FORM 10-K/A
Amendment No. 3
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, 1999.
Commission file number: 0-7261
CHAPARRAL RESOURCES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-0630863
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16945 Northchase Drive, Suite 1620
Houston, Texas 77060
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (281) 877-7100
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.0001 Per Share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 15, 2000, the aggregate market value of registrant's voting
common stock, par value $.0001 per share, held by nonaffiliates was $9,314,570.
As of March 15, 2000, registrant had 980,481 shares of its common stock,
par value $.0001 per share, issued and outstanding.
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PART I
ITEM 1. BUSINESS
Our Business
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Chaparral Resources, Inc. is an independent oil and gas exploration and
production company. Our strategy is to acquire and develop foreign oil and gas
projects in emerging markets, specifically targeting fields with previously
discovered reserves, which have never been commercially produced or could be
materially enhanced by our management team and technical expertise.
Through our two significant subsidiaries, Central Asian Petroleum
(Guernsey), Ltd. ("CAP-G"), a Guernsey company, and Central Asian Petroleum,
Inc. ("CAP-D"), a Delaware company, we own a 50% interest in Closed Type JSC
Karakudukmunay ("KKM"), a Kazakh joint stock company that holds a governmental
license to develop the Karakuduk Oil Field. Since 1995, the business of
Chaparral has been the development of the Karakuduk Field. The domestic oil and
gas assets of Chaparral were divested during 1996 and 1997 to fund the
development of the Karakuduk Field. The Karakuduk Field is a 16,900 acre oil
field in the Republic of Kazakhstan. The government of the former Soviet Union
discovered the Karakuduk Field in 1972 and drilled 22 exploratory and
development wells, none of which were produced commercially. KKM has
re-established oil production from some of the existing wells previously drilled
in the Karakuduk Field, as well as initiating its own drilling program. KKM
began commercial oil production from the Karakuduk Field as of November 1, 1999.
We plan to fully develop and commercially produce the oil reserves in the
Karakuduk Field.
Currently, the Karakuduk Field is our only oil field. We are in the process
of identifying and evaluating other oil fields for possible acquisition and
development. Chaparral has no other significant subsidiaries besides CAP-G and
CAP-D.
We have sustained significant operating losses in recent years, and we may fail
as an operating company.
We have incurred significant operating losses for each of our last five
fiscal years. We had an accumulated deficit of $24,983,000 as of December 31,
1999. We may continue to experience significant losses in the future. If so, we
may be unable to continue operations, which could result in a default under our
loan agreement with Shell Capital Limited, bankruptcy, and the loss of our
investment in the Karakuduk Field.
Currently, there is substantial doubt about our ability to continue as a
going concern. Our auditors have included a "going concern" explanatory
paragraph in their report on our consolidated financial statements for the year
ended December 31, 1999. See "Item 8 - Financial Statements and Supplemental
Data."
We are substantially leveraged which limits our ability to raise additional
financing and may adversely affect our business operations.
We have entered into a loan with Shell Capital to provide up to $24,000,000
in financing for the development of the Karakuduk Field. The loan subjects us to
numerous covenants and events of default. Our ability to obtain additional debt
or equity financing in the future for working capital, general corporate
purposes, capital expenditures, and acquisitions is severely restricted under
the loan, as well as our ability to acquire or dispose of significant assets and
pursue other business opportunities. These restrictions severely limit our
ability to obtain new capital and make us more vulnerable and less able to react
to adverse economic conditions. Our failure to meet the terms of the loan could
result in an event of default and the loss of our investment in the Karakuduk
Field. The terms of the loan are described in "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The financing costs of the loan are significant. A substantial portion of
our future cash flow from operations will be required for debt service and may
not be available for other purposes. We expect $36,000,000 to $48,000,000 of our
future available cash flows will be utilized to service the loan, which depends
upon future available cash flows to Chaparral from the Karakuduk Field. Future
available cash flows from the Karakuduk Field are contingent upon many factors
beyond our control, including successful development of the underlying oil
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reserves from the Karakuduk Field, production rates, production and development
costs, oil prices, access to oil transportation routes, and political stability
in the region.
If we are unable to fulfill the requirements to maintain our license to operate
in the Karakuduk Field, we will be unable to continue our operations in the
Karakuduk Field.
KKM's license from the government of the Republic of Kazakhstan allows KKM
to explore and develop the Karakuduk Field. The license establishes minimum work
thresholds and capital spending requirements that KKM must meet in order to
maintain the license.
As of March 24, 2000, KKM is required to drill 6 additional new wells and
invest an additional $13,500,000 in the development of the Karakuduk Field by
June 30, 2000, unless we obtain waivers or deferrals from the licensing
authority. We are required to provide funds necessary for KKM to enable it to
satisfy the work plan and maintain the license. If necessary, KKM will request a
deferral of these financial commitments; however, no assurances can be given
that the licensing authority will grant a deferral.
KKM's failure to satisfy the conditions under the license could cause the
licensing authority to cancel the license. If the license is cancelled, we will
be unable to develop and sell oil produced from the Karakuduk Field, and we will
have no other source of revenues.
The development of oil reserves is a risky business, and our efforts to develop,
produce, and market oil reserves may be unsuccessful.
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.
No assurances can be given that we will be able to successfully develop,
produce, and market the oil reserves underlying the Karakuduk Field or
elsewhere. The development of oil reserves inherently involves a high degree of
risk, even though the reserves are proven. Our risks are increased because our
activities are concentrated in areas where political or other unknown
developments could adversely affect commercial development of the reserves.
Costs necessary to acquire, explore, and develop oil reserves are substantial.
No assurances can be given that we will recover the costs incurred to acquire
and develop the Karakuduk Field and if the costs incurred exceed our revenues,
then our operations will not be profitable. If we fail to generate sufficient
cash flow from operations to repay the loan, we may lose our entire investment
in the Karakuduk Field pledged as collateral to Shell Capital.
We may be unable to compete effectively with larger, well-capitalized or more
experienced companies in the oil and gas industry.
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 us. 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.
The oil market is unstable and the price we receive for our oil may not be
sufficient to generate revenues in excess of our costs of production or
sufficient cash flow to service our debt obligations.
The current market for oil is characterized by instability. This
instability has caused fluctuations in world oil prices in recent years and
there can be no assurance of any price stability in the future. The production
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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
sufficient cash flow to service our debt obligations. If so, we will be unable
to generate profits and could default on our loan.
We are uncertain about the prices at which we will be able to sell oil that
we produce. Our estimated future net revenue from oil sales is highly dependent
on the price of oil, as well as the amount of oil produced. The volatility of
the energy market makes it difficult to estimate future prices of oil. Various
factors beyond our control affect these prices. These factors include:
o domestic and worldwide supplies of oil;
o the ability of the members of the Organization of Petroleum Exporting
Countries, or OPEC, to agree to and maintain oil price and production
controls;
o political instability or armed conflict in oil-producing regions;
o the price of foreign imports;
o the level of consumer demand;
o the price and availability of alternative fuels;
o the availability of pipeline capacity; and
o changes in existing federal regulation and price controls.
It is likely that oil prices will continue to fluctuate as they have in the
past. Current oil prices are not representative of oil prices in either the near
or short-term. We do not expect oil prices to maintain current price levels and
do not base our capital spending decisions on current market prices.
We have purchased $4,000,000 of oil hedges, which could mature with oil prices
in excess of the strike prices and result in significant impairment or a total
loss of our hedge investment.
In February 2000, we purchased hedges (put contracts) for a total of
1,562,250 barrels of North Sea Brent crude oil for $4,000,000. The exercise
prices of the hedges range from $22.35 to $17.25 per barrel, with monthly
expiration dates beginning in October 2000 and ending December 2002. Given the
volatile nature of prices for oil, it is possible that all or a significant
portion of the hedges could reach maturity with oil prices in excess of the
applicable strike prices, rendering the hedges worthless. If so, our entire
hedge investment could be lost or significantly impaired. We cannot sell or
terminate the hedges without the approval of Shell Capital, which may prevent us
from taking advantage of changes in oil prices that might increase the value of
all or part of the hedges. As of March 31, 2000, the hedges were valued at
$1,755,000. See "Item 7A - Quantitative and Qualitative Disclosure About Market
Risk."
We may face liability for risks associated with drilling for and producing oil
and gas.
There are many risks incident to drilling for and producing oil and gas.
These risks include blowouts, cratering, fires, equipment failure and accidents.
Any of these events could result in personal injury, loss of life and
environmental and/or property damage. If such an event does occur, we may be
held liable and we are not fully insured against these risks. In fact, many of
these risks are not insurable. The occurrence of such events that are not fully
covered by insurance may require us to pay damages, which would reduce our
profits. As of March 24, 2000, we have not experienced any material losses due
to these events.
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Because we do not entirely own and control KKM, we must obtain the consent of
other KKM stockholders in order to take actions, or operations may come to a
standstill.
Through a subsidiary, we own a 50% interest in KKM. The other stockholders
of KKM are KazakhOil, the national petroleum company of the Republic of
Kazakhstan, and a private Kazakhstan joint stock company. KazakhOil owns a 40%
interest in KKM and the private Kazakh joint stock company owns the remaining
10%. The government of Kazakhstan indirectly owns 40% of KKM through KazakhOil's
direct ownership interest.
Because we only control a 50% interest in KKM, we must seek the approval of
one of the other two stockholders before KKM can take any major action, such as
approving KKM's annual budget and work program, employing experts, appointing
and removing KKM's management, and approving KKM's material operations and
activities. If we are unable to obtain the approval of one of these
stockholders, the operations of KKM may come to a standstill. There are no
practical mechanisms in the agreements among the KKM stockholders to effectively
resolve deadlocks. A deadlock could halt KKM's operations and ultimately result
in the loss of KKM's rights to explore and develop the Karakuduk Field.
We may have to file for bankruptcy if we do not achieve profits and/or cannot
find additional sources of capital.
We have failed to achieve a profit for the last five fiscal years. If we
continue to incur operating losses and are unable to raise sufficient capital to
satisfy our financial commitments and repay our indebtedness, we may be forced
to file for protection against our creditors under federal bankruptcy laws. If
we file for such protection, our creditors will be paid prior to you, our
stockholders. We are restricted from raising additional financing without the
consent of Shell Capital, our largest creditor. In addition, if we file for
bankruptcy protection, the market for our common stock may no longer exist.
Our contracts with Kazakh agencies may be arbitrarily cancelled or re-negotiated
by the government of the Republic of Kazakhstan.
Our ability to develop the Karakuduk Field is dependent on fundamental
contracts that we have with governmental agencies in Kazakhstan, including the
license. The government of Kazakhstan may arbitrarily cancel our contracts or
may force them into re-negotiation. Cancellation or re-negotiation of contracts
could result in less favorable terms for us and could reduce or eliminate
revenues. While we have political risk insurance coverage, there is no assurance
that such a cancellation or re-negotiation would be recoverable under the
political risk policy or any proceeds received would be sufficient to satisfy
our losses incurred or to repay our outstanding indebtedness.
The environmental regulations to which we are subject may become more numerous,
and compliance with them may become more expensive and make production less
profitable.
We must comply with Kazakh laws and international requirements that
regulate the discharge of materials into the environment. Furthermore, our loan
and political risk policy (described below) both require that we comply with the
World Bank's environment, health, and safety guidelines for onshore oil and gas
development. Environmental protection and pollution control could, in the
future, become so restrictive as to make production unprofitable. Furthermore,
we may be exposed to potential claims and lawsuits involving such environmental
matters as soil and water contamination and air pollution. We are currently in
compliance with all local and international environmental requirements and are
closely monitored by the Kazakh environmental authorities. We have not made any
material capital expenditures for environmental control facilities and have no
plans to do so in the foreseeable future.
Taxation, customs declarations, production controls and other government
regulations may make our operations in Kazakhstan less profitable.
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.
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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.
If disputes arise, we may be unable to enforce our rights under the laws of
the Republic of Kazakhstan.
The laws of the Republic of Kazakhstan govern our operations and a number
of our significant agreements. As a result, we may be subject to arbitration in
Kazakhstan or to the jurisdiction of the Kazakh courts. Even if we seek relief
in the courts of the United States, we may not be successful in subjecting
foreign persons to the jurisdiction of those courts. In addition, we may be
prevented from enforcing our rights with respect to government agencies,
regulatory bodies, or other entities of Kazakhstan because they may consider
themselves immune from the jurisdiction of any court.
The Republic of Kazakhstan currency may devalue and may decrease the worth of
our investments in Kazakhstan.
The devaluation of the tenge, the currency of the Republic of Kazakhstan,
could 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.
Devaluation could also create uncertainty with respect to the future business
climate in Kazakhstan and to our investment in that country.
We may encounter difficulty in conducting operations in the Karakuduk Field due
to social, political and economic instability in the region.
We may encounter unexpected difficulties in conducting operations in
Kazakhstan. Kazakhstan is a relatively new country and there is uncertainty as
to the status of Kazakh law, the stability of the country and the region, and
the autonomy of the parties involved with us in Kazakhstan.
In order to counteract some of these potential difficulties, we obtained
political risk insurance through the Overseas Private Investment Corporation
("OPIC"), covering 90% of the book value of our investment in KKM up to a
maximum of $50,000,000. Our OPIC policy provides coverage for acts, which could
be committed against us by the government of the Republic of Kazakhstan or other
parties in times of severe political instability. The OPIC policy generally
provides the following types of risk coverage:
o Currency Inconvertibility. Currency restrictions, which might be
imposed by the government of the Republic of Kazakhstan to prevent or
defer our recovery of our investment in the Karakuduk Field, including
revoking KKM's right to retain U.S. dollar proceeds from oil sales
outside of Kazakhstan or to convert local currency into U.S. dollars
for repayment of our investment;
o Expropriation. Acts attributable to the government of the Republic of
Kazakhstan that are violations of international law or an abrogation,
repudiation or material breach of our agreements with the government.
To qualify for coverage, the act of expropriation must continue
without interruption for at least six months and prevent us from
exercising our fundamental rights under our agreements, exercising
control over our investment the Karakuduk Field, or recovering our
investment in the Karakuduk Field;
o Political Violence. The loss or impairment of our investment due to
politically motivated violent acts, including war, revolution,
insurrection, or politically motivated civil strife, terrorism and
sabotage; and
o Interference with Operations. The loss or impairment of our investment
due to political violence lasting more than six months.
While the OPIC policy provides significant political risk coverage, it does
not address political risks outside of the Republic of Kazakhstan or cover every
contingency within Kazakhstan. The OPIC policy does not cover commercial risks,
whatsoever. If social, political, or economic strife in the region hinder KKM or
our operations in a manner that is not covered by our OPIC policy, we will bear
the full burden of any resulting loss or damage. If we do have a future claim
under the OPIC policy, we may be required to assign all or a portion of our
rights to the Karakuduk Field to OPIC before any insurance payments will be
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made. The OPIC policy only covers 90% of our book value of our investment in
KKM, but there is no assurance any proceeds received will cover 90% of our
actual losses incurred or be sufficient to cover our outstanding indebtedness
repayable to our creditors.
Our limited access to transportation routes to markets may hinder our attempts
to sell our oil.
To maximize the value of our assets in Kazakhstan, we must not only extract
oil, but we must also transport it to appropriate markets for sale. The
exportation of oil from Kazakhstan depends on access to transportation routes,
particularly the Russian pipeline system. Transportation routes are limited in
number and access to them is regulated and restricted. If any of our agreements
relating to oil transportation or marketing are breached, or if we are unable to
renew such agreements upon their expiration, we may be unable to transport or
market our oil. Also, a breakdown of the Kazakhstan or Russian pipeline systems
could seriously delay or even halt our ability to sell oil. Any such event would
result in reduced revenues.
Obtaining the necessary quotas and permissions to export production through
the Russian pipeline system can be extremely difficult, if not impossible in
some circumstances. Although our agreements with the government of the Republic
of Kazakhstan grant us the right to export, and to receive export quota, we
cannot provide any assurances that we will receive export quota or any other
approvals required to export and deliver our production.
In November 1999, KKM entered into a long-term crude oil sale agreement
with Shell Trading International Limited ("STASCO"), an affiliate of Shell
Capital, for the sale of 100% of KKM's oil production on the export market.
STASCO will take title of KKM's crude oil at various delivery points outside of
Kazakhstan. Under the terms of the crude oil sales agreement, KKM is responsible
for obtaining export quotas and all other permissions from Kazakhstan, Russia,
or other relevant jurisdictions, necessary to transport and deliver KKM's oil
production to STASCO. The loan requires KKM to sell all of its oil production to
STASCO, unless otherwise approved by STASCO and Shell Capital. See "Item 7 -
Management's Discussion and Analysis of Financial Conditions and Results of
Operations."
In January 2000, KKM entered into a marketing services agreement with
KazakhOil, whereby KazakhOil will assist KKM with export oil sales under the
crude oil sales agreement, including obtaining export quotas from the government
of the Republic of Kazakhstan, consulting on procedures required for the
nomination and delivery of oil sales, obtaining other necessary approvals and
permissions, and preparation of relevant documentation. KKM has entered into a
similar contract with KazTransOil, the state owned pipeline transportation
company. KKM can utilize the services of either KazakhOil or KazTransOil to
facilitate future export oil sales.
The Republic of Kazakhstan may require that we sell a portion of our oil on the
domestic market which would result on a significant loss of revenue.
The government of the Republic of Kazakhstan has recently stated that it
may require all oil and gas producers within Kazakhstan to supply some portion
of their year 2000 production to local Kazakh refineries to meet domestic energy
needs. If the Republic of Kazakhstan institutes such a policy, we could suffer a
significant loss of revenue resulting in a default of our loan with Shell
Capital. As of March 24, 2000, KKM has not been required to supply any oil
locally.
Severe weather conditions may impede our operations in the Karakuduk Field.
Although our business is not seasonal, severe weather conditions could
impede our drilling and exploration activities. Any inability to conduct such
activities could delay our discovery and production of oil.
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Employees
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As of March 24, 2000, we had 6 full-time employees, one part-time employee,
and one consultant. KKM had 161 employees and retains independent contractors on
an as needed basis through us. We believe that our relationship with our
employees and consultants is good.
Corporate Information
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Chaparral was incorporated under the laws of the State of Colorado in 1972.
In April 1999, Chaparral completed a 60 for 1 reverse stock split and
reincorporated under the laws of the State of Delaware. Our address is 16945
Northchase Drive, Suite 1620, Houston, Texas 77060, and our telephone number is
(281) 877-7100.
Special Note Regarding Forward-Looking Statements
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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 outlined under "Risk Factors." 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. Moreover, neither we nor any other person assumes responsibility for
the accuracy and completeness of these forward-looking statements. 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,
unless otherwise required by law.
ITEM 2. PROPERTIES
Properties
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The Karakuduk Field
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 has been granted to KKM for a period of 25 years.
KKM obtained approval to develop the Karakuduk Field from Kazakhstan's Ministry
of Energy and Natural Resources in 1995. We own a 50% interest in KKM.
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 approximately 11,300 acres, with a minimum of seven separate
productive horizons present in the Jurassic formation. Oil has been recovered in
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tests from seven horizons within the Jurassic formation with flow rates ranging
from 3 to 966 barrels per day. None of the original wells were ever placed on
commercial production prior to KKM obtaining the rights to the Karakuduk Field.
As of December 31, 1999, the Karakuduk Field has total estimated proven
reserves of approximately 67.58 million barrels, net of government royalty, of
which our proportional equity interest equals 33.79 million barrels. The reserve
estimates are supported by a reserve study conducted in 1995, which was reviewed
by the Ryder Scott Company Petroleum Engineers, an internationally recognized
petroleum engineering firm. Ryder Scott issued an opinion letter dated October
8, 1999, supporting the reasonableness of the reserve estimates based upon their
review of the original reserve report and supporting reservoir data. Ryder Scott
also considered all actual data available since 1995.
We have not previously disclosed proven reserves from the Karakuduk Field
because of the necessary financing required to develop the Karakuduk Field. We
are responsible for providing 100% of the funding necessary for the development
of the Karakuduk Field, which is not provided by third-party sources. KKM plans
to meet its funding requirements through loans from us and through proceeds from
the sale of oil extracted from the Karakuduk Field. As of March 24, 2000, we
have loaned KKM in excess of $35 million to fund KKM's operations. While we have
invested significant amounts of capital into the Karakuduk Field, the funds
necessary to complete the field infrastructure and execute a practical drilling
program have not been readily available to us prior to executing the loan with
Shell Capital. The loan, and other related equity commitments it requires,
allows us to develop the underlying reserves, making the Karakuduk Field
commercially viable.
The Karakuduk Field is approximately 18 miles north of the main utility
corridor, which includes the Mukat-Mangishlak railroad, the
Mangishlak-Astrakghan water pipeline, the Beyneu-Uzen high voltage utility
lines, and the Uzen-Atrau-Samara oil and gas pipelines. KKM, according to its
agreements with Kazakhstan, has a right to use the existing oil export pipeline
and related utilities. KKM also has a contract with KazTransOil JSC, the
state-owned company controlling the export pipeline. The contract grants KKM
rights to use the export pipeline for transportation of crude oil to local and
export markets, subject to transit quota restrictions, and as a temporary
storage facility until the produced hydrocarbons are sold by KKM.
As of March 24, 2000, the Karakuduk Field has produced approximately
525,000 barrels of crude oil from three producing wells. Prior to the loan, KKM
sold 324,650 barrels of test production on both the local and export markets.
The remaining production has been stored as crude oil inventory in the export
pipeline, pending KKM's first sale to STASCO under the terms of the crude oil
sales agreement.
The crude oil sales agreement requires KKM to sell 100% of its crude oil
production, net of royalty-in-kind, to STASCO at one of six delivery locations
outside of Kazakhstan. The agreement is effective for a 5-year term beginning in
February 2000, and is renewable for 12-month periods after that. STASCO may
terminate the crude oil sales agreement if KKM does not nominate a sale for six
consecutive months, KKM enters into a sales agreement with a third-party, CAP-G
ceases to own at least 50% of KKM, or the loan is terminated or repaid. KKM may
terminate the crude oil sales agreement if the loan is repaid in full or STASCO
fails to pay amounts due to KKM.
Under the crude oil sales agreement, KKM is responsible for obtaining
export quotas and all other permissions from Kazakhstan, Russia, or other
relevant jurisdictions, necessary to transport and deliver KKM's oil production
to STASCO. STASCO is responsible for nominating and coordinating an oil tanker,
if necessary, and arranging for the resale/marketing of the crude oil purchased.
The sales prices to be received by KKM are based upon various factors, including
the point of delivery, current market oil prices, the size and quality of the
crude oil delivered, the size and type of tanker utilized (if any), and
applicable flat tanker rates (if any). KKM pays STASCO a commission on each oil
sale, calculated on a sliding scale based upon total annual crude oil quantities
delivered: $0.15 per barrel up to 5 million barrels, $0.10 per barrel from 5 to
10 million barrels, and $0.05 per barrel beyond 10 million barrels. All other
prices/costs utilized in the sales price formula are from published sources or
are actual costs incurred.
The six delivery points include three preferred port facilities on the
Black Sea (Novorossiisk, Odessa, and Ventspills) and three onshore pipeline
facilities (Dudkovce, Feyeshlitke, or Adamovo). KKM must use its best efforts to
deliver crude oil to the three port locations. Minimum delivery quantities are
approximately 460,000 barrels of crude oil for the port locations and 22,000
8
<PAGE>
barrels for the pipelines. KKM has a contractual right to deliver undersized
cargoes to the port facilities through December 31, 2000, which may be extended
with the approval of STASCO, but will incur additional freight charges if a
tanker is loaded below its tonnage capacity. Third-party sellers, however, may
offset capacity shortages in the tanker, with STASCO's approval.
Sales prices at the port locations are based upon quoted Urals crude oil
prices from Platt's Crude Oil Marketwire, net of published freight charges
published in both Platt's Dirty Tanker Wire and the Worldscale Tanker Nominal
Freight Scale. Payment is made by STASCO within 30 days of receipt of the final
bill of lading and KKM's invoice for the sale, unless otherwise agreed by both
parties. Sales prices received from pipeline deliveries equal the sales price
received by STASCO from their third party buyers of KKM's crude oil. STASCO
negotiates the best price possible and passes on the proceeds, net of their
applicable sales commission and incidental expenses, to KKM. Payment for onshore
pipeline sales is made on the earlier of 45 days or the date STASCO agrees to a
sales price with the third party buyer.
The crude oil sales agreement also includes a provision for KKM's delivery
of crude oil to the Caspian Pipeline Consortium pipeline, which is currently
being constructed from the Tengiz field in Kazakhstan to Novorrossiisk. KKM is
in the early stages of evaluating alternatives available, if any, to connect to
the Consortium's pipeline from the Karakuduk Field.
KKM's sale of test production during 1999 generated $1,019,000, net of
transportation and production costs. Related production and marketing costs were
approximately $1,254,000. KKM recorded the sale of test production as cost
recovery and did not record any revenues in 1999. KKM has nominated
approximately 219,000 barrels of crude oil for April 2000 delivery to STASCO at
the port of Odessa. KKM is currently awaiting final confirmation of its export
quota for the year 2000 from the government of the Republic of Kazakhstan, but
has already obtained approval for export quota for the April 2000 nomination.
During 1999, KKM drilled and successfully completed Well #101, and
continued to produce from two re-completions of previously existing wells worked
over in 1998. KKM suspended drilling activities for the majority of 1999 due to
a dispute with the drilling contractor and the lack of financing required to
obtain another drilling rig. In the fourth quarter of 1999, KKM entered into a
second drilling contract with KazakhOil Drilling Service Company, a subsidiary
of KazakhOil, and spudded Well #102 on December 31, 1999. Well #102 has been
successfully completed, and is undergoing post-completion production tests.
Drilling of Well #103 should commence on or before March 31, 2000.
In 2000, we expect to drill up to 15 wells and re-complete at least 4
previously drilled wells using a workover rig. To complete the drilling program,
an additional developmental drilling rig will be required. KKM has located a
second rig and is currently in negotiations to place it under contract. Workover
rigs are available within Kazakhstan and are currently being sourced for either
lease or purchase.
We estimate that drilling a maximum of 71 additional oil wells and 24 water
injection wells may be required to fully develop the Karakuduk Field. Peak oil
production from the field is expected to occur by the end of 2002, although the
time or amount of development or production cannot presently be assured. The
planned development program for the Karakuduk Field will include a pressure
maintenance operation that our management believes could result in additional
recoverable reserves.
Additional field facilities are either in place or under construction to
support the current drilling and development program. KKM has previously
constructed a base camp with living quarters for 150 people, a mini-camp for the
drilling contractor and other service company personnel, storage facilities,
processing facilities, warehouses, a repair shop, and other related support
facilities. KKM has also completed a main road between the export pipeline and
the field. KKM is also clearing access roads and performing other required site
preparation activities for other planned drilling locations.
Currently, crude oil production is being processed at a pilot facility and
then trucked to the export pipeline terminal at Say-Utes, which is approximately
51 miles southeast of the Karakuduk Field. KKM has been constructing another
export pipeline terminal, which is only 18 miles from the Karakuduk Field. KKM
also began construction of an 18-mile pipeline in 1998, capable of transporting
up to 18,000 barrels of oil per day from the Karakuduk Field to the export
9
<PAGE>
pipeline terminal. The completion of the pipeline was delayed due to our lack of
sufficient financial resources in 1999. We anticipate the pipeline will be
operational by June 30, 2000.
The license establishes minimum work thresholds and capital spending
requirements that KKM must meet in order to maintain its interest in the
Karakuduk Field. As of March 24, 2000, KKM is required to drill 6 additional new
wells and invest an additional $13.5 million in the development of the Karakuduk
Field by June 30, 2000, unless we obtain waivers or deferrals from the licensing
authority. We are required to provide funds necessary for KKM to enable it to
satisfy the work plan and maintain our interest in the Karakuduk Field. If
necessary, KKM will request a deferral of these financial commitments; however,
there is no guarantee that the licensing authority will grant a deferral.
KKM's failure to satisfy the conditions under the license could cause the
licensing authority to cancel the license. If the license is cancelled, we will
be unable to develop and sell oil produced from the Karakuduk Field, and we will
have no other source of revenues.
See also "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Reserves.
--------
As of December 31, 1999, the Karakuduk Field has total estimated proven
reserves of approximately 67.58 million barrels, net of government royalty, of
which we have a proportional equity interest in approximately 33.79 million
barrels, based upon our 50% equity interest in KKM. The reserve estimates are
supported by a reserve study of the Karakuduk Field conducted in 1995, which was
reviewed by Ryder Scott. Ryder Scott issued an opinion letter dated October 8,
1999, supporting the reasonableness of the reserve estimates based upon their
review of the original reserve report and supporting reservoir data. Ryder Scott
also considered all actual data available since 1995.
We have not previously disclosed proven reserves from our interest in the
Karakuduk Field because of the necessary financing required to develop the
Karakuduk Field. We are responsible for providing 100% of the funding necessary
for the development of the Karakuduk Field, which is not provided by third-party
sources. While we have invested significant amounts of capital into the
Karakuduk Field, the funds necessary to complete the field infrastructure and
execute a practical drilling program have not been readily available to us prior
to the loan with Shell Capital. The loan, along with the other related equity
commitments it requires, are expected to alleviate our past inability to finance
the development of the underlying reserves.
No reserve estimates have been filed with any Federal authority or other
agency since January 1, 1999.
Net Quantities of Oil and Gas Produced.
--------------------------------------
Our net oil and gas production for each of the last three fiscal years was as
follows:
As of the Year Ended December 31,
-----------------------------------------------
1997* 1998* 1999
----- ----- ----
Oil (Bbls) Less than 1,000 -- 29,625
Gas (Mcf) -- -- --
* Does not include our cumulative net share of test production totaling
188,296 barrels.
Oil production for 1999 represents our 50% equity interest in KKM's
production from November 1, 1999, the date the reserves underlying the Karakuduk
Field were determined to be commercially viable. Our net share of 1999
production 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.
10
<PAGE>
The remaining 35% of net cash flows will be 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.
The average sales price per barrel of oil and Mcf of gas, and average
production costs per barrel of oil equivalent ("BOE") excluding depreciation,
depletion and amortization are not presented because KKM did not sell any
significant quantities of oil or gas production from proven properties during
these periods. KKM's test production prior to the commercial viability of our
investment in the Karakuduk Field is not reported as part of the required
disclosures for the Statement of Financial Accounting Standards No. 69 ("SFAS
69"), Disclosures About Oil and Gas Producing Activities, and is not included in
the table above. Our share of KKM's sales of test production during 1999 totaled
162,325 barrels of oil, which were accounted for on a cost recovery basis. The
average sales price per barrel received by KKM was $7.00, net of transportation
costs. The average production costs per barrel was $3.86.
Productive Wells and Acreage.
----------------------------
As of December 31, 1999, we had interests in 3 gross productive oil wells
(1.5 net oil wells), and no producing gas wells. There were no multiple
completion wells. Production was from 16,900 gross acres and 11,300 developed
acres.
Undeveloped Acreage.
-------------------
As of December 31, 1999, we had no interests in undeveloped acreage.
Drilling Activity.
-----------------
During the last three fiscal years ended December 31, 1999, 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
------------ ---------- --- ---------- ---
1997 -- -- -- --
1998* 1.0 -- -- --
1999 .5 -- -- --
All wells are located in the Republic of Kazakhstan.
* Includes re-completions of delineation wells drilled prior to KKM
obtaining its interest in the Karakuduk Field. Does not include activity on 2
existing wells in 1998, which KKM plans to re-complete during 2000.
Present Activities.
-------------------
As of March 24, 2000, KKM had successfully completed development Well #102
and is in the process of performing post-completion production tests on the
well. KKM expects to spud a second development well (Well #103) shortly. We have
a net 50% interest in each well.
During remainder of 2000, we expect to drill 15 gross development wells
(7.5 net), including Well #102, and re-complete at least 4 existing delineation
wells using a workover rig. To complete the drilling program, an additional
developmental drilling rig will be required. KKM has located a second rig and is
currently in negotiations to place it under contract. Workover rigs are widely
available within Kazakhstan and are currently being sourced for either lease or
purchase by KKM.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In April 1999, the owner of the drilling rig operated by Challenger Oil
Services, PLC in the Karakuduk Field, Oil & Gas Exploration Cracow, Ltd.
("OGECC"), terminated its contract with Challenger. As a result of the
termination of the contract between Challenger and OGECC, KKM terminated the
drilling contract between KKM and Challenger, and arbitration proceedings were
instituted in accordance with the terms of such drilling contract. In the
arbitration, Challenger claimed that it was entitled to $9,800,000 in damages.
In February 2000, Chaparral, KKM, Challenger, and OGECC reached a mutual
settlement and release for all parties involved. The settlement requires KKM to
pay outstanding accrued liabilities to Challenger for prior work performed
totaling $1,336,000. We also agreed to fully discharge a note receivable from
Challenger in the amount of $1,009,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the fiscal
quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently traded on the Nasdaq Small-Cap Market under
the symbol "CHAR".
As of March 15, 2000, we had 1880 stockholders of record of our common
stock. No dividend has been paid on our common stock, and there are no plans to
pay dividends in the foreseeable future. We cannot pay any dividends without
Shell Capital's consent while the loan is outstanding. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The following table shows the range of high and low bid prices for each
quarter during our last two calendar years ended December 31, 1999 and 1998, as
reported by the National Association of Securities Dealers, Inc.
Price Range
-----------
Fiscal Quarter Ended High Low
-------------------- ---- ---
March 31, 1998 $167.530 $120.482
June 30, 1998 150.602 90.361
September 30, 1998 150.602 45.181
December 31, 1998 75.301 20.723
March 31, 1999 58.373 22.590
June 30, 1999 45.500 11.000
September 30, 1999 35.000 9.250
December 31, 1999 35.000 4.000
The following is information as to all securities sold since October 1,
1999, which were not registered under the Securities Act of 1933, as amended.
Effective as of September 30, 1999, we issued to Dr. Jack A. Krug, our
former President and Chief Operating Officer, an additional 2,361 shares of
common stock according to his employment agreement. We issued the common stock
in reliance upon the exemption from registration under Section 4(2) of the
Securities Act. Dr. Krug had available all material information concerning
Chaparral prior to such sale.
During the fourth quarter of 1999, we issued a total of $10,040,000 of our
8% Non-Negotiable Convertible Subordinated Promissory Notes, or notes, to
various related parties and other non-affiliated investors. Notes issued to
related parties totaled $8,290,000, including $5,827,000 from Allen & Company,
Inc., $2,051,000 from Whittier Ventures, LLC., and $412,000 from John G.
McMillian, our Co-Chairman and Chief Executive Officer. In exchange for the
notes, we received $4,750,000 in cash and canceled $5,290,000 in promissory
notes issued by us previously in 1999, plus accrued interest thereon, to Allen &
12
<PAGE>
Company ($3,827,000), Whittier ($1,051,000), and Mr. McMillian ($412,000). The
notes, plus accrued interest, are convertible into our common stock at a
conversion price of $1.86 per share, subject to the approval of our
stockholders. We issued the notes in reliance upon the exemption from
registration under Section 4(2) of the Securities Act. The purchasers of the
notes had available all material information concerning Chaparral prior to such
sale. Each purchaser of the notes is an accredited investor.
We issued an additional $3,300,000 of our notes during January and February
2000 to various related parties and other non-affiliated investors. Additional
notes issued to related parties totaled $2,400,000, including $2,000,000 to
Allen & Company, $250,000 to Mr. McMillian, and $150,000 to a relative of Jim
Jeffs, our Co-Chairman. We issued the notes in reliance upon the exemption from
registration under Section 4(2) of the Securities Act. The purchasers of the
notes had available all material information concerning Chaparral prior to such
sale.
In connection with finalizing the loan, we issued to Shell Capital a
warrant to purchase up to 15% of our outstanding common stock in February 2000.
The Shell warrant is non-transferable and will be exercisable on the earlier of
project completion or June 30, 2001. The Shell warrant contains registration
rights and is subject to anti-dilution provisions. The Shell warrant's exercise
price is $15.45 per share. We issued the warrant in reliance upon the exemption
from registration under Section 4(2) of the Securities Act. The holder of the
warrant had available all material information concerning Chaparral prior to
such sale. Shell Capital is an accredited investor.
13
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
As of or for the Year Month of As of or for the Year Ended
Ended November 30 December December 31
------------------------------ ---------- -----------------------------------------------
1995 1996 1996 1997 1998 1999
------------- ------------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Oil and gas sales (1) $ 255,000 $ 147,000 -- -- -- --
Total revenues 255,000 147,000 -- -- -- --
Noncash write-down of oil
and gas properties 619,000 -- -- -- -- --
Net loss (704,000) (2,416,000) $ (130,000) $ (2,603,000) $ (4,266,000) $ (5,163,000)
Net loss per
common share (2.24) (4.52) (.21) (3.76) (5.14) (5.63)
Working capital (deficit) 366,000 259,000 * 3,356,000 (287,000) (2,941,000)
Total assets 5,595,000 14,498,000 * 23,519,000 34,324,000 41,303,000
Long-term obligations and
redeemable preferred stock 461,000 1,491,000 * 4,710,000 5,060,000 14,776,000
Stockholders' equity 4,920,000 12,114,000 * 18,578,000 27,579,000 22,851,000
Other Data
----------
Present value of proven reserves 427,000 -- -- -- -- 177,680,000(2)
Proven oil reserves (bbls) 66,185 -- -- -- -- 33,788,822(3)
Proven gas reserves (mcf) 3,062,417 -- -- -- -- --
</TABLE>
(1) In 1994, we made a strategic decision to pursue international oil and gas
projects, and, by early 1997, we completely disposed of all domestic oil
and gas properties through sales to third parties.
(2) See "Supplemental Information - Disclosures About Oil and Gas Producing
Activities - Unaudited" included in the notes to our consolidated financial
statements for year ended December 31, 1999.
(3) See "Item 2 - Reserves."
* Not applicable due to one month short period ended December 31, 1996.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1. Liquidity and Capital Resources.
-----------------------------------
General Liquidity Considerations.
---------------------------------
Our financial statements have been presented on the basis we are a going
concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. We are responsible for providing
100% of the funding for the development of the Karakuduk Field not provided from
oil sales or third party sources. The Karakuduk Field will require significant
additional funding in order to obtain levels of production that would generate
sufficient cash flows to meet future capital and operating spending
requirements. We have recognized recurring operating losses and have a working
capital deficiency as of December 31, 1999. In addition, there are uncertainties
relating to Chaparral's and KKM's ability to meet commitments under KKM's
license, and all expenditure and cash flow requirements through fiscal year
2000. KKM's agreements with the government of the Republic of Kazakhstan require
KKM to meet expenditure and work commitments on or before June 30, 2000. If KKM
fails to meet these commitments, KKM's right to develop the Karakuduk Field may
be terminated and our investment in the Karakuduk Field may be lost. 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.
Management has taken the following actions, to address the substantial
doubt with respect to our ability to remain a going concern and enhance our
short and long-term liquidity:
o Shell Capital Loan. In November 1999, we entered into the loan with Shell
Capital, to provide up to $24,000,000 in financing for the development of
the Karakuduk Field. The consummation of the loan was subject to a number
of significant conditions, which were subsequently fulfilled in February
2000. As of March 24, 2000, we have borrowed a total of $13,800,000 under
the loan.
o Rights Offering. As a condition to the loan, we must utilize our best
efforts to complete a rights offering to our stockholders to acquire not
less than $6,000,000 of Chaparral's common stock on or before June 30,
2000. Two of Chaparral's related party stockholders, Allen & Company and
Whittier Ventures, have each undertaken to exercise their full pro-rata
share of the rights offering and, if the rights offering is not concluded
on or before June 30, 2000, to each contribute $2,000,000 to Chaparral for
either our common stock or indebtedness.
o Development of KKM's Proven Reserves. KKM has approximately 67.58 million
barrels of estimated proven oil reserves, net of government royalty, of
which our proportional equity interest is approximately 33.79 million
barrels. As of March 24, 2000, KKM has produced approximately 525,000
barrels of crude oil, of which 325,000 barrels of test production was sold
in 1999 for total proceeds of $1,019,000, net of transportation and
production costs. As of March 24, 1999, KKM had approximately 200,000
barrels of crude oil in inventory and was producing approximately 1,100
barrels of oil per day. Capital spending for the development of the
Karakuduk Field is expected to materially increase KKM's extraction of its
proven reserves, generating significant cash flows from future oil sales to
fund KKM's operations and repay our outstanding advances to KKM.
o Crude Oil Sales Agreement. In November 1999, KKM entered into the crude oil
sales agreement with STASCO, an affiliate of Shell Capital, for the
purchase of 100% of the oil production from the Karakuduk Field on the
export market for world market oil prices. KKM has currently nominated
approximately 219,000 barrels of crude oil for April 2000 delivery to
STASCO under the terms of the crude oil sales agreement, with payment
expected in late May or early June 2000. We expect KKM to obtain a
substantially higher return from oil sales under the crude oil sales
agreement than would otherwise be received from oil sales in Kazakhstan's
local market.
15
<PAGE>
Our considerations for addressing our going concern uncertainty is
partially based upon forward-looking events, which have yet to occur, including
the successful consummation of the rights offering and the successful
development, production, and sales of crude oil from the Karakuduk Field.
Expected funding requirements necessary for development of the Karakuduk Field
through December 31, 2000 are partially based upon future cash flows from the
sale of KKM's crude oil production. These risks are partially mitigated by the
current funding available under the loan, along with the equity support
agreement with Allen & Company and Whittier for a $4,000,000 capital infusion
into Chaparral in the event the rights offering is not completed by June 30,
2000.
Other risks and considerations also impact our short and long-term
liquidity, including the result of the proposed conversion of our notes into our
common stock, KKM's ability to successfully develop and increase production from
the Karakuduk Field, KKM's ability to obtain export oil quota and physically
deliver its production to the export market, volatility of oil prices on the
world market, our oil production hedge arrangements, and the impact of KKM's
license commitments to the government of the Republic of Kazakhstan.
1999 Activity.
--------------
During 1999, we raised additional capital to finance the development of the
Karakuduk Field, meet other working capital needs, and pay off a $975,000 loan
from the Chase Bank of Texas, N.A. by issuing a total of $10,040,000 of our
notes to various related parties and other non-affiliated investors. Notes
issued to related parties totaled $8,290,000, including $5,827,000 from Allen &
Company, $2,051,000 from Whittier, and $412,000 from John G. McMillian, our
Co-Chairman and Chief Executive Officer. In exchange for the notes, we received
$4,750,000 in cash and canceled $5,290,000 in promissory notes issued previously
in 1999, plus accrued interest thereon, issued by us to Allen & Company
($3,827,000), Whittier ($1,051,000), and Mr. McMillian ($412,000). We issued an
additional $3,300,000 of our notes during January and February 2000 to various
related parties and other non-affiliated investors. Additional notes issued to
related parties totaled $2,400,000, including $2,000,000 to Allen & Company,
$250,000 to Mr. McMillian, and $150,000 to a relative of Jim Jeffs, our
Co-Chairman.
The notes, plus accrued interest, are convertible into our common stock at
a conversion price of $1.86 per share, subject to the approval of our
stockholders of Chaparral. The notes bear interest at an annual rate of 8% until
our stockholders vote on the conversion of the notes. If the conversion feature
is approved, the notes will convert into the equivalent shares of our common
stock within 10 business days following the stockholder vote. The failure of the
stockholders to approve the conversion provision of the notes will result in an
immediate increase of the annual interest rate payable to the lesser of 25% or
the maximum rate allowed by applicable law. We expect to submit the vote on
conversion of the notes to our stockholders in the second quarter of fiscal year
2000. The notes have a stated maturity date of October 31, 2001, but are
unsecured and fully subordinated to the loan. The holders of the notes have no
rights to receive any principal or interest payments prior to full repayment of
the loan, under its terms, and have executed subordination agreements to that
effect.
Shell Capital loan.
-------------------
We entered into the loan with Shell Capital on November 1, 1999, to provide
up to $24,000,000 of financing for the development of the Karakuduk Field. The
consummation of the loan was subject to a number of significant conditions,
including, without limitation: (i) an equity infusion of at least $9,000,000,
(ii) obtaining political risk insurance, (iii) Shell Capital or Chaparral
obtaining transportation risk insurance, (iv) the hedging of a significant
portion of our future oil production, and (v) the retirement, conversion, or
full subordination of all of the outstanding indebtedness of Chaparral and KKM,
excluding current payables. On February 14, 2000, we fully satisfied all of the
outstanding conditions and drew down a total of $8,300,000 from the loan.
The $9,000,000 equity infusion was partially satisfied by our issuance of
notes totaling $5,050,000 for cash from November 11, 1999 through February 10,
2000. The remaining shortfall will be met through the rights offering and/or the
equity support agreement.
On January 31, 2000, we obtained binding political risk insurance coverage
from OPIC. We paid the initial insurance premium of $157,500, providing a total
of $30,000,000 of political risk coverage for our investment in the Karakuduk
Field through April 30, 2000. The OPIC policy's maximum coverage amount
available is $50,000,000, which would require a quarterly premium of $262,500.
We are required to maintain political risk insurance until the loan is fully
repaid.
16
<PAGE>
On February 11, 2000, we paid $4,000,000 for put contracts to sell a total
of 1,562,250 barrels of North Sea Brent crude. The exercise prices of the
various put contracts range from $22.35 to $17.25 per barrel, with monthly
expiration dates beginning in October 2000 and ending in December 2002. The
contracts are evenly spread between October 2000 to December 2001 (62,750
barrels per month) and between January 2002 to December 2002 (51,750 barrels per
month).
In March 2000, we paid Shell Capital a total of $750,000 for a beneficial
interest in Shell Capital's policy for transportation risk insurance, covering
some circumstances where KKM would be unable to export crude oil production
outside of the Republic of Kazakhstan through the existing pipeline routes
currently available. In the event coverage under Shell Capital's policy is
triggered, proceeds from the policy would go to the benefit of Chaparral for use
in making principal and interest payments required under the loan. The $750,000
payment for the beneficial interest in Shell Capital's transportation risk
insurance covers the life of the loan (discussed below).
We are allowed to drawdown the principal balance of the loan in minimum
increments of $2,000,000. loan advances will be used to meet the capital and
operational requirements of KKM, up-front fees and future finance costs required
under the loan, make payments for premiums due under the OPIC and transportation
risk insurance policies, and make payments required under the hedge agreement.
The loan is available for drawdown until the earlier of September 30, 2001 or
project completion.
Project completion occurs when various conditions are met by us and KKM,
including, but not limited to: (i) receipt by Shell Capital of an independent
engineer's reserve report evidencing proven developed reserves of at least 30
million barrels in the Karakuduk Field, (ii) sustaining average production of
13,000 barrels of oil per day from the Karakuduk Field for a period of 45
consecutive days, (iii) sustaining water injection at an average rate of 15,000
barrels per day over 45 consecutive days, (iv) injection of lift gas into one
well over a 24 hour period, and (v) various other financial and technical
milestones.
Prior to project completion, any borrowed amounts accrue interest at an
annual rate of LIBOR plus 17.75%, compounding quarterly. The annual interest
rate is reduced to LIBOR plus 12.75% after project completion. Prior to project
completion, an interest amount, equal to annual rate of LIBOR plus .50%, is
payable quarterly to Shell Capital, along with a commitment fee equal to an
annual rate of 1.5% of the undrawn portion of the $24,000,000 debt facility. The
remaining unpaid interest is capitalized to the loan at the end of each quarter.
After project completion, all quarterly interest on the outstanding loan is
fully due and payable at the end of each calendar quarter.
Principal payments, including any capitalized interest, are due on
quarterly reduction dates, beginning with the first calendar quarter ending on
the earlier of 60 days following project completion or December 31, 2001.
Minimum principal payments, based upon percentages of the principal outstanding
as of project completion, are set out in the loan and ensure full settlement of
the loan by September 30, 2004, the final maturity date. Mandatory prepayments
of principal outstanding are required on each reduction date out of any excess
cash flow available after consideration of Chaparral's and KKM's permitted
budgeted expenditures for the following 45 days and all fees, interest, and
principal payments scheduled on such reduction date.
In connection with finalizing the loan, we issued the Shell warrant to
Shell Capital to purchase up to 15% of our outstanding common stock. The Shell
warrant is non-transferable and will be exercisable on the earlier of project
completion or June 30, 2001. The Shell warrant contains registration rights and
is subject to anti-dilution provisions. The Shell warrant's exercise price is
$15.45 per share.
17
<PAGE>
The loan subjects us to a significant number of restrictions, including
various representations and warranties, positive and negative covenants, and
events of default. These restrictions include, but are not limited to, the
following:
o Pledge of Assets. We pledged substantially all of our assets to Shell
Capital, including our interest in the Karakuduk Field. If an event of
default occurs under the loan and is not timely cured, Shell Capital is
entitled to remedies, including the right to accelerate repayment of the
loan and obtain our rights to the Karakuduk Field.
o Business Alteration. We cannot engage in any other business except the
ownership of KKM and the operation of the Karakuduk Field without the prior
consent of Shell Capital.
o Rights Offering. We must use our best efforts to complete the rights
offering on or before June 30, 2000. Allen & Company and Whittier have
provided the equity support agreement to exercise their full pro-rata share
of the rights offering or, if the rights offering is not completed, to each
contribute $2,000,000 to Chaparral in exchange for our equity securities or
indebtedness.
o Change in Control. We cannot enter into any transaction where a "group" as
defined in the Securities Act of 1934 acquires or otherwise gains control
of 20% or more of our outstanding shares of voting stock. Some transactions
are exempt from this restriction, including, the conversion of our notes,
the rights offering, the equity support agreement, conversion of our
outstanding Series A Preferred Stock, the exercise of the Shell warrant,
and a grant of non-statutory or statutory options to purchase up to 15% of
our outstanding common stock to our officers, directors, employees, and
consultants (subject to anti-dilution provisions). Furthermore, Allen &
Company and Whittier, have agreed not to sell or otherwise transfer any of
our common stock on or before June 30, 2000, and at no time let their
ownership in us fall below 20%, unless otherwise agreed with Shell Capital.
o Charged Accounts. We must retain all cash receipts from oil sales, proceeds
from the loan, and any other funds raised through approved equity or debt
offerings in pledged bank accounts (the "Charged Accounts"). The Charged
Accounts are controlled by Shell Capital. We retain title to the Charged
Accounts, but Shell Capital directs all cash movements at our request. On a
monthly basis, we request transfers of funds from the Charged Accounts into
specific operating accounts controlled directly by us or by KKM,
respectively.
o Cash Expenditures. We must expend funds in accordance with capital and
operating budgets approved by Shell Capital on an annual basis, unless
otherwise approved by Shell Capital.
o Project Completion. KKM must reach project completion on or before
September 30, 2001.
o Share Capital. We cannot purchase, issue, or redeem any of our share
capital without the prior approval of Shell Capital.
o Future Indebtedness. We cannot borrow money, other than trade debt, without
the approval of Shell Capital.
o Sale of Significant Assets. We cannot dispose of any significant assets,
including capital stock in our subsidiaries, without the approval of Shell
Capital.
o Leases. Without Shell Capital's approval, KKM cannot enter into any lease
or license arrangement with annual payments in excess of $1,000,000 and we
will not enter into any lease or license arrangement with annual payments
in excess of $200,000.
o Dividends. KKM cannot pay dividends prior to project completion, and then
only subject to Shell Capital's approval. We cannot pay any dividends
without Shell Capital's consent.
18
<PAGE>
o OPIC Insurance. We must maintain OPIC political risk insurance throughout
the duration of the loan.
o Hedge Agreement. We will not cancel or terminate the hedging contracts
entered into as part of the loan or enter into any other hedging
transaction without Shell Capital's consent.
The terms and conditions and related financing costs of the loan are
significant. A substantial portion of our future cash flow from operations will
be required for debt service and may not be available for other purposes. Our
ability to obtain additional debt or equity financing in the future for working
capital, capital expenditures, or acquisitions is also restricted, as well as
our ability to acquire or dispose of significant assets or investments. These
restrictions may make us more vulnerable and less able to react to adverse
economic conditions. The failure of Chaparral to meet the terms of the loan,
including the deadline for project completion, could result in an event of
default and the loss of our investment in the Karakuduk Field.
The loan prohibits us from paying dividends to our stockholders without
Shell Capital's consent. We have not paid dividends in the past and have no
expectations to do so in the future.
As of March 24, 2000, we have borrowed $13,800,000 under the loan. The loan
proceeds were utilized to pay $2,225,000 in outstanding debt issuance costs,
$4,000,000 for the hedge agreement, $750,000 for transportation risk insurance,
$157,500 for the initial OPIC insurance premium, $6,000,000 for KKM's
operations, and $667,500 for our corporate overhead.
Other Sources of Liquidity and Capital Resources.
-------------------------------------------------
We expect to draw additional funds from the loan to support KKM's
development of the Karakuduk Field. The costs required to develop the Karakuduk
Field are significant and will not be fully covered by the available financial
resources under the loan. We are currently pursuing additional sources of
liquidity, which we believe will satisfy both the short and long-term liquidity
requirements of both Chaparral and KKM, including the conversion of the notes
into our common stock, the rights offering, and the sale of oil under the crude
oil sales agreement.
We are currently preparing a proxy statement to our stockholders, including
a proposal to approve the conversion of the notes into shares of our common
stock at $1.86 per share. The conversion of the notes would decrease our
indebtedness by $13,339,789, plus accrued interest. If the notes are not
converted, they will accrue interest at an annual rate equal to the lesser of
25% or the maximum rate allowed by law. The notes are fully subordinated to the
loan, and cannot be repaid until we have fully repaid the loan.
Our board of directors has approved a rights offering for 5,300,000 shares
of our common stock convertible at $1.86 per share, or $9,858,000. The board of
directors set the record date after the date of our Annual Meeting in order to
permit the holders of the notes to participate in the rights offering. Under the
terms of the equity support agreement, Allen & Company and Whittier have
undertaken to exercise their full pro-rata share of the rights offering, which
will be approximately $6,660,000, assuming conversion of the notes, plus accrued
interest, into our common stock. If the rights offering is not completed prior
to June 30, 2000, Allen & Company and Whittier will contribute an aggregate of
$4,000,000 in exchange for our equity securities or indebtedness.
KKM has nominated its first sale under the crude oil sales agreement for
approximately 219,000 barrels of oil. Delivery is expected in April, with
payment received in May 2000. Based on current market prices, net proceeds from
the sale would equal approximately $4,000,000 to KKM. Additional oil sales are
expected on at least a quarterly basis, as KKM works to increase production.
19
<PAGE>
While we fully expect to realize material cash benefits from some, or all,
of the above transactions, we can provide no assurances that the rights
offering, equity support agreement with Allen & Company and Whittier, conversion
of the notes, or sales under the crude oil sales agreement will be consummated.
If we fail to raise additional financial resources in the short term, through
internal or external means, we may be unable to meet operational cash flow
requirements or meet the terms of the loan. If so, we may lose our investment in
KKM and the Karakuduk Field.
Capital Commitments
-------------------
Under the terms of the license from the government of the Republic of
Kazakhstan, KKM was committed to minimum expenditures of $30,000,000 for the
year ended December 31, 1999. The license also establishes a minimum work
program requiring KKM to drill 8 new wells during 1999. In August 1999, we
received a letter from the State Investment Agency of the Republic of
Kazakhstan, extending the period for completion of the minimum work program and
expenditure commitments to June 30, 2000. The State Investment Agency letter is
not a formal amendment to the license.
As of March 24, 2000, KKM will need to drill an additional 6 new wells and
invest an additional $13,500,000 prior to June 30, 2000 to satisfy the terms of
the State Investment Agency letter. KKM has one rig running currently and is
expecting to place a second rig under contract in the near future. There is a
possibility, however, that KKM will not meet the work commitment to drill 6
additional wells before June 30, 2000. If KKM fails to satisfy the work or
capital commitment under the license or State Investment Agency letter, the
licensing authority could cancel or suspend the license. If the license is
cancelled, we will be unable to develop and sell oil produced from the Karakuduk
Field, and we will have no other source of oil revenue. We believe the licensing
authority will not suspend or cancel the license, but we can provide no
assurances that the license would not be revoked or suspended if the license
requirements are not satisfied. KKM can request a deferral of the license
commitments, but there is no guarantee that the licensing authority will grant a
deferral.
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. On April 5, 1999, the government of the Republic of Kazakhstan
discontinued its support of the tenge and allowed it to float freely against the
US dollar. Immediately thereafter, the official exchange rate declined from 87.5
tenge to the US dollar to 142 tenge to the US dollar, but was relatively stable
for the remainder of 1999. The devaluation decreased the US dollar realizable
value of any tenge denominated monetary assets held by KKM, and decreased the US
dollar obligation of any tenge denominated monetary liabilities held by KKM. KKM
maintains its financial statements in U.S. dollars and the impact of the
devaluation is not considered to be material at this time.
Year 2000 Update
----------------
There were no significant disruptions in either Chaparral's or KKM's
operations due to the Year 2000 date change. We are not aware of any material
problems resulting from Year 2000 issues, either with our operations or the
products and services of third parties. We will continue to monitor our computer
applications and those of our suppliers and vendors throughout the year 2000 to
ensure that any latent Year 2000 matters are addressed promptly.
20
<PAGE>
2. Results from Operations
--------------------------
We account for our investment in KKM using the equity method.
In 1999, the FASB released EITF 99-10, Percentage Used to Determine the
Amount of Equity Method Losses, which requires investors to recognize equity
method losses beyond their percentage of investee common stock to the extent of
their adjusted basis in the investee's common stock and other loans/advances
made to the investee. Future equity method gains, if any, would be recaptured by
the investor to the extent disproportionate equity method losses were recognized
in prior periods. EITF 99-10 is effective for interim and annual periods
beginning after September 23, 1999. We have elected to apply EITF 99-10
prospectively beginning in the quarter ended December 31, 1999. As a result, we
recognized an additional equity loss of $683,000 in 1999 due to the application
of EITF 99-10. See Note 5 to our consolidated financial statement for the year
ended December 31, 1999.
The conversion feature of the notes represent a "beneficial conversion
feature" as addressed in EITF 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios.
Under EITF 98-5, a portion of the proceeds received from the notes is allocable
to the conversion feature. The value assigned to the conversion feature is
determined as the difference between the market price of Chaparral's common
stock and the conversion price multiplied by the number of shares to be received
upon conversion. As the conversion price contained in the notes is substantially
below the market price, the value under the above formula significantly exceeds
the net proceeds from the notes. Under EITF 98-5, the discount assigned to the
conversion feature is limited to the total proceeds allocated to the convertible
instrument. Accordingly, upon approval of the conversion by the stockholders, we
will record total additional debt discount and additional paid in capital equal
to $12,834,000, the face amount of the notes net of original discount. This
amount will be immediately charged to interest expense since the notes are
convertible upon stockholder approval. Therefore, the adjustment will have a
negative impact on earnings, but no impact on total stockholder's equity.
Results of Operations Year Ended December 31, 1999 Compared to Year Ended
December 31, 1998
-------------------------------------------------------------------------
Our operations during 1999, resulted in a net loss of $5,163,000, compared
to a net loss of $4,266,000 for 1998.
Interest income increased by $262,000 from 1998 due to increased financing
of 100% of KKM's operations in Kazakhstan. Interest expense increased $318,000
in 1999 due to additional borrowings to support our corporate overhead and KKM's
operations.
General and administrative costs decreased by $625,000 from 1998 primarily
due to a decrease in compensation expense from a reduction in stock based
compensation and the reversal of accrued compensation which was contingent on
the sale of our interest in KKM. Our equity loss in KKM increased by $859,000
from, of which $683,000 was due to the increased amount of equity losses
recorded from the application of EITF 99-10 beginning in the fourth quarter of
1999. See Note 5 to our consolidated financial statements for the year ended
December 31, 1999. In the fourth quarter of 1999, KKM stopped capitalizing
interest expense and began amortization of its oil and gas properties.
In 1999, we recorded a $1,060,000 loss from a settlement with Challenger.
Chaparral, KKM, Challenger, and OGECC reached a full and final settlement in
February of 2000, and we will not recover the note receivable from Challenger.
We recorded the charge on the settlement of this dispute as of December 31,
1999. See Note 4 to our consolidated financial statements for the year ended
December 31, 1999.
In 1998, we settled a lawsuit filed against Chaparral for a total of
$200,000 and warrants to purchase 3,333 shares of the our common stock at an
exercise price of $60 per share, exercisable through January 2, 1999. The
warrants were recorded at the fair market value (approximately $34,000). See
Note 9 to our consolidated financial statements for the year ended December 31,
1999.
In 1998, we also recognized a $236,000 extraordinary loss on the
extinguishment of long-term debt. See Note 16 to our consolidated financial
statement for the year ended December 31, 1999.
21
<PAGE>
Results of Operations Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997
-------------------------------------------------------------------------
Our operations during 1998, resulted in a net loss of $4,266,000, compared
to a net loss of $2,603,000 for 1997.
Interest income increased by $436,000 from 1997 due to increased financing
of 100% of KKM's operations in Kazakhstan.
General and administrative costs increased by $1,363,000 from 1997 due
mainly to an increase in compensation expense and legal fees. Compensation
expense increased by $992,000, primarily due to stock based compensation granted
to our directors, employees, and consultants during 1998 plus amortization of
prior year equity based compensation. Furthermore, our cash based compensation
increased due to the hiring of additional personnel required for normal business
operations. Legal fees increased $125,000, primarily relating to a lawsuit,
which was settled in 1998. Our equity loss in KKM, increased $585,000 from 1997.
These increases are the result of KKM's increased operational activity in
Kazakhstan.
In 1998, we settled a lawsuit filed against Chaparral for a total of
$200,000 and warrants to purchase 3,333 shares of our common stock at an
exercise price of $60 per share, exercisable through January 2, 1999. The
warrants were recorded at the fair market value (approximately $34,000). See
Note 9 to our consolidated financial statements for the year ended December 31,
1999.
In 1998, we recognized a $236,000 extraordinary loss on the extinguishment
of long-term debt. In 1997, we recognized a $214,000 extraordinary loss on the
extinguishment of short-term debt. See Note 16 to our consolidated financial
statements for the year ended December 31, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1999, our only outstanding market risk sensitive
instruments were total aggregate notes outstanding of $10,040,000. The notes
accrue interest at 8% and are convertible into our common stock upon stockholder
approval at a conversion price of $1.86 per share. The notes were issued in the
fourth quarter of 1999 and are recorded at their fair value.
On February 11, 2000, we entered the hedge agreement, paying $4.0 million
for put contracts to sell a total of 1,562,250 barrels of North Sea Brent crude.
The exercise prices of the various put contracts range from $22.35 to $17.25 per
barrel, with monthly expiration dates beginning in October 2000 and ending in
December 2002. The contracts are evenly spread between October 2000 to December
2001 (62,750 barrels per month) and between January 2002 to December 2002
(51,750 barrels per month).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for a list of the Financial Statements and the supplementary
financial information included in this report following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 31, 2000, the following table sets forth (i) the names and ages
of the current directors, director nominees and executive officers of Chaparral,
(ii) the principal offices and positions with Chaparral held by each person and
(iii) the date such person became a director or executive officer. The executive
officers are elected annually by the board of directors. Executive officers
serve terms of one year or until their death, resignation or removal by the
board of directors. The present term of office of each director will expire at
the next annual meeting of shareholders. Each executive officer will hold office
until his successor duly is elected and qualified, until his resignation or
until he is removed in the manner provided by our bylaws.
<TABLE>
<CAPTION>
Name of Director or Officer Principal Occupation
and Position in Chaparral Since Age During the Last 5 Years
------------------------- ----- --- -----------------------
<S> <C> <C> <C>
John G. McMillian 1997 73 Mr. McMillian has served as the Chairman of the Board of
Co-Chairman and Chaparral and Chief Executive Officer since January 1999
Chief Executive Officer and Co-Chairman of the Board since May 1999. From May
1997 to January 1999, Mr. McMillian served as a director
of Chaparral. Mr. McMillian served as the Chairman,
President, and Chief Executive Officer of Allegheny &
Western Energy Corporation, an oil and gas company, from
1987 to 1995. Mr. McMillian founded Northwest Energy
Company, a major supplier of natural gas, and served as
its Chairman and Chief Executive Officer from 1973 to
1983. From 1986 to 1989, Mr. McMillian was the owner,
Chairman and Chief Executive Officer of Burger Boat
Company, a boat manufacturing company. McMillian has
served as a director of Excalibur Technologies and as a
member of its Audit Committee since 1996.
James A. Jeffs 1999 48 Mr. Jeffs has served as the Co-Chairman of the Board of
Co-Chairman Chaparral since May 1999. Since 1994, Mr. Jeffs has
served as Managing Director and the Chief Investment
Officer for The Whittier Trust Company, a trust and
investment management company, with substantial oil and
gas interests. From 1993 to 1994, Mr. Jeffs was a Senior
Vice President of Union Bank of California. Mr. Jeffs
was the Chief Investment Officer of Northern Trust of
California, N.A., a trust and investment management
company, from 1992 to 1993. Mr. Jeffs was Chief
Investment Officer and Senior Vice President of Trust
Services of America, a trust and investment management
company, from 1988 to 1992 and served as President and
Chief Executive Officer of TSA Capital Management, an
institutional investment management company, during that
period.
David A. Dahl 1997 38 Mr. Dahl served as Secretary of Chaparral from August
Director 1997 until May 1998. Currently, Mr. Dahl is the
President of Whittier Energy Company, an oil and gas
exploration and production company, a position that he
has held since 1997. Since 1996, Mr. Dahl has also
served as the President of Whittier, a private
investment entity. Since 1993, Mr. Dahl has been a Vice
President of Whittier Trust Company, an investment
management trust company. From 1990 to 1993, Mr. Dahl
was a Vice President of Merus Capital Management, an
investment firm.
23
<PAGE>
Ted Collins, Jr. 1997 61 Since 1988, Mr. Collins has been the President of
Director Collins & Ware, Inc., an independent oil and gas
company. From 1982 to 1988, Mr. Collins was the
President of Enron Oil & Gas Co., an oil and gas
company. Beginning in 1969 and until 1982, Mr. Collins
was an Executive Vice President and director of American
Quasar Petroleum Co., an oil and gas company. Mr.
Collins also serves on the Board of Directors of Hanover
Compression Company, MidCoast Energy Resources, Inc. and
Queen Sand Resources, Inc.
Richard L. Grant 1998 45 Mr. Grant is the President of Cabot LNG Corporation, an
Director importer of liquefied natural gas, a position he has
held since September 1998. Mr. Grant served in various
capacities at Mountaineer Gas Company, the largest
natural gas distribution company in West Virginia,
including President, from September 1988 to August 1998,
and Executive Vice President and General Counsel, from
1986 to 1988. Mr. Grant was an engineer and legal
counsel for the Cincinnati Gas & Electric Company from
1980 to 1986.
Mark L.G. Turner Nominee 42 Mr. Turner is the Director of the International E&P
Group of Shell Capital Services Limited, a position he
has held since January 1998. Prior to joining Shell
Capital Services Limited, Mr. Turner served as a
corporate tax advisor for Royal/Dutch Shell Group from
1987 to December 1997. Prior to 1987, Mr. Turner was
employed as Inspector of Taxes for the United Kingdom's
Board of Inland Revenue.
Judge Burton B. Roberts Nominee 77 Since January 1999, Judge Roberts has served as counsel
to the law firm of Fischbein o Badillo o Wagner o
Harding. From 1973 to 1999, Judge Roberts served as
Justice of the New York State Supreme Court, as
Administrative Judge for the Criminal Branch, 12th
Judicial District, from January 1984 to January 1999,
and for the Civil Branch, 12th Judicial District, from
1988 to 1999. Prior to his service on the bench, Judge
Roberts was an Assistant District Attorney in New York
County, then Chief Assistant District Attorney and
District Attorney for Bronx County, New York. Judge
Roberts was formerly Chair of the Bronx County
Coordinating Committee for Criminal Justice and of the
New York State Committee on Audio/Visual coverage.
Michael B. Young 1998 31 Treasurer, Controller and Principal Accounting Officer
Treasurer and Controller of Chaparral since February 1998; Tax Manager in the oil
and gas tax practice of Arthur Andersen LLP, an
accounting firm, from June 1991 to February 1998.
Alan D. Berlin 1997 59 A partner of Aitken Irvin Lewin Berlin Vrooman & Cohn,
Secretary LLP since 1995. Engaged in the private practice of law
for over five years prior to joining Aitken Irvin Lewin
Berlin Vrooman & Cohn LLP; Secretary of Chaparral from
January 1996 to August 1997 and from June 1998 to the
present; President of the International Division of
Belco Petroleum Corp. from 1985 to 1987 and held various
other positions with Belco Petroleum Corp. from 1977 to
1985; Currently a director of Belco Oil & Gas Corp.
24
</TABLE>
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of the Forms 3 and 4 and any amendments
furnished to Chaparral during our fiscal year ended December 31, 1999, and Form
5 and any amendments furnished to Chaparral with respect to the same fiscal
year, during our fiscal year ended December 31, 1999, we believe that its
directors, officers, and greater than 10% beneficial owners complied with all
applicable filing requirements, except that Mr. Young failed to file, on a
timely basis, a report representing one transaction for fiscal year ended
December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation paid by Chaparral for services
rendered by Mr. Karren, who was the Chairman, President, and Chief Executive
Officer of Chaparral until January 7, 1999, Dr. Krug who was the President and
Chief Operating Officer until September 30, 1999, Mr. McMillian who is currently
the Chief Executive Officer and Co-Chairman of the Board and Mr. Young, who is
the Treasurer, Controller, and Principal Accounting Officer of Chaparral. There
were no other executive officers of Chaparral whose annual salary and bonus
exceeded $100,000 during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
Summary Compensation Table.
---------------------------
Annual Compensation Long-Term Compensation
--------------------------------- ----------------------------------------------
Awards Payouts
---------------------------------- -------
Securities
Name and Other Annual Restricted Stock Underlying LTIP (#)All Other
Principal Position Year Salary Bonus Compensation Awards($) Options/SARs(#) Payouts($) Compensation
------------------ ---- ------ ----- ------------ --------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Howard Karren 1999 -- -- -- -- -- -- --
Chief Executive 1998 -- -- -- -- -- -- --
Officer (1/97-1/99) 1997 -- -- -- -- 17,084 -- --
and President (2/97
-1/99)
Dr. Jack A. Krug 1999 $159,990(1) -- $280,000(1) -- -- $172,132(2) --
President and Chief
Operating Officer
(1/99 - 9/99)
John G. McMillian 1999 -- -- -- -- -- -- --
Chief Executive
Officer (1/99 to
Present)
Michael B. Young 1999 $89,167 $42,500(3) -- -- -- -- --
1998 $73,333 -- -- $90,000(4) -- -- --
</TABLE>
----------
1. Under the terms of his employment agreement with Chaparral, Dr. Krug
received $159,990 as compensation for his employment with Chaparral and
$280,000 in connection with his resignation from Chaparral.
2. Under the terms of his employment agreement with Chaparral, Dr. Krug
received 3,333 shares on January 15, 1999. Effective as of September 30,
1999, we issued Dr. Krug an additional 2,361 shares of Common Stock
according to a letter agreement in connection with his resignation from
Chaparral. This agreement became effective February 18, 2000. The $172,132
represents the aggregate market value of 3,333 shares on January 15, 1999
and 2,361 shares on February 18, 2000.
3. Mr. Young received $42,500 in cash bonuses during 1999.
4. Under the terms of a letter agreement, Mr. Young is entitled to receive 167
shares on February 3, 1998, January 30, 1999, January 30, 2000, and January
30, 2001. The $90,000 represents the market value of such shares at the
closing price on the last trading day immediately preceding the date of
grant. Dividends will be paid on shares of restricted stock held by Mr.
Young if Chaparral pays any dividends on its Common Stock. At December 31,
1999, the aggregate value of the restricted stock grants to Mr. Young was
$5,500 based on the closing price of our Common Stock on the last trading
day immediately preceding the end of its fiscal year.
Options/SAR Grants.
-------------------
For the fiscal year ended December 31, 1999, we did not grant any options.
25
<PAGE>
Aggregated Option/SAR Exercises and Year-End Option/SAR Value Table.
--------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs at In-the-Money Options/SARs at
December 31, 1999 December 31, 1999
------------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Howard Karren 17,084 -- -- --
Michael B. Young 1,167 -- -- --
Additionally, no options were exercised in fiscal year 1999.
Director Interlocks.
--------------------
During our last fiscal year, Messrs. Jeffs, who is the Co-Chairman of the
Board, and Dahl served on the Compensation Committee of the Board and acted as
officers or directors to Whittier 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 and Whittier Energy Company. Whittier
currently owns approximately 6.49% of the outstanding Common Stock. Assuming
conversion of the notes, including all accrued interest as of March 31, 2000,
Whittier will own approximately 14.39% of the outstanding Common Stock. See
"Certain Relationships and Related Transactions" immediately below for a
description of transaction between Whittier and Chaparral.
Compensation of Directors.
--------------------------
During the fiscal year ended December 31, 1999, Chaparral did not
compensate its directors for their service as directors. There were no standard
or other arrangements for the compensation of directors in effect for the fiscal
year ended December 31, 1999.
26
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 31, 2000, with
respect to directors, nominees, named executive officers of Chaparral and each
person who is known by us to own beneficially more than 5% of Common Stock, and
with respect to shares owned beneficially by all directors, nominees and
executive officers of Chaparral as a group. The following table and supporting
footnotes include the aggregate value of notes held by each beneficial owner and
the number of shares such notes will convert into if Chaparral's stockholders
approve the conversion provision of the notes. The address for all directors and
executive officers of Chaparral is 16945 Northchase Drive, Suite 1620, Houston,
Texas 77060.
<TABLE>
<CAPTION>
Amount and Nature Percent of
of Beneficial Common
Name of Beneficial Owner Position Ownership (1) Stock (1)
------------------------ -------- ------------- ---------
<S> <C> <C> <C>
Allen & Company Incorporated -- 4,497,508(2) 53.54%
711 Fifth Avenue
New York, New York 10022
Whittier Ventures, LLC -- 1,203,630(3) 14.39%
1600 Huntington Drive
South Pasadena, California 91030
John G. McMillian Co-Chairman of the Board and Chief 372,773(4) 4.46%
Executive Officer
James A. Jeffs Co-Chairman of the Board 1,213,959(5) 14.52%
David A. Dahl Director 1,205,048(6) 14.41%
Ted Collins, Jr. Director 2,668 *
Richard L. Grant Director -- *
Mark L.G. Turner Nominee --(7) *
Judge Burton B. Roberts Nominee -- *
Michael B. Young Treasurer & Controller 1,668(8) *
Howard Karren Former Chairman, President and 19,917(9) *
Chief Executive Officer
Dr. Jack A. Krug Former President and Chief 4,868(10) *
Operating Officer
Arlo G. Sorensen Former Director 1,205,048(11) 14.41%
Michael J. Muckleroy Former Director 167(12) *
All current directors, nominees, -- 1,593,070(13) 19.04%
and executive officers as a group
(nine persons)
---------
* Represents less than 1% of the shares of Common Stock outstanding.
27
</TABLE>
<PAGE>
(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)(D), includes 4,325,850 shares
issuable upon conversion of Allen's $7,827,161 aggregate principal amount
of notes, together with $218,920 of accrued but unpaid interest thereon as
of March 31, 2000, at the conversion price of $1.86 per share if the
conversion provision is approved by the stockholders. Also includes 48,284
shares underlying warrants to purchase shares of Common Stock. Allen &
Company is a wholly owned subsidiary of Allen Holding Inc., and,
consequently, Allen Holding may be deemed to beneficially own the shares
beneficially owned by Allen & Company. Does not include shares owned
directly by officers and stockholders of Allen Holding and Allen & Company
with respect to which Allen Holding and Allen & Company disclaim beneficial
ownership. Officers and stockholders of Allen Holding and Allen & Company
may be deemed to beneficially own shares of the Common Stock reported to be
beneficially owned directly by Allen Holding and Allen & Company.
(3) In accordance with Rule 13d-3(d)(1)(i)(D), includes 1,137,797 shares
issuable upon conversion of Whittier's $2,050,959 aggregate principal
amount of notes, together with $65,345 of accrued but unpaid interest
thereon as of March 31, 2000, at the conversion price of $1.86 per share if
the conversion provision is approved by the stockholders. Also includes
2,002 shares underlying currently exercisable warrants and 8,334 shares
underlying a currently exercisable option.
(4) In accordance with Rule 13d-3(d)(1)(i)(D), includes 365,104 shares issuable
upon conversion of Mr. McMillian's $661,649 aggregate principal amount of
notes, together with $17,445 of accrued but unpaid interest thereon as of
March 31, 2000, at the conversion price of $1.86 per share if the
conversion provision is approved by the stockholders. Also includes 417
shares underlying a currently exercisable option and 417 shares underlying
a currently exercisable warrant.
(5) In accordance with Rule 13d-3(d)(1)(i)(D), includes 1,137,797 shares
issuable upon conversion of Whittier's $2,050,959 aggregate principal
amount of notes, together with $65,345 of accrued but unpaid interest
thereon as of March 31, 2000, at the conversion price of $1.86 per share if
the conversion provision is approved by the stockholders. Also includes
49,519 shares beneficially owned by Whittier, 1,584 shares underlying
currently exercisable warrants owned by Whittier, 5,820 shares owned by
Whittier Energy Company, 418 shares underlying currently exercisable
warrants owned by Whittier Energy Company, 158 shares owned by Whittier
Opportunity Fund, and 8,334 shares underlying currently exercisable options
owned by Whittier Opportunity Fund. Mr. Jeffs has no pecuniary interest in
the shares beneficially owned by Whittier, Whittier Energy Company, and
Whittier Opportunity Fund, however, as Vice President of Whittier, and
Director of Whittier Energy Company, Mr. Jeffs has voting power and
investment power over such shares and, thus, may be deemed to beneficially
own such shares.
(6) In accordance with Rule 13d-3(d)(1)(i)(D), includes 1,137,797 shares
issuable upon conversion of Whittier's $2,050,959 aggregate principal
amount of notes, together with $65,345 of accrued but unpaid interest
thereon as of March 31, 2000, at the conversion price of $1.86 per share if
the conversion provision is approved by the stockholders. Also includes
1,251 shares underlying currently exercisable options owned by Mr. Dahl,
49,519 includes shares beneficially owned by Whittier, 1,584 shares
underlying currently exercisable warrants owned by Whittier, 5,820 shares
owned by Whittier Energy Company, 418 shares underlying currently
exercisable warrants owned by Whittier Energy Company, 158 shares owned by
Whittier Opportunity Fund and 8,334 shares underlying currently exercisable
options owned by Whittier Opportunity Fund. Mr. Dahl has no pecuniary
interest in the shares beneficially owned by Whittier, Whittier Energy
Company, or Whittier Opportunity Fund, however, as the President of
Whittier and Whittier Energy Company, Mr. Dahl has voting power and
investment power over such shares and, thus, may be deemed to beneficially
own such shares.
(7) Does not include a warrant to Shell Capital to purchase up to 147,072
shares, with an exercise price of $15.45 per share.
(8) Includes 501 shares owned by Mr. Young and 1,167 shares underlying
currently exercisable options.
(9) Includes 17,083 shares underlying currently exercisable options. Mr. Karren
resigned as Chairman, President and Chief Executive Officer effective
January 7, 1999.
(10) Includes 3,333 shares beneficially owned by Dr. Krug. Effective as of
September 30, 1999, Chaparral issued to Dr. Krug an additional 2,361 shares
of Common Stock under his employment agreement, of which 826 shares were
subsequently assigned to a third party. Dr. Krug resigned as President and
Chief Operating Officer effective September 30, 1999.
28
<PAGE>
(11) In accordance with Rule 13d-3(d)(1)(i)(D), includes 1,137,797 shares
issuable upon conversion of Whittier's $2,050,959 aggregate principal
amount of notes, together with $65,345 of accrued but unpaid interest
thereon as of March 31, 2000, at the conversion price of $1.86 per share if
the conversion provision is approved by the stockholders. Also includes
49,519 shares beneficially owned by Whittier, 1,584 shares underlying
currently exercisable warrants owned by Whittier, 5,820 shares owned by
Whittier Energy Company, 418 shares underlying currently exercisable
warrants owned by Whittier Energy Company, 158 shares owned by Whittier
Opportunity Fund and 8,334 shares underlying currently exercisable options
owned by Whittier Opportunity Fund. Also includes 1,251 shares underlying
currently exercisable options owned by Mr. Sorensen. Mr. Sorensen has no
pecuniary interest in the shares beneficially owned by Whittier, Whittier
Energy Company, or Whittier Opportunity Fund, however, as a Director of
Whittier and Whittier Energy Company, Mr. Sorensen has voting power and
investment power over such shares and, thus, may be deemed to beneficially
own such shares. Mr. Sorensen resigned as a director effective August 31,
1999.
(12) Mr. Muckleroy resigned as a director effective January 8, 1999.
(13) Includes the shares as described in Notes (4) through (8) above. Also
includes 167 shares owned by Alan D. Berlin, the Secretary of Chaparral and
417 shares underlying a presently exercisable option owned by Mr. Berlin.
29
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Allen & Company loaned to Chaparral, at an interest rate of 8% per annum,
an aggregate of $700,000 in three transactions during January 1999, and an
aggregate of $1,050,000 in three transactions during February of 1999.
Whittier, for which the Co-Chairman, Mr. Jeffs, and a director, Mr. Dahl,
act as officers, loaned Chaparral, at an interest rate of 8% per annum, an
aggregate of $1,000,000 in two transactions in March 1999.
In March 1999, Chaparral issued a promissory note to Allen & Company in the
principal amount of $2,769,978, representing an additional $1,000,000 loan to
Chaparral and the retirement of the January and February 1999 notes, plus
accrued interest. In June 1999, Chaparral borrowed an additional $1,000,000 from
Allen. The promissory notes all bear interest at a rate of 8% per annum.
In August 1999, Chaparral restructured its indebtedness with Allen &
Company to enable Mr. McMillian to acquire a portion of such indebtedness. In
connection with the restructuring, Allen & Company surrendered its promissory
notes, and we replaced them with two new promissory notes, each bearing interest
at a rate of 8% per annum, in principal amounts of $2,494,978 and $900,000,
respectively. Also related to the restructuring, we issued to Mr. McMillian two
promissory notes, which also bore interest at 8% per annum. The principal
amounts on those notes were $275,000 and $100,000, respectively.
In August 1999, Chaparral borrowed additional funds from Allen & Company
and Mr. McMillian by the issuance of three demand promissory notes. The
principal amount of the two notes issued to Allen & Company was $280,000, and
the principal amount of the one note issued to Mr. McMillian was $20,000. Both
notes have interest rates of 8% per annum.
As collateral for the promissory notes issued by Chaparral, each of Allen &
Company, Whittier, and Mr. McMillian received a non-exclusive junior security
interest in all of the capital stock of Central Asian Petroleum (Guernsey)
Limited, a subsidiary of Chaparral. These junior security interests in the
shares were to be subordinate to a senior security interest held by Whittier in
the same stock.
The promissory notes held by Whittier , Allen & Company, and Mr. McMillian
permitted the holders to elect to exchange the outstanding balance of the notes,
together with accrued interest, for any convertible securities issued by
Chaparral, including any debt or equity instrument convertible into Common
Stock, on or before March 31, 2000.
In October 1999, we borrowed $2,000,000 from Allen & Company in exchange
for a $2,000,000 principal amount note.
In November 1999, each of Allen & Company, Whittier, and Mr. McMillian
exercised their right to exchange their outstanding notes, together with accrued
interest thereon, for notes. In connection with such exchange, Chaparral issued
$3,827,161 principal amount of notes to Allen & Company, $1,050,959 principal
amount of notes to Whittier and $411,649 principal amount of notes to Mr.
McMillian. Chaparral also borrowed an additional $1,000,000 from Whittier in
November 1999 in exchange for a $1,000,000 principal amount note.
Subsequent to the fiscal year ended December 31, 1999, Chaparral borrowed
an additional $1,250,000 from Allen & Company in exchange for a $1,250,000
principal amount note. In addition, as a condition of the loan, Allen & Company
and Whittier have undertaken to purchase an aggregate of $4,000,000 of Common
Stock at $1.86 per share or other Chaparral indebtedness if we do not complete a
rights offering to our stockholders to acquire not less than $6,000,000 of
Common Stock on or before June 30, 2000.
In January 2000, a related party of Mr. Jeffs purchased $150,000 aggregate
amount of the notes.
30
<PAGE>
Additionally, Chaparral issued to Shell Capital, in connection with the
loan, warrants to purchase 147,072 shares of Common Stock, subject to
anti-dilution provisions at $15.45 per share. Shell Capital was also entitled to
nominate one director to the Board. The Nominating Committee of the Board
nominated Mr. Turner, the Director of the International E&P Group of Shell
Capital Services Limited.
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, 1999
and December 31, 1998 ..................................... F-2
Consolidated Statements of Operations--Years ended
December 31, 1999, 1998, and 1997 ......................... F-4
Consolidated Statements of Cash Flows--Years ended
December 31, 1999, 1998, and 1997 ......................... F-5
Consolidated Statement of Changes in Stockholders' Equity--
Years ended December 31, 1999and 1998, and the 11 months
ended December 31, 1997 ................................... F-7
Notes to Consolidated Financial Statements ................... F-8
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited .......................... F-32
Closed Type JSC Karakudukmunay
------------------------------
Report of Independent Auditors ............................... F-35
Balance Sheets--As of December 31, 1999 and 1998 ............. F-36
Statements of Expenses and Accumulated Deficit--Years ended
December 31, 1999, 1998 and 1997 .......................... F-37
Statements of Cash Flows--Years ended December 31, 1999,
1998 and 1997 ............................................. F-38
Statements of Stockholders' Deficit .......................... F-39
Notes to the Financial Statements ............................ F-40
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited .......................... F-54
(a)(2) Financial Statement Schedules.
All schedules for which a provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.
(b) Current Reports on Form 8-K.
We filed a Current Report on Form 8-K, dated October 25, 1999 to
report the sale of our 8% Non-Negotiable Convertible Subordinated Notes and
announce execution of our loan agreement with Shell Capital Limited and
other lenders.
31
<PAGE>
(c) Exhibits.
Exhibit No. Description and Method of Filing
----------- --------------------------------
2.1 Stock Acquisition Agreement and Plan of Reorganization
dated April 12, 1995 between Chaparral Resources, Inc.,
and the Shareholders of Central Asian Petroleum, Inc.,
incorporated by reference to Exhibit 2.1 to Chaparral
Resources, Inc's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1995.
2.2 Escrow Agreement dated April 12, 1995 between Chaparral
Resources, Inc., the Shareholders of Central Asian
Petroleum, Inc. and Barry W. Spector, incorporated by
reference to Exhibit 2.2 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended May
31, 1995.
2.3 Amendment to Stock Acquisition Agreement and Plan of
Reorganization dated March 10, 1996 between Chaparral
Resources, Inc., and the Shareholders of Central Asian
Petroleum, Inc., incorporated by reference to Chaparral
Resources, Inc.'s Registration Statement No. 333-7779.
3.1 Certificate of Incorporation, dated April 21, 1999,
incorporated by reference to Chaparral Resources, Inc.'s
Notice and Definitive Schedule 14Adated April 21, 1999.
3.2 Bylaws, dated April 21, 1999, incorporated by reference
to Annex IV to our Notice and Definitive Schedule
14Adated April 21, 1999.
4.1* 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $101,400,
to Allen & Company Incorporated.
4.2* 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $182,680,
to Allen & Company Incorporated.
4.3* 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount
$2,613,097, to Allen & Company Incorporated.
4.4* 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $929,984,
to Allen & Company Incorporated.
4.5* 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $103,332,
to John G. McMillian.
4.6* 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $20,298,
to John G. McMillian.
4.7* 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $288,019,
to John G. McMillian.
4.8* 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $524,986,
to Whittier Ventures, LLC.
4.9* 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 2, 1999, principal amount $525,973,
to Whittier Ventures, LLC.
4.10 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated December 10, 1999, principal amount
$150,000, to Cord Family Exempt Trust, incorporated by
reference to Exhibit 10.40 to Chaparral Resources,
Inc.'s Current Report on 8-K dated March 22, 2000.
4.11 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated February 10, 2000, principal amount
$1,250,000, to Allen & Company Incorporated,
incorporated by reference to Exhibit 10.51 to Chaparral
Resources, Inc. Current Report on 8-K dated March 22,
2000.
32
<PAGE>
Exhibit No. Description and Method of Filing
----------- --------------------------------
4.12 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated February 9, 2000, principal amount $100,000,
to Helen Jacobs Strauss Trust, incorporated by reference
to Exhibit 10.50 to Chaparral Resources, Inc. Current
Report on 8-K dated March 22, 2000.
4.13 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated February 9, 2000, principal amount $100,000,
to EcoTels International Limited, incorporated by
reference to Exhibit 10.49 to Chaparral Resources,
Inc.'s Current Report on 8-K dated March 22, 2000.
4.14 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated January 27, 2000, principal amount $750,000,
to Allen & Company Incorporated, incorporated by
reference to Exhibit 10.48 to Chaparral Resources,
Inc.'s Current Report on 8-K dated March 22, 2000.
4.15 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated January 21, 2000, principal amount $250,000,
to Helen Jacobs Strauss Trust, incorporated by reference
to Exhibit 10.47 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
4.16 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated January 19, 2000, principal amount $200,000,
to Akin, Gump, Strauss, Hauer & Feld, incorporated by
reference to Exhibit 10.46 to Chaparral Resources,
Inc.'s Current Report on 8-K dated March 22, 2000.
4.17 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated January 19, 2000, principal amount $250,000,
to John G. McMillian, incorporated by reference to
Exhibit 10.45 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
4.18 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated January 14, 2000, principal amount $250,000,
to Capco Energy, Inc., incorporated by reference to
Exhibit 10.44 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
4.19 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated January 7, 2000, principal amount $150,000,
Rose Dosti IRA UTA Charles Schwab Inc. Contributory DTD,
incorporated by reference to Exhibit 10.43 to Chaparral
Resources, Inc.'s Current Report on 8-K dated March 22,
2000.
4.20 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated December 15, 1999, principal amount
$500,000, to Capco Energy, Inc., incorporated by
reference to Exhibit 10.42 to Chaparral Resources,
Inc.'s Current Report on 8-K dated March 22, 2000.
4.21 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated December 10, 1999, principal amount
$100,000, to Cord Capital, LLC, incorporated by
reference to Exhibit 10.41 to Chaparral Resources,
Inc.'s Current Report on 8-K dated March 22, 2000.
4.22 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated November 12, 1999, principal amount
$1,000,000, to Whittier Ventures, LLC, incorporated by
reference to Exhibit 4.9 to Chaparral Resources, Inc.'s
Current Report on 8-K dated November 17, 1999.
4.23 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount $100,000,
to Marathon Special Opportunity Fund, LLC, incorporated
by reference to Exhibit 4.8 to Chaparral Resources,
Inc.'s Current Report on 8-K dated November 17, 1999.
33
<PAGE>
Exhibit No. Description and Method of Filing
----------- --------------------------------
4.24 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount $100,000,
to Patrick McGee, incorporated by reference to Exhibit
4.7 to Chaparral Resources, Inc.'s Current Report on 8-K
dated November 17, 1999.
4.25 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount $100,000,
to Duncan A. Lee, incorporated by reference to Exhibit
4.6 to Chaparral Resources, Inc.'s Current Report on 8-K
dated November 17, 1999.
4.26 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount $125,000,
to William Keller, incorporated by reference to Exhibit
4.5 to Chaparral Resources, Inc.'s Current Report on 8-K
dated November 17, 1999.
4.27 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount $125,000,
to Thomas G. Murphy, incorporated by reference to
Exhibit 4.4 to Chaparral Resources, Inc.'s Current
Report on 8-K dated November 17, 1999.
4.28 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount $200,000,
to Pecos Joint Venture, incorporated by reference to
Exhibit 4.3 to Chaparral Resources, Inc.'s Current
Report on 8-K dated November 17, 1999.
4.29 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount $250,000,
to Global Undervalued Securities Fund, LP, incorporated
by reference to Exhibit 4.2 to Chaparral Resources,
Inc.'s Current Report on 8-K dated November 17, 1999.
4.30 8% Non-Negotiable Convertible Subordinated Promissory
Note, dated October 25, 1999, principal amount
$2,000,000, to Allen & Company Incorporated,
incorporated by reference to Exhibit 4.1 to Chaparral
Resources, Inc.'s Current Report on 8-K dated November
17, 1999.
10.1 Agreement dated August 30, 1995 for Exploration
Development and Production of Oil in Karakuduk Oil Field
in Mangistan Oblast of the Republic of Kazakhstan
between Ministry of Oil and Gas Industries of the
Republic of Kazakhstan for and on Behalf of the
Government of the Republic of Kazakhstan and Joint Stock
Company of Closed Type Karakuduk Munay Joint Venture,
incorporated by reference to Exhibit 10.17 to Chaparral
Resources, Inc.'s Annual Report on Form 10-K for the
fiscal year ended November 30, 1996.
10.2 License for the Right to Use the Subsurface in the
Republic of Kazakhstan, incorporated by reference to
Exhibit 10.18 to Chaparral Resources, Inc.'s Annual
Report on Form 10-K for the fiscal year ended November
30, 1996.
10.3 Amendment dated September 11, 1997, to License for Right
to Use the Subsurface in the Republic of Kazakhstan,
incorporated by reference to Exhibit 10.2 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
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.
34
<PAGE>
Exhibit No. Description and Method of Filing
----------- --------------------------------
10.5* Letter from the Agency of the Republic of Kazakhstan on
Investments to Central Asian Petroleum (Guernsey)
Limited dated July 28, 1999 regarding License for Right
to Use the Subsurface in the Republic of Kazakhstan.
10.6 Warrant Certificate entitling Allen & Company to
purchase up to 1,022,000 shares of Common Stock of
Chaparral Resources, Inc., incorporated by reference to
Exhibit 10.1 to Chaparral Resources, Inc.'s Current
Report on Form 8-K dated April 1, 1996.
10.7 Form of Warrant issued to Black Diamond Partners LP,
Clint D. Carlson, John A. Schneider, Victory Ventures
LLC, Whittier Energy Company and Whittier Ventures LLC
in connection with loans made by them to Chaparral
Resources, Inc. in November and December 1996 and to
Black Diamond Partners LP, Clint D. Carlson, Whittier
Energy Company and Whittier Ventures LLC in July 1997 in
connection with the same loans, incorporated by
reference to Exhibit 10.3 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June
30, 1997.
10.8 Warrant Certificate entitling Allen & Company
Incorporated to purchase up to 900,000 shares of Common
Stock of Chaparral Resources, Inc., incorporated by
reference to Exhibit 10.1 to Chaparral Resources, Inc.'s
Current Report on Form 8-K/A dated October 31, 1997.
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.
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.
10.11 1998 Incentive and Nonstatutory Stock Option Plan,
incorporated by reference to Exhibit 10.24 to Chaparral
Resources, Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
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.
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.
10.14 Settlement Agreement and Release between Heartland, Inc.
of Wichita and Collins & McIlhenny, Inc. and Chaparral
Resources, Inc., Howard Karren, Whittier Trust Company
and James A. Jeffs dated October 30, 1998, incorporated
by reference to Exhibit 10.3 to Chaparral Resources,
Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
10.15 Warrants issued to Heartland, Inc. of Wichita and
Collins & McIlhenny, Inc., as joint tenants and to Don
M. Kennedy, incorporated by reference to Exhibit 10.4 to
Chaparral Resources, Inc.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.
10.16 Loan Agreement between Challenger Oil Services, PLC and
Chaparral Resources, Inc. dated September 10, 1998,
incorporated by reference to Exhibit 10.5 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
35
<PAGE>
Exhibit No. Description and Method of Filing
----------- --------------------------------
10.17 Promissory Note between Challenger Oil Services, PLC and
Chaparral Resources, Inc. dated September 10, 1998,
incorporated by reference to Exhibit 10.6 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
10.18 International Daywork Drilling Contract - Land between
Challenger Oil Services, PLC and Karakuduk-Munay, JSC,
dated April 7, 1998, incorporated by reference to
Exhibit 10.32 to Chaparral Resources, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December
31, 1998.
10.19 Amendment No. 1 to the International Daywork Drilling
Contract - Land between Challenger Oil Services, PLC and
Karakuduk-Munay, JSC, dated April 7, 1998, incorporated
by reference to Exhibit 10.33 to Chaparral Resources,
Inc.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
10.20 Amendment No. 2 to the International Daywork Drilling
Contract - Land between Challenger Oil Services, PLC and
Karakuduk-Munay, JSC, dated March 17, 1999, incorporated
by reference to Exhibit 10.34 to Chaparral Resources,
Inc.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
10.21 Letter Agreement dated March 17, 1999 between
Karakuduk-Munay, JSC and Challenger Oil Services, PLC,
incorporated by reference to Exhibit 10.35 to Chaparral
Resources, Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
10.22 Letter Agreement and Restated Amendment No. 1 to Loan
Agreement and Promissory Note dated March 18, 1999
between Challenger Oil Services, PLC and Chaparral
Resources, Inc., incorporated by reference to Exhibit
10.36 to Chaparral Resources, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.
10.23 $24,000,000 Loan Agreement dated as of November 1, 1999,
incorporated by reference to Exhibit 10.1 to Chaparral
Resources, Inc.'s Current Report on 8-K dated November
17, 1999.
10.24 Supplemental Agreement, dated February 10, 2000, among
Shell Capital Limited, Shell Capital Services Limited,
Chaparral Resources, Inc., Central Asian Petroleum
(Guernsey) Limited, Closed Type JSC Karakudukmunay and
Central Asian Petroleum, Inc., incorporated by reference
to Exhibit 10.19 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
10.25 CRI-CAP(G) Loan Agreement, dated February 7, 2000,
between Chaparral Resources, Inc. and Central Asian
Petroleum (Guernsey) Limited, incorporated by reference
to Exhibit 10.13 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
10.26 CAP(G)-KKM Loan Agreement, dated February 7, 2000,
between Closed Type JSC Karakudukmunay and Central Asian
Petroleum (Guernsey) Limited, incorporated by reference
to Exhibit 10.16 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
10.27 Accounts Agreement, dated February 8, 2000, among
Chaparral Resources, Inc., Central Asian Petroleum
(Guernsey) Limited, Closed Type JSC Karakudukmunay,
Shell Capital Services Limited, ABN Amro Bank N.V.,
London Branch and The Law Debenture Trust Corporation
p.l.c., incorporated by reference to Exhibit 10.1 to
Chaparral Resources, Inc.'s Current Report on 8-K dated
March 22, 2000.
36
<PAGE>
Exhibit No. Description and Method of Filing
----------- --------------------------------
10.28 Security Trust Deed, dated February 7, 2000, among
Chaparral Resources, Inc., Central Asian Petroleum
(Guernsey) Limited, Central Asian Petroleum, Inc.,
Closed Type JSC Karakudukmunay, Shell Capital Services
Limited and The Law Debenture Trust Corporation p.l.c.,
incorporated by reference to Exhibit 10.17 to Chaparral
Resources, Inc.'s Current Report on 8-K dated March 22,
2000.
10.29 CRI Accounts Assignment, dated February 7, 2000, between
Chaparral Resources, Inc. and The Law Debenture Trust
Corporation p.l.c., incorporated by reference to Exhibit
10.2 to Chaparral Resources, Inc.'s Current Report on
8-K dated March 22, 2000.
10.30 CAP(G) Accounts Assignment, dated February 7, 2000,
between Chaparral Resources, Inc. and The Law Debenture
Trust Corporation, p.l.c., incorporated by reference to
Exhibit 10.3 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
10.31 KKM Accounts Assignment, dated February 7, 2000, between
Closed Type JSC Karakudukmunay and The Law Debenture
Trust Corporation p.l.c., incorporated by reference to
Exhibit 10.4 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
10.32 CRI-CAP(D) Pledge Agreement, dated February 7, 2000,
between Chaparral Resources, Inc. and The Law Debenture
Trust Corporation p.l.c., incorporated by reference to
Exhibit 10.11 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
10.33 CRI-CAP(G) Charge Over Shares, dated February 7, 2000,
between Chaparral Resources, Inc. and The Law Debenture
Trust Corporation p.l.c., incorporated by reference to
Exhibit 10.14 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
10.34 CAP(D)-CAP(G) Charge Over Shares, dated February 7,
2000, between Central Asian Petroleum, Inc. and The Law
Debenture Trust Corporation p.l.c., incorporated by
reference to Exhibit 10.15 to Chaparral Resources,
Inc.'s Current Report on 8-K dated March 22, 2000.
10.35 KKM Pledge Agreement, dated February 7, 2000, between
Central Asian Petroleum (Guernsey) Limited and The Law
Debenture Trust Corporation p.l.c., incorporated by
reference to Exhibit 10.12 to Chaparral Resources,
Inc.'s Current Report on 8-K dated March 22, 2000.
10.36 CRI Assignment, dated February 8, 2000, between
Chaparral Resources, Inc. and The Law Debenture Trust
Corporation p.l.c., incorporated by reference to Exhibit
10.5 to Chaparral Resources, Inc.'s Current Report on
8-K dated March 22, 2000.
10.37 CAP(G) Assignment, dated February 7, 2000, between
Central Asian Petroleum (Guernsey) Limited and The Law
Debenture Trust Corporation p.l.c., incorporated by
reference to Exhibit 10.6 to Chaparral Resources, Inc.'s
Current Report on 8-K dated March 22, 2000.
10.38 KKM Assignment, dated February 7, 2000, between Closed
Type JSC Karakudukmunay and The Law Debenture Trust
Corporation p.l.c., incorporated by reference to Exhibit
10.7 to Chaparral Resources, Inc.'s Current Report on
8-K dated March 22, 2000.
10.39 Assignment of Insurance Proceeds, dated February 7,
2000, between Chaparral Resources, Inc. and The Law
Debenture Trust Corporation p.l.c., incorporated by
reference to Exhibit 10.8 to Chaparral Resources, Inc.'s
Current Report on 8-K dated March 22, 2000.
37
<PAGE>
Exhibit No. Description and Method of Filing
----------- --------------------------------
10.40 KKM Assignment of Insurances, dated February 7, 2000,
between Closed Type JSC Karakudukmunay and The Law
Debenture Trust Corporation p.l.c., incorporated by
reference to Exhibit 10.9 to Chaparral Resources, Inc.'s
Current Report on 8-K dated March 22, 2000.
10.41 Assignment of Reinsurance, dated February 8, 2000, among
Closed Type JSC Karakudukmunay, Kazakinstrakh JSC,
Schwarzmeer und Ostsee Insurance Co. Limited (Sovag)
U.K. and The Law Debenture Trust Corporation p.l.c.,
incorporated by reference to Exhibit 10.10 to Chaparral
Resources, Inc.'s Current Report on 8-K dated March 22,
2000.
10.42 Warrant Agreement, dated February 8, 2000, between
Chaparral Resources, Inc. and Shell Capital Limited,
incorporated by reference to Exhibit 10.18 to Chaparral
Resources, Inc.'s Current Report on 8-K dated March 22,
2000.
10.43 Technical Services Agreement, dated February 8, 2000,
Shell Capital Services Limited and Closed Type JSC
Karakudukmunay, incorporated by reference to Exhibit
10.20 to Chaparral Resources, Inc.'s Current Report on
8-K dated March 22, 2000.
10.44 Contract of Insurance No. 158, dated December 29, 1999,
between the Overseas Private Investment Corporation and
Chaparral Resources, Inc., incorporated by reference to
Exhibit 10.21 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
10.45 Amendment No. 1 to Contract of Insurance No. F158, dated
as of February 4, 2000, between the Overseas Private
Investment Corporation and Chaparral Resources, Inc.,
incorporated by reference to Exhibit 10.22 to Chaparral
Resources, Inc.'s Current Report on 8-K dated March 22,
2000.
10.46 Trade Confirmation, dated February 11, 2000, between
Deutsche Bank AG New York and Chaparral Resources, Inc.,
incorporated by reference to Exhibit 10.23 to Chaparral
Resources, Inc.'s Current Report on 8-K dated March 22,
2000.
10.47 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Patrick McGee, incorporated by reference to
Exhibit 10.24 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
10.48 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Whittier Ventures, LLC., incorporated by
reference to Exhibit 10.25 to Chaparral Resources,
Inc.'s Current Report on 8-K dated March 22, 2000.
10.49 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Pecos Joint Venture, incorporated by
reference to Exhibit 10.26 to Chaparral Resources,
Inc.'s Current Report on 8-K dated March 22, 2000.
10.50 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Thomas G. Murphy, incorporated by reference
to Exhibit 10.27 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
10.51 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Duncan Lee, incorporated by reference to
Exhibit 10.28 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
38
<PAGE>
Exhibit No. Description and Method of Filing
----------- --------------------------------
10.52 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Marathon Special Opportunity Fund,
incorporated by reference to Exhibit 10.29 to Chaparral
Resources, Inc.'s Current Report on 8-K dated March 22,
2000.
10.53 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and William Keller, incorporated by reference to
Exhibit 10.30 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
10.54 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Global Undervalued Securities Fund, LP,
incorporated by reference to Exhibit 10.31 to Chaparral
Resources, Inc.'s Current Report on 8-K dated March 22,
2000.
10.55 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Cord Family Exempt Trust, incorporated by
reference to Exhibit 10.32 to Chaparral Resources,
Inc.'s Current Report on 8-K dated March 22, 2000.
10.56 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Cord Capital, LLC, incorporated by reference
to Exhibit 10.33 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
10.57 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Capco Energy, Inc, incorporated by reference
to Exhibit 10.34 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
10.58 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Rose Dosti IRA UTA Charles Schwab Inc
Contributory DTD, incorporated by reference to Exhibit
10.35 to Chaparral Resources, Inc.'s Current Report on
8-K dated March 22, 2000.
10.59 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and John G. McMillian, incorporated by reference
to Exhibit 10.36 to Chaparral Resources, Inc.'s Current
Report on 8-K dated March 22, 2000.
10.60 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Akin, Gump, Strauss, Hauer & Feld, L.L.P.,
incorporated by reference to Exhibit 10.37 to Chaparral
Resources, Inc.'s Current Report on 8-K dated March 22,
2000.
10.61 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Helen Jacobs Strauss Trust, incorporated by
reference to Exhibit 10.38 to Chaparral Resources,
Inc.'s Current Report on 8-K dated March 22, 2000.
10.62 Subordination Agreement, dated January 28, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and Allen & Company Incorporated, incorporated
by reference to Exhibit 10.39 to Chaparral Resources,
Inc.'s Current Report on 8-K dated March 22, 2000.
10.63* Subordination Agreement, dated February 8, 2000, between
Chaparral Resources, Inc., Shell Capital Services
Limited and EcoTels International Limited.
39
<PAGE>
Exhibit No. Description and Method of Filing
----------- --------------------------------
10.64 Crude Oil Sale and Purchase Agreement dated as of
November 1, 1999, between Closed Type JSC Karakuduk
Munay and Shell Trading International Limited,
incorporated by reference to Exhibit 10.1 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.
10.65* Daywork Drilling Contract Land between KazakhOil
Drilling Service Company and Closed Type Karakudukmunay,
JSC, dated October 10, 1999.
10.66* Transportation Contract between KazakhOil and Closed
Type Karakudukmunay, JSC, dated January 31, 2000.
10.67* Commercial Services Agreement between Shell Trading
International Limited and Closed Type Karakudukmunay,
JSC, dated November 1, 1999.
10.68* Letter from Ryder Scott Company Petroleum Engineers to
Chaparral Resources, Inc. regarding review of reserve
estimates of the Karakuduk Field, dated January 13,
1995.
10.69* Letter from Ryder Scott Company Petroleum Engineers to
Chaparral Resources, Inc. regarding review of reserve
estimates of the Karakuduk Field, dated October 8, 1999.
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.
23.1* Consent of Ryder Scott Company Petroleum Engineers.
27* Financial Data Schedule.
* Filed previously with original Form 10-K for period ended December 31, 1999.
40
<PAGE>
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/ Michael B. Young
-----------------------
Michael B. Young, Treasurer and Controller
(Principal Financial and Accounting Officer)
Dated December 4, 2000
41
<PAGE>
Chaparral Resources, Inc.
Consolidated Financial Statements
Years ended December 31, 1999, December 31, 1998, and December 31, 1997
with Reports of Independent Auditors
Contents
--------
Chaparral Resources, Inc.
Report of Independent Auditors ............................................ F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets ............................................... F-2
Consolidated Statements of Operations ..................................... F-4
Consolidated Statements of Cash Flows ..................................... F-5
Consolidated Statements of Changes in Stockholders' Equity ................ F-7
Notes to Consolidated Financial Statements ................................ F-8
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited ....................................... F-32
Closed Type JSC Karakudukmunay
Report of Independent Auditors ............................................ F-35
Audited Financial Statements
Balance Sheets ............................................................ F-36
Statements of Operations .................................................. F-37
Statements of Cash Flows .................................................. F-38
Statements of Stockholders' Deficit ....................................... F-39
Notes to Financial Statements ............................................. F-40
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited ....................................... F-54
<PAGE>
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company has incurred recurring operating losses and has a working capital
deficiency as of December 31, 1999. In addition, there are uncertainties
relating to the Company and its equity method investees' ability to meet their
commitments under a license agreement and ability to meet all expenditure/cash
flow requirements through 2000. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans and
other factors in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of these
uncertainties.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Houston, Texas
March 17, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
CHAPARRAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
December 31
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 23,000 $ 121,000
Restricted cash (Note 3) 578,000 756,000
Accounts receivable 23,000 25,000
Prepaid expenses 111,000 76,000
Current portion of note receivable (Note 4) -- 420,000
------------ ------------
Total current assets 735,000 1,398,000
Note receivable (Note 4) -- 589,000
Investment in KKM and other oil and gas property costs-
Full cost method Republic of Kazakhstan (Note 5): 38,151,000 32,261,000
Furniture, fixtures and equipment 100,000 93,000
Less accumulated depreciation (39,000) (17,000)
------------ ------------
61,000 76,000
------------ ------------
Deferred debt issuance cost (Note 6) 2,356,000 --
------------ ------------
Total assets $ 41,303,000 $ 34,324,000
============ ============
See accompanying notes.
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHAPARRAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
December 31
1999 1998
------------ ------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,045,000 $ 223,000
Accrued liabilities:
Accrued compensation 458,000 418,000
Accrued debt issuance cost 1,934,000 --
Accrued other 239,000 104,000
Short-term note payable, net of discount (Note 7) -- 940,000
------------ ------------
Total current liabilities 3,676,000 1,685,000
Note payable, net of discount (Note 7) 9,576,000 --
Accrued compensation (Note 13) -- 210,000
Redeemable preferred stock (Note 10)- cumulative, convertible,
Series A 75,000 designated, 50,000 issued and outstanding,
at stated value, $5.00 cumulative annual
dividend, $5,500,000 redemption value 5,200,000 4,850,000
Stockholders' equity (Note 8):
Common stock - authorized, 100,000,000
shares of $0.0001 par value; issued and outstanding,
980,314 and 972,980 shares at December 31, 1999 and 1998 -- --
Capital in excess of par value 47,857,000 47,611,000
Unearned portion of restricted stock awards (23,000) (56,000)
Preferred stock - 1,000,000 shares authorized, 925,000 shares
undesignated. Issued and outstanding - none -- --
Stock subscription receivable (Note 10) -- (506,000)
Accumulated deficit (24,983,000) (19,470,000)
------------ ------------
Total stockholders' equity 22,851,000 27,579,000
------------ ------------
Total liabilities and stockholders' equity $ 41,303,000 $ 34,324,000
============ ============
See accompanying notes.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue $ -- $ -- $ --
Costs and expenses:
Depreciation and depletion 31,000 14,000 7,000
General and administrative 2,392,000 3,017,000 1,654,000
----------- ----------- -----------
2,423,000 3,031,000 1,661,000
----------- ----------- -----------
Loss from operations (2,423,000) (3,031,000) (1,661,000)
Other income (expense):
Interest income 924,000 662,000 226,000
Interest expense (523,000) (205,000) (298,000)
Equity in loss from investment
(Notes 5 and 17) (2,081,000) (1,222,000) (637,000)
Legal settlement (Note 9) -- (234,000) --
Write-off of note receivable (Note 4) (1,060,000) -- --
Other -- -- (19,000)
----------- ----------- -----------
(2,740,000) (999,000) (728,000)
----------- ----------- -----------
Loss before extraordinary item (5,163,000) (4,030,000) (2,389,000)
Extraordinary loss on extinguishment of
long-term debt (Note 16) -- (236,000) (214,000)
----------- ----------- -----------
Net loss $(5,163,000) $(4,266,000) $(2,603,000)
=========== =========== ===========
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock (250,000) (250,000) --
Discount accretion
Series A Redeemable Preferred Stock (100,000) (100,000) --
----------- ----------- -----------
Net loss available to common stockholders $(5,513,000) $(4,616,000) $(2,603,000)
=========== =========== ===========
Basic and diluted earnings per share:
Loss per share before extraordinary item $ (5.63) $ (4.88) $ (3.45)
Extraordinary loss per share $ -- $ (.26) $ (.31)
Net loss per share $ (5.63) $ (5.14) $ (3.76)
Weighted average number of shares
outstanding (basic and diluted) 978,391 898,477 692,691
See accompanying notes.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (5,163,000) $ (4,266,000) $ (2,603,000)
Adjustments to reconcile net loss to
net cash provided (used) in operating activities:
Write-off of note receivable 1,060,000 -- --
Equity loss from investment 2,081,000 1,222,000 637,000
Reversal of long term accrued compensation (210,000) -- --
Depreciation and depletion 31,000 14,000 7,000
Loss on the sale of oil and gas properties -- -- 3,000
Provision for doubtful accounts 16,000 29,000 37,000
Write-down of oil and gas properties -- -- 30,000
Stock issued for services and bonuses 270,000 600,000 78,000
Stock options issued for services and bonuses 9,000 113,000 117,000
Warrants issued for legal settlement -- 34,000 --
Amortization of note discount 77,000 154,000 198,000
Loss on extinguishment of debt -- 236,000 214,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (14,000) 48,000 (129,000)
Prepaid expenses (35,000) (14,000) (59,000)
Note and related accrued interest receivable (51,000) (1,009,000) --
Accrued interest on advances to KKM (854,000) (522,000) (195,000)
Other -- -- 95,000
Increase in:
Accounts payable 822,000 46,000 177,000
Accrued debt issuance cost 1,934,000 -- --
Accrued other 135,000 50,000 19,000
Accrued compensation 40,000 418,000 --
------------ ------------ ------------
Net cash provided (used) in operating activities 148,000 (2,847,000) (1,374,000)
Cash flows from investing activities
Additions to furniture, fixtures and equipment $ (7,000) $ (80,000) $ (6,000)
Investment in and advances to KKM and other oil and
gas property costs (7,126,000) (13,039,000) (6,114,000)
Proceeds from sale of interest in oil and gas
properties - domestic -- -- 282,000
------------ ------------ ------------
Net cash used in investing activities (7,133,000) (13,119,000) (5,838,000)
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities
Net proceeds from notes payable $ 10,040,000 $ 2,045,000 $ 300,000
Repayment of notes payable (975,000) (1,095,000) (450,000)
Debt issuance cost (2,356,000) -- --
Restricted cash 178,000 (756,000) --
Payable for CAP-G shares -- -- (744,000)
Proceeds from warrant exercise -- 20,000 3,309,000
Net proceeds from redeemable preferred stock
issuance -- -- 5,000,000
Net proceeds from private placement -- 12,450,000 2,300,000
------------ ------------ ------------
Net cash provided by financing activities 6,887,000 12,664,000 9,715,000
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (98,000) (3,302,000) 2,503,000
Cash and cash equivalents at beginning
of period 121,000 3,423,000 920,000
------------ ------------ ------------
Cash and cash equivalents at end of period $ 23,000 $ 121,000 $ 3,423,000
============ ============ ============
Supplemental cash flow disclosure
Interest paid $ 68,000 $ 58,000 $ 53,000
Income taxes paid 23,000
Supplemental schedule of non-cash
investing and financing activities
Common stock issued for acquisition
of CAP-G $ -- $ -- $ 1,000,000
Discount recognized for note issued
with detachable stock warrants 506,000 146,000 74,250
Warrants issued for common stock in
conjunction with subscription and issuance
of preferred stock -- -- 2,270,000
Common stock issued for accrued
compensation -- -- 175,000
Common stock issued upon:
Conversion of debentures -- -- 1,500,000
Conversion of accrued interest -- -- 50,000
See accompanying notes.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Capital in Stock
------------------------- Excess of Par Subscription
Shares Amount Value Receivable
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at November 30, 1996 625,442 -- 24,235,000 --
Warrants exercised for capital
stock 94,135 -- 3,309,000 --
Conversion of debentures for
capital stock 36,162 -- 1,549,000 --
Capital stock issued for services 1,461 -- 78,000 --
Stock options issued for services -- -- 227,000 --
Capital stock issued for accrued
compensation 5,833 -- 175,000 --
Capital stock issued for
investment in affiliate 6,667 -- 1,000,000 --
Capital stock issued in private
placement 58,974 -- 2,300,000 --
Debt issuance costs--stock
warrants issued -- -- 168,000 --
Preferred stock issuance and related
common stock warrants -- -- 2,270,000 (1,770,000)
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1997 828,674 -- 35,311,000 (1,770,000)
Warrants exercised for capital
stock 1,333 -- 20,000 --
Capital stock issued for services 4,084 -- 645,000 --
Stock options issued for services -- -- 34,000 --
Stock options expired -- -- (19,000) --
Amortization of restricted stock
awards -- -- -- --
Capital stock issued in private
placement 138,889 -- 12,450,000 --
Legal Settlement
warrants issued -- -- 34,000 --
Debt issuance costs--stock
warrants issued -- -- 400,000 --
Preferred stock issuance and related
common stock warrants -- -- (1,264,000) 1,264,000
Cumulative dividend Series A
Redeemable Preferred Stock -- -- -- --
Discount accretion on redeemable
preferred stock -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1998 972,980 -- 47,611,000 (506,000)
Capital stock issued for services 5,861 -- 246,000 --
Amortization of restricted stock
awards -- -- -- --
Capital stock issued for fractional
shares after reverse stock split 1,473 -- -- --
Warrants earned -- -- -- 506,000
Cumulative dividend Series A
Redeemable Preferred Stock -- -- -- --
Discount accretion on redeemable
preferred stock -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1999 980,314 -- 47,857,000 --
=========== =========== =========== ===========
Table continues on following page.
F-7
<PAGE>
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
Unearned
Restricted Accumulated
Stock Awards Deficit Total
----------- ----------- -----------
Balance at November 30, 1996 -- (12,121,000) 12,114,000
Warrants exercised for capital
stock -- -- 3,309,000
Conversion of debentures for
capital stock -- -- 1,549,000
Capital stock issued for services -- -- 78,000
Stock options issued for services (109,000) -- 118,000
Capital stock issued for accrued
compensation -- -- 175,000
Capital stock issued for
investment in affiliate -- -- 1,000,000
Capital stock issued in private
placement -- -- 2,300,000
Debt issuance costs--stock
warrants issued -- -- 168,000
Preferred stock issuance and related
common stock warrants -- -- 500,000
Net loss -- (2,733,000) (2,733,000)
----------- ----------- -----------
Balance at December 31, 1997 (109,000) (14,854,000) 18,578,000
Warrants exercised for capital
stock -- -- 20,000
Capital stock issued for services (45,000) -- 600,000
Stock options issued for services (34,000) -- --
Stock options expired 17,000 -- (2,000)
Amortization of restricted stock
awards 115,000 -- 115,000
Capital stock issued in private
placement -- -- 12,450,000
Legal Settlement
warrants issued -- -- 34,000
Debt issuance costs--stock
warrants issued -- -- 400,000
Preferred stock issuance and related
common stock warrants -- -- --
Cumulative dividend Series A
Redeemable Preferred Stock -- (250,000) (250,000)
Discount accretion on redeemable
preferred stock -- (100,000) (100,000)
Net loss -- (4,266,000) (4,266,000)
----------- ----------- -----------
Balance at December 31, 1998 (56,000) (19,470,000) 27,579,000
Capital stock issued for services (246,000) -- --
Amortization of restricted stock
awards 279,000 -- 279,000
Capital stock issued for fractional
shares after reverse stock split -- -- --
Warrants earned -- -- 506,000
Cumulative dividend Series A
Redeemable Preferred Stock -- (250,000) (250,000)
Discount accretion on redeemable
preferred stock -- (100,000) (100,000)
Net loss -- (5,163,000) (5,163,000)
----------- ----------- -----------
Balance at December 31, 1999 (23,000) (24,983,000) 22,851,000
=========== =========== ===========
See accompanying notes.
F-7(a)
</TABLE>
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies and Organization
Organization, Principles of Consolidation, and Basis of Presentation
--------------------------------------------------------------------
Chaparral Resources, Inc. ("Chaparral") was incorporated in the state of
Colorado on January 13, 1972, principally to engage in the exploration,
development and production of oil and gas properties. On April 21, 1999, the
Company's stockholders approved the reincorporation of Chaparral from Colorado
to Delaware. Chaparral focuses substantially all of its efforts on the
exploration and development of the Karakuduk Field, an oilfield located in the
Central Asian Republic of Kazakhstan.
The consolidated financial statements include the accounts of Chaparral and its
100% owned subsidiaries, Central Asian Petroleum (Guernsey) Limited ("CAP-G"),
Road Runner Services Company ("RRSC"), Chaparral Acquisition Corporation
("CAC"), and Central Asian Petroleum, Inc. ("CAP-D"). Chaparral owns 80% of the
common stock of CAP-G directly and indirectly through CAP-D, which owns the
remaining 20%. Hereinafter, Chaparral and its subsidiaries are collectively
referred to as "the Company." All significant intercompany transactions have
been eliminated.
In order to unite the reporting period of the Company with that of its
subsidiaries, the fiscal year of the Company was changed to a December 31 year
end from the previous November 30 year end. This change took effect on May 29,
1997. As a result of this change, the consolidated statement of changes in
stockholders' equity for the thirteen months ended December 31, 1997 is
presented.
CAP-G owns a 50% interest in Closed Type JSC Karakudukmunay ("KKM"), a
Kazakhstan joint stock company, which holds the rights for the exploration,
development and production of oil in the Karakuduk Field. KKM is owned jointly
by CAP-G (50%), KazakhOil JSC ("KazakhOil") (40%) and a private Kazakhstan joint
stock company (10%). KazakhOil, the national petroleum company of Kazakhstan, is
owned by the Government of the Republic of Kazakhstan. The Company shares
control of KKM through participation on KKM's Board of Directors.
On April 21, 1999, the Company's stockholders approved and effected a sixty for
one reverse stock split. Accordingly, all historical weighted average share and
per share amounts have been restated to reflect the reverse stock split.
Reclassifications
-----------------
Certain reclassifications have been made in the 1998 and 1997 financial
statements to conform to the 1999 presentation.
Cash and Cash Equivalents
-------------------------
Cash equivalents consist of highly liquid investments purchased with an original
maturity of three months or less.
Investment in KKM and Other Oil and Gas Property Costs
------------------------------------------------------
The Company accounts for its investment in KKM using the equity method. The
Company follows the full cost method of accounting for oil and gas properties.
Accordingly, all costs associated with the acquisition, exploration, and
development of oil and gas reserves, including directly related overhead costs,
are capitalized.
All capitalized costs of oil and gas properties, including the estimated future
costs to develop proven reserves, are amortized on the unit-of-production method
using estimated proven reserves. Investments in unproven properties and major
development projects are not amortized until proven reserves associated with the
projects can be determined or until impairment occurs. If the results of an
assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized cost to be amortized.
F-8
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
In addition, the capitalized costs are subject to a "ceiling test," which
basically limits such costs to the aggregate of the "estimated present value,"
discounted at a 10-percent interest rate of the future net revenues from proved
reserves, based on current economic and operating conditions, plus the lower of
cost or fair market value of unproven properties.
Sales of proven and unproven 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 proven
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.
Revenue Recognition
-------------------
Revenues and their related costs are recognized upon delivery of commercial
quantities of oil and gas production produced from proven 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.
During 1999, KKM sold approximately 325,000 barrels of crude oil in the local
Kazakhstan and export markets and realized approximately $1,019,000, net of
related production and transportation costs. These sales resulted from placing
accumulations of crude oil production resulting from the initial work associated
with the early phases of the Karakuduk Field development plan. The proceeds from
these placements were not considered revenues, as volumes delivered were not
commercially viable or attributable to proven reserves. KKM has accordingly
accounted for these proceeds as cost recovery by reducing its net carrying value
of oil and gas properties by the amount of net proceeds received.
Depreciation of Furniture, Fixtures and Equipment
-------------------------------------------------
Furniture, fixtures and equipment are recorded at cost and are depreciated using
the straight-line method over estimated useful lives, which range from three to
seven years.
Loss Per Common Share
---------------------
Basic loss per common share is calculated by dividing net loss, after deducting
preferred stock dividends and discount on Redeemable Preferred Stock that is
accreted directly to the accumulated deficit, by the aggregate of the weighted
average shares outstanding during the period. Diluted loss per common share
considers the dilutive effect of the average number of common stock equivalents
that are outstanding during the period.
F-9
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
Loss Per Common Share (continued)
---------------------------------
Diluted loss per share is not presented because the exercise of stock options
and stock warrants, and the effect of the conversion of the Company's Redeemable
Preferred Stock of 32,367, 52,575, and 152,978 for the years 1999, 1998, and
1997, respectively, into shares of the Company's common stock are antidilutive.
Stock Based Compensation
------------------------
In accordance with the provision SFAS No. 123, Accounting for Stock-Based
Compensation, the Company has elected to follow the Accounting Principles
Board's Opinion No. 25, Accounting for Stock Issued to Employees and related
interpretations ("APB 25") in accounting for its employee stock-based
compensation plans. Under APB 25, if the exercise price of the Company's
employee stock options equals or exceeds the fair value of the underlying stock
on the date of grant as determined by the Company's Board of Directors, no
compensation expense is recognized.
New Accounting Standards
------------------------
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. This statement, as amended by SFAS No. 137, is effective for
fiscal years beginning after June 15, 2000. As of December 31, 1999, the Company
has not adopted SFAS 133. The Company is evaluating this pronouncement and
intends to adopt the statement no later than January 1, 2001. The impact of SFAS
133 on the Company's financial position and results of operations has not yet
been determined.
In 1999, the FASB released EITF 99-10, Percentage Used to Determine the Amount
of Equity Method Losses, which requires investors to recognize equity method
losses beyond their percentage of investee common stock to the extent of their
adjusted basis in the investee's common stock and other loans/advances made to
the investee. Future equity method gains, if any, would be recaptured by the
investor to the extent disproportionate equity method losses were recognized in
prior periods. The Company's policy is to recognize equity losses based on its
applicable ownership level in KKM's common stock, advances, interest receivable,
and other investments to which the equity method losses are being applied. EITF
99-10 is effective for interim and annual periods beginning after September 23,
1999. The Company has elected to apply EITF 99-10 prospectively beginning in the
quarter ended December 31, 1999. The Company recognized an additional equity
loss of $683,000 in 1999 due to the application of EITF 99-10.
Fair Value of Financial Instruments
-----------------------------------
All of the Company's financial instruments, including cash and cash equivalents,
accounts receivable, notes receivable, and notes payable, have fair values which
approximate their recorded values as they are either short-term in nature or
carry interest rates which approximate market rates.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-10
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
Risks and Uncertainties
-----------------------
The ability of KKM to realize the carrying value of its assets is dependent on
being able to develop, transport and market hydrocarbons. Currently, exports
from the Republic of Kazakhstan are restricted since they are dependent on
limited transport routes and, in particular, access to the Russian pipeline
system. Domestic markets in the Republic of Kazakhstan might not permit world
market prices to be obtained. Management believes, however, that over the life
of the project, transportation restrictions will be alleviated and prices will
be achievable for hydrocarbons extracted to allow full recovery of the carrying
value of its assets.
2. Going Concern
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company is responsible for
providing 100% of the funding for the development of the Karakuduk Field not
provided from oil sales or third party sources. The Karakuduk Field will require
significant additional funding in order to obtain levels of production that
would generate sufficient cash flows to meet future capital and operating
spending requirements. The Company has recognized recurring operating losses and
has a working capital deficiency as of December 31, 1999. In addition, there are
uncertainties relating to the Company and KKM's ability to meet commitments
under KKM's license agreement and all expenditure and cash flow requirements
through fiscal year 2000. As described in Note 15, KKM's agreements with the
government of the Republic of Kazakhstan require KKM to meet certain expenditure
and work commitments on or before June 30, 2000. If KKM fails to meet these
commitments, KKM's right to develop the Karakuduk Field may be terminated and
the Company's investment in the Karakuduk Field may be lost.
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.
Management's plan to address these uncertainties include:
o Shell Capital Loan. As discussed in Note 6, on November 1, 1999, the
Company entered a loan agreement (the "Loan") with Shell Capital Limited
("Shell Capital"), to provide up to $24,000,000 in financing for the
development of the Karakuduk Field. The consummation of the Loan was
subject to a number of significant conditions, which were subsequently
fulfilled in February 2000. As of March 24, 2000, the Company has borrowed
a total of $13,800,000 under the Loan.
o Rights Offering. As a condition to the Loan, the Company will utilize its
best efforts to issue to its stockholders rights to acquire not less than
$6,000,000 of the Company's common stock on or before June 30, 2000 (the
"Rights Offering"). Two of the Company's related party stockholders, Allen
& Company, Inc. ("Allen") and Whittier Ventures, LLC ("Whittier"), have
each undertaken to exercise their full pro-rata share of the Rights
Offering and, if the Rights Offering is not concluded on or before June 30,
2000, to each contribute $2,000,000 into the Company for the Company's
common stock or other indebtedness (the "Equity Support Agreement").
F-11
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Going Concern (Continued)
o Development of KKM's Proven Reserves. KKM has approximately 67.58 million
barrels of estimated proven oil reserves, net of government royalty, of
which 33.79 million barrels are attributable to the Company's net interest.
As of December 31, 1999, KKM has produced approximately 436,000 barrels of
crude oil, of which 325,000 barrels were sold in 1999 for a total proceeds
of $1,019,000, net of transportation and production costs. As of December
31, 1999, KKM had approximately 111,000 barrels of crude oil in inventory
and was producing approximately 1,100 barrels of oil per day.
o Crude Oil Sales Agreement. On November 1, 1999, KKM entered into a Crude
Oil Sale and Purchase Agreement (the "Crude Oil Sales Agreement") with
Shell Trading International Limited ("STASCO"), an affiliate of Shell
Capital, for the purchase of 100% of the oil production from the Karakuduk
Field on the export market for world market oil prices. The Company expects
KKM to obtain a substantially higher return from oil sales under the Crude
Oil Sales Agreement than would otherwise be obtainable from oil sales in
Kazakhstan's local market. The Crude Oil Sales Agreement became effective
upon the consummation of the Loan and KKM expects to begin placing oil
under the agreement in April 2000.
Management's plans for addressing the above uncertainties are partially based
upon forward looking events, which have yet to occur, including the successful
consummation of the Rights Offering and/or the Equity Support Agreement and the
successful development, production, and sales of crude oil from the Karakuduk
Field, as to which there is no assurance. Expected funding requirements
necessary for development of the Karakuduk Field through December 31, 2000 are
also partially based upon future cash flows from the sale of KKM's crude oil
production. It is management's belief, however, that these risks will be
mitigated by the funding available under the Loan, along with the Equity Support
Agreement in the event the Rights Offering is not successful.
3. Restricted Cash
As of December 31, 1999, the Company held restricted cash of $578,000 as
collateral for loans made by the Chase Bank of Texas, N.A. ("Chase") to KKM for
the acquisition of tangible equipment used in the Karakuduk Field. KKM fully
repaid the loans in January 2000, and the collateral was released.
4. Notes Receivable
In September 1998, the Company advanced $1,009,000 to a third-party drilling
contractor, Challenger Oil Services, PLC ("Challenger") to ready a drilling rig
for use by KKM in the Karakuduk Field. In April 1999, the owner of the drilling
rig operated by Challenger, Oil & Gas Exploration Company Cracow, Ltd.
("OGECC"), terminated its contract with Challenger. As a result of the
termination of the contract between Challenger and OGECC, KKM terminated the
drilling contract between KKM and Challenger, and arbitration proceedings were
instituted in accordance with the terms of the drilling contract.
In February 2000, the Company, KKM, Challenger, and OGECC reached a mutual
settlement and release (the "Settlement") for all parties involved. The
Settlement requires KKM to pay outstanding accrued liabilities to Challenger for
prior work performed totaling $1,336,000 The Company also agreed to fully
discharge the note receivable from Challenger to the Company. Due to the
Settlement, the Company fully impaired the note, plus accrued interest of
$51,000, as of December 31, 1999.
F-12
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Investment in KKM and Other Oil and Gas Property Costs
The Company's oil and gas properties and investments are comprised of
investments in KKM's common stock, advances to KKM, acquisition costs for CAP-G,
and other capitalizable costs allowed under the full cost method of accounting.
Accumulated equity losses in KKM and accumulated depletion have been netted
against the gross capitalized costs.
The Company is currently depleting costs associated with its acquisition costs
and other capitalizable costs (the "Company's Depletable Costs") under the
units-of-production method. The rate used for depletion reflects the ratio of
KKM's current period production divided by KKM's total proven reserves. These
amounts represent the Company's costs to acquire the right to develop the oil
and gas reserves underlying the Company's equity interest in KKM and accordingly
are depleted as the reserves are produced.
Advances to and interest due from KKM are to be recovered through payments
resulting from KKM's anticipated sales of future crude oil production. KKM's
agreement with the government of the Republic of Kazakhstan provides for
quarterly repayments equal to 65% of gross revenues, net of government
royalties. The Company, at its own discretion, may defer receipt of quarterly
repayments to maintain working capital within KKM.
On November 1, 1999, KKM classified approximately 67.58 million barrels of oil
reserves as proven, net of government royalty, based on the signing of the Loan
with Shell Capital, to provide up to $24,000,000 in financing for the
development of the Karakuduk Field. The Company's net interest in KKM's proven
reserves is approximately 33.79 million barrels of oil. Prior to the Loan, all
of KKM's reserves were considered unproven as the reserves were not considered
commercially viable due to the lack of financing necessary to develop the
Karakuduk Field. With the change in the status of KKM's reserves, the Company's
Depletable Costs became subject to depletion and the Company began recording
depletion expense. As of December 31, 1999, the Company recognized $9,000 of
depletion.
As discussed on Note 1, the Company's share of KKM's equity losses has been
increased by $683,000 to reflect the adoption of EITF 99-10 in the fourth
quarter of 1999. In addition, the Company's share of equity losses for 1999 and
1998 has been reduced by $854,000 and $522,000, respectively, to reflect the
elimination of the Company's 50% share of interest charged to KKM by CAP-G.
F-13
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Investment in KKM and Other Oil and Gas Property Costs (Continued)
Costs capitalized to Oil and Gas Properties and Investments consist of:
<TABLE>
<CAPTION>
December 31,
1999 1998
------------ ------------
<S> <C> <C>
Investment in KKM and Other Oil and Gas Property Costs:
Investments in KKM common stock $ 100,000 $ 100,000
Advances to and interest due from KKM 31,232,000 22,595,000
Acquisition costs 10,613,000 10,613,000
Other capitalizable costs 1,057,000 1,715,000
------------ ------------
Total gross oil and gas investments 43,002,000 35,023,000
------------ ------------
Less: Equity losses (4,842,000) (2,762,000)
Depletion (9,000) --
------------ ------------
Total oil and gas properties and investment $ 38,151,000 $ 32,261,000
============ ============
The condensed financial statements of KKM are as follows:
December 31,
1999 1998
----------- -----------
Condensed Balance Sheet
Current Assets $ 653,000 $ 730,000
Non-Current Assets (primarily oil and gas properties,
full cost method) 25,000,000 19,130,000
Current Liabilities
Current Loan Payable to Related Party -- 3,000,000
Other Current Liabilities 4,589,000 3,205,000
Non-Current Liabilities
Loan Payable to Related Party 32,871,000 20,380,000
Other Non-Current Liabilities -- 578,000
Common stock 200,000 200,000
Accumulated Deficit 12,007,000 7,503,000
Condensed Income Statement
Revenues $ -- $ --
Cost and Expenses 4,504,000 3,488,000
Net Loss $ 4,504,000 $ 3,488,000
</TABLE>
F-14
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Shell Capital Loan
On November 1, 1999, the Company entered into the Loan with Shell Capital, to
provide up to $24,000,000 of financing for the development of the Karakuduk
Field. CAP-D, CAP-G, and KKM also signed the Loan as co-obligors. The Company
and KKM are hereafter referred to as the "Borrowers". The consummation of the
Loan was subject to a number of significant conditions, including, without
limitation: (i) an equity infusion of at least $9,000,000, (ii) obtaining
political risk insurance, (iii) Shell or the Company obtaining transportation
risk insurance, (iv) the hedging of a significant portion of the Company's
future oil production, and (v) the retirement, conversion, or full subordination
of all of the outstanding indebtedness of the Company and KKM, excluding current
trade payables. On February 14, 2000, the Company fully satisfied all of the
outstanding conditions.
The $9,000,000 equity infusion was partially satisfied by the Company's issuance
of 8% Non-negotiable Convertible Promissory Notes (the "Notes") totaling
$5,050,000 for cash from November 11, 1999 through February 10, 2000. The Notes
are convertible upon stockholder approval. The remaining infusion should be met
through the Rights Offering and/or proceeds from the Equity Support Agreement.
On January 31, 2000, the Company obtained binding political risk insurance
coverage from the Overseas Private Investment Corporation ("OPIC"). The Company
paid the initial insurance premium of $157,500, providing a total of $30,000,000
of political risk coverage for the Company's investment in the Karakuduk Field
through April 30, 2000. The OPIC policy's maximum coverage amount electable by
the Company is $50,000,000, which would require a quarterly premium of $262,500.
The Company is required to maintain political risk insurance until the Loan is
fully repaid.
On February 11, 2000, the Company purchased for $4,000,000 put contracts to sell
1,562,250 barrels of North Sea Brent crude (the "Hedge Agreement"). The exercise
prices of the various put contracts in the Hedge Agreement range from $22.35 to
$17.25 per barrel, with monthly expiration dates beginning in October 2000 and
ending in December 2002. The contracts are evenly spread between October 2000 to
December 2001 (62,750 barrels per month) and between January 2002 to December
2002 (51,750 barrels per month).
In March 2000, the Company paid Shell Capital a total of $750,000 for a
beneficial interest in Shell Capital's policy for transportation risk insurance
(the "Transportation Risk Insurance"), covering certain circumstances whereby
KKM would be unable to export crude oil production outside of the Republic of
Kazakhstan through the existing pipeline routes currently available. In the
event coverage under Shell Capital's policy is triggered, proceeds from the
policy would go to the benefit of the Company for use in making principal and
interest payments required under the Loan. The $750,000 payment for the
beneficial interest in Shell Capital's Transportation Risk Insurance covers the
life of the Loan.
Additionally, KKM entered into a technical service agreement directly with Shell
Capital, granting Shell Capital, at their own discretion, the right to bring in
technical consultants to work on the Karakuduk Field on a cost only basis.
The Company is allowed to drawdown the principal balance of the Loan in minimum
increments of $2,000,000. Loan advances will be used to meet the capital and
operational requirements of KKM, up-front fees and future finance costs required
under the Loan, make payments for premiums due under the OPIC and Transportation
Risk Insurance policies, and make payments required under the Hedge Agreement.
The Loan is available for drawdown until the earlier of September 30, 2001 or
project completion.
F-15
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Shell Capital Loan (Continued)
Project completion occurs when various conditions are met by the Company and
KKM, including, but not limited to: (i) receipt by Shell Capital of an
independent engineer's reserve report evidencing proven developed reserves of at
least 30,000,000 barrels in the Karakuduk Field, (ii) sustaining average
production of 13,000 barrels of oil per day from the Karakuduk Field for a
period of 45 consecutive days, (iii) sustaining water injection at an average
rate of 15,000 barrels per day over 45 consecutive days, (iv) injection of lift
gas into one well over a 24 hour period, and (v) various other financial and
technical milestones ("Project Completion").
Prior to Project Completion, any borrowed amounts accrue interest at an annual
rate of LIBOR plus 17.75%, compounding quarterly. The annual interest rate is
reduced to LIBOR plus 12.75% after Project Completion. Prior to Project
Completion, an interest amount, equal to annual rate of LIBOR plus .50%, is
payable quarterly to Shell Capital, along with a commitment fee equal to an
annual rate of 1.5% of the undrawn portion of the $24,000,000 debt facility. The
remaining unpaid interest is capitalized to the Loan at the end of each quarter.
After Project Completion, all quarterly interest on the outstanding Loan is
fully due and payable by the Company at the end of each calendar quarter.
Principal payments, including any capitalized interest, are due on quarterly
reduction dates ("Reduction Date"), beginning with the first calendar quarter
ending on the earlier of 60 days following Project Completion or December 31,
2001. Minimum principal payments, based upon percentages of the principal
outstanding as of Project Completion, are set out in the Loan and ensure full
settlement of the Loan by September 30, 2004, the final maturity date. Mandatory
prepayments of principal outstanding are required on each Reduction Date out of
any excess cash flow available after consideration of the Company's and KKM's
permitted budgeted expenditures for the following 45 days and all fees,
interest, and principal payments scheduled on such Reduction Date.
In connection with finalizing the Loan, the Company issued to Shell Capital a
warrant to purchase up to 15% of the Company's outstanding common stock (the
"Shell Warrant"). The warrant is non-transferable and will be exercisable on the
earlier of Project Completion or June 30, 2001. The warrant contains certain
registration rights and is subject to certain anti-dilution provisions. The
warrant's exercise price is $15.45 per share.
The Loan subjects the Company to a significant number of restrictions, including
various representations and warranties, positive and negative covenants, and
events of default. The Loan restrictions include, but are not limited to, the
following:
o Pledge of Assets. Shell Capital holds a security interest in
substantially all of the Company's assets, including
its interest in the Karakuduk Field. KKM also
pledged certain security interests in its
receivables and insurances. Consequently, if an
event of default occurs under the Loan and such
event of default is not timely cured, Shell Capital
is entitled to certain remedies, including the right
to accelerate repayment of the Loan and obtain
possession of the assets over which it has a
security interest.
o Business Alteration. The Company cannot engage in any other business
except the ownership of KKM and the operation of the
Karakuduk Field without the prior consent of Shell
Capital.
F-16
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Shell Capital Loan (Continued)
o Rights Offering. The Company must use its best efforts to complete
the Rights Offering on or before June 30, 2000.
Allen and Whittier have executed the Equity Support
Agreement, whereby they will exercise their full
pro-rata share of the Rights Offering or, if the
Rights Offering is not completed, to each contribute
$2,000,000 to the Company in exchange for the
Company's equity securities or indebtedness.
o Change in Control. The Company cannot enter into any transaction
whereby a "group" as defined in the Securities Act
of 1934 acquires or otherwise gains control of 20%
or more of the outstanding shares of the Company's
voting stock. Certain transactions currently
proposed by the Company are exempt from this
restriction, including: the conversion of the
Company's Notes, the Rights Offering, the Equity
Support Agreement, the exercise of the Shell
Warrant, and a grant of non-statutory or statutory
options to purchase up to 15% of the Company's
outstanding common stock to our officers, directors,
employees, or consultants (subject to certain
anti-dilution provisions). Furthermore, Allen and
Whittier have agreed not to sell or otherwise
transfer any of the Company's common stock on or
before June 30, 2000, and at no time let their
ownership in the Company fall below 20%, unless
otherwise agreed with Shell Capital.
o Charged Accounts. The Borrowers must retain all cash receipts from oil
sales, drawdowns from the Loan, and any other funds
raised by the Company through approved equity or
debt offerings in pledged bank accounts ("Charged
Accounts") controlled by Shell Capital. The
Borrowers retain title to their respective Charged
Accounts, but Shell Capital directs all cash
movements at the request of the Borrowers. On a
monthly basis, the Borrowers request transfers of
funds from the Charged Accounts into certain
operating accounts controlled directly by Chaparral
and KKM, respectively.
o Cash Expenditures. The Borrowers must expend funds in accordance with
capital and operating budgets approved by Shell
Capital on an annual basis, unless otherwise
approved by Shell Capital.
o Project Completion. KKM must reach Project Completion on or before
September 30, 2001.
o Share Capital. The Borrowers cannot purchase, issue, or redeem any
of its share capital without the prior approval of
Shell Capital.
o Future Indebtedness. The Borrowers cannot incur financial indebtedness,
other than trade debt, without the approval of Shell
Capital.
o Sale of Significant
Assets. The Borrowers cannot dispose of any significant
assets, including capital stock in subsidiaries,
without the approval of Shell Capital.
F-17
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Shell Capital Loan (Continued)
o Leases. Without Shell Capital's approval, KKM cannot enter
into any lease or license arrangement with annual
payments in excess of $1,000,000 and the Company
will not enter any lease or license arrangement with
annual payments in excess of $200,000.
o Dividends. KKM cannot pay dividends prior to the Project
Completion, and then only subject to certain
restrictions. The Company cannot pay any dividends
without Shell Capital's consent.
o OPIC Insurance. The Company must maintain OPIC political risk
insurance throughout the duration of the Loan.
Annual premiums for $50,000,000 of maximum coverage
allowed under the OPIC policy are approximately
$1,050,000, paid on a quarterly basis.
o Hedge Agreement. The Company cannot cancel or terminate the Hedge
Agreement or enter into any other hedging
transaction without Shell Capital's consent.
As of December 31, 1999, the Company has recognized $2,356,000 in deferred debt
issuance costs associated with the Loan. Debt issuance costs are comprised of
up-front fees payable to Shell Capital, legal fees of Shell Capital and the
Borrowers, and miscellaneous financing fees and set-up charges. The debt
issuance costs will be recorded as a discount and amortized over the life of the
Loan, beginning February 14, 2000.
As of March 22, 2000, the Company has borrowed $13,800,000 from the Loan. The
proceeds were utilized to pay $2,225,000 in outstanding debt issuance costs,
$4,000,000 for the Hedge Agreement, $750,000 for Transportation Risk Insurance,
$157,000 for the initial OPIC insurance premium, $6,000,000 for KKM's
operations, and $667,500 for Chaparral's corporate overhead.
7. Notes Payable
In November 1999, the Company repaid the $975,000 note to Chase, originally
issued by the Company in July 1998. The Chase note was collateralized by a
$1,000,000 stand-by letter of credit put in place by Whittier in exchange for a
senior security interest in the Company's capital stock of CAP-G. Upon repayment
of the Chase note, the stand-by letter of credit was cancelled and Whittier's
security interest was fully released.
During the fourth quarter of 1999, the Company issued a total of $10,040,000 of
the Company's Notes to various related parties and other non-affiliated
investors. The Company recorded the Notes net of discount of $464,000. Notes
issued to related parties totaled $8,290,000, including $5,827,000 from Allen,
$2,051,000 from Whittier, and $412,000 from John G. McMillian, the Chairman and
Chief Executive Officer of the Company. In exchange for the Notes, the Company
received $4,750,000 in cash and canceled $5,290,000 in promissory notes issued
previously in 1999, plus accrued interest thereon, issued by the Company to
Allen ($3,827,000), Whittier ($1,051,000), and Mr. McMillian ($412,000). As of
December 31, 1999, the Company had $126,000 in accrued interest on the Notes, of
which $109,000 related to Notes issued to related parties.
F-18
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Notes Payable (Continued)
The Notes, plus accrued interest, are convertible into the Company's common
stock at a conversion price of $1.86 per share, subject to the approval of the
Company's stockholders. The Notes bear interest at an annual rate of 8% until
the Company's stockholders vote on the conversion of the Notes. If the
conversion feature is approved, the Notes will convert into the equivalent
shares of the Company's common stock within 10 business days following the
stockholder vote. The failure of the stockholders to approve the conversion
provision of the Notes will result in an immediate increase of the annual
interest rate payable to the lesser of 25% or the maximum rate allowed by
applicable law. Management expects to submit the vote on conversion of the Notes
to the Company's stockholders in the second quarter of 2000. The Notes have a
stated maturity date of October 31, 2001, but are unsecured and fully
subordinated to the Loan. The holders of the Notes have no rights to receive any
principal or interest payments prior to full repayment of the Loan, under its
terms, and have executed subordination agreements to that effect.
The Company issued an additional $3,300,000 of the Company's Notes during
January and February 2000 to various related parties and other non-affiliated
investors. Additional Notes issued to related parties totaled $2,400,000,
including $2,000,000 to Allen, $250,000 to Mr. McMillian, and $150,000 to a
relative of Jim Jeffs, the Co-Chairman of the Company.
The conversion feature of the Notes represent a "beneficial conversion feature"
as addressed in EITF 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios. Under EITF
98-5, a portion of the proceeds received from the Notes is allocable to the
conversion feature contained therein. The value assigned to the conversion
feature is determined as the difference between the market price of the
Company's common stock and the conversion price multiplied by the number of
shares to be received upon conversion. As the conversion price contained in the
Notes is substantially below the market price, the value under the above formula
significantly exceeds the net proceeds from the Notes. Under EITF 98-5, the
discount assigned to the conversion feature is limited to the total proceeds
allocated to the convertible instrument. Accordingly, upon approval of the
conversion by the stockholders, the Company will record total additional debt
discount and additional paid in capital equal to $12,834,000, the face amount of
the Notes net of original discount. This amount will be immediately charged to
interest expense since the Notes are convertible upon stockholder approval.
Therefore, the adjustment will have a negative impact on earnings, but no impact
on total stockholders' equity.
8. Common Stock
General
-------
On April 21, 1999, the Company's stockholders approved and effected a sixty for
one reverse stock split to stockholders of record as of April 7, 1999. All
commitments concerning stock options and other commitments payable in shares of
the Company's common stock were effected for the reverse stock split, including
the exercise prices of all outstanding stock options and warrants and the number
of shares to be received upon exercising the respective agreements. The effect
of the reverse stock split has been retroactively reflected as of December 31,
1999, 1998, and 1997 in the consolidated balance sheet, consolidated statement
of operations, and statements of changes in stockholders' equity. All references
to the number of common shares and per share amounts elsewhere in the
consolidated financial statements and related footnotes have been restated as
appropriate to reflect the effects of the reverse stock split for all periods
presented. Fractional shares that resulted from the reverse stock split were
rounded upward to the nearest whole share. As a result, the Company issued 1,473
additional shares of common stock.
F-19
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Common Stock (Continued)
In connection with the reverse stock split, the Company's stockholders also
approved the Plan and Agreement of Merger whereby the Company was reincorporated
from a Colorado to a Delaware corporation. The Plan was effected by exchanging
one share of the Company's $0.10 par value common stock for one share of the new
$.0001 par value common stock. The effect of the reincorporation has also been
retroactively reflected in the consolidated balance sheet and statements of
changes in stockholders' equity.
1989 Stock Warrant Plan
-----------------------
During 1989, the Board of Directors approved a stock warrant plan for key
employees and directors. The Company reserved 19,583 shares of its common stock
for issuance under the plan. The warrants must be granted and exercised within a
10-year period ending April 30, 1999. Immediately following approval of the plan
by the Board of Directors, warrants for 19,583 shares were granted with an
exercise price of $16.80 per share. Warrants for 1,667, 3,750, and 1,667 shares
were exercised for values of $28,000, $63,000, and $28,000 during 1997, 1996,
and 1995, respectively. The remaining 12,500 warrants expired on April 30, 1999.
1997 Incentive Stock Plan
-------------------------
On July 17, 1997, the stockholders of the Company approved the 1997 Incentive
Stock Plan pursuant to which up to 16,667 shares of the Company's common stock
may be granted to directors and employees of, or consultants to, the Company. On
June 26, 1998, the stockholders of the Company repealed the 1997 Incentive Stock
Plan and approved the 1998 Incentive and Nonstatutory Stock Option Plan,
described below. No options were granted under this plan.
1997 Non-employee Directors' Stock Option Plan
----------------------------------------------
On July 17, 1997, the stockholders approved the 1997 Non-employee Directors'
Stock Option Plan, which authorized granting 417 options annually to each
non-employee director in office or elected to the Board of Directors of the
Company, as of the date of the annual meeting of the Company's stockholders. On
June 26, 1998, the stockholders of the Company repealed the 1997 Non-employee
Directors' Stock Option Plan and approved the 1998 Incentive and Non-statutory
Stock Option Plan, described below. As of June 26, 1998, the date of termination
of the plan, options for 3,333 shares with an exercise price of $49.80 had been
issued to non-employee directors.
1998 Incentive and Non-statutory Stock Option Plan
--------------------------------------------------
On June 26, 1998, the stockholders approved the 1998 Incentive and Non-statutory
Stock Option Plan (the "1998 Plan"), pursuant to which up to 50,000 options to
acquire the Company's common stock may be granted to officers, directors,
employees, or consultants of the Company and its subsidiaries. The stock options
granted under the 1998 Plan may be either incentive stock options or
nonstatutory stock options. The 1998 Plan has an effective term of ten years,
commencing on May 20, 1998. The Company did not grant any options under the 1998
Plan during 1998 or 1999.
2000 Incentive and Non-statutory Stock Option Plan
--------------------------------------------------
On November 2, 1999, the Company's Board of Directors approved the formation of
an employee stock option plan, which will allow the Board's Compensation
Committee to grant qualified and/or non-qualified stock options to the
directors, employees, and consultants of the Company. The employee stock option
plan would allow the issuance of option grants to acquire up to 15% of the
Company's outstanding common stock, after giving effect to any changes in the
capital stock of the Company contemplated by the conditions necessary to obtain
funding under the Loan. As of December 31, 1999, the plan had not been ratified
by the stockholders of the Company.
F-20
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Common Stock (Continued)
Non-Qualified Stock Options
---------------------------
During 1997, the Company granted five-year non-qualified options, generally with
vesting periods of one year, to purchase 52,367 restricted shares of the
Company's common stock to various employees and directors of, and consultants
to, the Company. Options relating to 26,142 shares have an exercise price of $45
per share and options relating to 26,225 shares have an exercise price of $90
per share. The Company has recorded these stock options at their fair value on
the date of grant of $227,000.
During 1998, the Company granted five-year non-qualified options to purchase
4,958 shares of the Company's common stock to various employees of, and
consultants to, the Company at various exercise prices ranging between $43.20
and $145.80 per share. The Company recorded the stock options granted to the
consultants at their fair value of $34,000 on the date of grant.
During 1998, options to purchase 2,600 shares of the Company's common stock
granted to various employees of, and consultants to, the Company expired. The
expired options had exercise prices ranging between $45 and $145.80 per share.
During 1999, 542 options to purchase the Company's common stock granted to
various employees of, and consultants to, the Company expired. The options had
exercise prices ranging between $60 and $90 per share.
Common Stock Offerings and Common Stock Warrant Issuances
---------------------------------------------------------
During 1995 and 1996, the Company borrowed $1,050,000. In connection with the
loans, the Company issued 13,000 warrants to purchase common stock at an
exercise price of $15. During 1998, 1,333 warrants were exercised at a price of
$15 for a total of $20,000. On October 30, 1998, 3,333 warrants to purchase the
Company's common stock at an exercise price of $15 expired.
During 1996, in connection with a private placement, the Company issued warrants
to purchase 17,033 shares of the Company's common stock for a total of $10.00 to
the sales agent as a commission.
During late 1996, the Company issued notes totaling $1,850,000 to various
investors. In connection with the notes, the Company issued a total of 7,708
warrants to purchase shares of the Company's common stock at an exercise price
of $15 per share. The Company issued 5,625 warrants upon issuance of the notes.
An additional 2,083 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 2,083 warrants will expire on May 31, 2000.
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.
F-21
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Common Stock (Continued)
During 1997, the Company sold 51,282 shares of the Company's common stock for
$39 per share for a total of $2,000,000 to a private investor. In connection
with the transaction, the Company also issued a warrant to the investor to
purchase up to an additional 76,923 shares of the Company's common stock for
$3,000,000 or $39 per share. The warrant was to expire on December 31, 1997. In
October and November 1997, the private investor exercised warrants to acquire
76,923 shares of the Company's common stock. The same party exercised another
warrant for 2,083 shares of the Company's common stock with an exercise price of
$15 per share. The 2,083 warrant was originally granted in connection with the
issuance of a $500,000 promissory note on December 6, 1996. In April 1997, a
private investor converted a $500,000 promissory note (plus $2,000 of accrued
interest) that had previously been issued by the Company into 12,883 shares of
the Company's common stock at a conversion price of $39 per share.
On October 28, 1997, 7,051 shares of the Company's common stock were issued to a
private investor by way of a "cashless" exercise of a warrant as allowed by the
warrant. This warrant was originally exercisable for 8,333 shares at a
conversion price of $15 per share. The difference of 1,282 shares of the
Company's common stock underlying the warrant expired upon the cashless exercise
of the warrant.
In November 1997, a private investor converted a $1,000,000 promissory note
(plus $48,000 of accrued interest) that previously had been issued by the
Company into 23,279 shares of the Company's common stock at a conversion price
of $45 per share.
During 1997, the Company issued 1,461 shares of the Company's common stock to a
consultant in lieu of $78,000 of accrued fees that had not been paid.
The Company issued 5,833 shares of the Company's restricted common stock to Mr.
Howard Karren, former Chairman of the Board of Directors of the Company, as
payment of $175,000 for services during 1996. The Company recorded accrued
compensation of $175,000 in 1996, and issued the common stock in 1997.
In December 1997, the Company exercised an option to acquire the remaining 10%
of the outstanding shares of CAP-G. As part of the consideration, the Company
issued 6,667 shares valued at $1,000,000.
During 1997, the Company sold 7,692 shares of the Company's common stock for $39
per share for a total of $300,000 to a private investor. In connection with the
transaction, the Company also issued warrants to the investor to purchase up to
an additional 7,692 shares of the Company's common stock for $300,000 or $39 per
share. The private investor exercised a portion of the warrant on December 31,
1997, and received a total of 6,410 shares of the Company's common stock. The
remaining 1,282 warrants expired on the same day.
On January 23, 1998, the Company, granted 1,500 shares of the Company's common
stock to the directors of the Company and granted 3,084 shares of the Company's
common stock to various employees of, and consultants to, the Company, of which
500 shares will vest with respect to 167 shares on each of January 30, 1999,
2000, and 2001. As a result of these transactions, the Company recognized
$600,000 in 1998 compensation expense. An additional $45,000 relating to the
non-vested stock grants is being amortized over the vesting period of the
grants.
On April 3, 1998, the Company sold 20,833 shares of the Company's Common stock
for $120 per share for at total of $2,500,000 to a private investor. Allen acted
as placement agent in connection with the sale of the 20,833 shares. As a
result, Allen's exiting warrants to purchase 15,000 shares of the Company's
common stock, issued in 1997, became exercisable for an additional 1,667 shares.
The warrants to purchase the additional 1,667 shares of the Company's common
stock are exercisable through November 25, 2002, at an exercise price of $0.60
per share.
F-22
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Common Stock (Continued)
On June 4, 1998, the Company borrowed $1,000,000 from two related parties, one
of which is a director of the Company. In conjunction with the loans, the
Company issued warrants to purchase 16,667 shares of the Company's common stock.
The warrants are exercisable through November 25, 2002, at an exercise price of
$210 per share. The Company recorded the fair market value of the warrants
($367,000) as a discount of notes payable, amortizable as interest expense over
the life of the loan. The fair market value of the warrants was estimated as of
June 4, 1998, using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rates of 5.53%, dividend yield
of 0%, volatility factors of the expected market price of the Company's common
stock of .593, and a weighted average life expectancy of the warrants of 4.5
years.
On July 3, 1998, the Company borrowed $975,000 from Chase. The loan was fully
guaranteed with a stand-by letter of credit from an investor in the Company. In
return for issuing the loan guarantee, the Company paid the guarantor $10,000
plus related costs and issued warrants to purchase 333 shares of the Company's
Common stock at an exercise price of $0.60 per share. The Company recorded the
fair market value of the warrants (approximately $32,000) plus the related loan
costs as a discount of notes payable and was amortized as additional interest
expense over the life of the loan. The fair market value of the warrants was
determined using the Black-Scholes option pricing model, with the following
weighted average assumptions: risk free interest rate 5.53%, dividend yield of
0%, volatility factors of the Company's common stock of .644, and a weighted
average life expectancy of the warrants of 5 years.
On July 28 and July 29, 1998, the Company sold 111,111 shares of the Company's
common stock for $90 per share for $10,000,000 to certain investors. Issuance
costs incurred were approximately $50,000 and have been recorded as a reduction
to the proceeds received from the sale. Allen acted as placement agent in
connection with the sale of the 111,111 shares. As a result, Allen's existing
warrants to purchase 15,000 shares of the Company's common stock, issued in
1997, became exercisable for an additional 6,667 shares of the Company's common
stock. The 6,667 warrants are exercisable through November 25, 2002, at an
exercise price of $0.60 per share. Due to the sales price of the 111,111 shares
being below a price of $120 per share, the Company was required to issue an
additional 6,944 shares to the investor who purchased 20,833 shares of the
Company's common stock for $2,500,000 in April 1998 in order to satisfy certain
price protection agreements the Company has with such investor.
On October 30, 1998, the Company issued warrants to purchase 3,333 shares of the
Company's common stock at an exercise price of $60, exercisable through January
02, 1999, to settle the lawsuit filed against the Company by Heartland, Inc. of
Wichita and Collins & McIlhenny, Inc. on November 14, 1997. The Company recorded
legal settlement expense of $34,000, equal to the fair market value of the
warrants issued on the date of grant. On January 03, 1999, the 3,333 warrants
expired.
Pursuant to the terms of the employment agreement between the Company and Dr.
Jack A. Krug, the former President and Chief Operating Officer of the Company,
Dr. Krug received 3,333 shares on January 15, 1999. Effective as of September
30, 1999, the Company issued Dr. Krug an additional 2,361 shares of the
Company's common stock pursuant to his resignation from the Company. The Company
recorded the grants at their intrinsic value of $246,000.
In connection with the Notes issued to Allen in exchange for $5,827,000, Allen's
existing warrants to purchase 15,000 shares of the Company's common stock,
issued in 1997, became exercisable for an additional 3,333 shares of the
Company's common stock. The warrants to purchase the additional 3,333 shares of
the Company's common stock are exercisable through November 25, 2002 at an
exercise price of $0.60 per share. The Company recorded the fair market value of
the warrants (approximately $506,000) as a discount of notes payable, which is
amortized as interest expense over the life of the Notes.
F-23
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. 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
for options granted or modified after December 31, 1994. The fair value for
applicable options was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: risk free
interest rates of 5.53%; dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock between 0.528 and 1.07; and
a weighted average life expectancy of the options of 4.9 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows:
Year Ended December 31,
1999 1998 1997
----------- ----------- -----------
Net Loss under APB 25 $(5,163,000) $(4,266,000) $(2,603,000)
Effect of SFAS 123 (108,000) (190,000) (525,000)
----------- ----------- -----------
Pro forma Net Loss $(5,271,000) $(4,456,000) $(3,128,000)
=========== =========== ===========
Pro forma Basic and Diluted
Earnings per Share $ (5.75) $ (5.35) $ (4.52)
F-24
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Common Stock (Continued)
A summary of the Company's stock option activity and related information for the
periods ended follows:
Weighted
Shares Average Weighted
Under Exercise Average
Option Price Fair Value
------- -------- ----------
Unexercised options outstanding -
November 30, 1996 -- --
Options Granted 55,700 $ 66.60 $ 35.40
------- -------- -------
Unexercised options outstanding -
December 31, 1997 55,700 $ 66.60
Options Granted 4,958 $ 97.80 $ 65.40
Options Cancelled (2,600) $ 92.40
------- -------- -------
Unexercised options outstanding -
December 31, 1998 58,058 $ 67.80
Options Cancelled (542) $ 83.80
------- -------- -------
Unexercised options outstanding -
December 31, 1999 57,516 $ 67.73
Price range $123.00-$145.80
(Average life of 3.15 years) 1,342 $ 132.16
Price range $80.40-$90.00
(Average life of 2.70 years) 26,016 $ 89.82
Price range $43.20-$60.00
(Average life of 2.68 years) 30,158 $ 45.81
Exercisable options
December 31, 1997 3,333 $ 49.80
December 31, 1998 54,950 $ 66.60
December 31, 1999 57,309 $ 67.64
F-25
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Common Stock (Continued)
The following table summarizes all common stock purchase warrant activity:
Number of Exercise
Stock Price
Warrants Range
-------- -----------------
Outstanding, November 30, 1996 49,825 $ 0.0006 - $16.80
Granted 107,115 $ 0.60 - $75
Exercised (94,135) $ 15 - $39
Expired (2,564) $ 15 - $39
------- -----------------
Outstanding, December 31, 1997 60,241 $ 0.0006 - $75
Granted 20,333 $ 0.60 - $210
Exercised (1,333) $ 24
Expired (3,333) $ 15
------- -----------------
Outstanding, December 31, 1998 75,908 $ 0.0006 - $210
Expired (21,459) $ 15 - $60
======= =================
Outstanding, December 31, 1999 54,449 $ 0.0006 - $210
======= =================
The following table summarizes the price ranges of all common stock purchase
warrants outstanding as of December 31, 1999:
Number of Warrants Exercise Price
------------------ --------------
16,667 $210.00
1,667 $ 75.00
1,667 $ 51.00
2,082 $ 15.00
15,333 $ 0.60
17,033 $ 0.0006
------ ---------
54,449 $0.0006 - $210
9. Legal Settlement
On October 30, 1998, the Company settled the lawsuit filed against the Company
and others by Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. on
November 14, 1997, for a total of $200,000 and warrants to purchase 3,333 shares
of the Company's common stock at an exercise price of $60, exercisable through
January 02, 1999. The Company believes the lawsuit was without merit, but a
settlement was reached to avoid incurring additional legal costs. The Company
recorded the fair market value of the warrants ($34,000) using the Black-Scholes
option pricing model. On January 03, 1999, the 3,333 warrants expired.
F-26
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Redeemable Preferred Stock and Related Common Stock Warrants
On November 24, 1997, the Company entered into a Subscription Agreement
("Agreement") with an unaffiliated investor to purchase 225,000 shares of the
Company's designated Series A, B, and C Redeemable Preferred Stock, for $100 per
share. As of December 31, 1997, the investor had purchased 50,000 shares of the
Company's Series A Redeemable Preferred Stock for $5,000,000. In March 1998, the
Company and the investor mutually released each other from any further
obligations. The Company is not required to issue any additional preferred stock
under the Agreement and the investor has no obligation to provide funds to the
Company in exchange for such stock.
The Series A Redeemable Preferred Stock is convertible and accrues an annual,
cumulative dividend of $5 per share. The dividends are payable semi-annually on
May 31 and November 30, as declared by the Company's Board of Directors. As of
December 31, 1999, dividends in arrears relating to the Series A Redeemable
Preferred Stock were $500,000. The Company has increased the carrying value of
the Series A Redeemable Preferred Stock by $500,000 by accreting $250,000 in
1999 and 1998 directly to accumulated deficit.
The number of shares of common stock issuable upon conversion of each share of
Series A Redeemable Preferred Stock is determined by dividing $100 by the
conversion price of the preferred stock. The conversion price is subject to
recalculation if, and when, the Company issues additional common stock or common
stock equivalents to obtain additional equity or debt financing. During 1998,
the Company issued common stock and common stock warrants in both equity and
debt financing transactions. Adjusted for these transactions, the conversion
price as of December 31, 1999 was $128.47 per share (rounded), equivalent to
.77839 shares of common stock for each share of Series A Redeemable Preferred
Stock.
The Series A Redeemable Preferred Stock has voting privileges identical to the
Company's common stock. The total number of votes allowed to the holders of the
Series A Redeemable Preferred Stock is equal to the number of shares of common
stock the Series A Redeemable Preferred Stock could be converted into on the
specific date of record. As of December 31, 1999, the 50,000 shares of Series A
Redeemable Preferred Stock were convertible into 38,920 shares of common stock.
The Series A Redeemable Preferred Stock has preferential liquidation rights over
the Company's common stock. In the event of liquidation or dissolution of the
Company, any assets available for distribution to the Company's stockholders
will first be distributed to the holders of the Series A Redeemable Preferred
Stock up to each redeemable preferred share's liquidation value. The liquidation
value equals $100 per share, plus all unpaid dividends in arrears.
The Series A Redeemable Preferred Stock is subject to mandatory redemptions,
beginning on November 30, 2002. As of December 31, 1999, the schedule of
redemptions of the stated value, plus any unpaid dividends, is as follows:
Year Amount
---- ------
2000 --
2001 --
2002 $1,833,333
2003 $1,833,333
2004 and Thereafter $1,833,334
----------
Total $5,500,000
==========
F-27
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Redeemable Preferred Stock and Related Common Stock Warrants (Continued)
On November 24, 1997, the Company also designated Series B and C Redeemable
Preferred Stock, authorizing 75,000 shares for each class of preferred. As of
December 31, 1998, none of the Series B or Series C Redeemable Preferred Stock
was issued or outstanding. The Company's stockholders cancelled the Series B and
C Redeemable Preferred Stock on April 21, 1999.
Allen, a significant stockholder of the Company, acted as placement agent in
connection with the Agreement. Allen elected to receive its fees in the form of
warrants to purchase 15,000 shares of the Company's common stock that were all
originally exercisable through November 25, 2002, at an exercise price of $0.60
per share. The 15,000 warrants were recorded at their fair value of $2,270,000.
Out of the 15,000 warrants issued to Allen, 3,333 directly relate to the
issuance of 50,000 shares of the Series A Redeemable Preferred Stock. The 3,333
warrants were recorded as issuance costs of $500,000, reducing the $5,000,000
proceeds from Series A Redeemable Preferred Stock. The remaining 11,667
warrants, discussed below, were recorded as a stock subscription receivable. The
basis difference of $500,000 upon issuance of the Series A Redeemable Preferred
Stock is being accreted directly to accumulated deficit for the period through
the redemption date. The Company increased the carrying value of the Series A
Redeemable Preferred Stock by $100,000 in 1998 and 1999, respectively, to
reflect the accretion of the issuance costs.
In an agreement dated March 31, 1998, the Company agreed to allow Allen to
retain, subject to certain performance criteria, the warrants to purchase 11,667
shares of the Company's common stock related to the subscriptions not received
under the original terms of the Agreement. Accordingly, the unearned warrants
held by Allen were fully restricted from exercise unless Allen assisted the
Company in raising $17,500,000 in additional capital or alternative financing on
acceptable terms to the Company on or before November 25, 1999. For each $1,500
of additional capital raised, a warrant to purchase one share of common stock is
deemed earned by Allen.
During 1998, Allen assisted the Company in raising an additional $12,500,000 in
equity capital. As a result, 8,334 of the 11,667 warrants became unrestricted
and $1,264,000 was transferred from stock subscription receivable to additional
paid-in-capital. During 1999, Allen contributed an additional $5,827,000 in
exchange for the Company's Notes, earning the final 3,333 in restricted
warrants. The Company recognized the remaining stock subscription receivable of
$506,000 as discount of long-term notes payable as of December 31, 1999, which
is being amortized over the term of the Notes.
11. Income Taxes
The following is a summary of the provision for income taxes:
Year Ended December 31,
1999 1998 1997
----------- ----------- -----------
Income tax benefit computed
at federal statutory rate $(1,807,000) $(1,493,000) $ (910,000)
Other 442,000 121,000 (60,000)
Change in asset valuation
allowance 1,365,000 1,372,000 970,000
----------- ----------- -----------
Income taxes $ -- $ -- $ --
=========== =========== ===========
F-28
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Income Taxes (Continued)
The components of the Company's deferred tax assets and liabilities are as
follows:
Year Ended December 31,
1999 1998 1997
----------- ----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 8,172,000 $ 6,807,000 $ 5,812,000
Valuation allowance (8,172,000) (6,807,000) (5,812,000)
----------- ----------- -----------
Deferred tax assets $ -- $ -- $ --
=========== =========== ===========
As of December 31, 1999, the Company has estimated tax loss carryforwards of
$22,710,000, of which $16,106,000 are domestic losses for federal income tax
purposes and $6,604,000 are foreign losses related to the Company's investment
in KKM. These carryforwards will expire at various times between 2000 and 2019.
The Company also has unused statutory depletion carryforwards, which have an
unlimited duration, of approximately $639,000. The differences between the
income tax benefit calculation of the statutory and effective rate are due to
miscellaneous permanent book/tax differences, including stock compensation and
disallowance of meals and entertainment expenses.
The Company has cumulative book losses of $24,983,000. Cumulative book/tax
differences of approximately $2,224,000 primarily relate to accrued dividends
and discount accretion of the Company's Series A Redeemable Preferred Stock
booked directly to retained earnings, stock based compensation, and expired tax
net operating losses from prior periods.
The Company did not record any deferred tax assets or income tax benefits for
net operating losses as of December 31, 1999. The Company's only significant
asset is its 50% interest in KKM, which has generated recurring net operating
losses since inception. Therefore, the Company has taken a 100% valuation
allowance against any resulting deferred tax asset due to such carryforwards.
The Company has effected or proposed significant equity transactions for the
year ending December 31, 2000, including the issuance of a common stock warrant
to Shell Capital, conversion of existing Notes into the Company's common stock,
and consummation of the Rights Offering. These transactions may significantly
restrict the use of net operating loss carryforwards by the Company in the
future.
12. Other Related Party Transactions
During 1997, the Company paid consulting fees of approximately $180,000 to
McGee-Dilling, International ("MDI") for assistance in raising capital to meet
the Company's financial obligations for the Karakuduk Field. Two of the
Company's directors on the Board during 1997 were also stockholders of MDI. The
Company terminated the consulting agreement with MDI in the first quarter of
1997.
In 1998, the Company borrowed and repaid two loans, totaling $95,000, from
Howard Karren, the former Chairman and Chief Executive Officer of the Company.
F-29
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Other Related Party Transactions (Continued)
Effective March 1, 2000, the Company sold overriding royalty interests in
certain domestic oil and gas properties for $75,000 to a former Chairman and
Chief Executive Officer of the Company. In February 1997, the Company had
assigned the overriding royalty interests to the same individual as part of a
severance agreement.
13. Long-Term Accrued Compensation
On August 19, 1996, the Company's Board of Directors awarded a former Chief
Executive Officer and a former Vice President of the Company cash bonuses
totaling $210,000 as recognition for past services and, to be used to exercise
certain warrants granted in connection with the Company's 1989 Stock Warrant
Plan. These bonuses were to become payable on the earlier of (i) completion of a
sale or farmout by the Company of all or a portion of its interest in the
Karakuduk Field, or (ii) the date when the Company makes a public disclosure of
a sale or farmout of the Karakuduk Field. Due to the recent Loan entered into
with Shell Capital for the development of the Karakuduk Field, the Company
considers a possible sale or farmout of the Company's interests in the Karakuduk
Field to be remote. Therefore, the Company reversed the $210,000 accrual during
the fourth quarter of 1999.
14. Operating Leases
During 1999, the Company relocated its offices within the Houston area. The
Company assigned and was fully released from its existing obligations under the
non-cancelable operating lease in effect as of December 31, 1998. The Company
entered into a short-term sublease extending from September 1, 1999 through
March 31, 2000. The Company prepaid all lease payments under the sublease, and
had no outstanding rental obligations as of December 31, 1999.
The Company's rental expense for 1999, 1998, and 1997, was approximately
$93,000, $87,000, and $37,000, respectively.
15. Commitments and Contingencies
Under the terms of License MG 249, as amended, (the "Petroleum License"), KKM
was committed to minimum expenditures of $30,000,000 for the year ended December
31, 1999. The Petroleum License also establishes a minimum work program
requiring KKM to drill eight new wells during 1999. In August 1999, the Company
received a letter from the State Investment Agency of the Republic of
Kazakhstan, extending the period for completion of the minimum work program and
expenditure commitments to June 30, 2000. The letter is not a formal amendment
of KKM's Petroleum License. As of December 31, 1999, KKM was drilling the second
well under the work commitment and had spent approximately $10,400,000 under the
expenditure commitment.
16. Extraordinary Losses
During 1997, the Company retired several notes payable totaling $1,850,000 As
additional consideration for these notes, the Company issued to the note
holders, warrants to purchase 7,708 shares of the Company's common stock at $15
per share, exercisable at any time, but no later than November 30, 1999. The
notes were discounted by $290,000, the estimated fair value of the warrants,
with the discount being amortized over the life of the notes.
F-30
<PAGE>
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Extraordinary Losses (Continued)
If the notes were still outstanding on May 31, 1997, the Company agreed to issue
3,083 warrants as additional consideration to the holders. Furthermore, if the
notes were still outstanding on November 30, 1997, the Company agreed to issue
6,167 warrants as additional consideration to the holders. Under these
provisions, the Company issued 2,083 of the 3,083 warrants due to the May 31,
1997 deadline and none due to the November 30, 1997 deadline. The Company
recorded debt issuance costs of $168,000 for the estimated fair value of the
additional warrants issued, to be amortized over the life of the notes. On dates
between May 1997 and November 1997 the notes were repaid by the Company at their
face value. The Company recorded an extraordinary loss on extinguishment of debt
of approximately $214,000.
On August 5, 1998, the Company retired two outstanding loans, totaling
$1,000,000, from two related parties: Allen ($900,000) and Mr. McMillian, the
current Co-Chairman and Chief Executive Officer and a director of the Company at
the time of the loan ($100,000). The Company borrowed the $1,000,000 on June 3,
1998, subject to a 7% interest rate. The note was payable in full, plus accrued
interest, on the earlier of 180 days from the funding of the loans or upon the
Company's receipt of a minimum of $10,000,000 in equity investments. In
conjunction with the loans, the Company issued warrants to purchase 16,667
shares of the Company's common stock, at an exercise price of $210 per share.
The Company recorded the warrants at their fair market value of $367,000, as a
discount of notes payable, amortizable over the life of the loans. On July 27,
1998, the Company received $10,000,000 in equity financing and repaid the loans,
recognizing an extraordinary loss on the extinguishment of debt of approximately
$236,000
17. KKM Financial Statements
Due to the significance of the Company's equity investee, the Company has
attached audited financial statements for KKM. Reflected in the financial
statements are management fees of $2,040,000, $1,980,000, and $1,020,000, that
have been charged by the Company to KKM for the years ending December 31, 1999,
1998, and 1997, respectively. These amounts are exclusive of any local
withholding tax, which may be accrued by KKM. Also, for the same periods, the
financial statements include interest on the note payable to the Company from
KKM in the amounts $1,708,246, $1,043,565, and $389,624.
F-31
<PAGE>
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 disclosure requirements promulgated by the
Securities and Exchange Commission and SFAS No. 69, Disclosures About Oil and
Gas Producing Activities.
The Company entered into an agreement effective January 1, 1997 to sell its
remaining domestic oil and gas properties. Accordingly, no disclosure for
domestic proven reserves has been made for any year presented as the Company has
not acquired any additional domestic oil and gas properties since the January 1,
1997 disposition. Due to the lack of financing necessary to develop the
Karakuduk Field, no proven reserves were attributed to the Karakuduk Fields as
of December 31, 1998 and 1997. As discussed in Note 5, KKM recorded
approximately 67.58 million barrels of proven oil reserves attributable to the
Karakuduk Field on November 1, 1999, of which 33.79 million barrels are
attributable to the Company's net interest.
The following estimates of reserve quantities and related standardized measure
of discounted net cash flows are estimates only, and do not purport to reflect
realizable values or fair market values of the Company's proportional interest
in KKM's oil 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 the changes may be
significant. As discussed in Note 1, KKM sold approximately 325,000 barrels of
crude oil in the local Kazakhstan and export markets during 1999. The prices
received on these sales were substantially lower than world oil prices
prevailing at the time. Year-end prices used in the following standardized
measure of discounted net cash flows reflect the assumption of 100% of KKM's
future production being sold at world prices as outlined in the Crude Oil Sales
Agreement discussed in Note 2. In the event KKM was required to sell its crude
oil production in the local Kazakhstan market, the Company would more than
likely receive a net oil price that would be substantially lower than world
market prices prevailing at the time.
As discussed in Note 17, the Company has attached the audited financial
statements of KKM. Those financial statements should be reviewed in conjunction
with the following disclosures with respect to the Company's proportionate
interest in KKM's oil and gas producing activities.
F-32
<PAGE>
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
Proven Oil and Gas Reserve Quantities (All within the Republic of Kazakhstan)
Oil Gas
Reserves Reserves
(bbls.) (Mcf.)
---------- -----------
Company's proportional interest in KKM's proven
developed and undeveloped reserves
Balance December 31, 1999 33,788,822 --
========== ===========
Capitalized Costs Relating to Oil and Gas Producing Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
1999 1998 1997
----------- ----------- -----------
Company's share of equity method
investees' net capitalized cost $12,165,000 $ 9,134,000 $ 3,988,000
=========== =========== ===========
F-33
<PAGE>
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
Cost Incurred in Oil and Gas Property Acquisition,
Exploration, and Development Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
1999 1998 1997
---------- ---------- ----------
Company's share of equity method
investees costs of property
acquisition, exploration, and
development $3,738,000 $3,344,000 $2,034,000
========== ========== ==========
Standardized Measure of Discounted Future Net Cash Flows
--------------------------------------------------------
The following are the principal sources of changes in the standardized measure
of discounted future net cash flows:
Year Ended December 31,
1999 1998 1997
------------ ---------- ----------
Company's share of equity
method investees' standardized
measure of discounted future
cash flows $177,680,000 $ -- $ --
============ ========== ==========
F-34
<PAGE>
* Ernst & Young Kazakhstan * Tel. 7 (3272) 50 94 24
Kazakhstan 7 (3272) 50 94 25
Almaty 480009 7 (3272) 60 82 99
Prospekt Abai 153a 7 (3272) 41 48 00
Fax: 7 (3272) 50 94 27
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, 1999 and 1998, and the related
statements of operations, cash flows and stockholders' deficit for each of the
three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, 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 incurred recurring operating losses and has a working capital
deficiency as of December 31, 1999. In addition, there are uncertainties
relating to the Company's ability to meet its commitments under its license
agreement and ability to meet all expenditure/cash flow requirements through
2000. 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
March 15, 2000
Almaty
F-35
<PAGE>
Closed Type JSC Karakudukmunay
Balance Sheets as of
December 31,
(Amounts in US Dollars)
1999 1998
------------ ------------
ASSETS
Cash $ 86,084 $ 52,958
Prepaid and other receivables (Note 4) 68,783 125,231
Crude oil inventory (Note 5) 497,702 551,342
------------ ------------
Total current assets 652,569 729,531
Long term VAT receivable (Note 6) 670,914 863,077
Materials and supplies (Note 7) 1,136,418 1,494,572
Property, plant and equipment, net (Note 8) 4,318,290 4,209,396
Oil and gas properties (Note 9) 18,874,551 12,563,120
------------ ------------
TOTAL ASSETS $ 25,652,742 $ 19,859,696
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 3,138,761 $ 2,247,954
Accrued liabilities (Note 11) 872,291 779,596
Current portion of long-term debt (Note 12) 577,778 3,177,780
------------ ------------
Current liabilities 4,588,830 6,205,330
Long-term debt (Note 12) 32,871,339 20,957,855
------------ ------------
TOTAL LIABILITIES 37,460,169 27,163,185
------------ ------------
STOCKHOLDERS' DEFICIT
Charter capital (Note 14) 200,000 200,000
Accumulated deficit (12,007,427) (7,503,489)
------------ ------------
(11,807,427) (7,303,489)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 25,652,742 $ 19,859,696
============ ============
See accompanying notes which form an integral part of these
financial statements.
F-36
<PAGE>
<TABLE>
<CAPTION>
Closed Type JSC Karakudukmunay
Statements of Operations
for the years ended December 31,
(Amounts in US Dollars)
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Management service fee (Note 12) $ 594,079 $ 845,840 $ 495,000
General and administrative expenses 1,618,526 1,297,513 836,868
Interest expense (Note 12) 1,100,570 508,539 155,624
Depreciation expense (Note 8) 744,064 440,901 147,660
Miscellaneous taxes 230,023 135,441 30,214
Write-down of crude oil inventory (Note 5) -- 192,481 --
Exchange loss/(gain) 216,676 67,077 (387)
----------- ----------- -----------
Net loss $ 4,503,938 $ 3,487,792 $ 1,664,979
=========== =========== ===========
See accompanying notes which form an integral part of these
financial statements.
F-37
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Closed Type JSC Karakudukmunay
Statements of Cash Flows for the years ended December 31,
(Amounts in US Dollars)
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,503,938) $ (3,487,792) $ (1,664,979)
Adjustments to reconcile net loss to net cash
Provided (used) by operating activities:
Write-down of crude oil inventory -- 192,481 --
Depreciation and depletion 890,575 440,901 147,660
Management service fees 594,079 845,840 495,000
Changes in working capital:
(Increase)/decrease in prepaid and other receivables 56,448 147,224 (255,979)
(Increase)/decrease in crude oil inventory 53,640 (743,823) --
(Increase)/decrease in VAT receivable 192,163 (753,978) (51,803)
(Increase)/decrease in materials and supplies inventory 358,154 (982,714) (483,437)
Increase in accounts payable and accrued liabilities 983,502 259,972 2,022,350
Decrease in long term payable for land usage -- -- (34,000)
Increase in accrued interest payable to partner 1,708,245 1,043,565 389,624
------------ ------------ ------------
Net cash provided (used) by operating activities 332,868 (3,038,324) 564,436
Cash flows from investing activities
Purchase of property, plant and equipment (852,958) (3,061,240) (1,284,782)
Investments in oil and gas properties (6,030,726) (5,554,435) (3,288,937)
Net proceeds from sales of non-commercial crude oil 1,018,705 -- --
------------ ------------ ------------
Net cash used in investing activities (5,864,979) (8,615,675) (4,573,719)
Cash flows from financing activities
Increase in loans from banks -- 800,000 --
Principal payments on banks loans (177,777) (44,445) --
Increase in loan payable to partner due to cash contributions
and other contributions 5,743,014 10,537,018 4,386,778
------------ ------------ ------------
Net cash provided by financing activities 5,565,237 11,292,573 4,386,778
Net increase/(decrease) in cash 33,126 (361,426) 377,495
Cash at beginning of year 52,958 414,384 36,889
------------ ------------ ------------
Cash at end of year $ 86,084 $ 52,958 $ 414,384
============ ============ ============
Supplemental cash flow disclosure
Interest paid $ 88,949 $ 30,516 $ --
Supplemental schedule of non-cash
investing and financing activities
Increase in accrued management service fees $ 2,040,000 $ 1,980,000 $ 1,275,000
See accompanying notes which form an integral part of these
financial statements.
F-38
</TABLE>
<PAGE>
Closed Type JSC Karakudukmunay
Statement of Stockholders' Deficit
(Amounts in US Dollars)
Authorized Accumulated
Charter Capital Deficit Total
--------------- ------------ ------------
As at December 31,1996 $ 200,000 $ (2,350,718) $ (2,150,718)
Net loss for the year 1997 -- (1,664,979) (1,664,979)
------------ ------------ ------------
As at December 31,1997 200,000 (4,015,697) (3,815,697)
Net loss for the year 1998 -- (3,487,792) (3,487,792)
------------ ------------ ------------
As at December 31,1998 200,000 (7,503,489) (7,303,489)
Net loss for the year 1999 -- (4,503,938) (4,503,938)
------------ ------------ ------------
As at December 31,1999 $ 200,000 $(12,007,427) $(11,807,427)
============ ============ ============
See accompanying notes which form an integral part of these
financial statements.
F-39
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
1. Organization and Background Information
Closed Type JSC Karakudukmunay. (the "Company"), a Kazakhstan Joint Stock
Company of Closed Type, was formed to engage in the exploration, development,
and production of oil and gas properties in the Republic of Kazakhstan. The
Company's only significant investment is in the Karakuduk Field, an onshore oil
field in the Mangistau Oblast region of the Republic of Kazakhstan. On August
30, 1995, the Company entered into the Agreement with the Ministry of Energy and
Natural Resources 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 Natural Resources
and the Company as long as production of petroleum and/or gas is continued in
the Karakuduk oil field.
2. Basis of Presentation
The Company maintains its accounting records and prepares its financial
statements in US dollars in accordance with the terms of the Agreement. The
accompanying financial statements were prepared in accordance with U.S.
generally accepted accounting principles (US GAAP).
Certain reclassifications have been made in the 1998 and 1997 financial
statements to conform to the 1999 presentation.
The material accounting principles adopted by the Company are described below:
Foreign Currency Translation
----------------------------
The Company's functional currency is the US dollar. All transactions arising in
currencies other than US dollars, including assets, liabilities, revenue,
expenses, gains, or losses are measured and recorded into US dollars using the
exchange rate in effect on the date of the transaction.
Cash and other monetary assets held and liabilities denominated in currencies
other than US dollars are translated at exchange rates prevailing as of the
balance sheet date (138.20 and 83.80 Kazakh Tenge per US dollar as of December
31, 1999 and 1998, respectively ). Non-monetary assets and liabilities
denominated in currencies other than US dollars have been translated at the
estimated historical exchange rate prevailing on the date of the transaction.
Exchange gains and losses arising from translation of non-US dollar amounts at
the balance sheet date are recognized as an increase or decrease in income for
the period.
The Tenge is not a convertible currency outside of the Republic of Kazakhstan.
The translation of Tenge denominated assets and liabilities in these financial
statements does not indicate that the Company could realize or settle these
assets and liabilities in US dollars.
F-40
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
2. Basis of Presentation (continued)
On April 5, 1999, the Government discontinued its support of the National
currency, the Tenge, and allowed it to float freely against the US dollar.
Immediately thereafter, the official exchange rate declined from 87.5 Tenge to
the US dollar to 142 Tenge to the US dollar, but was relatively stable for the
remainder of 1999. The devaluation decreased the US dollar realizable value of
any Tenge denominated monetary assets held by the Company, and decreased the US
dollar obligation of any Tenge denominated monetary liabilities held by the
Company.
As of December 31, 1999, $201,077 of net monetary assets were denominated in
Tenge.
Interest Capitalization
-----------------------
The Company capitalized interest on significant construction projects for which
expenditures are being made. Assets qualifying for interest capitalization
include significant investments in unproved properties and other major
development projects that are not being depreciated, depleted, or amortized
currently, provided that work is currently in progress.
On November 1, 1999, the Company ceased capitalization of interest when it was
determined that the Karakuduk Field was commercially viable and oil and gas
properties became subject to depletion.
The Company capitalized interest of $696,625, $565,542, and $234,000 in 1999,
1998, and 1997, respectively. All other interest costs are expensed as incurred.
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 oil and gas properties, including the estimated future
costs to develop proven reserves, are amortized on the unit-of-production method
using estimated proven reserves. Investments in unproven properties and major
development projects are not amortized until proven 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 unproven properties.
Sales of proven and unproven 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 proven
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized costs
with no loss recognized.
F-41
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
2. Basis of Presentation (continued)
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are valued at historical cost and are depreciated
on a straight line basis over the estimated useful lives of the assets as
follows:
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. The Company's capitalized cost of crude oil
inventory is the lesser of the actual costs to produce, transport and store the
crude oil in inventory, or the inventory's net realizable value.
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.
Revenue Recognition
-------------------
Revenues and their related costs are recognized upon delivery of commercial
quantities of oil production produced from proven 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.
During 1999, the Company sold approximately 324,650 barrels of crude oil in the
local Kazakhstan and export markets and realized approximately $1,018,705, net
of related production and transportation costs. These sales resulted from
placing accumulations of initial crude oil production into the pipeline. The
proceeds from these placements were not considered revenues, as volumes
delivered were not commercially viable or attributable to proven reserves. The
Company has accounted for these proceeds as cost recovery by reducing its net
carrying value of oil and gas properties by the amount of net proceeds received.
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 No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. This statement, as amended by SFAS No. 137, is effective for
years beginning after June 15, 2000. As of December 31, 1999, the Company has
not adopted SFAS 133.
The Company is evaluating SFAS 133 and intends to adopt the statement no later
than January 1, 2001. The potential impact of SFAS 133 on the Company's
financial position and results of operations, if any, is presently being
evaluated and has not yet been determined.
F-42
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
2. Basis of Presentation (continued)
Fair Value of Financial Instruments
-----------------------------------
All of the Company's financial instruments, including loans payable to partner,
cash and trade receivables have fair values which approximate their recorded
values as they are either short-term in nature or carry interest rates which
approximate market rates.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
3. Going Concern
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has incurred recurring
operating losses and has a working capital deficiency as of December 31, 1999.
In addition, there are uncertainties relating to the Company's ability to meet
its commitments under the terms of License MG 249, as amended, (the "License)
and its ability to meet all expenditure and cash flow requirements through
fiscal year 2000. As more fully described in Note 17, the Company's agreements
with the government of the Republic of Kazakhstan require the Company to meet
certain expenditure and work commitments on or before June 30, 2000. Should the
Company not meet its capital requirements by June 30, 2000, the Company's rights
under the Agreement may be terminated. 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.
Management's plans to address these uncertainties include:
o Shell Capital Loan. As discussed in Note 12, on November 1, 1999, the
parent company of Central Asian Petroleum (Guernsey) Limited ("CAP-G"),
Chaparral Resources, Inc. ("Chaparral"), entered into a loan agreement (the
"Loan") with Shell Capital Limited ("Shell Capital") to provide up to
$24,000,000 in financing for the development of the Karakuduk Field. The
conditions required to obtain funding under the Loan were consummated in
February 2000, providing Chaparral, and therefore CAP-G, substantial
financial resources to continue funding the development of the Karakuduk
Field.
o Development of the Company's Proven Reserves. The Company has approximately
67.58 million barrels of estimated proven oil reserves, net of government
royalty. As of December 31, 1999, KKM has produced 435,840 barrels of crude
oil, of which 324,650 barrels were sold in 1999 for approximately
$1,019,000, net of transportation and production costs. As of December 31,
1999, KKM had approximately 111,000 barrels of crude oil in inventory and
was producing approximately 1,100 barrels of oil per day.
F-43
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
3. Going Concern (Continued)
o Crude Oil Sales Agreement. On November 1, 1999, the Company entered into
the Crude Oil Sale and Purchase Agreement (the "Crude Oil Sales Agreement")
with Shell Trading International Limited ("STASCO"), an affiliate of Shell
Capital, for the purchase of 100% of the oil production from the Karakuduk
Field on the export market for world market oil prices. The Company expects
to obtain a substantially higher return from oil sales under the Crude Oil
Sales Agreement than would otherwise be obtainable from oil sales on
Kazakhstan's local market. The Crude Oil Sales Agreement became effective
upon the consummation of the Loan. The Company expects to begin placing oil
under the agreement in April 2000.
Management's plans for addressing the above uncertainties are partially based
upon forward looking events, which have yet to occur, including the successful
development, production, and sales of crude oil from the Karakuduk Field, as to
which there is no assurance. Expected funding requirements necessary for
development of the Karakuduk Field through December 31, 2000 are partially based
upon future cash flows from the sale of the Company's crude oil production.
4. Prepaid and Other Receivables
Prepayments and Other Receivables primarily consisted of advances to the
Custom's Post for payment of VAT and customs duties on future imported materials
and supplies. The breakdown of Prepaid and Other Receivables is as follows:
December 31, December 31,
1999 1998
-------- --------
Travel advances to employees $ 73 $ --
Custom duties and prepaid taxes 54,952 120,631
Advance payment for oil and gas assets 13,758 4,600
-------- --------
Total $ 68,783 $125,231
======== ========
5. Crude Oil Inventory
Crude oil inventory represents all production costs associated with lifting and
transporting crude oil from the Karakuduk Field to the KazTransOil pipeline
("KTO Pipeline"), including depreciation, depletion, and amortization associated
with the production. Crude oil placed into the KTO Pipeline is held as inventory
on behalf of the Company until formally nominated for sale.
During 1999, the Company produced 352,012 barrels of crude oil and had
approximately 111,189 barrels in inventory as of December 31, 1999. As discussed
in Note 2, crude oil production of 324,650 barrels was sold on local Kazakhstan
and export markets in 1999.
As of December 31, 1998, the Company had approximately 83,828 barrels of oil in
crude oil inventory and had not completed a sale of crude oil, either to the
local or export markets. The Company recorded all operating (lifting) costs
required to produce, transport, and store the Company's 1998 oil production as
costs of crude oil inventory. As of December 31, 1998, the actual costs of the
inventory exceeded the net realizable value (NRV) of the inventory, which was
calculated using the quoted crude oil price for Urals as of December 31, 1998,
less estimated transportation costs to reach the export market. As a result, the
Company impaired crude oil inventory to reflect the estimated net realizable
value of $551,342. The impairment, totaling $192,481, was charged directly to
expense.
F-44
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
6. Long term VAT Receivable
VAT receivable is a Tenge denominated asset due from the Republic of Kazakhstan.
The VAT receivable consists of VAT paid on local expenditures (Local VAT) and
VAT paid on Imported goods (Import VAT). Currently, VAT is calculated as 20% of
the value of goods received (Import and Local VAT) or services rendered (Local
VAT only). VAT charged to the Company is recoverable in future periods as an
offset against the Company's fiscal obligations.
From December 31, 1998 to December 31, 1999, the Company's VAT receivable
decreased from $863,077 to $670,914, respectively, due to the Company's offset
of VAT payable on sales and due to the devaluation of the Tenge. During 1999,
the Company offset both the Local and Import VAT receivable against additional
VAT charged on imported goods. In prior years, the Company received several
refunds of VAT previously paid into the Government of Kazakhstan. The ability of
the Company to obtain future refunds or to offset the VAT receivable against
future Import VAT liabilities is uncertain as are the actual timings of such
refunds and offsets.
The Company expects to obtain full economic benefit from the VAT receivable
through the Company's right of offset against future fiscal obligations, as
provided for in the Agreement.
7. Materials and Supplies
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.
December 31, December 31,
1999 1998
---------- ----------
Inventory in-house $1,136,418 $1,084,359
Inventory in-transit -- 410,213
---------- ----------
Total $1,136,418 $1,494,572
========== ==========
F-45
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
8. 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,
1999 1998
----------- -----------
Office buildings and apartments $ 236,701 $ 214,468
Office equipment and furniture 480,362 390,671
Vehicles 1,708,420 1,663,364
Field buildings 2,874,753 2,248,920
Field equipment and furniture 393,969 323,824
----------- -----------
Total Cost 5,694,205 4,841,247
Accumulated depreciation (1,375,915) (631,851)
----------- -----------
Net book value $ 4,318,290 $ 4,209,396
=========== ===========
9. 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 prior to commercial production. Overhead
and general and administrative costs have been expensed as incurred.
As of November 1, 1999, the Company's unproven Oil and Gas Properties have been
reclassified as proven properties and transferred into the amortizable base. The
reclassification directly relates to the commercial viability of the Company
based upon the Loan entered into with Shell Capital on that same date. The Loan
will provide the Company, through its investor CAP-G, with the capital necessary
to develop the proven reserves underlying the Karakuduk Field.
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 proven 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 proven reserves. The
unamortized costs of proven oil and gas properties includes all capitalized
costs, less accumulated amortization, estimated future costs to develop proven
reserves, and estimated dismantlement and abandonment costs. Total 1999
amortization of $146,511 was calculated using production from November 1, 1999
through the balance sheet date, and represents $2.47 per barrel produced. In
accordance with SFAS 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies, the Company has accounted for 1999 amortization as a
component of crude oil inventory to properly record amortization as a part of
the cost of proven oil reserves produced during 1999.
F-46
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
9. Oil and Gas Properties (continued)
The composition of Oil and Gas Properties is as follow:
December 31, December 31,
1999 1998
------------ ------------
Acquisition costs $ 507,870 $ 507,870
Exploration and appraisal costs 11,255,708 11,255,708
Development cost 6,780,022 --
Capitalized interest 1,496,167 799,542
------------ ------------
Total Cost 20,039,767 12,563,120
Accumulated depletion (146,511) --
Net proceeds from sales of
non-commercial crude oil (1,018,705) --
------------ ------------
Net book value $ 18,874,551 $ 12,563,120
============ ============
The full cost ceiling test results as of December 31, 1999 support the carrying
amount of the assets disclosed above. Therefore, no impairment provision has
been made.
10. Bonuses
Production based bonuses will be payable to the Kazakhstan Ministry of Geology
amounting to $500,000 when cumulative production reaches ten million barrels and
$1,200,000 when cumulative production reaches fifty million barrels. Under
current Kazakhstan tax law, the production bonuses will be considered tax
deductible expenditures in the calculation of profits taxes. These amounts will
be accrued as production accumulates.
11. Accrued Liabilities
December 31, December 31,
1999 1998
-------- --------
Accrued management service fee 573,750 573,750
Accrued audit fees 75,000 75,000
Accrued interest payable 3,439 3,613
Miscellaneous taxes payable 220,102 127,233
-------- --------
Total accrued liabilities $872,291 $779,596
======== ========
F-47
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
12. Long -term Debt
December 31, December 31,
1999 1998
------------ ------------
Loans payable to banks $ 577,778 $ 755,555
Loans payable to partner 32,871,339 23,380,080
------------ ------------
33,449,117 24,135,635
Less current portion (577,778) (3,177,780)
------------ ------------
Total long-term debt $ 32,871,339 $ 20,957,855
============ ============
Loans Payable to Banks
----------------------
During 1998, the Company borrowed a total of $800,000 from the Chase Bank of
Texas, N.A. (Chase), a U.S. financial institution. On March 6, 1998, the Company
borrowed the initial $500,000 from Chase. The note accrues interest at a fixed,
annual interest rate of 6.84% and is repayable in 18 equal, quarterly
installments of $27,778, which began on December 6, 1998. The final principal
payment is due on or before February 26, 2003. On June 9, 1998, the Company
borrowed an additional $300,000 from Chase. The second note accrues interest at
a fixed, annual interest rate of 6.875% and is repayable in 18 equal, quarterly
installments of $16,667, which also began on December 6, 1998. The final
principal payment is payable on or before March 6, 2003.
As of December 31, 1999, the Company's outstanding principal balance on the
notes totaled $577,778. The notes were fully repaid on January 21, 2000.
Loans Payable to Partner
------------------------
The Company's stockholder, CAP-G bears sole financial responsibility for
providing all funding for the Company, which is not generated by the Company's
operations or borrowed from third party sources. The various forms of funding
from CAP-G are treated as long term loans to the Company and bear interest at
the rate of LIBOR plus 1%. The Agreement requires installment payments on the
loan to be calculated and paid on a quarterly basis and to be equal to 65% of
gross revenues after deduction of royalties due to the Republic of Kazakhstan.
CAP-G, at its own discretion, may waive receipt of quarterly repayments to
maintain working capital within the Company.
The loan is made up as follows:
December 31, December 31,
1999 1998
----------- -----------
Cash funding $20,671,850 $16,897,350
Management services fee 6,315,000 4,275,000
Other expenditures 2,603,107 634,594
Accrued interest payable 3,281,382 1,573,136
----------- -----------
Total interest and loan payable to partner $32,871,339 $23,380,080
=========== ===========
F-48
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
12. Long-Term Debt (continued)
On November 1, 1999, CAP-G's parent company, Chaparral, entered into the
$24,000,000 Loan with Shell Capital. CAP-G and the Company signed the Loan as
"co-obligors," assuming certain obligations and commitments to Shell Capital and
to Chaparral, as the borrower. The proceeds from the Loan, net of certain
financing and other related costs, are required to be used for the funding of
CAP-G's financial commitment to the Company to develop the Karakuduk Field. The
Company will continue to borrow funds from CAP-G in accordance with the terms of
the Agreement.
As a condition of the Loan, on November 1, 1999, the Company entered into the
Crude Oil Sales Agreement with STASCO 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 by STASCO and Shell Capital.
As a co-obligor of the Loan, the Company has made certain other commitments to
Shell Capital, including, but not limited to, the following pledges, covenants,
and other restrictions:
(i) A pledge of the Company's receivables, including proceeds from the sale of
crude oil, to Shell Capital in the event of default of the Loan;
(ii) A pledge of the Company's right to insurance proceeds to Shell Capital in
the event of default of the Loan;
(iii) Agreement to recognize and register CAP-G's pledge of its 50% ownership in
the Company to Shell Capital, which may be transferrable in the event of a
default of the Loan.
(iv) A representation to reach project completion ("Project Completion") on or
before September 30, 2001. Project Completion occurs when:
o an independent engineer certifies that the proven developed reserves
of the Karakuduk Field are at least 30 million barrels;
o average daily oil production from the Karakuduk Field is at least
13,000 barrels for 45 consecutive days;
o average daily water injection at the Karakuduk Field is at least
15,000 barrels for 45 consecutive days; and
o a gas lift system is successfully implemented for one well over a
24-hour period.
(v) Enter into a technical service agreement directly with Shell Capital,
granting Shell Capital, at their own discretion, the right to bring in
technical consultants to work on the development of the Karakuduk Field on
a cost only basis.
Management services are provided by a subsidiary of Chaparral. Services were
provided in 1999 for a fixed fee of $170,000 per month. Management services were
provided to the Company in the amount of $2,040,000 and $1,980,000 for the years
ended December 31, 1999 and 1998, respectively.
As of December 31, 1999, the Company's outstanding principal and accrued
interest balance on Loans Payable to Partners totaled $32,871,339, all of which
is classified as long-term due to the expected working capital needs of the
Company.
On February 14, 2000, Chaparral, CAP-G, and the Company completed all terms and
conditions required for Chaparral to draw from the Loan.
F-49
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
13. Taxes
The Company is subject to corporate income tax at the prevailing statutory rate
of 30%.
The following is a summary of the provision for income taxes:
Year ended December 31
1999 1998 1997
----------- ----------- -----------
Income taxes (benefit) computed
at statutory rate $(1,351,181) $(1,046,338) $ (499,494)
Non-deductible expenses 846,831 347,012 --
Change in asset valuation allowance 504,350 699,326 499,494
----------- ----------- -----------
Income taxes $ -- $ -- $ --
=========== =========== ===========
The components of the Company's deferred tax assets and liabilities are as
follows:
Year ended December 31
1999 1998 1997
----------- ----------- -----------
Deferred tax assets:
Fixed assets $ 733,514 $ -- $ --
Net operating loss carryforwards 1,653,884 1,904,035 1,204,709
Valuation allowance (2,387,398) (1,904,035) (1,204,709)
----------- ----------- -----------
Deferred tax assets $ -- $ -- $ --
=========== =========== ===========
There were no net deferred tax assets or net income tax benefits recorded in the
financial statements for deductible temporary differences or net operating loss
carryforwards due to the fact that the realization of the related tax benefits
will not be considered likely until the Company generates significant income.
The Agreement specifies profits taxes and other taxes applicable to the Company,
which are subject to the laws of the Republic of Kazakhstan.
The Company began extracting hydrocarbons from the Karakuduk field in 1998. At
December 31, 1999, the Company has tax loss carryforwards of approximately $
5,512,947 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. From December 31,
1998 to December 31, 1999, the Company's tax loss carryforwards decreased from $
6,346,783 to $ 5,512,947, respectively, primarily due to the devaluation of the
Tenge. There is a five-year carryforward of tax losses.
The Company has used the best estimates available to determine the Company's
deferred tax assets before consideration of the valuation allowance. Refer to
Note 15 regarding the uncertainties of taxation in the Republic of Kazakhstan.
F-50
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
14. Charter Capital
The total Charter Fund contribution specified in the new Founders Agreement of
KKM is $200,000. Each of the stockholders' portion of the Charter Fund and their
respective participating interest in the Company is:
December 31, December 31,
1999 1998
-----------------------------------------
Charter Percent Charter Percent
Contribution Contribution
-----------------------------------------
KazakhOil 80,000 40% 80,000 40%
Korporatsiya Mangistau Terra
International 20,000 10% 20,000 10%
Central Asian Petroleum (Guernsey)
Limited - CAP-G * 100,000 50% 100,000 50%
-------- ---- -------- ----
Total charter capital $200,000 100% $200,000 100%
======== ========
* See Note 12 relating to pledge of the interest of CAP-G in the Company.
KazakhOil JSC ("KazakhOil") is the national petroleum company of the Republic of
Kazakhstan.
Under the terms of the Loan, the Company may not declare a dividend prior to
Project Completion as defined in Note 12. Any dividend distributions following
Project Completion remain subject to certain other conditions stated in the
Loan.
15. 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.
Basis of Accounting
-------------------
The Company maintains its statutory books and records in accordance with U.S.
generally accepted accounting principles and calculates taxable income or loss
using the existing Kazakh tax legislation in effect on August 30, 1995, the date
the Agreement was signed. The Company considers these accounting methods correct
under the terms of the Agreement. The Republic of Kazakhstan currently requires
companies to comply with Kazakh accounting regulations and to calculate tax
profits or losses in accordance with these regulations as well as the prevailing
tax law. There is currently uncertainty as to the extent of tax losses available
to the Company. The potential effect of the uncertainty is not quantifiable.
F-51
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
16. Current Kazakhstan Environment
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.
On November 1, 1999, the Company entered into the Crude Oil Sales Agreement with
STASCO for the purchase of 100% of the oil production, less royalty in kind,
from the Karakuduk Field on the export market. It is a condition of the Loan
that all produced oil must be sold to STASCO through the six nominated outlets
in the contract. Prior agreement of both parties is required if sales are to be
made to any other destination or buyer.
The Company retains full responsibility for obtaining export quotas and
finalizing access routes through the KazTransOil pipeline and onward through the
Russian pipeline system to various agreed points of delivery, all of which are
outside of the Republic of Kazakhstan. The Company has a right to export, and
receive export quota for, 100% of the production from the Karakuduk Field. The
Government of the Republic of Kazakhstan has recently stated they may require
all oil and gas producers within Kazakhstan to supply some portion of year 2000
production to local Kazakh refineries to meet domestic energy needs. The Company
is currently awaiting confirmation of its export quota for the year 2000 from
the Ministry of Energy, Trade and Industry of the Republic of Kazakhstan.
17. License Commitments and Other Capital Commitments
License Commitments
-------------------
Under the License, the Company was committed to minimum expenditures of
$30,000,000 for the year ended December 31, 1999. The License, as amended, also
establishes a minimum work program, requiring the Company to drill 8 new wells
before December 31, 1999. In 1999 the Company received a letter from the State
Investment Committee (the "SIA Letter") extending the period for completion of
the minimum work program and expenditure commitment to June 30, 2000. The SIA
Letter is not a formal amendment of the License. As of December 31, 1999, the
Company has spent $10,400,000 towards fulfilling its financial obligations under
the License.
If the Company fails to satisfy the work or capital commitment under the License
or the SIA Letter, the licensing authority could cancel or suspend the License.
If the License is cancelled, the Company will be unable to develop and sell oil
produced from the Karakuduk Field. The Company can request a deferral of the
License commitments, but there is no guarantee that the license committee will
grant a deferral.
F-52
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
17. License Commitments and Other Capital Commitments (continued)
Other Capital Commitments
-------------------------
The Company cancelled its contract with Challenger Oil Services, PLC
("Challenger") in April 1999. The Company entered into a second drilling
contract with Kazakhoil Drilling Services Company, an affiliate of KazakhOil,
during the fourth quarter of 1999. Under the terms of the contract, the
operating rate (that includes both rig and crews) is $12,100 per day with a two
year contractual commitment. The Company prepaid $200,000 in drilling costs and
paid a $20,000 rig mobilization fee in December 1999. The Company began drilling
well #102 in late December 1999.
The Company has a contract in place with Geotex Geophysical Services ("Geotex"),
to acquire and process approximately 100 square kilometers of 3D seismic over
the Karakuduk field. The value of the contract and associated interpretation is
approximately $2,000,000. While some preliminary costs of approximately $65,000
were paid to Geotex in 1999, the reminder will be payable in the year 2000.
The Company has no other significant commitments other than those incurred
during the normal performance of the work program to develop the Karakuduk
field.
18. Related Party Transactions
In March 1999, the Company sold approximately 98,000 barrels of crude oil to
KazakhOil for approximately $850,000, net of transportation costs. Net proceeds
include a $39,000 marketing fee paid directly to KazakhOil.
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.
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
14 and CAP-G related party transactions are referenced in Note 12 to the
financial statements.
19. Subsequent Events
During 1999, KKM terminated the contract for drilling services with Challenger.
The termination led to all parties attending a mediation to resolve any
outstanding issues and financial matters relating to the work done prior to the
termination. In February 2000, a full and final settlement was reached and
approved by all parties in the presence of an independent mediator and the legal
representation of all parties. A sum of $1,336,000 was agreed as the amount
payable by the Company to fully and finally settle all outstanding liabilities
under the contract with Challenger. The Company accrued an amount of $1,400,000
in 1999 with respect to the drilling services performed under the contract prior
to termination. The settlement amount will be paid in the first quarter 2000.
The Company has no other obligations with regard to the Challenger contract.
F-53
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
The following supplemental information regarding the oil and gas activities of
the Company is presented pursuant to the disclosure requirements promulgated by
the Securities and Exchange Commission and Statement of Financial Accounting
Standards ("SFAS") No. 69, Disclosures About Oil and Gas Producing Activities.
Due to the previous uncertainties surrounding the development of the Karakuduk
Field no proven reserves were attributed to the Karakuduk Field as of December
31, 1998 and 1997. KKM recorded approximately 67.58 million barrels of proven
oil reserves attributable to the Karakuduk Field on November 1, 1999. The
disclosures below reflect the Company's proven reserves as of December 31, 1999.
The following estimates of reserve quantities and related standardized measure
of discounted net cash flows are estimates only, and do not purport 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 the changes may be significant. As discussed on Note 2,
the Company sold 324,650 barrels of crude oil an the local Kazakhstan and export
market during 1999. Prices received on these sales were substantially lower than
world market prices prevailing at that time. Year-end prices used for the
standardized measure of discounted net cash flows reflect the assumption of 100%
of the Company's production being sold at world prices as outlined in the
Company's Crude Oil Sales Agreement with STASCO. In the event the Company was
required to sell a portion of its production in the local Kazakhstan market, the
Company would more than likely receive a net oil price that would be
substantially lower than world market prices.
Proven 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. Proven 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 proven oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proven
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-54
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
Proven Oil and Gas Reserve Quantities
(All within the Republic of Kazakhstan)
Oil Gas
Reserves Reserves
(bbls.) (Mcf.)
----------- --------
Proven developed and undeveloped reserves:
Balance December 31, 1998 -- --
Extensions, discoveries and other additions 67,636,892 --
Production (59,249) --
-- --
Balance December 31, 1999 67,577,643 --
=========== ======
Proven Developed Reserves:
Balance December 31, 1999 1,233,059 --
=========== ======
Capitalized Costs Relating to Oil and Gas Producing Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
1999 1998 1997
------------ ------------ ------------
Unproven oil and gas properties $ -- $ 18,898,939 $ 8,166,390
Proven oil and gas properties 25,851,685 -- --
------------ ------------ ------------
Accumulated depreciation and
depletion (1,522,426) (631,851) (190,950)
------------ ------------ ------------
Net capitalized cost $ 24,329,259 $ 18,267,088 $ 7,975,440
============ ============ ============
F-55
<PAGE>
Closed Type JSC Karakudukmunay Notes
to the Financial Statements - (Continued)
(Amounts in US dollars unless otherwise stated)
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
Cost Incurred in Oil and Gas Property Acquisition, Exploration, and Development
Activities (All within the Republic of Kazakhstan)
Year Ended December 31,
1999 1998 1997
---------- ---------- ----------
Acquisition costs $ -- $ -- $ --
Exploration and appraisal costs -- 6,688,595 4,068,937
Development costs 7,476,647 -- --
---------- ---------- ----------
$7,476,647 $6,688,595 $4,068,937
========== ========== ==========
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,
1999 1998 1997
--------------- ------- -------
Future cash inflows $ 1,304,730,000 $ -- $ --
Future development costs (148,390,000)
Future production costs (78,280,000)
Future income tax expenses (311,620,000)
--------------- ------- -------
Future net cash flows 766,440,000 -- --
10% annual discount for estimated timing
of cash flows (411,080,000)
--------------- ------- -------
Standardized measure of discounted net
cash flows $ 355,360,000 $ -- $ --
=============== ======= =======
Principal sources of change in the standardized measure of discounted future net
cash flows
Beginning balance $ -- $ -- $ --
Extensions and discoveries 355,360,000
------------ --------- ----------
Ending balance $355,360,000 $ -- $ --
============ ========= ==========
F-56
