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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, 2001.
Commission file number: 0-7261
CHAPARRAL RESOURCES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-0630863
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16945 Northchase Drive, Suite 1620
Houston, Texas 77060
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (281) 877-7100
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.0001 Per Share
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(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. |_|
As of April 1, 2002, the aggregate market value of registrant's voting
common stock, par value $.0001 per share, held by non-affiliates was $5,992,083.
As of April 1, 2002, registrant had 14,283,801 shares of its common stock,
par value $.0001 per share, issued and outstanding.
PART I
ITEM 1. BUSINESS
Our Business
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Chaparral Resources, Inc. is an independent oil and gas exploration and
production company. Our strategy is to acquire and develop foreign 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 two of our significant subsidiaries, Central Asian Petroleum
(Guernsey), Ltd., a Guernsey company ("CAP-G"), and Central Asian Petroleum,
Inc., a Delaware company ("CAP-D"), we own a 50% interest in Closed Type JSC
Karakudukmunay ("KKM"), a Kazakh joint stock company that holds a governmental
license to develop the Karakuduk Oil Field. Shell Capital, Incorporated ("Shell
Capital"), Chaparral's primary creditor, owns a 40% interest in the
distributable profits of CAP-G. All references to "Chaparral," "we," "us," and
"our" refer to Chaparral Resources, Inc., its subsidiaries, and its 50% interest
in KKM, 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
domestic 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 September 2001. KKM intends to fully develop and commercially
produce the oil reserves in the Karakuduk Field.
The other stockholders of KKM are KazakhOil, the national petroleum company
of the Republic of Kazakhstan, and a private Kazakhstan joint stock company.
KazakhOil owns a 40% interest in KKM and the private Kazakh joint stock company
owns the remaining 10%. The government of Kazakhstan indirectly owns 40% of KKM
through KazakhOil's direct ownership interest. Because we only control a 50%
interest in KKM, we must seek the approval of one of the other two stockholders
before KKM can take any major action, such as approving KKM's annual budget and
work program, employing experts, appointing and removing KKM's management, and
approving KKM's material operations and activities. If we are unable to obtain
the approval of one of these stockholders, the operations of KKM may come to a
standstill.
Currently, the Karakuduk Field is our only oil field. We have no other
significant subsidiaries besides CAP-G and CAP-D.
Crude Oil Sales
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We derive all of our revenue through the production and sale of crude oil
from the Karakuduk Field. We are in the early stages of development and only
began generating revenue from the sale of crude oil during 2000. Crude oil
production and related sales, however, have increased materially from 2000 to
2001. KKM recognized $36.57 million in revenue in 2001 from the sale of
approximately 2.18 million barrels of crude oil. In 2000, KKM recorded $16.97
million in revenue based upon sales of approximately 765,000 barrels of crude
oil. Our financial information relating to operations in the Karakuduk Field is
disclosed in the financial statements for KKM and the consolidated financial
statements for Chaparral, both of which are included as part of this Annual
Report on Form 10-K.
KKM sells the majority of its crude oil on the export market to Shell
Trading International Limited ("STASCO"), an affiliate of Shell Capital. STASCO
is responsible for approximately 90% of KKM's oil sales revenue in 2001. KKM has
a long-term crude oil sales agreement with STASCO for the sale of 100% of KKM's
oil production on the export market. STASCO accepts title of KKM's crude oil at
various delivery points outside of Kazakhstan. 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 STASCO. STASCO is responsible for nominating and coordinating an oil tanker,
if necessary, and arranging for the resale/marketing of the crude oil purchased.
The crude oil sales agreement with STASCO is effective through 2004, and is
renewable thereafter for successive 12-month periods. STASCO may terminate the
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crude oil sales agreement if KKM does not nominate a sale for six consecutive
months, KKM enters into a sales agreement with a third-party, we cease to own at
least 50% of KKM, or the loan with Shell Capital is terminated or repaid. KKM
may terminate the crude oil sales agreement if the loan is repaid in full or
STASCO fails to pay amounts due to KKM.
The sales price to be received by KKM under the crude oil sales agreement
are based upon various factors, including the point of delivery, current market
oil prices, the volume and quality of the crude oil delivered, the size and type
of tanker utilized (if any), and applicable flat tanker rates (if any). KKM pays
STASCO a commission on each oil sale, calculated on a sliding scale based upon
total annual crude oil quantities delivered: $0.15 per barrel up to 5 million
barrels, $0.10 per barrel from 5 to 10 million barrels, and $0.05 per barrel
beyond 10 million barrels. All other prices/costs utilized in the sales price
formula are from published sources or are actual costs incurred.
There are six delivery points under the crude oil sales agreement,
including three preferred port facilities on the Black Sea (Novorossiisk,
Odessa, and Ventspills) and three onshore pipeline facilities (Dudkovce,
Feyeshlitke, and Adamovo). KKM must use its best efforts to deliver crude oil to
one of the three port locations. All of KKM's export oil sales to date have been
delivered to the Ukranian port of Odessa. The minimum deliverable quantity is
approximately 460,000 barrels of crude oil for the port locations and 22,000
barrels for the pipelines. 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, with STASCO's approval.
Sales prices at the port locations are based upon quoted Urals crude oil
prices from Platt's Crude Oil Marketwire, net of published freight charges
published in both Platt's Dirty Tanker Wire and the Worldscale Tanker Nominal
Freight Scale. Payment is made by STASCO within 30 days of receipt of the final
bill of lading and KKM's invoice for the sale, unless otherwise agreed by both
parties. Sales prices received from pipeline deliveries equal the sales price
received by STASCO from their third party buyers of KKM's crude oil. STASCO
negotiates the best price possible and passes on the proceeds, net of their
applicable sales commission and incidental expenses, to KKM. Payment for onshore
pipeline sales is made on the earlier of 45 days or the date STASCO agrees to a
sales price with the third party buyer.
Shell Capital Services Limited, acting as facility agent, has notified us
that Shell Capital's loan with Chaparral is in default, demanded Chaparral
accelerate the repayment of the loan, and has initiated legal proceedings
against Chaparral and CAP-G to enforce Shell Capital's rights under the loan,
which Chaparral and CAP-G are contesting. See Item 3 - Legal Proceedings. KKM,
however, has continued to sell its crude oil on the export market to STASCO per
the terms of the crude oil sales agreement. If Chaparral is able to refinance
the loan with a third-party, the crude oil sales agreement may be terminated by
either KKM or STASCO.
The government of the Republic of Kazakhstan requires oil producers within
Kazakhstan to supply a portion of their crude oil production to the local market
to meet domestic energy needs. Local market oil prices are significantly lower
than prices obtainable on the export market. In 2001, the government required
KKM to sell approximately 375,000 barrels of crude oil, or 17% of its total oil
sales, to the local market, compared to 161,000 barrels, or 21%, during 2000.
Local market prices obtained by KKM are approximately $7 to $10 per barrel below
export market prices, net of transportation costs. We have attempted to effect
the 100% export of all hydrocarbons produced from the Karakuduk Field through
informal discussions with the government of Kazakhstan. While we have been
successful in lowering the quantities of local sales required, we have been
unable to entirely eliminate our local market obligation. We plan to continue to
work with the government to minimize or eliminate KKM's future local sales
requirements. If we are unsuccessful, however, we may be required to initiate
legal proceedings within Kazakhstan or make a claim under our political risk
insurance policy for the breach of our agreement by the government of
Kazakhstan. We can provide no assurances that legal proceedings within
Kazakhstan would be successful, or that any potential insurance proceeds
available under the political risk policy would fully offset losses incurred due
to additional local sales requirements. Additionally, the initiation of formal
legal proceedings could lead to more material restrictions of our contractual
rights, including our right to develop the Karakuduk Field or sell any of our
crude oil production on the export market. The future loss of revenue from local
sales may be significant enough to prevent us from generating a profit from the
Karakuduk Field or generate enough cash flow to meet our working capital needs.
See Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
2
Risks of Oil and Gas Activities
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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 working capital requirements.
We are uncertain about the prices at which we will be able to sell oil that
we produce. Our estimated future net revenue from oil sales is highly dependent
on the price of oil, as well as the amount 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 or
elsewhere. 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 we will recover the costs incurred to acquire and
develop the Karakuduk Field. If the costs incurred exceed our revenues, our
operations will not be profitable. Furthermore, 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 Shell Capital under
the terms of the loan. See Item 3 - Legal Proceedings.
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 sufficient amounts of
oil to return a profit; and
o production of developed oil reserves which cannot be marketed or
cannot be sold for adequate market prices.
There are many additional risks incident to drilling for and producing oil
and gas. These risks include blowouts, cratering, fires, equipment failure and
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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 these risks. In fact, many of
these risks are not insurable. 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 April 1, 2002, we have not experienced any material losses due to
these events.
Risks of Foreign Operations
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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" 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 status of Kazakh law and the
stability of the country and 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 the courts of the United States, we may not be successful in subjecting
foreign persons to the jurisdiction of those courts.
The exportation 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. However,
we cannot provide any assurances that we will receive export quota or any other
approvals required to export and deliver our production in the future.
KKM has entered into marketing service agreements with KazakhOil and
KazTransOil JSC, the state owned pipeline transportation company, whereby
KazakhOil and/or KazTransOil will assist KKM with export oil sales under the
crude oil sales agreement. The services provided include assistance in obtaining
export quotas from the government of the Republic of Kazakhstan, consulting on
procedures required for the nomination and delivery of oil sales, obtaining
other necessary approvals and permissions, and preparation of relevant
documentation. KKM utilized the services of KazTransOil to facilitate export oil
sales during 2001 and expects to continue to do so in the future. In February
2002, KazakhOil and KazTransOil merged into a new government owned entity,
KazMunayGaz.
Political Risk Insurance
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In order to counteract some of these potential difficulties, we obtained
political risk insurance through the Overseas Private Investment Corporation
("OPIC"), covering 90% of the book value of our investment in KKM up to a
maximum of $50.0 million. The annual premium for the maximum OPIC coverage
available to Chaparral is $1.05 million, payable in quarterly installments. Our
OPIC policy provides coverage for acts, which could be committed against us by
the government of the Republic of Kazakhstan or other parties in times of severe
political instability. The OPIC policy generally provides the following types of
risk coverage:
o Currency Inconvertibility. Currency restrictions, which might be
imposed by the government of the Republic of Kazakhstan to prevent or
defer our recovery of our investment in the Karakuduk Field, including
revoking KKM's right to retain U.S. dollar proceeds from oil sales
outside of Kazakhstan or to convert local currency into U.S. dollars
for repayment of our investment;
o Expropriation. Acts attributable to the government of the Republic of
Kazakhstan that are violations of international law or an abrogation,
repudiation or material breach of our agreements with the government.
In order to qualify for coverage, the act of expropriation must
continue without interruption for at least six months and prevent us
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from exercising our fundamental rights under our agreements,
exercising control over our investment the Karakuduk Field, or
recovering our investment in the Karakuduk Field;
o Political Violence. The loss or impairment of our investment due to
politically motivated violent acts, including war, revolution,
insurrection, or politically motivated civil strife, terrorism and
sabotage; and
o Interference with Operations. The loss or impairment of our investment
due to political violence lasting more than six months.
While the OPIC policy provides significant political risk coverage, it does
not address political risks outside of the Republic of Kazakhstan or cover every
contingency within Kazakhstan. The OPIC policy does not cover commercial risks,
whatsoever. If social, political, or economic strife in the region hinder KKM or
our operations in a manner that is not covered by our OPIC policy, we will bear
the full burden of any resulting loss or damage. If we do have a future claim
under the OPIC policy, we may be required to assign all or a portion of our
rights to the Karakuduk Field to OPIC before any insurance payments will be
made. The OPIC policy only covers 90% of our book value of our investment in
KKM, but there is no assurance any proceeds received will cover 90% of our
actual losses incurred or be sufficient to cover our outstanding indebtedness
repayable to our creditors.
Environmental Regulations
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We must comply with laws of the Republic of Kazakhstan and international
requirements that regulate the discharge of materials into the environment.
Furthermore, both our loan and our OPIC political risk insurance policy require
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 and have no plans to do so in
the foreseeable future.
Competition
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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 with
greater financial resources and more experience than Chaparral. We do not hold a
significant competitive position in the oil industry. 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
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As of April 1, 2002, Chaparral had 6 full-time employees. KKM had 170
employees and retains independent contractors on an as needed basis through
Chaparral. We believe that our relationship with our employees and consultants
is good.
Corporate Information
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Chaparral was incorporated under the laws of the State of Colorado in 1972.
In 1999, Chaparral completed a 60 to 1 reverse stock split and reincorporated
under the laws of the State of Delaware.
Our address is 16945 Northchase Drive, Suite 1620, Houston, Texas 77060,
and our telephone number is (281) 877-7100.
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
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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
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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 term, which may be
extended by production. KKM entered an agreement to develop the Karakuduk Field
with Kazakhstan's Ministry of Energy and Natural Resources in 1995.
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.
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 eight 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-Astrakghan 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 KazTransOil
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 April 1, 2002, KKM has 36 productive wells in the Karakuduk Field,
including 23 new wells and 13 re-completions of previously existing delineation
wells. The 36 wells include 29 wells currently producing approximately 7,300
barrels of oil per day and 7 which are shut-in for various reasons, including
the installation of additional gathering lines and well equipment and additional
workover and stimulation operations. Another shut-in well is being considered
for future use as an injection well for a pilot waterflood project. 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. During 2001, KKM drilled an additional 10
development wells and re-completed 7 delineation wells. An additional
exploratory well and 2 re-completions were conducted prior to 2000. KKM has
successfully completed every well drilled to date. Oil has been recovered from
the originally identified J-1, J-2, J-4, J-8, and J-9 formations, along with new
discoveries in the J-6, J-7 and J-10 horizons.
KKM's daily oil production has been limited due to various facility
constraints and lack of working capital to fund field operations. KKM is working
to alleviate all facility constraints through expansion of its oil storage
capacity, installation of additional gathering and processing facilities,
commissioning of the oil sales pipeline and completion of the central processing
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facility. Crude oil production is currently being processed at a pilot facility
and trucked to the KKM pump station adjacent to the export pipeline. The pump
station is approximately 18 miles from the Karakuduk Field and was placed in
service in April 2000. KKM has finished construction of an 18-mile pipeline,
capable of transporting up to 18,000 barrels of oil per day to the export
pipeline terminal. Test production was successfully delivered through the
pipeline to the export pipeline pumping station in April 2002. The pipeline is
currently being commissioned and is expected to be operational by mid-2002.
Until the pipeline is fully operational, KKM will continue to truck oil
production to the pump station at the export pipeline. Maximum crude oil
trucking capacity has been approximately 8,500 barrels of oil per day. KKM also
expects to commission its central processing unit by mid-2002, with further
expansion through 2003 in order to improve its produced water processing
capability in the field.
KKM currently has one workover rig operating in the Karakuduk Field. KKM
had two drilling rigs in operation in 2001, one of which was released in April
2001 and the other in October 2001. KKM expects to renew its drilling program in
the latter part of 2002 if Chaparral is able to refinance its loan with Shell
Capital and adequate financial resources are available to continue the
development of the Karakuduk Field. The workover rig is expected to continue
operations throughout 2002, performing standard well maintenance, re-completions
of existing wells, and down-hole pump installations. We estimate up to 71 new
wells will be required to fully develop the Karakuduk Field, of which 20 would
eventually be converted into water injection wells. The planned development
program includes a pressure maintenance operation that our management believes
will enhance ultimate recovery.
KKM completed a 3-D seismic study in early 2001, which we have, and will
continue, to use to optimize location of wells (both producers and injectors)
and further define the possible total productive capacity of the Karakuduk
Field.
Chaparral has pledged its investment in KKM and the Karakuduk Field as
collateral for its loan with Shell Capital. Shell Capital Services Limited,
acting as facility agent, has notified us that the loan with Shell Capital is in
default, demanded Chaparral accelerate the repayment of the loan, and has
initiated legal proceedings against Chaparral and CAP-G to enforce Shell
Capital's rights under the loan, which Chaparral and CAP-G are contesting. See
Item 3 - Legal Proceedings.
See also Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Reserves
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As of December 31, 2001, the Karakuduk Field has total estimated proved
reserves of approximately 29.92 million barrels, net of government royalty, of
which we have a proportional equity interest in approximately 14.96 million
barrels, based upon our 50% equity interest in KKM. The reserve disclosure is
based upon a reserve study of the Karakuduk Field conducted by Ryder Scott,
including data available subsequent to December 31, 2001.
No reserve estimates have been filed with any Federal authority or other
agency since January 1, 2001.
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Net Quantities of Oil and Gas Produced
- --------------------------------------
The following table summarized sales volumes, sales prices and production
cost information for our net oil and gas production for each of the three years
ended December 31, 2001:
As of the Year Ended December 31,
-------------------------------------
1999 2000 2001
---- ---- ----
Net sales volumes
Oil (bbls) 29,625 382,500 1,092,000
Gas (mcf) -- -- --
Average sales price
Oil (per bbl) $ -- $ 22.18 $ 16.75
Gas (per mcf) $ -- $ -- $ --
Average production cost (per bbl) $ -- $ 4.81 $ 2.40
KKM did not sell any commercial quantities of crude oil prior to 2000.
Average sales revenue, net of transportation costs, was approximately $17.98 and
$12.95 per barrel for the years ended December 31, 2000 and 2001, respectively.
For the same periods, the average transportation costs per barrel were
approximately $4.20 and $3.80, respectively.
Net oil production 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.
KKM sold some quantities of test production prior to the commercial
viability of our investment in the Karakuduk Field, which are not reported as
part of the required disclosures for the Statement of Financial Accounting
Standards No. 69 ("SFAS 69"), Disclosures About Oil and Gas Producing
Activities, or included in the table above. Our share of KKM's sales of test
production during 1999 totaled 162,325 barrels of oil, which were accounted for
on a cost recovery basis. The average sales price per barrel received by KKM was
$7.00, net of transportation costs.
Productive Wells and Acreage
----------------------------
As of December 31, 2001, we had interests in 36 gross productive oil wells
(18 net 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 developed (2,500 net developed acres).
Undeveloped Acreage
-------------------
As of December 31, 2001, 5,000 acres in the Karakuduk Field are undeveloped
(2,500 net undeveloped acres).
8
Drilling Activity
- -----------------
During the three years ended December 31, 2001, our net interests in
exploratory and development wells drilled were as follows:
Year Ended Exploratory Wells, Net Development Wells, Net
December 31, ---------------------- ----------------------
Productive Dry Productive Dry
---------- --- ---------- ---
1999 .5 -- -- --
2000 1.5 -- 6.5 --
2001 .5 -- 8.0 --
All wells are located in the Republic of Kazakhstan.
Present Activities
------------------
KKM is not currently engaged in drilling activities, but expects to renew
its drilling program during the latter part of 2002 if it can resolve its
current legal dispute with Shell Capital and obtain the working capital
necessary to renew drilling operations. See Item 3 - Legal Proceedings.
ITEM 3. LEGAL PROCEEDINGS
On January 15, 2002, Shell Capital Services Limited, acting as facility
agent, initiated proceedings against Chaparral in the United Kingdom with the
High Court of Justice, Queen's Bench Division. Shell Capital Services alleges in
its lawsuit that Chaparral is liable to Shell Capital in the amount of
approximately $37.31 million, including accrued and unpaid interest under the
terms of the loan. Shell Capital Services further alleges that Chaparral is in
default of the loan for the following: failure to pay outstanding principal and
interest due on the bridge loan totaling $3.34 million on or before September
30, 2001, failure to achieve project completion by September 30, 2001, failure
to settle certain accounts payable within 90 days, failure to maintain listing
of Chaparral's common stock on the Nasdaq SmallCap Market, failure to pay
approximately $1.68 million in interest and $1.0 million in principal due on the
loan as of December 31, 2001, and failure to pay a $24,000 agency fee due to
Shell Capital Services on January 1, 2002. As a result of the foregoing alleged
defaults, Shell Capital Services claims that the entire outstanding principal
balance of the loan, plus accrued interest, fees and other costs associated with
the loan is due and payable. Chaparral has filed a notice of its intention to
defend the proceedings in the High Court of Justice. Shell Capital Services
filed a motion for summary judgment on March 1, 2002, which has tentatively been
scheduled for a July 8, 2002 hearing date with the High Court of Justice.
On February 7, 2002, Shell Capital Services filed an application in the
Royal Court of Guernsey Ordinary Court for the compulsory winding up of CAP-G
pursuant to Section 94 of the Companies (Guernsey) Law, 1994. Shell Capital
Services alleges that CAP-G owes Shell Capital approximately $37.31 million as a
co-obligor with Chaparral under the terms of Chaparral's loan with Shell
Capital. Shell Capital Services' claims in the Guernsey proceeding are the same
as those alleged in the English proceeding against Chaparral, discussed above.
CAP-G has filed a response to the Application for Winding Up and has requested
the Royal Court to defer the winding up proceedings pending resolution of the
proceedings filed by Shell Capital Services against Chaparral in the High Court
of Justice in England, on the grounds that CAP-G is a guarantor rather than a
co-obligor so that any liability it may have is derivative from that of
Chaparral. A hearing has yet to be scheduled in the Royal Court of Guernsey
regarding CAP-G's request for deferral of the winding up application.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the fiscal
quarter ended December 31, 2001.
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.ob". As of April 1, 2002, we had 1,822 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, 2001 and 2000, as
reported by the National Association of Securities Dealers, Inc.:
Price Range
-----------
Fiscal Quarter Ended High Low
-------------------- ---- ---
March 31, 2000 $15.19 $8.00
June 30, 2000 9.00 5.88
September 30, 2000 10.50 3.38
December 31, 2000 8.13 3.25
March 31, 2001 4.50 2.81
June 30, 2001 3.30 2.00
September 30, 2001 2.50 1.10
December 31, 2001 2.15 1.50
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, or 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.
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 US Dollars)
-----------------------------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------------------------
Oil and gas sales ....................... -- -- -- -- --
Total revenues .......................... -- -- -- -- --
Equity in income (loss) from
investment ........................... $ 4,616 $ 2,827 $ (1,849) $ (1,222) $ (832)
Net loss ................................ (16,215) (26,803) (5,163) (4,266) (2,603)
Net loss per
common share .......................... (1.16) (6.01) (5.63) (5.14) (3.76)
Working capital (deficit) ............... (39,357) (601) (2,941) (287) 3,356
Total assets ............................ 69,037 70,156 41,303 34,324 23,519
Long-term obligations and
redeemable preferred stock ........... 3,900 26,528 14,776 5,060 4,710
Stockholders' equity .................... 25,361 41,926 22,851 27,579 18,578
Other Data
----------
Present value of proved reserves ........ 40,344 70,281 61,312 -- --
Proved oil reserves (bbls) .............. 14,961 16,523 10,071 -- --
Proved gas reserves (mcf) ............... -- -- -- -- --
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 Chaparral is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. We are responsible for providing
100% of the funding for the development of the Karakuduk Field not provided from
oil sales or third party sources. We have recognized recurring operating losses,
have a working capital deficiency as of December 31, 2001, and there are
uncertainties relating to our ability to meet projected cash flow requirements
through 2002. In addition, Shell Capital Services Limited, acting as facility
agent, has notified Chaparral that it is in default under its loan with Shell
Capital and has issued a notice of acceleration demanding that Chaparral repay
the outstanding principal balance, plus all interest and other fees, payable
under the loan. Shell Capital Services Limited also initiated legal proceedings
against both Chaparral and CAP-G, which both Chaparral and CAP-G are defending.
If we are unable to successfully defend against the legal actions of Shell
Capital Services Limited or raise the capital necessary to refinance the loan,
the result will most likely be the loss of our investment in the Karakuduk
Field.
We are seeking to alleviate these conditions through the restructuring of
Chaparral and refinancing of the loan with Shell Capital. In April 2002,
Chaparral executed a letter of intent with Central Asian Industrial Holdings,
N.V., or CAIH, regarding a possible $12 million capital investment into
Chaparral and an amount of debt that is to be determined, in exchange for
approximately 60% of Chaparral's common stock. The transaction is subject to a
number of conditions precedent, including the approval of Shell Capital, the
negotiation and execution of a definitive agreement with CAIH, and the approval
of the boards of directors and shareholders of both companies. Chaparral plans
to use the capital infusion and debt from CAIH to restructure the loan. The
terms of the restructuring would include the cancellation of the common stock
warrants held by Shell Capital, CAP-G's reacquisition of the 40% net profits
interest held by Shell Capital, waiver of all outstanding defaults including
project completion, and adjusting the interest rate on the restructured loan to
an undetermined rate below the current interest rate being charged by Shell
Capital. Chaparral and CAP-G will continue to contest the legal actions of Shell
Capital Services Limited unless and until such time as a transaction with CAIH
can be consummated. We cannot provide any assurance, however, that the loan with
Shell Capital will be refinanced with CAIH or any other party and, if so,
whether the loan would be refinanced on terms and conditions favorable to
Chaparral.
Liquidity and Capital Resources
- -------------------------------
We are presently engaged in the development of the Karakuduk Field, which
requires substantial cash expenditures for drilling costs, well completions,
workovers, oil storage and processing facilities, pipelines, gathering systems,
plant and equipment (generators, pumps, communications, etc.) and other field
facilities. We have invested approximately $60.0 million in the development of
the Karakuduk Field and have drilled or re-completed 36 productive wells,
including 17 wells during 2001. Total capital expenditures for 2001 were
approximately $24.85 million in comparison to total capital expenditures of
$28.38 million incurred in 2000. Capital expenditures are estimated to be at
least $60.0 to $80.0 million for the period from 2002 through 2005, including
drilling approximately 37 more wells through this time period.
We expect to finance the continued development of the Karakuduk Field
primarily through cash flows from the sale of crude oil. During the twelve
months ended December 31, 2001, KKM sold approximately 2.18 million barrels of
crude oil for $28.28 million, net of transportation costs. As of April 1, 2002,
daily production, net of royalty, is approximately 7,300 barrels per day from 29
of the 36 productive wells in the field. The remaining 7 wells are shut-in for
various reasons, including installation of additional gathering lines and well
equipment and additional workover and well stimulation operations to bring wells
on to primary production. Another shut-in well is being considered for future
use as an injection well for a pilot waterflood project.
12
KKM's maximum daily production is also restrained by certain field facility
constraints, which KKM is attempting to alleviate through the expansion of oil
storage capacity, installation of additional gathering and processing
facilities, commissioning of an oil sales pipeline, installation of down hole
pumps for artificial lift, and completion of the central processing facility.
Crude oil production is currently being processed at a pilot facility and
trucked to the KKM pump station adjacent to the export pipeline. The pump
station is approximately 18 miles from the Karakuduk Field and was placed in
service in April 2000. KKM has finished constructing an 18-mile pipeline,
capable of transporting up to 18,000 barrels of oil per day to the export
pipeline terminal. Test production was successfully delivered through the
pipeline to the export pipeline pumping station in April 2002. The pipeline is
currently being commissioned and is expected to be operational by mid-2002.
Until the pipeline is fully operational, KKM will continue to truck oil
production to the pump station at the export pipeline. Maximum crude oil
trucking capacity has been approximately 8,500 barrels of oil per day. KKM also
expects to commission its central processing unit by mid-2002, with further
expansion through 2003 in order to improve its produced water processing
capability in the field.
In the short-term, we expect to maintain net daily production of
approximately 7,300 barrels of oil per day through the second quarter of 2002 as
these various restrictions are addressed. No assurances may be provided,
however, that production constraints will be alleviated as expected, due to
potential factors such as delays in obtaining necessary regulatory approvals,
inaccessibility of contractors and materials needed for construction, and
adequate working capital to timely fund field operations.
Our highest operational priority in the short-term is to refinance the loan
with Shell Capital and obtain additional working capital necessary to alleviate
production constraints in order to obtain a level of operational cash flow
sufficient to fund our future cash requirements. We anticipate up to $8.5
million in additional working capital will be necessary to achieve this
objective. Chaparral and KKM have also initiated cost reduction measures to
avoid incurring any unnecessary overhead or operating expenses. Primarily, KKM
has suspended drilling operations as of October 2001 to allow the development of
the facilities program to continue in order to process current and future
productive capacity. This will also allow further analysis of available
geological data to most efficiently complete the development of the Karakuduk
Field. Subject to refinancing the loan with Shell Capital (see below), we expect
drilling operations to resume in the latter part of 2002.
Our short and long-term operational liquidity is also impacted by local oil
sales obligations, imposed by the government of Kazakhstan on oil and gas
producers to supply local energy needs. Under the terms of our agreement with
the government, KKM has a right to export, and receive export quota for, 100% of
the production from the Karakuduk Field. However, in 2001, the government
required KKM to sell approximately 375,000 barrels of crude oil, or 17% of its
total oil sales, to the local market, compared to 161,000 barrels, or 21%,
during 2000. Local market prices obtained by KKM are approximately $7 to $10 per
barrel below export market prices, net of transportation costs. We have
attempted to effect the 100% export of all hydrocarbons produced from the
Karakuduk Field through informal discussions with the government of Kazakhstan.
While we have been successful in lowering the quantities of local sales
required, we have been unable to entirely eliminate our local market obligation.
We plan to continue to work with the government to minimize or eliminate KKM's
future local sales requirements. If we are unsuccessful, however, we may be
required to initiate legal proceedings within Kazakhstan or make a claim under
our political risk insurance policy for the breach of our agreement by the
government of Kazakhstan. We can provide no assurances that legal proceedings
within Kazakhstan would be successful, or that any potential insurance proceeds
available under the political risk policy would fully offset losses incurred due
to additional local sales requirements. Additionally, the initiation of formal
legal proceedings could lead to more material restrictions of our contractual
rights, including our right to develop the Karakuduk Field or sell any of our
crude oil production on the export market. The future loss of revenue from local
sales may be significant enough to prevent us from generating a profit from the
Karakuduk Field or generate enough cash flow to meet our working capital needs.
Shell Capital loan
- ------------------
As of April 1, 2002, our most significant outstanding indebtedness is our
loan with Shell Capital. We entered into the loan in November 1999, to provide
us with up to $24.0 million of financing for the development of the Karakuduk
Field. Chaparral borrowed $21.5 million under the loan as of December 31, 2000
and the remaining $2.5 million as of May 2001.
The loan accrues interest at an annual rate of LIBOR plus 17.75%,
compounding quarterly prior to project completion, which consists of various
financial and technical milestones in the development of the Karakuduk Field.
13
Prior to project completion, an interest amount, equal to an annual rate of
LIBOR plus .50%, is payable quarterly to Shell Capital. The annual interest rate
is reduced to LIBOR plus 12.75% after project completion. The remaining unpaid
interest is added to the loan balance at the end of each quarter. After project
completion, all quarterly interest on the outstanding loan is fully due and
payable at the end of each calendar quarter.
In May 2001, the loan was amended to provide Chaparral with up to $8.0
million in uncommitted working capital as a bridge loan, which could be drawn
down in increments of $250,000 through August 31, 2001, at the sole discretion
of Shell Capital. We borrowed a total of $3.15 million under the bridge loan
through August 31, 2001. The principal borrowed under the bridge loan accrues
interest at LIBOR plus 17.75% and is subject to an arrangement fee of 2%.
Interest payments in the amount of LIBOR plus .50% are due at the end of each
month the bridge loan is outstanding. All unpaid interest is added to the
outstanding principal balance on each repayment date. The outstanding principal
of the bridge loan, plus all accrued interest, was due on or before September
30, 2001.
As an incentive for Chaparral to repay the bridge loan or refinance the
entire loan (including the bridge loan), Chaparral's board of directors approved
CAP-G's issuance of Series A Preferred shares to Shell Capital. Per the terms of
the amendment, if Chaparral failed to repay or refinance the bridge loan on or
before September 30, 2001, the Series A Preferred shares automatically convert
and entitle Shell Capital to 40% of the distributable profits of CAP-G. CAP-G
did not have any distributable profits as of April 1, 2002.
Chaparral did not reach project completion on or before September 30, 2001.
Chaparral had previously requested that Shell Capital waive or revise the
project completion definition due to our belief that the production levels and
certain technical requirements of project completion were unattainable and not
necessary or prudent in the time frame specified under the loan. Shell Capital,
however, refused to waive or revise the project completion definition. As a
result of Chaparral's failure to timely repay the bridge loan, Shell Capital's
Series A Preferred shares in CAP-G converted as of October 1, 2001, entitling
Shell Capital to 40% of the distributable profits of CAP-G.
In October 2001, Chaparral received a notice of default from Shell Capital,
notifying us that the following events of default had occurred under the loan:
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 interest
due on the loan totaling approximately $189,000 on September 28, 2001, failure
to achieve project completion by September 30, 2001, failure to settle certain
accounts payable within 90 days, KKM's failure to obtain Shell Capital's
approval prior to entering a short-term debt arrangement, and failure to
maintain listing of Chaparral's common stock on one of the major stock exchanges
(i.e. Nasdaq, NYSE, or AMEX). Chaparral subsequently repaid the default interest
as of September 30, 2001 on both the loan and the bridge loan, and KKM repaid
the short-term indebtedness obtained without Shell Capital's approval.
In January 2002, Chaparral received a second notice of default under the
loan, along with a notice accelerating the payment of $37.29 million in
outstanding principal, interest, and other fees and expenses due under our
existing loans with Shell Capital. Shell Capital Services Limited, as facility
agent, also 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 the actions of Shell Capital
in their respective jurisdictions. See Item 3 - Legal Proceedings.
The second default notice stipulated various events of default in addition
to those previously disclosed above, including the Company's failure to pay
approximately $1.68 million in interest and $1.0 million in principal due on the
loan as of December 31, 2001, failure to pay a $24,000 agency fee due to Shell
Capital Services Limited on January 1, 2002, Chaparral's failure to pay
franchise taxes due on or before December 1, 2001, and KKM's failure to timely
pay local salaries due in Kazakhstan. The franchise taxes and KKM local salaries
were subsequently paid.
The acceleration notice demands that Chaparral immediately pay the entire
outstanding principal amount plus all interest and other fees payable under the
loan, or Shell Capital Services Limited, as facility agent, will pursue
available remedies under the loan. Such remedies include taking ownership of
Chaparral's investment in the Karakuduk Field. Furthermore, Shell Capital has
applied the default interest rate allowed under the loan of LIBOR plus 19.75%,
compounded daily, against the principal and interest due for the bridge loan as
of September 30, 2001, and the principal and interest payments due on the loan
as of January 1, 2002. The remaining balance of the loan accrued interest at
LIBOR plus 17.75% through January 14, 2002 and began accruing interest at the
default rate of LIBOR plus 19.75%, compounded on a daily basis, thereafter.
14
In April 2002, Chaparral executed a letter of intent with CAIH regarding a
possible $12 million capital investment into Chaparral and an amount of debt
that is to be determined, in exchange for approximately 60% of our common stock.
The transaction is subject to a number of conditions precedent, including the
approval of Shell Capital, the negotiation and execution of a definitive
agreement with CAIH, and the approval of the boards of directors and
shareholders of both companies. Chaparral plans to use the capital infusion and
debt from CAIH to restructure the loan. The terms of the restructuring would
include the cancellation of the common stock warrants held by Shell Capital,
CAP-G's reacquisition of the 40% net profits interest held by Shell Capital,
waiver of all outstanding defaults including project completion, and adjusting
the interest rate on the restructured loan to an undetermined rate below the
current interest rate being charged by Shell Capital. Chaparral and CAP-G are
contesting the legal actions of Shell Capital Services Limited unless and until
such time as a transaction with CAIH can be consummated. We cannot provide any
assurance, however, that the loan with Shell Capital will be refinanced with
CAIH or any other party and, if so, the loan would be refinanced on terms and
conditions favorable to Chaparral.
The failure of Chaparral to refinance the loan, including the waiver of all
existing defaults and the re-acquisition of Shell Capital's 40% interest in
CAP-G, will most likely result in the loss or significant impairment of our
investment in the Karakuduk Field.
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 will 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 in
an offshore bank account outside of Kazakhstan, but KKM's statutory tax basis in
its assets, tax loss carryforwards, and VAT receivables are all denominated in
tenge and subject to the effects of devaluation. Local tax laws allow basis
adjustments to offset the impact of inflation on statutory tax basis assets, but
there is no assurance that any adjustments will be sufficient to offset the
effects of inflation in whole or in part. If not, KKM may be subject to much
higher income tax liabilities within 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. As of December 31, 2001, the exchange rate was
150.20 tenge per U.S. dollar.
15
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.
Investment in KKM and Other Oil and Gas Property Costs - Chaparral accounts
for its investment in KKM using the equity method. We follow 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
properties, including directly related overhead costs, are capitalized.
All capitalized costs of 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 cash flows 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.
Reserves - Estimates of our proved oil and gas reserves are prepared by
Ryder Scott, an independent petroleum engineering firm, 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 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.
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.
16
2. Results from Operations
Results of Operations Year Ended December 31, 2001 Compared to
Year Ended December 31, 2000
- --------------------------------------------------------------------------------
We account for our investment in KKM using the equity method.
Our operations for the year ended December 31, 2001 resulted in a net loss
of $16.22 million compared to a net loss of $26.80 million as of December 31,
2000. The $10.58 million decrease in our loss from operations primarily relates
to decreases in interest charges from non-recurring transactions incurred during
2000 in our attempt to finance the development of the Karakuduk Field, net of
associated increases in general and administrative costs and the impact of the
adoption of FSAS 133, Accounting for Derivative Instruments and Hedging
Activities during 2001. Equity income from our investment in KKM increased by
$1.79 million due to KKM's increase in the production and sale of crude oil
during the period.
Interest expense decreased from $27.03 million in 2000 to $14.45 million in
2001. Interest expense for the current period reflects $10.01 million recognized
on our loan with Shell Capital, including $6.91 million in interest on
outstanding principal and $3.10 million in discount amortization, of which $2.42
million was expensed in the fourth quarter of 2001 upon the receipt of notices
of default and acceleration from Shell Capital. Additionally, we recognized
$4.37 million in interest expense due to the transfer of a 40% interest in the
distributable profits of CAP-G to Shell Capital for failure to repay the bridge
loan to Shell Capital on or before September 30, 2001. Comparatively, during
2000, we incurred $5.29 million in interest expense on the loan and $909,000 in
amortization of associated debt issuance costs. Approximately $3.48 million was
reclassified to the principal balance of the loan as of December 31, 2000. See
Note 7 to our consolidated financial statements for the year ended December 31,
2001.
Interest expense for the period ended December 31, 2000 also reflects a
non-recurring, non-cash interest charge of approximately $20.34 million
recognized upon the conversion of $20.85 million of notes into 11,690,259 shares
of our common stock at a conversion price of $1.86 per share. The conversion
feature of the notes was a "beneficial conversion feature" as addressed in EITF
98-5, Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios. EITF 98-5 required the recognition
of additional interest expense equal to the face value of the notes, net of
original discount of $506,000, upon conversion. See Note 8 to our consolidated
financial statements for the year ended December 31, 2001.
As a result of the adoption of SFAS 133, we recognized a loss of $2.52
million as a cumulative effect of change in accounting principal and an
additional loss of $237,000 for the year ended December 31, 2001 to record the
derivatives at their fair value as of the end of the period. See Note 5 to our
consolidated financial statements for the year ended December 31, 2001.
Interest income decreased $478,000 to $1.45 million in 2001, compared to
$1.93 million in 2000. The decrease was primarily due to lower interest rates
during 2001. The loan with KKM accrues interest at an annual rate of LIBOR plus
1%. The average interest rate charged during 2000 was approximately 7.3%
compared to approximately 5.1% during 2001.
General and administrative costs increased from $3.69 million as of
December 31, 2000 to $4.33 million as of December 31, 2001. The $637,000 change
was principally due to an approximate $682,000 increase in insurance expense
including additional OPIC political risk insurance premiums of $271,000, and
additional amortization of transportation risk insurance of $411,000, which was
fully amortized during the fourth quarter of 2001 due to the current status of
the Shell Capital loan. See Notes 6 and 7 to our consolidated financial
statements for the year ended December 31, 2001.
Depreciation and depletion expense increased $332,000 from $421,000 in 2000
to $753,000 in 2001, due to additional depletion of acquisition costs of our
investment in KKM. Our depletion expense was $730,000 in 2001 compared to
$403,000 in 2000, resulting from increased production from the Karakuduk Field.
17
Our equity income from investment was $4.62 million in 2001, compared to
$2.83 million in 2000. The net change of $1.79 million was the result of
increased crude oil production and sales by KKM during 2001, partially offset by
a decrease in crude oil prices during the same period. KKM sold 2.18 million
barrels of crude oil in 2001, generating revenues of $36.58 million, or $16.75
per barrel, compared to sales of approximately 765,000 barrels of crude oil in
2000, generating $16.97 million, or $22.18 per barrel. From 2000 to 2001, KKM
increased crude oil sales by 185%, generating a corresponding increase in oil
sales revenue of 116%. Transportation costs were $8.30 million in 2001, or $3.80
per barrel, compared to $3.21 million in 2000, or $4.20 per barrel, reflecting a
decrease of transportation costs on a per barrel basis of approximately 9.5%.
Operating costs increased in aggregate from 2000 to 2001, with current year
operating costs of $5.25 million, or $2.40 per barrel, compared to $3.68
million, or $4.81 per barrel, in the prior period. The approximate 50% decrease
in operating cost per barrel is due to the significant increase in crude oil
production during the period in relation to field level operating costs
necessary to achieve such production increases. Our equity income from
investment also reflects the elimination of $1.45 million of intercompany
interest income on the loan to KKM. See Notes 4 and 15 to our consolidated
financial statements for the year ended December 31, 2001.
Results of Operations Year Ended December 31, 2000 Compared to
Year Ended December 31, 1999
- --------------------------------------------------------------------------------
We account for our investment in KKM using the equity method.
Our operations for the year ended December 31, 2000 resulted in a net loss
of $26.80 million compared to a net loss of $5.16 million as of December 31,
1999. The $21.64 million increase in net loss relates to interest charges and
associated increases in general and administrative costs incurred in 2000 in our
efforts to finance the development of the Karakuduk Field. As a partial offset
to these additional expenses, we recognized equity income from our investment in
KKM due to KKM's significant increase in the production and sale of crude oil
during the year.
Interest expense increased from $523,000 in 1999 to $27.03 million in 2000,
primarily due to interest charges on our convertible notes and financing costs
of our loan with Shell Capital. Approximately $20.34 million of interest expense
was a non-cash charge recognized upon the September 2000 conversion of $20.85
million of notes into 11,690,259 shares of our common stock at a conversion
price of $1.86 per share. The conversion feature of the notes was a "beneficial
conversion feature" as addressed in EITF 98-5, whereby a portion of the proceeds
received from the notes was allocable to the conversion feature contained
therein. The value assigned to the conversion feature was determined as the
difference between the market price of our common stock on the date of issuance
and the conversion price, multiplied by the number of shares to be received upon
conversion, which was approximately $120 million. As the conversion price
contained in the notes was substantially below the market price, the value under
the above formula significantly exceeded the net proceeds from the notes. Under
EITF 98-5, the discount assigned to the conversion feature is limited to the
total proceeds allocated to the convertible instrument. Accordingly, upon
conversion of the notes, we recorded additional interest expense and additional
paid in capital equal to $20.34 million, the face amount of the notes net of
original discount. An additional $1.24 million in interest expense was incurred
on the notes in 2000, from discount amortization and accrued interest on the
notes through the date of conversion. We had accrued a total of $126,000 in
interest expense on the notes as of December 31, 1999. See Note 8 to our
consolidated financial statements for the year ended December 31, 2001.
During 2000, we borrowed $21.50 million under our Shell Capital loan,
recognizing $4.38 million in interest expense on the loan and $909,000 in
amortization of associated debt issuance costs. Approximately $3.48 million was
reclassified to the principal balance of the loan as of December 31, 2000. We
did not have any interest charges associated with the loan during 1999. See Note
7 to our consolidated financial statements for the year ended December 31, 2001.
Interest income increased $1.24 million to $1.93 million in 2000, compared
to $692,000 in 1999. The increase was primarily due to additional financing of
KKM's operations in Kazakhstan and recognition of additional interest income of
$232,000 from the application of EITF 99-10, Percentage Used to Determine the
Amount of Equity Method Losses.
General and administrative costs increased from $2.39 million as of
December 31, 1999 to $3.69 million as of December 31, 2000. The $1.3 million
increase was due to approximately $1.0 million in insurance expense from
premiums on our OPIC political risk insurance policy and amortization of
transportation risk insurance required by Shell Capital as part of the loan.
Both the OPIC and transportation risk insurance policies were executed in 2000.
18
The remaining increase in general and administrative costs was associated with
maintaining the Shell Capital loan and heightened operational activity in the
Karakuduk Field. See Note 6 to our consolidated financial statements for the
year ended December 31, 2001.
Depreciation and depletion expense increased $390,000 from $31,000 in 1999
to $421,000 in 2000, due to additional depletion of acquisition costs of our
investment in KKM. Our depletion expense was $403,000 in 2000 compared to $9,000
in 1999, based on the increase in oil production from the Karakuduk Field.
Our equity income from investment was $2.83 million in 2000, compared to an
equity loss of $1.85 million in 1999. The net change of $4.68 million was the
result of several factors. During 2000, KKM sold approximately 765,000 barrels
of crude oil, recognizing $16.97 million, or $22.18 per barrel, in revenue.
Transportation costs associated with 2000 sales were $3.21 million, or $4.20 per
barrel. Operating costs associated with 2000 sales were $3.68 million, or $4.81
per barrel. KKM did not have any commercial oil sales prior to 2000, therefore
there are no comparable oil sales revenue or operating costs from prior periods.
We recognized $683,000 of additional equity losses during 1999 due to the
application of EITF 99-10. All of these losses were recaptured during 2000. Our
equity income from investment also reflects the elimination of $1.44 million of
intercompany interest income on the loan to KKM. See Note 4 to our consolidated
financial statements for the year ended December 31, 2001.
During 2000, we paid $4.0 million for put contracts to sell 1,562,250
barrels of North Sea Brent crude. We amortized the hedge contracts ratably over
the period the underlying contracts expire, recognizing $482,000 in hedging
losses as of December 31, 2000. See Note 5 to our consolidated financial
statements for the year ended December 31, 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to various market risks, including interest rate risk and
commodity price risk.
Shell Capital Services Limited, acting as facility agent, has notified
Chaparral that it is in default under its loan with Shell Capital and has issued
a notice of acceleration as of January 14, 2002, demanding that Chaparral
immediately repay the outstanding principal balance, plus all interest and other
fees, payable under the loan. Shell Capital Services Limited also initiated
legal proceedings against both Chaparral and CAP-G, which both Chaparral and
CAP-G are defending. If we are unable to successfully defend against the legal
actions of Shell Capital Services Limited or raise the capital necessary to
refinance the loan, the result will most likely be the loss of our investment in
the Karakuduk Field. See Item 3 - Legal Proceedings.
The loan is subject to a variable default interest rate based upon LIBOR
plus 19.75%. As of December 31, 2001, the outstanding loan balance subject to
interest was approximately $34.90 million. During 2001, the high, low, and
average interest rates applicable against the loan were 24.27%, 20.34%, and
22.25%, respectively. The loan is more fully described under "Item 7. Management
Discussion and Analysis of Financial Condition and Results of Operations - Shell
Capital Loan."
To partially hedge the risk of a drop in commodity prices, we entered the
hedge agreement as part of the loan, paying $4.0 million for put contracts to
sell approximately 1.56 million barrels of North Sea Brent crude in February
2000. We had remaining put contracts to sell approximately 1.37 million barrels
of North Sea Brent crude as of December 31, 2000, 753,000 which expired ratably
during 2001 at a rate of 62,750 barrels per month at a weighted average exercise
price of $19.54 per barrel. The remaining 621,000 barrels expire ratably from
January 2002 through December 2002 at a rate of 51,750 barrels per month at a
weighted average exercise price of $17.68 per barrel. During 2001, the high,
low, and average price of the hedge agreement was $762,000, $234,000, and
$475,000, respectively. As of December 31, 2001, the put contracts had a fair
market value of $762,000. We do not expect to recover any material future
economic value from the hedge contracts before the put contracts expire as of
December 31, 2002, based on the current market price of crude oil in comparison
to the strike price of the outstanding put contracts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for a list of the Financial Statements and the supplementary
financial information included in this report following the signature page.
19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of April 1, 2002, 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
--------------------- ----- --- --------------------------------------------
John G. McMillian 1997 75 Mr. McMillian has served as the Chairman of the Board of Chaparral and
Co-Chairman and Chief Executive Officer since January 1999 and Co-Chairman of the Board
Chief Executive Officer since May 1999. From May 1997 to January 1999, Mr. McMillian served as a
director of Chaparral. Mr. McMillian served as the Chairman, President, and
Chief Executive Officer of Allegheny & Western Energy Corporation, an oil
and gas company, from 1987 to 1995. Mr. McMillian founded Northwest Energy
Company, a major supplier of natural gas, and served as its Chairman and
Chief Executive Officer from 1973 to 1983. From 1986 to 1989, Mr. McMillian
was the owner, Chairman and Chief Executive Officer of Burger Boat Company,
a boat manufacturing company. McMillian has served as a director of
Excalibur Technologies and as a member of its Audit Committee since 1996.
James A. Jeffs 1999 50 Mr. Jeffs has served as the Co-Chairman of the Board of Chaparral since May
1999. Since 1994, Mr. Jeffs has served as Managing Director and the Chief
Investment Officer for The Whittier Trust Company, a trust and investment
management company, with substantial oil and gas interests. From 1993 to
1994, Mr. Jeffs was a Senior Vice President of Union Bank of California.
Mr. Jeffs was the Chief Investment Officer of Northern Trust of California,
N.A., a trust and investment management company, from 1992 to 1993. Mr.
Jeffs was Chief Investment Officer and Senior Vice President of Trust
Services of America, a trust and investment management company, from 1988
to 1992 and served as President and Chief Executive Officer of TSA Capital
Management, an institutional investment management company, during that
period.
20
David A. Dahl 1997 40 Mr. Dahl served as Secretary of Chaparral from August 1997 until May 1998.
Director Currently, Mr. Dahl is the President of Whittier Energy Company, an oil and
gas exploration and production company, a position that he has held since
1997. Since 1996, Mr. Dahl has also served as the President of Whittier
Ventures, LLC, a private investment entity. Since 1993, Mr. Dahl has been a
Vice President of Whittier Trust Company, an investment management trust
company.
Ted Collins, Jr. 1997 63 Mr. Collins has been the President of Collins & Ware Investments Company, a
Director private investment company, since June 2000. From 1988 to 2000, Mr. Collins
was the President of Collins & Ware, Inc., an independent oil and gas
company. From 1982 to 1988, Mr. Collins was the President of Enron Oil &
Gas Co., an oil and gas company. Beginning in 1969 and until 1982, Mr.
Collins was an Executive Vice President and director of American Quasar
Petroleum Co., an oil and gas company. Mr. Collins also serves on the Board
of Directors of Hanover Compression Company and Encore Acquisition Company.
Richard L. Grant 1998 47 Mr. Grant is the President and Chief Executive Officer of Tractebel LNG
Director LLC, an importer of liquefied natural gas, a position he has held since
September 2000. Since September 1998, Mr. Grant has served as the President
of the same Company. Mr. Grant served in various capacities at Mountaineer
Gas Company, the largest natural gas distribution company in West Virginia,
including President, from September 1988 to August 1998, and Executive Vice
President and General Counsel, from 1986 to 1988. Mr. Grant was an engineer
and legal counsel for the Cincinnati Gas & Electric Company from 1980 to
1986.
Michael B. Young 1998 33 Mr. Young has been the Treasurer, Controller and Principal Financial and
Treasurer and Controller Accounting Officer of Chaparral since February 1998. From June 1991 to
February 1998, he was a Tax Manager in the oil and gas tax practice of
Arthur Andersen LLP, an accounting firm.
Alan D. Berlin 1997 61 Since 1995, Mr. Berlin has been a partner of the law firm Aitken Irvin
Secretary Berlin & Vrooman, LLP. He was engaged in the private practice of law for
over five years prior to joining Aitken Irvin. Mr. Berlin was the Secretary
of Chaparral from January 1996 to August 1997 and, since June 1998, has
served the Company 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. from 1977 to 2001.
21
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of the Forms 3 and 4 and any amendments
furnished to Chaparral during our fiscal year ended December 31, 2001, 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.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation paid by Chaparral for services
rendered by Mr. McMillian who is currently the Chief Executive Officer and
Co-Chairman of the Board, Mr. Jeffs who is currently Co-Chairman of the Board,
and Mr. Young, who is the Treasurer, Controller, and Principal Financial and
Accounting Officer of Chaparral. There were no other executive officers of
Chaparral whose annual salary and bonus exceeded $100,000 during the fiscal year
ended December 31, 2001.
Summary Compensation Table.
----------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
----------------------------------- -------------------------------------------------
Awards Payouts
------------------------------------ ------------
Name and Other Restricted Securities
Annual Annual Stock Awards Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation ($) Options/SARs (#) Payouts ($) Compensation
------------------ ---- ------ ----- ------------ --- ---------------- ---------- -------------
John G. McMillian 2001 $162,000(1) -- -- -- -- -- --
Chief Executive 2000 $137,500 -- -- -- -- -- --
Officer (1/99 to
Present)
James A. Jeffs 2001 $162,000(2) -- -- -- -- -- --
Co-Chairman
(1/99 to Present)
Michael B. Young 2001 $162,000 -- -- -- -- -- --
Treasurer and 2000 $150,000 -- -- -- -- -- --
Controller 1999 $ 89,167 $42,500(3) -- -- -- -- --
1. Mr. McMillian received cash compensation of $114,750 in December 31, 2001.
The remaining $47,250 has been recorded in Chaparral's financial statements
as accrued compensation.
2. Mr. Jeffs' did not receive any cash compensation during the year 2001. The
outstanding balance of $162,000 has been recorded in Chaparral's financial
statements as accrued compensation.
3. Mr. Young received $42,500 in cash bonuses during 1999.
Options/SAR Grants.
For the fiscal year ended December 31, 2001, we did not grant any options.
Aggregated Option/SAR Exercises and Year-End Option/SAR Value Table.
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options/SARs at Options/SARs at
December 31, 2001 December 31, 2001
------------------------------------- -----------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------- -----------------------------------------------
Michael B. Young 1,167 -- -- --
Additionally, no options were exercised in fiscal year 2001.
Director Interlocks.
During our last fiscal year, Messrs. Jeffs, who is the Co-Chairman of the
Board, and Dahl served on the Compensation Committee of the Board and acted as
officers or directors to Whittier Ventures or one of its affiliates. Mr. Jeffs
is a Vice President of Whittier Ventures and a Director of Whittier Energy
Company. Mr. Dahl is President of both Whittier Ventures and Whittier Energy
22
Company. Whittier Ventures currently owns approximately 16.23% of the
outstanding common stock.
Compensation of Directors.
During the fiscal year ended December 31, 2001, Chaparral implemented a
standard compensation arrangement for its directors, including providing $1,500
in compensation to each director for each board or committee meeting attended
and paying each director $2,500 quarterly 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, 2001.
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
CHAPARRAL RESOURCES, INC. 100.00 228.56 31.43 12.00 5.52 2.30
SIC CODE INDEX 100.00 101.56 81.35 99.37 126.24 115.83
NASDAQ MARKET INDEX 100.00 122.04 172.13 303.59 190.82 152.11
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
23
executive compensation. Chaparral's compensation philosophy is to ensure that
executive compensation be directly linked to continuous improvements in
corporate performance, achievement of specific operations, 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 and internal relationships. 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-term 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, 2001.
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,
Richard L. Grant, Chairman
James A. Jeffs
David A. Dahl
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of April 1, 2002, 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 16945 Northchase Drive, Suite 1620, Houston, Texas 77060.
Amount and Nature of Percent of
Beneficial Ownership Common
Name of Beneficial Owner Position (1) Stock (1)
- --------------------------------------- ----------------------------------- ---------------------- ------------
Allen & Company Incorporated -- 5,732,823(2) 40.00%
711 Fifth Avenue
New York, New York 10022
Whittier Ventures, LLC -- 2,319,169(3) 16.23%
1600 Huntington Drive
South Pasadena, California 91030
Capco Resources, Ltd. -- 1,612,903 11.29%
444 5th Avenue SW
Suite 2240
Calgary, Alberta
Canada T2P2T8
Shell Capital Incorporated -- 1,785,455(4) 11.11%
910 Louisiana
Suite 500
Houston, Texas 77002
John G. McMillian Co-Chairman of the Board and 386,303(5) 2.70%
Chief Executive Officer
James A. Jeffs Co-Chairman of the Board 2,329,498(6) 16.30%
David A. Dahl Director 2,320,587(7) 16.24%
Ted Collins, Jr. Director -- *
Richard L. Grant Director -- *
Judge Burton B. Roberts Former Director --(8) *
Michael B. Young Treasurer & Controller 1,835(9) *
All current directors and executive -- 2,722,306(10) 19.02%
officers as a group (eight persons)
- ---------
* Represents less than 1% of the shares of Common Stock outstanding.
25
(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 48,284 shares
underlying warrants to purchase shares of Common Stock. Allen & Company is
a wholly owned subsidiary of Allen Holding Inc., and, consequently, Allen
Holding may be deemed to beneficially own the shares beneficially owned by
Allen & Company. 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.
(3) In accordance with Rule 13d-3(d)(1)(i)(A), includes 334 shares underlying
currently exercisable warrants and 8,334 shares underlying a currently
exercisable option.
(4) In accordance with Rule 13d-3(d)(1)(i)(A), includes 1,785,455 shares
underlying a warrant.
(5) In accordance with Rule 13d-3(d)(1)(i)(A), includes 417 shares underlying a
currently exercisable option and 417 shares underlying a currently
exercisable warrant.
(6) In accordance with Rule 13d-3(d)(1)(i)(A), includes 2,304,523 shares
beneficially owned by Whittier Ventures, 334 shares underlying currently
exercisable warrants owned by Whittier Ventures, 5,820 shares owned by
Whittier Energy Company, 158 shares owned by Whittier Opportunity Fund, and
8,334 shares underlying currently exercisable options owned by Whittier
Opportunity Fund. Mr. Jeffs has no pecuniary interest in the shares
beneficially owned by Whittier Ventures, Whittier Energy Company, and
Whittier Opportunity Fund, however, as Vice President of Whittier Ventures,
and Director of Whittier Energy Company, Mr. Jeffs has voting power and
investment power over such shares and, thus, may be deemed to beneficially
own such shares.
(7) In accordance with Rule 13d-3(d)(1)(i)(A), includes 1,251 shares underlying
currently exercisable options owned by Mr. Dahl, 2,304,523 includes shares
beneficially owned by Whittier Ventures, 334 shares underlying currently
exercisable warrants owned by Whittier Ventures, 5,820 shares owned by
Whittier Energy Company, 158 shares owned by Whittier Opportunity Fund and
8,334 shares underlying currently exercisable options owned by Whittier
Opportunity Fund. Mr. Dahl has no pecuniary interest in the shares
beneficially owned by Whittier Ventures, Whittier Energy Company, or
Whittier Opportunity Fund, however, as the President of Whittier Ventures
and Whittier Energy Company, Mr. Dahl has voting power and investment power
over such shares and, thus, may be deemed to beneficially own such shares.
(8) Judge Roberts resigned as a director of Chaparral effective January 18,
2002.
(9) Includes 668 shares owned by Mr. Young and 1,167 shares underlying
currently exercisable options.
(10) Includes the shares as described in Notes (5) through (8) above. In
addition, it includes 167 shares owned by Alan D. Berlin, the Secretary of
Chaparral and 417 shares underlying a presently exercisable option owned by
Mr. Berlin.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 2001, Chaparral's loan with Shell Capital was amended to provide
Chaparral with up to $8.0 million in uncommitted working capital as a bridge
loan, which could be drawn down in increments of $250,000 through August 31,
2001, at the sole discretion of Shell Capital. We borrowed a total of $3.15
million under the bridge loan through August 31, 2001. The principal borrowed
under the bridge loan accrues interest at LIBOR plus 17.75% and is subject to an
arrangement fee of 2%. Interest payments in the amount of LIBOR plus .50% are
due at the end of each month the bridge loan is outstanding. All unpaid interest
is added to the outstanding principal balance on each repayment date. The
outstanding principal of the bridge loan, plus all accrued interest, was due on
or before September 30, 2001.
As an incentive for Chaparral to repay the bridge loan or refinance the
entire loan (including the bridge loan), Chaparral's board of directors approved
CAP-G's issuance of Series A Preferred shares to Shell Capital. Per the terms of
the amendment, if Chaparral failed to repay or refinance the bridge loan on or
before September 30, 2001, the Series A Preferred shares automatically convert
and entitle Shell Capital to 40% of the distributable profits of CAP-G. CAP-G
did not have any distributable profits as of April 1, 2002.
Chaparral did not reach project completion on or before September 30, 2001.
Chaparral had previously requested that Shell Capital waive or revise the
project completion definition due to our belief that the production levels and
certain technical requirements of project completion were unattainable and not
necessary or prudent to perform in the time frame specified under the loan.
Shell Capital, however, refused to waive or revise the project completion
definition. As a result of Chaparral's failure to timely repay the bridge loan,
Shell Capital's Series A Preferred shares in CAP-G converted as of October 1,
2001, entitling Shell Capital to 40% of the distributable profits of CAP-G.
In October 2001, Chaparral received a notice of default from Shell Capital,
notifying us that the following events of default had occurred under the loan:
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 interest
due on the loan totaling approximately $189,000 on September 28, 2001, failure
to achieve project completion by September 30, 2001, failure to settle certain
26
accounts payable within 90 days, KKM's failure to obtain Shell Capital's
approval prior to entering a short-term debt arrangement, and failure to
maintain listing of Chaparral's common stock on one of the major stock exchanges
(i.e. Nasdaq, NYSE, or AMEX). Chaparral subsequently repaid the default interest
as of September 30, 2001 on both the loan and the bridge loan, and KKM repaid
the short-term indebtedness obtained without Shell Capital's approval.
In January 2002, Chaparral received a second notice of events of default
under the loan, along with a notice accelerating the payment of $37.29 million
in outstanding principal, interest, and other fees and expenses due under our
existing loans with Shell Capital. Shell Capital Services Limited, as facility
agent, also 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 the actions of Shell Capital
in their respective jurisdictions.
The second default notice stipulated various events of default in addition
to those previously disclosed above, including the Company's failure to pay
approximately $1.68 million in interest and $1.0 million in principal due on the
loan as of December 31, 2001, failure to pay a $24,000 agency fee due to Shell
Capital Services Limited on January 1, 2002, Chaparral's failure to pay
franchise taxes due on or before December 1, 2001, and KKM's failure to timely
pay local salaries due in Kazakhstan. The franchise taxes and KKM local salaries
were subsequently paid.
The acceleration notice demands that Chaparral immediately pay the entire
outstanding principal amount plus all interest and other fees payable under the
loan, or Shell Capital Services Limited, as facility agent, will pursue
available remedies under the loan. Such remedies include taking ownership of
Chaparral's investment in the Karakuduk Field. Furthermore, Shell Capital has
applied the default interest rate allowed under the loan of LIBOR plus 19.75%,
compounded daily, against the principal and interest due for the bridge loan as
of September 30, 2001, and the principal and interest payments due as of January
1, 2002. The remaining balance of the loan accrued interest at LIBOR plus 17.75%
through January 14, 2002 and began accruing interest at the default rate of
LIBOR plus 19.75%, compounded on a daily basis, thereafter.
During the year ended December 31, 2001, Chaparral paid Shell Capital
approximately $986,000 in interest out of a total of $6.91 million interest
accrued on the principal balance of the loan during the same period.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
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Table of Contents
Page
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Chaparral Resources, Inc.
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Report of Independent Auditors..................................... F-1
Consolidated Balance Sheets--As of December 31, 2001
and December 31, 2000 ...........................................F-2
Consolidated Statements of Operations--Years ended
December 31, 2001, 2000, and 1999................................F-4
Consolidated Statements of Cash Flows--Years ended
December 31, 2001, 2000, and 1999................................F-5
Consolidated Statement of Changes in Stockholders'
Equity--Years ended December 31, 2001, 2000, and 1999............F-7
Notes to Consolidated Financial Statements..........................F-8
Supplemental Information - Disclosures About Oil and
Gas Producing Activities - Unaudited............................F-27
Supplemental Information - Selected Quarterly
Financial Data - Unaudited......................................F-30
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