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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, 2002.
Commission file number: 0-7261
CHAPARRAL RESOURCES, INC.
-------------------------
(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 Identification No.)
incorporation or organization)
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
----------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer.
YES |_| NO |X|
As of June 28, 2002, the aggregate market value of registrant's voting
common stock, par value $.0001 per share, held by non-affiliates was
$28,567,602.
As of March 24, 2003, registrant had 38,209,502 shares of its common stock,
par value $.0001 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
Page
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PART I
Item 1. Business
Our Business ................................................1
Available Information .......................................1
Equity and Debt Capital Infusion ............................2
Crude Oil Sales .............................................2
Risks of Oil and Gas Activities .............................3
Risks of Foreign Operations .................................4
Environmental Regulations ...................................4
Competition .................................................4
Employees ...................................................4
Corporate Information .......................................5
Special Note Regarding Forward-Looking Statements ...........5
Item 2. Properties
Properties ..................................................5
Net Quantities of Oil and Gas Produced ......................7
Drilling Activity ...........................................7
Item 3. Legal Proceedings ............................................8
Item 4. Submission of Matters to Vote of Security Holders ............8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ........................................9
Item 6. Selected Financial Data .....................................10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................11
Item 8. Financial Statements and Supplementary Data .................19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures ......................20
PART III
Item 10. Directors and Executives Officers of the Registrant ........20
Item 11. Executive Compensation .....................................22
Item 12. Security Ownership of Certain Beneficial Owners and
Management ................................................26
Item 13. Certain Relationships and Related Transactions .............27
Item 14. Controls and Procedures ....................................28
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....29
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 oil and gas projects
in emerging markets, specifically targeting fields with previously discovered
reserves, which have never been commercially produced or could be materially
enhanced by our management team and technical expertise.
Through intermediate holding companies, Central Asian Petroleum (Guernsey),
Ltd., a Guernsey company ("CAP-G"), Korporatsiya Mangistau Terra International
Limited ("MTI"), a Kazakhstan company, and Central Asian Petroleum, Inc., a
Delaware company ("CAP-D"), we own a 60% interest in Closed Type JSC
Karakudukmunay ("KKM"), a Kazakh joint stock company that holds a governmental
license to develop the Karakuduk Oil Field. All references to "Chaparral," "we,"
"us," and "our" refer to Chaparral Resources, Inc., and its greater than 50%
owned subsidiaries, unless indicated otherwise. In May 2002, Chaparral increased
its ownership in KKM from 50% to 60% through the acquisition of 100% of the
outstanding stock of MTI for $1.2 million and 1 million newly issued shares of
Chaparral's outstanding common stock.
Since 1995, the business of Chaparral has been the development of the
Karakuduk Field, a 16,900-acre oil field in the Republic of Kazakhstan. The U.S.
based oil and gas assets of Chaparral were divested during 1996 and 1997 to help
fund the development of the Karakuduk Field. The Government of the former Soviet
Union discovered the Karakuduk Field in 1972 and drilled 22 exploratory and
development wells, none of which were produced commercially. KKM began to
aggressively develop the Karakuduk Field in early 2000, re-establishing oil
production from a majority of the existing wells and drilling a total of 23 new
wells through September 2001. On February 12, 2003, KKM commenced a new drilling
campaign to further develop and commercially produce the oil reserves in the
Karakuduk Field.
The other stockholder of KKM is KazMunayGaz JSC, the state owned national
petroleum and transportation company of the Republic of Kazakhstan, which owns a
40% interest.
Currently, the Karakuduk Field is our only oil field. We are in the process
of identifying and evaluating other oil fields for possible acquisition and
development. We have no other significant subsidiaries besides CAP-G, MTI, and
CAP-D.
As a result of the acquisition of MTI, Chaparral obtained a controlling
interest in KKM. Consequently, Chaparral's financial statements have been
consolidated with KKM on a retroactive basis to January 1, 2002. Chaparral
previously accounted for its 50% investment in KKM using the equity method of
accounting, which is reflected in Chaparral's financial statements for periods
prior to 2002. The consolidated financial statements for Chaparral for the three
years ending December 31, 2002 and separate financial statements for KKM for the
two years ended December 31, 2001 are included as part of this Annual Report on
Form 10-K.
Available Information
- ---------------------
Chaparral files Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and registration statements and other items
with the Securities and Exchange Commission (SEC). Chaparral provides access
free of charge to all of these SEC filings, as soon as reasonably practicable
after filing, on its Internet site located at www.chaparralresources.com.
Chaparral will also make available to any stockholder, for a nominal fee, copies
of its Annual Report on Form 10-K as filed with the SEC. For copies of this, or
any other filing, please contact: Chaparral Resources, Inc., 16945 Northchase
Drive, Suite 1620, Houston, Texas 77060 or call (281) 877-7100.
In addition, the public may read and copy any materials Chaparral files
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information on the operation of the
1
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site (www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers, like Chaparral, that file
electronically with the SEC.
Equity and Debt Capital Infusion
- --------------------------------
In May 2002, Chaparral received a total equity and debt capital infusion of
$45 million, which was used to repay a substantial portion of a loan with Shell
Capital, Inc. (the "Shell Capital Loan") and finance additional working capital
requirements. Chaparral received a total investment of $12 million from Central
Asian Industrial Holdings, N.V. ("CAIH"), including $8 million in exchange for
22,925,701 shares, or 60%, of Chaparral's outstanding common stock, and $4
million in exchange for a three year note bearing interest at 12% per annum (the
"CAIH Note"). Additionally, JSC Kazkommertsbank ("Kazkommertsbank"), an
affiliate of CAIH, provided KKM with a credit facility totaling $33 million (the
"KKM Credit Facility") bearing interest at 14% per annum. The terms and
conditions of the CAIH Note and the KKM Credit facility are more fully described
in Note 11 to our consolidated financial statements for the year ended December
31, 2002.
Crude Oil Sales
- ---------------
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 of the
Karakuduk Field and only began generating revenue from the sale of crude oil
during 2000. KKM recognized $45.13 million in revenue in 2002 from the sale of
approximately 2.47 million barrels of crude oil. In 2001, KKM recorded $36.58
million in revenue based upon sales of approximately 2.18 million barrels of
crude oil.
KKM sells the majority of its crude oil on the export market. Sales to the
export market were responsible for approximately 92% of KKM's oil sales revenue
in 2002. KKM has a short-term renewable crude oil sales agreement in place with
NAFTEX Oil and Shipping Corporation ("NAFTEX") for the sale of 100% of KKM's oil
production allocation to the export market. KKM is responsible for obtaining
export quotas and all other permissions from Kazakhstan, Russia, or other
relevant jurisdictions necessary to transport and deliver KKM's oil production
to NAFTEX. NAFTEX is responsible for nominating and coordinating an oil tanker,
if necessary, and arranging for the resale/marketing of the crude oil purchased.
Sales prices at the export port locations are based upon quoted Urals crude
oil prices from the Platt's Crude Oil Marketwire average for the three banking
days following the bill of lading. The price is net of deductions that include
freight charges published in both Platt's Dirty Tanker Wire and the Worldscale
Tanker Nominal Freight Scale. As of January 1, 2003, additional deductions of
approximately $1 per barrel have been implemented due to increased regulatory
pressure on owners/ charter companies to improve safety requirements. Payment is
made by NAFTEX within 30 days of receipt of the final bill of lading and KKM's
invoice for the sale, unless otherwise agreed by both parties. There are six
delivery points for export sales, including three preferred port facilities on
the Black Sea (Novorossiisk, Odessa, and Ventspills) and three onshore pipeline
facilities (Dudkovce, Feyeshlitke, and Adamovo). KKM must use its best efforts
to deliver crude oil to one of the three preferred port locations. To date, all
of KKM's export oil sales have been delivered to the Ukrainian port of Odessa.
KKM has a contractual right to deliver undersized cargoes to the port
facilities, subject to additional freight charges if a tanker is loaded below
its tonnage capacity. Third-party sellers, however, may offset capacity
shortages in the tanker.
Under the terms of our agreement with the government of the Republic of
Kazakhstan, KKM has a right to export, and receive export quota for, 100% of the
production from the Karakuduk Field. However, oil producers within Kazakhstan
are required to supply a portion of their crude oil production to the local
market to meet domestic energy needs. During January and February 2003, KKM
refused to deliver its oil production to the local market. Consequently, the
amount of KKM's export quota has been limited to approximately 64% of its
production. Local market oil prices are significantly lower than prices
obtainable on the export market. In 2002, the government required KKM to sell
approximately 363,000 barrels of crude oil, or 15% of its total oil sales, to
the local market, compared to 375,000 barrels, or 17%, during 2001. Local market
prices obtained by KKM are approximately $6 to $10 per barrel below export
market prices, net of transportation costs. We are continuing to have informal
discussions with the government of Kazakhstan in an attempt to effect the 100%
export of all hydrocarbons produced from the Karakuduk Field. If we are
unsuccessful, however, we may be required to initiate an arbitration proceeding
in Switzerland for the breach of our agreement by the government of Kazakhstan.
We can provide no assurances that any such arbitration proceeding would be
successful. The future loss of revenue resulting from local sales may be
significant enough to prevent us from generating a profit from the Karakuduk
Field or generate enough cash flow to meet our investment and working capital
needs. See Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.
2
Risks of Oil and Gas Activities
- -------------------------------
The current market for oil is characterized by instability. This
instability has caused fluctuations in world oil prices in recent years and
there is no assurance of any price stability in the future. The production and
sale of oil from the Karakuduk Field may not be commercially feasible under
market conditions prevailing in the future. The price we receive for our oil may
not be sufficient to generate revenues in excess of our costs of production or
provide sufficient cash flow to meet our investment and working capital
requirements.
We make no assurance that we will be able to sell oil that we produce nor
the price at which such sales will be made. Our estimated future net revenue
from oil sales is highly dependent on the price of oil, as well as the 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. The
development of oil reserves inherently involves a high degree of risk, even
though the reserves are proved. Our risks are increased because our activities
are concentrated in areas where political or other unknown circumstances could
adversely affect commercial development of the reserves. Costs necessary to
acquire, explore, and develop oil reserves are substantial. No assurances can be
given we will recover the costs incurred to acquire and develop the Karakuduk
Field. If we fail to generate sufficient cash flow from operations to meet our
working capital requirements or other long-term debt obligations, we may lose
our entire investment in the Karakuduk Field, which is currently pledged as
collateral to Kazkommertsbank under the terms of the KKM Credit Facility.
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.
3
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 all of 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 24, 2003, we have not experienced any material losses
due to these events.
Risks of Foreign Operations
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Our ability to develop the Karakuduk Field is dependent on fundamental
contracts with governmental agencies in Kazakhstan, including KKM's Agreement
with the Ministry of Energy and Natural Resources for Exploration, Development,
and Production of Oil in the Karakuduk Oil Field (the "Agreement") and KKM's
petroleum license with the government allowing KKM to operate and develop the
Karakuduk Field. Kazakhstan is a relatively new country and, as is inherent in
such developing markets, there is some uncertainty as to the status of Kazakh
law and the stability of the country and the region.
The laws of the Republic of Kazakhstan govern our operations and a number
of our significant agreements. As a result, we may be subject to arbitration in
Kazakhstan or to the jurisdiction of the Kazakh courts. Even if we seek relief
in foreign territories such as the courts of the United States or Switzerland,
we may not be successful in subjecting foreign persons to the jurisdiction of
those courts.
The exportation of oil from Kazakhstan depends on access to transportation
routes, particularly the Russian pipeline system. Transportation routes are
limited in number, and access to them is regulated and restricted. If any of our
agreements relating to oil transportation or marketing are breached, or if we
are unable to renew such agreements upon their expiration, we may be unable to
transport or market our oil. Also, a breakdown of the Kazakhstan or Russian
pipeline systems could delay or even halt our ability to sell oil. Any such
event would result in reduced revenues.
Obtaining the necessary quotas and permissions to export production through
the Russian pipeline system can be extremely difficult, if not impossible in
some circumstances. Our agreements with the government of the Republic of
Kazakhstan grant us the right to export, and to receive export quota. However,
we cannot provide any assurances that we will receive export quota or any other
approvals required to export and deliver our production in the future.
Environmental Regulations
- -------------------------
We must comply with laws of the Republic of Kazakhstan and international
requirements that regulate the discharge of materials into the environment.
Furthermore, KKM's Credit Facility requires that we comply with the World Bank's
environment, health, and safety guidelines for onshore oil and gas development.
Environmental protection and pollution control could, in the future, become so
restrictive as to make production unprofitable. Furthermore, we may be exposed
to potential claims and lawsuits involving such environmental matters as soil
and water contamination and air pollution. We are currently in compliance with
all local and international environmental requirements and are closely monitored
by the environmental authorities of the Republic of Kazakhstan. We have not made
any material capital expenditures for environmental control facilities and have
no plans to do so in the foreseeable future.
Competition
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We compete in all areas of the exploration and production segment of the
oil and gas industry with a number of other companies. These companies include
large multinational oil and gas companies and other independent operators with
greater financial resources and more experience than Chaparral. We do not hold a
significant competitive position in the oil industry. We compete both with major
oil and gas companies and with independent producers for, among other things,
rights to develop oil and gas properties, access to limited pipeline capacity,
procurement of available materials and resources, and hiring qualified local and
international personnel.
Employees
- ---------
As of March 24, 2003, Chaparral had 6 full-time employees. KKM had 182
employees and retains independent contractors on an as needed basis. We believe
that our relationship with our employees and consultants is good.
4
Corporate Information
- ---------------------
Chaparral was incorporated under the laws of the State of Colorado in 1972.
In 1999, Chaparral reincorporated under the laws of the State of Delaware.
Our address is 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 if the productive life of the field exceeds this term. In 1995, KKM
entered into an agreement with Kazakhstan's Ministry of Energy and Natural
Resources to develop the Karakuduk Field.
The Karakuduk Field is geographically located approximately 227 miles
northeast of the regional capital city of Aktau, on the Ust-Yurt Plateau. The
closest settlement is the Say-Utes Railway Station approximately 51 miles
southeast of the field. The ground elevation varies between 590 and 656 feet
above sea level. The region has a dry, continental climate, with fewer than 10
inches of rainfall per year. Mean temperatures range from minus 25 degrees
Fahrenheit in January to 100 degrees Fahrenheit in July. The operating
environment is similar to that found in northern Arizona and New Mexico in the
United States.
The Karakuduk Field structure is an asymmetrical anticline located on the
Aristan Uplift in the North Ustyurt Basin. Oil was discovered in the structure
in 1972, when Kazakhstan was a republic of the former Soviet Union, from
Jurassic age sediments between 8,500 and 10,000 feet. The former Soviet Union
drilled 22 exploratory and development wells to delineate the Karakuduk Field,
discovering the presence of recoverable oil reserves. The productive area of the
Karakuduk Field is estimated to contain a minimum of 8 separate productive
horizons present in the Jurassic formation. None of the original wells were ever
placed on commercial production prior to KKM obtaining the rights to the
Karakuduk Field.
The Karakuduk Field is approximately 18 miles north of the main utility
corridor, which includes the Makat-Mangishlak railroad, the
Mangishlak-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.
5
As of March 24, 2003, KKM had 37 productive wells in the Karakuduk Field,
including 24 new wells and 13 re-completions of previously existing delineation
wells. The 37 wells include 25 wells currently producing approximately 6,000
barrels of oil per day and 11 which are shut-in for various reasons, including
hydraulic fracturing, installation of additional gathering lines, equipment and
additional workover, water injection and stimulation operations to bring wells
on to primary production. Another shut-in well is being considered for future
use as an injection well for a pilot waterflood project. KKM implemented an
aggressive drilling program during 2000, drilling a total of 12 development
wells and re-completing 4 delineation wells using a combination of two drilling
rigs and a workover rig. KKM drilled an additional exploratory well and
performed 2 re-completions prior to 2000. During 2001, KKM drilled an additional
10 development wells and re-completed 7 delineation wells. In 2002, KKM did not
have any drilling activity. On February 12, 2003, Chaparral announced the
spudding of Well No. 141 in the Karakuduk Field. Well No. 141 is the first of 12
wells budgeted for completion in 2003, which will increase the total number of
wells to 48 by year-end. KKM has successfully completed every well drilled to
date. Oil has been recovered from the originally identified J-1, J-2, J-4, J-8,
and J-9 formations, along with new discoveries in the J-6, J-7 and J-10
horizons.
In the past, KKM's daily oil production has been limited due to various
facility constraints and lack of working capital to fund field operations. KKM
remains committed to improving efficiency of field facilities through continued
expansion of its oil storage capacity, installation of additional gathering and
processing facilities, and the full implementation of the central processing
facility. In June 2002, KKM commissioned a 18-mile crude oil pipeline from the
Karakuduk Field capable of transporting up to 18,000 barrels of oil per day to
the export pipeline terminal. The pipeline runs from the central processing unit
to the pump station, which lies adjacent to the main export pipeline. Thus,
trucking the oil to the pump station is no longer required. In 2003, KKM expects
to further expand the central processing unit in order to improve its produced
water processing capability in the field.
KKM currently has one drilling rig and one workover rig operating in the
Karakuduk Field. The workover rig is expected to continue operations, performing
standard well maintenance, re-completions of existing wells, and down-hole pump
installations. We estimate that up to 76 new wells will be required to fully
develop the Karakuduk Field, of which 15 would eventually be converted into
water injection wells. The planned development program includes a pressure
maintenance operation, including hydraulic fractures and water injections that
our management believes will enhance ultimate recovery.
During 2002, Chaparral completed a simulation study, which we have used to
optimize the location of wells (both producers and injectors) and further define
the possible total productive capacity of the Karakuduk Field.
Reserves
--------
As of December 31, 2002, the Karakuduk Field has total estimated proved
reserves of approximately 21.86 million barrels, net of government royalty, of
which we have a proportional interest in approximately 13.12 million barrels,
based upon our 60% interest in KKM. The reserve disclosure is based on a reserve
study of the Karakuduk Field conducted by Ryder Scott Company, a petroleum
engineering firm, including data available subsequent to December 31, 2002.
No reserve estimates have been filed with any Federal authority or other
agency since January 1, 2002.
6
Net Quantities of Oil and Gas Produced
- --------------------------------------
The following table summarized sales volumes, sales prices and production
cost information for our oil and gas production for each of the three years
ended December 31, 2002:
As of the Year Ended December 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
Net sales volumes
Oil (bbls) 382,500 1,092,000 2,467,000
Gas (mcf) -- -- --
Average sales price
Oil (per bbl) $ 22.18 $ 16.75 $ 18.29
Gas (per mcf) $ -- $ -- $ --
Average production cost (per bbl) $ 4.81 $ 2.40 $ 3.11
The average sales revenue, net of transportation costs, was approximately
$14.47 and $12.95 per barrel for the years ended December 31, 2002 and 2001,
respectively. For the same periods, the average transportation costs per barrel
were approximately $3.82 and $3.80, respectively.
Net sales volumes for the years 2001 and 2000 represent our 50% equity
interest in KKM's production, but does not reflect our right under the agreement
with the government of the Republic of Kazakhstan to receive 65% of KKM's cash
flow from oil sales, net of royalty, on a quarterly basis until our loan to KKM
has been fully repaid. The remaining 35% of net cash flows is used by KKM to
meet capital and operating expenditures. We may waive receipt of quarterly loan
repayments, in whole or in part, to provide KKM with additional working capital.
Productive Wells and Acreage
----------------------------
As of December 31, 2002, we had interests in 36 gross productive oil wells,
and no producing gas wells. There were no multiple completion wells. Production
was from 16,900 gross acres, of which 5,000 acres are productive developed.
Undeveloped Acreage
-------------------
As of December 31, 2002, 5,000 acres in the Karakuduk Field are productive
undeveloped.
Drilling Activity
- -----------------
During the three years ended December 31, 2002, 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
------------ ---------- --- ---------- ---
2000 1.5 -- 6.5 --
2001 .5 -- 8.0 --
2002 -- -- -- --
All wells are located in the Republic of Kazakhstan.
7
Present Activities
------------------
As of March 24, 2003, KKM has successfully completed an additional
development well (No. 141) and another development well (No. 111) is expected to
be completed in April 2003. Well No. 141 is the first new well drilled in the
Karakuduk Field since October 2001 when KKM temporarily suspended its drilling
program. Well No. 141 was spudded on February 6, 2003 and was drilled to a depth
of approximately 10,500 feet (3,200 meters), with shows in the J-1, J-2, J-7 and
J-8 formations. On March 4, 2003, KKM completed pressure testing the production
casing and began the well completion work. A survey has been scheduled to
perform a multi-stage test in the near future. Well No. 111 was spud on March
12, 2003 and is expected to be drilled to a depth of 10,670 feet (3,250 meters).
The Karakuduk Field is currently producing approximately 6,000 barrels of oil
per day from 25 flowing wells.
ITEM 3. LEGAL PROCEEDINGS
As part of the restructuring of the loan with Shell Capital in May 2002,
Shell Capital Services Limited, as the facility agent for Shell Capital,
discontinued and withdrew all legal proceedings against Chaparral and CAP-G. All
parties to the original loan agreement with Shell Capital mutually released each
other from future liability. Shell Capital Services Limited filed a notice of
discontinuance in the United Kingdom with the High Court of Justice, Queen's
Bench Division, on May 8, 2002, regarding its legal proceedings against
Chaparral. Shell Capital Services Limited also withdrew its statutory demand for
the liquidation of CAP-G on May 13, 2002, by filing a written consent with the
Royal Court of Guernsey Ordinary Court.
In December 2002, KKM received a claim from the Ministry of State Revenues
of the Republic of Kazakhstan for $9.1 million (the "Tax Claim") relating to
taxes and penalties covering the three years from 1999 to 2001. KKM has appealed
the claim and has contracted legal firms in Kazakhstan to assist with the appeal
process. Based on the assessments of KKM's management and legal counsel, it is
our opinion that the ultimate resolution of the Tax Claim, after taking into
account reserves, will not have a material adverse effect on the financial
position and operating results of Chaparral.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 10, 2002, Chaparral held its Annual Meeting of Stockholders.
Our stockholders elected the following six persons as directors, each to serve
until the next Annual Meeting of Stockholders or until his successor is elected
or appointed: Askar Alshinbayev, Ian Connor, Nikolai D. Klinchev, Alan D.
Berlin, Peter G. Dilling, and John Duthie. Chaparral's stockholders also voted
to adopt, separately, amendments to Articles IV and V to Chaparral's Amended and
Restated Certificate of Incorporation, and to ratify selection by the board of
directors of Ernst & Young as Chaparral's independent auditors for the fiscal
year ended December 31, 2002.
The number of shares voted and withheld with respect to each director was
as follows:
Election of Directors For Withheld
--------------------- --- --------
Askar Alshinbayev 26,833,027 14,846
Ian Connor 26,822,024 25,849
Nikolai D. Klinchev 26,833,027 14,846
Alan D. Berlin 26,820,624 27,249
Peter G. Dilling 26,833,027 14,846
John Duthie 26,833,027 14,846
The number of shares voted (and broker non-votes) with respect to the
adoption of the new Article IV to Chaparral's Amended and Restated
Certificate of Incorporation was as follows:
For Against Abstained Not Voted
--- ------- --------- ---------
25,341,874 21,426 6,424 1,478,149
8
The number of shares voted (and broker non-votes) with respect to the
adoption of the new Article V to Chaparral's Amended and Restated
Certificate of Incorporation was as follows:
For Against Abstained
--- ------- ---------
26,825,600 15,155 7,118
The number of shares voted with respect to the approval of Ernst & Young as
Chaparral's independent auditors was as follows:
For Against Abstained
--- ------- ---------
26,841,997 2,234 3,642
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently quoted on the OTC Bulletin Board under the
symbol "CHAR". As of March 24, 2002, we have 1,830 stockholders of record of our
common stock. No dividend has been paid on our common stock, and there are no
plans to pay dividends in the foreseeable future.
The following table shows the range of high and low bid prices for each
quarter during our last two calendar years ended December 31, 2002 and 2001, as
reported by the National Association of Securities Dealers, Inc.:
Price Range
----------------
Fiscal Quarter Ended High Low
-------------------- ---- ---
March 31, 2001 4.50 2.81
June 30, 2001 3.30 2.00
September 30, 2001 2.50 1.10
December 31, 2001 2.15 1.50
March 31, 2002 1.75 1.30
June 30, 2002 3.05 1.40
September 30, 2002 2.20 1.25
December 31, 2002 1.50 0.82
In August 2001, our common stock was delisted from the Nasdaq SmallCap
Market for failure to comply with Nasdaq Marketplace Rules 4350(i)(1)(A),
4350(i)(1)(B) and 4350(i)(1)(D)(ii), which required Chaparral obtain stockholder
approval prior to the conversion of its 8% Non-Negotiable Subordinated
Convertible Promissory Notes into 11,690,259 shares of its common stock on
September 21, 2000 and the issuance of 1,612,903 shares of common stock on
October 30, 2000. Nasdaq also cited a violation of its annual meeting
requirement. The Nasdaq Listing Qualifications Panel did not, however, cite any
public interest concerns as a basis for its determination.
Chaparral's common stock is also subject to the rules and regulations of
the SEC concerning "penny stocks." The SEC's rules and regulations generally
define a penny stock to be an equity security that is not listed on Nasdaq or a
national securities exchange and that has a market price of less than $5.00 per
share, subject to certain exceptions. The SEC's rules and regulations require
broker-dealers to deliver to a purchaser of penny stock a disclosure schedule
explaining the penny stock market and the risks associated with it. Various
sales practice requirements are also imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, broker-dealers must provide the customer
with current bid and offer quotations for the penny stock, the compensation of
the broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account.
We did not sell any securities since October 1, 2002, which were not
registered under the Securities Act of 1933, as amended.
9
ITEM 6. SELECTED FINANCIAL DATA
As of or for the Year Ended
December 31,
(In Thousands of U.S. Dollars)
-------------------------------------------------------------
2002(1) 2001 2000 1999 1998
-------------------------------------------------------------
Oil and gas sales $ 45,133 -- -- -- --
Total revenues $ 45,133 -- -- -- --
Equity in income (loss) from
Investment $ -- 4,616 2,827 (1,849) (1,222)
Net income/(loss) $ 4,037 (16,215) (26,803) (5,163) (4,266)
Net income (loss) per
common share $ 0.14 (1.16) (6.01) (5.63) (5.14)
Working capital (deficit) $ (2,366) (39,357) (601) (2,941) (287)
Total assets $ 87,308 69,037 70,156 41,303 34,324
Long-term obligations and
Redeemable preferred stock $ 29,542 3,900 26,528 14,776 5,060
Stockholders' equity $ 44,129 25,361 41,926 22,851 27,579
Other Data
----------
Present value of proved reserves(2) $ 128,739 40,344 70,281 61,312 --
Minority interest present value of
proved reserves $ 51,496 -- -- -- --
Proved oil reserves (bbls) 21,855 14,961 16,523 10,071 --
Minority interest of proved oil
reserves (bbls) 8,742 -- -- -- --
Proved gas reserves (mcf) -- -- -- -- --
(1) In 2002, Chaparral obtained a controlling interest in KKM.
Consequently, our financial statements have been consolidated with KKM
on a retroactive basis to January 1, 2002. Chaparral accounted for its
50% investment in KKM using the equity method of accounting, which is
reflected in our selected financial data for periods prior to 2002.
(2) Present value of proved reserves for the years prior to 2002 represent
our 50% equity interest in KKM. Present value of proved reserves for
the year 2002 are presented at 100%.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1. Liquidity and Capital Resources
General Liquidity Considerations
- --------------------------------
Going Concern
- -------------
Our financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Chaparral has incurred recurring
operating losses, has a working capital deficiency as of December 31, 2002, and
there are uncertainties relating to our ability to meet projected cash flow
requirements through 2003. In addition, the Government of Kazakhstan has
required KKM to sell a significant portion of its crude oil production on the
local market, which generates substantially less revenue than oil sold on the
export market. Since January 2003, KKM has refused to deliver its oil production
to the local market and, consequently, the amount of our export quota has been
limited to approximately 64% of our production.
These conditions raise substantial doubt about our ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.
We have attempted, in accordance with our Agreement, to effect the 100%
export of all hydrocarbons produced from the Karakuduk Field, through
discussions with the Government of Kazakhstan. We plan to continue to work with
the Government to increase our export quota and minimize or eliminate future
local sales requirements. If we are unsuccessful, we may be required to initiate
an arbitration proceeding in Switzerland for the breach of the Agreement by the
Government of Kazakhstan. However, no assurances can be provided that the we
will be able to export 100% or a significant portion of our production and that
our cash flow from operations will be sufficient to meet working capital
requirements in the future, which may require us to seek additional debt or
equity financing in order to continue to develop the Karakuduk Field.
Liquidity and Capital Resources
- -------------------------------
We are presently engaged in the development of the Karakuduk Field, which
requires substantial cash expenditures for drilling costs, well completions,
workovers, oil storage and processing facilities, pipelines, gathering systems,
plant and equipment (generators, pumps, communications, etc.) and other field
facilities. We have invested approximately $93.6 million in the development of
the Karakuduk Field and have drilled or re-completed 36 productive wells,
including 17 wells during 2001. In 2002, KKM did not have any drilling activity.
Total capital expenditures for 2002 were approximately $11.5 million compared to
total capital expenditures of $24.85 million incurred in 2001. Capital
expenditures are estimated to be at least $85 million from 2003 through 2006,
including drilling approximately 56 more wells over this period. We anticipate
2003 capital expenditures could be approximately $26 million.
We expect to finance the continued development of the Karakuduk Field
primarily through cash flows from the sale of crude oil. During 2002, KKM sold
approximately 2.47 million barrels of crude oil for $45.13 million. As of March
24, 2003, daily production, net of royalty, is approximately 6,000 barrels per
day from 25 of the 37 productive wells in the field. The remaining 12 wells are
shut-in for various reasons including hydraulic fracturing, installation of
additional gathering lines/ equipment and additional workover, water injection
and stimulation operations to bring wells on production. Another shut-in well is
being considered for future use as an injection well for a pilot waterflood
project.
In 2003, KKM plans to increase its daily production by introducing a water
injection program, installing electric submersible pumps, performing hydraulic
fracturing, and drilling 12 additional wells. Accordingly, management expects
the Karakuduk Field production to increase from approximately 6,000 to
approximately 11,200 barrels of oil per day by year-end.
11
KKM has finished constructing an 18-mile pipeline, capable of transporting
up to 18,000 barrels of oil per day to the export pipeline terminal. The
pipeline was commissioned in June 2002 and is currently fully operational.
Our short- and long-term operational liquidity is also impacted by local
oil sales obligations, imposed on oil and gas producers by the government of
Kazakhstan to supply local energy needs. Under the terms of our Agreement with
the government, KKM has a right to export, and receive export quota for, 100% of
the production from the Karakuduk Field. However, in 2002, the government
required KKM to sell approximately 363,000 barrels of crude oil, or 15% of its
total oil sales, to the local market, compared to 375,000 barrels, or 17%,
during 2001. Local market prices obtained by KKM are approximately $6 to $10 per
barrel below export market prices, net of transportation cost. During January
and February 2003, KKM refused to deliver its oil production to the local market
and, consequently, the amount of KKM's export quota has been limited to
approximately 64% of its production. We have attempted to effect the 100% export
of all hydrocarbons produced from the Karakuduk Field through informal
discussions with the government of Kazakhstan. We plan to continue to work with
the government to minimize or eliminate KKM's future local sales requirements.
If we are unsuccessful, however, we may be required to initiate an arbitration
proceeding in Switzerland for the breach of our Agreement by the government of
Kazakhstan. We can provide no assurances that any such arbitration proceeding
would be successful. The future loss of revenue from local sales may be
significant enough to prevent us from generating a profit from the Karakuduk
Field or to generate enough cash flow to meet our investment and working capital
needs.
Obligations and Commitments
- ---------------------------
The following table is a summary of Chaparral's future payments on
obligations as of December 31, 2002.
Obligations by Period (In Thousands)
-----------------------------------------------
Later
1 Year 2-3 Years 4-5 Years Years Total
------ --------- --------- ----- -----
Debt and related interest 7,245 24,147 17,240 - 48,632
Drilling Contract 5,622 974 - - 6,596
In May 2002, Chaparral received a total equity and debt capital infusion of
$45 million. Chaparral received a total investment of $12 million from CAIH,
including $8 million in exchange for 22,925,701 shares, or 60%, of Chaparral's
outstanding common stock, and $4 million in exchange for a three year note
bearing interest at 12% per annum of which $2 million was repaid during 2002.
Additionally, Kazkommertsbank provided KKM with a credit facility totaling $33
million bearing interest at 14% per annum. The terms and conditions of the CAIH
Note and the KKM Credit facility are more fully described in Note 11 of our
consolidated financial statements for the year ended December 31, 2002.
The financing costs of the KKM Credit Facility and the CAIH Note represent
significant future cash flow requirements. A substantial portion of our future
cash flow from operations will be required for debt service and may not be
available for other purposes. We expect up to $48.63 million of our future
available net cash flows from the Karakuduk Field will be utilized to service
the loan, depending upon excess cash flows available from operations, if any, to
repay the loan prior to its stated maturity date. The availability of future
cash flows is contingent upon many factors beyond our control, including
successful development of the underlying oil reserves from the Karakuduk Field,
production rates, production and development costs, oil prices, access to oil
transportation routes, and political stability in the region.
As of December 31, 2002, Chaparral has a drilling contract with
KazMunayGas-Drilling, an affiliate of KMG, for one development drilling rig
currently operating in the Karakuduk Field. The rig is contracted through
February 6, 2004.
12
Legal Proceedings
- -----------------
As part of the restructuring of the loan with Shell Capital in May 2002,
Shell Capital Services Limited, as the facility agent for Shell Capital,
discontinued and withdrew all legal proceedings against Chaparral and CAP-G. All
parties to the original loan agreement with Shell Capital mutually released each
other from future liability. Shell Capital Services Limited filed a notice of
discontinuance in the United Kingdom with the High Court of Justice, Queen's
Bench Division, on May 8, 2002, regarding its legal proceedings against
Chaparral. Shell Capital Services Limited also withdrew its statutory demand for
the liquidation of CAP-G on May 13, 2002, by filing a written consent with the
Royal Court of Guernsey Ordinary Court.
In December 2002, KKM received a claim from the Ministry of State Revenues
of the Republic of Kazakhstan for $9.1 million (the "Tax Claim") relating to
taxes and penalties covering the three years from 1999 to 2001. KKM has appealed
the claim and has contracted legal firms in Kazakhstan to assist with the appeal
process. Based on the assessments of KKM's management and legal counsel, it is
our opinion that the ultimate resolution of the Tax Claim, after taking into
account reserves, will not have a material adverse effect on the financial
position and operating results of Chaparral.
Capital Commitments and Other Contingencies
- -------------------------------------------
Our operations may be subject to other regulations by the government of the
Republic of Kazakhstan or other regulatory bodies responsible for the area in
which the Karakuduk Field is located. In addition to taxation, customs
declarations and environmental controls, regulations may govern such things as
drilling permits and production rates. Drilling permits could become difficult
to obtain or prohibitively expensive. Production rates could be set so low that
they would make production unprofitable. These regulations may substantially
increase the costs of doing business and may prevent or delay the starting or
continuation of any given exploration or development project.
All regulations are subject to future changes by legislative and
administrative action and by judicial decisions. Such changes could adversely
affect the petroleum industry in general, and us in particular. It is impossible
to predict the effect that any current or future proposals or changes in
existing laws or regulations will have on our operations.
Commodity Prices for Oil
- ------------------------
Our revenues, profitability, growth and value are highly dependent upon the
price of oil. Market conditions make it difficult to estimate prices of oil or
the impact of inflation on such prices. Oil prices have been volatile, and it is
likely they will continue to fluctuate in the future. Various factors beyond our
control affect prices for oil, including supplies of oil available worldwide and
in Kazakhstan, the ability of OPEC to agree to maintain oil prices and
production controls, political instability or armed conflict in Kazakhstan or
other oil producing regions, the price of foreign imports, the level of consumer
demand, the price and availability of alternative fuels, the availability of
transportation routes and pipeline capacity, and changes in applicable laws and
regulations.
Inflation
- ---------
We cannot control prices received from our oil sales and to the extent we
are unable to pass on increases in operating costs, we may be affected by
inflation. The devaluation of the Tenge, the currency of the Republic of
Kazakhstan, can significantly decrease the value of the monetary assets that we
hold in Kazakhstan as well as our assets in that country that are based on the
Tenge. KKM retains the majority of cash and cash equivalents in U.S. Dollars,
but KKM's statutory tax basis for its assets, tax loss carryforwards, and VAT
receivables are all denominated in Tenge and subject to the effects of
devaluation. Local tax laws allow basis adjustments to offset the impact of
inflation on statutory tax basis assets, but there is no assurance that any
adjustments will be sufficient to offset the effects of inflation in whole or in
part. If not, KKM may be subject to much higher income tax liabilities within
Kazakhstan due to inflation and or devaluation of the local currency.
Additionally, devaluation may create uncertainty with respect to the future
business climate in Kazakhstan and to our investment in that country. As of
December 31, 2002, the exchange rate was 155.60 Tenge per U.S. Dollar compared
to 150.20 as of December 31, 2001.
13
Critical Accounting Policies
- ----------------------------
Application of generally accepted accounting principles requires the use of
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements and revenues and
expenses during the reporting period. In addition, alternatives can exist among
various accounting methods. In such cases, the choice of accounting method can
also have a significant impact on reported amounts.
Our determination of proved oil and gas reserve quantities, the application
of the full cost method of accounting for KKM's exploration and production
activities, and the application of standards of accounting for derivative
instruments and hedging activities require management to make numerous estimates
and judgments.
Oil and Gas properties (Full Cost Method). Chaparral follows the full cost
method of accounting for oil and gas properties. Accordingly, all costs
associated with the acquisition, exploration, and development of oil and gas
reserves, including directly related overhead costs, are capitalized.
All capitalized costs of proved oil and gas properties, including the
estimated future costs to develop proved reserves, are amortized on the
unit-of-production method using estimated proved reserves. Investments in
unproved properties and major development projects are not amortized until
proved reserves associated with the projects can be determined or until
impairment occurs. If the results of an assessment indicate that the properties
are impaired, the amount of the impairment is added to the capitalized cost to
be amortized.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized costs
with no loss recognized.
Cost Excluded. Oil and gas properties include costs that are excluded from
capitalized costs being amortized. These amounts represent costs of investments
in unproved properties and major development projects. Chaparral excludes these
costs on a country-by-country basis until proved reserves are found or until it
is determined that the costs are impaired. All costs excluded are reviewed
quarterly to determine if impairment has occurred. Any impairment is transferred
to the costs to be amortized or a charge is made against earnings for those
international operations where a reserve base has not yet been established. For
operations where a reserve base has not yet been established, an impairment
requiring a charge to earnings may be indicated through evaluation of drilling
results or relinquishing drilling rights.
Capitalized Interest. SFAS 34, Capitalization of Interest Costs, provides
standards for the capitalization of interest costs as part of the historical
cost of acquiring assets. FASB-Interpretation ("FIN") 33 provides guidance for
the application of SFAS 34 to the full cost method of accounting for oil and gas
properties. Under FIN 33, costs of investments in unproved properties and major
development projects, on which depreciation, depletion, and amortization
("DD&A") expense is not currently taken and on which exploration or development
activities are in progress, qualify for capitalization of interest. Capitalized
interest is calculated by multiplying the weighted-average interest rate on debt
by the amount of costs excluded. Capitalized interest cannot exceed gross
interest expense.
Ceiling Test. Companies that use the full cost method of accounting for oil
and gas exploration and development activities are required to perform a ceiling
test each quarter. The full cost ceiling test is an impairment test prescribed
by SEC Regulation S-X Rule 4-10. The ceiling test is performed on a
country-by-country basis. The test determines a limit, or ceiling, on the book
value of oil and gas properties. That limit is basically the after tax present
value of the future net cash flows from proved crude oil and natural gas
reserves. This ceiling is compared to the net book value of the oil and gas
properties reduced by any related deferred income tax liability. If the net book
value reduced by the related deferred income taxes exceeds the ceiling, an
impairment or non-cash write down is required. A ceiling test impairment can
give Chaparral a significant loss for a particular period; however, future DD&A
expense would be reduced.
14
Reserves. Estimates of our proved oil and gas reserves are prepared by
Ryder Scott Company in accordance with guidelines established by the SEC. Those
guidelines require that reserve estimates be prepared under existing economic
and operating conditions with no provisions for increases in commodity prices,
except by contractual arrangement. Estimation of oil and gas reserve quantities
is inherently difficult and is subject to numerous uncertainties. Such
uncertainties include the projection of future rates of production, export
allocation, and the timing of development expenditures. The accuracy of the
estimates depends on the quality of available geological and geophysical data
and requires interpretation and judgment. Estimates may be revised either upward
or downward by results of future drilling, testing or production. In addition,
estimates of volumes considered to be commercially recoverable fluctuate with
changes in commodity prices and operating costs. Our estimates of reserves are
expected to change as additional information becomes available.
Derivative Financial Instruments and Hedging Activities. We account for our
investment in derivative financial instruments in accordance with SFAS 133,
Accounting for Derivative Financial Instruments and Hedging Activities, as
amended. As a result, we recognize all derivative financial instruments in our
financial statements at fair value, regardless of the purpose or intent for
holding the instrument. Changes in the fair value of derivative financial
instruments are recognized periodically in income or in shareholders' equity as
a component of comprehensive income depending on whether the derivative
financial instrument qualifies for hedge accounting, and if so, whether it
qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair
values of derivatives accounted for as fair value hedges are recorded in income
along with the portions of the changes in the fair values of the hedged items
that relate to the hedged risks. Changes in fair values of derivatives accounted
for as cash flow hedges, to the extent they are effective as hedges, are
recorded in other comprehensive income net of deferred taxes. Changes in fair
values of derivatives not qualifying as hedges are reported in income.
Legal, Environmental and Other Contingencies. A provision for legal,
environmental and other contingencies is charged to expense when the loss is
probable and the cost can be reasonably estimated. Determining when expenses
should be recorded for these contingencies and the appropriate amounts for
accrual is a complex estimation process that includes the subjective judgment of
management. In many cases, management's judgment is based on interpretation of
laws and regulations, which can be interpreted differently by regulators and/or
courts of law. Chaparral's management closely monitors known and potential
legal, environmental and other contingencies and periodically determines when
Chaparral should record losses for these items based on information available to
us.
Recent Accounting Pronouncements
- --------------------------------
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities (VIEs), in an effort to expand upon and strengthen existing accounting
guidance that addresses when a company should include in its financial
statements the assets, liabilities and activities of another entity. In general,
a VIE is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires a VIE to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the VIE's activities, is entitled to receive a majority of the
VIE's residual returns, or both. FIN 46 also requires disclosures about VIEs
that Chaparral is not required to consolidate, but in which it has a significant
variable interest. The consolidation requirements of FIN 46 apply immediately to
VIEs created after January 31, 2003, and to older entities no later than the
third quarter of 2003. Certain of the disclosure requirements are required in
all financial statements issued after January 31, 2003, regardless of when the
VIE was established. Chaparral does not expect to identify any VIEs that must be
consolidated.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of SFAS 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. Chaparral currently uses the intrinsic method to account for stock
based employee compensation.
15
In November 2002, the FASB issued FIN 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 requires certain guarantees to be recorded at
fair value, which is different from current practice to record a liability only
when a loss is probable and reasonably estimable, as those terms are defined in
FASB Statement 5, Accounting for Contingencies. FIN 45 also requires Chaparral
to make significant new disclosures about guarantees. As of December 31, 2002,
Chaparral is not a guarantor of any unrelated party obligations.
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred and establishes that fair value is the objective for
initial measurement of the liability. The provisions of SFAS 146 are effective
for exit or disposal activities that are initiated after December 31, 2002.
Chaparral adopted SFAS 146 on January 1, 2003, but at this time this statement
has no effect on our consolidated financial position or results of operations.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. SFAS
No. 145, which is effective for fiscal years beginning after May 15, 2002,
provides guidance for income statement classification of gains and losses on
extinguishment of debt and accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. Chaparral
adopted SFAS 145 on January 1, 2003, but at this time this statement has no
effect on our consolidated financial position or results of operations.
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
Subsequently, the asset retirement cost should be allocated to expense using a
systematic and rational method. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. As a result of the adoption of FASB 143, Chaparral will
increase its assets and liabilities by $516,000 as of January 1, 2003 to reflect
the net present value of its retirement obligations. There will be no impact on
our cash flows as a result of adopting SFAS 143.
2. Results of Operations
Results of Operations Year Ended December 31, 2002 Compared to Year Ended
December 31, 2001
- -------------------------------------------------------------------------
In May 2002, Chaparral increased its ownership in KKM from 50% to 60%
through the acquisition of 100% of the outstanding stock of MTI. As a result of
the acquisition, Chaparral obtained a controlling interest in KKM. Consequently,
its financial statements have been consolidated with KKM on a retroactive basis
to January 1, 2002. We previously accounted for our 50% investment in KKM using
the equity method of accounting, which is reflected in our financial results for
periods prior to 2002.
Our operations for the year ended December 31, 2002 resulted in net income
of $4.12 million compared to a net loss of $16.22 million for the year ended
December 31, 2001. The $20.34 million increase in our net income relates to the
recognition of a $5.34 million extraordinary gain resulting from the May 2002
restructuring of our loan with Shell Capital, decreased interest charges
resulting from the refinancing of its debt obligations, and improved operational
results from the Karakuduk Field.
Interest expense decreased from $14.45 million for the year ended December
31, 2001 to $5.61 million for the year ended December 31, 2002, due to the lower
financing costs and the restructuring of our indebtedness. Chaparral's cost of
financing the development of the Karakuduk Field has improved from a
pre-restructuring annual interest rate of LIBOR plus 19.75% compounded daily, to
a simple fixed annual interest rate of 14%, generating a savings of
approximately $3 million dollars per year. Interest expense for the year ended
December 31, 2001 reflects an additional loan discount of $4.37 million recorded
and fully amortized as of September 30, 2001 due to the transfer of a 40%
interest in the distributable profits of CAP-G to Shell Capital for our failure
to repay a $3.15 million bridge loan to Shell Capital on or before September 30,
2001. See Notes 10 and 11 to our consolidated financial statements for the year
ended December 31, 2002.
16
As a result of the adoption of SFAS 133, we recognized a loss of $2.52
million as a cumulative effect of change in accounting principal and an
additional loss of $237,000 for the year ended December 31, 2001 to record the
hedges at their fair value as of the end of the period. Comparatively, Chaparral
recognized a loss of $762,000 to record the hedges at their fair value during
the year ended December 31, 2002. As of December 31, 2002, the hedge agreement
expired. See Note 7 to our consolidated financial statements for the year ended
December 31, 2002.
For the year ended December 31, 2002, Chaparral's financial results have
been consolidated with the financial results of its operating subsidiary, KKM.
During 2002, we sold approximately 2.47 million barrels of crude oil,
recognizing $45.13 million, or $18.29 per barrel, in revenue. Transportation
costs were $9.43 million, or $3.82 per barrel and operating costs associated
with sales were $7.68 million, or $3.11 per barrel. Comparatively, Chaparral
recognized $4.62 million in equity income from investment for the year ended
December 31, 2001, which represents our 50% share of KKM's results during the
period. During the year ended December 31, 2001, KKM sold approximately 2.18
million barrels of crude oil, recognizing $36.58 million in revenue, or $16.75
per barrel. Associated operating costs were $5.25 million, or $2.40 per barrel,
and associated transportation costs were $8.30 million, or $3.80 per barrel. The
increase in operating costs per barrel relates to increased utilization of a
workover rig in the Karakuduk Field to maintain production rates. During the
year ended December 31, 2001, our equity income from investment also reflects
the elimination of $1.45 million of inter-company interest income on our loan to
KKM. See Notes 5 and 20 to our consolidated financial statements for the year
ended December 31, 2002.
General and administrative costs increased from $4.33 million as of
December 31, 2001, to $5.87 million as of December 31, 2002. The $1.54 million
change was principally due to the consolidation of KKM financial results during
2002 as a result of the MTI acquisition. Comparably, general and administrative
expenses reported by Chaparral and KKM during the year ended December 31, 2001
were $4.33 million and $3.75 million, respectively. The $2.21 million decrease
was mainly due to lower insurance and lower professional services expenses.
During 2002, Chaparral canceled its Overseas Private Investment Corporation
("OPIC") political risk insurance as part of the restructuring of Chaparral
creating a savings of $650,000. In addition, expenses for professional services
decreased by $1.52 million from 2001 to 2002.
Depreciation and depletion expense increased $12.05 million from $753,000
in 2001 to $12.80 million in 2002, due to the consolidation of KKM's financial
results during 2002. Comparably, depreciation and depletion expense reported by
Chaparral and KKM during the year ended December 31, 2001 were $753,000 and
$9.48 million, respectively. Effectively, depreciation and depletion expense
increased by $2.57 million due to additional depletion of our investment in oil
and gas assets resulting from increased production from the Karakuduk Field and
an increase in the effective depletion rate from $3.97 per barrel during 2001 to
$4.59 per barrel during 2002. The increase in the effective depletion rate was
due to higher estimated development costs to produce proved reserve estimates.
Income taxes increased by $2.69 million from $0 in 2001 to $2.69 million in
2002, due to the consolidation of KKM financial results during 2002. All income
taxes payable relate to our operations in Kazakhstan. Chaparral has no U.S.
income taxes due to Chaparral's estimated domestic tax loss carryforwards of
$26.37 million as of December 31, 2002. These carryforwards will expire at
various times between 2003 and 2020. See Note 14 to our consolidated financial
statements for the year ended December 31, 2002.
Results of Operations Year Ended December 31, 2001 Compared to Year Ended
December 31, 2000
- -------------------------------------------------------------------------
We accounted for our investment in KKM using the equity method for the
years 2001 and 2000.
Our operations for the year ended December 31, 2001 resulted in a net loss
of $16.22 million compared to a net loss of $26.80 million as of December 31,
2000. The $10.58 million decrease in our loss from operations primarily relates
to decreases in interest charges from non-recurring transactions incurred during
2000 in our attempt to finance the development of the Karakuduk Field, net of
associated increases in general and administrative costs and the impact of the
adoption of FSAS 133, Accounting for Derivative Instruments and Hedging
Activities, during 2001. Equity income from our investment in KKM increased by
$1.79 million due to KKM's increase in the production and sale of crude oil
during the period.
Interest expense decreased from $27.03 million in 2000 to $14.45 million in
2001. Interest expense for the current period reflects $10.01 million recognized
from our loan with Shell Capital, including $6.91 million in interest on
17
outstanding principal and $3.10 million in discount amortization, of which $2.42
million was expensed in the fourth quarter of 2001 upon the receipt of notices
of default and acceleration from Shell Capital. Additionally, we recognized
$4.37 million in interest expense due to the transfer of a 40% interest in the
distributable profits of CAP-G to Shell Capital for failure to repay the bridge
loan to Shell Capital on or before September 30, 2001. Comparatively, during
2000, we incurred $5.29 million in interest expense on the loan and $909,000 in
amortization of associated debt issuance costs. Approximately $3.48 million was
reclassified to the principal balance of the loan as of December 31, 2000. See
Note 7 to our consolidated financial statements for the year ended December 31,
2001.
Interest expense for the period ended December 31, 2000 also reflects a
non-recurring, non-cash interest charge of approximately $20.34 million
recognized upon the conversion of $20.85 million of notes into 11,690,259 shares
of our common stock at a conversion price of $1.86 per share. The conversion
feature of the notes was a "beneficial conversion feature" as addressed in EITF
98-5, Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios. EITF 98-5 required the recognition
of additional interest expense equal to the face value of the notes, net of
original discount of $506,000, upon conversion. See Note 8 to our consolidated
financial statements for the year ended December 31, 2001.
As a result of the adoption of SFAS 133, we recognized a loss of $2.52
million as a cumulative effect of change in accounting principal and an
additional loss of $237,000 for the year ended December 31, 2001 to record the
derivatives at their fair value as of the end of the period. See Note 5 to our
consolidated financial statements for the year ended December 31, 2001.
Interest income decreased $478,000 to $1.45 million in 2001, compared to
$1.93 million in 2000. The decrease was primarily due to lower interest rates
during 2001. The loan with KKM accrues interest at an annual rate of LIBOR plus
1%. The average interest rate charged during 2000 was approximately 7.3%
compared to approximately 5.1% during 2001.
General and administrative costs increased from $3.69 million as of
December 31, 2000, to $4.33 million as of December 31, 2001. The $637,000 change
was principally due to an approximate $682,000 increase in insurance expense
including additional OPIC political risk insurance premiums of $271,000, and
additional amortization of transportation risk insurance of $411,000, which was
fully amortized during the fourth quarter of 2001 due to the current status of
the Shell Capital loan. See Notes 6 and 7 to our consolidated financial
statements for the year ended December 31, 2001.
Depreciation and depletion expense increased $332,000 from $421,000 in 2000
to $753,000 in 2001 due to additional depletion of acquisition costs of our
investment in KKM. Our depletion expense was $730,000 in 2001 compared to
$403,000 in 2000, resulting from increased production from the Karakuduk Field.
Our equity income from investment was $4.62 million in 2001, compared to
$2.83 million in 2000. The net change of $1.79 million was the result of
increased crude oil production and sales by KKM during 2001, partially offset by
a decrease in crude oil prices during the same period. KKM sold 2.18 million
barrels of crude oil in 2001, generating revenues of $36.58 million, or $16.75
per barrel, compared to sales of approximately 765,000 barrels of crude oil in
2000, generating $16.97 million, or $22.18 per barrel. From 2000 to 2001, KKM
increased crude oil sales by 185%, generating a corresponding increase in oil
sales revenue of 116%. Transportation costs were $8.30 million in 2001, or $3.80
per barrel, compared to $3.21 million in 2000, or $4.20 per barrel, reflecting a
decrease of transportation costs on a per barrel basis of approximately 9.5%.
Operating costs increased in aggregate from 2000 to 2001, with current year
operating costs of $5.25 million, or $2.40 per barrel, compared to $3.68
million, or $4.81 per barrel, in the prior period. The approximate 50% decrease
in operating cost per barrel is due to the significant increase in crude oil
production during the period in relation to field level operating costs
necessary to achieve such production increases. Our equity income from
investment also reflects the elimination of $1.45 million of intercompany
interest income on the loan to KKM. See Notes 4 and 15 to our consolidated
financial statements for the year ended December 31, 2001.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency
- ----------------
Chaparral's functional currency is the U.S. Dollar. All transactions
arising in currencies other than U.S. Dollars, including assets, liabilities,
revenue, expenses, gains, or losses are measured and recorded into U.S. Dollars
using the exchange rate in effect on the date of the transaction.
Cash and other monetary assets held and liabilities denominated in
currencies other than U.S. Dollars are translated at exchange rates prevailing
as of the balance sheet date (155.60 and 150.20 Kazakh Tenge per U.S. Dollar as
of December 31, 2002 and 2001, respectively). Non-monetary assets and
liabilities denominated in currencies other than U.S. Dollars have been
translated at the estimated historical exchange rate prevailing on the date of
the transaction. Exchange gains and losses arising from translation of non-U.S.
Dollar amounts at the balance sheet date are recognized as an increase or
decrease in income for the period.
The devaluation of the Tenge, the currency of the Republic of Kazakhstan,
can significantly decrease the value of the monetary assets that we hold in
Kazakhstan as well as our assets in that country that are based on the Tenge.
KKM retains the majority of cash and cash equivalents in U.S. Dollars in bank
accounts within Kazakhstan, but KKM's statutory tax basis in its assets, tax
loss carryforwards, and VAT receivables are all denominated in Tenge and subject
to the effects of devaluation. Local tax laws allow basis adjustments to offset
the impact of inflation on statutory tax basis assets, but there is no assurance
that any adjustments will be sufficient to offset the effects of inflation in
whole or in part. If not, KKM may be subject to much higher income tax
liabilities within Kazakhstan due to inflation and/ or devaluation of the local
currency. Additionally, devaluation may create uncertainty with respect to the
future business climate in Kazakhstan and to our investment in that country.
The Tenge is not a convertible currency outside of the Republic of
Kazakhstan. The translation of Tenge denominated assets and liabilities in these
financial statements does not indicate Chaparral could realize or settle these
assets and liabilities in U.S. Dollars.
We had $4.82 million of net monetary liabilities denominated in Tenge as of
December 31, 2002.
Commodity Prices for Oil
- ------------------------
Under the terms of our Agreement with the government of the Republic of
Kazakhstan, KKM has a right to export, and receive export quota for, 100% of the
production from the Karakuduk Field. However, oil producers within Kazakhstan
are required to supply a portion of their crude oil production to the local
market to meet domestic energy needs. During January and February 2003, KKM
refused to deliver its oil production to the local market. Consequently, the
amount of KKM's export quota has been limited to approximately 64% of its
production. Local market oil prices are significantly lower than prices
obtainable on the export market. In 2002, the government required KKM to sell
approximately 363,000 barrels of crude oil, or 15% of its total oil sales, to
the local market, compared to 375,000 barrels, or 17%, during 2001. Local market
prices obtained by KKM are approximately $6 to $10 per barrel below export
market prices, net of transportation costs. We are continuing to have informal
discussions with the government of Kazakhstan in an attempt to effect the 100%
export of all hydrocarbons produced from the Karakuduk Field. If we are
unsuccessful, however, we may be required to initiate an arbitration proceeding
in Switzerland for the breach of our Agreement by the government of Kazakhstan.
We can provide no assurances that any such arbitration proceeding would be
successful. The future loss of revenue resulting from local sales may be
significant enough to prevent us from generating a profit from the Karakuduk
Field or generate enough cash flow to meet our investment and working capital
needs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for a list of the Financial Statements and the supplementary
financial information included in this report following the signature page.
19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 24, 2003, the following table sets forth the names and ages of
our directors and executive officers of Chaparral, the principal offices and
positions with Chaparral held by each person and the date such person became a
director or executive officer. The executive officers are elected annually by
the board of directors. Executive officers serve terms of one year or until
their death, resignation or removal by the board of directors. The present term
of office of each director will expire at the next annual meeting of
stockholders. Each executive officer will hold office until his successor duly
is elected and qualified, until his resignation or until he is removed in the
manner provided by our bylaws.
Name of Director or Officer and
Position in Chaparral Since Age Principal Occupation During the Last 5 Years
--------------------- ----- --- --------------------------------------------
Ian Connor 2002 36 Mr. Connor has served as the Chairman of the Board
Chairman of the Board of Chaparral since November 2002. Since April
2001, Mr. Connor has served as a Managing Director
of Open Joint Stock Company Kazkommertsbank, a
commercial bank incorporated in Kazakhstan. Prior
to joining Kazkommertsbank, Mr. Connor held
several senior executive positions, including
Chief Executive Officer at Global Menkul Degerler
A.S., an Istanbul-based brokerage and investment
house, from May 1997 to March 2001.
Nikolai D. Klinchev 2002 45 Mr. Klinchev has been the Chief Executive Officer
Director and of Chaparral since November 2002. From June 2002
Chief Executive Officer to November 2002, he served as Vice President -
Business Development of Chaparral. Mr. Klinchev
has served as the General Director and as a board
member of KKM since 1996. Mr. Klinchev graduated
from the Institute of Energy in Almaty,
Kazakhstan, as a power engineer and studied
production management in St. Petersburg (formerly
Leningrad), Russia.
Askar Alshinbayev 2002 37 Mr. Alshinbayev has served as Managing Director
Director and Chief Executive Officer of Central Asian
Industrial Holdings, N.V. since May 2002. Since
1998, Mr. Alshinbayev has served as a Managing
Director of Open Joint Stock Company
Kazkommertsbank, a commercial bank incorporated in
Kazakhstan. From 1994 to 1998, he served as Deputy
Chairman of the Management Board of
Kazkommertsbank. Mr. Alshinbayev also serves on
the Board of Directors of Hurricane Hydrocarbons
Ltd. and Nelson Resources, Ltd.
20
Name of Director or Officer and
Position in Chaparral Since Age Principal Occupation During the Last 5 Years
--------------------- ----- --- --------------------------------------------
Peter G. Dilling * 2002 53 From 1995 to 1997, Mr. Dilling held various
Director positions with Chaparral, including Vice Chairman
of the Board. Since 2000, Mr. Dilling has served
as President and Chief Executive Officer and as a
director of Trinidad Exploration and Development,
Ltd., an oil and gas exploration company. He has
served as President and Chief Executive Officer,
and as a Director of Anglo-African Energy, Inc.,
an exploration and production company, since 1999.
Prior to joining Anglo-African, Mr. Dilling was
President and a director of M-D International
Petroleum, Inc., an exploration and production
company, from 1994 to 1997.
John Duthie * 2002 59 Since December 2002, Mr. Duthie has owned and
Director operated Bowler Hat Ltd., a H.K. based company
active in Turkey and the Black Sea region. He also
serves as an advisor to PDF, a corporate finance
house, and provides financial and investment
advice to various Turkish and international
corporations and institutions. Prior to Bowler
Hat, he served as General Manager for Westdeutsche
Landesbank Turkey, a commercial bank headquartered
in Germany, since 1994. He previously held various
positions with Merrill Lynch & Co., a stock
brokerage house and investment bank, and Deutsche
Bank, a commercial bank and financial institution.
Alan D. Berlin * 2002 62 Since 1995, Mr. Berlin has been a partner of the
Director and Corporate Secretary 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 served as a Director of Chaparral in 1997
and was the Secretary of Chaparral from January
1996 to August 1997. Since June 1998, he has
served Chaparral in the same position. From 1985
to 1987, Mr. Berlin was the President of the
International Division of Belco Petroleum Corp.
and held various other positions with Belco
Petroleum Corp. and Belco Oil and Gas Corp. from
1977 to 2001. Mr. Berlin has been appointed an
Honorary Associate of the Centre for Petroleum and
Mineral Law and Policy at the University of
Dundee, Scotland, and is a member of the
Association of International Petroleum
Negotiators.
Richard J. Moore 2002 44 Mr. Moore has held the position of VP-Finance and
VP-Finance and Chief Financial Officer since November 2002. Mr.
Chief Financial Officer Moore has served as Finance Director for KKM since
September 1998. He continues to serve on the Board
of Directors of KKM and has held the directorship
since October 1998. He has over 25 years
experience in the international petroleum
industry, including 10 years of experience in the
F.S.U.
Miguel C. Soto 2002 31 Mr. Soto has served as Treasurer and Financial
Treasurer and Controller Controller of Chaparral since November 2002. Since
June 2002, Mr. Soto has been the Financial
Controller of KKM. From June 2002 to November
2002, he served as the Financial Controller of
Chaparral. Prior to joining Chaparral, Mr. Soto
worked as a Tax Accountant for Arthur Andersen and
spent several years as a Staff Accountant for a
technology company.
* Audit Committee member.
21
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3 and 4 and any amendments furnished to
Chaparral during our fiscal year ended December 31, 2002, and Form 5 and any
amendments furnished to Chaparral with respect to the same fiscal year, we
believe that our directors, officers, and greater than 10% beneficial owners
complied with all applicable Section 16 filing requirements, except that
Whittier Ventures did not file one report representing three transactions.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation paid by Chaparral for services
rendered by Mr. McMillian, who was the Chief Executive Officer and Co-Chairman
of the Board, Mr. Jeffs who was the Chairman of the Board and Chief Executive
Officer of Chaparral, Mr. Young, who was the Vice President - Finance,
Treasurer, and Chief Financial Officer of Chaparral, Mr. Klinchev, who is
currently the Chief Executive Officer of Chaparral, Mr. Moore, who is currently
the Vice President - Finance and Chief Financial Officer of Chaparral, and Mr.
Soto, who is currently the Treasurer and Controller of Chaparral. There were no
other executive officers of Chaparral whose annual salary and bonus exceeded
$100,000 during the fiscal year 2002.
Summary Compensation Table.
Annual Compensation Long-Term Compensation
------------------------------------- -----------------------------------------------
Awards Payouts
--------------------------------- -----------
Other Restricted Securities
Name and Annual Stock Awards Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation ($) Options/SARs (#) Payouts ($) Compensation
------------------ ---- ------ ----- ------------ --- ---------------- ----------- ------------
Nikolai D. Klinchev 2002 $164,500(1) -- -- -- -- -- --
Chief Executive
Officer (11/02 to
Present)
Richard J. Moore 2002 $164,500(2) $90,000(2) -- -- -- -- --
VP-Finance and
Chief Financial
Officer (11/02 to
Present)
Miguel C. Soto 2002 $116,933(3) $35,000(3) -- -- -- -- --
Treasurer and
Controller (11/02
to present)
John G. McMillian 2002 $58,500 -- -- -- -- -- --
Chief Executive 2001 $162,000(4) -- -- -- -- -- --
Officer (1/99 to 2000 $137,500 -- -- -- -- -- --
5/02)
James A. Jeffs 2002 $130,250 -- -- -- -- -- --
Co-Chairman and 2001 $162,000(5) -- -- -- -- -- --
Chief Executive
Officer
(1/99 to 10/02)
Michael B. Young 2002 $162,000 $21,000 -- -- -- -- $81,000(6)
VP-Finance and 2001 $162,000 -- -- -- -- -- --
Chief Financial 2000 $150,000 -- -- -- -- -- --
Officer (6/02 to
11/02)
1. Represents compensation paid to Mr. Klinchev from June 2002 to December 31,
2002.
2. Represents compensation paid to Mr. Moore from June 2002 to December 31,
2002. In addition, Mr. Moore received a $90,000 cash bonus during 2002.
3. Represents compensation paid to Mr. Soto for the year ended December 31,
2002. In addition, Mr. Soto received a $35,000 cash bonus during 2002.
4. Mr. McMillian received cash compensation of $114,750 in December 31, 2001.
The remaining $47,250 was paid during 2002.
5. Mr. Jeffs' did not receive any cash compensation during the year 2001. The
outstanding balance of $162,000 was paid during 2002.
6. Under the terms of his employment agreement, Mr. Young received $81,000 in
connection with the termination of his employment with Chaparral.
22
Options/SAR Grants.
For the fiscal year ended December 31, 2002, 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, 2002 December 31, 2002
------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------- ------------------------------- ---------------------------------
Michael B. Young 1,167 -- -- --
Additionally, no options were exercised in fiscal year 2002.
Director Interlocks.
During our last fiscal year, Messrs. Jeffs, who was the Co-Chairman of the
Board, and David A. Dahl, a former director, 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 10.89% of the outstanding common stock. Messrs. Dahl and Jeffs
resigned effective May 10, 2002 and October 28, 2002, respectively.
Mr. Alshinbayev is a Managing Director of Kazkommertsbank and the Chief
Executive Officer of CAIH. Mr. Connor, Chaparral's current Chairman, is also a
Managing Director of Kazkommertsbank. Mr. Klinchev, Chaparral's current Chief
Executive Officer, has acted as a Director of KKM since 1996.
Compensation of Directors.
During the fiscal year ended December 31, 2002, Chaparral implemented a
standard compensation arrangement for its directors, including providing (i)
$700 in compensation to each director for each board or committee meeting
attended via teleconference, (ii) $1,000 in compensation to each director for
each board or committee meeting attended in person, (iii) $2,000 in compensation
per day while traveling on Chaparral related business, including board meetings,
and (iv) $2,500 in quarterly compensation for serving on Chaparral's Board.
Stock Performance Graph.
Comparison of Five Year Cumulative Total Return
- -----------------------------------------------
The following line graph compares the total returns (assuming reinvestment
of dividends) of common stock, the Nasdaq Market Index and the SIC Code Index
for the five year period ending December 31, 2002.
1997 1998 1999 2000 2001 2002
CHAPARRAL RESOURCES, INC. 100.00 13.75 5.25 2.42 1.01 0.67
SIC CODE INDEX 100.00 80.10 97.85 124.30 114.05 121.59
NASDAQ MARKET INDEX 100.00 141.04 248.76 156.35 124.64 86.94
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 operation, financial and
strategic objectives, and increases in shareholder value. The Compensation
Committee regularly reviews the compensation packages of Chaparral's executive
officers, taking into account factors which it considers relevant, such as
business conditions within and outside the industry, Chaparral's financial
performance, the market composition for executives of similar background and
experience, and the performance of the executive officer under consideration.
The particular elements of Chaparral's compensation programs for executive
officers are described below.
Compensation Structure
- ----------------------
The base compensation for the executive officers of Chaparral named in the
Summary Compensation Table is intended to be competitive with that paid in
comparable situated industries, taking into account the scope of
responsibilities. The goals of the Compensation Committee in establishing
Chaparral's executive compensation program are:
o to compensate the executive officers of Chaparral fairly for their
contributions to Chaparral's short, medium and long-term performance;
and
o to allow Chaparral to attract, motivate and retain the management
personnel necessary to Chaparral's success by providing an executive
compensation program comparable to that offered by companies with
which Chaparral competes for management personnel.
The elements of Chaparral's executive compensation program are annual base
salaries, annual bonuses and equity incentives. The Compensation Committee bases
its decisions on the scope of the executive's responsibilities, a subjective
evaluation of the executive's performance and the length of time the executive
has been in the position.
In June 2001, Chaparral's stockholders approved the 2001 Stock Incentive
Plan, which sets aside 2.14 million shares of Chaparral's common stock for
issuance to Chaparral's officers, directors, employees, and consultants.
Chaparral has not made any grants under the 2001 Stock Incentive Plan as of
December 31, 2002.
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,
Ian Connor, Chairman
Askar Alshinbayev
Nikolai D. Klinchev
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 24, 2003, 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)
- --------------------------------------- -------------------------------- --------------------- ----------
Central Asian Industrial Holdings, N.V. -- 26,002,624(2) 62.98%
81 Scharlooweg,
Curacao, Netherlands Antilles
Allen & Company Incorporated -- 5,697,707(3) 14.91%
711 Fifth Avenue
New York, New York 10022
Whittier Ventures, LLC -- 4,159,866(4) 10.89%
1600 Huntington Drive
South Pasadena, California 91030
Ian Connor Chairman of the Board -- *
Nikolai D. Klinchev Director and Chief Executive 1,000,084(5) 2.62%
Officer
Askar Alshinbayev Director 26,002,624(6) 62.98%
Peter G. Dilling Director -- *
John Duthie Director -- *
Alan D. Berlin Director and Corporate Secretary 167(7) *
James A. Jeffs Former Chairman and CEO 10,329(8) *
John G. McMillian Former Co-Chairman and CEO 385,469(9) 1.01%
David A. Dahl Former Director 167(10) *
Ted Collins, Jr. Former Director -- (10) *
Richard L. Grant Former Director -- (10) *
Judge Burton B. Roberts Former Director -- (11) *
Richard J. Moore Vice President - Finance and -- *
Chief Financial Officer
Miguel C. Soto Treasurer and Controller 333 *
Michael B. Young Former VP - Finance, Treasurer, 1,835(12) *
and Chief Financial Officer
All current directors, nominees, and -- 27,004,710 65.41%
executive 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 3,076,923 shares
underlying warrants to purchase shares of Common Stock. Does not include
shares owned directly by officers and stockholders of CAIH with respect to
which CAIH disclaim beneficial ownership. Officers and stockholders of CAIH
may be deemed to beneficially own shares of the Common Stock reported to be
beneficially owned directly by CAIH.
(3) Does not include shares owned directly by officers and stockholders of
Allen Holding and Allen & Company with respect to which Allen Holding and
Allen & Company disclaim beneficial ownership. Officers and stockholders of
Allen Holding and Allen & Company may be deemed to beneficially own shares
of the Common Stock reported to be beneficially owned directly by Allen
Holding and Allen & Company.
(4) In accordance with Rule 13d-3(d)(1)(i)(A), includes 334 shares underlying
warrants currently exercisable.
(5) In accordance with Rule 13d-3(d)(1)(i)(A), includes 1,000,000 shares
beneficially owned by NK Cayman Limited.
(6) In accordance with Rule 13d-3(d)(1)(i)(A), includes 3,076,923 shares
underlying warrants to purchase shares of Common Stock. Mr. Alshinbayev has
a pecuniary interest in the shares beneficially owned by CAIH and has
voting power and investment power over such shares and, thus, may be deemed
to beneficially own such shares.
(7) Includes 167 shares owned by Mr. Berlin.
(8) Mr. Jeffs resigned as the Chairman and Chief Executive Officer of Chaparral
effective October 28, 2002.
(9) Mr. McMillian resigned as the Co-Chairman and Chief Executive Officer of
Chaparral effective May 10, 2002.
(10) Resigned as a director of Chaparral effective May 10, 2002.
(11) Judge Roberts resigned as a director of Chaparral effective January 18,
2002.
(12) Includes 668 shares owned by Mr. Young and 1,167 shares underlying
currently exercisable options. Mr. Young's employment with Chaparral was
terminated effective December 15, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During May 2002, Chaparral received a total investment of $12 million from
CAIH, including $8 million in exchange for 22,925,701 shares, or 60%, of
Chaparral's outstanding common stock, and $4 million in exchange for a three
year note bearing interest at 12% per annum. Along with the CAIH Note, CAIH
received a warrant to purchase 3,076,923 shares of Chaparral's common stock at
$1.30 per share. Additionally, Kazkommertsbank provided KKM with a credit
facility totaling $33 million bearing interest of 14% per annum, Chaparral paid
CAIH $1.79 million as a restructuring fee.
In June 2002, Chaparral prepaid $2 million of the $4 million outstanding
principal balance of the CAIH Note. As a result, we recognized an extraordinary
loss on the early extinguishment of debt of $1.22 million from the write-off of
50% of the unamortized discount on the CAIH Note.
The KKM Credit Facility consists of a $30 million non-revolving line and a
$3 million revolving line, both of which were fully borrowed by KKM in May 2002.
We recognized $3.08 million of interest expense on the KKM Credit Facility for
the twelve months ended December 31, 2002.
The non-revolving portion of the KKM Credit Facility accrues simple
interest at an annual rate of 14% and is repayable over a five-year period with
final maturity in May 2007. Accrued interest is payable quarterly, beginning in
December 2002, and KKM must begin making quarterly principal payments in May
2003.
The revolving portion of the KKM Credit Facility accrues simple interest at
an annual rate of 14%. The revolver is loaned to KKM for short-term periods up
to one year, but KKM has the right to re-borrow the funds through May 2006 with
final repayment due in May 2007. The initial $3 million revolving loan to KKM
was subject to a three month term. The principal balance was repaid in July 2002
and KKM immediately re-borrowed another $3 million with a maturity date of July
31, 2003. Accrued interest on the revolving loan is payable at maturity.
The original KKM Credit Facility included repayment terms of three years
and four years for the non-revolving and revolving portions of the KKM Credit
Facility, respectively, with an