FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003.
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)
2 Gannett Drive, Suite 418
White Plains, New York 10604
----------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (866) 559-3822
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.0001 Per Share
----------------------------------------
(Title of Class)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer.
YES |_| NO |X|
As of June 30, 2003, the aggregate market value of registrant's voting
common stock, par value $.0001 per share, held by non-affiliates was
$15,426,505.
As of March 15, 2004, registrant had 38,209,502 shares of its common stock,
par value $.0001 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business
Our Business .............................................................................1
Available Information ....................................................................1
Crude Oil Sales ..........................................................................2
Risks of Oil and Gas Activities ..........................................................3
Risks of Foreign Operations ..............................................................4
Environmental Regulations ................................................................4
Competition ..............................................................................5
Employees ................................................................................5
Corporate Information ....................................................................5
Special Note Regarding Forward-Looking Statements ........................................5
Item 2. Properties
Properties ...............................................................................5
Net Quantities of Oil and Gas Produced ...................................................7
Drilling Activity ........................................................................8
Item 3. Legal Proceedings .........................................................................8
Item 4. Submission of Matters to Vote of Security Holders .........................................9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .....................9
Item 6. Selected Financial Data ..................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ....12
Item 7A Quantitative and Qualitative Disclosure about Market Risk ................................22
Item 8. Financial Statements and Supplementary Data ..............................................23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures ....23
Item 9A. Controls and Procedures ................................................................ 23
PART III
Item 10. Directors and Executives Officers of the Registrant .....................................24
Item 11. Executive Compensation ..................................................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management ..........................32
Item 13. Certain Relationships and Related Transactions ..........................................33
Item 14. Principal Accounting Fees and Services ..................................................34
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................35
PART I
ITEM 1. BUSINESS
Our Business
------------
Chaparral Resources, Inc. is an independent oil and gas exploration and
production company. Our strategy is to acquire and develop oil and gas projects
in emerging markets, specifically targeting fields with previously discovered
reserves, which have never been commercially produced or could be materially
enhanced by our management team and technical expertise.
Through intermediate holding companies, Central Asian Petroleum (Guernsey),
Ltd., a Guernsey company ("CAP-G"), Korporatsiya Mangistau Terra International
Limited ("MTI"), a Kazakhstan company, and Central Asian Petroleum, Inc., a
Delaware company ("CAP-D"), we own a 60% interest in Closed Type JSC
Karakudukmunay ("KKM"), a Kazakh joint stock company that holds a governmental
license to develop the Karakuduk Oil Field. All references to "Chaparral," "we,"
"us," and "our" refer to Chaparral Resources, Inc., and Chaparral's greater than
50% owned subsidiaries, unless indicated otherwise.
Since 1995, the business of Chaparral has been the development of the
Karakuduk Field, a 16,900-acre oil field in the Republic of Kazakhstan. The U.S.
based oil and gas assets of Chaparral were divested during 1996 and 1997 to help
fund the development of the Karakuduk Field. The Government of the former Soviet
Union discovered the Karakuduk Field in 1972 and drilled 22 exploratory and
development wells, none of which were produced commercially. KKM began to
aggressively develop the Karakuduk Field in early 2000, re-establishing oil
production from a majority of the existing wells and drilling a total of 23 new
wells through to September 2001. On February 12, 2003, KKM commenced a new
drilling campaign to further develop and commercially produce the oil reserves
in the Karakuduk Field. By the end of 2003 the well stock had risen to 45
producing wells, 4 water injection wells and 3 water supply wells (one of which
was under completion at year end). The drilling campaign is to be continued
throughout 2004 when it is anticipated that a further 12 production wells, 4
water injection wells and 3 water supply wells will be drilled.
The other stockholder of KKM is KazMunayGaz JSC, the state owned national
petroleum and transportation company of the Republic of Kazakhstan, which owns a
40% interest.
Currently, the Karakuduk Field is our only oil field. We are continuing to
identify and evaluate other oil fields for possible acquisition and development.
We have no other significant subsidiaries besides CAP-G, MTI, and CAP-D.
During 2002, Chaparral obtained a controlling interest in KKM.
Consequently, Chaparral's financial statements have been consolidated with KKM
on a retroactive basis to January 1, 2002. Chaparral previously accounted for
its 50% investment in KKM using the equity method of accounting, which is
reflected in Chaparral's financial statements for periods prior to 2002. The
consolidated financial statements for Chaparral for the three years ending
December 31, 2003 and separate financial statements for KKM for the two years
ended December 31, 2001 are included as part of this Annual Report on Form 10-K.
Available Information
---------------------
Chaparral files Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and registration statements and other items
with the Securities and Exchange Commission (SEC). Chaparral provides access
free of charge to all of these SEC filings, as soon as reasonably practicable
after filing, on its Internet site located at www.chaparralresources.com.
Chaparral will also make available to any stockholder, for a nominal fee, copies
of its Annual Report on Form 10-K as filed with the SEC. For copies of this, or
any other filing, please contact: Chaparral Resources, Inc., 2 Gannett Drive,
Suite 418, White Plains, New York 10604 or call (866) 559-3822.
1
In addition, the public may read and copy any materials Chaparral files
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site (www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers, like Chaparral, that file
electronically with the SEC.
Crude Oil Sales
---------------
We derive all of our revenue through the production and sale of crude oil
from the Karakuduk Field. We remain in the early stages of development of the
Karakuduk Field and only began generating revenue from the sale of crude oil
during 2000. KKM recognized $57.61 million in revenue in 2003 from the sale of
approximately 2.69 million barrels of crude oil, net of royalty. In 2002, KKM
recorded $45.13 million in revenue based upon sales of approximately 2.47
million barrels of crude oil, net of royalty.
KKM sells the majority of its crude oil on the "far" abroad export market.
Sales at world market prices were responsible for approximately 96% of KKM's oil
sales revenue in 2003. Currently, KKM has a month to month crude oil sales
agreement in place with Vitol Central Asia S.A. ("Vitol") for the sale of KKM's
oil production quota for the export market. KKM is responsible for obtaining
export quotas and all other permissions from Kazakhstan, Russia, or other
relevant jurisdictions necessary to transport and deliver KKM's oil production
to the off-taker. The off-taker is responsible for nominating and coordinating
oil tankers, if necessary, and arranging for the resale/marketing of the crude
oil purchased.
In 2003, KKM sold crude oil to the following major customers: Vitol Central
Asia S.A., Naftex Oil and Shipping Corporation ("Naftex"), and Euro-Asian Oil
Company Inc ("Euro-Asian"), accounting for 61%, 13% and 12% of total annual
deliveries, respectively.
The majority of our sales prices at the export port locations are based
upon quoted Urals crude oil prices from the Platt's Crude Oil Marketwire average
for the three banking days following the bill of lading. The price is net of
deductions that include freight charges published in both Platt's Dirty Tanker
Wire and the Worldscale Tanker Nominal Freight Scale. As of January 1, 2003,
additional deductions of approximately $1 per barrel have been implemented due
to increased regulatory pressure on owners/charter companies to improve safety
requirements. Recently, we have also witnessed a rise in both deductions and
demurrage costs, which is largely attributable to shipping delays at the
entrance to the Black Sea. Under contract terms, payment is made by the offtaker
within 30 days of receipt of the final bill of lading and KKM's invoice for the
sale, unless otherwise agreed by both parties. There are six delivery points for
export sales, including three preferred port facilities (Novorossiisk, Odessa,
and Ventspills) and three onshore pipeline facilities (Budkovce, Feyeshlitke,
and Adamovo). KKM must use its best efforts to deliver crude oil to one of the
three preferred port locations. To date, the majority of KKM's export oil sales
have been delivered to the Ukrainian port of Odessa. KKM has a contractual right
to deliver undersized cargoes to the port facilities, subject to additional
freight charges if a tanker is loaded below its tonnage capacity. Third-party
sellers, however, may offset capacity shortages in the tanker.
Under the terms of the Agreement with the Government of the republic of
Kazakhstan, we have a right to export, and receive export quota for, 100% of the
production from the Karakuduk Field. However, oil producers within Kazakhstan
are required to supply a portion of their crude oil production to the local
market to meet domestic energy needs. The domestic market does not permit world
market prices to be obtained, resulting in approximately $10 to $12 lower cash
flow per barrel. Furthermore, the Government of Kazakhstan 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 to obtain an export quota that will enable us to sell all of our
crude oil production on the export market. On July 17, 2003, we took the first
step towards the commencement of arbitration proceedings in Switzerland for the
breach of the Agreement by the Government of Kazakhstan by initiating a required
three-month period of consultation with the Government. Although the
consultation period has expired, we continue to seek an amicable resolution with
the Government on this matter rather than proceeding with arbitration. If the
matter can not be resolved in a satisfactory manner, we have, however, reserved
our right to commence formal arbitration proceedings pursuant to our contractual
arrangements with the Government. See Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
2
Risks of Oil and Gas Activities
-------------------------------
The current market for oil is characterized by instability. This
instability has caused fluctuations in world oil prices in recent years and
there is no assurance of any price stability in the future. The production and
sale of oil from the Karakuduk Field may not be commercially feasible under
market conditions prevailing in the future. The price we receive for our oil may
not be sufficient to generate revenues in excess of our costs of production or
provide sufficient cash flow to meet our investment and working capital
requirements.
We make no assurance that we will be able to sell oil that we produce nor
the price at which such sales will be made. Our estimated future net revenue
from oil sales is highly dependent on the price of oil, as well as the quantity
of oil produced. The volatility of the energy market makes it difficult to
estimate future prices of oil. Various factors beyond our control affect these
prices. These factors include:
o domestic and worldwide supplies of oil;
o the ability of the members of the Organization of Petroleum Exporting
Countries, or OPEC, to agree to and maintain oil price and production
controls;
o political instability or armed conflict in oil-producing regions;
o the price of foreign imports;
o the level of consumer demand;
o the price and availability of alternative fuels;
o the availability of pipeline capacity and;
o changes in existing federal regulation and price controls.
It is likely that oil prices will continue to fluctuate as they have in the
past. Current oil prices are not representative of oil prices in either the
near- or long-term. We do not expect oil prices to maintain current price levels
and do not base our capital spending decisions on current market prices.
No assurances can be given that we will be able to successfully develop,
produce, and market the oil reserves underlying the Karakuduk Field. The
development of oil reserves inherently involves a high degree of risk, even
though the reserves are proved. Our risks are increased because our activities
are concentrated in areas where political or other unknown circumstances could
adversely affect commercial development of the reserves. Costs necessary to
acquire, explore, and develop oil reserves are substantial. No assurances can be
given that we will recover the costs incurred to acquire and develop the
Karakuduk Field. If we fail to generate sufficient cash flow from operations to
meet our working capital requirements or other long-term debt obligations, we
may lose our entire investment in the Karakuduk Field, which is currently
pledged as collateral to JSC Kazkommertsbank ("Kazkommertsbank") under the terms
of the loan with Kazkommertsbank (the "KKM Credit Facility").
3
The development of oil reserves is a high risk endeavor and is frequently
marked by unprofitable efforts, such as:
o drilling unproductive wells;
o drilling productive wells which do not produce commercial quantities
and;
o production of developed oil reserves which cannot be marketed or
achieve an adequate market price.
There are many additional risks associated with drilling for and producing
oil and gas. These risks include blowouts, cratering, fires, equipment failure
and accidents. Any of these events could result in personal injury, loss of life
and environmental and/or property damage. If such an event does occur, we may be
held liable and we are not fully insured against all of these risks. In fact,
many of these risks cannot be insured against. The occurrence of such events
that are not fully covered by insurance may require us to pay damages, which
would reduce our profits. As of February 24, 2004, we have not experienced any
material losses due to these events.
Risks of Foreign Operations
---------------------------
Our ability to develop the Karakuduk Field is dependent on fundamental
contracts with governmental agencies in Kazakhstan, including KKM's Agreement
with the Ministry of Energy and Natural Resources for Exploration, Development,
and Production of Oil in the Karakuduk Oil Field (the "Agreement") and KKM's
petroleum license with the government allowing KKM to operate and develop the
Karakuduk Field. Kazakhstan is a relatively new country and, as is inherent in
such developing markets, there is some uncertainty as to the interpretation and
application of Kazakh law and the stability of the region.
The laws of the Republic of Kazakhstan govern our operations and a number
of our significant agreements. As a result, we may be subject to arbitration in
Kazakhstan or to the jurisdiction of the Kazakh courts. Even if we seek relief
in foreign territories such as the courts of the United States or Switzerland,
we may not be successful in subjecting foreign persons to the jurisdiction of
those courts.
The export of oil from Kazakhstan depends on access to transportation
routes, particularly the Russian pipeline system. Transportation routes are
limited in number, and access to them is regulated and restricted. If any of our
agreements relating to oil transportation or marketing are breached, or if we
are unable to renew such agreements upon their expiration, we may be unable to
transport or market our oil. Also, a breakdown of the Kazakhstan or Russian
pipeline systems could delay or even halt our ability to sell oil. Any such
event would result in reduced revenues.
Obtaining the necessary quotas and permissions to export production through
the Russian pipeline system can be extremely difficult, if not impossible in
some circumstances. Our agreements with the government of the Republic of
Kazakhstan grant us the right to export, and to receive export quota. We cannot,
however, provide any assurances that we will receive export quota or any other
approvals required to export and deliver our production in the future.
Environmental Regulations
-------------------------
We must comply with laws of the Republic of Kazakhstan and international
requirements that regulate the discharge of materials into the environment.
Furthermore, KKM's Credit Facility requires that we comply with the World Bank's
environment, health, and safety guidelines for onshore oil and gas development.
Environmental protection and pollution control could, in the future, become so
restrictive as to make production unprofitable. Furthermore, we may be exposed
to potential claims and lawsuits involving such environmental matters as soil
and water contamination and air pollution. We are currently in compliance with
all local and international environmental requirements and are closely monitored
by the environmental authorities of the Republic of Kazakhstan. We have not made
any material capital expenditures for environmental control facilities to date,
but we are currently performing a feasibility study, the results of which may
require capital expenditures to ensure environmental compliance for the
utilization of associated gas.
4
Competition
-----------
We compete in all areas of the exploration and production segment of the
oil and gas industry with a number of other companies. These companies include
large multinational oil and gas companies and other independent operators, many
of which possess greater financial resources and more experience than Chaparral.
We do not hold a significant competitive position in the oil industry given that
we compete both with major oil and gas companies and with independent producers
for, among other things, rights to develop oil and gas properties, access to
limited pipeline capacity, procurement of available materials and resources, and
hiring qualified local and international personnel.
Employees
---------
As of February 24, 2004, Chaparral had 4 full-time employees. KKM had 209
employees and retains independent consultants on an as needed basis. We believe
that our relationship with our employees and consultants is good.
Corporate Information
---------------------
Chaparral was incorporated under the laws of the State of Colorado in 1972.
In 1999, Chaparral reincorporated under the laws of the State of Delaware.
Our address is 2 Gannett Drive, Suite 418, White Plains, New York 10604,
and our telephone number is (866) 559-3822.
Special Note Regarding Forward-Looking Statements
-------------------------------------------------
Some of the statements in this Annual Report on Form 10-K 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
various factors, including the risks discussed above in "Risks of Oil and Gas
Activities" and "Risks of Foreign Operations." 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 Annual
Report on Form 10-K to conform these statements to actual results.
ITEM 2. PROPERTIES
Properties
----------
The Karakuduk Field is located in the Mangistau Region of the Republic of
Kazakhstan. The license to develop the Karakuduk Field covers an area of
approximately 16,900 acres and is effective for a 25-year period, which may be
extended if the productive life of the field exceeds this term. In 1995, KKM
entered into an agreement with Kazakhstan's Ministry of Energy and Natural
Resources to develop the Karakuduk Field.
The Karakuduk Field is geographically located approximately 227 miles
northeast of the regional capital city of Aktau, on the Ust-Yurt Plateau. The
closest settlement is the Say-Utes Railway Station approximately 51 miles
southeast of the field. The ground elevation varies between 590 and 656 feet
above sea level. The region has a dry, continental climate, with fewer than 10
inches of rainfall per year. Mean temperatures range from minus 25 degrees
Fahrenheit in January to 100 degrees Fahrenheit in July. The operating
environment is similar to that found in northern Arizona and New Mexico in the
United States.
5
The Karakuduk Field structure is an asymmetrical anticline located on the
Aristan Uplift in the North Ustyurt Basin. Oil was discovered in the structure
in 1972, when Kazakhstan was a republic of the former Soviet Union, from
Jurassic age sediments between 8,500 and 10,000 feet. The former Soviet Union
drilled 22 exploratory and development wells to delineate the Karakuduk Field,
discovering the presence of recoverable oil reserves. The productive area of the
Karakuduk Field is estimated to contain a minimum of 8 separate productive
horizons present in the Jurassic formation. None of the original wells were ever
placed on commercial production prior to KKM obtaining the rights to the
Karakuduk Field.
The Karakuduk Field is approximately 18 miles north of the main utility
corridor, which includes the Makat-Mangishlak railroad, the Mangishlak-Astrakhan
water pipeline, the Beyneu-Uzen high voltage utility lines, and the
Uzen-Atrau-Samara oil and gas pipelines. KKM, according to its agreements with
the Republic of Kazakhstan, has a right to use the existing oil export pipeline
and related utilities. KKM also has a contract with CJSC Kaztransoil ("KTO"), a
100% subsidiary of KMG, granting KKM the right to use the export pipeline for
transportation of crude oil to local and export markets, subject to transit
quota restrictions, and as a temporary storage facility until the produced
hydrocarbons are sold by KKM.
As of February 24, 2004, KKM had 47 productive wells in the Karakuduk
Field, including 34 new wells and 13 re-completions of previously existing
delineation wells. The 47 wells include 40 wells currently producing over 8,500
barrels of oil per day collectively and 7 which are shut-in for various reasons
that include completion, installation of additional gathering lines, equipment
and additional workover operations, water injection and stimulation activities
to bring wells on to primary production. KKM implemented an aggressive drilling
program during 2000, drilling a total of 12 development wells and re-completing
4 delineation wells using a combination of two drilling rigs and a workover rig.
KKM drilled an additional exploratory well and performed two re-completions
prior to 2000. During 2001, KKM drilled an additional 10 development wells and
re-completed seven delineation wells. In 2002, KKM did not have any drilling
activity. During 2003, KKM drilled 13 wells (12 producers and one injector),
completing all of these wells prior to the year-end. Two water supply wells were
also drilled and 2 redundant producing wells were converted to injectors as part
of KKM's reservoir pressure maintenance program. The drilling program has
continued into 2004 and it is anticipated that a further 12 producers, 4
injectors and 3 water source wells will be drilled during the year. Oil has been
recovered from the originally identified J-1, J-2, J-4, J-6a, J-8, and J-9
formations, along with new discoveries in the J-6b, J-7 and J-10 horizons.
In the past, KKM's daily oil production has been limited due to various
facility constraints and lack of working capital to fund field operations. KKM
remains committed to improving efficiency of field facilities through continued
expansion of its oil storage capacity, installation of additional gathering and
processing facilities, and the full implementation of the central processing
facility.
In June 2002, KKM commissioned an 18-mile crude oil pipeline from the
Karakuduk Field capable of transporting up to 18,000 barrels of oil per day to
the export pipeline terminal. To maximize efficiency of line and guarantee
throughput, KKM continues improvements at the facilities on mid pipeline, where
there are situated tanks, pumps, booster pumps and mid line heaters. The
pipeline runs from the central processing unit to the pump station, which lies
adjacent to the main export pipeline. While this has reduced the requirement for
trucking oil to the pump station, KKM does, however, continue to haul oil to the
central processing unit from remote wells and those awaiting flowline
installation.
In 2003, KKM further expanded the central processing unit in order to
improve its produced water processing capability in the field, to enable
reservoir pressure maintenance through water injection.
Having commissioned the field high line (providing electricity for the
field from the 110kv main grid) KKM continued the installation of 6kv power
lines to well sites during 2003. This project also included providing power to a
third gathering unit (GU3) commissioned July in 2003, which is capable of
handling the throughput of up to 24 wells.
6
KKM currently has 2 drilling rigs and 2 workover rigs operating in the
Karakuduk Field. While the main rig continues the drilling of development wells,
the second rig is used for the drilling of water supply wells. The workover rigs
are expected to continue operations, performing standard well maintenance,
completions of new wells, re-completions of existing wells, and down-hole pump
installations. As of February 24, 2004 we estimate that up to 63 additional new
wells will be required to fully develop the Karakuduk Field together with a
further 6 water supply wells. We estimate that some 32 producing wells will
eventually be converted into water injection wells. The planned development
program includes a pressure maintenance operation involving water injection that
management believes will substantially enhance ultimate recovery.
The artificial lift program, while encompassing water injection, also
includes the ongoing installation of pumps at well sites. In 2003, 10 electrical
submersible pumps, 10 sucker rod ("nodding donkey") pumps and 1 screw pump were
installed in the Karakuduk field.
As part of the artificial lift program to improve well productivity, KKM
also performed hydraulic fracturing on 11 wells. As of year end 2003, 9 of these
wells were completed with 2 in the process of completion. Hydraulic fracturing
has proven reasonably successful. KKM has achieved marked increases in post frac
production rates on 5 wells and has witnessed production increases on a further
3 wells. Of the remaining 3 wells, 2 are awaiting completion while 1 requires
remedial work.
During 2002, Chaparral completed a simulation study, which we have used to
optimize the location of wells (both producers and injectors) and further define
the possible total productive capacity of the Karakuduk Field. We have a
contract in place with Ryder Scott Company ("Ryder Scott"), a petroleum
engineering firm, for the monitoring and analysis of reservoir performance on a
monthly basis.
Reserves
--------
As of December 31, 2003, the Karakuduk Field has total estimated proved
reserves of approximately 25.62 million barrels (compared with 21.86 million
barrels for prior year), net of government royalty, of which we have a
proportional interest in approximately 15.37 million barrels, based upon our 60%
interest in KKM. The reserve disclosure is based on a reserve study of the
Karakuduk Field conducted by Ryder Scott, including data available subsequent to
December 31, 2003.
No reserve estimates have been filed with any Federal authority or other
agency since January 1, 2003.
Net Quantities of Oil and Gas Produced
--------------------------------------
The following table summarized sales volumes, sales prices and production
cost information for our oil and gas production for each of the three years
ended December 31, 2003:
As of the Year Ended December 31,
------------------------------------
2001 2002 2003
---------- ---------- ----------
Net sales volumes
Oil (bbls) 1,092,000 2,467,000 2,694,000
Gas (mcf) -- -- --
Average sales price
Oil (per bbl) $ 16.75 $ 18.29 $ 21.39
Gas (per mcf) $ -- $ -- $ --
Average production cost (per bbl) $ 2.40 $ 3.11 $ 2.20
The average sales revenue, net of transportation costs, was approximately
$17.13 and $14.47 per barrel for the years ended December 31, 2003 and 2002,
respectively. For the same periods, the average transportation costs per barrel
were approximately $4.26 and $3.82, respectively.
7
Net sales volume for the year 2001 represents our 50% equity interest in
KKM's production, but does not reflect our right under the agreement with the
government of the Republic of Kazakhstan to receive 65% of KKM's cash flow from
oil sales, net of royalty, on a quarterly basis until our loan to KKM has been
fully repaid. The remaining 35% of net cash flows is used by KKM to meet capital
and operating expenditures. We may waive receipt of quarterly loan repayments,
in whole or in part, to provide KKM with additional working capital.
Productive Wells and Acreage
----------------------------
As of December 31, 2003, we had interests in 45 gross productive oil wells,
and no producing gas wells. There were no multiple completion wells. Production
was from 16,900 gross acres, of which 5,000 acres are productive developed.
Undeveloped Acreage
-------------------
As of December 31, 2003, 5,000 acres in the Karakuduk Field are productive
undeveloped.
Drilling Activity
-----------------
During the three years ended December 31, 2003, our net interests in
exploratory and development wells drilled were as follows:
Exploratory Wells, Net Development Wells, Net
Year Ended ---------------------- ----------------------
December 31, Productive Dry Productive Dry
------------ ---------- --- ---------- ---
2001 .5 -- 8.0 --
2002 -- -- -- --
2003 -- -- 7.8 --
All wells are located in the Republic of Kazakhstan.
Present Activities
------------------
As of February 24, 2004, KKM has successfully completed an additional two
development wells (No. 195 and 190) and another development well (No. 143) is
expected to be completed in March 2004. Well No. 143 was spudded on February 19,
2004 and is expected to be drilled to a depth of approximately 10,700 feet
(3,250 meters). The Karakuduk Field is currently producing approximately 8,500
barrels of oil per day from 40 flowing wells. KKM has also successfully
completed 2 water supply wells and is currently drilling a third water supply
well. See Item 7 - Management's Discussion and Financial Condition and Results
of Operations for additional information on Chaparral's ongoing activities.
ITEM 3. LEGAL PROCEEDINGS
In December 2002, KKM received a claim from the Ministry of State Revenues
of the Republic of Kazakhstan for $9.1 million (the "Tax Claim") relating to
taxes and penalties covering the three years from 1999 to 2001. KKM appealed the
claim through the courts in Kazakhstan, which eventually ruled in favor of KKM
with the exception of $255,000 which was upheld. As a result KKM reversed
$899,000 for income taxes accrued during 2002 for the Tax Claim net of the
$255,000 which was settled in January 2004.
The Ministry of State Revenues of the Republic of Kazakhstan is currently
considering penalties with respect to the Tax Claim in the amount of $970,000.
Due to the success of the appeal on the Tax Claim, we expect that the liability
with regards to penalties will be reduced to approximately $55,000. The date for
the court hearing in respect of this claim is anticipated to be decided in March
2004, with the actual hearing to be conducted at a subsequent date. It is our
opinion that the ultimate resolution of this claim will not have a material
adverse effect on the financial position and operating results of Chaparral.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 16, 2003, 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: Askar Alshinbayev, Ian Connor, Nikolai D. Klinchev, Alan D. Berlin,
Peter G. Dilling, and John Duthie. Chaparral's stockholders also voted to ratify
selection by the board of directors of Ernst & Young as Chaparral's independent
auditors for the fiscal year ended December 31, 2003.
The number of shares voted and withheld with respect to each director was
as follows:
Election of Directors For Withheld
--------------------- --- --------
Askar Alshinbayev - 36,406,860 16,993
Ian Connor - 36,407,878 15.975
Nikolai D. Klinchev - 36,406,862 16,991
Alan D. Berlin - 36,407,796 16,057
Peter G. Dilling - 36,403,402 20,811
John Duthie - 36,408,842 15,811
The number of shares voted with respect to the approval of Ernst & Young as
Chaparral's independent auditors was as follows:
For Against Abstained
--- ------- ---------
36,416,928 1,278 5,647
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently quoted on the OTC Bulletin Board under the
symbol "CHAR". As of March 15, 2004, we have 1,373 stockholders of record of our
common stock. No dividend has been paid on our common stock, and there are no
plans to pay dividends in the foreseeable future.
The following table shows the range of high and low bid prices for each
quarter during our last two calendar years ended December 31, 2003 and 2002, as
reported by the National Association of Securities Dealers, Inc.:
Price Range
-----------
Fiscal Quarter Ended High Low
-------------------- ---- ---
March 31, 2002 1.75 1.30
June 30, 2002 3.05 1.40
September 30, 2002 2.20 1.25
December 31, 2002 1.50 0.82
March 31, 2003 1.05 0.60
June 30, 2003 1.50 0.88
September 30, 2003 2.20 1.00
December 31, 2003 1.45 1.00
9
In August 2001, our 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 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 also subject to the rules and regulations of
the SEC concerning "penny stocks." The SEC's rules and regulations generally
define a penny stock to be an equity security that is not listed on Nasdaq or a
national securities exchange and that has a market price of less than $5.00 per
share, subject to certain exceptions. The SEC's rules and regulations require
broker-dealers to deliver to a purchaser of penny stock a disclosure schedule
explaining the penny stock market and the risks associated with it. Various
sales practice requirements are also imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, broker-dealers must provide the customer
with current bid and offer quotations for the penny stock, the compensation of
the broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account.
1998 Incentive and Non-statutory Stock Option Plan
On June 26, 1998, the stockholders approved the 1998 Incentive and
Non-statutory Stock Option Plan (the "1998 Plan"), pursuant to which up to
50,000 options to acquire Chaparral's common stock may be granted to officers,
directors, employees, or consultants of Chaparral and its subsidiaries. The
stock options granted under the 1998 Plan may be either incentive stock options
or nonstatutory stock options. The 1998 Plan has an effective term of ten years,
commencing on May 20, 1998. Chaparral has not granted any options under the 1998
Plan as of December 31, 2003.
2001 Stock Incentive Plan
In June 2001, Chaparral's stockholders approved the 2001 Stock Incentive
Plan, which sets aside a total of 2.14 million shares of Chaparral's common
stock for issuance to Chaparral's officers, directors, employees, and
consultants. Chaparral has not made any grants under the 2001 Stock Incentive
Plan as of December 31, 2003.
We did not sell any securities since October 1, 2001, which were not
registered under the Securities Act of 1933, as amended.
10
ITEM 6. SELECTED FINANCIAL DATA
As of or for the Year Ended
December 31,
(In Thousands of U.S. Dollars)
--------------------------------------------------------------
2003(1) 2002(1) 2001 2000 1999
--------------------------------------------------------------
Oil and gas sales ................. $ 57,615 45,133 -- -- --
Total revenues .................... $ 57,615 45,133 -- -- --
Equity in income (loss) from
investment ..................... $ -- -- 4,616 2,827 (1,849)
Net income/(loss) ................. $ 2,061 4,117 (16,215) (26,803) (5,163)
Net income (loss) per
common share ................... $ 0.05 0.14 (1.16) (6.01) (5.63)
Working capital (deficit) ......... $ (12,487) (2,366) (39,357) (601) (2,941)
Total assets ...................... $ 98,668 87,308 69,037 70,156 41,303
Long-term obligations and
Redeemable preferred stock ..... $ 30,470 29,542 3,900 26,528 14,776
Stockholders' equity .............. $ 46,170 44,109 25,361 41,926 22,851
Other Data
----------
Present value of proved reserves(2) $ 167,182 128,739 40,344 70,281 61,312
Minority interest present value
of proved reserves ............. $ 66,873 51,496 -- -- --
Proved oil reserves (bbls) ........ 25,616 21,855 14,961 16,523 10,071
Minority interest of proved
oil reserves (bbls) ............ 10,246 8,742 -- -- --
Proved gas reserves (mcf) ......... -- -- -- -- --
(1) In 2002, Chaparral obtained a controlling interest in KKM. Consequently,
our financial statements have been consolidated with KKM on a retroactive
basis to January 1, 2002. Chaparral accounted for its 50% investment in KKM
using the equity method of accounting, which is reflected in our selected
financial data for periods prior to 2002.
(2) Present value of proved reserves for the years prior to 2002 represent our
50% equity interest in KKM. Present value of proved reserves for the years
2003 and 2002 are presented at 100%. Discount rate applied was 10%.
11
ITEM 7. 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 that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Chaparral has a working capital
deficiency as of December 31, 2003. In addition, we have experienced limitations
in obtaining 100% export quota for the sale of our hydrocarbons. These
conditions create uncertainties relating to our ability to meet all expenditure
and cash flow requirements through the next twelve months.
These conditions raise substantial doubt about our ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
Chaparral has been successful in 2003 in increasing its export sales and
reducing its local market deliveries. As of December 31, 2003, Chaparral has
sold approximately 2,694,000 barrels of its current year production, of which
approximately 2,591,000 barrels, or 96%, have been sold at world market prices
and 103,000 barrels, or 4%, have been sold at domestic market prices. This
represents a significant increase in sales at world market prices and
corresponding decrease in local market price sales from the year 2002.
In addition, we are continuing with our efforts to obtain additional
financing to cover any short-term working capital deficiencies and to refinance
our loan with Kazkommertsbank on more favorable terms. If we are successful in
these efforts, we plan to use the resulting capital infusion to restructure the
loan with Kazkommertsbank and eliminate or significantly reduce our current
working capital deficiencies.
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,
water injection facilities, plant and equipment (pumps, transformer sub-stations
etc.) and other field facilities. We have invested approximately $121.3 million
in the development of the Karakuduk Field and have drilled or re-completed 45
productive wells by the end of 2003, including 12 wells in the year 2003. Total
capital expenditures for 2003 were approximately $27.7 million compared to total
capital expenditures of $11.5 million incurred in 2002. Capital expenditures are
estimated to be at least $80 million from 2004 through 2008, including the
drilling of approximately 65 more wells over this period. We anticipate 2004
capital expenditures of approximately $28.4 million.
We expect to finance the continued development of the Karakuduk Field
primarily through cash flows from the sale of crude oil. During 2003, KKM sold
approximately 2.69 million barrels of crude oil for $57.61 million. In addition,
from May 2003 KKM has requested and received prepayment for approximately 90% of
the majority of crude sales in order to accelerate these cash flows, at a cost
in prepayment interest of $187,000. As of February 24, 2004, the daily oil
production is approximately 8,500 barrels per day from 40 of the 47 productive
wells in the field. The remaining 7 wells are shut-in for various reasons
including, completion, installation of additional gathering lines/ equipment and
additional workover, water injection and stimulation operations to bring wells
on production.
12
In 2004, KKM plans to increase its daily production by commissioning the
water injection facilities, installing further pumps, and drilling 16 additional
wells. Accordingly, management expects the Karakuduk Field production to
increase from approximately 8,500 to approximately 13,000 barrels of oil per day
by year-end 2004.
KKM successfully initiated a "pilot" reservoir pressure maintenance program
during 2003 by the injection of water into one well. KKM witnessed a favorable
increase in the reservoir pressure on surrounding well production performance.
In December 2003, KKM production peaked at over 12,000 barrels of oil per
day and daily production averaged over 11,000 barrels of oil per day for the
month. For the full implementation of the reservoir pressure maintenance program
and to ensure that gasification of the reservoir and reservoir pressure decline
is not accelerated due to delays in the implementation of this program, KKM has
taken a number of preventative measures in this regard so that ultimate
reservoir recovery will not be negatively affected. KKM has reduced choke sizes
and shut in a number of wells for pressure monitoring and analysis purposes.
Until the reservoir pressure maintenance program has been fully implemented, KKM
cannot fully maximize well productivity. As a result, oil production decreased
from 11,000 barrels per day average during December 2003 to our current level of
8,500 barrels per day.
While we expect the reservoir pressure maintenance program to be
commissioned by the end of March 2004, we do not anticipate a tangible benefit
in terms of increased production levels until the third quarter of 2004.
In addition, our short and long-term liquidity is impacted by local oil
sales obligations imposed on oil and gas producers within Kazakhstan 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 the
Agreement, we have a right to export, and receive export quota for, 100% of the
production from the Karakuduk Field. The domestic market does not permit world
market prices to be obtained, resulting in approximately $10 to $12 lower cash
flow per barrel. 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 to obtain
an export quota that will enable us to sell all of our crude oil production. On
July 17, 2003, we took the first step towards the commencement of arbitration
proceedings in Switzerland for the breach of the Agreement by the Government of
Kazakhstan by initiating a required three-month period of consultation with the
Government. Although the consultation period has expired, we continue to seek an
amicable resolution with the Government on this matter rather than proceeding
with arbitration. If the matter can not be resolved in a satisfactory manner, we
have, however, reserved our right to commence formal arbitration proceedings
pursuant to our contractual arrangements with the Government.
No assurances can be provided, however, that if arbitration is instituted,
it will be successful or that if successful, Chaparral will be able to enforce
the award in Kazakhstan, or that we will be able to export 100% or a significant
portion of its production and that we will be able to obtain additional
financing and cash flow from operations to meet working capital requirements in
the future.
Obligations and Commitments
---------------------------
The following table is a summary of Chaparral's future payments on
obligations as of December 31, 2003.
Obligations by Period (In Thousands)
-------------------------------------------------
Later
1 Year 2-3 Years 4-5 Years Years Total
Debt $12,000 $18,000 $ 4,000 $-- $34,000
Interest on debt $ 4,314 $ 3,774 $ 212 $-- $ 8,300
Drilling contract $ 5,520 $ -- $ -- $-- $ 5,520
Operating leases $ 29 $ -- $ -- $-- $ 29
13
In May 2002, Chaparral received a total equity and debt capital infusion of
$45 million. Chaparral 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 Chaparral's outstanding common stock, and $4
million in exchange for a three year note bearing interest at 12% per annum of
which $2 million was repaid during 2002. Additionally, Kazkommertsbank provided
KKM with a credit facility totaling $33 million bearing interest at 14% per
annum. As of December 31, 2003 the outstanding principal balance on the KKM
Credit Facility was $32 million. The terms and conditions of the CAIH Note and
the KKM Credit facility are more fully described in Note 11 of our consolidated
financial statements for the year ended December 31, 2003.
The financing costs of the KKM Credit Facility and the CAIH Note represent
significant future cash flow requirements. A substantial portion of our future
cash flow from operations will be required for debt service and may not be
available for other purposes. We expect up to $42.3 million of our future
available net cash flows from the Karakuduk Field will be utilized to service
the loan, depending upon excess cash flows available from operations, if any, to
repay the loan prior to its stated maturity date. The availability of future
cash flows is contingent upon many factors beyond our control, including
successful development of the underlying oil reserves from the Karakuduk Field,
production rates, production and development costs, oil prices, access to oil
transportation routes, and political stability in the region. In addition under
the KKM Credit Facility, 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 KKM Credit Facility could
result in an event of default and the loss of our shares in KKM, currently
pledge as collateral under the KKM Credit Facility. We are currently in
compliance with all the terms of the KKM Credit Facility. We had made all
principal and interest payment due under the KKM Credit Facility and CAIH Note
as of December 31, 2003. A payment of principal of $1 million and interest of
$983,000 was due on the KKM Credit Facility on February 6, 2004. KKM paid the
$983,000 interest on February 6, 2004, and KKM and Kazkommertsbank have agreed
to defer the repayment of $1 million in principal until March 31, 2004.
As of December 31, 2003, Chaparral has a drilling contract with
KazMunayGas-Drilling, an affiliate of KMG, for one development drilling rig
currently operating in the Karakuduk Field. The rig is contracted through
December 31, 2004. Our other drilling and operations related contracts are
either cancelable within 30 days or are on a call-off (as required) basis.
Related Party Transactions
--------------------------
KKM has a contract to transport 100% of its oil sales through the pipeline
owned and operated by KTO, a wholly owned subsidiary of KMG, the 40% minority
shareholder in KKM. The rates for transportation are in accordance with those
approved by the government of the Republic of Kazakhstan. Currently, the use of
the KTO pipeline system is the only viable method of exporting KKM's production.
As KTO notifies KKM of the export sales allocated to KKM on a monthly basis, KTO
controls both the volume and transportation cost of export sales.
KKM makes a prepayment for crude transportation based upon the allocation
of export sales received from KTO. This prepayment includes pipeline costs
charged by the operators of the Russian and Ukrainian pipeline systems and are
dependent upon the point of sale of KKM's exports. During 2003, KKM paid $12
million to KTO of which $11.29 million were recognized as transportation costs
for sales during 2003. At December 31, 2003, KKM had a prepayment balance of
$1.30 million with KTO in respect of sales to be made in January 2004.
Comparably during 2002, KKM paid $8.93 million to KTO of which $9.30 million
were recognized as transportation costs for sales during 2002. At December 31,
2002, KKM had a prepayment balance of $584,000 with KTO in respect of sales to
be made in January 2003.
KTO charges KKM for associated costs of oil storage within their pipeline
system, sales commission, and customs clearance fees in respect to export sales.
KTO also provides KKM with water through the Volga Water pipeline. Amounts
recognized for these services during 2003 and 2002 were $267,000 and $169,000 of
which $97,000 and 37,000 remained outstanding as of the end of the respective
period.
14
As mentioned above, KKM has a drilling contract with KazMunayGas-Drilling,
an affiliate of KMG, for one development drilling rig currently operating in the
Karakuduk Field. The rig is contracted through December 31, 2004.
All other related party transactions are disclosed in the notes to our
consolidated financial statements for December 31, 2003. The loans with
Kazkommertsbank and CAIH are disclosed in Note 11 and the drilling contract with
KMGD is described in Note 17 and 18, the lease with Nasikhat is described in
Note 14, prepaid transportation to KTO in Note 4 and Insurance policy with
Kazkommerts Policy in Note 18.
Legal Proceedings
-----------------
In December 2002, KKM received a claim from the Ministry of State Revenues
of the Republic of Kazakhstan for $9.1 million (the "Tax Claim") relating to
taxes and penalties covering the three years from 1999 to 2001. KKM appealed the
claim through the courts in Kazakhstan, which eventually ruled in favor of KKM
with the exception of $255,000 which was upheld. As a result KKM reversed
$899,000 for income taxes accrued during 2002 for the Tax Claim net of the
$255,000 which was settled January 2004.
The Ministry of State Revenues of the Republic of Kazakhstan is currently
considering penalties with respect to the Tax Claim in the amount of $970,000.
Due to the success of the appeal on the Tax Claim, we expect that the liability
with regards to penalties will be reduced to approximately $55,000. The date for
the court hearing in respect of this claim is anticipated to be decided in March
2004, with the actual hearing to be conducted at a subsequent date. It is our
opinion that the ultimate resolution of this claim will not have a material
adverse effect on the financial position and operating results of Chaparral.
Capital Commitments and Other Contingencies
-------------------------------------------
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 may have on our operations.
Commodity Prices for Oil
------------------------
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.
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,
but KKM's statutory tax basis for 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
15
part. If not, KKM may be subject to much higher income tax liabilities within
Kazakhstan 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. During
2003, however, the Tenge has appreciated against the U.S. Dollar by 7.31%. There
remains no guarantee that this appreciation is either sustainable or permanent
in the foreseeable future. As of December 31, 2003, the exchange rate was 144.22
Tenge per U.S. Dollar compared to 155.60 as of December 31, 2002. It should be
noted that 96% of our crude oil sales in 2003 were denominated in U.S. Dollars,
while the majority of our capital expenditures, operating costs and general and
administrative expenses are denominated in Tenge.
Critical Accounting Policies
----------------------------
Application of generally accepted accounting principles requires the use of
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements and revenues and
expenses during the reporting period. In addition, alternatives can exist among
various accounting methods. In such cases, the choice of accounting method can
also have a significant impact on reported amounts.
Our determination of proved oil and gas reserve quantities, the application
of the full cost method of accounting for KKM's exploration and production
activities, and the application of standards of accounting for derivative
instruments and hedging activities require management to make numerous estimates
and judgments.
Oil and Gas properties (Full Cost Method). Chaparral follows the full cost
method of accounting for oil and gas properties. Accordingly, all costs
associated with the acquisition, exploration, and development of oil and gas
reserves, including directly related overhead costs, are capitalized. Effective
with the adoption of SFAS No. 143 in 2003, the carrying amount of oil and gas
properties also includes estimated asset retirement costs recorded based on the
fair value of the asset retirement obligation when incurred. The application of
the full cost method of accounting for oil and gas properties generally results
in higher capitalized costs and higher DD&A rates compared to the successful
efforts method of accounting for oil and gas properties
All capitalized costs of proved oil and gas properties, including the
estimated future costs to develop proved reserves, are amortized on the
unit-of-production method using estimated proved reserves. Investments in
unproved properties and major development projects are not amortized until
proved reserves associated with the projects can be determined or until
impairment occurs. If the results of an assessment indicate that the properties
are impaired, the amount of the impairment is added to the capitalized cost to
be amortized.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized costs
with no loss recognized.
Cost Excluded. Oil and gas properties include costs that are excluded from
capitalized costs being amortized. These amounts represent costs of investments
in unproved properties and major development projects. Chaparral excludes these
costs on a country-by-country basis until proved reserves are found or until it
is determined that the costs are impaired. All costs excluded are reviewed
quarterly to determine if impairment has occurred. Any impairment is transferred
to the costs to be amortized or a charge is made against earnings for those
international operations where a reserve base has not yet been established. For
operations where a reserve base has not yet been established, an impairment
requiring a charge to earnings may be indicated through evaluation of drilling
results or relinquishing drilling rights.
Capitalized Interest. Statement of Financial Accounting Standards ("SFAS")
34, Capitalization of Interest Costs, provides standards for the capitalization
of interest costs as part of the historical cost of acquiring assets.
FASB-Interpretation ("FIN") 33 provides guidance for the application of SFAS 34
to the full cost method of accounting for oil and gas properties. Under FIN 33,
costs of investments in unproved properties and major development projects, on
which depreciation, depletion, and amortization ("DD&A") expense is not
currently taken and on which exploration or development activities are in
progress, qualify for capitalization of interest. Capitalized interest is
calculated by multiplying the weighted-average interest rate on debt by the
amount of costs excluded. Capitalized interest cannot exceed gross interest
expense.
16
Ceiling Test. Companies that use the full cost method of accounting for oil
and gas exploration and development activities are required to perform a ceiling
test each quarter. The full cost ceiling test is an impairment test prescribed
by SEC Regulation S-X Rule 4-10. The ceiling test is performed on a
country-by-country basis. The test determines a limit, or ceiling, on the book
value of oil and gas properties. That limit is basically the after tax present
value of the future net cash flows from proved crude oil and natural gas
reserves. This ceiling is compared to the net book value of the oil and gas
properties reduced by any related deferred income tax liability. If the net book
value reduced by the related deferred income taxes exceeds the ceiling, an
impairment or non-cash write down is required. A ceiling test impairment can
give Chaparral a significant loss for a particular period; however, future DD&A
expense would be reduced.
Reserves. Estimates of our proved oil and gas reserves are prepared by
Ryder Scott Company in accordance with guidelines established by the SEC. Those
guidelines require that reserve estimates be prepared under existing economic
and operating conditions with no provisions for increases in commodity prices,
except by contractual arrangement. Estimation of oil and gas reserve quantities
is inherently difficult and is subject to numerous uncertainties. Such
uncertainties include the projection of future rates of production, export
allocation, and the timing of development expenditures. The accuracy of the
estimates depends on the quality of available geological and geophysical data
and requires interpretation and judgment. Estimates may be revised either upward
or downward by results of future drilling, testing or production. In addition,
estimates of volumes considered to be commercially recoverable fluctuate with
changes in commodity prices and operating costs. Our estimates of reserves are
expected to change as additional information becomes available. A material
change in the estimated volumes of reserves could have an impact on the DD&A
rate calculation and the financial statements.
Derivative Financial Instruments and Hedging Activities. We account for our
investment in derivative financial instruments in accordance with SFAS 133,
Accounting for Derivative Financial Instruments and Hedging Activities, as
amended. As a result, we recognize all derivative financial instruments in our
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 shareholders' 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.
Accounting for Asset Retirement Obligations. SFAS 143, Accounting for Asset
Retirement Obligations, requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic and rational method. SFAS 143 is effective for fiscal
years beginning after June 15, 2002. As a result of the adoption of FASB 143,
Chaparral has increased its assets and liabilities by $516,000 as of January 1,
2003 to reflect the net present value of its retirement obligations. See Note 10
to our consolidated financial statements for the year ended December 31, 2003
for results on the adoption of SFAS 143.
Legal, Environmental and Other Contingencies. A provision for legal,
environmental and other contingencies is charged to expense when the loss is
probable and the cost can be reasonably estimated. Determining when expenses
should be recorded for these contingencies and the appropriate amounts for
accrual is a complex estimation process that includes the subjective judgment of
management. In many cases, management's judgment is based on interpretation of
laws and regulations, which can be interpreted differently by regulators and/or
courts of law. Chaparral's management closely monitors known and potential
legal, environmental and other contingencies and periodically determines when
Chaparral should record losses for these items based on information available to
us.
17
Income Taxes. As part of the process of preparing our consolidated
financial statements, we are required to estimate our taxes in each of the
jurisdictions of operation. This process involves management estimating the
actual current tax expense together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes in
accordance with the provisions of SFAS No. 109, Accounting for Income Taxes.
These differences result in deferred tax assets and liabilities, which are
included within the consolidated balance sheets. We then must assess the
likelihood that the deferred tax assets will be recovered from future taxable
income and, to the extent recovery is not likely, we must establish a valuation
allowance. Future taxable income depends on the ability to generate income in
excess of allowable deductions. To the extent we establish a valuation allowance
or increase this allowance in a period, an expense is recorded within the tax
provision in the consolidated statement of operations. Significant management
judgment is required in determining our provision for income taxes, deferred tax
assets and liabilities and any valuation allowance recorded against net deferred
tax assets. In the event that actual results differ from these estimates or we
adjust these estimates in future periods, we may need to establish a valuation
allowance that could materially impact our financial condition and results of
operations.
Change in Estimates. Chaparral has not materially changed the use of its
methodology for the estimates described above for the years presented and actual
results compared to estimates made have not had a material effect on Chaparral's
financial condition and results of operations. There are currently no known
trends, demands, commitments, events or uncertainties that are reasonably likely
to occur that could materially affect the methodology or assumptions described
above.
Recent Accounting Pronouncements
--------------------------------
In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104 Revenue Recognition ("SAB 104"), which codifies,
revises and rescinds certain sections of SAB No. 101, Revenue Recognition, in
order to make this interpretive guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. The changes
noted in SAB 104 did not have a material effect on our consolidated results of
operations, consolidated financial position or consolidated cash flows.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities under SFAS No. 133. The amendments set forth in
SFAS No. 149 require that contracts with comparable characteristics be accounted
for similarly. SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003 (with a few exceptions) and for hedging
relationships designated after June 30, 2003. The guidance is to be applied
prospectively only. The adoption of SFAS No. 149 as of July 1, 2003 has had no
effect on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures on its balance
sheet certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) because that
financial instrument embodies an obligation of the issuer. SFAS No. 150 was
effective for financial instruments entered into or modified after May 31, 2003,
and was otherwise effective for us as of July 1,2003. The adoption of the
applicable provisions of this statement as of the indicated dates has had no
effect on our consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." The
primary objectives of this interpretation are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and how to determine
when and which business enterprise (the "primary beneficiary") should
consolidate the variable interest entity. This new model for consolidation
applies to an entity in which either (i) the equity investors (if any) do not
have a controlling financial interest; or (ii) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN 46 requires
that the primary beneficiary, as well as all other enterprises with a
significant variable interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003.
18
In December 2003, the FASB issued FIN No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain
FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN
46-R are as follows:
(i) Special purpose entities ("SPEs") created prior to February 1, 2003.
Chaparral must apply either the provisions of FIN 46 or early adopt the
provisions of FIN 46-R at the end of the first interim or annual reporting
period ending after December 15, 2003.
(ii) Non-SPEs created prior to February 1, 2003. Chaparral is required to
adopt FIN 46-R at the end of the first interim or annual reporting period
ending after March 15, 2004.
(iii) All entities, regardless of whether a SPE, that were created
subsequent to January 31, 2003. The provisions of FIN 46 were applicable
for variable interests in entities obtained after January 31, 2003.
Chaparral is required to adopt FIN 46-R at the end of the first interim or
annual reporting period ending after March 15, 2004.
The adoption of the provisions applicable to SPEs and all other variable
interests obtained after January 31, 2003 did not have a material impact on
Chaparral's financial statements. Chaparral is currently evaluating the impact
of adopting FIN 46-R applicable to Non-SPEs created prior to February 1, 2003
but does not expect a material impact on Chaparral's results of operations,
financial position and cash flows.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
Subsequently, the asset retirement cost should be allocated to expense using a
systematic and rational method. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. Chaparral adopted SFAS 143 on January 1, 2003. See Note 10
to our consolidated financial statements for the year ended December 31, 2003
for results of the adoption of SFAS 143.
The EITF currently is deliberating on EITF No. 04-2 "Whether Mineral Rights
Are Tangible or Intangible Assets" and EITF No. 03-S "Application of FASB
Statement No. 142, Goodwill and Other Intangible Assets, to Oil and Gas
Companies." These proposed statements will determine whether contract-based oil
and gas mineral rights are classified as tangible or intangible assets based on
the EITF's interpretation of SFAS No. 141 and SFAS No.142. Historically,
Chaparral has classified all of its contract-based mineral rights within
property, plant, and equipment and has generally not identified these amounts
separately. If the EITF determines that these minerals rights should be
presented as intangible assets, Chaparral would have to reclassify its
contract-based oil and gas minerals rights acquired after June 30, 2001 to
intangible assets and make additional disclosures in accordance with SFAS No.
142. Chaparral has not acquired any contract-based mineral rights after June 30,
2001. Therefore, the adoption of this change will not have a material effect on
Chaparral's results from operations.
2. Results of Operations
Results of Operations for the Year Ended December 31, 2003 Compared to the Year
Ended December 31, 2002
-------------------------------------------------------------------------------
Our operations for the year ended December 31, 2003 resulted in a net
income of $2.06 million compared to a net income of $4.12 million for the year
ended December 31, 2002. The $2.06 million decrease in our net income is the
result of (i) higher transportation, depletion, general and administrative,
income tax, and minority interest costs for the year ended December 31, 2003,
(ii) a $5.34 million extraordinary gain recognized as a result of the
restructuring of our indebtedness during 2002, offset by (iii) higher revenues
recognized during 2003, (iv) the recognition of a $1.02 million gain as a result
of the adoption of SFAS 143 on January 1, 2003 and (v) lower interest costs for
2003.
19
Revenue. Revenues were $57.61 million for the year ended December 31, 2003
compared with $45.13 million for the year ended December 31, 2002. The $12.48
million increase is the result of higher volumes sold and higher oil prices
received during the year ended December 31, 2003. The increase in volumes sold
during 2003 was the result of increased production and sales quotas obtained for
the year. During 2003 we sold approximately 2,694,000 barrels of crude oil,
recognizing $57.61 million, or $21.39 per barrel, in revenue. In comparison, we
sold approximately 2,467,000 barrels of crude oil, recognizing $45.13 million in
revenue, or $18.29 per barrel, for the year ended December 31, 2002.
Transportation and Operating expenses. Transportation costs for the year
ended December 31, 2003 were $11.47 million, or $4.26 per barrel, and operating
costs associated with sales were $5.92 million, or $2.20 per barrel. In
comparison, transportation costs for the year ended December 31, 2002 were $9.43
million, or $3.82 per barrel, and operating costs associated with sales were
$7.68 million, or $3.11 per barrel. The increase in transportation costs per
barrel is mainly due to higher tariffs imposed on Chaparral and greater sales to
the export market during 2003. The decrease in operating cost per barrel is
mainly due to (i) economies of scale achieved by higher throughput during the
period, (ii) significantly lower transportation costs from the wellhead to entry
point of the KTO export pipeline, following the commission of the KKM pipeline,
and (iii) lower work-over cost for the current year due to the increase in
capital activities during the year 2003.
Depreciation and Depletion. Depreciation and depletion expense was $18.04
million for the year ended December 31, 2003 compared to $12.80 million for the
year ended December 31, 2002. The $5.24 million increase is the result of higher
effective depletion rates and higher volumes of oil sold during the year ended
December 31, 2003. During the year 2003, Chaparral recognized a total depletion
expense of $17.30 million or $6.42 per barrel, compared with $9.48 million or
$4.90 per barrel in depletion expense for the year 2002. The increase in the
effective depletion rate of $1.52 per barrel is due to increased estimated
capital expenditures for the development of the field for future years and
reductions to Chaparral's proved reserves, based on December 31, 2002 reserve
report.
Interest Expense. Interest expense for the year ended December 31, 2003,
decreased by $1.08 million from $5.61 million in 2002 to $4.53 million in 2003,
as a result of lower financing costs and the restructuring of our indebtedness
in 2002.
General and Administrative Expense. General and administrative costs for
the year ended December 31, 2003, increased by $950,000 from $6.81 million for
the year 2002 to $7.76 million for the year 2003. The $950,000 increase is
largely due to higher salaries accrued during 2003 and consultant payments,
comprising of $673,000 accrued 2003 year end bonus and a $278,000 production
bonus paid in the year to employees and consultants of Chaparral for achieving
the milestone of 1 million tons (approximately 8 million barrels) of cumulative
production. In addition, salaries increase at the KKM level by $304,000 due to
increase in personnel and salary adjustments performed during 2003.
Income Taxes. Income Tax expense for the year ended December 31, 2003,
increased by $1.43 million from $2.69 million for the year 2002 to $4.12 million
for the year 2003. The $1.43 million increase is largely due to KKM generating
higher taxable income in the Republic of Kazakhstan. (Net income at the KKM
level for the year ended December 31, 2003 was $10.76 million compared with
$4.88 million for the year ended December 31,2002). All income taxes provided
for relate to our operations in Kazakhstan. Chaparral currently has no U.S.
income tax liability due to Chaparral's estimated USA domestic tax loss
carryforwards of $24.7 million as of December 31, 2003. These carryforwards will
expire at various times between 2004 and 2021. See Note 13 to our consolidated
financial statements for the year ended December 31, 2003.
Cumulative effect of change in accounting princple. As a result of the
adoption of SFAS 143, Chaparral recognized a gain of $1.02 million as a
cumulative effect of change in accounting principle for the year ended December
31, 2003. In addition, Chaparral recognized $73,000 in accretion expense to
account for changes in the ARO liability. See Note 10 of our consolidated
financial statements.
20
Results of Operations Year Ended December 31, 2002 Compared to Year Ended
December 31, 2001
-------------------------------------------------------------------------
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.
Our operations for the year ended December 31, 2002 resulted in net income
of $4.12 million compared to a net loss of $16.22 million for the year ended
December 31, 2001. The $20.34 million increase in our net income relates to the
recognition of a $5.34 million extraordinary gain resulting from the May 2002
restructuring of our loan with Shell Capital, decreased interest charges
resulting from the refinancing of its debt obligations, and improved operational
results from the Karakuduk Field.
Interest expense decreased from $14.45 million for the year ended December
31, 2001 to $5.61 million for the year ended December 31, 2002, due to the lower
financing costs and the restructuring of our 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 a saving of approximately
$3 million per year. Interest expense for the year ended December 31, 2001
reflects an 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. See Notes
10 and 11 to our consolidated financial statements for the year ended December
31, 2002.
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 principle and an
additional loss of $237,000 for the year ended December 31, 2001 to record the
hedges at their fair value as of the end of the period. Comparatively, Chaparral
recognized a loss of $762,000 to record the hedges at their fair value during
the year ended December 31, 2002. As of December 31, 2002, the hedge agreement
expired. See Note 7 to our consolidated financial statements for the year ended
December 31, 2002.
For the year ended December 31, 2002, Chaparral's financial results have
been consolidated with the financial results of its operating subsidiary, KKM.
During 2002, we sold approximately 2.47 million barrels of crude oil,
recognizing $45.13 million, or $18.29 per barrel, in revenue. Transportation
costs were $9.43 million, or $3.82 per barrel and operating costs associated
with sales were $7.68 million, or $3.11 per barrel. Comparatively, Chaparral
recognized $4.62 million in equity income from investment for the year ended
December 31, 2001, which represents our 50% share of KKM's results during the
period. During the year ended December 31, 2001, KKM sold approximately 2.18
million barrels of crude oil, recognizing $36.58 million in revenue, or $16.75
per barrel. Associated operating costs were $5.25 million, or $2.40 per barrel,
and associated transportation costs were $8.30 million, or $3.80 per barrel. The
increase in operating costs per barrel relates to increased utilization of a
workover rig in the Karakuduk Field to maintain production rates. During the
year ended December 31, 2001, our equity income from investment also reflects
the elimination of $1.45 million of inter-company interest income on our loan to
KKM. See Notes 5 and 19 to our consolidated financial statements for the year
ended December 31, 2002.
General and administrative costs increased from $4.33 million as of
December 31, 2001, to $6.81 million as of December 31, 2002. The $2.52 million
change was principally due to the consolidation of KKM financial results during
2002 as a result of the MTI acquisition. Comparably, general and administrative
expenses reported by Chaparral and KKM during the year ended December 31, 2001
were $4.33 million and $3.75 million, respectively. The $2.21 million decrease
was mainly due to lower insurance and lower professional services expenses.
During 2002, Chaparral canceled its Overseas Private Investment Corporation
("OPIC") political risk insurance as part of the restructuring of Chaparral
creating a savings of $650,000. In addition, expenses for professional services
decreased by $1.52 million from 2001 to 2002.
21
Depreciation and depletion expense increased $12.05 million from $753,000
in 2001 to $12.80 million in 2002, due to the consolidation of KKM's financial
results during 2002. Comparably, depreciation and depletion expense reported by
Chaparral and KKM during the year ended December 31, 2001 were $753,000 and
$9.48 million, respectively. Effectively, depreciation and depletion expense
increased by $2.57 million due to additional depletion of our investment in oil
and gas assets resulting from increased production from the Karakuduk Field and
an increase in the effective depletion rate from $3.97 per barrel during 2001 to
$4.59 per barrel during 2002. The increase in the effective depletion rate was
due to higher estimated development costs to produce proved reserve estimates.
Income taxes increased by $2.69 million from $0 in 2001 to $2.69 million in
2002, due to the consolidation of KKM financial results during 2002. All income
taxes payable relate to our operations in Kazakhstan. Chaparral has no U.S.
income taxes due to Chaparral's estimated domestic tax loss carryforwards of
$26.37 million as of December 31, 2002. These carryforwards will expire at
various times between 2003 and 2020. See Note 14 to our consolidated financial
statements for the year ended December 31, 2002.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency
----------------
Chaparral's functional currency is the U.S. Dollar. All transactions
arising in currencies other than U.S. Dollars, including assets, liabilities,
revenue, expenses, gains, or losses are measured and recorded in U.S. Dollars
using the exchange rate in effect on the date of the transaction.
Cash and other monetary assets held and liabilities denominated in
currencies other than U.S. Dollars are translated at exchange rates prevailing
as of the balance sheet date (144.22 and 155.60 Kazakh Tenge per U.S. Dollar as
of December 31, 2003 and 2002, respectively). Non-monetary assets and
liabilities denominated in currencies other than U.S. Dollars have been
translated at the estimated historical exchange rate prevailing on the date of
the transaction. Exchange gains and losses arising from translation of non-U.S.
Dollar amounts at the balance sheet date are recognized as an increase or
decrease in income for the period.
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.
During 2003, however, the Tenge has appreciated against the U.S. Dollar by
7.31%. There remains no guarantee that this appreciation is either sustainable
or permanent in the foreseeable future. KKM retains the majority of cash and
cash equivalents in U.S. Dollars in bank accounts within 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 Kazakhstan 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. It should be noted that 96% of our crude
oil sales in 2003 were denominated in U.S. Dollars, while the majority of our
capital expenditures, operating costs and general and administrative expenses
are denominated in Tenge.
The Tenge is not a convertible currency outside of the Republic of
Kazakhstan. The translation of Tenge denominated assets and liabilities in these
financial statements does not indicate that Chaparral could realize or settle
these assets and liabilities in U.S. Dollars.
We had $3.70 million of net monetary liabilities denominated in Tenge as of
December 31, 2003.
22
Commodity Prices for Oil
------------------------
During 2003 we sold approximately 2,694,000 barrels of crude oil,
recognizing $57.61 million, or $21.39 per barrel, in revenue. In comparison, we
sold approximately 2,467,000 barrels of crude oil, recognizing $45.13 million in
revenue, or $18.29 per barrel, for the year ended December 31, 2002.
Under the terms of the Agreement, we have a right to export, and receive
export quota for, 100% of the production from the Karakuduk Field. The domestic
market does not permit world market prices to be obtained, resulting in
approximately $10 to $12 lower cash flow per barrel. 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 to obtain an export quota that will
enable us to sell all of our crude oil production. On July 17, 2003, we took the
first step towards the commencement of arbitration proceedings in Switzerland
for the breach of the Agreement by the Government of Kazakhstan by initiating a
required three-month period of consultation with the Government. Although the
consultation period has expired, we continue to seek an amicable resolution with
the Government on this matter rather than proceeding with arbitration. If the
matter can not be resolved in a satisfactory manner we have, however, reserved
our right to commence formal arbitration proceedings pursuant to our contractual
arrangements with the Government.
Chaparral has been successful in 2003 in increasing its export sales and
reducing its local market deliveries. As of December 31, 2003, Chaparral has
sold approximately 2,694,000 barrels of its current year production, of which
approximately 2,591,000 barrels, or 96%, have been sold at world market prices
and 103,000 barrels, or 4%, have been sold at domestic market prices. This
represents a significant increase in sales at world market prices and
corresponding decrease in local market price sales from the year 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15(a) for a list of the Financial Statements and the supplementary
financial information included in this report following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. Controls and Procedures.
a) Evaluation of Disclosure Controls and Procedures. We maintain
disclosure controls and procedures designed to provide reasonable
assurance that information required to be disclosed in the periodic
reports we file with the SEC is recorded, processed, summarized and
reported within the time periods specified in the rules of the SEC. We
carried out an evaluation as of December 31, 2003, under the
supervision and the participation of our management, including our
chief executive officer and chief financial officer, of the design and
operation of these disclosure controls and procedures pursuant to
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.
Based upon that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material
information required to be included in our periodic SEC filings.
(b) Changes in internal controls over financial reporting. There have been
no significant changes in internal controls over financial reporting
or other factors subsequent to December 31, 2003.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 15, 2004, the following table sets forth the names and ages of
our directors and executive officers of Chaparral, the principal offices and
positions with Chaparral held by each person and the date such person became a
director or executive officer. The executive officers are elected annually by
the board of directors. Executive officers serve terms of one year or until
their death, resignation or removal by the board of directors. The present term
of office of each director will expire at the next annual meeting of
stockholders. Each executive officer will hold office until his successor duly
is elected and qualified, until his resignation or until he is removed in the
manner provided by our bylaws.
Name of Director or Officer and
Position in Chaparral Since Age Principal Occupation During the Last 5 Years
--------------------- ----- --- --------------------------------------------
Ian Connor 2002 38 Mr. Connor has served as the Chairman of the Board of
Chairman of the Board Chaparral since November 2002. Mr Connor is also Chairman of
Kazkommerts Securities, the investment-banking subsidiary of
Kazkommertsbank; is a Managing Director of Meridian Capital,
an investment company; and Chairman of UzPEC Limited, a UK
registered oil and gas company. Formerly, Mr. Connor served
as a Managing Director of Open Joint Stock Company
Kazkommertsbank, a commercial bank incorporated in
Kazakhstan. Prior to joining Kazkommertsbank, Mr. Connor
held several senior executive positions, including Chief
Executive Officer at Global Menkul Degerler A.S., an
Istanbul-based brokerage and investment house, from May 1997
to March 2001.
Nikolai D. Klinchev 2002 46 Mr. Klinchev has been the Chief Executive Officer of
Director and Chaparral since November 2002. From June 2002 to November
Chief Executive Officer 2002, he served as Vice President - Business Development of
Chaparral. Mr. Klinchev has served as the General Director
and as a board member of KKM since 1996. Mr. Klinchev
graduated from the Institute of Energy in Almaty,
Kazakhstan, as a power engineer and studied production
management in St. Petersburg (formerly Leningrad), Russia.
Askar Alshinbayev 2002 39 Mr. Alshinbayev has served as Managing Director and Chief
Director Executive Officer of Central Asian Industrial Holdings, N.V.
since May 2002. Since 1998, Mr. Alshinbayev has served as a
Managing Director of Open Joint Stock Company
Kazkommertsbank, a commercial bank incorporated in
Kazakhstan. From 1994 to 1998, he served as Deputy Chairman
of the Management Board of Kazkommertsbank. Mr. Alshinbayev
also serves on the Board of Directors of PetroKazakhstan,
Inc. and Nelson Resources, Ltd.
24
Name of Director or Officer and
Position in Chaparral Since Age Principal Occupation During the Last 5 Years
--------------------- ----- --- --------------------------------------------
Peter G. Dilling * 2002 54 From 1995 to 1997, Mr. Dilling held various positions with
Director Chaparral, including Vice Chairman of the Board. Since 2000,
Mr. Dilling has served as President and Chief Executive
Officer and as a director of Trinidad Exploration and
Development, Ltd., an oil and gas exploration company. He
has served as President and Chief Executive Officer, and as
a Director of Anglo-African Energy, Inc., an exploration and
production company, since 1999. Prior to joining
Anglo-African, Mr. Dilling was President and a director of
M-D International Petroleum, Inc., an exploration and
production company, from 1994 to 1997.
John Duthie * 2002 61 Since December 2002, Mr. Duthie has owned and operated
Director Bowler Hat Ltd., a H.K. based company active in Turkey and
the Black Sea region. He also serves as an advisor to PDF, a
corporate finance house, and provides financial and
investment advice to various Turkish and international
corporations and institutions. Prior to Bowler Hat, he
served as General Manager for Westdeutsche Landesbank
Turkey, a commercial bank headquartered in Germany, since
1994. He previously held various positions with Merrill
Lynch & Co., a stock brokerage house and investment bank,
and Deutsche Bank, a commercial bank and financial
institution.
Alan D. Berlin * 2002 64 Since 1995, Mr. Berlin has been a partner of the law firm
Director and Corporate Secretary Aitken Irvin Berlin & Vrooman, LLP. He was engaged in the
private practice of law for over five years prior to joining
Aitken Irvin. Mr. Berlin served as a Director of Chaparral
in 1997 and was the Secretary of Chaparral from January 1996
to August 1997. Since June 1998, he has served Chaparral in
the same position. From 1985 to 1987, Mr. Berlin was the
President of the International Division of Belco Petroleum
Corp. and held various other positions with Belco Petroleum
Corp. and Belco Oil and Gas Corp. from 1977 to 2001. Mr.
Berlin has been appointed an Honorary Associate of the
Centre for Petroleum and Mineral Law and Policy at the
University of Dundee, Scotland, and is a member of the
Association of International Petroleum Negotiators.
Jonathan S. Wood 2004 40 Mr. Wood, currently the Finance Director of Closed Joint
VP-Finance and Stock Company Karakudukmunai ("KKM"), the Company's
Chief Financial Officer operating subsidiary in the Republic of Kazakhstan, assumed
the title of Vice President-Finance and Chief Financial
Officer of the Company in January 2004. Mr. Wood has been
with KKM since 1998 when he was appointed Financial
Controller of KKM. He has over 18 years experience in the
international petroleum industry, including over 9 years of
experience in the Former Soviet Union.
25
Name of Director or Officer and
Position in Chaparral Since Age Principal Occupation During the Last 5 Years
--------------------- ----- --- --------------------------------------------
Miguel C. Soto 2002 32 Mr. Soto has served as Treasurer and Financial Controller of
Treasurer and Controller Chaparral since November 2002. Since June 2002, Mr. Soto has
been the Financial Controller of KKM. From June 2002 to
November 2002, he served as the Financial Controller of
Chaparral. Prior to joining Chaparral, Mr. Soto worked as a
Tax Accountant for Arthur Andersen and spent several years
as a Staff Accountant for a technology company. * Audit
Committee member.
26
Audit Committee Financial Expert
The Board of Directors has determined that all audit committee members are
financially literate under the current listing standards of the New York Stock
Exchange. The Board also determined that John Duthie qualifies as an "audit
committee financial expert" as defined by the SEC rules adopted pursuant to the
Sarbanes-Oxley Act of 2002.
Code of Ethics
Chaparral has adopted a code of ethics that applies to all of its
directors, officers (including its chief executive officer, chief financial
officer, chief accounting officer, controller and any person performing similar
functions) and its employees. Chaparral has filed a copy of this Code of Ethics
as Exhibit 99.2 to this form 10-K.
Shareholder Nomination Procedures
There had been none material changes, during the fourth fiscal quarter, to
the procedures disclosed in the Proxy statement filed on September 9, 2003 with
the SEC.
Committees of the Board of Directors and Meeting Attendance
During the fiscal year 2003, Chaparral held six Board meetings. The Board
had several committees, including the Compensation Committee, the Audit
Committee, the Nominations Committee, and the Corporate Governance Committee.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3 and 4 and any amendments furnished to
Chaparral during our fiscal year ended December 31, 2003, and Form 5 and any
amendments furnished to Chaparral with respect to the same fiscal year, we
believe that our directors, officers, and greater than 10% beneficial owners
complied with all applicable Section 16 filing requirements.
27
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation paid by Chaparral for services
rendered by Mr. Moore, who was the Vice President - Finance, and Chief Financial
Officer of Chaparral, Mr. Klinchev, who is the Chief Executive Officer of
Chaparral, Mr. Wood, who is currently the Vice President - Finance and Chief
Financial Officer of Chaparral, and Mr. Soto, who is currently the Treasurer and
Controller of Chaparral. There were no other executive officers of Chaparral
whose annual salary and bonus exceeded $100,000 during the fiscal year 2003.
Summary Compensation Table.
Annual Compensation Long-Term Compensation
------------------------------------- ------------------------------------------------
Awards Payouts
---------------------------------- -----------
Name and Other Annual Restricted Securities Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Stock Awards ($) Options/SARs (#) Payouts ($) Compensation
------------------ ---- ------ ----- ------------ ---------------- ---------------- ----------- ------------
Nikolai D. Klinchev 2003 $282,000 $290,000 -- -- -- -- $28,000(1)
Chief Executive 2002 $164,500(1) -- -- -- -- --
Officer (11/02 to
Present)
Jonathan S. Wood 2003 $235,000(2) $136,000(2) -- -- -- -- --
VP-Finance and
Chief Financial
Officer (01/04 to
Present)
Richard J. Moore 2003 $282,000 $40,000 -- -- -- -- $1,800
Former VP-Finance 2002 $164,500(3) $90,000 -- -- -- -- --
and Chief Financial
Officer (11/02 to
12/03)
Miguel C. Soto 2003 $172,000 $67,000 -- -- -- -- --
Treasurer and 2002 $116,933 $35,000 -- -- -- -- --
Controller (11/02
to present)
1. Represents compensation paid to Mr. Klinchev from June 2002 to December 31,
2002. In addition, $28,000 was paid by Chaparral for the education for Mr.
Klinchev's daughter during 2003.
2. Mr. Wood served as Financial Director of KKM during 2003 for which he
received salary of $235,000 and bonuses in the amount $136,000.
3. Represents compensation paid to Mr. Moore from June 2002 to December 31,
2002.
Options/SAR Grants.
For the fiscal year ended December 31, 2003, we did not grant any options.
Aggregated Option/SAR Exercises and Year-End Option/SAR Value.
As of December 31, 2003, there were no unexercised options/SARs and
additionally, no options were exercised in fiscal year 2003.
Director Interlocks.
Mr. Alshinbayev is a Managing Director of Kazkommertsbank and the Chief
Executive Officer of CAIH. Mr. Connor, Chaparral's current Chairman, is also a
Chairman of Kazkommerts Securities. Mr. Klinchev, Chaparral's current Chief
Executive Officer, has acted as a Director of KKM since 1996.
28
Compensation of Directors.
During the fiscal year ended December 31, 2002, Chaparral implemented a
standard compensation arrangement for its directors, including providing (i)
$700 in compensation to each director for each board or committee meeting
attended via teleconference, (ii) $1,000 in compensation to each director for
each board or committee meeting attended in person, (iii) $2,000 in compensation
per day while traveling on Chaparral related business, including board meetings,
and (iv) $2,500 in quarterly compensation for serving on Chaparral's Board.
Stock Performance Graph.
Comparison of Five Year Cumulative Total Return
-----------------------------------------------
The following line graph compares the total returns (assuming reinvestment
of dividends) of common stock, the Nasdaq Market Index and the SIC Code Index
for the five year period ending December 31, 2003.
1998 1999 2000 2001 2002 2003
-------------------------------------------------
CHAPARRAL RESOURCES, INC. 100 38.02 17.50 7.29 4.83 4.88
SIC CODE INDEX 100 129.77 146.37 130.66 130.71 201.17
NASDAQ MARKET INDEX 100 185.46 111.65 88.57 61.09 92.15
29
Board Compensation Committee Report on Executive Compensation
Insider Participation In Compensation Decisions
And Compensation Committee
Report On Executive Compensation
The Compensation Committee of our board of directors determines the
compensation of the executive officers named in the Summary Compensation Table
included as part of "Item 11 - Executive Compensation." The Compensation
Committee will furnish the following report on executive compensation in
connection with the Annual Meeting:
Compensation Philosophy.
------------------------
As members of the Compensation Committee, it is our duty to administer the
executive compensation program for Chaparral. The Compensation Committee is
responsible for establishing appropriate compensation goals for the executive
officers of Chaparral, evaluating the performance of such executive officers in
meeting such goals and making recommendations to the Board with regard to
executive compensation. Chaparral's compensation philosophy is to ensure that
executive compensation be directly linked to continuous improvements in
corporate performance, achievement of specific operation, financial and
strategic objectives, and increases in shareholder value. The Compensation
Committee regularly reviews the compensation packages of Chaparral's executive
officers, taking into account factors which it considers relevant, such as
business conditions within and outside the industry, Chaparral's financial
performance, the market composition for executives of similar background and
experience, and the performance of the executive officer under consideration.
The particular elements of Chaparral's compensation programs for executive
officers are described below.
Compensation Structure.
-----------------------
The base compensation for the executive officers of Chaparral named in the
Summary Compensation Table is intended to be competitive with that paid in
comparable situated industries, taking into account the scope of
responsibilities. The goals of the Compensation Committee in establishing
Chaparral's executive compensation program are:
o to compensate the executive officers of Chaparral fairly for their
contributions to Chaparral's short, medium and long-term performance;
and
o to allow Chaparral to attract, motivate and retain the management
personnel necessary to Chaparral's success by providing an executive
compensation program comparable to that offered by companies with
which Chaparral competes for management personnel.
The elements of Chaparral's executive compensation program are annual base
salaries, annual bonuses and equity incentives. The Compensation Committee bases
its decisions on the scope of the executive's responsibilities, a subjective
evaluation of the executive's performance and the length of time the executive
has been in the position.
In June 2001, Chaparral's stockholders approved the 2001 Stock Incentive
Plan, which sets aside 2.14 million shares of Chaparral's common stock for
issuance to Chaparral's officers, directors, employees, and consultants.
Chaparral has not made any grants under the 2001 Stock Incentive Plan as of
December 31, 2003.
Compensation of the Chief Executive Officer.
--------------------------------------------
During fiscal year 2003, Mr. Klinchev served as Chief Executive Officer of
Chaparral. In establishing Mr. Klinchev's base salary, the Compensation
Committee considered the factors set forth above, including the level of CEO
compensation in other publicly owned/similar sized exploration and production
companies in the oil and gas industry and Mr. Klinchev's level of involvement in
the day-to-day operations of Chaparral.
30
Executive Compensation Deductibility.
-------------------------------------
Chaparral intends that amounts paid under Chaparral's compensation plans
generally will be deductible compensation expenses. The Compensation Committee
does not currently anticipate that the amount of compensation paid to executive
officers will exceed the amounts specified as deductible according to Section
162(m) of the Internal Revenue Code of 1986.
Compensation Committee Interlocks and Insider Participation.
------------------------------------------------------------
No executive officer or director of Chaparral serves as an executive
officer, director, or member of a compensation committee of any other entity,
for which an executive officer, director, or member of such entity is a member
of the Board or the Compensation Committee of the Board. There are no other
interlocks.
Compensation Committee of the Board of Directors,
Ian Connor, Chairman
Askar Alshinbayev
Nikolai D. Klinchev
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 15, 2004, with
respect to our directors, named executive officers and each person who is known
by us to own beneficially more than 5% of our common stock, and with respect to
shares owned beneficially by all of our directors and executive officers as a
group. The address for all of our directors and executive officers of Chaparral
is 2 Gannett Drive, Suite 418, White Plains, New York 10604.
Amount and Nature of Percent of
Beneficial Ownership Common
Name of Beneficial Owner Position (1) Stock (1)
-------------------------------- ---------------------- -------------------- ----------
Central Asian Industrial Holdings, N.V. -- 26,002,624(2) 62.98%
81 Scharlooweg,
Curacao, Netherlands Antilles
Allen & Company Incorporated -- 5,642,578(3) 14.77%
711 Fifth Avenue
New York, New York 10022
Whittier Ventures, LLC -- 4,113,122 10.76%
1600 Huntington Drive
South Pasadena, California 91030
Ian Connor Chairman of the Board -- --
Nikolai D. Klinchev Director and Chief Executive 500,084(4) 1.31%
Officer
Askar Alshinbayev Director 26,002,624(5) 62.98%
Peter G. Dilling Director -- --
John Duthie Director -- --
Alan D. Berlin Director and Corporate Secretary 167(6) *
Jonathan S. Wood VP - Finance and Chief Financial -- --
Officer
Richard J. Moore Former VP - Finance and Chief -- --
Financial Officer
Miguel C. Soto Treasurer and Controller -- --
All current directors, nominees, and -- 26,502,875 64.19%
executive officers as a group (eight
persons)
---------
* Represents less than 1% of the shares of Common Stock outstanding.
32
(1) Beneficial ownership of Common Stock has been determined for this purpose
in accordance with Rule 13d-3 under the Exchange Act, under which a person
is deemed to be the beneficial owner of securities if such person has or
shares voting power or investment power with respect to such securities,
has the right to acquire beneficial ownership within 60 days or acquires
such securities with the purpose or effect of changing or influencing the
control of Chaparral.
(2) In accordance with Rule 13d-3(d)(1)(i)(A), includes 3,076,923 shares
underlying warrants to purchase shares of Common Stock. Does not include
shares owned directly by officers and stockholders of CAIH with respect to
which CAIH disclaim beneficial ownership. Officers and stockholders of CAIH
may be deemed to beneficially own shares of the Common Stock reported to be
beneficially owned directly by CAIH.
(3) Does not include shares owned directly by officers and stockholders of
Allen Holding and Allen & Company with respect to which Allen Holding and
Allen & Company disclaim beneficial ownership. Officers and stockholders of
Allen Holding and Allen & Company may be deemed to beneficially own shares
of the Common Stock reported to be beneficially owned directly by Allen
Holding and Allen & Company.
(4) In accordance with Rule 13d-3(d)(1)(i)(A), includes 500,000 shares
beneficially owned by NK Cayman Limited.
(5) In accordance with Rule 13d-3(d)(1)(i)(A), includes 3,076,923 shares
underlying warrants to purchase shares of Common Stock. Mr. Alshinbayev has
a pecuniary interest in the shares beneficially owned by CAIH and has
voting power and investment power over such shares and, thus, may be deemed
to beneficially own such shares.
(6) Includes 167 shares owned by Mr. Berlin.
1998 Incentive and Non-statutory Stock Option Plan
On June 26, 1998, the stockholders approved the 1998 Incentive and
Non-statutory Stock Option Plan (the "1998 Plan"), pursuant to which up to
50,000 options to acquire Chaparral's common stock may be granted to officers,
directors, employees, or consultants of Chaparral and its subsidiaries. The
stock options granted under the 1998 Plan may be either incentive stock options
or nonstatutory stock options. The 1998 Plan has an effective term of ten years,
commencing on May 20, 1998. Chaparral has not granted any options under the 1998
Plan as of December 31, 2003.
2001 Stock Incentive Plan
In June 2001, Chaparral's stockholders approved the 2001 Stock Incentive
Plan, which sets aside a total of 2.14 million shares of Chaparral's common
stock for issuance to Chaparral's officers, directors, employees, and
consultants. Chaparral has not made any grants under the 2001 Stock Incentive
Plan as of December 31, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 2002, Chaparral received a total equity and debt capital infusion of
$45 million, which was partially utilized to repay a substantial portion of
Chaparral's loan agreement with Shell Capital. Chaparral received a total
investment of $12 million from CAIH, including $8 million in exchange for
22,925,701 shares, or 60%, of Chaparral's outstanding common stock, and $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 Chaparral's common stock at $1.30 per share (the "CAIH
Warrant"). Additionally, Kazkommertsbank, an affiliate of CAIH, provided KKM
with a credit facility totaling $33 million, 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. See Note 11 to our consolidated
financial statements for the year ended December 31, 2003 for additional
disclosure on loans with affiliates.
In 2003, Chaparral approved a one-year agreement with OJSC Kazkommerts
Securities ("KKS"), an affiliate of Kazkommertsbank, The agreement is effective
as of January 7, 2003 and provides for KKS to assist the Chaparral's senior
management with financial advisory and investment banking services. In
consideration for the services, KKS received a monthly fee of $25,000 (the
"Advisory Fee").
33
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table shows the fees paid or accrued (in thousands) by
Chaparral for the audit and other services provided by Ernst & Young and
affiliated entities for the years ended December 31, 2003 and 2002.
Description 2003 2002
----------- -------- --------
Audit Fees $ 261 $ 240
Tax Fees 12 9
Audit Related Fees -- --
All other fees -- --
-------- --------
Total $ 273 $ 249
======== ========
The Audit Committee must pre-approve audit-related and non-audit services
not prohibited by law to be performed by Chaparral's independent auditors. The
Audit Committee pre-approved all audit-related and non-audit services in 2003.
34
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
---------------------------
Table of Contents
Page
----
Chaparral Resources, Inc.
-------------------------
Report of Independent Auditors.........................................F-1
Consolidated Balance Sheets--As of December 31, 2003 and
December 31, 2002 ............................................F-2
Consolidated Statements of Operations--Years ended December
31, 2003, 2002, and 2001......................................F-4
Consolidated Statements of Cash Flows--Years ended December
31, 2003, 2002 and 2001.......................................F-6
Consolidated Statement of Changes in Stockholders' Equity-
Years ended December 31, 2003, 2002, and 2001.................F-8
Notes to Consolidated Financial Statements.............................F-9
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited..............................F-33
Supplemental Information - Selected Quarterly Financial
Data - Unaudited..............................................F-38
Audited Financial Statements of Closed Type JSC Karakudukmunay
For the Fiscal Years Ended 2001 and 2000......................F-40
(a)(2) Financial Statement Schedules
------------------------------------
All schedules for which a provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
(b) Current Reports on Form 8-K
-------------------------------
We filed a Current Report on Form 8-K, dated January 9, 2004 to report that
Richard J. Moore had resigned as Chaparral's Vice President-Finance and Chief
Financial Officer. Mr. Moore was replaced by Jonathan S. Wood, currently the
Finance Director of KKM, who assumed the title of Vice President-Finance and
Chief Financial Officer of Chaparral.
(c) Exhibits.
-------------
Exhibit No. Description and Method of Filing
----------- --------------------------------
*2.1 Stock Acquisition Agreement and Plan of Reorganization
dated April 12, 1995 between Chaparral Resources, Inc., and
the Shareholders of Central Asian Petroleum, Inc.
*2.2 Escrow Agreement dated April 12, 1995 between Chaparral
Resources, Inc., the Shareholders of Central Asian
Petroleum, Inc. and Barry W. Spector.
*2.3 Amendment to Stock Acquisition Agreement and Plan of
Reorganization dated March 10, 1996 between Chaparral
Resources, Inc., and the Shareholders of Central Asian
Petroleum, Inc.
3.1 Certificate of Incorporation, dated April 21, 1999,
incorporated by reference to Chaparral Resources, Inc.'s
Notice and Definitive Schedule 14A dated April 21, 1999.
35
Exhibit No. Description and Method of Filing
----------- --------------------------------
3.2 Bylaws, dated April 21, 1999, incorporated by reference to
Annex IV to our Notice and Definitive Schedule 14A dated
April 21, 1999.
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, incorporated by
reference to Exhibit 4.1 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June
30, 2001, filed with Securities and Exchange Commission on
August 14, 2001.
*10.1 Agreement dated August 30, 1995 for Exploration Development
and Production of Oil in Karakuduk Oil Field in Mangistan
Oblast of the Republic of Kazakhstan between Ministry of
Oil and Gas Industries of the Republic of Kazakhstan for
and on Behalf of the Government of the Republic of
Kazakhstan and Joint Stock Company of Closed Type Karakuduk
Munay Joint Venture.
*10.2 License for the Right to Use the Subsurface in the Republic
of Kazakhstan.
*10.3 Amendment dated September 11, 1997, to License for Right to
Use the Subsurface in the Republic of Kazakhstan.
10.4 Amendment to License for the Right to Use the Subsurface in
the Republic of Kazakhstan, dated December 31, 1998,
incorporated by reference to Exhibit 10.25 to Chaparral
Resources, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, filed with the Securities and
Exchange Commission on April 15, 1999.
10.5 Letter from the Agency of the Republic of Kazakhstan on
Investments to Central Asian Petroleum (Guernsey) Limited
dated July 28, 1999 regarding License for Right to Use the
Subsurface in the Republic of Kazakhstan, incorporated by
reference to Exhibit 10.5 to Chaparral Resources, Inc.'s
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, filed with the Securities and Exchange
Commission on March 30, 2000.
10.6 1998 Incentive and Non-statutory Stock Option Plan,
incorporated by reference to Exhibit 10.24 to Chaparral
Resources, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, filed with the Securities and
Exchange Commission on April 15, 1999.
10.7 CRI-CAP(G) Loan Agreement, dated February 7, 2000, between
Chaparral Resources, Inc. and Central Asian Petroleum
(Guernsey) Limited, incorporated by reference to Exhibit
10.13 to Chaparral Resources, Inc.'s Current Report on 8-K
dated February 14, 2000, filed with the Securities and
Exchange Commission on March 22, 2000.
10.8 CAP(G)-KKM Loan Agreement, dated February 7, 2000, between
Closed Type JSC Karakudukmunay and Central Asian Petroleum
(Guernsey) Limited, incorporated by reference to Exhibit
10.16 to Chaparral Resources, Inc.'s Current Report on 8-K
dated February 14, 2000, filed with the Securities and
Exchange Commission on March 22, 2000.
10.9 2001 Stock Incentive Plan approved by the stockholders of
Chaparral Resources, Inc. on June 21, 2001, incorporated by
reference to Exhibit 10.43 to Chaparral Resources, Inc.'s
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, filed with the Securities and Exchange
Commission on April 15, 2000.
10.10 Master Agreement, dated May 9, 2002, between Chaparral
Resources, Inc. and Central Asian Industrial Holdings,
N.V., incorporated by reference to Exhibit 10.1 to
Chaparral Resources, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002, filed with the
Securities and Exchange Commission on May 20, 2002.
36
Exhibit No. Description and Method of Filing
----------- --------------------------------
10.11 Mutual Release Agreement, dated May 7, 2002, among
Chaparral Resources, Inc., Central Asian Petroleum
(Guernsey) Limited, Central Asian Petroleum, Inc. and
Closed Type JSC Karakudukmunay, and Shell Capital Inc.,
Shell Capital Services Limited and Shell Capital Limited,
incorporated by reference to Exhibit 10.2 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002, filed with the Securities and
Exchange Commission on May 20, 2002.
10.12 Promissory Note, dated May 10, 2002, jointly and severally
between Chaparral Resources, Inc. and Central Asian
Petroleum (Guernsey) Limited and Central Asian Industrial
Holdings, N.V., incorporated by reference to Exhibit 10.3
to Chaparral Resources, Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 2002, filed with the
Securities and Exchange Commission on May 20, 2002.
10.13 Stock Purchase Warrant, dated May 10, 2002, between
Chaparral Resources, Inc. and Central Asian Industrial
Holdings, N.V., incorporated by reference to Exhibit 10.4
to Chaparral Resources, Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 2002, filed with the
Securities and Exchange Commission on May 20, 2002.
10.14 Registration Agreement, dated May 10, 2002, between
Chaparral Resources, Inc. and Central Asian Industrial
Holdings, N.V., incorporated by reference to Exhibit 10.5
to Chaparral Resources, Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 2002, filed with the
Securities and Exchange Commission on May 20, 2002.
10.15 Agreement, dated May 8, 2002, between Chaparral Resources,
Inc. and Exeter Finance Group, Inc., incorporated by
reference to Exhibit 10.6 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended March
31, 2002, filed with the Securities and Exchange Commission
on May 20, 2002.
10.16 Stock Purchase Agreement, dated May 9, 2002, between
Chaparral Resources, Inc. and Dardana Limited, incorporated
by reference to Exhibit 10.7 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended March
31, 2002, filed with the Securities and Exchange Commission
on May 20, 2002.
10.17 Loan Agreement #250, dated May 6, 2002, among Closed Joint
Stock Company Karakudukmunai and Open Joint Stock Company
Kazkommertsbank, incorporated by reference to Exhibit 10.1
to Chaparral Resources, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 2002, filed with the
Securities and Exchange Commission on August 19, 2002.
10.18 Additional Agreement, dated May 6, 2002, to Loan Agreement
#250, among Closed Joint Stock Company Karakudukmunai and
Open Joint Stock Company Kazkommertsbank, incorporated by
reference to Exhibit 10.2 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June
30, 2002, filed with the Securities and Exchange Commission
on August 19, 2002.
10.19 Additional Agreement, dated June 6, 2002, to Loan Agreement
#250, among Closed Joint Stock Company Karakudukmunai and
Open Joint Stock Company Kazkommertsbank, incorporated by
reference to Exhibit 10.3 to Chaparral Resources, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June
30, 2002, filed with the Securities and Exchange Commission
on August 19, 2002.
10.20 Accessorial Agreement #5382A, dated May 6, 2002, among
Closed Joint Stock Company Karakudukmunai and Open Joint
Stock Company Kazkommertsbank, incorporated by reference to
Exhibit 10.4 to Chaparral Resources, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002,
filed with the Securities and Exchange Commission on August
19, 2002.
37
Exhibit No. Description and Method of Filing
----------- --------------------------------
10.21 Additional Agreement, dated May 7, 2002, to Accessorial
Agreement #5382A, among Closed Joint Stock Company
Karakudukmunai and Open Joint Stock Company
Kazkommertsbank, incorporated by reference to Exhibit 10.5
to Chaparral Resources, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 2002, filed with the
Securities and Exchange Commission on August 19, 2002.
10.22 Accessorial Agreement #5896A, dated July 31, 2002, among
Closed Joint Stock Company Karakudukmunai and Open Joint
Stock Company Kazkommertsbank, incorporated by reference to
Exhibit 10.6 to Chaparral Resources, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002,
filed with the Securities and Exchange Commission on August
19, 2002.
10.23 Open Joint Stock Company Kazkommertsbank letter dated
August 16, 2002, to Closed Joint Stock Company
Karakudukmunai, incorporated by reference to Exhibit 10.7
to Chaparral Resources, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 2002, filed with the
Securities and Exchange Commission on August 19, 2002,
incorporated by reference to Exhibit 10.7 to Chaparral
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, filed with the Securities and
Exchange Commission on August 19, 2002.
10.24 Amendment to License dated December 11, 2002, to provide
for the stabilization of taxes and clarification on tax
laws applicable to KKK, incorporated by reference to
Exhibit 10.58 to Chaparral Resources, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 2002, filed
with the Securities and Exchange Commission on March 31,
2003.
10.25 Service Agreement, dated January 7, 2003, between Chaparral
Resources, Inc. and OJSC Kazkommerts Securities,
incorporated by reference to Exhibit 10.1 to Chaparral
Resources, Inc.'s Quaterly Report on Form 10-Q for the
period ended June 30, 2003, filed with the Securities and
Exchange Commission on August 14, 2003.
21 Subsidiaries of the Registrant, incorporated by reference
to Exhibit 21 to Chaparral Resources, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1997,
filed with the Securities and Exchange Commission on April
6, 1998.
**23 Consent of Ryder Scott Company dated March 10, 2004.
**31.2 Certification Pursuant to Item 601(b)(31) of Regulation
S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
**32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (furnished pursuant to Item 601(b)(32) of
Regulation S-K).
**32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (furnished pursuant to Item 601(b)(32) of
Regulation S-K).
**99.1 Letter from Ryder Scott Company to Chaparral Resources,
Inc. regarding reserve estimates of the Karakuduk Field as
of December 31, 2003, dated March 5, 2004.
**99.2 Chaparral's Code of Ethics
* These exhibits, previously incorporated by reference to Chaparral's reports
under file number 0-7261, have now been on file with the Commission for more
than 5 years and are not filed with this Annual Report. We agree to furnish
these documents to the Commission upon request.
** Filed herewith.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CHAPARRAL RESOURCES, INC.,
a Delaware corporation
By /s/ Nikolai D. Klinchev
-----------------------------------------------
Nikolai D. Klinchev
Chief Executive Officer
(Principal Executive Officer)
By /s/ Jonathan S. Wood
-----------------------------------------------
Jonathan S. Wood
Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ Miguel C. Soto
-----------------------------------------------
Miguel C. Soto
Treasurer and Financial Controller
(Financial Controller)
Dated: March 15, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Date Name and Title Signature
---- -------------- ---------
March 15, 2003 Askar Alshinbayev, Director /s/ Askar Alshinbayev
-----------------------
March 15, 2003 Alan D. Berlin, Director and /s/ Alan D. Berlin
Corporate Secretary -----------------------
March 15, 2003 Ian Connor, Chairman of the Board /s/ Ian Connor
-----------------------
March 15, 2003 Peter G. Dilling, Director /s/ Peter G. Dilling
-----------------------
March 15, 2003 John Duthie, Director /s/ John Duthie
-----------------------
March 15, 2003 Nikolai D. Klinchev, Chief /s/ Nikolai D. Klinchev
Executive Officer -----------------------
39
Consolidated Financial Statements
Chaparral Resources, Inc.
As of December 31, 2003 and 2002 and for the Three Years ended
December 31, 2003 with
Report of Independent Auditors
Chaparral Resources, Inc.
Consolidated Financial Statements
Contents
Chaparral Resources, Inc.
Report of Independent Auditors ..............................................F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets .................................................F-2
Consolidated Statements of Operations........................................F-4
Consolidated Statements of Cash Flows........................................F-6
Consolidated Statements of Changes in Stockholders' Equity...................F-8
Notes to Consolidated Financial Statements...................................F-9
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited.........................................F-33
Supplemental Information - Selected Quarterly
Financial Data - Unaudited...............................................F-38
Audited Financial Statements of Closed Type JSC Karakudukmunay
For the Fiscal Years Ended 2001 and 2000.................................F-40
Report of Independent Auditors
The Board of Directors and Stockholders
Chaparral Resources, Inc.
We have audited the accompanying consolidated balance sheets of Chaparral
Resources, Inc. as of December 31, 2003 and 2002, and the related consolidated
statements of operations, cash flows, and changes in stockholders' equity for
each of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chaparral
Resources, Inc. at December 31, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, in 2003
Chaparral Resources, Inc. adopted Statement of Financial Accounting Standards
(SFAS) No. 143, "Accounting for Asset Retirement Obligations".
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company has a working capital deficiency as of December 31, 2003, and there are
uncertainties relating to the Company's ability to meet projected cash flow
requirements through 2004. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans and other
factors in regard to these matters are also described in Note 2. 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.
/s/ Ernst & Young Kazakhstan
----------------------------
Ernst & Young Kazakhstan
March 17, 2004
Almaty, Kazakhstan
F-1
CHAPARRAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
2003 2002
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 2,639 $ 4,295
Accounts receivable:
Oil sales receivable 215 1,993
VAT receivable (Note 3) 2,907 1,999
Prepaid expenses (Note 4) 1,940 1,872
Prepaid expenses to affiliates (Note 4) 1,296 584
Crude oil inventory 544 548
--------- ---------
Total current assets 9,541 11,291
Materials and supplies 3,188 2,457
Other -- 5
Property, plant and equipment:
Oil and gas properties, full cost: (Note 5)
Properties subject to depletion 118,347 84,833
Properties not subject to depletion 2,942 8,814
--------- ---------
121,289 93,647
Other property, plant and equipment (Note 6) 9,408 8,210
--------- ---------
130,697 101,857
Less - accumulated depreciation, depletion, and amortization (44,758) (28,302)
--------- ---------
Property, plant and equipment, net 85,939 73,555
Total assets $ 98,668 $ 87,308
========= =========
See accompanying notes.
F-2
CHAPARRAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31,
2003 2002
--------- ---------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 6,086 $ 2,772
Accounts payable to affiliates (Note 18) 1,143 37
Accrued liabilities:
Accrued compensation 949 227
Other accrued liabilities (Note 8) 1,571 2,432
Accrued interest payable (Note 11) 776 250
Current income tax liability (Note 13) 3 1,939
Current portion of loans payable to affiliates (Note 11) 12,000 6,000
--------- ---------
Total current liabilities 22,528 13,657
Accrued production bonus (Note 9) 190 477
Loans payable to affiliates (Note 11) 21,284 27,998
Deferred tax liability (Note 13) 3,057 746
Minority interest 4,635 321
Asset Retirement Obligation (Note 10) 804 --
Commitments and contingencies (Note 16) -- --
Stockholders' equity:
Common stock (Note 12) - authorized, 100,000,000
shares of $0.0001 par value; issued and outstanding,
38,209,502 and 38,209,502 shares as of
December 31, 2003 and December 31, 2002, respectively 4 4
Capital in excess of par value 107,226 107,226
Preferred stock - 1,000,000 shares authorized, 925,000
shares undesignated. Issued and outstanding - none -- --
Accumulated deficit (61,060) (63,121)
--------- ---------
Total stockholders' equity 46,170 44,109
--------- ---------
Total liabilities and stockholders' equity $ 98,668 $ 87,308
========= =========
See accompanying notes.
F-3
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
Year Ended December 31,
2003 2002 2001
--------- --------- ---------
Revenue $ 57,615 $ 45,133 $ --
Costs and expenses:
Transportation costs 11,474 9,427 --
Operating expenses 5,915 7,678 --
Impairment of materials inventory -- 203 --
Depreciation, depletion, and amortization 18,038 12,804 753
Advisory fee (Note 18) 300 -- --
Hedge losses (Note 7) -- 762 237
General and administrative 7,762 6,811 4,330
--------- --------- ---------
43,489 37,685 5,320
--------- --------- ---------
Income/(loss) from operations 14,126 7,448 (5,320)
Other income (expense):
Interest income 24 8 1,454
Interest expense (4,526) (5,605) (14,446)
Equity income from investment (Note 20) -- -- 4,616
Accretion expense (73) -- --
Currency exchange gain/(loss) (62) (131) --
Minority interest (4,314) (241) --
Other (11) (15) --
--------- --------- ---------
(8,962) (5,984) (8,376)
--------- --------- ---------
Income/(loss) before income taxes,
extraordinary gain, and cumulative effect of
change in accounting principle 5,164 1,464 (13,696)
Income tax expense (Note 13) (4,121) (2,685) --
--------- --------- ---------
Income/(loss) before extraordinary gain and
cumulative effect of change in
accounting principle $ 1,043 $ (1,221) $ (13,696)
Extraordinary gain (Note 11) -- 5,338 --
Cumulative effect of change in accounting
principle, net of taxes of $436,000 for 2003
and $0 for 2001 (Notes 7 & 10) 1,018 -- (2,519)
--------- --------- ---------
Net income/(loss) $ 2,061 $ 4,117 $ (16,215)
========= ========= =========
F-4
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
Year Ended December 31,
2003 2002 2001
-------------- -------------- ------------
Net income/(loss) $ 2,061 $ 4,117 $ (16,215)
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock -- -- (250)
Discount accretion
Series A Redeemable Preferred Stock -- -- (100)
-------------- -------------- ------------
Net income/(loss) available to common
Stockholders $ 2,061 $ 4,117 $ (16,565)
============== ============== ============
Basic and diluted earnings per share:
Income/(loss) per share before extraordinary
gain and cumulative effect of change in
accounting principle $ 0.03 $ (0.04) $ (0.98)
Extraordinary gain $ -- $ 0.18 $ --
Cumulative effect of change in
accounting principle $ 0.02 $ -- $ (0.18)
Net income/(loss) per share $ 0.05 $ 0.14 $ (1.16)
Weighted average number of shares
outstanding (basic and diluted) 38,209,502 29,753,569 14,283,788
See accompanying notes.
F-5
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31,
2003 2002 2001
-------- -------- --------
Cash flows from operating activities
Net income/(loss) $ 2,061 $ 4,117 $(16,215)
Adjustments to reconcile net income/(loss) to
net cash provided in operating activities:
Equity income from investment -- -- (4,616)
Depreciation, depletion, and amortization 18,038 12,804 1,333
Loss on disposition of assets 11 15 --
Deferred Income taxes 2,311 746 --
Cumulative effect of change in accounting
principal (1,018) -- 2,519
Hedge losses -- 762 237
Accretion expense on ARO 73 -- --
Amortization of debt issuance cost -- -- 3,102
Amortization of note discount 286 234 --
Extraordinary gain on restructuring of debt -- (5,338) --
Interest expense from transfer of net profits interest -- -- 4,369
Non-cash interest expense -- 2,753 --
Minority interest 4,314 241 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 870 (1,960) 295
Prepaid expenses (775) (614) (43)
Crude oil inventory 55 (240) --
Accrued interest income on advances to KKM -- -- (1,452)
Interest payments from KKM -- -- 5,799
Increase (decrease) in:
Accounts payable and accrued liabilities (2,094) (5,560) 396
Accrued interest payable 526 261 1,676
Other liabilities 213 288 --
Interest expense reclassified as principal on
the Shell Capital loan -- -- 4,272
-------- -------- --------
Net cash provided by operating activities 24,871 8,509 1,672
-------- -------- --------
F-6
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31,
2003 2002 2001
-------- -------- --------
Cash flows from investing activities
Additions to property, plant, and equipment $(24,800) $(11,834) $ (18)
Investment in and advances to KKM -- -- (7,734)
Acquisition of 10% interest in KKM,
net of cash acquired -- (644) --
Materials and supplies inventory (732) 353 --
Proceeds from disposition of assets 5 5 --
-------- -------- --------
Net cash used in investing activities (25,527) (12,120) (7,752)
-------- -------- --------
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 6,500 40,000 --
Payments on Shell Capital loan -- (30,450) --
Debt restructuring and issuance costs -- (2,518) --
Payments on loans from affiliates (7,500) (5,000) --
Redemption of Series A Preferred Stock -- (2,300) --
-------- -------- --------
Net cash provided/(used) by financing activities (1,000) 7,732 5,650
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (1,656) 4,121 (430)
Cash and cash equivalents at beginning
of year 4,295 174 604
-------- -------- --------
Cash and cash equivalents at end of year $ 2,639 $ 4,295 $ 174
======== ======== ========
Supplemental cash flow disclosure
Interest paid $ 4,282 $ 3,019 $ 986
Income taxes paid $ 5,019 $ -- $ --
Supplemental schedule of non-cash
investing and financing activities
Non-cash additions to oil and gas properties $ 3,939 $ -- $ --
Common stock issued for 10% interest in KKM $ -- $ 2,701 $ --
Discount recognized for note issued
with stock warrants $ -- $ 2,466 $ --
See accompanying notes.
F-7
CHAPARRAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands, Except Share Data)
Capital in
Common Stock Excess of Unearned
----------------------- Par Restricted Accumulated
Shares Amount Value Stock Awards Deficit Total
---------- ---------- ---------- ------------ ---------- ----------
Balance at December 31, 2000 14,283,634 $ 1 $ 94,061 $ -- $ (52,136) $ 41,926
Capital stock issued for services 167 -- -- -- -- --
Cumulative dividend Series A -- -- -- -- (250) (250)
Redeemable Preferred Stock
Discount accretion on redeemable -- -- -- -- (100) (100)
preferred stock
Net loss for the year 2001 -- -- -- -- (16,215) (16,215)
---------- ---------- ---------- --------- ---------- ----------
Balance at December 31, 2001 14,283,801 $ 1 $ 94,061 $ -- $ (68,701) $ 25,361
---------- ---------- ---------- --------- ---------- ----------
Capital stock issued in private
placement 22,925,701 3 7,998 -- -- 8,001
Capital stock issued for 10%
interest in KKM 1,000,000 -- 2,701 -- -- 2,701
CAIH warrants issued -- -- 2,466 -- -- 2,466
Discount accretion on redeemable
preferred stock -- -- -- -- (36) (36)
Cumulative dividend Series A
Redeemable Preferred Stock -- -- -- -- (90) (90)
Redemption of Series A
Redeemable Preferred Stock -- -- -- -- 3,726 3,726
Adjustment due to full
consolidation of KKM -- -- -- -- (2,137) (2,137)
Net income for the year 2002 -- -- -- -- 4,117 4,117
---------- ---------- ---------- --------- ---------- ----------
Balance at December 31, 2002 38,209,502 $ 4 $ 107,226 $ -- $ (63,121) $ 44,109
---------- ---------- ---------- --------- ---------- ----------
Net income for the year 2003 -- -- -- -- 2,061 2,061
---------- ---------- ---------- --------- ---------- ----------
Balance at December 31, 2003 38,209,502 $ 4 $ 107,226 $ -- $ (61,060) $ 46,170
========== ========== ========== ========= ========== ==========
See accompanying notes.
F-8
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies and Organization
Organization, Principles of Consolidation, and Basis of Presentation
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 December 31, 2003, Chaparral owns a 60% interest in KKM, a Kazakhstan
Joint Stock Company of Closed Type. KKM was formed to engage in the exploration,
development, and production of oil and gas properties in the Republic of
Kazakhstan. KKM's only significant investment is in the Karakuduk Field, an
onshore oil field in the Mangistau Region of the Republic of Kazakhstan. On
August 30, 1995, KKM entered into an agreement with the Ministry of Oil and Gas
Industry for Exploration, Development and Production of Oil in the Karakuduk Oil
Field in the Mangistau Region of the Republic of Kazakhstan (the "Agreement").
KKM's rights and obligations regarding the exploration, development, and
production of underlying hydrocarbons in the Karakuduk Field are determined by
the Agreement.
KKM's rights to the Karakuduk Field may be terminated under certain conditions
specified in the Agreement. The term of the Agreement is 25 years commencing
from the date of KKM's registration. The Agreement can be extended to a date
agreed between the Ministry of Energy and Mineral Resources and KKM as long as
production of petroleum and/or gas is continued in the Karakuduk Field.
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
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 during 2002, 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 reclassifications have been made in the periods presented for the 2002
financial statements to conform to the 2003 presentation. The following
reclassifications have been made; (i) Prepaid transportation to KTO as of
December 31, 2002 is now shown separately, (ii) Accounts payable to affiliates
is shown separately for 2002, and (iii) $938,000 originally presented as
Management service fees during 2002 has been netted against general and
administrative expenses.
Acquisition
In May 2002, the Company acquired 100% of the outstanding shares of MTI from
Dardana Limited. MTI's only asset was its 10% ownership interest in KKM. 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 aggregate
purchase price was $3.9 million, including $1.2 million of cash and common stock
valued at $2.7 million. The value of the 1 million common shares issued was
determined based on the average market price of the Company's common shares over
the 3-day period before and after the terms of the acquisition were agreed to
and announced. As a result, the total purchase price of $3.9 million was
recorded as an addition to the Company's oil and gas properties.
F-9
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments purchased with an original
maturity of three months or less.
Revenue Recognition
Revenue and related costs are recognized upon delivery of commercial quantities
of oil production produced from proved reserves, in accordance with the accrual
method of accounting. Losses, if any, are provided for in the period in which
the loss is determined to occur.
Revenue is presented gross of transportation expenses in accordance with EITF
00-10, Accounting for Shipping and Handling Fees and Costs.
Foreign Currency Translation
The Company's functional currency is the U.S. Dollar. All transactions arising
in currencies other than U.S. Dollars, including assets, liabilities, revenue,
expenses, gains, or losses are measured and recorded in U.S. Dollars using the
exchange rate in effect on the date of the transaction.
Cash and other monetary assets held and liabilities denominated in currencies
other than U.S. Dollars are translated at exchange rates prevailing as of the
balance sheet date (144.22 and 155.60 Kazakh Tenge per U.S. Dollar as of
December 31, 2003 and 2002, respectively). Non-monetary assets and liabilities
denominated in currencies other than U.S. Dollars have been translated at the
estimated historical exchange rate prevailing on the date of the transaction.
Exchange gains and losses arising from translation of non-U.S. Dollar amounts at
the balance sheet date are recognized as an increase or decrease in income for
the period.
The Tenge is not a convertible currency outside of the Republic of Kazakhstan.
The translation of Tenge denominated assets and liabilities in these financial
statements does not indicate that the Company could realize or settle these
assets and liabilities in U.S. Dollars.
The Company had $3.7 million of net monetary liabilities denominated in Tenge as
of December 31, 2003.
Interest Capitalization
The Company capitalizes interest on significant construction projects. Statement
of Financial Accounting Standards ("SFAS") 34, Capitalization of Interest Costs,
provides standards for the capitalization of interest costs as part of the
historical cost of acquiring assets. FASB-Interpretation (FIN) 33 provides
guidance for the application of SFAS 34 to the full cost method of accounting
for oil and gas properties. Under FIN 33, costs of investments in unproved
properties and major development projects, on which depreciation, depletion, and
amortization (DD&A) expense is not currently taken and on which exploration or
development activities are in progress, qualify for capitalization of interest.
Capitalized interest is calculated by multiplying the weighted-average interest
rate on debt by the amount of costs excluded. Capitalized interest cannot exceed
gross interest expense. The Company incurred interest costs of $5.19 million and
$6.24 million for the years ended December 31, 2003 and 2002, respectively. For
the same periods, the Company capitalized interest totaling $662,000, and
$631,000, respectively.
F-10
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
Oil and Gas Properties - Full Cost Method
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with the acquisition, exploration,
and development of oil and gas reserves, including directly related overhead
costs, are capitalized.
All capitalized costs of proved oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized on the unit-of-production
method using estimated proved reserves. Investments in unproved properties and
major development projects are not amortized until proved reserves associated
with the projects can be determined or until impairment occurs. If the results
of an assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized cost to be amortized.
In addition, the capitalized costs are subject to a "ceiling test." The full
cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule
4-10. The ceiling test is performed on a country-by-country basis. The test
determines a limit, or ceiling, on the book value of oil and gas properties.
That limit is basically the after tax present value of the future net cash flows
from proved crude oil and natural gas reserves. This ceiling is compared to the
net book value of the oil and gas properties reduced by any related deferred
income tax liability. If the net book value reduced by the related deferred
income taxes exceeds the ceiling, an impairment or non-cash write down is
required. A ceiling test impairment can give the Company a significant loss for
a particular period; however, future DD&A expense would be reduced.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonment of properties is accounted for as adjustments of capitalized costs
with no loss recognized.
Other Property, Plant and Equipment
Other property, plant and equipment are valued at historical cost and are
depreciated on a straight line basis over the estimated useful lives of the
assets as follows:
Description Period
----------- ------
Office buildings and apartments 20 years
Office equipment 3 years
Vehicles 5 years
Field buildings 15 years
Field equipment Up to 10 years
Inventory
Crude oil inventory is valued using the first-in, first-out method, at the lower
of cost or net realizable value. Crude oil inventory represents production costs
associated with lifting and transporting crude oil from the Karakuduk Field to
the KazTransOil pipeline. Crude oil placed into the KazTransOil Pipeline is held
as inventory until formally nominated and delivered for sale. Crude oil
inventory as of December 31, 2003 and 2002 represented approximately 74,000
barrels and 87,000 barrels of crude oil, respectively.
Materials and supplies inventory is valued using the first-in, first-out method
and is recorded at the lower of cost or net realizable value. Certain unique
items, such as drilling equipment, are valued using the specific identification
method. Materials and supplies represent plant and equipment for development
activities, tangible drilling costs (drill bits, tubing, casing, wellheads,
etc.) required for development drilling operations, spare parts, diesel fuel,
and various materials for use in oil field operations.
F-11
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
Earnings Per Common Share
Basic Earnings Per Share ("EPS") is computed by dividing income (loss) available
to common stockholders by the weighted-average number of common shares
outstanding during the period. The computation of diluted EPS is similar to the
computation of basic EPS except that the numerator is increased to exclude
certain charges which would not have been incurred, and the denominator is
increased to include the number of additional common shares that would have been
outstanding (using the if-converted and treasury stock methods), if securities
containing potentially dilutive common shares (warrants, convertible notes
payable, and options) had been converted to such common shares, and if such
assumed conversion is dilutive. The Company's basic and diluted EPS for the
years ended December 31, 2003, 2002 and 2001 are the same, as the assumed
conversion of all potentially dilutive securities would be anti-dilutive.
New Accounting Standards
In December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 104 Revenue Recognition ("SAB 104"), which codifies, revises and
rescinds certain sections of SAB No. 101, Revenue Recognition, in order to make
this interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB 104
did not have a material effect on the Company's consolidated results of
operations, consolidated financial position or consolidated cash flows.
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities under SFAS No. 133. The amendments set forth in
SFAS No. 149 require that contracts with comparable characteristics be accounted
for similarly. SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003 (with a few exceptions) and for hedging
relationships designated after June 30, 2003. The guidance is to be applied
prospectively only. The adoption of SFAS No. 149 as of July 1, 2003 had no
effect on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures on its balance
sheet certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) because that
financial instrument embodies an obligation of the issuer. SFAS No. 150 was
effective for financial instruments entered into or modified after May 31, 2003,
and was otherwise effective for the Company as of July 1, 2003. The adoption of
the applicable provisions of this statement as of the indicated dates has no
effect on the Company's financial statements.
F-12
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
New Accounting Standards (continued)
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." The
primary objectives of this interpretation are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and how to determine
when and which business enterprise (the "primary beneficiary") should
consolidate the variable interest entity. This new model for consolidation
applies to an entity in which either (i) the equity investors (if any) do not
have a controlling financial interest; or (ii) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN 46 requires
that the primary beneficiary, as well as all other enterprises with a
significant variable interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003.
In December 2003, the FASB issued FIN No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain
FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN
46-R are as follows:
(i) Special purpose entities ("SPEs") created prior to February 1, 2003.
The company must apply either the provisions of FIN 46 or early adopt the
provisions of FIN 46-R at the end of the first interim or annual reporting
period ending after December 15, 2003.
(ii) Non-SPEs created prior to February 1, 2003. The company is required to
adopt FIN 46-R at the end of the first interim or annual reporting period
ending after March 15, 2004.
(iii) All entities, regardless of whether a SPE, that were created
subsequent to January 31, 2003. The provisions of FIN 46 were applicable
for variable interests in entities obtained after January 31, 2003. The
company is required to adopt FIN 46-R at the end of the first interim or
annual reporting period ending after March 15, 2004.
The adoption of the provisions applicable to SPEs and all other variable
interests obtained after January 31, 2003 did not have a material impact on the
Company's financial statements. The Company is currently evaluating the impact
of adopting FIN 46-R applicable to Non-SPEs created prior to February 1, 2003
but does not expect a material impact on the Company's results of operations,
financial position and cash flows.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
Subsequently, the asset retirement cost should be allocated to expense using a
systematic and rational method. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. The Company adopted SFAS 143 on January 1, 2003. See Note
10 for the effect of the adoption of SFAS 143.
The EITF currently is deliberating on EITF No. 04-2 "Whether Mineral Rights Are
Tangible or Intangible Assets" and EITF No. 03-S "Application of FASB Statement
No. 142, Goodwill and Other Intangible Assets, to Oil and Gas Companies." These
proposed statements will determine whether contract-based oil and gas mineral
rights are classified as tangible or intangible assets based on the EITF's
interpretation of SFAS No. 141 and SFAS No.142. Historically, the Company has
classified all of its contract-based mineral rights within property, plant, and
equipment and has generally not identified these amounts separately. If the EITF
determines that these minerals rights should be presented as intangible assets,
Chaparral would have to reclassify its contract-based oil and gas minerals
rights acquired after June 30, 2001 to intangible assets and make additional
disclosures in accordance with SFAS No. 142. The Company has not acquired any
contract-based mineral rights after June 30, 2001. Therefore, the adoption of
this change will not have an effect on the Company's financial position or
results from operations.
F-13
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies and Organization (continued)
Fair Value of Financial Instruments
All of the Company's financial instruments, including cash and cash equivalents,
accounts receivable, notes receivable, and loans payable, have fair values which
approximate their recorded values as they are either short-term in nature or
carry interest rates which approximate market rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Risks and Uncertainties
The ability of the Company to realize the carrying value of its assets is
dependent on being able to develop, transport and market hydrocarbons.
Currently, exports from the Republic of Kazakhstan are restricted since they are
dependent on limited transport routes and, in particular, access to the Russian
pipeline system. Domestic markets in the Republic of Kazakhstan do not permit
world market prices to be obtained. Management believes, however, that over the
life of the project, transportation restrictions will be alleviated by
additional pipeline capacity being planned or currently under construction and
prices will be achievable for hydrocarbons extracted to allow full recovery of
the carrying value of its assets.
2. 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 a working capital
deficiency as of December 31, 2003. In addition, the Company has experienced
limitations in obtaining 100% export quota for the sale of its hydrocarbons.
These conditions create uncertainties relating to the Company's ability to meet
all expenditure and cash flow requirements through the next twelve months. 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 obtaining 100% export of
all hydrocarbons produced from the Karakuduk Field through discussions with the
Government of Kazakhstan. On July 17, 2003, the Company took the first step
towards the commencement of arbitration proceedings in Switzerland for the
breach of the Agreement by the Government of Kazakhstan by initiating a required
three-month period of consultation with the Government. The Government indicated
an interest in trying to resolve this matter during the consultation period.
Although the consultation period has expired, the Company continues to seek an
amicable resolution with the Government on this matter rather than proceeding
with arbitration. If the matter cannot be resolved in a satisfactory manner, the
Company has, however, reserved the right to commence formal arbitration
proceedings pursuant to its contractual arrangements with the Government.
In addition, the Company is attempting to obtain additional financing to cover
any cash flow deficiencies that may occur and refinance the Company's loan with
JSC Kazkommertsbank ("Kazkommertsbank") in order to reduce the Company's current
interest rate of 14% and alleviate the Company's current working capital
deficiency.
No assurances can be provided, however, that if arbitration is instituted, it
will be successful or that if successful, the Company will be able to enforce
the award in Kazakhstan, or that the Company will be able to export 100% or a
significant portion of its production and that the Company will be able to
obtain additional financing and cash flow from operations to meet working
capital requirements in the future.
F-14
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. VAT Receivable
The value added tax (VAT) receivable is a Tenge denominated asset due from the
Republic of Kazakhstan. The VAT receivable consists of VAT paid on local
expenditures and imported goods. Under the Company's Agreement, VAT charged to
the Company is recoverable in future periods as either cash refunds or offsets
against the Company's fiscal obligations, including future income tax
liabilities. Periodically, the Company reviews its outstanding VAT receivable
for possible impairment. During the years ended December 31, 2003 and 2002, the
Company utilized its VAT receivable to offset fiscal obligations for
approximately $2.58 million and $1.6 million against other fiscal obligations
respectively.
4. Prepaid Expenses
The breakdown of Prepaid expenses is as follows:
Description December 31, December 31,
----------- 2003 2002
(Thousands) (Thousands)
----------- -----------
Prepaid transportation costs to KTO $1,296 $ 584
Advanced payments for materials and supplies 1,616 1,352
Prepaid insurance 210 104
Other prepaid expenses 114 416
------ ------
Total prepaid expenses $3,236 $2,456
====== ======
Prepaid transportation costs represent prepayments to CJSC KazTransOil ("KTO"),
a 100% subsidiary of KMG, for export tariffs necessary to sell oil on the export
market, which is expensed in the period the related oil revenue is recognized.
Advanced payments for materials and supplies represent prepayments for general
materials and supplies to be used in the development of the Karakuduk Field.
5. Oil and Gas Properties - Full Cost
The Company has capitalized all direct costs associated with acquisition,
exploration, and development of the Karakuduk Field. These costs include
geological and geophysical expenditures, license acquisition costs, tangible and
intangible drilling costs, production facilities, pipelines and related
equipment, access roads, gathering systems, management fees related to the
salary costs of individuals directly associated with exploration and development
activities, related interest costs associated with unproved properties, and
other capitalizable costs allowed under the full cost method of accounting.
Overhead and general and administrative costs have been expensed as incurred.
The Company calculates depreciation, depletion, and amortization of oil and gas
properties using the units-of-production method. The provision is computed by
multiplying the unamortized costs of proved oil and gas properties by a
production rate calculated by dividing the physical units of oil and gas
produced during the relevant period by the total estimated proved reserves. The
unamortized costs of proved oil and gas properties include all capitalized
costs net of accumulated amortization, estimated future costs to develop proved
reserves, and estimated dismantlement and abandonment costs. Estimates of proved
oil and gas reserves are prepared in accordance with guidelines established by
the SEC. Those guidelines require that reserve estimates be prepared under
existing economic and operating conditions with no provisions for increases in
commodity prices, except by contractual arrangement. Estimation of oil and gas
reserve quantities is inherently difficult and is subject to numerous
uncertainties. Such uncertainties include the projection of future rates of
production, export allocation, and the timing of development expenditures. The
accuracy of the estimates depends on the quality of available geological and
geophysical data and requires interpretation and judgment. Estimates may be
F-15
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Oil and Gas Properties - Full Cost (continued)
revised either upward or downward by results of future drilling, testing or
production. In addition, estimates of volumes considered to be commercially
recoverable fluctuate with changes in commodity prices and operating costs. The
Company's estimates of reserves are expected to change as additional information
becomes available. A material change in the estimated volumes of reserves could
have an impact on the DD&A rate calculation and the financial statements.
The Company recognized total amortization expense of $17.30 million and $12.08
million for the years ended December 31, 2003 and 2002, respectively. For the
same periods, the Company has an effective amortization rate of $6.42 and $4.90
per barrel, respectively. The Company's amortization expense during 2001 was
$730,000. Amortization expense from KKM of $8.67 million during 2001 was
accounted under the equity method.
In accordance with SFAS 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies, the Company accounts for amortization of crude oil
production as a component of crude oil inventory until the related crude oil is
sold. For the years ended December 31, 2003 and 2002, the Company had $423,000
and $372,000 of amortization expense allocated to crude oil inventory,
respectively.
Costs capitalized to oil and gas properties consist of:
Description December 31, December 31,
----------- 2003 2002
(Thousands) (Thousands)
----------- -----------
Acquisition costs $ 10,633 $ 10,633
Exploration and appraisal costs 22,277 22,277
Development cost 81,366 54,920
Other capitalized cost 1,097 1,097
Capitalized interest 5,275 4,720
Asset Retirement Obligation 641 --
--------- ---------
Total oil and gas properties at cost $ 121,289 $ 93,647
========= =========
Total costs not subject to amortization $ 2,942 $ 8,814
========= =========
Total costs subject to amortization $ 118,347 $ 84,833
Accumulated amortization (40,915) (25,105)
--------- ---------
Net properties subject to amortization $ 77,432 $ 59,728
========= =========
F-16
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Oil and Gas Properties - Full Cost (continued)
The condensed financial statements of KKM are as follows:
December 31,
2003 2002
(Thousands) (Thousands)
-------- --------
Condensed balance sheet
Current assets $ 9,109 $ 10,874
Non-current assets (primarily oil and gas
properties, full cost method) 81,551 66,949
Current liabilities 24,544 15,834
Non-current liabilities
Loan payable to related party 29,977 31,809
Loans payable to affiliates 20,000 27,000
Other non-current liabilities 4,551 2,376
Charter capital 200 200
Retained earnings/ (accumulated deficit) 11,388 604
Condensed income statement
Revenues $ 57,615 $ 45,133
Other costs and expenses (46,830) (40,255)
-------- --------
Net income $ 10,785 $ 4,878
======== ========
6. Other Property, Plant and Equipment
A summary of other property, plant and equipment is provided in the table below:
Description December 31, December 31,
----------- 2003 2002
(Thousands) (Thousands)
------- -------
Office buildings and apartments $ 879 $ 326
Office equipment and furniture 1,026 917
Vehicles 1,435 1,419
Land 25 25
Field buildings 5,413 4,948
Field equipment and furniture 630 575
------- -------
Total cost 9,408 8,210
Accumulated depreciation (3,843) (3,197)
------- -------
Property, plant and equipment, net $ 5,565 $ 5,013
======= =======
Depreciation expense for property, plant, and equipment was $734,000, $724,000,
and $23,000 for the years ending December 31, 2003, 2002 and 2001, respectively.
F-17
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Hedge Agreement
During 2000, the Company paid $4 million for put contracts to sell approximately
1.56 million 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 were 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).
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, 138, and 149, is
effective for years beginning after June 15, 2000. The Company adopted SFAS 133
on January 1, 2001. 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 shareholders' 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, which require
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. In addition and in
accordance with SFAS 133, the Company recognized $762,000 loss for the year
ended December 31, 2002 to record the Hedge Agreement at its fair value as of
that date. The Hedge Agreement expired in December 2002 and the Company did not
enter into any hedge agreements during 2003.
8. Other Accrued Liabilities
Description December 31, December 31,
----------- 2003 2002
(Thousands) (Thousands)
----------- -----------
Accrued taxes payable $ 910 $2,238
Production bonus 500 --
Other accrued liabilities 161 194
------ ------
Total accrued liabilities $1,571 $2,432
====== ======
9. Accrued Production Bonus
Accrued production bonus represents production based bonuses, which will be
payable to the Government of Kazakhstan, amounting to $500,000 when cumulative
production reaches 10 million barrels and $1.2 million when cumulative
production reaches 50 million barrels. Under current Kazakhstan tax law, the
production bonuses will be considered tax deductible expenditures in the
calculation of income taxes. The Company accrues the production bonuses in
relation to cumulative oil production. The Company accrued $213,000 and $201,000
in production bonuses for the years ended December 31, 2003 and 2002,
respectively. In addition, the first production bonus is expected to be paid
during the second quarter 2004.
F-18
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Asset Retirement Obligation
As discussed in Note 1, effective January 1, 2003, the Company changed its
method of accounting for asset retirement obligations in accordance with SFAS
143, Accounting for Asset Retirement Obligations. Previously, the Company used
an amount equal to the undiscounted cash flows associated with the asset
retirement obligation ("ARO") in determining depreciation, depletion, and
amortization ("DD&A") rates. Under the new accounting method, the Company now
recognizes AROs in the period in which they are incurred if a reasonable
estimate of a fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset.
The cumulative effect of the change on prior years resulted in a gain of $1.02
million, net of tax of $436,000, or $0.02 per share, which is included in income
for the year ended December 31, 2003.
Since 1995, the core business of the Company has been the development of the
Karakuduk Field. The Company is still in the early stages of development and
continues to develop the field by drilling additional wells, expansion of its
oil storage capacity, installation of additional gathering and processing
facilities, and the full implementation of the central processing facility. The
Company is legally required under the Agreement to restore the field to its
original condition. The Company recognized the fair value of its liability for
an ARO as of January 1, 2003 in the amount of $516,000 and capitalized that cost
as part of the cost basis of its oil and gas properties and depletes it using
the units of production method over proved reserves.
On February 12, 2003, the Company commenced a new drilling campaign to further
develop and commercially produce the oil reserves in the Karakuduk Field. As a
result of the new drilling campaign, the Company revised its estimate of
retirement costs to include expected additions to the Karakuduk Field during
2003. This change in estimate did not result in a direct charge to income for
the year ended December 31, 2003. The following table describes all changes to
the Company's asset retirement obligation liability:
December 31, 2003
(In Thousands)
--------------
Asset retirement obligation at beginning of year $ --
Liability recognized in transition 516
Accretion expense 73
Revision in estimated cash flows 215
--------
Asset retirement obligation at end of year $ 804
========
The pro forma effects of the application of SFAS 143 as if the Statement had
been adopted for periods prior to January 1, 2003 are presented below:
- The pro forma asset retirement obligation liability balances as if Statement
143 had been adopted on January 1, 2001 (rather than January 1, 2003) are as
follows (In Thousands);
December 31,
------------------------
2003 2002 2001
---- ---- ----
Pro forma amounts of liability for
asset retirement obligation at
beginning of year $516 $467 $426
Pro forma amounts of liability for
asset retirement obligation at end of year $804 $516 $467
F-19
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Asset Retirement Obligation (continued)
- The Pro forma amounts assuming the accounting change is applied retroactively
(In Thousands, Except Share Data);
Pro forma amounts assuming the
accounting change is applied
retroactively net-of-tax:
2003 2002 2001
--------- --------- ----------
Income/(loss) before extraordinary
gain and cumulative effect of
change in accounting principle $ 1,043 $ (708) $ (13,643)
Net income/(loss) $ 2,061 $ 4,630 $ (16,162)
Income/(loss) per share before
extraordinary gain and cumulative
effect of change in accounting $ 0.03 $ (0.02) $ (0.96)
principle
Net income/(loss) per share $ 0.05 $ 0.16 $ (1.13)
11. Loans Payable to Affiliates
CAIH Note
---------
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
Company's loan agreement with Shell Capital, Inc. (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. The Company paid CAIH $1.79 million as a related
restructuring fee.
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 is amortized using the effective interest rate over the life of the
CAIH Note. The principal balance of the CAIH Note is due on May 10, 2005 and
accrued interest is payable quarterly. The CAIH Warrant is fully discussed in
Note 12.
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 $423,000 in interest expense on the
CAIH Note for the year ended December 31, 2002 and $526,000 for the year ended
December 31, 2003. The CAIH Note is presented net of $716,000 remaining discount
as of December 31, 2003.
F-20
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Loans Payable to Affiliates (continued)
In addition, as a result of the restructuring 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 and $10.01 million in interest
expense on the Shell Capital loan during 2002 and 2001, respectively. As of May
2002, the Company has no further commitments or obligation under the Shell
Capital Loan.
KKM Credit Facility
-------------------
In May 2002, KKM established a five-year, $33 million credit line with
Kazkommertsbank. 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 $4.0 million and $3.08 million of interest
expense on the KKM Credit Facility for the years ended December 31, 2003 and
2002, respectively. Accrued interest payable as of December 31, 2003 on the KKM
Credit Facility amounts to $776,000.
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 2007. Accrued interest is payable quarterly, beginning in
December 2002; KKM started making quarterly principal payments in May 2003. As
of December 31, 2003, the Company has repaid $3 million in principal and is in
compliance with all the terms of the KKM Credit Facility.
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 of 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. KKM repaid the $3 million due on July 31, 2003 and exercised its
right to re-borrow another $3 million with a maturity date of July 31, 2004. In
addition, on December 30, 2003, Kazkommertsbank increased the revolving portion
of the KKM Credit Facility from $3 million to $5 million. On the same date, KKM
borrowed the additional $2 million to finance ongoing operations. The additional
$2 million accrued interest at 14% and principal and interest is due in full on
June 30, 2004. All amounts due in 2004 under the revolving portion of the KKM
Credit Facility are classified as current as of December 31, 2003.
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. In May 2002, KKM
exercised the option to extend the repayment term to five years with final
maturity in May 2007 for the entire KKM Credit Facility.
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) The Company provided a written guarantee to Kazkommertsbank that it
will repay the KKM Credit Facility in the event KKM fails to 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.
F-21
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Loans Payable to Affiliates (continued)
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 its 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 on 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.
The maturity schedule of the Company's indebtedness as of December 31, 2003 is
as follows:
Principal
Date Amount Due
---- ----------
2004 $ 12,000,000
2005 10,000,000
2006 8,000,000
2007 4,000,000
-----------------------------------------------
Total principal due $ 34,000,000
Less:
Principal due within one year (12,000,000)
Unamortized debt issue cost (716,000)
-----------------------------------------------
Net long-term principal due $21,284,000
===============================================
Line of Credit
--------------
On April 29, 2003, Kazkommertsbank provided a line of credit for $2.5 million to
the Company to cover necessary operating expenditures ("Line of Credit"). On the
same day, the Company accessed $1.5 million from the line of credit to cover the
required transportation costs for oil sales. The $1.5 million was due on May 29,
2003 and accrued simple interest at an annual rate of 14%. The company repaid
the $1.5 million and all accrued interest on May 22, 2003 and the credit line
was cancelled.
12. Common Stock
General
1998 Incentive and Non-statutory Stock Option Plan
On June 26, 1998, the stockholders approved the 1998 Incentive and Non-statutory
Stock Option Plan (the "1998 Plan"), pursuant to which up to 50,000 options to
acquire the Company's common stock may be granted to officers, directors,
employees, or consultants of the Company and its subsidiaries. The stock options
granted under the 1998 Plan may be either incentive stock options or
nonstatutory stock options. The 1998 Plan has an effective term of ten years,
commencing on May 20, 1998. The Company has not granted any options under the
1998 Plan as of December 31, 2003.
2001 Stock Incentive Plan
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.
The Company has not made any grants under the 2001 Stock Incentive Plan as of
December 31, 2003.
F-22
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Common Stock (continued)
Non-Qualified Stock Options
During 2003, stock options to purchase 2,817 shares of the Company's common
stock granted in 1997 to various employees and consultants of the Company
expired. The expired options had exercise prices ranging between $43.20 and
$142.50 per share.
Common Stock Offerings and Common Stock Warrant Issuances
In 1996, the Company sold 233,334 shares of common stock in a private placement
at a price of $30 per share. In connection with the private placement, the
Company issued warrants to purchase 17,033 shares of the Company's common stock
for a total of $10 to the sales agent as a commission. In April 2002, the 17,033
warrants expired.
During February 1997, the Company entered into a severance agreement with Paul
V. Hoovler, a former Chief Executive Officer and President of the Company,
pursuant to which Mr. Hoovler received warrants to purchase 1,667 shares of the
Company's common stock at an exercise price of $51 per share and warrants to
purchase 1,667 shares of the Company's common stock at an exercise price of $75
per share. The 3,334 warrants expired in February 2001.
In January 1998, the Company granted 500 shares of the Company's common stock to
an employee of the Company, which vested ratably on January 30, 1999, 2000, and
2001, respectively. The Company recognized $45,000 as compensation expense,
amortized over the vesting period of the grants.
As discussed in Note 11, Shell Capital's warrant for 1,785,455 shares of the
Company's common stock was canceled on May 2002 as part of the restructuring of
the Shell Capital Loan. The warrants had an exercise price of $9.79.
In November 1997, the Company entered into a subscription agreement with an
unaffiliated investor to purchase 225,000 shares of the Company's designated
Series A, B, and C Redeemable Preferred Stock, for $100 per share. As of
December 31, 1997, the investor had purchased 50,000 shares of the Company's
Series A Redeemable Preferred Stock for $5 million. The Company issued a warrant
for 15,000 shares at an exercise price of $0.60 per share as compensation to the
placement agent in connection with the subscription agreement. On November 24,
2002, the 15,000 share warrant expired.
In August 5, 1998, the Company retired two outstanding loans, totaling
$1,000,000. The Company borrowed the $1,000,000 on June 3, 1998, subject to a 7%
interest rate. In conjunction with the loans, the Company issued warrants to
purchase 16,667 shares of the Company's common stock, at an exercise price of
$210 per share. On November 25, 2002, the 16,667 warrants expired.
In May 2002, the Company issued 1 million shares of its outstanding common stock
valued at $2.7 million and $1.2 million in cash to Dardana Limited, in exchange
for 100% of the stock of MTI, which owns a 10% interest in KKM.
As discussed in Note 11, 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 on 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 0.624, and a weighted average life expectancy of 3.5 years.
As discussed in Note 11, the Company received a total investment of $12 million
from CAIH, including $8 million in exchange for 22,925,701 shares, or 60%, of
the Company's outstanding common stock.
F-23
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Common Stock (continued)
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.
SFAS 123 Disclosure. SFAS 123 requires that pro forma information regarding net
income and earnings per share are determined as if the Company had accounted for
its employee stock options under the fair value method as defined in SFAS 123.
The fair value for the options issued is estimated at the date of grant using
the Black-Scholes option pricing model by using weighted average assumptions,
volatility factors of the expected market price of the Company's common stock,
and the weighted average life expectancy of the options. The Company did not
issue any options during 2000, 2001, 2002 and 2003 and all outstanding options
were fully vested as of December 31, 1999, therefore pro-forma information is
not presented.
A summary of the Company's stock option activity and related information for the
periods ended follows:
Shares Weighted Weighted
Under Average Exercise Average
Option Price Fair Value
-----------------------------------------
Unexercised options outstanding -
December 31, 2000 57,516 $67.73 -
Options Cancelled - - -
-----------------------------------------
Unexercised options outstanding -
December 31, 2001 57,516 $67.73 -
Options Cancelled (54,700) $66.32
-----------------------------------------
Unexercised options outstanding -
December 31, 2002 2,816 $95.10 -
Options Cancelled (2,816) $95.10
-----------------------------------------
Unexercised options outstanding -
December 31, 2003 - $ - -
Exercisable options
December 31, 2001 57,516 $67.73
December 31, 2002 2,816 $95.10
December 31, 2003 0 $ -
F-24
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Common Stock (continued)
The following table summarizes all common stock purchase warrant activity:
Number of Exercise
Stock Price
Warrants Range
------------ ---------------
Outstanding, December 31, 2000 1,837,822 $0.0006 - $210
Expired (3,334) $ 51 - $75
------------ ---------------
Outstanding, December 31, 2001 1,834,488 $0.0006 - $210
Granted 3,076,923 $ 1.30
Expired (48,700) $ 0 - $210
Cancelled (1,785,455) $ 9.79
------------ ---------------
Outstanding as of December 31, 2002 3,077,256 $ 0.60 - $1.30
------------ ----------------
Expired (333) $ 0.60
------------ ---------------
Outstanding as of December 31, 2003 3,076,923 $ 1.30
============ ===============
F-25
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Income Taxes
The Company accounts for income taxes under FASB 109, Accounting for Income
Taxes. Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
For financial reporting purposes, income before income taxes, extraordinary
gain, and cumulative effect of change in accounting principle includes the
following components:
Year ended December 31,
2003 2002 2001
(Thousands) (Thousands) (Thousands)
-------- -------- --------
Domestic $ (3,883) $ (5,923) $(13,696)
Foreign 9,047 7,387 --
-------- -------- --------
$ 5,164 $ 1,464 $(13,696)
======== ======== ========
The components of the income tax provision (benefit) are as follows:
Year ended December 31,
2003 2002 2001
(Thousands) (Thousands) (Thousands)
----------- ----------- -----------
Income tax provision:
Current
Domestic $ -- $ -- $ --
Foreign 2,246 1,939 --
--------- --------- -----------
Total current 2,246 1,939 --
--------- --------- -----------
Deferred
Domestic -- -- --
Foreign 1,875 746 --
--------- --------- -----------
Total deferred 1,875 746 --
--------- --------- -----------
Total provision for income taxes $ 4,121 $ 2,685 $ --
========= ========= ===========
F-26
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows:
Year Ended December 31,
--------------------------
2003 2002
(Thousands) (Thousands)
--------- ---------
Deferred tax assets:
Oil and gas assets $ 983 $ 660
Sales of assets 23 28
Obsolete inventory 52 48
Amortization of derivatives 1,400 1,400
Compensation and accrued expenses 1,022 41
Capital loss on transfer of net
profits interest 1,529 1,529
Net operating loss carry-forwards 8,645 9,231
-------- --------
Deferred tax assets 13,654 12,937
Valuation allowance (13,046) (12,751)
-------- --------
Total deferred tax assets 608 186
Deferred tax liabilities:
Depreciation and other basis
Differences (3,665) (932)
-------- --------
Net deferred tax liabilities $ (3,057) $ (746)
======== ========
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $13,046 valuation allowance at December 31, 2003 is necessary
to reduce the deferred tax assets to the amount that will more likely than not
be realized. The change in the valuation allowance for the current year is
$295,000. The increase in valuation allowance is mainly due to domestic
operating losses realized during 2003 less expiration of net operating losses
from prior years and prior year return to provision adjustments.
As of December 31, 2003, the Company has estimated domestic tax loss
carry-forwards of $24.7 million. These carry-forwards will expire at various
times between 2004 and 2021.
Expiration of domestic tax loss carry-forward
(In Thousands)
-----------------------------------------------------
Later
1 Year 2-3 Years 4-5 Years Years Total
------ --------- --------- ----- -----
Tax loss carry-forward $ 913 $ 704 $ 741 $ 22,342 $ 24,700
During 2000 and 2002, the Company had an ownership change under ss.382 of the
Internal Revenue Code, which significantly limits the Company's use of its net
operating tax loss carry-forwards. During 2003 no such ownership change took
place.
F-27
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Income Taxes (continued)
Undistributed earnings associated with the Company's interest in KKM amounted to
approximately $6.83 million at December 31, 2003. Those earnings are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. federal
income taxes has been provided thereon. Upon distribution of those earnings in
the form of dividends, the Company would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes payable
to the Republic of Kazakhstan. Determination of the amount of unrecognized
deferred U.S. income tax liability is not practical because of the complexities
associated with the hypothetical calculation; however, unrecognized foreign tax
credit forwards would be available to reduce some portion of the U.S. liability.
Withholding taxes of approximately $1.02 million would be payable upon
remittance of all previously unremitted earnings at December 31, 2003.
The following table summarizes the significant differences between the statutory
tax rate and the Company's effective tax rate for financial statement purposes:
Year ended December 31, (In Thousands)
2003 2002 2001
-------- -------- --------
Income/(loss) before minority interest,
income taxes, extraordinary gain,
and cumulative effect of change in
accounting principle $ 9,478 $ 1,705 $(13,696)
Statutory tax rate 35% 35% 35%
Income taxes (benefit) computed
at statutory rate $ 3,317 $ 597 $ (4,794)
Losses and expenses with no tax
benefit 1,919 840 7
Expiration of NOL carry forwards 320 597 663
Difference in foreign tax rate (694) (378) --
Valuation allowance 295 221 4,124
Reversal of provision for tax claim (899) -- --
Additional foreign taxes/(benefit) (137) 808 --
-------- -------- --------
Income tax provision $ 4,121 $ 2,685 $ --
======== ======== ========
Foreign taxes applicable to the Company are specified under the Agreement with
the Government of the Republic of Kazakhstan. As of December 31, 2003, the
Company has utilized all available foreign tax loss carry forwards.
In December 2002, KKM received a claim from the Ministry of State Revenues of
the Republic of Kazakhstan for $9.1 million (the "Tax Claim") relating to taxes
and penalties covering the three years from 1999 to 2001. KKM appealed the claim
through the courts in Kazakhstan, which eventually ruled in favor of KKM with
the exception of $255,000 which was upheld. As a result, KKM reversed $899,000
of income taxes accrued during 2002 for the Tax Claim net of $255,000 which was
settled in January 2004.
The Company has used the best estimates available to determine the Company's
deferred tax assets and liabilities. Refer to Note 15 regarding the
uncertainties of taxation in the Republic of Kazakhstan.
F-28
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Operating Leases
The Company entered into a sublease agreement extending from March 2000 through
November 2003. At the expiration date of the lease, the Company moved its
registered office from Houston to New York. In addition, the Company entered
into a new 6 month lease agreement for reduced office space at a new location in
Houston. The Company also maintains an executive office in Almaty, Kazakhstan.
The Almaty office is subleased from Nasikhat, an affiliate of Kazkommertsbank,
for approximately $3,000 per month renewable at the Company's option on
September 1, 2004. As of December 31, 2003, the Company's future minimum annual
lease payments through the contractual term of these leases are $29,000, all due
in 2004.
The Company's rental expense for 2003, 2002 and 2001, was approximately
$144,000, $83,000 and $77,000, respectively.
15. Commitments and Contingencies
Taxation
--------
As part of the process of preparing the Company's consolidated financial
statements, the Company is required to estimate our taxes in each of the
jurisdictions of operation. This process involves management estimating the
actual current tax expense together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes in
accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes".
These differences result in deferred tax assets and liabilities, which are
included within the consolidated balance sheets. Management then must assess the
likelihood that the deferred tax assets will be recovered from future taxable
income and, to the extent recovery is not likely; management must establish a
valuation allowance. Future taxable income depends on the ability to generate
income in excess of allowable deductions. To the extent the Company establishes
a valuation allowance or increase this allowance in a period, an expense is
recorded within the tax provision in the consolidated statement of operations.
Significant management judgment is required in determining our provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets. In the event that actual results
differ from these estimates or the Company adjusts these estimates in future
periods, the Company may need to establish a valuation allowance that could
materially impact the Company's financial condition and results of operations.
In addition, the existing legislation with regard to taxation in the Republic of
Kazakhstan is constantly evolving as the Government manages the transition from
a command to a market economy. Tax and other laws applicable to the Company are
not always clearly written and their interpretation is often subject to the
opinions of the local or Central Tax Authorities. Instances of inconsistent
opinions between local, regional and national tax authorities are not unusual.
In December 2002, KKM received an amendment to the Agreement to provide for the
stabilization of taxes and clarification on tax laws applicable to KKM. The
amendment increased the KKM royalty rate from 8% to 8.14% and allowed KKM to use
the lower current tax rates for payroll taxes, social taxes and pension taxes.
In addition, during 2003 the royalty rate was increased to 8.4% from 8.14%. The
effect of these changes is reflected on the Company's financial statements as of
December 31, 2003.
The Ministry of State Revenues of the Republic of Kazakhstan is currently
considering penalties with respect to the Tax Claim in the amount of $970,000
(see Note 13). Due to the success of the appeal on the Tax Claim, we expect that
the liability with regards to penalties will be reduced to approximately
$55,000. The date for the court hearing in respect of this claim is anticipated
to be decided in March 2004, with the actual hearing to be conducted at a
subsequent date. It is our opinion that the ultimate resolution of this claim
will not have a material adverse effect on the financial position and operating
results of Chaparral.
F-29
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Commitments and Contingencies (continued)
Basis of Accounting
-------------------
KKM maintains its statutory books and records in accordance with U.S. generally
accepted accounting principles and calculates taxable income or loss using the
existing Kazakh tax legislation in effect on August 30, 1995, the date the
Agreement was signed. The Company considers these accounting methods correct
under the terms of the Agreement. The Republic of Kazakhstan currently requires
companies to comply with Kazakh accounting regulations and to calculate tax
profits or losses in accordance with these regulations as well as the prevailing
tax law.
16. Local Oil Sales Requirements and Export Quotas
The ability of the Company to realize the carrying value of its assets is
dependent on being able to transport hydrocarbons and finding appropriate
markets for their sale. Domestic markets in the Republic of Kazakhstan currently
do not permit world market prices to be obtained.
The Company is responsible for obtaining export quotas and finalizing access
routes through the KazTransOil pipeline and onward through the Russian pipeline
system. The Company has a right to export and receive export quota for 100% of
the production from the Karakuduk Field under the terms of the Agreement.
During 2003, the Company sold crude oil to the following major customers: Vitol
Central Asia S.A., Naftex Oil and Shipping Corporation, and Euro-Asian Oil
Company Inc, accounting for 61%, 13% and 12% of total annual deliveries,
respectively.
Oil and gas producers within Kazakhstan are required to sell a certain portion
of their crude oil production to the local market to supply local energy needs.
During 2002, the Company sold approximately 363,000 barrels of crude oil on the
local market for approximately $3.3 million and 2.1 million barrels at world
market prices for approximately $41.83 million. During 2003 the Company sold
approximately 103,000 barrels of crude oil on the local market for approximately
$947,000 and 2.59 million barrels on the export market for approximately $56.67
million. Oil sales at world market prices represent 98% and 92% of the Company's
oil sales revenues during 2003 and 2002, respectively.
The Company continues to seek an amicable resolution with the Government to
eliminate local market requirements. If this matter can not be resolved in a
satisfactory manner, the Company has, however, reserved the right to commence
formal arbitration proceedings pursuant to its contractual arrangements with the
Government (See Note 2).
17. Capital Commitments
As of December 31, 2003, the Company has a drilling contract with
KazMunayGas-Drilling ("KMGD"), an affiliate of KMG, for one development drilling
rig currently operating in the Karakuduk Field. The rig is contracted through
December 31, 2004. The minimum payments under the drilling contract with KMGD
for 2004 are $5.52 million. The Company's other drilling and operations related
contracts can either be cancelable within 30 days or are on a call-off (as
required) basis.
The Company has no other significant commitments other than those incurred
during the normal performance of the work program to develop the Karakuduk
field.
F-30
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Related Party Transactions
In 2003, the Company approved a one-year agreement with OJSC Kazkommerts
Securities ("KKS"), an affiliate of Kazkommertsbank. The agreement is effective
as of January 7, 2003 and provides for KKS to assist the Company's senior
management with financial advisory and investment banking services. In
consideration for the services KKS received a monthly fee of $25,000 (the
"Advisory Fee").
Kazkommerts Policy, an affiliate of Kazkommertsbank, is the major insurer of KKM
oil and gas activities. The current insurance policy expires in November 2004.
KKM has a contract to transport 100% of its oil sales through the pipeline owned
and operated by KTO, a wholly owned subsidiary of KMG, the 40% minority
shareholder in KKM. The rates for transportation are in accordance with those
approved by the government of the Republic of Kazakhstan. Currently, the use of
the KTO pipeline system is the only viable method of exporting KKM's production.
As KTO notifies KKM of the export sales allocated to the company on a monthly
basis, KTO controls both the volume and transportation cost of export sales.
KKM makes a prepayment for crude transportation based upon the allocation of
export sales received from KTO. This prepayment includes pipeline costs charged
by the operators of the Russian and Ukrainian pipeline systems and are dependent
upon the point of sale of KKM's exports. During 2003, KKM paid $12 million to
KTO, of which $11.29 million were recognized as transportation costs for sales
during 2003. Comparably during 2002, KKM paid $8.93 million to KTO, of which
$9.30 million were recognized as transportation costs for sales during 2002. See
Note 4 for prepaid transportation as of December 31, 2003 and 2002.
KTO charges KKM for associated costs of oil storage within their pipeline
system, sales commission, and customs clearance fees in respect to export sales.
KTO also provides KKM with water through the Volga Water pipeline. Amounts
recognized for these services during 2003 and 2002 were $267,000 and $169,000,
respectively.
KMGD, a subsidiary of KMG, provided a drilling rig for the drilling campaign,
which commenced February 12, 2003 and is contracted to provide the services of a
drilling rig throughout 2004.
The total amounts of the transactions with the above related companies are as
follows:
2003 2002
(Thousands) (Thousands)
----------- -----------
Kazkommerts Policy $ 524 $ 82
KTO $11,561 $ 9,476
KMGD $ 5,999 $ 66
Accounts Payable Balance to affiliates as of December 31,
2003 2002
(Thousands) (Thousands)
----------- -----------
Kazkommerts Policy $ 48 $ --
KTO 97 37
KMGD 998 --
------ ------
$1,143 $ 37
====== ======
All other related party transactions are disclosed on the face of the balance
sheet and in the notes to the financial statements. The loans with
Kazkommertsbank and CAIH are disclosed in Note 11 and the drilling contract with
KMGD is described in Note 17 and 18, the lease with Nasikhat is described in
Note 14, and prepaid transportation to KTO in Note 4.
F-31
CHAPARRAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. Subsequent Events
A payment of principal of $1 million and interest of $983,000 on the KKM Credit
Facility was due on February 6, 2004. The Company paid the $983,000 interest on
February 6, 2004, and the Company and Kazkommertsbank have agreed to defer the
repayment of $1 million in principal until March 31, 2004.
20. KKM Financial Statements
As a result of the acquisition of MTI in May 2002, 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.
Due to the significance of the Company's equity investee, the Company has
attached audited financial statements for KKM for the years ended December 31,
2001 and 2000. Reflected in the financial statements are management fees of
$2.04 million charged by the Company to KKM for each of the two years ended
December 31, 2001. These amounts are exclusive of any local withholding tax,
which may be accrued by KKM. Also, the financial statements include interest on
the note payable to the Company from KKM in the amounts $2.90 million and $3.35
million for the years ended December 31, 2001 and 2000, respectively.
F-32
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(IN THOUSANDS)
The following supplemental information regarding the oil and gas activities of
the Company is presented pursuant to the disclosure requirements promulgated by
the Securities and Exchange Commission (the "SEC") and SFAS 69, Disclosures
About Oil and Gas Producing Activities.
The following estimates of reserve quantities and related standardized measure
of discounted net cash flows are estimates only, and are not intended to reflect
realizable values or fair market values of the Company's reserves. The Company
emphasizes that reserve estimates are inherently imprecise and that estimates of
new discoveries are more imprecise than producing oil and gas properties.
Additionally, the price of oil has been very volatile and downward changes in
prices can significantly affect quantities that are economically recoverable.
Accordingly, these estimates are expected to change as future information
becomes available and these changes may be significant.
KKM sold 2.69 million barrels of crude oil in 2003, of which 103,000 barrels, or
approximately 4%, were sold to the local market. Comparatively, the Company sold
2.47 million barrels of crude oil in 2002, of which 363,000, or approximately
15%, was sold to the local market. KKM has an existing Agreement to sell 100% of
its production on the export market for world market prices and a right to
export 100% of its production under the terms of its Agreement with the
government. Although the Company expects to sell 100% of its production on the
export market in future years, the year-end prices used for the standardized
measure of discounted net cash flows for 2003 reflects the assumption that 5% of
KKM's production will be sold on the local market for a substantially lower net
oil price. Year-end prices used for the standardized measure of discounted net
cash flows for 2002 and 2001 reflect the assumption that 15% and 20% of KKM's
production would have been sold on the local market for a substantially lower
net oil price, respectively.
Proved reserves are estimated reserves of crude oil and natural gas that
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those expected to be
recovered through existing wells, equipment and operating methods.
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses. The estimated future net
cash flows are then discounted using a rate of 10% a year to reflect the
estimated timing of the future cash flows.
As a result of the acquisition of an additional 10% interest in KKM through the
acquisition of 100% of the stock in MTI during 2002, the Company's SFAS 69 is
presented in full for the years 2003 and 2002. For the year 2001 the Company had
a 50% proportionate equity interest in KKM's oil and gas producing activities.
The Company has attached the audited financial statements of KKM for the years
2001 and 2000. Those financial statements should be reviewed in conjunction with
the following disclosures with respect to the Company's proportionate equity
interest in KKM's oil and gas producing activities for the years 2001 and 2000.
F-33
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(IN THOUSANDS)
Proved Oil and Gas Reserve Quantities
(All within the Republic of Kazakhstan)
Year Ended December 31,
--------------------------------------------------------
2003 2002 2001
---- ---- ----
Oil Gas Oil Gas Oil Gas
Reserves Reserves Reserves Reserves Reserves Reserves
(bbls.) (Mcf.) (bbls.) (Mcf.) (bbls.) (Mcf.)
------- ------ ------- ------ ------ -------
Proved developed and undeveloped reserves:
Beginning Balance 21,855 -- 29,921 -- -- --
Revision of previous estimates 6,455 -- (5,348) -- -- --
Extensions, discoveries and other additions -- -- -- -- -- --
Production (2,694) -- (2,718) -- -- --
------- ------ ------- ------ ------ -------
Ending Balance December 31, 25,616 -- 21,855 -- -- --
======= ====== ======= ====== ====== =======
Company's proportional interest in KKM's
Proved developed and undeveloped
Reserves -- -- -- -- 14,961 --
======= ====== ======= ====== ====== =======
Minority interest in KKM's
Proved developed and undeveloped
Reserves 10,246 -- 8,742 -- -- --
======= ====== ======= ====== ====== =======
Proved Developed Reserves 15,107 -- 9,321 -- -- --
======= ====== ======= ====== ====== =======
Minority interest in KKM's
Proved Developed Reserves 6,043 -- 3,728 -- -- --
======= ====== ======= ====== ====== =======
F-34
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(IN THOUSANDS)
Capitalized Costs Relating to Oil and Gas Producing Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2003 2002 2001
--------- --------- ---------
Unproved oil and gas properties $ 6,131 $ 11,270 $ --
Proved oil and gas properties 118,347 84,853 --
--------- --------- ---------
124,478 96,123
Accumulated depreciation and depletion (40,915) (25,105) --
--------- --------- ---------
Net capitalized cost $ 83,563 $ 71,018 $ --
========= ========= =========
Company's share of equity method
investee's net capitalized cost $ -- $ -- $ 33,530
========= ========= =========
Cost Incurred in Oil and Gas Property Acquisition, Exploration, and Development
Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2003 2002 2001
------- ------- -------
Acquisition costs (1) $ -- $ 3,881 $ --
Exploration and appraisal costs -- -- --
Development costs 27,642 10,287 --
------- ------- -------
$27,642 $14,168 $ --
======= ======= =======
Company's share of equity method
inveestee's costs of property acquisition,
Exploration, and development $ -- $ -- $12,446
======= ======= =======
(1) Acquisition cost for the year 2002 represents the cost for acquiring an
additional 10% interest in KKM through the acquisition of 100% of the
outstanding stock in MTI .
F-35
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(IN THOUSANDS)
Results of Operations for Producing Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2003 2002 2001
-------- -------- --------
Oil revenue $ 57,615 $ 45,133 $ --
Transportation costs (11,474) (9,427) --
Operating expenses (5,915) (7,678) --
Depreciation, depletion, and amortization (18,038) (12,804) --
-------- -------- --------
22,188 15,224 --
Provision for income taxes(1) (6,986) (3,633) --
-------- -------- --------
$ 15,202 $ 11,591 $ --
======== ======== ========
Company's share of equity method
investee's results from operations
for producing activities $ -- $ -- $ 6,090
======== ======== ========
(1) Income tax expense is calculated by applying the statutory tax rate to
operating profit, adjusted for applicable net operating loss carry
forwards.
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proven Oil and Gas Reserves (All within the Republic of Kazakhstan)
Year Ended December 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
Future cash inflows $ 476,969 $ 377,660 $ --
Future development costs (73,642) (83,189) --
Future production costs (53,338) (50,952) --
Future income tax expenses (90,699) (55,699) --
--------- --------- ---------
Future net cash flows 259,290 187,820 --
10% annual discount for
estimated timing of cash flows (92,108) (59,081) --
--------- --------- ---------
Standardized measure of discounted net
cash flows $ 167,182 $ 128,739 $ --
========= ========= =========
Minority interest $ 66,873 $ 51,496 $ --
========= ========= =========
Company's share of equity method
investee's standardized measure of
discounted future net cash flows $ -- $ -- $ 40,344
========= ========= =========
F-36
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(IN THOUSANDS)
Principal Sources of Change in the Standardized Measure of Discounted Future Net
Cash Flows
Year Ended December 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
Beginning balance $ 128,739 $ 80,688 $ --
Sales of oil produced, net of production
and transportation costs (40,226) (28,028) --
Extensions and discoveries -- -- --
Net changes in prices, production
cost and future development cost (3,377) 129,412 --
Net changes due to revisions of previous
quantity estimates 79,054 (63,344) --
Development cost incurred 27,642 10,287 --
Accretion of discount 463 10,393 --
Net change in income taxes (25,113) (10,669) --
Ending balance $ 167,182 $ 128,739 $ --
========= ========= =========
F-37
SUPPLEMENTAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(All Amounts in Thousands, Except Share Data)
2003 Quarterly Information
For the Three Months Ended Total as of
----------------------------------------------------------- ------------
March 31, June 30, September 30, December 31, December 31,
2003 2003 2003 2003 2003
------------ ------------ ------------ ------------ ------------
Revenue (1) $ 7,813 $ 8,472 $ 23,308 $ 18,022 $ 57,615
Transportation and operating costs 2,785 3,048 6,288 5,268 17,389
Depreciation and depletion 2,438 3,319 7,140 5,141 18,038
------------ ------------ ------------ ------------ ------------
Operating income 2,590 2,105 9,880 7,613 22,188
============ ============ ============ ============ ============
Income/(loss) before taxes and cumulative effect
of change in accounting principle (617) (779) 4,550 2,010 5,164
Income taxes 352 330 2,479 960 4,121
------------ ------------ ------------ ------------ ------------
Income/(loss) before extraordinary gains (969) (1,109) 2,071 1,050 1,043
Cumulative effect of change in
accounting principle 1,018 -- -- -- 1,018
------------ ------------ ------------ ------------ ------------
Net income/(loss) available to common
Stockholders $ 49 $ (1,109) $ 2,071 $ 1,050 $ 2,061
------------ ------------ ------------ ------------ ------------
Diluted earnings per share:
Income/(loss) per share before cumulative
effect of change in accounting principle $ (0.03) $ (0.03) $ 0.05 $ 0.03 $ 0.03
Cumulative effect of change in
accounting principle $ 0.03 $ 0.00 $ -- $ -- $ 0.02
Net loss per share $ (0.00) $ (0.03) $ 0.05 $ 0.03 $ 0.05
Basic Weighted average number of shares
Outstanding (basic) 38,209,502 38,209,502 38,209,502 38,209,502 38,209,502
Diluted earnings per share:
Loss per share before cumulative
effect of change in accounting principle $ (0.03) $ (0.03) $ 0.05 $ 0.03 $ 0.03
Cumulative effect of change in
accounting principle $ 0.03 $ 0.00 $ -- $ -- $ 0.02
Net loss per share $ (0.00) $ (0.03) $ 0.05 $ 0.03 $ 0.05
Diluted Weighted average number of shares
Outstanding (basic and diluted) 38,209,502 38,209,635 38,408,726 38,209,502 38,209,502
(1) Revenue is presented gross of transportation and marketing cost in accordance with EITF 00-10, Accounting for Shipping
and Handling Fees and Costs
F-38
SUPPLEMENTAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(All Amounts in Thousands, Except Share Data)
2002 Quarterly Information
For the Three Months Ended Total as of
----------------------------------------------------------- ------------
March 31, June 30, September 30, December 31, December 31,
2002 2002 2002 2002 2002
------------ ------------ ------------ ------------ ------------
Revenue (1) $ 8,379 $ 10,646 $ 13,446 $ 12,662 $ 45,133
Transportation and operating costs 4,123 4,248 4,609 4,125 17,105
Depreciation and depletion 2,932 3,067 3,709 3,096 12,804
------------ ------------ ------------ ------------ ------------
Operating income (loss) 1,324 3,331 5,128 5,441 15,224
============ ============ ============ ============ ============
Income/(loss) before taxes and
extraordinary gains (2,893) 3 2,465 1,889 1,464
Income taxes 233 287 352 1,813 2,685
------------ ------------ ------------ ------------ ------------
Income/(loss) before extraordinary gains (3,126) (284) 2,113 76 (1,221)
Extraordinary gains -- 5,338 -- -- 5,338
------------ ------------ ------------ ------------ ------------
Net income/(loss) available to common
Stockholders $ (3,126) $ 5,054 $ 2,113 $ 76 $ 4,117
============ ============ ============ ============ ============
Basic earnings per share:
Loss per share before cumulative
Extraordinary gain $ (0.22) $ (0.01) $ 0.06 $ (0.00) $ (0.04)
Extraordinary gain $ -- $ 0.19 $ -- $ -- $ 0.18
Net loss per share $ (0.22) $ 0.18 $ -- $ (0.00) $ 0.14
Basic weighted average number of shares
outstanding (basic) 14,283,801 27,955,630 38,209,501 38,209,501 29,753,569
Diluted earnings per share:
Loss per share before cumulative
Extraordinary gain $ (0.22) $ (0.01) $ 0.05 $ (0.00) $ (0.04)
Extraordinary gain $ -- $ 0.19 $ -- $ -- $ 0.18
Net loss per share $ (0.22) $ 0.18 $ 0.05 $ (0.00) $ 0.14
Diluted weighted average number of shares
outstanding (basic and diluted) 14,283,801 28,488,711 39,134,622 38,209,615 29,753,682
(1) Revenue is presented gross of transportation and marketing cost in accordance with EITF 00-10, Accounting for
Shipping and Handling Fees and Costs
F-39
Financial Statements
Closed Type JSC Karakudukmunay
For the Two Years ended December 31, 2001 with
Reports of Independent Auditors
F-40
Report of Independent Auditors
The Board of Directors and Stockholders
Closed Type JSC Karakudukmunay
We have audited the accompanying balance sheets of Closed Type JSC
Karakudukmunay ("the Company") as of December 31, 2001 and 2000, and the related
statements of operations, cash flows and stockholders' deficit for each of the
two years in the period ended December 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Closed Type JSC Karakudukmunay
at December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 3, the
Company has a working capital deficiency as of December 31, 2001 and there are
uncertainties relating to the Company's ability to meet its expenditure/cash
flow requirements through 2002. In addition, the Company's principal investor
has been notified that it is in default of its loan agreement with its primary
creditor and the primary creditor has initiated legal proceedings for purposes
of obtaining control of the principal investor's interest in the Company. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans and other factors in regard to these matters
are also described in Note 3. 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.
/s/ Ernst & Young Kazakhstan
----------------------------
Ernst & Young Kazakhstan
April 2, 2002
Almaty, Kazakhstan
F-41
Closed Type JSC Karakudukmunay
Balance Sheets as of
December 31,
(In Thousands of U.S. Dollars)
2001 2000
-------- --------
ASSETS
Current assets:
Cash $ 556 $ 51
Trade receivables -- 680
Prepaid and other receivables (Note 4) 1,705 1,251
Crude oil inventory 145 155
Current VAT receivable (Note 5) 1,925 3,100
-------- --------
Total current assets 4,331 5,237
Deferred tax assets (Note 11) 58 --
Long term VAT receivable (Note 5) -- 985
Materials and supplies 2,809 3,800
Property, plant and equipment, net (Note 6) 4,741 4,682
Oil and gas properties, full cost (Note 7)
Properties subject to depletion 42,336 22,779
Properties not subject to depletion 17,173 20,527
-------- --------
59,509 43,306
-------- --------
TOTAL ASSETS $ 71,448 $ 58,010
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 9,914 $ 8,926
Accrued liabilities (Note 8) 675 795
Current portion of loans payable to partner (Note 10) 5,000 --
-------- --------
Total current liabilities 15,589 9,721
Long-term debt (Note 10) 58,438 58,605
Other long-term liabilities (Note 9) 276 86
Deferred tax liability (Note 11) 1,220 --
Stockholders' deficit:
Charter capital (Note 12) 200 200
Accumulated deficit (4,275) (10,602)
-------- --------
(4,075) (10,402)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 71,448 $ 58,010
======== ========
See accompanying notes.
F-42
Closed Type JSC Karakudukmunay
Statements of Operations for the years ended December 31,
(In Thousands of U.S. Dollars)
2001 2000
-------- --------
Revenues:
Oil sales $ 36,575 $ 16,968
Costs and expenses:
Transportation costs 8,297 3,213
Operating expenses 5,246 3,676
Depreciation and depletion 9,479 3,598
Management service fee 620 454
General and administrative 3,753 2,316
-------- --------
Total cost and expenses 27,395 13,257
-------- --------
Income (loss) from operations 9,180 3,711
Other (income) expense:
Interest income (14) (51)
Interest expense 1,847 2,245
Currency exchange (gain)/loss (258) 54
Other 116 58
-------- --------
Income (loss) before income taxes $ 7,489 $ 1,405
======== ========
Income tax expense 1,162 --
-------- --------
Net income / (loss) $ 6,327 $ 1,405
======== ========
See accompanying notes.
F-43
Closed Type JSC Karakudukmunay
Statements of Cash Flows for the years ended December 31,
(In Thousands of U.S. Dollars)
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) $ 6,327 $ 1,405
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and depletion 9,479 3,598
Loss from sale and disposition of fixed assets 116 58
Management service fees 362 --
Accrued production bonus 190 86
Deferred income taxes 1,162 --
Changes in working capital:
(Increase)/decrease in prepaid and other receivables 227 (1,862)
(Increase)/decrease in crude oil inventory (3) 272
(Increase)/decrease in materials and supplies inventory 991 (2,664)
(Increase)/decrease in VAT receivable 2,160 (3,414)
Increase in accounts payable and accrued liabilities 868 5,710
Increase/(decrease) in accrued interest payable to partner (2,897) 3,346
-------- --------
Net cash provided by operating activities 18,982 6,535
Cash flows from investing activities:
Purchase of property, plant and equipment (980) (1,178)
Investments in oil and gas properties (23,911) (27,205)
Proceeds from sale of fixed assets 45 3
Net proceeds from sales of non-commercial crude oil -- --
-------- --------
Net cash used in investing activities (24,846) (28,380)
Cash flows from financing activities:
Increase in loan payable to bank 1,600 --
Principal payments on bank loan (1,600) (578)
Increase in loan payable to partner due to cash contributions
and other contributions 6,369 22,388
-------- --------
Net cash provided by financing activities 6,369 21,810
Net increase/(decrease) in cash 505 (35)
Cash at beginning of year 51 86
-------- --------
Cash at end of year $ 556 $ 51
======== ========
Supplemental cash flow disclosure:
Interest paid to non-related parties $ 14 $ 33
Supplemental schedule of non-cash
investing and financing activities:
Increase in accrued management service fees $ 1,360 $ --
See accompanying notes.
F-44
Closed Type JSC Karakudukmunay
Statement of Stockholders' Deficit
(In Thousands of U.S. Dollars)
Authorized Accumulated
Charter Capital Deficit Total
-------- -------- --------
As of December 31,1999 200 (12,007) (11,807)
Net income for the year 2000 -- 1,405 1,405
-------- -------- --------
As of December 31, 2000 200 (10,602) (10,402)
Net income for the year 2001 -- 6,327 6,327
-------- -------- --------
As of December 31, 2001 $ 200 $ (4,275) $ (4,075)
======== ======== ========
See accompanying notes.
F-45
Closed Type JSC Karakudukmunay
Notes to the Financial Statements
(Amounts in thousands of U.S. dollars unless otherwise stated)
1. Organization and Background Information
Closed Type JSC Karakudukmunay. (the "Company"), a Kazakhstan Joint Stock
Company of Closed Type, was formed to engage in the exploration, development,
and production of oil and gas properties in the Republic of Kazakhstan. The
Company's only significant investment is in the Karakuduk Field, an onshore oil
field in the Mangistau Oblast region of the Republic of Kazakhstan. On August
30, 1995, the Company entered into an agreement with the Ministry of Oil and Gas
Industry for Exploration, Development and Production of Oil in the Karakuduk Oil
Field in the Mangistau Oblast of the Republic of Kazakhstan (the "Agreement").
The Company's rights and obligations regarding the exploration, development, and
production of underlying hydrocarbons in the Karakuduk Field are determined by
the Agreement.
The Company's rights to the Karakuduk Field may be terminated under certain
conditions specified in the Agreement. The term of the Agreement is 25 years
commencing from the date of the Company's registration. The Agreement can be
extended to a date agreed between the Ministry of Energy and Mineral Resources
and the Company as long as production of petroleum and/or gas is continued in
the Karakuduk Field.
2. Basis of Presentation
The Company maintains its accounting records and prepares its financial
statements in U.S. dollars in accordance with the terms of the Agreement.
Certain reclassifications have been made in the financial statements for 2000 to
conform to the 2001 presentation.
The material accounting principles adopted by the Company are described below:
Foreign Currency Translation
----------------------------
The Company's functional currency is the U.S. dollar. All transactions arising
in currencies other than U.S. dollars, including assets, liabilities, revenue,
expenses, gains, or losses are measured and recorded into U.S. dollars using the
exchange rate in effect on the date of the transaction.
Cash and other monetary assets held and liabilities denominated in currencies
other than U.S. dollars are translated at exchange rates prevailing as of the
balance sheet date (150.20 and 144.50 Kazakh Tenge per U.S. dollar as of
December 31, 2001 and 2000, respectively). Non-monetary assets and liabilities
denominated in currencies other than U.S. dollars have been translated at the
estimated historical exchange rate prevailing on the date of the transaction.
Exchange gains and losses arising from translation of non-U.S. dollar amounts at
the balance sheet date are recognized as an increase or decrease in income for
the period.
The Tenge is not a convertible currency outside of the Republic of Kazakhstan.
The translation of Tenge denominated assets and liabilities in these financial
statements does not indicate the Company could realize or settle these assets
and liabilities in U.S. dollars.
F-46
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
2. Basis of Presentation (continued)
The Company had $6.57 million of net monetary liabilities denominated in Tenge
as of December 31, 2001 and $1.67 million net monetary liabilities denominated
in Tenge as of December 31, 2000.
Interest Capitalization
-----------------------
The Company capitalizes interest on significant construction projects. Assets
qualifying for interest capitalization include significant investments in
unproved properties and other major development projects that are not being
depreciated, depleted, or amortized, provided that work is in progress at that
time. The Company had interest expense of $2.92 million and $3.38 million for
the years ended December 2001 and 2000, respectively. For the same periods, the
Company capitalized interest totaling $1.07 million and $1.13 million,
respectively.
Oil and Gas Properties - Full Cost Method
-----------------------------------------
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with the acquisition, exploration,
and development of oil and gas reserves, including directly related overhead
costs, are capitalized.
All capitalized costs of proved oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized on the unit-of-production
method using estimated proved reserves. Investments in unproved properties and
major development projects are not amortized until proved reserves associated
with the projects can be determined or until impairment occurs. If the results
of an assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized cost to be amortized.
In addition, the capitalized costs are subject to a "ceiling test," which
basically limits such costs to the aggregate of the "estimated present value,"
discounted at a 10-percent interest rate of the future net revenues from proved
reserves, based on current economic and operating conditions, plus the lower of
cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized costs
with no loss recognized.
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are valued at historical cost and are depreciated
on a straight line basis over the estimated useful lives of the assets as
follows:
Description Period
----------- ------
Office buildings and apartments 20 years
Office equipment 3 years
Vehicles 5 years
Field buildings 15 years
Field equipment Up to 10 years
F-47
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
2. Basis of Presentation (continued)
Inventory
---------
Crude oil inventory is valued using the first-in, first-out method, at the lower
of cost or net realizable value. Crude oil inventory represents production costs
associated with lifting and transporting crude oil from the Karakuduk Field to
the KazTransOil pipeline. Crude oil placed into the KazTransOil Pipeline is held
as inventory until formally nominated and delivered for sale. Crude oil
inventory as of December 31, 2001 and 2000 represented approximately 24,000 and
19,000 barrels of crude oil, respectively.
Materials and supplies inventory is valued using the first-in, first-out method
and is recorded at the lower of cost or net realizable value. Certain unique
items, such as drilling equipment, are valued using the specific identification
method. Materials and supplies represent plant and equipment for development
activities, tangible drilling costs (drill bits, tubing, casing, wellheads,
etc.) required for development drilling operations, spare parts, diesel fuel,
and various materials for use in oil field operations.
Revenue Recognition
-------------------
Revenues and their related costs are recognized upon delivery of commercial
quantities of oil production produced from proved reserves, in accordance with
the accrual method of accounting. Losses, if any, are provided for in the period
in which the loss is determined to occur.
Revenue is presented gross of transportation expenses in accordance with EITF
00-10, Accounting for Shipping and Handling Fees and Costs.
Earnings Per Common Share
-------------------------
Basic earnings (loss) and diluted earnings (loss) are not presented due to the
Company being of a "closed" nature, and having no underlying shares outstanding.
New Accounting Standards
------------------------
In June 1998, the FASB issued SFAS 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. SFAS 133, as amended by SFAS 137 and 138, is effective for years
beginning after June 15, 2000. The Company adopted SFAS 133 on January 1, 2001.
As a result of adoption of SFAS 133, the Company recognizes all derivative
financial instruments in the 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 has not identified any derivative financial instruments,
which could be designated as fair value or cash flow hedges under SFAS 133 as of
December 31, 2001.
During 2001, the FASB issued the following pronouncements, which have potential
future accounting implications for the Company:
SFAS 141, Accounting for Business Combinations, requires the use of the purchase
method of accounting for all business combinations and provides new criteria to
determine whether an acquired intangible asset should be recognized. SFAS 141
applies to all business combinations initiated after June 30, 2001 and to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001.
F-48
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
2. Basis of Presentation (continued)
SFAS 142, Accounting for Goodwill and Intangible Assets, requires that goodwill
as well as other intangible assets with indefinite lives be tested annually for
impairment. SFAS 142 is effective for fiscal years beginning after December 15,
2001.
SFAS 143, Accounting for Asset Retirement Obligations, requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred and a corresponding increase in the carrying
amount of the related long-lived asset. SFAS 143 is effective for fiscal years
beginning after June 15, 2002.
SFAS 141 and 142 will not apply to the Company unless it enters into a future
business combination. The Company is currently assessing the impact of SFAS 143
on its financial condition and results of operations and is unsure if the effect
of the future adoption of SFAS 143, if any, will be material to the Company's
financial results.
Fair Value of Financial Instruments
-----------------------------------
All of the Company's financial instruments, including loans payable to partner,
cash and trade receivables have fair values which approximate their recorded
values as they are either short-term in nature or carry interest rates which
approximate market rates.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
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 a working capital
deficiency as of December 31, 2001 and there are uncertainties relating to the
Company's ability to meet all expenditure and cash flow requirements through
fiscal year 2002. In addition, Chaparral Resources, Inc. ("Chaparral"), the
parent company of the Company's principal investor, Central Asian Petroleum
(Guernsey) Limited ("CAP-G"), has been notified by Shell Capital Services
Limited, acting as facility agent, that it is in default of its loan agreement
(the "Loan") with Shell Capital Inc. ("Shell Capital"), and Shell Capital
Services Limited has initiated legal proceedings against both Chaparral and
CAP-G. See Note 13 regarding the status of the Loan.
These conditions raise 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
through increased production and related sale of oil from the Karakuduk Field
and elimination or minimization of local oil sales requirements imposed upon the
Company by the Government. See Note 14 regarding the Company's local market
requirements.
F-49
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
4. Prepaid and Other Receivables
The breakdown of Prepaid and Other Receivables is as follows:
December 31, December 31,
Description 2001 2000
----------- ------ ------
Advanced payment for oil and gas assets $ -- $ 189
Advanced payments for materials and supplies 588 --
VAT receivable from drilling contractor -- 651
Prepaid transportation costs 959 291
Other prepaid expenses 158 120
------ ------
Total $1,705 $1,251
====== ======
Advanced payment for materials and supplies represents prepayments for general
materials and supplies to be used in the development of the Karakuduk Field.
Advanced payments for oil and gas assets represents prepaid drilling costs,
which were fully recovered during 2001 through reduction of monthly charges from
the Company's drilling contractor, KazakhOil Drilling Services Company ("KODS"),
an affiliate of KazakhOil JSC. The VAT receivable from the drilling contractor
represents import VAT paid by the Company on behalf of KODS, which was offset
against drilling invoices charged to the Company in 2001. Prepaid transportation
costs represent the prepayment of export tariffs necessary to sell oil on the
export market, which is expensed in the period the related oil revenue is
recognized.
5. VAT Receivable
The VAT receivable is a Tenge denominated asset due from the Republic of
Kazakhstan. The VAT receivable consists of VAT paid on local expenditures and
imported goods. Under the Company's Agreement, VAT charged to the Company is
recoverable in future periods as either cash refunds or offsets against the
Company's fiscal obligations, including future income tax liabilities.
Periodically, the Company reviews it outstanding VAT receivable for possible
impairment. During 2001, the Company received VAT refunds of approximately $5.94
million.
6. Property, Plant and Equipment
Upon full amortization of tangible assets, the right of ownership of the
tangible assets shall be transferred to the Republic of Kazakhstan in accordance
with the Agreement. The Company is entitled to the use of the fully amortized
tangible assets during the whole term of the Agreement. A summary of property,
plant and equipment is provided in the table below:
December 31, December 31,
Description 2001 2000
----------- ------- -------
Office buildings and apartments $ 326 $ 312
Office equipment and furniture 770 552
Vehicles 1,376 1,758
Field buildings 4,304 3,652
Field equipment and furniture 492 479
------- -------
Total cost 7,268 6,753
Accumulated depreciation (2,527) (2,071)
------- -------
Property, plant and equipment, net $ 4,741 $ 4,682
======= =======
F-50
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
6. Property, Plant and Equipment (continued)
Depreciation expense for property, plant, and equipment was $803,000 and
$755,000 for years ending December 31, 2001 and 2000, respectively.
7. Oil and Gas Properties
The Company has capitalized all direct costs associated with acquisition,
exploration, and development of the Karakuduk Field. These costs include
geological and geophysical expenditures, license acquisition costs, tangible and
intangible drilling costs, production facilities, pipelines and related
equipment, access roads, gathering systems, management fees related to the
salary costs of individuals directly associated with exploration and development
activities, and related interest costs associated with unproved properties.
Overhead and general and administrative costs have been expensed as incurred.
The Company calculates depreciation, depletion, and amortization of oil and gas
properties using the units-of-production method. The provision is computed by
multiplying the unamortized costs of proved oil and gas properties by a
production rate calculated by dividing the physical units of oil and gas
produced during the relevant period by the total estimated proved reserves. The
unamortized costs of proved oil and gas properties includes all capitalized
costs net of accumulated amortization, estimated future costs to develop proved
reserves, and estimated dismantlement and abandonment costs.
The Company recognized total amortization expense of $8.67 million and $2.77
million for the years ended December 31, 2001 and 2000, respectively. For the
same periods, the effective amortization rate was $3.97 and $3.70 per barrel,
respectively.
In accordance with SFAS 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies, the Company accounts for amortization of crude oil
production as a component of crude oil inventory until the related crude oil is
sold. As of December 31, 2001 and 2000, $96,000 and $76,000 of amortization
expense was capitalized to crude oil inventory, respectively.
The composition of Oil and Gas Properties is as follows:
December 31, December 31,
Description 2001 2000
----------- -------- --------
Acquisition costs $ 508 $ 508
Exploration and appraisal costs 22,277 22,077
Development cost 44,633 21,012
Capitalized interest 3,699 2,628
-------- --------
Total oil and gas properties at cost $ 71,117 $ 46,225
======== ========
Total costs not subject to amortization $ 17,173 $ 20,527
======== ========
Total costs subject to amortization 53,944 25,698
Accumulated amortization (11,608) (2,919)
-------- --------
Net properties subject to amortization $ 42,336 $ 22,779
======== ========
The full cost ceiling test results as of December 31, 2001 support the carrying
amount of the assets disclosed above. Therefore, no impairment provision has
been made.
F-51
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
8. Accrued Liabilities
December 31, December 31,
Description 2001 2000
----------- ---- ----
Accrued management service fee $574 $574
Accrued taxes payable 36 156
Other accrued liabilities 65 65
---- ----
Total accrued liabilities $675 $795
==== ====
9. Other Long-Term Liabilities
Other long-term liabilities represent production based bonuses, which will be
payable to the Government of Kazakhstan amounting to $500,000 when cumulative
production reaches ten million barrels and $1.2 million when cumulative
production reaches 50 million barrels. Under current Kazakhstan tax law, the
production bonuses will be considered tax deductible expenditures in the
calculation of profits taxes. The Company accrues the production bonuses in
relation to cumulative oil production. The Company accrued $190,000 and $86,000
in production bonuses for the years ended December 31, 2001 and December 31,
2000, respectively.
10. Long-term Debt
December 31, December 31,
Description 2001 2000
----------- -------- --------
Loans payable to partner
Cash funding $ 47,317 $ 42,477
Management service fee 7,675 6,315
Other expenditures 4,715 3,186
Accrued interest payable 3,731 6,627
-------- --------
63,438 58,605
Less current portion (5,000) --
-------- --------
Total long-term debt $ 58,438 $ 58,605
======== ========
Loans Payable to Partner
------------------------
One of the Company's founders, CAP-G, bears sole financial responsibility for
providing all funding for the Company, which is not otherwise generated by the
Company's operations or borrowed from third party sources. The various forms of
funding from CAP-G are treated as long-term loans to the Company and bear
interest at the rate of LIBOR plus 1%. The Agreement requires installment
payments on the loan to be paid quarterly in an amount equal to 65% of gross
revenues after deduction of royalties payable to the Government of Kazakhstan.
CAP-G, at its own discretion, may waive receipt of quarterly repayments to
maintain working capital within the Company. During 2001, the Company paid $5.79
million to CAP-G as investment recovery.
The management service fee element of loans payable to partners relates to
management services provided by a subsidiary of Chaparral from 1996 through 1999
and directly by Chaparral, thereafter. Chaparral is CAP-G's parent company. The
accrued management fees were paid by CAP-G on the Company's behalf and made part
of the loan.
Loans Payable to Banks
----------------------
In September 2001, the Company borrowed $1.60 million from a local Kazakhstan
financial institution. The Company fully repaid the loan in October, 2001.
F-52
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
11. Taxes
The Company is subject to corporate income tax at the prevailing statutory rate
of 30%. Income (loss) from continuing operations before provision for income
taxes consists of:
Year ended December 31,
2001 2000
--------- ---------
Income/(Loss) before income taxes $ 7,489 $ 1,405
========= =========
The provision for income taxes consists of:
Year ended December 31,
2001 2000
------ ------
Income tax provision:
Current -- --
Deferred 1,162 --
------ ------
Total provision for income taxes $1,162 $ --
====== ======
The following table summarizes the significant differences between the statutory
tax rate and the Company's effective tax rate for financial statement purposes:
Year ended December 31,
2001 2000
------- -------
Statutory tax rate 30% 30%
Income taxes (benefit) computed
at statutory rate $ 2,247 $ 422
Losses and expenses with no tax
benefit 1,608 487
Utilization of net operating
loss carryforwards -- --
Change in asset valuation allowance
(2,693) (909)
------- -------
Income tax provision $ 1,162 $ --
======= =======
F-53
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
11. Taxes (continued)
The components of the Company's deferred tax assets and liabilities are as
follows:
Year ended December 31,
2001 2000
------- -------
Deferred tax assets:
Oil and gas properties $ 24 $ 253
Net operating loss carryforwards 34 908
------- -------
Total deferred tax assets before 58 1,161
valuation allowance
Valuation allowance -- (1,161)
------- -------
Net deferred tax assets 58 --
Deferred tax liabilities
Oil and gas properties and
other book/tax differences 1,220 --
------- -------
Total deferred tax liabilities 1,220 --
------- -------
Net deferred tax liabilities (assets) $ 1,162 $ --
======= =======
The Company recognized a net deferred tax liability of $1.16 million as of
December 31, 2001, primarily related to deductible temporary differences for
cost recovery adjusted for net operating loss carryforwards expected to be
utilized in future years. The Company did not record a valuation allowance for
the year ended December 31, 2001, due to the Company's determination that net
operating loss carryforwards would be fully utilized to offset taxable income in
2001 and future periods. Additionally, the Company increased its valuation
allowance by $1.53 million applied against 2001 taxable income to reflect the
impact of depreciation for basis adjustments allowed for statutory tax reporting
purposes. The adjustment did not impact the provision for prior years as the
Company recognized a 100% valuation allowance on its deferred tax assets due to
recurring operating losses from prior periods.
The Agreement specifies the income taxes and other taxes applicable to the
Company, which is subject to the tax laws of the Republic of Kazakhstan. At
December 31, 2001, the Company has tax loss carryforwards of approximately
$115,000 available to offset against future taxable income, in accordance with
the terms of the Agreement and legislation existing as of the date the Agreement
was signed. The tax loss carryforwards are Tenge denominated and expire in 2004.
The Company has used the best estimates available to determine the Company's
deferred tax assets and liabilities before consideration of the valuation
allowance. Refer to Note 13 regarding the uncertainties of taxation in the
Republic of Kazakhstan.
F-54
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
12. Charter Capital
The total Charter Fund contribution specified in the Founders Agreement of the
Company is $200,000. Each of the founders' portion of the Charter Fund and their
respective participating interest in the Company is:
December 31, December 31,
2001 2000
------------------------ ----------------------
Charter Charter
Contribution Percent Contribution Percent
------------ ------- ------------ -------
KazakhOil $ 80 40% $ 80 40%
Korporatsiya Mangistau Terra International 20 10% 20 10%
Central Asian Petroleum (Guernsey)
Limited - CAP-G 100 50% 100 50%
---- ---- ---- ----
Total charter capital $200 100% $200 100%
==== ====
KazakhOil JSC ("KazakhOil") is the national petroleum company of the Republic of
Kazakhstan.
13. Contingencies
Shell Capital Loan
------------------
In November 1999, Chaparral entered into the Loan with Shell Capital to provide
up to $24 million to partially fund the development of the Karakuduk Field. In
May 2001, the Loan was amended to provide Chaparral with up to $8 million in
uncommitted working capital (the "Bridge Loan"), repayable on or before
September 30, 2001. The Company and CAP-G both signed the Loan and Bridge Loan
as "co-obligors," assuming certain obligations and commitments to Shell Capital
and to Chaparral, as the borrower. The Company, however, continues to borrow
funds directly from CAP-G in accordance with the terms of the Agreement.
As of December 31, 2001, Chaparral was notified by Shell Capital Services
Limited, acting as facility agent, that it was in default of the Loan for
failure to pay outstanding principal and interest due on the Bridge Loan
totaling $3.34 million on or before September 30, 2001, failure to pay principal
and interest due on the Loan totaling $2.68 million on or before December 31,
2001, failure to achieve project completion by September 30, 2001, failure to
settle certain accounts payable within 90 days, the Company's failure to obtain
Shell Capital's approval prior to entering certain short-term debt arrangements,
and failure to maintain the listing of Chaparral's common stock on one of the
major stock exchanges (i.e. Nasdaq, NYSE, or AMEX). In January 2002, Chaparral
received a notice from Shell Capital Services Limited accelerating the payment
of the outstanding principal, interest, and other fees and expenses due under
the Loan. Additionally, Shell Capital Services Limited initiated legal
proceedings against Chaparral in the United Kingdom and against CAP-G in the
Isle of Guernsey to enforce Shell Capital's rights under the Loan. Chaparral and
CAP-G are contesting Shell Capital Services Limited's respective actions, but
there are no assurances that either CAP-G or Chaparral will be successful. Shell
Capital has not initiated legal action against the Company itself, but there can
be no assurance that Shell Capital will not do so in the future.
As a co-obligor of the Loan, the Company is subject to the following pledges,
covenants, and other restrictions:
(v) A pledge of the Company's receivables, including proceeds from the sale of
crude oil, to Shell Capital in the event of default of the Loan;
(vi) A pledge of the Company's right to insurance proceeds to Shell Capital in
the event of default of the Loan;
As a condition of the Loan, the Company entered into a crude oil sales agreement
with Shell Trading International Limited ("STASCO"), an affiliate of Shell
Capital, for the purchase of 100% of the Company's oil production from the
Karakuduk Field on the export market. The Loan requires the Company to sell all
of its net oil production to STASCO, unless otherwise agreed. The Company sold
approximately 1.81 million barrels of oil to STASCO during 2001, and
F-55
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
13. Contingencies (continued)
approximately 604,000 barrels during 2000. Furthermore, the Government of the
Republic of Kazakhstan required the Company to sell approximately 375,000 and
161,000 barrels of oil to the local market for the years ended December 31, 2001
and December 31, 2000, respectively. Although the Loan has been called in
default by Shell Capital Services Limited, the Company has continued to sell its
crude oil to STASCO on the export market in accordance with the Loan and the
STASCO agreement.
Taxation
--------
The existing legislation with regard to taxation in the Republic of Kazakhstan
is constantly evolving as the Government manages the transition from a command
to a market economy. Tax and other laws applicable to the Company 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.
Basis of Accounting
-------------------
The Company maintains its statutory books and records in accordance with U.S.
generally accepted accounting principles and calculates taxable income or loss
using the existing Kazakh tax legislation in effect on August 30, 1995, the date
the Agreement was signed. The Company considers these accounting methods correct
under the terms of the Agreement. The Republic of Kazakhstan currently requires
companies to comply with Kazakh accounting regulations and to calculate tax
profits or losses in accordance with these regulations as well as the prevailing
tax law. There is currently uncertainty as to the extent of tax losses available
to the Company. The potential effect of the uncertainty is not quantifiable.
14. Local Oil Sales Requirements
The ability of the Company to realize the carrying value of its assets is
dependent on being able to transport hydrocarbons and finding appropriate
markets for their sale. Domestic markets in the Republic of Kazakhstan currently
do not permit world market prices to be obtained.
The Company's crude oil sales agreement with STASCO, discussed in Note 13,
requires the Company to sell 100% of its oil production to STASCO on the export
market. The Company is not allowed to sell to other parties, on either the
export or local markets, without the approval of STASCO and Shell Capital. While
the Company is responsible for obtaining export quotas and finalizing access
routes through the KazTransOil pipeline and onward through the Russian pipeline
system, the Company has a right to export, and receive export quota for, 100% of
the production from the Karakuduk Field under the terms of the Agreement.
The Government of Kazakhstan, however, has required the Company, along with
other oil and gas producers within Kazakhstan, to sell a certain portion of
their crude oil production to the local market to supply local energy needs.
During 2001, the Company sold approximately 375,000 barrels of crude oil on the
local market for approximately $3.38 million and 1.81 million barrels to STASCO
on the export market for approximately $33.20 million. During 2000, the Company
sold approximately 161,000 barrels of crude oil on the local market for
approximately $1.69 million and sold 604,000 barrels to STASCO on the export
market for approximately $15.28 million.
The Company has and is continuing to work with the Government to effect the
export of 100% of hydrocarbons produced. It is uncertain, however, whether the
Company will be successful in doing so, as the Government is expected to require
additional local sales from oil and gas producers in the future.
F-56
Closed Type JSC Karakudukmunay
Notes to the Financial Statements (continued)
(Amounts in thousands of U.S. dollars unless otherwise stated)
15. Related Party Transactions
The Company entered into a marketing services agreement with KazakhOil on
January 31, 2000, whereby KazakhOil will assist the Company in expediting export
oil sales under the crude oil sales agreement with STASCO.
In January 2000, the Company canceled its management service contract with
Chaparral's subsidiary and entered into a similar contract directly with
Chaparral. The contract is for $170,000 per month, plus reimbursable expenses,
or $2.04 million per year.
Other related party transactions are disclosed on the face of the balance sheet.
Stockholders and their respective holdings in the Company are disclosed in Note
12, CAP-G related party transactions are referenced in Note 10.
F-57
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
The following supplemental information regarding the oil and gas activities of
the Company is presented pursuant to the disclosure requirements promulgated by
the SEC and Statement of Financial Accounting Standards ("SFAS") 69, Disclosures
About Oil and Gas Producing Activities.
The following estimates of reserve quantities and related standardized measure
of discounted net cash flows are estimates only, and are not intended to reflect
realizable values or fair market values of the Company's reserves. The Company
emphasizes that reserve estimates are inherently imprecise and that estimates of
new discoveries are more imprecise than producing oil and gas properties.
Additionally, the price of oil has been very volatile and downward changes in
prices can significantly affect quantities that are economically recoverable.
Accordingly, these estimates are expected to change as future information
becomes available and these changes may be significant.
The Company sold 2.18 million barrels of crude oil in 2001, of which 375,000
barrels, or approximately 17%, were sold to the local market. Comparatively, the
Company sold 765,000 barrels of crude oil in 2000, of which 161,000, or
approximately 21%, was sold to the local market. Prices received on local market
sales were substantially lower than world market prices prevailing at that time.
The Company has an existing crude oil sales agreement with STASCO to sell 100%
of its production on the export market for world market prices and a right to
export 100% of its production under the terms of its Agreement with the
government. The Company, however, expects the government to continue to require
the Company to sell a portion of its future crude oil production to the local
market. Therefore, year-end prices used for the standardized measure of
discounted net cash flows for the three years ended December 31, 2001 reflect
the assumption that 20% of the Company's production will be sold to the local
market for a substantially lower net oil price per barrel.
Proved reserves are estimated reserves of crude oil and natural gas that
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those expected to be
recovered through existing wells, equipment and operating methods.
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses. The estimated future net
cash flows are then discounted using a rate of 10% a year to reflect the
estimated timing of the future cash flows.
F-58
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(All Amounts in Thousands)
Proved Oil and Gas Reserve Quantities
(All within the Republic of Kazakhstan)
Oil Gas
Reserves Reserves
(bbls.) (Mcf.)
------- -------
Proved developed and undeveloped reserves:
Balance December 31, 1999 20,142 --
Revision of previous estimates -- --
Extensions, discoveries and other additions 13,633 --
Production (730) --
Balance December 31, 2000 33,045 --
Revision of previous estimates (1,978) --
Extensions, discoveries and other additions 1,043 --
Production (2,189) --
------- -------
Balance December 31, 2001 29,921 --
======= =======
Proved Developed Reserves:
Balance December 31, 2000 10,414 --
======= =======
Balance December 31, 2001 13,520 --
======= =======
F-59
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(All Amounts in Thousands)
Capitalized Costs Relating to Oil and Gas Producing Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2001 2000
-------- --------
Unproved oil and gas properties $ 23,179 $ 29,892
Proved oil and gas properties 58,015 26,886
-------- --------
Accumulated depreciation and depletion (14,135) (4,990)
-------- --------
Net capitalized cost $ 67,059 $ 51,788
======== ========
Cost Incurred in Oil and Gas Property Acquisition, Exploration, and Development
Activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2001 2000
------- -------
Acquisition costs $ -- $ --
Exploration and appraisal costs 200 5,060
Development costs 24,692 22,144
------- -------
$24,892 $27,204
======= =======
F-60
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(All Amounts in Thousands)
Results of operations for producing activities
(All within the Republic of Kazakhstan)
Year Ended December 31,
2001 2000
-------- --------
Oil revenue $ 36,575 $ 16,968
Transportation costs (8,297) (3,213)
Operating expenses (5,246) (3,676)
Depreciation, depletion, and amortization (9,479) (3,598)
-------- --------
13,553 6,481
Provision for income taxes(1) (1,373) --
-------- --------
$ 12,180 $ 6,481
======== ========
(1) Income tax expense is calculated by applying the statutory tax rate to
operating profit, adjusted for applicable net operating loss carryforwards.
F-61
SUPPLEMENTAL INFORMATION - DISCLOSURES ABOUT OIL AND GAS
PRODUCING ACTIVITIES-UNAUDITED
(All Amounts in Thousands)
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proven Oil and Gas Reserves (All within the Republic of Kazakhstan)
Year Ended December 31,
-------------------------
2001 2000
--------- ---------
Future cash inflows $ 305,579 $ 430,082
Future development costs (92,433) (92,685)
Future production costs (57,945) (46,477)
Future income tax expenses (34,132) (71,000)
--------- ---------
Future net cash flows 121,069 219,920
10% annual discount for
estimated timing of cash flows (40,381) (79,358)
--------- ---------
Standardized measure of discounted net
cash flows $ 80,688 $ 140,562
========= =========
Principal sources of change in the standardized measure of discounted future net
cash flows
Year Ended December 31,
---------------------------
2001 2000 (1)
--------- ---------
Beginning balance $ 140,562 $ 122,623
Sales of oil produced, net of
production and transportation
costs (23,032) (10,079)
Extensions and discoveries 7,094 69,464
Net changes in prices, production
cost and future development cost (93,058) (75,990)
Net changes due to revisions of previous
quantity estimates (13,459) --
Development cost incurred 24,692 22,144
Accretion of discount 18,519 16,496
Net change in income taxes 21,387 (2,296)
Other (2,017) (1,800)
--------- ---------
Ending balance $ 80,688 $ 140,562
========= =========
(1) Certain reclassifications have been made in the 2000 presentation for
principal sources of change in the standardized measure of discounted
future net cash flows to conform to the 2001 presentation.
F-62
SUPPLEMENTAL INFORMATION - SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(All Amounts in Thousands)
2001 Quarterly Information
For the Three Months Ended
(In Thousands of U.S. Dollars) Total as of
------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, December 31,
2001 2001 2001 2001 2001
-------- -------- -------- -------- --------
Revenue (1) $ 8,436 $ 9,559 $ 6,916 $ 11,664 $ 36,575
Transportation and operating costs (3,082) (3,198) (2,046) (5,217) (13,543)
Depreciation and depletion (1,931) (2,132) (1,828) (3,588) (9,479)
-------- -------- -------- -------- --------
Operating income (loss) 3,423 4,229 3,042 2,859 13,553
======== ======== ======== ======== ========
Income (loss) before income taxes $ 1,667 $ 2,712 $ 1,677 $ 1,433 $ 7,489
Income tax provision -- -- -- 1,162 1,162
-------- -------- -------- -------- --------
Net income (loss) $ 1,667 $ 2,712 $ 1,677 $ 271 $ 6,327
======== ======== ======== ======== ========
(1) Revenue is presented gross of transportation and marketing cost in accordance with EITF 00-10, Accounting for
Shipping and Handling Fees and Costs.
F-63
SUPPLEMENTAL INFORMATION - SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(All Amounts in Thousands)
2000 Quarterly Information
For the Three Months Ended
(In Thousands of U.S. Dollars) Total as of
------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, December 31,
2000 2000 2000 2000 2000
-------- -------- -------- -------- --------
Revenue(1) $ -- $ 4,552 $ 4,341 $ 8,075 $ 16,968
Transportation and operating costs -- (1,863) (2,235) (2,791) (6,889)
Depreciation and depletion (180) (828) (884) (1,706) (3,598)
-------- -------- -------- -------- --------
Operating income (loss) (180) 1,861 1,222 3,578 6,481
======== ======== ======== ======== ========
Income (loss) before income taxes $ (1,209) $ 625 $ (148) $ 2,137 $ 1,405
Income tax provision -- -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ (1,209) $ 625 $ (148) $ 2,137 $ 1,405
======== ======== ======== ======== ========
(1) Revenue is presented gross of transportation and marketing cost in accordance with EITF 00-10, Accounting for
Shipping and Handling Fees and Costs.
F-64