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, 2001
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
---------- ----------
Commission File Number: 0 - 7261
CHAPARRAL RESOURCES, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-0630863
------------------------------ -----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
16945 Northchase Drive, Suite 1620
Houston, Texas 77060
--------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (281) 877-7100
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO | |
As of August 14, 2001 the Registrant had 14,283,801 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,
2001 2000
(Unaudited) (Audited)
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 120 $ 604
Accounts receivable -- 30
Receivable from affiliate -- 265
Prepaid expenses 128 202
-------- --------
Total current assets 248 1,101
Investment in KKM and other oil and gas
property costs - full cost method
Republic of Kazakhstan: 72,117 64,902
Furniture, fixtures and equipment 109 91
Less accumulated depreciation (52) (41)
-------- --------
57 50
-------- --------
Other Assets
Hedge agreement 234 3,518
Other 525 585
-------- --------
Total other assets 759 4,103
-------- --------
Total assets $ 73,181 $ 70,156
======== ========
See accompanying notes.
2
Chaparral Resources, Inc.
Consolidated Balance Sheets (continued)
(In Thousands)
June 30, December 31,
2001 2000
(Unaudited) (Audited)
-------- --------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 292 $ 243
Accrued liabilities:
Accrued compensation 336 346
Accrued interest and other 278 213
Shell Capital loan, current portion 6,888 900
-------- --------
Total current liabilities 7,794 1,702
Shell Capital loan, net of discount 23,572 20,978
Redeemable preferred stock- cumulative, convertible,
Series A 75,000 designated, 50,000 issued and outstanding,
at stated value, $5.00 cumulative annual
dividend, $5,875,000 redemption value 5,725 5,550
Stockholders' equity:
Common stock - authorized, 100,000,000
shares of $0.0001 par value; issued and outstanding,
14,283,801 and 14,283,634 shares as of
June 30, 2001 and December 31, 2000, respectively 1 1
Capital in excess of par value 94,061 94,061
Preferred stock - 1,000,000 shares authorized, 925,000 shares
undesignated. Issued and outstanding - none -- --
Accumulated deficit (57,972) (52,136)
-------- --------
Total stockholders' equity 36,090 41,926
-------- --------
Total liabilities and stockholders' equity $ 73,181 $ 70,156
======== ========
See accompanying notes.
3
Chaparral Resources, Inc.
Consolidated Statements of Operations (Unaudited)
(In Thousands, Except Share Data)
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue $ -- $ -- $ -- $ --
Costs and expenses:
Depreciation and depletion 180 60 343 114
General and administrative 1,188 718 2,159 1,466
------------ ------------ ------------ ------------
1,368 778 2,502 1,580
------------ ------------ ------------ ------------
Loss from operations (1,368) (778) (2,502) (1,580)
Other income (expense):
Interest income 390 3 817 8
Interest expense (1,933) (1,807) (3,697) (2,696)
Equity in income from investment 1,746 1,445 3,005 865
Hedge losses (278) -- (765) --
Other -- (9) -- 66
------------ ------------ ------------ ------------
(75) (368) (640) (1,757)
------------ ------------ ------------ ------------
Loss before cumulative effect of change in
accounting principle (1,443) (1,146) (3,142) (3,337)
Cumulative effect of change in accounting
principle -- -- (2,519) --
------------ ------------ ------------ ------------
Net loss $ (1,443) $ (1,146) $ (5,661) $ (3,337)
============ ============ ============ ============
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock (62) (62) (125) (125)
Discount accretion
Series A Redeemable Preferred Stock (25) (25) (50) (50)
------------ ------------ ------------ ------------
Net loss available to common stockholders $ (1,530) $ (1,233) $ (5,836) $ (3,512)
============ ============ ============ ============
Basic and diluted earnings per share:
Loss per share before cumulative
effect of change in accounting principle $ (0.11) $ (1.26) $ (0.23) $ (3.58)
Cumulative effect of change in
accounting principle $ -- $ -- $ (0.18) $ --
Net loss per share $ (0.11) $ (1.26) $ (0.41) $ (3.58)
Weighted average number of shares
outstanding (basic and diluted) 14,283,801 980,481 14,283,775 980,454
See accompanying notes.
4
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
For the Six Months Ended
June 30, June 30,
2001 2000
-------- --------
Cash flows from operating activities
Net loss $ (5,661) $ (3,337)
Adjustments to reconcile net loss to
net cash used in operating activities:
Equity income from investment (3,005) (865)
Depreciation, depletion, and amortization 403 114
Gain on the sale of oil and gas properties -- (75)
Loss on disposition of furniture and fixtures -- 9
Cumulative effect of change in
accounting principal 2,519 --
Hedge losses 765 --
Stock options issued for services and bonuses -- 11
Amortization of debt issuance cost 383 412
Amortization of note discount -- 127
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 295 (822)
Prepaid expenses 74 10
Accrued interest income on advances to KKM (815) --
Interest payments from KKM 2,451 --
Hedge agreement -- (4,000)
Other -- (678)
Increase (decrease) in:
Accounts payable and accrued liabilities 104 (549)
Interest expense reclassified as principal
on the Shell Capital loan 2,700 1,201
-------- --------
Net cash provided (used) in operating activities 213 (8,442)
-------- --------
Cash flows from investing activities
Additions to furniture, fixtures and equipment $ (18) $ (9)
Investment in and advances to KKM and other oil and
gas property costs (6,179) (13,532)
Proceeds from sale of interest in oil and gas
properties - domestic -- 75
-------- --------
Net cash used in investing activities (6,197) (13,466)
-------- --------
5
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (Continued) (Unaudited)
(In Thousands)
For the Six Months Ended
June 30, June 30,
2001 2000
-------- --------
Cash flows from financing activities
Net proceeds from Shell Capital loan $ 5,500 $ 23,800
Debt issuance cost -- (2,415)
Restricted cash -- 578
-------- --------
Net cash provided by financing activities 5,500 21,963
-------- --------
Net (decrease) increase in cash and
cash equivalents (484) 55
Cash and cash equivalents at beginning
of period 604 23
-------- --------
Cash and cash equivalents at end of period $ 120 $ 78
======== ========
Supplemental cash flow disclosure
Interest paid $ 575 $ 326
Supplemental schedule of non-cash
Investing and financing activities
Discount recognized on loan for
issuance of stock warrant to Shell Capital $ -- $ 1,175
See accompanying notes.
6
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
100% owned subsidiaries, Central Asian Petroleum (Guernsey) Limited ("CAP-G"),
Road Runner Services Company ("RRSC"), Chaparral Acquisition Corporation
("CAC"), and Central Asian Petroleum, Inc. ("CAP-D"). Chaparral owns 80% of the
common stock of CAP-G directly and 20% indirectly through CAP-D. Hereinafter,
Chaparral and its subsidiaries are collectively referred to as the "Company."
All significant intercompany transactions have been eliminated.
CAP-G owns a 50% interest in Closed Type JSC Karakudukmunay ("KKM"), a
Kazakhstan joint stock company, which holds the rights for the exploration,
development and production of oil in the Karakuduk Field in Western Kazakhstan.
KKM is owned jointly by CAP-G (50%), KazakhOil JSC ("KazakhOil") (40%) and a
private Kazakhstan joint stock company (10%). KazakhOil, the national petroleum
company of Kazakhstan, is owned by the government of the Republic of Kazakhstan.
The Company shares control of KKM through participation on KKM's board of
directors.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Reference should be made to the notes to the
financial statements in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
The information furnished herein was taken from the books and records of the
Company without audit. However, such information reflects all adjustments, which
are, in the opinion of management, normal recurring adjustments necessary to a
fair statement of the results for the interim periods presented. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for any future interim period or for the year.
2. New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. This statement, as amended by SFAS No. 137 and 138, is
effective for years beginning after June 15, 2000. On January 1, 2001, the
Company adopted SFAS No. 133.
As a result of adoption of SFAS 133, the Company recognizes all derivative
financial instruments in the consolidated financial statements at fair value
regardless of the purpose or intent for holding the instrument. Changes in the
fair value of derivative financial instruments are recognized periodically in
income or in stockholders' equity as a component of comprehensive income
depending on whether the derivative financial instrument qualifies for hedge
accounting, and if so, whether it qualifies as a fair value hedge or cash flow
hedge. Generally, changes in fair values of derivatives accounted for as fair
value hedges are recorded in income along with the portions of the changes in
the fair values of the hedged items that relate to the hedged risks. Changes in
fair values of derivatives accounted for as cash flow hedges, to the extent they
are effective as hedges, are recorded in other comprehensive income net of
deferred taxes. Changes in fair values of derivatives not qualifying as hedges
are reported in income. The Company's put contracts entered into as part of its
loan agreement (the "Loan") with Shell Capital Incorporated ("Shell Capital"),
do not qualify for hedge accounting under SFAS 133. Therefore, effective January
1, 2001, the Company adjusted the carrying value of the contracts to their fair
value of $999,000, recognizing a loss from the cumulative effect of adoption of
approximately $2.52 million.
7
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. Going Concern
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has incurred recurring
operating losses in previous years and has a working capital deficiency as of
June 30, 2001. In addition, there are uncertainties relating to the Company's
ability to meet all expenditure and cash flow requirements through fiscal year
2001, which could result in a default of the Loan and the loss of the Company's
investment in the Karakuduk Field. 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 is seeking to alleviate these conditions by increasing cash flows
available from the sale of crude oil production from the Karakuduk Field. The
Company expects to finance the development of the Karakuduk Field primarily
through the production and sale of crude oil, which is currently limited to
approximately 7,000 barrels of oil per day, net of royalty, by short-term
facility constraints. Additionally, the government of Kazakhstan has required
KKM to sell a portion of its crude oil production on the local market, which
generates substantially less revenue than oil sold on the export market. KKM is
attempting to resolve both of these issues by removing field facility
constraints as quickly as possible and petitioning the government to reduce
local oil sales requirements imposed upon KKM. Management expects to
incrementally increase net daily production to approximately 8,500 barrels of
oil per day in the fourth quarter of 2001 as various field facility limitations
are removed. The Company is also trying to obtain additional debt financing to
cover any deficiencies which may occur in the near term, including borrowing
additional short-term working capital under an $8.0 million uncommitted bridge
facility executed with Shell Capital in May 2001 (the "Bridge Loan"). The
Company borrowed $3.0 million under the Bridge Loan in May 2001. See Note 7.
No assurances can be provided, however, that the Company will be able to
increase its operational cash flow to meet working capital requirements or that
additional financing will be available. The remaining $5.0 million under the
Bridge Loan is uncommitted and is not accessible by the Company to meet current
working capital requirements. Additionally, the Company is attempting to
restructure the Loan with Shell Capital to repay the Bridge Loan on or before
September 30, 2001, address certain project completion requirements of the Loan,
and provide any future working capital necessary to fully develop the Karakuduk
Field (see Note 7). The Company requires Shell Capital's approval before it can
raise additional capital or debt financing from other sources, which may hinder
the Company's attempts to raise the necessary working capital to continue
operations if the Company's negotiations with Shell Capital are unsuccessful.
Shell Capital, however, has agreed to allow the Company to issue capital stock
in order to repay the Bridge Loan, if necessary. If the Company is unsuccessful
in raising additional capital or generating sufficient cash flows from
operations, the Company's Loan may be called into default and the Company's
investment in the Karakuduk Field may be lost.
8
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
4. Restatement of Quarter and Six Months Ended June 30, 2000
The Company's net loss available to common stockholders for the quarter ended
June 30, 2000 has been restated from $1.25 million to $1.23 million, or by $0.01
per share of common stock. The adjustment is due to KKM's restatement of proved
oil reserves as of December 31, 1999 to reflect the SEC's definition of proved
undeveloped reserves versus the definition as accepted by the Society of
Petroleum Engineers. Specifically, the restated amounts represent proved
undeveloped reserves from "drilling units offsetting productive units that are
reasonably certain of production when drilled" or from "other undrilled
units...where it can be demonstrated with certainty that there is a continuity
of production from the existing productive formation." As a result of the
restatement, the Company's equity income from investment for the quarter ended
June 30, 2000 was increased by $53,000 to reflect adjustments to KKM's net
income for the period (see Note 9). The Company recognized an additional $38,000
in depreciation and depletion expense for the quarter ended June 30, 2000 due to
the resulting increase in the effective depletion rate attributable to the
Company's acquisition costs of its equity interest in KKM. Equity income from
investment for the quarter ended June 30, 2000 also reflects the elimination of
$410,000 in interest income from KKM to eliminate 100% of intercompany
transactions due to the application of EITF 99-10, Percentage Used to Determine
the Amount of Equity Method Losses. The reclassification of interest income did
not impact the Company's net loss for the period.
The Company's net loss available to common stockholders for the six months ended
June 30, 2000 was restated from $3.73 million to $3.51 million, or by $0.22 per
share of common stock, based on KKM's restatement of proved oil reserves as of
December 31, 1999 discussed above. The Company's equity loss from investment for
the six months ended June 30, 2000 was adjusted downward by $288,000, reflecting
net equity income for the period (see Note 9). The Company recognized an
additional $72,000 in depreciation and depletion expense due to the resulting
increase in the effective depletion rate attributable to the Company's
acquisition costs of its equity interest in KKM. Equity income from investment
for the six months ended June 30, 2000, as adjusted, also reflects the
elimination of $725,000 in interest income from KKM to eliminate 100% of
intercompany transactions due to the application of EITF 99-10, Percentage Used
to Determine the Amount of Equity Method Losses. The reclassification of
interest income did not impact the Company's net loss for the period.
5. Hedge Agreement
As a condition of the Loan, 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). Beginning in October 2000, the
Company amortized the Hedge Agreement ratably over the period the underlying
contracts expired, recognizing $482,000 in hedge losses as of December 31, 2000.
As discussed in Note 2, the Company adopted SFAS 133 effective January 1, 2001,
which requires derivative financial instruments be recorded at their fair value.
Accordingly, the Company recognized a $2.52 million loss from the cumulative
effect of change in accounting principle upon adoption. In addition, the Company
recognized an additional $765,000 in hedge losses due to the application of SFAS
133 for the six months ended June 30, 2001.
9
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
6. Other Assets
In March 2000, the Company paid $750,000 to Shell Capital for a beneficial
interest in Shell Capital's policy for transportation risk insurance, covering
certain circumstances whereby KKM would be unable to export crude oil production
outside of the Republic of Kazakhstan through the existing pipeline routes
currently available. In the event coverage under Shell Capital's policy is
triggered, proceeds from the policy would go to the benefit of the Company for
use in making principal and interest payments required under the Loan. The
Company is amortizing the transportation risk insurance over the life of the
Loan. The Company has recognized cumulative amortization expense of $230,000 on
the transportation risk policy, of which $60,000 was incurred during the six
months ended June 30, 2001.
7. Shell Capital Loan
In November 1999, the Company entered into the Loan with Shell Capital, to
provide up to $24 million of financing for the development of the Karakuduk
Field. CAP-D, CAP-G, and KKM also signed the Loan as co-obligors. As of June 30,
2001, the Company had drawn down the entire $24 million principal balance
available under the Loan.
The Loan accrues interest at an annual rate of the London Interbank Offered Rate
("LIBOR") plus 17.75%, compounding quarterly prior to project completion
("Project Completion"). Prior to Project Completion, an interest amount, equal
to annual rate of LIBOR plus .50%, is payable quarterly to Shell Capital. The
annual interest rate is reduced to LIBOR plus 12.75% after Project Completion.
The remaining unpaid interest is added to the Loan balance 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.
Project completion occurs when various conditions are met by the Company and
KKM, including, but not limited to: (i) receipt by Shell Capital of an
independent engineer's reserve report evidencing proved developed reserves of at
least 30 million barrels in the Karakuduk Field, (ii) sustaining average gross
production of 13,000 barrels of oil per day from the Karakuduk Field for a
period of 45 consecutive days, (iii) sustaining water injection at an average
rate of 15,000 barrels per day over 45 consecutive days, (iv) injection of lift
gas into one well over a 24 hour period, and (v) various other financial and
technical milestones.
The Company will not reach Project Completion as presently defined on or before
September 30, 2001. Furthermore, the Company believes that certain technical
requirements of Project Completion are not necessary or prudent to perform in
the time frame specified under the Loan. Failure to meet Project Completion on
or before September 30, 2001, however, is an event of default under the Loan,
unless otherwise waived by Shell Capital.
The Company plans to re-negotiate the definition of Project Completion prior to
September 30, 2001, but there is no assurance the Company will be able to do so.
If not, the Company may be in default under its Loan and, if the default is not
waived by Shell Capital, the Company's investment in the Karakuduk Field may be
lost.
Principal payments, including any interest added to the Loan balance, are due on
quarterly reduction dates ("Reduction Date"), beginning with the first calendar
quarter ending on the earlier of 60 days following 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.
10
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
7. Shell Capital Loan (continued)
The Loan subjects the Company to a significant number of restrictions, including
various representations and warranties, positive and negative covenants, and
events of default, which are more fully described in the Company's Form 10-K for
the year ended December 31, 2000. In general, the Company has pledged
substantially all of its assets to Shell Capital as collateral for the Loan and
has committed to not engage in any other business activity besides the
development of the Karakuduk Field without Shell Capital's approval.
Shell Capital Bridge Loan
-------------------------
The Bridge Loan, executed on May 31, 2001, was structured as an amendment to the
existing Loan. The Bridge Loan provides the Company with up to $8.0 million in
uncommitted working capital, which may be drawn down in increments of $250,000
through August 31, 2001, at the sole discretion of Shell Capital. The principal
borrowed under the Bridge Loan accrues interest at LIBOR plus 17.75% and is
subject to an arrangement fee of 2%. The Company has borrowed a total of $3.0
million under the Bridge Loan.
Interest payments in the amount of LIBOR plus .50% are due at the end of each
month the Bridge Loan is outstanding. All unpaid interest is added to the
outstanding principal balance on each repayment date. The outstanding principal
of the Bridge Loan, plus all accrued interest, is due on or before September 30,
2001, provided that available cash flows on each interest repayment date in
excess of budgeted expenditures for the subsequent month will be used to prepay
the existing Bridge Loan without penalty.
As an incentive for the Company to repay the Bridge Loan or refinance the entire
Loan (including the Bridge Loan), Chaparral's board of directors approved
CAP-G's issuance of Series A Preferred shares to Shell Capital. If the Company
fails to repay or refinance the Bridge Loan on or before September 30, 2001, the
Series A Preferred shares will convert and entitle Shell Capital to 40% of the
distributable profits of CAP-G. Upon repayment of the Bridge Loan the Series A
Preferred shares will be canceled. The Loan, as amended, grants the Company the
prerequisite approval to issue the Company's common or preferred stock in order
to repay the Bridge Loan, if necessary. If the Bridge Loan is not repaid and the
Series A Preferred shares are converted, a significant charge to earnings would
result upon transfer of the 40% interest of distributable profits of CAP-G to
Shell Capital.
As of June 30, 2001, the outstanding Loan balance (including the Bridge Loan) of
$30.46 million is comprised of $27 million in cash borrowings plus $6.18 million
of interest added to the balance as additional principal, net of $2.72 million
in unamortized discount. Interest expense for the six months ended June 30, 2001
totaled $3.7 million, including $3.32 million of interest on outstanding
principal and $383,000 in discount amortization.
8. Common Stock
In June 2001, the Company's stockholders approved the 2001 Stock Incentive Plan,
which sets aside a total of 2.14 million shares of the Company's common stock
for issuance to the Company's officers, directors, employees, and consultants.
As of August 14, 2001, no grants have been made under the 2001 Stock Incentive
Plan.
On August 9, 2001, the Company's common stock was delisted from the Nasdaq
SmallCap Market for failure to comply with Nasdaq Marketplace Rules
4350(i)(1)(A), 4350(i)(1)(B) and 4350(i)(1)(D)(ii), which required the Company
to obtain stockholder approval prior to the conversion of its 8% Non-Negotiable
Subordinated Convertible Promissory Notes into 11,690,259 shares of its common
stock on September 21, 2000 and the issuance of 1,612,903 shares of common stock
on October 30, 2000. Nasdaq also cited a violation of its annual meeting
requirement. The Nasdaq Listing Qualifications Panel did not, however, cite any
public interest concerns as a basis for its determination. The Company's common
stock is being traded on the OTC Bulletin Board.
Shell Capital has waived its requirement under the Loan that the Company's
common stock be listed on one of the three major stock exchanges (i.e. NASDAQ,
NYSE, or AMEX), subject to the Company not incurring another event of default
under the Loan. Shell Capital also waived certain trade payables over 90 days
past due. Therefore, the Company is not in default of the Loan as of August 14,
2001.
11
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
9. Investments
The results from operations of the Company's equity-based investment in KKM are
summarized below:
Closed Type JSC Karakudukmunay
Statement of Expenses and Accumulated Deficit
For the Periods Ended June 30, 2001 and 2000
(Amounts in Thousand US Dollars)
(Unaudited)
For The Three Months Ended For The Six Months Ended
---------------------------------------------------
June 30, June 30, June 30, June 30,
2001 2000(2) 2001 2000(3)
---------------------------------------------------
Revenues:
Oil Sales(1) $ 7,595 $ 3,483 $ 14,213 $ 3,483
Costs and expenses:
Operating expenses 1,234 794 2,498 794
Depreciation and depletion 2,132 828 4,063 1,008
Management service fee 137 148 257 280
General and administrative 892 517 2,042 1,021
-------- -------- -------- --------
Total cost and expenses 4,395 2,287 8,860 3,103
-------- -------- -------- --------
Income from operations 3,200 1,196 5,353 380
Other income (expense):
Interest income $ 2 $ 26 $ 10 $ 26
Interest expense from affiliates (438) (539) (932) (932)
Other (52) (58) (52) (58)
-------- -------- -------- --------
Net income (loss) $ 2,712 $ 625 $ 4,379 $ (584)
Accumulated deficit, beginning of
period (8,935) (13,216) (10,602) (12,007)
-------- -------- -------- --------
Accumulated deficit, end of period $ (6,223) $(12,591) $ (6,223) $(12,591)
======== ======== ======== ========
(1) Revenue is presented net of transportation and marketing cost. In
addition, revenue for the quarter ended June 30, 2000 is shown net of
$153,000 royalty originally presented as a separate line item.
Revenues for all other quarters were shown net of royalty in the
original filings.
(2) KKM's net income for the quarter ended June 30, 2000 has been restated
from $572,000 to $625,000 to reflect additional interest
capitalization of $283,000 and additional depreciation and depletion
expense of $230,000 during the period.
(3) KKM's net loss for the six months ended June 30, 2000 has been
restated from $873,000 to $584,000 to reflect additional interest
capitalization of $519,000 and additional depreciation and depletion
expense of $230,000 during the period.
During the quarter ended June 30, 2001, KKM sold approximately 511,000 barrels
of crude oil for $7.59 million in revenue, net of transportation costs. Export
sales for the period were approximately 357,000 barrels of crude oil for
approximately $6.30 million. To fulfill government requirements, KKM also sold
approximately 154,000 barrels on the local market for approximately $1.29
million.
12
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
9. Investments (continued)
During the six months ended June 30, 2001, KKM sold approximately 974,000
barrels of crude oil for approximately $14.21 million in revenue, net of
transportation costs. Export sales for the period were approximately 719,000
barrels of crude oil for approximately $11.95 million. To fulfill government
requirements, KKM also sold approximately 255,000 barrels on the local market
for approximately $2.26 million.
The Company's equity income or loss from investment in KKM represents its share
of KKM's net income or loss for the respective period after applying EITF 99-10,
adjusted for the elimination of the Company's proportional share of
inter-company interest charged by the Company to KKM during the period.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1. Liquidity and Capital Resources
General Liquidity Considerations.
---------------------------------
Going Concern
-------------
Our financial statements have been presented on the basis Chaparral is a going
concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. We are responsible for providing
100% of the funding for the development of the Karakuduk Field not provided from
oil sales or third party sources. We have recognized recurring operating losses
and have a working capital deficiency as of June 30, 2001. In addition, there
are uncertainties relating to our ability to meet all expenditure and cash flow
requirements through fiscal year 2001, which could result in a default of our
loan with Shell Capital and the loss of our investment in the Karakuduk Field.
We are seeking to alleviate these conditions by increasing cash flows available
from the sale of crude oil production from the Karakuduk Field. We expect to
finance the development of the Karakuduk Field primarily through the production
and sale of crude oil, which is currently limited to approximately 7,000 barrels
of oil per day, net of royalty, by short-term facility constraints.
Additionally, the government of Kazakhstan has required KKM to sell a portion of
its crude oil production on the local market, which generates substantially less
revenue than oil sold on the export market. KKM is attempting to resolve both of
these issues by removing field facility constraints as quickly as possible and
requesting that the government reduce local oil sales requirements imposed upon
KKM. Management expects to incrementally increase daily production, net of
royalty, to approximately 8,500 barrels of oil per day in the fourth quarter of
2001 as various field facility limitations are removed.
We are also trying to obtain additional debt financing to cover any deficiencies
which may occur in the near term, including borrowing short-term working capital
under the $8.0 million uncommitted bridge facility executed with Shell Capital
in May 2001. We borrowed $3.0 million under the bridge loan in May 2001.
No assurances can be provided, however, that we will be able to increase our
operational cash flow to meet our working capital requirements or that
additional financing will be available. The remaining $5.0 million under the
bridge facility is uncommitted and is not accessible by Chaparral to meet
current working capital requirements. Additionally, we are attempting to
restructure the loan with Shell Capital to repay the bridge facility on or
before September 30, 2001, address certain project completion requirements of
the loan, and provide any future working capital necessary to fully develop the
Karakuduk Field. We are required to obtain Shell Capital's approval before we
can raise additional capital or debt financing from other sources, which may
hinder our attempts to raise the necessary working capital to continue
operations if our negotiations with Shell Capital are unsuccessful. Shell
Capital, however, has agreed to allow Chaparral to issue common or preferred
stock in order to repay the bridge facility, if necessary. If we are
unsuccessful in raising additional capital or generating sufficient cash flows
from operations, our loan with Shell Capital may be called into default and/or
our investment in the Karakuduk Field may be lost.
Liquidity and Capital Resources
-------------------------------
We are presently engaged in the development of the Karakuduk Field, which
requires substantial cash expenditures for drilling costs, well completions,
workovers, oil storage and processing facilities, pipelines, gathering systems,
plant & equipment (generators, pumps, communications, etc.) and other field
facilities. As of August 14, 2001, we have invested approximately $58.2 million
in the development of the Karakuduk Field and have drilled or re-completed 31
productive wells, including 12 wells subsequent to December 31, 2000. During
2001, we have drilled 9 wells and 1 water well, and plan to expand field
facilities to increase crude oil processing capacity in excess of 16,000 barrels
of oil per day by the end of 2002. Total capital expenditures for 2001 are
estimated at approximately $26.5 million in comparison to total capital
expenditures of $23.6 million incurred in 2000. Capital expenditures are
estimated to be at least $80.0 to $100.0 million for the period from 2002-2005.
14
We expect to finance the continued development of the Karakuduk Field primarily
through cash flows from the sale of crude oil. During the six months ended June
30, 2001, KKM sold approximately 974,000 barrels of crude oil for $14.21
million, net of transportation costs. Oil prices are also expected to remain at
or near current levels in the short-term, which should positively impact KKM's
net revenues from oil sales on the export market. Total productive capacity of
existing wells is currently in excess of 10,000 barrels of oil per day, but
daily production, net of royalty, is limited to approximately 7,000 barrels due
to short-term field facility constraints. We expect to increase net daily
production to approximately 8,500 barrels of oil per day in the fourth quarter
of 2001, as various facility limitations are removed, including expansion of oil
storage capacity, upgrading existing and installing additional gathering and
processing facilities, and commissioning an oil sales pipeline connecting the
Field to the export pipeline. No assurances may be provided, however, that field
facility constraints will be alleviated as expected, due to potential factors
such as delays in obtaining necessary regulatory approvals, inaccessibility of
contractors and materials needed for construction, and adequate working capital
to timely fund field operations.
Our highest priority in the short-term is to alleviate facility constraints as
quickly as possible to obtain a level of operational cash flow sufficient to
fund our cash requirements. We anticipate up to $4 million in additional working
capital will be necessary to achieve this objective. Furthermore, the
outstanding principal balance of the bridge facility must be repaid on or before
September 30, 2001 to cancel the Series A Preferred shares CAP-G issued to Shell
Capital as part of the terms of the bridge loan (discussed below). If the bridge
facility is not repaid on or before September 30, 2001, Shell Capital will
receive a 40% interest in the net distributable profits of CAP-G, which will
result in a significant reduction in Chaparral's ownership interest in the
Karakuduk Field and a considerable charge to Chaparral's existing stockholders.
Therefore, we are presently in discussions with Shell Capital to restructure the
existing debt facility to repay the outstanding bridge facility on or before
September 30, 2001, redefine or eliminate the loan's project completion
requirement, and provide Chaparral with the necessary working capital to fully
develop the Karakuduk Field.
If we are unable to restructure the loan with Shell Capital, we will be required
to look for additional debt or equity financing from other sources. Shell
Capital must approve any capital or debt financing transactions we may enter
into, but has already approved the issuance of Chaparral's common or preferred
stock in order to repay the bridge facility, if necessary. We can provide no
assurances that any other sources of capital or debt financing will be available
or, if available, will be on terms favorable to Chaparral. If we are unable to
raise additional equity or debt financing in the short-term, we may be in
default of our loan and our investment in the Karakuduk Field may be lost.
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. Under the terms of its agreement with the government,
KKM has a right to export, and receive export quota for, 100% of the production
from the Karakuduk Field. Through August 14, 2001, however, KKM was required by
the government to sell approximately 22% of its crude oil on the domestic
market. The domestic market does not permit world market prices to be obtained,
resulting in approximately $6.0 to $8.0 less cash flow per barrel on 2001 local
oil sales. We are taking steps to reduce our local market obligations, including
petitioning the government to enforce our rights under KKM's agreement and
seeking an exemption from all local market obligations during the early stages
of development of the Karakuduk Field. While management believes we will be
successful in reducing KKM's local sales requirements, some level of future
local market obligation is expected for all oil and gas producers in Kazakhstan,
including KKM. If we are unsuccessful in reducing or eliminating our future
local sales obligations, we may be required to initiate legal proceedings within
Kazakhstan or make a claim under our political risk insurance policy for the
breach of our agreement by the government of Kazakhstan. We can provide no
assurances that legal proceedings within Kazakhstan would be successful, or that
any potential insurance proceeds available under our political risk policy would
fully offset losses incurred due to additional local sales requirements. The
initiation of formal legal proceedings could lead to more material restrictions
of our contractual rights, including our right to develop the Karakuduk Field or
sell any of our crude oil production on the export market whatsoever.
15
Shell Capital loan.
-------------------
As of August 15, 2001, our most significant outstanding indebtedness is our loan
with Shell Capital. We entered into the Loan on November 1, 1999, to provide up
to $24 million of financing for the development of the Karakuduk Field, drawing
down a total of $21.5 million of the facility as of December 31, 2000 and the
remaining $2.5 million as of May 2001.
The Loan accrues interest at an annual rate of LIBOR plus 17.75%, compounding
quarterly prior to project completion. Prior to project completion, an interest
amount, equal to annual rate of LIBOR plus .50%, is payable quarterly to Shell
Capital. The annual interest rate is reduced to LIBOR plus 12.75% after project
completion. The remaining unpaid interest is added to the loan balance at the
end of each quarter. After project completion, all quarterly interest on the
outstanding loan is fully due and payable at the end of each calendar quarter.
Project completion occurs when various conditions are met by us and KKM,
including, but not limited to: (i) receipt by Shell Capital of an independent
engineer's reserve report evidencing proved developed reserves of at least 30
million barrels in the Karakuduk Field, (ii) sustaining average gross production
of 13,000 barrels of oil per day from the Karakuduk Field for a period of 45
consecutive days, (iii) sustaining water injection at an average rate of 15,000
barrels per day over 45 consecutive days, (iv) injection of lift gas into one
well over a 24-hour period, and (v) various other financial and technical
milestones.
We will not reach project completion as presently defined on or before September
30, 2001. Furthermore, we believe that certain technical requirements of project
completion are not necessary or prudent to perform in the time frame specified
under the loan. Failure to meet project completion on or before September 30,
2001, however, is an event of default under the loan. We plan to re-negotiate
the definition of project completion with Shell Capital prior to September 30,
2001, but there are no assurances we will be able to do so. If not, we may be in
default under the loan and if the default is not waived by Shell Capital, our
investment in the Karakuduk Field may be lost.
Principal payments, including any interest added to the loan balance, are due on
quarterly reduction dates, beginning with the first calendar quarter ending on
the earlier of 60 days following 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 Chaparral's and KKM's permitted
budgeted expenditures for the following 45 days and all fees, interest, and
principal payments scheduled on such reduction date.
In connection with finalizing the loan, we also issued a warrant to Shell
Capital to purchase up to 12.5% of our outstanding common stock. The warrant is
non-transferable and will be exercisable on September 30, 2001. The warrant
contains registration rights and is subject to anti-dilution provisions. As of
August 14, 2001, the warrant represents the right to purchase up to 1,785,455
shares of our common stock at an exercise price of $9.79 per share.
The loan subjects us to a significant number of restrictions, including various
representations and warranties, positive and negative covenants, and events of
default. These restrictions include, but are not limited to, the following:
o Pledge of Assets. We pledged substantially all of our assets to Shell
Capital, including our interest in the Karakuduk Field. If an event of
default occurs under the loan and is not timely cured, Shell Capital
is entitled to remedies, including the right to accelerate repayment
of the loan and obtain our rights to the Karakuduk Field.
o Business Alteration. We cannot engage in any other business except the
ownership of KKM and the operation of the Karakuduk Field without the
prior consent of Shell Capital.
o Change in Control. We cannot enter into any transaction where a
"group" as defined in the Securities Exchange Act of 1934 acquires or
otherwise gains control of 20% or more of our outstanding shares of
voting stock. Some transactions are exempt from this restriction,
including the conversion of our outstanding Series A Preferred Stock,
the exercise of the Shell warrant, and a grant of non-statutory or
statutory options to purchase up to 15% of our outstanding common
stock to our officers, directors, employees, and consultants (subject
to anti-dilution provisions). Furthermore, it is an event of default
under the loan if Allen & Company and Whittier Ventures let their
ownership in us fall below 20%, unless otherwise agreed with Shell
Capital.
16
o Charged Accounts. We must retain all cash receipts from oil sales,
proceeds from the loan, and any other funds raised through approved
equity or debt offerings in pledged bank accounts (the "Charged
Accounts"). The Charged Accounts are controlled by Shell Capital. We
retain title to the Charged Accounts, but Shell Capital directs all
cash movements at our request. On a monthly basis, we request
transfers of funds from the Charged Accounts into specific operating
accounts controlled directly by us or by KKM, respectively.
o Cash Expenditures. We must expend funds in accordance with capital and
operating budgets approved by Shell Capital on an annual basis, unless
otherwise approved by Shell Capital.
o Project Completion. KKM must reach project completion on or before
September 30, 2001. Failure to reach project completion is an event of
default under the loan.
o Share Capital. We cannot purchase, issue, or redeem any of our share
capital without the prior approval of Shell Capital.
o Future Indebtedness. We cannot borrow money, other than trade debt,
without the approval of Shell Capital.
o Sale of Significant Assets. We cannot dispose of any significant
assets, including capital stock in our subsidiaries, without the
approval of Shell Capital.
o Leases. Without Shell Capital's approval, KKM cannot enter into any
lease or license arrangement with annual payments in excess of $1.0
million and Chaparral will not enter into any lease or license
arrangement with annual payments in excess of $200,000.
o Dividends. KKM cannot pay dividends prior to project completion, and
then only subject to Shell Capital's approval. We cannot pay any
dividends without Shell Capital's consent.
o OPIC Insurance. We must maintain political risk insurance with the
Overseas Private Investment Company ("OPIC") throughout the duration
of the loan.
o Hedge Agreement. We will not cancel or terminate the hedging contracts
entered into as part of the loan or enter into any other hedging
transaction without Shell Capital's consent.
o Market Listing. Shell Capital has waived Chaparral's requirement under
the loan to be listed on either of The Nasdaq Stock Exchange, the
American Stock Exchange, or the New York Stock Exchange, subject to
Chaparral not incurring another event of default under the loan.
Shell Capital Bridge Loan
-------------------------
The bridge loan, executed on May 31, 2001, was structured as an amendment to the
existing loan with Shell Capital. The bridge loan provides Chaparral with up to
$8.0 million in uncommitted working capital, which may be drawn down in
increments of $250,000 through August 31, 2001, at the sole discretion of Shell
Capital. The principal borrowed under the bridge loan accrues interest at LIBOR
plus 17.75% and is subject to an arrangement fee of 2%. Chaparral has borrowed a
total of $3.0 million under the bridge loan.
Interest payments in the amount of LIBOR plus .50% are due at the end of each
month the bridge loan is outstanding. All unpaid interest is added to the
outstanding principal balance on each repayment date. The outstanding principal
of the bridge loan, plus all accrued interest, is due on or before September 30,
2001, provided that available cash flows on each interest repayment date in
excess of budgeted expenditures for the subsequent month will be used to prepay
the existing bridge loan without penalty.
As an incentive for Chaparral to repay the bridge loan or refinance the entire
loan (including the bridge loan), Chaparral's board of directors approved
CAP-G's issuance of Series A Preferred shares to Shell Capital. If Chaparral
fails to repay or refinance the bridge loan on or before September 30, 2001, the
Series A Preferred shares will convert and entitle Shell Capital to 40% of the
17
distributable profits of CAP-G. Upon repayment of the bridge loan the Series A
Preferred shares will be canceled. The loan, as amended, grants Chaparral the
prerequisite approval to issue Chaparral's common or preferred stock in order to
repay the bridge loan, if necessary. If the bridge loan is not repaid and the
Series A Preferred Shares are converted, a significant charge to earnings would
result upon transfer of the 40% interest of distributable profits of CAP-G to
Shell Capital.
The terms and conditions and related financing costs of the loan are
significant. We estimate approximately $39 to $48 million of future cash flows
will be necessary to fully repay the loan and all accrued interest and fees
thereon, depending upon excess cash flows available from operations to repay the
loan prior to scheduled repayments. Future cash flows from operations required
for debt service will not be available for other purposes. Our ability to obtain
additional debt or equity financing in the future for working capital, capital
expenditures, or acquisitions is also restricted, as well as our ability to
acquire or dispose of significant assets or investments. These restrictions may
make us more vulnerable and less able to react to adverse economic conditions.
The failure of Chaparral to meet the terms of the loan, including the deadline
for project completion, could result in an event of default and the loss of our
investment in the Karakuduk Field.
Capital Commitments and Other Contingencies
-------------------------------------------
On August 9, 2001, Chaparral's common stock was delisted from the Nasdaq
SmallCap Market for failure to comply with Nasdaq Marketplace Rules
4350(i)(1)(A), 4350(i)(1)(B) and 4350(i)(1)(D)(ii), which required Chaparral to
obtain stockholder approval prior to the conversion of its 8% Non-Negotiable
Subordinated Convertible Promissory Notes into 11,690,259 shares of its common
stock on September 21, 2000 and the issuance of 1,612,903 shares of common stock
on October 30, 2000. Nasdaq also cited a violation of its annual meeting
requirement. The Nasdaq Listing Qualifications Panel did not, however, cite any
public interest concerns as a basis for its determination. Chaparral's common
stock is currently being traded on the OTC Bulletin Board.
Shell Capital has waived its requirement under the loan that Chaparral's common
stock be listed on one of the three major stock exchanges, subject to Chaparral
not incurring another event of default under the loan. Shell Capital also waived
certain trade payables over 90 days past due. Therefore, Chaparral is not in
default of the loan as of August 14, 2001.
Our operations may be subject to other regulations by the government of the
Republic of Kazakhstan or other regulatory bodies responsible for the area in
which the Karakuduk Field is located. In addition to taxation, customs
declarations and environmental controls, regulations may govern such things as
drilling permits and production rates. Drilling permits could become difficult
to obtain or prohibitively expensive. Production rates could be set so low that
they would make production unprofitable. These regulations may substantially
increase the costs of doing business and may prevent or delay the starting or
continuation of any given exploration or development project.
All regulations are subject to future changes by legislative and administrative
action and by judicial decisions. Such changes could adversely affect the
petroleum industry in general, and us in particular. It is impossible to predict
the effect that any current or future proposals or changes in existing laws or
regulations will have on our operations.
2. Results from Operations
Results of Operations for the Three Months Ended June 30, 2001 Compared to the
------------------------------------------------------------------------------
Three Months Ended June 30, 2000.
---------------------------------
We account for our investment in KKM using the equity method.
Our operations for the three months ended June 30, 2001 resulted in a net loss
of $1.44 million, compared to a net loss of $1.15 million as of June 30, 2000.
The $297,000 increase in our net loss primarily relates to the adoption of SFAS
133, Accounting for Derivative Instruments and Hedging Activities, as of January
1, 2001, which required us to recognize our hedging activities at fair value. As
a result of the adoption of SFAS 133, we recognized a loss of $278,000 in hedge
losses for the three months ended June 30, 2001 (see Note 2 to our consolidated
financial statements). Additionally, interest and general and administrative
costs increased due to our increased efforts to finance and develop the
Karakuduk Field. As a result of these efforts, we recognized equity income from
our investment in KKM due to KKM's increase in the production and sale of crude
oil during the quarter.
Interest expense increased from $1.8 million for the three months ended June 30,
2000 to $1.9 million for the three months ended June 30, 2001, primarily due to
the increased principal outstanding on our loan with Shell Capital. See Note 7
to our consolidated financial statements.
18
Interest income increased $387,000 to $390,000 for the three months ended June
30, 2001, compared to $3,000 for the three months ended June 30, 2000. The
increase was due to additional financing of KKM's operations in Kazakhstan and
the impact of EITF 99-10, Percentage Used to Determine the Amount of Equity
Method Losses, on the equity method income or losses recognized by Chaparral. We
eliminate inter-company interest income from KKM based upon the proportion of
equity income or losses recognized from KKM for the respective period. During
the three months ended June 30, 2000, we recognized 100% of KKM's equity method
income and, therefore, eliminated 100% of our interest income from KKM. As of
December 31, 2000, we have recaptured all non-proportional EITF 99-10 losses and
recognize income from KKM based on our proportional 50% interest. Therefore, 50%
of our interest income from KKM was eliminated against equity method income for
the three months ended June 30, 2001.
General and administrative costs increased from $718,000 for the three months
ended June 30, 2000 to $1.19 million for the three months ended June 30, 2001.
The $470,000 increase was due to approximately $68,000 in additional insurance
expense from premiums on our OPIC political risk insurance policy and
amortization of transportation risk insurance required by Shell Capital as part
of the loan and $347,000 in additional professional fees associated with the
development of the Karakuduk Field. The remaining increase in general and
administrative costs was associated with the heightened operational activity in
the Karakuduk Field.
Depreciation and depletion expense increased by $120,000 to $180,000 for the
three months ended June 30, 2001, due to the increase in oil production from the
Karakuduk Field. Our depreciation and depletion expense was $60,000 for the
three months ended June 30, 2000.
Our equity income from investment was $1.75 million for the three months ended
June 30, 2001, compared to $1.45 million for the three months ended June 30,
2000. The net change of $300,000 was the result of several factors. During the
three months ended June 30, 2001, KKM sold approximately 511,000 barrels of
crude oil, recognizing $7.59 million, or $14.86 per barrel, in revenue net of
transportation costs. Operating costs associated with sales for the three months
ended June 30, 2001 were $1.23 million, or $2.41 per barrel. During the three
months ended June 30, 2000, KKM sold approximately 201,000 barrels of crude oil,
recognizing $3.48 million, or $17.33 per barrel, in revenue net of
transportation costs. Operating costs associated with sales for the three months
ended June 30, 2000 were $794,000 or $3.95 per barrel. Our equity income or loss
from investment also reflects the elimination of $390,000 and $818,000 of
inter-company interest income on our loan to KKM for the three months ended June
30, 2001 and 2000, respectively.
Results of Operations for the Six Months Ended June 30, 2001 Compared to the Six
--------------------------------------------------------------------------------
Months Ended June 30, 2000.
---------------------------
We account for our investment in KKM using the equity method.
Our operations for the six months ended June 30, 2001 resulted in a net loss of
$5.66 million, compared to a net loss of $3.34 million as of June 30, 2000. The
$2.32 million increase in our net loss primarily relates to the adoption of SFAS
133, Accounting for Derivative Instruments and Hedging Activities, as of January
1, 2001, which required us to recognize our hedging activities at fair value. 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 and a loss of $765,000 in
hedge losses for the six months ended June 30, 2001 (see Note 2 to our
consolidated financial statements). Additionally, interest and general and
administrative costs increased due to our increased efforts to finance and
develop the Karakuduk Field. As a result of these efforts, we recognized equity
income from our investment in KKM due to KKM's significant increase in the
production and sale of crude oil during the period.
Interest expense increased from $2.70 million for the six months ended June 30,
2000 to $3.70 million for the six months ended June 30, 2001, primarily due to
the increased principal outstanding on our loan with Shell Capital. See Note 7
to our consolidated financial statements.
Interest income increased $809,000 to $817,000 for the six months ended June 30,
2001, compared to $8,000 for the six months ended June 30, 2000. The increase
was due to additional financing of KKM's operations in Kazakhstan and the impact
of EITF 99-10, Percentage Used to Determine the Amount of Equity Method Losses,
on the equity method income or losses recognized by Chaparral. We eliminate
inter-company interest income from KKM based upon the proportion of equity
income or losses recognized from KKM for the respective period. During the six
months ended June 30, 2000, we recognized 100% of KKM's equity method losses
and, therefore, eliminated 100% of our interest income from KKM. As of December
19
31, 2000, we have recaptured all non-proportional EITF 99-10 losses and
recognize income from KKM based on our proportional 50% interest. Therefore, 50%
of our interest income from KKM was eliminated against equity method income for
the six months ended June 30, 2001.
General and administrative costs increased from $1.47 million for the six months
ended June 30, 2000 to $2.16 million for the six months ended June 30, 2001. The
$693,000 increase was due to approximately $247,000 in additional insurance
expense from premiums on our OPIC political risk insurance policy and
amortization of transportation risk insurance required by Shell Capital as part
of the loan and a $243,000 increase in professional fees associated with the
development of the Karakuduk Field. The remaining increase in general and
administrative costs was associated with heightened operational activity in the
Karakuduk Field.
Depreciation and depletion expense increased by $229,000 to $343,000 for the six
months ended June 30, 2001, due to the increase in oil production from the
Karakuduk Field. Our depreciation and depletion expense was $114,000 for the six
months ended June 30, 2000.
Our equity income from investment was $3.01 million for the six months ended
June 30, 2001, compared to $865,000 for the six months ended June 30, 2000. The
net change of $2.14 million was the result of several factors. During the six
months ended June 30, 2001, KKM sold approximately 974,000 barrels of crude oil,
recognizing $14.21 million, or $14.59 per barrel, in revenue net of
transportation costs. Operating costs associated with sales for the six months
ended June 30, 2001 were $2.50 million, or $2.56 per barrel. During the six
months ended June 30, 2000, KKM sold approximately 201,000 barrels of crude oil,
recognizing $3.48 million, or $17.33 per barrel, in revenue net of
transportation costs. Operating costs associated with sales for the six months
ended June 30, 2000 were $794,000 or $3.95 per barrel. Our equity income or loss
from investment also reflects the elimination of $815,000 and $1.45 million of
inter-company interest income on our loan to KKM for the six months ended June
30, 2001 and 2000, respectively.
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 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, 2001, the exchange rate was 146.5
tenge per U.S. dollar.
Special Note Regarding Forward-Looking Statements
-------------------------------------------------
Some of the statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements." Forward-looking statements relate to future events
or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "estimates," "believes," "predicts," "potential," "likely,"
or "continue," or by the negative of such terms or comparable terminology.
Forward-looking statements are predictions based on current expectations that
involve a number of risks and uncertainties. Actual events may differ
materially. In evaluating forward-looking statements, you should consider
20
various factors, including the risks discussed above and in our Form 10-K for
the year ended December 31, 2000, which is incorporated by reference as part of
this report. These factors may cause our actual results to differ materially
from any forward-looking statement.
Although we believe that these statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements, and you are
encouraged to exercise caution in considering such forward-looking statements.
Unless otherwise required by law, we are not under any duty to update any of the
forward-looking statements after the date of this Quarterly Report on Form 10-Q
to conform these statements to actual results.
Item 3 - Quantitative and Qualitative Disclosures About Market Risks
We are subject to various market risks, including interest rate risk and
commodity price risk.
Our loan is subject to a variable quarterly interest rate based upon LIBOR plus
17.75%. As of June 30, 2001, the outstanding loan balance subject to interest
was approximately $33.18 million. During the six months ended June 30, 2001, the
high, low, and average interest rates applicable against the loan were 24.27%,
21.81%, and 22.81%, respectively. The terms of the loan are more fully described
in Note 7 of our consolidated financial statements. An increase of applicable
interest rates will result in a corresponding increase in the interest costs
associated with the loan. Furthermore, the majority of the loan interest is
capitalized on a quarterly basis until we reach project completion, which
exposes us to additional interest rate risk on the additional principal amount
of the loan.
We must begin repaying the principal balance of the loan on December 31, 2001.
The loan stipulates the minimum principal repayments required, but also requires
all excess cash flows available from crude oil sales be utilized to repay the
loan as quickly as possible. Earlier repayment of the loan results in
significantly less interest expense charged on the loan. KKM's ability to
generate excess cash flows is dependent upon many factors, including production
rates, access to export markets to sell our crude oil production, and the
available commodity price of crude oil. Lower crude oil prices could
significantly reduce cash flows earned by KKM, which would otherwise be used to
prepay the loan. We estimate approximately $39.0 million to $48.0 million of net
cash flows from oil sales will be required to repay the loan depending upon
excess cash flows available to repay principal earlier than scheduled.
To hedge the risk of a drop in commodity prices, we entered into the hedge
agreement as part of the loan, paying $4.0 million for put contracts to sell a
total of 1,562,250 barrels of North Sea Brent crude. The exercise prices of the
various put contracts 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). During the six months ended June 30, 2001, the high, low, and average
price of the hedge agreement was $999,000, $234,000, and $617,000, respectively.
As of June 30, 2001, the put contracts had a fair market value of $234,000.
While we do not expect to recover any future economic value from the hedge
contracts, we cannot sell the contracts under the terms of the loan.
21
Part II- Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
On June 21, 2001, Chaparral held its Annual Meeting of Stockholders. Our
stockholders elected the following six persons as directors, each to serve until
the next Annual Meeting of Stockholders or until his successor is elected or
appointed: John G. McMillian, James A. Jeffs, Ted Collins, Jr., David A. Dahl,
Richard L. Grant, and Judge Burton B. Roberts. Chaparral's stockholders also
voted to adopt, separately, the 2001 Stock Incentive Plan and to ratify
selection by the board of directors of Ernst & Young LLP as Chaparral's
independent auditors for the fiscal year ended December 31, 2001.
The number of shares voted and withheld with respect to each director was as
follows:
Election of Directors For Against
---------------------------------------------------
John G. McMillian 13,156,431 47,181
James A. Jeffs 13,156,431 47,181
Ted Collins, Jr. 13,156,414 47,198
David A. Dahl 13,156,431 47,181
Richard L. Grant 13,156,410 47,202
Judge Burton B. Roberts 13,156,392 47,220
The number of shares voted (and broker non votes) with respect to the adoption
of the 2001 Stock Incentive Plan was as follows:
For Against Abstain Broker Non-Votes
---------------------------------------------------------------------
12,636,635 53,495 117,023 396,459
The number of shares voted with respect to the approval of Ernst & Young LLP as
Chaparral's independent auditors was as follows:
For Against Abstain
-------------------------------------------
13,168,107 33,806 1,699
22
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
------ -------
4.1 Written Resolutions of the Shareholders of Central Asian
Petroleum (Guernsey) Limited dated May 30, 2001, authorizing
the issuance of Series A Preferred Shares in Central Asian
Petroleum (Guernsey) Limited.
10.1 Amendment Agreement between Chaparral Resources, Inc.
Central Asian Petroleum (Guernsey) Limited, Closed Type JSC
Karakudukmunay, Central Asian Petroleum, Inc., Shell Capital
Services Limited, and Shell Capital Inc., dated May 31,
2001.
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K, dated June 8, 2001 to report receipt of a
Nasdaq Staff Determination regarding the status of our listing on The Nasdaq
SmallCap Market.
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 14, 2001
Chaparral Resources, Inc.
By: /s/ Michael B. Young
--------------------------------
Michael B. Young,
Treasurer, Controller and
Principal Accounting
Officer
23