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 June 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.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-0630863
------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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 August 21, 2000, the Registrant had 980,481 shares of its common
stock, par value $0.0001 per share, issued and outstanding.
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Part I - Summarized Financial Information
Item 1 - Financial Statements
Chaparral Resources, Inc.
Consolidated Balance Sheets
June 30, December 31,
2000 1999
(Unaudited) (Audited)
------------ ------------
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Assets
Current assets:
Cash and cash equivalents $ 78,000 $ 23,000
Restricted cash -- 578,000
Accounts receivable 50,000 23,000
Receivable from affiliate 795,000 --
Prepaid expenses 101,000 111,000
------------ ------------
Total current assets 1,024,000 735,000
Investment in KKM and other oil and gas
property costs - full cost method
Republic of Kazakhstan (Karakuduk Field): 52,227,000 38,151,000
Furniture, fixtures and equipment 89,000 100,000
Less accumulated depreciation (37,000) (39,000)
------------ ------------
52,000 61,000
------------ ------------
Other Assets
Deferred debt issuance cost -- 2,356,000
Hedge agreement 4,000,000 --
Other 678,000 --
------------ ------------
Total other assets 4,678,000 2,356,000
------------ ------------
Total assets $ 57,981,000 $ 41,303,000
============ ============
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Chaparral Resources, Inc.
Consolidated Balance Sheets (continued)
June 30, December 31,
2000 1999
(Unaudited) (Audited)
------------ ------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 317,000 $ 1,045,000
Accrued liabilities:
Accrued compensation 240,000 458,000
Accrued debt issuance cost -- 1,934,000
Accrued interest and other 636,000 239,000
------------ ------------
Total current liabilities 1,193,000 3,676,000
Shell Capital loan, net of discount 18,100,000 --
Notes payable, net of discount 13,003,000 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, $5,625,000 redemption value 5,375,000 5,200,000
Stockholders' equity:
Common stock - authorized, 100,000,000
shares of $0.0001 par value; issued and outstanding,
980,481 and 980,314 shares, respectively -- --
Capital in excess of par value 49,032,000 47,857,000
Unearned portion of restricted stock awards (11,000) (23,000)
Preferred stock - 1,000,000 shares authorized, 925,000 shares
undesignated. Issued and outstanding - none -- --
Accumulated deficit (28,711,000) (24,983,000)
------------ ------------
Total stockholders' equity 20,310,000 22,851,000
------------ ------------
Total liabilities and stockholders' equity $ 57,981,000 $ 41,303,000
============ ============
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Chaparral Resources, Inc.
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenue $ -- $ -- $ -- $ --
Costs and expenses:
Depreciation and depletion 22,000 5,000 42,000 11,000
General and administrative 718,000 825,000 1,466,000 1,258,000
----------- ----------- ----------- -----------
740,000 830,000 1,508,000 1,269,000
----------- ----------- ----------- -----------
Loss from operations (740,000) (830,000) (1,508,000) (1,269,000)
Other income (expense):
Interest income 413,000 238,000 733,000 455,000
Interest expense (1,807,000) (113,000) (2,696,000) (167,000)
Equity in income (loss) from investment 982,000 (345,000) (148,000) (692,000)
Legal settlement -- -- -- 34,000
Other (9,000) -- 66,000 --
----------- ----------- ----------- -----------
(421,000) (220,000) (2,045,000) (370,000)
----------- ----------- ----------- -----------
Net loss $(1,161,000) $(1,050,000) $(3,553,000) $(1,639,000)
=========== =========== =========== ===========
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock (63,000) (63,000) (125,000) (125,000)
Discount accretion
Series A Redeemable Preferred Stock (25,000) (25,000) (50,000) (50,000)
----------- ----------- ----------- -----------
Net loss available to common stockholders $(1,249,000) $(1,138,000) $(3,728,000) $(1,814,000)
=========== =========== =========== ===========
Basic and diluted earnings per share:
Net loss per share $ (1.27) $ (1.16) $ (3.80) $ (1.86)
Weighted average number of shares
Outstanding (basic and diluted) 980,481 977,954 980,454 977,649
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Chaparral Resources, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30, June 30,
2000 1999
------------ ------------
Cash flows from operating activities
Net loss $ (3,553,000) $ (1,639,000)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Equity loss from investment 148,000 692,000
Depreciation and depletion 42,000 11,000
Gain on the sale of oil and gas properties (75,000) --
Loss on disposition of furniture and fixtures 9,000 --
Stock issued for services and bonuses 11,000 235,000
Expired warrants -- (117,000)
Provision for doubtful accounts -- 14,000
Amortization of note discount 127,000 23,000
Amortization of debt issuance cost 412,000 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (822,000) (2,000)
Prepaid expenses 10,000 72,000
Accrued interest on advances to KKM (725,000) (402,000)
Notes receivable -- (51,000)
Hedge agreement (4,000,000) --
Other assets (678,000) --
Increase (decrease) in:
Accounts payable and accrued liabilities (2,483,000) 240,000
Accrued interest converted to debt on
Shell Capital loan 1,201,000 --
------------ ------------
Net cash used in operating activities (10,376,000) (924,000)
Cash flows from investing activities
Additions to furniture, fixtures and equipment $ (9,000) $ (5,000)
Investment in and advances to oil and
gas properties (13,532,000) (3,545,000)
Proceeds from sale of interest in oil and gas
properties - domestic 75,000 --
------------ ------------
Net cash used in investing activities (13,466,000) (3,550,000)
5
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Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the Six Months Ended
June 30, June 30,
2000 1999
------------ ------------
Cash flows from financing activities
Net proceeds from Shell Capital loan and
notes payable $ 23,800,000 $ 4,820,000
Debt issuance cost (481,000) --
Restricted cash 578,000 89,000
------------ ------------
Net cash provided by financing activities 23,897,000 4,909,000
------------ ------------
Net increase in cash and
cash equivalents 55,000 435,000
Cash and cash equivalents at beginning
of period 23,000 121,000
------------ ------------
Cash and cash equivalents at end of period $ 78,000 $ 556,000
============ ============
Supplemental cash flow disclosure
Interest paid $ 326,000 $ 45,000
Supplemental schedule of non-cash investing
and financing activities
Stock warrant issued to Shell Capital 1,175,000 --
See accompanying notes.
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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 June 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.
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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. The Company recognized an additional equity
loss of $74,000 for the six months ended June 30, 2000 due to the application of
EITF 99-10.
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
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 with the government (the "License") and all
expenditure and cash flow requirements through fiscal year 2000.
The License required KKM to meet certain expenditure and work commitments on or
before June 30, 2000. KKM did not satisfy the License's stated work commitments
before June 30, 2000, but has received a letter dated July 4, 2000, from the
State Investment Agency of the government of the Republic of Kazakhstan stating
that due to KKM's activities and expenditures to date there are "no grounds for
termination or suspension of the operation of the License." KKM does not expect
the State Investment Agency to suspend or revoke the License, but the letter is
not a formal amendment of the License and no assurances can be given that they
will not do so. If the License is revoked, 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 August 21, 2000, the Company
has borrowed a total of $20,500,000 under the Loan.
8
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3. Going Concern (continued)
o Equity Support. As an original condition to the Loan, the Company was
required to complete a rights 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 has been 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 has raised a total
of $4,000,000 of the $10,000,000 equity support required, through the
issuance of the Company's 8% Non-Negotiable Convertible Promissory Notes
(the "Notes") and other subordinated indebtedness (See Notes 7 and 8). The
existing Equity Support Agreements for a total of $4,000,000 have not been
called by Shell Capital, but Allen and Whittier have confirmed in writing
to Shell Capital that the Equity Support Agreements are in full force and
effect until the Company fulfills its total $10,000,000 equity support
requirement under the Loan.The Company is working to raise the additional
$6,000,000 in equity support required through the issuance of the Company's
securities or indebtedness. Any such issuance requires the approval of
Shell Capital under the terms of the Loan.
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 August 21, 2000, KKM has produced approximately 760,000 barrels of
crude oil and was producing approximately 3,300 barrels of oil per day.
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. KKM delivered approximately 219,000 barrels of
crude oil to STASCO in early May 2000, and has approximately an additional
73,000 and 146,000 barrels nominated for export delivery in late August and
September 2000, respectively. The initial oil sale generated cash proceeds
of approximately $3,483,000, net of royalty and transportation costs. At
current oil prices, KKM expects to generate approximately an additional
$4,200,000, net of royalty and transportation costs, from the 219,000
barrels currently nominated for export sale. Additionally, the government
recently required that KKM sell approximately 43,800 barrels of oil on the
local market in early August 2000. KKM completed the local sale, with the
approval of STASCO and Shell Capital, receiving approximate cash proceeds
of $450,000, net of royalty and transportation costs.
9
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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 satisfaction
of the $10,000,000 equity support requirement stipulated under the Loan and the
successful 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 are
partially based upon future cash flows from the sale of KKM's crude oil
production. While the Company expects to realize material cash benefits from
some, or all, of the above transactions, no assurances can be given that the
equity support requirements will be met, or additional sales under the Crude Oil
Sales Agreement will be consummated. If additional financial resources are not
raised in the short term, through internal or external means, the Company may be
unable to meet operational cash flow requirements through the year 2000 or meet
the terms of the Loan. If so, 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 accounts for the
Hedge Agreement as a hedge of an anticipated transaction. Changes in market
value of the underlying put contracts will be recognized as other income or loss
in the period KKM's corresponding crude oil production is recorded as oil
revenue. As of June 30, 2000, the market value of the Hedge Agreement was
$896,000 and the Company's unrealized hedging loss was $3,104,000.
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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.
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 June 30, 2000, the Company has borrowed $20,500,000 under the Loan and
capitalized $1,201,000 of subordinated interest expense as additional principal.
The Loan is recorded net of $3,601,000 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 $9,000,000 equity infusion was partially satisfied by the Company's issuance
of Notes. The Notes are convertible upon stockholder approval. As of August 21,
2000, the Loan has been amended to extend the Company's remaining equity support
commitment to $10,000,000 on or before September 30, 2000. With the approval of
Shell Capital, the Company has raised a total of $4,000,000 of the $10,000,000
requirement, through the Company's issuance of $3,000,000 aggregate principal
amount of Notes on August 21, 2000 and the issuance of $1,000,000 aggregate
principal amount of non-convertible subordinated notes on August 5, 2000. See
Note 8.
Equity Support Agreements between Allen and Whittier, the Company's two largest
stockholders, and Shell Capital, are also in place, 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. The
Equity Support Agreements are in effect until such time the Company has fully
satisfied the $10,000,000 equity infusion requirement of the Loan.
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 August 21, 2000,
the Company has paid $604,000 in premiums and has 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.
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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. 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") equal to 147,072 shares of the Company's common stock on the
date of grant. The Shell Warrant is exercisable for a period of 5 years
beginning on the earlier of Project Completion or September 30, 2001, at an
exercise price of $15.45 per share. The Shell Warrant is non-transferable,
contains certain registration rights, and is subject to certain anti-dilution
provisions. The fair market value of the Shell Warrant, $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.
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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 June 30, 2000 equaled $412,000.
As of June 30, 2000, the principal borrowings of $20,500,000 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, $11,550,000 for KKM's operations, and
$1,307,000 for the Company's corporate overhead. Interest expense for the period
was $1,516,000, of which $1,201,000 of subordinated interest was capitalized as
additional principal at the end of the quarter.
8. Notes Payable
The Company's Notes outstanding of $13,340,000 consist of $10,040,000 of the
Company's Notes issued during the fourth quarter of 1999 and $3,300,000 of the
Company's Notes issued during January and February 2000. The Notes were issued
to various related parties and other non-affiliated investors. Notes issued to
related parties totaled $10,690,000, including $7,827,000 to Allen, $2,051,000
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. The Notes are recorded net of a $337,000 unamortized discount.
In exchange for the Notes, the Company received $8,050,000 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 June 30, 2000, the Company had $636,000 in
accrued interest on the Notes, of which $516,000 related to Notes issued to
related parties.
On August 21, 2000, the Company issued $3,000,000 in additional Notes to two
unrelated parties as partial satisfaction of the Company's $10,000,000 equity
support requirement under the Loan. The Notes are fully subordinated to the
Loan.
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 intends to submit the vote on conversion of the Notes
to the Company's stockholders as soon as practicable. 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.
13
<PAGE>
8. Notes Payable (continued)
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 on the date of issuance 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 $15,834,000, 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.
On August 5, 2000, the Company issued a total of $1,000,000 in promissory notes
to Whittier ($500,000), an affiliate of the Company, and EcoTels International,
Ltd. ($500,000). Both creditors currently have subordination agreements in place
with the Company and Shell Capital. The notes accrue interest at a 10% annual
rate and mature on September 30, 2000. The Company may repay the notes upon
raising a minimum of $9,000,000 of the $10,000,000 equity infusion required
under the Loan, subject to Shell Capital's approval. The issuance of the notes
has been approved by Shell Capital.
9. Common Stock
On May 31, 2000, 2,083 warrants to purchase the Company's common stock at an
exercise price of $15 expired. The warrants were issued by the Company as part
of 13,000 warrants issued in connection with $1,050,000 in notes issued during
1995 and 1996.
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 $430,000 of accrued management fees net of payments
received through June 30, 2000, as well as reimbursable costs and expenses paid
by the Company on behalf of KKM during the same period.
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>
11. Investments
The results from operations of the Company's equity-based investment in KKM are
summarized below:
<TABLE>
<CAPTION>
Closed Type JSC Karakudukmunay
Statement of Expenses and Accumulated Deficit
For the Six Month Period Ended June 30, 2000 and 1999
(Amounts in US Dollars)
(Unaudited)
For The Three Months Ended For The Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Oil Sales $ 4,705,000 $ -- $ 4,705,000 $ --
Costs and expenses:
Transportation and marketing costs 1,069,000 -- 1,069,000 --
Operating expenses 794,000 -- 794,000 --
Government royalties 153,000 -- 153,000 --
Depreciation and depletion 598,000 125,000 778,000 250,000
Management service fee 148,000 87,000 280,000 280,000
General and administrative 517,000 547,000 1,021,000 1,098,000
------------------------------------------------------------------------
Total cost and expenses 3,279,000 759,000 4,095,000 1,628,000
------------------------------------------------------------------------
Income (Loss) from operations 1,426,000 (759,000) 610,000 (1,628,000)
Other income (expense):
Interest Income $ 26,000 $ -- $ 26,000 $ --
Interest expense (822,000) (355,000) (1,451,000) (560,000)
Other (58,000) -- (58,000) --
------------------------------------------------------------------------
Net income (loss) 572,000 (1,114,000) (873,000) (2,188,000)
Accumulated deficit, beginning of period (13,452,000) (8,577,000) (12,007,000) (7,503,000)
------------------------------------------------------------------------
------------------------------------------------------------------------
Accumulated deficit, end of period (12,880,000) (9,691,000) (12,880,000) (9,691,000)
------------------------------------------------------------------------
</TABLE>
KKM completed an export sale to the port of Odessa, Ukraine, for approximately
219,000 barrels of crude oil to STASCO in May 2000, receiving payment in early
June 2000. KKM has made additional nominations for export sales to STASCO for
approximately 73,000 and 146,000 barrels for delivery in late August and
September 2000, respectively.
In August 2000, the government of the Republic 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 sold approximately 43,800
barrels of crude oil on the local market for $450,000, net of royalty and
transportation costs.
15
<PAGE>
11. Investments (continued)
As of August 21, 2000, KKM has drilled and successfully completed four wells in
the Karakuduk Field. A fifth well has been drilled and is undergoing production
tests to determine if it commercially productive. An additional four existing
delineation wells have been successfully recompleted, establishing production
from each well.
The daily productive capacity of the eight producing wells is approximately
5,000 barrels of oil per day. Due to current facility constraints, however, KKM
is only capable of processing and transporting approximately 3,300 barrels of
oil per day into the export pipeline. KKM is working to alleviate the facility
constraints, which involve the expansion of the Karakuduk Field's oil storage
capacity, upgrading existing and installing additional gathering and processing
facilities, and installing larger transfer pumps at the main export pipeline
entry point. KKM expects its capacity to deliver oil production into the main
export pipeline to be incrementally extended to approximately 7,000 barrels of
oil per day prior to October 31, 2000.
KKM currently has one drilling rig and one workover rig operating in the
Karakuduk Field. The drilling rig spudded a sixth well on August 18, 2000. A
second drilling rig has been contracted for and has arrived on location. It is
currently being rigged up to begin drilling operations and is expected to
commence drilling activities before August 31, 2000.
KKM has completed a 3-D seismic shoot in the Karakuduk Field. The seismic data
is being processed currently, with an estimated completion date in October 2000.
The results from the seismic study are expected to help optimize the well
drilling order for KKM's drilling program and further define the total
productive capability of the Karakuduk Field.
16
<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 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.
The License required KKM to meet certain expenditure and work commitments on or
before June 30, 2000. KKM did not satisfy the License's stated work commitments
before June 30, 2000, but has received a letter dated July 4, 2000, from the
State Investment Agency stating that due to KKM's activities and expenditures to
date, there are "no grounds for termination or suspension of the operation of
the License." KKM does not expect the State Investment Agency to suspend or
revoke the License, but the letter is not a formal amendment of the License and
no assurances can be given that they will not do so. If the License is revoked,
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 August 21, 2000, we have borrowed a
total of $20,500,000 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 in their
Equity Support Agreements 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 common stock or other indebtedness. The Loan was amended on August
21, 2000, to extend the total amount of equity support to be raised by
Chaparral to $10,000,000 on or before September 30, 2000. We have
raised a total of $4,000,000 out of the $10,000,000 in equity support
required through the issuance of Notes and other non-convertible
subordinated indebtedness. The existing Equity Support Agreements for
a total of $4,000,000 have not been called by Shell Capital, but Allen
and Whittier have confirmed in writing to Shell Capital that the
Equity Support Agreements are in full force and effect until Chaparral
fulfills its total $10,000,000 equity support requirement under the
Loan. We are working to raise the additional $6,000,000 in equity
support required through the issuance of the our securities or
indebtedness. Any such issuance requires the approval of Shell Capital
under the terms of the Loan.
17
<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 August 21, 2000, KKM has produced approximately
760,000 barrels of crude oil and was producing approximately 3,300
barrels of oil per day.
o Crude Oil Sales Agreement. In November 1999, KKM entered into a Crude
Oil Sale and Purchase 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. KKM has delivered approximately 219,000
barrels of crude oil to STASCO in early May 2000, and has
approximately an additional 73,000 and 146,000 barrels nominated for
export delivery in late August and September 2000, respectively. The
initial oil sale generated cash proceeds of approximately $3,483,000,
net of royalty and transportation costs. At current oil prices, KKM
expects to generate approximately an additional $4,200,000, net of
royalty and transportation costs, from the 219,000 barrels currently
nominated for export sale. Additionally, the government recently
required that KKM sell approximately 43,800 barrels of oil on the
local market in early August 2000. KKM completed the local sale, with
the approval of STASCO and Shell Capital, receiving approximate cash
proceeds of $450,000, net of royalty and transportation costs.
Our considerations for addressing the above uncertainties are partially based
upon forward looking events, which have yet to occur, including the satisfaction
of the $10,000,000 in equity support requirements stipulated under the Loan 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 partially based upon future cash flows from the sale of KKM's crude
oil production. While we expect to realize material cash benefits from some, or
all, of the above transactions, no assurances can be given that the equity
support requirements will be met, or additional sales under the Crude Oil Sales
Agreement will be consummated. If additional financial resources are not raised
in the short term, through internal or external means, we will be unable to meet
operational cash flow requirements through the year 2000 or meet the terms of
the Loan. If so, we may lose our investment in KKM and the Karakuduk Field.
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.
The Company's Notes and Other Subordinated Indebtedness.
--------------------------------------------------------
We issued an additional $3,300,000 of our Notes during January and February 2000
to meet working capital needs for the development of the Karakuduk Field and to
satisfy the capital requirements of the Loan. As of June 30, 2000, we had total
Notes outstanding of $13,340,000, issued to various related parties and other
non-affiliated investors. Notes issued to related parties totaled $10,690,000,
including $7,827,000 to Allen, $2,051,000 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. As of June
30, 2000, Chaparral had $636,000 in accrued interest on the Notes, of which
$516,000 related to Notes issued to related parties.
18
<PAGE>
On August 21, 2000, we issued $3,000,000 in additional Notes to two unrelated
parties as partial satisfaction of our $10,000,000 equity support requirement
under the Loan. The Notes are fully subordinated to the Loan.
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 intend to submit the vote on
conversion of the Notes to our stockholders as soon as practicable. 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.
On August 5, 2000, we issued a total of $1,000,000 in promissory notes to
Whittier ($500,000), an affiliate of Chaparral, and EcoTels International, Ltd.
($500,000). Both creditors currently have subordination agreements in place with
Chaparral and Shell Capital. The notes accrue interest at a 10% annual rate and
mature on September 30, 2000. We may repay the notes upon raising a minimum of
$9,000,000 of the $10,000,000 equity infusion required under the Loan, subject
to Shell Capital's approval. The issuance of the notes has been approved by
Shell Capital.
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 has been 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 have raised a total of $4,000,000 of the
$10,000,000 requirement, through the issuance of $3,000,000 aggregate principal
amount of Notes on August 21, 2000 and the issuance of $1,000,000 aggregate
principal amount of non-convertible subordinated promissory notes on August 5,
2000 (as described above).
Equity Support Agreements between Allen and Whittier, our two largest
stockholders, and Shell Capital, are also in place, committing Allen and
Whittier to each contribute $2,000,000 into Chaparral for our equity securities
or other subordinated indebtedness at Shell Capital's request. The Equity
Support Agreements are in effect until we have fully satisfied the $10,000,000
equity infusion requirement of the Loan.
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 $45,000,000 through October 30, 2000.
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 June 30, 2000, the market value of the Hedge
Agreement was $896,000 and our unrealized hedging loss was $3,104,000.
19
<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, 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 September 30, 2001. The Shell Warrant contains certain registration rights
and is subject to certain anti-dilution provisions. The Shell Warrant's exercise
price is $15.45 per share.
The Loan subjects us to a significant number of restrictions, including various
representations and warranties, positive and negative covenants, and events of
default. These restrictions include, but are not limited to, the following:
o Pledge of Assets. We pledged substantially all of our assets to Shell
Capital, including our interest in the Karakuduk Field. If an event of
default occurs under the Loan and is not timely cured, Shell Capital
is entitled to certain remedies, including the right to accelerate
repayment of the loan and obtain our rights to the Karakuduk Field.
20
<PAGE>
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 Equity Support. We must raise an additional $10,000,000 of equity
support through the issuance of our securities or indebtedness on or
before September 30, 2000. As described above, we have raised a total
of $4,000,000 of the $10,000,000 requirement through the issuance of
Notes and non-convertible subordinated promissory notes. Allen and
Whittier have also entered into Equity Support Agreements with Shell
Capital to each contribute $2,000,000 into Chaparral in exchange for
our securities or indebtedness at Shell Capital's request, until such
time as we have fully satisfied the $10,000,000 equity infusion
requirement of the Loan.
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 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 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.
21
<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 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 August 21, 2000, we have borrowed $20,500,000 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, $11,550,000 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 will not
be 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 liquidity requirements of both Chaparral and KKM,
through the the sale of oil under the Crude Oil Sales Agreement, conversion of
the Notes into our common stock, issuance of additional Notes or other
subordinated indebtedness, and issuance of Chaparral's common or preferred
stock.
We have filed a preliminary proxy statement to our stockholders with the SEC,
which includes 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 $16,340,000, 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 applicable law. The Notes are fully
subordinated to the Loan, and cannot be repaid until we have fully repaid the
Loan. As of August 21, 2000, Chaparral is responding to comments of the SEC to
its preliminary proxy statement. Management intends to file a definitive proxy
as soon as practicable.
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. Due to
the inability of Chaparral to obtain clearance from the SEC and complete the
Rights Offering before June 30, 2000, however, the future completion of the
Rights Offering is uncertain. The Loan requires additional equity infusions on
or before September 30, 2000 of $10,000,000, of which $4,000,000 has been
obtained by Chaparral. It is unlikely, if not impossible, that the Rights
Offering could be completed before September 30, 2000. Allen and Whittier have
undertaken to Shell Capital to contribute an aggregate of $4,000,000 in exchange
for our equity securities or indebtedness to partially satisfy the requirements
of the Loan. We are currently evaluating all perceived options available to
Chaparral in order to meet the Loan requirements for additional equity support.
At this time, no decision has been made by Chaparral's board of directors
regarding whether we will proceed with the Rights Offering immediately, delay or
amend the Rights Offering, or cancel the Rights Offering altogether. Without the
additional infusion of equity or other indebtedness, Chaparral will not have
enough additional capital to fund our corporate overhead requirements, as well
as KKM's working capital needs prior to becoming self-sustaining from cash flow
from oil sales.
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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, 33.79 million
which is attributable to our 50% equity interest in KKM. KKM is implementing a
two-rig drilling program to accelerate recoverability of these proven reserves
to generate cash flows capable of supporting KKM's operations and begin
repayment of our investment in KKM as soon as possible. We will utilize the
principal and interest repayments on our investment in KKM to fund repayment of
our Loan with Shell Capital.
In early May 2000, KKM completed its first export oil sale to STASCO, delivering
approximately 219,000 barrels of oil to the sea port of Odessa. The oil sale
generated cash proceeds of approximately $3,483,000, net of royalty and
transportation costs. KKM has made additional nominations for export sales to
STASCO for approximately 73,000 and 146,000 barrels for delivery in late August
and September 2000, respectively. At current market prices, the additional
nominations are expected to generate cash proceeds of approximately $4,200,000,
net of royalties and transportation costs. Additional oil sales are expected on
at least a quarterly basis, as KKM increases its production.
In August 2000, the government of the Republic 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 sold approximately 43,800
barrels of crude oil on the local market for approximately $450,000, net of
royalty and transportation costs.
While we 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, conversion of the Notes, the issuance of additional
debt or equity securities, 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.
--------------------
As of August 21, 2000, KKM has drilled and successfully completed four wells in
the Karakuduk Field. A fifth well has been completed and is undergoing
production tests to determine if it commercially productive. An additional four
existing delineation wells have been successfully recompleted, establishing
production from each well.
The daily productive capacity of the eight producing wells is approximately
5,000 barrels of oil per day. Due to current facility constraints, however, KKM
is only capable of processing and transporting approximately 3,300 barrels of
oil per day into the export pipeline. KKM is currently working to alleviate the
facility constraints, which involve the expansion of the Karakuduk Field's oil
storage capacity, upgrading existing and installing additional gathering and
processing facilities, and installing larger transfer pumps at the main export
pipeline entry point. KKM expects its capacity to deliver oil production into
the main export pipeline to be incrementally extended to approximately 7,000
barrels of oil per day prior to October 21, 2000.
KKM currently has one drilling rig and one workover rig operating in the
Karakuduk Field. The drilling rig spudded a sixth well on August 18, 2000. A
second drilling rig has been contracted for and has arrived on location. It is
currently being rigged up and is expected to commence drilling activities before
August 31, 2000. In 2000, we expect to drill up to 14 wells and re-complete
another 5 previously drilled wells using the workover rig.
23
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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.
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 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 export pipeline terminal at an export pipeline terminal 18 miles from the
Karakuduk Field, which 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 November 2000. Until the pipeline is operational, KKM will
continue to truck oil production to the new export pipeline terminal. As
discussed above, the productive capacity of the Karakuduk Field is currently
limited due to various facility constraints, which KKM is working diligently to
alleviate.
KKM has completed a 3-D seismic shoot in the Karakuduk Field. The seismic data
is being processed currently, with an estimated completion date in October 2000.
The results from the seismic study are expected to help optimize the well
drilling order for KKM's drilling program and further define the 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 State Investment Agency, 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.
On July 4, 2000, however, KKM received a second letter from the State Investment
Agency stating that due to KKM's activities and expenditures to date, there are
"no grounds for termination or suspension of the operation of the License." KKM
does not expect the licensing authority to suspend or revoke the License, but
the letters received from the State Investment Agency are not formal amendments
to the License and no assurances can be given that the State Investment Agency
will not do so. If the License is revoked, KKM's right to develop the Karakuduk
Field may be terminated and our investment in the Karakuduk Field may be lost.
24
<PAGE>
2. Results of Operations
Results of Operations for Three Months Ended June 30, 2000 Compared to the
Three Months Ended June 30, 1999
--------------------------------------------------------------------------------
Our operations during the three months ended June 30, 2000, resulted in a net
loss of $1,161,000, compared to a net loss of $1,050,000 for the three months
ended June 30, 1999, primarily due to increased operational activity in the
Karakuduk Field and increased financing costs related to the Loan and other
Notes.
Interest income increased by $175,000 from the three months ended June 30, 1999
due to increased financing of 100% of KKM's operations in Kazakhstan. Interest
expense increased $1,694,000 from the three months ended June 30, 1999 due to
significant additional borrowings outstanding during the quarter ended June 30,
2000 to support KKM's operations and our corporate overhead.
General and administrative costs decreased by $107,000 from the three months
ended June 30, 1999 due to reduction of corporate overhead incurred by the
company. We recorded net equity income from our equity investment in KKM of
$982,000 for the three months ended June 30, 2000 compared to a net equity loss
of $345,000 for the three months ended June 30, 1999. KKM recognized initial oil
revenue from the sale of crude oil production from the Karakuduk field in May
2000. 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. See Note 11 of the consolidated financial statements.
As discussed in Note 8 to the consolidated financial statements, due to the
beneficial conversion feature of the Notes, we expect to record a significant
charge to interest expense upon obtaining stockholder approval for the
conversion of the Notes.
Results of Operations for Six Months Ended June 30, 2000 Compared to the
Six Months Ended June 30, 1999
--------------------------------------------------------------------------------
Our operations during the six months ended June 30, 2000, resulted in a net loss
of $3,553,000, compared to a net loss of $1,639,000 for the six months ended
June 30, 1999, primarily due to increased operational activity in the Karakuduk
Field, increased financing costs related to the Loan and other Notes, and
application of EITF 99-10, requiring the recognition of 100% of the equity
losses from KKM.
Interest income increased by $278,000 from the six months ended June 30, 1999
due to increased financing of 100% of KKM's operations in Kazakhstan. Interest
expense increased $2,529,000 from the six months ended June 30, 1999 due to
significant additional borrowings outstanding during the quarter ended June 30,
2000 from the Loan with Shell Capital and outstanding Notes necessary to support
KKM's operations and our corporate overhead.
General and administrative costs increased by $208,000 from the six months ended
June 30, 1999 due to increased professional fees related to various SEC filings
and litigation matters settled during the quarter ended March 31, 2000. Also, we
incurred significantly higher insurance costs during the six months ended June
30, 2000 related to OPIC insurance premiums. Our equity loss in KKM decreased by
$544,000, primarily due to KKM's recognition of initial oil revenue from the
sale of crude oil production from the Karakuduk Field in May 2000. We also
recognized an additional equity loss of $74,000 beyond our 50% equity interest
in KKM due to the application of EITF 99-10. See Note 11 to the consolidated
financial statements.
As discussed in Note 8 to the consolidated financial statements, due to the
beneficial conversion feature of the Notes, we expect to record a significant
charge to interest expense upon obtaining stockholder approval for the
conversion of the Notes.
25
<PAGE>
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.
26
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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 June 30, 2000, the market value of the put
contracts underlying the Hedge Agreement was $896,000.
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the Company's stockholders
during the quarter ended June 30, 2000.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
27
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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: August 21, 2000
Chaparral Resources, Inc.
By: /s/ Michael B. Young
--------------------------------
Michael B. Young, Treasurer,
Controller and Principal
Accounting Officer
28
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Exhibit Index
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Number Exhibit
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27 Financial Data Schedule
