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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission file number: 0-7261
CHAPARRAL RESOURCES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-063086
- ------------------------------- ----------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2211 Norfolk, Suite 1150
Houston, Texas 77098
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(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 807-7100
Securities registered pursuant to Section 12(g) of the Act:
$0.10 Par Value Common Stock
---------------------------
(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 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 March 31, 1999, the aggregate market value of Registrant's voting
stock held by nonaffiliates was $24,311,368.
As of March 31, 1999, Registrant had 58,588,790, shares of its $0.10 par
value common stock issued and outstanding.
Total Pages ___
Exhibit Index ___
PART I
ITEM 1. BUSINESS
Business
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Chaparral Resources, Inc. ("Company"), incorporated under the laws of the
state of Colorado in 1972, is an independent oil and gas exploration and
production company, based in Houston, Texas. In June 1999, the Company plans to
move its corporate offices to Golden, Colorado. The Company currently owns all
of the outstanding common stock of Central Asian Petroleum Guernsey Limited
("CAP-G") which has a 50% interest in Karakuduk-Munay, JSC("KKM"). KKM holds
100% of the rights to develop the Karakuduk Field in Kazakhstan.
The Company's business strategy is to acquire and develop oil and gas
projects in emerging markets, specifically targeting fields with previously
discovered reserves, which either have never been placed on production or could
be materially enhanced with efficient management and technical experience
provided by the Company. The Karakuduk Field ("Karakuduk Field" or "Karakuduk
Project") described below is the Company's first oil field to be acquired under
the Company's new corporate strategy.
The Company has called for a special meeting of the Company's shareholders
to approve proposals for reincorporating the Company from the state of Colorado
to the state of Delaware and to effect a reverse stock split in which one new
share of the Company's common stock would be exchanged for every 60 shares of
common stock presently outstanding. The Company expects the special meeting to
occur in late April 1999.
Risks Inherent in Oil and Gas Exploration
There can be no assurance that the Company will be able to discover,
develop and produce sufficient reserves in the Karakuduk Field, or elsewhere.
Further, there can be no assurance that the Company will recover the expenses
incurred when it explores the Karakuduk Field or that it will achieve
profitability. The odds against discovering commercially exploitable oil and gas
reserves are always substantial and are increased as a result of the
concentration of the Company's activities in areas that have not yet been
significantly explored and where political or other unknown developments could
adversely affect commercialization. The Company, through KKM, will be required
to perform extensive geological and/or seismic surveys on its properties.
Depending on the results of the surveys, only subsequent drilling at substantial
cost and high risk can determine whether commercial development of the
properties is feasible. Oil and gas drilling is frequently marked by
unprofitable efforts, including unproductive wells, productive wells which do
not produce sufficient amounts of reserves to return a profit, and developed
reserves which cannot be marketed. The Company will be subject to all of the
risks inherent to drilling for and producing oil and gas. These risks include
blowouts, cratering, fires and accidents. Any of the risks could result in the
Company being liable for damages from loss of life and property. The Company is
not fully insured against these risks. Many of these risks are not insurable.
Risks of Operations in Kazakhstan
As a result of the Company's interest in KKM and the Karakuduk Field, it
will be subject to certain risks inherent in the ownership and development of
properties in Kazakhstan. The contracts that the Company has with the government
of Kazakhstan may be arbitrarily cancelled or forced into renegotiation.
Cancellation or renegotiation will or is likely to adversely affect the
Company's ability to profitably extract oil from the Karakuduk Field. The
government of Kazakhstan may impose royalty increases, tax increases and
retroactive tax claims against the Company. These taxes would adversely affect
the Company's ability to profitably extract oil from the Karakuduk Field because
of increased expenses. Expropriation, environmental controls, and other laws and
regulations may adversely affect the Company's interest in the Karakuduk Project
because of increased costs, inaccessibility or delays.
Due to the fact that the Company only controls a 50% interest in KKM, the
Company must seek the approval of KKM's other two shareholders, KazakhOil, which
is the national petroleum company for the Republic of Kazakhstan, and a private
Kazakhstan joint stock company, before any major actions are taken by KKM. If
the Company is unable to obtain the approval of one of KKM's remaining
shareholders, the operations of KKM may come to a standstill, which could result
in the loss of KKM's rights to explore and develop the Karakuduk Field. There
are no practical mechanisms in the agreement with KazakhOil and the joint stock
company to resolve any such stalemate.
2
The Company's operations and agreements are also governed by the laws of
Kazakhstan. The Company may be subject to arbitration in Kazakhstan or to the
jurisdiction of the courts in Kazakhstan. The Company may not be successful in
subjecting foreign persons to the jurisdiction of courts in the United States.
The Company may be hindered or prevented from enforcing its rights with respect
to a government agency, instrumentality or other government entity of Kazakhstan
because such entities may consider themselves immune from the jurisdiction of
any court.
KKM's Kazakhstan license for the Karakuduk Field includes the right to
export oil produced and to establish and maintain bank accounts in U.S. dollars
or other foreign currency outside of Kazakhstan. The Kazakhstan government's
agreement with KKM allows KKM to maintain its books and records in U.S. dollars,
but requires local Kazakh taxes be reported in tenge, the local Kazakh currency.
KKM's functional currency is the U.S. dollar. Because Kazakh law prohibits the
export of tenge, any payment for oil sold in tenge will be used for the payment
of local costs and expenses. KKM expects that the majority of the oil it
produces will be exported and sold outside of Kazakhstan and that payment will
be in U.S. dollars. The U.S. dollars will be deposited in bank accounts
established outside of Kazakhstan.
The Company may encounter unexpected difficulties in conducting foreign
operations. Although management of the Company believes that the recent and
continuing political, social and economic developments in Kazakhstan have
created opportunities for foreign investment, uncertainty exists about the
status of Kazakhstan law, the stability of Kazakhstan and the autonomy of the
parties involved with the Company in Kazakhstan.
Political Risk Insurance.
The Company has applied with Overseas Private Investment Corporation
("OPIC") for political risk insurance. OPIC insurance can cover the following
political risks:
o Currency Inconvertibility--deterioration of the investor's ability to
convert profits, debt service and other remittances from local
currency into U.S. dollars;
o Expropriation--loss of an investment due to expropriation,
nationalization or confiscation by a foreign government;
o Political Violence--loss of assets or income due to war, revolution,
insurrection or politically motivated civil strife, terrorism and
sabotage; and
o Interference With Operations--loss of assets or income due to
cessation of operations lasting six months or more caused by political
violence.
The coverage elections for each category of insurance are computed on a
ceiling and an active amount. The coverage ceiling represents the maximum
insurance available for the insured investment and future earnings under an
insurance contract. The premiums for each category are based on a maximum
insured amount ("MIA"), a current insured amount ("CIA") and a standby amount.
The MIA represents the maximum insurance available for the insured investment
under an insurance contract. The CIA represents the insurance actually in force
during the contract period. The CIA cannot exceed the book value of the insured
assets physically in Kazakhstan. The difference between the CIA and the MIA is
the standby amount. There is a charge for standby coverage.
The Company has applied with OPIC for all four political risk coverages on
the Company's investment in the Karakuduk Field. The Investment Committee of
OPIC approved the Company's Karakuduk operations for political risk insurance
coverage on December 19, 1995. The Company received an executed Letter of
Commitment from OPIC on September 25, 1996, binding issuance of Political Risk
Insurance for the Karakuduk Project. Currently, the Company has a standby
facility for which it has made eight equal payments of $31,250 and two payments
of $15,625. The Company expects to execute the actual contract offered to the
Company by OPIC on or before June 30, 1999.
3
The final terms of the contract must be agreed upon at the time the
contract is executed. The CIA will be equal to the book value of the Company's
assets physically located in Kazakhstan. The MIA will equal the total coverage
available for current and future assets placed in Kazakhstan by the Company. The
MIA directly impacts both the premiums and deductible requirements in the
contract. Premiums will be paid quarterly. The Company will not know the
specific terms of the contract until the MIA required has been firmly
established. In the event of a loss, the reimbursement by OPIC to the Company
will be limited to the Company's actual loss of physical property in Kazakhstan.
The maximum reimbursement cannot exceed 90% of the MIA. The Company has delayed
execution of a final OPIC contract until the substantial costs of the premiums
are justified by the Company's investment in the Karakuduk Field.
Under the terms of OPIC's Expropriation and Interference with Operations
insurance coverage, the Company must be able to transfer to OPIC the shares of
beneficial interests related to the insured investment, free and clear of all
encumbrances. There are certain restrictions on the transfer of shares and
assignment of the Company's beneficial interests in KKM. At such time as the
Company obtains coverage, the Company will seek a waiver of the transfer
restrictions from the shareholders of KKM that are not affiliated with the
Company. While there is no assurance the waiver will be obtained, the Company
does not anticipate significant problems in obtaining the waiver, if required to
secure long term financing for the benefit of KKM
Markets
There is substantial uncertainty as to the future prices the Company could
obtain for any oil reserves produced from the Karakuduk Field. It is possible
that, under the market conditions prevailing in the future, the production and
sale of oil from the Karakuduk Field may not be commercially feasible. The
availability of ready markets and the price obtained for oil produced depends
upon numerous factors beyond the control of the Company. The current market for
oil is characterized by instability, which has caused dramatic declines and
increases in world oil prices in recent years. There can be no assurance of any
price stability in the current, and future, oil and gas market.
During 1998, the oil industry experienced major declines in oil prices
worldwide. The Commonwealth of Independent States (CIS), and Kazakhstan in
particular, were impacted severely, with competition increasing dramatically for
limited pipeline capacity required to access the world oil market. Furthermore,
instability in the economies of Russia and other CIS countries led to the
devaluation of the Ruble and weakening of other regional currencies. Competition
to sell oil on the world market, in exchange for more stable, western currencies
(i.e. the US dollar), drove oil prices in the CIS down even farther than
declines in other markets.
On March 7, 1998, KKM entered into a contract with the export-import firm
of Munay-Impex, a subsidiary of KazakhOil, to export up to 100,000 tons of crude
oil produced by KKM to both the CIS and other countries. KKM was to supply crude
oil to Munay-Impex in amounts of not less than five to 10 thousand metric tons.
Munay-Impex, acting as a broker, would market KKM's crude oil production for
sale on either the local or export market. KKM produced a total of 11,103 tons
(81,052 barrels) of oil during 1998, which has been stored as inventory in the
KazTransOil pipeline. Due to existing market conditions, however, Munay-Impex
was unable to find a suitable market to sell KKM's limited crude oil production
for an economical return. As a result, KKM did not sell any crude oil in 1998,
and allowed the Munay-Impex contract to terminate on December 31, 1998 at the
end of the contractual term. During December of 1998 and throughout the first
quarter of 1999, KKM continued to attempt to sell it's crude oil production at
acceptable economic terms, but was unsuccessful.
On March 30, 1999, KKM entered into a contract with KazakhOil JSC, a
shareholder of KKM, to export up to 19,000 tons of crude oil during April 1999.
Under the contract, KazakhOil guaranteed KKM the necessary transit quota to sell
to export markets outside of Kazakhstan, via the KazTansOil pipeline. As of
March 31, 1999, KKM had approximately 18,000 tons of crude oil production stored
in the KazTransOil pipeline, and expects to achieve 19,000 tons of cumulative
production in early April 1999. KKM expects to sell the entire 19,000 tons of
oil during April, with payment expected in late April or May of 1999.
4
KKM anticipates that production facilities required to process and
transport larger volumes of expected future production from the Karakduk Field
will be completed during 1999. The production facilities currently under
construction will initially allow up to 16,000 barrels of oil per day to be
transported to the KazTransOil pipeline. Until the production facilities are
completed, crude oil production is being placed into storage tanks and then
trucked to the pipeline. The number of crude oil trucks operating in the
Karakuduk Field has been increased to facilitate 24 hours a day transportation
to the pipeline, which allows increased production from existing wells.
The Company's business is not seasonal, except that severe weather
conditions could limit the Company's exploration and drilling activities.
However, severe cold weather increases the demand for oil and natural gas, which
are used for heating purposes.
See also "Item 2. Properties - The Karakuduk Field."
Competition
Foreign oil and gas exploration and the acquisition of producing and
undeveloped properties is a highly competitive and speculative business. In
seeking suitable opportunities, the Company competes in all areas of the oil and
gas industry with a number of other companies, including large multi-national
oil and gas companies and other independent operators with greater financial
resources and, in some cases, with more experience than the Company. The Company
does not hold a significant competitive position in the oil and gas industry.
Such competition may adversely affect the Company's ability to market its oil
and/or obtain a competitive price for any oil sold. At this time, no prediction
can be made as to the effect such competition will ultimately have upon the
Company.
Even considering the recent downturn in the oil and gas industry, the CIS
is currently a primary focal point for substantial exploration and development
activities. Within Kazakhstan, the Company competes with both major oil and gas
companies and independent producers for, among other things, rights to develop
available oil and gas properties, access to limited pipeline capacity,
procurement of available materials and resources, and hiring qualified
international and local personnel.
Regulation
General. The Company's operations may be subject to regulation by
governments or other regulatory bodies governing the area in which the Company's
overseas operations are located. Regulations govern such things as drilling
permits, production rates, environmental protection and pollution control,
royalty rates and taxation rates, among others. These regulations may
substantially increase the costs of doing business and sometimes may prevent or
delay the starting or continuing of any given exploration or development
project. Moreover, regulations are subject to future changes by legislative and
administrative action and by judicial decisions, which may adversely affect the
petroleum industry in general and the Company in particular. At the present
time, it is impossible to predict the effect any current or future proposals or
changes in existing laws or regulations will have on the Company's operations.
The Company believes that it complies with all applicable legislation and
regulations in all material respects.
KKM is subject to various taxes in Kazakhstan, including, but not limited
to, income tax, value added tax (VAT), customs duties, excise taxes, property
taxes, payroll taxes, and excess profits tax. Furthermore, payments made by KKM
to the Company or its subsidiaries may also be subject to additional withholding
tax depending upon the type of payment and the country of incorporation of the
recipient of the payment. Without consideration of tax treaty benefits,
Kazakhstan requires 15% withholding on payments for dividends and interest to
foreign persons. Royalties and services are subject to a 20% withholding rate,
as well.
The Company and all its subsidiaries, other than CAP-G, are incorporated in
the United States and enjoy the tax benefits provided by the tax treaty between
the United States and Kazakhstan. Under the U.S./Kazakhstan tax treaty currently
in effect, withholding rates are substantially reduced. Generally, the tax
treaty rates are 5% for dividends paid to 10% or greater shareholders, 10% for
interest and royalties, and no withholding on payments for services as long as a
permanent residence has not been established by the foreign person.
5
CAP-G is incorporated in the Isle of Guernsey, which currently does not
have a tax treaty with Kazakhstan. Under KKM's license with Kazakhstan ,
interest payments made by KKM to CAP-G are not subject to withholding tax. Any
dividends paid by KKM to CAP-G, however, are currently subject to a withholding
tax rate of 15%. Currently, and for the foreseeable future, the Company does not
expect KKM to pay any income tax in Kazakhstan or to declare any dividends for
the benefit of its shareholders.
Environmental. Based upon a study undertaken on behalf of the Company by an
unaffiliated party, the Company believes that its business operations presently
meet all legally required environmental quality standards. However, compliance
with foreign laws and regulations, which have been enacted or adopted regulating
the discharge of materials into the environment could have an adverse effect
upon the Company, the extent of which the Company is unable to assess. As is the
case with other companies engaged in oil and gas exploration, production and
refining, the Company faces exposure from potential claims and lawsuits
involving environmental matters. These matters may involve alleged soil and
water contamination and air pollution. Since inception the Company has not made
any material capital expenditures for environmental control facilities and has
no plans to do so.
Devaluation of Currency. On April 5, 1999, the government of Kazakhstan,
with the approval of the International Monetary Fund, allowed the national
currency of Kazakhstan, the tenge, to float freely against the US dollar.
Immediately thereafter, the official exchange rate declined from 87.5 tenge to
the US dollar to 142 tenge to the US dollar. As of April 12, 1999, the exchange
rate was approximately 115 tenge to the US dollar. The devaluation of the tenge
significantly decreases the realizable value of tenge monetary assets, but also
decreases the financial obligation of tenge denominated liabilities.
The instability resulting from the tenge devaluation creates uncertainty
regarding the future business climate in Kazakhstan and for the Company's
investment in KKM. The Company, however, does not expect an material adverse
impact to it's operations. The majority of KKM's current assets and current
liabilities are denominated in US dollars and are unaffected. While statutory
tax reporting is done in tenge, the Kazakh government allows revaluation
adjustments to step-up the tax basis in assets to offset the effects of Kazakh
deflation. KKM expects to utilize the revaluation adjustments to determine
taxable income or loss reported to the Kazakh tax authorities.
Expected revenue from KKM's pending sale of crude oil is denominated in US
dollars, although final settlement is expected in tenge based upon the exchange
rate on the date of payment. KKM expects future sales to be both denominated and
settled in US dollars.
Employees
As of March 31,1999, the Company had 8 full-time employees and 1 part-time
employee. CAP-G operates through its officers and directors and had no
employees. KKM had 161 employees and retains independent contractors on an as
needed basis through the Company's wholly owned subsidiary, Road Runner Service
Company, Inc.
ITEM 2. PROPERTIES
Properties
The Karakuduk Field
The Karakuduk Field is located in the Mangistau Region of the Republic of
Kazakhstan. KKM's license to develop the Karakuduk Field covers an area of
approximately 16,922.5 acres and has been granted to KKM for a period of 25
years. The agreement granting KKM the right to develop the Karakuduk Field was
approved by Kazakhstan's Ministry of Energy and Natural Resources on August 30,
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
6
inches of rainfall per year. Mean temperatures range from -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 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. Twenty-two exploratory and development
wells were drilled to delineate the field. However, none of the wells were ever
placed on production. The productive area of the Karakuduk Field is 11,300
acres, with a minimum of seven separate productive horizons present in the
Jurassic formation. Oil has been recovered in tests from seven horizons within
the Jurassic formation with flow rates ranging from 3 to 966 barrels per day.
The Company estimates that drilling a maximum of 80 additional oil wells and 26
water injection wells may be required to fully develop the field. Peak oil
production from the field is expected to occur by 2002, although the time or
amount of development or production cannot presently be assured. The planned
development program for the Karakuduk Field will include a pressure maintenance
operation that the Company believes could result in additional recoverable
reserves.
The ability of the Company to realize the carrying value of its assets is
dependent on the Company being able to extract and transport hydrocarbons and
finding appropriate markets for their sale. Currently, exports from Kazakhstan
are dependent on limited transport routes and, in particular, access to the
Russian pipeline system. Domestic markets in Kazakhstan might not permit world
market price to be obtained. Management believes, however, over the life of the
project, transportation restrictions will be alleviated and adequate prices will
be obtained for hydrocarbons produced from the Karakuduk Field, for the Company
to fully recover the the carrying value of its assets.
The Karakuduk Field is approximately 18 miles north of the Mukat-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 license agreement with Kazakhstan, has a priority use of the existing
pipeline network. In early 1998, KKM entered into a contract with KazTransOil
JSC, the state-owned company controlling the Uzen-Atrau-Samara pipeline. The
contract grants KKM rights to use the 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.
Currently, KKM is producing oil through field separators, into storage tanks and
then into crude oil trucks, for delivery to the pipeline. As of March 31, 1999,
KKM had produced approximately 18,000 tons (131,000 barrels) of crude oil, which
has been stored in the KazTransOil pipeline.
On March 30, 1999, KKM entered into a contract with KazakhOil JSC, a
shareholder of KKM, to export up to 19,000 tons of crude oil during April 1999.
Under the contract, KazakhOil guaranteed KKM the necessary transit quota to sell
to export markets outside of Kazakhstan, via the KazTansOil pipeline. KKM
expects to achieve 19,000 tons of cumulative production in early April 1999. KKM
nominated 13,000 tons for sale in early April, and expects to sell the remaining
6,000 tons of oil in late April, with payment expected in late April or May of
1999. KKM has no other existing contracts for sales of future crude oil
production. Although the management of the Company believes long-term sales
contracts for KKM's crude oil production will be available in the future, at
terms acceptable to KKM, there is no assurance that any such agreements will
ever be obtained by KKM.
Because of uncertainties surrounding the Karakuduk Project, no proved
reserves have been attributed to the field as of March 31, 1999. The crude oil
production stored in the KazTransOil pipeline throughout 1998 was not considered
commercially viable by the Company as of December 31, 1998, primarily due to the
depressed crude oil prices during the fall of 1998 and early spring of 1999. The
Karakuduk Project will require significant development costs for which the
financing is not complete. There can be no assurances that the project will be
adequately financed or that the field will be successfully developed.
On December 31, 1998, the government of Kazakhstan approved KKM's request
to amend KKM's license to develop the Karakuduk Field. The license, as amended,
requires the KKM to meet expenditure commitments of $16.5 million by December
31, 1998 and $30 million by December 31, 1999. Expenditure commitments through
December 31, 1998 exceeded the commitment requirement of $16.5 million by
approximately $480,000. The excess is applicable against the expenditure
commitment required as of December 31, 1999. As of March 31, 1999, KKM has
7
incurred approximately $3.5 million in expenses against its 1999 expenditure
commitment. Should the license terms not be adhered to, the license may be
withdrawn by the government of Kazakhstan.
The Company is responsible for providing 100% of the funding necessary for
the development of the Karakuduk Field, which is not provided by third-party
sources. KKM plans to meet it's funding requirements through loans from CAP-G to
KKM, and through proceeds from the sale of oil extracted by KKM from the
Karakuduk Field. As of March 31, 1999, the Company has loaned CAP-G in excess of
$25 million to fund KKM's current operations. The Company is attempting to
obtain project financing for either CAP G or KKM, which may reduce the amount of
loans from the Company to CAP-G.
KKM first produced crude oil from the Karakuduk Field in December 1997. At
present, the oil is transported by truck to the export pipeline at Say-Utes,
which is approximately 51 miles from the field. By the end of the second quarter
of 1999, it is anticipated that any oil produced will be transported by pipeline
from the field to the pipeline terminal to be built at Railroad Station No. 6,
which is approximately 18 miles from the Karakuduk Field. During 1998, KKM began
construction of an 18-mile pipeline from the field to the the Station No. 6
pipeline terminal, capable of transporting up to 16,000 barrels of oil per day
to the KazTransOil pipeline. Once construction is completed on the Station No. 6
terminal, allowing direct access into the export pipeline, KKM plans to complete
and bring on-line the 18-mile pipeline.
Until the pipeline and related production facilities are completed, daily
crude oil production is being processed, placed into storage tanks, and then
trucked to the Say-Utes pipeline terminal. Production placed into the pipeline
is considered inventory of KKM until the production is sold. As of March 31,
1999, KKM had not recognized any revenue from the sale of oil production, but
expects to complete a sale during April 1999.
During 1998, KKM re-entered four of the original twenty-two wells drilled
in the Karakuduk Field, establishing production from two wells. KKM plans to
complete the other two workover wells in the spring of 1999. KKM began drilling
the initial exploratory well No. 101, on February 14, 1999, and reached total
depth in early April. KKM plans to complete Well No. 101 during April 1999. If
Well No. 101 is successful, KKM expects to bring production on-line in May of
1999. KKM also plans to drill 7 new wells before December 31, 1999, in
accordance with KKM's license obligation to the government of Kazakhstan.
Additional field facilities are either in place or under construction to
support the development and production of the wells to be drilled during 1999.
KKM has constructed a base camp with living quarters for 150 men, a mini-camp
for the drilling contractor and other service company personnel, storage
facilities, processing facilities, warehouses, a repair shop, and other related
support facilities. KKM has also completed a main road between the KazTransOil
pipeline terminal at the Station No. 6 and the field. KKM is also clearing
access roads and performing other required site preparation activities for other
planned drilling locations.
Management of the Company believes the risk-to-reward considerations
involved with the development of the Karakuduk Field are very positive and may
lead to substantial growth of the Company over the next several years. However,
the Company can provide no assurances that the Karakuduk Field will produce oil
in any specific amounts or that the Company will ever realize a profit as a
result of the Company's interest in the field.
KKM was re-registered on July 24, 1997, with the government of Kazakhstan.
The re-registration was required as a result of new legislation in Kazakhstan.
The Company believes that KKM is now in compliance with all Kazakhstan laws and
regulations related to the registration requirements relating to legal entities.
The current KKM shareholders' include CAP-G, KazakhOil, and a local Kazakhstan
joint stock company. KazakhOil JSC, the national petroleum company of the
government of Kazakhstan holds a 40% ownership interest in KKM. The private
Kazakhstan joint stock company owns the remaining 10%.
The permits and licenses required to develop the Karakuduk Field have been
obtained. However, there is no assurance that any further permits or licenses,
if required, will be obtained. Also, because of uncertainties surrounding the
project and lack of proven commercial viability of crude oil production
extracted during 1998 and early 1999, no proved reserves have been attributed to
the Karakuduk Field. The project will require significant development costs for
8
which the financing is not in place. There can be no assurance that the project
will be financed or that the Karakuduk Field will be successfully developed.
Further, the Company will face all of the risks inherent in attempting to
develop an oil and gas property in a foreign country.
See also Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Reserves. The Company claims no proved reserves as of December 31, 1998.
As a result of the Company recently reentering a well in the Karakuduk
Field and because of the Company's future drilling plans for the Karakuduk
Field, the Company expects to be able to obtain a reserve report for the
Karakuduk Field during 1999.
Since January 1, 1998, the Company has not filed with or included in any
reports to any other federal authority or agency any estimates of total, proved
net oil or gas reserves.
Net Quantities of Oil and Gas Produced. The Company's net oil and gas
production for each of the last three fiscal years and for the month of December
1996 (all of which prior to 1997 was from properties located in the United
States) was as follows:
Year ended Year ended Month of Year ended
December 31, 1998 December 31, 1997 December 1996 November 30, 1996
----------------- ----------------- ------------- -----------------
Oil (Bbls) 81,052 Less than 1,000 -0- 1,737
Gas (Mcf) -0- -0- -0- 96,906
KKM did not sell any oil during 1998. Oil production for 1998 represents
100% of KKM's 1998 production, which was placed into the KazTransOil pipeline.
While the Company, through CAP-G, owns 50% of KKM, the Company will receive the
entire economic benefit from the sale of KKM's initial production. The net
proceeds to be received from the sale of KKM's 1998 production will be used to
partially repay CAP-G's loan to KKM and to fund KKM's ongoing operations,
reducing CAP-G's funding commitment to do the same.
The average sales price per barrel of oil and Mcf of gas, and average
production costs per barrel of oil equivalent ("BOE") excluding depreciation,
depletion and amortization were as follows:
Average Average Average
Year Ended Month of Year Ended Sales Price Sales Price Production
December 31, December, November 30, Oil (Bbls) Gas (Mcf) Cost Per BOE
------------ --------- ------------ ---------- --------- ------------
1998 * * *
1997 * * *
1996 * * *
1996 $17.53 $1.17 $2.07
The above table represents activities related only to oil and gas
production.
*The Company did not sell any significant quantities of oil or gas during
these periods. KKM did not sell any oil or gas during the years presented.
Productive Wells and Acreage. As of December 31, 1998, KKM had interests in
one productive oil well, one shut-in productive oil well, and no productive gas
wells. As of December 31, 1998, the Company had a net 50% beneficial interest in
KKM which holds a governmental license to develop the Karakuduk Field, a 16,900
acre oil field in Kazakhstan which was discovered in 1972 with the drilling of
22 exploratory and development wells by the former Soviet Union. None of these
wells were produced commercially prior to 1998.
9
On December 31, 1997, KKM delivered by truck to the pipeline oil that KKM
had recovered from testing Well No. 21, the first well KKM reentered in the
Karakuduk Field. Well No. 21 tested on a sustained flow of 526 barrels of oil
per day. The well was subsequently shut-in until additional facilities are put
in place to process and transport the combined daily production from Well No. 21
and Well No. 10. In February 1998, Well No. 10 was reperforated and produced at
a sustained test flow rate of 1,450 barrels of oil per day. Well No. 10 was
placed on limited production to fill storage tanks and transport trucks that
deliver oil to the export pipeline. In March 1999, KKM acquired additional
trucks and personnel to increase the amount of daily production currently
deliverable to the pipeline terminal. KKM also has begun preparations to
workover Well Nos. 7 and 20 and, if the wells are productive, will place them on
production at such time as the field facility construction is completed.
On February 14 1999, KKM began drilling well No. 101, reaching total depth
in early April. The well has not been completed as of the filing date of this
report.
Drilling Activity. During the last two fiscal years ended December 31,
1998, the month of December 1996 and the fiscal year ended November 30, 1996,
the Company did not participate in the drilling of any productive exploratory or
development wells. The Company did participate in the capital workover of four
previous drilled wells, which had never been placed on production.
Present Activities. As of April 13, 1999, the Company was in the process of
drilling Well No. 101, reopening Well No. 21, previously shut-in during 1998,
and planning the reentry of Well No. 20. Well No. 10 is currently producing
approximately 1,200 barrels of oil per day.
Offices. On March 1, 1999, the Company announced that it is relocating its
principal office from Houston, Texas to Golden, Colorado. On this date, the
Company leased office space from a related party, on 1010 Tenth Street, Suite
100, Golden, Colorado 80401. The offices consist of approximately 2,255 square
feet and will be leased until August 31, 1999 at an initial rent of
approximately $4,000 per month, and on a month to month basis after that. On
April 1, 1999, the Company assigned its office space at 2211 Norfolk, Suite
1150, Houston, Texas 77098 to an unaffiliated third party. The Company is
currently subleasing the Houston office space on a month by month basis for
approximately $5,000 per month. The Company expects the relocation to be
completed by the fall of 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings required to be reported
hereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during the Company's fiscal quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's $0.10 par value common stock is currently traded on the
Nasdaq Small-Cap Market (Nasdaq) under the symbol CHAR. The Company has been
advised that the Company's common stock is subject to being delisted by Nasdaq
as a result of the common stock not meeting the minimum bid price requirements.
The Company has scheduled a hearing with Nasdaq for April 30, 1999, to request
additional time to satisfy Nasdaq's minimum bid price requirements. Additionaly,
the Company has requested a special meeting of the Company's shareholder's in
late April, 1999 to approve a reverse stock split in which one new share of the
Company's common stock would be exchanged for every 60 shares of common stock
presently outstanding.
10
As of April 7, 1999, the Company had approximately 2,022 shareholders
of record of its $0.10 par value common stock. No dividend has been paid on the
Company's common stock, and there are no plans to pay dividends in the
foreseeable future.
The following table shows the range of high, low and closing sales
prices for each quarter during the Company's last two calendar years ended
December 31, 1998 and December 31, 1997, as reported by the National Association
of Securities Dealers, Inc.
Price Range
--------------------------
Fiscal Quarter Ended High Low Closing
- -------------------- ---- --- -------
March 31, 1997 1 3/16 3/4 7/8
June 30, 1997 * 1 3/4 13/16
September 30, 1997 1 1/4 11/16 1 5/32
December 31, 1997 3 3/32 1 1/16 2 1/2
March 31, 1998 2 25/32 2 2 7/16
June 30, 1998 2 1/2 1 1/2 1 11/16
September 30, 1998 2 1/2 3/4 1 9/32
December 31, 1998 1 3/4 11/32 11/32
* On May 29, 1997, the Company changed its fiscal year end from November 30 to
December 31.
The following is information as to all securities of the Company sold by
the Company since October 1, 1998, which were not registered under the
Securities Act of 1933, as amended ("Securities Act").
On October 30, 1998, the Company issued warrants to purchase 200,000 shares
of the Company's common stock at an exercise price of $1.00 per share as part of
the settlement for a lawsuit filed against the Company and others in the
District Court of Harris County, Texas, by Heartland, Inc. of Wichita and
Collins & McIlhenny, Inc. on November 14, 1997. The warrants are exercisable
through January 2, 1999. The Company issued the warrants in reliance upon the
exemption from registration under Section 4(2) of the Securities Act. The
recipients had available all material information concerning the Company. The
warrant certificates bear an appropriate restrictive legend under the Securities
Act. No underwriter was involved in the transaction.
During the quarter ended December 31, 1998, the Company granted 5-year
options to purchase 38,500 shares of the Company's common stock to employees of,
and consultants to, the Company. The Company made the grants in reliance upon
the exemption from registration under Section 4(2) of the Securities Act. Such
persons had available to them all material information concerning the Company.
The options will have an appropriate restrictive legend under the Securities
Act. No underwriter was involved in the transaction.
On December 31, 1998, warrants to purchase 80,000 shares of the Company's
common stock were exercised, at a price of $0.25 per share, for a total of
$20,000.
11
ITEM 6. SELECTED FINANCIAL DATA
The following is selected consolidated financial information concerning the
Company. This information should be read in conjunction with the Consolidated
Financial Statements appearing elsewhere in this Annual Report on Form 10-K.
As of or for
the Year As of or for the Year Ended
Ended Month of -------------------------------------------
December 31 , December 31, December November 30, November 30, November 30,
1998 1997 1996 1996 1995 1994
---- ---- ---- ---- ---- ----
Oil and gas sales (1)........... -- -- -- $ 147,000 $ 255,000 $ 374,000
Total revenues.................. -- -- -- 147,000 255,000 374,000
Noncash write-down of oil
and gas properties ............. -- -- -- -- 619,000 416,000
Net income (loss)............... (4,266,000) (2,603,000) (130,000) (2,416,000) (704,000) (474,000)
Net income (loss) per
common share.................. (.09) (.06) (.00) (.08) (0.04) (0.02)
Working capital................. (287,000) 3,356,000 * 259,000 366,000 497,000
Total assets.................... 34,324,000 23,519,000 * 14,498,000 5,595,000 2,388,000
Long-term obligations and
redeemable preferred stock 5,060,000 4,710,000 * 1,491,000 461,000
Shareholders' equity............ 27,579,000 18,578,000 * 12,114,000 4,920,000 2,035,000
Other Data
- ----------
Present value of proved reserves -- -- -- -- 427,000 1,084,000
Proved oil reserves (bbls) -- -- -- -- 66,185 111,690
Proved gas reserves (mcf) -- -- -- -- 3,062,417 3,294,730
(1) In 1994, the Company made a strategic decision to pursue international oil
and gas projects and, by early 1997, had completely disposed of all
domestic oil and gas properties.
* Not applicable due to one month short period ended December 31, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
During 1998, the Company raised additional capital to finance CAP-G's
obligation for the development of the Karakuduk Field and to satisfy other
working capital needs of the Company. Since January 1, 1998, the Company raised
$12,500,000 through the sale of common stock and $20,000 through the exercises
of common stock warrants. The Company also raised an additional $2,070,000
through various loans to the Company, of which $975,000 was outstanding as of
December 31, 1998. The Company's material capital and financing transactions
during 1998 were as follows:
On April 3, 1998, the Company sold 1,250,000 shares of the Company's common
stock for $2.00 per share for at total of $2,500,000 to a private investor.
Allen & Company, Incorporated acted as placement agent in connection with the
12
sale of the 1,250,000 shares. As a result, Allen & Company, Incorporated's
warrants to purchase shares of the Company's common stock, originally issued as
a commission in connection with the Redeemable Preferred Stock sale on November
24, 1997, became exercisable for an additional 100,000 shares. The warrants to
purchase the additional 100,000 shares of the Company's common stock are
exercisable through November 25, 2002, at an exercise price of $0.01 per share.
On July 28 and July 29, 1998, the Company sold 6,666,667 shares of the
Company's common stock for $1.50 per share for at total of $10,000,000 to
certain investors. Issuance costs incurred were approximately $50,000 and have
been recorded as a reduction to the proceeds received from the sale. Allen &
Company, Incorporated acted as placement agent in connection with the sale of
the 6,666,667 shares. As a result, Allen & Company, Incorporated's warrants to
purchase 900,000 shares of the Company's common stock, originally issued as
commission in connection with the Redeemable Preferred Stock sale on November
24, 1997, became exercisable for an additional 400,000 shares of the Company's
common stock. The 400,000 warrants are exercisable through November 25, 2002, at
an exercise price of $0.01 per share. As of December 31, 1998, 200,000 warrants
held by Allen & Company, Incorporated were unexercisable pending the performance
of future services.
Due to the fact, the sales price of the 6,666,667 shares was below a price
of $2.00 per share, the Company was required to issue an additional 416,667
shares to the investor who purchased 1,250,000 shares of the Company's common
stock for $2,500,000 in April 1998 in order to satisfy certain price protection
agreements the Company has with such investor.
On August 5, 1998, the Company retired two outstanding loans, totaling
$1,000,000, from two related parties: Allen & Company, Incorporated ($900,000)
and John McMillian, a director and current Chairman and Chief Executive Officer
of the Company ($100,000). The Company borrowed the $1,000,000 on June 3, 1998,
subject to a 7% interest rate. The note was payable in full, plus accrued
interest, on the earlier of 180 days from the funding of the loans or upon the
Company's receipt of a minimum of $10,000,000 in equity investments. In
conjunction with the loans, the Company issued warrants to purchase 1,000,000
shares of the Company's common stock, at an exercise price of $3.50 per share.
The Company recorded the warrants at their fair market value of $367,000, as a
discount of notes payable, amortizable over the life of the loans. On July 27,
1998, the Company received $10,000,000 in equity financing and repaid the loans,
recognizing an extraordinary loss on the extinguishment of debt of approximately
$236,000.
On July 3, 1998, the Company borrowed $975,000 from the Chase Bank of Texas
(Chase). The Company subsequently amended the Chase note on December 3, 1998 and
on February 28, 1999. Under the restructured terms of the note dated February
28, 1999, the loan accrues interest at an adjustable prime rate, as determined
by Chase. As of December 31, 1998 the stated prime rate was 7.75%. Principal
payments in the amount of $250,000, plus accrued interest, are due quarterly,
beginning on August 31, 1999.
The $975,000 loan is fully guaranteed with a stand-by letter of credit from
Whittier Ventures, LLC, an investor in the Company. In return for issuing the
loan guarantee, the Company paid the guarantor $10,000 plus related costs,
issued warrants to purchase 20,000 shares of the Company's common stock, and
granted the guarantor a security interest in the Company's common stock of
Central Asian Petroleum (Guernsey) (CAP-G).
In the event of the Company's default on the $975,000 note, the guarantor's
security interest in the Company's common stock in CAP-G cannot be perfected for
at least 30 days after notification of such default. In the event of default,
the Company may make full payment of any outstanding principal and interest on
the note plus any additional charges incurred by the guarantor to completely
remove any security interest held by the guarantor.
The Company may seek to obtain additional capital through debt or equity
offerings, encumbering properties, entering into arrangements whereby certain
costs of development will be paid by others to earn an interest in the
properties, or sale of a portion of the Company's interest in the Karakuduk
Field. The present environment for financing the acquisition of oil and gas
properties or the ongoing obligations of the oil and gas business is uncertain
due, in part, to instability in oil and gas pricing in recent years. The
Company's small size and the early stage of development of the Karakuduk Field
may also increase the difficulty in raising any financing that may be needed in
the future. There can be no assurance that the debt or equity financing that
13
might be required to fund the Company's operations and obligations in the future
will be available to the Company on economically acceptable terms if at all.
During the first quarter of 1999, the Company borrowed an additional
$3,800,000 from related party investors. The notes are repayable in full on
August 31, 1999 and accrue interest at an 8% rate. The financing was primarily
utilized to fund KKM's operations during the first quarter of 1999.
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred recurring operating losses and has no operating assets presently
generating cash to fund its operating and capital requirements. The Company does
not anticipate that its current cash reserves and cash flow from operations will
be sufficient to meet its capital requirements through fiscal 1999.
As of December 31, 1998, substantially all of the Company's assets are
invested in the development of the Karakuduk Field. The Karakuduk Field has not
produced any revenues as of December 31, 1998 and is not expected to produce
revenues sufficient to meet KKM's cash needs during 1999. The development of the
Karakuduk Field, through KKM, will require substantial amounts of additional
capital. KKM's revised license with the government required KKM to expend $10
million as of December 31, 1997 and another $16.5 million as of December 31,
1998. Total expenditure commitments, from the commencement of operations through
December 31, 1998, of $26,500,000 have been satisfied by KKM. KKM has an
additional expenditure commitment of $30 million for the year ending December
31, 1999, of which KKM has spent approximately $3.5 million as of April 8, 1999.
The 1999 expenditure commitment is expected to be spent primarily for KKM's
drilling operations and completion of the field facilities capable of sustaining
expected future production from the Karakuduk Field, along with general overhead
expenses. Without additional funding and significant revenues from oil sales, of
which there are no assurances, the Company will not be able to provide necessary
funds to KKM in order to satisfy these requirements. As a result, the Company's
interest in the Karakuduk Field may be lost.
The Company received an extension to June 30, 1999, from the Overseas
Private Investment Corp. ("OPIC") for political risk insurance. OPIC granted the
Company a binding executed letter of commitment on September 25, 1996. The
Company has a standby facility for which it has made eight payments of $31,250
and another two payments of $15,625. The Company expects to execute the contract
on or before June 30, 1999.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal
business activities.
The Company has addressed the availability and integrity of financial
systems and the reliability of operational systems. The Company has specifically
reviewed the status of readiness for the year 2000 for it's management and
financial reporting systems in the U.S. and in Kazakhstan, and believes the
systems are year 2000 compliant. The Company does not expect to incur any
material operating expenses or be required to make significant investment in
computer system improvements to become Year 2000 compliant.
Third party systems that expose the Company to risk are primarily those
surrounding the Company's equity investee, KKM. Management has begun
communications with KKM regarding their readiness for the year 2000 and is
currently assisting KKM to formalize an evaluation and assessment process.
KKM has completed a partial assessment and currently believes that the
computer systems it has in place are year 2000 compliant. KKM has initiated
formal communication with all of its significant suppliers and large customers
to determine the extent to which the Company is vulnerable to those third
14
parties failure to remediate their own year 2000 issues. In particular, it is
unclear as to the extent the Kazakh government and other organizations who
provide significant infrastructure services within the Kazakh Republic have
addressed the year 2000 issue. Furthermore, the current crisis in Russia and the
CIS could adversely affect the ability of the government and such organizations
to fund adequate Year 2000 compliance programs. There is no guarantee that the
systems of the government or of other organizations on which the Company and KKM
rely will be timely converted and will not have an adverse effect on the Company
and its systems.
The most likely worst case scenario the Company can foresee from a failure
of internal or third-party systems would include an inability of vendors to
timely deliver required materials, supplies, or services to the Karakuduk Field
necessary to conduct drilling or other field operations. In order to mitigate
the possibility of timely delivery of critical materials and supplies, KKM can
fully stock materials to sustain drilling operations over the transition period
from December 1999 through the first quarter of the 2000. At this time, KKM will
assess if any critical vendors are having difficulties due to year 2000 issues.
KKM has an extensive selection of vendors for all types of materials and service
needs. If certain vendors cannot perform on a timely basis, KKM will simply
utilize a different service provider.
Furthermore, a breakdown of the existing KazTransOil pipeline required by
KKM to export oil outside of Kazakhstan would seriously delay or even halt KKM's
ability to sell oil. KKM management has performed physical inspections of the
KazTransOil pipeline and do not foresee any problems with placing production
into the pipeline and properly recording the volumes attributable to KKM. There
are no assurances, however, that problems will not occur at different points
along the pipeline, inside or outside of Kazakhstan, including points of
destination for the throughput. Due to the limited transportation options for
marketing crude oil within Kazakhstan and the CIS, KKM will not be able to avoid
the negative consequences associated with a breakdown in the export pipeline if
it should occur. The management of KKM, however, considers this likelihood to be
remote.
Results of Operations Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997
Interest income increased by $763,000 from the year ended December 31, 1997
due to increased financing of 100% of KKM's operations in Kazakhstan. As of
December 31, 1998, the Company held a 50% equity interest in KKM.
General and administrative costs increased by $1,363,000 from the year
ended December 31, 1997 due mainly to the Company's increase in compensation
expense and legal fees. Compensation expense increased by $992,000, primarily
due to stock based compensation granted to directors, employees, and consultants
of the Company during 1998 plus amortization of prior year equity based
compensation. Furthermore, the Company's cash based compensation increased due
to the hiring of additional personnel required for normal business operations.
Legal fees increased $125,000, primarily relating to the Heartland lawsuit,
which was settled on October 30, 1998. The Company's equity loss in KKM,
increased $912,000 from the year ended December 31, 1997. The increase is the
result of KKM's increased operational activity in Kazakhstan.
In 1998, the Company settled a lawsuit filed against the Company on
November 14, 1997, for a total of $200,000 and warrants to purchase 200,000
shares of the Company's common stock at an exercise price of $1.00, exercisable
through January 2, 1999. The warrants were recorded at the fair market value of
the warrants (approximately $34,000).
In 1998, the Company recognized a $236,000 extraordinary loss on the
extinguishment of long term debt. The Company has debt obligations of $940,000
outstanding as of December 31, 1998.
Inflation. The Company cannot control prices in its oil and gas sales and
to the extent the Company is unable to pass on increases in operating costs, it
may be affected by inflation.
Results of Operations Year Ended December 31, 1997 Compared to Year Ended
November 30, 1996
As mentioned above, during 1997 the Company changed from a fiscal year
ended November 30 to a fiscal year ended December 31. The Company's operations
during the fiscal year ended December 31, 1997, and the month ended December 31,
1996, resulted in losses before extraordinary items, if any, of $2,389,000 and
$130,000, respectively, due to the Company's ongoing transition to international
exploration and production operations. The Company's operational loss for
15
December 1996 consisted of miscellaneous corporate level expenses and is
immaterial to the overall operational results of the Company.
Results for the fiscal year ended November 30, 1996 have also been restated
to reflect the equity method of accounting for the Company's investment in KKM.
In 1996, the Company accounted for KKM using proportional consolidation. After
adoption of the equity method, the Company's net loss for the fiscal year ended
November 30, 1996, $2,416,000, remained unchanged from the amount originally
reported.
Oil and gas revenues and production costs decreased by $147,000 and
$37,000, respectively, from the year ended November 30, 1996, due to the
disposition of all of the Company's domestic oil and gas properties during the
first quarter of 1997. Interest income increased by $267,000 from the year ended
November 30, 1996 due to increased financing of 100% of KKM's operations in
Kazakhstan. As of December 31, 1997, the Company held a 50% equity interest in
KKM.
General and administrative costs and interest expense increased by $186,000
and $208,000, respectively, also due to KKM's increased operational activity in
Kazakhstan. The Company's equity loss in KKM, however, decreased by $139,000
from the year ended November 30, 1996 due to additional capitalization of costs
directly related to development of oil and gas properties held by KKM. The
Company recognized a $36,000 economic loss on the disposition of the Company's
domestic properties.
In 1997, the Company recognized a $214,000 extraordinary loss on the
extinguishment of long term debt. The Company did not have any other debt
obligations outstanding as of December 31, 1997.
Inflation. The Company cannot control prices in its oil and gas sales and
to the extent the Company is unable to pass on increases in operating costs, it
may be affected by inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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.
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 March 31, 1999, the following table sets forth the names and ages of
the current directors and executive officers of the Company, the principal
offices and positions with the Company held by each person and the date such
person became a director or executive officer of the Company. The executive
officers of the Company 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 shareholders. 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 the Company's
Bylaws.
16
Name of Director or Officer and Director Principal Occupation
Position in the Company Since Age During the last Five Years
- ----------------------- ----- --- --------------------------
John G. McMillian 1997 72
Chairman Retired since 1995. Chairman, President and Chief Executive
Officer of Allegheny & Western Energy Corporation, an oil and gas
company, from 1987 to 1995; founder and former Chairman and Chief
Executive Officer of Northwest Energy Company and owner and
Chairman and Chief Executive Officer of Burger Boat Company. A
director of Marker International and Excalibur Technologies.
Dr. Jack A. Krug 1999 53
President and Chief
Operating Officer President and Chief Operating Officer of the Company since January
1999, a director, Vice President, and former owner of Questa
Engineering, LLC, prior to 1999; First Deputy Project Manager,
LukOil-AIK, an oil and gas joint venture in Russia, from October
1994 to December 1998; First Deputy of Zhetaby Quest an oil and gas
joint venture in the Republic of Kazakhstan, from 1993 to November,
1994.
David A. Dahl 1997 37 Secretary of the Company from August 1997 to May 1998; President
of Whittier Energy Company, an oil and gas exploration and
production company, since 1997; President of Whittier Ventures,
LLC, a private investment entity, since January 1996; Vice
President of Whittier Trust Company since April 1993;, Vice
President of Merus Capital Management, an investment firm, from
1990 to 1993.
Ted Collins, Jr. 1997 60 President of Collins & Ware, Inc., an independent oil and gas
company, since 1988. President of Enron Oil & Gas Co. from 1982
to 1988; Executive Vice President and a director of American
Quasar Petroleum Co. from 1969 to 1982. Mr. Collins is a director
of Hanover Compression Company, Mid Coast Energy Resources, Inc.
and Queen Sand Resources, Inc.
Richard L. Grant 1998 44 President of Cabot LNG Corporation, a natural gas company, since
September 1998; President of Mountaineer Gas Company, the largest
natural gas distribution copany in West Virginia, from 1988 to
September 1998; Prior thereto, legal counsel with The Cincinnati
Gas & Electric Company.
James A. Jeffs 1999 46 Chief Investment Officer for the Whittier Trust Company since
1994; A director of M-D International Petroleum, Inc., an oil and
gas company, since 1994; Senior Vice President of Union Bank of
Los Angeles from 1993 to 1994; Chief Investment Officer for
Northern Trust of California, N.A., from 1991 to 1992; President
and Chief Executive Officer of TSA Capital Management and Senior
Vice President of Trust Services of America, capital managem
17
Arlo G. Sorensen 1996 58 Chief Financial Officer and Principal Accounting Officer of the
Company from March 1997 to June 1998; Treasurer of the Company
from February 1997 to February 1998; Trustee of M.H. Whittier
Corporation, a private investment entity, since 1985; Chairman of
the Board and a director of Whittier Trust Company since 1988.
Michael B. Young N/A 30
Treasurer and Controller Treasurer and Controller and Principal Accounting Officer of the
Company since February 1998; Tax Manager in the oil & gas tax
practice of Arthur Andersen LLP, an accounting firm, from June
1991 to February 1998.
Alan D. Berlin 1997 58
Secretary A partner of Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP since
1995. Engaged in the private practice of law for over five years
prior to joining Aitken Irvin Lewin Berlin Vrooman & Cohn LLP;
Secretary of the Company from January 1996 to August 1997 and
from June 1998 to the present; President of the International
Division of Belco Petroleum Corp. from 1985 to 1987 and held
various other positions with Belco Petroleum Corp. from 1977 to
1985; Currently a director of Belco Oil & Gas Corp.
Except as indicated in the above table, no director of the Company is a
director of an entity that has its securities registered pursuant to Section 12
of the Securities Exchange Act of 1934.
In connection with the Company's acquisition of all of the stock of CAP-D
in 1995, the former shareholders of CAP-D have certain rights to nominate
directors of their choosing for election to the Company's Board of Directors. If
by June 30, 2000, the Karakuduk Field obtains 5,000 barrels of oil production
per day averaged over any sixty (60) day period, or the Company's beneficial
interest in the field is sold or the Company and the former shareholders jointly
participate in a new exploratory development project, the former shareholders
(one of which is James A. Jeffs) have the right to cause the Company to nominate
one additional director at the Company's 2000 year annual meeting of
shareholders.
In connection with borrowings in August 1996, the Company agreed to add two
directors selected by two of the lenders, Whittier Ventures LLC and Whittier
Energy Company (collectively "Whittiers"). In connection with the transactions,
James A. Jeffs resigned from the Company's board of directors. At the request of
the Whittiers, on December 2, 1996, Arlo G. Sorensen replaced Mr. Jeffs on the
Company's board of directors and on January 3, 1997, David A. Dahl was appointed
to the Company's board of directors. The Whittiers will have the right to have
their two representatives nominated for directors of the Company until the
Whittiers no longer have any investment in the Company.
There are no other arrangements or understandings between any executive
officer and any director or other person pursuant to which any person was
selected as a director or an executive officer.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of the Forms 3 and 4 and any amendments thereto
furnished to the Company during the Company's fiscal year ended December 31,
1998 and Form 5 and amendments thereto furnished to the Company with respect to
18
such fiscal year, during the Company's fiscal year ended December 31, 1998, no
persons who were directors, officers or beneficial owners of more than 10% of
the Company's outstanding Common Stock during such fiscal year filed late
reports on Form 3, 4, or 5.
ITEM 11. EXECUTIVE COMPENSATION
In May 1997, the Company changed its fiscal year end from November 30 to
December 31. The following table shows all cash compensation paid by the Company
for services rendered during the fiscal years ended December 31, 1998 and
December 31, 1997, during the month of December 1996 and during the fiscal year
ended November 30, 1996 to Howard Karren (there were no executive officers of
the Company whose annual salary and bonus exceeded $100,000 during the fiscal
year ended December 31, 1998).
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
------------------- ------
Name and Year Year Year
Principal Position Ended Ended Ended Other Securities All Other
------------------ December December Month of November Annual Underlying Compen-
31, 31, December 30, Salary($) Bonus($) Compensation Options(#) tion($)
--- --- -------- --------- --------- -------- ------------ ---------- -------
Howard Karren 1998 -- -- -- -- --
Chief Executive
Officer
and President from 1997 -- -- -- 1,025,000 --
January 1997 and
February 1997, 1996 -- -- -- -- --
respectively, to 1996 -- -- $175,000(1) -- --
January 1999 1995 -- -- -- -- --
(1) In connection with Howard Karren becoming a Director and Chairman of the
Company, subject to a certain contingency which was satisfied in April
1996, the Company agreed to issue 350,000 shares of the Company's
restricted common stock to Howard Karren, a director of the Company, or his
designees. The $175,000 represents the market value of the 350,000 shares
on April 5, 1996, the date the contingency was satisfied.
On January 11, 1999, the Company entered into an employment agreement with
Dr. Jack A. Krug pursuant to which Dr. Krug was employed as the President and
Chief Operating Officer of the Company. The employment agreement has a term of
three years and is automatically extended for successive one year terms
thereafter unless either the Company or Dr. Krug elects to terminate the
agreement. Under the terms of the employment agreement, the Company pays Dr.
Krug a salary of $250,000 and has agreed to grant Dr. Krug 200,000 shares of the
Company's common stock for each year, up to a maximum of five years, of Dr.
Krug's services under the agreement. The first stock grant was made on January
15, 1999. Each subsequent grant is to be made on each subsequent January 15.
Option Grants in Last Fiscal Year
The Company did not grant any options to Howard Karren, the former Chairman
and Chief Executive Officer of the Company, during the year ended December 31,
1998.
19
Fiscal Year-End Option Values
The following table sets forth information concerning unexercised options
held by Howard Karren on December 31, 1998:
Number of Securities
Underlying Unexercised Value of Unexercised
Options as of In-the-Money Options at
December 31, 1998(#) December 31, 1998($)
---------------------- ---------------------
Name Exercisable/ Unexercisable Exercisable/ Unexercisable
- ---- ------------ ------------- --------------------------
Howard Karren........ 1,025,000 - 0 - $ -0- - 0 -
(1) The value was determined by multiplying the number of shares underlying the
warrants by the difference between the exercise price and the closing sale
price of the Company's common stock on December 31, 1998.
Compensation of Directors
On July 17, 1997, the shareholders of the Company approved a 1997 Incentive
Stock Plan pursuant to which all non-employee directors were to receive an award
of 250 shares of common stock of the Company for each meeting of the board of
directors attended by such director. The directors have waived their rights to
receive shares for the meetings in 1997 and 1998. Also on July 17, 1997, the
shareholders approved a 1997 Non-Employee Directors' Stock Option Plan pursuant
to which each year each non- employee director was to receive an option to
purchase 25,000 shares of common stock of the Company. The only options granted
were granted effective July 17, 1997 and relate to a total of 200,000 shares
that were exercisable at a price of $0.828125 per share. Both plans were
terminated in June 1998.
On January 23, 1998, the Board of Directors of the Company granted each
director of the Company 10,000 shares of the Company's common stock for their
service to the Company. There were no other standard or other arrangements for
the compensation of the Company's directors in effect for the Company's fiscal
year ended December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of April 7, 1999, the number of shares of
the Company's outstanding $0.10 par value common stock beneficially owned by
each of the Company's current directors and the Company's executive officers
named in Item 11, sets forth the number of shares of the Company's outstanding
Common Stock beneficially owned by all of the Company's current directors and
executive officers as a group, sets forth the number of shares of the Company's
outstanding common stock owned by each person who owned of record, or was known
to own beneficially, more than 5% of the Company's outstanding shares of common
stock and sets forth the number of shares of the Company's outstanding common
stock owned by Howard Karren. The address for all directors and executive
officers of the Company is 2211 Norfolk, Suite 1150, Houston, Texas 77098-4096.
20
Amount and Nature of Percent of
Beneficial Common
Name of Beneficial Owner Position Ownership (1) Stock (1)
- ------------------------ -------- ------------- ---------
Allen & Company Incorporated -- 11,222,387 (2) 18.31%
711 Fifth Avenue
New York, New York 10022
Cascade Investment, LLC -- 3,333,333 5.69%
2365 Carillon Point
Kirkland, WA 98033
Whittier Ventures, LLC -- 3,373,556 (3) 5.73%
1600 Huntington Drive
South Pasadena, California 91030
Jack A. Krug President and Chief Operating 200,000 (4) *
Officer
John G. McMillian Chairman of the Board, 250,000 (5) *
Director, and Chief Executive
Officer
David A. Dahl Director 5,679,803 (6) 8.84%
Ted Collins, Jr. Director 60,000 *
James Jeffs Director 2,568,247(7) 4.38%
Arlo G. Sorensen Director 96,242 (8) *
Richard L. Grant Director -0- *
Howard Karren Former President and Chief 1,195,000 (9) 2.00%
Executive Officer
All Current Directors and Executive 8,869,292 (10) 15.03%
Officers as a Group (nine persons)
* Represents less than 1% of the shares of the Common Stock outstanding.
(1) Beneficial ownership of the Common Stock has been determined for this
purpose in accordance with Rule 13d-3 under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), under which a person is
deemed to be the beneficial owner of securities if he or she has or
shares voting power or investment power with respect to such
securities or has the right to acquire beneficial ownership within 60
days.
(2) Includes 2,697,720 shares underlying warrants to purchase shares of
Common Stock. The number of warrants reflected includes 225,000
warrants that Allen & Company Incorporated ("ACI") acquired and holds
for the benefit of certain of its officers, directors and employees.
ACI is a wholly owned subsidiary of Allen Holding Inc. ("AHI"), and,
consequently, AHI may be deemed to beneficially own the shares
beneficially owned by ACI. Does not include certain shares owned
directly by certain officers and stockholders of AHI and ACI with
respect to which AHI and ACI disclaim beneficial ownership. Certain
officers and stockholders of AHI and ACI may be deemed to beneficially
own certain shares of the Common Stock reported to be beneficially
owned directly by AHI and ACI.
21
(3) Includes 282,500 shares underlying currently exercisable warrants.
(4) Does not include 800,000 shares that vest annually at a rate of
200,000 shares on January 15th of each year. If Dr. Krug's employment
terminates, the stock award will be prorated as to that year.
(5) Includes 25,000 shares underlying a currently exercisable option and
25,000 shares underlying a currently exercisable warrant.
(6) Includes 75,000 shares underlying currently exercisable options owned
by Mr. Dahl, 3,373,556 shares beneficially owned by Whittier Ventures
LLC, 349,185 shares owned by Whittier Energy Company, 87,500 shares
underlying currently exercisable warrants owned by Whittier Energy
Company, 1,285,192 shares beneficially owned by Whittier Trust
Company, 9,370 shares owned by Whittier Opportunity Fund and 500,000
shares underlying currently exercisable options owned by Whittier
Opportunity Fund. Although Mr. Dahl has no pecuniary interest in the
shares beneficially owned by Whittier Ventures LLC, Whittier Energy
Company, Whittier Trust Company or Whittier Opportunity Fund, as the
President of Whittier Ventures LLC and Whittier Energy Company, as the
Vice President of Whittier Trust Company, and as a Manager of Whittier
Opportunity Fund, Mr. Dahl has voting power and investment power over
such shares and, thus, may be deemed to beneficially own such shares.
(7) Includes 349,185 shares owned by Whittier Energy Company, 87,500
shares underlying currently exercisable options owned by Whittier
Energy Company, 1,285,192 shares beneficially owned by Whittier Trust
Company, 9,370 shares owned by Whittier Opportunity Fund and 500,000
shares underlying currently exercisable options owned by Whittier
Opportunity Fund. Although Mr. Jeffs has no pecuniary interest in the
shares beneficially owned by Whittier Energy Company, Whittier Trust
Company and Whittier Opportunity Fund, as Vice President of Whittier
Energy Company, Vice President of Whittier Trust Company and a Manger
of Whittier Opportunity Fund, Mr. Jeffs has voting power and
investment power over such shares and, thus, may be deemed to
beneficially own such shares. Does not include 235,000 shares subject
to an escrow agreement which provides that such shares will be
released to Mr. Jeffs if the Company's oil and gas interests attain
specified performance levels.
(8) Includes 75,000 shares underlying currently exercisable options and
11,242 shares owned by Whittier 1982 Oil Trust for which Mr. Sorensen
is the trustee and has voting and investment power over such shares.
Mr. Sorensen is a director of Whittier Ventures LLC and Whittier
Energy Company. Mr. Sorensen disclaims beneficial ownership of the
shares that are owned by Whittier Ventures LLC and Whittier Energy
Company.
(9) Includes 1,025,000 shares underlying currently exercisable options.
Mr. Karren is no longer employed by the Company.
(10) Includes the shares as described in notes (4) through (8) above. Also
includes (i) 20,000 shares owned by Michael B. Young, the Treasurer
and Controller of the Company, and 70,000 shares underlying presently
exercisable options owned by Mr. Young, and (ii) 10,000 shares owned
by Mr. Berlin, the Secretary of the Company, and 25,000 shares
underlying a presently exercisable option owned by Mr. Berlin. Does
not include a grant for 20,000 shares that will vest with respect to
10,000 shares on each of January 30, 2000 and 2001, if Mr. Young is
still employed by the Company on those dates. The shares will vest
earlier if Mr. Young is terminated without due cause or if the Company
is acquired or merges with another entity.
22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP, a law firm in which Alan D.
Berlin, who is currently the Secretary of the Company and who was a director of
the Company from March 1997 to May 1998, is a partner, provides legal services
to the Company for which the law firm charges the Company an amount not in
excess of the law firm's normal billing rates. The total amount of fees that
were paid by the Company to the law firm during the Company's year ended
December 31, 1998, did not exceed 5% of the law firm's gross revenues for the
law firm's last full fiscal year. The Company believes that the fees paid to the
law firm were reasonable for the services rendered.
On November 24, 1997, the Company executed a Subscription Agreement
("Agreement") with an investor, which was not affiliated with the Company.
Pursuant to the Agreement, the Company sold to the investor 50,000 shares of the
Company's Series A Preferred Stock, no par value, for a purchase price of
$100.00 per share or an aggregate purchase price of $5,000,000. The investor
also agreed to purchase an additional 25,000 shares of the Company's Series A
Preferred Stock for an additional $2,500,000 and 150,000 shares of the Company's
Series B and Series C Preferred Stock for $15,000,000.
In March 1998, prior to the receipt of the funds for any additional
purchases the investor was to make under the Agreement, the Company and the
investor mutually released each other from any further obligations under the
Agreement. The investor retained the initial 50,000 shares of Series A Preferred
Stock that are convertible into the Company's Common Stock at $2.25 per share.
The number of shares of Common Stock issuable upon conversion of each share of
Series A Preferred Stock will be determined by dividing $100 by the conversion
price per share. The Company is not required to issue any additional preferred
stock under the Agreement and the investor has no other obligation to provide
funds to the Company in exchange for such stock.
The Series B Preferred Stock and Series C Preferred Stock would have been
convertible at the option of the holders thereof at any time or from time to
time on or prior to the redemption date into Common Stock. The conversion price
of the Series B Preferred Stock was initially $3.00 per share; and the
conversion price of the Series C Preferred Stock was initially $4.25 per share.
The number of shares of Common Stock issuable upon conversion of each share of
Series B Preferred Stock and Series C Preferred Stock would have been determined
by dividing $100 by the conversion price per share.
Allen & Company Incorporated ("Allen & Company") acted as placement agent
in connection with the sale of the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock pursuant to the Agreement. Allen & Company
elected to receive its fees in the form of warrants to purchase 900,000 shares
of the Company's common stock that were all originally exercisable through
November 25, 2002, at an exercise price of $0.01 per share.
The Company has agreed to allow Allen & Company to retain the warrants to
purchase 700,000 shares of the Company's common stock related to the $17,500,000
in funds not received under the original terms of the Agreement, provided Allen
& Company raises additional capital for the Company within the two year period
ending November 25, 1999. Based on a subsequent agreement, the unearned warrants
to purchase 700,000 shares of the Company's Common Stock held by Allen & Company
are fully restricted from exercise unless Allen & Company raises additional
capital for the Company that is acceptable to the Company's board of directors.
For each $25 of additional capital raised, a warrant to purchase one share of
common stock will be deemed to be earned. If, before November 25, 1999, Allen &
Company fails to raise additional capital for the Company under terms acceptable
to the Company, Allen & Company will return the unearned portion of the warrants
to the Company. In April 1998, Allen & Company raised an additional $2,500,000
of capital for the Company through the sale by the Company of 1,250,000 shares
of the Company's common stock at $2.00 per share. As a result, the warrants
became exercisable as to an additional 100,000 shares of the Company's common
stock.
On January 23, 1998, the board of directors of the Company granted each
then director of the Company 10,000 shares of the Company's common stock for
their service to the Company.
23
In connection with his employment, the Company granted Michael B. Young a
five year option to purchase 50,000 shares of the Company's common stock at an
exercise price of $2.25 per share and granted Mr. Young 40,000 shares of the
Company's common stock that, subject to certain conditions, vested 10,000 shares
on each of January 30, 1998 and 1999 and will vest 10,000 shares on each of
January 30, 2000 and 2001. All unvested shares shall vest immediately if the
Company is acquired or merge with another company or if Mr. Young is termination
without due cause. The Company also granted Mr. Young an option to purchase
20,000 shares of the Company's common stock at $0.75 per share, which was fully
vested as of January 31, 1999.
On March 10, 1999, Whittier Ventures LLC loaned the Company $500,000. On
March 19, 1999, Whittier Ventures LLC loaned the Company an additional $500,000.
Both loans bear interest at a rate of 8% per annum and both loans are due and
payable on or before August 31, 1999. Both loans are secured by all of the
issued and outstanding shares of CAP-G owned by the Company. If the Company
issues convertible securities within one year after the date of each respective
loan, Whittier Ventures LLC shall have the right to exchange all the outstanding
principal and interest due under the loans for such convertible securities. The
amount of convertible securities to be issued to Whittier Ventures LLC is
determined by dividing the amount of all principal and interest outstanding
under the loans into the issue price of the convertible securities.
On March 31, 1999, the Company issued a promissory note in the amount of
$2,769,978.08 to Allen & Company. The new promissory note superseded promissory
notes dated January 12, January 19, January 26, February 4, February 11 and
February 22, 1999, in the aggregate amount of $1,750,000 which represented loans
that Allen & Company had previously made to the Company. The new promissory note
to Allen & Company bears interest at a rate of 8% per annum and is due and
payable on or before August 31, 1999. The new promissory note is secured by all
of the outstanding stock of CAP-G and carries the same exchange privileges as
the promissory notes issued to Whittier Ventures LLC.
On January 4, 1999, Howard Karren, who was then the President and a
director of the Company, advanced the Company $50,000. The Company accrues
interest on the advance at an 8% annual interest rate.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
---------------------
Table of Contents
Chaparral Resources, Inc.
Report of Independent Auditors
Consolidated Balance Sheets--As of December 31, 1998 and December 31, 1997
Consolidated Statements of Operations--Years ended December 31, 1998,
December 31, 1997, November 30, 1996 and the month ended December 31, 1996
Consolidated Statements of Cash Flows--Years ended December 31, 1998,
December 31, 1997, November 30, 1996 and the month ended December 31, 1996
Consolidated Statement of Changes in Stockholders' Equity--Year ended
December 31, 1998, Thirteen months ended December 31, 1997 and the year
ended November 30, 1996
Notes to Consolidated Financial Statements
Supplemental Information - Disclosures About Oil and Gas producing
Activities - Unaudited
Karakuduk-Munay, JSC
Report of Independent Auditors
Balance Sheets--As of December 31, 1998 and 1997
Statements of Expenses and Accumulated Deficit--Years ended December
31, 1998, 1997 and 1996
24
Statements of Cash Flows--Years ended December 31, 1998, 1997 and 1996
Statements of Shareholders' Deficit
Notes to the Financial Statements
(a)(2) Financial Statement Schedules.
-----------------------------
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
(b) Current Reports on Form 8-K:
----------------------------
The Company did not file any Current Reports on Form 8-K during the last
fiscal quarter ended December 31, 1998:
25
(c) Exhibits.
---------
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
2.1 Stock Acquisition Agreement and Plan of Reorganization dated
April 12, 1995 between Chaparral Resources, Inc., and the
Shareholders of Central Asian Petroleum, Inc., incorporated by
reference to Exhibit 2.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 1995.
2.2 Escrow Agreement dated April 12, 1995 between Chaparral
Resources, Inc., the Shareholders of Central Asian Petroleum,
Inc. and Barry W. Spector, incorporated by reference to Exhibit
2.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1995.
2.3 Amendment to Stock Acquisition Agreement and Plan of
Reorganization dated March 10, 1996 between Chaparral Resources,
Inc., and the Shareholders of Central Asian Petroleum, Inc.,
incorporated by reference to the Company's Registration Statement
No. 333-7779.
3.1 Restated Articles of Incorporation + Amendments dated September
25, 1976, incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1993.
3.2 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated April 21, 1988, incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1993.
3.3 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated April 12, 1994, incorporated by reference to
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
3.4 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated June 21, 1995, incorporated by reference to
Exhibit B to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1995.
3.5 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated July 17, 1996, incorporated by reference to the
Company's Registration Statement No. 333-7779.
3.6 Articles of Amendment to the Restated Articles of Incorporation +
Amendments dated November 25, 1997, incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K dated
October 31, 1997.
3.7 Bylaws, as amended through October 31, 1997, incorporated by
reference to Exhibit 3(ii) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10.1 Chaparral Resources, Inc. 1989 Stock Warrant Plan effective May
1, 1989, incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1993.
10.2 Warrant Certificate entitling Allen & Company to purchase up to
1,022,000 shares of Common Stock of Chaparral Resources, Inc.,
incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated April 1, 1996.
26
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.3 Amendments to Chaparral Resources, Inc. Stock Warrant Plan,
incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the fiscal year ended November 30,
1996.
10.4 Agreement dated August 30, 1995 for Exploration Development and
Production of Oil in Karakuduk Oil Field in Mangistan Oblast of
the Republic of Kazakhstan between Ministry of Oil and Gas
Industries of the Republic of Kazakhstan for and on Behalf of the
Government of the Republic of Kazakhstan and Joint Stock Company
of Closed Type Karakuduk Munay Joint Venture, incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on Form
10-K for the fiscal year ended November 3
10.5 License for the Right to Use the Subsurface in the Republic of
Kazakhstan, incorporated by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1996.
10.6 Subscription Agreement dated April 22, 1997 between Chaparral
Resources, Inc. and Victory Ventures LLC, incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
10.7 Warrant Certificate dated December 31, 1997 entitling Victory
Ventures LLC to purchase up to 4,615,385 shares of Common Stock
of Chaparral Resources, Inc., incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997.
10.8 Form of Warrant issued to Black Diamond Partners LP, Clint D.
Carlson, John A. Schneider, Victory Ventures LLC, Whittier Energy
Company and Whittier Ventures LLC in connection with loans made
by them to Chaparral Resources, Inc. in November and December
1996 and to Black Diamond Partners LP, Clint D. Carlson, Wittier
Energy Company and Whittier Ventures LLC in July 1997 in
connection with the same loans, incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on quarter ended
June 30, 1997.
10.9 Chaparral Resources, Inc. 1997 Incentive Stock Plan, incorporated
by reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
10.10 Amendment to Common Stock Purchase Warrant dated December 31,
1997 entitling Victory Ventures LLC to purchase up to 4,615,385
shares of Common Stock of Chaparral Resources, Inc., incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10.11 Amendment dated September 11, 1997, to License for Right to Use
the Subsurface in the Republic of Kazakhstan, incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10.12 Warrant Certificate entitling Allen & Company Incorporated to
purchase up to 900,000 shares of Common Stock of Chaparral
Resources, Inc., incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K/A dated October 31, 1997.
10.13 Form of Subscription Agreement dated November 21, 1997,
incorporated by reference to Exhibit 10.19 to the Company's
Current Report on Form 8-K dated October 31, 1997.
10.14 Letter dated February 4, 1998, from the Company to Michael B.
Young, incorporated by reference to Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
27
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.15 Release and Understanding with H. Guntekin Koksal, incorporated
by reference to Exhibit 10.30 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
10.16 Termination Agreement dated March 6, 1998 with Exeter Finance
Group, incorporated by reference to Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
10.17 Agreement dated March 7, 1998, with Munay-Implex, incorporated by
reference to Exhibit 10.32 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
10.18 Agreement dated March 31, 1998, effective as of November 4, 1997,
between the Company and Allen & Company Incorporated,
incorporated by reference to Exhibit 10.33 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
10.19 Subscription Agreement dated April 1, 1998 between the Company
and Network Fund III, Ltd., incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K dated April 3,
1998.
10.20 Form of Subscription Agreement between the Company and certain
investors, incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated July 28, 1998.
10.21 Subordinated Loan Agreement dated as of June 4, 1997 between the
Company and Allen & Company, Incorporated, incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998.
10.22 Warrants issued to Allen & Company, Incorporated and John G.
McMillian, incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998.
10.23 Loan agreements between the Company and Howard Karren dated May
27, 1998 and July 1, 1998, respectively, incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998.
10.24 1998 Incentive and Nonstatutory Stock Option Plan
10.25 Amendment to License for the Right to Use the Subsurface in the
Republic of Kazakhstan, dated December 31, 1998.
10.26 Credit Support and Pledge Agreement between Whittier Ventures,
LLC and Chaparral Resources, Inc. dated July 2, 1998,
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
10.27 Warrants issued to Whittier Ventures, LLC, incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
10.28 Settlement Agreement and Release between Heartland, Inc. of
Wichita and Collins & McIlhenny, Inc. and Chaparral Resources,
Inc., Howard Karren, Whittier Trust Company and James A. Jeffs
dated October 30, 1998, incorporated by reference to Exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
10.29 Warrants issued to Heartland, Inc. of Wichita and Collins &
McIlhenny, Inc., as joint tenants and to Don M. Kennedy,
incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
28
Exhibit No. Description and Method of Filing
- ----------- --------------------------------
10.30 Loan Agreement between Challenger Oil Services, PLC and Chaparral
Resources, Inc. dated September 10, 1998, incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
10.31 Promissory Note between Challenger Oil Services, PLC and
Chaparral Resources, Inc. dated September 10, 1998, incorporated
by reference to Exhibit 10.6 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
10.32 International Daywork Drilling Contract - Land between Challenger
Oil Services, PLC and Karakuduk-Munay, JSC, dated April 7, 1998
10.33 Amendment No. 1 to the International Daywork Drilling Contract -
Land between Challenger Oil Services, PLC and Karakuduk-Munay,
JSC, dated April 7, 1998
10.34 Amendment No. 2 to the International Daywork Drilling Contract -
Land between Challenger Oil Services, PLC and Karakuduk-Munay,
JSC, dated March 17, 1999
10.35 Letter Agreement dated March 17, 1999 between Karakuduk-Munay,
JSC and Challenger Oil Services, PLC.
10.36 Letter Agreement and Restated Amendment No. 1 to Loan Agreement
and Promissory Note dated March 18, 1999 between Challenger Oil
Services, PLC and the Company.
21 Subsidiaries of the Registrant, incorporated by reference to
Exhibit 21 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Ernst & Young Kazakhstan
27 Financial Data Schedule
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHAPARRAL RESOURCES, INC.,
a Colorado corporation
By /s/ Dr. Jack a. Krug
-------------------------------------------
Dr. Jack A. Krug