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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, 2000.
Commission file number: 0-7261
CHAPARRAL RESOURCES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-0630863
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16945 Northchase Drive, Suite 1620
Houston, Texas 77060
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (281) 877-7100
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.0001 Per Share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
As of March 30, 2001, the aggregate market value of registrant's voting
common stock, par value $.0001 per share, held by non-affiliates was
$16,592,781.
As of March 30, 2001, registrant had 14,283,634 shares of its common stock,
par value $.0001 per share, issued and outstanding.
PART I
ITEM 1. BUSINESS
Our Business
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Chaparral Resources, Inc. is an independent oil and gas exploration and
production company. Our strategy is to acquire and develop foreign oil and gas
projects in emerging markets, specifically targeting fields with previously
discovered reserves, which have never been commercially produced or could be
materially enhanced by our management team and technical expertise.
Through two of our significant subsidiaries, Central Asian Petroleum
(Guernsey), Ltd., a Guernsey company ("CAP-G"), and Central Asian Petroleum,
Inc., a Delaware company ("CAP-D"), we own a 50% interest in Closed Type JSC
Karakudukmunay ("KKM"), a Kazakh joint stock company that holds a governmental
license to develop the Karakuduk Oil Field. All references to "Chaparral," "we,"
"us," and "our" refer to Chaparral Resources, Inc., its subsidiaries, and its
50% interest in KKM, unless indicated otherwise.
Since 1995, the business of Chaparral has been the development of the
Karakuduk Field, a 16,900 acre oil field in the Republic of Kazakhstan. The
domestic oil and gas assets of Chaparral were divested during 1996 and 1997 to
help fund the development of the Karakuduk Field. The government of the former
Soviet Union discovered the Karakuduk Field in 1972 and drilled 22 exploratory
and development wells, none of which were produced commercially. KKM has
re-established oil production from some of the existing wells and initiated an
aggressive drilling and development program in 2000 to fully develop and
commercially produce the oil reserves in the Karakuduk Field.
The other stockholders of KKM are KazakhOil, the national petroleum company
of the Republic of Kazakhstan, and a private Kazakhstan joint stock company.
KazakhOil owns a 40% interest in KKM and the private Kazakh joint stock company
owns the remaining 10%. The government of Kazakhstan indirectly owns 40% of KKM
through KazakhOil's direct ownership interest. Because we only control a 50%
interest in KKM, we must seek the approval of one of the other two stockholders
before KKM can take any major action, such as approving KKM's annual budget and
work program, employing experts, appointing and removing KKM's management, and
approving KKM's material operations and activities. If we are unable to obtain
the approval of one of these stockholders, the operations of KKM may come to a
standstill. There are no practical mechanisms in the agreements among the KKM
stockholders to effectively resolve deadlocks. A deadlock could halt KKM's
operations and ultimately result in the loss of KKM's rights to explore and
develop the Karakuduk Field.
Currently, the Karakuduk Field is our only oil field. We are in the process
of identifying and evaluating other oil fields for possible acquisition and
development. We have no other significant subsidiaries besides CAP-G and CAP-D.
Shell Capital Loan Agreement
- ----------------------------
We have entered into a loan with Shell Capital Limited to provide up to
$24.0 million in financing for the development of the Karakuduk Field. The loan
subjects us to numerous covenants and events of default. Our ability to obtain
additional debt or equity financing in the future for working capital, general
corporate purposes, capital expenditures, and acquisitions is severely
restricted under the loan, as well as our ability to acquire or dispose of
significant assets and pursue other business opportunities. These restrictions
severely limit our ability to obtain new capital and make us more vulnerable and
less able to react to adverse economic conditions. Our failure to meet the terms
of the loan could result in an event of default and the loss of our investment
in the Karakuduk Field. The terms of the loan are described in "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The financing costs of the loan are significant. A substantial portion of
our future cash flow from operations will be required for debt service and may
not be available for other purposes. We expect $36.0 million to $45.0 million of
our future available net cash flows from the Karakuduk Field to be utilized to
service the loan, depending upon excess cash flows available from operations, if
any, to repay the loan prior to its stated maturity date of September 30, 2004.
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The availability of future cash flows is contingent upon many factors beyond our
control, including successful development of the underlying oil reserves from
the Karakuduk Field, production rates, production and development costs, oil
prices, access to oil transportation routes, and political stability in the
region.
Crude Oil Sales
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We derive all of our revenue through the production and sale of crude oil
from the Karakuduk Field. We are in the early stages of development and only
began generating revenue from the sale of crude oil during 2000. KKM sold
approximately 765,000 barrels of crude oil, of which approximately 604,000
barrels were sold to Shell Trading International Limited ("STASCO"), an
affiliate of Shell Capital, on the export market and an additional 161,000
barrels were sold to various purchasers on the local market in Kazakhstan. Total
oil sales generated $13.76 million, of which $12.27 million was generated from
export sales to STASCO and $1.49 million resulted from local oil sales. Our
financial information relating to operations in the Karakuduk Field is disclosed
in the financial statements for KKM and the consolidated financial statements
for Chaparral, both of which are included as part of this Annual Report on Form
10-K.
STASCO is the only customer responsible for more than 10% of oil sales
revenue in 2000. KKM has a long-term crude oil sale agreement with STASCO for
the sale of 100% of KKM's oil production, net of royalty-in-kind, on the export
market. STASCO accepts title of KKM's crude oil at various delivery points
outside of Kazakhstan. KKM is responsible for obtaining export quotas and all
other permissions from Kazakhstan, Russia, or other relevant jurisdictions
necessary to transport and deliver KKM's oil production to STASCO. STASCO is
responsible for nominating and coordinating an oil tanker, if necessary, and
arranging for the resale/marketing of the crude oil purchased. The crude oil
sales agreement with STASCO is effective for a 5-year term beginning in February
2000, and is renewable thereafter for successive 12-month periods. STASCO may
terminate the crude oil sales agreement if KKM does not nominate a sale for six
consecutive months, KKM enters into a sales agreement with a third-party, we
cease to own at least 50% of KKM, or the loan with Shell Capital is terminated
or repaid. KKM may terminate the crude oil sales agreement if the loan is repaid
in full or STASCO fails to pay amounts due to KKM.
The sales prices to be received by KKM under the crude oil sales agreement
are based upon various factors, including the point of delivery, current market
oil prices, the size and quality of the crude oil delivered, the size and type
of tanker utilized (if any), and applicable flat tanker rates (if any). KKM pays
STASCO a commission on each oil sale, calculated on a sliding scale based upon
total annual crude oil quantities delivered: $0.15 per barrel up to 5 million
barrels, $0.10 per barrel from 5 to 10 million barrels, and $0.05 per barrel
beyond 10 million barrels. All other prices/costs utilized in the sales price
formula are from published sources or our actual costs incurred.
There are six delivery points under the crude oil sales agreement,
including three preferred port facilities on the Black Sea (Novorossiisk,
Odessa, and Ventspills) and three onshore pipeline facilities (Dudkovce,
Feyeshlitke, or Adamovo). KKM must use its best efforts to deliver crude oil to
one of the three port locations. All of KKM's export oil sales to date have been
delivered to the Ukranian port of Odessa. The minimum deliverable quantity is
approximately 460,000 barrels of crude oil for the port locations and 22,000
barrels for the pipelines. KKM has a contractual right to deliver undersized
cargoes to the port facilities, subject to additional freight charges if a
tanker is loaded below its tonnage capacity. Third-party sellers, however, may
offset capacity shortages in the tanker, with STASCO's approval.
Sales prices at the port locations are based upon quoted Urals crude oil
prices from Platt's Crude Oil Marketwire, net of published freight charges
published in both Platt's Dirty Tanker Wire and the Worldscale Tanker Nominal
Freight Scale. Payment is made by STASCO within 30 days of receipt of the final
bill of lading and KKM's invoice for the sale, unless otherwise agreed by both
parties. Sales prices received from pipeline deliveries equal the sales price
received by STASCO from their third party buyers of KKM's crude oil. STASCO
negotiates the best price possible and passes on the proceeds, net of their
applicable sales commission and incidental expenses, to KKM. Payment for onshore
pipeline sales is made on the earlier of 45 days or the date STASCO agrees to a
sales price with the third party buyer.
The crude oil sales agreement also includes a provision for KKM's delivery
of crude oil to the Caspian Pipeline Consortium pipeline, which is currently
being constructed from the Tengiz field in Kazakhstan to Novorrossiisk. KKM is
in the early stages of evaluating alternatives available, if any, to connect to
the Consortium's pipeline from the Karakuduk Field.
2
The government of the Republic of Kazakhstan requires oil producers within
Kazakhstan to supply a portion of their crude oil production to the local market
to meet domestic energy needs. Local market oil prices are significantly lower
than prices obtainable on the export market. In 2000, the government required
KKM to sell approximately 161,000 barrels of crude oil, or 21% of its total oil
sales, to the local market, for prices approximately $8 to $10 per barrel below
export market prices. We are currently engaged in informal discussions with the
government to enforce KKM's contractual rights for the 100% export of all
hydrocarbons produced from the Karakuduk Field. We believe we will be successful
in working with the government to minimize or eliminate KKM's future local sales
requirements. If we are unsuccessful, however, we may be required to initiate
legal proceedings within Kazakhstan or make a claim under our political risk
insurance policy for the breach of our agreement by the government of
Kazakhstan. We can provide no assurances that legal proceedings within
Kazakhstan would be successful, or that any potential insurance proceeds
available under the political risk policy would fully offset losses incurred due
to additional local sales requirements. Additionally, the initiation of formal
legal proceedings could lead to more material restrictions of our contractual
rights, including our right to develop the Karakuduk Field or sell any of our
crude oil production on the export market. The future loss of revenue from local
sales may be significant enough to prevent us from generating a profit from the
Karakuduk Field or generate enough cash flow to repay the loan to Shell Capital.
See "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Risks of Oil and Gas Activities
- --------------------------------
The current market for oil is characterized by instability. This
instability has caused fluctuations in world oil prices in recent years and
there is no assurance of any price stability in the future. The production and
sale of oil from the Karakuduk Field may not be commercially feasible under
market conditions prevailing in the future. The price we receive for our oil may
not be sufficient to generate revenues in excess of our costs of production or
provide sufficient cash flow to service our debt obligations. If not, we will be
unable to generate profits and could default on our loan.
We are uncertain about the prices at which we will be able to sell oil that
we produce. Our estimated future net revenue from oil sales is highly dependent
on the price of oil, as well as the amount of oil produced. The volatility of
the energy market makes it difficult to estimate future prices of oil. Various
factors beyond our control affect these prices. These factors include:
o domestic and worldwide supplies of oil;
o the ability of the members of the Organization of Petroleum Exporting
Countries, or OPEC, to agree to and maintain oil price and production
controls;
o political instability or armed conflict in oil-producing regions;
o the price of foreign imports;
o the level of consumer demand;
o the price and availability of alternative fuels;
o the availability of pipeline capacity; and
o changes in existing federal regulation and price controls.
It is likely that oil prices will continue to fluctuate as they have in the
past. Current oil prices are not representative of oil prices in either the near
or long-term. We do not expect oil prices to maintain current price levels and
do not base our capital spending decisions on current market prices.
No assurances can be given that we will be able to successfully develop,
produce, and market the oil reserves underlying the Karakuduk Field or
elsewhere. The development of oil reserves inherently involves a high degree of
3
risk, even though the reserves are proved. Our risks are increased because our
activities are concentrated in areas where political or other unknown
circumstances could adversely affect commercial development of the reserves.
Costs necessary to acquire, explore, and develop oil reserves are substantial.
No assurances can be given we will recover the costs incurred to acquire and
develop the Karakuduk Field. If the costs incurred exceed our revenues, our
operations will not be profitable. If we fail to generate sufficient cash flow
from operations to repay the loan, we may lose our entire investment in the
Karakuduk Field pledged as collateral to Shell Capital.
The development of oil reserves is a high risk endeavor and is frequently
marked by unprofitable efforts, such as:
o drilling unproductive wells;
o drilling productive wells which do not produce sufficient amounts of
oil to return a profit; and
o production of developed oil reserves which cannot be marketed or
cannot be sold for adequate market prices.
There are many additional risks incident to drilling for and producing oil
and gas. These risks include blowouts, cratering, fires, equipment failure and
accidents. Any of these events could result in personal injury, loss of life and
environmental and/or property damage. If such an event does occur, we may be
held liable and we are not fully insured against these risks. In fact, many of
these risks are not insurable. The occurrence of such events that are not fully
covered by insurance may require us to pay damages, which would reduce our
profits. As of March 30, 2001, we have not experienced any material losses due
to these events.
Risks of Foreign Operations
- ---------------------------
Our ability to develop the Karakuduk Field is dependent on fundamental
contracts that we have with governmental agencies in Kazakhstan, including KKM's
Agreement with the Ministry of Energy and Natural Resources for Exploration,
Development, and Production of Oil in the Karakuduk Oil Field and KKM's
petroleum license with the government allowing KKM to operate and develop the
Karakuduk Field. Kazakhstan is a relatively new country and there is uncertainty
as to the status of Kazakh law, the stability of the country and the region, and
the autonomy of the parties involved with us in Kazakhstan. There is a risk the
government of Kazakhstan may arbitrarily cancel our contracts or may force them
into re-negotiation. Cancellation or re-negotiation of contracts could result in
less favorable terms for us and could reduce or eliminate revenues.
The laws of the Republic of Kazakhstan govern our operations and a number
of our significant agreements. As a result, we may be subject to arbitration in
Kazakhstan or to the jurisdiction of the Kazakh courts. Even if we seek relief
in the courts of the United States, we may not be successful in subjecting
foreign persons to the jurisdiction of those courts. In addition, we may be
prevented from enforcing our rights with respect to government agencies,
regulatory bodies, or other entities of Kazakhstan because they may consider
themselves immune from the jurisdiction of any court.
The exportation of oil from Kazakhstan depends on access to transportation
routes, particularly the Russian pipeline system. Transportation routes are
limited in number and access to them is regulated and restricted. If any of our
agreements relating to oil transportation or marketing are breached, or if we
are unable to renew such agreements upon their expiration, we may be unable to
transport or market our oil. Also, a breakdown of the Kazakhstan or Russian
pipeline systems could seriously delay or even halt our ability to sell oil. Any
such event would result in reduced revenues.
Obtaining the necessary quotas and permissions to export production through
the Russian pipeline system can be extremely difficult, if not impossible in
some circumstances. Our agreements with the government of the Republic of
Kazakhstan grant us the right to export, and to receive export quota. However,
we cannot provide any assurances that we will receive export quota or any other
approvals required to export and deliver our production in the future.
KKM has entered into marketing service agreements with KazakhOil and
KazTransOil JSC, the state owned pipeline transportation company, whereby
KazakhOil and/or KazTransOil will assist KKM with export oil sales under the
4
crude oil sales agreement. The services provided include assistance in obtaining
export quotas from the government of the Republic of Kazakhstan, consulting on
procedures required for the nomination and delivery of oil sales, obtaining
other necessary approvals and permissions, and preparation of relevant
documentation. KKM utilized the services of both KazakhOil and KazTransOil to
facilitate export oil sales during 2000 and expects to continue to do so in
future periods.
Political Risk Insurance
- ------------------------
In order to counteract some of these potential difficulties, we obtained
political risk insurance through the Overseas Private Investment Corporation
("OPIC"), covering 90% of the book value of our investment in KKM up to a
maximum of $50.0 million. Our OPIC policy provides coverage for acts, which
could be committed against us by the government of the Republic of Kazakhstan or
other parties in times of severe political instability. The OPIC policy
generally provides the following types of risk coverage:
o Currency Inconvertibility. Currency restrictions, which might be
imposed by the government of the Republic of Kazakhstan to prevent or
defer our recovery of our investment in the Karakuduk Field, including
revoking KKM's right to retain U.S. dollar proceeds from oil sales
outside of Kazakhstan or to convert local currency into U.S. dollars
for repayment of our investment;
o Expropriation. Acts attributable to the government of the Republic of
Kazakhstan that are violations of international law or an abrogation,
repudiation or material breach of our agreements with the government.
In order to qualify for coverage, the act of expropriation must
continue without interruption for at least six months and prevent us
from exercising our fundamental rights under our agreements,
exercising control over our investment the Karakuduk Field, or
recovering our investment in the Karakuduk Field;
o Political Violence. The loss or impairment of our investment due to
politically motivated violent acts, including war, revolution,
insurrection, or politically motivated civil strife, terrorism and
sabotage; and
o Interference with Operations. The loss or impairment of our investment
due to political violence lasting more than six months.
While the OPIC policy provides significant political risk coverage, it does
not address political risks outside of the Republic of Kazakhstan or cover every
contingency within Kazakhstan. The OPIC policy does not cover commercial risks,
whatsoever. If social, political, or economic strife in the region hinder KKM or
our operations in a manner that is not covered by our OPIC policy, we will bear
the full burden of any resulting loss or damage. If we do have a future claim
under the OPIC policy, we may be required to assign all or a portion of our
rights to the Karakuduk Field to OPIC before any insurance payments will be
made. The OPIC policy only covers 90% of our book value of our investment in
KKM, but there is no assurance any proceeds received will cover 90% of our
actual losses incurred or be sufficient to cover our outstanding indebtedness
repayable to our creditors.
Environmental Regulations
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We must comply with laws of the Republic of Kazakhstan and international
requirements that regulate the discharge of materials into the environment.
Furthermore, our loan and OPIC political risk insurance policy both require that
we comply with the World Bank's environment, health, and safety guidelines for
onshore oil and gas development. Environmental protection and pollution control
could, in the future, become so restrictive as to make production unprofitable.
Furthermore, we may be exposed to potential claims and lawsuits involving such
environmental matters as soil and water contamination and air pollution. We are
currently in compliance with all local and international environmental
requirements and are closely monitored by the environmental authorities of the
Republic of Kazakhstan. We have not made any material capital expenditures for
environmental control facilities and have no plans to do so in the foreseeable
future.
Competition
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We compete in all areas of the exploration and production segment of the
oil and gas industry with a number of other companies. These companies include
large multinational oil and gas companies and other independent operators with
5
greater financial resources and more experience than Chaparral. We do not hold a
significant competitive position in the oil industry. We compete both with major
oil and gas companies and with independent producers for, among other things,
rights to develop oil and gas properties, access to limited pipeline capacity,
procurement of available materials and resources, and hiring qualified local and
international personnel.
Employees
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As of March 30, 2001, we had 6 full-time employees and one consultant. KKM
had 161 employees and retains independent contractors on an as needed basis
through us. We believe that our relationship with our employees and consultants
is good.
Corporate Information
- ---------------------
Chaparral was incorporated under the laws of the State of Colorado in 1972.
In 1999, Chaparral completed a 60 to 1 reverse stock split and reincorporated
under the laws of the State of Delaware.
Our address is 16945 Northchase Drive, Suite 1620, Houston, Texas 77060,
and our telephone number is (281) 877-7100.
Special Note Regarding Forward-Looking Statements
- -------------------------------------------------
Some of the statements in this Annual Report on Form 10-K constitute
"forward-looking statements." Forward-looking statements relate to future events
or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "estimates," "believes," "predicts," "potential," "likely,"
or "continue," or by the negative of such terms or comparable terminology.
Forward-looking statements are predictions based on current expectations that
involve a number of risks and uncertainties. Actual events may differ
materially. In evaluating forward-looking statements, you should consider
various factors, including the risks discussed above in "Risks of Oil and Gas
Activities" and "Risks of Foreign Operations." These factors may cause our
actual results to differ materially from any forward-looking statement.
Although we believe that these statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements, and
you are encouraged to exercise caution in considering such forward-looking
statements. Unless otherwise required by law, we are not under any duty to
update any of the forward-looking statements after the date of this Annual
Report on Form 10-K to conform these statements to actual results.
ITEM 2. PROPERTIES
Properties
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The Karakuduk Field is located in the Mangistau Region of the Republic of
Kazakhstan. The license to develop the Karakuduk Field covers an area of
approximately 16,900 acres and is effective for a 25 year term, which may be
extended by production. KKM entered an agreement to develop the Karakuduk Field
with Kazakhstan's Ministry of Energy and Natural Resources in 1995.
The Karakuduk Field is geographically located, approximately 227 miles
northeast of the regional capital city of Aktau, on the Ust-Yurt Plateau. The
closest settlement is the Say-Utes Railway Station approximately 51 miles
southeast of the field. The ground elevation varies between 590 and 656 feet
above sea level. The region has a dry, continental climate, with fewer than 10
inches of rainfall per year. Mean temperatures range from minus 25 degrees
Fahrenheit in January to 100 degrees Fahrenheit in July. The operating
environment is similar to that found in northern Arizona and New Mexico in the
United States.
The Karakuduk Field structure is an asymmetrical anticline located on the
Aristan Uplift in the North Ustyurt Basin. Oil was discovered in the structure
in 1972, when Kazakhstan was a republic of the former Soviet Union, from
Jurassic age sediments between 8,500 and 10,000 feet. The former Soviet Union
drilled 22 exploratory and development wells to delineate the Karakuduk Field,
discovering the presence of recoverable oil reserves. The productive area of the
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Karakuduk Field is estimated to contain a minimum of seven separate productive
horizons in the Jurassic formation. None of the original wells were ever placed
on commercial production prior to KKM obtaining the rights to the Karakuduk
Field.
The Karakuduk Field is approximately 18 miles north of the main utility
corridor, which includes the Makat-Mangishlak railroad, the
Mangishlak-Astrakghan water pipeline, the Beyneu-Uzen high voltage utility
lines, and the Uzen-Atrau-Samara oil and gas pipelines. KKM, according to its
agreements with the Republic of Kazakhstan, has a right to use the existing oil
export pipeline and related utilities. KKM also has a contract with KazTransOil
granting KKM the right to use the export pipeline for transportation of crude
oil to local and export markets, subject to transit quota restrictions, and as a
temporary storage facility until the produced hydrocarbons are sold by KKM.
As of March 30, 2001, KKM has 23 productive wells in the Karakuduk Field,
of which 16 are new wells and 7 are re-completions of previously existing
delineation wells. KKM implemented an aggressive drilling program during 2000,
drilling a total of 12 development wells and re-completing 4 delineation wells
using a combination of two drilling rigs and a workover rig. An additional 4
wells have been successfully completed subsequent to year end, including 1
re-completion of a previously existing well. Another well has reached total
depth and is expected to be completed during April 2001. KKM has successfully
completed every well drilled to date. Oil has been recovered from the J-1, J-4,
J-8, and J-9 formations, along with new discoveries in the J-6 and J-7 horizons.
The gross daily productive capacity of the 23 producing wells is
approximately 12,300 barrels of oil per day. Due to current facility
constraints, however, KKM is only capable of processing and transporting
approximately 7,500 barrels of oil per day into the export pipeline. KKM has
made significant progress in resolving existing facility constraints, but has
not been able to keep up with productive capacity given the success of our
drilling program. KKM is working to alleviate all facility constraints, through
expansion of its oil storage capacity, upgrading existing and installing
additional gathering and processing facilities, commissioning an oil sales
pipeline connecting to the export pipeline, and installing and completing a
central processing unit. KKM expects its gross capacity to deliver oil
production into the main export pipeline to be incrementally extended to
approximately 8,500 barrels of oil per day by July 2001 and approximately 11,500
barrels of oil per day before September 2001. Completion of the central
processing unit by mid 2002 will allow gross delivery capacity to exceed 25,000
barrels of oil per day.
KKM currently has one drilling rig and one workover rig operating in the
Karakuduk Field. A second drilling rig was released as of April 1, 2001, but is
expected to be made available to KKM later in 2001, if needed. KKM expects to
drill a total of 14 development wells in 2001 and re-complete approximately 5
existing delineation wells. We estimate up to 108 oil wells will be required to
fully develop the Karakuduk Field, of which 28 would eventually be converted
into water injection wells. The planned development program includes a pressure
maintenance operation that our management believes could result in increased
production.
Crude oil production is being processed at a pilot facility and trucked to
the KKM pump station adjacent to the export pipeline. The pump station is
approximately 18 miles from the Karakuduk Field and was placed in service in
April 2000. KKM is constructing an 18-mile pipeline, capable of transporting up
to 18,000 barrels of oil per day from the Karakuduk Field to the export pipeline
terminal. We anticipate the pipeline will be operational in July 2001. Until the
pipeline is operational, KKM will continue to truck oil production to the pump
station at the export pipeline. KKM is currently sourcing additional oil trucks
to increase crude oil trucking capacity in the field, along with larger pumps to
increase the daily production which can be pumped into the export pipeline.
Maximum crude oil trucking capacity is estimated at 8,800 barrels of oil per
day.
KKM has completed a 3-D seismic study of the Karakuduk Field. The seismic
data has been processed and is being utilized to optimize the well drilling
order for KKM's drilling program and further define the possible total
productive capability of the Karakuduk Field.
See also "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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Reserves
--------
As of December 31, 2000, the Karakuduk Field has total estimated proved
reserves of approximately 33.05 million barrels, net of government royalty, of
which we have a proportional equity interest in approximately 16.52 million
barrels, based upon our 50% equity interest in KKM. The reserve disclosure is
based upon a reserve study of the Karakuduk Field conducted by Ryder Scott,
including data available subsequent to December 31, 2000.
The reserve estimates as of December 31, 1999 have been restated from the
original presentation, revising the original disclosure of 33.79 million barrels
of proved reserves downward by 23.72 million barrels to 10.07 million barrels of
proved reserves. The restatement is to reflect the SEC's definition of proved
undeveloped reserves, which differs from the definition employed by the Society
of Petroleum Engineers.
Prior to signing the loan with Shell Capital, we did not disclose any
proved reserves relating to the Karakuduk Field due to the lack of necessary
financing. We are responsible for providing 100% of the funding necessary for
the development of the Karakuduk Field, which is not provided by third-party
sources. While we have invested significant amounts of capital into the
Karakuduk Field, the funds necessary to complete the field infrastructure and
execute a practical drilling program were not readily available to us prior to
the loan with Shell Capital, including related equity commitments necessitated
by the loan.
No reserve estimates have been filed with any Federal authority or other
agency since January 1, 2000.
Net Quantities of Oil and Gas Produced
--------------------------------------
The following table summarized sales volumes, sales prices and production
cost information for our net oil and gas production for each of the last three
fiscal years ended December 31, 2000:
As of the Year Ended December 31,
----------------------------------
1998 1999 2000
---- ---- ----
Net sales volumes
Oil (bbls) -- 29,625 382,500
Gas (mcf) -- -- --
Average sales price
Oil (per bbl) $ -- $ -- $ 17.98
Gas (per mcf) $ -- $ -- $ --
Average production cost (per bbl) $ -- $ -- $ 4.81
KKM did not sell any commercial quantities of crude oil prior to 2000. The
average sales price is shown net of related transportation costs. Average gross
sales revenue per barrel was approximately $22.18, while average transportation
costs per barrel was approximately $4.20.
Net oil production represents our 50% equity interest in KKM's production,
but does not reflect our right under the agreement with the government of the
Republic of Kazakhstan to receive 65% of KKM's cash flow from oil sales, net of
royalty, on a quarterly basis until our loan to KKM has been fully repaid. The
remaining 35% of net cash flows is used by KKM to meet capital and operating
expenditures. We may waive receipt of quarterly loan repayments, in whole or in
part, to provide KKM with additional working capital.
KKM sold some quantities of test production prior to the commercial
viability of our investment in the Karakuduk Field, which are not reported as
part of the required disclosures for the Statement of Financial Accounting
Standards No. 69 ("SFAS 69"), Disclosures About Oil and Gas Producing
Activities, or included in the table above. Our share of KKM's sales of test
8
production during 1999 totaled 162,325 barrels of oil, which were accounted for
on a cost recovery basis. The average sales price per barrel received by KKM was
$7.00, net of transportation costs.
Productive Wells and Acreage
----------------------------
As of December 31, 2000, we had interests in 19 gross productive oil wells
(9.5 net oil wells), and no producing gas wells. There were no multiple
completion wells. Production was from 16,900 gross acres, of which 3,382 acres
are developed.
Undeveloped Acreage
-------------------
As of December 31, 2000, 7,918 net acres in the Karakuduk Field are
undeveloped.
Drilling Activity
-----------------
During the last three fiscal years ended December 31, 2000, our net
interests in exploratory and development wells drilled were as follows:
Exploratory Wells, Net Development Wells, Net
Year Ended ---------------------- ----------------------
December 31, Productive Dry Productive Dry
----------- ---------- --- ---------- ---
1998 1.0 -- -- --
1999 .5 -- -- --
2000 1.5 -- 6.5 --
All wells are located in the Republic of Kazakhstan.
Present Activities.
-------------------
As of March 30, 2001, KKM has successfully completed an additional 4 gross
development wells (2 net), and is has reached total depth on another gross
development well (.5 net) which is expected to be completed in April 2001.
ITEM 3. LEGAL PROCEEDINGS
We do not have any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the fiscal
quarter ended December 31, 2000.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently quoted on the Nasdaq SmallCap Market under
the symbol "CHAR."
As of March 30, 2001, we had 1,853 stockholders of record of our common
stock. No dividend has been paid on our common stock, and there are no plans to
pay dividends in the foreseeable future. We cannot pay any dividends without
Shell Capital's consent while the loan is outstanding.
The following table shows the range of high and low bid prices for each
quarter during our last two calendar years ended December 31, 2000 and 1999, as
reported by the National Association of Securities Dealers, Inc.. Prices are
adjusted for our 60 to 1 reverse common stock split in April 1999.
Price Range
-----------
Fiscal Quarter Ended High Low
-------------------- ---- ---
March 31, 1999 $58.373 $22.590
June 30, 1999 45.500 11.000
September 30, 1999 35.000 9.250
December 31, 1999 35.000 4.000
March 31, 2000 15.188 8.000
June 30, 2000 9.000 5.875
September 30, 2000 10.500 3.375
December 31, 2000 8.125 3.250
Under Marketplace Rules of The Nasdaq Stock Market, Inc. ("Nasdaq")
governing qualitative and quantitative standards for listing, stockholder
approval is required prior to the issuance of common stock which will result in
a change of control of the issuer or the issuance of common stock equal to 20%
or more of the greater of book or market value of our common stock outstanding
immediately before the transaction. Chaparral did not obtain stockholder
approval for either the conversion of its 8% Non-Negotiable Convertible
Promissory Notes, or notes, into 11,690,259 shares of our common stock on
September 21, 2000 or the issuance of 1,612,903 shares of common stock to Capco
Resources, Ltd. ("Capco"). The note conversion and the Capco stock subscription
are discussed in "Item 13 - Certain Relationships and Related Transactions."
On March 16, 2001, Chaparral received a letter from Nasdaq notifying us
that we may be in violation of the continued listing requirements with respect
to obtaining stockholder approval for the note conversion and the Capco stock
subscription, as stipulated by Nasdaq Marketplace Rules 4310(i)(1)(B) and
4310(i)(1)(D)(ii). Consequently, Nasdaq is reviewing Chaparral's eligibility for
continued listing on The Nasdaq SmallCap Market and has requested Chaparral's
specific plan to achieve and sustain compliance with all of The Nasdaq SmallCap
Market listing requirements. Chaparral had a meeting with Nasdaq on April 12,
2001, presenting a plan of compliance and discussing the conversion of the notes
and the common stock issued to Capco.
There can be no assurance, however, the outcome of the Nasdaq meeting will
be favorable. If not, Nasdaq could delist our common stock. Being delisted would
have an adverse impact on the liquidity of our common stock and our Series A
Preferred Stock. The possible consequences of delisting could include litigation
and difficulties in raising additional capital, which may be necessary to
continue our operations. In addition, the loan requires us to maintain our
listing on Nasdaq. If we are delisted we may be called in default of the loan
and our investment in the Karakuduk Field could be lost.
If we are delisted from Nasdaq, trading of our common stock may be
conducted on the OTC Bulletin Board or the over-the-counter market. Because
spreads between the "bid" and "asked" prices of common stock quoted by market
makers on the OTC Bulletin Board and the over-the-counter market will likely be
greater than on Nasdaq, our stockholders would likely experience a greater
degree of difficulty in trading our common stock. In addition, there are
significant restrictions imposed by most brokerage houses on the ability of
their brokers to solicit orders or recommend the purchase of stocks that trade
on the OTC Bulletin Board. In the majority of cases, the purchase of stock is
limited to unsolicited offers from private investors, who have to comply with
10
policies and practices involving the completion of time-consuming forms that can
make the handling of lower-priced stocks economically unattractive. Moreover,
most brokerage houses do not permit lower-priced stocks to be used as collateral
for margin accounts or to be purchased on margin. Consequently, our board of
directors believes that the current per share price of our common stock may
limit its effective marketability because of the reluctance of many brokerage
firms and institutional investors to recommend lower-priced stocks to their
clients or to hold them in their own portfolios. The brokerage commission on the
purchase or sale of a lower-priced stock may also represent a higher percentage
of the price than the brokerage commission on a higher-priced issue.
In addition, Chaparral's common stock would be subject to the rules and
regulations of the SEC concerning "penny stocks." The SEC's rules and
regulations generally define a penny stock to be an equity security that is not
listed on Nasdaq or a national securities exchange and that has a market price
of less than $5.00 per share, subject to certain exceptions. The SEC's rules and
regulations require broker-dealers to deliver to a purchaser of penny stock a
disclosure schedule explaining the penny stock market and the risks associated
with it. Various sales practice requirements are also imposed on broker-dealers
who sell penny stocks to persons other than established customers and accredited
investors (generally institutions). In addition, broker-dealers must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. If our common stock is traded on the OTC Bulletin Board
or the over-the-counter market and remains subject to the regulations applicable
to penny stocks, investors may find it more difficult to obtain timely and
accurate quotes and execute trades of our common stock.
There can be no assurance that we will be successful in maintaining our
Nasdaq listing or avoid application of the SEC's penny stock rules if we are
delisted from Nasdaq. Failure to maintain our Nasdaq listing is an event of
default under our Shell Capital loan. We cannot provide any assurance that Shell
Capital would not call us into default if we are delisted from Nasdaq, which
might result in our loss of our investment in the Karakuduk Field.
The following is information as to all securities sold since October 1,
2000, which were not registered under the Securities Act of 1933, as amended:
All sales of unregistered securities from October 1, 2000 to December 31,
2000 have been disclosed by the registrant in our quarterly report for the
quarter ended September 30, 2000 on Form 10-Q.
11
ITEM 6. SELECTED FINANCIAL DATA
As of or for
the Year
Month of Ended
As of or for the Year Ended December 31 December November 30
----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1996
----------------------------------------------------------------------------------------
Oil and gas sales (1)............ -- -- -- -- -- $ 147,000
Total revenues................... -- -- -- -- -- 147,000
Net loss......................... $ (26,803,000) $(5,163,000) $(4,266,000) $(2,603,000) $ (130,000) ( 2,416,000)
Net loss per
common share................... (6.01) (5.63) (5.14) (3.76) (.21) (4.52)
Working capital (deficit)........ (601,000) (2,941,000) (287,000) 3,356,000 * 259,000
Total assets..................... 70,156,000 41,303,000 34,324,000 23,519,000 * 14,498,000
Long-term obligations and
redeemable preferred stock.... 26,528,000 14,776,000 5,060,000 4,710,000 * 1,491,000
Stockholders' equity............. 41,926,000 22,851,000 27,579,000 18,578,000 * 12,114,000
Other Data
Present value of proved reserves(2) 70,281,000 61,312,000 -- -- -- --
Proved oil reserves (bbls)(3).... 16,523,000 10,071,000 -- -- -- --
Proved gas reserves (mcf)........ -- -- -- -- -- --
- -----------------------
* Not applicable due to one month short period ended December 31, 1996.
(1) In 1994, we made a strategic decision to pursue international oil and gas
projects, and, by early 1997 we completely disposed of all domestic oil and
gas properties through sales to third parties.
(2) The present value of proved reserves as of December 31, 1999 has been
restated from the original presentation, revising the original disclosure
of $177,680,000 downward by $116,368,000 to reflect the restatement of our
proportional net interest in KKM's proved reserves as of December 31, 1999.
See footnote (3) below and "Supplemental Information - Disclosures About
Oil and Gas Producing Activities - Unaudited" included in the notes to our
consolidated financial statements for the year ended December 31, 2000.
(3) Proved oil reserves as of December 31, 1999 have been restated from the
original presentation, revising the original disclosure of 33,789,000
barrels of proved oil reserves by 23,718,000 barrels. The restatement is to
reflect the SEC's definition of proved undeveloped reserves, which differs
from the definition as accepted by the Society of Petroleum Engineers. See
"Item 2 Properties - Reserves."
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1. Liquidity and Capital Resources
- ----------------------------------
General Liquidity Considerations.
- ---------------------------------
Going Concern
- -------------
Our financial statements have been presented on the basis we are a going
concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. We are responsible for providing
100% of the funding for the development of the Karakuduk Field not provided from
oil sales or third party sources. We have recognized recurring operating losses
and have a working capital deficiency as of December 31, 2000. In addition,
there are uncertainties relating to our ability to meet all expenditure and cash
flow requirements through fiscal year 2001, which could result in a default of
our loan with Shell Capital and the loss of our investment in the Karakuduk
Field.
We are seeking to alleviate these conditions by increasing cash flows
available from the sale of crude oil production from the Karakuduk Field. We
expect to finance the development of the Karakuduk Field primarily through the
production and sale of crude oil, which is currently limited to approximately
7,000 barrels of oil per day, net of royalty, by short-term facility
constraints. Additionally, the government of Kazakhstan has required KKM to sell
a portion of its crude oil production on the local market, which generates
substantially less revenue than oil sold on the export market. KKM is attempting
to resolve both of these issues by removing field facility constraints as
quickly as possible and requesting that the government to reduce or eliminate
local oil sales requirements imposed upon KKM. Management expects to
incrementally increase daily production, net of royalty, to approximately 8,000
barrels of oil per day by July 2001 and up to 10,800 barrels of oil per day by
September 2001 as various field facility limitations are addressed. We are also
trying to obtain additional debt financing to cover any deficiencies, which may
occur in the near term.
No assurances can be provided, however, that we will be able to increase
our operational cash flow to meet working capital requirements or that
additional debt financing will be available. Additionally, we are required to
obtain Shell Capital's approval before issuing any additional equity or debt
securities, which may hinder our attempts to raise the necessary working capital
to continue operations. If we are unsuccessful in raising additional capital or
generating sufficient cash flows from operations, our loan to Shell Capital may
be called into default and/or our investment in the Karakuduk Field may be lost.
Liquidity and Capital Resources
- -------------------------------
We are presently engaged in the development of the Karakuduk Field, which
requires substantial cash expenditures for drilling costs, well completions,
workovers, oil storage and processing facilities, pipelines, gathering systems,
plant & equipment (generators, pumps, communications, etc.) and other field
facilities. As of March 30, 2001, we have invested approximately $53.2 million
in the development of the Karakuduk Field and have drilled or re-completed 23
productive wells, including 4 subsequent to December 31, 2000. During 2001,we
plan to drill a total of 14 wells, including the 4 already completed,
re-complete 5 existing delineation wells, and expand field facilities to
increase productive capacity in excess of 25,000 barrels of oil per day by
mid-2002. Total capital expenditures for 2001 are estimated at $32.5 million in
comparison to total capital expenditures of $23.6 million incurred in 2000.
Capital expenditures are estimated at least $85.0 to $100.0 million for the
period from 2002-2005.
We expect to finance the continued development of the Karakuduk Field
primarily through cash flows from the sale of crude oil. In 2000, KKM sold
approximately 765,000 barrels of crude oil for $13.76 million, net of
transportation costs, of which $6.6 million in revenue was attributable to the
quarter ended December 31, 2000. Total productive capacity is currently in
excess of 12,300 barrels of oil per day, but daily production, net of royalty,
is limited to approximately 7,000 barrels due to short-term field facility
constraints. We expect to increase net daily production to approximately 8,000
barrels of oil per day by July 2001 and to 10,800 barrels of oil per day by
September 2001, as various facility limitations are removed. Average daily
production was approximately 1,100 barrels of oil per day as of December 31,
13
1999. Relatively high oil prices are also expected to continue in the
short-term, which should positively impact KKM's net revenues from oil sales on
the export market.
Our highest priority in the short-term is to alleviate facility constraints
as quickly as possible to obtain a level of operational cash flow sufficient to
fund our cash requirements. Over the next 3 to 6 months, we anticipate $3.0 to
$5.0 million in additional working capital will be necessary to achieve this
objective. As of March 30, 2001, we have borrowed a total of $23.1 million out
of the $24.0 million available from the loan, leaving only $900,000 in
additional borrowings available to cover any working capital shortfalls.
Therefore, we are presently in discussions with Shell Capital to either increase
the existing debt facility or implement a revolving line of credit to meet any
working capital deficiencies that may arise. If we are unable to obtain
additional debt financing from Shell Capital, we will be required to look for
additional debt or equity financing from other sources. We can provide no
assurances that any other sources of capital will be available or, if available,
will be on terms favorable to Chaparral, however. Additionally, Shell Capital
must approve any capital or debt financing transactions we may enter into.
Otherwise, we may be in default of our Loan and our investment in the Karakuduk
Field may be lost.
Our short and long-term liquidity is also impacted by local oil sales
obligations, imposed by the government of Kazakhstan on oil and gas producers to
supply local energy needs. Although KKM has a right to export, and receive
export quota for, 100% of the production from the Karakuduk Field under the
terms of its agreement, KKM was required to sell approximately 20% of its crude
oil on the domestic market in 2000. The domestic market, however, does not
permit world market prices to be obtained, resulting in approximately $8 to $11
less cash flow per barrel on 2000 local oil sales. We are taking steps to reduce
or eliminate our local market obligations, including petitioning the government
to enforce our rights under KKM's agreement and seeking a holiday from all local
market obligations during the early stages of development of the Karakuduk
Field. While management believes we will be successful in minimizing KKM's local
sales requirements, some level of future local market obligation is expected for
all oil and gas producers in Kazakhstan, including KKM. If we are unsuccessful
in reducing or eliminating our future local sales obligations, however, we may
be required to initiate legal proceedings within Kazakhstan or make a claim
under our political risk insurance policy with OPIC for the breach of our
agreement by the government of Kazakhstan. We can provide no assurances that
legal proceedings within Kazakhstan would be successful, or that any potential
insurance proceeds available under the OPIC policy would fully offset losses
incurred due to additional local sales requirements. Additionally, the
initiation of formal legal proceedings could lead to more material restrictions
of our contractual rights, including our right to develop the Karakuduk Field or
sell any of our crude oil production on the export market whatsoever.
Shell Capital loan.
- -------------------
As of December 31, 2000, our only significant outstanding indebtedness is
our loan with Shell Capital. We entered into the loan on November 1, 1999, to
provide up to $24.0 million of financing for the development of the Karakuduk
Field and have drawn down a total of $23.1 million of the available facility as
of March 30, 2001. The loan is available for drawdown until the earlier of
September 30, 2001 or project completion. Project completion occurs when various
conditions are met by us and KKM, including, but not limited to: (i) receipt by
Shell Capital of an independent engineer's reserve report evidencing proved
developed reserves of at least 30.0 million barrels in the Karakuduk Field, (ii)
sustaining average gross production of 13,000 barrels of oil per day from the
Karakuduk Field for a period of 45 consecutive days, (iii) sustaining water
injection at an average rate of 15,000 barrels per day over 45 consecutive days,
(iv) injection of lift gas into one well over a 24 hour period, and (v) various
other financial and technical milestones. We anticipate that we will not reach
project completion as presently defined on or before September 30, 2001, and
that certain technical requirements of project completion are not necessary or
prudent to perform in the time frame specified under the loan. We plan to
re-negotiate the definition of project completion prior to September 30, 2001.
The loan accrues interest at an annual rate of the London Interbank Offered
Rate ("LIBOR") plus 17.75%, compounding quarterly prior to project completion.
The annual interest rate is reduced to LIBOR plus 12.75% after project
completion. Prior to project completion, an interest amount, equal to annual
rate of LIBOR plus .50%, is payable quarterly to Shell Capital, along with a
commitment fee equal to an annual rate of 1.5% of the undrawn portion of the
$24.0 million debt facility. The remaining unpaid interest is capitalized to the
loan at the end of each quarter. After project completion, all quarterly
interest on the outstanding loan is fully due and payable at the end of each
calendar quarter.
14
Principal payments, including any capitalized interest, are due on
quarterly reduction dates, beginning with the first calendar quarter ending on
the earlier of 60 days following project completion or December 31, 2001.
Minimum principal payments, based upon percentages of the principal outstanding
as of project completion, are set out in the loan and ensure full settlement of
the loan by September 30, 2004, the final maturity date. Mandatory prepayments
of principal outstanding are required on each reduction date out of any excess
cash flow available after consideration of Chaparral's and KKM's permitted
budgeted expenditures for the following 45 days and all fees, interest, and
principal payments scheduled on such reduction date. As of March 30, 2001, we
expect approximately $1.0 million of mandatory principal payments will be due on
December 31, 2001 and approximately $6.5 million of additional principal will be
payable throughout 2002.
In connection with finalizing the loan, we also issued a warrant to Shell
Capital to purchase up to 15% of our outstanding common stock. The warrant is
non-transferable and will be exercisable on June 30, 2001. The warrant contains
registration rights and is subject to anti-dilution provisions. As of March 30,
2001, the warrant represents the right to purchase up to 1,785,455 shares of our
common stock at an exercise price of $9.79 per share.
The loan subjects us to a significant number of restrictions, including
various representations and warranties, positive and negative covenants, and
events of default. These restrictions include, but are not limited to, the
following:
o Pledge of Assets. We pledged substantially all of our assets to Shell
Capital, including our interest in the Karakuduk Field. If an event of
default occurs under the loan and is not timely cured, Shell Capital
is entitled to remedies, including the right to accelerate repayment
of the loan and obtain our rights to the Karakuduk Field.
o Business Alteration. We cannot engage in any other business except the
ownership of KKM and the operation of the Karakuduk Field without the
prior consent of Shell Capital.
o Change in Control. We cannot enter into any transaction where a
"group" as defined in the Securities Act of 1934 acquires or otherwise
gains control of 20% or more of our outstanding shares of voting
stock. Some transactions are exempt from this restriction, including,
the conversion of our notes, conversion of our outstanding Series A
Preferred Stock, the exercise of the Shell warrant, and a grant of
non-statutory or statutory options to purchase up to 15% of our
outstanding common stock to our officers, directors, employees, and
consultants (subject to anti-dilution provisions). Furthermore, Allen
& Company and Whittier Ventures, LLC, have agreed not to let their
ownership in us fall below 20%, unless otherwise agreed with Shell
Capital.
o Charged Accounts. We must retain all cash receipts from oil sales,
proceeds from the loan, and any other funds raised through approved
equity or debt offerings in pledged bank accounts (the "Charged
Accounts"). The Charged Accounts are controlled by Shell Capital. We
retain title to the Charged Accounts, but Shell Capital directs all
cash movements at our request. On a monthly basis, we request
transfers of funds from the Charged Accounts into specific operating
accounts controlled directly by us or by KKM, respectively.
o Cash Expenditures. We must expend funds in accordance with capital and
operating budgets approved by Shell Capital on an annual basis, unless
otherwise approved by Shell Capital.
o Project Completion. KKM must reach project completion on or before
September 30, 2001. Failure to reach project completion is an event of
default under the loan.
o Share Capital. We cannot purchase, issue, or redeem any of our share
capital without the prior approval of Shell Capital.
o Future Indebtedness. We cannot borrow money, other than trade debt,
without the approval of Shell Capital.
o Sale of Significant Assets. We cannot dispose of any significant
assets, including capital stock in our subsidiaries, without the
approval of Shell Capital.
15
o Leases. Without Shell Capital's approval, KKM cannot enter into any
lease or license arrangement with annual payments in excess of $1.0
million and we will not enter into any lease or license arrangement
with annual payments in excess of $200,000.
o Dividends. KKM cannot pay dividends prior to project completion, and
then only subject to Shell Capital's approval. We cannot pay any
dividends without Shell Capital's consent.
o OPIC Insurance. We must maintain OPIC political risk insurance
throughout the duration of the loan.
o Hedge Agreement. We will not cancel or terminate the hedging contracts
entered into as part of the loan or enter into any other hedging
transaction without Shell Capital's consent.
The terms and conditions and related financing costs of the loan are
significant. We estimate approximately $36.0 to $45.0 million of future cash
flows will be necessary to fully repay the loan and all accrued interest and
fees thereon, depending upon excess cash flows available from operations to
repay the loan prior to schedule repayments. Future cash flows from operations
required for debt service will not be available for other purposes. Our ability
to obtain additional debt or equity financing in the future for working capital,
capital expenditures, or acquisitions is also restricted, as well as our ability
to acquire or dispose of significant assets or investments. These restrictions
may make us more vulnerable and less able to react to adverse economic
conditions. The failure of Chaparral to meet the terms of the loan, including
the deadline for project completion, could result in an event of default and the
loss of our investment in the Karakuduk Field.
Capital Commitments and Other Contingencies
- -------------------------------------------
Under the terms of our license with the government of the Republic of
Kazakhstan, KKM was committed to spend a minimum of $30.0 million and drill a
minimum of 8 wells on or before June 30, 2000. KKM did not timely satisfy the
work commitments of the license as of June 30, 2000, but received a letter from
Kazakhstan's licensing authority on July 4, 2000 stating that due to KKM's
activities and expenditures to date there were "no grounds for termination or
suspension of the operation of the license." While the letter was not a formal
amendment to the license, KKM has been advised by its Kazakhstan legal counsel,
the Law Firm Grata, that the license is not in default and a formal amendment
should not be expected from the licensing authority. KKM fulfilled all of its
license commitments as of September 30, 2000, and is not subject to any further
minimum capital or work obligations other than to continue to develop the
Karakuduk Field in accordance with its agreement with the government.
Our operations may be subject to other regulations by the government of the
Republic of Kazakhstan or other regulatory bodies responsible for the area in
which the Karakuduk Field is located. In addition to taxation, customs
declarations and environmental controls, regulations may govern such things as
drilling permits and production rates. Drilling permits could become difficult
to obtain or prohibitively expensive. Production rates could be set so low that
they would make production unprofitable. These regulations may substantially
increase the costs of doing business and may prevent or delay the starting or
continuation of any given exploration or development project.
All regulations are subject to future changes by legislative and
administrative action and by judicial decisions. Such changes could adversely
affect the petroleum industry in general, and us in particular. It is impossible
to predict the effect that any current or future proposals or changes in
existing laws or regulations will have on our operations.
Commodity Prices for Oil
- ------------------------
Our revenues, profitability, growth and value are highly dependent upon the
price of oil. Market conditions make it difficult to estimate prices of oil or
the impact of inflation on such prices. Oil prices have been volatile, and it is
likely they will continue to fluctuate in the future. Various factors beyond our
control affect prices for oil, including supplies of oil available worldwide and
in Kazakhstan, the ability of OPEC to agree to maintain oil prices and
16
production controls, political instability or armed conflict in Kazakhstan or
other oil producing regions, the price of foreign imports, the level of consumer
demand, the price and availability of alternative fuels, the availability of
transportation routes and pipeline capacity, and changes in applicable laws and
regulations.
Inflation
- ---------
We cannot control prices received from our oil sales and to the extent we
are unable to pass on increases in operating costs, we may be affected by
inflation. In April 1999, the government of the Republic of Kazakhstan
discontinued its support of the tenge and allowed it to float freely against the
U.S. dollar. Immediately thereafter, the official exchange rate declined from
87.5 tenge to the U.S. dollar to 142 tenge to the U.S. dollar, but was
relatively stable for the remainder of 1999 and 2000. The devaluation of the
tenge, the currency of the Republic of Kazakhstan, can significantly decrease
the value of the monetary assets that we hold in Kazakhstan as well as our
assets in that country that are based on the tenge. KKM retains the majority of
cash and cash equivalents in U.S. dollars in an offshore bank account outside of
Kazakhstan, but KKM's statutory tax basis in its assets, tax loss carryforwards,
and VAT receivables are all denominated in tenge and subject to the effects of
devaluation. Local tax laws allow basis adjustments to offset the impact of
inflation on statutory tax basis assets, but there is no assurance that any
adjustments will be sufficient to offset the effects of inflation in whole or in
part. If not, KKM may be subject to much higher income tax liabilities within
Kazakhtan due to inflation and or devaluation of the local currency.
Additionally, devaluation may create uncertainty with respect to the future
business climate in Kazakhstan and to our investment in that country. As of
December 31, 2000, the exchange rate was 144.5 tenge per U.S. dollar.
2. Results from Operations
Results of Operations Year Ended December 31, 2000 Compared to Year Ended
December 31, 1999
- -------------------------------------------------------------------------
We account for our investment in KKM using the equity method.
Our operations for the year ended December 31, 2000 resulted in a net loss
of $26.8 million compared to a net loss of $5.16 million as of December 31,
1999. The $21.64 million increase in net loss relates to interest charges and
associated increases in general and administrative costs incurred in 2000 in our
efforts to finance the development of the Karakuduk Field. As a partial offset
to these additional expenses, we recognized equity income from our investment in
KKM due to KKM's significant increase in the production and sale of crude oil
during the year.
Interest expense increased from $523,000 in 1999 to $27.03 million in 2000,
primarily due to interest charges on our convertible notes and financing costs
of our loan with Shell Capital. Approximately $20.34 million of interest expense
was a non-cash charge recognized upon the September 2000 conversion of $20.85
million of notes into 11,690,259 shares of our common stock at a conversion
price of $1.86 per share. The conversion feature of the notes was a "beneficial
conversion feature" as addressed in EITF 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, whereby a portion of the proceeds received from the notes was
allocable to the conversion feature contained therein. The value assigned to the
conversion feature was determined as the difference between the market price of
our common stock on the date of issuance and the conversion price, multiplied by
the number of shares to be received upon conversion, which was approximately
$120.0 million. As the conversion price contained in the notes was substantially
below the market price, the value under the above formula significantly exceeded
the net proceeds from the notes. Under EITF 98-5, the discount assigned to the
conversion feature is limited to the total proceeds allocated to the convertible
instrument. Accordingly, upon conversion of the notes, we recorded additional
interest expense and additional paid in capital equal to $20.34 million, the
face amount of the notes net of original discount. An additional $1.24 million
in interest expense was incurred on the notes in 2000, from discount
amortization and accrued interest on the notes through the date of conversion.
We had accrued a total of $126,000 in interest expense on the notes as of
December 31, 1999. See Note 9 to our consolidated financial statements for the
year ended December 31, 2000.
During 2000, we borrowed $21.50 million under our Shell Capital loan,
recognizing $4.38 million in interest expense on the loan and $909,000 in
amortization of associated debt issuance costs. Approximately $3.48 million was
reclassified to the principal balance of the loan as of December 31, 2000. We
did not have any interest charges associated with the loan during 1999. See Note
8 to our consolidated financial statements for the year ended December 31, 2000.
17
Interest income increased $1.24 million to $1.93 million in 2000, compared
to $692,000 in 1999. The increase was primarily due to additional financing of
of KKM's operations in Kazakhstan and recognition of additional interest income
of $232,000 from the application of EITF 99-10, Percentage Used to Determine the
Amount of Equity Method Losses.
General and administrative costs increased from $2.39 million as of
December 31, 1999 to $3.69 million as of December 31, 2000. The $1.3 million
increase was due to approximately $1.0 million in insurance expense from
premiums on our OPIC political risk insurance policy and amortization of
transportation risk insurance required by Shell Capital as part of the loan.
Both the OPIC and transportation risk insurance policies were executed in 2000.
The remaining increase in general and administrative costs was associated with
maintaining the Shell Capital loan and heightened operational activity in the
Karakuduk Field. See Notes 7 and 16 to our consolidated financial statements for
the year ended December 31, 2000.
Depreciation and depletion expense increased $390,000 from $31,000 in 1999
to $421,000 in 2000, due to additional depletion of acquisition costs of our
investment in KKM. Our depletion expense was $403,000 in 2000 compared to $9,000
in 1999, based on the increase in oil production from the Karakuduk Field.
Our equity income from investment was $2.83 million in 2000, compared to an
equity loss of $1.85 million in 1999. The net change of $4.68 million was the
result of several factors. During 2000, KKM sold approximately 765,000 barrels
of crude oil, recognizing $13.76 million, or $17.98 per barrel, in revenue net
of transportation costs. Operating costs associated with 2000 sales were $3.68
million, or $4.81 per barrel. KKM did not have any commercial oil sales prior to
2000, therefore there are no comparable oil sales revenue or operating costs
from prior periods. We recognized $683,000 of additional equity losses during
1999 due to the application of EITF 99-10. All of these losses were recaptured
during 2000. Our equity income from investment also reflects the elimination of
$1.44 million of intercompany interest income on the loan to KKM. See Note 5 to
our consolidated financial statements for the year ended December 31, 2000.
During 2000, we paid $4.0 million for put contracts to sell 1,562,250
barrels of North Sea Brent crude. We amortized the hedge contracts ratably over
the period the underlying contracts expire, recognizing $482,000 in hedging
losses as of December 31, 2000. See Note 6 to our consolidated financial
statements for the year ended December 31, 2000.
Results of Operations Year Ended December 31, 1999 Compared to Year Ended
December 31, 1998
- -------------------------------------------------------------------------
Our operations in the year ended December 31, 1999 resulted in a net loss
of $5.16 million, compared to a net loss of $4.27 million in 1998.
Interest income increased by $30,000 from 1998 due to increased financing
of of 100% of KKM's operations in the Karakuduk Field. Additionally, we
eliminated an additional $232,000 of interest income against equity losses from
our investment in KKM in application of EITF 99-10.
Interest expense increased $318,000 in 1999 due to additional borrowings to
support our corporate overhead and KKM's operations. During 1999, we issued
$10.04 million in convertible notes and recognized interest expense of $126,000
from interest accrued on the notes and $77,000 from related discount
amortization. See Note 9 to our consolidated financial statements for the year
ended December 31, 2000.
General and administrative costs decreased $625,000 from 1998, primarily
due to a decrease in compensation expense from a reduction in stock based
compensation and the reversal of accrued compensation, which was contingent on
the sale of our interest in KKM.
Our equity loss in KKM increased $627,000 from 1998. In the fourth quarter
of 1999, we began applying EITF 99-10 to determine its equity income and losses
from its investment in KKM. As a result, we recognized an additional $683,000 of
equity losses from KKM in 1999 and eliminated 100% of our interest income from
KKM for the quarter ended December 31, 1999. The net impact was approximately
$451,000 in additional equity losses from our investment for 1999. See Note 5 to
our consolidated financial statements for the year ended December 31, 2000.
18
In 1999, we recorded a $1.06 million loss from a settlement with a formal
drilling contractor for KKM. We recorded the charge on the settlement of this
dispute as of December 31, 1999. See Note 4 to our consolidated financial
statements for the year ended December 31, 2000.
In 1998, we settled a lawsuit filed against us for a total of $200,000 and
warrants to purchase 3,333 shares of our common stock at an exercise price of
$60 per share, exercisable through January 2, 1999. The warrants were recorded
at the fair market value (approximately $34,000). See Note 11 to our
consolidated financial statements for the year ended December 31, 2000.
In 1998, we recognized a $236,000 extraordinary loss on the extinguishment
of long-term debt. In 1997, we recognized a $214,000 extraordinary loss on the
extinguishment of short-term debt. See Note 17 to our consolidated financial
statements for the year ended December 31, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to various market risks, including interest rate risk and
commodity price risk.
Our loan is subject to a variable quarterly interest rate based upon LIBOR
plus 17.75%. As of December 31, 2000, the outstanding loan balance subject to
interest was approximately $24.98 million. During 2000, the high, low, and
average interest rates applicable against the loan were 24.53%, 23.70%, and
24.17%, respectively. The terms of the loan are more fully described under "Item
7 Management Discussion and Analysis of Financial Condition and Results of
Operations - Shell Capital Loan." An increase of applicable interest rates will
result in a corresponding increase in the interest costs associated with the
loan. Furthermore, the majority of the loan interest is capitalized on a
quarterly basis until we reach project completion, which exposes us to
additional interest rate risk on the additional principal amount of the loan.
We must begin repaying the loan on December 31, 2001. The loan stipulates
the minimum principal repayments required, but also requires all excess cash
flows available from crude oil sales be utilized to repay the loan as quickly as
possible. Earlier repayment of the loan results in significantly less interest
expense charged on the loan. KKM's ability to generate excess cash flows is
dependent upon many factors, including production rates, access to export
markets to sell our crude oil production, and the available commodity price of
crude oil. Lower crude oil prices will could significantly reduce cash flows
earned by KKM, which would otherwise be used to prepay the loan. We estimate
approximately $36.0 million to $45.0 million of net cash flows from oil sales
will be required to repay the loan depending upon excess cash flows available to
repay principal earlier than scheduled.
To hedge the risk of a drop in commodity prices, we entered the hedge
agreement as part of the loan, paying $4.0 million for put contracts to sell a
total of 1,562,250 barrels of North Sea Brent crude. The exercise prices of the
various put contracts ranges from $22.35 to $17.25 per barrel, with monthly
expiration dates beginning in October 2000 and ending in December 2002. The
contracts are evenly spread between October 2000 to December 2001 (62,750
barrels per month) and between January 2002 to December 2002 (51,750 barrels per
month). During 2000, the high, low, and average price of the hedge agreement was
$4.0 million, $261,000, and $978,000, respectively. As of December 31, 2000, the
put contracts had a fair market value of $999,000. While we do not expect to
recover any future economic value from the hedge contracts, we cannot sell the
contracts under the terms of the loan.
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.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 30, 2000, the following table sets forth (i) the names and ages
of our directors and executive officers of Chaparral, (ii) the principal offices
and positions with Chaparral held by each person and (iii) the date such person
became a director or executive officer. The executive officers are elected
annually by the board of directors. Executive officers serve terms of one year
or until their death, resignation or removal by the board of directors. The
present term of office of each director will expire at the next annual meeting
of stockholders. Each executive officer will hold office until his successor
duly is elected and qualified, until his resignation or until he is removed in
the manner provided by our bylaws.
Name of Director or Officer Principal Occupation During the Last 5
and Position in Chaparral Since Age Years
- ------------------------- ----- --- ----------------------------------------
John G. McMillian 1997 74 Mr. McMillian has served as the Chairman
Co-Chairman and of the Board of Chaparral and Chief
Chief Executive Officer Executive Officer since January 1999 and
Co-Chairman of the Board since May 1999.
From May 1997 to January 1999, Mr.
McMillian served as a director of
Chaparral. Mr. McMillian served as the
Chairman, President, and Chief Executive
Officer of Allegheny & Western Energy
Corporation, an oil and gas company,
from 1987 to 1995. Mr. McMillian founded
Northwest Energy Company, a major
supplier of natural gas, and served as
its Chairman and Chief Executive Officer
from 1973 to 1983. From 1986 to 1989,
Mr. McMillian was the owner, Chairman
and Chief Executive Officer of Burger
Boat Company, a boat manufacturing
company. McMillian has served as a
director of Excalibur Technologies and
as a member of its Audit Committee since
1996.
James A. Jeffs 1999 49 Mr. Jeffs has served as the Co-Chairman
Co-Chairnman of the Board of Chaparral since May
1999. Since 1994, Mr. Jeffs has served
as Managing Director and the Chief
Investment Officer for The Whittier
Trust Company, a trust and investment
management company, with substantial oil
and gas interests. From 1993 to 1994,
Mr. Jeffs was a Senior Vice President of
Union Bank of California. Mr. Jeffs was
the Chief Investment Officer of Northern
Trust of California, N.A., a trust and
investment management company, from 1992
to 1993. Mr. Jeffs was Chief Investment
Officer and Senior Vice President of
Trust Services of America, a trust and
investment management company, from 1988
to 1992 and served as President and
Chief Executive Officer of TSA Capital
Management, an institutional investment
management company, during that period.
David A. Dahl 1997 39 Mr. Dahl served as Secretary of
Director Chaparral from August 1997 until May
1998. Currently, Mr. Dahl is the
President of Whittier Energy Company, an
oil and gas exploration and production
company, a position that he has held
since 1997. Since 1996, Mr. Dahl has
also served as the President of Whittier
Ventures, LLC, a private investment
entity. Since 1993, Mr. Dahl has been a
Vice President of Whittier Trust
Company, an investment management trust
company. From 1990 to 1993, Mr. Dahl was
a Vice President of Merus Capital
Management, an investment firm.
20
Name of Director or Officer Principal Occupation During the Last 5
and Position in Chaparral Since Age Years
- ------------------------- ----- --- ----------------------------------------
Ted Collins, Jr. 1997 62 Mr. Collins has been the President of
Director Collins & Ware Investments Company, a
private investment company, since June
2000. From 1988 to 2000, Mr. Collins was
the President of Collins & Ware, Inc.,
an independent oil and gas company. From
1982 to 1988, Mr. Collins was the
President of Enron Oil & Gas Co., an oil
and gas company. Beginning in 1969 and
until 1982, Mr. Collins was an Executive
Vice President and director of American
Quasar Petroleum Co., an oil and gas
company. Mr. Collins also serves on the
Board of Directors of Hanover
Compression Company, MidCoast Energy
Resources, Inc. and Queen Sand
Resources, Inc.
Richard L. Grant 1998 46 Mr. Grant is the President and Chief
Director Executive Officer of Cabot LNG LLC, an
importer of liquefied natural gas, a
position he has held since September
2000. Since September 1998, Mr. Grant
has served as the President of Cabot
LNG. Mr. Grant served in various
capacities at Mountaineer Gas Company,
the largest natural gas distribution
company in West Virginia, including
President, from September 1988 to August
1998, and Executive Vice President and
General Counsel, from 1986 to 1988. Mr.
Grant was an engineer and legal counsel
for the Cincinnati Gas & Electric
Company from 1980 to 1986.
Judge Burton B. Roberts 2001 78 Since January 1999, Judge Roberts has
Director served as counsel to the law firm of
Fischbein o Badillo o Wagner o Harding.
From 1973 to 1999, Judge Roberts served
as Justice of the New York State Supreme
Court, as Administrative Judge for the
Criminal Branch, 12th Judicial District,
from January 1984 to January 1999, and
for the Civil Branch, 12th Judicial
District, from 1988 to 1999. Prior to
his service on the bench, Judge Roberts
was an Assistant District Attorney in
New York County, then Chief Assistant
District Attorney and District Attorney
for Bronx County, New York. Judge
Roberts was formerly Chair of the Bronx
County Coordinating Committee for
Criminal Justice and of the New York
State Committee on Audio/Visual
Coverage.
Michael B. Young 1998 32 Mr. Young has been the Treasurer,
Treasurer and Controller Controller and Principal Accounting
Officer of Chaparral since February
1998. From June 1991 to February 1998,
he was a Tax Manager in the oil and gas
tax practice of Arthur Andersen LLP, an
accounting firm.
Alan D. Berlin 1997 60 Since 1995, Mr. Berlin has been a
Secretary partner of the law firm Aitken Irvin
Berlin & Vrooman, LLP. He was engaged in
the private practice of law for over
five years prior to joining Aitken
Irvin. Mr. Berlin was the Secretary of
Chaparral from January 1996 to August
1997 and, since June 1998, has served
the Company in the same position. From
1985 to 1987, Mr. Berlin was the
President of the International Division
of Belco Petroleum Corp. and has held
various other positions with Belco
Petroleum Corp. from 1977 to 1985. Mr.
Berlin is currently a director of Belco
Oil & Gas Corp.
21
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of the Forms 3 and 4 and any amendments
furnished to Chaparral during our fiscal year ended December 31, 2000, and Form
5 and any amendments furnished to Chaparral with respect to the same fiscal
year, during our fiscal year ended December 31, 2000, we believe that our
directors, officers, and greater than 10% beneficial owners complied with all
applicable filing requirements, except the following: (i) Capco Resources, Ltd.
failed to file, on a timely basis, one report representing one transaction; (ii)
Mr. Young failed to file, on a timely basis, one report representing one
transaction, (iii) Messrs. McMillian and Jeffs failed to file, on a timely
basis, one report representing two transactions for fiscal year ended December
31, 2000, (iv) Whittier Ventures, LLC failed to file one report representing one
transaction for the fiscal year ended December 31, 2000, and (v) Mr. Dahl failed
to file one report representing one transaction for the fiscal year ended
December 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation paid by Chaparral for services
rendered Mr. McMillian who is currently the Chief Executive Officer and
Co-Chairman of the Board and Mr. Young, who is the Treasurer, Controller, and
Principal Accounting Officer of Chaparral. There were no other executive
officers of Chaparral whose annual salary and bonus exceeded $100,000 during the
fiscal year ended December 31, 2000.
Summary Compensation Table.
-------------------------------------- -----------------------------------------------
Annual Compensation Long-Term Compensation
-------------------------------------- -----------------------------------------------
Awards Payouts
--------------------------------- -----------
Other Restricted Securities
Name and Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Awards ($) Options/SARs (#) Payouts ($) Compensation
------------------ ---- ------ ----- ------------ ---------- ---------------- ----------- -----------
John G. McMillian 2000 $137,500 -- -- -- -- -- --
Chief Executive 1999 -- -- -- -- -- -- --
Officer (1/99 to
Present)
Michael B. Young 2000 $150,000 -- -- -- -- -- --
Treasurer and 1999 $89,167 $42,500(1) -- -- -- -- --
Controller 1998 $73,333 -- -- $90,000(2) -- -- --
- ----------
1. Mr. Young received $42,500 in cash bonuses during 1999.
2. Under the terms of a letter agreement, Mr. Young received 167 shares on
February 3, 1998, January 30, 1999, January 30, 2000, and January 30, 2001.
The $90,000 represents the market value of such shares at the closing price
on the last trading day immediately preceding the date of grant. Dividends
will be paid on shares of restricted stock held by Mr. Young if Chaparral
pays any dividends on its Common Stock. At December 31, 2000, the aggregate
value of the restricted stock grants to Mr. Young was $2,168 based on the
closing price of our common stock on the last trading day immediately
preceding the end of its fiscal year.
22
Options/SAR Grants.
For the fiscal year ended December 31, 2000, we did not grant any options.
Aggregated Option/SAR Exercises and Year-End Option/SAR Value Table.
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options/SARs at Options/SARs at
December 31, 2000 December 31, 2000
------------------------------------- -----------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------- -----------------------------------------------
Michael B. Young 1,167 -- -- --
Additionally, no options were exercised in fiscal year 2000.
Director Interlocks.
During our last fiscal year, Messrs. Jeffs, who is the Co-Chairman of the
Board, and Dahl served on the Compensation Committee of the Board and acted as
officers or directors to Whittier Ventures or one of its affiliates. Mr. Jeffs
is a Vice President of Whittier Ventures and a Director of Whittier Energy
Company. Mr. Dahl is President of both Whittier Ventures and Whittier Energy
Company. Whittier Ventures currently owns approximately 16.23% of the
outstanding common stock. See "Certain Relationships and Related Transactions"
immediately below for a description of transactions between Whittier Ventures
and Chaparral.
Compensation of Directors.
During the fiscal year ended December 31, 2000, Chaparral did not
compensate its directors for their service as directors. There were no standard
or other arrangements for the compensation of directors in effect for the fiscal
year ended December 31, 2000.
Stock Performance Graph
Comparison of Five Year Cumulative Total Return
The following line graph compares the total returns (assuming reinvestment
of dividends) of common stock, the Nasdaq Market Index and the SIC Code Index
for the five year period ending December 31, 2000.
1995 1996 1997 1998 1999 2000
Chaparral Resources, Inc. 100.00 140.00 319.98 44.00 16.80 7.73
SIC Code Index 100.00 138.85 141.02 112.96 137.98 175.29
Nasdaq Market Index 100.00 124.07 151.42 213.57 376.67 236.75
23
Board Compensation Committee Report on Executive Compensation
Insider Participation In Compensation Decisions
And Compensation Committee
Report On Executive Compensation
The Compensation Committee of our board of directors determines the
compensation of the executive officers named in the Summary Compensation Table
included as part of "Item 11 - Executive Compensation." The Compensation
Committee will furnish the following report on executive compensation in
connection with the Annual Meeting:
Compensation Philosophy
- -----------------------
As members of the Compensation Committee, it is our duty to administer the
executive compensation program for Chaparral. The Compensation Committee is
responsible for establishing appropriate compensation goals for the executive
officers of Chaparral, evaluating the performance of such executive officers in
meeting such goals and making recommendations to the Board with regard to
executive compensation. Chaparral's compensation philosophy is to ensure that
executive compensation be directly linked to continuous improvements in
corporate performance, achievement of specific operations, financial and
strategic objectives, and increases in shareholder value. The Compensation
Committee regularly reviews the compensation packages of Chaparral's executive
officers, taking into account factors which it considers relevant, such as
business conditions within and outside the industry, Chaparral's financial
performance, the market composition for executives of similar background and
experience, and the performance of the executive officer under consideration.
The particular elements of Chaparral's compensation programs for executive
officers are described below.
Compensation Structure
- ----------------------
The base compensation for the executive officers of Chaparral named in the
Summary Compensation Table is intended to be competitive with that paid in
comparable situated industries, taking into account the scope of
responsibilities and internal relationships. The goals of the Compensation
Committee in establishing Chaparral's executive compensation program are:
o to compensate the executive officers of Chaparral fairly for their
contributions to Chaparral's short-term and long-term performance; and
o to allow Chaparral to attract, motivate and retain the management personnel
necessary to Chaparral's success by providing an executive compensation
program comparable to that offered by companies with which Chaparral
competes for management personnel.
The elements of Chaparral's executive compensation program are annual base
salaries, annual bonuses and equity incentives. The Compensation Committee bases
its decisions on the scope of the executive's responsibilities, a subjective
evaluation of the executive's performance and the length of time the executive
has been in the position.
During fiscal year ended December 31, 2000, the Compensation Committee
determined not to grant incentive compensation to the executive officers of
Chaparral named in the Summary Compensation Table due to the performance of
Chaparral's common stock in relation to the Nasdaq Market Index and the SIC Code
Index. See the Stock Performance Graph above.
During 2000, Chaparral retained an outside consulting firm to assist the
Compensation Committee in formulating a new incentive compensation plan to be
implemented in fiscal year 2001. As of the date of this filing, the consultant's
report has not been finalized and a new compensation plan has not been issued.
Executive Compensation Deductibility
- ------------------------------------
Chaparral intends that amounts paid under Chaparral's compensation plans
generally will be deductible compensation expenses. The Compensation Committee
does not currently anticipate that the amount of compensation paid to executive
officers will exceed the amounts specified as deductible according to Section
162(m) of the Internal Revenue Code of 1986.
24
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
No executive officer or director of Chaparral serves as an executive
officer, director, or member of a compensation committee of any other entity,
for which an executive officer, director, or member of such entity is a member
of the Board or the Compensation Committee of the Board. There are no other
interlocks.
Compensation Committee
of the Board of Directors,
By: /s/ Richard L. Grant
--------------------------------
Richard L. Grant
Chairman
By: /s/ James A. Jeffs
--------------------------------
James A. Jeffs
By: /s/ David A. Dahl
--------------------------------
David A. Dahl
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 30, 2001, with
respect to our directors, named executive officers and each person who is known
by us to own beneficially more than 5% of our common stock, and with respect to
shares owned beneficially by all of our directors and executive officers as a
group. The address for all of our directors and executive officers of Chaparral
is 16945 Northchase Drive, Suite 1620, Houston, Texas 77060.
Amount and Nature of Percent of
Beneficial Ownership Common
Name of Beneficial Owner Position (1) Stock (1)
- --------------------------------------- ----------------------------------- ---------------------- ------------
Allen & Company Incorporated -- 5,732,823(2) 40.00%
711 Fifth Avenue
New York, New York 10022
Whittier Ventures, LLC -- 2,319,169(3) 16.23%
1600 Huntington Drive
South Pasadena, California 91030
Capco Resources, Ltd. -- 1,894,733(4) 13.27%
444 5th Avenue SW
Suite 2240
Calgary, Alberta
Canada T2P2T8
Shell Capital Limited -- 1,785,455(5) 11.11%
Shell Centre
London SE1 7NA
United Kingdom
John G. McMillian Co-Chairman of the Board and 386,303(6) 2.70%
Chief Executive Officer
James A. Jeffs Co-Chairman of the Board 2,329,498(7) 16.30%
David A. Dahl Director 2,320,587(8) 16.24%
Ted Collins, Jr. Director 2,668 *
Richard L. Grant Director -- *
Judge Burton B. Roberts Director -- *
Michael B. Young Treasurer & Controller 1,835(9) *
All current directors and executive -- 2,722,306(10) 19.04%
officers as a group (eight persons)
- ---------
* Represents less than 1% of the shares of Common Stock outstanding.
26
(1) Beneficial ownership of common stock has been determined for this purpose
in accordance with Rule 13d-3 under the Exchange Act, under which a person
is deemed to be the beneficial owner of securities if such person has or
shares voting power or investment power with respect to such securities,
has the right to acquire beneficial ownership within 60 days or acquires
such securities with the purpose or effect of changing or influencing the
control of Chaparral.
(2) In accordance with Rule 13d-3(d)(1)(i)(A, includes 48,284 shares underlying
warrants to purchase shares of Common Stock. Allen & Company is a wholly
owned subsidiary of Allen Holding Inc., and, consequently, Allen Holding
may be deemed to beneficially own the shares beneficially owned by Allen &
Company. Does not include shares owned directly by officers and
stockholders of Allen Holding and Allen & Company with respect to which
Allen Holding and Allen & Company disclaim beneficial ownership. Officers
and stockholders of Allen Holding and Allen & Company may be deemed to
beneficially own shares of the common stock reported to be beneficially
owned directly by Allen Holding and Allen & Company.
(3) In accordance with Rule 13d-3(d)(1)(i)(A), includes 334 shares underlying
currently exercisable warrants and 8,334 shares underlying a currently
exercisable option.
(4) In accordance with Rule 13d-3(d)(1)(i)(A), includes 281,830 shares held by
Capco Asset Management, Inc., an affiliate of Capco Resources, Ltd.
(5) In accordance with Rule 13d-3(d)(1)(i)(A), includes 1,785,455 shares
underlying a warrant, which will be exercisable at the earlier of project
completion or September 30, 2001.
(6) In accordance with Rule 13d-3(d)(1)(i)(A), includes 417 shares underlying a
currently exercisable option and 417 shares underlying a currently
exercisable warrant.
(7) In accordance with Rule 13d-3(d)(1)(i)(A), includes 2,304,523 shares
beneficially owned by Whittier Ventures, 334 shares underlying currently
exercisable warrants owned by Whittier Ventures, 5,820 shares owned by
Whittier Energy Company, 158 shares owned by Whittier Opportunity Fund, and
8,334 shares underlying currently exercisable options owned by Whittier
Opportunity Fund. Mr. Jeffs has no pecuniary interest in the shares
beneficially owned by Whittier Ventures, Whittier Energy Company, and
Whittier Opportunity Fund, however, as Vice President of Whittier Ventures,
and Director of Whittier Energy Company, Mr. Jeffs has voting power and
investment power over such shares and, thus, may be deemed to beneficially
own such shares.
(8) In accordance with Rule 13d-3(d)(1)(i)(A), includes 1,251 shares underlying
currently exercisable options owned by Mr. Dahl, 2,304,523 includes shares
beneficially owned by Whittier Ventures, 334 shares underlying currently
exercisable warrants owned by Whittier Ventures, 5,820 shares owned by
Whittier Energy Company, 158 shares owned by Whittier Opportunity Fund and
8,334 shares underlying currently exercisable options owned by Whittier
Opportunity Fund. Mr. Dahl has no pecuniary interest in the shares
beneficially owned by Whittier Ventures, Whittier Energy Company, or
Whittier Opportunity Fund, however, as the President of Whittier Ventures
and Whittier Energy Company, Mr. Dahl has voting power and investment power
over such shares and, thus, may be deemed to beneficially own such shares.
(9) Includes 668 shares owned by Mr. Young and 1,167 shares underlying
currently exercisable options.
(10) Includes the shares as described in Notes (6) through (9) above. In
addition, it includes 2,668 shares owned by Ted Collins, Jr. a Director of
Chaparral. Also includes 167 shares owned by Alan D. Berlin, the Secretary
of Chaparral and 417 shares underlying a presently exercisable option owned
by Mr. Berlin.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 21, 2000, we converted notes with an aggregate principal
amount of $20.85 million, plus accrued interest of $898,000, into 11,690,259
shares of our common stock at a conversion price of $1.86 per share. Originally,
the conversion provision of the notes was subject to shareholder approval, but
our board of directors authorized management to obtain approval from the holders
of the notes to amend the terms of the notes to allow immediate conversion into
shares of our common stock. We obtained approval from such holders, and the
notes were converted on September 21, 2000. The board of directors decision to
amend the terms of the notes to allow immediate conversion was based upon
several factors, including funding our working capital requirements, a
requirement of our Shell Capital loan to raise $10.0 million in new equity on or
before September 30, 2000, and complying with various restrictive covenants of
the Shell Capital loan.
The principal balance of the notes consisted of $10.04 million issued
during the fourth quarter of 1999 and $10.81 million issued during 2000,
including notes totaling $3.3 million in January and February, $3.0 million in
August, and $4.51 million in September 2000, respectively. The notes were issued
to various related parties and other non-affiliated investors. Notes issued to
related parties totaled $14.69 million, including $9.83 million to Allen &
Company, $4.05 million to Whittier Ventures, $662,000 to John G. McMillian, our
Co-Chairman and Chief Executive Officer, and $150,000 to a relative of Jim
Jeffs, our Co-Chairman.
27
The notes were issued in a series of transactions from late 1999 through
2000. In exchange for the notes, we received $15.56 million in cash and canceled
$5.29 million in promissory notes issued previously in 1999, plus accrued
interest thereon, to Allen & Company ($3.83 million), Whittier Ventures ($1.05
million), and Mr. McMillian ($412,000).
In October 2000, Chaparral issued 1,612,903 shares of common stock to Capco
for $3.0 million, or $1.86 per share. Capco Energy, Inc., an affiliate of Capco,
was also a holder of two notes with an aggregate principal amount of $750,000,
which were converted, along with accrued interest thereon, into 427,113 shares
of our common stock on September 21, 2000. After the capital stock transaction,
Capco or its affiliates owned approximately 14.28% of our outstanding common
stock.
The conversion of the notes and the common stock subscription to Capco
resulted in a 92.28% dilution of the holders of our common stock outstanding as
of September 20, 2000, not including any shares owned by holders of the notes.
The conversion of the notes resulted in a change of ownership control, as Allen
& Company and Whittier Ventures together own greater than 50% of our outstanding
common stock. The following table summarizes the additional shares of common
stock received by each note holder upon conversion and their respective change
in ownership of our common stock before and after the conversion of the notes
and the issuance of common stock to Capco.
INCREASE BENEFICIAL OWNERSHIP %
IN SHARES ---------------------------
OF COMMON BEFORE AFTER %
8% NOTEHOLDER STOCK DILUTION(1) DILUTION(2) INCREASE
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