FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission File Number: 0 - 7261
CHAPARRAL RESOURCES, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-0630863
- ------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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 May 15, 2002 the Registrant had 38,209,502 shares of its common
stock, par value $0.0001 per share, issued and outstanding.
Part I - Summarized Financial Information
Item 1 - Financial Statements
Chaparral Resources, Inc.
Consolidated Balance Sheets
(In Thousands)
March 31, December 31,
2002 2001
(Unaudited) (Audited)
---------- ------------
Assets
Current assets:
Cash and cash equivalents $ 495 $ 174
Prepaid expenses 193 245
-------- --------
Total current assets 688 419
Investment in KKM and other oil and gas
property costs - full cost method
Republic of Kazakhstan 66,841 67,806
Furniture, fixtures and equipment 104 109
Less: accumulated depreciation (68) (64)
-------- --------
36 45
-------- --------
Other Assets
Hedge agreement 64 762
Other 5 5
-------- --------
Total other assets 69 767
-------- --------
Total assets $ 67,634 $ 69,037
======== ========
See accompanying notes.
2
Chaparral Resources, Inc.
Consolidated Balance Sheets (continued)
(In Thousands)
March 31, December 31,
2002 2001
(Unaudited) (Audited)
--------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 221 $ 536
Accrued liabilities:
Accrued compensation 546 449
Other accrued liabilities 110 144
Redeemable preferred stock, current portion 2,030 2,000
Shell Capital loan, current portion of principal
and accrued interest 38,395 36,647
-------- --------
Total current liabilities 41,302 39,776
Redeemable preferred stock - cumulative, convertible,
Series A 75,000 designated, 50,000 issued and
outstanding, at stated value, $5.00 cumulative
annual dividend, $6,062,000 redemption value 3,958 3,900
Stockholders' equity:
Common stock - authorized, 100,000,000 shares
of $0.0001 par value; issued
and outstanding, 14,283,801 and 14,283,801 shares as of
March 31, 2002 and December 31, 2001, respectively 1 1
Capital in excess of par value 94,061 94,061
Preferred stock - 1,000,000 shares authorized, 925,000 shares
undesignated. Issued and outstanding - none -- --
Accumulated deficit (71,688) (68,701)
-------- --------
Total stockholders' equity 22,374 25,361
-------- --------
Total liabilities and stockholders' equity $ 67,634 $ 69,037
======== ========
See accompanying notes.
3
Chaparral Resources, Inc.
Consolidated Statements of Operations (Unaudited)
(In Thousands, Except Share Data)
For the Three Months Ended
March 31, March 31,
2002 2001
----------------------------------
Revenue $ -- $ --
Costs and expenses:
Depreciation and depletion 142 163
General and administrative 523 971
------------ ------------
665 1,134
------------ ------------
Loss from operations (665) (1,134)
Other income (expense):
Interest income -- 427
Interest expense (1,749) (1,764)
Equity in income from investment 211 1,259
Hedge losses (698) (487)
Other 1 --
------------ ------------
(2,235) (565)
------------ ------------
Loss before cumulative effect of change in
accounting principle (2,900) (1,699)
Cumulative effect of change in accounting
principle -- (2,519)
------------ ------------
Net loss $ (2,900) $ (4,218)
============ ============
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock (62) (63)
Discount accretion
Series A Redeemable Preferred Stock (25) (25)
------------ ------------
Net loss available to common stockholders $ (2,987) $ (4,306)
============ ============
Basic and diluted earnings per share:
Loss per share before cumulative
effect of change in accounting principle $ (0.21) $ (0.12)
Cumulative effect of change in
accounting principle $ -- $ (0.18)
Net loss per share $ (0.21) $ (0.30)
Weighted average number of shares
outstanding (basic and diluted) 14,283,801 14,283,746
See accompanying notes.
4
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
For the Three Months Ended
March 31, March 31,
2002 2001
-----------------------------
Cash flows from operating activities
Net loss $(2,900) $(4,218)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Equity income from investment (211) (1,259)
Depreciation, depletion, and amortization 142 202
Gain on disposition of furniture and fixtures (1) --
Cumulative effect of change in accounting principal -- 2,519
Hedge losses 698 487
Amortization of debt issuance cost -- 206
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable -- 266
Prepaid expenses 52 34
Accrued interest income on advances to KKM -- (427)
Interest payments from KKM 1,571 825
Increase in:
Accounts payable and accrued liabilities 1,496 15
Interest expense reclassified as principal
on the Shell Capital loan -- 1,261
------- -------
Net cash provided (used) in operating activities 847
(89)
------- -------
Cash flows from investing activities
Additions to furniture, fixtures and equipment $ -- $ (18)
Investment in and advances to KKM and other oil and
gas property costs (531) (2,065)
Proceeds from disposition of assets 5 --
------- -------
Net cash used in investing activities (526) (2,083)
------- -------
5
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (Continued) (Unaudited)
(In Thousands)
For the Three Months
Ended
March 31, March 31,
2002 2001
---------------------
Cash flows from financing activities
Net proceeds from Shell Capital loan $ -- $ 1,600
------- -------
Net cash provided by financing activities -- 1,600
------- -------
Net (decrease) increase in cash and
cash equivalents 321 (572)
Cash and cash equivalents at beginning
of period 174 604
------- -------
Cash and cash equivalents at end of period $ 495 $ 32
======= =======
Supplemental cash flow disclosure
Interest paid $ -- $ 323
See accompanying notes.
6
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
1. General
Chaparral Resources, Inc. ("Chaparral") was incorporated in the state of
Colorado on January 13, 1972, principally to engage in the exploration,
development and production of oil and gas properties. Chaparral focuses
substantially all of its efforts on the exploration and development of the
Karakuduk Field, an oilfield located in the Central Asian Republic of
Kazakhstan. In 1999, Chaparral reincorporated from Colorado to Delaware.
The consolidated financial statements include the accounts of Chaparral and its
100% owned subsidiaries, Central Asian Petroleum (Guernsey) Limited ("CAP-G"),
Road Runner Services Company ("RRSC"), Chaparral Acquisition Corporation
("CAC"), and Central Asian Petroleum, Inc. ("CAP-D"). Chaparral owns 80% of the
common stock of CAP-G directly and 20% indirectly through CAP-D. Hereinafter,
Chaparral and its subsidiaries are collectively referred to as the "Company."
All significant intercompany transactions have been eliminated.
As of March 31, 2002, the Company 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 in
Western Kazakhstan. Chaparral acquired an additional 10% interest in KKM from
Dardana Limited in May 2002. As of May 15, 2002, KKM is owned jointly by CAP-G
(50%), Chaparral (10%), and KazakhOil JSC ("KazakhOil") (40%). KazakhOil, the
national petroleum company of Kazakhstan, is owned by the government of the
Republic of Kazakhstan.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States 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 for the fiscal year ended December 31, 2001.
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
During 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13 and Technical Corrections. SFAS 145
rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of
Debt, and an amendment of SFAS 4, SFAS 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. SFAS 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions.
Under SFAS 145, gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria of APB 30,
Reporting the Results of Operations - Reporting the effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. Applying the provisions of APB 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual or infrequent or that meet the criteria for classification as an
extraordinary item. The provisions of SFAS 145 relating to SFAS 4 are effective
for fiscal years beginning after May 15, 2002. The Company plans to adopt SFAS
145 as of January 1, 2003 and does not expect SFAS 145 to have a material effect
on its consolidated results of operations or financial position.
7
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. Going Concern
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has incurred recurring
operating losses in previous years and has a working capital deficiency as of
March 31, 2002 and these conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
The Company has taken significant steps to alleviate these issues through the
restructuring of the Company, including the infusion of a total of $45 million
in debt and equity capital into the Company and KKM and the refinancing of the
Company's loan agreement (the "Loan") with Shell Capital Inc. ("Shell Capital")
in May 2002. As part of the restructuring, Shell Capital Services Limited, as
facility agent to Shell Capital, discontinued and withdrew all legal proceedings
against Chaparral in the United Kingdom and against CAP-G in the Isle of
Guernsey. Additionally, KKM is currently producing approximately 7,800 barrels
of crude oil per day. The Company expects the refinancing of the Loan, along
with approximately $11 million in additional working capital provided by the
restructuring and anticipated future cash flows from operations, will allow the
Company to proceed with the full development of the Karakuduk Field. See Note 7.
4. Hedge Agreement
As a requirement of the Loan, in February 2000, the Company paid $4 million 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 adopted SFAS 133 effective January 1, 2001, which requires
derivative financial instruments be recorded at their fair value. Accordingly,
the Company recognized a $2.52 million loss from the cumulative effect of change
in accounting principle upon adoption. The Company recognized approximately
$698,000 and $487,000 in losses for the three months ended March 31, 2002 and
2001, respectively, to record the Hedge Agreement at its fair value as of these
dates in accordance with SFAS 133. As of March 31, 2002 the market value of the
Hedge Agreement was $64,000.
5. Shell Capital Loan
As of March 31, 2002, the total outstanding balance of the Company's Loan with
Shell Capital consisted of $38.4 million of principal and accrued, but unpaid
interest. Accrued interest payable to Shell Capital as of March 31, 2002 was
$3.49 million. Interest expense for the three months ended March 31, 2002
totaled $1.75 million.
In May 2002, the Company and KKM received a total equity and debt capital
infusion of $45 million, which was partially utilized to repay a substantial
portion of the Loan. As further described in Note 7, the remaining balance of
the Loan has been restructured.
8
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
6. 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 Periods Ended March 31, 2002 and 2001
(Amounts in Thousand US Dollars)
(Unaudited)
For The Three Months Ended
March 31, March 31,
2002 2001
-------------------------------
Revenues:
Oil Sales $ 8,379 $ 8,436
Costs and expenses:
Transportation expenses 2,249 1,818
Operating expenses 1,875 1,264
Depreciation and depletion 2,789 1,931
Management service fee 265 120
General and administrative 898 1,150
--------------------------
Total cost and expenses 8,076 6,283
--------------------------
Income from operations 303 2,153
Other income (expense):
Interest income $ 1 $ 8
Interest expense from affiliates (326) (494)
--------------------------
Income (loss) before income taxes $ (22) $ 1,667
Income tax expense (232) --
--------------------------
Net income (loss) $ (254) $ 1,667
Accumulated deficit, beginning of
period (4,275) (10,602)
--------------------------
Accumulated deficit, end of period $(4,529) $(8,935)
==========================
9
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
6. Investments (continued)
During the three months ended March 31, 2002, KKM sold approximately 571,000
barrels of crude oil for approximately $8.38 million in revenue. Export sales
for the period were approximately 501,000 barrels of crude oil for approximately
$7.98 million. To fulfill government requirements, KKM also sold approximately
70,000 barrels on the local market for approximately $400,000.
The Company's equity income or loss from investment in KKM represents its share
of KKM's net income or loss for the respective period after applying EITF 99-10,
Percentage Used to Determine the Amount of Equity Method Losses, adjusted for
the elimination of the Company's proportional share of inter-company interest
charged by the Company to KKM during the period.
7. Subsequent Events
In May 2002, the Company and KKM received a total equity and debt capital
infusion of $45 million, which was partially utilized to repay a substantial
portion of the Loan. The Company received a total investment of $12 million from
Central Asian Industrial Holdings, NV ("CAIH"), including $8 million in exchange
for 22,925,701 shares, or 60%, of the Company's outstanding common stock, and $4
million in exchange for a three year note bearing interest at 12% per annum.
Along with the note, CAIH received a warrant to purchase 3,076,923 shares of the
Company's common stock at an exercise price of $1.30 per share. Additionally,
JSC Kazkommertsbank ("KKB"), an affiliate of CAIH, provided KKM with a credit
facility totaling $33 million (the "KKM Credit Facility"), consisting of $28
million used to repay a portion of the Loan and $5 million for KKM's working
capital requirements. The KKM Credit Facility bears interest at an annual rate
of 14% and is repayable over 5 years. The Company paid CAIH $1.788 million as a
restructuring fee.
In conjunction with the closing of the restructuring transaction, (i) the
remaining $11 million balance of the Loan was written down to $2.45 million and
restructured to reflect a 14% interest rate, (ii) the existing Shell Capital
warrant for 1,785,455 shares of the Company's common stock was canceled, (iii)
the Shell Capital 40% net profits interest in CAP-G was reacquired by CAP-G for
a nominal amount and canceled; (iv) the Company acquired an additional 10%
interest in KKM from Dardana Limited for $1.2 million and 1 million shares of
the Company's outstanding common stock; and (v) the Company redeemed the 50,000
shares of its outstanding Series A Preferred Stock held by an unrelated party
for $2.3 million. All other agreements with Shell Capital or its affiliates have
been terminated, including KKM's crude oil sales agreement with Shell Trading
International Limited and the technical services agreement with Shell Capital
Services Limited. In addition, the Company's OPIC political risk insurance and
transportation risk insurance policies have been canceled.
Shell Capital Services Limited, as the facility agent for Shell Capital, has
discontinued and withdrew all legal proceedings against the Company in the
United Kingdom and against CAP-G in the Isle Guernsey and all parties to the
original Loan have mutually released each other from future liability. All
outstanding defaults under the Loan were waived by CAIH upon the completion of
this transaction.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1. Liquidity and Capital Resources
Our financial statements have been presented on the basis that it is a going
concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. 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. We have recognized recurring operating losses
in previous years and had a working capital deficiency as of March 31, 2002 and
these conditions raise substantial doubt about our ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
We have taken significant steps to alleviate these issues through the
restructuring of Chaparral, including the infusion of a total of $45 million in
debt and equity capital into Chaparral and KKM and the refinancing of
Chaparral's loan with Shell Capital in May 2002. As part of the restructuring,
Shell Capital Services Limited, as facility agent to Shell Capital, discontinued
and withdrew all legal proceedings against Chaparral in the United Kingdom and
against CAP-G in the Isle of Guernsey. Additionally, KKM is currently producing
approximately 7,800 barrels of crude oil per day. We expect the refinancing of
the loan, along with approximately $11 million in additional working capital
provided by the restructuring and anticipated future cash flows from operations,
will allow Chaparral and KKM to proceed with the full development of the
Karakuduk Field.
Chaparral received a total investment of $12 million from CAIH, including $8
million in exchange for 22,925,701 shares, or 60%, of Chaparral's outstanding
common stock, and CAP-G received $4 million in exchange for a three-year note
bearing interest at 12% per annum. Along with the note, CAIH received a warrant
to purchase 3,076,923 shares of Chaparral's common stock at an exercise price of
$1.30 per share. Additionally, JSC Kazkommertsbank, an affiliate of CAIH,
provided KKM with a $33 million credit facility, consisting of $28 million used
to repay a portion of the Shell Capital loan and $5 million for KKM's working
capital requirements. The KKB credit facility bears interest at an annual rate
of 14% and is repayable over 5 years. Chaparral paid CAIH $1.788 million as a
restructuring fee.
In conjunction with the restructuring transaction, (i) the remaining Shell
Capital loan was assumed by CAIH, written down from approximately $11 million to
$2.45 million and restructured to reflect a 14% interest rate, (ii) the existing
Shell Capital warrant for 1,785,455 shares of Chaparral's common stock was
canceled, (iii) the Shell Capital 40% net profits interest in CAP-G was
reacquired by CAP-G for a nominal amount and canceled; (iv) Chaparral acquired
an additional 10% interest in KKM from Dardana Limited for $1.2 million and 1
million shares of Chaparral's outstanding common stock; and (v) Chaparral
redeemed the 50,000 shares of its outstanding Series A Preferred Stock held by
an unrelated party for $2.3 million. All other agreements with Shell Capital or
its affiliates have been terminated, including KKM's crude oil sales agreement
with Shell Trading International Limited and the technical services agreement
with Shell Capital Services Limited. In addition, Chaparral's OPIC political
risk insurance and transportation risk insurance policies have been canceled.
Shell Capital Services Limited, as the facility agent for Shell Capital,
discontinued and withdrew all legal proceedings against Chaparral in the United
Kingdom and against CAP-G in the Isle Guernsey and all parties to the original
Shell Capital loan have mutually released each other from future liability. All
outstanding defaults under the Shell Capital loan were waived by CAIH upon the
completion of the transaction.
We expect to finance the continued development of the Karakuduk Field primarily
through cash flows from the sale of crude oil and using working capital provided
by the KKB credit facility and CAIH capital investment of debt and equity. We
have approximately $11 million in additional working capital in excess of cash
flows provided by operations in order to continue development of the field. In
the short-term, we expect to maintain net daily production of approximately
7,800 barrels of oil per day through the second quarter of 2002, as KKM
alleviates various facility restrictions on production and commissions an 18
mile pipeline connecting the field with the export pipeline. Additionally, we
expect to perform well stimulation techniques to enhance current production from
existing wells until KKM can renew its developmental drilling program. KKM is
currently working to source a replacement developmental drilling rig and expects
to renew drilling operations in the fall of 2002. No assurances may be provided,
11
however, that production constraints will be alleviated or production will
increase as a result of well stimulation activities, due to potential factors
such as delays in obtaining necessary regulatory approvals, inaccessibility of
contractors and materials needed for construction, and general risks of oil
field operations.
Our highest operational priority in the short-term is to alleviate production
constraints in order to obtain a level of operational cash flow sufficient to
fund our future cash requirements. We anticipate the necessary working capital
to achieve this objective will be available through the recent equity and debt
capital infusion into Chaparral and KKM. Additionally, a short-term increase in
crude oil prices has provided additional cash flow from operations, although we
do not utilize current crude oil prices for planning purposes.
Capital Commitments and Other Contingencies
- -------------------------------------------
Our operations may be subject to other regulations by the government of the
Republic of Kazakhstan or other regulatory bodies responsible for the area in
which the Karakuduk Field is located. In addition to taxation, customs
declarations and environmental controls, regulations may govern such things as
drilling permits and production rates. Drilling permits could become difficult
to obtain or prohibitively expensive. Production rates could be set so low that
they would make production unprofitable. These regulations may substantially
increase the costs of doing business and may prevent or delay the starting or
continuation of any given exploration or development project.
All regulations are subject to future changes by legislative and administrative
action and by judicial decisions. Such changes could adversely affect the
petroleum industry in general, and us in particular. It is impossible to predict
the effect that any current or future proposals or changes in existing laws or
regulations will have on our operations.
2. Results from Operations
Results of Operations for the Three Months Ended March 31, 2002 Compared to the
Three Months Ended March 31, 2001
- --------------------------------------------------------------------------------
We account for our investment in KKM using the equity method.
Our operations for the three months ended March 31, 2002 resulted in a net loss
of $2.9 million compared to a net loss of $4.22 million as of March 31, 2001.
The $1.32 million decrease in our loss from operations primarily relates to the
impact of the adoption of SFAS 133, Accounting for Derivative Instruments and
Hedging Activities during 2001, net of a decrease in equity income from
investment during the quarter ended March 31, 2002. The decrease in equity
income is generally attributable to lower oil prices obtained on the sale of
crude oil by KKM during the current period.
As a result of the adoption of SFAS 133, we recognized a loss of $2.52 million
as a cumulative effect of change in accounting principal for the three months
ended March 31, 2001, along with an additional loss of $487,000 to record the
derivatives at their fair value at the end of the period. Comparably, Chaparral
recognized a loss of $698,000 for the three months ended March 31, 2002 to
record the derivatives at their fair value as of the end of the period. See Note
4 to our consolidated financial statements.
Chaparral did not recognize any interest income for the three months ended March
31, 2002, compared to $427,000 for the three months ended March 31, 2001, due to
the impact of EITF 99-10, Percentage Used to Determine the Amount of Equity
Method Losses, on the equity method income or losses recognized by Chaparral. We
eliminate inter-company interest income from KKM based upon the proportion of
equity income or losses recognized from KKM for the respective period. During
the three months ended March 31, 2002, we recognized 100% of KKM's equity method
losses and, therefore, eliminated 100% of our interest income from KKM. During
the period ended March 31, 2001, Chaparral recognized 50% of KKM's equity method
income and accordingly only eliminated 50% of our related interest income from
KKM.
General and administrative costs decreased from $971,000 for the three months
ended March 31, 2001 to $523,000 for the three months ended March 31, 2002. The
$448,000 change was due to a decrease in professional fees relating to the
reduction in activities in the Karakuduk field during the current period and
impact of cost reduction initiatives by Chaparral to reduce overhead expenses
implemented during the fourth quarter of 2001.
Depreciation and depletion expense decreased $21,000 from $163,000 for the three
months ended March 31, 2001 to $142,000 for the three months ended March 31,
2002. Depletion expense was $137,000 for the three months ended March 31, 2002
12
compared to $157,000 for the three months ended March 31, 2001. The decrease in
depletion expense was due to lower depletable acquisition costs of our
investment in KKM resulting from the transfer of 40% net profits interest in
CAP-G to Shell Capital during 2001.
Our equity income from investment was $211,000 for the three months ended March
31, 2002, compared to $1.26 million for the three months ended March 31, 2001.
The net change of $1.05 million was the result of several factors. KKM sold
571,000 barrels of crude oil during the current period, generating revenues of
$8.38 million, or $14.68 per barrel, compared to sales of approximately 463,000
barrels of crude oil for the three months ended March 31, 2001, generating $8.44
million, or $18.21 per barrel, reflecting a decrease in oil sales price per
barrel of 19.38%. Transportation costs were $2.25 million during the current
period, or $3.94 per barrel, compared to $1.82 million for the three months
ended March 31, 2001, or $3.92 per barrel, reflecting fairly static
transportation costs between periods. Operating costs increased from the first
quarter 2001 to the first quarter 2002, with current period operating costs of
$1.87 million, or $3.28 per barrel, compared to $1.26 million, or $2.73 per
barrel, in the prior period. The approximate 20% increase in operating cost per
barrel is due to increased workover operations by KKM in order to maintain
current production levels.
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.
The devaluation of the tenge, the currency of the Republic of Kazakhstan, can
significantly decrease the value of the monetary assets that we hold in
Kazakhstan as well as our assets in that country that are based on the tenge.
KKM retains the majority of its cash and cash equivalents in U.S. dollars in an
offshore bank account outside of Kazakhstan, but KKM's statutory tax basis in
its assets, tax loss carryforwards, and VAT receivables are all denominated in
tenge and subject to the effects of devaluation. Local tax laws allow basis
adjustments to offset the impact of inflation on statutory tax basis assets, but
there is no assurance that any adjustments will be sufficient to offset the
effects of inflation in whole or in part. If not, KKM may be subject to much
higher income tax liabilities within Kazakhtan due to inflation and or
devaluation of the local currency. Additionally, devaluation may create
uncertainty with respect to the future business climate in Kazakhstan and to our
investment in that country. As of March 31, 2002, the exchange rate was 152.20
tenge per U.S. dollar.
Item 3 - Quantitative and Qualitative Disclosures About Market Risks
Chaparral restructured the Shell Capital loan in May 2002. The transaction is
more fully described under "Item 7. Management Discussion and Analysis of
Financial Condition and Results of Operations."
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Part II- Other Information
Item 1 - Legal Proceedings
As part of the restructuring of the loan with Shell Capital in May 2002, Shell
Capital Services Limited, as the facility agent for Shell Capital, has
discontinued and withdrew all legal proceedings against Chaparral and CAP-G and
all parties to the original loan agreement with Shell Capital have mutually
released each other from future liability. Shell Capital Services Limited filed
a notice of discontinuance in the United Kingdom with the High Court of Justice,
Queen's Bench Division, on May 8, 2002, regarding its legal proceedings against
Chaparral. Shell Capital Services Limited also withdrew its statutory demand for
the liquidation of CAP-G on May 13, 2002, by filing a written consent with the
Royal Court of Guernsey Ordinary Court.
Item 2 - Changes in Securities and Use of Proceeds
On May 10, 2002, Chaparral issued 22,925,701 shares of its outstanding common
stock to CAIH in exchange for $8 million. Chaparral issued the common stock in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended. CAIH 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.
CAP-G, Chaparral's wholly owned subsidiary, issued a note to CAIH in exchange
for $4 million on May 10, 2002. The note bears interest at an annual rate of 12%
and is repayable on or before May 10, 2005. In conjunction with the issuance of
the note by CAP-G, Chaparral issued to CAIH 3,076,923 warrants to purchase
Chaparral's common stock at an exercise price of $1.30 per share.
On May 10, 2002, Chaparral issued 1 million shares of its outstanding common
stock and $1.2 million to Dardana Limited, in exchange for an additional 10%
interest in KKM previously held by Korporatsiya Mangistau Terra International.
Chaparral issued the common stock in reliance upon the exemption from
registration under Regulation "S". Dardana 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.
Item 3 - Defaults Upon Senior Securities
As a result of the restructuring transaction described above in "Item 2 -
Management's Discussion and Analysis of Financial Condition and Results from
Operations," Chaparral is no longer in default under any of its outstanding
indebtedness.
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Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
------ -------
10.1 Master Agreement, dated May 9, 2002, between Chaparral
Resources, Inc. and Central Asian Industrial Holdings, N.V.
10.2 Mutual Release Agreement, dated May 7, 2002, among Chaparral
Resources, Inc., Central Asian Petroleum (Guernsey) Limited,
Central Asian Petroleum, Inc. and Closed Type JSC
Karakudukmunay, and Shell Capital Inc., Shell Capital
Services Limited and Shell Capital Limited
10.3 Promissory Note, dated May 10, 2002, jointly and severally
between Chaparral Resources, Inc. and Central Asian
Petroleum (Guernsey) Limited and Central Asian Industrial
Holdings, N.V.
10.4 Stock Purchase Warrant, dated May 10, 2002, between
Chaparral Resources, Inc. and Central Asian Industrial
Holdings, N.V.
10.5 Registration Agreement, dated May 10, 2002, between
Chaparral Resources, Inc. and Central Asian Industrial
Holdings, N.V.
10.6 Agreement, dated May 8, 2002, between Chaparral Resources,
Inc. and Exeter Finance Group, Inc.
10.7 Stock Purchase Agreement, dated May 9, 2002, between
Chaparral Resources, Inc. and Dardana Limited.
(b) Reports on Form 8-K
Chaparral filed a Form 8-K on January 24, 2002, announcing a second default
notice and acceleration of its loan with Shell Capital Inc.
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: May 20, 2002
Chaparral Resources, Inc.
By: /s/ Michael B. Young
--------------------------------------------
Michael B. Young, Treasurer and Controller
(Principal Financial and Accounting Officer)
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