SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 [ ] 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) Colorado 84-0630863 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3400 Bissonnet Street, Suite 135 Houston, Texas 77005 -------------------------------------- (Address of principal executive offices) (Zip Code) (713) 669-0932 -------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of November 5, 1997, the Registrant had 44,470,731 shares of its $0.10 par value common stock issued and outstanding. PART I--SUMMARIZED FINANCIAL INFORMATION CHAPARRAL RESOURCES, INC. Consolidated Balance Sheets September 30, November 30, 1997 (unaudited) 1996 ---------------- ------------ ASSETS - ------ CURRENT ASSETS Cash and cash equivalents $ 94,000 $ 800,000 Accounts receivable Joint interest participants -- 8,000 Oil and gas purchasers -- 53,000 Prepaid expenses 140,000 40,000 Oil and gas properties under agreement for sale -- 306,000 ------------ ------------ Total current assets 234,000 1,207,000 PROPERTY AND EQUIPMENT - AT COST Oil and Gas Properties - full cost: Republic of Kazakhstan (Karakuduk Field) not subject to depletion 12,692,000 11,189,000 ------------ ------------ 12,692,000 11,189,000 Furniture, fixtures and equipment 275,000 441,000 Less accumulated depreciation 17,000 198,000 ------------ ------------ 258,000 234,000 ------------ ------------ 12,950,000 11,432,000 OTHER ASSETS Cash value of insurance and annuities -- 8,000 Due from Karakuduk-Munay, Inc. 3,174,000 2,012,000 Equipment inventory -- 27,000 Other 130,000 74,000 ------------ ------------ 3,304,000 2,121,000 ------------ ------------ $ 16,488,000 $ 14,760,000 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Accounts payable Trade $ 665,000 $ 278,000 Joint interest participants - revenue -- 42,000 Accrued liabilities 21,000 91,000 Accounts payable CAP-G shares 444,000 744,000 ------------ ------------ Total current liabilities 1,130,000 1,155,000 ------------ ------------ LONG TERM OBLIGATIONS Notes payable (including $1,100,000 to related party) 1,240,000 1,106,000 Accrued compensation 412,000 385,000 ------------ ------------ 1,652,000 1,491,000 STOCKHOLDERS' EQUITY Common stock - authorized, 100,000,000 shares of $0.10 par value, issued and outstanding; 42,392,965 4,239,000 3,753,000 and 37,526,517 shares at September 30, 1997 and November 30, 1996, respectively Capital in excess of par value 23,070,000 20,482,000 Preferred stock - authorized, 1,000,000 shares as of September 30, 1997 and November 30, 1996 (no shares issued or outstanding) Retained earnings (deficit) (13,603,000) (12.121,000) ------------ ------------ Total shareholders' equity 13,706,000 12,114,000 ------------ ------------ Total liabilities and stockholders' equity $ 16,488,000 $ 14,760,000 ------------ ------------ See accompanying notes to financial statements. 2 CHAPARRAL RESOURCES, INC. Consolidated Statements of Operations (Unaudited) For the Three Months Ended For the Nine Months Ended -------------------------- ------------------------- September August 31, September 30, August 31, 1997 1996 1997 1996 ---- ---- ---- ---- Revenue: Oil and gas sales $ -- $ 35,000 $ 52,000 $ 116,000 ------------ ------------ ------------ ------------ Cost and expenses: Production costs -- 17,000 18,000 25,000 Loss on sale of domestic oil and gas -- -- 36,000 -- properties Depreciation and depletion 7,000 41,000 8,000 80,000 General and administrative 474,000 339,000 1,424,000 688,000 ------------ ------------ ------------ ------------ 481,000 397,000 1,486,000 793,000 ------------ ------------ ------------ ------------ (Loss) from operations (481,000) (362,000) (1,434,000) (677,000) Other income (expenses): Interest income 58,000 9,000 142,000 11,000 Interest expense (59,000) -- (189,000) (28,000) Other, net -- 21,000 (1,000) 22,000 ------------ ------------ ------------ ------------ (1,000) 30,000 (48,000) 5,000 ------------ ------------ ------------ ------------ Net (loss) $ (482,000) $ (332,000) $ (1,482,000) $ (672,000) ------------ ------------ ------------ ------------ Earnings (loss) per common share $ (0.011) $ (0.009) $ (0.037) $ (0.022) ============ ============ ============ ============ Average number of outstanding shares 42,508,350 37,409,850 39,608,833 30,277,448 ------------ ------------ ------------ ------------ See accompanying notes to financial statements 3 CHAPARRAL RESOURCES, INC. Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended -------------------------------- September 30, August 31, 1997 1996 ---- ---- Cash flows from operating activities: Net (loss) $(1,482,000) $ (672,000) Adjustments to reconcile net (loss) to net cash used by operating activities: Depreciation and depletion 8,000 80,000 Amortization of note discount 99,000 -- Loss on the sale of domestic oil and gas property 33,000 -- Changes in assets and liabilities: (increase) in: Accounts receivable 10,000 18,000 Notes receivable (35,000) Prepaid expenses (100,000) 2,000 Other assets (28,000) (650,000) Equipment inventory 3,000 Increase (decrease) in: Accounts payable 389,000 1,611,000 Accrued liabilities 51,000 (26,000) ----------- ----------- Net cash (used in) operating activities (1,020,000) 331,000 Cash flows from investing activities: Additions to property and equipment (23,000) 56,000 Investment in foreign oil and gas properties -- (3,855,000) Additions to Republic of Kazakhstan (Karakuduk Field) not subject to depletion (1,487,000) (3,195,000) Advances to Karakuduk-Munay, Inc. (1,162,000) -- Increase (decrease) in minority interest 50,000 Proceeds from sale of interest in oil & gas properties 273,000 19,000 ----------- ----------- Net cash provided from (used in) investing activities (2,399,000) (6,925,000) Cash flows from financing activities: Payment of Note (600,000) (750,000) Proceeds from notes payable 100,000 -- Proceeds from sale of stock 3,074,000 7,552,000 ----------- ----------- Net cash provided by financing activities 2,574,000 6,802,000 ----------- ----------- Net (decrease) in cash and cash equivalents (845,000) 208,000 Cash and cash equivalents at beginning of period 939,000 501,000 ----------- ----------- Cash and cash equivalents at end of 2nd quarter $ 94,000 $ 2,357,000 ----------- ----------- See accompanying notes to financial statements. 4 CHAPARRAL RESOURCES, INC. Notes to Consolidated Financial Information Unaudited (1) GENERAL Management has elected to omit substantially all notes to the Company's financial statements. Reference should be made to the notes to the financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. (2) UNAUDITED INFORMATION The information furnished herein was taken from the books and records of the Company without audit. However, such information reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year. The November 30, 1996 balance sheet data is derived from the audited financial statements but does not include all disclosures required by generally accepted accounting principles. (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 has over 80% of its assets invested in entities that are pursuing the development of the Karakuduk field, a shut in oil field in the central Asian Republic of Kazakhstan, which will require significant additional funding. The Company's current cash reserves and cash flow from operations will not be sufficient to meet the Company's capital requirements through fiscal 1997. While the Company believes that additional funds will be available from additional financing, there can be no assurance that such will be the case. There is also no assurance that additional financing, if available, can be obtained on terms favorable or affordable to the Company. The Company's continued existence as a going concern in its present form is dependent upon the success of future operations, which is, in the near term, dependent on the successful financing and development of the Karakuduk field, of which there is no assurance. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (1) Liquidity and Capital Resources Previously, the Company's primary source of capital was from oil and gas sales from domestic properties. All domestic properties have been sold or otherwise disposed. The only oil and gas interest of the Company at this time is as a result of the Company's investment in Karakuduk-Munay, Inc. (KKM) through Central Asian Petroleum Guernsey Limited (CAP-G). KKM is a closed joint stock company in Kazakhstan. Due to the timing of the final payment of $443,750 related to the acquisition of an interest in CAP-G, current liabilities of $1,130,000 exceed the current assets of $234,000 at September 30, 1997, resulting in a current ratio of 0.21 to 1. Without the purchase payment obligation, the current ratio would be 0.33 to 1. An extension of the due date for the final payment on the acquisition of this interest and the terms of the option for the remaining 10% interest in CAP-G are currently being negotiated. The Company now owns 90% of CAP-G, providing a 45% beneficial interest in the Karakuduk field. Upon exercising the option, the Company will have a 50% beneficial interest in the Karakuduk field. The other 50% is owned by Kazak Oil, the Kazakhstan national oil company, and a private Kazakhstan joint stock company. Since the Karakuduk field is in the early stage of development, the field does not currently produce revenues sufficient to meet its cash outflow needs. The development of the Karakuduk field, through KKM, will require substantial amounts of additional capital. The terms of the KKM revised license require a work plan from the commencement of operations through December 31, 1997, of at least $10,000,000. Of this amount, approximately $7,000,000 has been expended to date and the Company's remaining share through December 31, 1997 is estimated at $3,000,000. The license, which was amended by the authority of the government of Kazakhstan, originally required that the work plan be completed by August 31, 1997. It is anticipated that the Company will either have spent or will have committed to the required expenditures by this date. Additional requirements exist for the year ending December 31, 1998. KKM was re-registered on July 24, 1997 with the government of Kazakhstan. The re- registration was required as a result of new legislation in Kazakhstan. The Company believes that KKM is now in compliance with all Kazakhstan laws and regulations related to the registration requirements relating to legal entities. The re-registered KKM includes newly established Kazak Oil, the national petroleum company which holds the majority of the interest of the government of Kazakhstan in KKM. 6 The Company received an extension to December 31, 1997 from the Overseas Private Investment Corp. ("OPIC") for political risk insurance. OPIC granted the Company a binding executed letter of commitment on September 25, 1996. It was to expire on June 30, 1997. The Company has a standby facility for which it has made five previous payments of $31,250. The Company expects to execute the contract in the fourth quarter of 1997. The Company has raised capital to finance a portion of its obligations in connection with the acquisition of its interest in CAP-G and the development of the Karakuduk field and to satisfy working capital needs in the short term. The amount raised since July 1, 1997, was approximately $350,000 in short term loans, $450,000 from an expired option, $300,000 through the sale of common stock and $1,499,999.80 through the partial exercise of a warrant. The Company plans to meet its additional capital needs through debt or equity offerings, encumbering properties, entering into arrangements whereby certain costs of development will be paid by others to earn an interest in the properties, or sale of a portion of the Company's interest in the Karakuduk field. The present environment for financing the acquisition of oil and gas properties or the ongoing obligations of the oil and gas business is uncertain due, in part, to instability in oil and gas pricing in recent years. The Company's small size and early stage of development of the Karakuduk field may also increase the difficulty in raising needed financing. There can be no assurance that debt or equity financing anticipated to be necessary to continue to fund the Company's operations and obligations will be available to the Company on economically acceptable terms if at all. If sufficient funds cannot be raised to meet the continuing obligations with respect to the Karakuduk field development, the Company's interest in such property may be lost. Also, if sufficient funds cannot be raised to provide additional working capital, it is likely that the Company will not be able to continue operations. The Company has no other material commitments for cash outlay and capital expenditures other than for normal operations. (2) Results of Operations ln order to unite the reporting period of the Company with that of its subsidiaries, the fiscal year was changed to a December 31 year end from the previous November 30 year end. This change took effect in the second quarter of 1997. As a result of this change, quarterly and year to date data is as of September 30 for 1997 and as of August 31 for 1996. Three Months Ended September 30, 1997 vs Three Months Ended August 31, 1996. The Company's operations resulted in a net loss of $482,000 for the three month period ended September 30, 1997 compared to a net loss of $332,000 for the three months ended August 31, 1996. Although the Company significantly reduced its corporate overhead costs, increases in general and administrative costs still accounted for most of this change. This was the result of costs incurred 7 related to the operation of the Company's beneficial interest in the Karakuduk field and financing costs for the project. The Company has elected not to capitalize the general and administrative expense at this time, however, these amounts may be capitalized upon final financing for the project. Due to the previous sale of the domestic properties, there was no revenue during the three months ended September 30, 1997. Interest expense during the three months ended September 30, 1997, was $59,000 which was incurred in connection with financing the Company obtained, primarily for the Karakuduk field. Nine Months Ended September 30, 1997 vs. Nine Months Ended August 31, 1996. The Company realized a loss on the sale of the Company's domestic oil and gas properties that totaled $36,000 during the three months ended March 31, 1997. There was a $43,000 gain related to subsidiary billings of related party transactions. General and administrative expenses increased from $688,000 during the nine months ended August 31, 1996 to $1,424,000, during the nine months ended September 30, 1997, an increase of 172%. Although the Company significantly reduced its corporate overhead costs, increases in general and administrative costs still accounted for most of this change. This was the result of costs incurred related to the operation of the Company's beneficial interest in the Karakuduk field and financing costs for the project. Due to the previous sale of the domestic properties, there was no revenue during the six months ended September 30, 1997. Interest expense during the nine months ended September 30, 1997, was $189,000 which was incurred in connection with financing the Company obtained, primarily for the Karakuduk field. Interest income is primarily that portion of interest undertaken on behalf of the stockholders of Karakuduk which is indirectly owed to the Company. 8 PART II - OTHER INFORMATION Item 2 - Changes in Securities (c) On September 3, 1997, the Company sold 461,358 shares of the Company's common stock for $0.65 per share for a total of $300,000 to a private investor. In connection with the transaction, the Company also issued a warrant to the investor to purchase up to an additional 461,358 shares of the Company's common stock for $300,000 or $0.65 per share. The warrant expires on December 31, 1997, if not previously exercised. The Company issued the stock and warrant in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. The investor represented to the Company that the investor acquired the stock and warrant for the investor's own account and not with a view to distribution. The investor had available to the investor all material information concerning the Company. The certificates evidencing the stock and warrant bear or will bear an appropriate restrictive legend under the Securities Act of 1933, as amended. During the period from July 1, 1997, through September 30, 1997, the Company granted five year options to purchase 1,625,000 shares of the Company's common stock to certain directors of the Company. Options relating to 825,000 shares have an exercise price of $0.75 per share and options relating to 800,000 shares having an exercise price of $1.50 per share. The Company does not consider the grants of the options to be sales under the Securities Act of 1933, as amended, because the Company received no consideration for the grants. No underwriters were involved in the aforementioned transactions. Item 4 - Submission of Matters to A Vote of Security Holders On July 17, 1997 the Company held its Annual Meeting of Stockholders. The Company's stockholders elected the following eight persons as directors, each to serve until the next Annual Meeting of Stockholders or until his successor is elected or appointed: Howard Karren, Peter G. Dilling, Jay W. McGee, Alan D. Berlin, Walter A. Carozza, David A. Dahl, John G. McMillian and Arlo G. Sorensen. The Company's stockholders also voted to adopt, separately, a 1997 Stock Incentive Plan and a 1997 Nonemployee Directors' Stock Option Plan. 9 The number of shares voted and withheld with respect to each director were as follows: Election of Directors For Withheld - --------------------- --- -------- Howard Karren 24,756,934 540,387 Peter G. Dilling 23,072,406 2,224,915 Jay W. McGee 22,726,326 2,570,995 Alan D. Berlin 23,216,656 2,080,665 Walter A. Carozza 24,660,134 637,187 David A. Dahl 23,243,206 2,054,115 John G. McMillian 24,755,784 541,537 Arlo G. Sorensen 23,244,106 2,053,215 The number of shares voted with respect to the approval of the 1997 Incentive Stock Plan was as follows: For Against Abstain Broker Non-Votes - --- ------- ------- ---------------- 17,088,991 3,253,159 193,019 4,762,152 The number of shares with respect to the approval of the 1997 Nonemployee Directors' Stock Option Plan was as follows: For Against Abstain Broker Non-Votes - --- ------- ------- ---------------- 15,110,428 5,229,093 196,648 4,761,152 Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 3(ii) Bylaws as amended through October 31, 1997 10.1 Amendment to Common Stock Purchase Warrant dated December 31, 1997 entitling Victory Ventures, LLC to purchase up to 4,615,385 shares of common stock of Chaparral Resources, Inc. 10.2 Amendment dated September 11, 1997, to License for Right to Use the Subsurface in the Republic of Kazakhstan 27 Financial Data Schedule (b) Reports on Form 8-K. None. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 7, 1997 CHAPARRAL RESOURCES, INC., a Colorado Corporation By: /s/ Howard Karren ------------------------------------------- Howard Karren President and Principal Executive Officer By: /s/ Arlo G. Sorensen ------------------------------------------- Arlo G. Sorensen, Chief Financial Officer and Principal Accounting Officer 11 EXHIBIT INDEX 3(ii) Bylaws as amended through October 31, 1997 10.1 Amendment to Common Stock Purchase Warrant dated December 31, 1997 entitling Victory Ventures, LLC to purchase up to 4,615,385 shares of common stock of Chaparral Resources, Inc. 10.2 Amendment dated September 11, 1997, to License for Right to Use the Subsurface in the Republic of Kazakhstan 27 Financial Data Schedule 12