CHAPARRAL RESOURCES INC, 10-Q, 2000-05-18

CHAPARRAL RESOURCES INC
10-Q, 2000-05-18
CRUDE PETROLEUM & NATURAL GAS

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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________.

Commission File Number: 0 - 7261

CHAPARRAL RESOURCES, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

Delaware 84-0630863
- ------------------------------- ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

16945 Northchase Drive, Suite 1620
Houston, Texas 77060
--------------------------------------
(Address of Principal Executive Offices)

Registrant's telephone number, including area code: (281) 877-7100

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.

YES [ x ] NO [ ]

As of May 15, 2000, the Registrant had 980,481 shares of its common stock,
par value $0.0001 per share, issued and outstanding.

<PAGE>

Part I - Summarized Financial Information

Item 1 - Financial Statements

Chaparral Resources, Inc.
Consolidated Balance Sheets

March 31, December 31,
2000 1999
----------- ------------
(Unaudited) (Audited)

Assets
Current assets:
Cash and cash equivalents $ 238,000 $ 23,000
Restricted cash -- 578,000
Accounts receivable 15,000 23,000
Receivable from affiliate 799,000 --
Prepaid expenses 121,000 111,000
------------ ------------
Total current assets 1,173,000 735,000

Oil and gas properties and investments
- full cost method
Republic of Kazakhstan (Karakuduk Field) 45,397,000 38,151,000

Furniture, fixtures and equipment 100,000 100,000
Less accumulated depreciation (44,000) (39,000)
------------ ------------

56,000 61,000
------------ ------------
Other Assets
Deferred debt issuance cost -- 2,356,000
Hedge agreement 4,000,000 --
Other 729,000 --
------------ ------------
Total other assets 4,729,000 2,356,000
------------ ------------

Total assets $ 51,355,000 $ 41,303,000
============ ============

See accompanying notes.

<PAGE>

Chaparral Resources, Inc.
Consolidated Balance Sheets (continued)

March 31, December 31,
2000 1999
--------- ------------
(Unaudited) (Audited)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 772,000 $ 1,045,000
Accrued liabilities:
Accrued compensation 247,000 458,000
Accrued debt issuance cost -- 1,934,000
Accrued interest and other 370,000 239,000
------------ ------------
Total current liabilities 1,389,000 3,676,000

Shell Capital loan, net of discount 10,187,000 --
Notes payable, net of discount 12,940,000 9,576,000
Redeemable preferred stock- cumulative,
convertible,
Series A 75,000 designated, 50,000
issued and outstanding,
at stated value, $5.00 cumulative annual
dividend, $5,500,000 redemption value 5,288,000 5,200,000
Stockholders' equity:
Common stock - authorized, 100,000,000
shares of $0.0001 par value; issued and
outstanding, 980,481 and 980,314 shares,
respectively -- --
Capital in excess of par value 49,032,000 47,857,000
Unearned portion of restricted stock awards (17,000) (23,000)
Preferred stock - 1,000,000 shares authorized,
925,000 shares undesignated. Issued and
outstanding - none -- --
Accumulated deficit (27,464,000) (24,983,000)
------------ ------------
Total stockholders' equity 21,551,000 22,851,000
------------ ------------
Total liabilities and stockholders' equity $ 51,355,000 $ 41,303,000
============ ============

See accompanying notes.

<PAGE>

Chaparral Resources, Inc.
Consolidated Statements of Operations
(Unaudited)

For the Three Months Ended
March 31, March 31,
2000 1999
----------- -----------

Revenue $ -- $ --

Costs and expenses:
Depreciation and depletion 20,000 5,000
General and administrative 748,000 433,000
----------- -----------
768,000 438,000
----------- -----------

Loss from operations (768,000) (438,000)

Other income (expense):
Interest income 320,000 216,000
Interest expense (889,000) (54,000)
Equity in loss from investment (1,131,000) (347,000)
Legal settlement -- 34,000
Other 75,000 --
----------- -----------

(1,625,000) (151,000)
----------- -----------

Net loss $(2,393,000) $ (589,000)
=========== ===========

Cumulative annual dividend accrued
Series A Redeemable Preferred Stock (63,000) (63,000)
Discount accretion
Series A Redeemable Preferred Stock (25,000) (25,000)
----------- -----------

Net loss available to common stockholders $(2,481,000) $ (677,000)
=========== ===========

Basic and diluted earnings per share:
Net loss per share $ (2.53) $ (.69)
Weighted average number of shares
outstanding (basic and diluted) 980,427 977,388

See accompanying notes.

Chaparral Resources, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

For the Three Months Ended
March 31, March 31,
2000 1999
------------ ------------

<S> <C> <C>
Cash flows from operating activities
Net loss $ (2,393,000) $ (589,000)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Equity loss from investment 1,131,000 347,000
Depreciation and depletion 20,000 5,000
Gain on the sale of oil and gas properties (75,000) --
Stock issued for services and bonuses 6,000 194,000
Expired warrants -- (117,000)
Amortization of note discount 63,000 12,000
Amortization of debt issuance cost 136,000 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (791,000) 2,000
Prepaid expenses (10,000) (4,000)
Accrued interest on advances to KKM (315,000) (190,000)
Hedge agreement (4,000,000) --
Other assets (729,000) --
Increase (decrease) in:
Accounts payable and accrued liabilities (2,287,000) 53,000
Accrued interest converted to debt on
Shell Capital loan 264,000 --
------------ ------------
Net cash used in operating activities (8,980,000) (287,000)

Cash flows from investing activities
Additions to furniture, fixtures and equipment $ -- $ (5,000)
Investment in and advances to oil and
gas properties (8,077,000) (2,511,000)
Proceeds from sale of interest in oil and gas
properties - domestic 75,000 --
------------ ------------
Net cash used in investing activities (8,002,000) (2,516,000)

5
</TABLE>

<PAGE>

Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)

For the Three Months Ended
March 31, March 31,
2000 1999
------------ ------------
Cash flows from financing activities

Net proceeds from Shell Capital loan and
notes payable $ 17,100,000 $ 3,820,000
Debt issuance cost (481,000) --
Restricted cash 578,000 45,000
------------ ------------
Net cash provided by financing activities 17,197,000 3,865,000
------------ ------------

Net increase in cash and
cash equivalents 215,000 1,062,000
Cash and cash equivalents at beginning
of period 23,000 121,000
------------ ------------
Cash and cash equivalents at end of period $ 238,000 $ 1,183,000
============ ============

Supplemental cash flow disclosure
Interest paid $ 79,000 $ 13,000

Supplemental schedule of non-cash investing
and financing activities
Stock warrant issued to Shell Capital 1,175,000 --

See accompanying notes.

<PAGE>

Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

1. General

Chaparral Resources, Inc. ("Chaparral") was incorporated in the state of
Colorado on January 13, 1972, principally to engage in the exploration,
development and production of oil and gas properties. On April 21, 1999, the
Company's stockholders approved the reincorporation of Chaparral from Colorado
to Delaware. Chaparral focuses substantially all of its efforts on the
exploration and development of the Karakuduk Field, an oilfield located in the
Central Asian Republic of Kazakhstan.

The consolidated financial statements include the accounts of Chaparral and its
100% owned subsidiaries, Central Asian Petroleum (Guernsey) Limited ("CAP-G"),
Road Runner Services Company ("RRSC"), Chaparral Acquisition Corporation
("CAC"), and Central Asian Petroleum, Inc. ("CAP-D"). Chaparral owns 80% of the
common stock of CAP-G directly and indirectly through CAP-D, which owns the
remaining 20%. Hereinafter, Chaparral and its subsidiaries are collectively
referred to as the "Company." All significant intercompany transactions have
been eliminated.

CAP-G owns a 50% interest in Closed Type JSC Karakudukmunay ("KKM"), a
Kazakhstan joint stock company, which holds the rights for the exploration,
development and production of oil in the Karakuduk Field. KKM is owned jointly
by CAP-G (50%), KazakhOil JSC ("KazakhOil") (40%) and a private Kazakhstan joint
stock company (10%). KazakhOil, the national petroleum company of Kazakhstan, is
owned by the government of the Republic of Kazakhstan. The Company shares
control of KKM through participation on KKM's Board of Directors.

In April 1999, the Company's stockholders approved and effected a sixty for one
reverse stock split. Accordingly, all historical weighted average share and per
share amounts have been restated to reflect the reverse stock split.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Reference should be made to the notes to the
financial statements in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.

The information furnished herein was taken from the books and records of the
Company without audit. However, such information reflects all adjustments, which
are, in the opinion of management, normal recurring adjustments necessary to a
fair statement of the results for the interim periods presented. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for any future interim period or for the year.

2. New Accounting Standards

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. This statement, as amended by SFAS No. 137, is effective for
fiscal years beginning after June 15, 2000. As of December 31, 1999, the Company
has not adopted SFAS 133. The Company is evaluating this pronouncement and
intends to adopt the statement no later than January 1, 2001. The impact of SFAS
133 on the Company's financial position and results of operations is not
expected to be material.

<PAGE>

Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

2. New Accounting Standards (continued)

In 1999, the FASB released EITF 99-10, Percentage Used to Determine the Amount
of Equity Method Losses, which requires investors to recognize equity method
losses beyond their percentage of investee common stock to the extent of their
adjusted basis in the investee's common stock and other loans/advances made to
the investee. Future equity method gains, if any, would be recaptured by the
investor to the extent disproportionate equity method losses were recognized in
prior periods. EITF 99-10 is effective for interim and annual periods beginning
after September 23, 1999. The Company has elected to apply EITF 99-10
prospectively beginning in the quarter ended December 31, 1999. The Company
recognized an additional equity loss of $723,000 in 2000 due to the application
of EITF 99-10.

3. Going Concern

The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company is responsible for
providing 100% of the funding for the development of the Karakuduk Field not
provided from oil sales or third party sources. The Karakuduk Field will require
significant additional funding in order to obtain levels of production that
would generate sufficient cash flows to meet future capital and operating
spending requirements. The Company has recognized recurring operating losses and
has a working capital deficiency as of December 31, 1999. In addition, there are
uncertainties relating to the Company and KKM's ability to meet commitments
under KKM's license agreement with the government (the "License") and all
expenditure and cash flow requirements through fiscal year 2000. The License
requires KKM to meet certain expenditure and work commitments on or before June
30, 2000. KKM does not expect to satisfy the License commitments before June 30,
2000. The Company does not anticipate that the licensing authority will suspend
or cancel the License, but no assurances can be given that the licensing
authority will not do so if the commitments are not satisfied. If the License is
revoked, KKM's right to develop the Karakuduk Field may be terminated and the
Company's investment in the Karakuduk Field may be lost.

These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of these uncertainties.

Management's plan to address these uncertainties include:

o Shell Capital Loan. In November 1999, the Company entered a loan agreement
(the "Loan") with Shell Capital Limited ("Shell Capital"), to provide up to
$24,000,000 in financing for the development of the Karakuduk Field. The
consummation of the Loan was subject to a number of significant conditions,
which were fulfilled in February 2000. As of May 15, 2000, the Company has
borrowed a total of $20,500,000 under the Loan.

o Rights Offering. As a condition to the Loan, the Company is utilizing its
best efforts to issue to its stockholders rights to acquire not less than
$6,000,000 of the Company's common stock on or before June 30, 2000 (the
"Rights Offering"). Two of the Company's related party stockholders, Allen
& Company, Inc. ("Allen") and Whittier Ventures, LLC ("Whittier"), have
each undertaken to exercise their full pro-rata share of the Rights
Offering and, if the Rights Offering is not concluded on or before June 30,
2000, to each contribute $2,000,000 into the Company for the Company's
common stock or other indebtedness (the "Equity Support Agreement"). If the
Rights Offering is not completed, the Company will require additional
sources of capital to supplement the Equity Support Agreement in the
short-term.

<PAGE>

Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

3. Going Concern (continued)

o Crude Oil Sales Agreement. In November 1999, KKM entered into a Crude Oil
Sale and Purchase Agreement (the "Crude Oil Sales Agreement") with Shell
Trading International Limited ("STASCO"), an affiliate of Shell Capital,
for the purchase of 100% of the oil production from the Karakuduk Field on
the export market for world market oil prices. The Company expects KKM to
obtain a substantially higher return from oil sales under the Crude Oil
Sales Agreement than would otherwise be obtainable from oil sales in
Kazakhstan's local market. KKM sold approximately 219,000 barrels of crude
oil to STASCO in early May 2000 under the terms of the Crude Oil Sales
Agreement. Pending final settlement, the oil sale is expected to generate
cash proceeds of approximately $4,500,000, net of royalty. Related
transportation costs of approximately $1,000,000 were paid by KKM prior to
the sale.

Management's plans for addressing the above uncertainties are partially based
upon forward looking events, which have yet to occur, including the successful
consummation of the Rights Offering and/or the Equity Support Agreement and the
successful development, production, and sales of crude oil from the Karakuduk
Field, as to which there is no assurance. Expected funding requirements
necessary for development of the Karakuduk Field through December 31, 2000 are
partially based upon future cash flows from the sale of KKM's crude oil
production. While the Company expects to realize material cash benefits from
some, or all, of the above transactions, no assurances that the Rights Offering,
Equity Support Agreement, or sales under the Crude Oil Sales Agreement will be
consummated. If additional financial resources are not raised in the short term,
through internal or external means, the Company may be unable to meet
operational cash flow requirements through the year 2000 or meet the terms of
the Loan. If so, the Company may lose its investment in KKM and the Karakuduk
Field.

4. Restricted Cash

As of December 31, 1999, the Company held restricted cash of $578,000 as
collateral for loans made by the Chase Bank of Texas, N.A. ("Chase") to KKM. KKM
fully repaid the loans in January 2000, and the collateral was released.

5. Hedge Agreement

On February 11, 2000, the Company paid $4,000,000 for put contracts to sell
1,562,250 barrels of North Sea Brent crude (the "Hedge Agreement") to hedge
price risk of future sales of oil production from the Karakuduk Field. The
exercise prices of the various put contracts in the Hedge Agreement range from
$22.35 to $17.25 per barrel, with monthly expiration dates beginning in October
2000 and ending in December 2002. The contracts are evenly spread between
October 2000 to December 2001 (62,750 barrels per month) and between January
2002 to December 2002 (51,750 barrels per month). The Company accounts for the
Hedge Agreement as a hedge of an anticipated transaction. Changes in market
value of the underlying put contracts will be recognized as other income or loss
in the period KKM's corresponding crude oil production is recorded as oil
revenue. As of March 31, 2000, the market value of the Hedge Agreement was
$1,755,000 and the Company's unrealized hedging loss was $2,245,000.

<PAGE>

Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

6. Other Assets

In March 2000, the Company paid Shell Capital $750,000 for a beneficial interest
in Shell Capital's policy for transportation risk insurance ( "Transportation
Risk Insurance"), covering certain circumstances whereby KKM would be unable to
export crude oil production outside of the Republic of Kazakhstan through the
existing pipeline routes currently available. In the event coverage under Shell
Capital's policy is triggered, proceeds from the policy would go to the benefit
of the Company for use in making principal and interest payments required under
the Loan.

7. Shell Capital Loan

In November 1999, the Company entered into the Loan with Shell Capital, to
provide up to $24,000,000 of financing for the development of the Karakuduk
Field. CAP-D, CAP-G, and KKM also signed the Loan as co-obligors. The Company
and KKM are hereafter referred to as the "Borrowers".

As of March 31, 2000, the Company has borrowed $13,800,000 under the Loan and
capitalized $264,000 of subordinated interest expense as additional principal.
The Loan is recorded net of $3,877,000 in unamortized discount, further
described below.

The consummation of the Loan was subject to a number of significant conditions,
including, without limitation: (i) an equity infusion of at least $9,000,000,
(ii) obtaining political risk insurance, (iii) Shell or the Company obtaining
transportation risk insurance, (iv) the hedging of a significant portion of the
Company's future oil production, and (v) the retirement, conversion, or full
subordination of all of the outstanding indebtedness of the Company and KKM,
excluding current trade payables. In February 2000, the Company fully satisfied
all of the outstanding conditions, drawing down initial funds from the Loan.

The $9,000,000 equity infusion was partially satisfied by the Company's issuance
of 8% Non-negotiable Convertible Promissory Notes (the "Notes"). See Note 8. The
Notes are convertible upon stockholder approval. The remaining infusion should
be met through the Rights Offering and/or proceeds from the Equity Support
Agreement.

In January 2000, the Company obtained binding political risk insurance coverage
from the Overseas Private Investment Corporation ("OPIC"). The OPIC policy's
maximum coverage amount electable by the Company is $50,000,000, which would
require a quarterly premium of $262,500. The Company is required to maintain
political risk insurance until the Loan is fully repaid. As of May 15, 2000, the
Company has paid $368,000 in premiums and has bound OPIC coverage of $40,000,000
through July 31, 2000.

As discussed in Note 5, the Company entered into the Hedge Agreement in February
2000, purchasing put contracts to sell 1,562,250 barrels of North Sea Brent
crude.

<PAGE>

Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

7. Shell Capital Loan (continued)

As discussed in Note 6, the Company paid Shell Capital a total of $750,000 for
Transportation Risk Insurance in March 2000.

Additionally, KKM entered into a technical service agreement directly with Shell
Capital, granting Shell Capital, at their own discretion, the right to bring in
technical consultants to work on the Karakuduk Field on a cost only basis.

The Company is allowed to drawdown the principal balance of the Loan in minimum
increments of $2,000,000. Loan advances will be used to meet the capital and
operational requirements of KKM, up-front fees and future finance costs required
under the Loan, make payments for premiums due under the OPIC and Transportation
Risk Insurance policies, and make payments required under the Hedge Agreement.
The Loan is available for drawdown until the earlier of September 30, 2001 or
project completion.

Project completion occurs when various conditions are met by the Company and
KKM, including, but not limited to: (i) receipt by Shell Capital of an
independent engineer's reserve report evidencing proven developed reserves of at
least 30,000,000 barrels in the Karakuduk Field, (ii) sustaining average
production of 13,000 barrels of oil per day from the Karakuduk Field for a
period of 45 consecutive days, (iii) sustaining water injection at an average
rate of 15,000 barrels per day over 45 consecutive days, (iv) injection of lift
gas into one well over a 24 hour period, and (v) various other financial and
technical milestones ("Project Completion").

Prior to Project Completion, any borrowed amounts accrue interest at an annual
rate of LIBOR plus 17.75%, compounding quarterly. The annual interest rate is
reduced to LIBOR plus 12.75% after Project Completion. Prior to Project
Completion, an interest amount, equal to annual rate of LIBOR plus .50%, is
payable quarterly to Shell Capital, along with a commitment fee equal to an
annual rate of 1.5% of the undrawn portion of the $24,000,000 debt facility. The
remaining unpaid interest is capitalized to the Loan at the end of each quarter.
After Project Completion, all quarterly interest on the outstanding Loan is
fully due and payable by the Company at the end of each calendar quarter.

Principal payments, including any capitalized interest, are due on quarterly
reduction dates ("Reduction Date"), beginning with the first calendar quarter
ending on the earlier of 60 days following Project Completion or December 31,
2001. Minimum principal payments, based upon percentages of the principal
outstanding as of Project Completion, are set out in the Loan and ensure full
settlement of the Loan by September 30, 2004, the final maturity date. Mandatory
prepayments of principal outstanding are required on each Reduction Date out of
any excess cash flow available after consideration of the Company's and KKM's
permitted budgeted expenditures for the following 45 days and all fees,
interest, and principal payments scheduled on such Reduction Date.

In connection with finalizing the Loan, the Company issued to Shell Capital a
warrant to purchase up to 15% of the Company's outstanding common stock (the
"Shell Warrant") equal to 147,072 shares of the Company's common stock on the
date of grant. The Shell Warrant is exercisable for a period of 5 years
beginning on the earlier of Project Completion or September 30, 2001, at an
exercise price of $15.45 per share. The Shell Warrant is non-transferable,
contains certain registration rights, and is subject to certain anti-dilution
provisions. The fair market value of the Shell Warrant, $1,175,000, was recorded
as a discount of the Loan, amortizable as interest expense over the life of the
Loan. The fair market value of the Shell Warrant was estimated as of February
14, 2000, the date of initial drawdown under the Loan, using the Black-Scholes
option pricing model with the following weighted average assumptions: risk free
interest rate of 6.61%, dividend yield of 0%, volatility factors of the expected
market price of the Company's common stock of 1.27, and a weighted average life
expectancy of the warrants of 3.5 years.

<PAGE>

Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

7. Shell Capital Loan (continued)

The Loan subjects the Company to a significant number of restrictions, including
various representations and warranties, positive and negative covenants, and
events of default. See the notes to the financial statements in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999 for
additional information regarding such restrictions.

The Company incurred $3,877,000 in deferred debt issuance costs as of March 31,
2000, comprised of up-front fees payable to Shell Capital, legal fees of Shell
Capital and the Borrowers, the value of the Shell Warrant on the date of grant,
and miscellaneous financing fees and set-up charges, net of amortization. The
Company recorded the debt issuance costs as a discount to the Loan, amortizable
over the life of the Loan.

As of March 31, 2000, the principal borrowings of $13,800,000 from the Loan were
utilized to pay $2,225,000 in outstanding debt issuance costs, $4,000,000 for
the Hedge Agreement, $750,000 for Transportation Risk Insurance, $157,000 for
the initial OPIC insurance premium, $6,000,000 for KKM's operations, and
$668,000 for the Company's corporate overhead. Interest expense for the period
was $331,000, of which $264,000 of subordinated interest was capitalized as
additional principal at the end of the quarter.

As of May 15, 2000, the Company borrowed an additional $6,700,000 under the
Loan, bringing total principal borrowings to $20,500,000.

8. Notes Payable

The Company's Notes outstanding of $13,340,000 consist of $10,040,000 of the
Company's Notes issued during the fourth quarter of 1999 and $3,300,000 of the
Company's Notes issued during January and February 2000. The Notes were issued
to various related parties and other non-affiliated investors. Notes issued to
related parties totaled $10,690,000, including $7,827,000 to Allen, $2,051,000
to Whittier, $662,000 to Mr. McMillian, the Co-Chairman and Chief Executive
Officer of the Company, and $150,000 to a relative of Jim Jeffs, the Co-Chairman
of the Company. The Notes are recorded net of a $400,000 unamortized discount.

In exchange for the Notes, the Company received $8,050,000 in cash and canceled
$5,290,000 in promissory notes issued previously in 1999, plus accrued interest
thereon, issued by the Company to Allen ($3,827,000), Whittier ($1,051,000), and
Mr. McMillian ($412,000). As of March 31, 2000, the Company had $370,000 in
accrued interest on the Notes, of which $304,000 related to Notes issued to
related parties.

The Notes, plus accrued interest, are convertible into the Company's common
stock at a conversion price of $1.86 per share, subject to the approval of the
Company's stockholders. The Notes bear interest at an annual rate of 8% until
the Company's stockholders vote on the conversion of the Notes. If the
conversion feature is approved, the Notes will convert into the equivalent
shares of the Company's common stock within 10 business days following the
stockholder vote. The failure of the stockholders to approve the conversion
provision of the Notes will result in an immediate increase of the annual
interest rate payable to the lesser of 25% or the maximum rate allowed by
applicable law. Management expects to submit the vote on conversion of the Notes
to the Company's stockholders in the second quarter of 2000. The Notes have a
stated maturity date of October 31, 2001, but are unsecured and fully
subordinated to the Loan. The holders of the Notes have no rights to receive any
principal or interest payments prior to full repayment of the Loan, under its
terms, and have executed subordination agreements to that effect.

<PAGE>

Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

8. Notes Payable (continued)

The conversion feature of the Notes represent a "beneficial conversion feature"
as addressed in EITF 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios. Under EITF
98-5, a portion of the proceeds received from the Notes is allocable to the
conversion feature contained therein. The value assigned to the conversion
feature is determined as the difference between the market price of the
Company's common stock and the conversion price multiplied by the number of
shares to be received upon conversion. As the conversion price contained in the
Notes is substantially below the market price, the value under the above formula
significantly exceeds the net proceeds from the Notes. Under EITF 98-5, the
discount assigned to the conversion feature is limited to the total proceeds
allocated to the convertible instrument. Accordingly, upon approval of the
conversion by the stockholders, the Company will record total additional debt
discount and additional paid in capital equal to $12,834,000, the face amount of
the Notes net of original discount. This amount will be immediately charged to
interest expense since the Notes are convertible upon stockholder approval.
Therefore, the adjustment will have a negative impact on earnings, but no impact
on total stockholder's equity.

9. Other Related Party Transactions

Effective January 1, 2000, Chaparral entered into an agreement to provide
management services to KKM for a fee of $170,000 per month, to be recovered from
KKM on a current basis from proceeds from oil sales. The receivable from
affiliate represents $510,000 of accrued management fees through March 31, 2000,
as well as reimbursable costs and expenses paid by the Company on behalf of KKM
during the same period.

Effective March 1, 2000, the Company sold overriding royalty interests in
certain domestic oil and gas properties for $75,000 to a former Chairman and
Chief Executive Officer of the Company, resulting in a $75,000 gain. In February
1997, the Company had assigned the overriding royalty interests to the same
individual as part of a severance agreement. The Company holds no other
interests in domestic oil and gas properties.

<PAGE>

Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)

10. Investments

The results from operations of the Company's equity-based investment in KKM are
summarized below:

Closed Type JSC Karakudukmunay
Statement of Expenses and Accumulated Deficit
For the Three Month Period Ended March 31, 2000 and 1999
(Amounts in US Dollars)
(Unaudited)

For The Three Months Ended
March 31, March 31,
2000 1999
----------- -----------

Management service fee $ 132,000 $ 193,000
General and administrative expenses 504,000 552,000
Depreciation and depletion 180,000 125,000
Interest expense 629,000 204,000
----------- -----------

Net loss 1,445,000 1,074,000

Accumulated deficit, beginning of period 12,007,000 7,503,000
----------- -----------

Accumulated deficit, end of period $13,452,000 $ 8,577,000
----------- -----------

In January 2000, KKM repaid two loans from Chase totaling $578,000. In
April 2000, KKM sold its first commercial production to STASCO under the terms
of the Crude Oil Sales Agreement. KKM sold approximately 219,000 barrels of
crude oil to STASCO in early May 2000 under the terms of the Crude Oil Sales
Agreement. Pending final settlement, the oil sale is expected to generate cash
proceeds of approximately $4,500,000, net of royalty. Related transportation
costs of approximately $1,000,000 were paid by KKM prior to the sale.

<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

1. Liquidity and Capital Resources

General Liquidity Considerations.

Our financial statements have been presented on the basis we are a going
concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. We are responsible for providing
100% of the funding for the development of the Karakuduk Field not provided from
oil sales or third party sources. The Karakuduk Field will require significant
additional funding in order to obtain levels of production that would generate
sufficient cash flows to meet future capital and operating spending
requirements. We have recognized recurring operating losses and have a working
capital deficiency as of December 31, 1999. In addition, there are uncertainties
relating to Chaparral's and KKM's ability to meet commitments under KKM's
License, and all expenditure and cash flow requirements through fiscal year
2000. The License requires KKM to meet certain expenditure and work commitments
on or before June 30, 2000. KKM does not expect to satisfy the License
commitments before June 30, 2000. We do not anticipate that the licensing
authority will suspend or cancel the License, but no assurances can be given
that the licensing authority will not do so if the commitments are not
satisfied. If the License is revoked, KKM's right to develop the Karakuduk Field
may be terminated and our investment in the Karakuduk Field may be lost.

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.

Management has taken the following actions, to address the substantial doubt
with respect to our ability to remain a going concern and enhance our short and
long-term liquidity:

o Shell Capital Loan. In November 1999, we entered into the Loan with
Shell Capital, to provide up to $24,000,000 in financing for the
development of the Karakuduk Field. The consummation of the Loan was
subject to a number of significant conditions, which were subsequently
fulfilled in February 2000. As of May 15, 2000, we have borrowed a
total of $20,500,000 under the Loan.

o Rights Offering. As a condition to the Loan, we are utilizing our best
efforts to complete a Rights Offering to our stockholders to acquire
not less than $6,000,000 of Chaparral's common stock on or before June
30, 2000. Two of Chaparral's related party stockholders, Allen and
Whittier, have each undertaken in the Equity Support Agreement to
exercise their full pro-rata share of the Rights Offering and, if the
Rights Offering is not concluded on or before June 30, 2000, to each
contribute $2,000,000 to Chaparral for either our common stock or
indebtedness. If the Rights Offering is not completed, we will require
additional sources of capital to supplement the Equity Support
Agreement in the short-term.

<PAGE>

o Development of KKM's Proven Reserves. KKM has approximately 67.58
million barrels of estimated proven oil reserves, net of government
royalty. As of May 15, 2000, KKM has produced approximately 590,000
barrels of crude oil and is producing approximately 1,500 barrels of
oil per day. Capital spending for the development of the Karakuduk
Field is expected to materially increase KKM's extraction of its
proven reserves, generating significant cash flows from future oil
sales to fund KKM's operations and repay our outstanding advances to
KKM.

o Crude Oil Sales Agreement. In November 1999, KKM entered into the
Crude Oil Sales Agreement with STASCO, an affiliate of Shell Capital,
for the purchase of 100% of the oil production from the Karakuduk
Field on the export market for world market oil prices. We expect KKM
to obtain a substantially higher return from oil sales under the Crude
Oil Sales Agreement than would otherwise be received from oil sales in
Kazakhstan's local market. KKM sold approximately 219,000 barrels of
crude oil to STASCO in early May 2000 under the terms of the Crude Oil
Sales Agreement. Pending final settlement, the oil sale is expected to
generate cash proceeds of approximately $4,500,000, net of royalty.
Related transportation costs of approximately $1,000,000 were paid
by KKM prior to the sale.

Our considerations for addressing our going concern uncertainty are partially
based upon forward-looking events, which have yet to occur, including the
successful consummation of the Rights Offering and the successful development,
production, and sales of crude oil from the Karakuduk Field. Expected funding
requirements necessary for development of the Karakuduk Field through December
31, 2000 are partially based upon future cash flows from the sale of KKM's crude
oil production. While we expect to realize material cash benefits from some, or
all, of the above transactions, we can provide no assurances that the Rights
Offering, Equity Support Agreement, or sales under the Crude Oil Sales Agreement
will be consummated. If we fail to raise additional financial resources in the
short term, through internal or external means, we may be unable to meet
operational cash flow requirements or meet the terms of the Loan. If so, we may
lose our investment in KKM and the Karakuduk Field.

Other risks and considerations also impact our short and long-term liquidity,
including the result of the proposed conversion of our Notes into our common
stock, KKM's ability to successfully develop and increase production from the
Karakuduk Field, KKM's ability to obtain export oil quota and physically deliver
its production to the export market, volatility of oil prices on the world
market, our oil production hedge arrangements, and the impact of KKM's License
commitments to the government of the Republic of Kazakhstan.

The Company's Notes.
- --------------------

We issued an additional $3,300,000 of our Notes during January and February 2000
to meet working capital needs for the development of the Karakuduk Field and to
satisfy the capital requirements of the Loan. As of March 31, 2000, the Company
had total Notes outstanding of $13,340,000, issued to various related parties
and other non-affiliated investors. Notes issued to related parties totaled
$10,690,000, including $7,827,000 to Allen, $2,051,000 to Whittier, $662,000 to
Mr. McMillian, the Co-Chairman and Chief Executive Officer of the Company, and
$150,000 to a relative of Jim Jeffs, the Co-Chairman of the Company. As of March
31, 2000, the Company had $370,000 in accrued interest on the Notes, of which
$304,000 related to Notes issued to related parties.

The Notes, plus accrued interest, are convertible into our common stock at a
conversion price of $1.86 per share, subject to the approval of our stockholders
of Chaparral. The Notes bear interest at an annual rate of 8% until our
stockholders vote on the conversion of the Notes. If the conversion feature is
approved, the Notes will convert into the equivalent shares of our common stock
within 10 business days following the stockholder vote. The failure of the
stockholders to approve the conversion provision of the Notes will result in an
immediate increase of the annual interest rate payable to the lesser of 25% or
the maximum rate allowed by applicable law. We expect to submit the vote on
conversion of the Notes to our stockholders in the second quarter of fiscal year
2000. The Notes have a stated maturity date of October 31, 2001, but are

<PAGE>

unsecured and fully subordinated to the Loan. The holders of the Notes have no
rights to receive any principal or interest payments prior to full repayment of
the Loan, under its terms, and have executed subordination agreements to that
effect.

Shell Capital Loan.
- -------------------

We entered into the Loan with Shell Capital on November 1, 1999, to provide up
to $24,000,000 of financing for the development of the Karakuduk Field. The
consummation of the Loan was subject to a number of significant conditions,
including, without limitation: (i) an equity infusion of at least $9,000,000,
(ii) obtaining political risk insurance, (iii) Shell Capital or Chaparral
obtaining transportation risk insurance, (iv) the hedging of a significant
portion of our future oil production, and (v) the retirement, conversion, or
full subordination of all of the outstanding indebtedness of Chaparral and KKM,
excluding current payables. On February 14, 2000, we fully satisfied all of the
outstanding conditions and drew down a total of $8,300,000 from the Loan.

The $9,000,000 equity infusion was partially satisfied by our issuance of Notes
totaling $5,050,000 for cash from November 11, 1999 through February 10, 2000.
The remaining shortfall will be met through the proposed Rights Offering and/or
the Equity Support Agreement.

On January 31, 2000, we obtained binding political risk insurance coverage from
OPIC. The OPIC policy's maximum coverage amount available is $50,000,000, which
would require a quarterly premium of $262,500. We are required to maintain
political risk insurance until the Loan is fully repaid. We have elected
coverage of $40,000,000 through July 31, 2000.

In February 2000, we entered into the Hedge Agreement, paying $4,000,000 for put
contracts to sell a total of 1,562,250 barrels of North Sea Brent crude. The
exercise prices of the various put contracts range from $22.35 to $17.25 per
barrel, with monthly expiration dates beginning in October 2000 and ending in
December 2002. The contracts are evenly spread between October 2000 to December
2001 (62,750 barrels per month) and between January 2002 to December 2002
(51,750 barrels per month). As of March 31, 2000, the market value of the Hedge
Agreement was $1,755,000 and our unrealized hedging loss was $2,245,000.

In March 2000, we paid Shell Capital a total of $750,000 for Transportation Risk
Insurance, providng us with a beneficial interest in Shell Capital's policy for
transportation risk insurance, covering certain circumstances whereby KKM would
be unable to export crude oil production outside of the Republic of Kazakhstan
through the existing pipeline routes currently available. In the event coverage
under Shell Capital's policy is triggered, proceeds from the policy would go to
the benefit of Chaparral for use in making principal and interest payments
required under the Loan.

We are allowed to drawdown the principal balance of the Loan in minimum
increments of $2,000,000. Loan advances will be used to meet the capital and
operational requirements of KKM, up-front fees and future finance costs required
under the Loan, make payments for premiums due under the OPIC and Transportation
Risk Insurance policies, and make payments required under the Hedge Agreement.
The Loan is available for drawdown until the earlier of September 30, 2001 or
Project Completion.

Project Completion occurs when various conditions are met by us and KKM,
including, but not limited to: (i) receipt by Shell Capital of an independent
engineer's reserve report evidencing proven developed reserves of at least 30
million barrels in the Karakuduk Field, (ii) sustaining average production of
13,000 barrels of oil per day from the Karakuduk Field for a period of 45
consecutive days, (iii) sustaining water injection at an average rate of 15,000
barrels per day over 45 consecutive days, (iv) injection of lift gas into one
well over a 24 hour period, and (v) various other financial and technical
milestones.

<PAGE>

remaining unpaid interest is capitalized to the Loan at the end of each quarter.
After Project Completion, all quarterly interest on the outstanding Loan is
fully due and payable at the end of each calendar quarter.

Principal payments, including any capitalized interest, are due on quarterly
Reduction Dates, beginning with the first calendar quarter ending on the earlier
of 60 days following Project Completion or December 31, 2001. Minimum principal
payments, based upon percentages of the principal outstanding as of Project
Completion, are set out in the Loan and ensure full settlement of the Loan by
September 30, 2004, the final maturity date. Mandatory prepayments of principal
outstanding are required on each Reduction Date out of any excess cash flow
available after consideration of Chaparral's and KKM's permitted budgeted
expenditures for the following 45 days and all fees, interest, and principal
payments scheduled on such Reduction Date.

In connection with finalizing the Loan, we issued the Shell Warrant to Shell
Capital to purchase up to 15% of our outstanding common stock. The Shell Warrant
is non-transferable and will be exercisable on the earlier of Project Completion
or September 30, 2001. The Shell Warrant contains certain registration rights
and is subject to certain anti-dilution provisions. The Shell Warrant's exercise
price is $15.45 per share.

The Loan subjects us to a significant number of restrictions, including various
representations and warranties, positive and negative covenants, and events of
default. These restrictions include, but are not limited to, the following:

o Pledge of Assets. We pledged substantially all of our assets to Shell
Capital, including our interest in the Karakuduk Field. If an event of
default occurs under the Loan and is not timely cured, Shell Capital
is entitled to certain remedies, including the right to accelerate
repayment of the loan and obtain our rights to the Karakuduk Field.

o Business Alteration. We cannot engage in any other business except the
ownership of KKM and the operation of the Karakuduk Field without the
prior consent of Shell Capital.

o Rights Offering. We must use our best efforts to complete the Rights
Offering on or before June 30, 2000. Allen and Whittier have provided
the Equity Support Agreement to exercise their full pro-rata share of
the Rights Offering or, if the Rights Offering is not completed, to
each contribute $2,000,000 to Chaparral in exchange for our equity
securities or indebtedness.

o Change in Control. We cannot enter into any transaction whereby a
"group" as defined in the Securities Act of 1934 acquires or otherwise
gains control of 20% or more of our outstanding shares of voting
stock. Certain transactions are exempt from this restriction,
including, the conversion of our Notes, the Rights Offering, the
Equity Support Agreement, conversion of our outstanding Series A
Preferred Stock, the exercise of the Shell Warrant, and a grant of
non-statutory or statutory options to purchase up to 15% of our
outstanding common stock to our officers, directors, employees, and
consultants (subject to certain anti-dilution provisions).
Furthermore, Allen and Whittier, have agreed not to sell or otherwise
transfer any of our common stock on or before June 30, 2000, and at no
time let their ownership in us fall below 20%, unless otherwise agreed
with Shell Capital.

o Charged Accounts. We must retain all cash receipts from oil sales,
proceeds from the Loan, and any other funds raised through approved
equity or debt offerings in pledged bank accounts (the "Charged
Accounts"). The Charged Accounts are controlled by Shell Capital. We
retain title to the Charged Accounts, but Shell Capital directs all
cash movements at our request. On a monthly basis, we request
transfers of funds from the Charged Accounts into certain operating
accounts controlled directly by us or by KKM, respectively.

<PAGE>

o Cash Expenditures. We must expend funds in accordance with capital and
operating budgets approved by Shell Capital on an annual basis, unless
otherwise approved by Shell Capital.

o Project Completion. KKM must reach Project Completion on or before
September 30, 2001.

o Share Capital. We cannot purchase, issue, or redeem any of our share
capital without the prior approval of Shell Capital.

o Future Indebtedness. We cannot borrow money, other than trade debt,
without the approval of Shell Capital.

o Sale of Significant Assets. We cannot dispose of any significant
assets, including capital stock in our subsidiaries, without the
approval of Shell Capital.

o Leases. Without Shell Capital's approval, KKM cannot enter into any
lease or license arrangement with annual payments in excess of
$1,000,000 and we will not enter into any lease or license arrangement
with annual payments in excess of $200,000.

o Dividends. KKM cannot pay dividends prior to Project Completion, and
then only subject to certain restrictions. We cannot pay any dividends
without Shell Capital's consent.

o OPIC Insurance. We must maintain OPIC political risk insurance
throughout the duration of the Loan.

o Hedge Agreement. We will not cancel or terminate the hedging contracts
entered into as part of the Loan or enter into any other hedging
transaction without Shell Capital's consent.

The terms and conditions and related financing costs of the Loan are
significant. A substantial portion of our future cash flow from operations will
be required for debt service and may not be available for other purposes. Our
ability to obtain additional debt or equity financing in the future for working
capital, capital expenditures, or acquisitions is also restricted, as well as
our ability to acquire or dispose of significant assets or investments. These
restrictions may make us more vulnerable and less able to react to adverse
economic conditions. The failure of Chaparral to meet the terms of the Loan
could result in an event of default and the loss of our investment in the
Karakuduk Field.

The Loan prohibits us from paying dividends to our stockholders without Shell
Capital's consent. We have not paid dividends in the past and have no
expectations to do so in the future.

As of May 15, 2000, we have borrowed $20,500,000 under the Loan. The Loan
proceeds were utilized to pay $2,525,000 in outstanding debt issuance costs,
$4,000,000 for the Hedge Agreement, $750,000 for Transportation Risk Insurance,
$368,000 for OPIC insurance premiums, $11,550,000 for KKM's operations, and
$1,307,000 for our corporate overhead.

Other Sources of Liquidity and Capital Resources.
- -------------------------------------------------

The costs required to develop the Karakuduk Field are significant and will not
be fully covered by the available financial resources under the Loan. We are
currently pursuing other sources of liquidity, which we believe will satisfy
both the short and long-term liquidity requirements of both Chaparral and KKM,
through the conversion of the Notes into our common stock, the Rights Offering,
and the sale of oil under the Crude Oil Sales Agreement.

<PAGE>

We have filed a preliminary proxy statement to our stockholders with the SEC,
which includes a proposal to approve the conversion of the Notes into shares of
our common stock at $1.86 per share. The conversion of the Notes would decrease
our indebtedness by $13,339,789, plus accrued interest. If the Notes are not
converted, they will accrue interest at an annual rate equal to the lesser of
25% or the maximum rate allowed by law. The Notes are fully subordinated to the
Loan, and cannot be repaid until we have fully repaid the Loan.

Our board of directors has approved a Rights Offering for 5,300,000 shares of
our common stock convertible at $1.86 per share, or $9,858,000. The board of
directors set the record date after the date of our annual meeting in order to
permit the holders of the Notes to participate in the Rights Offering. Under the
terms of the Equity Support Agreement, Allen and Whittier have undertaken to
exercise their full pro-rata share of the Rights Offering, which will be
approximately $6,660,000, assuming conversion of the Notes, plus accrued
interest, into our common stock. If the Rights Offering is not completed prior
to June 30, 2000, Allen and Whittier will contribute an aggregate of $4,000,000
in exchange for our equity securities or indebtedness. The Equity Support
Agreement, however, will not provide enough additional capital to fund our
corporate overhead requirements, as well as KKM's working capital needs prior to
becoming self-sustaining from cash flow from oil sales.

If the Rights Offering is not completed by June 30, 2000, we will require
additional sources of capital besides the Equity Support Agreement in the short
term. In this event, we will request an extension of the deadline to complete
the Rights Offering beyond June 30, 2000, and may seek additional forms of
capital investment from the issuance of additional Notes and/or equity
securities. We must obtain the approval of Shell Capital before we can issue any
debt or equity securities apart from the conversion of the Notes, the Rights
Offering, and the Equity Support Agreement.

Both short and long-term financial resources necessary to develop the Karakuduk
Field are expected to result from crude oil sales under the Crude Oil Sales
Agreement. Ryder Scott has estimated the proven reserves underlying the
Karakuduk Field to be approximately 67.58 million barrels of oil. KKM is
implementing a two-rig drilling program to accelerate recoverability of these
proven reserves to generate cash flows capable of supporting KKM's operations
and begin repayment of our investment in KKM as soon as possible. We will
utilize the principal and interest repayments on our investment in KKM to fund
repayment of our Loan with Shell Capital.

In early May 2000, KKM completed its first export oil sale to STASCO, delivering
approximately 219,000 barrels of oil to the sea port of Odessa. Pending final
settlement, the oil sale is expected to generate cash proceeds of approximately
$4,500,000, net of royalty. Related transportation costs of approximately
$1,000,000 were paid by KKM prior to the sale. Additional oil sales are expected
on at least a quarterly basis, as KKM increases its production.

While we expect to realize material cash benefits from some, or all, of the
above transactions, we can provide no assurances that the Rights Offering,
Equity Support Agreement, conversion of the Notes, or sales under the Crude Oil
Sales Agreement will be consummated. If we fail to raise additional financial
resources in the short term, through internal or external means, we may be
unable to meet operational cash flow requirements or meet the terms of the Loan.
If so, we may lose our investment in KKM and the Karakuduk Field.

Capital Commitments.
- --------------------

As of March 31, 2000, KKM has drilled and successfully completed two wells (Well
#101 and Well #102), and continues to produce from two re-completions of
previously existing wells worked over in 1998. Well #102 was successfully
completed in March, and is undergoing post-completion production tests. Well
#103 has reached its objective depth and should be completed shortly.

In 2000, we expect to drill up to 15 wells and re-complete at least 4 previously
drilled wells using a workover rig. To complete the drilling program, an
additional developmental drilling rig will be required. KKM has contracted for a

<PAGE>

second rig and it is currently being mobilized to the Karakuduk Field. Workover
rigs are available within Kazakhstan, and we expect to lease or purchase a
workover rig in the near future.

Over the next 5 years, KKM expects to spend an additional $130,000,000 to
$150,000,000 on the development of the Karakuduk Field. As previously discussed,
cash flow from oil sales is expected to be the primary source of capital
necessary to meet KKM's cash requirements, as well as repay the Loan from CAP-G.

We estimate that drilling a maximum of 71 additional oil wells and 24 water
injection wells may be required to fully develop the Karakuduk Field. Peak oil
production from the field is expected to occur by the end of 2002, although the
time or amount of development or production cannot presently be estimated. The
planned development program for the Karakuduk Field will include a pressure
maintenance operation that our management believes could result in additional
recoverable reserves.

Field facilities are either in place or under construction to support the
initial stages of the development program. Engineering plans are being prepared
on additional facilities required for long-term development, including
electrical systems and compression facilities required for gas lift recovery.
KKM has previously constructed a base camp with living quarters for 150 people,
a mini-camp for the drilling contractor and other service company personnel,
storage facilities, processing facilities, warehouses, a repair shop, and other
related support facilities. KKM has also completed a main road between the
export pipeline and the field. KKM is also clearing access roads and performing
other required site preparation activities for other planned drilling locations,
which will continue throughout the drilling program.

Crude oil production is being processed at a pilot facility and has been trucked
to the export pipeline terminal at Say-Utes, which is approximately 51 miles
southeast of the Karakuduk Field. In April, KKM completed construction of an
export pipeline terminal 18 miles from the Karakuduk Field, which has been
subsequently placed in service. KKM also began construction of an 18-mile
pipeline in 1998, capable of transporting up to 18,000 barrels of oil per day
from the Karakuduk Field to the export pipeline terminal. The completion of the
pipeline was delayed due to our lack of sufficient financial resources in 1999.
We anticipate the pipeline will be operational in August 2000. Until the
pipeline is operational, KKM will continue to truck oil production to the new
export pipeline terminal.

In May 2000, KKM completed shooting a 3-D seismic study, which will be processed
over the next several months. The seismic data will be utilized to better refine
the drilling program to maximize recoverability of the underlying reserves.

Under the terms of the License from the government of the Republic of
Kazakhstan, KKM was committed to minimum expenditures of $30,000,000 for the
year ended December 31, 1999. The License also establishes a minimum work
program requiring KKM to drill 8 new wells during 1999. In August 1999, we
received a letter from the State Investment Agency of the Republic of Kazakhstan
(the "SIA Letter"), extending the period for completion of the minimum work
program and expenditure commitments to June 30, 2000. The SIA Letter is not a
formal amendment to the License.

As of May 15, 2000, KKM will need to drill an additional 5 new wells and invest
an additional $7,500,000 prior to June 30, 2000 to satisfy the terms of the SIA
Letter. KKM will not meet the work commitment to drill 5 additional wells before
June 30, 2000. If KKM fails to satisfy the work or capital commitment under the
License or SIA Letter, the licensing authority could cancel or suspend the
License. If the License is cancelled, we will be unable to develop and sell oil
produced from the Karakuduk Field, and we will have no other source of oil
revenue. We believe the licensing authority will not suspend or cancel the
License, but we can provide no assurances that the License would not be revoked
or suspended if the License requirements are not satisfied. KKM is planning to
seek a deferral or release from its outstanding License commitments, but there
is no guarantee that the licensing authority will grant such a deferral or
release.

<PAGE>

2. Results of Operations

Results of Operations for Three Months Ended March 31, 2000 Compared to the
Three Months Ended March 31, 1999
- --------------------------------------------------------------------------------

Our operations during the three months ended March 31, 2000, resulted in a net
loss of $2,393,000, compared to a net loss of $589,000 for the three months
ended March 31, 1999, primarily due to increased operational activity in the
Karakuduk Field, increased financing costs related to the Loan and other Notes,
and application of EITF 99-10, requiring the recognition of 100% of the equity
losses from KKM.

Interest income increased by $104,000 from the three months ended March 31, 1999
due to increased financing of 100% of KKM's operations in Kazakhstan. Interest
expense increased $835,000 from the three months ended March 31, 1999 due to
significant additional borrowings outstanding during the quarter ended March 31,
2000 to support KKM's operations and our corporate overhead.

General and administrative costs increased by $315,000 from the three months
ended March 31, 1999 due to increased professional fees related to various SEC
filings and litigation matters settled during the quarter ended March 31, 2000.
Also, we incurred significantly higher insurance costs during the quarter
related to OPIC insurance premiums. Our equity loss in KKM increased by
$784,000, primarily due to application of EITF 99-10, which requires the
reporting of 100% of KKM's losses ($723,000) and additional interest expense
incurred by KKM on its loan to CAP-G.

As discussed in Note 8 to the consolidated financial statements, due to the
beneficial conversion feature of the Notes, we expect to record a significant
charge to interest expense upon obtaining stockholder approval for the
conversion of the Notes.

3. Commodity Prices for Oil and Gas

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.

4. 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.
On April 5, 1999, the government of the Republic of Kazakhstan discontinued its
support of the tenge and allowed it to float freely against the US dollar.
Immediately thereafter, the official exchange rate declined from 87.5 tenge to
the US dollar to 142 tenge to the US dollar, but was relatively stable for the
remainder of 1999 and 2000. The devaluation decreased the US dollar realizable
value of any tenge denominated monetary assets held by KKM, and decreased the US
dollar obligation of any tenge denominated monetary liabilities held by KKM. KKM
maintains its financial statements in U.S. dollars and the impact of the
devaluation is not considered to be material at this time.

<PAGE>

Item 3 - Quantitative and Qualitative Disclosures About Market Risks

On February 11, 2000, we entered the Hedge Agreement, paying $4.0 million for
put contracts to sell a total of 1,562,250 barrels of North Sea Brent crude. The
exercise prices of the various put contracts range from $22.35 to $17.25 per
barrel, with monthly expiration dates beginning in October 2000 and ending in
December 2002. The contracts are evenly spread between October 2000 to December
2001 (62,750 barrels per month) and between January 2002 to December 2002
(51,750 barrels per month). As of March 31, 2000, the market value of the put
contracts underlying the Hedge Agreement was $1,755,000.

Part II - Other Information

Item 1 - Legal Proceedings

In April 1999, the owner of the drilling rig operated by Challenger Oil
Services, PLC ("Challenger") in the Karakuduk Field, Oil & Gas Exploration
Cracow, Ltd. ("OGECC"), terminated its contract with Challenger. As a result of
the termination of the contract between Challenger and OGECC, KKM terminated the
drilling contract between KKM and Challenger, and arbitration proceedings were
instituted in accordance with the terms of such drilling contract. In the
arbitration, Challenger claimed that it was entitled to $9,800,000 in damages.

In February 2000, Chaparral, KKM, Challenger, and OGECC reached a mutual
settlement and release for all parties involved. The settlement required KKM to
pay outstanding accrued liabilities to Challenger for prior work performed
totaling $1,336,000. We also agreed to fully discharge a note receivable from
Challenger in the amount of $1,009,000. The note receivable impairment was
recorded as of December 31, 1999.

Item 4 - Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of the Company's stockholders during
the quarter ended March 31, 2000.

Item 6 - Exhibits and Reports on Form 8-K

(a) Exhibits

Number
Exhibit
27
Financial Data Schedule

(b) Reports on Form 8-K

On March 22, 2000, the Company filed a current report on Form 8-K reporting the
finalization and first drawdown of $8.3 million under the Loan on February 14,
2000.

<PAGE>

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: May 15, 2000

Chaparral Resources, Inc.

By: /s/ Michael B. Young
----------------------------------------
Michael B. Young, Treasurer, Controller
and Principal Accounting Officer

<PAGE>

Exhibit Index

Number Exhibit
- ------ -------

27 Financial Data Schedule

<ARTICLE> 5

<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 238,000 23,000
<SECURITIES> 0 0
<RECEIVABLES> 814,000 23,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,173,000 735,000
<PP&E> 45,497,000 38,251,000
<DEPRECIATION> 44,000 39,000
<TOTAL-ASSETS> 51,355,000 41,303,000
<CURRENT-LIABILITIES> 1,389,000 3,676,000
<BONDS> 0 0
5,288,000 5,200,000
0 0
<COMMON> 0 0
<OTHER-SE> 21,551,000 22,851,000
<TOTAL-LIABILITY-AND-EQUITY> 51,355,000 41,303,000
<SALES> 0 0
<TOTAL-REVENUES> 395,000 250,000
<CGS> 0 0
<TOTAL-COSTS> (768,000) (438,000)
<OTHER-EXPENSES> (1,131,000) (347,000)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (889,000) (54,000)
<INCOME-PRETAX> (2,393,000) (589,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,393,000) (589,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,393,000) (589,000)
<EPS-BASIC> (2.53) (0.69)
<EPS-DILUTED> (2.53) (0.69)

</TABLE>