FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission File Number: 0 - 7261
CHAPARRAL RESOURCES, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-0630863
------------------------------ ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
16945 Northchase Drive, Suite 1620
Houston, Texas 77060
--------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (281) 877-7100
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO | |
As of August 19, 2002 the Registrant had 38,209,502 shares of its
common stock, par value $0.0001 per share, issued and outstanding.
Part I - Summarized Financial Information
Item 1 - Financial Statements
Chaparral Resources, Inc.
Consolidated Balance Sheets
(In Thousands)
June 30, December 31,
2002 2001
(Unaudited) (Audited)
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 3,266 $ 174
Accounts receivable:
Oil sales receivable 1,746 --
VAT receivable 1,621 --
Other receivables 133 --
Prepaid expenses 2,110 245
Crude oil inventory 1,383 --
-------- --------
Total current assets 10,259 419
Materials and supplies 2,151 --
Hedge agreement -- 762
Other 5 5
Property, plant and equipment:
Oil and gas properties, full cost:
Properties subject to depletion 72,520 --
Properties not subject to depletion 14,638 --
Investment in KKM and other oil and gas
property costs - full cost method
Republic of Kazakhstan -- 68,948
-------- --------
87,158 68,948
Furniture and fixtures and other equipment 7,581 109
-------- --------
94,739 69,057
Less - accumulated depreciation, depletion, and amortization (21,986) (1,206)
-------- --------
Property, plant and equipment, net 72,753 67,851
Total assets $ 85,168 $ 69,037
======== ========
See accompanying notes.
2
Chaparral Resources, Inc.
Consolidated Balance Sheets (continued)
(In Thousands)
June 30, December 31,
2002 2001
(Unaudited) (Audited)
--------- ---------
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 4,523 $ 536
Accrued liabilities:
Accrued compensation 595 449
Other accrued liabilities 1,363 144
Current income tax liability 448 --
Accrued interest payable 718 1,745
Redeemable preferred stock, current portion -- 2,000
Current portion of loans payable to affiliates 4,000 --
Shell Capital loan 100 34,902
--------- ---------
Total current liabilities 11,747 39,776
Loans payable to affiliates 29,788 --
Deferred tax liability 1,233 --
Accrued production bonus 379 --
Redeemable preferred stock - cumulative, convertible,
Series A 75,000 designated, issued and outstanding,
none and 50,000 shares as of June 30, 2002 and
December 31, 2001, respectively -- 3,900
Stockholders' equity:
Common stock - authorized, 100,000,000
shares of $0.0001 par value; issued and outstanding,
38,209,502 and 14,283,801 shares as of
June 30, 2002 and December 31, 2001, respectively 4 1
Capital in excess of par value 107,226 94,061
Preferred stock - 1,000,000 shares authorized, 925,000 shares
undesignated. Issued and outstanding - none -- --
Accumulated deficit (65,209) (68,701)
--------- ---------
Total stockholders' equity 42,021 25,361
--------- ---------
Total liabilities and stockholders' equity $ 85,168 $ 69,037
========= =========
See accompanying notes.
3
Chaparral Resources, Inc.
Consolidated Statements of Operations (Unaudited)
(In Thousands, Except Share Data)
For the Three For the Six
Months Ended Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Revenue $ 10,646 $ -- $ 19,025 $ --
Costs and expenses:
Transportation costs 2,382 -- 4,631 --
Operating expenses 1,866 -- 3,741 --
Depreciation and depletion 3,067 180 5,999 343
Management service fee 195 -- 365 --
Hedge losses 64 278 762 765
General and administrative 1,371 1,188 2,918 2,159
-------- -------- -------- --------
8,945 1,646 18,416 3,267
-------- -------- -------- --------
Income/(loss) from operations 1,701 (1,646) 609 (3,267)
Other income (expense):
Interest income 4 390 6 817
Interest expense (1,603) (1,933) (3,352) (3,697)
Equity in income from investment -- 1,746 -- 3,005
Currency exchange loss (100) -- (154) --
Other 1 -- 1 --
-------- -------- -------- --------
(1,698) 203 (3,499) 125
-------- -------- -------- --------
Income/(loss) before income taxes,
extraordinary gain, and cumulative effect of
change in accounting principle 3 (1,443) (2,890) (3,142)
Income tax expense (287) -- (519) --
-------- -------- -------- --------
Loss before extraordinary gain
and cumulative effect of change in
accounting principle $ (284) $ (1,443) $ (3,409) $ (3,142)
Extraordinary gain 5,338 -- 5,338 --
Cumulative effect of change in accounting
principle -- -- -- (2,519)
-------- -------- -------- --------
Net income/(loss) $ 5,054 $ (1,443) $ 1,929 $ (5,661)
======== ======== ======== ========
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock -- (62) -- (125)
Discount accretion
Series A Redeemable Preferred Stock -- (25) -- (50)
-------- -------- -------- --------
Net income/(loss) available to common
stockholders $ 5,054 $ (1,530) $ 1,929 $ (5,836)
======== ======== ======== ========
4
Chaparral Resources, Inc.
Consolidated Statements of Operations (continued) (Unaudited)
(In Thousands, Except Share Data)
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Basic earnings per share:
Loss per share before extraordinary
gain and cumulative effect of change in
accounting principle $ (0.01) $ (0.11) $ (0.16) $ (0.23)
Extraordinary gain $ 0.19 $ -- $ 0.25 $ --
Cumulative effect of change in
accounting principle $ -- $ -- $ -- $ (0.18)
Net income/(loss) per share $ 0.18 $ (0.11) $ 0.09 $ (0.41)
Weighted average number of shares
outstanding (basic) 27,955,630 14,283,801 21,157,483 14,283,775
Diluted earnings per share:
Income/(loss) per share before extraordinary
gain and cumulative effect of change in
accounting principle $ (0.01) $ (0.11) $ (0.16) $ (0.23)
Extraordinary gain $ 0.19 $ -- $ 0.25 $ --
Cumulative effect of change in
accounting principle $ -- $ -- $ -- $ (0.18)
Net income/(loss) per share $ 0.18 $ (0.11) $ 0.09 $ (0.41)
Weighted average number of shares
outstanding (diluted) 28,488,711 14,283,801 21,430,647 14,283,775
See accompanying notes.
5
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
For the Six
Months Ended
June 30, June 30,
2002 2001
------- -------
Cash flows from operating activities
Net income/(loss) $ 1,929 $(5,661)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Equity income from investment -- (3,005)
Depreciation, depletion, and amortization 5,999 403
Gain on disposition of furniture and fixtures (1) --
Deferred Income Taxes 71 --
Cumulative effect of change in accounting
principal -- 2,519
Hedge losses 762 765
Amortization of debt issuance cost 36 383
Extraordinary gain on restructuring of debt (5,338) --
Non-cash interest expense 2,753 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,442) --
Prepaid expenses (293) 369
Crude oil inventory (587) --
Accrued interest income on advances to KKM -- (815)
Interest payments from KKM -- 2,451
Increase in:
Accounts payable and accrued liabilities (4,788) 104
Accrued interest payable 717 --
Other liabilities 103 --
Interest expense reclassified as principal
on the Shell Capital loan -- 2,700
------- -------
Net cash provided in operating activities (79) 213
------- -------
Cash flows from investing activities
Additions to property, plant, and equipment $(4,680) $ (18)
Investment in and advances to KKM -- (6,179)
Acquisition of 10% interest in KKM, net of cash acquired (644) --
Materials and supplies inventory 658 --
Proceeds from disposition of assets 5 --
------- -------
Net cash used in investing activities (4,661) (6,197)
------- -------
6
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (continued) (Unaudited)
(In Thousands)
For the Six Months Ended
June 30, June 30,
2002 2001
-------- --------
Cash flows from financing activities
Net proceeds from Shell Capital loan $ -- $ 5,500
Proceeds from sale of stock 8,000 --
Proceeds from loans from affiliates 37,000 --
Payments on Shell Capital loan (30,350) --
Debt restructuring costs (2,518) --
Payments on loans from affiliates (2,000) --
Redemption of Series A Preferred Stock (2,300) --
-------- --------
Net cash provided by financing activities 7,832 5,500
-------- --------
Net increase (decrease) in cash and
cash equivalents 3,092 (484)
Cash and cash equivalents at beginning
of period 174 604
-------- --------
Cash and cash equivalents at end of period $ 3,266 $ 120
======== ========
Supplemental cash flow disclosure
Interest paid $ 72 $ 575
Supplemental schedule of non-cash
investing and financing activities
Common stock issued for 10% interest in KKM $ 2,701 $ --
Discount recognized for note issued
with stock warrants $ 2,466 $ --
See accompanying notes.
7
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
Chaparral Resources, Inc. ("Chaparral") was incorporated in the state of
Colorado on January 13, 1972, principally to engage in the exploration,
development and production of oil and gas properties. Chaparral focuses
substantially all of its efforts on the exploration and development of the
Karakuduk Field, an oilfield located in the Central Asian Republic of
Kazakhstan. In 1999, Chaparral reincorporated from Colorado to Delaware.
The consolidated financial statements include the accounts of Chaparral and its
greater than 50% owned subsidiaries, Closed Type JSC Karakudukmunay ("KKM"),
Central Asian Petroleum (Guernsey) Limited ("CAP-G"), Korporatsiya Mangistau
Terra International ("MTI"), Road Runner Services Company ("RRSC"), Chaparral
Acquisition Corporation ("CAC"), and Central Asian Petroleum, Inc. ("CAP-D").
Chaparral owns 80% of the common stock of CAP-G directly and 20% indirectly
through CAP-D. Hereinafter, Chaparral and its subsidiaries are collectively
referred to as the "Company." All significant intercompany transactions have
been eliminated.
As of June 30, 2002, Chaparral owns a 60% interest in KKM, a Kazakhstan joint
stock company, which holds the rights for the exploration, development and
production of oil in the Karakuduk Field in Western Kazakhstan. KKM is owned
jointly by CAP-G (50%), MTI (10%), and KazMunayGaz JSC ("KMG") (40%). In May
2002, Chaparral increased its ownership in KKM from 50% to 60% through the
acquisition of 100% of the outstanding stock of MTI, a Kazakhstan joint stock
company. KMG, the national petroleum company of Kazakhstan, is owned by the
government of the Republic of Kazakhstan.
As a result of the acquisition of MTI, the Company obtained a controlling
interest in KKM. Consequently, the Company's financial statements have been
consolidated with KKM on a retroactive basis to January 1, 2002. The Company
previously accounted for its 50% investment in KKM using the equity method of
accounting, which is reflected in the Company's financial statements for periods
prior to 2002.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. Reference should be made to
the relevant notes to the financial statements for both Chaparral and KKM
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
The information furnished herein was taken from the books and records of the
Company without audit. However, such information reflects all adjustments, which
are, in the opinion of management, normal recurring adjustments necessary for
the fair statement of the results for the interim periods presented. The results
of operations for the interim periods are not necessarily indicative of the
results to be expected for any future interim period or for the year.
2. New Accounting Standards
During 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13 and Technical Corrections. SFAS 145
rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of
Debt, and an amendment of SFAS 4, SFAS 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. SFAS 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions.
Under SFAS 145, gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria of APB 30,
Reporting the Results of Operations - Reporting the effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. Applying the provisions of APB 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual or infrequent or that meet the criteria for classification as an
extraordinary item. The provisions of SFAS 145 relating to SFAS 4 are effective
for fiscal years beginning after May 15, 2002. The Company plans to adopt SFAS
145 as of January 1, 2003 and does not expect SFAS 145 to have a material effect
on its consolidated results of operations or financial position.
8
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. Going Concern
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has incurred recurring
operating losses in previous years and has a working capital deficiency as of
June 30, 2002. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
The Company has taken significant steps to alleviate these issues through the
restructuring of the Company, including the infusion of a total of $45 million
in debt and equity capital into the Company and the refinancing of the Company's
loan agreement with Shell Capital Inc. (the "Shell Capital Loan") in May 2002.
As part of the restructuring, Shell Capital Services Limited, as facility agent
to Shell Capital, discontinued and withdrew all legal proceedings against
Chaparral in the United Kingdom and against CAP-G in the Isle of Guernsey.
Additionally, KKM is currently producing approximately 7,500 barrels of crude
oil per day. The Company expects the refinancing of the Shell Capital Loan,
along with anticipated future cash flows from operations, to allow the Company
to proceed with the full development of the Karakuduk Field. No assurances can
be provided, however, that the Company's restructured indebtedness or cash flow
from operations will be sufficient to meet our working capital requirements in
the future, which may require the Company to seek additional debt or equity
financing in order to continue to develop the Karakuduk Field.
4. Shell Capital Loan Restructuring
In May 2002, the Company received a total equity and debt capital infusion of
$45 million, which was partially utilized to repay a substantial portion of the
Shell Capital Loan. The Company received a total investment of $12 million from
Central Asian Industrial Holdings, N.V. ("CAIH"), including $8 million in
exchange for 22,925,701 shares, or 60%, of the Company's outstanding common
stock, and $4 million in exchange for a three year note bearing interest at 12%
per annum (the "CAIH Note"). Along with the CAIH Note, CAIH received a warrant
to purchase 3,076,923 shares of the Company's common stock at $1.30 per share
(the "CAIH Warrant"). Additionally, JSC Kazkommertsbank ("Kazkommertsbank"), an
affiliate of CAIH, provided KKM with a credit facility totaling $33 million (the
"KKM Credit Facility"), consisting of $28 million that was used to repay a
portion of the Shell Capital Loan and $5 million that was made available for
KKM's working capital requirements. Chaparral paid CAIH $1.79 million as a
related restructuring fee. The terms and conditions of the CAIH Note and the KKM
Credit Facility are more fully described in Note 6, Loans from Affiliates.
In conjunction with the closing of the restructuring transaction, the Shell
Capital Loan was transferred from Shell Capital to CAIH, written down from
approximately $11.43 million (the amount remaining after the $28 million
repayment) to $2.45 million and restructured to reflect a fixed, annual interest
rate of 14%. Additionally, the Shell Capital warrant for 1,785,455 shares of the
Company's common stock was canceled, and the Shell Capital 40% net profits
interest in CAP-G was reacquired by CAP-G for a nominal amount. All other
agreements with Shell Capital or its affiliates were terminated, including KKM's
crude oil sales agreement with Shell Trading International Limited, KKM's
technical services agreement with Shell Capital Services Limited, and
Chaparral's transportation risk insurance policy held directly by Shell Capital.
Chaparral also terminated its political risk insurance coverage with the
Overseas Private Investment Corporation ("OPIC") as a condition of the
restructuring. Shell Capital Services Limited, as the facility agent for Shell
Capital, discontinued and withdrew all legal proceedings against the Company in
the United Kingdom and against CAP-G in the Isle Guernsey and all parties to the
original Shell Capital Loan mutually released each other from future liability.
All outstanding defaults under the Shell Capital Loan were waived by CAIH upon
the completion of the transaction.
9
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
5. Hedge Agreement
As a requirement of the Shell Capital Loan, in February 2000, the Company paid
$4 million for put contracts to sell 1,562,250 barrels of North Sea Brent crude
(the "Hedge Agreement") to hedge price risk of future sales of oil production
from the Karakuduk Field. The exercise prices of the various put contracts in
the Hedge Agreement range from $22.35 to $17.25 per barrel, with monthly
expiration dates beginning in October 2000 and ending in December 2002. The
contracts are evenly spread between October 2000 to December 2001 (62,750
barrels per month) and between January 2002 to December 2002 (51,750 barrels per
month).
The Company adopted SFAS 133 effective January 1, 2001, which requires
derivative financial instruments to be recorded at their fair value.
Accordingly, the Company recognized a $2.52 million loss from the cumulative
effect of change in accounting principle upon adoption. The Company recognized
approximately $762,000 and $765,000 in losses for the six months ended June 30,
2002 and 2001, respectively, to record the Hedge Agreement at its fair value as
of these dates in accordance with SFAS 133. As of June 30, 2002 the Hedge
Agreement had a negligible market value.
6. Loans from Affiliates
Shell Capital Loan
- ------------------
As of June 30, 2002, the Company had $100,000 in principal outstanding on the
Shell Capital Loan. As discussed in Note 4, the Company restructured the Shell
Capital Loan in May 2002. As part of the restructuring, the Company repaid $28
million in principal to Shell Capital, who then transferred the $11.43 million
remaining balance on the Shell Capital Loan to CAIH. As part of the
restructuring agreement, CAIH wrote down the Company's remaining principal and
interest owed under the Shell Capital Loan from $11.43 million to $2.45 million
and reduced the interest rate from Libor plus 19.75% to a fixed annual rate of
14%. All outstanding defaults under the Shell Capital Loan were waived by CAIH.
Interest payments are due at the end of each quarter and the other remaining
terms and conditions of the original Shell Capital Loan still apply, except that
all agreements with Shell Capital or its affiliates have been terminated and the
Company's requirement to carry political and transportation risk insurances has
been waived. The Company repaid an additional $2.35 million in principal on the
Shell Capital Loan subsequent to the completion of the restructuring
transaction. See Note 4 for a more complete discussion of the refinancing of the
Shell Capital Loan.
The Company recognized a $6.56 million extraordinary gain on the extinguishment
of debt due to the restructuring of the Shell Capital Loan. The extraordinary
gain reflects the forgiveness of $9.07 million in principal, interest, and fees
previously owed to Shell Capital, less $1.79 million in restructuring fees paid
to CAIH, $509,000 in professional fees, and $220,000 in other costs and
expenses. The Company recognized $2.75 million in interest expense on the Shell
Capital loan for the six months ended June 30, 2002, the forgiveness of which
was included in the extraordinary gain from extinguishment of debt.
CAIH Note
- ---------
In May 2002, the Company borrowed $4 million from CAIH in exchange for the CAIH
Note, which bears simple interest at an annual rate of 12%. The CAIH Note was
recorded net of a $2.47 million discount, based on the fair market value of the
CAIH Warrant issued in conjunction with the CAIH Note. The discount will be
amortized ratably over the life of the CAIH Note. The CAIH Warrant is fully
discussed in Note 7. The principal balance of the CAIH Note is due on May 10,
2005 and accrued interest is payable quarterly.
In June 2002, the Company prepaid $2 million of the $4 million outstanding
principal balance of the CAIH Note. As a result, the Company recognized an
extraordinary loss on the early extinguishment of debt of $1.22 million from the
write-off of 50% of the unamortized discount on the CAIH Note. The extraordinary
loss was netted against the extraordinary gain from the restructuring of the
Shell Capital Loan.
10
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
6. Loans from Affiliates (continued)
KKM Credit Facility
- -------------------
In May 2002, KKM established a five-year, $33 million credit line with
Kazkommertsbank, an affiliate of CAIH. The KKM Credit Facility consists of a $30
million non-revolving line and a $3 million revolving line, both of which were
fully borrowed by KKM in May 2002.
The non-revolving portion of the KKM Credit Facility accrues simple interest at
an annual rate of 14% and is repayable over a five year period with final
maturity in May 2006. Accrued interest is payable quarterly, beginning in
December 2002, and KKM must begin making quarterly principal payments in May
2003.
The revolving portion of the KKM Credit Facility accrues simple interest at an
annual rate of 14%. The revolver is loaned to KKM for short-term periods up to
one year, but KKM has the right to re-borrow the funds through May 2006 with
final repayment due in May 2007. The initial $3 million revolving loan to KKM
was subject to a three month term. The principal balance was repaid in July 2002
and KKM immediately re-borrowed another $3 million with a maturity date of July
31, 2003. Accrued interest on the revolving loan is payable at maturity.
The original KKM Credit Facility included repayment terms of three years and
four years for the non-revolving and revolving portions of the KKM Credit
Facility, respectively, with an option to extend the final maturity date for
repayment of the entire KKM Credit Facility to five years. KKM exercised the
option to extend the repayment term to five years for the entire KKM Credit
Facility as of May 2002, and the revised terms, as disclosed above, are
currently being reflected in the underlying loan agreements.
The Company is subject to certain pledges, covenants, and other restrictions
under the KKM Credit Facility, including, but not limited to, the following:
(i) CAP-G pledged its 50% interest in KKM to Kazkommertsbank as
collateral for the KKM Credit Facility;
(ii) Chaparral has provided a written guarantee to Kazkommertsbank that it
will repay the KKM Credit Facility in the event KKM fails do so;
(iii) KKM may not incur additional indebtedness or pledge its assets to
another party without the written consent of Kazkommertsbank; and
(iv) KKM may not pay dividends without the written consent of
Kazkommertsbank.
The KKM Credit Facility stipulates certain events of default, including, but not
limited to, KKM's inability to meet the terms of the KKM Credit Facility, KKM's
failure to meet it obligations to third parties in excess of $100,000, and the
Company's involvement in legal proceedings in excess of $100,000 where an
adverse judgment against the Company occurs or is expected to occur. If an event
of default does occur and is not waived by the lender, Kazkommertbank has a
right to call the KKM Credit Facility immediately due and payable and/or
exercise its security interest by seizing the Company's shares in KKM pledged as
collateral. Furthermore, in the event of a material adverse change in the
financial or credit markets, Kazkommertsbank has a right to unilaterally alter
any terms and conditions of the KKM Credit Facility, including the rate of
interest, by written request. KKM may either agree to the amended terms or repay
the outstanding KKM Credit Facility within 10 days of notification.
11
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
6. Loans from Affiliates (continued)
The maturity schedule of the Company's indebtedness as of June 30, 2002 is as
follows:
Principal
Date Amount Due
-------------------------------
2003 6,100,000
2004 7,000,000
2005 10,000,000
2006 8,000,000
2007 4,000,000
-------------------------------
Total 35,100,000
7. Common Stock
In May 2002, Chaparral acquired 100% of the stock of MTI, which holds a 10%
interest in KKM, for $1.2 million and one million shares of the Company's
outstanding common stock. The Company acquired MTI to obtain a controlling
interest in KKM as well as to increase the Company's ownership interest in the
Karakuduk Field. The total purchase price of $3.9 million was capitalized to the
Company's oil and gas properties.
As discussed in Note 4, Shell Capital's warrant for 1,785,455 shares of the
Company's common stock was canceled as part of the restructuring of the Shell
Capital Loan.
In connection with the CAIH Note, the Company issued to CAIH a warrant to
purchase 3,076,923 shares of the Company's common stock at an exercise price of
$1.30 per share, subject to certain anti-dilution provisions. The CAIH Warrant
is exercisable for five years from May 10, 2002, the date of grant. The fair
market value of the CAIH Warrant of $2.47 million was recorded as a discount of
the CAIH Note. The fair market value of the CAIH Warrant was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rate of 4.09%, dividend yield
of 0%, volatility factor of the expected market price of the Company's common
stock of .624, and a weighted average life expectancy of 3.5 years.
In April 2002, 17,033 warrants to purchase the Company's common stock expired.
The warrants were held by Allen & Company Incorporated, an affiliate of the
Company.
8. Redeemable Preferred Stock
In May 2002, the Company repurchased 50,000 shares of its Series A Redeemable
Preferred Stock from an unrelated party for $2.3 million. The Series A
Redeemable Preferred Stock had a carrying value of approximately $6 million,
including $1.1 million in accrued dividends. The $3.7 million difference between
the redemption price and the carrying value was recorded directly to retained
earnings.
12
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
9. Income Taxes
Income tax expense as reported entirely relates to foreign income taxes provided
on the Company's operations within the Republic of Kazakhstan. KKM's principal
agreement with the government of the Republic of Kazakhstan for the exploration,
development and production of oil in the Karakuduk Field specifies the income
taxes and other taxes applicable to KKM, which is subject to the tax laws of the
Republic of Kazakshtan. The Company has used the best estimates available to
determine its current and deferred tax liabilities within Kazakhstan. The
existing legislation with regard to taxation in the Republic of Kazakhstan is
constantly evolving and tax laws are not always clearly written and their
interpretation is often subject to the opinions of the local or main State Tax
Service. Instances of inconsistent opinions between local, regional, and
national tax authorities are not unusual.
13
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
10. Investments
During May 2002, Chaparral increased its ownership in KKM from 50% to 60%
through the acquisition of 100% of the outstanding stock of MTI, which owns a
10% interest in KKM. Due to the Company's establishment of a controlling
interest in KKM, the Company's financial statements have been consolidated with
KKM on a retroactive basis to January 1, 2002. The Company previously accounted
for its 50% investment in KKM using the equity method of accounting, which is
reflected in the Company's financial statements for periods prior to 2002. The
results from operations of the Company's investment in KKM for periods accounted
for using the equity method are summarized below:
Closed Type JSC Karakudukmunay
Statement of Expenses and Accumulated Deficit
For the Periods Ended June 30, 2001
(Amounts in Thousand US Dollars)
(Unaudited)
For The Three For The Six
Months Ended Months Ended
------------- ------------
June 30, June 30,
2001 2001
-------- --------
Revenues:
Oil sales(1) $ 9,559 $ 17,995
Costs and expenses:
Transportation expenses 1,964 3,782
Operating expenses 1,234 2,498
Depreciation and depletion 2,132 4,063
Management service fee 137 257
General and administrative 892 2,042
-------- --------
Total cost and expenses 6,359 12,642
-------- --------
Income from operations 3,200 5,353
Other income (expense):
Interest income 2 10
Interest expense (438) (932)
Other (52) (52)
-------- --------
Net income before income taxes $ 2,712 $ 4,379
======== ========
Income tax expense -- --
-------- --------
Net income $ 2,712 $ 4,379
======== ========
Accumulated deficit, beginning of
period (8,935) (10,602)
-------- --------
Accumulated deficit, end of period $ (6,223) $ (6,223)
======== ========
(1) Revenue is presented gross of transportation expenses in accordance with
EITF 00-10, Accounting for Shipping and Handling Fees and Costs.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1. Liquidity and Capital Resources
Our financial statements have been presented on the basis that we are a going
concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. We are responsible for providing
100% of the funding for the development of the Karakuduk Field not provided from
oil sales or third party sources. We have recognized recurring operating losses
in previous years and had a working capital deficiency as of June 30, 2002.
These conditions raise substantial doubt about our ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
We have recently taken significant steps to alleviate these issues through the
restructuring of Chaparral, including the infusion of a total of $45 million in
debt and equity capital, the refinancing of our loan with Shell Capital, and the
discontinuance and withdrawal of all legal proceedings previously initiated by
Shell Capital Services Limited, the facility agent for Shell Capital.
Additionally, we are currently producing approximately 7,500 barrels of crude
oil per day and we expect the anticipated future cash flows from operations
along with the lower interest costs from the refinancing of the Shell Capital
loan will allow us to proceed with the full development of the Karakuduk Field.
No assurances can be provided, however, that the Company's restructured
indebtedness or cash flow from operations will be sufficient to meet our working
capital requirements in the future, which may require the Company to seek
additional debt or equity financing in order to continue to develop the
Karakuduk Field.
In May 2002, Chaparral received a total investment of $12 million from CAIH,
including $8 million in exchange for 22,925,701 shares, or 60%, of Chaparral's
outstanding common stock, and CAP-G received $4 million in exchange for a
three-year note bearing interest at 12% per annum. Along with the note, CAIH
received a warrant to purchase 3,076,923 shares of Chaparral's common stock at
an exercise price of $1.30 per share. Additionally, KKM established a five-year,
$33 million credit line with JSC Kazkommertsbank, an affiliate of CAIH, which
consists of a $30 million non-revolving credit line and a $3 million revolving
credit line, both of which were fully drawn down by KKM in May 2002. The
Kazkommertsbank credit line was utilized to repay $28 million in principal on
the Shell Capital loan and to provide KKM with $5 million in working capital.
In conjunction with the restructuring transaction, the remaining Shell Capital
loan was transferred to CAIH, the existing Shell Capital warrant for 1,785,455
shares of Chaparral's common stock was canceled, and the Shell Capital 40% net
profits interest in CAP-G was reacquired by CAP-G for a nominal amount. All
other agreements with Shell Capital or its affiliates were terminated, including
KKM's crude oil sales agreement with Shell Trading International Limited, KKM's
technical services agreement with Shell Capital Services Limited, and
Chaparral's transportation risk insurance policy held directly by Shell Capital.
Chaparral also terminated its political risk insurance coverage with OPIC as a
condition of the restructuring. Furthermore, CAIH wrote down the remaining
principal and interest owed under the Shell Capital loan from approximately
$11.43 million (the amount remaining after the $28 million repayment) to $2.45
million, and reduced the interest rate from LIBOR plus 19.75% to a fixed annual
rate of 14%. All outstanding defaults under the Shell Capital loan were waived
by CAIH upon the completion of the transaction.
In May 2002, Chaparral acquired 100% of the stock of MTI, which owns a 10%
interest in KKM, for $1.2 million and one million shares of Chaparral's
outstanding common stock. Chaparral also redeemed 50,000 shares of its
outstanding Series A Preferred Stock held by an unrelated party for $2.3
million. Chaparral utilized the remaining proceeds from the $12 million equity
and debt infusion to pay $2.52 million in restructuring fees and other charges,
repay $2.35 million of additional principal on the Shell Capital loan to CAIH,
repay $2 million of the $4 principal outstanding on the CAIH note, and utilize
$1.63 million for working capital.
We expect to finance the continued development of the Karakuduk Field primarily
through cash flows from the sale of crude oil and using the remaining working
capital provided by the recent restructuring. In the short-term, our biggest
operational priority is to maintain current daily production levels until KKM
can renew its developmental drilling program and implement a secondary recovery
program to maximize overall oil recovery from the Karakuduk Field. KKM is
currently working to source a replacement developmental drilling rig and expects
to renew drilling operations in the fourth quarter of 2002. KKM is also
installing down-hole pumps in certain wells to help maintain primary production
at current levels. KKM commissioned a crude oil pipeline from the Karakuduk
Field in June 2002, which is expected to reduce operating costs by approximately
$100,000 per month.
15
Our short and long-term liquidity is also impacted by local oil sales
obligations imposed by the government of Kazakhstan on oil and gas producers to
supply local energy needs, and our ability to obtain export quota necessary to
sell our crude oil production on the international market. Under the terms of
our agreement with the government, we have a right to export, and receive export
quota for, 100% of the production from the Karakuduk Field. Consistent with
prior periods, we have been required to sell approximately 18% of our crude oil
on the domestic market through August 19, 2002 of the current year. The domestic
market does not permit world market prices to be obtained, resulting in
approximately $8 to $10 less cash flow per barrel on 2002 local oil sales.
Furthermore, the government has not allocated sufficient export quota to allow
us to sell all of our available crude oil production on the world market. We are
taking steps to reduce our local market obligations and obtain enough export
quota necessary to sell all of our crude oil production, including appealing to
the government to enforce our contractual rights. While management believes we
will be ultimately successful in reducing our local sales requirements and
obtaining higher export quotas, we cannot provide any assurances that we will be
able to do so. If we are unsuccessful, we most likely will not generate enough
cash flow from operations to sustain the development of the Karakuduk Field and
additional sources of liquidity may be required to continue operations,
including obtaining additional debt and equity financing.
Capital Commitments and Other Contingencies
- -------------------------------------------
Our operations may be subject to regulations or other restrictions instituted by
the government of the Republic of Kazakhstan or other regulatory bodies
responsible for the area in which the Karakuduk Field is located. In addition to
taxation, customs declarations and environmental controls, regulations may
govern such things as export quotas, local oil sales requirements, and
commissioning and approval of surface production facilities. These regulations
may substantially limit the amount of revenue and cash flow obtainable from
crude oil production and sales, increase the costs of doing business, and/or
prevent or delay the starting or continuation of any given exploration or
development project.
All regulations are subject to future changes by legislative and administrative
action and by judicial decisions. Such changes could adversely affect the
petroleum industry in general, and us in particular. It is impossible to predict
the effect that any current or future proposals or changes in existing laws or
regulations will have on our operations.
2. Results from Operations
In May 2002, Chaparral increased its ownership in KKM from 50% to 60% through
the acquisition of 100% of the outstanding stock of MTI. As a result of the
acquisition, Chaparral obtained a controlling interest in KKM. Consequently, its
financial statements have been consolidated with KKM on a retroactive basis to
January 1, 2002. We previously accounted for our 50% investment in KKM using the
equity method of accounting, which is reflected in our financial results for
periods prior to 2002.
Results of Operations for the Three Months Ended June 30, 2002 Compared to the
- --------------------------------------------------------------------------------
Three Months Ended June 30, 2001
- --------------------------------
Our operations for the three months ended June 30, 2002 resulted in net income
of $5.05 million compared to a net loss of $1.44 million as of June 30, 2001.
The $6.49 million increase in our net income primarily relates to the
recognition of a $5.34 million extraordinary gain on the May 2002 restructuring
of our loan with Shell Capital, lower financing costs on our new debt
obligations and improved operational results from the Karakuduk Field.
Chaparral's $5.34 million extraordinary gain on the extinguishment of debt in
the quarter ended June 30, 2002, reflects a $6.56 million extraordinary gain on
the restructuring of the Shell Capital loan and a $1.22 million extraordinary
loss on the early repayment of $2 million in principal on Chaparral's $4 million
note payable to CAIH. The extraordinary gain on the restructuring of the Shell
Capital loan consists of the forgiveness of $9.07 million in principal,
interest, and fees previously owed to Shell Capital, less $1.79 million in
restructuring fees paid to CAIH, $509,000 in professional fees, and $220,000 in
16
other costs and expenses. The $1.22 million extraordinary loss on the CAIH note
equates to the 50% write-off of the unamortized discount on the note from the
issuance of a related warrant to purchase 3,076,923 shares of Chaparral's common
stock for $1.30 per share. See Notes 6 and 7 of our consolidated financial
statements.
Interest expense decreased from $1.9 million for the three months ended June 30,
2001 to $1.6 million for the three months ended June 30, 2002, due to the lower
financing costs of our restructured indebtedness. Chaparral's cost of financing
the development of the Karakuduk Field has improved from a pre-restructuring
annual interest rate of LIBOR plus 19.75% compounded daily, to a simple fixed
annual interest rate of 14%, generating savings of approximately $750,000 per
quarter.
For the quarter ended June 30, 2002, Chaparral's financial results have been
consolidated with the financial results of its operating subsidiary, KKM. During
the three months ended June 30, 2002, we sold approximately 579,000 barrels of
crude oil, recognizing $10.65 million, or $18.39 per barrel, in revenue.
Transportation costs were $2.38 million, or $4.11 per barrel and operating costs
associated with sales were $1.87 million, or $3.22 per barrel. Comparatively,
Chaparral recognized $1.75 million in equity income from investment for the
quarter ended June 30, 2001, which represents our 50% share of KKM's results
during the period. During the quarter ended June 30, 2001, KKM sold
approximately 511,000 barrels of crude oil, recognizing $9.56 million, or $18.71
per barrel in revenue. Transportation costs were $1.96 million, or $3.84 per
barrel and operating costs associated with sales were $1.23 million, or $2.41
per barrel. See Note 10 to our consolidated financial statements. The increase
in operating costs per barrel relates to increased utilization of a workover rig
in the Karakuduk Field to maintain current production rates. Our equity income
from investment also reflects the elimination of $390,000 of inter-company
interest income on our loan to KKM for the three months ended June 30, 2001.
Results of Operations for the Six Months Ended June 30, 2002 Compared to the Six
- --------------------------------------------------------------------------------
Months Ended June 30, 2001.
- ---------------------------
Our operations for the six months ended June 30, 2002 resulted in net income of
$1.93 million compared to a net loss of $5.66 million as of June 30, 2001. The
$7.59 million increase in our net income primarily relates to the recognition of
a $5.34 million extraordinary gain on the May 2002 restructuring of our loan
with Shell Capital, improved operational results from the Karakuduk Field , and
the impact of the adoption of SFAS 133, Accounting for Derivative Instruments
and Hedging Activities during 2001.
Chaparral's $5.34 million extraordinary gain on the extinguishment of debt in
the six months ended June 30, 2002, reflects a $6.56 million extraordinary gain
on the restructuring of the Shell Capital loan and a $1.22 million extraordinary
loss on the early repayment of $2 million in principal on Chaparral's $4 million
note payable to CAIH. The extraordinary gain on the restructuring of the Shell
Capital loan consists of the forgiveness of $9.07 million in principal,
interest, and fees previously owed to Shell Capital, less $1.79 million in
restructuring fees paid to CAIH, $509,000 in professional fees, and $220,000 in
other costs and expenses. The $1.22 million extraordinary loss on the CAIH note
equates to the 50% write-off of the unamortized discount on the note from the
issuance of a related warrant to purchase 3,076,923 shares of Chaparral's common
stock for $1.30 per share. See Notes 6 and 7 of our consolidated financial
statements.
Interest expense decreased from $3.7 million for the six months ended June 30,
2001 to $3.35 for the six months ended June 30, 2002, due to the lower financing
costs of our restructured indebtedness. Chaparral's cost of financing the
development of the Karakuduk Field has improved from a pre-restructuring annual
interest rate of LIBOR plus 19.75% compounded daily, to a simple fixed annual
interest rate of 14%, generating savings of approximately $3 million per year.
For the six months ended June 30, 2002, Chaparral's financial results have been
consolidated with the financial results of its operating subsidiary, KKM. During
the six months ended June 30, 2002, we sold approximately 1,150,000 barrels of
crude oil, recognizing $19.03 million, or $16.54 per barrel, in revenue.
Transportation costs were $4.63 million, or $4.03 per barrel and operating costs
associated with sales were $3.74 million, or $3.25 per barrel. Comparatively,
Chaparral recognized $3.01 million in equity income from investment for the six
months ended June 30, 2001, which represents our 50% share of KKM's results
during the period. During the six months ended June 30, 2001, KKM sold
approximately 974,000 barrels of crude oil, recognizing $18 million, or $18.48
per barrel in revenue. Transportation costs were $3.78 million, or $3.88 per
barrel and operating costs associated with sales were $2.5 million, or $2.56 per
barrel. The increase in operating costs per barrel relates to increased
utilization of a workover rig in the Karakuduk Field to maintain current
production rates. Our equity income from investment also reflects the
elimination of $815,000 of inter-company interest income on our loan to KKM for
the six months ended June 30, 2001.
17
As a result of the adoption of SFAS 133, we recognized a loss of $2.52 million
as a cumulative effect of change in accounting principal for the six months
ended June 30, 2001, to record derivatives entered into as a requirement of the
Shell Capital loan at their fair value. As of June 30, 2002, the derivatives had
a negligible value and had been fully written off against income.
3. Commodity Prices for Oil and Gas
Our revenues, profitability, growth and value are highly dependent upon the
price of oil. Market conditions make it difficult to estimate prices of oil or
the impact of inflation on such prices. Oil prices have been volatile, and it is
likely they will continue to fluctuate in the future. Various factors beyond our
control affect prices for oil, including supplies of oil available worldwide and
in Kazakhstan, the ability of OPEC to agree to maintain oil prices and
production controls, political instability or armed conflict in Kazakhstan or
other oil producing regions, the price of foreign imports, the level of consumer
demand, the price and availability of alternative fuels, the availability of
transportation routes and pipeline capacity, and changes in applicable laws and
regulations.
4. Inflation
We cannot control prices received from our oil sales and to the extent we are
unable to pass on increases in operating costs, we may be affected by inflation.
The devaluation of the tenge, the currency of the Republic of Kazakhstan, can
significantly decrease the value of the monetary assets that we hold in
Kazakhstan as well as our assets in that country that are based on the tenge.
KKM retains the majority of its cash and cash equivalents in U.S. dollars in an
offshore bank account outside of Kazakhstan, but KKM's statutory tax basis in
its assets, tax loss carryforwards, and VAT receivables are all denominated in
tenge and subject to the effects of devaluation. Local tax laws allow basis
adjustments to offset the impact of inflation on statutory tax basis assets, but
there is no assurance that any adjustments will be sufficient to offset the
effects of inflation in whole or in part. If not, KKM may be subject to much
higher income tax liabilities within Kazakhtan due to inflation and or
devaluation of the local currency. Additionally, devaluation may create
uncertainty with respect to the future business climate in Kazakhstan and to our
investment in that country. As of June 30, 2002, the exchange rate was 153.1
tenge per U.S. dollar.
Item 3 - Quantitative and Qualitative Disclosures About Market Risks
Chaparral restructured the Shell Capital loan in May 2002. The transaction is
more fully described under "Item 7. Management Discussion and Analysis of
Financial Condition and Results of Operations."
18
Part II- Other Information
Item 1 - Legal Proceedings
As part of the restructuring of the loan with Shell Capital in May 2002, Shell
Capital Services Limited, as the facility agent for Shell Capital, has
discontinued and withdrew all legal proceedings against Chaparral and CAP-G and
all parties to the original loan agreement with Shell Capital have mutually
released each other from future liability. Shell Capital Services Limited filed
a notice of discontinuance in the United Kingdom with the High Court of Justice,
Queen's Bench Division, on May 8, 2002, regarding its legal proceedings against
Chaparral. Shell Capital Services Limited also withdrew its statutory demand for
the liquidation of CAP-G on May 13, 2002, by filing a written consent with the
Royal Court of Guernsey Ordinary Court.
Item 2 - Changes in Securities and Use of Proceeds
On May 10, 2002, Chaparral issued 22,925,701 shares of its outstanding common
stock to CAIH in exchange for $8 million. Chaparral issued the common stock in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended. CAIH had available all material information
concerning Chaparral and the stock certificate bears an appropriate restrictive
legend under the Securities Act of 1933, as amended. No underwriter was involved
in the transaction.
CAP-G, Chaparral's wholly owned subsidiary, issued a note to CAIH in exchange
for $4 million on May 10, 2002. The note bears interest at an annual rate of 12%
and is repayable on or before May 10, 2005. In conjunction with the issuance of
the note by CAP-G, Chaparral issued to CAIH 3,076,923 warrants to purchase
Chaparral's common stock at an exercise price of $1.30 per share.
On May 10, 2002, Chaparral issued 1 million shares of its outstanding common
stock and $1.2 million to Dardana Limited, in exchange for an 100% of the stock
of MTI, which owns a 10% interest in KKM. Chaparral issued the common stock in
reliance upon the exemption from registration under Regulation "S". Dardana had
available all material information concerning Chaparral and the stock
certificate bears an appropriate restrictive legend under the Securities Act of
1933, as amended. No underwriter was involved in the transaction.
Item 3 - Defaults Upon Senior Securities
As a result of the restructuring transaction described above in "Item 2 -
Management's Discussion and Analysis of Financial Condition and Results from
Operations," Chaparral is no longer in default under any of its outstanding
indebtedness.
19
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
------ -------
10.1 Loan Agreement #250, dated May 6, 2002, among Closed Joint
Stock Company Karakudukmunai and Open Joint Stock Company
Kazkommertsbank
10.2 Additional Agreement, dated May 6, 2002, to Loan Agreement
#250, among Closed Joint Stock Company Karakudukmunai and
Open Joint Stock Company Kazkommertsbank
10.3 Additional Agreement, dated June 6, 2002, to Loan Agreement
#250, among Closed Joint Stock Company Karakudukmunai and
Open Joint Stock Company Kazkommertsbank
10.4 Accessorial Agreement #5382A, dated May 6, 2002, among
Closed Joint Stock Company Karakudukmunai and Open Joint
Stock Company Kazkommertsbank
10.5 Additional Agreement, dated May 7, 2002, to Accessorial
Agreement #5382A, among Closed Joint Stock Company
Karakudukmunai and Open Joint Stock Company Kazkommertsbank
10.6 Accessorial Agreement #5896A, dated July 31, 2002, among
Closed Joint Stock Company Karakudukmunai and Open Joint
Stock Company Kazkommertsbank
10.7 Open Joint Stock Company Kazkommertsbank letter dated August
16, 2002, to Closed Joint Stock Company Karakudukmunai
99 Letter of Certification under Section 906 of the
Sarbanes-Oxley Act of 2002 dated August 19, 2002
(b) Reports on Form 8-K
Chaparral filed a Form 8-K on May 24, 2002, announcing the corporate
restructuring of Chaparral Resources, Inc. with Central Asian Industrial
Holdings, N.V.
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: August 19, 2002
Chaparral Resources, Inc.
By: /s/ James A. Jeffs
-------------------------------
James A. Jeffs,
Chairman and Chief
Executive Officer
By: /s/ Michael B. Young
-------------------------------
Michael B. Young,
VP Finance and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
21