FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
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)
Colorado 84-0630863
- - ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2211 Norfolk, Suite 1150
Houston, Texas 77098
--------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 807-7100
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and, (2) has been subject to such filing requirements
for the past 90 days.
YES |X| NO |_|
As of November 16, 1998 Registrant had 58,298,790 shares of its $0.10 par
value common stock issued and outstanding.
Part I - Summarized Financial Information
Item 1 - Financial Statements
Chaparral Resources, Inc.
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
1998 1997
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 3,991,000 $ 3,423,000
Restricted cash 800,000 --
Accounts receivable:
Other 249,000 102,000
Prepaid expenses 54,000 62,000
------------ ------------
Total current assets 5,094,000 3,587,000
Notes Receivable 1,009,000
Oil and gas properties and investments -
full cost method
Republic of Kazakhstan (Karakuduk Field)--
not subject to depletion : 29,111,000 19,922,000
Furniture, fixtures and equipment 93,000 13,000
Less accumulated depreciation (13,000) (3,000)
------------ ------------
80,000 10,000
------------ ------------
Total assets $ 35,294,000 $ 23,519,000
============ ============
See accompanying notes to financial statements
2
Chaparral Resources, Inc.
Consolidated Balance Sheets (continued)
(Unaudited)
September 30, December 31,
1998 1997
------------ ------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable:
Trade $ 345,000 $ 177,000
Accrued liabilities 246,000 54,000
Notes payable (net of discount) 932,000 --
------------ ------------
Total current liabilities 1,523,000 231,000
Long-term obligations:
Accrued compensation 210,000 210,000
Redeemable preferred stock - cumulative, convertible:
Series A, 50,000 shares issued and outstanding,
at stated value, includes $5.00 cumulative annual
dividend, less $500,000 cost of issuance,
$5,000,000 redemption value 4,575,000 4,500,000
Stockholders' equity:
Common stock - authorized, 100,000,000
shares at September 30, 1998 and
December 31, 1997, of
$.10 par value; issued and outstanding,
58,298,790 and 49,720,456 shares at
September 30, 1998 and December 31, 1997, respectively 5,829,000 4,971,000
Capital in excess of par value 41,800,000 30,340,000
Unearned portion of restricted stock awards (152,000) (109,000)
Stock subscription receivable (506,000) (1,770,000)
Accumulated Deficit (17,985,000) (14,854,000)
------------ ------------
Total stockholders' equity 28,986,000 18,578,000
------------ ------------
Total liabilities and stockholders' equity $ 35,294,000 $ 23,519,000
============ ============
See accompanying notes to financial statements
3
Chaparral Resources, Inc.
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenue:
Oil and gas sales $ -- $ -- $ -- $ --
Costs and expenses:
Depreciation and depletion 4,000 3,000 10,000 4,000
General and administrative 572,000 298,000 2,203,000 1,040,000
------------ ------------ ------------ ------------
576,000 301,000 2,213,000 1,044,000
------------ ------------ ------------ ------------
Loss from operations (576,000) (301,000) (2,213,000) (1,044,000)
Other income (expense):
Interest income 355,000 109,000 805,000 271,000
Interest expense (126,000) (59,000) (189,000) (189,000)
Equity in loss from investment (534,000) (231,000) (1,223,000) (520,000)
------------ ------------ ------------ ------------
(305,000) (181,000) (607,000) (438,000)
------------ ------------ ------------ ------------
Loss before extraordinary items (881,000) (482,000) (2,820,000) (1,482,000)
Extraordinary Gain (Loss)
Loss on Extinguishment of Debt (236,000) -- (236,000) --
Net loss $ (1,117,000) $ (482,000) $ (3,056,000) $ (1,482,000)
------------ ------------ ------------ ------------
Basic and diluted earnings per share:
Net loss per share $ (.020) $ (.011) $ (.058) $ (.037)
Weighted average number of shares
Outstanding 56,142,992 42,106,477 52,428,894 40,263,263
See accompanying notes to financial statements
4
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30, September 30,
1998 1997
------------ ------------
Cash flows from operating activities
Net loss $ (3,056,000) $ (1,482,000)
Adjustments to reconcile net loss to
Net cash used in operating
Activities:
Equity loss from investment 1,223,000 520,000
Depreciation and depletion 10,000 4,000
Loss on the sale of oil and gas properties -- 30,000
Write-down of oil and gas properties -- 3,000
Stock issued for services and bonuses 691,000 --
Amortization of note discount 145,000 99,000
Extraordinary loss on estinguishment of debt 236,000 --
Changes in assets and liabilities:
Accounts receivable (147,000) (52,000)
Prepaid expenses 8,000 (121,000)
Notes receivable (1,009,000) --
Accounts payable & Accrued liabilities 360,000 100,000
------------ ------------
Net cash used in operating activities (1,539,000) (899,000)
Cash flows from investing activities
Additions to property and equipment (80,000) (7,000)
Proceeds from sale of interest in oil & gas -- 273,000
properties
Investment in and advances to foreign oil and gas
Properties (10,413,000) (2,818,000)
------------ ------------
Net cash used in investing activities (10,493,000) (2,552,000)
Cash flows from financing activities
Restricted cash (800,000) --
Payment of notes payable (1,095,000) --
Proceeds from notes payable (net of cash discount) 2,045,000 300,000
Proceeds from warrant exercise -- 7,000
Proceeds from sale of stock (net) 12,450,000 2,300,000
------------ ------------
Net cash provided by financing
Activities 12,600,000 2,607,000
------------ ------------
Net increase/(decrease) in cash and
Cash equivalents 568,000 (844,000)
Cash and cash equivalents at beginning
of period 3,423,000 920,000
------------ ------------
Cash and cash equivalents at end of period $ 3,991,000 $ 76,000
============ ============
See accompanying notes to financial statements
5
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements
(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
December 31, 1997.
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,
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.
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. As of September
30, 1998, substantially all of the Company's assets are invested in 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 has incurred recurring operating losses and has no operating
assets presently generating cash to fund its operating and capital requirements.
The Company's current cash reserves and cash flow from operations are not
sufficient to meet the capital spending requirements required to develop the
Karakuduk Field through fiscal 1998. Should the Company not meet its capital
requirements, the Company's rights to the Karakuduk Field can be terminated.
There is no assurance that additional financing will be available, or if
available, that it will be timely or on terms favorable to the Company. The
Company's continued existence as a going concern is dependent upon the success
of future operations, which are, in the near term, dependent on the successful
financing and development of the Karakuduk Field, of which there is no
assurance.
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 this uncertainty.
6
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
4. New Accounting Standards
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. This Statement requires companies to record derivatives on the
balance sheet as assets and liabilities, measured at fair value. Gains or losses
resulting from the changes in the values of those derivatives would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company has not determined what the effect of SFAS No. 133 will
be on results of operations and financial position. The Company will adopt this
accounting standard as required by January 1, 2000.
5. Restricted Cash
As of September 30, 1998, the Company held $800,000 cash on hand, as
collateral for loans made by a financial institution to KKM for the acquisition
of tangible equipment used in the Karakuduk Field.
6. Notes Receivable
As of September 30, 1998, the Company has an outstanding note receivable of
approximately $1,009,000 from a third-party drilling contractor (Contractor).
The note consists of $1,000,000 in cash advances from the Company to the
Contractor, plus approximately $9,000 in accrued interest owed to the Company
from the Contractor. On April 20, 1998, the Company advanced $300,000 to the
Contractor to refurbish and winterize the Contractor's drilling rig under
contract with KKM. On July 15, 1998, the Company loaned an additional $100,000
to the Contractor for the same purpose. Both loans were subject to an annual
rate of interest equal to the three month London Interbank Offered Rate (LIBOR),
as published by the Wall Street Journal, plus 1%. On September 10, 1998, the
Company loaned an additional $600,000 to the Contractor, as an advance to
complete the refurbishment and acquire spare parts for the rig. The Company
combined the $600,000 advance with the prior notes for $100,000 and $300,000,
plus accrued interest of $8,768, into a new note dated September 10, 1998.
Under the terms of the $1,009,000 note, the Contractor will repay the note
in twelve monthly payments of approximately $84,000, plus accrued interest,
beginning with the earlier of sixty days after the date the drilling rig arrives
on location at the Karakuduk Field, or the date the first payment is made by KKM
to the drilling contractor for use of the drilling rig. The principal balance of
the note accrues interest at a variable rate equal to the three month LIBOR, as
published by the Wall Street Journal, plus 1% (approximately 6.4% as of November
18, 1998).
7. Notes Payable
On July 1, 1998, the Company borrowed $20,000 from Howard Karren, the
Chairman and Chief Executive Officer of the Company. The note was payable 180
days after the date of issuance at an interest rate of 7%. On July 30, 1998, the
Company repaid two outstanding loans to Howard Karren, totaling $75,000 and
$20,000, respectively.
On July 3, 1998, the Company borrowed $975,000 from the Chase Bank of Texas
(Chase). The note accrues interest at an adjustable prime rate, as determined
by Chase. As of November 16, 1998, Chase's stated prime rate is 8%. The
principal of the loan, plus accrued interest, is payable in 4 installments:
$250,000 on December 3, 1998, March 3, 1999, and June 3, 1999, and a final
principal payment of $225,000 on August 31, 1999.
The $975,000 loan was fully guaranteed with a stand-by letter of credit
from an investor in the Company. In return for issuing the loan guarantee, the
Company paid the guarantor $10,000 plus related costs, issued warrants to
purchase 20,000 shares of the Company's Common Stock at an exercise price of
$.01 per share, and granted the guarantor a security interest in the Company's
Common Stock of Central Asian Petroleum (Guernsey) (CAP-G).
7
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
7. Notes Payable (continued)
The Company recorded the fair market value of the warrants (approximately
$32,000) plus the related loan costs, as a discount of notes payable. The fair
market value of the warrants was determined using the Black-Scholes option
pricing model, with the following weighted average assumptions: risk free
interest rate 5.53%, dividend yield of 0%, volatility factors of the Company's
Common Stock of .644, and a weighted average life expectancy of the warrants of
5 years.
In the event of the Company's default on the $975,000 note, the guarantor's
security interest in the Company's Common Stock in CAP-G cannot be perfected for
at least 30 days after notification of such default. In the event of default,
the Company may make full payment of any outstanding principal and interest on
the note plus any additional charges incurred by the guarantor to completely
remove any security interest held by the guarantor in the Company's investment
in CAP-G.
On August 5, 1998, the Company retired two outstanding loans, totaling
$1,000,000, from two related parties: Allen & Company, Incorporated ($900,000)
and John McMillian, a director of the Company ($100,000). The Company borrowed
the $1,000,000 on June 3, 1998, subject to a 7% interest rate. The note was
payable in full, plus accrued interest, on the earlier of 180 days from the
funding of the loans or upon the Company's receipt of a minimum of $10,000,000
in equity investments. In conjunction with the loans, the Company issued
warrants to purchase 1,000,000 shares of the Company's Common Stock, at an
exercise price of $3.50 per share. The Company recorded the warrants at their
fair market value of $367,000, as a discount of notes payable, amortizable over
the life of the loans. On July 27, 1998, the Company received $10,000,000 in
equity financing and repaid the loans, recognizing an extraordinary loss on the
extinguishment of debt of approximately $236,000.
8
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
8. Common Stock and Related Common Stock Warrants
As discussed in Notes Payable (7) above, on July 3, 1998, the Company
issued warrants to purchase 20,000 shares of the Company's Common Stock at an
exercise price of $.01 per share, in exchange for a stand-by letter of credit
securing the $975,000 loan to the Company from the Chase Bank of Texas.
Effective on July 28 and July 29, 1998, the Company sold 6,666,667 shares
of the Company's Common Stock for $1.50 per share for at total of $10,000,002.50
to certain accredited investors. Allen & Company, Incorporated acted as
placement agent in connection with the sale of the 6,666,667 shares. As a
result, Allen & Company, Incorporated's warrants to purchase 900,000 shares of
the Company's Common Stock, originally issued as commission in connection with
the Preferred Stock sale on November 24, 1997, became exercisable for an
additional 400,000 shares of the Company's Common Stock. The warrants to
purchase the additional 400,000 shares of the Company's Common Stock are
exercisable through November 25, 2002, at an exercise price of $0.01 per share.
Of the total warrants to purchase 900,000 shares of Common Stock issued to Allen
& Company, Incorporated on November 24, 1997, warrants to purchase 700,000
shares of the Company's Common Stock are currently exercisable.
Due to the fact the sales price of the 6,666,667 shares was below a price
of $2.00 per share, the Company issued an additional 416,667 shares to the
investor who purchased 1,250,000 shares of the Company's common stock for
$2,500,000 in April 1998 in order to satisfy certain price protection agreements
the Company has with such investor.
9. Subsequent Events
On October 30, 1998, the Company settled the lawsuit filed against the
Company and others in the District Court of Harris County, Texas, by Heartland,
Inc. of Wichita and Collins & McIlhenny, Inc. on November 14, 1997, for a total
of $200,000 and warrants to purchase 200,000 shares of the Company's Common
Stock at an exercise price of $1.00, exercisable through January 28, 1999. The
lawsuit was dismissed with prejudice for all defendants involved. The Company
believes the lawsuit was without merit, but a settlement was reached to avoid
incurring additional legal costs.
The Company recorded the fair market value of the warrants (approximately
$34,000) using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rate 5.53%, dividend yield of
0%, volatility factors of the Company's Common Stock of 1.046, and a weighted
average life expectancy of the warrants of .25 years. The lawsuit was previously
discussed in Item 3 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
On October 31, 1998, warrants to purchase 200,000 shares of the Company's
Common Stock at an exercise price of $0.25 expired.
9
10. Investments
The results from operations of the Company's equity-based investment in KKM
are summarized below:
Karakuduk-Munay Inc
Statement of Expenses and Accumulated Deficit
For the Nine Month Period Ended September 30, 1998 and 1997
(Amounts in US Dollars)
(Unaudited)
For The Three Months Ended For The Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
---------------------------------------------------------------------
Management service fee $ 152,000 $ 90,000 $ 427,000 $ 270,000
General and administrative expenses 557,000 269,000 1,100,000 511,000
Depreciation of fixed assets 75,000 -- 225,000 --
Interest expense 283,000 104,000 695,000 259,000
---------- ---------- ---------- ----------
Net loss 1,067,000 463,000 2,447,000 1,040,000
Accumulated deficit, beginning of period 5,396,000 2,928,000 4,016,000 2,351,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Accumulated deficit, end period $6,463,000 $3,391,000 $6,463,000 $3,391,000
---------- ---------- ---------- ----------
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1. Liquidity and Capital Resources
The only oil and gas interest of the Company at this time is the Company's
investment in Karakuduk-Munay, Inc. (KKM), through Central Asian Petroleum
(Guernsey) (CAP-G). KKM is a closed joint stock company in Kazakhstan.
The Company has previously 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. Since January 1, 1998, the Company has raised $12,500,000 through
the sale of Common Stock and $2,070,000 through debt obligations. The Company
repaid notes payable of $95,000 to Howard Karren on July 30, 1998, and
$1,000,000 to two related parties, Allen & Company, Incorporated and John
McMillian, a director of the Company, on August 5, 1998, using proceeds raised
from the sale of Common Stock. Under the terms of the $1,000,000 note, repayment
was required on the earlier of 180 days from the funding of the loans or upon
the Company's receipt of a minimum of $10,000,000 in equity financing. In
conjunction with the loans, the Company issued warrants to purchase 1,000,000
shares of the Company's Common Stock, at an exercise price of $3.50 per share.
The Company recorded the warrants at their fair market value of $367,000, as a
discount of notes payable, amortizable over the life of the loans. The Company
received $10,000,000 in equity financing on July 27, 1998. Accordingly, the
Company repaid the $1,000,000 note, and recognized a $236,000 loss on the early
extinguishment of debt.
On July 3, 1998, the Company borrowed $975,000 from the Chase Bank of Texas
(Chase) . The note accrues interest at an adjustable prime rate, as determined
by Chase. As of November 16, 1998, Chase's stated prime rate is 8%. The
principal of the loan, plus accrued interest, is payable in 4 installments:
$250,000 on December 3, 1998, March 3, 1999, and June 3, 1999, and a final
principal payment of $225,000 on August 31, 1999. The proceeds of the loan were
used by the Company for the winterization and refurbishment of a drilling rig to
be used by KKM in Kazakhstan, expansion of KKM's existing camp facilities, and
partial construction of an 18-mile pipeline between the camp and the existing
export pipeline.
The $975,000 loan is fully guaranteed with a stand-by letter of credit from
an investor in the Company. In return for issuing the loan guarantee, the
Company paid the guarantor $10,000 plus related costs, issued warrants to
purchase 20,000 shares of the Company's Common Stock at an exercise price of
$.01 per share, and granted the guarantor a security interest in the Company's
Common Stock of CAP-G. There are no other material negative covenants in the
loan agreement.
In the event of the Company's default on the $975,000 note, the guarantor's
security interest in the Company's Common Stock in CAP-G cannot be perfected for
at least 30 days after notification of such default. In the event of default,
the Company may make full payment of any outstanding principal and interest on
the note plus any additional charges incurred by the guarantor to completely
remove any security interest held by the guarantor in the Company's investment
in CAP-G.
The Company is currently seeking to obtain additional capital 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 the early stage of development of the Karakuduk Field
also increase the difficulty in raising any financing that may be needed in the
future. There can be no assurance that the debt or equity financing that might
be required to fund the Company's operations and obligations in the future will
be available to the Company on economically acceptable terms, if at all. If the
Company fails to obtain the additional capital required to develop the Karakuduk
Field, the Company's investment in the field most likely will be lost.
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
incurred recurring operating losses and has no operating assets presently
11
generating sufficient cash to fund its operating and capital requirements. The
Company current cash reserves and cash flow from operations are not sufficient
to meet its capital requirements through fiscal 1998.
As of September 30, 1998, substantially all of the Company's assets are
invested in the development of the Karakuduk Field. Since the Karakuduk Field is
in the early stage of development, the Karakuduk Field does not currently
produce any revenue. 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, which has been satisfied. Additional
requirements of $34.5 million and $12 million exist for the years ending
December 31, 1998 and 1999, respectively. The capital requirements required
under the license will be primarily used to fund KKM's drilling operations for
the Karakuduk Field, to build the required Field infrastructure and camp
facilities necessary to support drilling and production operations, to construct
an 18-mile pipeline between the field and the export pipeline, and to construct
a central processing unit (cpu) to process oil production from the Field.
The Company will not be able to satisfy the $34.5 million requirement for
the year ending December 31, 1998, and has requested that the obligation be
deferred until the year ended December 31, 1999. If the deferment is not
granted, KKM will not be in compliance with the terms of KKM's License with the
Government of Kazakhstan and the License may be terminated by the Government of
Kazakhstan. In the event KKM's License to develop the Karakuduk Field is
terminated, the Company's interest in the Karakuduk Field may be lost. If the
Company receives a deferment of the capital requirement, the Company will
require substantial additional funding in order to satisfy the 1999 capital
commitment under the License. If the 1999 capital requirement is not satisfied,
KKM's License may be terminated and the Company's interest in the Karakuduk
Field may be lost.
As of November 16, 1998, KKM has placed approximately 8,000 tons of
production into the export pipeline. KKM has an existing marketing contract with
Munay-Impex, a subsidiary of KazakhOil, obligating Munay-Impex to purchase oil
from KKM in minimum increments of 5,000 tons. KKM has not sold any of the oil
production in the pipeline to Munay-Impex under the existing contract. Instead,
KKM is carrying the production as inventory and is attempting to sell the
production to the export market outside of the Commonwealth of Independent
States, where KKM expects to obtain a higher price per barrel. If KKM cannot
complete a sale on the world export market, KKM will sell the current production
in inventory to Munay-Impex, in accordance with the existing contract. KKM will
record oil revenues when a sale has been completed.
On September 25, 1998, the Company requested and received an additional
extension to December 31, 1998, from the Overseas Private Investment Corp.
("OPIC") for political risk insurance. OPIC originally granted the Company a
binding executed letter of commitment on September 25, 1996. The Company has a
standby facility for which it has made eight payments of $31,250 plus one
additional payment of $15,625. The Company expects to execute the contract on or
before December 31, 1998.
The Company has no other material commitments for cash outlay and capital
expenditures other than for normal operations.
2. Results of Operations
In 1996, the Company accounted for its investment in KKM using pro rata
consolidation. In 1997, the Company changed to the equity method in order to
reflect the legal ownership right of the other shareholders in KKM. The
consolidated financial statements for the quarter ended September 30, 1997
reported herein have been reclassified to reflect the equity method. There was
no impact on previously reported earnings.
Three Months Ended September 30, 1998 Compared with the Three Months Ended
September 30, 1997
The Company's operations during the three months ended September 30, 1998,
resulted in a net loss of $1,117,000 compared to a net loss of $482,000 for the
three months ended September 30, 1997.
12
Interest income increased by $246,000 from the three months ended September
30, 1997, due to increased financing provided by CAP-G to KKM for KKM's
operations in Kazakhstan. Interest expense increased by $67,000 from the three
months ended September 30, 1997, due to increased amortization of discounts on
notes payable outstanding during the three months ended September 30, 1998.
General and administrative costs increased by $274,000 during the three
months ended September 30, 1998 as compared to the three months ended September
30, 1997, due to expanding workover and exploration operations in Kazakhstan and
increased professional fees relating to the lawsuit that was settled on October
30, 1998, and public SEC filings (Registration Statement on Form S-3). Also, the
Company's equity loss in KKM increased by $303,000 during the three months ended
September 30, 1998 as compared to the three months ended September 30, 1997, due
to increased operational costs directly related to development of oil and gas
properties held by KKM.
The Company recognized an extraordinary loss of $236,000 on the
extinquishment of debt during the three months ended September 30, 1998, from
the retirement of two notes totaling $1,000,000.
Nine Months Ended September 30, 1998 Compared with the Nine Months Ended
September 30, 1997
The Company's operations during the nine months ended September 30, 1998,
resulted in a net loss of $3,056,000 compared to a net loss of $1,482,000 for
the nine months ended September 30, 1997.
Interest income increased by $534,000 from the nine months ended September
30, 1997, due to increased financing provided by CAP-G to KKM for KKM's
operations in Kazakhstan. Interest expense remained unchanged from the nine
months ended September 30, 1997.
General and administrative costs increased by $1,163,000 from the nine
months ended September 30, 1997. Without consideration of stock based
compensation, a non-cash item, general and administrative costs increased by
$472,000 due to expanding workover and exploration operations in Kazakhstan,
legal fees associated with the lawsuit that was settled on October 30, 1998, and
professional fees relating to the Company's non-routine SEC filings
(Registration Statement on Form S-1 and Form S-3). Also, the Company's equity
loss in KKM increased by $703,000 from the nine months ended September 30, 1997,
due to increased operational costs directly related to development of oil and
gas properties held by KKM.
The Company recognized an extraordinary loss of $236,000 on the
extinquishment of debt during the nine months ended September 30, 1998, from the
retirement of two notes totaling $1,000,000.
3. Year 2000 Issue
The Company has assessed the Year 2000 issue and does not expect the Year
2000 problem to have a material impact on the Company's operations. After
consulting with major vendors, contractors, and technical field personnel, the
Company does not anticipate any material costs to result from Year 2000 problems
impacting the Company's operations.
Item 3 - Quantitative and Qualitative Disclosures About Market Risks
Not Applicable.
13
Part II - Other Information
Item 1 - Legal Proceedings
On October 30, 1998, the Company settled the lawsuit filed against the
Company and others in the District Court of Harris County, Texas, by Heartland,
Inc. of Wichita and Collins & McIlhenny, Inc. on November 14, 1997, for a total
of $200,000 and warrants to purchase 200,000 shares of the Company's Common
Stock at an exercise price of $1.00, exercisable through January 28, 1999. The
lawsuit was dismissed with prejudice for all defendants involved. The Company
believes the lawsuit was without merit, but a settlement was reached to avoid
incurring additional legal costs.
The Company recorded the fair market value of the warrants (approximately
$34,000) using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rate 5.53%, dividend yield of
0%, volatility factors of the Company's Common Stock of 1.046, and a weighted
average life expectancy of the warrants of .25 years. The lawsuit was previously
discussed in Item 3 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
Item 2 - Changes in Securities and Use of Proceeds
On July 3, 1998, the Company issued warrants to purchase 20,000 shares of
the Company's Common Stock at an exercise price of $.01 per share, in exchange
for a stand-by letter of credit securing the $975,000 loan to the Company from
the Chase Bank of Texas. The Company issued the warrants in reliance upon the
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended. The guarantor had available all material information concerning the
Company. The warrant certificate bears an appropriate restrictive legend under
the Securities Act of 1933, as amended. No underwriter was involved in the
transaction.
Effective on July 28 and July 29, 1998, the Company sold 6,666,667 shares
of the Company's Common Stock for $1.50 per share for at total of $10,000,002.50
to certain accredited investors. The Company sold the shares in reliance upon
the exemption from registration under Sections 4(2) of the Securities Act of
1933, as amended, and Regulation D promulgated thereunder. A Form D was timely
filed in connection with the sales. The investors, who all were accredited
investors, had available all material information concerning the Company. The
certificates bear an appropriate restrictive legend under the Securities Act of
1933, as amended. Allen & Company, Incorporated acted as placement agent in
connection with the sale of the 6,666,667 shares. As a result, Allen & Company,
Incorporated's warrants to purchase 900,000 shares of the Company's Common
Stock, originally issued as commission in connection with the Preferred Stock
sale on November 24, 1997, became exercisable for an additional 400,000 shares
of the Company's Common Stock. The warrants to purchase the additional 400,000
shares of the Company's Common Stock are exercisable through November 25, 2002,
at an exercise price of $0.01 per share. Of the total warrants to purchase
900,000 shares of Common Stock issued to Allen & Company, Incorporated on
November 24, 1997, warrants to purchase 700,000 shares of the Company's Common
Stock are currently exercisable.
Due to the fact the sales price of the 6,666,667 shares was below a price
of $2.00 per share, the Company issued an additional 416,667 shares to the
investor who purchased 1,250,000 shares of the Company's common stock for
$2,500,000 in April 1998 in order to satisfy certain price protection agreements
the Company has with such investor. The Company does not consider the issuance
of 416,667 shares to be a sale.
During the quarter ended September 30, 1998, the Company granted 5-year
options to purchase 110,000 shares of the Company's Common Stock to employees
of, and consultants to, the Company. The Company made the grants in reliance
upon the exemption from registration under Section 4(2) of the Securities Act of
1933, as Amended. Such persons had available to them all material information
concerning the Company. The options will have an appropriate restrictive legend
under the Securities Act of 1933, as amended.
14
Item 5 - Other Information
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. This Statement requires companies to record derivatives on the
balance sheet as assets and liabilities, measured at fair value. Gains or losses
resulting from the changes in the values of those derivatives would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company has not determined what the effect of SFAS No. 133 will
be on results of operations and financial position. The Company will adopt this
accounting standard as required by January 1, 2000.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Credit Support and Pledge Agreement between Whittier Ventures,
LLC and Chaparral Resources, Inc. dated July 2, 1998.
10.2 Warrants issued to Whittier Ventures, LLC
10.3 Settlement Agreement and Release between Heartland, Inc. of
Wichita and Collins & McIlhenny, Inc. and Chaparral Resources,
Inc., Howard Karren, Whittier Trust Company, and James A. Jeffs
dated October 30, 1998.
10.4 Warrants issued to Heartland, Inc. of Wichita and Collins &
McIlhenny, Inc., as joint tenants, and to Don M. Kennedy.
10.5 Loan Agreement between Challenger Oil Services, PLC and Chaparral
Resources, Inc. dated September 10, 1998.
10.6 Promissory Note between Challenger Oil Services, PLC and
Chaparral Resources, Inc. dated September 10, 1998.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
15
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 16, 1998
Chaparral Resources, Inc.,
a Colorado corporation
By: /s/ Howard Karren
------------------------------------------
Howard Karren
President and Chief Executive Officer
By: /s/ Michael B. Young
------------------------------------------
Michael B. Young, Treasurer and Controller
And Principal Accounting Officer
16
Exhibit Index
10.1 Credit Support and Pledge Agreement between Whittier Ventures,
LLC and Chaparral Resources, Inc. dated July 2, 1998.
10.2 Warrants issued to Whittier Ventures, LLC
10.3 Settlement Agreement and Release between Heartland, Inc. of
Wichita and Collins & McIlhenny, Inc. and Chaparral Resources,
Inc., Howard Karren, Whittier Trust Company, and James A. Jeffs,
dated October 30, 1998.
10.4 Warrants issued to Heartland, Inc. of Wichita and Collins &
McIlhenny, Inc., as joint tenants, and to Don M. Kennedy.
10.5 Loan Agreement between Challenger Oil Services, PLC and Chaparral
Resources, Inc. dated September 10, 1998.
10.6 Promissory Note between Challenger Oil Services, PLC and
Chaparral Resources, Inc. dated September 10, 1998.
27 Financial Data Schedule
17