the whole term of the Agreement. A summary of property,
plant and equipment is provided in the table below:
December 31, December 31,
Description 2001 2000
----------- ------------ -------------
Office buildings and apartments $ 326 $ 312
Office equipment and furniture 770 552
Vehicles 1,376 1,758
Field buildings 4,304 3,652
Field equipment and furniture 492 479
------- -------
Total cost 7,268 6,753
Accumulated depreciation (2,527) (2,071)
------- -------
Property, plant and equipment, net $ 4,741 $ 4,682
======= =======
Depreciation expense for property, plant, and equipment was $803,000, $755,000,
and $744,000 for years ending December 31, 2001, 2000, and 1999, respectively.
7. Oil and Gas Properties
The Company has capitalized all direct costs associated with acquisition,
exploration, and development of the Karakuduk Field. These costs include
geological and geophysical expenditures, license acquisition costs, tangible and
intangible drilling costs, production facilities, pipelines and related
equipment, access roads, gathering systems, management fees related to the
salary costs of individuals directly associated with exploration and development
activities, and related interest costs associated with unproved properties.
Overhead and general and administrative costs have been expensed as incurred.
The Company calculates depreciation, depletion, and amortization of oil and gas
properties using the units-of-production method. The provision is computed by
multiplying the unamortized costs of proved oil and gas properties by a
production rate calculated by dividing the physical units of oil and gas
produced during the relevant period by the total estimated proved reserves. The
unamortized costs of proved oil and gas properties includes all capitalized
costs net of accumulated amortization, estimated future costs to develop proved
reserves, and estimated dismantlement and abandonment costs.
F-42
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in thousands of US dollars unless otherwise stated)
7. Oil and Gas Properties (continued)
The Company recognized total amortization expense of $8.67 million and $2.77
million for the years ended December 31, 2001 and 2000, respectively. For the
same periods, the effective amortization rate was $3.97 and $3.70 per barrel,
respectively.
In accordance with SFAS 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies, the Company accounts for amortization of crude oil
production as a component of crude oil inventory until the related crude oil is
sold. As of December 31, 2001 and 2000, $96,000 and $76,000 of amortization
expense was capitalized to crude oil inventory, respectively.
The composition of Oil and Gas Properties is as follows:
December 31, December 31,
Description 2001 2000
-----------
------------- --------------
Acquisition costs $ 508 $ 508
Exploration and appraisal costs 22,277 22,077
Development cost 44,633 21,012
Capitalized interest 3,699 2,628
-------- --------
Total oil and gas properties at cost $ 71,117 $ 46,225
======== ========
Total costs not subject to amortization $ 17,173 $ 20,527
======== ========
Total costs subject to amortization 53,944 25,698
Accumulated amortization (11,608) (2,919)
-------- --------
Net properties subject to amortization $ 42,336 $ 22,779
======== ========
The full cost ceiling test results as of December 31, 2001 support the carrying
amount of the assets disclosed above. Therefore, no impairment provision has
been made.
F-43
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in thousands of US dollars unless otherwise stated)
8. Accrued Liabilities
December 31, December 31,
Description 2001 2000
-----------
-------------- --------------
Accrued management service fee $574 $574
Accrued taxes payable 36 156
Other accrued liabilities 65 65
---- ----
Total accrued liabilities $675 $795
==== ====
9. Other Long-Term Liabilities
Other long-term liabilities represent production based bonuses, which will be
payable to the Government of Kazakhstan amounting to $500,000 when cumulative
production reaches ten million barrels and $1.2 million when cumulative
production reaches 50.0 million barrels. Under current Kazakhstan tax law, the
production bonuses will be considered tax deductible expenditures in the
calculation of profits taxes. The Company accrues the production bonuses in
relation to cumulative oil production. The Company accrued $190,000 and $86,000
in production bonuses for the years ended December 31, 2001 and December 31,
2000, respectively.
10. Long-term Debt
December 31, December 31,
Description 2001 2000
----------- ------------ ------------
Loans payable to partner
Cash funding $ 47,317 $ 42,477
Management service fee 7,675 6,315
Other expenditures 4,715 3,186
Accrued interest payable 3,731 6,627
-------- --------
63,438 58,605
Less current portion (5,000) --
-------- --------
Total long-term debt $ 58,438 $ 58,605
======== ========
F-44
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in thousands of US dollars unless otherwise stated)
10. Long-term Debt (continued)
Loans Payable to Partner
- ------------------------
One of the Company's founders, CAP-G, bears sole financial responsibility for
providing all funding for the Company, which is not otherwise generated by the
Company's operations or borrowed from third party sources. The various forms of
funding from CAP-G are treated as long-term loans to the Company and bear
interest at the rate of LIBOR plus 1%. The Agreement requires installment
payments on the loan to be paid quarterly in an amount equal to 65% of gross
revenues after deduction of royalties payable to the Government of Kazakhstan.
CAP-G, at its own discretion, may waive receipt of quarterly repayments to
maintain working capital within the Company. During 2001, the Company paid $5.79
million to CAP-G as investment recovery.
The management service fee element of loans payable to partners relates to
management services provided by a subsidiary of Chaparral from 1996 through 1999
and directly by Chaparral, thereafter. Chaparral is CAP-G's parent company. The
accrued management fees were paid by CAP-G on the Company's behalf and made part
of the loan.
Loans Payable to Banks
- ----------------------
In September 2001, the Company borrowed $1.60 million from a local Kazakhstan
financial institution. The Company fully repaid the loan in October, 2001.
11. Taxes
The Company is subject to corporate income tax at the prevailing statutory rate
of 30%. Income (loss) from continuing operations before provision for income
taxes consists of:
Year ended December 31,
2001 2000 1999
---------------------------------------------
Income/(Loss) before income taxes $7,489 $1,405 $(4,504)
====== ====== =======
The provision for income taxes consists of:
Year ended December 31,
2001 2000 1999
--------------------------------------------------
Income tax provision:
Current -- -- --
Deferred 1,162 -- --
------ ---- -----
Total provision for income taxes $1,162 $-- $--
====== ==== =====
F-45
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in thousands of US dollars unless otherwise stated)
11. Taxes (continued)
The following table summarizes the significant differences between the statutory
tax rate and the Company's effective tax rate for financial statement purposes:
Year ended December 31
2001 2000 1999
-------------------------------------------------------
Statutory tax rate 30% 30% 30%
Income taxes (benefit) computed
at statutory rate $ 2,247 $ 422 $(1,351)
Losses and expenses with no tax
benefit 1,608 487 847
Utilization of net operating
loss carryforwards -- -- --
Change in asset valuation allowance (2,693) (909) 504
------- ------- -------
Income tax provision $ 1,162 $ -- $ --
======= ======= =======
The components of the Company's deferred tax assets and liabilities are as
follows:
Year ended December 31
2001 2000
----------------------
Deferred tax assets:
Oil and gas properties $ 24 $ 253
Net operating loss carryforwards 34 908
------- -------
Total deferred tax assets before 58 1,161
valuation allowance
Valuation allowance -- (1,161)
------- -------
Net deferred tax assets 58 --
Deferred tax liabilities
Oil and gas properties and
other book/tax differences 1,220 --
------- -------
Total deferred tax liabilities 1,220 --
------- -------
Net deferred tax liabilities (assets) $ 1,162 $ --
======= =======
The Company recognized a net deferred tax liability of $1.16 million as of
December 31, 2001, primarily related to deductible temporary differences for
cost recovery adjusted for net operating loss carryforwards expected to be
utilized in future years. The Company did not record a valuation allowance for
the year ended December 31, 2001, due to the Company's determination that net
operating loss carryforwards would be fully utilized to offset taxable income in
2001 and future periods. Additionally, the Company increased its valuation
allowance by $1.53 million applied against 2001 taxable income to reflect the
impact of depreciation for basis adjustments allowed for statutory tax reporting
purposes. The adjustment did not impact the provision for prior years as the
Company recognized a 100% valuation allowance on its deferred tax assets due to
recurring operating losses from prior periods.
F-46
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in thousands of US dollars unless otherwise stated)
11. Taxes (continued)
The Agreement specifies the income taxes and other taxes applicable to the
Company, which is subject to the tax laws of the Republic of Kazakhstan. At
December 31, 2001, the Company has tax loss carryforwards of approximately
$115,000 available to offset against future taxable income, in accordance with
the terms of the Agreement and legislation existing as of the date the Agreement
was signed. The tax loss carryforwards are Tenge denominated and expire in 2004.
The Company has used the best estimates available to determine the Company's
deferred tax assets and liabilities before consideration of the valuation
allowance. Refer to Note 13 regarding the uncertainties of taxation in the
Republic of Kazakhstan.
12. Charter Capital
The total Charter Fund contribution specified in the Founders Agreement of the
Company is $200,000. Each of the founders' portion of the Charter Fund and their
respective participating interest in the Company is:
December 31, December 31,
2001 2000
------------------------------------------------------
Charter Charter
Contribution Percent Contribution Percent
-------------------------------------------------------
KazakhOil $ 80 40 % $ 80 40 %
Korporatsiya Mangistau Terra International 20 10 % 20 10 %
Central Asian Petroleum (Guernsey)
Limited - CAP-G 100 50 % 100 50 %
-------------------------------------------------
Total charter capital $200 100 % $200 100 %
===== =====
KazakhOil JSC ("KazakhOil") is the national petroleum company of the Republic of
Kazakhstan.
13. Contingencies
Shell Capital Loan
- ------------------
In November 1999, Chaparral entered into the Loan with Shell Capital to provide
up to $24.0 million to partially fund the development of the Karakuduk Field. In
May 2001, the Loan was amended to provide Chaparral with up to $8.0 million in
uncommitted working capital (the "Bridge Loan"), repayable on or before
September 30, 2001. The Company and CAP-G both signed the Loan and Bridge Loan
as "co-obligors," assuming certain obligations and commitments to Shell Capital
and to Chaparral, as the borrower. The Company, however, continues to borrow
funds directly from CAP-G in accordance with the terms of the Agreement.
F-47
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in thousands of US dollars unless otherwise stated)
13. Contingencies (continued)
As of December 31, 2001, Chaparral was notified by Shell Capital Services
Limited, acting as facility agent, that it was in default of the Loan for
failure to pay outstanding principal and interest due on the Bridge Loan
totaling $3.34 million on or before September 30, 2001, failure to pay principal
and interest due on the Loan totaling $2.68 million on or before December 31,
2001, failure to achieve project completion by September 30, 2001, failure to
settle certain accounts payable within 90 days, the Company's failure to obtain
Shell Capital's approval prior to entering certain short-term debt arrangements,
and failure to maintain the listing of Chaparral's common stock on one of the
major stock exchanges (i.e. Nasdaq, NYSE, or AMEX). In January 2002, Chaparral
received a notice from Shell Capital Services Limited accelerating the payment
of the outstanding principal, interest, and other fees and expenses due under
the Loan. Additionally, Shell Capital Services Limited initiated legal
proceedings against Chaparral in the United Kingdom and against CAP-G in the
Isle of Guernsey to enforce Shell Capital's rights under the Loan. Chaparral and
CAP-G are contesting Shell Capital Services Limited's respective actions, but
there are no assurances that either CAP-G or Chaparral will be successful. Shell
Capital has not initiated legal action against the Company itself, but there can
be no assurance that Shell Capital will not do so in the future.
As a co-obligor of the Loan, the Company is subject to the following pledges,
covenants, and other restrictions:
(i) A pledge of the Company's receivables, including proceeds from the sale of
crude oil, to Shell Capital in the event of default of the Loan;
(ii) A pledge of the Company's right to insurance proceeds to Shell Capital in
the event of default of the Loan;
As a condition of the Loan, the Company entered into a crude oil sales agreement
with Shell Trading International Limited ("STASCO"), an affiliate of Shell
Capital, for the purchase of 100% of the Company's oil production from the
Karakuduk Field on the export market. The Loan requires the Company to sell all
of its net oil production to STASCO, unless otherwise agreed. The Company sold
approximately 1.81 million barrels of oil to STASCO during 2001, and
approximately 604,000 barrels during 2000. Furthermore, the Government of the
Republic of Kazakhstan required the Company to sell approximately 375,000 and
161,000 barrels of oil to the local market for the years ended December 31, 2001
and December 31, 2000, respectively. Although the Loan has been called in
default by Shell Capital Services Limited, the Company has continued to sell its
crude oil to STASCO on the export market in accordance with the Loan and the
STASCO agreement.
Taxation
- --------
The existing legislation with regard to taxation in the Republic of Kazakhstan
is constantly evolving as the Government manages the transition from a command
to a market economy. Tax and other laws applicable to the Company are not always
clearly written and their interpretation is often subject to the opinions of the
local or main State Tax Service. Instances of inconsistent opinions between
local, regional and national tax authorities are not unusual.
Basis of Accounting
- -------------------
The Company maintains its statutory books and records in accordance with U.S.
generally accepted accounting principles and calculates taxable income or loss
using the existing Kazakh tax legislation in effect on August 30, 1995, the date
the Agreement was signed. The Company considers these accounting methods correct
under the terms of the Agreement. The Republic of Kazakhstan currently requires
companies to comply with Kazakh accounting regulations and to calculate tax
profits or losses in accordance with these regulations as well as the prevailing
tax law. There is currently uncertainty as to the extent of tax losses available
to the Company. The potential effect of the uncertainty is not quantifiable.
F-48
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in thousands of US dollars unless otherwise stated)
14. Local Oil Sales Requirements
The ability of the Company to realize the carrying value of its assets is
dependent on being able to transport hydrocarbons and finding appropriate
markets for their sale. Domestic markets in the Republic of Kazakhstan currently
do not permit world market prices to be obtained.
The Company's crude oil sales agreement with STASCO, discussed in Note 13,
requires the Company to sell 100% of its oil production to STASCO on the export
market. The Company is not allowed to sell to other parties, on either the
export or local markets, without the approval of STASCO and Shell Capital. While
the Company is responsible for obtaining export quotas and finalizing access
routes through the KazTransOil pipeline and onward through the Russian pipeline
system, the Company has a right to export, and receive export quota for, 100% of
the production from the Karakuduk Field under the terms of the Agreement.
The Government of Kazakhstan, however, has required the Company, along with
other oil and gas producers within Kazakhstan, to sell a certain portion of
their crude oil production to the local market to supply local energy needs.
During 2001, the Company sold approximately 375,000 barrels of crude oil on the
local market for approximately $3.38 million and 1.81 million barrels to STASCO
on the export market for approximately $33.20 million. During 2000, the Company
sold approximately 161,000 barrels of crude oil on the local market for
approximately $1.69 million and sold 604,000 barrels to STASCO on the export
market for approximately $15.28 million.
The Company has and is continuing to work with the Government to effect the
export of 100% of hydrocarbons produced. It is uncertain, however, whether the
Company will be successful in doing so, as the Government is expected to require
additional local sales from oil and gas producers in the future.
15. Related Party Transactions
The Company entered into a marketing services agreement with KazakhOil on
January 31, 2000, whereby KazakhOil will assist the Company in expediting export
oil sales under the crude oil sales agreement with STASCO.
In January 2000, the Company canceled its management service contract with
Chaparral's subsidiary and entered into a similar contract directly with
Chaparral. The contract is for $170,000 per month, plus reimbursable expenses,
or $2.04 million per year.
Other related party transactions are disclosed on the face of the balance sheet.
Stockholders and their respective holdings in the Company are disclosed in Note
12, CAP-G related party transactions are referenced in Note 10.
F-49
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
The following supplemental information regarding the oil and gas activities of
the Company is presented pursuant to the disclosure requirements promulgated by
the SEC and Statement of Financial Accounting Standards ("SFAS") No. 69,
Disclosures About Oil and Gas Producing Activities.
The following estimates of reserve quantities and related standardized measure
of discounted net cash flows are estimates only, and are not intended to reflect
realizable values or fair market values of the Company's reserves. The Company
emphasizes that reserve estimates are inherently imprecise and that estimates of
new discoveries are more imprecise than producing oil and gas properties.
Additionally, the price of oil has been very volatile and downward changes in
prices can significantly affect quantities that are economically recoverable.
Accordingly, these estimates are expected to change as future information
becomes available and these changes may be significant.
The Company sold 2.18 million barrels of crude oil in 2001, of which 375,000
barrels, or approximately 17%, were sold to the local market. Comparatively, the
Company sold 765,000 barrels of crude oil in 2000, of which 161,000, or
approximately 21%, was sold to the local market. Prices received on local market
sales were substantially lower than world market prices prevailing at that time.
The Company has an existing crude oil sales agreement with STASCO to sell 100%
of its production on the export market for world market prices and a right to
export 100% of its production under the terms of its Agreement with the
government. The Company, however, expects the government to continue to require
the Company to sell a portion of its future crude oil production to the local
market. Therefore, year-end prices used for the standardized measure of
discounted net cash flows for the three years ended December 31, 2001 reflect
the assumption that 20% of the Company's production will be sold to the local
market for a substantially lower net oil price per barrel.
Proved reserves are estimated reserves of crude oil and natural gas that
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those expected to be
recovered through existing wells, equipment and operating methods.
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses. The estimated future net
cash flows are then discounted using a rate of 10% a year to reflect the
estimated timing of the future cash flows.
F-50
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(All Amounts in Thousands)
Proved Oil and Gas Reserve Quantities
(All within the Republic of Kazakhstan)
Oil Gas
Reserves Reserves
(bbls.) (Mcf.)
---------------------------------------
Proved developed and undeveloped reserves:
Balance December 31, 1998 - -
Revision of previous estimates - -
Extensions, discoveries and other additions 20,201 -
Production (59) -
Balance December 31, 1999 20,142 -
Revision of previous estimates - -
Extensions, discoveries and other additions 13,633 -
Production (730) -
Balance December 31, 2000 33,045 -
Revision of previous estimates (1,978) -
Extensions, discoveries and other additions 1,043 -
Production (2,189) -
-----------------------------------------
Balance December 31, 2001 29,921 -
=========================================
Proved Developed Reserves:
Balance December 31, 1999 3,899 -
=========================================
Balance December 31, 2000 10,414 -
=========================================
Balance December 31, 2001 16,401 -
=========================================
F-51
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(All Amounts in Thousands)
Capitalized Costs Relating to Oil and Gas Producing Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2001 2000 1999
Unproved oil and gas properties $ 23,179 $ 29,892 $20,256
Proved oil and gas properties 58,015 26,886 5,596
-----------------------------------------------------
Accumulated depreciation and depletion (14,135) (4,990) (1,522)
----------------------------------------------------
Net capitalized cost $ 67,059 $51,788 $ 24,330
=====================================================
Cost Incurred in Oil and Gas Property Acquisition, Exploration, and Development Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2001 2000 1999
----------------------------------------------------
Acquisition costs $ - $ - $ -
Exploration and appraisal costs 200 5,060 7,477
Development costs 24,692 22,144 -
--------------------------------------------------
$ 24,892 $ 27,204 $ 7,477
====================================================
Results of operations for producing activities
(All within the Republic of Kazakhstan
Year Ended December 31,
2001 2000 1999
---------------------------------------------------
Oil revenue $ 36,575 $ 16,968 $ -
Transportation costs (8,297) (3,213) -
Operating expenses (5,246) (3,676) -
Depreciation, depletion, and amortization (9,479) (3,598) -
---------------------------------------------------
13,553 6,481 -
Provision for income taxes(1) (1,373) - -
---------------------------------------------------
$ 12,180 $ 6,481 $ -
===================================================
(1) Income tax expense is calculated by applying the statutory tax rate to
operating profit, adjusted for applicable net operating loss carryforwards.
F-52
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(All Amounts in Thousands)
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proven Oil and Gas Reserves (All within the Republic of Kazakhstan)
Year Ended December 31,
-----------------------------------------------------
2001 2000 1999
-----------------------------------------------------
Future cash inflows $ 305,579 $ 430,082 $ 343,617
Future development costs (92,433) (92,685) (66,611)
Future production costs (57,945) (46,477) (32,547)
Future income tax expenses (34,132) (71,000) (63,566)
--------- --------- ---------
Future net cash flows 121,069 219,920 180,893
10% annual discount for
estimated timing of cash flows (40,381) (79,358) (58,270)
--------- --------- ---------
Standardized measure of discounted net
cash flows $ 80,688 $ 140,562 $ 122,623
========= ========= =========
Principal sources of change in the standardized measure of discounted future net cash flows
Year Ended December 31,
----------------------------------------------------
2001 2000 (1) 1999
-----------------------------------------------------
Beginning balance $ 140,562 $ 122,623 $ --
Sales of oil-produced, net of
production and transportation costs (23,032) (10,079) --
Extensions and discoveries 7,094 69,464 164,657
Net changes in prices, production
cost and future development cost (93,058) (75,990) --
Net changes due to revisions of previous
quantity estimates (13,459) -- --
Development cost incurred 24,692 22,144 --
Accretion of discount 18,519 16,496 --
Net change in income taxes 21,387 (2,296) (42,034)
Other (2,017) (1,800) --
--------- --------- ---------
Ending balance $ 80,688 $ 140,562 $ 122,623
========= ========= =========
(1) Certain reclassifications have been made in the 2000 presentation for
principal sources of change in the standardized measure of discounted future net
cash flows to conform to the 2001 presentation.
F-53
SUPPLEMENTAL INFORMATION - SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(All Amounts in Thousands)
2001 Quarterly Information
For the Three Months Ended
(In Thousands of US Dollars) Total as of
-----------------------------------------------------------------------------
March 31, June 30, September 30, December 31, December 31,
2001 2001 2001 2001 2001
-----------------------------------------------------------------------------
Revenue (1) $ 8,436 $ 9,559 $ 6,916 $ 11,664 $ 36,575
Transportation and operating
costs (3,082) (3,198) (2,046) (5,217) (13,543)
Depreciation and depletion (1,931) (2,132) (1,828) (3,588) (9,479)
----------------------------------------------------------------------------
Operating income (loss) 3,423 4,229 3,042 2,859 13,553
============================================================================
Income (loss) before income taxes $ 1,667 $ 2,712 $ 1,677 $ 1,433 $ 7,489
Income tax provision -- -- -- 1,162 1,162
----------------------------------------------------------------------------
Net income (loss) $ 1,667 $ 2,712 $ 1,677 $ 271 $ 6,327
============================================================================
(1) Revenue is presented gross of transportation and marketing cost in
accordance with EITF 00-10, Accounting for Shipping and Handling Fees and Costs.
F-54
SUPPLEMENTAL INFORMATION - SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(All Amounts in Thousands)
2000 Quarterly Information
For the Three Months Ended
(In Thousands of US Dollars) Total as of
-----------------------------------------------------------------------------
March 31, June 30, September 30, December 31, December 31,
2000 2000 2000 2000 2000
-----------------------------------------------------------------------------
Revenue(1) $ -- $ 4,552 $ 4,341 $ 8,075 $ 16,968
Transportation and operating
costs -- (1,863) (2,235) (2,791) (6,889)
Depreciation and depletion (180) (828) (884) (1,706) (3,598)
----------------------------------------------------------------------------
Operating income (loss) (180) 1,861 1,222 3,578 6,481
============================================================================
Income (loss) before income taxes (1,209) $ 625 $ (148) $ 2,137 $ 1,405
Income tax provision -- -- -- -- --
---------------------------------------------------------------------------
Net income (loss) $ (1,209) $ 625 $ (148) $ 2,137 $ 1,405
============================================================================
(1) Revenue is presented gross of transportation and marketing cost in
accordance with EITF 00-10, Accounting for Shipping and Handling Fees and Costs.
F-55