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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, 2000.
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 March 30, 2001, the aggregate market value of registrant's voting
common stock, par value $.0001 per share, held by non-affiliates was
$16,592,781.
As of March 30, 2001, registrant had 14,283,634 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. 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 has
re-established oil production from some of the existing wells and initiated an
aggressive drilling and development program in 2000 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. There are no practical mechanisms in the agreements among the KKM
stockholders to effectively resolve deadlocks. A deadlock could halt KKM's
operations and ultimately result in the loss of KKM's rights to explore and
develop the Karakuduk Field.
Currently, the Karakuduk Field is our only oil field. We are in the process
of identifying and evaluating other oil fields for possible acquisition and
development. We have no other significant subsidiaries besides CAP-G and CAP-D.
Shell Capital Loan Agreement
- ----------------------------
We have entered into a loan with Shell Capital Limited to provide up to
$24.0 million in financing for the development of the Karakuduk Field. The loan
subjects us to numerous covenants and events of default. Our ability to obtain
additional debt or equity financing in the future for working capital, general
corporate purposes, capital expenditures, and acquisitions is severely
restricted under the loan, as well as our ability to acquire or dispose of
significant assets and pursue other business opportunities. These restrictions
severely limit our ability to obtain new capital and make us more vulnerable and
less able to react to adverse economic conditions. Our failure to meet the terms
of the loan could result in an event of default and the loss of our investment
in the Karakuduk Field. The terms of the loan are described in "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The financing costs of the loan are significant. A substantial portion of
our future cash flow from operations will be required for debt service and may
not be available for other purposes. We expect $36.0 million to $45.0 million of
our future available net cash flows from the Karakuduk Field to be utilized to
service the loan, depending upon excess cash flows available from operations, if
any, to repay the loan prior to its stated maturity date of September 30, 2004.
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The availability of future cash flows is contingent upon many factors beyond our
control, including successful development of the underlying oil reserves from
the Karakuduk Field, production rates, production and development costs, oil
prices, access to oil transportation routes, and political stability in the
region.
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. KKM sold
approximately 765,000 barrels of crude oil, of which approximately 604,000
barrels were sold to Shell Trading International Limited ("STASCO"), an
affiliate of Shell Capital, on the export market and an additional 161,000
barrels were sold to various purchasers on the local market in Kazakhstan. Total
oil sales generated $13.76 million, of which $12.27 million was generated from
export sales to STASCO and $1.49 million resulted from local oil sales. 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.
STASCO is the only customer responsible for more than 10% of oil sales
revenue in 2000. KKM has a long-term crude oil sale agreement with STASCO for
the sale of 100% of KKM's oil production, net of royalty-in-kind, 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 for a 5-year term beginning in February
2000, and is renewable thereafter for successive 12-month periods. STASCO may
terminate the 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 prices 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 size 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 our 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, or 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.
The crude oil sales agreement also includes a provision for KKM's delivery
of crude oil to the Caspian Pipeline Consortium pipeline, which is currently
being constructed from the Tengiz field in Kazakhstan to Novorrossiisk. KKM is
in the early stages of evaluating alternatives available, if any, to connect to
the Consortium's pipeline from the Karakuduk Field.
2
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 2000, the government required
KKM to sell approximately 161,000 barrels of crude oil, or 21% of its total oil
sales, to the local market, for prices approximately $8 to $10 per barrel below
export market prices. We are currently engaged in informal discussions with the
government to enforce KKM's contractual rights for the 100% export of all
hydrocarbons produced from the Karakuduk Field. We believe we will be successful
in working 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 repay the loan to Shell Capital.
See "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Risks of Oil and Gas Activities
- --------------------------------
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 service our debt obligations. If not, we will be
unable to generate profits and could default on our loan.
We are uncertain about the prices at which we will be able to sell oil that
we produce. Our estimated future net revenue from oil sales is highly dependent
on the price of oil, as well as the amount of oil produced. The 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
3
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. If we fail to generate sufficient cash flow
from operations to repay the loan, we may lose our entire investment in the
Karakuduk Field pledged as collateral to Shell Capital.
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
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 March 30, 2001, we have not experienced any material losses due
to these events.
Risks of Foreign Operations
- ---------------------------
Our ability to develop the Karakuduk Field is dependent on fundamental
contracts that we have 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 there is uncertainty
as to the status of Kazakh law, the stability of the country and the region, and
the autonomy of the parties involved with us in Kazakhstan. There is a risk the
government of Kazakhstan may arbitrarily cancel our contracts or may force them
into re-negotiation. Cancellation or re-negotiation of contracts could result in
less favorable terms for us and could reduce or eliminate revenues.
The laws of the Republic of Kazakhstan govern our operations and a number
of our significant agreements. As a result, we may be subject to arbitration in
Kazakhstan or to the jurisdiction of the Kazakh courts. Even if we seek relief
in the courts of the United States, we may not be successful in subjecting
foreign persons to the jurisdiction of those courts. In addition, we may be
prevented from enforcing our rights with respect to government agencies,
regulatory bodies, or other entities of Kazakhstan because they may consider
themselves immune from the jurisdiction of any court.
The 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 seriously 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
4
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 both KazakhOil and KazTransOil to
facilitate export oil sales during 2000 and expects to continue to do so in
future periods.
Political Risk Insurance
- ------------------------
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. 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
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, our loan and OPIC political risk insurance policy both 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
5
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 March 30, 2001, we had 6 full-time employees and one consultant. KKM
had 161 employees and retains independent contractors on an as needed basis
through us. We believe that our relationship with our employees and consultants
is good.
Corporate Information
- ---------------------
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
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
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Karakuduk Field is estimated to contain a minimum of seven separate productive
horizons 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 March 30, 2001, KKM has 23 productive wells in the Karakuduk Field,
of which 16 are new wells and 7 are re-completions of previously existing
delineation wells. 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. An additional 4
wells have been successfully completed subsequent to year end, including 1
re-completion of a previously existing well. Another well has reached total
depth and is expected to be completed during April 2001. KKM has successfully
completed every well drilled to date. Oil has been recovered from the J-1, J-4,
J-8, and J-9 formations, along with new discoveries in the J-6 and J-7 horizons.
The gross daily productive capacity of the 23 producing wells is
approximately 12,300 barrels of oil per day. Due to current facility
constraints, however, KKM is only capable of processing and transporting
approximately 7,500 barrels of oil per day into the export pipeline. KKM has
made significant progress in resolving existing facility constraints, but has
not been able to keep up with productive capacity given the success of our
drilling program. KKM is working to alleviate all facility constraints, through
expansion of its oil storage capacity, upgrading existing and installing
additional gathering and processing facilities, commissioning an oil sales
pipeline connecting to the export pipeline, and installing and completing a
central processing unit. KKM expects its gross capacity to deliver oil
production into the main export pipeline to be incrementally extended to
approximately 8,500 barrels of oil per day by July 2001 and approximately 11,500
barrels of oil per day before September 2001. Completion of the central
processing unit by mid 2002 will allow gross delivery capacity to exceed 25,000
barrels of oil per day.
KKM currently has one drilling rig and one workover rig operating in the
Karakuduk Field. A second drilling rig was released as of April 1, 2001, but is
expected to be made available to KKM later in 2001, if needed. KKM expects to
drill a total of 14 development wells in 2001 and re-complete approximately 5
existing delineation wells. We estimate up to 108 oil wells will be required to
fully develop the Karakuduk Field, of which 28 would eventually be converted
into water injection wells. The planned development program includes a pressure
maintenance operation that our management believes could result in increased
production.
Crude oil production is 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 is constructing an 18-mile pipeline, capable of transporting up
to 18,000 barrels of oil per day from the Karakuduk Field to the export pipeline
terminal. We anticipate the pipeline will be operational in July 2001. Until the
pipeline is operational, KKM will continue to truck oil production to the pump
station at the export pipeline. KKM is currently sourcing additional oil trucks
to increase crude oil trucking capacity in the field, along with larger pumps to
increase the daily production which can be pumped into the export pipeline.
Maximum crude oil trucking capacity is estimated at 8,800 barrels of oil per
day.
KKM has completed a 3-D seismic study of the Karakuduk Field. The seismic
data has been processed and is being utilized to optimize the well drilling
order for KKM's drilling program and further define the possible total
productive capability of the Karakuduk Field.
See also "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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Reserves
--------
As of December 31, 2000, the Karakuduk Field has total estimated proved
reserves of approximately 33.05 million barrels, net of government royalty, of
which we have a proportional equity interest in approximately 16.52 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, 2000.
The reserve estimates as of December 31, 1999 have been restated from the
original presentation, revising the original disclosure of 33.79 million barrels
of proved reserves downward by 23.72 million barrels to 10.07 million barrels of
proved reserves. The restatement is to reflect the SEC's definition of proved
undeveloped reserves, which differs from the definition employed by the Society
of Petroleum Engineers.
Prior to signing the loan with Shell Capital, we did not disclose any
proved reserves relating to the Karakuduk Field due to the lack of necessary
financing. We are responsible for providing 100% of the funding necessary for
the development of the Karakuduk Field, which is not provided by third-party
sources. While we have invested significant amounts of capital into the
Karakuduk Field, the funds necessary to complete the field infrastructure and
execute a practical drilling program were not readily available to us prior to
the loan with Shell Capital, including related equity commitments necessitated
by the loan.
No reserve estimates have been filed with any Federal authority or other
agency since January 1, 2000.
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 last three
fiscal years ended December 31, 2000:
As of the Year Ended December 31,
----------------------------------
1998 1999 2000
---- ---- ----
Net sales volumes
Oil (bbls) -- 29,625 382,500
Gas (mcf) -- -- --
Average sales price
Oil (per bbl) $ -- $ -- $ 17.98
Gas (per mcf) $ -- $ -- $ --
Average production cost (per bbl) $ -- $ -- $ 4.81
KKM did not sell any commercial quantities of crude oil prior to 2000. The
average sales price is shown net of related transportation costs. Average gross
sales revenue per barrel was approximately $22.18, while average transportation
costs per barrel was approximately $4.20.
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
8
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, 2000, we had interests in 19 gross productive oil wells
(9.5 net oil wells), and no producing gas wells. There were no multiple
completion wells. Production was from 16,900 gross acres, of which 3,382 acres
are developed.
Undeveloped Acreage
-------------------
As of December 31, 2000, 7,918 net acres in the Karakuduk Field are
undeveloped.
Drilling Activity
-----------------
During the last three fiscal years ended December 31, 2000, our net
interests in exploratory and development wells drilled were as follows:
Exploratory Wells, Net Development Wells, Net
Year Ended ---------------------- ----------------------
December 31, Productive Dry Productive Dry
----------- ---------- --- ---------- ---
1998 1.0 -- -- --
1999 .5 -- -- --
2000 1.5 -- 6.5 --
All wells are located in the Republic of Kazakhstan.
Present Activities.
-------------------
As of March 30, 2001, KKM has successfully completed an additional 4 gross
development wells (2 net), and is has reached total depth on another gross
development well (.5 net) which is expected to be completed in April 2001.
ITEM 3. LEGAL PROCEEDINGS
We do not have any material pending legal proceedings.
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, 2000.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently quoted on the Nasdaq SmallCap Market under
the symbol "CHAR."
As of March 30, 2001, we had 1,853 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. We cannot pay any dividends without
Shell Capital's consent while the loan is outstanding.
The following table shows the range of high and low bid prices for each
quarter during our last two calendar years ended December 31, 2000 and 1999, as
reported by the National Association of Securities Dealers, Inc.. Prices are
adjusted for our 60 to 1 reverse common stock split in April 1999.
Price Range
-----------
Fiscal Quarter Ended High Low
-------------------- ---- ---
March 31, 1999 $58.373 $22.590
June 30, 1999 45.500 11.000
September 30, 1999 35.000 9.250
December 31, 1999 35.000 4.000
March 31, 2000 15.188 8.000
June 30, 2000 9.000 5.875
September 30, 2000 10.500 3.375
December 31, 2000 8.125 3.250
Under Marketplace Rules of The Nasdaq Stock Market, Inc. ("Nasdaq")
governing qualitative and quantitative standards for listing, stockholder
approval is required prior to the issuance of common stock which will result in
a change of control of the issuer or the issuance of common stock equal to 20%
or more of the greater of book or market value of our common stock outstanding
immediately before the transaction. Chaparral did not obtain stockholder
approval for either the conversion of its 8% Non-Negotiable Convertible
Promissory Notes, or notes, into 11,690,259 shares of our common stock on
September 21, 2000 or the issuance of 1,612,903 shares of common stock to Capco
Resources, Ltd. ("Capco"). The note conversion and the Capco stock subscription
are discussed in "Item 13 - Certain Relationships and Related Transactions."
On March 16, 2001, Chaparral received a letter from Nasdaq notifying us
that we may be in violation of the continued listing requirements with respect
to obtaining stockholder approval for the note conversion and the Capco stock
subscription, as stipulated by Nasdaq Marketplace Rules 4310(i)(1)(B) and
4310(i)(1)(D)(ii). Consequently, Nasdaq is reviewing Chaparral's eligibility for
continued listing on The Nasdaq SmallCap Market and has requested Chaparral's
specific plan to achieve and sustain compliance with all of The Nasdaq SmallCap
Market listing requirements. Chaparral had a meeting with Nasdaq on April 12,
2001, presenting a plan of compliance and discussing the conversion of the notes
and the common stock issued to Capco.
There can be no assurance, however, the outcome of the Nasdaq meeting will
be favorable. If not, Nasdaq could delist our common stock. Being delisted would
have an adverse impact on the liquidity of our common stock and our Series A
Preferred Stock. The possible consequences of delisting could include litigation
and difficulties in raising additional capital, which may be necessary to
continue our operations. In addition, the loan requires us to maintain our
listing on Nasdaq. If we are delisted we may be called in default of the loan
and our investment in the Karakuduk Field could be lost.
If we are delisted from Nasdaq, trading of our common stock may be
conducted on the OTC Bulletin Board or the over-the-counter market. Because
spreads between the "bid" and "asked" prices of common stock quoted by market
makers on the OTC Bulletin Board and the over-the-counter market will likely be
greater than on Nasdaq, our stockholders would likely experience a greater
degree of difficulty in trading our common stock. In addition, there are
significant restrictions imposed by most brokerage houses on the ability of
their brokers to solicit orders or recommend the purchase of stocks that trade
on the OTC Bulletin Board. In the majority of cases, the purchase of stock is
limited to unsolicited offers from private investors, who have to comply with
10
policies and practices involving the completion of time-consuming forms that can
make the handling of lower-priced stocks economically unattractive. Moreover,
most brokerage houses do not permit lower-priced stocks to be used as collateral
for margin accounts or to be purchased on margin. Consequently, our board of
directors believes that the current per share price of our common stock may
limit its effective marketability because of the reluctance of many brokerage
firms and institutional investors to recommend lower-priced stocks to their
clients or to hold them in their own portfolios. The brokerage commission on the
purchase or sale of a lower-priced stock may also represent a higher percentage
of the price than the brokerage commission on a higher-priced issue.
In addition, Chaparral's common stock would be 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. If our common stock is traded on the OTC Bulletin Board
or the over-the-counter market and remains subject to the regulations applicable
to penny stocks, investors may find it more difficult to obtain timely and
accurate quotes and execute trades of our common stock.
There can be no assurance that we will be successful in maintaining our
Nasdaq listing or avoid application of the SEC's penny stock rules if we are
delisted from Nasdaq. Failure to maintain our Nasdaq listing is an event of
default under our Shell Capital loan. We cannot provide any assurance that Shell
Capital would not call us into default if we are delisted from Nasdaq, which
might result in our loss of our investment in the Karakuduk Field.
The following is information as to all securities sold since October 1,
2000, which were not registered under the Securities Act of 1933, as amended:
All sales of unregistered securities from October 1, 2000 to December 31,
2000 have been disclosed by the registrant in our quarterly report for the
quarter ended September 30, 2000 on Form 10-Q.
11
ITEM 6. SELECTED FINANCIAL DATA
As of or for
the Year
Month of Ended
As of or for the Year Ended December 31 December November 30
----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1996
----------------------------------------------------------------------------------------
Oil and gas sales (1)............ -- -- -- -- -- $ 147,000
Total revenues................... -- -- -- -- -- 147,000
Net loss......................... $ (26,803,000) $(5,163,000) $(4,266,000) $(2,603,000) $ (130,000) ( 2,416,000)
Net loss per
common share................... (6.01) (5.63) (5.14) (3.76) (.21) (4.52)
Working capital (deficit)........ (601,000) (2,941,000) (287,000) 3,356,000 * 259,000
Total assets..................... 70,156,000 41,303,000 34,324,000 23,519,000 * 14,498,000
Long-term obligations and
redeemable preferred stock.... 26,528,000 14,776,000 5,060,000 4,710,000 * 1,491,000
Stockholders' equity............. 41,926,000 22,851,000 27,579,000 18,578,000 * 12,114,000
Other Data
Present value of proved reserves(2) 70,281,000 61,312,000 -- -- -- --
Proved oil reserves (bbls)(3).... 16,523,000 10,071,000 -- -- -- --
Proved gas reserves (mcf)........ -- -- -- -- -- --
- -----------------------
* Not applicable due to one month short period ended December 31, 1996.
(1) In 1994, we made a strategic decision to pursue international oil and gas
projects, and, by early 1997 we completely disposed of all domestic oil and
gas properties through sales to third parties.
(2) The present value of proved reserves as of December 31, 1999 has been
restated from the original presentation, revising the original disclosure
of $177,680,000 downward by $116,368,000 to reflect the restatement of our
proportional net interest in KKM's proved reserves as of December 31, 1999.
See footnote (3) below and "Supplemental Information - Disclosures About
Oil and Gas Producing Activities - Unaudited" included in the notes to our
consolidated financial statements for the year ended December 31, 2000.
(3) Proved oil reserves as of December 31, 1999 have been restated from the
original presentation, revising the original disclosure of 33,789,000
barrels of proved oil reserves by 23,718,000 barrels. The restatement is to
reflect the SEC's definition of proved undeveloped reserves, which differs
from the definition as accepted by the Society of Petroleum Engineers. See
"Item 2 Properties - Reserves."
12
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 we are a going
concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. We are responsible for providing
100% of the funding for the development of the Karakuduk Field not provided from
oil sales or third party sources. We have recognized recurring operating losses
and have a working capital deficiency as of December 31, 2000. In addition,
there are uncertainties relating to our ability to meet all expenditure and cash
flow requirements through fiscal year 2001, which could result in a default of
our loan with Shell Capital and the loss of our investment in the Karakuduk
Field.
We are seeking to alleviate these conditions by increasing cash flows
available from the sale of crude oil production from the Karakuduk Field. We
expect to finance the development of the Karakuduk Field primarily through the
production and sale of crude oil, which is currently limited to approximately
7,000 barrels of oil per day, net of royalty, by short-term facility
constraints. Additionally, the government of Kazakhstan has required KKM to sell
a portion of its crude oil production on the local market, which generates
substantially less revenue than oil sold on the export market. KKM is attempting
to resolve both of these issues by removing field facility constraints as
quickly as possible and requesting that the government to reduce or eliminate
local oil sales requirements imposed upon KKM. Management expects to
incrementally increase daily production, net of royalty, to approximately 8,000
barrels of oil per day by July 2001 and up to 10,800 barrels of oil per day by
September 2001 as various field facility limitations are addressed. We are also
trying to obtain additional debt financing to cover any deficiencies, which may
occur in the near term.
No assurances can be provided, however, that we will be able to increase
our operational cash flow to meet working capital requirements or that
additional debt financing will be available. Additionally, we are required to
obtain Shell Capital's approval before issuing any additional equity or debt
securities, which may hinder our attempts to raise the necessary working capital
to continue operations. If we are unsuccessful in raising additional capital or
generating sufficient cash flows from operations, our loan to Shell Capital may
be called into default and/or our investment in the Karakuduk Field may be lost.
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 & equipment (generators, pumps, communications, etc.) and other field
facilities. As of March 30, 2001, we have invested approximately $53.2 million
in the development of the Karakuduk Field and have drilled or re-completed 23
productive wells, including 4 subsequent to December 31, 2000. During 2001,we
plan to drill a total of 14 wells, including the 4 already completed,
re-complete 5 existing delineation wells, and expand field facilities to
increase productive capacity in excess of 25,000 barrels of oil per day by
mid-2002. Total capital expenditures for 2001 are estimated at $32.5 million in
comparison to total capital expenditures of $23.6 million incurred in 2000.
Capital expenditures are estimated at least $85.0 to $100.0 million for the
period from 2002-2005.
We expect to finance the continued development of the Karakuduk Field
primarily through cash flows from the sale of crude oil. In 2000, KKM sold
approximately 765,000 barrels of crude oil for $13.76 million, net of
transportation costs, of which $6.6 million in revenue was attributable to the
quarter ended December 31, 2000. Total productive capacity is currently in
excess of 12,300 barrels of oil per day, but daily production, net of royalty,
is limited to approximately 7,000 barrels due to short-term field facility
constraints. We expect to increase net daily production to approximately 8,000
barrels of oil per day by July 2001 and to 10,800 barrels of oil per day by
September 2001, as various facility limitations are removed. Average daily
production was approximately 1,100 barrels of oil per day as of December 31,
13
1999. Relatively high oil prices are also expected to continue in the
short-term, which should positively impact KKM's net revenues from oil sales on
the export market.
Our highest priority in the short-term is to alleviate facility constraints
as quickly as possible to obtain a level of operational cash flow sufficient to
fund our cash requirements. Over the next 3 to 6 months, we anticipate $3.0 to
$5.0 million in additional working capital will be necessary to achieve this
objective. As of March 30, 2001, we have borrowed a total of $23.1 million out
of the $24.0 million available from the loan, leaving only $900,000 in
additional borrowings available to cover any working capital shortfalls.
Therefore, we are presently in discussions with Shell Capital to either increase
the existing debt facility or implement a revolving line of credit to meet any
working capital deficiencies that may arise. If we are unable to obtain
additional debt financing from Shell Capital, we will be required to look for
additional debt or equity financing from other sources. We can provide no
assurances that any other sources of capital will be available or, if available,
will be on terms favorable to Chaparral, however. Additionally, Shell Capital
must approve any capital or debt financing transactions we may enter into.
Otherwise, we may be in default of our Loan and our investment in the Karakuduk
Field may be lost.
Our short and long-term 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. Although KKM has a right to export, and receive
export quota for, 100% of the production from the Karakuduk Field under the
terms of its agreement, KKM was required to sell approximately 20% of its crude
oil on the domestic market in 2000. The domestic market, however, does not
permit world market prices to be obtained, resulting in approximately $8 to $11
less cash flow per barrel on 2000 local oil sales. We are taking steps to reduce
or eliminate our local market obligations, including petitioning the government
to enforce our rights under KKM's agreement and seeking a holiday from all local
market obligations during the early stages of development of the Karakuduk
Field. While management believes we will be successful in minimizing KKM's local
sales requirements, some level of future local market obligation is expected for
all oil and gas producers in Kazakhstan, including KKM. If we are unsuccessful
in reducing or eliminating our future local sales obligations, however, we may
be required to initiate legal proceedings within Kazakhstan or make a claim
under our political risk insurance policy with OPIC 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 OPIC 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 whatsoever.
Shell Capital loan.
- -------------------
As of December 31, 2000, our only significant outstanding indebtedness is
our loan with Shell Capital. We entered into the loan on November 1, 1999, to
provide up to $24.0 million of financing for the development of the Karakuduk
Field and have drawn down a total of $23.1 million of the available facility as
of March 30, 2001. The loan is available for drawdown until the earlier of
September 30, 2001 or project completion. Project completion occurs when various
conditions are met by us and KKM, including, but not limited to: (i) receipt by
Shell Capital of an independent engineer's reserve report evidencing proved
developed reserves of at least 30.0 million barrels in the Karakuduk Field, (ii)
sustaining average gross production of 13,000 barrels of oil per day from the
Karakuduk Field for a period of 45 consecutive days, (iii) sustaining water
injection at an average rate of 15,000 barrels per day over 45 consecutive days,
(iv) injection of lift gas into one well over a 24 hour period, and (v) various
other financial and technical milestones. We anticipate that we will not reach
project completion as presently defined on or before September 30, 2001, and
that certain technical requirements of project completion are not necessary or
prudent to perform in the time frame specified under the loan. We plan to
re-negotiate the definition of project completion prior to September 30, 2001.
The loan accrues interest at an annual rate of the London Interbank Offered
Rate ("LIBOR") plus 17.75%, compounding quarterly prior to project completion.
The annual interest rate is reduced to LIBOR plus 12.75% after project
completion. Prior to project completion, an interest amount, equal to annual
rate of LIBOR plus .50%, is payable quarterly to Shell Capital, along with a
commitment fee equal to an annual rate of 1.5% of the undrawn portion of the
$24.0 million debt facility. The remaining unpaid interest is capitalized to the
loan at the end of each quarter. After project completion, all quarterly
interest on the outstanding loan is fully due and payable at the end of each
calendar quarter.
14
Principal payments, including any capitalized interest, are due on
quarterly reduction dates, beginning with the first calendar quarter ending on
the earlier of 60 days following project completion or December 31, 2001.
Minimum principal payments, based upon percentages of the principal outstanding
as of project completion, are set out in the loan and ensure full settlement of
the loan by September 30, 2004, the final maturity date. Mandatory prepayments
of principal outstanding are required on each reduction date out of any excess
cash flow available after consideration of Chaparral's and KKM's permitted
budgeted expenditures for the following 45 days and all fees, interest, and
principal payments scheduled on such reduction date. As of March 30, 2001, we
expect approximately $1.0 million of mandatory principal payments will be due on
December 31, 2001 and approximately $6.5 million of additional principal will be
payable throughout 2002.
In connection with finalizing the loan, we also issued a warrant to Shell
Capital to purchase up to 15% of our outstanding common stock. The warrant is
non-transferable and will be exercisable on June 30, 2001. The warrant contains
registration rights and is subject to anti-dilution provisions. As of March 30,
2001, the warrant represents the right to purchase up to 1,785,455 shares of our
common stock at an exercise price of $9.79 per share.
The loan subjects us to a significant number of restrictions, including
various representations and warranties, positive and negative covenants, and
events of default. These restrictions include, but are not limited to, the
following:
o Pledge of Assets. We pledged substantially all of our assets to Shell
Capital, including our interest in the Karakuduk Field. If an event of
default occurs under the loan and is not timely cured, Shell Capital
is entitled to remedies, including the right to accelerate repayment
of the loan and obtain our rights to the Karakuduk Field.
o Business Alteration. We cannot engage in any other business except the
ownership of KKM and the operation of the Karakuduk Field without the
prior consent of Shell Capital.
o Change in Control. We cannot enter into any transaction where a
"group" as defined in the Securities Act of 1934 acquires or otherwise
gains control of 20% or more of our outstanding shares of voting
stock. Some transactions are exempt from this restriction, including,
the conversion of our notes, conversion of our outstanding Series A
Preferred Stock, the exercise of the Shell warrant, and a grant of
non-statutory or statutory options to purchase up to 15% of our
outstanding common stock to our officers, directors, employees, and
consultants (subject to anti-dilution provisions). Furthermore, Allen
& Company and Whittier Ventures, LLC, have agreed not to let their
ownership in us fall below 20%, unless otherwise agreed with Shell
Capital.
o Charged Accounts. We must retain all cash receipts from oil sales,
proceeds from the loan, and any other funds raised through approved
equity or debt offerings in pledged bank accounts (the "Charged
Accounts"). The Charged Accounts are controlled by Shell Capital. We
retain title to the Charged Accounts, but Shell Capital directs all
cash movements at our request. On a monthly basis, we request
transfers of funds from the Charged Accounts into specific operating
accounts controlled directly by us or by KKM, respectively.
o Cash Expenditures. We must expend funds in accordance with capital and
operating budgets approved by Shell Capital on an annual basis, unless
otherwise approved by Shell Capital.
o Project Completion. KKM must reach project completion on or before
September 30, 2001. Failure to reach project completion is an event of
default under the loan.
o Share Capital. We cannot purchase, issue, or redeem any of our share
capital without the prior approval of Shell Capital.
o Future Indebtedness. We cannot borrow money, other than trade debt,
without the approval of Shell Capital.
o Sale of Significant Assets. We cannot dispose of any significant
assets, including capital stock in our subsidiaries, without the
approval of Shell Capital.
15
o Leases. Without Shell Capital's approval, KKM cannot enter into any
lease or license arrangement with annual payments in excess of $1.0
million and we will not enter into any lease or license arrangement
with annual payments in excess of $200,000.
o Dividends. KKM cannot pay dividends prior to project completion, and
then only subject to Shell Capital's approval. We cannot pay any
dividends without Shell Capital's consent.
o OPIC Insurance. We must maintain OPIC political risk insurance
throughout the duration of the loan.
o Hedge Agreement. We will not cancel or terminate the hedging contracts
entered into as part of the loan or enter into any other hedging
transaction without Shell Capital's consent.
The terms and conditions and related financing costs of the loan are
significant. We estimate approximately $36.0 to $45.0 million of future cash
flows will be necessary to fully repay the loan and all accrued interest and
fees thereon, depending upon excess cash flows available from operations to
repay the loan prior to schedule repayments. Future cash flows from operations
required for debt service will not be available for other purposes. Our ability
to obtain additional debt or equity financing in the future for working capital,
capital expenditures, or acquisitions is also restricted, as well as our ability
to acquire or dispose of significant assets or investments. These restrictions
may make us more vulnerable and less able to react to adverse economic
conditions. The failure of Chaparral to meet the terms of the loan, including
the deadline for project completion, could result in an event of default and the
loss of our investment in the Karakuduk Field.
Capital Commitments and Other Contingencies
- -------------------------------------------
Under the terms of our license with the government of the Republic of
Kazakhstan, KKM was committed to spend a minimum of $30.0 million and drill a
minimum of 8 wells on or before June 30, 2000. KKM did not timely satisfy the
work commitments of the license as of June 30, 2000, but received a letter from
Kazakhstan's licensing authority on July 4, 2000 stating that due to KKM's
activities and expenditures to date there were "no grounds for termination or
suspension of the operation of the license." While the letter was not a formal
amendment to the license, KKM has been advised by its Kazakhstan legal counsel,
the Law Firm Grata, that the license is not in default and a formal amendment
should not be expected from the licensing authority. KKM fulfilled all of its
license commitments as of September 30, 2000, and is not subject to any further
minimum capital or work obligations other than to continue to develop the
Karakuduk Field in accordance with its agreement with the government.
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
16
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. In April 1999, the government of the Republic of Kazakhstan
discontinued its support of the tenge and allowed it to float freely against the
U.S. dollar. Immediately thereafter, the official exchange rate declined from
87.5 tenge to the U.S. dollar to 142 tenge to the U.S. dollar, but was
relatively stable for the remainder of 1999 and 2000. 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
Kazakhtan 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, 2000, the exchange rate was 144.5 tenge per U.S. dollar.
2. Results from Operations
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 $26.8 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, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, 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
$120.0 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 9 to our consolidated financial statements for the
year ended December 31, 2000.
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
8 to our consolidated financial statements for the year ended December 31, 2000.
17
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
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.
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 Notes 7 and 16 to our consolidated financial statements for
the year ended December 31, 2000.
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 $13.76 million, or $17.98 per barrel, in revenue net
of transportation costs. 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 5 to
our consolidated financial statements for the year ended December 31, 2000.
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 6 to our consolidated financial
statements for the year ended December 31, 2000.
Results of Operations Year Ended December 31, 1999 Compared to Year Ended
December 31, 1998
- -------------------------------------------------------------------------
Our operations in the year ended December 31, 1999 resulted in a net loss
of $5.16 million, compared to a net loss of $4.27 million in 1998.
Interest income increased by $30,000 from 1998 due to increased financing
of of 100% of KKM's operations in the Karakuduk Field. Additionally, we
eliminated an additional $232,000 of interest income against equity losses from
our investment in KKM in application of EITF 99-10.
Interest expense increased $318,000 in 1999 due to additional borrowings to
support our corporate overhead and KKM's operations. During 1999, we issued
$10.04 million in convertible notes and recognized interest expense of $126,000
from interest accrued on the notes and $77,000 from related discount
amortization. See Note 9 to our consolidated financial statements for the year
ended December 31, 2000.
General and administrative costs decreased $625,000 from 1998, primarily
due to a decrease in compensation expense from a reduction in stock based
compensation and the reversal of accrued compensation, which was contingent on
the sale of our interest in KKM.
Our equity loss in KKM increased $627,000 from 1998. In the fourth quarter
of 1999, we began applying EITF 99-10 to determine its equity income and losses
from its investment in KKM. As a result, we recognized an additional $683,000 of
equity losses from KKM in 1999 and eliminated 100% of our interest income from
KKM for the quarter ended December 31, 1999. The net impact was approximately
$451,000 in additional equity losses from our investment for 1999. See Note 5 to
our consolidated financial statements for the year ended December 31, 2000.
18
In 1999, we recorded a $1.06 million loss from a settlement with a formal
drilling contractor for KKM. We recorded the charge on the settlement of this
dispute as of December 31, 1999. See Note 4 to our consolidated financial
statements for the year ended December 31, 2000.
In 1998, we settled a lawsuit filed against us for a total of $200,000 and
warrants to purchase 3,333 shares of our common stock at an exercise price of
$60 per share, exercisable through January 2, 1999. The warrants were recorded
at the fair market value (approximately $34,000). See Note 11 to our
consolidated financial statements for the year ended December 31, 2000.
In 1998, we recognized a $236,000 extraordinary loss on the extinguishment
of long-term debt. In 1997, we recognized a $214,000 extraordinary loss on the
extinguishment of short-term debt. See Note 17 to our consolidated financial
statements for the year ended December 31, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to various market risks, including interest rate risk and
commodity price risk.
Our loan is subject to a variable quarterly interest rate based upon LIBOR
plus 17.75%. As of December 31, 2000, the outstanding loan balance subject to
interest was approximately $24.98 million. During 2000, the high, low, and
average interest rates applicable against the loan were 24.53%, 23.70%, and
24.17%, respectively. The terms of the loan are more fully described under "Item
7 Management Discussion and Analysis of Financial Condition and Results of
Operations - Shell Capital Loan." An increase of applicable interest rates will
result in a corresponding increase in the interest costs associated with the
loan. Furthermore, the majority of the loan interest is capitalized on a
quarterly basis until we reach project completion, which exposes us to
additional interest rate risk on the additional principal amount of the loan.
We must begin repaying the loan on December 31, 2001. The loan stipulates
the minimum principal repayments required, but also requires all excess cash
flows available from crude oil sales be utilized to repay the loan as quickly as
possible. Earlier repayment of the loan results in significantly less interest
expense charged on the loan. KKM's ability to generate excess cash flows is
dependent upon many factors, including production rates, access to export
markets to sell our crude oil production, and the available commodity price of
crude oil. Lower crude oil prices will could significantly reduce cash flows
earned by KKM, which would otherwise be used to prepay the loan. We estimate
approximately $36.0 million to $45.0 million of net cash flows from oil sales
will be required to repay the loan depending upon excess cash flows available to
repay principal earlier than scheduled.
To 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 a
total of 1,562,250 barrels of North Sea Brent crude. The exercise prices of the
various put contracts ranges 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 high, low, and average price of the hedge agreement was
$4.0 million, $261,000, and $978,000, respectively. As of December 31, 2000, the
put contracts had a fair market value of $999,000. While we do not expect to
recover any future economic value from the hedge contracts, we cannot sell the
contracts under the terms of the loan.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for a list of the Financial Statements and the supplementary
financial information included in this report following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 30, 2000, the following table sets forth (i) the names and ages
of our directors and executive officers of Chaparral, (ii) the principal offices
and positions with Chaparral held by each person and (iii) 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 Principal Occupation During the Last 5
and Position in Chaparral Since Age Years
- ------------------------- ----- --- ----------------------------------------
John G. McMillian 1997 74 Mr. McMillian has served as the Chairman
Co-Chairman and of the Board of Chaparral and Chief
Chief Executive Officer Executive Officer since January 1999 and
Co-Chairman of the Board 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 49 Mr. Jeffs has served as the Co-Chairman
Co-Chairnman 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.
David A. Dahl 1997 39 Mr. Dahl served as Secretary of
Director Chaparral from August 1997 until May
1998. 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. From 1990 to 1993, Mr. Dahl was
a Vice President of Merus Capital
Management, an investment firm.
20
Name of Director or Officer Principal Occupation During the Last 5
and Position in Chaparral Since Age Years
- ------------------------- ----- --- ----------------------------------------
Ted Collins, Jr. 1997 62 Mr. Collins has been the President of
Director Collins & Ware Investments Company, a
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, MidCoast Energy
Resources, Inc. and Queen Sand
Resources, Inc.
Richard L. Grant 1998 46 Mr. Grant is the President and Chief
Director Executive Officer of Cabot LNG 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 Cabot
LNG. 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.
Judge Burton B. Roberts 2001 78 Since January 1999, Judge Roberts has
Director served as counsel to the law firm of
Fischbein o Badillo o Wagner o Harding.
From 1973 to 1999, Judge Roberts served
as Justice of the New York State Supreme
Court, as Administrative Judge for the
Criminal Branch, 12th Judicial District,
from January 1984 to January 1999, and
for the Civil Branch, 12th Judicial
District, from 1988 to 1999. Prior to
his service on the bench, Judge Roberts
was an Assistant District Attorney in
New York County, then Chief Assistant
District Attorney and District Attorney
for Bronx County, New York. Judge
Roberts was formerly Chair of the Bronx
County Coordinating Committee for
Criminal Justice and of the New York
State Committee on Audio/Visual
Coverage.
Michael B. Young 1998 32 Mr. Young has been the Treasurer,
Treasurer and Controller Controller and Principal 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 60 Since 1995, Mr. Berlin has been a
Secretary partner of the law firm Aitken Irvin
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 has held
various other positions with Belco
Petroleum Corp. from 1977 to 1985. Mr.
Berlin is currently a director of Belco
Oil & Gas Corp.
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, 2000, and Form
5 and any amendments furnished to Chaparral with respect to the same fiscal
year, during our fiscal year ended December 31, 2000, we believe that our
directors, officers, and greater than 10% beneficial owners complied with all
applicable filing requirements, except the following: (i) Capco Resources, Ltd.
failed to file, on a timely basis, one report representing one transaction; (ii)
Mr. Young failed to file, on a timely basis, one report representing one
transaction, (iii) Messrs. McMillian and Jeffs failed to file, on a timely
basis, one report representing two transactions for fiscal year ended December
31, 2000, (iv) Whittier Ventures, LLC failed to file one report representing one
transaction for the fiscal year ended December 31, 2000, and (v) Mr. Dahl failed
to file one report representing one transaction for the fiscal year ended
December 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation paid by Chaparral for services
rendered Mr. McMillian who is currently the Chief Executive Officer and
Co-Chairman of the Board and Mr. Young, who is the Treasurer, Controller, and
Principal Accounting Officer of Chaparral. There were no other executive
officers of Chaparral whose annual salary and bonus exceeded $100,000 during the
fiscal year ended December 31, 2000.
Summary Compensation Table.
-------------------------------------- -----------------------------------------------
Annual Compensation Long-Term Compensation
-------------------------------------- -----------------------------------------------
Awards Payouts
--------------------------------- -----------
Other Restricted Securities
Name and Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Awards ($) Options/SARs (#) Payouts ($) Compensation
------------------ ---- ------ ----- ------------ ---------- ---------------- ----------- -----------
John G. McMillian 2000 $137,500 -- -- -- -- -- --
Chief Executive 1999 -- -- -- -- -- -- --
Officer (1/99 to
Present)
Michael B. Young 2000 $150,000 -- -- -- -- -- --
Treasurer and 1999 $89,167 $42,500(1) -- -- -- -- --
Controller 1998 $73,333 -- -- $90,000(2) -- -- --
- ----------
1. Mr. Young received $42,500 in cash bonuses during 1999.
2. Under the terms of a letter agreement, Mr. Young received 167 shares on
February 3, 1998, January 30, 1999, January 30, 2000, and January 30, 2001.
The $90,000 represents the market value of such shares at the closing price
on the last trading day immediately preceding the date of grant. Dividends
will be paid on shares of restricted stock held by Mr. Young if Chaparral
pays any dividends on its Common Stock. At December 31, 2000, the aggregate
value of the restricted stock grants to Mr. Young was $2,168 based on the
closing price of our common stock on the last trading day immediately
preceding the end of its fiscal year.
22
Options/SAR Grants.
For the fiscal year ended December 31, 2000, 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, 2000 December 31, 2000
------------------------------------- -----------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------- -----------------------------------------------
Michael B. Young 1,167 -- -- --
Additionally, no options were exercised in fiscal year 2000.
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
Company. Whittier Ventures currently owns approximately 16.23% of the
outstanding common stock. See "Certain Relationships and Related Transactions"
immediately below for a description of transactions between Whittier Ventures
and Chaparral.
Compensation of Directors.
During the fiscal year ended December 31, 2000, Chaparral did not
compensate its directors for their service as directors. There were no standard
or other arrangements for the compensation of directors in effect for the fiscal
year ended December 31, 2000.
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, 2000.
1995 1996 1997 1998 1999 2000
Chaparral Resources, Inc. 100.00 140.00 319.98 44.00 16.80 7.73
SIC Code Index 100.00 138.85 141.02 112.96 137.98 175.29
Nasdaq Market Index 100.00 124.07 151.42 213.57 376.67 236.75
23
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
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.
During fiscal year ended December 31, 2000, the Compensation Committee
determined not to grant incentive compensation to the executive officers of
Chaparral named in the Summary Compensation Table due to the performance of
Chaparral's common stock in relation to the Nasdaq Market Index and the SIC Code
Index. See the Stock Performance Graph above.
During 2000, Chaparral retained an outside consulting firm to assist the
Compensation Committee in formulating a new incentive compensation plan to be
implemented in fiscal year 2001. As of the date of this filing, the consultant's
report has not been finalized and a new compensation plan has not been issued.
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.
24
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,
By: /s/ Richard L. Grant
--------------------------------
Richard L. Grant
Chairman
By: /s/ James A. Jeffs
--------------------------------
James A. Jeffs
By: /s/ David A. Dahl
--------------------------------
David A. Dahl
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 30, 2001, 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. -- 1,894,733(4) 13.27%
444 5th Avenue SW
Suite 2240
Calgary, Alberta
Canada T2P2T8
Shell Capital Limited -- 1,785,455(5) 11.11%
Shell Centre
London SE1 7NA
United Kingdom
John G. McMillian Co-Chairman of the Board and 386,303(6) 2.70%
Chief Executive Officer
James A. Jeffs Co-Chairman of the Board 2,329,498(7) 16.30%
David A. Dahl Director 2,320,587(8) 16.24%
Ted Collins, Jr. Director 2,668 *
Richard L. Grant Director -- *
Judge Burton B. Roberts Director -- *
Michael B. Young Treasurer & Controller 1,835(9) *
All current directors and executive -- 2,722,306(10) 19.04%
officers as a group (eight persons)
- ---------
* Represents less than 1% of the shares of Common Stock outstanding.
26
(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 281,830 shares held by
Capco Asset Management, Inc., an affiliate of Capco Resources, Ltd.
(5) In accordance with Rule 13d-3(d)(1)(i)(A), includes 1,785,455 shares
underlying a warrant, which will be exercisable at the earlier of project
completion or September 30, 2001.
(6) 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.
(7) 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.
(8) 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.
(9) Includes 668 shares owned by Mr. Young and 1,167 shares underlying
currently exercisable options.
(10) Includes the shares as described in Notes (6) through (9) above. In
addition, it includes 2,668 shares owned by Ted Collins, Jr. a Director of
Chaparral. Also 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
On September 21, 2000, we converted notes with an aggregate principal
amount of $20.85 million, plus accrued interest of $898,000, into 11,690,259
shares of our common stock at a conversion price of $1.86 per share. Originally,
the conversion provision of the notes was subject to shareholder approval, but
our 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
shares of our common stock. We 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 our working capital requirements, a
requirement of our Shell Capital loan to raise $10.0 million in new equity on or
before September 30, 2000, and complying with various restrictive covenants of
the Shell Capital loan.
The principal balance of the notes consisted of $10.04 million 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, $4.05 million to Whittier Ventures, $662,000 to John G. McMillian, our
Co-Chairman and Chief Executive Officer, and $150,000 to a relative of Jim
Jeffs, our Co-Chairman.
27
The notes were issued in a series of transactions from late 1999 through
2000. In exchange for the notes, we received $15.56 million in cash and canceled
$5.29 million in promissory notes issued previously in 1999, plus accrued
interest thereon, to Allen & Company ($3.83 million), Whittier Ventures ($1.05
million), and Mr. McMillian ($412,000).
In October 2000, Chaparral issued 1,612,903 shares of common stock to Capco
for $3.0 million, or $1.86 per share. Capco Energy, Inc., an affiliate of Capco,
was also a holder of two notes with an aggregate principal amount of $750,000,
which were converted, along with accrued interest thereon, into 427,113 shares
of our common stock on September 21, 2000. After the capital stock transaction,
Capco or its affiliates owned approximately 14.28% of our outstanding common
stock.
The conversion of the notes and the common stock subscription to Capco
resulted in a 92.28% dilution of the holders of our common stock outstanding as
of September 20, 2000, not including any shares owned by holders of the notes.
The conversion of the notes resulted in a change of ownership control, as Allen
& Company and Whittier Ventures together own greater than 50% of our outstanding
common stock. The following table summarizes the additional shares of common
stock received by each note holder upon conversion and their respective change
in ownership of our common stock before and after the conversion of the notes
and the issuance of common stock to Capco.
INCREASE BENEFICIAL OWNERSHIP %
IN SHARES ---------------------------
OF COMMON BEFORE AFTER %
8% NOTEHOLDER STOCK DILUTION(1) DILUTION(2) INCREASE
- ------------------------------------------------------------------------------------------------
Akin, Gump, Strauss, Hauer & Feld, LLP 113,309 -- 0.79% 0.79%
Allen & Company Incorporated 5,561,165 16.69% 40.00% 23.31%
Capco Resources, Ltd. (3) 2,040,016 -- 14.28% 14.28%
Cord Capital, LLC 57,125 -- 0.40% 0.40%
Cord Family Exempt Trust 85,688 -- 0.60% 0.60%
Dardana Limited 405,958 -- 2.84% 2.84%
Duncan A. Lee 57,667 -- 0.40% 0.40%
EcoTels International Limited 328,593 -- 2.30% 2.30%
Global Undervalued Securities Fund, LP 144,168 -- 1.01% 1.01%
Goldrust Venture Capital Limited 405,958 -- 2.84% 2.84%
Helen Jacobs Strauss Trust 197,985 -- 1.39% 1.39%
John G. McMillian 378,634 0.78% 2.70% 1.92%
Marathon Special Opportunity Fund 57,667 -- 0.40% 0.40%
Patrick McGee 57,667 -- 0.40% 0.40%
Pecos Joint Venture 115,334 -- 0.81% 0.81%
Rose Dosti IRA UTA Charles Schwab, Inc. 85,140 -- 0.60% 0.60%
Sage Operating, Ltd. 405,958 -- 2.84% 2.84%
Stardust Fund Limited 405,958 -- 2.84% 2.84%
Thomas G. Murphy 72,084 1.51% 0.61% -0.90%
Whitier Ventures, LLC (4) 2,255,004 6.49% 16.23% 9.74%
William Keller 72,084 1.47% 0.61% -0.86%
----------------------------------------------------
13,303,162 26.94% 94.89% 67.95%
====================================================
(1) Chaparral had 980,472 shares of common stock outstanding as of September
20, 2000, prior to the conversion of the notes and common stock
subscription agreement with Capco. In addition, the beneficial ownership
percentage before dilution excludes any additional shares of common stock
resulting from the conversion of the notes and accrued interest thereon.
(2) Chaparral had 14,283,634 shares of common stock outstanding after the
conversion of the notes and accrued interest thereon into 11,690,259 shares
of common stock on September 21, 2000, and the issuance of 1,612,903 shares
of common stock to Capco on October 30, 2000.
(3) Includes 427,113 shares of common stock held by Capco Asset Management,
Inc., an affiliate of Capco Resources, Ltd. and Capco Energy, Inc.
(4) Includes 5,820 shares held by Whittier Energy Company, 158 shares held by
Whittier Opportunity Fund, and 8,334 options underlying shares held by
Whittier Opportunity Fund.
In connection with the loan, Chaparral issued to Shell Capital a warrant to
purchase up to 15% of the our outstanding common stock, subject to certain
anti-dilution provisions. On the date of grant, the warrant represented 147,072
shares of our common stock at an exercise price of $15.45 per share. After the
conversion of the notes and the issuance of our common stock to Capco, both
dilutive events, the warrant represents 1,785,455 shares of our common stock
exercisable at a price of $9.79 per share. Shell Capital is also entitled to
nominate one director to our board of directors.
28
Mr. Alan Berlin, Chaparral's Secretary, is a partner in a law firm, Aitken,
Irvin, Berlin & Vrooman, LLP, which provides outside legal services to
Chaparral. The fees incurred are not in excess of 5% of the law firm's gross
revenues for the year ended December 31, 2000.
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, 2000 and
December 31, 1999 .............................................F-2
Consolidated Statements of Operations--Years ended
December 31, 2000, 1999, and 1998..............................F-4
Consolidated Statements of Cash Flows--Years ended
December 31, 2000, 1999, and 1998..............................F-5
Consolidated Statement of Changes in Stockholders'
Equity--Years ended December 31, 2000, 1999, and 1998.........F-7
Notes to Consolidated Financial Statements..........................F-8
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited..............................F-28
Supplemental Information - Selected Quarterly Financial
Data - Unaudited..............................................F-31
Closed Type JSC Karakudukmunay.
-------------------------------
Report of Independent Auditors ....................................F-33
Balance Sheets--As of December 31, 2000 and 1999 ..................F-34
Statements of Expenses and Accumulated Deficit--Years ended
December 31, 2000, 1998 and 1998..........................F-35
Statements of Cash Flows--Years ended December 31, 2000,
1999 and 1998.................................................F-36
Statements of Stockholders' Deficit................................F-37
Notes to the Financial Statements .................................F-38
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.
----------------------------
We filed a Current Report on Form 8-K, dated October 6, 2000 to
report the execution of an agreement to sell $3.0 million of the
Chaparral's common stock to Capco, a Canadian corporation, at $1.86
per share, the issuance of notes in the principal amount of $4.0
million to two stockholders of Chaparral, and conversion of $20.85
million of our notes, plus accrued interest, into 11,690,259 shares of
our common stock at $1.86 per share.
29
(c) Exhibits.
---------
Exhibit No. Description and Method of Filing
---------- --------------------------------
*2.1 Stock Acquisition Agreement and Plan of Reorganization
dated April 12, 1995 between Chaparral Resources, Inc.,
and the Shareholders of Central Asian Petroleum, Inc.
*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., incorporated by reference to Chaparral
Resources, Inc.'s Registration Statement No. 333-7779,
filed with the Securities and Exchange Commission on
July 8, 1996.
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 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $101,400,
to Allen & Company Incorporated, incorporated by
reference to Exhibit 4.1 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.
4.2 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $182,680,
to Allen & Company Incorporated, incorporated by
reference to Exhibit 4.2 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.
4.3 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount
$2,613,097, to Allen & Company Incorporated,
incorporated by reference to Exhibit 4.3 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.
4.4 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $929,984,
to Allen & Company Incorporated, incorporated by
reference to Exhibit 4.4 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.
4.5 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $103,332,
to John G. McMillian, incorporated by reference to
Exhibit 4.5 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.
30
Exhibit No. Description and Method of Filing
---------- --------------------------------
4.6 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $20,298,
to John G. McMillian, incorporated by reference to
Exhibit 4.6 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.
4.7 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $288,019,
to John G. McMillian, incorporated by reference to
Exhibit 4.7 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.
4.8 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $524,986,
to Whittier Ventures, LLC, incorporated by reference to
Exhibit 4.8 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.
4.9 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $525,973,
to Whittier Ventures, LLC, incorporated by reference to
Exhibit 4.9 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.
4.10 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated December 10, 1999, principal amount
$150,000, to Cord Family Exempt Trust, incorporated by
reference to Exhibit 10.40 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000,
filed with the Securities and Exchange Commission on
March 22, 2000.
4.11 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated February 10, 2000, principal amount
$1,250,000, to Allen & Company Incorporated,
incorporated by reference to Exhibit 10.51 to Chaparral
Resources, Inc. Current Report on 8-K dated February 14,
2000, filed with the Securities and Exchange Commission
on March 22, 2000.
4.12 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated February 9, 2000, principal amount $100,000,
to Helen Jacobs Strauss Trust, incorporated by reference
to Exhibit 10.50 to Chaparral Resources, Inc. Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
4.13 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated February 9, 2000, principal amount $100,000,
to EcoTels International Limited, incorporated by
reference to Exhibit 10.49 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000,
filed with the Securities and Exchange Commission on
March 22, 2000.
4.14 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated January 27, 2000, principal amount $750,000,
to Allen & Company Incorporated, incorporated by
reference to Exhibit 10.48 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000,
filed with the Securities and Exchange Commission on
March 22, 2000.
31
Exhibit No. Description and Method of Filing
---------- --------------------------------
4.15 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated January 21, 2000, principal amount $250,000,
to Helen Jacobs Strauss Trust, incorporated by reference
to Exhibit 10.47 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
4.16 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated January 19, 2000, principal amount $200,000,
to Akin, Gump, Strauss, Hauer & Feld, incorporated by
reference to Exhibit 10.46 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000,
filed with the Securities and Exchange Commission on
March 22, 2000.
4.17 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated January 19, 2000, principal amount $250,000,
to John G. McMillian, incorporated by reference to
Exhibit 10.45 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
4.18 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated January 14, 2000, principal amount $250,000,
to Capco Energy, Inc., incorporated by reference to
Exhibit 10.44 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
4.19 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated January 7, 2000, principal amount $150,000,
Rose Dosti IRA UTA Charles Schwab Inc. Contributory DTD,
incorporated by reference to Exhibit 10.43 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February
14, 2000, filed with the Securities and Exchange
Commission on March 22, 2000.
4.20 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated December 15, 1999, principal amount
$500,000, to Capco Energy, Inc., incorporated by
reference to Exhibit 10.42 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000,
filed with the Securities and Exchange Commission on
March 22, 2000.
4.21 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated December 10, 1999, principal amount
$100,000, to Cord Capital, LLC, incorporated by
reference to Exhibit 10.41 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000,
filed with the Securities and Exchange Commission on
March 22, 2000.
4.22 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 12, 1999, principal amount
$1,000,000, to Whittier Ventures, LLC, incorporated by
reference to Exhibit 4.9 to Chaparral Resources, Inc.'s
Current Report on 8-K dated February 14, 2000, filed
with the Securities and Exchange Commission on November
17, 1999.
4.23 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount $100,000,
to Marathon Special Opportunity Fund, LLC, incorporated
by reference to Exhibit 4.8 to Chaparral Resources,
Inc.'s Current Report on 8-K dated October 25, 1999,
filed with the Securities and Exchange Commission on
November 17, 1999.
4.24 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount $100,000,
to Patrick McGee, incorporated by reference to Exhibit
4.7 to Chaparral Resources, Inc.'s Current Report on 8-K
dated October 25, 1999, filed with the Securities and
Exchange Commission on November 17, 1999.
32
Exhibit No. Description and Method of Filing
---------- --------------------------------
4.25 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount $100,000,
to Duncan A. Lee, incorporated by reference to Exhibit
4.6 to Chaparral Resources, Inc.'s Current Report on 8-K
dated October 25, 1999, filed with the Securities and
Exchange Commission on November 17, 1999.
4.26 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount $125,000,
to William Keller, incorporated by reference to Exhibit
4.5 to Chaparral Resources, Inc.'s Current Report on 8-K
dated October 25, 1999, filed with the Securities and
Exchange Commission on November 17, 1999.
4.27 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount $125,000,
to Thomas G. Murphy, incorporated by reference to
Exhibit 4.4 to Chaparral Resources, Inc.'s Current
Report on 8-K dated October 25, 1999, filed with the
Securities and Exchange Commission on November 17, 1999.
4.28 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount $200,000,
to Pecos Joint Venture, incorporated by reference to
Exhibit 4.3 to Chaparral Resources, Inc.'s Current
Report on 8-K dated October 25, 1999, filed with the
Securities and Exchange Commission on November 17, 1999.
4.29 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount $250,000,
to Global Undervalued Securities Fund, LP, incorporated
by reference to Exhibit 4.2 to Chaparral Resources,
Inc.'s Current Report on 8-K dated October 25, 1999,
filed with the Securities and Exchange Commission on
November 17, 1999.
4.30 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount
$2,000,000, to Allen & Company Incorporated,
incorporated by reference to Exhibit 4.1 to Chaparral
Resources, Inc.'s Current Report on 8-K dated October
25, 1999, filed with the Securities and Exchange
Commission on November 17, 1999.
4.31 Non-Negotiable Promissory Note, dated August 5, 2000,
principal amount $500,000, to Ecotels International
Limited, incorporated by reference to Exhibit 4.1 to
Chaparral Resources, Inc.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 2000, filed
with Securities and Exchange Commission on November 20,
2000.
4.32 Non-Negotiable Promissory Note, dated August 5, 2000,
principal amount $500,000, to Whittier Ventures LLC,
incorporated by reference to Exhibit 4.2 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, filed with Securities
and Exchange Commission on November 20, 2000.
4.33 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated August 21, 2000, principal amount $750,000,
to Dardana Limited, incorporated by reference to Exhibit
4.3 to Chaparral Resources, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000,
filed with Securities and Exchange Commission on
November 20, 2000.
4.34 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated August 21, 2000, principal amount $750,000,
to Goldrust Venture Capital Limited, incorporated by
reference to Exhibit 4.4 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000, filed with Securities and Exchange
Commission on November 20, 2000.
33
Exhibit No. Description and Method of Filing
---------- --------------------------------
4.35 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated August 21, 2000, principal amount $750,000,
to Sage Operating Ltd, incorporated by reference to
Exhibit 4.5 to Chaparral Resources, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2000, filed with Securities and Exchange Commission on
November 20, 2000.
4.36 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated August 21, 2000, principal amount $750,000,
to Stardust Fund Limited, incorporated by reference to
Exhibit 4.6 to Chaparral Resources, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2000, filed with Securities and Exchange Commission on
November 20, 2000.
4.37 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated September 21, 2000, principal amount
$2,000,000, to Allen & Company Incorporated,
incorporated by reference to Exhibit 4.7 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, filed with Securities
and Exchange Commission on November 20, 2000.
4.38 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated September 21, 2000, principal amount
$2,000,000, to Whittier Ventures LLC, incorporated by
reference to Exhibit 4.8 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000, filed with Securities and Exchange
Commission on November 20, 2000.
4.39 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated September 15, 2000, principal amount
$505,600, to Ecotels International Limited, incorporated
by reference to Exhibit 4.9 to Chaparral Resources,
Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000, filed with Securities and
Exchange Commission on November 20, 2000.
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.
34
Exhibit No. Description and Method of Filing
---------- --------------------------------
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., incorporated by reference to
Exhibit 10.1 to Chaparral Resources, Inc.'s Current
Report on Form 8-K dated April 1, 1996, filed with the
Securities and Exchange Commission on April 12, 1996.
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 Nonstatutory Stock Option Plan,
incorporated by reference to Exhibit 10.24 to Chaparral
Resources, Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, 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.
35
Exhibit No. Description and Method of Filing
---------- --------------------------------
10.14 Settlement Agreement and Release between Heartland, Inc.
of Wichita and Collins & McIlhenny, Inc. and Chaparral
Resources, Inc., Howard Karren, Whittier Trust Company
and James A. Jeffs dated October 30, 1998, incorporated
by reference to Exhibit 10.3 to Chaparral Resources,
Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998, filed with the Securities and
Exchange Commission on November 19, 1998.
10.15 Warrants issued to Heartland, Inc. of Wichita and
Collins & McIlhenny, Inc., as joint tenants and to Don
M. Kennedy, incorporated by reference to Exhibit 10.4 to
Chaparral Resources, Inc.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 1998, filed
with the Securities and Exchange Commission on November
19, 1998.
10.16 Loan Agreement between Challenger Oil Services, PLC and
Chaparral Resources, Inc. dated September 10, 1998,
incorporated by reference to Exhibit 10.5 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, filed with the
Securities and Exchange Commission on November 19, 1998.
10.17 Promissory Note between Challenger Oil Services, PLC and
Chaparral Resources, Inc. dated September 10, 1998,
incorporated by reference to Exhibit 10.6 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, filed with the
Securities and Exchange Commission on November 19, 1998.
10.18 International Daywork Drilling Contract - Land between
Challenger Oil Services, PLC and Karakuduk-Munay, JSC,
dated April 7, 1998, incorporated by reference to
Exhibit 10.32 to Chaparral Resources, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December
31, 1998, filed with the Securities and Exchange
Commission on April 15, 1999.
10.19 Amendment No. 1 to the International Daywork Drilling
Contract - Land between Challenger Oil Services, PLC and
Karakuduk-Munay, JSC, dated April 7, 1998, incorporated
by reference to Exhibit 10.33 to Chaparral Resources,
Inc.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, filed with the Securities and
Exchange Commission on April 15, 1999.
10.20 Amendment No. 2 to the International Daywork Drilling
Contract - Land between Challenger Oil Services, PLC and
Karakuduk-Munay, JSC, dated March 17, 1999, incorporated
by reference to Exhibit 10.34 to Chaparral Resources,
Inc.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, filed with the Securities and
Exchange Commission on April 15, 1999.
10.21 Letter Agreement dated March 17, 1999 between
Karakuduk-Munay, JSC and Challenger Oil Services, PLC,
incorporated by reference to Exhibit 10.35 to Chaparral
Resources, Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, filed with the
Securities and Exchange Commission on April 15, 1999.
10.22 Letter Agreement and Restated Amendment No. 1 to Loan
Agreement and Promissory Note dated March 18, 1999
between Challenger Oil Services, PLC and Chaparral
Resources, Inc., incorporated by reference to Exhibit
10.36 to Chaparral Resources, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1998,
filed with the Securities and Exchange Commission on
April 15, 1999.
10.23 $24,000,000 Loan Agreement dated as of November 1, 1999,
incorporated by reference to Exhibit 10.1 to Chaparral
Resources, Inc.'s Current Report on 8-K dated October
25, 1999, filed with the Securities and Exchange
Commission on November 17, 1999.
36
Exhibit No. Description and Method of Filing
---------- --------------------------------
10.24 Supplemental Agreement, dated February 10, 2000, among
Shell Capital Limited, Shell Capital Services Limited,
Chaparral Resources, Inc., Central Asian Petroleum
(Guernsey) Limited, Closed Type JSC Karakudukmunay and
Central Asian Petroleum, Inc., incorporated by reference
to Exhibit 10.19 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.25 CRI-CAP(G) Loan Agreement, dated February 7, 2000,
between Chaparral Resources, Inc. and Central Asian
Petroleum (Guernsey) Limited, incorporated by reference
to Exhibit 10.13 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.26 CAP(G)-KKM Loan Agreement, dated February 7, 2000,
between Closed Type JSC Karakudukmunay and Central Asian
Petroleum (Guernsey) Limited, incorporated by reference
to Exhibit 10.16 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.27 Accounts Agreement, dated February 8, 2000, among
Chaparral Resources, Inc., Central Asian Petroleum
(Guernsey) Limited, Closed Type JSC Karakudukmunay,
Shell Capital Services Limited, ABN Amro Bank N.V.,
London Branch and The Law Debenture Trust Corporation
p.l.c., incorporated by reference to Exhibit 10.1 to
Chaparral Resources, Inc.'s Current Report on 8-K dated
February 14, 2000, filed with the Securities and
Exchange Commission on March 22, 2000.
10.28 Security Trust Deed, dated February 7, 2000, among
Chaparral Resources, Inc., Central Asian Petroleum
(Guernsey) Limited, Central Asian Petroleum, Inc.,
Closed Type JSC Karakudukmunay, Shell Capital Services
Limited and The Law Debenture Trust Corporation p.l.c.,
incorporated by reference to Exhibit 10.17 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February
14, 2000, filed with the Securities and Exchange
Commission on March 22, 2000.
10.29 CRI Accounts Assignment, dated February 7, 2000, between
Chaparral Resources, Inc. and The Law Debenture Trust
Corporation p.l.c., incorporated by reference to Exhibit
10.2 to Chaparral Resources, Inc.'s Current Report on
8-K dated February 14, 2000, filed with the Securities
and Exchange Commission on March 22, 2000.
10.30 CAP(G) Accounts Assignment, dated February 7, 2000,
between Chaparral Resources, Inc. and The Law Debenture
Trust Corporation, p.l.c., incorporated by reference to
Exhibit 10.3 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.31 KKM Accounts Assignment, dated February 7, 2000, between
Closed Type JSC Karakudukmunay and The Law Debenture
Trust Corporation p.l.c., incorporated by reference to
Exhibit 10.4 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.32 CRI-CAP(D) Pledge Agreement, dated February 7, 2000,
between Chaparral Resources, Inc. and The Law Debenture
Trust Corporation p.l.c., incorporated by reference to
Exhibit 10.11 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
37
Exhibit No. Description and Method of Filing
---------- --------------------------------
10.33 CRI-CAP(G) Charge Over Shares, dated February 7, 2000,
between Chaparral Resources, Inc. and The Law Debenture
Trust Corporation p.l.c., incorporated by reference to
Exhibit 10.14 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.34 CAP(D)-CAP(G) Charge Over Shares, dated February 7,
2000, between Central Asian Petroleum, Inc. and The Law
Debenture Trust Corporation p.l.c., incorporated by
reference to Exhibit 10.15 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000,
filed with the Securities and Exchange Commission on
March 22, 2000.
10.35 KKM Pledge Agreement, dated February 7, 2000, between
Central Asian Petroleum (Guernsey) Limited and The Law
Debenture Trust Corporation p.l.c., incorporated by
reference to Exhibit 10.12 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000,
filed with the Securities and Exchange Commission on
March 22, 2000.
10.36 CRI Assignment, dated February 8, 2000, between
Chaparral Resources, Inc. and The Law Debenture Trust
Corporation p.l.c., incorporated by reference to Exhibit
10.5 to Chaparral Resources, Inc.'s Current Report on
8-K dated February 14, 2000, filed with the Securities
and Exchange Commission on March 22, 2000.
10.37 CAP(G) Assignment, dated February 7, 2000, between
Central Asian Petroleum (Guernsey) Limited and The Law
Debenture Trust Corporation p.l.c., incorporated by
reference to Exhibit 10.6 to Chaparral Resources, Inc.'s
Current Report on 8-K dated February 14, 2000, filed
with the Securities and Exchange Commission on March 22,
2000.
10.38 KKM Assignment, dated February 7, 2000, between Closed
Type JSC Karakudukmunay and The Law Debenture Trust
Corporation p.l.c., incorporated by reference to Exhibit
10.7 to Chaparral Resources, Inc.'s Current Report on
8-K dated February 14, 2000, filed with the Securities
and Exchange Commission on March 22, 2000.
10.39 Assignment of Insurance Proceeds, dated February 7,
2000, between Chaparral Resources, Inc. and The Law
Debenture Trust Corporation p.l.c., incorporated by
reference to Exhibit 10.8 to Chaparral Resources, Inc.'s
Current Report on 8-K dated February 14, 2000, filed
with the Securities and Exchange Commission on March 22,
2000.
10.40 KKM Assignment of Insurances, dated February 7, 2000,
between Closed Type JSC Karakudukmunay and The Law
Debenture Trust Corporation p.l.c., incorporated by
reference to Exhibit 10.9 to Chaparral Resources, Inc.'s
Current Report on 8-K dated February 14, 2000, filed
with the Securities and Exchange Commission on March 22,
2000.
10.41 Assignment of Reinsurance, dated February 8, 2000, among
Closed Type JSC Karakudukmunay, Kazakinstrakh JSC,
Schwarzmeer und Ostsee Insurance Co. Limited (Sovag)
U.K. and The Law Debenture Trust Corporation p.l.c.,
incorporated by reference to Exhibit 10.10 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February
14, 2000, filed with the Securities and Exchange
Commission on March 22, 2000.
10.42 Warrant Agreement, dated February 8, 2000, between
Chaparral Resources, Inc. and Shell Capital Limited,
incorporated by reference to Exhibit 10.18 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February
14, 2000, filed with the Securities and Exchange
Commission on March 22, 2000.
38
Exhibit No. Description and Method of Filing
---------- --------------------------------
10.43 Technical Services Agreement, dated February 8, 2000,
Shell Capital Services Limited and Closed Type JSC
Karakudukmunay, incorporated by reference to Exhibit
10.20 to Chaparral Resources, Inc.'s Current Report on
8-K dated February 14, 2000, filed with the Securities
and Exchange Commission on March 22, 2000.
10.44 Contract of Insurance No. 158, dated December 29, 1999,
between the Overseas Private Investment Corporation and
Chaparral Resources, Inc., incorporated by reference to
Exhibit 10.21 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.45 Amendment No. 1 to Contract of Insurance No. F158, dated
as of February 4, 2000, between the Overseas Private
Investment Corporation and Chaparral Resources, Inc.,
incorporated by reference to Exhibit 10.22 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February
14, 2000, filed with the Securities and Exchange
Commission on March 22, 2000.
10.46 Trade Confirmation, dated February 11, 2000, between
Deutsche Bank AG New York and Chaparral Resources, Inc.,
incorporated by reference to Exhibit 10.23 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February
14, 2000, filed with the Securities and Exchange
Commission on March 22, 2000.
10.47 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Patrick McGee, incorporated by reference to
Exhibit 10.24 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.48 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Whittier Ventures, LLC., incorporated by
reference to Exhibit 10.25 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000,
filed with the Securities and Exchange Commission on
March 22, 2000.
10.49 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Pecos Joint Venture, incorporated by
reference to Exhibit 10.26 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000,
filed with the Securities and Exchange Commission on
March 22, 2000.
10.50 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Thomas G. Murphy, incorporated by reference
to Exhibit 10.27 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.51 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Duncan Lee, incorporated by reference to
Exhibit 10.28 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.52 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Marathon Special Opportunity Fund,
incorporated by reference to Exhibit 10.29 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February
14, 2000, filed with the Securities and Exchange
Commission on March 22, 2000.
39
Exhibit No. Description and Method of Filing
---------- --------------------------------
10.53 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and William Keller, incorporated by reference to
Exhibit 10.30 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.54 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Global Undervalued Securities Fund, LP,
incorporated by reference to Exhibit 10.31 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February
14, 2000, filed with the Securities and Exchange
Commission on March 22, 2000.
10.55 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Cord Family Exempt Trust, incorporated by
reference to Exhibit 10.32 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000,
filed with the Securities and Exchange Commission on
March 22, 2000.
10.56 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Cord Capital, LLC, incorporated by reference
to Exhibit 10.33 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.57 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Capco Energy, Inc, incorporated by reference
to Exhibit 10.34 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.58 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Rose Dosti IRA UTA Charles Schwab Inc
Contributory DTD, incorporated by reference to Exhibit
10.35 to Chaparral Resources, Inc.'s Current Report on
8-K dated February 14, 2000, filed with the Securities
and Exchange Commission on March 22, 2000.
10.59 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and John G. McMillian, incorporated by reference
to Exhibit 10.36 to Chaparral Resources, Inc.'s Current
Report on 8-K dated February 14, 2000, filed with the
Securities and Exchange Commission on March 22, 2000.
10.60 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Akin, Gump, Strauss, Hauer & Feld, L.L.P.,
incorporated by reference to Exhibit 10.37 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February
14, 2000, filed with the Securities and Exchange
Commission on March 22, 2000.
10.61 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Helen Jacobs Strauss Trust, incorporated by
reference to Exhibit 10.38 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000,
filed with the Securities and Exchange Commission on
March 22, 2000.
40
Exhibit No. Description and Method of Filing
---------- --------------------------------
10.62 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Allen & Company Incorporated, incorporated
by reference to Exhibit 10.39 to Chaparral Resources,
Inc.'s Current Report on 8-K dated February 14, 2000,
filed with the Securities and Exchange Commission on
March 22, 2000.
10.63 Subordination Agreement, dated February 8, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and EcoTels International Limited, incorporated
by reference to Exhibit 10.63 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.
10.64 Crude Oil Sale and Purchase Agreement dated as of
November 1, 1999, between Closed Type JSC Karakuduk
Munay and Shell Trading International Limited,
incorporated by reference to Exhibit 10.1 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, filed with the
Securities and Exchange Commission on November 19, 1999.
10.65 Daywork Drilling Contract Land between KazakhOil
Drilling Service Company and Closed Type Karakudukmunay,
JSC, dated October 10, 1999, incorporated by reference
to Exhibit 10.65 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.
10.66 Transportation Contract between KazakhOil and Closed
Type Karakudukmunay, JSC, dated January 31, 2000,
incorporated by reference to Exhibit 10.66 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.
10.67 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.
10.68 Letter from Ryder Scott Company Petroleum Engineers to
Chaparral Resources, Inc. regarding reserve estimates of
the Karakuduk Field as of December 31, 1999, dated April
9, 2001.
10.69 Letter from Ryder Scott Company Petroleum Engineers to
Chaparral Resources, Inc. regarding reserve estimates of
the Karakuduk Field as of December 31, 2000, dated April
9, 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.
23.1 Consent of the Law Firm Grata dated April 12, 2001.
* 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.
41
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 12, 2001
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 Signature
April 12, 2001 By: /s/ Ted Collins, Jr.
--------------------------------
Ted Collins, Jr.
Director
April 12, 2001 By: /s/ David A. Dahl
--------------------------------
David A. Dahl
Director
April 12, 2001 By: /s/ James A. Jeffs
--------------------------------
James A. Jeffs
Co-Chairman
April 12, 2001 By: /s/ Richard L. Grant
--------------------------------
Richard L. Grant
Director
April 12, 2001 By: /s/ John G. McMillian
--------------------------------
John G. McMillian
Co-Chairman and Chief
Executive Officer
April 12, 2001 By: /s/ Judge Burton B. Roberts
--------------------------------
Judge Burton B. Roberts
Director
42
Chaparral Resources, Inc.
Consolidated Financial Statements
Years ended December 31, 2000, December 31, 1999, and
December 31, 1998 with Reports of Independent Auditors
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-28
Supplemental Information - Selected Quarterly
Financial Data - Unaudited...............................................F-31
Closed Type JSC Karakudukmunay
Report of Independent Auditors..............................................F-33
Audited Financial Statements
Balance Sheets..............................................................F-34
Statements of Operations....................................................F-35
Statements of Cash Flows....................................................F-36
Statements of Stockholders' Deficit.........................................F-37
Notes to Financial Statements...............................................F-38
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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company has incurred recurring operating losses and has a working capital
deficiency as of December 31, 2000. In addition, there are uncertainties
relating to the Company and its equity method investee's ability to meet
projected cash flow requirements through 2001. 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 2, 2001
F-1
CHAPARRAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
December 31
2000 1999
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 604,000 $ 23,000
Restricted cash (Note 3) -- 578,000
Accounts receivable 30,000 23,000
Receivable from affiliate (Note 14) 265,000 --
Prepaid expenses 202,000 111,000
------------ ------------
Total current assets 1,101,000 735,000
Investment in KKM and other oil and gas
property costs - full cost method
Republic of Kazakhstan (Note 5): 64,902,000 38,151,000
Furniture, fixtures and equipment 91,000 100,000
Less accumulated depreciation (41,000) (39,000)
------------ ------------
50,000 61,000
------------ ------------
Other Assets
Deferred debt issuance cost -- 2,356,000
Hedge agreement (Note 6) 3,518,000 --
Other (Note 7) 585,000 --
------------ ------------
Total other assets 4,103,000 2,356,000
------------ ------------
Total assets $ 70,156,000 $ 41,303,000
============ ============
See accompanying notes.
F-2
CHAPARRAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
December 31
2000 1999
------------- -------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 243,000 $ 1,045,000
Accrued liabilities:
Accrued compensation 346,000 458,000
Accrued debt issuance cost -- 1,934,000
Accrued interest and other 213,000 239,000
Shell Capital loan, current portion (Note 8) 900,000 --
------------- -------------
Total current liabilities 1,702,000 3,676,000
Shell Capital loan, net of discount (Note 8) 20,978,000 --
Note payable, net of discount (Note 9) -- 9,576,000
Redeemable preferred stock (Note 12)- cumulative, convertible,
Series A 75,000 designated, 50,000 issued and outstanding,
at stated value, $5.00 cumulative annual
dividend, $5,750,000 redemption value 5,550,000 5,200,000
Stockholders' equity (Note 10):
Common stock - authorized, 100,000,000
shares of $0.0001 par value; issued and outstanding,
14,283,634 and 980,314 shares as of
December 31, 2000 and 1999, respectively 1,000 --
Capital in excess of par value 94,061,000 47,857,000
Unearned portion of restricted stock awards -- (23,000)
Preferred stock - 1,000,000 shares authorized, 925,000 shares
undesignated. Issued and outstanding - none -- --
Accumulated deficit (52,136,000) (24,983,000)
------------- -------------
Total stockholders' equity 41,926,000 22,851,000
------------- -------------
Total liabilities and stockholders' equity $ 70,156,000 $ 41,303,000
============= =============
See accompanying notes.
F-3
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2000 1999 1998
------------ ------------ ------------
Revenue $ -- $ -- $ --
Costs and expenses:
Depreciation and depletion 421,000 31,000 14,000
General and administrative 3,693,000 2,392,000 3,017,000
------------ ------------ ------------
4,114,000 2,423,000 3,031,000
------------ ------------ ------------
Loss from operations (4,114,000) (2,423,000) (3,031,000)
Other income (expense):
Interest income 1,932,000 692,000 662,000
Interest expense (27,031,000) (523,000) (205,000)
Write-off of note receivable (Note 4) -- (1,060,000) --
Equity in income (loss) from investment
(Notes 5 and 18) 2,827,000 (1,849,000) (1,222,000)
Hedge losses (Note 6) (482,000) -- --
Legal settlement (Note 11) -- -- (234,000)
Other 65,000 -- --
------------ ------------ ------------
(22,689,000) (2,740,000) (999,000)
------------ ------------ ------------
Loss before extraordinary item (26,803,000) (5,163,000) (4,030,000)
Extraordinary loss on extinguishment of
long-term debt (Note 17) -- -- (236,000)
------------ ------------ ------------
Net loss $(26,803,000) $ (5,163,000) $ (4,266,000)
============ ============ ============
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock (250,000) (250,000) (250,000)
Discount accretion
Series A Redeemable Preferred Stock (100,000) (100,000) (100,000)
------------ ------------ ------------
Net loss available to common stockholders $(27,153,000) $ (5,513,000) $ (4,616,000)
============ ============ ============
Basic and diluted earnings per share:
Loss per share before extraordinary item $ (6.01) $ (5.63) $ (4.88)
Extraordinary loss per share $ -- $ -- $ (.26)
Net loss per share $ (6.01) $ (5.63) $ (5.14)
Weighted average number of shares
outstanding (basic and diluted) 4,516,032 978,391 898,477
See accompanying notes.
F-4
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities
Net loss $(26,803,000) $ (5,163,000) $ (4,266,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Equity loss (income) from investment (2,827,000) 1,849,000 1,222,000
Depreciation, depletion, and amortization 591,000 31,000 14,000
Gain on the sale of oil and gas properties (75,000) -- --
Loss on disposition of furniture and fixtures 8,000 -- --
Provision for doubtful accounts -- 16,000 29,000
Write-off of note receivable -- 1,060,000 --
Hedge losses 482,000 -- --
Reversal of long term accrued compensation -- (210,000) --
Stock issued for services and bonuses 23,000 270,000 600,000
Stock options issued for services and bonuses -- 9,000 113,000
Warrants issued for legal settlement -- -- 34,000
Interest expense attributable to beneficial
conversion 20,340,000 -- --
Interest expense converted into capital stock 898,000 -- --
Amortization of debt issuance cost 909,000 -- --
Amortization of note discount 464,000 77,000 154,000
Loss on extinguishment of debt -- -- 236,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (272,000) (14,000) 48,000
Prepaid expenses (91,000) (35,000) (14,000)
Note and related accrued interest receivable -- (51,000) (1,009,000)
Accrued interest on advances to KKM (1,904,000) (622,000) (522,000)
Hedge agreement (4,000,000) -- --
Other (753,000) -- --
Increase (decrease) in:
Accounts payable (802,000) 822,000 46,000
Accrued other (26,000) 135,000 50,000
Accrued compensation (112,000) 40,000 418,000
Interest expense reclassified as principal on
the Shell Capital loan 3,481,000 -- --
------------ ------------ ------------
Net cash used in operating activities (10,469,000) (1,786,000) (2,847,000)
F-5
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2000 1999 1998
------------ ------------ ------------
Cash flows from investing activities
Additions to furniture, fixtures and equipment $ (18,000) $ (7,000) $ (80,000)
Investment in and advances to KKM and other oil and
gas property costs (22,422,000) (7,126,000) (13,039,000)
Proceeds from sale of interest in oil and gas
properties - domestic 75,000 -- --
------------ ------------ ------------
Net cash used in investing activities (22,365,000) (7,133,000) (13,119,000)
------------ ------------ ------------
Cash flows from financing activities
Net proceeds from notes payable $ 10,806,000 $ 10,040,000 $ 2,045,000
Net proceeds from Shell Capital loan 21,500,000 -- --
Repayment of notes payable -- (975,000) (1,095,000)
Debt issuance cost (2,415,000) (422,000) --
Restricted cash 578,000 178,000 (756,000)
Proceeds from warrant exercise -- -- 20,000
Net proceeds from private placement 2,946,000 -- 12,450,000
------------ ------------ ------------
Net cash provided by financing activities 33,415,000 8,821,000 12,664,000
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 581,000 (98,000) (3,302,000)
Cash and cash equivalents at beginning
of period 23,000 121,000 3,423,000
------------ ------------ ------------
Cash and cash equivalents at end of period $ 604,000 $ 23,000 $ 121,000
============ ============ ============
Supplemental cash flow disclosure
Interest paid $ 888,000 $ 68,000 $ 58,000
Income taxes paid -- 23,000 --
Supplemental schedule of non-cash
investing and financing activities
Principal of notes converted into capital stock $ 20,846,000 -- --
Discount recognized on loan for
issuance of stock warrant to Shell Capital 1,175,000 -- --
Discount recognized for note issued
with detachable stock warrants -- 506,000 146,000
See accompanying notes.
F-6
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Capital in Stock Unearned
------------------------ Excess of Par Subscription Restricted Accumulated
Shares Amount Value Receivable Stock Awards Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 828,674 -- 35,311,000 (1,770,000) (109,000) (14,854,000) 18,578,000
Warrants exercised for capital
stock 1,333 -- 20,000 -- -- -- 20,000
Capital stock issued for services 4,084 -- 645,000 -- (45,000) -- 600,000
Stock options issued for services -- -- 34,000 -- (34,000) -- --
Stock options expired -- -- (19,000) -- 17,000 -- (2,000)
Amortization of restricted stock
awards -- -- -- -- 115,000 -- 115,000
Capital stock issued in private
placement 138,889 -- 12,450,000 -- -- -- 12,450,000
Legal Settlement
warrants issued -- -- 34,000 -- -- -- 34,000
Debt issuance costs--stock
warrants issued -- -- 400,000 -- -- -- 400,000
Preferred stock issuance and
related common stock warrants -- -- (1,264,000) 1,264,000 -- -- --
Cumulative dividend Series A
Redeemable Preferred Stock -- -- -- -- -- (250,000) (250,000)
Discount accretion on
preferred stock -- -- -- -- -- (100,000) (100,000)
Net loss -- -- -- -- -- (4,266,000) (4,266,000)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 972,980 -- 47,611,000 (506,000) (56,000) (19,470,000) 27,579,000
Capital stock issued for services 5,861 -- 246,000 -- (246,000) -- --
Amortization of restricted stock
awards -- -- -- -- 279,000 -- 279,000
Capital stock issued for fractional
shares after reverse stock split 1,473 -- -- -- -- -- --
Warrants earned -- -- -- 506,000 -- -- 506,000
Cumulative dividend Series A
Redeemable Preferred Stock -- -- -- -- -- (250,000) (250,000)
Discount accretion on
redeemable preferred stock -- -- -- -- -- (100,000) (100,000)
Net loss -- -- -- -- -- (5,163,000) (5,163,000)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 980,314 -- 47,857,000 -- (23,000) (24,983,000) 22,851,000
Adjustment of capital stock
outstanding (9) -- -- -- -- -- --
Capital stock issued for services 167 -- -- -- -- -- --
Capital stock issued in private
placement 1,612,903 -- 2,946,000 -- -- -- 2,946,000
Amortization of restricted stock
awards -- -- -- -- 23,000 -- 23,000
Conversion of debentures into
capital stock 11,207,187 1,000 20,845,000 -- -- -- 20,846,000
Conversion of accrued interest
into capital stock 483,072 -- 898,000 -- -- -- 898,000
Interest expense attributable to
beneficial conversion -- -- 20,340,000 -- -- -- 20,340,000
Shell warrants issued -- -- 1,175,000 -- -- -- 1,175,000
Cumulative dividend Series A
Redeemable Preferred Stock -- -- -- -- -- (250,000) (250,000)
Discount accretion on redeemable
preferred stock -- -- -- -- -- (100,000) (100,000)
Net loss -- -- -- -- -- (26,803,000) (26,803,000)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 14,283,634 1,000 94,061,000 -- -- (52,136,000) 41,926,000
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes.
F-7
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization
Organization, Principles of Consolidation, and Basis of Presentation
Chaparral Resources, Inc. ("Chaparral") was incorporated in the state of
Colorado on January 13, 1972, principally to engage in the exploration,
development and production of oil and gas properties. On April 21, 1999, the
Company's stockholders approved the reincorporation of Chaparral from Colorado
to Delaware. Chaparral focuses substantially all of its efforts on the
exploration and development of the Karakuduk Field, an oilfield located in the
Central Asian Republic of Kazakhstan.
The consolidated financial statements include the accounts of Chaparral and its
100% owned subsidiaries, Central Asian Petroleum (Guernsey) Limited ("CAP-G"),
Road Runner Services Company ("RRSC"), Chaparral Acquisition Corporation
("CAC"), and Central Asian Petroleum, Inc. ("CAP-D"). Chaparral owns 80% of the
common stock of CAP-G directly and 20% indirectly through CAP-D. 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.
Reclassifications
Certain reclassifications have been made in the 1999 financial statements to
conform to the 2000 presentation.
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.
Effective October 1, 2000, the Company adopted SAB No.101, Revenue Recognition
in Financial Statements, as amended, issued by the Securities and Exchange
Commission in December 1999. The Company's adoption of SAB 101 did not result in
a change in method of accounting.
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, of 32,367, 32,367, and 52,575 for the
years 2000, 1999, and 1998, respectively, into shares of the Company's common
stock are anti-dilutive.
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 has adopted SFAS
133 effective 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 Limited ("Shell Capital"), do not
qualify for hedge accounting under SFAS 133. Therefore, effective January 1,
2001, the Company will adjust the carrying value of the contracts to their fair
value of $999,000, recognizing a loss from the cumulative effect of adoption of
approximately $2,519,000. See "Note 6 Hedge Agreement."
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.
F-10
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
Risks and Uncertainties
The ability of KKM to realize the carrying value of its assets is dependent on
being able to develop, transport and market hydrocarbons. Currently, exports
from the Republic of Kazakhstan are restricted since they are dependent on
limited transport routes and, in particular, access to the Russian pipeline
system. Domestic markets in the Republic of Kazakhstan 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 and has a working capital deficiency as of
December 31, 2000. In addition, there are uncertainties relating to the
Company's ability to meet all expenditure and cash flow requirements through
fiscal year 2001, which could result in a default of the Company's Loan and the
loss of the Company's investment in the Karakuduk Field. 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.
The Company is seeking to alleviate these conditions by increasing cash flows
available from the sale of crude oil production from the Karakuduk Field. The
Company expects to finance the development of the Karakuduk Field primarily
through the production and sale of crude oil, which is currently limited to
approximately 7,000 barrels of oil per day, net of royalty, by short-term
facility constraints. Additionally, the government of Kazakhstan has required
KKM to sell a portion of its crude oil production on the local market, which
generates substantially less revenue than oil sold on the export market. KKM is
attempting to resolve both of these issues by removing field facility
constraints as quickly as possible and petitioning the government to reduce or
eliminate local oil sales requirements imposed upon KKM. Management expects to
incrementally increase net daily production to approximately 8,000 barrels of
oil per day by July 2001 and up to 10,800 barrels of oil per day by September
2001 as various field facility limitations are addressed. The Company is also
trying to obtain additional equity or debt financing to cover any deficiencies
which may occur in the near term, including extending the Shell Capital facility
or implementing a revolving line of credit to meet working capital needs.
No assurances can be provided, however, that the Company will be able to
increase its operational cash flow to meet working capital requirements or that
additional debt or equity financing will be available. Additionally, the Company
requires Shell Capital's approval before it can raise additional capital, which
may hinder the Company's attempts to raise the necessary working capital to
continue operations. If the Company is unsuccessful in raising additional
capital or generating sufficient cash flows from operations, the Company's loan
to Shell Capital may be called into default and/or the Company's investment in
the Karakuduk Field may be lost.
3. Restricted Cash
As of December 31, 1999, the Company held restricted cash of $578,000 as
collateral for loans made by the Chase Bank of Texas, N.A. ("Chase") to KKM for
the acquisition of tangible equipment used in the Karakuduk Field. KKM fully
repaid the loans in January 2000, and the collateral was released.
F-11
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Notes Receivable
In September 1998, the Company advanced $1,009,000 to a third-party drilling
contractor, Challenger Oil Services, PLC ("Challenger") to ready a drilling rig
for use by KKM in the Karakuduk Field. In April 1999, the owner of the drilling
rig operated by Challenger, Oil & Gas Exploration Company Cracow, Ltd.
("OGECC"), terminated its contract with Challenger. As a result of the
termination of the contract between Challenger and OGECC, KKM terminated the
drilling contract between KKM and Challenger, and arbitration proceedings were
instituted in accordance with the terms of the drilling contract.
In February 2000, the Company, KKM, Challenger, and OGECC reached a mutual
settlement and release (the "Settlement") for all parties involved. The
Settlement required KKM to pay outstanding accrued liabilities to Challenger for
prior work performed totaling $1,336,000. The Company also agreed to fully
discharge the note receivable from Challenger to the Company. Due to the
Settlement, the Company fully impaired the note, plus accrued interest of
$51,000, during the fourth quarter of 1999.
5. 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 equity losses in KKM and accumulated depletion have been netted
against the gross capitalized costs.
The Company is currently depleting costs associated with its acquisition costs
and other capitalizable costs 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. KKM did not make any repayments during 2000.
On November 1, 1999, KKM reclassified all of its oil and gas properties as
proved due to the completion of the Shell Capital loan, which affirmed KKM's
ability to develop the Karakuduk Field and adequately mitigated the risks of the
Company financing the project. 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.
As further discussed in the unaudited footnote to these financial statements
"Supplemental Information - Disclosures About Oil and Gas Producing Activities,"
KKM restated its proved reserves previously reported as of December 31, 1999.
The restatement is to reflect the SEC's definition of proved undeveloped
reserves versus the definition as accepted by the Society of Petroleum
Engineers. Specifically, the restated amounts represent proved undeveloped
reserves from "drilling units offsetting productive units that are reasonably
certain of production when drilled" or from "other undrilled units...where it
can be demonstrated with certainty that there is a continuity of production from
the existing productive formation." The reclassification of KKM's oil reserves
resulted in the restatement of the Company's net equity interest in KKM's proved
reserves as originally presented. The Company calculated depletion expense for
2000 based upon the revised reserve estimates. The Company recognized $403,000
and $9,000 in depletion for the years ended December 31, 2000 and 1999,
respectively.
F-12
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Investment in KKM and Other Oil and Gas Property Costs (Continued)
Costs capitalized to Oil and Gas Properties and Investments consist of:
December 31,
2000 1999
------------ ------------
Investment in KKM and Other Oil and Gas Property Costs:
Investments in KKM common stock $ 100,000 $ 100,000
Advances to and interest due from KKM 55,292,000 31,000,000
Acquisition costs 10,613,000 10,613,000
Other capitalizable costs 1,092,000 1,057,000
------------ ------------
Total gross oil and gas investments 67,097,000 42,770,000
------------ ------------
Less: Equity losses (1,783,000) (4,610,000)
Depletion (412,000) (9,000)
------------ ------------
Total oil and gas properties and investment $ 64,902,000 $ 38,151,000
============ ============
The condensed financial statements of KKM are as follows:
December 31,
2000 1999
------------ ------------
Condensed balance sheet
Current assets $ 5,237,000 $ 653,000
Non-current assets (primarily oil and gas properties,
full cost method) 52,773,000 25,000,000
Current liabilities 9,721,000 4,589,000
Non-current liabilities
Loan payable to related party 58,605,000 32,871,000
Other non-current liabilities 86,000 --
Charter capital 200,000 200,000
Accumulated deficit (10,602,000) (12,007,000)
Condensed income statement
Revenues $ 13,755,000 $ --
Other costs and expenses (12,350,000) (4,504,000)
------------ ------------
Net income (loss) $ 1,405,000 $ (4,504,000)
F-13
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Hedge Agreement
As a condition of the Loan , the Company paid $4,000,000 for put contracts to
sell 1,562,250 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 of
December 31, 2000, the market value of the Hedge Agreement was $999,000 and the
unrealized hedging loss was $2,519,000.
As of January 1, 2001, the Company adopted SFAS 133, which requires derivative
financial instruments be recorded at their fair value. Accordingly, the Company
recognized a $2,519,000 loss from the cumulative effect of adoption.
7. 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 is amortizing the transportation risk insurance over the life of the
Loan. As of December 31, 2000, the Company has recognized $170,000 as
amortization expense.
8. Shell Capital Loan
In November 1999, the Company entered into the Loan with Shell Capital, to
provide up to $24,000,000 of financing for the development of the Karakuduk
Field. CAP-D, CAP-G, and KKM also signed the Loan as co-obligors. As of December
31, 2000, the Company has borrowed $21,500,000 under the Loan. Interest expense
for the period was $4,379,000, of which $3,481,000 of subordinated interest was
capitalized as additional principal. The Loan is recorded net of $3,103,000 in
unamortized discount, further described below.
The remaining balance of the Loan may be borrowed prior to September 30, 2001 or
project completion. Project completion occurs when various conditions are met by
the Company and KKM, including, but not limited to: (i) receipt by Shell Capital
of an independent engineer's reserve report evidencing proved developed reserves
of at least 30,000,000 barrels in the Karakuduk Field, (ii) sustaining average
gross production of 13,000 barrels of oil per day from the Karakuduk Field for a
period of 45 consecutive days, (iii) sustaining water injection at an average
rate of 15,000 barrels per day over 45 consecutive days, (iv) injection of lift
gas into one well over a 24 hour period, and (v) various other financial and
technical milestones ("Project Completion").
Prior to Project Completion, any borrowed amounts accrue interest at an annual
rate of LIBOR plus 17.75%, compounding quarterly. The annual interest rate is
reduced to LIBOR plus 12.75% after Project Completion. Prior to Project
Completion, an interest amount, equal to annual rate of LIBOR plus .50%, is
payable quarterly to Shell Capital, along with a commitment fee equal to an
annual rate of 1.5% of the undrawn portion of the $24,000,000 debt facility. The
remaining unpaid interest is capitalized to the Loan at the end of each quarter.
After Project Completion, all quarterly interest on the outstanding Loan is
fully due and payable by the Company at the end of each calendar quarter.
F-14
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Shell Capital Loan (continued)
Principal payments, including any capitalized interest, are due on quarterly
reduction dates ("Reduction Date"), beginning with the first calendar quarter
ending on the earlier of 60 days following Project Completion or December 31,
2001. Minimum principal payments, based upon percentages of the principal
outstanding as of Project Completion, are set out in the Loan and ensure full
settlement of the Loan by September 30, 2004, the final maturity date. Mandatory
prepayments of principal outstanding are required on each Reduction Date out of
any excess cash flow available after consideration of the Company's and KKM's
permitted budgeted expenditures for the following 45 days and all fees,
interest, and principal payments scheduled on such Reduction Date.
The Loan subjects the Company to a significant number of restrictions, including
various representations and warranties, positive and negative covenants, and
events of default. The Loan restrictions include, but are not limited to, the
following:
o Pledge of Assets. Shell Capital holds a security interest in
substantially all of the Company's assets,
including its interest in the Karakuduk Field. KKM
also pledged certain security interests in its
receivables and insurances. Consequently, if an
event of default occurs under the Loan and such
event of default is not timely cured, Shell
Capital is entitled to certain remedies, including
the right to accelerate repayment of the Loan and
obtain possession of the assets over which it has
a security interest.
o Business Alteration. The Company cannot engage in any other business
except the ownership of KKM and the operation of
the Karakuduk Field without the prior consent of
Shell Capital.
o Change in Control. The Company cannot enter into any transaction
whereby a "group" as defined in the Securities Act
of 1934 acquires or otherwise gains control of 20%
or more of the outstanding shares of the Company's
voting stock, with certain exemptions specified in
the Loan. Furthermore, the Company's two largest
stockholders, Allen & Company Incorporated
("Allen") and Whittier Ventures, LLC. ("Whittier")
agreed not to let their ownership in the Company
fall below 20%, unless otherwise agreed with Shell
Capital.
o Charged Accounts. The Company and KKM must retain all cash receipts
from oil sales, drawdowns from the Loan, and any
other funds raised by the Company through approved
equity or debt offerings in pledged bank accounts
("Charged Accounts") controlled by Shell Capital.
The Company and KKM retain title to their
respective Charged Accounts, but Shell Capital
directs all cash movements at their request.
o Cash Expenditures. The Company must expend funds in accordance with
capital and operating budgets approved by Shell
Capital on an annual basis, unless otherwise
agreed.
o Project Completion. KKM must reach Project Completion on or before
September 30, 2001. Failure to reach Project
Completion is an event of default under the loan.
o Share Capital. The Borrowers cannot purchase, issue, or redeem
any of its share capital without the prior
approval of Shell Capital.
F-15
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Shell Capital Loan (continued)
o Future Indebtedness. The Borrowers cannot incur financial indebtedness,
other than trade debt, without the approval of
Shell Capital.
o Sale of Significant The Borrowers cannot dispose of any significant
Assets assets, including capital stock in subsidiaries,
without the approval of Shell Capital.
o Leases. Without Shell Capital's approval, KKM cannot enter
into any lease or license arrangement with annual
payments in excess of $1,000,000 and the Company
will not enter any lease or license arrangement
with annual payments in excess of $200,000.
o Dividends. KKM cannot pay dividends prior to the Project
Completion, and then only subject to certain
restrictions. The Company cannot pay any dividends
without Shell Capital's consent.
o OPIC Insurance. The Company must maintain OPIC political risk
insurance throughout the duration of the Loan.
Annual premiums for $50,000,000 of maximum
coverage allowed under the OPIC policy are
approximately $1,050,000, paid on a quarterly
basis.
o Hedge Agreement. The Company cannot cancel or terminate the Hedge
Agreement or enter into any other hedging
transaction without Shell Capital's consent.
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, $1,175,000, 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 8%
Non-negotiable Convertible Subordinated Promissory Notes (the "Notes") and the
issuance of the Company's common stock to Capco Resources, Ltd. ("Capco"), both
dilutive events discussed in Notes 9 and 10, respectively, the Shell Warrant
represents 1,785,455 shares of the Company's common stock at an exercise price
of $9.79 per share.
The Company incurred $4,013,000 in debt issuance costs related to the Loan,
comprised of up-front fees payable 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.
Total amortization through December 31, 2000 equaled $909,000 and has been
included as interest expense.
The Company borrowed an additional $1,600,000 under the loan in January 2001.
F-16
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Notes Payable
On September 21, 2000, the Company converted Notes with an aggregate principal
amount of $20,846,000, 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 $10,040,000 of the Company's Notes issued during the
fourth quarter of 1999 and $10,806,000 issued during 2000, including Notes
totaling $3,300,000 in January and February, $3,000,000 in August, and
$4,506,000 in September 2000, respectively. The Notes were issued to various
related parties and other non-affiliated investors. Notes issued to related
parties totaled $14,690,000, including $9,827,000 to Allen, $4,051,000 to
Whittier, $662,000 to Mr. John McMillian, 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 $15,556,000 in cash and canceled
$5,290,000 in promissory notes issued previously in 1999, plus accrued interest
thereon, to Allen ($3,827,000), Whittier ($1,051,000), 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 $120,000,000.
As the conversion price contained in the Notes is 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 $20,340,000, the face
amount of the Notes net of original discount.
The $10,040,000 in Notes outstanding as of December 31, 1999 were recorded net
of a $464,000 unamortized discount.
In November 1999, the Company repaid a $975,000 note to Chase, originally issued
by the Company in July 1998. The Chase note was collateralized by a $1,000,000
stand-by letter of credit put in place by Whittier in exchange for a senior
security interest in the Company's capital stock of CAP-G. Upon repayment of the
Chase note, the stand-by letter of credit was cancelled and Whittier's security
interest was fully released.
F-17
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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.
1997 Non-employee Directors' Stock Option Plan
On July 17, 1997, the stockholders approved the 1997 Non-employee Directors'
Stock Option Plan, which authorized granting 417 options annually to each
non-employee director in office or elected to the Board of Directors of the
Company, as of the date of the annual meeting of the Company's stockholders. On
June 26, 1998, the stockholders of the Company repealed the 1997 Non-employee
Directors' Stock Option Plan and approved the 1998 Incentive and Non-statutory
Stock Option Plan, described below. As of June 26, 1998, the date of termination
of the plan, options for 3,333 shares with an exercise price of $49.80 had been
issued to non-employee directors.
1998 Incentive and Non-statutory Stock Option Plan
On June 26, 1998, the stockholders approved the 1998 Incentive and Non-statutory
Stock Option Plan (the "1998 Plan"), pursuant to which up to 50,000 options to
acquire the Company's common stock may be granted to officers, directors,
employees, or consultants of the Company and its subsidiaries. The stock options
granted under the 1998 Plan may be either incentive stock options or
nonstatutory stock options. The 1998 Plan has an effective term of ten years,
commencing on May 20, 1998. The Company has not granted any options under the
1998 Plan as of December 31, 2000.
Non-Qualified Stock Options
During 1997, the Company granted five-year non-qualified options, generally with
vesting periods of one year, to purchase 52,367 restricted shares of the
Company's common stock to various employees and directors of, and consultants
to, the Company. Options relating to 26,142 shares have an exercise price of $45
per share and options relating to 26,225 shares have an exercise price of $90
per share. The Company has recorded these stock options at their fair value on
the date of grant of $227,000.
During 1998, the Company granted five-year non-qualified options to purchase
4,958 shares of the Company's common stock to various employees of, and
consultants to, the Company at various exercise prices ranging between $43.20
and $145.80 per share. The Company recorded the stock options granted to the
consultants at their fair value of $34,000 on the date of grant.
During 1998, options to purchase 2,600 shares of the Company's common stock
granted to various employees of, and consultants to, the Company expired. The
expired options had exercise prices ranging between $45 and $145.80 per share.
During 1999, 542 options to purchase the Company's common stock granted to
various employees of, and consultants to, the Company expired. The expired
options had exercise prices ranging between $60 and $90 per share.
F-18
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Common Stock (Continued)
Common Stock Offerings and Common Stock Warrant Issuances
During 1995 and 1996, the Company borrowed $1,050,000. In connection with the
loans, the Company issued 13,000 warrants to purchase common stock at an
exercise price of $15. During 1998, 1,333 warrants were exercised at a price of
$15 for a total of $20,000. On October 30, 1998, 3,333 warrants to purchase the
Company's common stock at an exercise price of $15 expired.
During late 1996, the Company issued notes totaling $1,850,000 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.
On January 23, 1998, the Company, granted 1,500 shares of the Company's common
stock to the directors of the Company and granted 3,084 shares of the Company's
common stock to various employees of, and consultants to, the Company, of which
500 shares vested ratably on January 30, 1999, 2000, and 2001. As a result of
these transactions, the Company recognized $600,000 in 1998 compensation
expense. An additional $45,000 relating to the non-vested stock grants was
amortized over the vesting period of the grants.
On April 3, 1998, the Company sold 20,833 shares of the Company's Common stock
for $120 per share for at total of $2,500,000 to a private investor. Allen acted
as placement agent in connection with the sale of the 20,833 shares. As a
result, Allen's existing warrants to purchase 15,000 shares of the Company's
common stock, issued in 1997, became exercisable for an additional 1,667 shares
(see Note 12). The warrants to purchase the additional 1,667 shares of the
Company's common stock are exercisable through November 25, 2002, at an exercise
price of $0.60 per share.
On June 4, 1998, the Company borrowed $1,000,000 from two related parties, one
of which was Mr. McMillian, then a director of the Company. In conjunction with
the loans, the Company issued warrants to purchase 16,667 shares of the
Company's common stock. The warrants are exercisable through November 25, 2002,
at an exercise price of $210 per share. The Company recorded the fair market
value of the warrants ($367,000) as a discount of notes payable, amortizable as
interest expense over the life of the loan. The fair market value of the
warrants was estimated as of June 4, 1998, using the Black-Scholes option
pricing model with the following weighted average assumptions: risk free
interest rates of 5.53%, dividend yield of 0%, volatility factors of the
expected market price of the Company's common stock of .593, and a weighted
average life expectancy of the warrants of 4.5 years.
On July 3, 1998, the Company borrowed $975,000 from Chase. The loan was fully
guaranteed with a stand-by letter of credit from Whittier. In return for issuing
the loan guarantee, the Company paid Whittier $10,000 plus related costs and
issued warrants to purchase 333 shares of the Company's common stock at an
exercise price of $0.60 per share. The Company recorded the fair market value of
the warrants (approximately $32,000) plus the related loan costs as a discount
of notes payable and was amortized as additional interest expense over the life
of the loan. The fair market value of the warrants was determined using the
Black-Scholes option pricing model, with the following weighted average
assumptions: risk free interest rate 5.53%, dividend yield of 0%, volatility
factors of the Company's common stock of .644, and a weighted average life
expectancy of the warrants of 5 years.
F-19
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Common Stock (Continued)
On July 28 and July 29, 1998, the Company sold 111,111 shares of the Company's
common stock for $90 per share for $10,000,000 to certain investors. Issuance
costs incurred were approximately $50,000 and were recorded as a reduction to
the proceeds received from the sale. Allen acted as placement agent in
connection with the sale of the 111,111 shares. As a result, Allen's existing
warrants to purchase 15,000 shares of the Company's common stock, issued in
1997, became exercisable for an additional 6,667 shares of the Company's common
stock (see Note 12). The 6,667 warrants are exercisable through November 25,
2002, at an exercise price of $0.60 per share. Due to the sales price of the
111,111 shares being below a price of $120 per share, the Company issued an
additional 6,944 shares to the investor who purchased 20,833 shares of the
Company's common stock for $2,500,000 in April 1998 in order to satisfy certain
price protection agreements the Company had with such investor.
On October 30, 1998, the Company issued warrants to purchase 3,333 shares of the
Company's common stock at an exercise price of $60, exercisable through January
02, 1999, to settle the lawsuit filed against the Company by Heartland, Inc. of
Wichita and Collins & McIlhenny, Inc. on November 14, 1997. The Company recorded
legal settlement expense of $34,000, equal to the fair market value of the
warrants issued on the date of grant. On January 03, 1999, the 3,333 warrants
expired.
Pursuant to the terms of the employment agreement between the Company and Dr.
Jack A. Krug, the former President and Chief Operating Officer of the Company,
Dr. Krug received 3,333 shares on January 15, 1999. Effective as of September
30, 1999, the Company issued Dr. Krug an additional 2,361 shares of the
Company's common stock pursuant to his resignation from the Company. The Company
recorded the grants at their intrinsic value of $246,000.
In connection with the Notes issued to Allen in exchange for $5,827,000, Allen's
existing warrants to purchase 15,000 shares of the Company's common stock,
issued in 1997, became exercisable for an additional 3,333 shares of the
Company's common stock (see Note 12). The warrants to purchase the additional
3,333 shares of the Company's common stock are exercisable through November 25,
2002 at an exercise price of $0.60 per share. The Company recorded the fair
market value of the warrants (approximately $506,000) as a discount of notes
payable, amortized as interest expense over the life of the Notes.
The conversion of the Company's Notes on September 21, 2000 resulted in the
issuance of 11,690,259 shares of the Company's common stock (see Note 9), 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).
On October 30, 2000, the Company issued 1,612,903 shares of the Company's common
stock to Capco in exchange for $3,000,000, 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 on September 21, 2000. The Company
recorded the stock issuance net of issuance costs of $54,000, or $2,946,000.
F-20
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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 1998 was estimated at the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions: risk free interest rates of 5.53%; dividend yield of 0%;
volatility factors of the expected market price of the Company's common stock
between 0.528 and 1.07; and a weighted average life expectancy of the options of
4.9 years. The Company did not issue any options during 1999 or 2000.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows:
Year Ended December 31,
2000 1999 1998
------------------------------------------------
Net loss under APB 25 $ (26,803,000) $ (5,163,000) $ (4,266,000)
Effect of SFAS 123 -- (108,000) (190,000)
------------------------------------------------
Pro forma net loss $ (26,803,000) $ (5,271,000) $ (4,456,000)
================================================
Pro forma basic and diluted
Earnings per share $ (6.01) $ (5.75) $ (5.35)
F-21
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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, 1997 55,700 $66.60
Options Granted 4,958 $97.80 $65.40
Options Cancelled (2,600) $92.40
----------------------------------------
Unexercised options outstanding -
December 31, 1998 58,058 $67.80
Options Cancelled (542) $83.80
----------------------------------------
Unexercised options outstanding -
December 31, 1999 57,516 $67.73
Options Cancelled --
----------------------------------------
Unexercised options outstanding -
December 31, 2000 57,516 $67.73
Price range $123.00-$145.80
(Average life of 2.15 years) 1,342 $132.16
Price range $80.40-$90.00
(Average life of 1.70 years) 26,016 $89.82
Price range $43.20-$60.00
(Average life of 1.68 years) 30,158 $45.81
Exercisable options
December 31, 1998 54,950 $66.60
December 31, 1999 57,309 $67.64
December 31, 2000 57,516 $67.73
F-22
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Common Stock (Continued)
The following table summarizes all common stock purchase warrant activity:
Number of Exercise
Stock Price
Warrants Range
------------------------------
Outstanding, December 31, 1997 60,241 $ 0.0006 - $75
Granted 20,333 $ 0.60 - $210
Exercised (1,333) $ 24
Expired (3,333) $ 15
------------------------------
Outstanding, December 31, 1998 75,908 $ 0.0006 -$210
Expired (21,459) $ 15 - $60
------------------------------
Outstanding, December 31, 1999 54,449 $ 0.0006 -$210
Granted 1,785,455 $ 9.79
Expired (2,082) $ 15
------------------------------
Outstanding, December 31, 2000 1,837,822 $ 0.0006 -$210
==============================
The following table summarizes the price ranges of all common stock purchase
warrants outstanding as of December 31, 2000:
Number of Warrants Exercise Price
------------------------------------------
16,667 $ 210.00
1,667 $ 75.00
1,667 $ 51.00
1,785,455 $ 9.79
15,333 $ 0.60
17,033 $ 0.0006
------------------------------------------
1,837,822 $0.0006 - $210
11. Legal Settlement
On October 30, 1998, the Company settled the lawsuit filed against the Company
and others by Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. on
November 14, 1997, for a total of $200,000 and warrants to purchase 3,333 shares
of the Company's common stock at an exercise price of $60, exercisable through
January 02, 1999. The Company believes the lawsuit was without merit, but a
settlement was reached to avoid incurring additional legal costs. The Company
recorded the fair market value of the warrants ($34,000) using the Black-Scholes
option pricing model. On January 03, 1999, the 3,333 warrants expired.
F-23
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Redeemable Preferred Stock and Related Common Stock Warrants
On November 24, 1997, the Company entered into a Subscription Agreement
("Agreement") with an unaffiliated investor to purchase 225,000 shares of the
Company's designated Series A, B, and C Redeemable Preferred Stock, for $100 per
share. As of December 31, 1997, the investor had purchased 50,000 shares of the
Company's Series A Redeemable Preferred Stock for $5,000,000. In March 1998, the
Company and the investor mutually released each other from any further
obligations. The Company is not required to issue any additional preferred stock
under the Agreement and the investor has no obligation to provide funds to the
Company in exchange for such stock.
The Series A Redeemable Preferred Stock is convertible and accrues an annual,
cumulative dividend of $5 per share. The dividends are payable semi-annually on
May 31 and November 30, as declared by the Company's Board of Directors. As of
December 31, 2000, dividends in arrears relating to the Series A Redeemable
Preferred Stock were $750,000. The Company has increased the carrying value of
the Series A Redeemable Preferred Stock by $750,000 by accreting $250,000 in
2000, 1999, and 1998, respectively, directly to accumulated deficit.
The number of shares of common stock issuable upon conversion of each share of
Series A Redeemable Preferred Stock is determined by dividing $100 by the
conversion price of the preferred stock. The conversion price is subject to
recalculation if, and when, the Company issues additional common stock or common
stock equivalents to obtain additional equity or debt financing. 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, 2000 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, 2000, 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, 2000, the schedule of
redemptions of the stated value, plus any unpaid dividends, is as follows:
Year Amount
-------------------------------
2001 --
2002 $1,917,000
2003 $1,917,000
2004 $1,916,000
-----------
Total $5,750,000
===========
F-24
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Redeemable Preferred Stock and Related Common Stock Warrants (Continued)
On November 24, 1997, the Company also designated Series B and C Redeemable
Preferred Stock, authorizing 75,000 shares for each class of preferred. As of
December 31, 1998, none of the Series B or Series C Redeemable Preferred Stock
was issued or outstanding. The Company's stockholders cancelled the Series B and
C Redeemable Preferred Stock on April 21, 1999.
Allen, a significant stockholder of the Company, acted as placement agent in
connection with the Agreement. Allen elected to receive its fees in the form of
warrants to purchase 15,000 shares of the Company's common stock that were all
originally exercisable through November 25, 2002, at an exercise price of $0.60
per share. The 15,000 warrants were recorded at their fair value of $2,270,000.
Out of the 15,000 warrants issued to Allen, 3,333 directly relate to the
issuance of 50,000 shares of the Series A Redeemable Preferred Stock. The 3,333
warrants were recorded as issuance costs of $500,000, reducing the $5,000,000
proceeds from Series A Redeemable Preferred Stock. The remaining 11,667
warrants, discussed below, were recorded as a stock subscription receivable. The
basis difference of $500,000 upon issuance of the Series A Redeemable Preferred
Stock is being accreted directly to accumulated deficit for the period through
the redemption date. The Company increased the carrying value of the Series A
Redeemable Preferred Stock by $100,000 in 2000, 1999, and 1998, respectively, to
reflect the accretion of the issuance costs.
In an agreement dated March 31, 1998, the Company agreed to allow Allen to
retain, subject to certain performance criteria, the warrants to purchase 11,667
shares of the Company's common stock related to the subscriptions not received
under the original terms of the Agreement. Accordingly, the unearned warrants
held by Allen were fully restricted from exercise unless Allen assisted the
Company in raising $17,500,000 in additional capital or alternative financing on
acceptable terms to the Company on or before November 25, 1999. For each $1,500
of additional capital raised, a warrant to purchase one share of common stock is
deemed earned by Allen.
During 1998, Allen assisted the Company in raising an additional $12,500,000 in
equity capital. As a result, 8,334 of the 11,667 warrants became unrestricted
and $1,264,000 was transferred from stock subscription receivable to additional
paid-in-capital. During 1999, Allen contributed an additional $5,827,000 in
exchange for the Company's Notes, earning the final 3,333 in restricted
warrants. The Company recognized the remaining stock subscription receivable of
$506,000 as a discount to the Company's Notes issued in 1999.
13. Income Taxes
The following is a summary of the provision for income taxes:
Year Ended December 31,
2000 1999 1998
----------------------------------------------------
Income tax benefit computed
at federal statutory rate $ (9,381,000) $ (1,807,000) $ (1,493,000)
Non-deductible interest associated with
convertible notes 7,551,000 -- --
Expiration of NOL carryforwards 518,000 330,000 --
Other 90,000 112,000 121,000
Change in asset valuation
allowance 1,222,000 1,365,000 1,372,000
----------------------------------------------------
Income taxes $ -- $ -- $ --
====================================================
F-25
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Income Taxes (continued)
The components of the Company's deferred tax assets and liabilities are as
follows:
Year Ended December 31,
----------------------------
2000 1999
----------------------------
Deferred tax assets:
Oil and gas assets $ 141,000 $ --
Net operating loss carryforwards 9,253,000 8,172,000
Valuation allowance (9,394,000) (8,172,000)
----------------------------
Deferred tax assets $ -- $ --
============================
As of December 31, 2000, the Company has estimated tax loss carryforwards of
$25,796,000 of which $20,448,000 are domestic losses for federal income tax
purposes and $5,348,000 are foreign losses related to the Company's investment
in KKM. These carryforwards will expire at various times between 2001 and 2019.
The Company also has unused statutory depletion carryforwards, which have an
unlimited duration, of approximately $639,000. The differences between the
income tax benefit calculation of the statutory and effective rate are primarily
due to the disallowance of interest expense associated with the Company's Notes
converted in September 2000, including a $20,340,000 interest charge due to the
application of EITF 98-5. See Note 9. Other permanent book/tax differences
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 $52,136,000. Cumulative book/tax
differences of approximately $26,340,000 primarily relates to the disallowance
of $21,575,000 in interest expense incurred on the Company's Notes, $1,050,000
in accrued dividends and discount accretion of the Company's Series A Redeemable
Preferred Stock booked directly to retained earnings. The remaining difference
relates to adjustments for stock based compensation, meals & entertainment, and
expired tax net operating losses from prior periods.
The Company did not record any deferred tax assets or income tax benefits for
net operating losses as of December 31, 2000. The Company's only significant
asset is its 50% interest in KKM, which has generated cumulative net operating
losses for the last three fiscal years. Therefore, the Company has taken a 100%
valuation allowance against any resulting deferred tax asset due to such
carryforwards.
The conversion of the Company's Notes into common stock resulted in an ownership
change under ss.382 of the Internal Revenue Code, which may significantly limit
the Company's use of its net operating tax loss carryforwards.
14. 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.
Effective March 1, 2000, the Company sold overriding royalty interests in
certain domestic oil and gas properties for $75,000 to Mr. Paul Hoovler, a
former Chairman and Chief Executive Officer of the Company, resulting in a
$75,000 gain. In February 1997, the Company had assigned the overriding royalty
interests to Mr. Hoovler as part of a severance agreement for a period of three
years, after which they would revert to the Company. The Company holds no other
interests in domestic oil and gas properties.
F-26
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Operating Leases
During 1999, the Company relocated its offices within the Houston area. The
Company assigned and was fully released from its existing obligations under the
non-cancelable operating lease in effect as of December 31, 1998. The Company
entered into a short-term sublease extending from September 1, 1999 through
March 31, 2000. The Company prepaid all lease payments under the sublease, and
had no outstanding rental obligations as of December 31, 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
--------------------------------
2001 $ 60,000
2002 $ 60,000
2003 $ 55,000
2004 $ --
2005 $ --
The Company's rental expense for 2000, 1999, and 1998, was approximately
$60,000, $93,000, and $87,000, respectively.
16. 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 $50,000,000, 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, 2000, the
Company has paid a total of $867,000 in premiums and had bound OPIC coverage of
$50,000,000 through January 30, 2001.
17. Extraordinary Losses
On August 5, 1998, the Company retired two outstanding loans, totaling
$1,000,000, from two related parties: Allen ($900,000) and Mr. McMillian, the
current Co-Chairman and Chief Executive Officer and a director of the Company at
the time of the loan ($100,000). The Company borrowed the $1,000,000 on June 3,
1998, subject to a 7% interest rate. The note was payable in full, plus accrued
interest, on the earlier of 180 days from the funding of the loans or upon the
Company's receipt of a minimum of $10,000,000 in equity investments. In
conjunction with the loans, the Company issued warrants to purchase 16,667
shares of the Company's common stock, at an exercise price of $210 per share.
The Company recorded the warrants at their fair market value of $367,000, as a
discount of notes payable, amortizable over the life of the loans. On July 27,
1998, the Company received $10,000,000 in equity financing and repaid the loans,
recognizing an extraordinary loss on the extinguishment of debt of approximately
$236,000.
18. KKM Financial Statements
Due to the significance of the Company's equity investee, the Company has
attached audited financial statements for KKM. Reflected in the financial
statements are management fees of $2,040,000, $2,040,000, and $1,980,000,
charged by the Company to KKM for the years ended December 31, 2000, 1999, and
1998, respectively. These amounts are exclusive of any local withholding tax,
which may be accrued by KKM. Also, for the same periods, the financial
statements include interest on the note payable to the Company from KKM in the
amounts $3,346,000, $1,708,000, and $1,044,000.
F-27
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.
Due to the previous uncertainties surrounding the development of the Karakuduk
Field no proved reserves were attributed to the Karakuduk Field as of December
31, 1998. The Company recorded it's net equity interest in KKM's proved oil
reserves on November 1, 1999, in conjunction with the signing of the Loan. The
disclosures relating to 1999 have been restated to reflect the SEC's definition
of proved undeveloped reserves versus the definition as accepted by the Society
of Petroleum Engineers. Specifically, the restated amounts represent proved
undeveloped reserves from "drilling units offsetting productive units that are
reasonably certain of production when drilled" or from "other undrilled
units...where it can be demonstrated with certainty that there is a continuity
of production from the existing productive formation." As of December 31, 2000,
the Company has a net equity interest in 16,523,000 barrels of proved oil
reserves in the Karakuduk Field.
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 765,000 barrels of crude oil in 2000, of which 161,000 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 and 2000 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 18, 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-28
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
Proven Oil and Gas Reserve Quantities
(All within the Republic of Kazakhstan)
Oil Gas
Reserves Reserves
(bbls.) (Mcf.)
----------------------
Company's proportional interest in KKM's proved
developed and undeveloped reserves
Balance December 31, 1998 -- --
=======================
Balance December 31, 1999(1) 10,071,000 --
=======================
Balance December 31, 2000 16,523,000 --
=======================
(1) Proved oil reserves as of December 31, 1999 have been
restated from the original presentation, revising the
original disclosure of 33,789,000 barrels of proved reserves
downward by 23,718,000 barrels. The restatement is to
reflect the SEC's definition of proved undeveloped reserves
versus the definition as accepted by the Society of
Petroleum Engineers. Specifically, the restated amounts
represent proved undeveloped reserves from "drilling units
offsetting productive units that are reasonably certain of
production when drilled" or from "other undrilled
units...where it can be demonstrated with certainty that
there is a continuity of production from the existing
productive formation."
Capitalized Costs Relating to Oil and Gas Producing Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2000 1999 1998
------------------------------------------
Company's share of equity method
Investee's net capitalized cost $ 25,894,000 $ 12,165,000 $ 9,134,000
==========================================
Cost Incurred in Oil and Gas Property Acquisition,
Exploration, and Development Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2000 1999 1998
------------------------------------------
Company's share of equity method
Investee's costs of property
acquisition, exploration, and
development $ 13,198,000 $ 3,738,000 $ 3,344,000
==========================================
F-29
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,
2000 1999 1998
---------------------------------------
Company's share of equity method
Investee's results from operations
for producing activities $ 3,241,000 $ -- $ --
=======================================
Standardized Measure of Discounted Future Net Cash Flows
The following are the principal sources of changes in the standardized measure
of discounted future net cash flows:
Year Ended December 31,
2000 1999(2) 1998
------------------------------------------
Company's share of equity
Method investee's standardized
measure of discounted future
cash flows $ 70,281,000 $ 61,312,000 $ --
==========================================
(2) The standardized measure of discounted future net cash
flows as of December 31, 1999 has been restated from the
original presentation, revising the original disclosure of
$177,680,000 downward by $116,368,000 to reflect the
restatement of the proportional net interest in KKM's proved
oil reserves as of December 31, 1999 as discussed in
footnote 1 above.
F-30
SUPPLEMENTAL INFORMATION - SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
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 (1) $ (802,000) $ (778,000) $ (1,170,000) $ (1,364,000) $ (4,114,000)
Other income (loss) (2) (1,389,000) (368,000) (21,856,000) 924,000 (22,689,000)
----------------------------------------------------------------- ------------
Net loss, as adjusted (2,191,000) (1,146,000) (23,026,000) (440,000) (26,803,000)
Cumulative annual dividend accrued on
Series A Preferred Stock (63,000) (63,000) (63,000) (61,000) (250,000)
Discount accretion on
Series A Preferred Stock (25,000) (25,000) (25,000) (25,000) (100,000)
----------------------------------------------------------------- ------------
Net loss available to common stockholders,
as adjusted $ (2,279,000) $ (1,234,000) $(23,114,000) $ (526,000) $(27,153,000)
================================================================= ============
Basic and diluted earnings per share:
Net loss per share as adjusted $ (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
Reconciliation of quarterly data:
- ---------------------------------
Net loss available to common stockholders,
as originally filed $ (2,481,000) $ (1,249,000) $(23,125,000) $ (526,000) $(27,381,000)
Adjustments to quarterly data
Depletion expense(1) (34,000) (38,000) (77,000) -- (149,000)
Net adjustment to KKM's income (loss) (2) 236,000 53,000 88,000 -- 377,000
----------------------------------------------------------------- ------------
Net loss available to common stockholders,
as adjusted $ (2,279,000) $ (1,234,000) $(23,114,000) $ (526,000) $(27,153,000)
================================================================= ============
(1) The Company increased its depreciation and depletion
expense as previously presented due to KKM's restatement of
proved oil reserves as of December 31, 1999, which increased
the effective depletion rate attributable to the Company's
acquisition costs of its equity interest in KKM. The Company
originally recorded depreciation and depletion expense of
$20,000, 22,000, and $39,000 for the quarters ended March
31, 2000, June 30, 2000, and September 30, 2000,
respectively. The as adjusted quarterly results reflect
additional depletion expense of $34,000, $38,000, and
$77,000 for the three respective periods.
(2) The Company originally recorded other losses of
($1,625,000), ($421,000), and ($21,944,000) for the quarters
ended March 31, June 30, and September 30, 2000,
respectively, which have been adjusted by $236,000, $53,000,
and $88,000 in net income adjustments to KKM's net income or
loss for the respective periods. KKM adjustments result from
KKM's restatement of its proved reserves as of December 31,
1999. Due to the application of EITF 99-10, the Company
recognized 100% of the adjustment to KKM's net income or
loss in its equity income or loss from investment.
F-31
SUPPLEMENTAL INFORMATION - SELECTED QUARTERLY FINANCIAL DATA-UNAUDITED
1999 Quarterly Information
For the Three Months Ended
--------------------------------------------------------------- Total as of
March 31, June 30, September 30, December 31, December 31,
1999 1999 1999 1999 1999
--------------------------------------------------------------- -------------
Operating expenses $ (438,000) $ (830,000) $ (384,000) $ (771,000) $ (2,423,000)
Other income (expense) (151,000) (220,000) (167,000) (2,202,000) (2,740,000)
--------------------------------------------------------------------------------
Net loss (589,000) (1,050,000) (551,000) (2,973,000) (5,163,000)
Cumulative annual dividend accrued on
Series A Preferred Stock (63,000) (63,000) (63,000) (61,000) (250,000)
Discount accretion on
Series A Preferred Stock (25,000) (25,000) (25,000) (25,000) (100,000)
--------------------------------------------------------------------------------
Net loss available to common stockholders $ (677,000) $(1,138,000) $ (639,000) $ (3,059,000) $ (5,513,000)
================================================================================
Basic and diluted earnings per share:
Net loss per share $ (0.69) $ (1.16) $ (0.65) $ (3.12) $ (5.63)
Weighted average number of shares
outstanding (basic and diluted) 977,388 977,954 977,954 980,313 978,391
F-32
Ernst & Young
273 Furmanova St.
Almaty Kazakhstan 480099
Phone: 7(3272) 585 960
7(3272) 585 969
Fax 7(3272) 585 961
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, 2000 and 1999, and the related
statements of operations, cash flows and stockholders' deficit for each of the
three years in the period ended December 31, 2000. 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, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, 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, 2000. In addition,
there are uncertainties relating to the Company's ability to meet its
expenditure/cash flow requirements through 2001. 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.
April 2, 2001
Almaty
F-33
Closed Type JSC Karakudukmunay
Balance Sheets as of
December 31,
(Amounts in US Dollars)
2000 1999
------------ ------------
ASSETS
Current assets:
Cash $ 51,000 $ 86,000
Trade receivables 680,000 --
Prepaid and other receivables (Note 4) 1,251,000 69,000
Crude oil inventory 155,000 498,000
Current VAT receivable (Note 5) 3,100,000 --
------------ ------------
Total current assets 5,237,000 653,000
Long term VAT receivable (Note 5) 985,000 671,000
Materials and supplies 3,800,000 1,136,000
Property, plant and equipment, net (Note 6) 4,682,000 4,318,000
Oil and gas properties, full cost (Note 7)
Properties subject to depletion 22,779,000 5,291,000
Properties not subject to depletion 20,527,000 13,584,000
------------ ------------
43,306,000 18,875,000
------------ ------------
TOTAL ASSETS $ 58,010,000 $ 25,653,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 8,926,000 $ 3,139,000
Accrued liabilities (Note 8) 795,000 872,000
Current portion of long-term debt (Note 10) -- 578,000
------------ ------------
Current liabilities 9,721,000 4,589,000
Long-term debt (Note 10) 58,605,000 32,871,000
Other long-term liabilities (Note 9) 86,000 --
Stockholders' deficit:
Charter capital (Note 12) 200,000 200,000
Accumulated deficit (10,602,000) (12,007,000)
------------ ------------
(10,402,000) (11,807,000)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 58,010,000 $ 25,653,000
============ ============
See accompanying notes which form an integral
part of these financial statements.
F-34
Closed Type JSC Karakudukmunay
Statements of Operations for the years ended December 31,
(Amounts in US Dollars)
2000 1999 1998
--------------------------------------------
Revenues:
Oil sales $ 13,755,000 $ -- $ --
Costs and expenses:
Operating expenses 3,676,000 -- --
Depreciation and depletion 3,598,000 744,000 441,000
Management service fee 454,000 594,000 846,000
General and administrative 2,316,000 1,849,000 1,433,000
Write-down of crude oil inventory -- -- 192,000
--------------------------------------------
Total cost and expenses 10,044,000 3,187,000 2,912,000
--------------------------------------------
Income (loss) from operations 3,711,000 (3,187,000) (2,912,000)
Other (income) expense:
Interest income (51,000) -- --
Interest expense 2,245,000 1,101,000 509,000
Currency exchange loss 54,000 216,000 67,000
Other 58,000 -- --
--------------------------------------------
Net income (loss) $ 1,405,000 $ (4,504,000) $ (3,488,000)
============================================
See accompanying notes which form an integral
part of these financial statements.
F-35
Closed Type JSC Karakudukmunay
Statements of Cash Flows for the years ended December 31,
(Amounts in US Dollars)
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
- -------------------------------------
Net income (loss) $ 1,405,000 $ (4,504,000) $ (3,488,000)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Write-down of crude oil inventory -- -- 192,000
Depreciation and depletion 3,598,000 744,000 441,000
Loss from sale and disposition of fixed assets 58,000 -- --
Management service fees -- 594,000 846,000
Accrued production bonus 86,000 -- --
Changes in working capital:
(Increase)/decrease in prepaid and other receivables (1,862,000) 56,000 147,000
(Increase)/decrease in crude oil inventory 272,000 201,000 (744,000)
(Increase)/decrease in materials and supplies inventory (2,664,000) 358,000 (983,000)
(Increase)/decrease in VAT receivable (3,414,000) 192,000 (754,000)
Increase in accounts payable and accrued liabilities 5,710,000 984,000 260,000
Increase in accrued interest payable to partner 3,346,000 1,708,000 1,044,000
------------ ------------ ------------
Net cash provided (used) by operating activities 6,535,000 333,000 (3,039,000)
Cash flows from investing activities:
- -------------------------------------
Purchase of property, plant and equipment (1,178,000) (853,000) (3,061,000)
Investments in oil and gas properties (27,205,000) (6,031,000) (5,554,000)
Proceeds from sale of fixed assets 3,000 -- --
Net proceeds from sales of non-commercial crude oil -- 1,019,000 --
------------ ------------ ------------
Net cash used in investing activities (28,380,000) (5,865,000) (8,615,000)
Cash flows from financing activities:
- -------------------------------------
Increase in loans from banks -- -- 800,000
Principal payments on banks loans (578,000) (178,000) (44,000)
Increase in loan payable to partner due to cash contributions
and other contributions 22,388,000 5,743,000 10,537,000
------------ ------------ ------------
Net cash provided by financing activities 21,810,000 5,565,000 11,293,000
Net increase/(decrease) in cash (35,000) 33,000 (361,000)
Cash at beginning of year 86,000 53,000 414,000
------------ ------------ ------------
Cash at end of year $ 51,000 $ 86,000 $ 53,000
============ ============ ============
Supplemental cash flow disclosure:
- ----------------------------------
Interest paid $ 33,000 $ 89,000 $ 31,000
Supplemental schedule of non-cash
investing and financing activities:
- ---------------------------------------
Increase in accrued management service fees $ -- $ 2,040,000 $ 1,980,000
See accompanying notes which form an integral
part of these financial statements.
F-36
Closed Type JSC Karakudukmunay
Statement of Stockholders' Deficit
(Amounts in US Dollars)
Authorized Accumulated
Charter Capital Deficit Total
-------------------------------------------
As of December 31,1997 $ 200,000 $ (4,015,000) $ (3,815,000)
Net loss for the year 1998 -- (3,488,000) (3,488,000)
-------------------------------------------
As of December 31,1998 200,000 (7,503,000) (7,303,000)
Net loss for the year 1999 -- (4,504,000) (4,504,000)
-------------------------------------------
As of December 31,1999 200,000 (12,007,000) (11,807,000)
Net income for the year 2000 -- 1,405,000 1,405,000
-------------------------------------------
As of December 31, 2000 $ 200,000 $(10,602,000) $(10,402,000)
===========================================
See accompanying notes which form an integral
part of these financial statements.
F-37
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
1. Organization and Background Information
Closed Type JSC Karakudukmunay. (the "Company"), a Kazakhstan Joint Stock
Company of Closed Type, was formed to engage in the exploration, development,
and production of oil and gas properties in the Republic of Kazakhstan. The
Company's only significant investment is in the Karakuduk Field, an onshore oil
field in the Mangistau Oblast region of the Republic of Kazakhstan. On August
30, 1995, the Company entered into 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 1999 and 1998 financial statements to
conform to the 2000 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 (144.50 and 138.20 Kazakh Tenge per US dollar as of December
31, 2000 and 1999, 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-38
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
2. Basis of Presentation (continued)
In April 1999, the Government discontinued its support of the national currency,
the Tenge, and allowed it to float freely against the US dollar. Immediately
thereafter, the official exchange rate declined from 87.5 Tenge to the US dollar
to 142 Tenge to the US dollar, but has remained relatively stable for the
remainder of 1999 and during 2000. The devaluation decreased the US dollar
realizable value of any Tenge denominated monetary assets held by the Company,
and decreased the US dollar obligation of any Tenge denominated monetary
liabilities held by the Company.
The Company had $1,667,000 of net monetary liabilities denominated in Tenge as
of December 31, 2000 and $201,000 net monetary assets denominated in Tenge as of
December 31, 1999.
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 capitalized interest totaling $1,132,000, $697,000, and
$565,000 for the years ended December 2000, 1999, and 1998, 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-39
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in 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 ("KTO Pipeline"). Crude oil placed into the KTO
Pipeline is held as inventory until formally nominated and delivered for sale.
Crude oil inventory as of December 31, 2000 and 1999 represented approximately
19,000 and 107,000 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.
Effective October 1, 2000, the Company adopted SAB No.101, Revenue Recognition
in Financial Statements, as amended, issued by the Securities and Exchange
Commission ("SEC") in December 1999. The Company's adoption of SAB 101 did not
result in a change in method of accounting.
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-40
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in 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. This statement, as amended by SFAS No. 137 and 138, is
effective for years beginning after June 15, 2000. The Company has adopted SFAS
133 effective January 1, 2001. The Company has not identified any derivative
financial instruments, which could be designated as fair value or cash flow
hedges under SFAS 133 and does not expect to record any corresponding SFAS 133
adjustments for items reflected in these financial statements for the quarter
ended March 31, 2001.
Fair Value of Financial Instruments
- -----------------------------------
All of the Company's financial instruments, including loans payable to partner,
cash and trade receivables have fair values which approximate their recorded
values as they are either short-term in nature or carry interest rates which
approximate market rates.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
3. Going Concern
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has incurred recurring
operating losses in previous years and has a working capital deficiency as of
December 31, 2000. In addition, there are uncertainties relating to the
Company's ability to meet all expenditure and cash flow requirements through
fiscal year 2001. 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
reduction of local oil sales requirements imposed upon the Company by the
Government. See Note 14 regarding the Company's local market requirements.
F-41
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
4. Prepaid and Other Receivables
The breakdown of Prepaid and Other Receivables is as follows:
December 31, December 31,
Description 2000 1999
----------- ---------- ---------
Advanced payment for oil and gas assets $ 189,000 $ 14,000
VAT receivable from drilling contractor 651,000 --
Prepaid transportation costs 291,000 --
Other prepaid expenses 120,000 55,000
----------- ---------
Total $ 1,251,000 $ 69,000
=========== =========
Advanced payment for oil and gas assets represents prepaid drilling costs, which
will be recovered 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 will be offset against
future drilling invoices charged to the Company. Prepaid transportation costs
represent the prepayment of export tariffs necessary to sell oil on the export
market, which will be 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. Generally, VAT paid is equal to 20% of the value of goods
purchased in, or imported into, Kazakhstan, and 20% of services rendered within
Kazakhstan. 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.
From December 31, 1999 to December 31, 2000, the Company's VAT receivable
increased from $671,000 to $4,085,000, due to the Company's significant increase
in capital expenditure and operational activity. In March 2001, the Company
received a VAT refund of approximately $3,100,000, which has been presented as a
current receivable as of December 31, 2000.
F-42
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in 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 2000 1999
----------- ----------- -----------
Office buildings and apartments $ 312,000 $ 237,000
Office equipment and furniture 552,000 480,000
Vehicles 1,758,000 1,708,000
Field buildings 3,652,000 2,875,000
Field equipment and furniture 479,000 394,000
----------- -----------
Total cost 6,753,000 5,694,000
Accumulated depreciation (2,071,000) (1,376,000)
----------- -----------
Property, plant and equipment, net $ 4,682,000 $ 4,318,000
=========== ===========
Depreciation expense for property, plant, and equipment was $755,000, $744,000,
and $441,000 for years ending December 31, 2000, 1999, and 1998, 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.
On November 1, 1999, the Company reclassified all of its oil and gas properties
from "not subject to amortization" to "subject to amortization" as the Company
determined the oil reserves underlying the Karakuduk Field were commercial and
qualified for classification as proved. The key event in determining this
classification was the completion of the Shell Capital loan, which affirmed the
Company's commitment to develop the Karakuduk Field and adequately mitigated the
risks of financing the project. All capitalized costs incurred were deemed
subject to amortization as the proved reserves originally recorded as of
December 31, 1999 contemplated inclusion of such costs to develop the reserves.
F-43
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
7. Oil and Gas Properties (continued)
As further discussed in the unaudited footnote to these financial statements
"Supplemental Information - Disclosures About Oil and Gas Producing Activities",
the Company has restated its proved reserves previously reported as of December
31, 1999. The restatement is to reflect the SEC's definition of proved
undeveloped reserves versus the definition as accepted by the Society of
Petroleum Engineers. Specifically, the restated amounts represent proved
undeveloped reserves from "drilling units offsetting productive units that are
reasonably certain of production when drilled" or from "other undrilled
units...where it can be demonstrated with certainty that there is a continuity
of production from the existing productive formation." The reclassification of
oil reserves resulted in the restatement of oil and gas properties that are
"subject to amortization" to only include costs associated with wells to which
proved reserves have been assigned. Field level costs are allocated to "costs
subject to amortization" based upon total wells assigned to proved reserves over
the total number of wells expected to be drilled in order to develop the
Karakuduk Field.
The Company recognized total amortization expense of $2,773,000 and $146,000 for
the years ended December 31, 2000 and 1999, respectively, representing an
effective amortization rate of $3.70 per barrel through December 31, 2000.
Amortization expense for 1999 was calculated using production from November 1,
1999 through December 31, 1999.
During 1999, the Company sold approximately 314,000 barrels of crude oil,
realizing approximately $1,019,000, net of related production and transportation
costs. These sales resulted from placing accumulations of initial crude oil
production into the pipeline. The proceeds from these placements were not
considered revenues, as volumes delivered were not commercially viable or
attributable to proved reserves. The Company accounted for these proceeds as
cost recovery by reducing the net carrying value of oil and gas properties
subject to amortization by the amount of net proceeds received.
In accordance with SFAS 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies, the Company accounted for the 1999 amortization as a
component of crude oil inventory until the related crude oil was sold during
2000. As of December 31, 2000, $76,000 of amortization expense was capitalized
to crude oil inventory.
The composition of Oil and Gas Properties is as follow:
December 31, December 31,
Description 2000 1999
----------- ------------ ------------
Acquisition costs $ 508,000 $ 508,000
Exploration and appraisal costs 11,256,000 11,256,000
Development cost 31,833,000 5,761,000
Capitalized interest 2,628,000 1,496,000
------------ ------------
Total oil and gas properties at cost $ 46,225,000 $ 19,021,000
============ ============
Total costs not subject to amortization $ 20,527,000 $ 13,584,000
============ ============
Total costs subject to amortization 25,698,000 5,437,000
Accumulated amortization (2,919,000) (146,000)
------------ ------------
Net properties subject to amortization $ 22,779,000 $ 5,291,000
============ ============
The full cost ceiling test results as of December 31, 2000 support the carrying
amount of the assets disclosed above. Therefore, no impairment provision has
been made.
F-44
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
8. Accrued Liabilities
December 31, December 31,
Description 2000 1999
----------- ------------ ------------
Accrued management service fee $ 574,000 $ 574,000
Accrued taxes payable 156,000 220,000
Other accrued liabilities 65,000 78,000
------------ ------------
Total accrued liabilities $ 795,000 $ 872,000
============ ============
9. Other Long-Term Liabilities - Production Bonuses
Production based bonuses will be payable to the Government of Kazakhstan
amounting to $500,000 when cumulative production reaches ten million barrels and
$1,200,000 when cumulative production reaches fifty million barrels. Under
current Kazakhstan tax law, the production bonuses will be considered tax
deductible expenditures in the calculation of profits taxes. The Company accrues
the production bonuses in relation to cumulative oil production. The Company has
accrued $86,000 as a bonus payable for its cumulative production through
December 31, 2000.
10. Long-term Debt
December 31, December 31,
Description 2000 1999
----------- ------------ ------------
Loans payable to banks $ -- $ 578,000
Loans payable to partner
Cash funding 42,477,000 20,672,000
Management service fee 6,315,000 6,315,000
Other expenditures 3,186,000 2,603,000
Accrued interest payable 6,627,000 3,281,000
------------ ------------
58,605,000 33,449,000
Less current portion -- (578,000)
------------ ------------
Total long-term debt $ 58,605,000 $ 32,871,000
============ ============
Loans Payable to Banks
- ----------------------
During 1998, the Company borrowed a total of $800,000 from the Chase Bank of
Texas, N.A. (Chase), a U.S. financial institution, of which $578,000 was
outstanding as of December 31, 1999. The Company fully repaid the loans on
January 21, 2000.
F-45
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
10. Long-term Debt (continued)
Loans Payable to Partner
- ------------------------
One of the Company's founders, Central Asian Petroleum (Guernsey) Limited
("CAP-G"), bears sole financial responsibility for providing all funding for the
Company, which is not generated by the Company's operations or borrowed from
third party sources. The various forms of funding from CAP-G are treated as
long-term loans to the Company and bear interest at the rate of LIBOR plus 1%.
The Agreement requires installment payments on the loan to be calculated and
paid on a quarterly basis 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.
The management service fee element of loans payable to partners relates to
management services provided by a subsidiary of Chaparral Resources, Inc
("Chaparral"). from 1996 through 1999. 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.
11. Taxes
The Company is subject to corporate income tax at the prevailing statutory rate
of 30%.
The following is a summary of the provision for income taxes:
Year ended December 31
2000 1999 1998
----------------------------------------
Income taxes (benefit) computed
at statutory rate $ 422,000 $(1,351,000) $(1,046,000)
Non-deductible expenses 487,000 847,000 347,000
Utilization of net operating
loss carry forwards (909,000) -- --
Change in asset valuation allowance -- 504,000 699,000
----------------------------------------
Income taxes $ -- $ -- $ --
========================================
The components of the Company's deferred tax assets are as follows:
Year ended December 31
2000 1999
----------------------------
Deferred tax assets:
Oil and gas properties $ 253,000 $ 734,000
Net operating loss carryforwards 908,000 1,654,000
Valuation allowance (1,161,000) (2,388,000)
----------------------------
Deferred tax assets $ -- $ --
============================
There were no net deferred tax assets or net income tax benefits recorded in the
financial statements for deductible temporary differences or net operating loss
carry forwards as the Company has recognized cumulative operating losses in
recent years.
F-46
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in 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, 2000, the Company has tax loss carryforwards of approximately
$3,027,000 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 are subject to
a five-year carryforward period.
The Company has used the best estimates available to determine the Company's
deferred tax assets before consideration of the valuation allowance. Refer to
Note 13 regarding the uncertainties of taxation in the Republic of Kazakhstan.
12. Charter Capital
The total Charter Fund contribution specified in the new 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,
2000 1999
----------------------------------------------------
Charter Percent Charter Percent
Contribution Contribution
----------------------------------------------------
KazakhOil 80,000 40 % 80,000 40 %
Korporatsiya Mangistau Terra International 20,000 10 % 20,000 10 %
Central Asian Petroleum (Guernsey)
Limited - CAP-G 100,000 50 % 100,000 50 %
--------------------------------------------------
Total charter capital $200,000 100% $200,000 100%
======== ========
KazakhOil JSC ("KazakhOil") is the national petroleum company of the Republic of
Kazakhstan.
13. Contingencies
Shell Capital Loan
- ------------------
On November 1, 1999, Chaparral entered into a $24,000,000 loan agreement with
Shell Capital Limited (the "Loan") to partially fund the development of the
Karakuduk Field. CAP-G and the Company signed the Loan as "co-obligors,"
assuming certain obligations and commitments to Shell Capital and to Chaparral,
as the borrower. The Company, however, continues to borrow funds from CAP-G in
accordance with the terms of the Agreement.
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 604,000 barrels of oil to STASCO as of December 31, 2000.
Furthermore, the Government of the Republic of Kazakhstan required the Company
to sell approximately 161,000 barrels of oil to the local market. All local oil
sales were approved by Shell Capital and STASCO.
F-47
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
13. Contingencies (continued)
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;
(iii) A representation to reach project completion ("Project Completion") on or
before September 30, 2001. Project Completion occurs when:
o an independent engineer certifies that the proven developed reserves
of the Karakuduk Field are at least 30 million barrels;
o average daily oil production from the Karakuduk Field is at least
13,000 barrels for 45 consecutive days;
o average daily water injection at the Karakuduk Field is at least
15,000 barrels for 45 consecutive days; and
o a gas lift system is successfully implemented for one well over a
24-hour period.
(iv) The Company may not pay dividends prior to Project Completion and must
meet certain conditions to pay dividends thereafter.
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 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 it's 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.
During 2000, however, the Government of Kazakhstan 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.
With the approval of Shell Capital and STASCO, the Company sold approximately
161,000 barrels of crude oil on the local market for approximately $1,487,000.
Comparatively, the Company also sold 604,000 barrels of crude oil to STASCO on
the export market for approximately $12,268,000.
The Company is presently petitioning the Government to enforce it's right under
the Agreement to export 100% of hydrocarbons produced. It is uncertain, however,
whether the Company will be successful in enforcing it's rights, in whole or in
part, as the Government is expected to require additional local sales from oil
and gas producers in the future.
15. Capital Commitments
As of December 31, 2000, the Company has outstanding drilling contracts with
KODS for two development drilling rigs currently operating in the Karakuduk
Field. The initial rig is contracted through December 31, 2001, at an operating
rate of $12,100 per day, including crew. The second drilling rig is contracted
through August 30, 2001, at an operating rate of $11,000 per day, including
crew. Effective as of April 1, 2001, the Company released the second rig to KODS
for use by KazakhOil, retaining a first right of refusal through December 31,
2001 in the event the rig is released by KazakhOil to another party.
The Company has no other significant commitments other than those incurred
during the normal performance of the work program to develop the Karakuduk
field.
16. 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 it's 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 $2,040,000 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, and the drilling
contracts with KODS, an affiliate of KazakhOil are described in Note 15.
F-49
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
The following supplemental information regarding the oil and gas activities of
the Company is presented pursuant to the disclosure requirements promulgated by
the SEC and Statement of Financial Accounting Standards ("SFAS") No. 69,
Disclosures About Oil and Gas Producing Activities.
Due to the previous uncertainties surrounding the development of the Karakuduk
Field no proved reserves were attributed to the Karakuduk Field as of December
31, 1998. KKM recorded proved oil reserves on November 1, 1999, in conjunction
with the signing of the Shell Capital loan. The disclosures relating to 1999
have been restated to reflect the SEC's definition of proved undeveloped
reserves versus the definition as accepted by the Society of Petroleum
Engineers. Specifically, the restated amounts represent proved undeveloped
reserves from "drilling units offsetting productive units that are reasonably
certain of production when drilled" or from "other undrilled units...where it
can be demonstrated with certainty that there is a continuity of production from
the existing productive formation." As of December 31, 2000, the Company has
33,045,000 barrels of proved oil reserves, of which 10,414,000 are proved
developed.
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 765,000 barrels of crude oil in 2000, of which 161,000 barrels
were sold on the local market. Prices received on local market sales were
substantially lower than world market prices prevailing at that time. The
Company has an existing crude oil sales agreement with STASCO to sell 100% of
it's production on the export market for world market prices and a right to
export 100% of it's production under the terms of it's Agreement with the
government. However, the Company expects the government to continue to require
the Company to sell up to 20% of it's future crude oil production to the local
market. Therefore, year-end prices used for the standardized measure of
discounted net cash flows for 1999 and 2000 reflect the assumption that 20% of
the Company's production will be sold on 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
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
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 20,201,000 --
Production (59,000) --
Balance December 31, 1999(1) 20,142,000 --
Revision of previous estimates -- --
Extensions, discoveries and other additions 13,633,000 --
Production (730,000) --
-----------------------
Balance December 31, 2000 33,045,000 --
=======================
Proved Developed Reserves:
Balance December 31, 1998 -- --
=======================
Balance December 31, 1999(1) 3,899,000 --
=======================
Balance December 31, 2000 10,414,000 --
=======================
(1) Proved oil reserves as of December 31, 1999 have been restated from the
original presentation, revising the original disclosure of 67,637,000 barrels of
proved reserves downward by 47,495,000 barrels. The restatement is to reflect
the SEC's definition of proved undeveloped reserves versus the definition as
accepted by the Society of Petroleum Engineers. Specifically, the restated
amounts represent proved undeveloped reserves from "drilling units offsetting
productive units that are reasonably certain of production when drilled" or from
"other undrilled units...where it can be demonstrated with certainty that there
is a continuity of production from the existing productive formation."
Additionally, proved developed reserves as of December 31, 1999 were revised
upward by 2,666,000 barrels from the original presentation of 1,233,000 as a
result of additional analysis of underlying reserves as of the balance sheet
date.
F-51
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
Capitalized Costs Relating to Oil and Gas Producing Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2000 1999(2) 1998
--------------------------------------------
Unproved oil and gas properties $ 29,892,000 $ 20,256,000 $ 18,899,000
Proved oil and gas properties 26,886,000 5,596,000 --
--------------------------------------------
Accumulated depreciation and depletion (4,990,000) (1,522,000) (632,000)
--------------------------------------------
Net capitalized cost $ 51,788,000 $ 24,330,000 $ 18,267,000
============================================
(2) Oil and gas properties as of December 31, 1999 have been restated from the
original presentation, reclassing the original $25,852,000 of proved oil and gas
properties between proved and unproved based upon the total number of wells
drilled as of each balance sheet date over the total wells expected to be
drilled for the total development of the Karakuduk Field.
Cost Incurred in Oil and Gas Property Acquisition, Exploration, and Development
Activities (All within the Republic of Kazakhstan)
Year Ended December 31,
2000 1999 1998
---------------------------------------
Acquisition costs $ -- $ -- $ --
Exploration and appraisal costs -- -- 6,689,000
Development costs 26,396,000 7,477,000 --
---------------------------------------
$26,396,000 $ 7,477,000 $ 6,689,000
=======================================
Results of operations for producing activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2000 1999 1998
---------------------------------
Oil revenue $ 13,755,000 $ -- $ --
Production (lifting) costs (3,676,000) -- --
Depreciation, depletion, and amortization (3,598,000) -- --
---------------------------------
6,481,000 -- --
Provision for income taxes -- -- --
=================================
$ 6,481,000 $ -- $ --
=================================
F-52
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
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,
--------------------------------------------
2000 1999(3) 1998
--------------------------------------------
Future cash inflows $ 430,082,000 $ 343,617,000 $ --
Future development costs (92,685,000) (66,611,000) --
Future production costs (46,477,000) (32,547,000) --
Future income tax expenses (71,000,000) (63,566,000) --
--------------------------------------------
Future net cash flows 219,920,000 180,893,000 --
10% annual discount for
estimated timing of cash flows (79,358,000) (58,270,000) --
--------------------------------------------
Standardized measure of discounted net
cash flows $ 140,562,000 $ 122,623,000 $ --
============================================
Principal sources of change in the standardized measure of discounted future net
cash flows
Year Ended December 31,
--------------------------------------------
2000 1999(3) 1998
--------------------------------------------
Beginning balance $ 122,623,000 $ -- --
Extensions and discoveries 90,438,000 164,657,000 --
Net changes in prices, production cost
and future development cost (60,303,000) -- --
Net changes due to revisions of previous
quantity estimates -- -- --
Development cost incurred (26,396,000) -- --
Accretion of discount 16,496,000 -- --
Net change in income taxes (2,296,000) (42,034,000) --
--------------------------------------------
Ending balance $ 140,562,000 $ 122,623,000 $ --
============================================
(3) The standardized measure of discounted future net cash flows as of December
31, 1999 has been restated from the original presentation, revising the original
disclosure of $355,360,000 downward by $232,737,000 to reflect the restatement
of the Company's proved oil reserves as of December 31, 1999 as discussed above.
F-53
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
SUPPLEMENTAL INFORMATION - SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
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
---------------------------------------------------------------------------------
Revenue(1) $ -- $ 3,483,000 $ 3,627,000 $ 6,645,000 $ 13,755,000
Operating expenses -- (794,000) (1,521,000) (1,361,000) (3,676,000)
Depreciation and depletion (180,000) (828,000) (884,000) (1,706,000) (3,598,000)
---------------------------------------------------------------------------------
Operating income (loss) (180,000) 1,861,000 1,222,000 3,578,000 6,481,000
=================================================================================
Net income (loss) as adjusted $ (1,209,000) $ 625,000 $ (148,000) $ 2,137,000 $ 1,405,000
=================================================================================
Reconciliation of quarterly data:
Net income (loss) as originally filed $ (1,445,000) $ 572,000 $ (236,000) $ 2,137,000 $ 1,028,000
Adjustments to quarterly data
Interest capitalization(2) 236,000 283,000 287,000 -- 806,000
Depletion expense(3) -- (230,000) (199,000) -- (429,000)
---------------------------------------------------------------------------------
Net income (loss) as adjusted $ (1,209,000) $ 625,000 $ (148,000) $ 2,137,000 $ 1,405,000
=================================================================================
(1) Revenue is presented net of transportation and marketing cost. In addition,
revenue for the quarter ended June 30, 2000 is shown net of $153,000 royalty
originally shown as a separate item. Revenues for all other quarters were shown
net of royalty in the original filings.
(2) The Company recognized interest capitalization during 2000 due to the
reclassification of oil reserves as of December 31, 1999, as discussed in
"Supplemental Information - Disclosures About Oil and Gas Producing Activities."
The restatement of reserves resulted in the transfer of oil and gas property
costs previously classified as "subject to amortization" to property costs "not
subject to amortization," which became subject to additional interest
capitalization. Consequently, the Company recorded interest capitalization of
$236,000, $283,000, and $287,000 for the quarters ended March 31, June 30, and
September 30, 2000, respectively. There was no interest capitalized in these
periods as originally presented.
(3) The Company's restatement of proved oil reserves as of December 31, 1999,
resulted in an increase in depreciation and depletion expense as previously
presented. The Company originally recorded depreciation and depletion expense of
$598,000 and $685,000 for the quarters ended June 30, 2000, and September 30,
2000, respectively. The as adjusted quarterly results reflect additional
depletion expense of $230,000 and $199,000 for the two respective periods.
F-54
Closed Type JSC Karakudukmunay
Notes to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
SUPPLEMENTAL INFORMATION - SELECTED QUARTERLY FINANCIAL DATA-UNAUDITED
1999 Quarterly Information
For the Three Months Ended
--------------------------------------------------------- Total as of
March 31, June 30, September 30, December 31, December 31,
1999 1999 1999 1999 1999
-----------------------------------------------------------------------
Revenue $ -- $ -- $ -- $ -- $ --
Transportation and marketing costs -- -- -- -- --
Operating expenses -- -- -- -- --
Depreciation and depletion (125,000) (125,000) (150,000) (344,000) (744,000)
-----------------------------------------------------------------------
Income (loss) from operations (125,000) (125,000) (150,000) (344,000) (744,000)
=======================================================================
Net loss $(1,074,000) $(1,114,000) $ (951,000) (1,365,000) (4,504,000)
=======================================================================
F-55