FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 November 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)
September 30, December 31,
2002 2001
(Unaudited) (Audited)
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 1,196 $ 174
Accounts receivable:
Oil sales receivable 5,368 --
VAT receivable 1,829 --
Other receivables 133 --
Prepaid expenses 2,817 245
Crude oil inventory 776 --
-------- --------
Total current assets 12,119 419
Materials and supplies 2,540 --
Hedge agreement -- 762
Other 5 5
Property, plant and equipment:
Oil and gas properties, full cost:
Properties subject to depletion 73,745 --
Properties not subject to depletion 14,832 --
Investment in KKM and other oil and gas
property costs - full cost method
Republic of Kazakhstan -- 68,948
-------- --------
88,577 68,948
Furniture and fixtures and other equipment 7,812 109
-------- --------
96,389 69,057
Less - accumulated depreciation, depletion, and amortization (25,382) (1,206)
-------- --------
Property, plant and equipment, net 71,007 67,851
Total assets $ 85,671 $ 69,037
======== ========
See accompanying notes.
2
Chaparral Resources, Inc.
Consolidated Balance Sheets (continued)
(In Thousands)
September 30, December 31,
2002 2001
(Unaudited) (Audited)
--------- ---------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,139 $ 536
Accrued liabilities:
Accrued compensation 298 449
Other accrued liabilities 922 144
Current income tax liability 1,114 --
Accrued interest payable 1,789 1,745
Redeemable preferred stock, current portion -- 2,000
Current portion of loans payable to affiliates 4,615 --
Shell Capital loan -- 34,902
--------- ---------
Total current liabilities 10,877 39,776
Loans payable to affiliates 29,313 --
Deferred tax liability 915 --
Accrued production bonus 432 --
Redeemable preferred stock - cumulative, convertible,
Series A 75,000 designated, issued and outstanding,
none and 50,000 shares as of September 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
September 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 (63,096) (68,701)
--------- ---------
Total stockholders' equity 44,134 25,361
--------- ---------
Total liabilities and stockholders' equity $ 85,671 $ 69,037
========= =========
See accompanying notes.
3
Chaparral Resources, Inc.
Consolidated Statements of Operations (Unaudited)
(In Thousands, Except Share Data)
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Revenue $ 13,446 $ -- $ 32,471 $ --
Costs and expenses:
Transportation costs 2,397 -- 7,028 --
Operating expenses 2,212 -- 5,953 --
Depreciation and depletion 3,709 250 9,708 593
Management service fee 233 -- 598 --
Hedge (gains)/losses -- (158) 762 607
General and administrative 1,324 940 4,242 3,099
-------- -------- -------- --------
9,875 1,032 28,291 4,299
-------- -------- -------- --------
Income/(loss) from operations 3,571 (1,032) 4,180 (4,299)
Other income (expense):
Interest income -- 371 6 1,188
Interest expense (1,097) (6,312) (4,449) (10,009)
Equity in income from investment -- 1,208 -- 4,213
Currency exchange gain/(loss) 7 -- (147) --
Other (16) -- (15) --
-------- -------- -------- --------
(1,106) (4,733) (4,605) (4,608)
-------- -------- -------- --------
Income/(loss) before income taxes,
extraordinary gain, and cumulative effect of
change in accounting principle 2,465 (5,765) (425) (8,907)
Income tax expense (352) -- (871) --
-------- -------- -------- --------
Income/(loss) before extraordinary gain
and cumulative effect of change in
accounting principle $ 2,113 $ (5,765) $ (1,296) $ (8,907)
Extraordinary gain -- -- 5,338 --
Cumulative effect of change in accounting
principle -- -- -- (2,519)
-------- -------- -------- --------
Net income/(loss) $ 2,113 $ (5,765) $ 4,042 $(11,426)
======== ======== ======== ========
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock -- (63) -- (188)
Discount accretion
Series A Redeemable Preferred Stock -- (25) -- (75)
-------- -------- -------- --------
Net income/(loss) available to common
stockholders $ 2,113 $ (5,853) $ 4,042 $(11,689)
======== ======== ======== ========
4
Chaparral Resources, Inc.
Consolidated Statements of Operations (continued) (Unaudited)
(In Thousands, Except Share Data)
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Basic earnings per share:
Income/(loss) per share before extraordinary
gain and cumulative effect of change in
accounting principle $ 0.06 $ (0.41) $ (0.05) $ (0.64)
Extraordinary gain $ -- $ -- $ 0.20 $ --
Cumulative effect of change in
accounting principle $ -- $ -- $ -- $ (0.18)
Net income/(loss) per share $ 0.06 $ (0.41) $ 0.15 $ (0.82)
Weighted average number of shares
outstanding (basic) 38,209,502 14,283,801 26,903,950 14,283,783
Diluted earnings per share:
Income/(loss) per share before extraordinary
gain and cumulative effect of change in
accounting principle $ 0.05 $ (0.41) $ (0.05) $ (0.64)
Extraordinary gain $ -- $ -- $ 0.19 $ --
Cumulative effect of change in
accounting principle $ -- $ -- $ -- $ (0.18)
Net income/(loss) per share $ 0.05 $ (0.41) $ 0.14 $ (0.82)
Weighted average number of shares
outstanding (diluted) 39,134,622 14,283,801 27,396,822 14,283,783
See accompanying notes.
5
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
For the Nine Months Ended
September 30, September 30,
2002 2001
-------- --------
Cash flows from operating activities
Net income/(loss) $ 4,042 $(11,426)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Equity income from investment -- (4,213)
Depreciation, depletion, and amortization 9,708 694
Gain on disposition of furniture and fixtures 15 --
Deferred Income Taxes 419 --
Cumulative effect of change in accounting
principal -- 2,519
Hedge losses 762 607
Amortization of debt issuance cost 211 540
Extraordinary gain on restructuring of debt (5,338) --
Interest expense from transfer of net profits interest -- 4,369
Non-cash interest expense 2,753 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (5,273) 295
Prepaid expenses (1,000) (39)
Crude oil inventory (292) --
Accrued interest income on advances to KKM -- (1,185)
Interest payments from KKM -- 3,913
Increase (decrease) in:
Accounts payable and accrued liabilities (7,564) 376
Accrued interest payable 1,752 --
Other liabilities (190) --
Interest expense reclassified as principal on -- 4,260
the Shell Capital loan -------- --------
Net cash provided in operating activities 5 710
-------- --------
Cash flows from investing activities
Additions to property, plant, and equipment $ (6,346) $ (18)
Investment in and advances to KKM -- (6,917)
Acquisition of 10% interest in KKM,
net of cash acquired (644) --
Materials and supplies inventory 270 --
Proceeds from disposition of assets 5 --
-------- --------
Net cash used in investing activities (6,715) (6,935)
-------- --------
6
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (continued) (Unaudited)
(In Thousands)
For the Nine Months Ended
September 30, September 30,
2002 2001
-------- --------
Cash flows from financing activities
Net proceeds from Shell Capital loan $ -- $ 5,650
Proceeds from sale of stock 8,000 --
Proceeds from loans from affiliates 40,000 --
Payments on Shell Capital loan (30,450) --
Debt restructuring costs (2,518) --
Payments on loans from affiliates (5,000) --
Redemption of Series A Preferred Stock (2,300) --
-------- --------
Net cash provided by financing activities 7,732 5,650
-------- --------
Net increase (decrease) in cash and
cash equivalents 1,022 (575)
Cash and cash equivalents at beginning
of period 174 604
-------- --------
Cash and cash equivalents at end of period $ 1,196 $ 29
======== ========
Supplemental cash flow disclosure
Interest paid $ 239 $ 669
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 September 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, which raises substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of 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 6,700 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 Guernsey Isle 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 $607,000 in losses for the nine months ended
September 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 September 30,
2002 the Hedge Agreement had a negligible market value.
6. Loans from Affiliates
Shell Capital Loan
------------------
As of September 30, 2002, the Company had fully repaid 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, all agreements between the
Company and Shell Capital or its affiliates were terminated, and the Company's
requirement to carry political and transportation risk insurances was waived.
The Company repaid an additional $2.35 million in principal on the Shell Capital
Loan subsequent to the completion of the restructuring transaction and repaid
the final $100,000 in principal in August 2002. 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 during 2002.
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. The Company recognized $258,000 in interest expense on the
CAIH Note for the nine months ended September 30, 2002.
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 Company recognized $1.89 million of
interest expense on the KKM Credit Facility for the nine months ended September
30, 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.
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, Kazkommertsbank 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 September 30, 2002 is
as follows:
Principal
Date Amount Due
--------------------------
2003 6,000,000
2004 7,000,000
2005 10,000,000
2006 8,000,000
2007 4,000,000
--------------------------
Total 35,000,000
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.
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.
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.
12
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 September 30, 2001
(Amounts in Thousand US Dollars)
(Unaudited)
For The Three For The Nine
Months Ended Months Ended
---------------------------
September 30, September 30,
2001 2001
---------- ------------
Revenues:
Oil sales(1) $ 6,916 $ 24,911
Costs and expenses:
Transportation expenses 1,234 5,016
Operating expenses 812 3,310
Depreciation and depletion 1,828 5,891
Management service fee 144 401
General and administrative 711 2,753
-------- --------
Total cost and expenses 4,729 17,371
-------- --------
Income from operations 2,187 7,540
Other income (expense):
Interest income $ 3 $ 13
Interest expense (514) (1,446)
Other 1 (51)
-------- --------
Net income before income taxes $ 1,677 $ 6,056
Income tax expense -- --
======== ========
Net income $ 1,677 $ 6,056
======== ========
Accumulated deficit, beginning of
Period (6,223) (10,602)
-------- --------
Accumulated deficit, end of period $ (4,546) $ (4,546)
======== ========
(1) Revenue is presented gross of transportation expenses in accordance with
EITF 00-10, Accounting for Shipping and Handling Fees and Costs.
13
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, which raises 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. See Notes
4 and 6 to our consolidated financial statements. Additionally, we are currently
producing approximately 6,700 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 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 first half of 2003. 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.
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 November 14, 2002 of the current year. The
domestic market does not permit world market prices to be obtained, resulting in
approximately $10 to $12 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 may 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.
14
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 September 30, 2002 Compared to
the Three Months Ended September 30, 2001
--------------------------------------------------------------------------------
Our operations for the three months ended September 30, 2002 resulted in net
income of $2.11 million compared to a net loss of $5.77 million as of September
30, 2001. The $7.88 million increase in our net income primarily relates to
lower costs associated with the refinancing of our debt obligations and improved
operational results from the Karakuduk Field.
Interest expense decreased from $6.31 million for the three months ended
September 30, 2001 to $1.10 million for the three months ended September 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. In addition, Interest expense for
the quarter ended September 30, 2001 reflects additional loan discount of $4.37
million recorded and fully amortized as of September 30, 2001 due to the
transfer of a 40% interest in the distributable profits of CAP-G to Shell
Capital for our failure to repay a $3.15 million bridge loan to Shell Capital on
or before September 30, 2001.
For the quarter ended September 30, 2002, Chaparral's financial results have
been consolidated with the financial results of its operating subsidiary, KKM.
During the three months ended September 30, 2002, we sold approximately 731,000
barrels of crude oil, recognizing $13.45 million, or $18.40 per barrel, in
revenue. Transportation costs were $2.39 million, or $3.27 per barrel and
operating costs associated with sales were $2.21 million, or $3.03 per barrel.
Comparatively, Chaparral recognized $1.21 million in equity income from
investment for the quarter ended September 30, 2001, which represents our 50%
share of KKM's results during the period. During the quarter ended September 30,
2001, KKM sold approximately 385,000 barrels of crude oil, recognizing $6.92
million in revenue, or $17.96 per barrel. Associated operating costs were
$812,000, or $2.11 per barrel, and associated transportation costs were $1.23
million, or $3.21 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 $370,000 of inter-company interest income on our loan to KKM for
the three months ended September 30, 2001.
Results of Operations for the Nine Months Ended September 30, 2002 Compared to
the Nine Months Ended September 30, 2001.
--------------------------------------------------------------------------------
Our operations for the nine months ended September 30, 2002 resulted in net
income of $4.04 million compared to a net loss of $11.43 million as of September
30, 2001. The $15.47 million increase in our net income relates to several
factors. Recognition of a $5.34 million extraordinary gain on the May 2002
restructuring of our loan with Shell Capital, lower costs associated with the
refinancing of our debt obligations, 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.
15
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Chaparral's $5.34 million extraordinary gain on the extinguishment of debt in
the nine months ended September 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 $10 million for the nine months ended September
30, 2001 to $4.45 million for the nine months ended September 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. In addition, interest expense for the nine months ended
September 30, 2001 reflects additional loan discount of $4.37 million recorded
and fully amortized as of September 30, 2001 due to the transfer of a 40%
interest in the distributable profits of CAP-G to Shell Capital for our failure
to repay a $3.15 million bridge loan to Shell Capital on or before September 30,
2001.
For the nine months ended September 30, 2002, Chaparral's financial results have
been consolidated with the financial results of its operating subsidiary, KKM.
During the nine months ended September 30, 2002, we sold approximately 1,881,000
barrels of crude oil, recognizing $32.47 million, or $17.26 per barrel, in
revenue. Transportation costs were $7.03 million, or $3.74 per barrel and
operating costs associated with sales were $5.95 million, or $3.16 per barrel.
Comparatively, Chaparral recognized $4.21 million in equity income from
investment for the nine months ended September 30, 2001, which represents our
50% share of KKM's results during the period. During the nine months ended
September 30, 2001, KKM sold approximately 1.36 million barrels of crude oil,
recognizing $24.91 million in revenue, or $18.34 per barrel. Associated
operating costs were $3.31 million, or $2.44 per barrel, and associated
transportation costs were $5.02 million, or $3.69 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 $1.19 million of inter-company
interest income on our loan to KKM for the nine months ended September 30, 2001.
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 nine months
ended September 30, 2001, to record derivatives entered into as a requirement of
the Shell Capital loan at their fair value. As of September 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
16
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 September 30, 2002, the exchange rate was
154.6 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."
Item 4 - Controls and Procedures
An evaluation was performed under the supervision and with the participation of
the Company's management, including the CEO and CFO, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures were effective
as of September 30, 2002. There have been no significant changes in the
Company's internal controls or in other factors that could have a significant
adverse effect on internal controls subsequent to September 30, 2002.
17
Part II- Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
18
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 19, 2002
Chaparral Resources, Inc.
By: /s/ Nikolai D. Klinchev
------------------------------------
Nikolai D. Klinchev
Chief Executive Officer
By: /s/ Richard J. Moore
------------------------------------
Richard J. Moore,
VP Finance and Chief Financial
Officer (Principal Financial and
Accounting Officer)
19
Certifications
I, Nikolai D. Klinchev, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chaparral Resources,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002 /s/ Nikolai D. Klinchev
---------------------------
Nikolai D. Klinchev
Chief Executive Officer
20
I, Richard J. Moore, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chaparral Resources,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002 /s/ Richard J. Moore
---------------------------
Richard J. Moore
Chief Financial Officer
21