FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to ________________.
Commission File Number: 0 - 7261
CHAPARRAL RESOURCES, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-0630863
------------------------------ ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
16945 Northchase Drive, Suite 1620
Houston, Texas 77060
--------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (281) 877-7100
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
As of November 20, 2000, the Registrant had 14,283,634 shares of its common
stock, par value $0.0001 per share, issued and outstanding.
<PAGE>
Part I - Summarized Financial Information
Item 1 - Financial Statements
Chaparral Resources, Inc.
Consolidated Balance Sheets
September 30, December 31,
2000 1999
(Unaudited) (Audited)
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 1,626,000 $ 23,000
Restricted cash -- 578,000
Accounts receivable 38,000 23,000
Receivable from affiliate 333,000 --
Prepaid expenses 147,000 111,000
------------ ------------
Total current assets 2,144,000 735,000
Investment in KKM and other oil and gas
property costs - full cost method
Republic of Kazakhstan (Karakuduk Field): 59,280,000 38,151,000
Furniture, fixtures and equipment 91,000 100,000
Less accumulated depreciation (40,000) (39,000)
------------ ------------
51,000 61,000
------------ ------------
Other Assets
Deferred debt issuance cost -- 2,356,000
Hedge agreement 4,000,000 --
Other 626,000 --
------------ ------------
Total other assets 4,626,000 2,356,000
------------ ------------
Total assets $ 66,101,000 $ 41,303,000
============ ============
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<CAPTION>
Chaparral Resources, Inc.
Consolidated Balance Sheets (continued)
September 30, December 31,
2000 1999
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 606,000 $ 1,045,000
Accrued liabilities:
Accrued compensation 306,000 458,000
Accrued debt issuance cost -- 1,934,000
Accrued interest and other 6,000 239,000
------------ ------------
Total current liabilities 918,000 3,676,000
Shell Capital loan, net of discount 20,447,000 --
Notes payable, net of discount -- 9,576,000
Redeemable preferred stock- cumulative, convertible,
Series A 75,000 designated, 50,000 issued and outstanding,
at stated value, $5.00 cumulative annual
dividend, $5,688,000 redemption value 5,463,000 5,200,000
Stockholders' equity:
Common stock - authorized, 100,000,000
shares of $0.0001 par value; issued and outstanding,
12,670,731 and 980,314 shares, respectively 1,000 --
Capital in excess of par value 94,114,000 47,857,000
Unearned portion of restricted stock awards (6,000) (23,000)
Preferred stock - 1,000,000 shares authorized, 925,000 shares
undesignated. Issued and outstanding - none -- --
Stock subscription receivable (3,000,000) --
Accumulated deficit (51,836,000) (24,983,000)
------------ ------------
Total stockholders' equity 39,273,000 22,851,000
------------ ------------
Total liabilities and stockholders' equity $ 66,101,000 $ 41,303,000
============ ============
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<CAPTION>
Chaparral Resources, Inc.
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ --
Costs and expenses:
Depreciation and depletion 39,000 5,000 81,000 16,000
General and administrative 1,054,000 379,000 2,520,000 1,636,000
------------ ------------ ------------ ------------
1,093,000 384,000 2,601,000 1,652,000
------------ ------------ ------------ ------------
Loss from operations (1,093,000) (384,000) (2,601,000) (1,652,000)
Other income (expense):
Interest income 444,000 230,000 1,177,000 685,000
Interest expense (22,597,000) (143,000) (25,293,000) (309,000)
Equity in income (loss) from investment 206,000 (254,000) 58,000 (947,000)
Legal settlement -- -- -- 34,000
Other 3,000 -- 69,000 --
------------ ------------ ------------ ------------
(21,944,000) (167,000) (23,989,000) (537,000)
------------ ------------ ------------ ------------
Net loss $(23,037,000) $ (551,000) $(26,590,000) $ (2,189,000)
------------ ------------ ------------ ------------
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock (63,000) (63,000) (188,000) (188,000)
Discount accretion
Series A Redeemable Preferred Stock (25,000) (25,000) (75,000) (75,000)
------------ ------------ ------------ ------------
Net loss available to common stockholders $(23,125,000) $ (639,000) $(26,853,000) $ (2,452,000)
------------ ------------ ------------ ------------
Basic and diluted earnings per share:
Net loss per share $ (10.89) $ (.65) $ (19.66) $ (2.51)
Weighted average number of shares
outstanding (basic and diluted) 2,124,083 977,954 1,365,848 977,752
4
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<CAPTION>
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30, September 30,
2000 1999
------------ ------------
Cash flows from operating activities
<S> <C> <C>
Net loss $(26,590,000) $ (2,189,000)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Equity (gain)/loss from investment (58,000) 947,000
Depreciation, depletion, and amortization 205,000 16,000
Gain on the sale of oil and gas properties (75,000) --
Loss on disposition of furniture and fixtures 6,000 --
Stock issued for services and bonuses 16,000 277,000
Interest expense converted into capital stock 899,000 --
Expired warrants -- (117,000)
Provision for doubtful accounts -- 14,000
Amortization of note discount 464,000 34,000
Amortization of debt issuance cost 687,000 --
Interest expense attributable to beneficial
conversion 20,340,000 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (348,000) (19,000)
Prepaid expenses (36,000 (11,000)
Accrued interest on advances to KKM (1,167,000) (623,000)
Notes receivable -- (51,000)
Hedge agreement (4,000,000) --
Other assets (750,000) --
Increase (decrease) in:
Accounts payable and accrued liabilities (2,758,000) 629,000
Interest expense capitalized to Shell
Capital loan 2,273,000 --
------------ ------------
Net cash used in operating activities (10,892,000) (1,093,000)
Cash flows from investing activities
Additions to furniture, fixtures and equipment $ (10,000) $ (7,000)
Investment in and advances to oil and
gas properties (19,972,000) (4,250,000)
Proceeds from sale of interest in oil and gas
properties - domestic 75,000 --
------------ ------------
Net cash used in investing activities (19,907,000) (4,257,000)
5
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Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the Nine Months Ended
September 30, September 30,
2000 1999
------------ ------------
Cash flows from financing activities
Net proceeds from Shell Capital loan $ 21,500,000 $ --
Net proceeds from convertible notes 10,806,000 --
Net proceeds from other notes payable -- 5,120,000
Debt issuance cost (482,000) --
Restricted cash 578,000 130,000
------------ ------------
Net cash provided by financing activities 32,402,000 5,250,000
------------ ------------
Net increase in cash and
cash equivalents 1,603,000 (100,000)
Cash and cash equivalents at beginning
of period 23,000 121,000
------------ ------------
Cash and cash equivalents at end of period $ 1,626,000 $ 21,000
============ ============
Supplemental cash flow disclosure
Interest paid $ 624,000 $ 65,000
Supplemental schedule of non-cash investing
and financing activities
Stock warrant issued to Shell Capital 1,175,000 --
Notes payable converted to common stock 20,846,000 --
See accompanying notes.
6
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1. General
Chaparral Resources, Inc. ("Chaparral") was incorporated in the state of
Colorado in January 1972, principally to engage in the exploration, development
and production of oil and gas properties. In April 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, Chaparral Acquisition Corporation, and Central
Asian Petroleum, Inc. ("CAP-D"). Chaparral owns 80% of the common stock of CAP-G
directly and the remaining 20% indirectly through CAP-D. Hereinafter, Chaparral
and its subsidiaries are collectively referred to as the "Company." All
significant intercompany transactions have been eliminated.
CAP-G owns a 50% interest in Closed Type JSC Karakudukmunay ("KKM"), a
Kazakhstan joint stock company, which holds the rights for the exploration,
development and production of oil in the Karakuduk Field. 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.
In April 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.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Reference should be made to the notes to the
financial statements in the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1999.
The information furnished herein was taken from the books and records of the
Company without audit. However, such information reflects all adjustments, which
are, in the opinion of management, normal recurring adjustments necessary to a
fair statement of the results for the interim periods presented. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for any future interim period or for the year.
2. 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 September 30, 2000, 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.
7
<PAGE>
2. New Accounting Standards (continued)
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 upon 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. For the period ended September 30, 2000, the
Company's equity income was $58,000 with the application of EITF 99-10. Without
consideration of EITF 99-10, the Company would have recognized equity income of
$613,000, an increase of $555,000.
3. Going Concern
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. 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
additional funding to obtain levels of production that will generate sufficient
cash flows to meet future capital and operating spending requirements. The
primary source of funding is expected to be revenue generated from oil sales,
but additional sources of capital may be necessary. The Company has recognized
recurring operating losses and had a working capital deficiency as of December
31, 1999. In addition, there are uncertainties with respect to commitments under
KKM's license agreement with the government (the "License").
The License required KKM to meet certain expenditure and work commitments on or
before June 30, 2000. KKM did not timely satisfy the License's work commitments,
but received a letter dated July 4, 2000, from Kazakhstan's licensing authority
stating that due to KKM's activities and expenditures to date there were "no
grounds for termination or suspension of the operation of the License." While
the letter is not a formal amendment to the License, KKM has been advised by its
Kazakhstan legal counsel that the License is not in default and a formal
amendment should not be expected from the licensing authority. As of September
30, 2000, KKM has fulfilled the expenditure and work commitments originally
required by the License. If the License is revoked, however, 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. In November 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 fulfilled in February 2000. As of September 30, 2000, the
Company has borrowed a total of $21,500,000 under the Loan.
8
<PAGE>
3. Going Concern (continued)
o Equity Support. As an original condition to the Loan, the Company was
required to complete an equity offering to its stockholders 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"), committed to Shell Capital to exercise their full pro-rata
share of the Rights Offering and, if the Rights Offering was not concluded
on or before June 30, 2000, to each contribute $2,000,000 into the Company
for the Company's securities or indebtedness (the "Equity Support
Agreements"). As of August 21, 2000, the Loan was amended to extend the
total amount of equity support to be raised by the Company to $10,000,000
on or before September 30, 2000. The Company fulfilled the $10,000,000
equity support commitment by raising a total of $7,500,000 through the
issuance of the Company's 8% Non-Negotiable Convertible Promissory Notes
(the " Notes"), including $2,000,000 each to Whittier and Allen in
satisfaction of their Equity Support Agreements, and execution of a stock
subscription agreement to sell $3,000,000 of the Company's common stock to
Capco Resources, Ltd. ("Capco") on or before October 30, 2000.
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 50% interest.
As of September 30, 2000, KKM has produced approximately 822,000 barrels of
crude oil and was producing approximately 3,500 barrels of oil per day.
Average daily production was limited due to short-term facility
constraints, which KKM is working to alleviate.
o Crude Oil Sales Agreement. In November 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 KKM's 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. In March 2000, KKM began making nominations for
export sales to STASCO. Each nomination is subject to the approval of the
government of Kazakhstan.
From January 1, 2000, to September 30, 2000, KKM sold approximately 365,000
barrels of crude oil on the export market for $6,710,000, net of
transportation costs. KKM also received government approval to export an
additional 73,000 barrels for sale in October 2000. To fulfill government
requirements, KKM sold approximately 43,800 barrels on the local market in
August 2000. The local sale, approved by Shell Capital and STASCO,
generated approximately $400,000, net of transportation costs.
9
<PAGE>
3. Going Concern (continued)
Management's plans for addressing the above uncertainties are partially based
upon forward-looking events, which have yet to occur, including the successful
future development, production, and sale 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 and beyond are
significantly based upon future cash flows from the sale of KKM's crude oil
production. While the Company has fulfilled the equity support requirements of
the Loan, no assurances can be given that they will be sufficient to meet the
Company's capital requirements not satisfied by cash flows from operations. If
the necessary financial resources are not available, the Company may lose its
investment in KKM and the Karakuduk Field.
4. 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. KKM
fully repaid the loans in January 2000, and the collateral was released.
5. Hedge Agreement
On February 11, 2000, the Company paid $4,000,000 for put contracts to sell
1,562,250 barrels of North Sea Brent crude (the "Hedge Agreement") to hedge
price risk of future sales of oil production from the Karakuduk Field. The
exercise prices of the various put contracts in the Hedge Agreement range from
$22.35 to $17.25 per barrel, with monthly expiration dates beginning in October
2000 and ending in December 2002. The contracts are evenly spread between
October 2000 to December 2001 (62,750 barrels per month) and between January
2002 to December 2002 (51,750 barrels per month). The Company will amortize the
Hedge Agreement ratably over the period the underlying contracts expire. As of
September 30, 2000, the market value of the Hedge Agreement was $261,000 and the
Company's unrealized hedging loss was $3,739,000.
6. Other Assets
In March 2000, the Company paid Shell Capital $750,000 for a beneficial interest
in Shell Capital's policy for transportation risk insurance ("Transportation
Risk Insurance"), covering certain circumstances whereby KKM would be unable to
export crude oil production outside of the Republic of Kazakhstan through the
existing pipeline routes currently available. In the event coverage under Shell
Capital's policy is triggered, proceeds from the policy would go to the benefit
of the Company for use in making principal and interest payments required under
the Loan. The Company is amortizing the Transportation Risk Insurance over the
life of the Loan.
10
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7. Shell Capital Loan
In November 1999, the Company entered into the Loan with Shell Capital, to
provide up to $24,000,000 of financing for the development of the Karakuduk
Field. CAP-D, CAP-G, and KKM also signed the Loan as co-obligors. The Company
and KKM are hereafter referred to as the "Borrowers".
As of September 30, 2000, the Company has borrowed $21,500,000 under the Loan
and capitalized $2,273,000 of subordinated interest expense as additional
principal. The Loan is recorded net of $3,326,000 in unamortized discount,
further described below.
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. In February 2000, the Company fully satisfied
all of the outstanding conditions, drawing down initial funds from the Loan.
The equity infusion requirements of the Loan were partially satisfied by the
Company's issuance of Notes, convertible into the Company's common stock at an
exercise price of $1.86 per share. In August 2000, the Loan was amended to
extend the Company's remaining equity support commitment to $10,000,000 on or
before September 30, 2000. With Shell Capital's consent, the Company satisfied
the $10,000,000 requirement through the issuance of additional Notes totaling
approximately $7,500,000 and $3,000,000 of the Company's common stock. The
Company issued Notes with an aggregate principal amount of $3,000,000 in August
2000 and another $4,506,000 in September 2000, including Notes totaling
$2,000,000 each to Allen and Whittier, respectively. In September 2000, the
Company executed a $3,000,000 stock subscription agreement with Capco, a
non-affiliated entity, whereby Capco would contribute $3,000,000 into the
Company on or before October 30, 2000 for the Company's common stock at $1.86
per share. Capco invested $3,000,000 into the Company on October 30, 2000 in
exchange for 1,612,903 shares of the Company's common stock. See Notes 8 and 9.
Allen and Whittier, the Company's two largest stockholders, previously entered
into Equity Support Agreements with Shell Capital, committing Allen and Whittier
to each contribute $2,000,000 into the Company for the Company's equity
securities or other subordinated indebtedness at Shell Capital's request. As
described above, Allen and Whittier fulfilled their Equity Support Agreement
commitments by each contributing $2,000,000 into the Company in exchange for the
Company's Notes in September 2000.
On September 21, 2000, the Company's outstanding Notes with an aggregate
principal amount of $20,846,000, plus accrued interest of $899,000, were
converted into 11,690,259 shares of the Company's common stock at a conversion
price of $1.86 per share. Shell Capital approved the conversion of the Notes, as
required by the Loan. See Note 8.
In January 2000, the Company obtained binding political risk insurance coverage
from the Overseas Private Investment Corporation ("OPIC"). The OPIC policy's
maximum coverage amount electable by the Company is $50,000,000, which would
require a quarterly premium of $262,500. The Company is required to maintain
political risk insurance until the Loan is fully repaid. As of September 30,
2000, the Company has paid $604,000 in premiums and had bound OPIC coverage of
$45,000,000 through October 30, 2000.
As discussed in Note 5, the Company entered into the Hedge Agreement in February
2000, purchasing put contracts to sell 1,562,250 barrels of North Sea Brent
crude.
11
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7. Shell Capital Loan (continued)
As discussed in Note 6, the Company paid Shell Capital a total of $750,000 for
Transportation Risk Insurance in March 2000.
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, unless otherwise agreed with Shell Capital. 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 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"), subject to certain anti-dilution provisions. The Shell Warrant
is exercisable for a period of 5 years beginning on the earlier of Project
Completion or September 30, 2001. Furthermore, the Shell Warrant is
non-transferable and contains certain registration rights. On the date of grant,
the Shell Warrant represented 147,072 shares of the Company's common stock at an
exercise price of $15.45 per share. After the conversion of the Notes and the
issuance of the Company's common stock to Capco, both dilutive events, the Shell
Warrant represents 1,785,455 shares of the Company's common stock at an exercise
price of $9.79 per share. The fair market value of the Shell Warrant on the date
of grant, $1,175,000, was recorded as a discount of the Loan, amortizable as
interest expense over the life of the Loan. The fair market value of the Shell
Warrant was estimated as of February 14, 2000, the date of initial drawdown
under the Loan, using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rate of 6.61%, dividend yield
of 0%, volatility factors of the expected market price of the Company's common
stock of 1.27, and a weighted average life expectancy of the warrants of 3.5
years.
12
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7. Shell Capital Loan (continued)
The Loan subjects the Company to a significant number of restrictions, including
various representations and warranties, positive and negative covenants, and
events of default. See the notes to the financial statements in the Company's
Annual Report on Form 10-K/A for the fiscal year ended December 31, 1999 for
additional information regarding such restrictions.
The Company incurred $4,013,000 in debt issuance costs related to the Loan,
comprised of up-front fees payable to Shell Capital, legal fees of Shell Capital
and the Borrowers, the value of the Shell Warrant on the date of grant, and
miscellaneous financing fees and set-up charges. The Company recorded the debt
issuance costs as a discount to the Loan, amortizable over the life of the Loan.
Total amortization through September 30, 2000 equaled $687,000.
As of September 30, 2000, the principal borrowings of $21,500,000 from the Loan
were utilized to pay $2,525,000 in outstanding debt issuance costs, $4,000,000
for the Hedge Agreement, $750,000 for Transportation Risk Insurance, $368,000
for the initial OPIC insurance premium, $12,550,000 for KKM's operations, and
$1,307,000 for the Company's corporate overhead. Interest expense for the period
was $2,874,000, of which $2,273,000 of subordinated interest was capitalized as
additional principal at the end of each quarterly period.
8. Notes Payable
On September 21, 2000, the Company converted Notes with an aggregate principal
amount of $20,846,000, plus accrued interest of $899,000, into 11,690,259 shares
of the Company's common stock at a conversion price of $1.86 per share. Prior to
conversion, the Notes carried an unamortized discount of $281,000.
Originally, the conversion provision of the Notes was subject to shareholder
approval, but the Company's board of directors authorized management to obtain
approval from the holders of the Notes to amend the terms of the Notes to allow
immediate conversion into the Company's common stock. The Company obtained
approval from such holders, and the Notes were converted on September 21, 2000.
The board of directors decision to amend the terms of the Notes to allow
immediate conversion was based upon several factors, including funding the
working capital requirements of the Company, the Loan requirement to raise
$10,000,000 on or before September 30, 2000, and complying with the various
restrictive covenants of the Loan.
The Notes consisted of $10,040,000 of the Company's Notes issued during the
fourth quarter of 1999 and $10,806,000 issued during 2000, including Notes
totaling $3,300,000 in January and February, $3,000,000 in August, and
$4,506,000 in September 2000, respectively. The Notes were issued to various
related parties and other non-affiliated investors. Notes issued to related
parties totaled $14,690,000, including $9,827,000 to Allen, $4,051,000 to
Whittier, $662,000 to Mr. McMillian, the Co-Chairman and Chief Executive Officer
of the Company, and $150,000 to a relative of Jim Jeffs, the Co-Chairman of the
Company.
In exchange for the Notes, the Company received $15,556,000 in cash and canceled
$5,290,000 in promissory notes issued previously in 1999, plus accrued interest
thereon, to Allen ($3,827,000), Whittier ($1,051,000), Mr. McMillian ($412,000).
13
<PAGE>
8. Notes Payable (continued)
The conversion feature of the Notes was a "beneficial conversion feature" as
addressed in EITF 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, whereby a
portion of the proceeds received from the Notes is allocable to the conversion
feature contained therein. The value assigned to the conversion feature is
determined as the difference between the market price of the Company's common
stock on the date of issuance and the conversion price multiplied by the number
of shares to be received upon conversion, which was approximately $120,000,000.
As the conversion price contained in the Notes is substantially below the market
price, the value under the above formula significantly exceeds the net proceeds
from the Notes. Under EITF 98-5, the discount assigned to the conversion feature
is limited to the total proceeds allocated to the convertible instrument.
Accordingly, upon conversion of the Notes, the Company recorded additional
interest expense and additional paid in capital equal to $20,340,000, the face
amount of the Notes net of original discount.
9. Common Stock
The conversion of the Company's Notes on September 21, 2000 resulted in the
issuance of 11,690,259 shares of the Company's common stock (see Note 8), a
portion of which were issued to certain affiliates of the Company who were
holders of the Notes. Affiliates receiving shares as a result of the conversion
include Allen (5,561,166 shares), Whittier (2,255,004 shares), and Mr. McMillian
(378,364 shares).
In September 2000, the Company executed a stock subscription agreement with
Capco, whereby Capco would acquire $3,000,000 of the Company's common stock on
or before October 30, 2000 at $1.86 per share, or 1,612,903 shares. The
transaction was completed on October 30, 2000, with Shell Capital's approval.
Capco was also a holder of two of the Company's Notes with an aggregate
principal amount of $750,000, which were converted, along with accrued interest
thereon, into 427,113 shares of the Company's common stock on September 21,
2000.
10. Other Related Party Transactions
Effective January 1, 2000, Chaparral entered into an agreement to provide
management services to KKM for a fee of $170,000 per month, to be recovered from
KKM on a current basis from proceeds from oil sales. The receivable from
affiliate represents 100% of accrued management fees and reimbursable expenses,
net of payments received from KKM through September 30, 2000. The reimbursable
expenses include costs paid by the Company on behalf of KKM.
Effective March 1, 2000, the Company sold overriding royalty interests in
certain domestic oil and gas properties for $75,000 to a former Chairman and
Chief Executive Officer of the Company, resulting in a $75,000 gain. In February
1997, the Company had assigned the overriding royalty interests to the same
individual as part of a severance agreement for a period of three years, after
which they would revert to the Company. The Company holds no other interests in
domestic oil and gas properties.
14
<PAGE>
<TABLE>
<CAPTION>
11. Investments
The results from operations of the Company's equity-based investment in KKM are
summarized below:
Closed Type JSC Karakudukmunay
Statement of Expenses and Accumulated Deficit
For the Three and Nine Month Periods Ended September 30, 2000 and 1999
(Amounts in US Dollars)
(Unaudited)
For The Three Months Ended For The Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ -------------
Revenues:
<S> <C> <C> <C> <C>
Oil Sales $ 4,341,000 $ -- $ 8,893,000 $ --
Costs and expenses:
Transportation and marketing costs 714,000 -- 1,783,000 --
Operating expenses 1,521,000 -- 2,315,000 --
Depreciation and depletion 685,000 150,000 1,463,000 400,000
Management service fee 173,000 151,000 454,000 431,000
General and administrative 615,000 323,000 1,637,000 1,421,000
------------ ------------ ------------ -------------
Total cost and expenses 3,708,000 624,000 7,652,000 2,252,000
------------ ------------ ------------ -------------
Income (Loss) from operations 633,000 (624,000) 1,241,000 (2,252,000)
Other income (expense):
Interest Income $ 14,000 $ -- $ 41,000 $ --
Interest expense from affiliates (883,000) (327,000) (2,334,000) (887,000)
Other -- -- (57,000) --
------------ ------------ ------------ -------------
Net loss (236,000) (951,000) (1,109,000) (3,139,000)
Accumulated deficit, beginning of period (12,880,000) (9,691,000) (12,007,000) (7,503,000)
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Accumulated deficit, end of period (13,116,000) (10,642,000) (13,116,000) (10,642,000)
============ ============ ============ =============
From January 1, 2000 to September 30, 2000, KKM sold approximately 365,000
barrels of crude oil on the export market for approximately $6,710,000, net
of transportation costs. KKM also received government approval to export an
additional 73,000 barrels for sale in October 2000. To fulfill government
requirements, KKM sold approximately 43,800 barrels on the local market
during this period. The local sale, approved by Shell Capital and STASCO,
generated approximately $400,000, net of transportation costs.
15
</TABLE>
<PAGE>
Item 2. 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 additional
funding to obtain levels of production that will generate sufficient cash flows
to meet future capital and operating spending requirements. The primary source
of funding is expected to be revenue generated from oil sales, but additional
sources of capital may be necessary. We have recognized recurring operating
losses and had a working capital deficiency as of December 31, 1999. In
addition, there are uncertainties with respect to commitments under KKM's
License.
The License required KKM to meet certain expenditure and work commitments on or
before June 30, 2000. KKM did not timely satisfy the License's work commitments,
but received a letter dated July 4, 2000, from the licensing authority stating
that due to KKM's activities and expenditures to date, there were "no grounds
for termination or suspension of the operation of the License." While the letter
is not a formal amendment to the License, KKM has been advised by its Kazakhstan
legal counsel that the License is not in default and a formal amendment should
not be expected from the licensing authority. As of September 30, 2000, KKM has
fulfilled the expenditure and work commitments originally required by the
License. If the License is revoked, however, 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 November 20, 2000, we have borrowed
a total of $21,500,000 under the Loan.
o Equity Support. As an original condition to the Loan, we were required
to complete a Rights Offering to our stockholders to acquire not less
than $6,000,000 of our common stock on or before June 30, 2000. Two of
our related party stockholders, Allen and Whittier, committed to Shell
Capital to exercise their full pro-rata share of the Rights Offering
and, if the Rights Offering was not concluded on or before June 30,
2000, to each contribute $2,000,000 into Chaparral for our securities
or indebtedness. As of August 21, 2000, the Loan was amended to extend
the total amount of equity support to be raised by Chaparral to
$10,000,000 on or before September 30, 2000. We fulfilled the
$10,000,000 equity support commitment by raising a total of $7,500,000
through the issuance of Notes, including $2,000,000 each to Whittier
and Allen in satisfaction of their Equity Support Agreements, and
execution of a stock subscription agreement to sell $3,000,000 of the
Company's common stock to Capco on or before October 30, 2000.
16
<PAGE>
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 our 50%
interest. As of November 20, 2000, KKM has produced approximately
1,000,000 barrels of crude oil and was producing approximately 3,500
barrels of oil per day. Average daily production has been limited due
to short-term facility constraints, which KKM is working to alleviate,
including field shut-downs to install and hook-up various field
facilities.
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 KKM's oil production from the Karakuduk Field on
the export market for world market oil prices. We expect 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. In July 2000, KKM began making monthly
nominations for export sales to STASCO. Each nomination is subject to
the approval of the government of Kazakhstan.
From January 1, 2000 to November 20, 2000, KKM sold approximately
438,000 barrels of crude oil on the export market for approximately
$8,500,000, net of transportation costs. KKM also has a government
approved nomination of approximately 146,000 barrels for December 2000
delivery to STASCO, which is expected to generate approximately
$3,300,000, net of transportation costs. The government has required
KKM sell approximately 139,000 barrels of oil on the local market
during 2000. As of November 20, 2000, KKM completed local sales, with
the approval of STASCO and Shell Capital, of approximately 102,000
barrels for approximately $950,000, net of transportation costs. The
remaining local sales requirement is scheduled for delivery in
December 2000.
Management's plans for addressing the above uncertainties are partially based
upon forward looking events, which have yet to occur, including the successful
future development, production, and sale 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 and beyond are
significantly based upon future cash flows from the sale of KKM's crude oil
production. While Chaparral has fulfilled the equity support requirements of the
Loan, no assurances can be given that they will be sufficient to meet future
capital requirements not satisfied by cash flows from operations. If the
necessary financial resources are not available, Chaparral could lose its
investment in KKM and the Karakuduk Field.
Other risks and considerations also impact our short and long-term liquidity.
Specifically, KKM's ability to develop the Karakuduk Field, obtain export oil
quota, and physically deliver its production to the export market are
significant liquidity factors, along with the impact of volatile oil prices on
cash proceeds from oil sales.
Chaparral's Notes and Other Subordinated Indebtedness.
------------------------------------------------------
Chaparral has raised a total of $20,846,000 through the issuance of Notes for
the development of the Karakuduk Field and to satisfy the capital requirements
of the Loan, of which $10,856,000 was raised during 2000. On September 21, 2000,
Chaparral converted all of its outstanding Notes, plus accrued interest of
$899,000, into 11,690,259 shares of Chaparral's common stock at a conversion
price of $1.86 per share.
Originally, the conversion provision of the Notes was subject to shareholder
approval, but Chaparral's board of directors authorized management to obtain
approval from the holders of the Notes to amend the terms of the Notes to allow
immediate conversion into Chaparral's common stock. We obtained approval from
the holders of the Notes and the Notes were converted on September 21, 2000. The
board of directors decision to amend the terms of the Notes to allow immediate
conversion was based upon several factors, including funding the working capital
requirements of the Company, the Loan requirement for Chaparral to raise
17
<PAGE>
$10,000,000 on or before September 30, 2000, and Chaparral's compliance with the
various restrictive covenants of the Loan.
The converted Notes consisted of $10,040,000 of Chaparral's Notes issued during
the fourth quarter of 1999 and $10,806,000 issued during 2000, including Notes
totaling $3,300,000 in January and February, $3,000,000 in August, and
$4,506,000 in September 2000, respectively. The Notes were issued to various
related parties and other non-affiliated investors. Notes issued to related
parties totaled $14,690,000, including $9,827,000 to Allen, $4,051,000 to
Whittier, $662,000 to Mr. McMillian, the Co-Chairman and Chief Executive Officer
of Chaparral, and $150,000 to a relative of Jim Jeffs, the Co-Chairman of
Chaparral.
In exchange for the Notes, Chaparral received $15,556,000 in cash and canceled
$5,290,000 in promissory notes issued previously in 1999, plus accrued interest
thereon, to Allen ($3,827,000), Whittier ($1,051,000), Mr. McMillian ($412,000).
The conversion feature of the Notes was a "beneficial conversion feature" as
addressed in EITF 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, whereby a
portion of the proceeds received from the Notes is allocable to the conversion
feature contained therein. The value assigned to the conversion feature is
determined as the difference between the market price of Chaparral's common
stock on the date of issuance and the conversion price multiplied by the number
of shares to be received upon conversion, which was approximately $120,000,000.
As the conversion price contained in the Notes is substantially below the market
price, the value under the above formula significantly exceeds the net proceeds
from the Notes. Under EITF 98-5, the discount assigned to the conversion feature
is limited to the total proceeds allocated to the convertible instrument.
Accordingly, upon conversion of the Notes, Chaparral recorded additional
interest expense and additional paid in capital equal to $20,340,000, the face
amount of the Notes net of original discount.
Shell Capital Loan.
-------------------
We entered into the Loan with Shell Capital in November 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.
As of August 21, 2000, the Loan was amended to extend our remaining equity
support commitment to $10,000,000 on or before September 30, 2000. With the
approval of Shell Capital, we raised a total of $7,500,000 through the issuance
of Notes and another $3,000,000 through a stock subscription agreement with
Capco, which was fully executed on October 30, 2000.
On January 31, 2000, we obtained binding political risk insurance coverage from
OPIC. 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. We have elected
coverage of $50,000,000 through January 30, 2001.
In February 2000, we entered into the Hedge Agreement, paying $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). As of September 30, 2000, the market value of the
Hedge Agreement was $261,000 and our unrealized hedging loss was $3,739,000.
18
<PAGE>
In March 2000, we paid Shell Capital a total of $750,000 for Transportation Risk
Insurance, providng us with a beneficial interest in Shell Capital's policy for
transportation risk insurance, covering certain circumstances whereby KKM would
be unable to export crude oil production outside of the Republic of Kazakhstan
through the existing pipeline routes currently available. In the event coverage
under Shell Capital's policy is triggered, proceeds from the policy would go to
the benefit of Chaparral for use in making principal and interest payments
required under the Loan.
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, Chaparral issued to Shell Capital the
Shell Warrant to purchase up to 15% of Chaparral's outstanding common stock,
subject to certain anti-dilution provisions. The Shell Warrant is exercisable
for a period of 5 years beginning on the earlier of Project Completion or
September 30, 2001. Furthermore, the Shell Warrant is non-transferable and
contains certain registration rights. On the date of grant, the Shell Warrant
represented 147,072 shares of Chaparral's common stock at an exercise price of
$15.45 per share. After the conversion of the Notes and the issuance of our
common stock to Capco, both dilutive events, the Shell Warrant represents
1,785,455 shares of Chaparral's common stock at an exercise price of $9.79 per
share. The fair market value of the Shell Warrant on the date of grant,
$1,175,000, was recorded as a discount of the Loan, amortizable as interest
expense over the life of the Loan.
The 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:
19
<PAGE>
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 certain remedies, including the right to accelerate
repayment of the loan and obtain our rights to the Karakuduk Field.
o Business Alteration. We cannot engage in any other business except the
ownership of KKM and the operation of the Karakuduk Field without the
prior consent of Shell Capital.
o Change in Control. We cannot enter into any transaction whereby 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. Certain transactions are exempt from this restriction,
including, the conversion of our Notes, 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 certain
anti-dilution provisions). Furthermore, Allen and Whittier, have
agreed not to let their ownership in Chaparral 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 certain 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 certain restrictions. We cannot pay any dividends
without Shell Capital's consent.
o OPIC Insurance. We must maintain OPIC political risk insurance
throughout the duration of the Loan.
20
<PAGE>
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 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 November 20, 2000, we have borrowed $21,500,000 under the Loan. The Loan
proceeds were utilized to pay $2,525,000 in outstanding debt issuance costs,
$4,000,000 for the Hedge Agreement, $750,000 for Transportation Risk Insurance,
$368,000 for OPIC insurance premiums, $12,550,000 for KKM's operations, and
$1,307,000 for our corporate overhead.
Other Sources of Liquidity and Capital Resources.
-------------------------------------------------
The costs required to develop the Karakuduk Field are significant and have not
been fully covered by the available financial resources under the Loan. We are
currently pursuing other sources of liquidity, which we believe will satisfy
both the short and long-term cash requirements of Chaparral and KKM, primarily
through the sale of oil under the Crude Oil Sales Agreement. If the proceeds
from oil sales are not sufficient to meet our working capital needs, we will
pursue other sources of capital through the issuance of additional indebtedness
and/or the issuance of Chaparral's common or preferred stock. We can provide no
assurances, however, that other sources of capital will be available, or, if
available, will be on favorable terms to Chaparral.
Previously, our board of directors approved a Rights Offering for 5,300,000
shares of our common stock convertible at $1.86 per share, or $9,858,000, in
order to satisfy the equity requirements of the Loan. The Loan's equity
requirements were fulfilled through the issuance of Notes and completion of the
stock subscription to Capco on October 30, 2000. Therefore, the board of
directors decided to withdraw the Rights Offering, instructing Chaparral's
management to withdraw the registration statement currently on file with the
SEC.
Both short and long-term financial resources necessary to develop the Karakuduk
Field are expected to result from crude oil sales under the Crude Oil Sales
Agreement. Ryder Scott has estimated the proven reserves underlying the
Karakuduk Field to be approximately 67.58 million barrels of oil, of which 33.79
million is attributable to our 50% equity interest in KKM. KKM has implemented a
two-rig drilling program to accelerate recovery of these proven reserves and
generate cash flows capable of supporting KKM's operations and begin repayment
of our investment in KKM. We will utilize the principal and interest repayments
on our investment in KKM to fund repayment of our Loan with Shell Capital.
As of November 20, 2000, KKM has completed 4 export oil sales to STASCO,
delivering approximately 438,000 barrels of oil to the sea-port of Odessa,
Ukraine. The oil sales generated cash proceeds of approximately $8,500,000, net
of transportation costs. KKM has an additional nomination for the export
delivery of approximately 146,000 barrels to STASCO in December 2000. At current
market prices, the December 2000 sale is expected to generate cash proceeds of
approximately $3,300,000, net of transportation costs. Additional oil sales are
expected on a monthly basis, as KKM continues to increase its crude oil
production.
The government of Kazakhstan required KKM, along with other oil and gas
producers within Kazakhstan, to sell a certain portion of their crude oil
production to the local market to supply local energy needs. With the approval
of Shell Capital and STASCO, KKM has sold approximately 102,000 barrels of crude
21
<PAGE>
oil on the local market for approximately $950,000, net of transportation costs.
While KKM is attempting to eliminate any future local oil sales, such
requirements are expected from the government in the future.
Capital Commitments.
--------------------
As of November 20, 2000, KKM has drilled and successfully completed 9 wells in
the Karakuduk Field. Another 3 wells have been drilled to total depth and are
awaiting completion. An additional 5 existing delineation wells have been
successfully recompleted, establishing production from each well.
The daily productive capacity of the 14 producing wells is approximately 6,000
barrels of oil per day. Due to current facility constraints, however, KKM is
only capable of processing and transporting approximately 3,500 barrels of oil
per day into the export pipeline. KKM expected to have some of the facility
constraints resolved prior to October 31, 2000, but encountered delays in
completion of necessary works by local contractors and in obtaining approvals
from the local regulatory authorities to commission certain facilities. KKM is
working to alleviate all facility constraints, through expansion of the
Karakuduk Field's oil storage capacity, upgrading existing and installing
additional gathering and processing facilities, and commissioning an oil sales
pipeline connecting the Karakuduk Field to the export pipeline. KKM expects its
capacity to deliver oil production into the main export pipeline to be
incrementally extended to approximately 6,300 barrels of oil per day prior to
December 31, 2000.
KKM currently has two drilling rigs and one workover rig operating in the
Karakuduk Field. KKM expects to drill up to 4 additional developmental wells
before December 31, 2000.
Over the next 5 years, KKM expects to spend an additional $130,000,000 to
$150,000,000 on the development of the Karakuduk Field. As previously discussed,
cash flow from oil sales is expected to be the primary source of capital
necessary to meet KKM's cash requirements, as well as repay the Loan from CAP-G
to KKM.
We estimate that 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 estimated. The planned development
program for the Karakuduk Field will include a pressure maintenance operation
that our management believes could result in additional recoverable reserves.
Field facilities are either in place or under construction to support the
initial stages of the development program. Engineering plans are being prepared
on additional facilities required for long-term development, including
electrical systems and compression facilities required for artificial lift. 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. A second mini-camp for the drilling crew of the
second rig is being constructed and installed in the Karakuduk Field. KKM has
also completed a main road between the export pipeline and the field. KKM is
continuously clearing access roads and performing other required site
preparation activities for future planned drilling locations.
Crude oil production is being processed at a pilot facility and has been trucked
to the KKM pump station adjacent to the export pipeline. The pump station is
approximately 18 miles from the Karakuduk Field and was placed in service in
April 2000. KKM 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 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 in the first quarter of 2001. Until the pipeline is
operational, KKM will continue to truck oil production to the pump station at
the export pipeline. KKM is currently sourcing oil trucks to increase crude oil
trucking capacity in the Field. As discussed above, the productive capacity of
the Karakuduk Field is currently limited due to various facility constraints,
which KKM is working to alleviate.
KKM has completed a 3-D seismic shoot in the Karakuduk Field. The seismic data
has been processed and is currently being interpreted, with estimated completion
by the end of December 2000. The results from the seismic study are expected to
22
<PAGE>
help optimize the well drilling order for KKM's drilling program and further
define the possible total productive capability of the Karakuduk Field.
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 established a minimum work
program requiring KKM to drill 8 new wells during 1999. In August 1999, we
received a letter from the licensing authority, extending the period for
completion of the minimum work program and expenditure commitments to June 30,
2000. KKM did not satisfy the stated License commitments before June 30, 2000,
but has satisfied all requirements as of this filing.
On July 4, 2000, however, KKM received a second letter from the licensing
authority stating that due to KKM's activities and expenditures to date, there
were "no grounds for termination or suspension of the operation of the License."
While the letter is not a formal amendment to the License, KKM has been advised
by its Kazakhstan counsel that the License is not in jeopardy and a formal
amendment should not be expected from the licensing authority. If the License is
revoked, however, KKM's right to develop the Karakuduk Field may be terminated
and our investment in the Karakuduk Field may be lost.
23
<PAGE>
2. Results of Operations
Results of Operations for Three Months Ended September 30, 2000 Compared to the
--------------------------------------------------------------------------------
Three Months Ended September 30, 1999
-------------------------------------
Our operations during the three months ended September 30, 2000, resulted in a
net loss of $23,037,000, compared to a net loss of $551,000 for the three months
ended September 30, 1999. The $22,486,000 increase in our net loss was almost
entirely driven by the increased costs of financing the development of the
Karakuduk Field and additional non-cash interest expense recognized upon
conversion of our outstanding Notes. Alternatively, we recognized $206,000 in
net equity income from our investment in KKM, reflecting KKM's increased
production and sales of its crude oil reserves.
While interest income increased by $214,000 from the three months ended
September 30, 1999, interest expense increased $22,454,000 compared to the same
period. The increase in interest expense reflects a non-recurring, non-cash
interest charge of $20,340,000 from the September 2000 conversion of Notes with
an aggregate principal amount of $20,846,000. The Notes' conversion feature, at
$1.86 per share, was a "beneficial conversion feature" as addressed in EITF
98-5. EITF 98-5 requires the recognition of additional interest expense equal to
the face value of the Notes, net of original discount of $506,000, upon
conversion of the Notes. The remaining increase in interest expense is primarily
related to the financing costs of the Loan with Shell Capital and interest
accrued on the Notes through the date of conversion. See Notes 7 and 8 of the
consolidated financial statements.
General and administrative costs increased by $675,000 from the three months
ended September 30, 1999, primarily due to higher insurance premiums under the
OPIC political risk insurance policy and additional legal fees incurred during
the period.
We recognized $206,000 in net equity income from our investment in KKM for the
three months ended September 30, 2000, compared to a net equity loss of $254,000
for the three months ended September 30, 1999. During the quarter ended
September 30, 2000, KKM recognized $633,000 in operating income, reflecting the
sale of approximately 183,000 barrels of crude oil for $3,627,000, net of
transportation costs. For the comparable period in 1999, KKM recognized an
operating loss of $624,000 without generating any revenue from oil sales. In
application of EITF 99-10, we recognized 100% of KKM's net income for the
quarter to recapture prior losses recognized in excess of our 50% equity
interest in KKM. Equity income or loss is presented net of Chaparral's 50% share
of accrued interest revenue from Chaparral's loan to KKM. See Note 11 of the
consolidated financial statements.
Results of Operations for Nine Months Ended September 30, 2000 Compared to the
--------------------------------------------------------------------------------
Nine Months Ended September 30, 1999
------------------------------------
Our operations during the nine months ended September 30, 2000, resulted in a
net loss of $26,590,000, compared to a net loss of $2,189,000 for the nine
months ended September 30, 1999. The $24,401,000 increase in our net loss was
almost entirely driven by the increased costs of financing the development of
the Karakuduk Field and additional non-cash interest expense recognized upon
conversion of our outstanding Notes. Alternatively, we recognized $58,000 in net
equity income from our investment in KKM, reflecting KKM's increased production
and sales of its crude oil reserves.
While interest income increased by $492,000 from the nine months ended September
30, 1999, interest expense increased $24,984,000 compared to the same period.
The increase in interest expense reflects a non-recurring, non-cash interest
charge of $20,340,000 from the September 2000 conversion of Notes with an
aggregate principal amount of $20,846,000. The Notes' conversion feature, at
$1.86 per share, was a "beneficial conversion feature" as addressed in EITF
98-5. EITF 98-5 requires the recognition of additional interest expense equal to
the face value of the Notes, net of original discount of $506,000, upon
conversion of the Notes. The remaining increase in interest expense is primarily
related to the financing costs of the Loan with Shell Capital, including
interest expense of $2,874,000 and discount amortization of $687,000 through
September 30, 2000.
24
<PAGE>
Chaparral also recognized accrued interest of $773,000 on the Notes through the
date of conversion, plus related discount amortization of $464,000. See Notes 7
and 8 of the consolidated financial statements.
General and administrative costs increased by $884,000 from the nine months
ended September 30, 1999, primarily due to higher insurance premiums under the
OPIC political risk insurance policy and additional legal fees incurred during
the period.
We recognized $58,000 in net equity income from our investment in KKM for the
nine months ended September 30, 2000, compared to a net equity loss of $947,000
for the nine months ended September 30, 1999. Through September 30, 2000, KKM
recognized $1,241,000 in operating income, reflecting the sale of approximately
408,800 barrels of crude oil for approximately $7,100,000, net of transportation
costs. For the comparable period in 1999, KKM recognized an operating loss of
$2,252,000 without generating any revenue from oil sales. In application of EITF
99-10, we recognized 100% of KKM's net income for the period to recapture prior
losses recognized in excess of our 50% equity interest in KKM. Equity income or
loss is presented net of Chaparral's 50% share of accrued interest revenue from
Chaparral's loan to KKM. See Note 11 of the consolidated financial statements.
3. Commodity Prices for Oil and Gas
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.
4. 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 and 2000. 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.
Item 3 - Quantitative and Qualitative Disclosures About Market Risks
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). As of September 30, 2000, the market value of the
put contracts underlying the Hedge Agreement was $261,000.
25
<PAGE>
Part II - Other Information
Item 2 - Changes in Securities and Use of Proceeds
On September 21, 2000, Chaparral converted Notes with an aggregate principal
amount of $20,846,000, plus accrued interest of $899,000, into 11,690,259 shares
of our common stock at a conversion price of $1.86 per share. Chaparral issued
9,737,834 shares of common stock in reliance upon the exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended, and
1,952,425 shares of common stock in reliance upon the exemption from
registration under Regulation S. The holders of the Notes had available all
material information concerning Chaparral and the stock certificate bears an
appropriate restrictive legend under the Securities Act of 1933, as amended. No
underwriter was involved in the transaction.
The converted Notes consisted of $10,040,000 of Chaparral's Notes issued
during the fourth quarter of 1999 and $10,806,000 issued during 2000, including
Notes totaling $3,300,000 in January and February, $3,000,000 in August, and
$4,506,000 in September 2000, respectively. The Notes were issued to various
related parties and other non-affiliated investors. Notes issued to related
parties totaled $14,690,000, including $9,827,000 to Allen, $4,051,000 to
Whittier, $662,000 to Mr. McMillian, the Co-Chairman and Chief Executive Officer
of Chaparral, and $150,000 to a relative of Jim Jeffs, the other Co-Chairman of
Chaparral.
In exchange for the Notes, Chaparral received $15,556,000 in cash and canceled
$5,290,000 in promissory notes issued previously in 1999, plus accrued interest
thereon, to Allen ($3,827,000), Whittier ($1,051,000), Mr. McMillian ($412,000).
On September 21, 2000, Chaparral executed a stock subscription agreement with
Capco, whereby Capco would acquire $3,000,000 of Chaparral's common stock on or
before October 30, 2000 at $1.86 per share, or 1,612,903 shares. Chaparral
issued the common stock in reliance upon the exemption from registration under
Regulation S. Capco had available all material information concerning Chaparral
and the stock certificate bears an appropriate restrictive legend under the
Securities Act of 1933, as amended. No underwriter was involved in the
transaction. Capco was also a holder of two Notes with an aggregate principal
amount of $750,000, which were converted along with accrued interest, into
427,113 shares of Chaparral's common stock on September 21, 2000. See above.
Item 4 - Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of Chaparral's stockholders
during the quarter ended September 30, 2000.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
------ -------
4.1 Non-Negotiable Promissory Note, dated August 5, 2000,
principal amount $500,000, to Ecotels International Limited
4.2 Non-Negotiable Promissory Note, dated August 5, 2000,
principal amount $500,000, to Whittier Ventures LLC
4.3 8% Non-Negotiable Convertible Subordinated Promissory Note,
dated August 21, 2000, principal amount $750,000, to Dardana
Limited
4.4 8% Non-Negotiable Convertible Subordinated Promissory Note,
dated August 21, 2000, principal amount $750,000, to
Goldrust Venture Capital Limited
26
<PAGE>
4.5 8% Non-Negotiable Convertible Subordinated Promissory Note,
dated August 21, 2000, principal amount $750,000, to Sage
Operating Ltd.
4.6 8% Non-Negotiable Convertible Subordinated Promissory Note,
dated August 21, 2000, principal amount $750,000, to
Stardust Fund Limited
4.7 8% Non-Negotiable Convertible Subordinated Promissory Note,
dated September 21, 2000, principal amount $2,000,000, to
Allen & Company Incorporated
4.8 8% Non-Negotiable Convertible Subordinated Promissory Note,
dated September 21, 2000, principal amount $2,000,000, to
Whittier Ventures LLC
4.9 8% Non-Negotiable Convertible Subordinated Promissory Note,
dated September 15, 2000, principal amount $505,600, to
Ecotels International Limited
10.1 Subordination Agreement, dated August 21, 2000, between
Chaparral Resources, Inc., Shell Capital Services Limited
and Dardana Limited
10.2 Subordination Agreement, dated August 21, 2000, between
Chaparral Resources, Inc., Shell Capital Services Limited
and Goldrust Venture Capital Limited
10.3 Subordination Agreement, dated August 21, 2000, between
Chaparral Resources, Inc., Shell Capital Services Limited
and Sage Operating Ltd
10.4 Subordination Agreement, dated August 21, 2000, between
Chaparral Resources, Inc., Shell Capital Services Limited
and Stardust Fund Limited
10.5 Letter from the Agency of the Republic of Kazakhstan on
Investments to Closed Type JSC Karakudukmunay dated July 4,
2000
10.6 Deed between Chaparral Resources, Inc, Whittier Ventures
LLC, Ecotels International Limited, Dardana Limited,
Goldrust Venture Capital Limited, Stardust Fund Limited,
Sage Operating Ltd., and Shell Capital Services Limited,
dated August 21, 2000
10.7 Pledge Agreement between Chaparral Resources, Inc. and Capco
Resources, Ltd. dated September 21, 2000
10.8 Amended Letter Agreement, dated October 11, 2000, between
Chaparral Resources, Inc. and Capco Resources, Ltd.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed for during the quarter ended
September 30, 2000.
27
<PAGE>
Signatures
Pursuant to the requirements 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.
Dated: November 20, 2000
Chaparral Resources, Inc.
By: /s/ Michael B. Young
--------------------------------
Michael B. Young, Treasurer,
Controller and Principal
Accounting Officer
28
<PAGE>
Exhibit Index
Number Exhibit
------ -------
4.1 Non-Negotiable Promissory Note, dated August 5, 2000,
principal amount $500,000, to Ecotels International Limited
4.2 Non-Negotiable Promissory Note, dated August 5, 2000,
principal amount $500,000, to Whittier Ventures LLC
4.3 8% Non-Negotiable Convertible Subordinated Promissory Note,
dated August 21, 2000, principal amount $750,000, to Dardana
Limited
4.4 8% Non-Negotiable Convertible Subordinated Promissory Note,
dated August 21, 2000, principal amount $750,000, to
Goldrust Venture Capital Limited
4.5 8% Non-Negotiable Convertible Subordinated Promissory Note,
dated August 21, 2000, principal amount $750,000, to Sage
Operating Ltd.
4.6 8% Non-Negotiable Convertible Subordinated Promissory Note,
dated August 21, 2000, principal amount $750,000, to
Stardust Fund Limited
4.7 8% Non-Negotiable Convertible Subordinated Promissory Note,
dated September 21, 2000, principal amount $2,000,000, to
Allen & Company Incorporated
4.8 8% Non-Negotiable Convertible Subordinated Promissory Note,
dated September 21, 2000, principal amount $2,000,000, to
Whittier Ventures LLC
4.9 8% Non-Negotiable Convertible Subordinated Promissory Note,
dated September 15, 2000, principal amount $505,600, to
Ecotels International Limited
10.1 Subordination Agreement, dated August 21, 2000, between
Chaparral Resources, Inc., Shell Capital Services Limited
and Dardana Limited
10.2 Subordination Agreement, dated August 21, 2000, between
Chaparral Resources, Inc., Shell Capital Services Limited
and Goldrust Venture Capital Limited
10.3 Subordination Agreement, dated August 21, 2000, between
Chaparral Resources, Inc., Shell Capital Services Limited
and Sage Operating Ltd
10.4 Subordination Agreement, dated August 21, 2000, between
Chaparral Resources, Inc., Shell Capital Services Limited
and Stardust Fund Limited
10.5 Letter from the Agency of the Republic of Kazakhstan on
Investments to Closed Type JSC Karakudukmunay dated July 4,
2000
10.6 Deed between Chaparral Resources, Inc, Whittier Ventures
LLC, Ecotels International Limited, Dardana Limited,
Goldrust Venture Capital Limited, Stardust Fund Limited,
Sage Operating Ltd., and Shell Capital Services Limited,
dated August 21, 2000
10.7 Pledge Agreement between Chaparral Resources, Inc. and Capco
Resources, Ltd. dated September 21, 2000
10.8 Amended Letter Agreement, dated October 11, 2000, between
Chaparral Resources, Inc. and Capco Resources, Ltd.
27 Financial Data Schedule
29
