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, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission File Number: 0 - 7261
CHAPARRAL RESOURCES, INC.
---------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-0630863
------------------------------ ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
16945 Northchase Drive, Suite 1440
Houston, Texas 77060
--------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (281) 877-7100
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
As of November 15, 1999, the Registrant had 977,954 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
September 30, December 31,
1999 1998
(Unaudited) (Audited)
------------ -------------
Assets
Current assets:
Cash and cash equivalents $ 21,000 $ 121,000
Restricted cash 626,000 756,000
Accounts receivable 30,000 25,000
Prepaid expenses 87,000 76,000
Current portion of note receivable -- 420,000
------------ ------------
Total current assets 764,000 1,398,000
Note receivable 1,060,000 589,000
Oil and gas properties and investments - full cost method
Republic of Kazakhstan (Karakuduk Field)--
Not subject to depletion: 36,187,000 32,261,000
Furniture, fixtures and equipment 100,000 93,000
Less accumulated depreciation (33,000) (17,000)
------------ ------------
67,000 76,000
------------ ------------
Total assets $ 38,078,000 $ 34,324,000
============ ============
See accompanying notes to financial statements
2
Chaparral Resources, Inc.
Consolidated Balance Sheets (continued)
September 30, December 31,
1999 1998
(Unaudited) (Audited)
------------ ------------
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 762,000 $ 223,000
Accrued interest payable 195,000 --
Accrued liabilities 417,000 522,000
Short-term notes payable, net of discount 6,094,000 940,000
------------ ------------
Total current liabilities 7,468,000 1,685,000
Accrued compensation 210,000 210,000
Redeemable preferred stock - cumulative, convertible,
Series A, 50,000 issued and outstanding,
at stated value, $5.00 cumulative annual
dividend, $5,438,000 redemption value 5,113,000 4,850,000
Stockholders' equity:
Common stock - authorized, 100,000,000 shares
at September 30, 1999 and December 31, 1998, of
$.0001 par value; issued and outstanding,
977,954 and 972,980 shares at
September 30, 1999 and December 31, 1998 -- --
Capital in excess of par value 48,210,000 47,611,000
Unearned portion of restricted stock awards (495,000) (56,000)
Preferred stock - 1,000,000 shares authorized,
75,000 shares designated Series A -- --
Stock subscription receivable (506,000) (506,000)
Accumulated deficit (21,922,000) (19,470,000)
------------ ------------
Total stockholders' equity 25,287,000 27,579,000
------------ ------------
Total liabilities and stockholders' equity $ 38,078,000 $ 34,324,000
============ ============
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,
1999 1998 1999 1998
--------------------------------------------------------------------
Revenue:
Oil and gas sales $ -- $ -- $ -- $ --
Costs and expenses:
Depreciation 5,000 4,000 16,000 10,000
General and administrative 379,000 572,000 1,636,000 2,203,000
----------- ----------- ----------- -----------
384,000 576,000 1,652,000 2,213,000
----------- ----------- ----------- -----------
Loss from operations (384,000) (576,000) (1,652,000) (2,213,000)
Other income (expense):
Interest income 451,000 355,000 1,308,000 805,000
Interest expense (143,000) (126,000) (309,000) (189,000)
Heartland Settlement -- -- 34,000 --
Equity loss from investment (475,000) (534,000) (1,570,000) (1,223,000)
----------- ----------- ----------- -----------
(167,000) (305,000) (537,000) (607,000)
----------- ----------- ----------- -----------
Loss before extraordinary items (551,000) (881,000) (2,189,000) (2,820,000)
----------- ----------- ----------- -----------
Extraordinary loss
Loss on extinguishment of debt -- (236,000) -- (236,000)
Net loss $ (551,000) $(1,117,000) $(2,189,000) $(3,056,000)
----------- ----------- ----------- -----------
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock (25,000) (25,000) (75,000) (75,000)
Discount accretion
Series A Redeemable Preferred Stock (63,000) -- (188,000) --
=========== =========== =========== ===========
Net loss available to common stockholders $ (639,000) $(1,142,000) $(2,452,000) $(3,131,000)
=========== =========== =========== ===========
Basic and diluted earnings per share:
Net loss per share $ (.65) $ (1.22) $ (2.51) $ (3.58)
Weighted average number of shares
Outstanding 977,954 935,717 977,752 873,815
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,
1999 1998
------------ ------------
Cash flows from operating activities
Net loss $ (2,189,000) $ (3,056,000)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Equity loss from investment 1,570,000 1,223,000
Depreciation 16,000 10,000
Bad debt expense 14,000 --
Stock issued for services and bonuses 277,000 691,000
Amortization of note discount 34,000 145,000
Extraordinary loss on extinguishment of debt -- 236,000
Expired warrants (117,000) --
Changes in assets and liabilities:
Accounts receivable (19,000) (147,000)
Prepaid expenses (11,000) 8,000
Notes receivable (51,000) (1,009,000)
Accounts payable and accrued liabilities 629,000 360,000
------------ ------------
Net cash used in operating activities 153,000 (1,539,000)
Cash flows from investing activities
Additions to property and equipment (7,000) (80,000)
Investment in and advances to foreign oil and gas
properties (5,496,000) (10,413,000)
------------ ------------
Net cash used in investing activities (5,503,000) (10,493,000)
Cash flows from financing activities
Payment of notes payable (1,095,000)
Proceeds from notes payable 5,120,000 2,045,000
Restricted cash 130,000 (800,000)
Proceeds from sale of stock -- 12,450,000
------------ ------------
Net cash provided by financing
activities 5,250,000 12,600,000
------------ ------------
5
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Net increase (decrease) in cash and
cash equivalents (100,000) 568,000
Cash and cash equivalents at beginning
of period 121,000 3,423,000
---------- ----------
Cash and cash equivalents at end of period $ 21,000 $3,991,000
========== ==========
Supplemental cash flow disclosure
Interest paid $ 65,000 $ 44,000
See accompanying notes to financial statements
6
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/A for the fiscal year
ended December 31, 1998.
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
any future interim period or 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, 1999, substantially all of the Company's assets are invested in the
development of the Karakuduk Field, an oil field in the Central Asian Republic
of Kazakhstan, which will require significant additional funding in the future.
The Company has incurred recurring operating losses and lacks operating
assets to generate sufficient 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 necessary to
develop the Karakuduk Field through fiscal 1999. Should the Company not meet its
capital requirements, the Company's rights to develop the Karakuduk Field may be
terminated, and if terminated, the Company's investment in the Karakuduk Field
will most likely be lost. 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 successful financing and development of the Karakuduk Field.
On November 1, 1999, the Company entered into a loan agreement ("the Loan")
with Shell Capital Services Limited ("Shell"), to provide up to $24.0 million in
financing for the development of the Karakuduk Field. Central Asian Petroleum,
Inc. ("CAP-D"), Central Asian Petroleum (Guernsey), Ltd. ("CAP-G"), and Closed
Type JSC Karakuduk Munay ("KKM") also executed the Loan as co-obligors. The
consummation of the Loan is subject to a number of significant conditions,
including, without limitation, (i) an equity infusion of at least $9.0 million,
(ii) obtaining political risk insurance, (iii) obtaining transportation risk
insurance, (iv) the hedging of a significant portion of the Company's future oil
production, and (v) the retirement or conversion of all of the Company's and
KKM's outstanding indebtedness, excluding current trade payables.
The Company is currently working to satisfy the conditions required to
obtain funding under the Loan. In this regard, the Company is i) seeking
stockholder approval to convert existing indebtedness of $9.1 million (See Notes
6 and 9 of Item 1), plus accrued interest, into the Company's common stock at a
conversion price of $1.86 per share, and ii) raise at least $9.0 million through
the sale of the Company's unsecured 8% Non-negotiable Convertible Promissory
Notes, which are convertible into the Company's common stock at a conversion
price of $1.86 per share (the "Notes") and through a dutch auction format rights
offering granted proportionally to the Company's stockholders. The Company has
not determined the record date for the rights offering as of the filing of this
report.
7
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. Going Concern (continued)
If the Company is not successful in raising the additional $9.0 million of
equity required by the Loan, the Company will be required to obtain a standby
letter of credit for any deficiency prior to initial funding under the Loan. The
letter of credit would be in favor of the lender; provided, however, the lender
would not be permitted to draw upon the standby letter of credit unless the
Company fails to raise such deficit amount prior to March 31, 2000. The Company
is currently negotiating the terms of the letter of credit. The Company can give
no assurances that the standby letter of credit can be obtained, or if obtained,
will be obtained on terms and conditions favorable to the Company.
The Company's ability to timely satisfy these conditions raises 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 such
uncertainties.
4. Restricted Cash
As of September 30, 1999, the Company held $626,000 cash on hand, as
collateral for loans made by the Chase Bank of Texas, N.A. ("Chase") to KKM for
the acquisition of tangible equipment used in the Karakuduk Field.
5. Notes Receivable
On September 30, 1999, the Company had an outstanding note receivable for
$1,009,000, plus accrued interest, from a third-party drilling contractor,
Challenger Oil Services, PLC ("Challenger"). On March 17, 1999, the Company
amended the terms of the note to extend the repayment period from 12 to 24
months, beginning with the first payment made to Challenger for drilling
services provided to KKM in 1999. Under the revised terms of the note, the
Company would receive principal payments of approximately $42,000 per month,
plus accrued interest, through approximately February 2001. As of September 30,
1999, however, the Company had not received any payments on the note.
In April 1999, the owner of the drilling rig operated by Challenger in the
Karakuduk Field, Oil & Gas Exploration Company Cracow, Ltd. ("OGECC"),
terminated its contract with Challenger. As a result of the termination of the
contract between Challenger and OGECC, KKM terminated the drilling contract
between KKM and Challenger, and arbitration proceedings have been instituted in
accordance with the terms of such drilling contract. In the arbitration,
Challenger has claimed that it is entitled to $9.8 million in damages. The
Company and KKM intend to vigorously defend the arbitration claim made by
Challenger. In the opinion of Management, the probable amount payable to
Challenger with respect to such arbitration will be significantly less than the
amount claimed by Challenger. Drilling in the Karakuduk Field has been suspended
temporarily until the arbitration is resolved or until another drilling rig can
be procured. KKM is currently exploring strategic alternatives to continue its
drilling program.
8
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
6. Notes Payable
On September 30, 1999, the $975,000 note between Chase and the Company was
amended. The revised note requires the Company to make a principal payment of
$250,000 on November 15, 1999, and a principal payment of $725,000 on November
30, 1999. The note accrues interest at a variable prime rate, as determined by
Chase. As of September 30, 1999, the stated prime rate on the note was 8.25%. As
collateral for the Chase loan to the Company, Whittier Ventures, LLC
("Whittier") put in place a $1.0 million standby letter of credit in exchange
for a senior security interest in the capital stock of CAP-G owned by the
Company (the "Whittier Security Interest").
During March 1999, the Company issued two promissory notes to Whittier of
$500,000 each (aggregate amount of $1,000,000), bearing interest at 8% per annum
and due and maturing on August 31, 1999. On March 31, 1999, the Company issued a
term promissory note to Allen & Company Incorporated ("Allen") in the principal
amount of $2,769,978, bearing interest at a rate of 8% per annum and maturing on
August 31, 1999.
On June 3, 1999, the Company issued a an additional promissory note to
Allen in the principal amount of $1.0 million, bearing interest at a rate of 8%
per annum and maturing on September 3, 1999.
On August 27, 1999, the Company restructured its indebtedness with Allen,
whereby John McMillian, the Co-Chairman and Chief Executive Officer of the
Company, acquired a portion of such indebtedness. In connection with such stock
restructuring, (i) Allen surrendered its promissory notes and the Company issued
two replacement promissory notes, bearing interest at a rate of 8% per annum, in
the principal amount of $2,494,978, maturing on August 31, 1999, and in the
principal amount of $900,000, maturing on September 3, 1999, respectively, and
(ii) the Company issued two promissory notes to Mr. McMillian, bearing interest
at 8% per annum, in the principal amount of $275,000, maturing on August 31,
1999, and in the principal amount of $100,000, maturing on September 3, 1999,
respectively. On August 27, 1999, the Company also issued two demand promissory
notes, bearing interest at a rate of 8% per annum, in the principal amount of
$180,0000 to Allen and in the principal amount of $20,000 to Mr. McMillian,
respectively.
On August 31, 1999, the Company issued a demand promissory note, bearing
interest at a rate of 8% per annum, in the principal amount of $100,000 to
Allen.
As collateral for the promissory notes the Company issued to Whittier,
Allen, and Mr. McMillian, each holder received a non-exclusive junior security
interest in all of the capital stock of CAP-G owned by the Company. The junior
security interest in the CAP-G shares is subordinate to the Whittier Security
Interest.
The promissory notes issued by the Company to Whittier, Allen, and Mr.
McMillian permit each holder to elect to exchange the outstanding balance of the
notes, together with accrued interest, for any convertible securities issued by
the Company on or before March 31, 2000, including any debt or equity instrument
convertible into the Company's common stock. The number of convertible
securities potentially to be issued will be determined by dividing the
outstanding principal balance of the loans, together with accrued but unpaid
interest, by the issue price of the convertible securities.
Upon maturity, the promissory notes to Whittier, Allen, and Mr. McMillian
were not repaid, and such holders of such promissory notes have exercised their
rights to exchange the original promissory notes for new indebtedness of the
Company. See Note 9 of Item 1.
9
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
7. Common Stock and Related Common Stock Warrants
On January 15, 1999, the Company granted Dr. Jack A. Krug, the President
and Chief Operating Officer of the Company, 16,667 shares of the Company's
common stock, of which 3,334 shares vested immediately and 13,333 shares will
vest ratably over the next four years. The Company recorded the common stock at
its intrinsic value of $719,000, which is being amortized over the vesting
period of the common stock.
Certain warrants to purchase the Company's common stock expired relating to
a 1998 legal settlement. The Company recognized the fair value of the warrants
on the date of grant, $34,000, as other income in 1999.
On April 21, 1999, the Company effected a 1 for 60 reverse stock split. The
voting and economic rights of the shareholders of Common Stock and the Series A
Redeemable Preferred Stock were not affected by the reverse stock split. The
financial statements included herein retroactively reflect the adjustments to
shares outstanding as a result of the reverse stock split and reincorporation.
Since there were no shares of the Company's Series B Preferred Stock and the
Series C Preferred Stock issued or outstanding, they were eliminated in the
reincorporation.
On April 30, 1999, warrants expired to purchase 12,500 shares of the
Company's common stock at an exercise price of $16.80 per share.
8. Series A Redeemable Preferred Stock
During 1998, the Company accrued the $250,000 annual dividend payable on
its Series A Redeemable Preferred Stock in the fourth quarter of 1998. For
fiscal year 1999, the Company has accrued the $250,000 dividend payable on its
Series A Redeemable Preferred Stock on a quarterly basis.
9. Subsequent Events
On October 25, the Company borrowed $2.0 million from Allen and $1.0
million from seven non-affiliated investors, in exchange for the Company's
unsecured Notes, which are convertible into the Company's common stock at a
conversion price of $1.86 per share. The conversion provision of the Notes is
subject to the approval of the Company's stockholders. The failure of the
stockholders to approve the conversion provisions of the Notes will result in an
increase of the annual interest rate payable to the lesser of 25% or the maximum
rate allowed by applicable law and a due date for repayment of all outstanding
principal and accrued interest on October 31, 2001. The Notes are fully
subordinated to the Loan. The Company will most likely issue additional Notes to
satisfy the conditions to consummation of the Loan.
As discussed in Note 3, on November 1, 1999, the Company entered into the
Loan with Shell, to provide up to $24.0 million in financing for the development
of the Karakuduk Field. CAP-D, CAP-G, and KKM also signed the Loan as
co-obligors. The consummation of the Loan is subject to a number of significant
conditions, including, without limitation, (i) an equity infusion of at least
$9.0 million, (ii) obtaining political risk insurance, (iii) obtaining
transportation risk insurance, (iv) the hedging of a significant portion of the
Company's future oil production, and (v) the retirement or conversion of all of
the Company's and KKM's outstanding indebtedness, excluding current trade
payables.
10
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
9. Subsequent Events (continued)
The Company is currently working to satisfy the conditions required to
obtain funding under the Loan. In this regard, the Company is i) seeking
stockholder approval to convert existing indebtedness of $9.1 million (See Notes
6 and 9 of Item 1), plus accrued interest, into the Company's common stock at a
conversion price of $1.86 per share, and ii) raise at least $9.0 million through
the sale of the Company's unsecured Notes, which are convertible into the
Company's common stock at a conversion price of $1.86 per share, and through a
dutch auction format rights offering granted proportionally to the Company's
stockholders. The Company has not determined the record date for the rights
offering as of the filing of this report.
If the Company is not successful in raising the additional $9.0 million of
equity required by the Loan, the Company will be required to obtain a standby
letter of credit for any deficiency prior to initial funding under the Loan. The
letter of credit would be in favor of the lender; provided, however, the lender
would not be permitted to draw upon the standby letter of credit unless the
Company fails to raise such deficit amount prior to March 31, 2000. The Company
is currently negotiating the terms of the letter of credit. The Company can give
no assurances that the standby letter of credit can be obtained, or if obtained,
will be obtained on terms and conditions favorable to the Company.
Upon completion of all of the outstanding conditions precedent to closing
the Loan and compliance with a number of covenants, the Company will be allowed
to drawdown the Loan in minimum increments of $2.0 million to meet the capital
and operational requirements of KKM, finance costs required under the Loan,
premiums due under the political and transportation risk insurance policies, and
payments required to hedge a portion of KKM's future production. The Loan is
available for drawdown until the earlier of September 30, 2001 or "Project
Completion".
Project Completion occurs when various conditions are met by the Company
and KKM, including, but not limited to, the production of an average of 13,000
barrels of oil per day from the Karakuduk Field for a period of 45 consecutive
days, receipt by the lender of an independent engineer's reserve report
evidencing proven developed reserves of at least 30 million barrels in the
Karakuduk Field, and various other financial and technical milestones detailed
further in the Loan.
Prior to Project Completion, any borrowed amounts accrue interest at an
annual rate of LIBOR plus 17.75%, compounding quarterly. The annual interest
rate is reduced to LIBOR plus 12.75% after Project Completion. Prior to Project
Completion, a de-minimus interest amount, approximating 4.125% on an annual
basis, is payable quarterly to the lender. The remaining unpaid interest is
capitalized to the Loan at the end of each quarter. After Project Completion,
all quarterly interest on the outstanding Loan is fully due and payable by the
Company at the end of each calendar quarter.
Principal payments, including any capitalized interest, are due on
quarterly reduction dates ("Reduction Dates"), beginning on the earlier of the
first calendar quarter ending at least 60 days following the earlier of Project
Completion or December 31, 2001. Minimum principal payments, based upon
percentages of the principal outstanding as of Project Completion, are set out
in the Loan and ensure full settlement of the Loan by September 30, 2004, the
final maturity date. Mandatory prepayments of principal outstanding are required
on each Reduction Date out of any excess cash flow available after consideration
of the Company's and KKM's permitted budgeted expenditures for the following 45
days and all fees, interest, and principal payments scheduled on such Reduction
Date.
Pursuant to the terms of the Loan, the Company will grant to the lender a
security interest in substantially all of its assets, including its interest in
the Karakuduk Field. Consequently, if an event of default occurs under the Loan
and such event of default is not timely cured, the lender is entitled to certain
remedies, including the right to accelerate repayment of the Loan and obtain
possession of the assets over which it has a security interest.
11
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
9. Subsequent Events (continued)
In connection with the Loan, the Registrant will issue to the lender a
warrant to purchase up to 15% of the Registrant's outstanding Common Stock. The
warrant will be non-transferable and will not be exercisable for a period of
approximately 18 months after its initial issuance. Additionally, it will
contain registration rights provisions. The warrant exercise price will be
determined by reference to the average closing price of the Common Stock for the
90-day period immediately preceding November 1, 1999, subject to certain
anti-dilution provisions.
On November 1, 1999, KKM entered into a Crude Oil Sale and Purchase
Agreement ("Offtake Agreement") with Shell Trading International Limited ("Shell
Trading") for the purchase of 100% of the oil production from the Karakuduk
Field. The Offtake Agreement requires KKM to sell 100% of its oil production to
Shell Trading on the export market for a price per barrel based upon a quoted
spot rate for North Sea Brent Crude. The Company expects KKM to obtain a
substantially higher return from oil sales under the Offtake Agreement than
would otherwise be obtainable from oil sales on Kazakhstan's local market. The
Offtake Agreement will become effective upon consummation of the Loan.
On November 2, 1999, Whittier, Allen, and Mr. McMillian all exercised their
rights to exchange their promissory notes for debt with terms and conditions
identical to the Notes. The Company will physically exchange the notes upon
receipt of the original promissory notes issued to each relevant party. The new
Notes will be unsecured and all security interests granted as collateral for the
promissory notes submitted for exchange will be terminated.
On November 2, 1999, the Company's board of directors approved the
formation of an employee stock option plan, which will allow the board's
compensation committee to grant qualified and/or non-qualified stock options to
the directors, employees, and consultants of the Company. The employee stock
option plan would allow the issuance of options grants to acquire up to 15% of
the Company's outstanding common stock, after giving effect to any changes in
the capital stock of the Company contemplated by the conditions necessary to
obtain funding under the Loan.
On November 12, 1999, the Company borrowed $1.0 million from Whittier in
exchange for new Notes, and repaid the Chase loan, releasing the Whittier
Security Interest.
12
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
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, 1999 and 1998
(Amounts in US Dollars)
(Unaudited)
For The Three Months Ended For The Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
----------------------------------------------------------------------
Management service fee $ 151,000 $ 152,000 $ 431,000 $ 427,000
General and administrative expenses 323,000 557,000 1,421,000 1,100,000
Depreciation of fixed assets 150,000 75,000 400,000 225,000
Interest expense 327,000 283,000 887,000 695,000
--------------------------------------------------------------------
Net loss 951,000 1,067,000 3,139,000 2,447,000
Accumulated deficit, beginning of period 9,691,000 5,396,000 7,503,000 4,016,000
--------------------------------------------------------------------
--------------------------------------------------------------------
Accumulated deficit, end of period $10,642,000 $ 6,463,000 $10,642,000 $ 6,463,000
--------------------------------------------------------------------
As of September 30, 1999, KKM had received net proceeds of approximately
$2.5 million from the sale of hydrocarbons produced from the Karakuduk Field.
Until such time as the production from the Karakuduk Field reaches commercially
viable levels, net proceeds from the sales of hydrocarbons will be accounted for
on a cost recovery basis and will be offset against KKM's oil and gas
investment.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1. Liquidity and Capital Resources
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
recurring operating losses and has no operating assets presently generating
enough cash to fund its operating and capital requirements. The Company's
current cash reserves and cash flow from operations are not sufficient to meet
its capital requirements through fiscal 1999.
The only oil and gas interest of the Company is its investment in KKM,
which is owned by the Company through CAP-G. KKM is a closed joint stock company
in the Republic of Kazakhstan and has the right to develop the Karakuduk Field
in western Kazakhstan. As of September 30, 1999, substantially all of the
Company's assets are invested in the development of the Karakuduk Field. The
Karakuduk Field does not currently produce revenues capable of funding the
development of the project, and requires substantial amounts of additional
capital.
On November 1, 1999, the Company entered into a loan arrangement (the
"Loan") with Shell to provide up to $24.0 million in financing for the
development of the Karakuduk Field. The consummation of the Loan is subject to a
number of significant conditions, including, without limitation, (i) an equity
infusion of at least $9.0 million, (ii) obtaining political risk insurance,
(iii) obtaining transportation risk insurance, (iv) the hedging of a significant
portion of the Company's future oil production, and (v) the retirement or
conversion of all of the Company's and KKM's outstanding indebtedness, excluding
current trade debt.
The Company is currently working to satisfy the conditions required to
obtain funding under the Loan. In this regard, the Company is i) seeking
stockholder approval to convert existing indebtedness of $9.1 million (See Notes
6 and 9 of Item 1), plus accrued interest, into the Company's common stock at a
conversion price of $1.86 per share, and ii) raise at least $9.0 million through
the sale of the Company's unsecured Notes, which are convertible into the
Company's common stock at a conversion price of $1.86 per share, and through a
dutch auction format rights offering granted proportionally to the Company's
stockholders. The Company has not determined the record date for the rights
offering as of the filing of this report.
If the Company is not successful in raising the additional $9.0 million of
equity required by the Loan, the Company will be required to obtain a standby
letter of credit for any deficiency prior to initial funding under the Loan. The
letter of credit would be in favor of the lender; provided, however, the lender
would not be permitted to draw upon the standby letter of credit unless the
Company fails to raise such deficit amount prior to March 31, 2000. The Company
is currently negotiating the terms of the letter of credit. The Company can give
no assurances that the standby letter of credit can be obtained, or if obtained,
will be obtained on terms and conditions favorable to the Company.
Upon completion of all of the outstanding conditions precedent to closing
the Loan and compliance with a number of covenants, the Company will be allowed
to drawdown the Loan in minimum increments of $2.0 million to meet the capital
and operational requirements of KKM, finance costs required under the Loan,
premiums due under the political and transportation risk insurance policies, and
payments required to hedge a portion of KKM's future production. The Loan is
available for drawdown until the earlier of September 30, 2001 or "Project
Completion".
14
1. Liquidity and Capital Resources (continued)
Project Completion occurs when various conditions are met by the Company
and KKM, including, but not limited to, the production of an average of 13,000
barrels of oil per day from the Karakuduk Field for a period of 45 consecutive
days, receipt by the lender of an independent engineer's reserve report
evidencing proven developed reserves of at least 30 million barrels in the
Karakuduk Field, and various other financial and technical milestones detailed
further in the Loan.
Prior to Project Completion, any borrowed amounts accrue interest at an
annual rate of LIBOR plus 17.75%, compounding quarterly. The annual interest
rate is reduced to LIBOR plus 12.75% after Project Completion. Prior to Project
Completion, a de-minimus interest amount, approximating 4.125% on an annual
basis, is payable quarterly to the lender. The remaining unpaid interest is
capitalized to the Loan at the end of each quarter. After Project Completion,
all quarterly interest on the outstanding Loan is fully due and payable by the
Company at the end of each calendar quarter.
Principal payments, including any capitalized interest, are due on
quarterly reduction dates ("Reduction Dates"), beginning on the earlier of the
first calendar quarter ending at least 60 days following the earlier of Project
Completion or December 31, 2001. Minimum principal payments, based upon
percentages of the principal outstanding as of Project Completion, are set out
in the Loan and ensure full settlement of the Loan by September 30, 2004, the
final maturity date. Mandatory prepayments of principal outstanding are required
on each Reduction Date out of any excess cash flow available after consideration
of the Company's and KKM's permitted budgeted expenditures for the following 45
days and all fees, interest, and principal payments scheduled on such reduction
date.
Pursuant to the terms of the Loan, the Company will grant to the lender a
security interest in substantially all of its assets, including its interest in
the Karakuduk Field. Consequently, if an event of default occurs under the Loan
and such event of default is not timely cured, the lender is entitled to certain
remedies, including the right to accelerate repayment of the Loan and obtain
possession of the assets over which it has a security interest.
In connection with the Loan, the Registrant will issue to the lender a
warrant to purchase up to 15% of the Registrant's outstanding Common Stock. The
warrant will be non-transferable and will not be exercisable for a period of
approximately 18 months after its initial issuance. Additionally, it will
contain registration rights provisions. The warrant exercise price will be
determined by reference to the average closing price of the Common Stock for the
90-day period immediately preceding November 1, 1999, subject to certain
anti-dilution provisions.
The proceeds of the Loan, along with proceeds from the sale of oil by KKM,
will be used to meet the capital requirements necessary to develop the Karakuduk
Field, pay any financing costs required under the terms of the Loan, pay
premiums due under the political and transportation risk insurance policies, and
pay any costs associated with hedging a portion of KKM's future production. The
additional equity will be used to fund the Company's working capital needs
through September 30, 2001, and to provide additional funding for the
development of the Karakuduk Field. The Company expects the Loan, in conjunction
with the additional $9.0 million in equity infusion, to meet the long-term
capital needs of the Company with regards to developing the Karakuduk Field.
The conditions outstanding to complete the Loan are significant. There can
be no assurances that these conditions will be completed on a timely basis, if
at all, or on terms acceptable to the Company. The costs of capital for foreign
investments in emerging markets, such as the Republic of Kazakhstan, are
significantly higher than for similar investments in the United States and
Europe. If the Company fails to obtain the additional capital required to
complete the Loan and develop the Karakuduk Field, the Company's investment in
the Karakuduk Field will most likely be lost.
If the Company is not able to consummate the Loan, the Company will
consider all financing alternatives available to it at that time. Those
alternatives may include pursuing other sources of financing, the sale of all or
part of its business, or commencing a bankruptcy proceeding under applicable
provisions of the United States Bankruptcy Code. A bankruptcy proceeding brought
under these circumstances could be lengthy, contested, disrupt the Company's
business operations, and shrink or eliminate the value of its assets, including
the potential loss of its investment in the Karakuduk Field.
15
1. Liquidity and Capital Resources (Continued)
KKM will not meet its license commitments for the year ended December 31,
1999. KKM's revised license requires an expenditure commitment of at least $30.0
million and a work commitment of drilling eight wells as of December 31, 1999.
As of November 11, 1999, KKM has spent approximately $8.3 million and drilled
one well. CAP-G has obtained a letter from the State Investment Agency of the
Republic of Kazakhstan, granting KKM until June 30, 2000, to fulfill the
conditions of KKM's revised license. The letter is not an amendment to KKM's
license. The Company can give no assurances that the letter has any legal effect
within the Republic of Kazakhstan. If practicable, the Company may request KKM
to seek a formal extension of time to meet the expenditure and work commitments
established by the license. No assurances can be given that KKM will be able to
obtain an amendment to the license, or if obtained, the amendment will be on
terms favorable to KKM or the Company. Due to KKM's failure to satisfy its 1999
expenditure requirement and work commitment, KKM's license may be terminated
and, if terminated, the Company's interest in the Karakuduk Field will most
likely be lost.
As of November 11, 1999, KKM has sold 43,000 tons (approximately 314,000
barrels) of crude oil production for total proceeds of approximately $2.5
million, net of transportation costs. On November 1, 1999, KKM entered into the
Offtake Agreement to sell 100% of KKM's crude oil production on the export
market. The Company expects the Offtake Agreement to generate substantially
higher sales revenues for KKM's oil production than would otherwise result from
oil sales on the local and/or regional markets within the former Soviet Union.
KKM expects to begin utilizing the Offtake Agreement after consummating the
Loan. KKM cannot sustain current operations and future development of the
Karakuduk Field from proceeds received from oil sales of current levels of
production, even if the crude oil is sold at world market prices.
In April 1999, the owner of the drilling rig operated by Challenger in the
Karakuduk Field, OGECC, terminated its contract with Challenger. As a result of
the termination of the contract between Challenger and OGECC, KKM terminated the
drilling contract between KKM and Challenger, and arbitration proceedings have
been instituted in accordance with the terms of such drilling contract. In the
arbitration, Challenger has claimed that it is entitled to $9.8 million in
damages. The Company and KKM intend to vigorously defend the arbitration claim
made by Challenger. In the opinion of Management, the probable amount payable to
Challenger with respect to such arbitration will be significantly less than the
amount claimed by Challenger. Drilling in the Karakuduk Field has been suspended
temporarily until the arbitration is resolved or until another drilling rig can
be procured. KKM is currently exploring strategic alternatives to continue its
drilling program.
On September 30, 1999, the Company requested and received an extension to
December 31, 1999, 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 five additional payments of
$15,625 each. The Company expects to execute the contract as soon as possible,
as it is a condition precedent to completing the Loan. The executed contract
will provide up to $50 million in political risk coverage. The Company expects
annual premiums for the full coverage amount to be approximately $1.0 million
per year, payable on a quarterly basis.
16
2. Results of Operations
Nine Months Ended September 30, 1999 Compared with the Nine Months Ended
September 30, 1998
The Company's operations during the nine months ended September 30, 1999,
resulted in a net loss of $2,189,000 compared to a net loss of $3,056,000 for
the nine months ended September 30, 1998.
General and administrative costs decreased by $567,000 during the nine
months ended September 30, 1999, as compared to the nine months ended September
30, 1998, due to a reduction in stock based compensation and expiration of
common stock warrants. Without consideration of the stock based compensation, a
non-cash item, general and administrative costs decreased by $153,000, primarily
due to a reduction in the Company's operational personnel in Kazakhstan. The
Company expects overall payroll costs to increase significantly during the
remainder of 1999. The Company's equity loss in KKM increased by $347,000 during
the nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998, primarily due additional financing costs associated with the
loan from CAP-G to KKM, increased depreciation expense on tangible equipment,
and additional overhead incurred relating to production activities in the
Karakuduk Field.
Interest income increased by $503,000 from the nine months ended September
30, 1998, due to increased financing provided by CAP-G to KKM for KKM's
operations in Kazakhstan.
Interest expense increased by $120,000 during the nine months ended
September 30, 1999 as compared to the nine months ended September 30, 1998, due
to the Company acquiring additional indebtedness of $5,120,000. The Company had
notes payable of $6,095,000 outstanding as of September 30, 1999.
Three Months Ended September 30, 1999 Compared with the Three Months Ended
September 30, 1998
The Company's operations during the three months ended September 30, 1999,
resulted in a net loss of $551,000, compared to a net loss of $1,117,000 for the
three months ended September 30, 1998.
General and administrative costs decreased by $193,000 during the three
months ended September 30, 1999, as compared to the three months ended September
30, 1998, primarily due to a reduction in the Company's operational personnel in
Kazakhstan. The Company expects overall payroll costs to increase significantly
during the remainder of 1999. The Company's equity loss in KKM decreased by
$59,000 during the three months ended September 30, 1999, as compared to the
three months ended September 30, 1998.
Interest income increased by $96,000 from the three months ended September
30, 1998, due to increased financing provided by CAP-G to KKM for KKM's
operations in Kazakhstan.
Interest expense increased by $17,000 during the three months ended
September 30, 1999, as compared to the three months ended September 30, 1998,
due to the Company acquiring additional indebtedness of $5,120,000 during 1999.
The Company had notes payable of $6,095,000 outstanding as of September 30,
1999.
17
3. Commodity Prices for Oil and Gas
The Company's revenues, profitability, growth and value of its oil and gas
properties are highly dependent upon prices of oil and gas. Market conditions
make it difficult to estimate prices of oil and gas or the impact of inflation
on such prices. Oil and gas prices have been volatile, and it is likely that
they will continue to fluctuate in the future. Various factors beyond the
Company's control affect prices for oil and gas, including supplies of oil and
gas available worldwide and in Kazakhstan, the ability of the Organization of
Petroleum Exporting Countries (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
On April 5, 1999, the government of the Republic of Kazakhstan decided not
to continue its support of the national currency, the tenge, and allowed it to
float freely against the U.S. dollar. Immediately thereafter, the official
exhange rate declined from 87.5 tenge to the U.S. dollar to 142 tenge to the
U.S. dollar. As of November 11, 1999, the official exhange rate was
approximately 140 tenge to the U.S. dollar. The devaluation decreased the tenge
realizable value of any U.S. dollar or other hard currency denominated monetary
assets held by the Company, and increases the tenge obligation of any U.S.
dollar or other hard currency denominated monetary liabilities held by the
Company. KKM's financial statements are denominated in U.S. dollars, and the
only impact to the Company relates to assets and liabilities denominated in
tenge. The net impact of the tenge devaluation to the Company is not material.
5. 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. However, it
is unclear as to the extent that the government of the Republic of Kazakhstan
and other organizations who provide significant infrastructure services within
the Former Soviet Union have addressed the Year 2000 issue. There is no
guarantee that the systems of the government or other organizations on which the
Company relies will be timely converted and would not have a material adverse
effect on the Company and its systems.
Item 3 - Quantitative and Qualitative Disclosures About Market Risks
Not Applicable.
18
Part II - Other Information
Item 1 - Legal Proceedings
In April 1999, the owner of the drilling rig operated by Challenger in the
Karakuduk Field, OGECC, terminated its contract with Challenger. As a result of
the termination of the contract between Challenger and OGECC, KKM terminated the
drilling contract between KKM and Challenger, and arbitration proceedings have
been instituted in accordance with the terms of such drilling contract. In the
arbitration, Challenger has claimed that it is entitled to $9.8 million in
damages. The Company and KKM intend to vigorously defend the arbitration claim
made by Challenger. In the opinion of Management, the probable amount payable to
Challenger with respect to such arbitration will be significantly less than the
amount claimed by Challenger. Drilling in the Karakuduk Field has been suspended
temporarily until the arbitration is resolved or until another drilling rig can
be procured. KKM is currently exploring strategic alternatives to continue its
drilling program.
Item 4 - Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the Company's stockholders
during the quarter ended September 30, 1999.
19
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
------ -------
10.1 Crude Oil Sale and Purchase Agreement dated as of
November 1, 1999, between Closed Type JSC Karakuduk
Munay and Shell Trading International Limited
27 Financial Data Schedule.
(b) Reports on Form 8-K
On November 17, 1999, the Company filed a current report on Form 8-K
reporting the execution of a $24.0 million loan agreement between the Company
and Shell Capital Services Limited on November 1, 1999 and the Company's
issuance of 8% Non-negotiable Convertible Promissory Notes for a total of $4.0
million.
20
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 19, 1999
Chaparral Resources, Inc.
By: /s/ Michael B. Young
---------------------------------------
Michael B. Young, Treasurer, Controller
and Principal Accounting Officer
21
Exhibit Index
Number Exhibit
------ -------
10.1 Crude Oil Sale and Purchase Agreement dated as of
November 1, 1999, between Closed Type JSC Karakuduk
Munay and Shell Trading International Limited
27 Financial Data Schedule.
22