FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission file number: 0-7261
CHAPARRAL RESOURCES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-0630863
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2211 Norfolk, Suite 1150
Houston, Texas 77098
--------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 807-7100
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and, (2) has been subject to such filing requirements
for the past 90 days.
YES |X| NO |_|
As of May 17, 1999 Registrant had 977,954 shares of its $0.0001 par value
common stock issued and outstanding.
<PAGE>
Part I - Summarized Financial Information
Item 1 - Financial Statements
Chaparral Resources, Inc.
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
1999 1998
------------ -------------
Assets
Current assets:
Cash and cash equivalents $ 1,183,000 $ 121,000
Restricted cash 711,000 756,000
Accounts receivable 23,000 25,000
Prepaid expenses 80,000 76,000
Current portion of note receivable 546,000 420,000
------------ ------------
Total current assets 2,543,000 1,398,000
Note receivable 463,000 589,000
Oil and gas properties and investments
- full cost method
Republic of Kazakhstan (Karakuduk Field)-
Not subject to depletion: 34,615,000 32,261,000
Furniture, fixtures and equipment 98,000 93,000
Less accumulated depreciation (23,000) (17,000)
------------ ------------
75,000 76,000
------------ ------------
Total assets $ 37,696,000 $ 34,324,000
============ ============
See accompanying notes to financial statements
2
<PAGE>
Chaparral Resources, Inc.
Consolidated Balance Sheets (continued)
(Unaudited)
March 31, December 31,
1999 1998
------------ ------------
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 358,000 $ 223,000
Accrued liabilities 440,000 522,000
Short-term notes payable, net of discount 4,772,000 940,000
------------ ------------
Total current liabilities 5,570,000 1,685,000
Accrued compensation 210,000 210,000
Redeemable preferred stock
- cumulative, convertible,
Series A, 50,000 issued and outstanding,
at stated value, $5.00 cumulative annual
Dividend, $5,312,500 redemption value 4,938,000 4,850,000
Stockholders' equity:
Common stock - authorized, 100,000,000 shares
at March 31, 1999 and December 31, 1998, of
$.0001 par value; issued and outstanding,
977,954 and 972,980 shares at
March 31, 1999 and December 31, 1998 -- --
Capital in excess of par value 48,208,000 47,611,000
Unearned portion of restricted stock awards (577,000) (56,000)
Preferred stock - 1,000,000 shares authorized,
75,000 shares designated of Series A -- --
Stock subscription receivable (506,000) (506,000)
Accumulated deficit (20,147,000) (19,470,000)
------------ ------------
Total stockholders' equity 26,978,000 27,579,000
------------ ------------
Total liabilities and stockholders' equity $ 37,696,000 $ 34,324,000
============ ============
See accompanying notes to financial statements
3
<PAGE>
Chaparral Resources, Inc.
Consolidated Statements of Operations
(Unaudited)
For Three Months Ended
March 31, March 31,
1999 1998
----------- -----------
Revenue:
Oil and gas sales $ -- $ --
Costs and expenses:
Production costs -- --
Depreciation and depletion 5,000 2,000
General and administrative 433,000 880,000
----------- -----------
438,000 882,000
----------- -----------
Loss from operations (438,000) (882,000)
Other income (expense):
Interest income 406,000 202,000
Interest expense (54,000) --
Equity loss from investment (537,000) (332,000)
Heartland legal settlement 34,000 --
----------- -----------
(151,000) (130,000)
----------- -----------
Net loss $ (589,000) $(1,012,000)
=========== ===========
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock (63,000) --
Discount accretion
Series A Redeemable Preferred Stock (25,000) (25,000)
----------- -----------
Net loss available to common stockholders $ (677,000) $(1,037,000)
=========== ===========
Basic and diluted earnings per share:
Net loss per share $ (.69) $ (1.25)
Weighted average number of shares
Outstanding 977,388 831,681
See accompanying notes to financial statements
4
<PAGE>
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
---------------------------
March 31, March 31,
1999 1998
----------- -----------
Cash flows from operating activities
Net loss $ (589,000) $(1,012,000)
Adjustments to reconcile net loss to
Net cash used in operating Activities:
Equity loss from investment 537,000 332,000
Depreciation and depletion 5,000 2,000
Stock issued for services and bonuses 194,000 614,000
Expired stock warrants (117,000) --
Amortization of note discount 12,000 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 2,000 68,000
Prepaid expenses (4,000) (1,000)
Increase in:
Accounts payable & accrued liabilities 53,000 167,000
----------- -----------
Net cash used in operating activities $ 93,000 $ 170,000
Cash flows from investing activities
Additions to property and equipment $ (5,000) $ (45,000)
Investment in and advances to foreign oil and
gas properties (2,891,000) (2,955,000)
Increase in other assets -- --
----------- -----------
Net cash used in investing activities (2,896,000) (3,000,000)
Cash flows from financing activities
Net proceeds from notes payable $ 3,820,000 $ --
Restricted cash 45,000 --
Repayment of note payable -- --
----------- -----------
Net cash provided by financing activities 3,865,000 --
----------- -----------
Net increase in cash and
cash equivalents 1,062,000 (2,830,000)
Cash and cash equivalents at beginning
of period 121,000 3,423,000
=========== ===========
Cash and cash equivalents at end of period $ 1,183,000 $ 593,000
=========== ===========
See accompanying notes to financial statements
5
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
Management has elected to omit substantially all notes to the Company's
financial statements. Reference should be made to the notes to the financial
statements in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
2. Unaudited Information
The information furnished herein was taken from the books and records of
the Company without audit. However, such information reflects all adjustments,
which are, in the opinion of management, necessary to a fair statement of the
results for the interim periods presented. The results of operations for the
interim periods are not necessarily indicative of the results to be expected for
the year.
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 the
satisfaction of liabilities in the normal course of business. As of March 31,
1999, substantially all of the Company's assets are invested in the development
of the Karakuduk Field, an oil field in the central Asian Republic of
Kazakhstan, which will require significant additional funding.
The Company has incurred recurring operating losses and has no operating
assets presently generating cash to fund its operating and capital requirements.
The Company's current cash reserves and cash flow from operations are not
sufficient to meet the capital spending requirements required to develop the
Karakuduk Field through fiscal 1999. Should the Company not meet its capital
requirements, the Company's rights to the Karakuduk Field can be terminated.
There is no assurance that additional financing will be available, or if
available, that it will be timely or on terms favorable to the Company. The
Company's continued existence as a going concern is dependent upon the success
of future operations, which are, in the near term, dependent on the successful
financing and development of the Karakuduk Field, of which there is no
assurance.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
6
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
4. Restricted Cash
As of March 31, 1999, the Company held $711,000 cash on hand, as collateral
for loans made by a financial institution to KKM for the acquisition of tangible
equipment used in the Karakuduk Field.
5. Notes Receivable
On March 31, 1999, the Company had an outstanding note receivable for
$1,009,000 from a third-party drilling contractor (Contractor) originally
entered into on September 10, 1998. On March 17, 1999, the Company amended the
terms of the note to extend the repayment period from twelve to twenty four
months, beginning with the first payment made to the Contractor for drilling
services provided to Karakuduk Munay, Inc. (KKM). Under the revised terms of the
note, the Company will receive principal payments of approximately $42,000 per
month, plus accrued interest, through approximately February 2001. As of March
31, 1999, the Company had not received any payments on the note. See Note 8,
Subsequent Events.
6. Notes Payable
On February 28, 1999, the $975,000 note between the Chase Bank of Texas,
N.A. (Chase) and the Company was amended. The revised note requires the Company
to make an initial principal payment of $250,000, originally due February 28,
1999, on August 31, 1999, with the remaining principal of $725,000 due on, or
before, November 30, 1999. The note accrues interest at a variable prime rate,
as determined by Chase. Quarterly interest payments are due on May 31, 1999,
August 31, 1999, and November 30, 1999. The Company made the initial interest
payment due on February 28, 1999. As of March 31, 1999, the stated prime rate on
the note was 7.75%.
On January 4, 1999, Howard Karren, the Company's former Chairman and Chief
Executive Officer, advanced the Company $50,000. The Company is accruing
interest at 8% on the advance.
During January and February 1999, Allen & Company, Incorporated (Allen &
Company) loaned the Company, in a series of transactions, a total of $1,750,000,
at an interest rate of 8% per annum. On March 31, 1999, the Company issued a
promissory note to Allen & Company in the principal amount of $2,769,978,
representing an additional $1,000,000 loan to the Company on March 31, 1999, and
the retirement of the January and February loans, plus accrued interest. The
promissory note bears interest at a rate of 8% per annum and matures on August
31, 1999.
As collateral for the note, Allen & Company received a security interest in
100% of the Company's shares in Central Asian Petroleum (Guernsey), Ltd.
(CAP-G), which owns 50% of KKM. The security interest in the CAP-G shares is
subordinated to a similar security interest held by Whittier Ventures, LLC
(Whittier) in conjunction with providing collateral for the $975,000 Chase note
outstanding as of December 31, 1998. If the Company issues convertible
securities on or before March 31, 2000, Allen & Company has the right to
exchange the outstanding balance of the note, plus accrued interest, for such
convertible securities. The number of convertible securities potentially to be
issued will be determined by dividing the outstanding principal balance of the
loans, together with accrued but unpaid interest, by the issue price of the
convertible securities.
7
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
6. Notes Payable (continued)
During March 1999, Whittier loaned the Company an aggregate of $1,000,000
for ongoing operations. The Company issued two notes for $500,000 each, dated
March 10, 1999, and March 19, 1999, respectively. The loans are due and payable
on August 31, 1999, and accrue interest at 8% per annum. As collateral for the
notes, Whittier received a security interest in 100% of the Company's shares in
CAP-G. The security interest has identical rights to the one received by Allen &
Company above, and is subordinated to the security interest retained by Whittier
for providing the collateral for the $975,000 Chase note. If the Company issues
convertible securities within one year from the date of each of the notes,
Whittier has the right to exchange the outstanding balance of the loans,
together with accrued interest, for such convertible securities. The amount of
convertible securities potentially to be issued to Whittier will be determined
by dividing the outstanding principal balance of the loans, together with
accrued but unpaid interest, by the issue price of the convertible securities.
7. Common Stock and Related Common Stock Warrants
On January 15, 1999, the Company granted Dr. Jack A. Krug, the President
and Chief Operating Officer of the Company, 16,667 shares of the Company's
common stock, of which 13,333 shares will vest with respect to 3,333.25 shares
on January 15, 2000, 2001, 2002, and 2003. The Company recorded the common stock
at its fair value on the date of grant of $719,000, and is amortizing the value
of the shares subject to vesting restrictions ratably over four years.
Certain warrants to purchase the Company's common stock expired relating to
a 1998 settlement of a lawsuit by the Company. The Company recognized the fair
value of the warrants on the date of grant, $34,000, as other income in 1999.
On April 21, 1999, the Company's shareholders approved a 1 for 60 reverse
stock split, effective immediately. The voting and economic rights of the
shareholders of Common Stock and the Series A Redeemable Preferred Stock were
not effected by the reverse stock split. On the same date, the shareholders also
approved the reincorporation of the Company from Colorado to Delaware. The
financial statements included herein retroactively reflect the adjustments to
shares outstanding as a result of the reverse stock split and reincorporation.
The reincorporation was effected by merging the Company with and into Chaparral
Delaware. Upon completion of the reincorporation, the Company ceased to exist in
accordance with the Colorado Business Corporation Act and Chaparral Delaware
operates the business of the Company under the existing Company name, Chaparral
Resources, Inc. Pursuant to the Plan and Agreement of Merger between the Company
and Chaparral Delaware, each outstanding share of Common Stock and Series A
Preferred Stock will automatically be converted into one share of Chaparral
Delaware common stock, par value $0.0001 per share, or preferred stock, no par
value, as appropriate. Since there were no shares of the Series B Preferred
Stock and the Series C Preferred Stock issued or outstanding, there was no
conversion thereof and the Series B Preferred Stock and Series C Preferred Stock
ceased to exist.
8. Series A Redeemable Preferred Stock
During 1998, the Company accrued the $250,000 annual dividend on its Series
A Redeemable Preferred Stock in the fourth quarter. For 1999, the Company will
accrue the dividend on its Series A Redeemable Preferred Stock on a quarterly
basis. Management believes this will more fairly present the fair value of its
Series A Redeemable Preferred Stock.
8
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
9. Subsequent Events
On April 21, 1999, at a special meeting the Company's shareholders approved
a one-for-sixty reverse stock split, effective immediately. All references and
calculations involving outstanding common stock have been adjusted to reflect
the reverse split. On the same date, the shareholders also approved the
reincorporation of the Company from Colorado to Delaware.
On April 30, 1999, warrants expired to purchase 12,500 shares of the
Company's common stock at an exercise price of $15 per share. The warrants were
originally issued as part of the 1989 Stock Warrant Plan to a former Chairman
and Chief Executive Officer and a former Vice President of the Company.
On April 5, 1999, the government of Kazakhstan decided not to continue its
support of the National currency, the tenge and allowed it to float freely
against the U.S. dollar. Immediately thereafter, the official exchange rate
declined from 87.5 tenge to the U.S. dollar to 142 tenge to the U.S. dollar. The
devaluation decreases the tenge realizable value of any U.S. dollar or other
hard currency denominated monetary assets held by the Company, and increases the
tenge obligation of any U.S. dollar or other hard currency denominated monetary
liabilities held by the Company. KKM's financial statements are denominated in
U.S. dollars, the only impact will relate to assets and liabilities denominated
in tenge. The net impact is not expected to be material to the Company's
financial statements.
On March 30, 1999, KKM entered into a contract with KazakhOil, JSC, the
national oil company of Kazakhstan and a shareholder of KKM, for the sale of up
to 19,000 tons (138,700 barrels) of the Company's crude oil production in 1999.
Under the terms of the contract, the Company has been granted a transit quota to
export 19,000 tons of crude oil to the far abroad and near abroad markets, with
KazakhOil acting as broker for the sale.
According to the contract, net revenue to the Company is based upon a
formula indexed to the price of Brent crude on the date of sale, adjusted for
transportation costs and other minor charges. On April 21, 1999, KKM sold 13,000
tons (95,000 barrels) of crude oil on the world export market for approximately
$850,000, net of transportation costs.
The owner of the drilling rig currently working in the Karakuduk Field, Oil
& Gas Exploration Company Cracow, Ltd., terminated its contract with Challenger,
subsequent to the amendment to the Challenger drilling contract with KKM. On
April 14, 1999, the KKM Board of Directors passed a resolution approving the
termination of the drilling contract between KKM and Challenger. Challenger was
informed of KKM's decision and, subsequently, received notification of the
beginning of arbitration proceedings pursuant to the contract. Drilling in the
Field has been suspended temporarily until the arbitration is resolved or until
another drilling rig can be procured. KKM is currently exploring strategic
alternatives to its drilling program.
On April 30, 1999, the Company appeared before the Nasdaq Qualifications
Hearing Panel. We expect to be notified of the outcome of the hearing before
June 30, 1999, however, no assurances can be made as to the Company's continued
listing on Nasdaq.
9
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
10. Investments
The results from operations of the Company's equity-based investment in KKM
are summarized below:
Karakuduk-Munay Inc
Statement of Expenses and Accumulated Deficit
For the Three Month Period Ended March 31, 1999 and 1998
(Amounts in US Dollars)
(Unaudited)
For The Three Months Ended
--------------------------------
March 31, March 31,
1999 1998
--------------------------------
Management service fee $193,000 120,000
General and administrative expenses 552,000 363,000
Depreciation of fixed assets 125,000 -
Interest expense 204,000 181,000
--------------------------------
Net loss 1,074,000 664,000
Accumulated deficit, beginning of period 7,503,000 4,016,000
--------------------------------
--------------------------------
Accumulated deficit, end period $8,577,000 $4,680,000
--------------------------------
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1. Liquidity and Capital Resources
Since January 1, 1999, the Company raised $3,820,000 through various debt
obligations and restructured the existing $975,000 note payable to the Chase
Bank of Texas, N.A., deferring a $250,000 principal payment due on February 28,
1999 until August 31, 1999. The loans are fully described in Note 6 of Item 1.
The funds have been, and will be, utilized to finance the development of the
Karakuduk Field and to satisfy the Company's working capital needs in the
short-term. The Company has no assurance that future debt or equity financing
will be available, from existing creditors and shareholders, or any other party.
The Company is currently seeking additional capital. To meet long-term
capital needs, the Company is pursuing debt financing and public and/or private
equity placements of the Company's common or preferred stock. To satisfy
short-term liquidity requirements, the Company is seeking additional short-term
debt financing, restructuring of existing loans, if necessary, and revenue from
the sale of oil by KKM. The present environment for financing the acquisition or
ongoing operations of oil and gas properties is uncertain, due in part, to
instability of oil and gas prices in recent years. The Company's small size, and
the early stage of development of the Karakuduk Field increases the difficulty
of raising financing that may be needed in the future.
There can be no assurance that the debt or equity financing that might be
required to fund the Company's operations and obligations in the future will be
available to the Company on economically acceptable terms, if at all. The costs
of capital for foreign investments, such as the Karakuduk Field, are typically
higher than for similar investments in western countries, such as the United
States. If the Company fails to obtain the additional capital required to
develop the Karakuduk Field, the Company's investment in the Field may be lost.
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
recurring operating losses and has no operating assets presently generating
sufficient cash to fund its operating and capital requirements. The Company's
current cash reserves and cash flow from operations are not sufficient to meet
its capital requirements through fiscal 1999.
The only oil and gas interest of the Company at this time is the Company's
investment in Karakuduk-Munay, Inc. (KKM), held through a wholly owned
subsidiary of the Company, Central Asian Petroleum (Guernsey) (CAP-G). KKM is a
closed joint stock company in Kazakhstan and has the right to develop the
Karakuduk Field in western Kazakhstan. As of March 31, 1999, substantially all
of the Company's assets are invested in the development of the Karakuduk Field.
The Karakuduk Field does not currently produce revenues capable of funding the
development of the project, and requires substantial amounts of additional
capital.
The terms of KKM's revised license require an expenditure commitment of $30
million for the year ending December 31, 1999. The expenditures required under
the license will be used to conduct drilling operations in the Karakuduk Field,
build the required Field infrastructure necessary to support drilling and
production activities, and market the crude oil produced. If the 1999
expenditure requirement is not satisfied, KKM's License with the government of
Kazakhstan may be terminated and the Company's interest in the Karakuduk Field
may be lost.
On February 14, 1999, KKM spudded Well #101, the first well drilled by the
Company in the Karakuduk Field. On April 29, 1999, KKM successfully completed
Well #101, which is currently undergoing extended production tests. Test results
will be announced as soon as they are available. KKM currently trucks all
production to the pipeline terminal at Say-Utes, over 89 km from the Field. KKM
11
<PAGE>
1. Liquidity and Capital Resources (continued)
has received approval to begin trucking production to the pipeline terminal at
Station 6, approximately 30 km from the Field, and is currently preparing
Station 6 for use as an offloading facility. Total daily production is presently
limited, due to the trucking restrictions and the lack of certain production
facilities required for processing additional oil production for delivery to the
pipeline.
On April 21, 1999, KKM sold 13,000 tons (95,000 barrels) of crude oil on
the world export market, for approximately $850,000. KKM expects to nominate an
additional sale in early June, on either the local or export market. KKM will
nominate some or all of the available crude oil production in inventory
depending on the available terms at that time. As of May 17, 1999, KKM had
approximately 11,500 tons (84,000 barrels) of crude oil stored as inventory in
the KazTransOil pipeline. While the current rise in oil prices has increased the
potential return on the sale of KKM's crude oil, no assurances can be provided
that additional sales will be completed, or, if completed, on terms favorable to
Company.
On March 17, 1999, KKM retroactively amended its drilling contract with
Challenger Oil Services, PLC (Challenger), originally entered into on April 7,
1998. The Company is subject to the following terms of the amended contract:
Amount
------------
Operational rate $12,500/Day
Stand-by-rate with crews 11,250/Day
Stand-by rate without crews 8,500/Day
Rig move rate 20,000/Move
Rig demobilization (one time charge only) $250,000
Lease term 2 years
The owner of the drilling rig currently working in the Karakuduk Field, Oil
& Gas Exploration Company Cracow, Ltd., terminated its contract with Challenger,
subsequent to the amendment to the Challenger drilling contract with KKM. In
April, KKM notified Challenger of its request to begin arbitration proceedings
pursuant to the drilling contract. Drilling in the Field has been suspended
temporarily until the arbitration is resolved or until another drilling rig can
be procured. KKM is currently exploring strategic alternatives to continue its
drilling program.
On March 31, 1999, the Company requested and received an additional
extension to June 30, 1999, from the Overseas Private Investment Corp. ("OPIC")
for political risk insurance. OPIC originally granted the Company a binding
executed letter of commitment on September 25, 1996. The Company has a standby
facility for which it has made eight payments of $31,250 plus three additional
payments of $15,625. The Company expects to execute the contract on or before
June 30, 1999.
The Company has no other material commitments for cash outlays and capital
expenditures other than for normal operations.
2. Results of Operations
Three Months Ended March 31, 1999 Compared with the Three Months Ended March 31,
1998
The Company's operations during the three months ended March 31, 1999,
resulted in a net loss of $589,000 compared to a net loss of $1,012,000 for the
three months ended March 31, 1998.
12
<PAGE>
2. Results of Operations (continue)
Interest income increased by $204,000 from the three months ended March 31,
1998, due to increased financing provided by CAP-G to KKM for the development of
the Karakuduk Field. Interest expense increased by $54,000 from the three months
ended March 31, 1998, due to $3,800,000 in various short-term borrowings made by
the Company during the quarter ended March 31, 1999 along with a $975,000 loan
outstanding originally borrowed by the Company in 1998.
General and adminstrative costs decreased by $444,000 from the quarter
ended March 31, 1998, due to a reduction in stock based compensation and
expiration of common stock warrants. Without consideration of stock-based
compensation , a non-cash item, general and administrative costs increased by
$55,000 from the quarter ended March 31, 1998. The Company's equity loss in KKM
increased by $205,000, related to increased operational costs associated with
the development of the Karakuduk Field.
Inflation.
The Company cannot control prices in its oil and gas sales, and to the
extent the Company is unable to pass on increases in operating costs, it may be
affected by inflation.
3. Year 2000 Issue
The Company has assessed the Year 2000 issue and does not expect the Year
2000 problem to have a material impact on the Company's operations. After
consulting with major vendors, contractors, and technical field personnel, the
Company does not anticipate any material costs to result from Year 2000 problems
impacting the Company's operations.
Item 3 - Quantitative and Qualitative Disclosures About Market Risks
Not Applicable.
13
<PAGE>
Part II - Other Information
Item 1 - Legal Proceedings
The owner of the drilling rig currently working in the Karakuduk Field, Oil
& Gas Exploration Company Cracow, Ltd., has terminated its contract with
Challenger Oil Services, PLC, the drilling contractor. On April 14, 1999, the
KKM Board of Directors passed a resolution approving the termination of the
drilling contract between KKM and Challenger. Challenger was informed of KKM's
decision and, subsequently, received notification of the beginning of
arbitration proceedings pursuant to the contract. Drilling in the Field has been
suspended temporarily until the arbitration is resolved or until another
drilling rig can be procured. KKM is currently exploring strategic alternatives
to its drilling program.
Item 2 - Changes in Securities and Use of Proceeds
On January 15, 1998, the Company issued 16,667 shares of restricted common
stock to Dr. Jack Krug, the President and Chief Operating Officer of the
Company, of which 13,333 shares vest with respect to 3,333.25 shares on January
15, 2000, 2001, 2002, and 2003. The Company issued the common stock in reliance
upon the exemption from registration under Section 4(2) of the Securities Act of
1933, as amended. The guarantor had available all material information
concerning the Company. The stock certificate bears an appropriate restrictive
legend under the Securities Act of 1933, as amended. No underwriter was involved
in the transaction.
On April 21, 1999, the Company approved a 1 for 60 reverse stock split
in a special meeting of the Company's shareholders, effective immediately. The
reverse stock split did not impact the rights of the Company's shareholders of
either the Common Stock or Series A Preferred Stock, except for reducing the
total number of shares outstanding. Each shareholder's proportional voting and
economic rights remained unchanged.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment agreement of Dr. Jack A. Krug dated January 15, 1999.
27 Financial Data Schedule
(b) Reports on Form 8-K
On April 29, 1999, the Company filed a current report on Form 8-K reporting
under Item 5 thereof a special meeting of the Company's shareholders to vote on
proposals for a 1 for 60 reverse stock split and reincorporation of the Company
from the state of Colorado to the State of Delaware.
14
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 17, 1999
Chaparral Resources, Inc.,
a Delaware corporation
By: /s/ Dr. Jack A. Krug
------------------------------------------
Dr. Jack A. Krug
President and Chief Operating Officer
By: /s/ Michael B. Young
------------------------------------------
Michael B. Young, Treasurer and Controller
And Principal Accounting Officer
15
<PAGE>
Exhibit Index
10.1 Employment agreement of Dr. Jack A. Krug dated January 15, 1999.
27 Financial Data Schedule
16
EXECUTIVE EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made effective the 11th day
of January 1999 by and between CHAPARRAL RESOURCES, INC., a Colorado corporation
(the "Employer"), and DR. JACK A. KRUG, an individual resident in the State of
Colorado (the "Executive").
RECITALS:
WHEREAS, Employer desires to employ Executive and to have the benefit of
his expertise, skills and services; and
WHEREAS, Executive desires to be employed by Employer.
AGREEMENT:
NOW, THEREFORE, in consideration of the premises, mutual covenants and
agreements herein after contained, the parties agree as follows:
ARTICLE 1
DEFINITIONS
For the purposes of this Agreement, the following terms have the meanings
specified or referred to in this Article 1:
"Agreement"--this Employment Agreement, as may be amended from time to
time.
"Affiliate"--means any entity that, directly or indirectly, through one or
more intermediaries, Controls or is Controlled by, or is under common Control
with the Employer.
"Benefits"--as defined in Section 3.1(d).
"Board of Directors"--the board of directors of the Employer.
"Bonus"--as defined in Section 3.1(b).
"Compensation"--means Salary, Bonus, Benefits, and stock awards.
"Confidential Information"--any and all (i) trade secrets concerning the
business and affairs of the Employer, product specifications, data, know-how,
formulae, compositions, processes, designs, sketches, photographs, graphs,
drawings, samples, inventions and ideas, past, current, and planned research and
development, current and planned manufacturing or distribution methods and
<PAGE>
processes, customer lists, price lists, market studies, business plans, computer
software and programs (including object code and source code), computer software
and database technologies, systems, structures, and architectures (and related
formulae, compositions, processes, improvements, devices, know-how, inventions,
discoveries, concepts, ideas, designs, methods and information), and any other
information, however documented, that is a trade secret under the laws of the
State of Colorado and other applicable laws, (ii) information concerning the
business and affairs of the Employer (which includes historical financial
statements, financial projections and budgets, historical and projected sales,
capital spending budgets and plans, the names and backgrounds of key personnel,
personnel training and techniques and materials, and related information),
however documented, and (iii) notes, analysis, compilations, studies, summaries,
and other material prepared by or for the Employer containing or based, in whole
or in part, on any information included in the foregoing. This Confidential
Information excludes information previously known or held by Executive or
information in the public domain.
"Control" or "Controlled"--means ownership of fifty percent (50%) or
greater of the voting stock of an entity.
"Disability"--as defined in Section 6.2.
"Effective Date--means January 11, 1999.
"Employment Period"--the term of the Executive's employment under this
Agreement.
"Fiscal Year"--the Employer's fiscal year, as it exists on the Effective
Date or as may be changed from time to time.
"For cause"--as defined in Section 6.3.
"Person"--any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, or governmental body.
"Plan"--means Employer's 1998 Incentive and Non Statutory Stock Option
Plan.
"Proprietary Items"--as defined in Section 7.2(a)(iv).
"Salary"--as defined in Section 3.1(a).
"USD" - means lawful currency of the United States of America.
2
<PAGE>
ARTICLE 2
EMPLOYMENT TERMS AND DUTIES
2.1 Employment. The Employer hereby employs the Executive, and the Executive
hereby accepts employment by the Employer, upon the terms and conditions set
forth in this Agreement.
2.2 Term. Subject to the provisions of Article 6, the term of the Executive's
employment under this Agreement will be three (3) years, commencing on the
Effective Date and ending on the same date in the year 2002; provided, however,
this Agreement will be automatically extended for successive one (1) year terms
thereafter, unless either the Employer or the Executive elects not to
automatically extend the term of this Agreement by giving written notice to the
other party at least sixty (60) days prior to the expiration of the then current
term. Any extension of this Agreement shall be under the same terms and
conditions hereof, unless otherwise agreed to in writing by the Employer and the
Executive.
2.3 Duties. The Executive will have such duties as are assigned or delegated to
the Executive by the Board of Directors, and will initially serve as the
President and Chief Operating Officer of the Employer. The Executive will devote
his entire business time, attention, skill, and energy to the business of the
Employer, will use his best faith efforts to promote the success of the
Employer's business, and will cooperate fully with the Board of Directors in the
advancement of the best interests of the Employer. The Executive will make
regular oral and written reports to the Board of Directors regarding activities,
as requested by the Board of Directors. The Executive will not be prohibited
from engaging in additional activities in connection with personal investments,
community affairs, or being a member of a board of directors of another company
or companies that are not inconsistent or in conflict with the Executive's
duties under this Agreement. If the Executive is elected as a director of the
Employer or as a director or officer of any of its Affiliates, the Executive
will fulfill his duties as such director or officer without additional
compensation, unless otherwise agreed to by the parties.
ARTICLE 3
COMPENSATION
3.1 Compensation. The Executive's Compensation shall be as follows:
(a) Salary. The Executive will be paid an annual salary of USD$250,000.00
(the "Salary"), which will be payable in equal periodic installments
according to the Employer's customary payroll practices, but no less
frequently than monthly.
(b) Bonus. An annual bonus may be awarded at the sole discretion of the
Board of Directors.
(c) Stock awards. The Employer hereby grants to Executive stock awards for
200,000 shares of stock for each year of Executive's service under
this Agreement for a period of five years, in accordance with the
terms and conditions set forth herein. The first stock award is
granted on January 15, 1999; the date of approval by the Board of
Directors of the stock awards. The remaining stock awards are hereby
3
<PAGE>
granted and vest 200,000 shares per year on the anniversary date of
the grant of such awards being January 15. The Executive shall be
entitled to all the rights, benefits and privileges consistent with
the company including but not limited to the right of registration of
the stock awarded herein. If this Agreement is terminated for any
reason, the stock award shall be prorated for each month of
Executive's service for the applicable year. The stock awards granted
hereunder are outside the scope of the Plan.
(d) Benefits. The Executive will, during the Employment Period, be
permitted to participate in such life insurance, hospitalization,
major medical, disability and other employee benefit plans of the
Employer that may be in effect from time to time, to the extent the
Executive is eligible under the terms of those plans (collectively,
the "Benefits").
ARTICLE 4
EXPENSES
4.1 Reimbursement. Employer will reimburse Executive's necessary and reasonable
expenses incurred in the conduct of Employer's business upon Executive's monthly
presentation of an itemized account of such expenses with proof that such
expenses were incurred.
ARTICLE 5
PERFORMANCE EVALUATIONS
Evaluations. Performance evaluations of the Executive may occur or may be given
from time to time by the Employer. Employer may conduct both a written and oral
performance evaluation yearly. Performance criteria will include, in the sole
discretion of the Employer, the following:
(a) financial success of Employer; and
(b) fulfillment of the terms of this Employment Agreement.
ARTICLE 6
TERMINATION
6.1 Events of Termination. The Employment Period, the Executive's Compensation
and any and all other rights of the Executive under this Agreement or otherwise
as an employee of the Employer will terminate (unless provided otherwise in this
Article 6):
(a) upon the death of the Executive;
(b) upon the Disability of the Executive (as defined in Section 6.2)
immediately upon notice from either party to the other; or
(c) For cause (as defined in Section 6.3), immediately upon notice from
the Employer to the Executive, or at such later time as such notice
may specify.
4
<PAGE>
6.2 Definition of Disability. For purposes of Section 6.1, the Executive will be
deemed to have a "Disability" if, for physical or mental reasons, the Executive
is unable to perform the essential functions of the Executive's duties under
this Agreement for one hundred eighty (180) consecutive days, as determined in
accordance with this Section 6.2. The Disability of the Executive will be
determined by a medical doctor selected by written agreement of the Employer and
the Executive upon the request of either party by notice to the other. If the
Employer and the Executive cannot agree on the selection of a medical doctor,
each of them will select a medical doctor and the two medical doctors will
select a third medical doctor who will determine whether the Executive has a
Disability. The determination of the medical doctor selected under this Section
6.2 will be binding on both parties. The Executive must submit to a reasonable
number of examinations by the medical doctor making the determination of
Disability under this Section 6.2, and the Executive hereby authorizes the
disclosure and release to the Employer of such determination and all supporting
medical records. If the Executive is not legally competent, the Executive's
legal guardian or duly authorized attorney-in-fact will act in the Executive's
stead, under this Section 6.2, for the purposes of submitting the Executive to
the examinations, and providing the authorization of disclosure, required under
this Section 6.2. This provision shall not conflict with or be required to be
consistent with, and should be separate from, any and all issues related to
requirements for disability insurance coverage or statutory benefits.
6.3 Definition of "For Cause". For purposes of Section 6.1, the phrase "For
Cause" means:
(a) the Executive's material breach of this Agreement;
(b) the misappropriation or attempted misappropriation of funds or
property of Employer;
(c) any act or action taken by Executive to usurp, or attempt to usurp, a
corporate advantage or opportunity to or for Executive's benefit,
either directly or indirectly, without the prior written consent of
Employer and then only after full disclosure;
(d) disclosure of confidential, secret, or proprietary information in any
form (including but not limited to patents or trade secrets) to third
parties whether competitors of Employer or not unless required for the
conduct of business and only after confidentiality agreements are
completed to protect the interest of Employer;
(e) the conviction of a felony;
(f) any participation in activities which are prejudicial to the best
interests of Employer which may or may not result in a felony or
misdemeanor conviction.
6.4 Accrual of Benefits. The Executive's accrual of, or participation in plans
providing for, the Benefits will cease at the effective date of the termination
of this Agreement, and the Executive will be entitled to accrued Benefits
pursuant to such plans only as provided in such plans.
5
<PAGE>
6.5 Disability Pay. In the event that Executive is unable, for physical or
mental reasons, to perform the essential functions of Executive's duties under
this Agreement Executive shall be paid all Compensation under this Agreement
until such time as Employer's short-term disability policy becomes effective. If
Employer does not have a short term disability policy, then Employer shall pay
Executive's Compensation for a period of one hundred eighty (180) consecutive
days beginning on the first day of the event described in the first sentence of
this Section 6.5. Thereafter, Employer will not be obligated to pay Executive's
Compensation for that period beginning after Employer's short-term disability
policy becomes effective or the conclusion of the one hundred eighty (180) days
through that period whereby Executive is either terminated in accordance with
Section 6.1(b) or returns to active employment.
ARTICLE 7
NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS
7.1 Acknowledgments by the Executive. The Executive acknowledges the following:
(a) during the Employment Period and as a part of his employment, the
Executive will be afforded access to Confidential Information;
(b) public disclosure of such Confidential Information could have an
adverse effect on the Employer and its business; and
(c) the provisions of this Article 7 are reasonable and necessary to
prevent the improper use or disclosure of Confidential Information.
7.2 Agreements of the Executive. In consideration of the compensation and
benefits to be paid or provided to the Executive by the Employer under this
Agreement, the Executive covenants as follows:
(i) During and following the Employment Period, the Executive will
hold in confidence the Confidential Information and will not
disclose it to any Person except with the specific prior written
consent of the Employer or except as otherwise expressly
permitted by the terms of this Agreement.
(ii) Any trade secrets of the Employer will be entitled to all of the
protections and benefits of the laws of the State of Colorado and
any other applicable law. If any information that the Employer
deems to be a trade secret is found by a court of competent
jurisdiction not to be a trade secret for purposes of this
Agreement, such information will, nevertheless, be considered
Confidential Information for purposes of this Agreement. The
Executive hereby waives any requirement that the Employer submit
proof of the economic value of any trade secret or post a bond or
other security.
6
<PAGE>
(iii)None of the foregoing obligations and restrictions applies to
any part of the Confidential Information that the Executive
demonstrates was or became generally available to the public
other than as a result of a disclosure by the Executive.
(iv) The Executive will not remove from the Employer's premises
(except to the extent such removal is for purposes of the
performance of the Executive's duties at home or while traveling,
or except as otherwise specifically authorized by the Employer)
any document, record, notebook, plan, model, component, device,
or computer software or code, whether embodied in a disk or in
any other form (collectively, the "Proprietary Items"). The
Executive recognizes that, as between the Employer and the
Executive, all of the Proprietary Items, whether or not developed
by the Executive, are the exclusive property of the Employer.
Upon termination of this Agreement by either party the Executive
will return to the Employer all of the Proprietary Items in the
Executive's possession or subject to the Executive's control, and
the Executive shall not retain any copies, abstracts, sketches,
or other physical embodiment of any of the Proprietary Items.
7.3 Disputes or Controversies. The Executive recognizes that should a dispute or
controversy arising from or relating to this Agreement be submitted for
adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Employer, the Executive, and their respective attorneys and experts, who will
agree, in advance and in writing, to receive and maintain all such information
in secrecy, except as may be limited by them in writing.
ARTICLE 8
GENERAL PROVISIONS
8.1 Injunctive Relief and Additional Remedy. The Executive acknowledges that the
injury that would be suffered by the Employer as a result of a breach of the
provisions of this Agreement (including any provision of Articles 7 and 8) would
be irreparable and that an award of monetary damages to the Employer for such a
breach would be an inadequate remedy. Consequently, the Employer will have the
right, in addition to any other rights it may have, to obtain injunctive relief
to restrain any breach or threatened breach or otherwise to specifically enforce
any provision of this Agreement, and the Employer will not be obligated to post
bond or other security in seeking such relief.
8.2 Covenants of Article 8 are Essential and Independent Covenants. The
covenants by the Executive in Article 7 are essential elements of this
Agreement, and without the Executive's agreement to comply with such covenants
the Employer would not have entered into this Agreement or employed or continued
the employment of the Executive. The Employer and the Executive have
7
<PAGE>
independently consulted their respective counsel and have been advised in all
respects concerning the reasonableness and propriety of such covenants, with
specific regard to the nature of the business conducted by the Employer. The
Executive's covenants in Articles 7 are independent covenants and the existence
of any claim by the Executive against the Employer under this Agreement, or
otherwise, will not excuse the Executive's breach of any covenant in Article 7.
If the Executive's employment hereunder expires or is terminated, this Agreement
will continue in full force and effect as is necessary or appropriate to enforce
the covenants and agreement of the Executive in Article 7.
8.3 Representations and Warranties by the Executive. The Executive represents
and warrants to the Employer that the execution and delivery by the Executive of
this Agreement do not, and the performance by the Executive of the Executive's
obligations hereunder will not, with or without the giving of notice or the
passage of time, or both (a) violate any judgment, writ, injunction, or order of
any court, arbitrator, or governmental agency applicable to the Executive or (b)
conflict with, result in the breach of any provisions of or the termination of,
or constitute a default under, any agreement to which the Executive is a party
or by which the Executive is or may be bound.
8.4 Waiver. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by either
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
(a) no claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other party, (b) no waiver that may be given by
a party will be applicable except in the specific instance for which it is
given, and (c) no notice to or demand on one party will be deemed to be a waiver
of any obligation of such party or of the right of the party giving such notice
or demand to take further action without notice or demand as provided in this
Agreement.
8.5 Binding Effect; Delegation of Duties Prohibited. This Agreement shall inure
to the benefit of, and shall be binding upon, the parties hereto and their
respective successors, assigns, heirs, and legal representatives, including any
entity with which the Employer may merge or consolidate or to which all or
substantially all of its assets may be transferred. The duties and covenants of
the Executive under this Agreement, being personal, may not be delegated.
8.6 Notices. All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt), (b) sent by facsimile
(with written confirmation of receipt), provided that a copy is mailed by
registered mail, return receipt requested, or (c) when received by the
addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and fax numbers
set forth below (or to such other addresses and fax numbers as a party may
designate by notice to the other parties):
If to Employer: If to Executive:
Attn: Mr. John McMillian Attn: Dr. Jack A. Krug
Attn: MaryBeth Sobel, Esq.
Fax No.: 305-860-9988 Fax No.: 303-308-5977
8
<PAGE>
8.7 Entire Agreement; Amendments. This Agreement, contains the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral or written, between the parties hereto
with respect to the subject matter hereof. This Agreement may not be amended
orally, but only by an agreement in writing signed by the parties hereto.
8.8 Governing Law. This Agreement will be governed by the laws of the State of
Colorado without regard to conflicts of laws principles.
8.9 Arbitration. Any dispute arising out of or relating to this Agreement,
including without limitation, any dispute between Employer and Executive shall
be submitted to final and binding arbitration in Denver, Colorado, in accordance
with the rules of the American Arbitration Association then in effect. Any
arbitration award may be fully enforced pursuant to applicable law.
8.10 Section Headings; Construction. The headings of Articles and Sections in
this Agreement are provided for convenience only and will not affect its
construction or interpretation. All references to "Article," "Articles,"
"Section" or "Sections" refer to the corresponding Section or Sections of this
Agreement unless otherwise specified. All words used in this Agreement will be
construed to be of such gender or number as the circumstances require. Unless
otherwise expressly provided, the word "including" does not limit the preceding
words or terms.
8.11 Severability. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
8.12 Counterparts. This Agreement may be executed in one or more counterparts,
each of which will be deemed to be an original copy of this Agreement and all of
which, when taken together, will be deemed to constitute one and the same
agreement.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of
the date first written above.
CHAPARRAL RESOURCES, INC.
By: /s/ John G. McMillian
Name:John G. McMillian
Title: Chairman & Chief Executive Officer
DR. JACK A. KRUG
/s/ Dr. Jack A. Krug
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 1,183,000 121,100
<SECURITIES> 0 0
<RECEIVABLES> 569,000 445,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,543,000 1,398,000
<PP&E> 34,713,000 32,354,000
<DEPRECIATION> 23,000 17,000
<TOTAL-ASSETS> 37,696,000 34,324,000
<CURRENT-LIABILITIES> 5,570,000 1,685,000
<BONDS> 0 0
4,938,000 4,850,000
0 0
<COMMON> 0 0
<OTHER-SE> 26,978,000 27,579,000
<TOTAL-LIABILITY-AND-EQUITY> 37,696,000 34,324,000
<SALES> 0 0
<TOTAL-REVENUES> 406,000 202,000
<CGS> 0 0
<TOTAL-COSTS> 438,000 882,000
<OTHER-EXPENSES> 503,000 332,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 54,000 0
<INCOME-PRETAX> (589,000) (1,012,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (589,000) (1,012,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (589,000) (1,012,000)
<EPS-BASIC> (.69) (1.25)
<EPS-DILUTED> (.69) (1.25)
</TABLE>
