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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, 2002.
Commission file number: 0-7261
CHAPARRAL RESOURCES, INC.
-------------------------
(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 Identification No.)
incorporation or organization)
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
----------------------------------------
(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. |_|
Indicate by check mark whether the registrant is an accelerated filer.
YES |_| NO |X|
As of June 28, 2002, the aggregate market value of registrant's voting
common stock, par value $.0001 per share, held by non-affiliates was
$28,567,602.
As of March 24, 2003, registrant had 38,209,502 shares of its common stock,
par value $.0001 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
Page
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PART I
Item 1. Business
Our Business ................................................1
Available Information .......................................1
Equity and Debt Capital Infusion ............................2
Crude Oil Sales .............................................2
Risks of Oil and Gas Activities .............................3
Risks of Foreign Operations .................................4
Environmental Regulations ...................................4
Competition .................................................4
Employees ...................................................4
Corporate Information .......................................5
Special Note Regarding Forward-Looking Statements ...........5
Item 2. Properties
Properties ..................................................5
Net Quantities of Oil and Gas Produced ......................7
Drilling Activity ...........................................7
Item 3. Legal Proceedings ............................................8
Item 4. Submission of Matters to Vote of Security Holders ............8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ........................................9
Item 6. Selected Financial Data .....................................10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................11
Item 8. Financial Statements and Supplementary Data .................19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures ......................20
PART III
Item 10. Directors and Executives Officers of the Registrant ........20
Item 11. Executive Compensation .....................................22
Item 12. Security Ownership of Certain Beneficial Owners and
Management ................................................26
Item 13. Certain Relationships and Related Transactions .............27
Item 14. Controls and Procedures ....................................28
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....29
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 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 intermediate holding companies, Central Asian Petroleum (Guernsey),
Ltd., a Guernsey company ("CAP-G"), Korporatsiya Mangistau Terra International
Limited ("MTI"), a Kazakhstan company, and Central Asian Petroleum, Inc., a
Delaware company ("CAP-D"), we own a 60% 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., and its greater than 50%
owned subsidiaries, unless indicated otherwise. In May 2002, Chaparral increased
its ownership in KKM from 50% to 60% through the acquisition of 100% of the
outstanding stock of MTI for $1.2 million and 1 million newly issued shares of
Chaparral's outstanding common stock.
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 U.S.
based oil and gas assets of Chaparral were divested during 1996 and 1997 to help
fund the development of the Karakuduk Field. The Government of the former Soviet
Union discovered the Karakuduk Field in 1972 and drilled 22 exploratory and
development wells, none of which were produced commercially. KKM began to
aggressively develop the Karakuduk Field in early 2000, re-establishing oil
production from a majority of the existing wells and drilling a total of 23 new
wells through September 2001. On February 12, 2003, KKM commenced a new drilling
campaign to further develop and commercially produce the oil reserves in the
Karakuduk Field.
The other stockholder of KKM is KazMunayGaz JSC, the state owned national
petroleum and transportation company of the Republic of Kazakhstan, which owns a
40% interest.
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, MTI, and
CAP-D.
As a result of the acquisition of MTI, Chaparral obtained a controlling
interest in KKM. Consequently, Chaparral's financial statements have been
consolidated with KKM on a retroactive basis to January 1, 2002. Chaparral
previously accounted for its 50% investment in KKM using the equity method of
accounting, which is reflected in Chaparral's financial statements for periods
prior to 2002. The consolidated financial statements for Chaparral for the three
years ending December 31, 2002 and separate financial statements for KKM for the
two years ended December 31, 2001 are included as part of this Annual Report on
Form 10-K.
Available Information
- ---------------------
Chaparral files Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and registration statements and other items
with the Securities and Exchange Commission (SEC). Chaparral provides access
free of charge to all of these SEC filings, as soon as reasonably practicable
after filing, on its Internet site located at www.chaparralresources.com.
Chaparral will also make available to any stockholder, for a nominal fee, copies
of its Annual Report on Form 10-K as filed with the SEC. For copies of this, or
any other filing, please contact: Chaparral Resources, Inc., 16945 Northchase
Drive, Suite 1620, Houston, Texas 77060 or call (281) 877-7100.
In addition, the public may read and copy any materials Chaparral files
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information on the operation of the
1
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site (www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers, like Chaparral, that file
electronically with the SEC.
Equity and Debt Capital Infusion
- --------------------------------
In May 2002, Chaparral received a total equity and debt capital infusion of
$45 million, which was used to repay a substantial portion of a loan with Shell
Capital, Inc. (the "Shell Capital Loan") and finance additional working capital
requirements. Chaparral received a total investment of $12 million from Central
Asian Industrial Holdings, N.V. ("CAIH"), including $8 million in exchange for
22,925,701 shares, or 60%, of Chaparral's outstanding common stock, and $4
million in exchange for a three year note bearing interest at 12% per annum (the
"CAIH Note"). Additionally, JSC Kazkommertsbank ("Kazkommertsbank"), an
affiliate of CAIH, provided KKM with a credit facility totaling $33 million (the
"KKM Credit Facility") bearing interest at 14% per annum. The terms and
conditions of the CAIH Note and the KKM Credit facility are more fully described
in Note 11 to our consolidated financial statements for the year ended December
31, 2002.
Crude Oil Sales
- ---------------
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 of the
Karakuduk Field and only began generating revenue from the sale of crude oil
during 2000. KKM recognized $45.13 million in revenue in 2002 from the sale of
approximately 2.47 million barrels of crude oil. In 2001, KKM recorded $36.58
million in revenue based upon sales of approximately 2.18 million barrels of
crude oil.
KKM sells the majority of its crude oil on the export market. Sales to the
export market were responsible for approximately 92% of KKM's oil sales revenue
in 2002. KKM has a short-term renewable crude oil sales agreement in place with
NAFTEX Oil and Shipping Corporation ("NAFTEX") for the sale of 100% of KKM's oil
production allocation to the export market. 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 NAFTEX. NAFTEX is responsible for nominating and coordinating an oil tanker,
if necessary, and arranging for the resale/marketing of the crude oil purchased.
Sales prices at the export port locations are based upon quoted Urals crude
oil prices from the Platt's Crude Oil Marketwire average for the three banking
days following the bill of lading. The price is net of deductions that include
freight charges published in both Platt's Dirty Tanker Wire and the Worldscale
Tanker Nominal Freight Scale. As of January 1, 2003, additional deductions of
approximately $1 per barrel have been implemented due to increased regulatory
pressure on owners/ charter companies to improve safety requirements. Payment is
made by NAFTEX within 30 days of receipt of the final bill of lading and KKM's
invoice for the sale, unless otherwise agreed by both parties. There are six
delivery points for export sales, including three preferred port facilities on
the Black Sea (Novorossiisk, Odessa, and Ventspills) and three onshore pipeline
facilities (Dudkovce, Feyeshlitke, and Adamovo). KKM must use its best efforts
to deliver crude oil to one of the three preferred port locations. To date, all
of KKM's export oil sales have been delivered to the Ukrainian port of Odessa.
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.
Under the terms of our agreement with the government of the Republic of
Kazakhstan, KKM has a right to export, and receive export quota for, 100% of the
production from the Karakuduk Field. However, oil producers within Kazakhstan
are required to supply a portion of their crude oil production to the local
market to meet domestic energy needs. During January and February 2003, KKM
refused to deliver its oil production to the local market. Consequently, the
amount of KKM's export quota has been limited to approximately 64% of its
production. Local market oil prices are significantly lower than prices
obtainable on the export market. In 2002, the government required KKM to sell
approximately 363,000 barrels of crude oil, or 15% of its total oil sales, to
the local market, compared to 375,000 barrels, or 17%, during 2001. Local market
prices obtained by KKM are approximately $6 to $10 per barrel below export
market prices, net of transportation costs. We are continuing to have informal
discussions with the government of Kazakhstan in an attempt to effect the 100%
export of all hydrocarbons produced from the Karakuduk Field. If we are
unsuccessful, however, we may be required to initiate an arbitration proceeding
in Switzerland for the breach of our agreement by the government of Kazakhstan.
We can provide no assurances that any such arbitration proceeding would be
successful. The future loss of revenue resulting from local sales may be
significant enough to prevent us from generating a profit from the Karakuduk
Field or generate enough cash flow to meet our investment and working capital
needs. See Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.
2
Risks of Oil and Gas Activities
- -------------------------------
The current market for oil is characterized by instability. This
instability has caused fluctuations in world oil prices in recent years and
there is no assurance of any price stability in the future. The production and
sale of oil from the Karakuduk Field may not be commercially feasible under
market conditions prevailing in the future. The price we receive for our oil may
not be sufficient to generate revenues in excess of our costs of production or
provide sufficient cash flow to meet our investment and working capital
requirements.
We make no assurance that we will be able to sell oil that we produce nor
the price at which such sales will be made. 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. The
development of oil reserves inherently involves a high degree of risk, even
though the reserves are proved. Our risks are increased because our activities
are concentrated in areas where political or other unknown circumstances could
adversely affect commercial development of the reserves. Costs necessary to
acquire, explore, and develop oil reserves are substantial. No assurances can be
given we will recover the costs incurred to acquire and develop the Karakuduk
Field. If we fail to generate sufficient cash flow from operations to meet our
working capital requirements or other long-term debt obligations, we may lose
our entire investment in the Karakuduk Field, which is currently pledged as
collateral to Kazkommertsbank under the terms of the KKM Credit Facility.
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.
3
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 all of 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 24, 2003, we have not experienced any material losses
due to these events.
Risks of Foreign Operations
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Our ability to develop the Karakuduk Field is dependent on fundamental
contracts with governmental agencies in Kazakhstan, including KKM's Agreement
with the Ministry of Energy and Natural Resources for Exploration, Development,
and Production of Oil in the Karakuduk Oil Field (the "Agreement") and KKM's
petroleum license with the government allowing KKM to operate and develop the
Karakuduk Field. Kazakhstan is a relatively new country and, as is inherent in
such developing markets, there is some uncertainty as to the status of Kazakh
law and the stability of the country and the region.
The laws of the Republic of Kazakhstan govern our operations and a number
of our significant agreements. As a result, we may be subject to arbitration in
Kazakhstan or to the jurisdiction of the Kazakh courts. Even if we seek relief
in foreign territories such as the courts of the United States or Switzerland,
we may not be successful in subjecting foreign persons to the jurisdiction of
those courts.
The exportation of oil from Kazakhstan depends on access to transportation
routes, particularly the Russian pipeline system. Transportation routes are
limited in number, and access to them is regulated and restricted. If any of our
agreements relating to oil transportation or marketing are breached, or if we
are unable to renew such agreements upon their expiration, we may be unable to
transport or market our oil. Also, a breakdown of the Kazakhstan or Russian
pipeline systems could delay or even halt our ability to sell oil. Any such
event would result in reduced revenues.
Obtaining the necessary quotas and permissions to export production through
the Russian pipeline system can be extremely difficult, if not impossible in
some circumstances. Our agreements with the government of the Republic of
Kazakhstan grant us the right to export, and to receive export quota. However,
we cannot provide any assurances that we will receive export quota or any other
approvals required to export and deliver our production in the future.
Environmental Regulations
- -------------------------
We must comply with laws of the Republic of Kazakhstan and international
requirements that regulate the discharge of materials into the environment.
Furthermore, KKM's Credit Facility requires that we comply with the World Bank's
environment, health, and safety guidelines for onshore oil and gas development.
Environmental protection and pollution control could, in the future, become so
restrictive as to make production unprofitable. Furthermore, we may be exposed
to potential claims and lawsuits involving such environmental matters as soil
and water contamination and air pollution. We are currently in compliance with
all local and international environmental requirements and are closely monitored
by the environmental authorities of the Republic of Kazakhstan. We have not made
any material capital expenditures for environmental control facilities and have
no plans to do so in the foreseeable future.
Competition
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We compete in all areas of the exploration and production segment of the
oil and gas industry with a number of other companies. These companies include
large multinational oil and gas companies and other independent operators with
greater financial resources and more experience than Chaparral. We do not hold a
significant competitive position in the oil industry. We compete both with major
oil and gas companies and with independent producers for, among other things,
rights to develop oil and gas properties, access to limited pipeline capacity,
procurement of available materials and resources, and hiring qualified local and
international personnel.
Employees
- ---------
As of March 24, 2003, Chaparral had 6 full-time employees. KKM had 182
employees and retains independent contractors on an as needed basis. We believe
that our relationship with our employees and consultants is good.
4
Corporate Information
- ---------------------
Chaparral was incorporated under the laws of the State of Colorado in 1972.
In 1999, Chaparral 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 if the productive life of the field exceeds this term. In 1995, KKM
entered into an agreement with Kazakhstan's Ministry of Energy and Natural
Resources to develop the Karakuduk Field.
The Karakuduk Field is geographically located approximately 227 miles
northeast of the regional capital city of Aktau, on the Ust-Yurt Plateau. The
closest settlement is the Say-Utes Railway Station approximately 51 miles
southeast of the field. The ground elevation varies between 590 and 656 feet
above sea level. The region has a dry, continental climate, with fewer than 10
inches of rainfall per year. Mean temperatures range from minus 25 degrees
Fahrenheit in January to 100 degrees Fahrenheit in July. The operating
environment is similar to that found in northern Arizona and New Mexico in the
United States.
The Karakuduk Field structure is an asymmetrical anticline located on the
Aristan Uplift in the North Ustyurt Basin. Oil was discovered in the structure
in 1972, when Kazakhstan was a republic of the former Soviet Union, from
Jurassic age sediments between 8,500 and 10,000 feet. The former Soviet Union
drilled 22 exploratory and development wells to delineate the Karakuduk Field,
discovering the presence of recoverable oil reserves. The productive area of the
Karakuduk Field is estimated to contain a minimum of 8 separate productive
horizons present in the Jurassic formation. None of the original wells were ever
placed on commercial production prior to KKM obtaining the rights to the
Karakuduk Field.
The Karakuduk Field is approximately 18 miles north of the main utility
corridor, which includes the Makat-Mangishlak railroad, the
Mangishlak-Astrakghan water pipeline, the Beyneu-Uzen high voltage utility
lines, and the Uzen-Atrau-Samara oil and gas pipelines. KKM, according to its
agreements with the Republic of Kazakhstan, has a right to use the existing oil
export pipeline and related utilities. KKM also has a contract with KazTransOil
granting KKM the right to use the export pipeline for transportation of crude
oil to local and export markets, subject to transit quota restrictions, and as a
temporary storage facility until the produced hydrocarbons are sold by KKM.
5
As of March 24, 2003, KKM had 37 productive wells in the Karakuduk Field,
including 24 new wells and 13 re-completions of previously existing delineation
wells. The 37 wells include 25 wells currently producing approximately 6,000
barrels of oil per day and 11 which are shut-in for various reasons, including
hydraulic fracturing, installation of additional gathering lines, equipment and
additional workover, water injection and stimulation operations to bring wells
on to primary production. Another shut-in well is being considered for future
use as an injection well for a pilot waterflood project. 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. KKM drilled an additional exploratory well and
performed 2 re-completions prior to 2000. During 2001, KKM drilled an additional
10 development wells and re-completed 7 delineation wells. In 2002, KKM did not
have any drilling activity. On February 12, 2003, Chaparral announced the
spudding of Well No. 141 in the Karakuduk Field. Well No. 141 is the first of 12
wells budgeted for completion in 2003, which will increase the total number of
wells to 48 by year-end. KKM has successfully completed every well drilled to
date. Oil has been recovered from the originally identified J-1, J-2, J-4, J-8,
and J-9 formations, along with new discoveries in the J-6, J-7 and J-10
horizons.
In the past, KKM's daily oil production has been limited due to various
facility constraints and lack of working capital to fund field operations. KKM
remains committed to improving efficiency of field facilities through continued
expansion of its oil storage capacity, installation of additional gathering and
processing facilities, and the full implementation of the central processing
facility. In June 2002, KKM commissioned a 18-mile crude oil pipeline from the
Karakuduk Field capable of transporting up to 18,000 barrels of oil per day to
the export pipeline terminal. The pipeline runs from the central processing unit
to the pump station, which lies adjacent to the main export pipeline. Thus,
trucking the oil to the pump station is no longer required. In 2003, KKM expects
to further expand the central processing unit in order to improve its produced
water processing capability in the field.
KKM currently has one drilling rig and one workover rig operating in the
Karakuduk Field. The workover rig is expected to continue operations, performing
standard well maintenance, re-completions of existing wells, and down-hole pump
installations. We estimate that up to 76 new wells will be required to fully
develop the Karakuduk Field, of which 15 would eventually be converted into
water injection wells. The planned development program includes a pressure
maintenance operation, including hydraulic fractures and water injections that
our management believes will enhance ultimate recovery.
During 2002, Chaparral completed a simulation study, which we have used to
optimize the location of wells (both producers and injectors) and further define
the possible total productive capacity of the Karakuduk Field.
Reserves
--------
As of December 31, 2002, the Karakuduk Field has total estimated proved
reserves of approximately 21.86 million barrels, net of government royalty, of
which we have a proportional interest in approximately 13.12 million barrels,
based upon our 60% interest in KKM. The reserve disclosure is based on a reserve
study of the Karakuduk Field conducted by Ryder Scott Company, a petroleum
engineering firm, including data available subsequent to December 31, 2002.
No reserve estimates have been filed with any Federal authority or other
agency since January 1, 2002.
6
Net Quantities of Oil and Gas Produced
- --------------------------------------
The following table summarized sales volumes, sales prices and production
cost information for our oil and gas production for each of the three years
ended December 31, 2002:
As of the Year Ended December 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
Net sales volumes
Oil (bbls) 382,500 1,092,000 2,467,000
Gas (mcf) -- -- --
Average sales price
Oil (per bbl) $ 22.18 $ 16.75 $ 18.29
Gas (per mcf) $ -- $ -- $ --
Average production cost (per bbl) $ 4.81 $ 2.40 $ 3.11
The average sales revenue, net of transportation costs, was approximately
$14.47 and $12.95 per barrel for the years ended December 31, 2002 and 2001,
respectively. For the same periods, the average transportation costs per barrel
were approximately $3.82 and $3.80, respectively.
Net sales volumes for the years 2001 and 2000 represent 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.
Productive Wells and Acreage
----------------------------
As of December 31, 2002, we had interests in 36 gross productive oil wells,
and no producing gas wells. There were no multiple completion wells. Production
was from 16,900 gross acres, of which 5,000 acres are productive developed.
Undeveloped Acreage
-------------------
As of December 31, 2002, 5,000 acres in the Karakuduk Field are productive
undeveloped.
Drilling Activity
- -----------------
During the three years ended December 31, 2002, 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
------------ ---------- --- ---------- ---
2000 1.5 -- 6.5 --
2001 .5 -- 8.0 --
2002 -- -- -- --
All wells are located in the Republic of Kazakhstan.
7
Present Activities
------------------
As of March 24, 2003, KKM has successfully completed an additional
development well (No. 141) and another development well (No. 111) is expected to
be completed in April 2003. Well No. 141 is the first new well drilled in the
Karakuduk Field since October 2001 when KKM temporarily suspended its drilling
program. Well No. 141 was spudded on February 6, 2003 and was drilled to a depth
of approximately 10,500 feet (3,200 meters), with shows in the J-1, J-2, J-7 and
J-8 formations. On March 4, 2003, KKM completed pressure testing the production
casing and began the well completion work. A survey has been scheduled to
perform a multi-stage test in the near future. Well No. 111 was spud on March
12, 2003 and is expected to be drilled to a depth of 10,670 feet (3,250 meters).
The Karakuduk Field is currently producing approximately 6,000 barrels of oil
per day from 25 flowing wells.
ITEM 3. LEGAL PROCEEDINGS
As part of the restructuring of the loan with Shell Capital in May 2002,
Shell Capital Services Limited, as the facility agent for Shell Capital,
discontinued and withdrew all legal proceedings against Chaparral and CAP-G. All
parties to the original loan agreement with Shell Capital mutually released each
other from future liability. Shell Capital Services Limited filed a notice of
discontinuance in the United Kingdom with the High Court of Justice, Queen's
Bench Division, on May 8, 2002, regarding its legal proceedings against
Chaparral. Shell Capital Services Limited also withdrew its statutory demand for
the liquidation of CAP-G on May 13, 2002, by filing a written consent with the
Royal Court of Guernsey Ordinary Court.
In December 2002, KKM received a claim from the Ministry of State Revenues
of the Republic of Kazakhstan for $9.1 million (the "Tax Claim") relating to
taxes and penalties covering the three years from 1999 to 2001. KKM has appealed
the claim and has contracted legal firms in Kazakhstan to assist with the appeal
process. Based on the assessments of KKM's management and legal counsel, it is
our opinion that the ultimate resolution of the Tax Claim, after taking into
account reserves, will not have a material adverse effect on the financial
position and operating results of Chaparral.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 10, 2002, Chaparral held its Annual Meeting of Stockholders.
Our stockholders elected the following six persons as directors, each to serve
until the next Annual Meeting of Stockholders or until his successor is elected
or appointed: Askar Alshinbayev, Ian Connor, Nikolai D. Klinchev, Alan D.
Berlin, Peter G. Dilling, and John Duthie. Chaparral's stockholders also voted
to adopt, separately, amendments to Articles IV and V to Chaparral's Amended and
Restated Certificate of Incorporation, and to ratify selection by the board of
directors of Ernst & Young as Chaparral's independent auditors for the fiscal
year ended December 31, 2002.
The number of shares voted and withheld with respect to each director was
as follows:
Election of Directors For Withheld
--------------------- --- --------
Askar Alshinbayev 26,833,027 14,846
Ian Connor 26,822,024 25,849
Nikolai D. Klinchev 26,833,027 14,846
Alan D. Berlin 26,820,624 27,249
Peter G. Dilling 26,833,027 14,846
John Duthie 26,833,027 14,846
The number of shares voted (and broker non-votes) with respect to the
adoption of the new Article IV to Chaparral's Amended and Restated
Certificate of Incorporation was as follows:
For Against Abstained Not Voted
--- ------- --------- ---------
25,341,874 21,426 6,424 1,478,149
8
The number of shares voted (and broker non-votes) with respect to the
adoption of the new Article V to Chaparral's Amended and Restated
Certificate of Incorporation was as follows:
For Against Abstained
--- ------- ---------
26,825,600 15,155 7,118
The number of shares voted with respect to the approval of Ernst & Young as
Chaparral's independent auditors was as follows:
For Against Abstained
--- ------- ---------
26,841,997 2,234 3,642
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently quoted on the OTC Bulletin Board under the
symbol "CHAR". As of March 24, 2002, we have 1,830 stockholders of record of our
common stock. No dividend has been paid on our common stock, and there are no
plans to pay dividends in the foreseeable future.
The following table shows the range of high and low bid prices for each
quarter during our last two calendar years ended December 31, 2002 and 2001, as
reported by the National Association of Securities Dealers, Inc.:
Price Range
----------------
Fiscal Quarter Ended High Low
-------------------- ---- ---
March 31, 2001 4.50 2.81
June 30, 2001 3.30 2.00
September 30, 2001 2.50 1.10
December 31, 2001 2.15 1.50
March 31, 2002 1.75 1.30
June 30, 2002 3.05 1.40
September 30, 2002 2.20 1.25
December 31, 2002 1.50 0.82
In August 2001, our common stock was delisted from the Nasdaq SmallCap
Market for failure to comply with Nasdaq Marketplace Rules 4350(i)(1)(A),
4350(i)(1)(B) and 4350(i)(1)(D)(ii), which required Chaparral obtain stockholder
approval prior to the conversion of its 8% Non-Negotiable Subordinated
Convertible Promissory Notes into 11,690,259 shares of its common stock on
September 21, 2000 and the issuance of 1,612,903 shares of common stock on
October 30, 2000. Nasdaq also cited a violation of its annual meeting
requirement. The Nasdaq Listing Qualifications Panel did not, however, cite any
public interest concerns as a basis for its determination.
Chaparral's common stock is also subject to the rules and regulations of
the SEC concerning "penny stocks." The SEC's rules and regulations generally
define a penny stock to be an equity security that is not listed on Nasdaq or a
national securities exchange and that has a market price of less than $5.00 per
share, subject to certain exceptions. The SEC's rules and regulations require
broker-dealers to deliver to a purchaser of penny stock a disclosure schedule
explaining the penny stock market and the risks associated with it. Various
sales practice requirements are also imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, broker-dealers must provide the customer
with current bid and offer quotations for the penny stock, the compensation of
the broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account.
We did not sell any securities since October 1, 2002, which were not
registered under the Securities Act of 1933, as amended.
9
ITEM 6. SELECTED FINANCIAL DATA
As of or for the Year Ended
December 31,
(In Thousands of U.S. Dollars)
-------------------------------------------------------------
2002(1) 2001 2000 1999 1998
-------------------------------------------------------------
Oil and gas sales $ 45,133 -- -- -- --
Total revenues $ 45,133 -- -- -- --
Equity in income (loss) from
Investment $ -- 4,616 2,827 (1,849) (1,222)
Net income/(loss) $ 4,037 (16,215) (26,803) (5,163) (4,266)
Net income (loss) per
common share $ 0.14 (1.16) (6.01) (5.63) (5.14)
Working capital (deficit) $ (2,366) (39,357) (601) (2,941) (287)
Total assets $ 87,308 69,037 70,156 41,303 34,324
Long-term obligations and
Redeemable preferred stock $ 29,542 3,900 26,528 14,776 5,060
Stockholders' equity $ 44,129 25,361 41,926 22,851 27,579
Other Data
----------
Present value of proved reserves(2) $ 128,739 40,344 70,281 61,312 --
Minority interest present value of
proved reserves $ 51,496 -- -- -- --
Proved oil reserves (bbls) 21,855 14,961 16,523 10,071 --
Minority interest of proved oil
reserves (bbls) 8,742 -- -- -- --
Proved gas reserves (mcf) -- -- -- -- --
(1) In 2002, Chaparral obtained a controlling interest in KKM.
Consequently, our financial statements have been consolidated with KKM
on a retroactive basis to January 1, 2002. Chaparral accounted for its
50% investment in KKM using the equity method of accounting, which is
reflected in our selected financial data for periods prior to 2002.
(2) Present value of proved reserves for the years prior to 2002 represent
our 50% equity interest in KKM. Present value of proved reserves for
the year 2002 are presented at 100%.
10
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 that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Chaparral has incurred recurring
operating losses, has a working capital deficiency as of December 31, 2002, and
there are uncertainties relating to our ability to meet projected cash flow
requirements through 2003. In addition, the Government of Kazakhstan has
required KKM to sell a significant portion of its crude oil production on the
local market, which generates substantially less revenue than oil sold on the
export market. Since January 2003, KKM has refused to deliver its oil production
to the local market and, consequently, the amount of our export quota has been
limited to approximately 64% of our production.
These conditions raise substantial doubt about our 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.
We have attempted, in accordance with our Agreement, to effect the 100%
export of all hydrocarbons produced from the Karakuduk Field, through
discussions with the Government of Kazakhstan. We plan to continue to work with
the Government to increase our export quota and minimize or eliminate future
local sales requirements. If we are unsuccessful, we may be required to initiate
an arbitration proceeding in Switzerland for the breach of the Agreement by the
Government of Kazakhstan. However, no assurances can be provided that the we
will be able to export 100% or a significant portion of our production and that
our cash flow from operations will be sufficient to meet working capital
requirements in the future, which may require us to seek additional debt or
equity financing in order to continue to develop the Karakuduk Field.
Liquidity and Capital Resources
- -------------------------------
We are presently engaged in the development of the Karakuduk Field, which
requires substantial cash expenditures for drilling costs, well completions,
workovers, oil storage and processing facilities, pipelines, gathering systems,
plant and equipment (generators, pumps, communications, etc.) and other field
facilities. We have invested approximately $93.6 million in the development of
the Karakuduk Field and have drilled or re-completed 36 productive wells,
including 17 wells during 2001. In 2002, KKM did not have any drilling activity.
Total capital expenditures for 2002 were approximately $11.5 million compared to
total capital expenditures of $24.85 million incurred in 2001. Capital
expenditures are estimated to be at least $85 million from 2003 through 2006,
including drilling approximately 56 more wells over this period. We anticipate
2003 capital expenditures could be approximately $26 million.
We expect to finance the continued development of the Karakuduk Field
primarily through cash flows from the sale of crude oil. During 2002, KKM sold
approximately 2.47 million barrels of crude oil for $45.13 million. As of March
24, 2003, daily production, net of royalty, is approximately 6,000 barrels per
day from 25 of the 37 productive wells in the field. The remaining 12 wells are
shut-in for various reasons including hydraulic fracturing, installation of
additional gathering lines/ equipment and additional workover, water injection
and stimulation operations to bring wells on production. Another shut-in well is
being considered for future use as an injection well for a pilot waterflood
project.
In 2003, KKM plans to increase its daily production by introducing a water
injection program, installing electric submersible pumps, performing hydraulic
fracturing, and drilling 12 additional wells. Accordingly, management expects
the Karakuduk Field production to increase from approximately 6,000 to
approximately 11,200 barrels of oil per day by year-end.
11
KKM has finished constructing an 18-mile pipeline, capable of transporting
up to 18,000 barrels of oil per day to the export pipeline terminal. The
pipeline was commissioned in June 2002 and is currently fully operational.
Our short- and long-term operational liquidity is also impacted by local
oil sales obligations, imposed on oil and gas producers by the government of
Kazakhstan to supply local energy needs. Under the terms of our Agreement with
the government, KKM has a right to export, and receive export quota for, 100% of
the production from the Karakuduk Field. However, in 2002, the government
required KKM to sell approximately 363,000 barrels of crude oil, or 15% of its
total oil sales, to the local market, compared to 375,000 barrels, or 17%,
during 2001. Local market prices obtained by KKM are approximately $6 to $10 per
barrel below export market prices, net of transportation cost. During January
and February 2003, KKM refused to deliver its oil production to the local market
and, consequently, the amount of KKM's export quota has been limited to
approximately 64% of its production. We have attempted to effect the 100% export
of all hydrocarbons produced from the Karakuduk Field through informal
discussions with the government of Kazakhstan. We plan to continue to work with
the government to minimize or eliminate KKM's future local sales requirements.
If we are unsuccessful, however, we may be required to initiate an arbitration
proceeding in Switzerland for the breach of our Agreement by the government of
Kazakhstan. We can provide no assurances that any such arbitration proceeding
would be successful. The future loss of revenue from local sales may be
significant enough to prevent us from generating a profit from the Karakuduk
Field or to generate enough cash flow to meet our investment and working capital
needs.
Obligations and Commitments
- ---------------------------
The following table is a summary of Chaparral's future payments on
obligations as of December 31, 2002.
Obligations by Period (In Thousands)
-----------------------------------------------
Later
1 Year 2-3 Years 4-5 Years Years Total
------ --------- --------- ----- -----
Debt and related interest 7,245 24,147 17,240 - 48,632
Drilling Contract 5,622 974 - - 6,596
In May 2002, Chaparral received a total equity and debt capital infusion of
$45 million. Chaparral received a total investment of $12 million from CAIH,
including $8 million in exchange for 22,925,701 shares, or 60%, of Chaparral's
outstanding common stock, and $4 million in exchange for a three year note
bearing interest at 12% per annum of which $2 million was repaid during 2002.
Additionally, Kazkommertsbank provided KKM with a credit facility totaling $33
million bearing interest at 14% per annum. The terms and conditions of the CAIH
Note and the KKM Credit facility are more fully described in Note 11 of our
consolidated financial statements for the year ended December 31, 2002.
The financing costs of the KKM Credit Facility and the CAIH Note represent
significant future cash flow requirements. 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 up to $48.63 million of our future
available net cash flows from the Karakuduk Field will 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. 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.
As of December 31, 2002, Chaparral has a drilling contract with
KazMunayGas-Drilling, an affiliate of KMG, for one development drilling rig
currently operating in the Karakuduk Field. The rig is contracted through
February 6, 2004.
12
Legal Proceedings
- -----------------
As part of the restructuring of the loan with Shell Capital in May 2002,
Shell Capital Services Limited, as the facility agent for Shell Capital,
discontinued and withdrew all legal proceedings against Chaparral and CAP-G. All
parties to the original loan agreement with Shell Capital mutually released each
other from future liability. Shell Capital Services Limited filed a notice of
discontinuance in the United Kingdom with the High Court of Justice, Queen's
Bench Division, on May 8, 2002, regarding its legal proceedings against
Chaparral. Shell Capital Services Limited also withdrew its statutory demand for
the liquidation of CAP-G on May 13, 2002, by filing a written consent with the
Royal Court of Guernsey Ordinary Court.
In December 2002, KKM received a claim from the Ministry of State Revenues
of the Republic of Kazakhstan for $9.1 million (the "Tax Claim") relating to
taxes and penalties covering the three years from 1999 to 2001. KKM has appealed
the claim and has contracted legal firms in Kazakhstan to assist with the appeal
process. Based on the assessments of KKM's management and legal counsel, it is
our opinion that the ultimate resolution of the Tax Claim, after taking into
account reserves, will not have a material adverse effect on the financial
position and operating results of Chaparral.
Capital Commitments and Other Contingencies
- -------------------------------------------
Our operations may be subject to other regulations by the government of the
Republic of Kazakhstan or other regulatory bodies responsible for the area in
which the Karakuduk Field is located. In addition to taxation, customs
declarations and environmental controls, regulations may govern such things as
drilling permits and production rates. Drilling permits could become difficult
to obtain or prohibitively expensive. Production rates could be set so low that
they would make production unprofitable. These regulations may substantially
increase the costs of doing business and may prevent or delay the starting or
continuation of any given exploration or development project.
All regulations are subject to future changes by legislative and
administrative action and by judicial decisions. Such changes could adversely
affect the petroleum industry in general, and us in particular. It is impossible
to predict the effect that any current or future proposals or changes in
existing laws or regulations will have on our operations.
Commodity Prices for Oil
- ------------------------
Our revenues, profitability, growth and value are highly dependent upon the
price of oil. Market conditions make it difficult to estimate prices of oil or
the impact of inflation on such prices. Oil prices have been volatile, and it is
likely they will continue to fluctuate in the future. Various factors beyond our
control affect prices for oil, including supplies of oil available worldwide and
in Kazakhstan, the ability of OPEC to agree to maintain oil prices and
production controls, political instability or armed conflict in Kazakhstan or
other oil producing regions, the price of foreign imports, the level of consumer
demand, the price and availability of alternative fuels, the availability of
transportation routes and pipeline capacity, and changes in applicable laws and
regulations.
Inflation
- ---------
We cannot control prices received from our oil sales and to the extent we
are unable to pass on increases in operating costs, we may be affected by
inflation. The devaluation of the Tenge, the currency of the Republic of
Kazakhstan, can significantly decrease the value of the monetary assets that we
hold in Kazakhstan as well as our assets in that country that are based on the
Tenge. KKM retains the majority of cash and cash equivalents in U.S. Dollars,
but KKM's statutory tax basis for its assets, tax loss carryforwards, and VAT
receivables are all denominated in Tenge and subject to the effects of
devaluation. Local tax laws allow basis adjustments to offset the impact of
inflation on statutory tax basis assets, but there is no assurance that any
adjustments will be sufficient to offset the effects of inflation in whole or in
part. If not, KKM may be subject to much higher income tax liabilities within
Kazakhstan due to inflation and or devaluation of the local currency.
Additionally, devaluation may create uncertainty with respect to the future
business climate in Kazakhstan and to our investment in that country. As of
December 31, 2002, the exchange rate was 155.60 Tenge per U.S. Dollar compared
to 150.20 as of December 31, 2001.
13
Critical Accounting Policies
- ----------------------------
Application of generally accepted accounting principles requires the use of
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements and revenues and
expenses during the reporting period. In addition, alternatives can exist among
various accounting methods. In such cases, the choice of accounting method can
also have a significant impact on reported amounts.
Our determination of proved oil and gas reserve quantities, the application
of the full cost method of accounting for KKM's exploration and production
activities, and the application of standards of accounting for derivative
instruments and hedging activities require management to make numerous estimates
and judgments.
Oil and Gas properties (Full Cost Method). Chaparral 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.
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.
Cost Excluded. Oil and gas properties include costs that are excluded from
capitalized costs being amortized. These amounts represent costs of investments
in unproved properties and major development projects. Chaparral excludes these
costs on a country-by-country basis until proved reserves are found or until it
is determined that the costs are impaired. All costs excluded are reviewed
quarterly to determine if impairment has occurred. Any impairment is transferred
to the costs to be amortized or a charge is made against earnings for those
international operations where a reserve base has not yet been established. For
operations where a reserve base has not yet been established, an impairment
requiring a charge to earnings may be indicated through evaluation of drilling
results or relinquishing drilling rights.
Capitalized Interest. SFAS 34, Capitalization of Interest Costs, provides
standards for the capitalization of interest costs as part of the historical
cost of acquiring assets. FASB-Interpretation ("FIN") 33 provides guidance for
the application of SFAS 34 to the full cost method of accounting for oil and gas
properties. Under FIN 33, costs of investments in unproved properties and major
development projects, on which depreciation, depletion, and amortization
("DD&A") expense is not currently taken and on which exploration or development
activities are in progress, qualify for capitalization of interest. Capitalized
interest is calculated by multiplying the weighted-average interest rate on debt
by the amount of costs excluded. Capitalized interest cannot exceed gross
interest expense.
Ceiling Test. Companies that use the full cost method of accounting for oil
and gas exploration and development activities are required to perform a ceiling
test each quarter. The full cost ceiling test is an impairment test prescribed
by SEC Regulation S-X Rule 4-10. The ceiling test is performed on a
country-by-country basis. The test determines a limit, or ceiling, on the book
value of oil and gas properties. That limit is basically the after tax present
value of the future net cash flows from proved crude oil and natural gas
reserves. This ceiling is compared to the net book value of the oil and gas
properties reduced by any related deferred income tax liability. If the net book
value reduced by the related deferred income taxes exceeds the ceiling, an
impairment or non-cash write down is required. A ceiling test impairment can
give Chaparral a significant loss for a particular period; however, future DD&A
expense would be reduced.
14
Reserves. Estimates of our proved oil and gas reserves are prepared by
Ryder Scott Company in accordance with guidelines established by the SEC. Those
guidelines require that reserve estimates be prepared under existing economic
and operating conditions with no provisions for increases in commodity prices,
except by contractual arrangement. Estimation of oil and gas reserve quantities
is inherently difficult and is subject to numerous uncertainties. Such
uncertainties include the projection of future rates of production, export
allocation, and the timing of development expenditures. The accuracy of the
estimates depends on the quality of available geological and geophysical data
and requires interpretation and judgment. Estimates may be revised either upward
or downward by results of future drilling, testing or production. In addition,
estimates of volumes considered to be commercially recoverable fluctuate with
changes in commodity prices and operating costs. Our estimates of reserves are
expected to change as additional information becomes available.
Derivative Financial Instruments and Hedging Activities. We account for our
investment in derivative financial instruments in accordance with SFAS 133,
Accounting for Derivative Financial Instruments and Hedging Activities, as
amended. As a result, we recognize all derivative financial instruments in our
financial statements at fair value, regardless of the purpose or intent for
holding the instrument. Changes in the fair value of derivative financial
instruments are recognized periodically in income or in shareholders' equity as
a component of comprehensive income depending on whether the derivative
financial instrument qualifies for hedge accounting, and if so, whether it
qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair
values of derivatives accounted for as fair value hedges are recorded in income
along with the portions of the changes in the fair values of the hedged items
that relate to the hedged risks. Changes in fair values of derivatives accounted
for as cash flow hedges, to the extent they are effective as hedges, are
recorded in other comprehensive income net of deferred taxes. Changes in fair
values of derivatives not qualifying as hedges are reported in income.
Legal, Environmental and Other Contingencies. A provision for legal,
environmental and other contingencies is charged to expense when the loss is
probable and the cost can be reasonably estimated. Determining when expenses
should be recorded for these contingencies and the appropriate amounts for
accrual is a complex estimation process that includes the subjective judgment of
management. In many cases, management's judgment is based on interpretation of
laws and regulations, which can be interpreted differently by regulators and/or
courts of law. Chaparral's management closely monitors known and potential
legal, environmental and other contingencies and periodically determines when
Chaparral should record losses for these items based on information available to
us.
Recent Accounting Pronouncements
- --------------------------------
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities (VIEs), in an effort to expand upon and strengthen existing accounting
guidance that addresses when a company should include in its financial
statements the assets, liabilities and activities of another entity. In general,
a VIE is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires a VIE to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the VIE's activities, is entitled to receive a majority of the
VIE's residual returns, or both. FIN 46 also requires disclosures about VIEs
that Chaparral is not required to consolidate, but in which it has a significant
variable interest. The consolidation requirements of FIN 46 apply immediately to
VIEs created after January 31, 2003, and to older entities no later than the
third quarter of 2003. Certain of the disclosure requirements are required in
all financial statements issued after January 31, 2003, regardless of when the
VIE was established. Chaparral does not expect to identify any VIEs that must be
consolidated.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of SFAS 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. Chaparral currently uses the intrinsic method to account for stock
based employee compensation.
15
In November 2002, the FASB issued FIN 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 requires certain guarantees to be recorded at
fair value, which is different from current practice to record a liability only
when a loss is probable and reasonably estimable, as those terms are defined in
FASB Statement 5, Accounting for Contingencies. FIN 45 also requires Chaparral
to make significant new disclosures about guarantees. As of December 31, 2002,
Chaparral is not a guarantor of any unrelated party obligations.
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred and establishes that fair value is the objective for
initial measurement of the liability. The provisions of SFAS 146 are effective
for exit or disposal activities that are initiated after December 31, 2002.
Chaparral adopted SFAS 146 on January 1, 2003, but at this time this statement
has no effect on our consolidated financial position or results of operations.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. SFAS
No. 145, which is effective for fiscal years beginning after May 15, 2002,
provides guidance for income statement classification of gains and losses on
extinguishment of debt and accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. Chaparral
adopted SFAS 145 on January 1, 2003, but at this time this statement has no
effect on our consolidated financial position or results of operations.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
Subsequently, the asset retirement cost should be allocated to expense using a
systematic and rational method. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. As a result of the adoption of FASB 143, Chaparral will
increase its assets and liabilities by $516,000 as of January 1, 2003 to reflect
the net present value of its retirement obligations. There will be no impact on
our cash flows as a result of adopting SFAS 143.
2. Results of Operations
Results of Operations Year Ended December 31, 2002 Compared to Year Ended
December 31, 2001
- -------------------------------------------------------------------------
In May 2002, Chaparral increased its ownership in KKM from 50% to 60%
through the acquisition of 100% of the outstanding stock of MTI. As a result of
the acquisition, Chaparral obtained a controlling interest in KKM. Consequently,
its financial statements have been consolidated with KKM on a retroactive basis
to January 1, 2002. We previously accounted for our 50% investment in KKM using
the equity method of accounting, which is reflected in our financial results for
periods prior to 2002.
Our operations for the year ended December 31, 2002 resulted in net income
of $4.12 million compared to a net loss of $16.22 million for the year ended
December 31, 2001. The $20.34 million increase in our net income relates to the
recognition of a $5.34 million extraordinary gain resulting from the May 2002
restructuring of our loan with Shell Capital, decreased interest charges
resulting from the refinancing of its debt obligations, and improved operational
results from the Karakuduk Field.
Interest expense decreased from $14.45 million for the year ended December
31, 2001 to $5.61 million for the year ended December 31, 2002, due to the lower
financing costs and the restructuring of our indebtedness. Chaparral's cost of
financing the development of the Karakuduk Field has improved from a
pre-restructuring annual interest rate of LIBOR plus 19.75% compounded daily, to
a simple fixed annual interest rate of 14%, generating a savings of
approximately $3 million dollars per year. Interest expense for the year ended
December 31, 2001 reflects an additional loan discount of $4.37 million recorded
and fully amortized as of September 30, 2001 due to the transfer of a 40%
interest in the distributable profits of CAP-G to Shell Capital for our failure
to repay a $3.15 million bridge loan to Shell Capital on or before September 30,
2001. See Notes 10 and 11 to our consolidated financial statements for the year
ended December 31, 2002.
16
As a result of the adoption of SFAS 133, we recognized a loss of $2.52
million as a cumulative effect of change in accounting principal and an
additional loss of $237,000 for the year ended December 31, 2001 to record the
hedges at their fair value as of the end of the period. Comparatively, Chaparral
recognized a loss of $762,000 to record the hedges at their fair value during
the year ended December 31, 2002. As of December 31, 2002, the hedge agreement
expired. See Note 7 to our consolidated financial statements for the year ended
December 31, 2002.
For the year ended December 31, 2002, Chaparral's financial results have
been consolidated with the financial results of its operating subsidiary, KKM.
During 2002, we sold approximately 2.47 million barrels of crude oil,
recognizing $45.13 million, or $18.29 per barrel, in revenue. Transportation
costs were $9.43 million, or $3.82 per barrel and operating costs associated
with sales were $7.68 million, or $3.11 per barrel. Comparatively, Chaparral
recognized $4.62 million in equity income from investment for the year ended
December 31, 2001, which represents our 50% share of KKM's results during the
period. During the year ended December 31, 2001, KKM sold approximately 2.18
million barrels of crude oil, recognizing $36.58 million in revenue, or $16.75
per barrel. Associated operating costs were $5.25 million, or $2.40 per barrel,
and associated transportation costs were $8.30 million, or $3.80 per barrel. The
increase in operating costs per barrel relates to increased utilization of a
workover rig in the Karakuduk Field to maintain production rates. During the
year ended December 31, 2001, our equity income from investment also reflects
the elimination of $1.45 million of inter-company interest income on our loan to
KKM. See Notes 5 and 20 to our consolidated financial statements for the year
ended December 31, 2002.
General and administrative costs increased from $4.33 million as of
December 31, 2001, to $5.87 million as of December 31, 2002. The $1.54 million
change was principally due to the consolidation of KKM financial results during
2002 as a result of the MTI acquisition. Comparably, general and administrative
expenses reported by Chaparral and KKM during the year ended December 31, 2001
were $4.33 million and $3.75 million, respectively. The $2.21 million decrease
was mainly due to lower insurance and lower professional services expenses.
During 2002, Chaparral canceled its Overseas Private Investment Corporation
("OPIC") political risk insurance as part of the restructuring of Chaparral
creating a savings of $650,000. In addition, expenses for professional services
decreased by $1.52 million from 2001 to 2002.
Depreciation and depletion expense increased $12.05 million from $753,000
in 2001 to $12.80 million in 2002, due to the consolidation of KKM's financial
results during 2002. Comparably, depreciation and depletion expense reported by
Chaparral and KKM during the year ended December 31, 2001 were $753,000 and
$9.48 million, respectively. Effectively, depreciation and depletion expense
increased by $2.57 million due to additional depletion of our investment in oil
and gas assets resulting from increased production from the Karakuduk Field and
an increase in the effective depletion rate from $3.97 per barrel during 2001 to
$4.59 per barrel during 2002. The increase in the effective depletion rate was
due to higher estimated development costs to produce proved reserve estimates.
Income taxes increased by $2.69 million from $0 in 2001 to $2.69 million in
2002, due to the consolidation of KKM financial results during 2002. All income
taxes payable relate to our operations in Kazakhstan. Chaparral has no U.S.
income taxes due to Chaparral's estimated domestic tax loss carryforwards of
$26.37 million as of December 31, 2002. These carryforwards will expire at
various times between 2003 and 2020. See Note 14 to our consolidated financial
statements for the year ended December 31, 2002.
Results of Operations Year Ended December 31, 2001 Compared to Year Ended
December 31, 2000
- -------------------------------------------------------------------------
We accounted for our investment in KKM using the equity method for the
years 2001 and 2000.
Our operations for the year ended December 31, 2001 resulted in a net loss
of $16.22 million compared to a net loss of $26.80 million as of December 31,
2000. The $10.58 million decrease in our loss from operations primarily relates
to decreases in interest charges from non-recurring transactions incurred during
2000 in our attempt to finance the development of the Karakuduk Field, net of
associated increases in general and administrative costs and the impact of the
adoption of FSAS 133, Accounting for Derivative Instruments and Hedging
Activities, during 2001. Equity income from our investment in KKM increased by
$1.79 million due to KKM's increase in the production and sale of crude oil
during the period.
Interest expense decreased from $27.03 million in 2000 to $14.45 million in
2001. Interest expense for the current period reflects $10.01 million recognized
from our loan with Shell Capital, including $6.91 million in interest on
17
outstanding principal and $3.10 million in discount amortization, of which $2.42
million was expensed in the fourth quarter of 2001 upon the receipt of notices
of default and acceleration from Shell Capital. Additionally, we recognized
$4.37 million in interest expense due to the transfer of a 40% interest in the
distributable profits of CAP-G to Shell Capital for failure to repay the bridge
loan to Shell Capital on or before September 30, 2001. Comparatively, during
2000, we incurred $5.29 million in interest expense on the loan and $909,000 in
amortization of associated debt issuance costs. Approximately $3.48 million was
reclassified to the principal balance of the loan as of December 31, 2000. See
Note 7 to our consolidated financial statements for the year ended December 31,
2001.
Interest expense for the period ended December 31, 2000 also reflects a
non-recurring, non-cash interest charge of approximately $20.34 million
recognized upon the conversion of $20.85 million of notes into 11,690,259 shares
of our common stock at a conversion price of $1.86 per share. The conversion
feature of the notes was a "beneficial conversion feature" as addressed in EITF
98-5, Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios. EITF 98-5 required the recognition
of additional interest expense equal to the face value of the notes, net of
original discount of $506,000, upon conversion. See Note 8 to our consolidated
financial statements for the year ended December 31, 2001.
As a result of the adoption of SFAS 133, we recognized a loss of $2.52
million as a cumulative effect of change in accounting principal and an
additional loss of $237,000 for the year ended December 31, 2001 to record the
derivatives at their fair value as of the end of the period. See Note 5 to our
consolidated financial statements for the year ended December 31, 2001.
Interest income decreased $478,000 to $1.45 million in 2001, compared to
$1.93 million in 2000. The decrease was primarily due to lower interest rates
during 2001. The loan with KKM accrues interest at an annual rate of LIBOR plus
1%. The average interest rate charged during 2000 was approximately 7.3%
compared to approximately 5.1% during 2001.
General and administrative costs increased from $3.69 million as of
December 31, 2000, to $4.33 million as of December 31, 2001. The $637,000 change
was principally due to an approximate $682,000 increase in insurance expense
including additional OPIC political risk insurance premiums of $271,000, and
additional amortization of transportation risk insurance of $411,000, which was
fully amortized during the fourth quarter of 2001 due to the current status of
the Shell Capital loan. See Notes 6 and 7 to our consolidated financial
statements for the year ended December 31, 2001.
Depreciation and depletion expense increased $332,000 from $421,000 in 2000
to $753,000 in 2001 due to additional depletion of acquisition costs of our
investment in KKM. Our depletion expense was $730,000 in 2001 compared to
$403,000 in 2000, resulting from increased production from the Karakuduk Field.
Our equity income from investment was $4.62 million in 2001, compared to
$2.83 million in 2000. The net change of $1.79 million was the result of
increased crude oil production and sales by KKM during 2001, partially offset by
a decrease in crude oil prices during the same period. KKM sold 2.18 million
barrels of crude oil in 2001, generating revenues of $36.58 million, or $16.75
per barrel, compared to sales of approximately 765,000 barrels of crude oil in
2000, generating $16.97 million, or $22.18 per barrel. From 2000 to 2001, KKM
increased crude oil sales by 185%, generating a corresponding increase in oil
sales revenue of 116%. Transportation costs were $8.30 million in 2001, or $3.80
per barrel, compared to $3.21 million in 2000, or $4.20 per barrel, reflecting a
decrease of transportation costs on a per barrel basis of approximately 9.5%.
Operating costs increased in aggregate from 2000 to 2001, with current year
operating costs of $5.25 million, or $2.40 per barrel, compared to $3.68
million, or $4.81 per barrel, in the prior period. The approximate 50% decrease
in operating cost per barrel is due to the significant increase in crude oil
production during the period in relation to field level operating costs
necessary to achieve such production increases. Our equity income from
investment also reflects the elimination of $1.45 million of intercompany
interest income on the loan to KKM. See Notes 4 and 15 to our consolidated
financial statements for the year ended December 31, 2001.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency
- ----------------
Chaparral's functional currency is the U.S. Dollar. All transactions
arising in currencies other than U.S. Dollars, including assets, liabilities,
revenue, expenses, gains, or losses are measured and recorded into U.S. 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 U.S. Dollars are translated at exchange rates prevailing
as of the balance sheet date (155.60 and 150.20 Kazakh Tenge per U.S. Dollar as
of December 31, 2002 and 2001, respectively). Non-monetary assets and
liabilities denominated in currencies other than U.S. 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-U.S.
Dollar amounts at the balance sheet date are recognized as an increase or
decrease in income for the period.
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 bank
accounts within Kazakhstan, but KKM's statutory tax basis in its assets, tax
loss carryforwards, and VAT receivables are all denominated in Tenge and subject
to the effects of devaluation. Local tax laws allow basis adjustments to offset
the impact of inflation on statutory tax basis assets, but there is no assurance
that any adjustments will be sufficient to offset the effects of inflation in
whole or in part. If not, KKM may be subject to much higher income tax
liabilities within Kazakhstan due to inflation and/ or devaluation of the local
currency. Additionally, devaluation may create uncertainty with respect to the
future business climate in Kazakhstan and to our investment in that country.
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 Chaparral could realize or settle these
assets and liabilities in U.S. Dollars.
We had $4.82 million of net monetary liabilities denominated in Tenge as of
December 31, 2002.
Commodity Prices for Oil
- ------------------------
Under the terms of our Agreement with the government of the Republic of
Kazakhstan, KKM has a right to export, and receive export quota for, 100% of the
production from the Karakuduk Field. However, oil producers within Kazakhstan
are required to supply a portion of their crude oil production to the local
market to meet domestic energy needs. During January and February 2003, KKM
refused to deliver its oil production to the local market. Consequently, the
amount of KKM's export quota has been limited to approximately 64% of its
production. Local market oil prices are significantly lower than prices
obtainable on the export market. In 2002, the government required KKM to sell
approximately 363,000 barrels of crude oil, or 15% of its total oil sales, to
the local market, compared to 375,000 barrels, or 17%, during 2001. Local market
prices obtained by KKM are approximately $6 to $10 per barrel below export
market prices, net of transportation costs. We are continuing to have informal
discussions with the government of Kazakhstan in an attempt to effect the 100%
export of all hydrocarbons produced from the Karakuduk Field. If we are
unsuccessful, however, we may be required to initiate an arbitration proceeding
in Switzerland for the breach of our Agreement by the government of Kazakhstan.
We can provide no assurances that any such arbitration proceeding would be
successful. The future loss of revenue resulting from local sales may be
significant enough to prevent us from generating a profit from the Karakuduk
Field or generate enough cash flow to meet our investment and working capital
needs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for a list of the Financial Statements and the supplementary
financial information included in this report following the signature page.
19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 24, 2003, the following table sets forth the names and ages of
our directors and executive officers of Chaparral, the principal offices and
positions with Chaparral held by each person and the date such person became a
director or executive officer. The executive officers are elected annually by
the board of directors. Executive officers serve terms of one year or until
their death, resignation or removal by the board of directors. The present term
of office of each director will expire at the next annual meeting of
stockholders. Each executive officer will hold office until his successor duly
is elected and qualified, until his resignation or until he is removed in the
manner provided by our bylaws.
Name of Director or Officer and
Position in Chaparral Since Age Principal Occupation During the Last 5 Years
--------------------- ----- --- --------------------------------------------
Ian Connor 2002 36 Mr. Connor has served as the Chairman of the Board
Chairman of the Board of Chaparral since November 2002. Since April
2001, Mr. Connor has served as a Managing Director
of Open Joint Stock Company Kazkommertsbank, a
commercial bank incorporated in Kazakhstan. Prior
to joining Kazkommertsbank, Mr. Connor held
several senior executive positions, including
Chief Executive Officer at Global Menkul Degerler
A.S., an Istanbul-based brokerage and investment
house, from May 1997 to March 2001.
Nikolai D. Klinchev 2002 45 Mr. Klinchev has been the Chief Executive Officer
Director and of Chaparral since November 2002. From June 2002
Chief Executive Officer to November 2002, he served as Vice President -
Business Development of Chaparral. Mr. Klinchev
has served as the General Director and as a board
member of KKM since 1996. Mr. Klinchev graduated
from the Institute of Energy in Almaty,
Kazakhstan, as a power engineer and studied
production management in St. Petersburg (formerly
Leningrad), Russia.
Askar Alshinbayev 2002 37 Mr. Alshinbayev has served as Managing Director
Director and Chief Executive Officer of Central Asian
Industrial Holdings, N.V. since May 2002. Since
1998, Mr. Alshinbayev has served as a Managing
Director of Open Joint Stock Company
Kazkommertsbank, a commercial bank incorporated in
Kazakhstan. From 1994 to 1998, he served as Deputy
Chairman of the Management Board of
Kazkommertsbank. Mr. Alshinbayev also serves on
the Board of Directors of Hurricane Hydrocarbons
Ltd. and Nelson Resources, Ltd.
20
Name of Director or Officer and
Position in Chaparral Since Age Principal Occupation During the Last 5 Years
--------------------- ----- --- --------------------------------------------
Peter G. Dilling * 2002 53 From 1995 to 1997, Mr. Dilling held various
Director positions with Chaparral, including Vice Chairman
of the Board. Since 2000, Mr. Dilling has served
as President and Chief Executive Officer and as a
director of Trinidad Exploration and Development,
Ltd., an oil and gas exploration company. He has
served as President and Chief Executive Officer,
and as a Director of Anglo-African Energy, Inc.,
an exploration and production company, since 1999.
Prior to joining Anglo-African, Mr. Dilling was
President and a director of M-D International
Petroleum, Inc., an exploration and production
company, from 1994 to 1997.
John Duthie * 2002 59 Since December 2002, Mr. Duthie has owned and
Director operated Bowler Hat Ltd., a H.K. based company
active in Turkey and the Black Sea region. He also
serves as an advisor to PDF, a corporate finance
house, and provides financial and investment
advice to various Turkish and international
corporations and institutions. Prior to Bowler
Hat, he served as General Manager for Westdeutsche
Landesbank Turkey, a commercial bank headquartered
in Germany, since 1994. He previously held various
positions with Merrill Lynch & Co., a stock
brokerage house and investment bank, and Deutsche
Bank, a commercial bank and financial institution.
Alan D. Berlin * 2002 62 Since 1995, Mr. Berlin has been a partner of the
Director and Corporate Secretary 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 served as a Director of Chaparral in 1997
and was the Secretary of Chaparral from January
1996 to August 1997. Since June 1998, he has
served Chaparral in the same position. From 1985
to 1987, Mr. Berlin was the President of the
International Division of Belco Petroleum Corp.
and held various other positions with Belco
Petroleum Corp. and Belco Oil and Gas Corp. from
1977 to 2001. Mr. Berlin has been appointed an
Honorary Associate of the Centre for Petroleum and
Mineral Law and Policy at the University of
Dundee, Scotland, and is a member of the
Association of International Petroleum
Negotiators.
Richard J. Moore 2002 44 Mr. Moore has held the position of VP-Finance and
VP-Finance and Chief Financial Officer since November 2002. Mr.
Chief Financial Officer Moore has served as Finance Director for KKM since
September 1998. He continues to serve on the Board
of Directors of KKM and has held the directorship
since October 1998. He has over 25 years
experience in the international petroleum
industry, including 10 years of experience in the
F.S.U.
Miguel C. Soto 2002 31 Mr. Soto has served as Treasurer and Financial
Treasurer and Controller Controller of Chaparral since November 2002. Since
June 2002, Mr. Soto has been the Financial
Controller of KKM. From June 2002 to November
2002, he served as the Financial Controller of
Chaparral. Prior to joining Chaparral, Mr. Soto
worked as a Tax Accountant for Arthur Andersen and
spent several years as a Staff Accountant for a
technology company.
* Audit Committee member.
21
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3 and 4 and any amendments furnished to
Chaparral during our fiscal year ended December 31, 2002, and Form 5 and any
amendments furnished to Chaparral with respect to the same fiscal year, we
believe that our directors, officers, and greater than 10% beneficial owners
complied with all applicable Section 16 filing requirements, except that
Whittier Ventures did not file one report representing three transactions.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation paid by Chaparral for services
rendered by Mr. McMillian, who was the Chief Executive Officer and Co-Chairman
of the Board, Mr. Jeffs who was the Chairman of the Board and Chief Executive
Officer of Chaparral, Mr. Young, who was the Vice President - Finance,
Treasurer, and Chief Financial Officer of Chaparral, Mr. Klinchev, who is
currently the Chief Executive Officer of Chaparral, Mr. Moore, who is currently
the Vice President - Finance and Chief Financial Officer of Chaparral, and Mr.
Soto, who is currently the Treasurer and Controller of Chaparral. There were no
other executive officers of Chaparral whose annual salary and bonus exceeded
$100,000 during the fiscal year 2002.
Summary Compensation Table.
Annual Compensation Long-Term Compensation
------------------------------------- -----------------------------------------------
Awards Payouts
--------------------------------- -----------
Other Restricted Securities
Name and Annual Stock Awards Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation ($) Options/SARs (#) Payouts ($) Compensation
------------------ ---- ------ ----- ------------ --- ---------------- ----------- ------------
Nikolai D. Klinchev 2002 $164,500(1) -- -- -- -- -- --
Chief Executive
Officer (11/02 to
Present)
Richard J. Moore 2002 $164,500(2) $90,000(2) -- -- -- -- --
VP-Finance and
Chief Financial
Officer (11/02 to
Present)
Miguel C. Soto 2002 $116,933(3) $35,000(3) -- -- -- -- --
Treasurer and
Controller (11/02
to present)
John G. McMillian 2002 $58,500 -- -- -- -- -- --
Chief Executive 2001 $162,000(4) -- -- -- -- -- --
Officer (1/99 to 2000 $137,500 -- -- -- -- -- --
5/02)
James A. Jeffs 2002 $130,250 -- -- -- -- -- --
Co-Chairman and 2001 $162,000(5) -- -- -- -- -- --
Chief Executive
Officer
(1/99 to 10/02)
Michael B. Young 2002 $162,000 $21,000 -- -- -- -- $81,000(6)
VP-Finance and 2001 $162,000 -- -- -- -- -- --
Chief Financial 2000 $150,000 -- -- -- -- -- --
Officer (6/02 to
11/02)
1. Represents compensation paid to Mr. Klinchev from June 2002 to December 31,
2002.
2. Represents compensation paid to Mr. Moore from June 2002 to December 31,
2002. In addition, Mr. Moore received a $90,000 cash bonus during 2002.
3. Represents compensation paid to Mr. Soto for the year ended December 31,
2002. In addition, Mr. Soto received a $35,000 cash bonus during 2002.
4. Mr. McMillian received cash compensation of $114,750 in December 31, 2001.
The remaining $47,250 was paid during 2002.
5. Mr. Jeffs' did not receive any cash compensation during the year 2001. The
outstanding balance of $162,000 was paid during 2002.
6. Under the terms of his employment agreement, Mr. Young received $81,000 in
connection with the termination of his employment with Chaparral.
22
Options/SAR Grants.
For the fiscal year ended December 31, 2002, 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, 2002 December 31, 2002
------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------- ------------------------------- ---------------------------------
Michael B. Young 1,167 -- -- --
Additionally, no options were exercised in fiscal year 2002.
Director Interlocks.
During our last fiscal year, Messrs. Jeffs, who was the Co-Chairman of the
Board, and David A. Dahl, a former director, 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 10.89% of the outstanding common stock. Messrs. Dahl and Jeffs
resigned effective May 10, 2002 and October 28, 2002, respectively.
Mr. Alshinbayev is a Managing Director of Kazkommertsbank and the Chief
Executive Officer of CAIH. Mr. Connor, Chaparral's current Chairman, is also a
Managing Director of Kazkommertsbank. Mr. Klinchev, Chaparral's current Chief
Executive Officer, has acted as a Director of KKM since 1996.
Compensation of Directors.
During the fiscal year ended December 31, 2002, Chaparral implemented a
standard compensation arrangement for its directors, including providing (i)
$700 in compensation to each director for each board or committee meeting
attended via teleconference, (ii) $1,000 in compensation to each director for
each board or committee meeting attended in person, (iii) $2,000 in compensation
per day while traveling on Chaparral related business, including board meetings,
and (iv) $2,500 in quarterly compensation for serving on Chaparral's Board.
Stock Performance Graph.
Comparison of Five Year Cumulative Total Return
- -----------------------------------------------
The following line graph compares the total returns (assuming reinvestment
of dividends) of common stock, the Nasdaq Market Index and the SIC Code Index
for the five year period ending December 31, 2002.
1997 1998 1999 2000 2001 2002
CHAPARRAL RESOURCES, INC. 100.00 13.75 5.25 2.42 1.01 0.67
SIC CODE INDEX 100.00 80.10 97.85 124.30 114.05 121.59
NASDAQ MARKET INDEX 100.00 141.04 248.76 156.35 124.64 86.94
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 operation, 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. 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, medium and long-term performance;
and
o to allow Chaparral to attract, motivate and retain the management
personnel necessary to Chaparral's success by providing an executive
compensation program comparable to that offered by companies with
which Chaparral competes for management personnel.
The elements of Chaparral's executive compensation program are annual base
salaries, annual bonuses and equity incentives. The Compensation Committee bases
its decisions on the scope of the executive's responsibilities, a subjective
evaluation of the executive's performance and the length of time the executive
has been in the position.
In June 2001, Chaparral's stockholders approved the 2001 Stock Incentive
Plan, which sets aside 2.14 million shares of Chaparral's common stock for
issuance to Chaparral's officers, directors, employees, and consultants.
Chaparral has not made any grants under the 2001 Stock Incentive Plan as of
December 31, 2002.
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,
Ian Connor, Chairman
Askar Alshinbayev
Nikolai D. Klinchev
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 24, 2003, 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)
- --------------------------------------- -------------------------------- --------------------- ----------
Central Asian Industrial Holdings, N.V. -- 26,002,624(2) 62.98%
81 Scharlooweg,
Curacao, Netherlands Antilles
Allen & Company Incorporated -- 5,697,707(3) 14.91%
711 Fifth Avenue
New York, New York 10022
Whittier Ventures, LLC -- 4,159,866(4) 10.89%
1600 Huntington Drive
South Pasadena, California 91030
Ian Connor Chairman of the Board -- *
Nikolai D. Klinchev Director and Chief Executive 1,000,084(5) 2.62%
Officer
Askar Alshinbayev Director 26,002,624(6) 62.98%
Peter G. Dilling Director -- *
John Duthie Director -- *
Alan D. Berlin Director and Corporate Secretary 167(7) *
James A. Jeffs Former Chairman and CEO 10,329(8) *
John G. McMillian Former Co-Chairman and CEO 385,469(9) 1.01%
David A. Dahl Former Director 167(10) *
Ted Collins, Jr. Former Director -- (10) *
Richard L. Grant Former Director -- (10) *
Judge Burton B. Roberts Former Director -- (11) *
Richard J. Moore Vice President - Finance and -- *
Chief Financial Officer
Miguel C. Soto Treasurer and Controller 333 *
Michael B. Young Former VP - Finance, Treasurer, 1,835(12) *
and Chief Financial Officer
All current directors, nominees, and -- 27,004,710 65.41%
executive 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 3,076,923 shares
underlying warrants to purchase shares of Common Stock. Does not include
shares owned directly by officers and stockholders of CAIH with respect to
which CAIH disclaim beneficial ownership. Officers and stockholders of CAIH
may be deemed to beneficially own shares of the Common Stock reported to be
beneficially owned directly by CAIH.
(3) 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.
(4) In accordance with Rule 13d-3(d)(1)(i)(A), includes 334 shares underlying
warrants currently exercisable.
(5) In accordance with Rule 13d-3(d)(1)(i)(A), includes 1,000,000 shares
beneficially owned by NK Cayman Limited.
(6) In accordance with Rule 13d-3(d)(1)(i)(A), includes 3,076,923 shares
underlying warrants to purchase shares of Common Stock. Mr. Alshinbayev has
a pecuniary interest in the shares beneficially owned by CAIH and has
voting power and investment power over such shares and, thus, may be deemed
to beneficially own such shares.
(7) Includes 167 shares owned by Mr. Berlin.
(8) Mr. Jeffs resigned as the Chairman and Chief Executive Officer of Chaparral
effective October 28, 2002.
(9) Mr. McMillian resigned as the Co-Chairman and Chief Executive Officer of
Chaparral effective May 10, 2002.
(10) Resigned as a director of Chaparral effective May 10, 2002.
(11) Judge Roberts resigned as a director of Chaparral effective January 18,
2002.
(12) Includes 668 shares owned by Mr. Young and 1,167 shares underlying
currently exercisable options. Mr. Young's employment with Chaparral was
terminated effective December 15, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During May 2002, Chaparral received a total investment of $12 million from
CAIH, including $8 million in exchange for 22,925,701 shares, or 60%, of
Chaparral's outstanding common stock, and $4 million in exchange for a three
year note bearing interest at 12% per annum. Along with the CAIH Note, CAIH
received a warrant to purchase 3,076,923 shares of Chaparral's common stock at
$1.30 per share. Additionally, Kazkommertsbank provided KKM with a credit
facility totaling $33 million bearing interest of 14% per annum, Chaparral paid
CAIH $1.79 million as a restructuring fee.
In June 2002, Chaparral prepaid $2 million of the $4 million outstanding
principal balance of the CAIH Note. As a result, we recognized an extraordinary
loss on the early extinguishment of debt of $1.22 million from the write-off of
50% of the unamortized discount on the CAIH Note.
The KKM Credit Facility consists of a $30 million non-revolving line and a
$3 million revolving line, both of which were fully borrowed by KKM in May 2002.
We recognized $3.08 million of interest expense on the KKM Credit Facility for
the twelve months ended December 31, 2002.
The non-revolving portion of the KKM Credit Facility accrues simple
interest at an annual rate of 14% and is repayable over a five-year period with
final maturity in May 2007. Accrued interest is payable quarterly, beginning in
December 2002, and KKM must begin making quarterly principal payments in May
2003.
The revolving portion of the KKM Credit Facility accrues simple interest at
an annual rate of 14%. The revolver is loaned to KKM for short-term periods up
to one year, but KKM has the right to re-borrow the funds through May 2006 with
final repayment due in May 2007. The initial $3 million revolving loan to KKM
was subject to a three month term. The principal balance was repaid in July 2002
and KKM immediately re-borrowed another $3 million with a maturity date of July
31, 2003. Accrued interest on the revolving loan is payable at maturity.
The original KKM Credit Facility included repayment terms of three years
and four years for the non-revolving and revolving portions of the KKM Credit
Facility, respectively, with an option to extend the final maturity date for
repayment of the entire KKM Credit Facility to five years. KKM exercised the
option to extend the repayment term to five years for the entire KKM Credit
Facility as of May 2002.
Chaparral is subject to certain pledges, covenants, and other restrictions
under the KKM Credit Facility, including, but not limited to, the following:
27
(i) CAP-G pledged its 50% interest in KKM to Kazkommertsbank as
collateral for the KKM Credit Facility;
(ii) Chaparral provided a written guarantee to Kazkommertsbank that it
will repay the KKM Credit Facility in the event KKM fails do so;
(iii) KKM may not incur additional indebtedness or pledge its assets to
another party without the written consent of Kazkommertsbank; and
(iv) KKM may not pay dividends without the written consent of
Kazkommertsbank.
The KKM Credit Facility stipulates certain events of default, including,
but not limited to, KKM's inability to meet the terms of the KKM Credit
Facility, KKM's failure to meet it obligations to third parties in excess of
$100,000, and Chaparral's involvement in legal proceedings in excess of $100,000
where an adverse judgment against us occurs or is expected to occur. If an event
of default does occur and is not waived by the lender, Kazkommertsbank has a
right to call the KKM Credit Facility immediately due and payable and/or
exercise its security interest on our shares in KKM pledged as collateral.
Furthermore, in the event of a material adverse change in the financial or
credit markets, Kazkommertsbank has a right to unilaterally alter any terms and
conditions of the KKM Credit Facility, including the rate of interest, by
written request. KKM may either agree to the amended terms or repay the
outstanding KKM Credit Facility within 10 days of notification.
ITEM 14. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of
Chaparral's disclosure controls and procedures as of March 24, 2003 was carried
out by the Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that Chaparral's disclosure controls and procedures have been designed and are
being operated in a manner that provides reasonable assurance that the
information required to be disclosed by Chaparral in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. A controls
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within an entity have been detected. Subsequent to the date of
the most recent evaluation of Chaparral's internal controls, there were no
significant changes in Chaparral's internal controls or in other factors that
could significantly affect the internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
28
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, 2002
and December 31, 2001 .............................................. F-2
Consolidated Statements of Operations--Years ended
December 31, 2002, 2001, and 2000................................... F-4
Consolidated Statements of Cash Flows--Years ended
December 31, 2002, 2001, and 2000................................... F-6
Consolidated Statement of Changes in Stockholders'
Equity--Years ended December 31, 2002, 2001, and 2000............... F-8
Notes to Consolidated Financial Statements............................. F-9
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited....................................F-29
Supplemental Information - Selected Quarterly Financial
Data - Unaudited....................................................F-34
Audited Financial Statements of Closed Type JSC Karakudukmunay
For the Fiscal Years Ended 2001 and 2001............................F-37
(a)(2) Financial Statement Schedules
------------------------------------
All schedules for which a provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.
(b) Current Reports on Form 8-K
-------------------------------
No reports on Form 8-K were filed by Chaparral Resources, Inc. for the
quarter ended December 31, 2002.
(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.
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.
29
Exhibit No. Description and Method of Filing
----------- --------------------------------
3.2 Bylaws, dated April 21, 1999, incorporated by reference to
Annex IV to our Notice and Definitive Schedule 14A dated
April 21, 1999.
4.1 Written Resolutions of the Shareholders of Central Asian
Petroleum (Guernsey) Limited dated May 30, 2001, authorizing
the issuance of Series A Preferred Shares in Central Asian
Petroleum (Guernsey) Limited, incorporated by reference to
Exhibit 4.1 to Chaparral Resources, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001, filed with
Securities and Exchange Commission on August 14, 2001.
*10.1 Agreement dated August 30, 1995 for Exploration Development
and Production of Oil in Karakuduk Oil Field in Mangistan
Oblast of the Republic of Kazakhstan between Ministry of Oil
and Gas Industries of the Republic of Kazakhstan for and on
Behalf of the Government of the Republic of Kazakhstan and
Joint Stock Company of Closed Type Karakuduk Munay Joint
Venture.
*10.2 License for the Right to Use the Subsurface in the Republic
of Kazakhstan.
*10.3 Amendment dated September 11, 1997, to License for Right to
Use the Subsurface in the Republic of Kazakhstan.
10.4 Amendment to License for the Right to Use the Subsurface in
the Republic of Kazakhstan, dated December 31, 1998,
incorporated by reference to Exhibit 10.25 to Chaparral
Resources, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, filed with the Securities and
Exchange Commission on April 15, 1999.
10.5 Letter from the Agency of the Republic of Kazakhstan on
Investments to Central Asian Petroleum (Guernsey) Limited
dated July 28, 1999 regarding License for Right to Use the
Subsurface in the Republic of Kazakhstan, incorporated by
reference to Exhibit 10.5 to Chaparral Resources, Inc.'s
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, filed with the Securities and Exchange
Commission on March 30, 2000.
*10.6 Warrant Certificate entitling Allen & Company to purchase up
to 1,022,000 shares of Common Stock of Chaparral Resources,
Inc.
*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.
*10.8 Warrant Certificate entitling Allen & Company Incorporated
to purchase up to 900,000 shares of Common Stock of
Chaparral Resources, Inc.
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.
30
Exhibit No. Description and Method of Filing
----------- --------------------------------
10.11 1998 Incentive and Non-statutory Stock Option Plan,
incorporated by reference to Exhibit 10.24 to Chaparral
Resources, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, filed with the Securities and
Exchange Commission on April 15, 1999.
10.12 Credit Support and Pledge Agreement between Whittier
Ventures, LLC and Chaparral Resources, Inc. dated July 2,
1998, incorporated by reference to Exhibit 10.1 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, filed with the Securities
and Exchange Commission on November 19, 1998.
10.13 Warrants issued to Whittier Ventures, LLC, incorporated by
reference to Exhibit 10.2 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, filed with the Securities and Exchange
Commission on November 19, 1998.
10.14 $24,000,000 Loan Agreement dated as of November 1, 1999,
incorporated by reference to Exhibit 10.1 to Chaparral
Resources, Inc.'s Current Report on 8-K dated October 25,
1999, filed with the Securities and Exchange Commission on
November 17, 1999.
10.15 Supplemental Agreement, dated February 10, 2000, among Shell
Capital Limited, Shell Capital Services Limited, Chaparral
Resources, Inc., Central Asian Petroleum (Guernsey) Limited,
Closed Type JSC Karakudukmunay and Central Asian Petroleum,
Inc., incorporated by reference to Exhibit 10.19 to
Chaparral Resources, Inc.'s Current Report on 8-K dated
February 14, 2000, filed with the Securities and Exchange
Commission on March 22, 2000.
10.16 CRI-CAP(G) Loan Agreement, dated February 7, 2000, between
Chaparral Resources, Inc. and Central Asian Petroleum
(Guernsey) Limited, incorporated by reference to Exhibit
10.13 to Chaparral Resources, Inc.'s Current Report on 8-K
dated February 14, 2000, filed with the Securities and
Exchange Commission on March 22, 2000.
10.17 CAP(G)-KKM Loan Agreement, dated February 7, 2000, between
Closed Type JSC Karakudukmunay and Central Asian Petroleum
(Guernsey) Limited, incorporated by reference to Exhibit
10.16 to Chaparral Resources, Inc.'s Current Report on 8-K
dated February 14, 2000, filed with the Securities and
Exchange Commission on March 22, 2000.
10.18 Accounts Agreement, dated February 8, 2000, among Chaparral
Resources, Inc., Central Asian Petroleum (Guernsey) Limited,
Closed Type JSC Karakudukmunay, Shell Capital Services
Limited, ABN Amro Bank N.V., London Branch and The Law
Debenture Trust Corporation p.l.c., incorporated by
reference to Exhibit 10.1 to Chaparral Resources, Inc.'s
Current Report on 8-K dated February 14, 2000, filed with
the Securities and Exchange Commission on March 22, 2000.
10.19 Security Trust Deed, dated February 7, 2000, among Chaparral
Resources, Inc., Central Asian Petroleum (Guernsey) Limited,
Central Asian Petroleum, Inc., Closed Type JSC
Karakudukmunay, Shell Capital Services Limited and The Law
Debenture Trust Corporation p.l.c., incorporated by
reference to Exhibit 10.17 to Chaparral Resources, Inc.'s
Current Report on 8-K dated February 14, 2000, filed with
the Securities and Exchange Commission on March 22, 2000.
10.20 CRI Accounts Assignment, dated February 7, 2000, between
Chaparral Resources, Inc. and The Law Debenture Trust
Corporation p.l.c., incorporated by reference to Exhibit
10.2 to Chaparral Resources, Inc.'s Current Report on 8-K
dated February 14, 2000, filed with the Securities and
Exchange Commission on March 22, 2000.
31
Exhibit No. Description and Method of Filing
----------- --------------------------------
10.21 CAP(G) Accounts Assignment, dated February 7, 2000, between
Chaparral Resources, Inc. and The Law Debenture Trust
Corporation, p.l.c., incorporated by reference to Exhibit
10.3 to Chaparral Resources, Inc.'s Current Report on 8-K
dated February 14, 2000, filed with the Securities and
Exchange Commission on March 22, 2000.
10.22 KKM Accounts Assignment, dated February 7, 2000, between
Closed Type JSC Karakudukmunay and The Law Debenture Trust
Corporation p.l.c., incorporated by reference to Exhibit
10.4 to Chaparral Resources, Inc.'s Current Report on 8-K
dated February 14, 2000, filed with the Securities and
Exchange Commission on March 22, 2000.
10.23 CRI-CAP(D) Pledge Agreement, dated February 7, 2000, between
Chaparral Resources, Inc. and The Law Debenture Trust
Corporation p.l.c., incorporated by reference to Exhibit
10.11 to Chaparral Resources, Inc.'s Current Report on 8-K
dated February 14, 2000, filed with the Securities and
Exchange Commission on March 22, 2000.
10.24 CRI-CAP(G) Charge Over Shares, dated February 7, 2000,
between Chaparral Resources, Inc. and The Law Debenture
Trust Corporation p.l.c., incorporated by reference to
Exhibit 10.14 to Chaparral Resources, Inc.'s Current Report
on 8-K dated February 14, 2000, filed with the Securities
and Exchange Commission on March 22, 2000.
10.25 CAP(D)-CAP(G) Charge Over Shares, dated February 7, 2000,
between Central Asian Petroleum, Inc. and The Law Debenture
Trust Corporation p.l.c., incorporated by reference to
Exhibit 10.15 to Chaparral Resources, Inc.'s Current Report
on 8-K dated February 14, 2000, filed with the Securities
and Exchange Commission on March 22, 2000.
10.26 KKM Pledge Agreement, dated February 7, 2000, between
Central Asian Petroleum (Guernsey) Limited and The Law
Debenture Trust Corporation p.l.c., incorporated by
reference to Exhibit 10.12 to Chaparral Resources, Inc.'s
Current Report on 8-K dated February 14, 2000, filed with
the Securities and Exchange Commission on March 22, 2000.
10.27 CRI Assignment, dated February 8, 2000, between Chaparral
Resources, Inc. and The Law Debenture Trust Corporation
p.l.c., incorporated by reference to Exhibit 10.5 to
Chaparral Resources, Inc.'s Current Report on 8-K dated
February 14, 2000, filed with the Securities and Exchange
Commission on March 22, 2000.
10.28 CAP(G) Assignment, dated February 7, 2000, between Central
Asian Petroleum (Guernsey) Limited and The Law Debenture
Trust Corporation p.l.c., incorporated by reference to
Exhibit 10.6 to Chaparral Resources, Inc.'s Current Report
on 8-K dated February 14, 2000, filed with the Securities
and Exchange Commission on March 22, 2000.
10.29 KKM Assignment, dated February 7, 2000, between Closed Type
JSC Karakudukmunay and The Law Debenture Trust Corporation
p.l.c., incorporated by reference to Exhibit 10.7 to
Chaparral Resources, Inc.'s Current Report on 8-K dated
February 14, 2000, filed with the Securities and Exchange
Commission on March 22, 2000.
10.30 Assignment of Insurance Proceeds, dated February 7, 2000,
between Chaparral Resources, Inc. and The Law Debenture
Trust Corporation p.l.c., incorporated by reference to
Exhibit 10.8 to Chaparral Resources, Inc.'s Current Report
on 8-K dated February 14, 2000, filed with the Securities
and Exchange Commission on March 22, 2000.
32
Exhibit No. Description and Method of Filing
----------- --------------------------------
10.31 KKM Assignment of Insurances, dated February 7, 2000,
between Closed Type JSC Karakudukmunay and The Law Debenture
Trust Corporation p.l.c., incorporated by reference to
Exhibit 10.9 to Chaparral Resources, Inc.'s Current Report
on 8-K dated February 14, 2000, filed with the Securities
and Exchange Commission on March 22, 2000.
10.32 Assignment of Reinsurance, dated February 8, 2000, among
Closed Type JSC Karakudukmunay, Kazakinstrakh JSC,
Schwarzmeer und Ostsee Insurance Co. Limited (Sovag) U.K.
and The Law Debenture Trust Corporation p.l.c., incorporated
by reference to Exhibit 10.10 to Chaparral Resources, Inc.'s
Current Report on 8-K dated February 14, 2000, filed with
the Securities and Exchange Commission on March 22, 2000.
10.33 Warrant Agreement, dated February 8, 2000, between Chaparral
Resources, Inc. and Shell Capital Limited, incorporated by
reference to Exhibit 10.18 to Chaparral Resources, Inc.'s
Current Report on 8-K dated February 14, 2000, filed with
the Securities and Exchange Commission on March 22, 2000.
10.34 Technical Services Agreement, dated February 8, 2000, Shell
Capital Services Limited and Closed Type JSC Karakudukmunay,
incorporated by reference to Exhibit 10.20 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February 14,
2000, filed with the Securities and Exchange Commission on
March 22, 2000.
10.35 Contract of Insurance No. 158, dated December 29, 1999,
between the Overseas Private Investment Corporation and
Chaparral Resources, Inc., incorporated by reference to
Exhibit 10.21 to Chaparral Resources, Inc.'s Current Report
on 8-K dated February 14, 2000, filed with the Securities
and Exchange Commission on March 22, 2000.
10.36 Amendment No. 1 to Contract of Insurance No. F158, dated as
of February 4, 2000, between the Overseas Private Investment
Corporation and Chaparral Resources, Inc., incorporated by
reference to Exhibit 10.22 to Chaparral Resources, Inc.'s
Current Report on 8-K dated February 14, 2000, filed with
the Securities and Exchange Commission on March 22, 2000.
10.37 Trade Confirmation, dated February 11, 2000, between
Deutsche Bank AG New York and Chaparral Resources, Inc.,
incorporated by reference to Exhibit 10.23 to Chaparral
Resources, Inc.'s Current Report on 8-K dated February 14,
2000, filed with the Securities and Exchange Commission on
March 22, 2000.
10.38 Crude Oil Sale and Purchase Agreement dated as of November
1, 1999, between Closed Type JSC Karakuduk Munay and Shell
Trading International Limited, incorporated by reference to
Exhibit 10.1 to Chaparral Resources, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999, filed
with the Securities and Exchange Commission on November 19,
1999.
10.39 Commercial Services Agreement between Shell Trading
International Limited and Closed Type Karakudukmunay, JSC,
dated November 1, 1999, incorporated by reference to Exhibit
10.67 to Chaparral Resources, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1999, filed with
the Securities and Exchange Commission on March 30, 2000.
10.41 Amended and Restated Warrant Agreement, dated April 18,
2001, between Chaparral Resources, Inc. and Shell Capital
Limited, incorporated by reference to Exhibit 10.1 to
Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001, filed with the
Securities and Exchange Commission on May 15, 2001.
33
Exhibit No. Description and Method of Filing
----------- --------------------------------
10.42 Amendment Agreement between Chaparral Resources, Inc.
Central Asian Petroleum (Guernsey) Limited, Closed Type JSC
Karakudukmunay, Central Asian Petroleum, Inc., Shell Capital
Services Limited, and Shell Capital Inc., dated May 31,
2001, incorporated by reference to Exhibit 10.1 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, filed with the Securities and
Exchange Commission on August 14, 2001.
10.43 2001 Stock Incentive Plan approved by the stockholders of
Chaparral Resources, Inc. on June 21, 2001, incorporated by
reference to Exhibit 10.43 to Chaparral Resources, Inc.'s
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, filed with the Securities and Exchange
Commission on April 15, 2000.
10.44 Master Agreement, dated May 9, 2002, between Chaparral
Resources, Inc. and Central Asian Industrial Holdings, N.V.,
incorporated by reference to Exhibit 10.1 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002, filed with the Securities and
Exchange Commission on May 20, 2002.
10.45 Mutual Release Agreement, dated May 7, 2002, among Chaparral
Resources, Inc., Central Asian Petroleum (Guernsey) Limited,
Central Asian Petroleum, Inc. and Closed Type JSC
Karakudukmunay, and Shell Capital Inc., Shell Capital
Services Limited and Shell Capital Limited, incorporated by
reference to Exhibit 10.2 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended March
31, 2002, filed with the Securities and Exchange Commission
on May 20, 2002.
10.46 Promissory Note, dated May 10, 2002, jointly and severally
between Chaparral Resources, Inc. and Central Asian
Petroleum (Guernsey) Limited and Central Asian Industrial
Holdings, N.V., incorporated by reference to Exhibit 10.3 to
Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002, filed with the
Securities and Exchange Commission on May 20, 2002.
10.47 Stock Purchase Warrant, dated May 10, 2002, between
Chaparral Resources, Inc. and Central Asian Industrial
Holdings, N.V., incorporated by reference to Exhibit 10.4 to
Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002, filed with the
Securities and Exchange Commission on May 20, 2002.
10.48 Registration Agreement, dated May 10, 2002, between
Chaparral Resources, Inc. and Central Asian Industrial
Holdings, N.V., incorporated by reference to Exhibit 10.5 to
Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002, filed with the
Securities and Exchange Commission on May 20, 2002.
10.49 Agreement, dated May 8, 2002, between Chaparral Resources,
Inc. and Exeter Finance Group, Inc., incorporated by
reference to Exhibit 10.6 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended March
31, 2002, filed with the Securities and Exchange Commission
on May 20, 2002.
10.50 Stock Purchase Agreement, dated May 9, 2002, between
Chaparral Resources, Inc. and Dardana Limited, incorporated
by reference to Exhibit 10.7 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended March
31, 2002, filed with the Securities and Exchange Commission
on May 20, 2002.
10.51 Loan Agreement #250, dated May 6, 2002, among Closed Joint
Stock Company Karakudukmunai and Open Joint Stock Company
Kazkommertsbank, incorporated by reference to Exhibit 10.1
to Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002, filed with the
Securities and Exchange Commission on August 19, 2002.
10.52 Additional Agreement, dated May 6, 2002, to Loan Agreement
#250, among Closed Joint Stock Company Karakudukmunai and
Open Joint Stock Company Kazkommertsbank, incorporated by
reference to Exhibit 10.2 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002, filed with the Securities and Exchange Commission on
August 19, 2002.
34
Exhibit No. Description and Method of Filing
----------- --------------------------------
10.53 Additional Agreement, dated June 6, 2002, to Loan Agreement
#250, among Closed Joint Stock Company Karakudukmunai and
Open Joint Stock Company Kazkommertsbank, incorporated by
reference to Exhibit 10.3 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002, filed with the Securities and Exchange Commission on
August 19, 2002.
10.54 Accessorial Agreement #5382A, dated May 6, 2002, among
Closed Joint Stock Company Karakudukmunai and Open Joint
Stock Company Kazkommertsbank, incorporated by reference to
Exhibit 10.4 to Chaparral Resources, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002, filed with
the Securities and Exchange Commission on August 19, 2002.
10.55 Additional Agreement, dated May 7, 2002, to Accessorial
Agreement #5382A, among Closed Joint Stock Company
Karakudukmunai and Open Joint Stock Company Kazkommertsbank,
incorporated by reference to Exhibit 10.5 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, filed with the Securities and
Exchange Commission on August 19, 2002.
10.56 Accessorial Agreement #5896A, dated July 31, 2002, among
Closed Joint Stock Company Karakudukmunai and Open Joint
Stock Company Kazkommertsbank, incorporated by reference to
Exhibit 10.6 to Chaparral Resources, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002, filed with
the Securities and Exchange Commission on August 19, 2002.
10.57 Open Joint Stock Company Kazkommertsbank letter dated August
16, 2002, to Closed Joint Stock Company Karakudukmunai,
incorporated by reference to Exhibit 10.7 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, filed with the Securities and
Exchange Commission on August 19, 2002, incorporated by
reference to Exhibit 10.7 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002, filed with the Securities and Exchange Commission on
August 19, 2002.
**10.58 Amendment to License dated December 11, 2002, to provide for
the stabilization of taxes and clarification on tax laws
applicable to KKM.
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 Consent of Ryder Scott Company dated March 28, 2003.
**99 Letter from Ryder Scott Company to Chaparral Resources, Inc.
regarding reserve estimates of the Karakuduk Field as of
December 31, 2002, dated March 28, 2003.
* These exhibits, previously incorporated by reference to Chaparral's reports
under file number 0-7261, have now been on file with the Commission for more
than 5 years and are not filed with this Annual Report. We agree to furnish
these documents to the Commission upon request.
** Filed herewith.
35
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/ Nikolai D. Klinchev
---------------------------------------------------
Nikolai D. Klinchev
Chief Executive Officer
(Principal Executive Officer)
By /s/ Richard J. Moore
---------------------------------------------------
Richard J. Moore
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 31, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Date Name and Title Signature
- ---- -------------- ---------
March 31, 2003 Askar Alshinbayev, Director /s/ Askar Alshinbayev
-----------------------
March 31, 2003 Alan D. Berlin, Director and /s/ Alan D. Berlin
Corporate Secretary -----------------------
March 31, 2003 Ian Connor, Chairman of the Board /s/ Ian Connor
-----------------------
March 31, 2003 Peter G. Dilling, Director /s/ Peter G. Dilling
-----------------------
March 31, 2003 John Duthie, Director /s/ John Duthie
-----------------------
March 31, 2003 Nikolai D. Klinchev, Chief /s/ Nikolai D. Klinchev
Executive Officer -----------------------
36
CERTIFICATION
I, Nikolai D. Klinchev, Chief Executive Officer of Chaparral Resources, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Chaparral Resources Inc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared; (b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and (c) presented in
this annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions): (a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; and (b) any fraud, whether or not
material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Nikolai D. Klinchev
-------------------------------
Nikolai D. Klinchev
Chief Executive Officer
CERTIFICATION
I, Richard J. Moore, Vice President, Finance and Chief Financial Officer of
Chaparral Resources, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Chaparral Resources
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared; (b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and (c) presented in
this annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions): (a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; and (b) any fraud, whether or not
material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Richard J. Moore
------------------------------------
Richard J. Moore
Vice President - Finance and Chief
Financial Officer
CERTIFICATION ACCOMPANYING ANNUAL REPORT PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SEC.1350)
The undersigned, Nikolai D. Klinchev, Chief Executive Officer of Chaparral
Resources Inc., hereby certifies that the Annual Report on Form 10-K for the
year ended December 31, 2002 (the Report) (1) fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and (2) the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Date: March 31, 2003
/s/ Nikolai D. Klinchev
-----------------------------------
Nikolai D. Klinchev
Chief Executive Officer
CERTIFICATION ACCOMPANYING ANNUAL REPORT PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SEC.1350)
The undersigned, Richard J. Moore, Chief Financial Officer of Chaparral
Resources Inc., hereby certifies that the Annual Report on Form 10-K for the
year ended December 31, 2002 (the Report) (1) fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and (2) the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Date: March 31, 2003
/s/ Richard J. Moore
-----------------------------------
Richard J. Moore
Vice President - Finance and Chief
Financial Officer
Consolidated Financial Statements
Chaparral Resources, Inc.
For the Three Years ended December 31, 2002 with
Report of Independent Auditors
Chaparral Resources, Inc.
Consolidated Financial Statements
Contents
Chaparral Resources, Inc.
Report of Independent Auditors ..............................................F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets .................................................F-2
Consolidated Statements of Operations........................................F-4
Consolidated Statements of Cash Flows........................................F-6
Consolidated Statements of Changes in Stockholders' Equity...................F-8
Notes to Consolidated Financial Statements...................................F-9
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited.........................................F-29
Supplemental Information - Selected Quarterly
Financial Data - Unaudited...............................................F-34
Audited Financial Statements of Closed Type JSC Karakudukmunay
For the Fiscal Years Ended 2001 and 2000.................................F-37
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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company has incurred recurring operating losses, has a working capital
deficiency as of December 31, 2002, and there are uncertainties relating to the
Company's ability to meet projected cash flow requirements through 2003. 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 Kazakhstan
----------------------------
Ernst & Young Kazakhstan
March 17, 2003
Almaty, Kazakhstan
F-1
CHAPARRAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
2002 2001
--------- ---------
Assets
- ------
Current assets:
Cash and cash equivalents $ 4,295 $ 174
Accounts receivable:
Oil sales receivable 1,993 --
VAT receivable (Note 3) 1,999 --
Prepaid expenses (Note 4) 2,456 245
Crude oil inventory 548 --
--------- ---------
Total current assets 11,291 419
Materials and supplies 2,457 --
Hedge agreement (Note 7) -- 762
Other 5 5
Property, plant and equipment:
Oil and gas properties, full cost: (Note 5)
Properties subject to depletion 84,833 --
Properties not subject to depletion 8,814 --
Investment in KKM and other oil and gas
Property costs - full cost method
Republic of Kazakhstan -- 68,948
--------- ---------
93,647 68,948
Other property, plant and equipment (Note 6) 8,210 109
--------- ---------
101,857 69,057
Less - accumulated depreciation, depletion, and amortization (28,302) (1,206)
--------- ---------
Property, plant and equipment, net 73,555 67,851
Total assets $ 87,308 $ 69,037
========= =========
See accompanying notes.
F-2
CHAPARRAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
2002 2001
--------- ---------
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable $ 2,809 $ 536
Accrued liabilities:
Accrued compensation 227 449
Other accrued liabilities (Note 8) 2,432 144
Accrued interest payable (Note 11) 250 1,745
Current income tax liability (Note 14) 1,939 --
Shell Capital loan (Note 10) -- 34,902
Current portion of loans payable to affiliates (Note 11) 6,000 --
Redeemable preferred stock, current portion (Note 13) -- 2,000
--------- ---------
Total current liabilities 13,657 39,776
Accrued production bonus (Note 9) 477 --
Loans payable to affiliates (Note 11) 27,998 --
Deferred tax liability (Note 14) 746 --
Minority interest 321 --
Commitments and contingencies (Note 16) -- --
Redeemable preferred stock - cumulative, convertible,
Series A 75,000 designated, issued and outstanding -
none and 50,000 shares as of December 31, 2002 and
December 31, 2001, respectively (Note 13) -- 3,900
Stockholders' equity:
Common stock (Note 12) - authorized, 100,000,000
shares of $0.0001 par value; issued and outstanding,
38,209,502 and 14,283,801 shares as of
December 31, 2002 and December 31, 2001, respectively 4 1
Capital in excess of par value 107,226 94,061
Preferred stock - 1,000,000 shares authorized, 925,000 shares
undesignated. Issued and outstanding - none -- --
Accumulated deficit (63,121) (68,701)
--------- ---------
Total stockholders' equity 44,109 25,361
--------- ---------
Total liabilities and stockholders' equity $ 87,308 $ 69,037
========= =========
See accompanying notes.
F-3
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
Year Ended December 31,
2002 2001 2000
------------ ------------ ------------
Revenue $ 45,133 $ -- $ --
Costs and expenses:
Transportation costs 9,427 -- --
Operating expenses 7,678 -- --
Impairment of materials inventory 203 -- --
Depreciation, depletion, and amortization 12,804 753 421
Management service fee 938 -- --
Hedge losses (Note 7) 762 237 482
General and administrative 5,873 4,330 3,693
------------ ------------ ------------
37,685 5,320 4,596
------------ ------------ ------------
Income/(loss) from operations 7,448 (5,320) (4,596)
Other income (expense):
Interest income 8 1,454 1,932
Interest expense (5,605) (14,446) (27,031)
Equity income from investment (Note 5 & 20) -- 4,616 2,827
Currency exchange gain/(loss) (131) -- --
Minority interest (241) -- --
Other (15) -- 65
------------ ------------ ------------
(5,984) (8,376) (22,207)
------------ ------------ ------------
Income/(loss) before income taxes,
extraordinary gain, and cumulative effect of
change in accounting principle 1,464 (13,696) (26,803)
Income tax expense (Note 14) (2,685) -- --
------------ ------------ ------------
Income/(loss) before extraordinary gain
and cumulative effect of change in
accounting principle $ (1,221) $ (13,696) $ (26,803)
Extraordinary gain (Notes 10 and 11) 5,338 -- --
Cumulative effect of change in accounting
principle (Note 7) -- (2,519) --
------------ ------------ ------------
Net income/(loss) $ 4,117 $ (16,215) $ (26,803)
============ ============ ============
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock -- (250) (250)
Discount accretion
Series A Redeemable Preferred Stock -- (100) (100)
------------ ------------ ------------
Net income/(loss) available to common
Stockholders $ 4,117 $ (16,565) $ (27,153)
============ ============ ============
F-4
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
Year Ended December 31,
2002 2001 2000
------------ ------------ ------------
Basic and diluted earnings per share:
Income/(loss) per share before extraordinary
gain and cumulative effect of change in
accounting principle $ (0.04) $ (0.98) $ (6.01)
Extraordinary gain $ 0.18 $ -- $ --
Cumulative effect of change in
accounting principle $ -- $ (0.18) $ --
Net income/(loss) per share $ 0.14 $ (1.16) $ (6.01)
Weighted average number of shares
outstanding (basic and diluted) 29,753,569 14,283,788 4,516,032
See accompanying note
F-5
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31,
2002 2001 2000
-------- -------- --------
Cash flows from operating activities
- ------------------------------------
Net income/(loss) $ 4,117 $(16,215) $(26,803)
Adjustments to reconcile net income/(loss) to
net cash provided/(used) in operating activities:
Equity income from investment -- (4,616) (2,827)
Depreciation, depletion, and amortization 12,804 1,333 591
Gain on sale of oil and gas properties -- -- (75)
Loss on disposition of assets 15 -- 8
Deferred Income taxes 746 -- --
Cumulative effect of change in accounting
principal -- 2,519 --
Hedge losses 762 237 482
Stock issued for services and bonuses -- -- 23
Amortization of debt issuance cost -- 3,102 909
Amortization of note discount 234 -- 464
Extraordinary gain on restructuring of debt (5,338) -- --
Interest expense from transfer of net profits interest -- 4,369 --
Interest expense attributable to beneficial conversion -- -- 20,340
Interest expense converted into capital stock -- -- 898
Non-cash interest expense 2,753 -- --
Minority interest 241 -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,960) 295 (272)
Prepaid expenses (614) (43) (91)
Crude oil inventory (240) -- --
Accrued interest income on advances to KKM -- (1,452) (1,904)
Interest payments from KKM -- 5,799 --
Hedge agreement -- -- (4,000)
Other -- -- (753)
Increase (decrease) in:
Accounts payable and accrued liabilities (5,560) 396 (940)
Accrued interest payable 261 1,676 --
Other liabilities 288 -- --
Interest expense reclassified as principal on
the Shell Capital loan -- 4,272 3,481
-------- -------- --------
Net cash provided/(used) by operating activities 8,509 1,672 (10,469)
-------- -------- --------
F-6
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31,
2002 2001 2000
-------- -------- --------
Cash flows from investing activities
- ------------------------------------
Additions to property, plant, and equipment $(11,834) $ (18) $ (18)
Investment in and advances to KKM -- (7,734) (22,422)
Acquisition of 10% interest in KKM,
Net of cash acquired (644) -- --
Materials and supplies inventory 353 -- --
Proceeds from disposition of assets 5 -- 75
-------- -------- --------
Net cash used in investing activities (12,120) (7,752) (22,365)
-------- -------- --------
Cash flows from financing activities
- ------------------------------------
Net proceeds from Shell Capital loan $ -- $ 5,650 $ 21,500
Net proceeds from notes payable -- -- 10,806
Proceeds from private placement -- -- 2,946
Proceeds from sale of stock 8,000 -- --
Proceeds from loans from affiliates 40,000 -- --
Payments on Shell Capital loan (30,450) -- --
Debt restructuring and issuance costs (2,518) -- (2,415)
Payments on loans from affiliates (5,000) -- --
Restricted cash -- -- 578
Redemption of Series A Preferred Stock (2,300) -- --
-------- -------- --------
Net cash provided by financing activities 7,732 5,650 33,415
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents 4,121 (430) 581
Cash and cash equivalents at beginning
of period 174 604 23
-------- -------- --------
Cash and cash equivalents at end of period $ 4,295 $ 174 $ 604
======== ======== ========
Supplemental cash flow disclosure
- ---------------------------------
Interest paid $ 3,019 $ 986 $ 888
Supplemental schedule of non-cash
investing and financing activities
----------------------------------
Principal notes converted into capital stock $ -- $ -- $ 20,846
Common stock issued for 10% interest in KKM $ 2,701 $ -- $ --
Discount recognized for note issued
with stock warrants $ 2,466 $ -- $ 1,175
See accompanying notes.
F-7
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
Common Stock Capital in Unearned
-------------------------- Excess of Par Restricted Accumulated
Shares Amount Value Stock Awards Deficit Total
----------- ----------- ----------- ------------ ----------- -----------
Balance at December 31, 1999 980,314 -- 47,857 (23) (24,983) 22,851
Adjustment of capital stock
outstanding (9) -- -- -- -- --
Capital stock issued for services 167 -- -- -- -- --
Capital stock issued in private
placement 1,612,903 -- 2,946 -- -- 2,946
Amortization of restricted stock
awards -- -- -- 23 -- 23
Conversion of debentures into
capital stock 11,207,187 1 20,845 -- -- 20,846
Conversion of accrued interest
into capital stock 483,072 -- 898 -- -- 898
Interest expense attributable to
beneficial conversion -- -- 20,340 -- -- 20,340
Shell warrants issued -- -- 1,175 -- -- 1,175
Cumulative Dividend Series A
Redeemable Preferred Stock -- -- -- -- (250) (250)
Discount accretion on redeemable
preferred stock -- -- -- -- (100) (100)
Net loss -- -- -- -- (26,803) (26,803)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 14,283,634 1 94,061 -- (52,136) 41,926
----------- ----------- ----------- ----------- ----------- -----------
Capital stock issued for services 167 -- -- -- -- --
Cumulative dividend Series A -- -- -- -- (250) (250)
Redeemable Preferred Stock
Discount accretion on redeemable -- -- -- -- (100) (100)
preferred stock
Net loss -- -- -- -- (16,215) (16,215)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 14,283,801 $ 1 $ 94,061 $ -- $ (68,701) $ 25,361
----------- ----------- ----------- ----------- ----------- -----------
Capital stock issued in private
placement 22,925,701 3 7,998 -- -- 8,001
Capital stock issued for 10%
interest in KKM 1,000,000 -- 2,701 -- -- 2,701
CAIH warrants issued -- -- 2,466 -- -- 2,466
Discount accretion on redeemable
preferred stock -- -- -- -- (36) (36)
Cumulative dividend Series A
Redeemable Preferred Stock -- -- -- -- (90) (90)
Redemption of Series A
Redeemable Preferred Stock -- -- -- -- 3,726 3,726
Adjustment due to full
consolidation of KKM -- -- -- -- (2,137) (2,037)
Net income -- -- -- -- 4,117 4,037
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2002 38,209,502 $ 4 $ 107,226 $ -- $ (63,121) $ 44,129
=========== =========== =========== =========== =========== ===========
See accompanying notes.
F-8
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. Chaparral focuses
substantially all of its efforts on the exploration and development of the
Karakuduk Field, an oilfield located in the Central Asian Republic of
Kazakhstan. In 1999, Chaparral reincorporated from Colorado to Delaware.
The consolidated financial statements include the accounts of Chaparral and its
greater than 50% owned subsidiaries, Closed Type JSC Karakudukmunay ("KKM"),
Central Asian Petroleum (Guernsey) Limited ("CAP-G"), Korporatsiya Mangistau
Terra International ("MTI"), 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.
As of December 31, 2002, Chaparral owns a 60% interest in KKM, a Kazakhstan
Joint Stock Company of Closed Type. KKM was formed to engage in the exploration,
development, and production of oil and gas properties in the Republic of
Kazakhstan. KKM'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, KKM 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 Region of the Republic of Kazakhstan (the
"Agreement"). KKM's rights and obligations regarding the exploration,
development, and production of underlying hydrocarbons in the Karakuduk Field
are determined by the Agreement.
KKM'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 KKM's registration. The Agreement can be extended to a date
agreed between the Ministry of Energy and Mineral Resources and KKM as long as
production of petroleum and/or gas is continued in the Karakuduk Field.
KKM is owned jointly by CAP-G (50%), MTI (10%), and KazMunayGaz JSC ("KMG")
(40%). In May 2002, Chaparral increased its ownership in KKM from 50% to 60%
through the acquisition of 100% of the outstanding stock of MTI, a Kazakhstan
joint stock company. KMG, the national petroleum company of Kazakhstan, is owned
by the government of the Republic of Kazakhstan.
As a result of the acquisition of MTI, the Company obtained a controlling
interest in KKM. Consequently, the Company's financial statements have been
consolidated with KKM on a retroactive basis to January 1, 2002. The Company
previously accounted for its 50% investment in KKM using the equity method of
accounting, which is reflected in the Company's financial statements for periods
prior to 2002.
Acquisition
In May 2002, the Company acquired 100% of the outstanding shares of MTI from
Dardana Limited. MTI's only asset was its 10% ownership interest in KKM. The
Company acquired MTI to obtain a controlling interest in KKM as well as to
increase the Company's ownership interest in the Karakuduk Field. The aggregate
purchase price was $3.9 million, including $1.2 million of cash and common stock
valued at $2.7 million. The value of the 1 million common shares issued was
determined based on the average market price of the Company's common shares over
the 3-day period before and after the terms of the acquisition were agreed to
and announced. As a result, the total purchase price of $3.9 million was
recorded as an addition to the Company's oil and gas properties.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments purchased with an original
maturity of three months or less.
F-9
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
Revenue Recognition
Revenue and related costs are recognized upon delivery of commercial quantities
of oil production produced from proved reserves, in accordance with the accrual
method of accounting. Losses, if any, are provided for in the period in which
the loss is determined to occur.
Revenue is presented gross of transportation expenses in accordance with EITF
00-10, Accounting for Shipping and Handling Fees and Costs.
Foreign Currency Translation
The Company's functional currency is the U.S. Dollar. All transactions arising
in currencies other than U.S. Dollars, including assets, liabilities, revenue,
expenses, gains, or losses are measured and recorded into U.S. 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 U.S. Dollars are translated at exchange rates prevailing as of the
balance sheet date (155.60 and 150.20 Kazakh Tenge per U.S. Dollar as of
December 31, 2002 and 2001, respectively). Non-monetary assets and liabilities
denominated in currencies other than U.S. 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-U.S. 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 U.S. Dollars.
The Company had $4.82 million of net monetary liabilities denominated in Tenge
as of December 31, 2002.
Interest Capitalization
The Company capitalizes interest on significant construction projects. Statement
of Financial Accounting Standards ("SFAS") 34, Capitalization of Interest Costs,
provides standards for the capitalization of interest costs as part of the
historical cost of acquiring assets. FASB-Interpretation (FIN) 33 provides
guidance for the application of SFAS 34 to the full cost method of accounting
for oil and gas properties. Under FIN 33, costs of investments in unproved
properties and major development projects, on which depreciation, depletion, and
amortization (DD&A) expense is not currently taken and on which exploration or
development activities are in progress, qualify for capitalization of interest.
Capitalized interest is calculated by multiplying the weighted-average interest
rate on debt by the amount of costs excluded. Capitalized interest cannot exceed
gross interest expense. The Company capitalized interest totaling $631,000
during 2002.
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.
F-10
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." The full
cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule
4-10. The ceiling test is performed on a country-by-country basis. The test
determines a limit, or ceiling, on the book value of oil and gas properties.
That limit is basically the after tax present value of the future net cash flows
from proved crude oil and natural gas reserves. This ceiling is compared to the
net book value of the oil and gas properties reduced by any related deferred
income tax liability. If the net book value reduced by the related deferred
income taxes exceeds the ceiling, an impairment or non-cash write down is
required. A ceiling test impairment can give the Company a significant loss for
a particular period; however, future DD&A expense would be reduced.
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.
Other Property, Plant and Equipment
Other property, plant and equipment are valued at historical cost and are
depreciated on a straight line basis over the estimated useful lives of the
assets as follows:
Description Period
----------- ------
Office buildings and apartments 20 years
Office equipment 3 years
Vehicles 5 years
Field buildings 15 years
Field equipment Up to 10 years
Inventory
Crude oil inventory is valued using the first-in, first-out method, at the lower
of cost or net realizable value. Crude oil inventory represents production costs
associated with lifting and transporting crude oil from the Karakuduk Field to
the KazTransOil pipeline. Crude oil placed into the KazTransOil Pipeline is held
as inventory until formally nominated and delivered for sale. Crude oil
inventory as of December 31, 2002 represented approximately 87,000 barrels of
crude oil.
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.
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
related 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.
Diluted loss per share is not presented because the exercise of "in the money"
stock options and stock warrants, and the effect of the conversion of the
Company's Redeemable Preferred Stock, into the Company's common stock are
anti-dilutive. The Company had 333, 32,367, and 32,367 "in the money" stock
warrants convertible into the Company's common stock for the years ended
December 31, 2002, 2001, and 2000, respectively.
F-11
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
New Accounting Standards
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities (VIEs), in an effort to expand upon and strengthen existing accounting
guidance that addresses when a company should include in its financial
statements the assets, liabilities and activities of another entity. In general,
a VIE is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. Interpretation 46 requires a
VIE to be consolidated by a company if that company is subject to a majority of
the risk of loss from the VIE's activities, is entitled to receive a majority of
the VIE's residual returns, or both. The Interpretation also requires
disclosures about VIEs that the company is not required to consolidate, but in
which it has a significant variable interest. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after January 31,
2003, and to older entities no later than the third quarter of 2003. Certain of
the disclosure requirements are required in all financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. The Company has not identified any VIEs that must be consolidated.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of SFAS 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. The Company currently uses the intrinsic method to account for
stock based employee compensation in each period presented.
In November 2002, the FASB issued FIN 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others). FIN 45 requires certain guarantees to be recorded at fair value, which
is different from current practice to record a liability only when a loss is
probable and reasonably estimable, as those terms are defined in FASB Statement
5, Accounting for Contingencies. FIN 45 also requires the Company to make
significant new disclosures about guarantees. As of December 31, 2002, the
Company is not the guarantor of any unrelated party liabilities.
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred and establishes that fair value is the objective for
initial measurement of the liability. The provisions of SFAS 146 are effective
for exit or disposal activities that are initiated after December 31, 2002. The
Company adopted SFAS 146 on January 1, 2003, but at this time this statement has
no effect on the Company's consolidated financial position or results of
operations.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections. SFAS 145,
which is effective for fiscal years beginning after May 15, 2002, provides
guidance for income statement classification of gains and losses on
extinguishment of debt and accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. The Company
will adopt SFAS 145 effective January 1, 2003 and will restate all prior periods
to reflect this change in presentation.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
Subsequently, the asset retirement cost should be allocated to expense using a
systematic and rational method. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. As a result of the adoption of FASB 143, the Company will
increase its oil and gas assets and long term liabilities by approximately
$516,000 as of January 1, 2003 to reflect the net present value of its
retirement obligations.
F-12
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
Fair Value of Financial Instruments
All of the Company's financial instruments, including cash and cash equivalents,
accounts receivable, notes receivable, and notes payable, have fair values which
approximate their recorded values as they are either short-term in nature or
carry interest rates which approximate market rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Risks and Uncertainties
The ability of the Company 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 by
additional pipeline capacity being planned or currently under construction 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, has a working capital deficiency as of December 31, 2002, and
there are uncertainties relating to the Company's ability to meet projected cash
flow requirements through 2003. In addition, the Government of Kazakhstan has
required the Company to sell a significant portion of its crude oil production
on the local market, which generates substantially less revenue than oil sold on
the export market. During January and February 2003, the Company has refused to
deliver its oil production to the local market and, consequently, the amount of
the Company's export quota has been limited to approximately 64% of the
Company's production.
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 has attempted, in accordance with the Agreement, to effect the 100%
export of all hydrocarbons produced from the Karakuduk Field through discussions
with the Government of Kazakhstan. The Company plans to continue to work with
the Government to increase its export quota and minimize or eliminate future
local sales requirements. If the Company is unsuccessful, the Company may be
required to initiate arbitration proceedings in Switzerland for the breach of
the Agreement by the Government of Kazakhstan. However, no assurances can be
provided that the Company will be able to export 100% or a significant portion
of its production and that the Company's cash flow from operations will be
sufficient to meet working capital requirements in the future, which may require
the Company to seek additional debt or equity financing in order to continue to
develop the Karakuduk Field.
F-13
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. VAT Receivable
The value added tax (VAT) receivable is a Tenge denominated asset due from the
Republic of Kazakhstan. The VAT receivable consists of VAT paid on local
expenditures and imported goods. Under the Company's Agreement, VAT charged to
the Company is recoverable in future periods as either cash refunds or offsets
against the Company's fiscal obligations, including future income tax
liabilities. Periodically, the Company reviews its outstanding VAT receivable
for possible impairment. During 2002, the Company offset its VAT receivable by
approximately $1.6 million against other fiscal obligations.
4. Prepaid Expenses
The breakdown of Prepaid expenses is as follows:
December 31, December 31,
Description 2002 2001
----------- (Thousands) (Thousands)
----------- -----------
Prepaid transportation costs $ 584 $ --
Advanced payments for materials and supplies 1,352 --
Prepaid insurance 104 245
Other prepaid expenses 416 --
------ ------
Total $2,456 $ 245
====== ======
Prepaid transportation costs represent prepayments for export tariffs necessary
to sell oil on the export market, which is expensed in the period the related
oil revenue is recognized. Advanced payments for materials and supplies
represent prepayments for general materials and supplies to be used in the
development of the Karakuduk Field.
5. Oil and Gas Properties - Full Cost
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, related interest costs associated with unproved properties, and
other capitalizable costs allowed under the full cost method of accounting.
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.
The Company recognized total amortization expense of $12.08 million and had an
effective amortization rate of $4.89 per barrel for the year ended December 31,
2002.
In accordance with SFAS 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies, the Company accounts for amortization of crude oil
production as a component of crude oil inventory until the related crude oil is
sold. As of December 31, 2002, $372,000 of amortization expense was capitalized
to crude oil inventory.
The acquisition of MTI, which holds a 10% interest in KKM, resulted in the
consolidation of KKM and the increase in oil and gas properties.
F-14
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Oil and Gas Properties - Full Cost (continued)
Costs capitalized to oil and gas properties consist of:
December 31,
2002
Description (Thousands)
- ----------- -----------
Acquisition costs $ 10,633
Exploration and appraisal costs 22,277
Development cost 54,920
Other capitalized cost 1,097
Capitalized interest 4,720
--------
Total oil and gas properties at cost $ 93,647
========
Total costs not subject to amortization $ 8,814
========
Total costs subject to amortization 84,833
Accumulated amortization (25,105)
--------
Net properties subject to amortization $ 59,728
========
The Company's oil and gas properties and investments for the year ended December
31, 2001 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.
Cost capitalized to oil and gas properties and investments for the year ended
December 31, 2001 is as follows:
December 31,
2001
Description (Thousands)
- ----------- -----------
Investment in KKM and other oil and gas Property costs -
full cost method Republic of Kazakhstan
Investments in KKM common stock $ 100
Advances to and interest due from KKM 58,674
Acquisition costs 6,244
Other capitalizable costs 1,097
Equity income 2,833
--------
Total gross oil and gas investments 68,948
Accumulated amortization (1,142)
--------
Total oil and gas properties and investment $ 67,806
========
F-15
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Oil and Gas Properties - Full Cost (continued)
The condensed financial statements of KKM are as follows:
December 31,
2002 2001
(Thousands) (Thousands)
-------- --------
Condensed balance sheet
Current assets $ 10,874 $ 4,331
Non-current assets (primarily oil and gas
properties, full cost method) 66,949 67,117
Current liabilities 15,834 15,589
Non-current liabilities
Loan payable to related party 31,809 58,438
Loans payable to affiliates 27,000 --
Other non-current liabilities 2,376 1,496
Charter capital 200 200
Retained earnings/ (accumulated deficit) 604 (4,275)
Condensed income statement
Revenues $ 45,133 $ 36,575
Other costs and expenses (40,255) (30,248)
-------- --------
Net income $ 4,878 $ 6,327
======== ========
6. Other Property, Plant and Equipment
A summary of other property, plant and equipment is provided in the table below:
December 31, December 31,
Description 2002 2001
----------- (Thousands) (Thousands)
------- -------
Office buildings and apartments $ 326 $ --
Office equipment and furniture 917 109
Vehicles 1,419 --
Land 25 --
Field buildings 4,948 --
Field equipment and furniture 575 --
------- -------
Total cost 8,210 109
Accumulated depreciation (3,197) (64)
------- -------
Property, plant and equipment, net $ 5,013 $ 45
======= =======
Depreciation expense for property, plant, and equipment was $724,000, $23,000,
and $18,000 for the years ending December 31, 2002, 2001, and 2000,
respectively.
F-16
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Hedge Agreement
During 2000, the Company paid $4 million for put contracts to sell approximately
1.56 million barrels of North Sea Brent crude (the "Hedge Agreement") to hedge
price risk of future sales of oil production from the Karakuduk Field. The
exercise prices of the various put contracts in the Hedge Agreement range from
$22.35 to $17.25 per barrel, with monthly expiration dates beginning in October
2000 and ending in December 2002. The contracts were 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.
The Company adopted SFAS 133 on January 1, 2001. As a result of adoption of SFAS
133, the Company recognizes all derivative financial instruments in the
consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are recognized periodically in income or in shareholders'
equity as a component of comprehensive income depending on whether the
derivative financial instrument qualifies for hedge accounting, and if so,
whether it qualifies as a fair value hedge or cash flow hedge. Generally,
changes in fair values of derivatives accounted for as fair value hedges are
recorded in income along with the portions of the changes in the fair values of
the hedged items that relate to the hedged risks. Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective
as hedges, are recorded in other comprehensive income net of deferred taxes.
Changes in fair values of derivatives not qualifying as hedges are reported in
income, which require derivative financial instruments to be recorded at their
fair value. Accordingly, the Company recognized a $2.52 million loss from the
cumulative effect of change in accounting principle upon adoption. In addition
and in accordance with SFAS 133, the Company recognized $237,000 and $762,000 in
losses for the years ended December 31, 2001 and 2002, respectively to record
the Hedge Agreement at its fair value as of that date. As of December 31, 2002,
the Hedge Agreement expired.
8. Other Accrued Liabilities
December 31, December 31,
Description 2002 2001
----------- (Thousands) (Thousands)
------ ------
Accrued taxes payable $2,238 $ --
Other accrued liabilities 194 144
------ ------
Total accrued liabilities $2,432 $ 144
====== ======
9. Accrued Production Bonus
Accrued production bonus represents production based bonuses, which will be
payable to the Government of Kazakhstan amounting to $500,000 when cumulative
production reaches ten million barrels and $1.2 million when cumulative
production reaches 50.0 million barrels. Under current Kazakhstan tax law, the
production bonuses will be considered tax deductible expenditures in the
calculation of profits taxes. The Company accrues the production bonuses in
relation to cumulative oil production. The Company accrued $201,000 in
production bonuses for the year ended December 31, 2002.
F-17
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Shell Capital Loan
In May 2002, the Company received a total equity and debt capital infusion of
$45 million, which was partially utilized to repay a substantial portion of the
Company's loan agreement with Shell Capital, Inc. (the "Shell Capital Loan").
The Company received a total investment of $12 million from Central Asian
Industrial Holdings, N.V. ("CAIH"), including $8 million in exchange for
22,925,701 shares, or 60%, of the Company's outstanding common stock, and $4
million in exchange for a three year note bearing interest at 12% per annum (the
"CAIH Note"). Along with the CAIH Note, CAIH received a warrant to purchase
3,076,923 shares of the Company's common stock at $1.30 per share (the "CAIH
Warrant"). Additionally, JSC Kazkommertsbank ("Kazkommertsbank"), an affiliate
of CAIH, provided KKM with a credit facility totaling $33 million (the "KKM
Credit Facility"), consisting of $28 million that was used to repay a portion of
the Shell Capital Loan and $5 million that was made available for KKM's working
capital requirements. The Company paid CAIH $1.79 million as a related
restructuring fee. The terms and conditions of the CAIH Note and the KKM Credit
Facility are more fully described in Note 11, Loans Payable to Affiliates.
In conjunction with the closing of the restructuring transaction, the Shell
Capital Loan was transferred from Shell Capital to CAIH, written down from
approximately $11.43 million (the amount remaining after the $28 million
repayment) to $2.45 million and restructured to reflect a fixed, annual interest
rate of 14%. Additionally, the Shell Capital warrant for 1,785,455 shares of the
Company's common stock was canceled, and the Shell Capital 40% net profits
interest in CAP-G was reacquired by CAP-G for a nominal amount. All other
agreements with Shell Capital or its affiliates were terminated, including KKM's
crude oil sales agreement with Shell Trading International Limited, KKM's
technical services agreement with Shell Capital Services Limited, and the
Company's transportation risk insurance policy held directly by Shell Capital.
The Company also terminated its political risk insurance coverage with the
Overseas Private Investment Corporation ("OPIC") as a condition of the
restructuring. Shell Capital Services Limited, as the facility agent for Shell
Capital, discontinued and withdrew all legal proceedings against the Company in
the United Kingdom and against CAP-G in the Isle of Guernsey and all parties to
the original Shell Capital Loan mutually released each other from future
liability. All outstanding defaults under the Shell Capital Loan were waived by
CAIH upon the completion of the transaction.
The Company recognized a $6.56 million extraordinary gain on the extinguishment
of debt due to the restructuring of the Shell Capital Loan. The extraordinary
gain reflects the forgiveness of $9.07 million in principal, interest, and fees
previously owed to Shell Capital, less $1.79 million in restructuring fees paid
to CAIH, $509,000 in professional fees, and $220,000 in other costs and
expenses. The Company recognized $2.75 million in interest expense on the Shell
Capital loan during 2002.
11. Loans Payable to Affiliates
CAIH Note
- ---------
In May 2002, the Company borrowed $4 million from CAIH in exchange for the CAIH
Note, which bears simple interest at an annual rate of 12%. The CAIH Note was
recorded net of a $2.47 million discount, based on the fair market value of the
CAIH Warrant issued in conjunction with the CAIH Note. The discount is amortized
using the effective interest rate over the life of the CAIH Note. The principal
balance of the CAIH Note is due on May 10, 2005 and accrued interest is payable
quarterly. The CAIH Warrant is fully discussed in Note 12.
In June 2002, the Company prepaid $2 million of the $4 million outstanding
principal balance of the CAIH Note. As a result, the Company recognized an
extraordinary loss on the early extinguishment of debt of $1.22 million from the
write-off of 50% of the unamortized discount on the CAIH Note. The extraordinary
loss was netted against the extraordinary gain from the restructuring of the
Shell Capital Loan. The Company recognized $423,000 in interest expense on the
CAIH Note for the year ended December 31, 2002. The CAIH Note is presented net
of a $1 million remaining discount as of December 31, 2002.
F-18
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Loans Payable to Affiliates (continued)
KKM Credit Facility
- -------------------
In May 2002, KKM established a five-year, $33 million credit line with
Kazkommertsbank. The KKM Credit Facility consists of a $30 million non-revolving
line and a $3 million revolving line, both of which were fully borrowed by KKM
in May 2002. The Company recognized $3.08 million of interest expense on the KKM
Credit Facility for the year ended December 31, 2002. Accrued interest payable
as of December 31, 2002 on the KKM Credit Facility amounts to $250,000.
The non-revolving portion of the KKM Credit Facility accrues simple interest at
an annual rate of 14% and is repayable over a five year period with final
maturity in May 2007. Accrued interest is payable quarterly, beginning in
December 2002, and KKM must begin making quarterly principal payments in May
2003. The Company is in compliance with all the terms of the KKM Credit
Facility.
The revolving portion of the KKM Credit Facility accrues simple interest at an
annual rate of 14%. The revolver is loaned to KKM for short-term periods up to
one year, but KKM has the right to re-borrow the funds through May 2006 with
final repayment due in May 2007. The initial $3 million revolving loan to KKM
was subject to a three month term. The principal balance was repaid in July 2002
and KKM immediately re-borrowed another $3 million with a maturity date of July
31, 2003, which was classified as current as of December 31, 2002. Accrued
interest on the revolving loan is payable at maturity.
The original KKM Credit Facility included repayment terms of three years and
four years for the non-revolving and revolving portions of the KKM Credit
Facility, respectively, with an option to extend the final maturity date for
repayment of the entire KKM Credit Facility to five years. In May 2002, KKM
exercised the option to extend the repayment term to five years with final
maturity in May 2007 for the entire KKM Credit Facility.
The Company is subject to certain pledges, covenants, and other restrictions
under the KKM Credit Facility, including, but not limited to, the following:
(i) CAP-G pledged its 50% interest in KKM to Kazkommertsbank as
collateral for the KKM Credit Facility;
(ii) The Company provided a written guarantee to Kazkommertsbank that it
will repay the KKM Credit Facility in the event KKM fails do so;
(iii) KKM may not incur additional indebtedness or pledge its assets to
another party without the written consent of Kazkommertsbank; and
(iv) KKM may not pay dividends without the written consent of
Kazkommertsbank.
The KKM Credit Facility stipulates certain events of default, including, but not
limited to, KKM's inability to meet the terms of the KKM Credit Facility, KKM's
failure to meet it obligations to third parties in excess of $100,000, and the
Company's involvement in legal proceedings in excess of $100,000 where an
adverse judgment against the Company occurs or is expected to occur. If an event
of default does occur and is not waived by the lender, Kazkommertsbank has a
right to call the KKM Credit Facility immediately due and payable and/or
exercise its security interest on the Company's shares in KKM pledged as
collateral. Furthermore, in the event of a material adverse change in the
financial or credit markets, Kazkommertsbank has a right to unilaterally alter
any terms and conditions of the KKM Credit Facility, including the rate of
interest, by written request. KKM may either agree to the amended terms or repay
the outstanding KKM Credit Facility within 10 days of notification.
F-19
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Loans Payable to Affiliates (continued)
The maturity schedule of the Company's indebtedness as of December 31, 2002 is
as follows:
Principal
Date Amount Due
--------------------------
2003 6,000,000
2004 7,000,000
2005 10,000,000
2006 8,000,000
2007 4,000,000
--------------------------
Total 35,000,000
==========================
12. Common Stock
General
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, 2002.
2001 Stock Incentive Plan
In June 2001, the Company's stockholders approved the 2001 Stock Incentive Plan,
which sets aside a total of 2.14 million shares of the Company's common stock
for issuance to the Company's officers, directors, employees, and consultants.
The Company has not made any grants under the 2001 Stock Incentive Plan as of
December 31, 2002.
Non-Qualified Stock Options
During 2002, stock options to purchase 54,700 shares of the Company's common
stock granted in 1997 to various employees and consultants of the Company
expired. The expired options had exercise prices ranging between $46.86 and
$108.78 per share.
Common Stock Offerings and Common Stock Warrant Issuances
During 1996, the Company issued notes totaling $1.85 million to various
investors. In connection with the notes, the Company issued a total of 7,708
warrants to purchase shares of the Company's common stock at an exercise price
of $15 per share. The Company issued 5,626 warrants upon issuance of the notes.
An additional 2,082 warrants were issued on May 31, 1997, when the notes were
not repaid on or before such date. The 5,625 warrants issued in 1996 expired
during 1999. The remaining 2,082 warrants expired on May 31, 2000.
Also in 1996, the Company sold 233,334 shares of common stock in a private
placement at a price of $30 per share. In connection with the private placement,
the Company issued warrants to purchase 17,033 shares of the Company's common
stock for a total of $10 to the sales agent as a commission. In April 2002, the
17,033 warrants expired.
F-20
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Common Stock (continued)
During February 1997, the Company entered into a severance agreement with Paul
V. Hoovler, a former Chief Executive Officer and President of the Company,
pursuant to which Mr. Hoovler received warrants to purchase 1,667 shares of the
Company's common stock at an exercise price of $51 per share and warrants to
purchase 1,667 shares of the Company's common stock at an exercise price of $75
per share. The 3,334 warrants expired in February 2001.
In January 1998, the Company, granted 500 shares of the Company's common stock
to an employee of the Company, which 500 shares vested ratably on January 30,
1999, 2000, and 2001, respectively. The Company recognized $45,000 as
compensation expense, amortized over the vesting period of the grants.
In September 2000, the Company converted 8% Non-negotiable Convertible
Subordinated Promissory Notes with an aggregate principal amount of $20.85
million, plus accrued interest of $898,000, into 11,690,259 shares of the
Company's common stock at a conversion price of $1.86 per share.
In October 2000, the Company issued 1,612,903 shares of the Company's common
stock to Capco Resources, Ltd. in exchange for $3 million, or $1.86 per share.
As discussed in Note 10, Shell Capital's warrant for 1,785,455 shares of the
Company's common stock was canceled as part of the restructuring of the Shell
Capital Loan. The warrants had an exercise price of $9.79.
In November 1997, the Company entered into a subscription agreement with an
unaffiliated investor to purchase 225,000 shares of the Company's designated
Series A, B, and C Redeemable Preferred Stock, for $100 per share. As of
December 31, 1997, the investor had purchased 50,000 shares of the Company's
Series A Redeemable Preferred Stock for $5 million. The Company issued a warrant
for 15,000 shares at an exercise price of $0.60 per share as compensation to the
placement agent in connection with the subscription agreement. On November 24,
2002, the 15,000 share warrant expired.
In August 5, 1998, the Company retired two outstanding loans, totaling
$1,000,000. The Company borrowed the $1,000,000 on June 3, 1998, subject to a 7%
interest rate. 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. On November 25, 2002, the 16,667 warrants expired.
In May 2002, the Company issued 1 million shares of its outstanding common stock
valued at $2.7 million and $1.2 million in cash to Dardana Limited, in exchange
for an 100% of the stock of MTI, which owns a 10% interest in KKM.
As discussed in Note 10, the Company issued to CAIH a warrant to purchase
3,076,923 shares of the Company's common stock at an exercise price of $1.30 per
share, subject to certain anti-dilution provisions. The CAIH Warrant is
exercisable for five years from May 10, 2002, the date of grant. The fair market
value of the CAIH Warrant of $2.47 million was recorded as a discount of the
CAIH Note. The fair market value of the CAIH Warrant was estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rate of 4.09%, dividend yield
of 0%, volatility factor of the expected market price of the Company's common
stock of .624, and a weighted average life expectancy of 3.5 years.
As discussed in Note 10, the Company received a total investment of $12 million
from CAIH, including $8 million in exchange for 22,925,701 shares, or 60%, of
the Company's outstanding common stock.
F-21
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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 is estimated at the date of grant using
the Black-Scholes option pricing model by using weighted average assumptions,
volatility factors of the expected market price of the Company's common stock,
and the weighted average life expectancy of the options. The Company did not
issue any options during 2000, 2001, or 2002 and all outstanding options were
fully vested as of December 31, 1999, therefore pro-forma information is not
presented.
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, 1999 57,516 $67.73 --
Options Cancelled --
------------------------------------------
Unexercised options outstanding -
December 31, 2000 57,516 $67.73 --
Options Cancelled --
------------------------------------------
Unexercised options outstanding -
December 31, 2001 57,516 $67.73 --
Options Expired (54,700) $66.32
------------------------------------------
Unexercised options outstanding -
December 31, 2002 2,816 $95.10 --
Price range $123.00-$145.80
(Average life of 0.15 years) 1,342 $132.16
Price range $80.40-$86.40
(Average life of 0.66 years) 583 $82.11
Price range $43.20-$45.00
(Average life of 0.52 years) 891 $47.82
Exercisable options
December 31, 2000 57,516 $67.73
December 31, 2001 57,516 $67.73
December 31, 2002 2,816 $95.10
F-22
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Common Stock (continued)
The following table summarizes all common stock purchase warrant activity:
Number of Exercise
Stock Price
Warrants Range
---------- --------------
Outstanding, December 31, 1999 54,449 $0.0006 - $210
Granted 1,785,455 $ 9.79
Expired (2,082) $ 15
---------- --------------
Outstanding, December 31, 2000 1,837,822 $0.0006 - $210
Expired (3,334) $ 51 - $75
---------- --------------
Outstanding, December 31, 2001 1,834,488 $0.0006 - $210
Granted 3,076,923 $ 1.30
Expired (48,700) $ 0 - $210
Cancelled (1,785,455) $ 9.79
---------- --------------
Outstanding, December 31, 2002 3,077,256 $ 0.60 - $1.30
========== ==============
The following table summarizes the price ranges of all common stock purchase
warrants outstanding as of December 31, 2002:
Number of Warrants Exercise Price
-------------------------------------
3,076,923 $ 1.30
333 $ 0.60
-------------------------------------
3,077,256 $0.60 - $1.30
13. Redeemable Preferred Stock and Related Common Stock Warrants
In May 2002, the Company repurchased 50,000 shares of its Series A Redeemable
Preferred Stock from an unrelated party for $2.3 million. The Series A
Redeemable Preferred Stock had a carrying value of approximately $6 million,
including $1.1 million in accrued dividends. The $3.7 million difference between
the redemption price and the carrying value was recorded directly to retained
earnings.
The Series A Redeemable Preferred Stock was convertible and accrued an annual,
cumulative dividend of $5 per share. There were no dividends paid on the Series
A Redeemable Preferred Stock. As of December 31, 2001, dividends in arrears
relating to the Series A Redeemable Preferred Stock amounted to $1 million. The
Company increased the carrying value of the Series A Redeemable Preferred Stock
by $1 million by accreting $250,000 in 2001, 2000, 1999, and 1998, respectively,
directly to accumulated deficit.
F-23
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Income Taxes
The Company accounts for income taxes under FASB 109, Accounting for Income
Taxes. Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
For financial reporting purposes, income before income taxes, extraordinary
gain, and cumulative effect of change in accounting principle includes the
following components:
Year ended December 31,
2002 2001 2000
(Thousands) (Thousands) (Thousands)
-------- -------- --------
Domestic $ (5,923) $(13,696) $(26,803)
Foreign 7,387 -- --
-------- -------- --------
$ 1,464 $(13,696) $(26,803)
-------- -------- --------
The components of the income tax provision (benefit) are as follows:
Year ended December 31,
2002 2001 2000
(Thousands) (Thousands) (Thousands)
-------- -------- --------
Income tax provision:
Current
Domestic $ -- $ -- $ --
Foreign 1,939 -- --
-------- -------- --------
Total current 1,939 -- --
-------- -------- --------
Deferred
Domestic -- -- --
Foreign 746 -- --
-------- -------- --------
Total deferred 746 -- --
-------- -------- --------
Total provision for income taxes $ 2,685 $ -- $ --
======== ======== ========
F-24
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows:
Year Ended December 31,
--------------------------
2002 2001
(Thousands) (Thousands)
-------- --------
Deferred tax assets:
Oil and gas assets $ 660 $ 400
Sales of assets 28 --
Obsolete inventory 48 --
Amortization of derivatives 1,400 1,133
Compensation and accrued expenses 41 786
Capital loss on transfer of net
profits interest 1,529 1,529
Net operating loss carryforwards 9,231 10,550
-------- --------
Deferred tax assets 12,937 14,398
Valuation allowance (12,751) (14,398)
-------- --------
Total deferred tax assets 186 --
Deferred tax liabilities:
Depreciation and other basis
Differences (932) --
-------- --------
Net deferred tax liabilities $ (746) $ --
======== ========
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $12,751 valuation allowance at December 31, 2002 is necessary
to reduce the deferred tax assets to the amount that will more likely than not
be realized. The change in the valuation allowance for the current year is $1.65
million. The decrease in valuation allowance is mainly due to the tax impact of
the extraordinary gain recognized during 2002.
As of December 31, 2002, the Company has estimated domestic tax loss
carryforwards of $26.37 million. These carryforwards will expire at various
times between 2003 and 2020.
During 2000 and 2002, the Company had an ownership change under ss.382 of the
Internal Revenue Code, which significantly limits the Company's use of its net
operating tax loss carryforwards.
Undistributed earnings associated with the Company's interest in KKM amounted to
approximately $362,000 at December 31, 2002. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal income
taxes has been provided thereon. Upon distribution of those earnings in the form
of dividends, the Company would be subject to both U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable to the
Republic of Kazakhstan. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practical because of the complexities
associated with the hypothetical calculation; however, unrecognized foreign tax
credit forwards would be available to reduce some portion of the U.S. liability.
Withholding taxes of approximately $54,000 would be payable upon remittance of
all previously unremitted earnings at December 31, 2002.
F-25
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Income Taxes (continued)
The following table summarizes the significant differences between the statutory
tax rate and the Company's effective tax rate for financial statement purposes:
Year ended December 31, (Thousands)
2002 2001 2000
------- ------- -------
Statutory tax rate 35% 35% 35%
Income taxes (benefit) computed
at statutory rate $ 512 $(4,794) $(9,381)
Losses and expenses with no tax
benefit 840 7 7,641
Expiration of NOL carryforwards 597 663 518
Difference in foreign tax rate (378) -- --
Valuation allowance 221 4,124 1,222
Additional foreign taxes 893 -- --
------- ------- -------
Income tax provision $ 2,685 $ -- $ --
======= ======= =======
Foreign taxes applicable to the Company are specified under the Agreement with
the Government of the Republic of Kazakhstan. As of December 31, 2002, the
Company has utilized all available foreign tax loss carryforwards.
The Company has used the best estimates available to determine the Company's
deferred tax assets and liabilities. Refer to Note 16 regarding the
uncertainties of taxation in the Republic of Kazakhstan.
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 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
--------------------------
2003 $ 55,000
2004 $ --
2005 $ --
2006 $ --
2007 $ --
The Company's rental expense for 2002, 2001, and 2000, was approximately
$83,000, $77,000, and $60,000, respectively.
F-26
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Commitments and Contingencies
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.
In December 2002, KKM received an amendment to the Agreement to provide for the
stabilization of taxes and clarification on tax laws applicable to KKM. The
amendment increased the KKM royalty rate from 8% to 8.14% and allowed KKM to use
the lower current tax rates for payroll taxes, social taxes and pension taxes.
The effect of this change is reflected on the Company's financial statements as
of December 31, 2002.
In December 2002, KKM received a claim from the Ministry of State Revenues of
the Republic of Kazakhstan for $9.1 million (the "Tax Claim") relating to taxes
and penalties covering the three years from 1999 to 2001. KKM has appealed the
claim and has contracted legal firms in Kazakhstan to assist with the appeal
process. Based on the assessments of KKM's management and legal counsel, it is
the Company's opinion that the ultimate resolution of the Tax Claim, after
taking into account reserves, will not have a material adverse effect on the
financial position or operating results of the Company.
Basis of Accounting
- -------------------
KKM 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.
17. Local Oil Sales Requirements and Export Quotas
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 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.
Oil sales to the export market represent approximately 92% of the Company's oil
sales revenue during 2002. The Company has a short-term renewable crude oil
sales agreement in place with NAFTEX Oil and Shipping Corporation for the sale
of 100% of the Company's oil production allocation to the export market.
Oil and gas producers within Kazakhstan are required to sell a certain portion
of their crude oil production to the local market to supply local energy needs.
During 2002, the Company sold approximately 363,000 barrels of crude oil on the
local market for approximately $3.3 million and 2.1 million barrels on the
export market for approximately $41.83 million. During 2001, the Company sold
approximately 375,000 barrels of crude oil on the local market for approximately
$3.38 million and 1.81 million barrels on the export market for approximately
$33.20 million. During January and February 2003, the Company refused to deliver
its oil production to the local market and, consequently, the amount of the
Company's export quota has been limited to approximately 64% of the Company's
production.
F-27
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Local Oil Sales Requirements and Export Quotas (continued)
The Company has and is continuing to work with the Government to effect the
export of 100% of hydrocarbons produced. It is uncertain, however, whether the
Company will be successful in doing so, as the Government is expected to require
additional local sales from oil and gas producers in the future.
18. Capital Commitments
As of December 31, 2002, the Company has an outstanding drilling contract with
KazMunayGas-Drilling ("KMGD"), an affiliate of KMG, for one development drilling
rig currently operating in the Karakuduk Field. The rig is contracted through
February 6, 2004.
The Company has no other significant commitments other than those incurred
during the normal performance of the work program to develop the Karakuduk
field.
19. Related Party Transactions
Related party transactions are disclosed on the face of the balance sheet and
notes to the financial statements. The loans with KKB and CAIH are disclosed on
Notes 10 and 11 and the drilling contract with KMGD is described in Note 18.
20. KKM Financial Statements
As a result of the acquisition of MTI in May 2002, the Company obtained a
controlling interest in KKM. Consequently, the Company's financial statements
have been consolidated with KKM on a retroactive basis to January 1, 2002. The
Company previously accounted for its 50% investment in KKM using the equity
method of accounting, which is reflected in the Company's financial statements
for periods prior to 2002.
Due to the significance of the Company's equity investee, the Company has
attached audited financial statements for KKM for the years ended December 31,
2001 and 2000. Reflected in the financial statements are management fees of
$2.04 million charged by the Company to KKM for each of the two years ended
December 31, 2001. These amounts are exclusive of any local withholding tax,
which may be accrued by KKM. Also, the financial statements include interest on
the note payable to the Company from KKM in the amounts $2.90 million and $3.35
million for the years ended December 31, 2001 and 2000, respectively.
F-28
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 SFAS 69, Disclosures
About Oil and Gas Producing Activities.
The following estimates of reserve quantities and related standardized measure
of discounted net cash flows are estimates only, and are not intended to reflect
realizable values or fair market values of the Company's reserves. The Company
emphasizes that reserve estimates are inherently imprecise and that estimates of
new discoveries are more imprecise than producing oil and gas properties.
Additionally, the price of oil has been very volatile and downward changes in
prices can significantly affect quantities that are economically recoverable.
Accordingly, these estimates are expected to change as future information
becomes available and these changes may be significant.
KKM sold 2.47 million barrels of crude oil in 2002, of which 363,000 barrels, or
approximately 15%, were sold to the local market. Comparatively, the Company
sold 2.18 million barrels of crude oil in 2001, of which 375,000, or
approximately 17%, was sold to the local market. 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 its Agreement with
the government. However, the Company expects the government to continue to
require KKM to sell up to 15% 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 2002 reflects the assumption that 15% of KKM's
production will be sold on the local market for a substantially lower net oil
price. Year-end prices used for the standardized measure of discounted net cash
flows for 2001 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 a result of the acquisition of an additional 10% interest in KKM through the
acquisition of 100% of the stock in MTI during 2002, the Company's SFAS 69 is
presented in full for the year 2002. For the years 2001 and 2000 the Company had
a 50% proportionate equity interest in KKM's oil and gas producing activities.
The Company has attached the audited financial statements of KKM for the years
2001 and 2000. Those financial statements should be reviewed in conjunction with
the following disclosures with respect to the Company's proportionate equity
interest in KKM's oil and gas producing activities for the years 2001 and 2000.
F-29
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(IN THOUSANDS)
Proved Oil and Gas Reserve Quantities
(All within the Republic of Kazakhstan)
Year Ended December 31,
--------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Oil Gas Oil Gas Oil Gas
Reserves Reserves Reserves Reserves Reserves Reserves
(bbls.) (Mcf.) (bbls.) (Mcf.) (bbls.) (Mcf.)
------- ----- ------ ----- ------ -------
Proved developed and undeveloped reserves:
Beginning Balance 29,921 -- -- -- -- --
Revision of previous estimates (5,348) -- -- -- -- --
Extensions, discoveries and other additions -- -- -- -- -- --
Production (2,718) -- -- -- -- --
------- ----- ------ ----- ------ -------
Ending Balance December 31, 21,855 -- -- -- -- --
======= ===== ====== ===== ====== =======
Company's equity interest in KKM's
Proved developed and undeveloped
Reserves -- -- 14,961 -- 16,523 --
======= ===== ====== ===== ====== =======
Minority interest in KKM's
Proved developed and undeveloped
Reserves 8,742 -- -- -- -- --
======= ===== ====== ===== ====== =======
Proved Developed Reserves 9,321 -- -- -- -- --
======= ===== ====== ===== ====== =======
Minority interest in KKM's
Proved Developed Reserves 3,728 -- -- -- -- --
======= ===== ====== ===== ====== =======
F-30
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(IN THOUSANDS)
Capitalized Costs Relating to Oil and Gas Producing Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2002 2001 2000
-------- --------- --------
Unproved oil and gas properties $ 11,270 $ -- $ --
Proved oil and gas properties 84,853 -- --
-------- --------- --------
Accumulated depreciation and depletion (25,105) -- --
-------- --------- --------
Net capitalized cost $ 71,018 $ -- $ --
======== ========= ========
Company's share of equity method ======== ========= ========
investee's net capitalized cost $ -- $ 33,530 $ 25,894
======== ========= ========
Cost Incurred in Oil and Gas Property Acquisition, Exploration, and Development
Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2002 2001 2000
-------- --------- --------
Acquisition costs (1) $ 3,881 $ -- $ --
Exploration and appraisal costs --
-------- --------- --------
Development costs 10,287 -- --
-------- --------- --------
$ 14,168 $ -- $ --
======== ========= ========
Company's share of equity method
inveestee's costs of property acquisition, ======== ========= ========
Exploration, and development $ -- $ 12,446 $ 13,602
======== ========= ========
(1) Acquisition cost for the year 2002 represents the cost for acquiring an
additional 10% interest in KKM through the acquisition of 100% of the
outstanding stock in MTI.
F-31
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(IN THOUSANDS)
Results of Operations for Producing Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2002 2001 2000
-------- ----------- --------
Oil revenue $ 45,133 $ -- $ --
Transportation costs (9,427) -- --
Operating expenses (7,678) -- --
Depreciation, depletion, and amortization (12,804) -- --
-------- ----------- --------
15,224 -- --
Provision for income taxes(1) (3,633) -- --
-------- ----------- --------
$ 11,591 $ -- $ --
======== =========== ========
Company's share of equity method
investee's results from operations ======== =========== ========
for producing activities $ -- $ 6,090 $ 3,241
======== =========== ========
(1) Income tax expense is calculated by applying the statutory tax rate to
operating profit, adjusted for applicable net operating loss carryforwards.
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,
------------------------------------
2002 2001 2000
--------- ----------- ---------
Future cash inflows $ 377,660 $ -- $ --
Future development costs (83,189) -- --
Future production costs (50,952) -- --
Future income tax expenses (55,699) -- --
--------- ----------- ---------
Future net cash flows 187,820 -- --
10% annual discount for
estimated timing of cash flows (59,081) -- --
--------- ----------- ---------
Standardized measure of discounted net
cash flows $ 128,739 $ -- $ --
========= =========== =========
Minority interest $ 51,496 $ -- $ --
========= =========== =========
Company's share of equity method
investee's standardized measure of --------- ----------- ---------
discounted future net cash flows $ -- $ 40,344 $ 70,281
========= =========== =========
F-32
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(IN THOUSANDS)
Principal Sources of Change in the Standardized Measure of
Discounted Future Net Cash Flows
Year Ended December 31,
----------------------------------
2002 2001 2000
--------- --------- ---------
Beginning balance $ 80,688 $ -- $ --
Sales of oil produced, net of
production and transportation costs (28,028) -- --
Extensions and discoveries -- -- --
Net changes in prices, production
cost and future development cost 129,412 -- --
Net changes due to revisions of previous
quantity estimates (63,344) -- --
Development cost incurred 10,287 -- --
Accretion of discount 10,393 -- --
Net change in income taxes (10,669) -- --
Other -- -- --
--------- --------- ---------
Ending balance $ 128,739 $ -- $ --
========= ========= =========
F-33
SUPPLEMENTAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(All Amounts in Thousands, Except Share Data)
2002 Quarterly Information
For the Three Months Ended Total as of
----------------------------------------------------------- ------------
March 31, June 30, September 30, December 31, December 31,
2002 (1) 2002 2002 2002 2002
------------ ------------ ------------ ------------ ------------
Revenue (2) $ 8,379 $ 10,646 $ 13,446 $ 12,662 $ 45,133
Transportation and operating costs 4,123 4,248 4,609 4,125 17,105
Depreciation and depletion 2,932 3,067 3,709 3,096 12,804
------------ ------------ ------------ ------------ ------------
Operating income (loss) 1,324 3,331 5,128 5,441 15,224
============ ============ ============ ============ ============
Income/(loss) before taxes and extraordinary
Gains (2,893) 3 2,465 1,889 1,464
Income taxes 233 287 352 1,813 2,685
------------ ------------ ------------ ------------ ------------
Income/(loss) before extraordinary gains (3,126) (284) 2,113 76 (1,221)
Extraordinary gains -- 5,338 -- -- 5,338
------------ ------------ ------------ ------------ ------------
Net income/(loss) available to common
Stockholders $ (3,126) $ 5,054 $ 2,113 $ 76 $ 4,117
------------ ------------ ------------ ------------ ------------
Basic earnings per share:
Loss per share before cumulative
Extraordinary gain $ (0.22) $ (0.01) $ 0.06 $ (0.00) $ (0.04)
Extraordinary gain $ -- $ 0.19 -- -- $ 0.18
Net loss per share $ (0.22) $ 0.18 $ 0.06 $ (0.00) $ 0.14
Basic Weighted average number of shares
Outstanding (basic) 14,283,801 27,955,630 38,209,501 38,209,501 29,753,569
Diluted earnings per share:
Loss per share before cumulative
Extraordinary gain $ (0.22) $ (0.01) $ 0.05 $ (0.00) $ (0.04)
Extraordinary gain $ -- $ 0.19 $ -- $ -- $ 0.18
Net loss per share $ (0.22) $ 0.18 $ 0.05 $ (0.00) $ 0.14
Diluted Weighted average number of shares
Outstanding (basic and diluted) 14,283,801 28,488,711 39,134,622 38,209,615 29,753,682
F-34
SUPPLEMENTAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(All Amounts in Thousands, Except Share Data)
2002 Quarterly Information (continued)
For the Three Months Ended Total as of
----------------------------------------------------- -----------
March 31, June 30, September 30, December 31, December 31,
2002(1) 2002 2002 2002 2002
------- ------- ------- ------- -------
Reconciliation of quarterly data:
- ---------------------------------
Net income/(loss) available to common
stockholders, as originally filed $(2,987) $ 5,054 $ 2,113 $ 76 $ 4,256
Adjustments to quarterly data (1)
Revenue 8,379 -- -- -- 8,379
Transportation and operating costs 4,124 -- -- -- 4,124
Depreciation and depletion 2,789 -- -- -- 2,789
Management service fee 171 -- -- -- 171
General and administrative 1,025 -- -- -- 1,025
------- ------- ------- ------- -------
Income/(loss) from operations 270 -- -- -- 270
Other income/expense:
Equity income from investment (211) -- -- -- (211)
Currency exchange loss (54) -- -- -- (54)
Income taxes (232) -- -- -- (232)
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock 63 -- -- -- 63
Discount accretion
Series A Redeemable Preferred Stock 25 -- -- -- 25
Other
------- ------- ------- ------- -------
Net Adjustment to quarterly data income/(loss) $ (139) $ -- $ -- $ -- $ (139)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income/(loss) available to common
stockholders, as adjusted $(3,126) $ 5,054 $ 2,113 $ 76 $ 4,117
======= ======= ======= ======= =======
------- ------- ------- ------- -------
Adjustment to net income/(loss) per share $ (0.01) $ 0.00 $ 0.00 $ 0.00 $ (0.01)
======= ======= ======= ======= =======
(1) As discussed in Note 1, In May 2002, the Company acquired an additional 10%
interest in KKM. As a result of the acquisition the Company's financial
statements have been consolidated with KKM on a retroactive basis to
January 1, 2002. The Company previously accounted for its 50% investment in
KKM using the equity method of accounting. The financial information
presented for the first quarter ended March 31, 2002 has been restated to
reflect the consolidation of KKM's financial results from operations for
the first quarter ended 2002.
(2) Revenue is presented gross of transportation and marketing cost in
accordance with EITF 00-10, Accounting for Shipping and Handling Fees and
Costs.
F-35
SUPPLEMENTAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(All Amounts in Thousands, Except Share Data)
2001 Quarterly Information
For the Three Months Ended Total as of
------------------------------------------------------------ ------------
March 31, June 30, September 30, December 31, December 31,
2001 2001 2001 2001 2001
------------ ------------ ------------ ------------ ------------
Operating expenses $ (1,134) $ (1,368) $ (1,190) $ (1,391) $ (5,083)
Other income (loss) (565) (75) (4,575) (3,398) (8,613)
------------ ------------ ------------ ------------ ------------
Loss before cumulative effect of change in
Accounting principle (1,699) (1,443) (5,765) (4,789) (13,696)
Cumulative effect of change in accounting
Principle (2,519) -- -- -- (2,519)
------------ ------------ ------------ ------------ ------------
Net loss $ (4,218) $ (1,443) $ (5,765) $ (4,789) $ (16,215)
------------ ------------ ------------ ------------ ------------
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock (63) (62) (63) (62) (250)
Discount accretion
Series A Redeemable Preferred Stock (25) (25) (25) (25) (100)
------------ ------------ ------------ ------------ ------------
Net loss available to common stockholders $ (4,306) $ (1,530) $ (5,853) $ (4,876) $ (16,565)
============ ============ ============ ============ ============
Basic and diluted earnings per share:
Loss per share before cumulative $ (0.12) $ (0.11) $ (0.41) $ (0.34) $ (0.98)
effect of change in accounting principle
Cumulative effect of change in $ (0.18) $ -- $ -- $ -- $ (0.18)
Accounting principle
Net loss per share $ (0.30) $ (0.11) $ (0.41) $ (0.34) $ (1.16)
Weighted average number of shares
Outstanding (basic and diluted) 14,283,746 14,283,801 14,283,801 14,283,801 14,283,788
F-36
Financial Statements
Closed Type JSC Karakudukmunay
For the Two Years ended December 31, 2001 with
Report of Independent Auditors
F-37
Report of Independent Auditors
The Board of Directors and Stockholders
Closed Type JSC Karakudukmunay
We have audited the accompanying balance sheets of Closed Type JSC
Karakudukmunay ("the Company") as of December 31, 2001 and 2000, and the related
statements of operations, cash flows and stockholders' deficit for each of the
two years in the period ended December 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Closed Type JSC Karakudukmunay
at December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 3, the
Company has a working capital deficiency as of December 31, 2001 and there are
uncertainties relating to the Company's ability to meet its expenditure/cash
flow requirements through 2002. In addition, the Company's principal investor
has been notified that it is in default of its loan agreement with its primary
creditor and the primary creditor has initiated legal proceedings for purposes
of obtaining control of the principal investor's interest in the Company. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans and other factors in regard to these matters
are also described in Note 3. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
/s/ Ernst & Young Kazakhstan
----------------------------
Ernst & Young Kazakhstan
April 2, 2002
Almaty, Kazakhstan
F-38
Closed Type JSC Karakudukmunay
Balance Sheets as of
December 31,
(In Thousands of U.S. Dollars)
2001 2000
-------- --------
ASSETS
Current assets:
Cash $ 556 $ 51
Trade receivables -- 680
Prepaid and other receivables (Note 4) 1,705 1,251
Crude oil inventory 145 155
Current VAT receivable (Note 5) 1,925 3,100
-------- --------
Total current assets 4,331 5,237
Deferred tax assets (Note 11) 58 --
Long term VAT receivable (Note 5) --
985
Materials and supplies 2,809 3,800
Property, plant and equipment, net (Note 6) 4,741 4,682
Oil and gas properties, full cost (Note 7)
Properties subject to depletion 42,336 22,779
Properties not subject to depletion 17,173 20,527
-------- --------
59,509 43,306
-------- --------
TOTAL ASSETS $ 71,448 $ 58,010
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 9,914 $ 8,926
Accrued liabilities (Note 8) 675 795
Current portion of loans payable to partner (Note 10) 5,000 --
-------- --------
Total current liabilities 15,589 9,721
Long-term debt (Note 10) 58,438 58,605
Other long-term liabilities (Note 9) 276 86
Deferred tax liability (Note 11) 1,220 --
Stockholders' deficit:
Charter capital (Note 12) 200 200
Accumulated deficit (4,275) (10,602)
-------- --------
(4,075) (10,402)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 71,448 $ 58,010
======== ========
See accompanying notes.
F-39
Closed Type JSC Karakudukmunay
Statement of Operations for the years ended December 31,
(In Thousands of U.S. Dollars)
2001 2000
-------- --------
Revenues:
Oil sales $ 36,575 $ 16,968
Costs and expenses:
Transportation costs 8,297 3,213
Operating expenses 5,246 3,676
Depreciation and depletion 9,479 3,598
Management service fee 620 454
General and administrative 3,753 2,316
-------- --------
Total cost and expenses 27,395 13,257
-------- --------
Income (loss) from operations 9,180 3,711
Other (income) expense:
Interest income (14) (51)
Interest expense 1,847 2,245
Currency exchange (gain)/loss (258) 54
Other 116 58
-------- --------
Income (loss) before income taxes $ 7,489 $ 1,405
======== ========
Income tax expense 1,162 --
-------- --------
Net income / (loss) $ 6,327 $ 1,405
======== ========
See accompanying notes.
F-40
Closed Type JSC Karakudukmunay
Statements of Cash Flows for the years ended December 31,
(In Thousands of U.S. Dollars)
2001 2000
-------- --------
Cash flows from operating activities:
- -------------------------------------
Net income (loss) $ 6,327 $ 1,405
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and depletion 9,479 3,598
Loss from sale and disposition of fixed assets 116 58
Management service fees 362 --
Accrued production bonus 190 86
Deferred income taxes 1,162 --
Changes in working capital:
(Increase)/decrease in prepaid and other receivables 227 (1,862)
(Increase)/decrease in crude oil inventory (3) 272
(Increase)/decrease in materials and supplies inventory 991 (2,664)
(Increase)/decrease in VAT receivable 2,160 (3,414)
Increase in accounts payable and accrued liabilities 868 5,710
Increase/(decrease) in accrued interest payable to partner (2,897) 3,346
-------- --------
Net cash provided by operating activities 18,982 6,535
Cash flows from investing activities:
- -------------------------------------
Purchase of property, plant and equipment (980) (1,178)
Investments in oil and gas properties (23,911) (27,205)
Proceeds from sale of fixed assets 45 3
Net proceeds from sales of non-commercial crude oil -- --
-------- --------
Net cash used in investing activities (24,846) (28,380)
Cash flows from financing activities:
- -------------------------------------
Increase in loan payable to bank 1,600 --
Principal payments on bank loan (1,600) (578)
Increase in loan payable to partner due to cash contributions
and other contributions 6,369 22,388
-------- --------
Net cash provided by financing activities 6,369 21,810
Net increase/(decrease) in cash 505 (35)
Cash at beginning of year 51 86
-------- --------
Cash at end of year $ 556 $ 51
======== ========
Supplemental cash flow disclosure:
- ----------------------------------
Interest paid to non-related parties $ 14 $ 33
Supplemental schedule of non-cash
investing and financing activities:
- ---------------------------------------
Increase in accrued management service fees $ 1,360 $ --
See accompanying notes.
F-41
Closed Type JSC Karakudukmunay
Statement of Stockholders' Deficit
(In Thousands of U.S. Dollars)
Authorized Accumulated
Charter Capital Deficit Total
--------------- -------- --------
As of December 31,1999 200 (12,007) (11,807)
Net income for the year 2000 -- 1,405 1,405
-------- -------- --------
As of December 31, 2000 200 (10,602) (10,402)
Net income for the year 2001 -- 6,327 6,327
-------- -------- --------
As of December 31, 2001 $ 200 $ (4,275) $ (4,075)
======== ======== ========
See accompanying notes.
F-42
Closed Type JSC Karakudukmunay
Notes to the Financial Statements
(Amounts in thousands of U.S. 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 U.S. dollars in accordance with the terms of the Agreement.
Certain reclassifications have been made in the financial statements for 2000 to
conform to the 2001 presentation.
The material accounting principles adopted by the Company are described below:
Foreign Currency Translation
- ----------------------------
The Company's functional currency is the U.S. dollar. All transactions arising
in currencies other than U.S. dollars, including assets, liabilities, revenue,
expenses, gains, or losses are measured and recorded into U.S. 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 U.S. dollars are translated at exchange rates prevailing as of the
balance sheet date (150.20 and 144.50 Kazakh Tenge per U.S. dollar as of
December 31, 2001 and 2000, respectively). Non-monetary assets and liabilities
denominated in currencies other than U.S. 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-U.S. 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 U.S. dollars.
F-43
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
2. Basis of Presentation (continued)
The Company had $6.57 million of net monetary liabilities denominated in Tenge
as of December 31, 2001 and $1.67 million net monetary liabilities denominated
in Tenge as of December 31, 2000.
Interest Capitalization
- -----------------------
The Company capitalizes interest on significant construction projects. Assets
qualifying for interest capitalization include significant investments in
unproved properties and other major development projects that are not being
depreciated, depleted, or amortized, provided that work is in progress at that
time. The Company had interest expense of $2.92 million and $3.38 million for
the years ended December 2001 and 2000, respectively. For the same periods, the
Company capitalized interest totaling $1.07 million and $1.13 million,
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.
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
F-44
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
2. Basis of Presentation (continued)
Inventory
- ---------
Crude oil inventory is valued using the first-in, first-out method, at the lower
of cost or net realizable value. Crude oil inventory represents production costs
associated with lifting and transporting crude oil from the Karakuduk Field to
the KazTransOil pipeline. Crude oil placed into the KazTransOil Pipeline is held
as inventory until formally nominated and delivered for sale. Crude oil
inventory as of December 31, 2001 and 2000 represented approximately 24,000 and
19,000 barrels of crude oil, respectively.
Materials and supplies inventory is valued using the first-in, first-out method
and is recorded at the lower of cost or net realizable value. Certain unique
items, such as drilling equipment, are valued using the specific identification
method. Materials and supplies represent plant and equipment for development
activities, tangible drilling costs (drill bits, tubing, casing, wellheads,
etc.) required for development drilling operations, spare parts, diesel fuel,
and various materials for use in oil field operations.
Revenue Recognition
- -------------------
Revenues and their related costs are recognized upon delivery of commercial
quantities of oil production produced from proved reserves, in accordance with
the accrual method of accounting. Losses, if any, are provided for in the period
in which the loss is determined to occur.
Revenue is presented gross of transportation expenses in accordance with EITF
00-10, Accounting for Shipping and Handling Fees and Costs.
Earnings Per Common Share
- -------------------------
Basic earnings (loss) and diluted earnings (loss) are not presented due to the
Company being of a "closed" nature, and having no underlying shares outstanding.
New Accounting Standards
- ------------------------
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. This standard provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. SFAS 133, as amended by SFAS 137 and 138, is effective for years
beginning after June 15, 2000. The Company adopted SFAS 133 on January 1, 2001.
As a result of adoption of SFAS 133, the Company recognizes all derivative
financial instruments in the financial statements at fair value regardless of
the purpose or intent for holding the instrument. Changes in the fair value of
derivative financial instruments are recognized periodically in income or in
stockholders' equity as a component of comprehensive income depending on whether
the derivative financial instrument qualifies for hedge accounting, and if so,
whether it qualifies as a fair value hedge or cash flow hedge. Generally,
changes in fair values of derivatives accounted for as fair value hedges are
recorded in income along with the portions of the changes in the fair values of
the hedged items that relate to the hedged risks. Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective
as hedges, are recorded in other comprehensive income net of deferred taxes.
Changes in fair values of derivatives not qualifying as hedges are reported in
income. The Company has not identified any derivative financial instruments,
which could be designated as fair value or cash flow hedges under SFAS 133 as of
December 31, 2001.
During 2001, the FASB issued the following pronouncements, which have potential
future accounting implications for the Company:
SFAS 141, Accounting for Business Combinations, requires the use of the purchase
method of accounting for all business combinations and provides new criteria to
determine whether an acquired intangible asset should be recognized. SFAS 141
applies to all business combinations initiated after June 30, 2001 and to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001.
F-45
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
2. Basis of Presentation (continued)
SFAS 142, Accounting for Goodwill and Intangible Assets, requires that goodwill
as well as other intangible assets with indefinite lives be tested annually for
impairment. SFAS 142 is effective for fiscal years beginning after December 15,
2001.
SFAS 143, Accounting for Asset Retirement Obligations, requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred and a corresponding increase in the carrying
amount of the related long-lived asset. SFAS 143 is effective for fiscal years
beginning after June 15, 2002.
SFAS 141 and 142 will not apply to the Company unless it enters into a future
business combination. The Company is currently assessing the impact of SFAS 143
on its financial condition and results of operations and is unsure if the effect
of the future adoption of SFAS 143, if any, will be material to the Company's
financial results.
Fair Value of Financial Instruments
- -----------------------------------
All of the Company's financial instruments, including loans payable to partner,
cash and trade receivables have fair values which approximate their recorded
values as they are either short-term in nature or carry interest rates which
approximate market rates.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
3. Going Concern
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has a working capital
deficiency as of December 31, 2001 and there are uncertainties relating to the
Company's ability to meet all expenditure and cash flow requirements through
fiscal year 2002. In addition, Chaparral Resources, Inc. ("Chaparral"), the
parent company of the Company's principal investor, Central Asian Petroleum
(Guernsey) Limited ("CAP-G"), has been notified by Shell Capital Services
Limited, acting as facility agent, that it is in default of its loan agreement
(the "Loan") with Shell Capital Inc. ("Shell Capital"), and Shell Capital
Services Limited has initiated legal proceedings against both Chaparral and
CAP-G. See Note 13 regarding the status of the Loan.
These conditions raise doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of these uncertainties. The Company is seeking to alleviate these conditions
through increased production and related sale of oil from the Karakuduk Field
and elimination or minimization of local oil sales requirements imposed upon the
Company by the Government. See Note 14 regarding the Company's local market
requirements.
F-46
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
4. Prepaid and Other Receivables
The breakdown of Prepaid and Other Receivables is as follows:
Description December 31, December 31,
----------- 2001 2000
------ ------
Advanced payment for oil and gas assets $ -- $ 189
Advanced payments for materials and supplies 588 --
VAT receivable from drilling contractor -- 651
Prepaid transportation costs 959 291
Other prepaid expenses 158 120
------ ------
Total $1,705 $1,251
====== ======
Advanced payment for materials and supplies represents prepayments for general
materials and supplies to be used in the development of the Karakuduk Field.
Advanced payments for oil and gas assets represents prepaid drilling costs,
which were fully recovered during 2001 through reduction of monthly charges from
the Company's drilling contractor, KazakhOil Drilling Services Company ("KODS"),
an affiliate of KazakhOil JSC. The VAT receivable from the drilling contractor
represents import VAT paid by the Company on behalf of KODS, which was offset
against drilling invoices charged to the Company in 2001. Prepaid transportation
costs represent the prepayment of export tariffs necessary to sell oil on the
export market, which is expensed in the period the related oil revenue is
recognized.
5. VAT Receivable
The VAT receivable is a Tenge denominated asset due from the Republic of
Kazakhstan. The VAT receivable consists of VAT paid on local expenditures and
imported goods. Under the Company's Agreement, VAT charged to the Company is
recoverable in future periods as either cash refunds or offsets against the
Company's fiscal obligations, including future income tax liabilities.
Periodically, the Company reviews it outstanding VAT receivable for possible
impairment. During 2001, the Company received VAT refunds of approximately $5.94
million.
6. Property, Plant and Equipment
Upon full amortization of tangible assets, the right of ownership of the
tangible assets shall be transferred to the Republic of Kazakhstan in accordance
with the Agreement. The Company is entitled to the use of the fully amortized
tangible assets during the whole term of the Agreement. A summary of property,
plant and equipment is provided in the table below:
December 31, December 31,
Description 2001 2000
----------- ------- -------
Office buildings and apartments $ 326 $ 312
Office equipment and furniture 770 552
Vehicles 1,376 1,758
Field buildings 4,304 3,652
Field equipment and furniture 492 479
------- -------
Total cost 7,268 6,753
Accumulated depreciation (2,527) (2,071)
------- -------
Property, plant and equipment, net $ 4,741 $ 4,682
======= =======
F-47
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
6. Property, Plant and Equipment (continued)
Depreciation expense for property, plant, and equipment was $803,000 and
$755,000 for years ending December 31, 2001 and 2000, 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.
The Company recognized total amortization expense of $8.67 million and $2.77
million for the years ended December 31, 2001 and 2000, respectively. For the
same periods, the effective amortization rate was $3.97 and $3.70 per barrel,
respectively.
In accordance with SFAS 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies, the Company accounts for amortization of crude oil
production as a component of crude oil inventory until the related crude oil is
sold. As of December 31, 2001 and 2000, $96,000 and $76,000 of amortization
expense was capitalized to crude oil inventory, respectively.
The composition of Oil and Gas Properties is as follows:
December 31, December 31,
Description 2001 2000
----------- -------- --------
Acquisition costs $ 508 $ 508
Exploration and appraisal costs 22,277 22,077
Development cost 44,633 21,012
Capitalized interest 3,699 2,628
-------- --------
Total oil and gas properties at cost $ 71,117 $ 46,225
======== ========
Total costs not subject to amortization $ 17,173 $ 20,527
======== ========
Total costs subject to amortization 53,944 25,698
Accumulated amortization (11,608) (2,919)
-------- --------
Net properties subject to amortization $ 42,336 $ 22,779
======== ========
The full cost ceiling test results as of December 31, 2001 support the carrying
amount of the assets disclosed above. Therefore, no impairment provision has
been made.
F-48
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
8. Accrued Liabilities
December 31, December 31,
Description 2001 2000
----------- ---- ----
Accrued management service fee $574 $574
Accrued taxes payable 36 156
Other accrued liabilities 65 65
---- ----
Total accrued liabilities $675 $795
==== ====
9. Other Long-Term Liabilities
Other long-term liabilities represent production based bonuses, which will be
payable to the Government of Kazakhstan amounting to $500,000 when cumulative
production reaches ten million barrels and $1.2 million when cumulative
production reaches 50 million barrels. Under current Kazakhstan tax law, the
production bonuses will be considered tax deductible expenditures in the
calculation of profits taxes. The Company accrues the production bonuses in
relation to cumulative oil production. The Company accrued $190,000 and $86,000
in production bonuses for the years ended December 31, 2001 and December 31,
2000, respectively.
10. Long-term Debt
December 31, December 31,
Description 2001 2000
----------- -------- --------
Loans payable to partner
Cash funding $ 47,317 $ 42,477
Management service fee 7,675 6,315
Other expenditures 4,715 3,186
Accrued interest payable 3,731 6,627
-------- --------
63,438 58,605
Less current portion (5,000) --
-------- --------
Total long-term debt $ 58,438 $ 58,605
======== ========
Loans Payable to Partner
- ------------------------
One of the Company's founders, CAP-G, bears sole financial responsibility for
providing all funding for the Company, which is not otherwise generated by the
Company's operations or borrowed from third party sources. The various forms of
funding from CAP-G are treated as long-term loans to the Company and bear
interest at the rate of LIBOR plus 1%. The Agreement requires installment
payments on the loan to be paid quarterly in an amount equal to 65% of gross
revenues after deduction of royalties payable to the Government of Kazakhstan.
CAP-G, at its own discretion, may waive receipt of quarterly repayments to
maintain working capital within the Company. During 2001, the Company paid $5.79
million to CAP-G as investment recovery.
The management service fee element of loans payable to partners relates to
management services provided by a subsidiary of Chaparral from 1996 through 1999
and directly by Chaparral, thereafter. Chaparral is CAP-G's parent company. The
accrued management fees were paid by CAP-G on the Company's behalf and made part
of the loan.
Loans Payable to Banks
- ----------------------
In September 2001, the Company borrowed $1.60 million from a local Kazakhstan
financial institution. The Company fully repaid the loan in October, 2001.
F-49
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
11. Taxes
The Company is subject to corporate income tax at the prevailing statutory rate
of 30%. Income (loss) from continuing operations before provision for income
taxes consists of:
Year ended December 31,
2001 2000
------- -------
Income/(Loss) before income taxes $ 7,489 $ 1,405
======= =======
The provision for income taxes consists of:
Year ended December 31,
2001 2000
------- -------
Income tax provision:
Current -- --
Deferred 1,162 --
------- -------
Total provision for income taxes $ 1,162 $ --
======= =======
The following table summarizes the significant differences between the statutory
tax rate and the Company's effective tax rate for financial statement purposes:
Year ended December 31,
2001 2000
------- -------
Statutory tax rate 30% 30%
Income taxes (benefit) computed
at statutory rate $ 2,247 $ 422
Losses and expenses with no tax
benefit 1,608 487
Utilization of net operating
loss carryforwards -- --
Change in asset valuation allowance
(2,693) (909)
------- -------
Income tax provision $ 1,162 $ --
======= =======
F-50
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
11. Taxes (continued)
The components of the Company's deferred tax assets and liabilities are as
follows:
Year ended December 31,
2001 2000
------- -------
Deferred tax assets:
Oil and gas properties $ 24 $ 253
Net operating loss carryforwards 34 908
------- -------
Total deferred tax assets before 58 1,161
valuation allowance
Valuation allowance -- (1,161)
------- -------
Net deferred tax assets 58 --
Deferred tax liabilities
Oil and gas properties and
other book/tax differences 1,220 --
------- -------
Total deferred tax liabilities 1,220 --
------- -------
Net deferred tax liabilities (assets) $ 1,162 $ --
======= =======
The Company recognized a net deferred tax liability of $1.16 million as of
December 31, 2001, primarily related to deductible temporary differences for
cost recovery adjusted for net operating loss carryforwards expected to be
utilized in future years. The Company did not record a valuation allowance for
the year ended December 31, 2001, due to the Company's determination that net
operating loss carryforwards would be fully utilized to offset taxable income in
2001 and future periods. Additionally, the Company increased its valuation
allowance by $1.53 million applied against 2001 taxable income to reflect the
impact of depreciation for basis adjustments allowed for statutory tax reporting
purposes. The adjustment did not impact the provision for prior years as the
Company recognized a 100% valuation allowance on its deferred tax assets due to
recurring operating losses from prior periods.
The Agreement specifies the income taxes and other taxes applicable to the
Company, which is subject to the tax laws of the Republic of Kazakhstan. At
December 31, 2001, the Company has tax loss carryforwards of approximately
$115,000 available to offset against future taxable income, in accordance with
the terms of the Agreement and legislation existing as of the date the Agreement
was signed. The tax loss carryforwards are Tenge denominated and expire in 2004.
The Company has used the best estimates available to determine the Company's
deferred tax assets and liabilities before consideration of the valuation
allowance. Refer to Note 13 regarding the uncertainties of taxation in the
Republic of Kazakhstan.
F-51
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
12. Charter Capital
The total Charter Fund contribution specified in the Founders Agreement of the
Company is $200,000. Each of the founders' portion of the Charter Fund and their
respective participating interest in the Company is:
December 31, 2001 December 31, 2000
---------------------- ----------------------
Charter Charter
Contribution Percent Contribution Percent
------------ ------- ------------ -------
KazakhOil $ 80 40% $ 80 40%
Korporatsiya Mangistau Terra International 20 10% 20 10%
Central Asian Petroleum (Guernsey)
Limited - CAP-G 100 50% 100 50%
---- ----- ---- -----
Total charter capital $200 100% $200 100%
==== ====
KazakhOil JSC ("KazakhOil") is the national petroleum company of the Republic of
Kazakhstan.
13. Contingencies
Shell Capital Loan
- ------------------
In November 1999, Chaparral entered into the Loan with Shell Capital to provide
up to $24 million to partially fund the development of the Karakuduk Field. In
May 2001, the Loan was amended to provide Chaparral with up to $8 million in
uncommitted working capital (the "Bridge Loan"), repayable on or before
September 30, 2001. The Company and CAP-G both signed the Loan and Bridge Loan
as "co-obligors," assuming certain obligations and commitments to Shell Capital
and to Chaparral, as the borrower. The Company, however, continues to borrow
funds directly from CAP-G in accordance with the terms of the Agreement.
As of December 31, 2001, Chaparral was notified by Shell Capital Services
Limited, acting as facility agent, that it was in default of the Loan for
failure to pay outstanding principal and interest due on the Bridge Loan
totaling $3.34 million on or before September 30, 2001, failure to pay principal
and interest due on the Loan totaling $2.68 million on or before December 31,
2001, failure to achieve project completion by September 30, 2001, failure to
settle certain accounts payable within 90 days, the Company's failure to obtain
Shell Capital's approval prior to entering certain short-term debt arrangements,
and failure to maintain the listing of Chaparral's common stock on one of the
major stock exchanges (i.e. Nasdaq, NYSE, or AMEX). In January 2002, Chaparral
received a notice from Shell Capital Services Limited accelerating the payment
of the outstanding principal, interest, and other fees and expenses due under
the Loan. Additionally, Shell Capital Services Limited initiated legal
proceedings against Chaparral in the United Kingdom and against CAP-G in the
Isle of Guernsey to enforce Shell Capital's rights under the Loan. Chaparral and
CAP-G are contesting Shell Capital Services Limited's respective actions, but
there are no assurances that either CAP-G or Chaparral will be successful. Shell
Capital has not initiated legal action against the Company itself, but there can
be no assurance that Shell Capital will not do so in the future.
As a co-obligor of the Loan, the Company is subject to the following pledges,
covenants, and other restrictions:
(v) 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;
(vi) A pledge of the Company's right to insurance proceeds to Shell Capital in
the event of default of the Loan;
As a condition of the Loan, the Company entered into a crude oil sales agreement
with Shell Trading International Limited ("STASCO"), an affiliate of Shell
Capital, for the purchase of 100% of the Company's oil production from the
Karakuduk Field on the export market. The Loan requires the Company to sell all
of its net oil production to STASCO, unless otherwise agreed. The Company sold
approximately 1.81 million barrels of oil to STASCO during 2001, and
F-52
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
13. Contingencies (continued)
approximately 604,000 barrels during 2000. Furthermore, the Government of the
Republic of Kazakhstan required the Company to sell approximately 375,000 and
161,000 barrels of oil to the local market for the years ended December 31, 2001
and December 31, 2000, respectively. Although the Loan has been called in
default by Shell Capital Services Limited, the Company has continued to sell its
crude oil to STASCO on the export market in accordance with the Loan and the
STASCO agreement.
Taxation
- --------
The existing legislation with regard to taxation in the Republic of Kazakhstan
is constantly evolving as the Government manages the transition from a command
to a market economy. Tax and other laws applicable to the Company are not always
clearly written and their interpretation is often subject to the opinions of the
local or main State Tax Service. Instances of inconsistent opinions between
local, regional and national tax authorities are not unusual.
Basis of Accounting
- -------------------
The Company maintains its statutory books and records in accordance with U.S.
generally accepted accounting principles and calculates taxable income or loss
using the existing Kazakh tax legislation in effect on August 30, 1995, the date
the Agreement was signed. The Company considers these accounting methods correct
under the terms of the Agreement. The Republic of Kazakhstan currently requires
companies to comply with Kazakh accounting regulations and to calculate tax
profits or losses in accordance with these regulations as well as the prevailing
tax law. There is currently uncertainty as to the extent of tax losses available
to the Company. The potential effect of the uncertainty is not quantifiable.
14. Local Oil Sales Requirements
The ability of the Company to realize the carrying value of its assets is
dependent on being able to transport hydrocarbons and finding appropriate
markets for their sale. Domestic markets in the Republic of Kazakhstan currently
do not permit world market prices to be obtained.
The Company's crude oil sales agreement with STASCO, discussed in Note 13,
requires the Company to sell 100% of its oil production to STASCO on the export
market. The Company is not allowed to sell to other parties, on either the
export or local markets, without the approval of STASCO and Shell Capital. While
the Company is responsible for obtaining export quotas and finalizing access
routes through the KazTransOil pipeline and onward through the Russian pipeline
system, the Company has a right to export, and receive export quota for, 100% of
the production from the Karakuduk Field under the terms of the Agreement.
The Government of Kazakhstan, however, has required the Company, along with
other oil and gas producers within Kazakhstan, to sell a certain portion of
their crude oil production to the local market to supply local energy needs.
During 2001, the Company sold approximately 375,000 barrels of crude oil on the
local market for approximately $3.38 million and 1.81 million barrels to STASCO
on the export market for approximately $33.20 million. During 2000, the Company
sold approximately 161,000 barrels of crude oil on the local market for
approximately $1.69 million and sold 604,000 barrels to STASCO on the export
market for approximately $15.28 million.
The Company has and is continuing to work with the Government to effect the
export of 100% of hydrocarbons produced. It is uncertain, however, whether the
Company will be successful in doing so, as the Government is expected to require
additional local sales from oil and gas producers in the future.
F-53
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
15. Related Party Transactions
The Company entered into a marketing services agreement with KazakhOil on
January 31, 2000, whereby KazakhOil will assist the Company in expediting export
oil sales under the crude oil sales agreement with STASCO.
In January 2000, the Company canceled its management service contract with
Chaparral's subsidiary and entered into a similar contract directly with
Chaparral. The contract is for $170,000 per month, plus reimbursable expenses,
or $2.04 million per year.
Other related party transactions are disclosed on the face of the balance sheet.
Stockholders and their respective holdings in the Company are disclosed in Note
12, CAP-G related party transactions are referenced in Note 10.
F-54
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") 69, Disclosures
About Oil and Gas Producing Activities.
The following estimates of reserve quantities and related standardized measure
of discounted net cash flows are estimates only, and are not intended to reflect
realizable values or fair market values of the Company's reserves. The Company
emphasizes that reserve estimates are inherently imprecise and that estimates of
new discoveries are more imprecise than producing oil and gas properties.
Additionally, the price of oil has been very volatile and downward changes in
prices can significantly affect quantities that are economically recoverable.
Accordingly, these estimates are expected to change as future information
becomes available and these changes may be significant.
The Company sold 2.18 million barrels of crude oil in 2001, of which 375,000
barrels, or approximately 17%, were sold to the local market. Comparatively, the
Company sold 765,000 barrels of crude oil in 2000, of which 161,000, or
approximately 21%, was sold to the local market. Prices received on local market
sales were substantially lower than world market prices prevailing at that time.
The Company has an existing crude oil sales agreement with STASCO to sell 100%
of its production on the export market for world market prices and a right to
export 100% of its production under the terms of its Agreement with the
government. The Company, however, expects the government to continue to require
the Company to sell a portion of its future crude oil production to the local
market. Therefore, year-end prices used for the standardized measure of
discounted net cash flows for the three years ended December 31, 2001 reflect
the assumption that 20% of the Company's production will be sold to the local
market for a substantially lower net oil price per barrel.
Proved reserves are estimated reserves of crude oil and natural gas that
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those expected to be
recovered through existing wells, equipment and operating methods.
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses. The estimated future net
cash flows are then discounted using a rate of 10% a year to reflect the
estimated timing of the future cash flows.
F-55
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(All Amounts in Thousands)
Proved Oil and Gas Reserve Quantities
(All within the Republic of Kazakhstan)
Oil Gas
Reserves Reserves
(bbls.) (Mcf.)
-------- ---------
Proved developed and undeveloped reserves:
Balance December 31, 1999 20,142 -
Revision of previous estimates - -
Extensions, discoveries and other additions 13,633 -
Production (730) -
Balance December 31, 2000 33,045 -
Revision of previous estimates (1,978) -
Extensions, discoveries and other additions 1,043 -
Production (2,189) -
--------- ---------
Balance December 31, 2001 29,921 -
========= =========
Proved Developed Reserves:
Balance December 31, 2000 10,414 -
========= =========
Balance December 31, 2001 13,520 -
========= =========
F-56
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(All Amounts in Thousands)
Capitalized Costs Relating to Oil and Gas Producing Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2001 2000
-------- --------
Unproved oil and gas properties $ 23,179 $ 29,892
Proved oil and gas properties 58,015 26,886
-------- --------
Accumulated depreciation and depletion (14,135) (4,990)
-------- --------
Net capitalized cost $ 67,059 $ 51,788
======== ========
Cost Incurred in Oil and Gas Property Acquisition, Exploration,
and Development Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2001 2000
-------- --------
Acquisition costs $ -- $ --
Exploration and appraisal costs 200 5,060
Development costs 24,692 22,144
-------- --------
$ 24,892 $ 27,204
======== ========
F-57
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(All Amounts in Thousands)
Results of operations for producing activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2001 2000
-------- --------
Oil revenue $ 36,575 $ 16,968
Transportation costs (8,297) (3,213)
Operating expenses (5,246) (3,676)
Depreciation, depletion, and amortization (9,479) (3,598)
-------- --------
13,553 6,481
Provision for income taxes(1) (1,373) --
-------- --------
$ 12,180 $ 6,481
======== ========
(1) Income tax expense is calculated by applying the statutory tax rate to
operating profit, adjusted for applicable net operating loss carryforwards.
F-58
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(All Amounts in Thousands)
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proven Oil and Gas Reserves (All within the Republic of Kazakhstan)
Year Ended December 31,
-----------------------
2001 2000
--------- ---------
Future cash inflows $ 305,579 $ 430,082
Future development costs (92,433) (92,685)
Future production costs (57,945) (46,477)
Future income tax expenses (34,132) (71,000)
--------- ---------
Future net cash flows 121,069 219,920
10% annual discount for
estimated timing of cash flows (40,381) (79,358)
--------- ---------
Standardized measure of discounted net
cash flows $ 80,688 $ 140,562
========= =========
Principal sources of change in the standardized measure of discounted future
net cash flows
Year Ended December 31,
-------------------------
2001 2000 (1)
--------- ---------
Beginning balance $ 140,562 $ 122,623
Sales of oil produced, net of
production and transportation costs (23,032) (10,079)
Extensions and discoveries 7,094 69,464
Net changes in prices, production
cost and future development cost (93,058) (75,990)
Net changes due to revisions of previous
quantity estimates (13,459) --
Development cost incurred 24,692 22,144
Accretion of discount 18,519 16,496
Net change in income taxes 21,387 (2,296)
Other (2,017) (1,800)
--------- ---------
Ending balance $ 80,688 $ 140,562
========= =========
(1) Certain reclassifications have been made in the 2000 presentation for
principal sources of change in the standardized measure of discounted
future net cash flows to conform to the 2001 presentation.
F-59
SUPPLEMENTAL INFORMATION - SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(All Amounts in Thousands)
2001 Quarterly Information
For the Three Months Ended
(In Thousands of U.S. Dollars) Total as of
-----------------------------------------------------------------------------
March 31, June 30, September 30, December 31, December 31,
2001 2001 2001 2001 2001
-------- -------- -------- -------- --------
Revenue (1) $ 8,436 $ 9,559 $ 6,916 $ 11,664 $ 36,575
Transportation and operating costs (3,082) (3,198) (2,046) (5,217) (13,543)
Depreciation and depletion (1,931) (2,132) (1,828) (3,588) (9,479)
-------- -------- -------- -------- --------
Operating income (loss) 3,423 4,229 3,042 2,859 13,553
======== ======== ======== ======== ========
Income (loss) before income taxes $ 1,667 $ 2,712 $ 1,677 $ 1,433 $ 7,489
Income tax provision -- -- -- 1,162 1,162
-------- -------- -------- -------- --------
Net income (loss) $ 1,667 $ 2,712 $ 1,677 $ 271 $ 6,327
======== ======== ======== ======== ========
(1) Revenue is presented gross of transportation and marketing cost in
accordance with EITF 00-10, Accounting for Shipping and Handling Fees and
Costs.
F-60
SUPPLEMENTAL INFORMATION - SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(All Amounts in Thousands)
2000 Quarterly Information
For the Three Months Ended
(In Thousands of U.S. Dollars) Total as of
-----------------------------------------------------------------------------
March 31, June 30, September 30, December 31, December 31,
2000 2000 2000 2000 2000
-------- -------- -------- -------- --------
Revenue(1) $ -- $ 4,552 $ 4,341 $ 8,075 $ 16,968
Transportation and operating costs -- (1,863) (2,235) (2,791) (6,889)
Depreciation and depletion (180) (828) (884) (1,706) (3,598)
-------- -------- -------- -------- --------
Operating income (loss) (180) 1,861 1,222 3,578 6,481
======== ======== ======== ======== ========
Income (loss) before income taxes $ (1,209) $ 625 $ (148) $ 2,137 $ 1,405
Income tax provision -- -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ (1,209) $ 625 $ (148) $ 2,137 $ 1,405
======== ======== ======== ======== ========
(1) Revenue is presented gross of transportation and marketing cost in
accordance with EITF 00-10, Accounting for Shipping and Handling Fees and
Costs.
F-61