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, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission File Number: 0 - 7261
CHAPARRAL RESOURCES, INC.
-------------------------
(Exact Name of Registrant as Specified in Its Charter)
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 |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES |_| NO |X|
As of May 12, 2003 the Registrant had 38,209,502 shares of its common
stock, par value $0.0001 per share, issued and outstanding.
Part I - Summarized Financial Information
Item 1 - Financial Statements
Chaparral Resources, Inc.
Consolidated Balance Sheets
(In Thousands)
March 31, December 31,
2003 2002
(Unaudited) (Audited)
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 1,838 $ 4,295
Accounts receivable:
Oil sales receivable 2,471 1,993
VAT receivable 1,854 1,999
Prepaid expenses 2,519 2,456
Crude oil inventory 2,052 548
--------- ---------
Total current assets 10,734 11,291
Materials and supplies 3,443 2,457
Other 5 5
Property, plant and equipment:
Oil and gas properties, full cost:
Properties subject to depletion 87,279 84,833
Properties not subject to depletion 10,562 8,814
--------- ---------
97,841 93,647
Furniture and fixtures and other equipment 8,408 8,210
--------- ---------
106,249 101,857
Less - accumulated depreciation, depletion, and amortization (30,149) (28,302)
--------- ---------
Property, plant and equipment, net 76,100 73,555
Total assets $ 90,282 $ 87,308
========= =========
See accompanying notes.
2
Chaparral Resources, Inc.
Consolidated Balance Sheets (continued)
(In Thousands)
March 31, December 31,
2003 2002
(Unaudited) (Audited)
--------- ---------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 4,328 $ 2,809
Accrued liabilities:
Accrued compensation 265 227
Other accrued liabilities 2,178 2,432
Current income tax liability 1,844 1,939
Accrued interest payable 356 250
Current portion of loans payable to affiliates 7,000 6,000
--------- ---------
Total current liabilities 15,971 13,657
Loans payable to affiliates 27,057 27,998
Deferred tax liability 1,183 746
Long term assets retirement obligation 558 --
Accrued production bonus 516 477
--------- ---------
Long Term Liabilities 29,314 29,221
Minority Interest 839 321
--------- ---------
Total liabilities 46,124 43,199
Stockholders' equity:
Common stock - authorized, 100,000,000
shares of $0.0001 par value; issued and outstanding,
38,209,502 shares as of March 31, 2003 and
December 31, 2002 4 4
Capital in excess of par value 107,226 107,226
Accumulated deficit (63,072) (63,121)
--------- ---------
Total stockholders' equity 44,158 44,109
--------- ---------
Total liabilities and stockholders' equity $ 90,282 $ 87,308
========= =========
See accompanying notes.
3
Chaparral Resources, Inc.
Consolidated Statements of Operations (Unaudited)
(In Thousands, Except Share Data)
For the Three Months Ended
----------------------------
March 31, March 31,
2003 2002
------------ ------------
Revenue $ 7,813 $ 8,379
Costs and expenses:
Transportation costs 1,663 2,248
Operating expenses 1,122 1,875
Depreciation and depletion 2,438 2,932
Management service fee 134 171
Hedge losses -- 698
Accretion expense 14 --
General and administrative 1,352 1,548
------------ ------------
Total costs and expenses 6,723 9,472
------------ ------------
Income/(loss) from operations 1,090 (1,093)
Other income (expense):
Interest income 5 1
Interest expense (1,121) (1,749)
Minority interest (518) --
Currency exchange loss (65) (54)
Gain/(Loss) on disposition of assets (8) 1
------------ ------------
Loss before income taxes and cumulative effect of
change in accounting principle (617) (2,894)
Income tax expense 352 232
------------ ------------
Loss before cumulative effect of change in
accounting principle (969) (3,126)
Cumulative effect of change in accounting principle,
net of tax 1,018 --
------------ ------------
Net income/(loss) available to common
Stockholders $ 49 $ (3,126)
============ ============
Basic and diluted earnings per share:
Loss per share before cumulative effect of change in
accounting principle $ (0.03) $ (0.22)
Cumulative effect of change in accounting principle 0.03 --
Net income/(loss) per share $ 0.00 $ (0.22)
Weighted average number of shares outstanding (basic and
diluted) 38,209,501 14,283,801
See accompanying notes.
4
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
For the Three Months Ended
--------------------------
March 31, March 31,
2003 2002
------- -------
Cash flows from operating activities
Net income/(loss) $ 49 $(3,126)
Adjustments to reconcile net income/(loss) to
Net cash provided in operating activities:
Depreciation, depletion, and amortization 2,438 2,932
Loss/(gain) on disposition of furniture and fixtures 8 (1)
Cumulative effect of change in accounting
Principal (1,018) --
Accretion expense 14 --
Hedge losses -- 698
Amortization of note discount 59 --
Minority interest 518 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (333) (494)
Prepaid expenses (63) (2,206)
Crude oil inventory (545) (188)
Increase (decrease) in:
Accounts payable and accrued liabilities 1,208 2,709
Accrued interest payable 106 139
Other liabilities 39 49
------- -------
Net cash provided in operating activities $ 2,480 $ 512
------- -------
Cash flows from investing activities
Additions to property, plant, and equipment $ (207) $ (104)
Acquisition of oil and gas properties (3,744) (2,287)
Materials and supplies inventory (986) 788
Proceeds from disposition of assets -- 5
------- -------
Net cash used in investing activities $(4,937) $(1,598)
------- -------
5
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows (continued) (Unaudited)
(In Thousands)
For the Three Months Ended
--------------------------
March 31, March 31,
2003 2002
------- -------
Cash flows from financing activities
Proceeds from loans from banks $ -- $ 999
------- -------
Net cash provided by financing activities $ -- $ 999
------- -------
Net increase (decrease) in cash and
cash equivalents $(2,457) $ (87)
Cash and cash equivalents at beginning
of period 4,295 730
------- -------
Cash and cash equivalents at end of period $ 1,838 $ 643
======= =======
See accompanying notes.
6
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. Chaparral focuses
substantially all of its efforts on the exploration and development of the
Karakuduk Field, an oil field located in the Central Asian Republic of
Kazakhstan. In 1999, Chaparral reincorporated from Colorado to Delaware.
The consolidated financial statements include the accounts of Chaparral and its
greater than 50% owned subsidiaries, Closed Type JSC Karakudukmunay ("KKM"),
Central Asian Petroleum (Guernsey) Limited ("CAP-G"), Korporatsiya Mangistau
Terra International ("MTI"), 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 20% indirectly
through CAP-D. Hereinafter, Chaparral and its subsidiaries are collectively
referred to as the "Company." All significant intercompany transactions have
been eliminated.
As of March 31, 2003, Chaparral owns a 60% interest in KKM, a Kazakhstan Joint
Stock Company of Closed Type. KKM was formed to engage in the exploration,
development, and production of oil and gas properties in the Republic of
Kazakhstan. KKM's only significant investment is in the Karakuduk Field, an
onshore oil field in the Mangistau Oblast region of the Republic of Kazakhstan.
On August 30, 1995, KKM entered into an agreement with the Ministry of Oil and
Gas Industry for Exploration, Development and Production of Oil in the Karakuduk
Oil Field in the Mangistau Oblast Region of the Republic of Kazakhstan (the
"Agreement"). KKM's rights and obligations regarding the exploration,
development, and production of underlying hydrocarbons in the Karakuduk Field
are determined by the Agreement. KKM is owned jointly by CAP-G (50%), MTI (10%),
and KazMunayGaz JSC ("KMG") (40%). KMG is the national petroleum company of
Kazakhstan.
KKM's rights to the Karakuduk Field may be terminated under certain conditions
specified in the Agreement. The term of the Agreement is 25 years commencing
from the date of KKM's registration. The Agreement can be extended to a date
agreed between the Ministry of Energy and Mineral Resources and KKM as long as
production of petroleum and/or gas is continued in the Karakuduk Field.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. Reference should be made to
the relevant notes to the financial statements for both Chaparral and KKM
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002.
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 for
the 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 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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. The Company adopted SFAS 143 on January 1, 2003. See Note 6
for results of the adoption of SFAS 143.
7
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. New Accounting Standards (continued)
In January 2003, the FASB issued FASB-Interpretation ("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 the company is not required to consolidate, but in
which it has a significant variable interest. The consolidation requirements of
FIN 46 apply immediately to variable interest entities 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 variable interest entity was
established. The Company has not identified any VIEs that must be consolidated.
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 satisfaction of
liabilities in the normal course of business. The Company has incurred recurring
operating losses and has a working capital deficiency as of March 31, 2003. In
addition, oil producers within Kazakhstan are required to supply a portion of
their crude oil production to the local market to meet domestic energy needs,
which generates substantially less revenue than oil sold on the export market.
Furthermore, during the first quarter ended March 31, 2003, the Company's export
quota has been limited to approximately 59% of the Company's production
available for sale. These conditions create uncertainties relating to the
Company's ability to meet all expenditure and cash flow requirements through
fiscal year 2003.
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.
The Company has attempted, in accordance with the Agreement, to effect the 100%
export of all hydrocarbons produced from the Karakuduk Field through discussions
with the Government of Kazakhstan. The Company plans to continue to work with
the Government to increase its export quota and minimize or eliminate future
local sales requirements. The Company is considering whether to initiate
arbitration proceedings in Switzerland for the breach of the Agreement by the
Government of Kazakhstan. However, no assurances can be provided that the
arbitration, if instituted, will be successful or that if successful, the
Company will be able to enforce the award in Kazakhstan, or that the Company
will be able to export 100% or a significant portion of its production and that
the Company's cash flow from operations will be sufficient to meet working
capital requirements in the future, which may require the Company to seek
additional debt or equity financing in order to continue to develop the
Karakuduk Field.
8
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
4. Restatement of Quarter ended March 31, 2002
In May 2002, Chaparral increased its ownership in KKM from 50% to 60% through
the acquisition of 100% of the outstanding stock of MTI, a Kazakhstan company.
As a result of the acquisition of MTI, the Company obtained a controlling
interest in KKM. Consequently, the Company's financial statements have been
consolidated with KKM on a retroactive basis to January 1, 2002. The Company
previously accounted for its 50% investment in KKM using the equity method of
accounting, which is reflected in the Company's financial statements originally
presented for the quarter ended March 31, 2002. The presentation of the
consolidated statement of operations and consolidated statement of cash flows
for the quarter ended March 31, 2002 has been changed to reflect the
consolidation of KKM financial results for the quarter ended March 31, 2002. See
table below for reconciliation of net loss available to common stockholders for
the quarter ended March 31, 2002.
March 31,
2002
(In Thousands, Except
For Share Data)
---------------
Reconciliation:
---------------
Net loss available to common stockholders, as
originally filed $(2,987)
Adjustments to quarterly data
Revenue 8,379
Transportation and operating costs 4,124
Depreciation and depletion 2,789
Management service fee 171
General and administrative 1,025
-------
Income/(loss) from operations 270
Other income/(expense):
Equity income from investment (211)
Currency exchange loss (54)
Income taxes (232)
Cumulative annual dividend accrued
Series A Redeemable Preferred Stock 63
Discount accretion
Series A Redeemable Preferred Stock 25
Other
-------
Net Adjustment to quarterly data loss $ (139)
-------
Net loss available to common stockholders,
as adjusted $(3,126)
=======
-------
Adjustment to net loss per share $ (0.01)
=======
9
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
5. Crude Oil Inventory
Crude oil inventory represents production costs associated with lifting and
transporting crude oil from the Karakuduk Field to the KazTransOil pipeline.
Crude oil placed into the KazTransOil pipeline is held as inventory until
formally nominated and delivered for sale. Crude oil inventory as of March 31,
2003 represents approximately 235,000 barrels of crude oil, an increase of
148,000 barrels from 87,000 barrels of crude oil as of December 31, 2002. The
increase in crude oil inventory is mainly due to the export sales limitations
imposed on the Company during the first quarter 2003. See Item 2. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
additional information on crude oil sales to the local market and export quotas.
6. Asset Retirement Obligation
As discussed in Note 2, effective January 1, 2003, the Company changed its
method of accounting for asset retirement obligations in accordance with FASB
Statement No. 143, Accounting for Asset Retirement Obligations. Previously, the
Company used an amount equal to the undiscounted cash flows associated with the
asset retirement obligation ("ARO") in determining depreciation, depletion, and
amortization ("DD&A") rates. Under the new accounting method, the Company now
recognizes asset retirement obligations in the period in which they are incurred
if a reasonable estimate of a fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset.
The cumulative effect of the change on prior years resulted in a gain of $1.02
million, or $0.03 per share, which is included in income for the period ended
March 31, 2003.
Since 1995, the business of Chaparral has been the development of the Karakuduk
Field. The Company is still in the early stages of development and continues to
develop the field by drilling additional wells, expansion of its oil storage
capacity, installation of additional gathering and processing facilities, and
the full implementation of the central processing facility. The Company is
legally required under the Agreement to restore the field to its original
condition. The Company recognized the fair value of its liability for an asset
retirement obligation as of January 1, 2003 in the amount of $516,000 and
capitalized that cost as part of the cost basis of its oil and gas properties
and depletes it using the units of production method over proved reserves.
On February 12, 2003, the Company commenced a new drilling campaign to further
develop and commercially produce the oil reserves in the Karakuduk Field. As a
result of the new drilling campaign, the Company revised its estimate of
retirement costs to include expected additions to the Karakuduk Field during
2003. This change in estimate did not result in any charge to income for the
period ended March 31, 2003. The following table describes all changes to the
Company's asset retirement obligation liability:
March 31,
2003
(In Thousands)
--------------
Asset retirement obligation at beginning of period $ --
Liability recognized in transition 516
Accretion expense 14
Revision in estimated cash flows 28
------
Asset retirement obligation at end of period $ 558
======
10
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
6. Asset Retirement Obligation (continued)
The pro forma effects of the application of SFAS 143 as if the Statement had
been adopted for periods prior to January 1, 2003 are presented below:
(In Thousands, Except Share Data)
Pro forma amounts assuming the accounting
change is applied retroactively
For the Three Months Ended
------------------------------
March 31, 2003 March 31, 2002
-------------- --------------
Net income/(loss) $ 49 $ (3,002)
Net income/(loss) per common share $ 0.00 $ (0.21)
7. Loans from Affiliates
CAIH Note
---------
In May 2002, the Company borrowed $4 million from Central Asian Industrial
Holdings, N.V. ("CAIH") in exchange for a three year note bearing interest at
12% per annum (the "CAIH Note"). Along with the CAIH Note, CAIH received a
warrant to purchase 3,076,923 shares of the Company's common stock at $1.30 per
share (the "CAIH Warrant"). The CAIH Note was recorded net of a $2.47 million
discount, based on the fair market value of the CAIH Warrant. The discount is
amortized using the effective interest rate over the life of the CAIH Note. The
principal balance of the CAIH Note is due on May 10, 2005 and accrued interest
is payable quarterly.
In June 2002, the Company prepaid $2 million of the $4 million outstanding
principal balance of the CAIH Note. As a result, the Company 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 Company
recognized $118,000 in interest expense on the CAIH Note for the three months
ended March 31, 2003, including $59,000 of interest on outstanding principal and
$59,000 in discount amortization.
KKM Credit Facility
-------------------
In May 2002, KKM established a five-year, $33 million credit line ("KKM Credit
Facility") with JSC Kazkommertsbank ("Kazkommertsbank"), an affiliate of CAIH.
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.
The Company recognized $1.16 million of interest expense on the KKM Credit
Facility for the three months ended March 31, 2003.
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. During May 2003, the Company received an extension until June 1, 2003 to
pay the principal and interest of $1.5 million to Kazkommertsbank, which was
originally due on May 6, 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.
11
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
7. Loans from Affiliates (continued)
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 option to extend the final maturity date for
repayment of the entire KKM Credit Facility to five years. KKM exercised the
option to extend the repayment term to five years for the entire KKM Credit
Facility as of May 2002.
The Company is subject to certain pledges, covenants, and other restrictions
under the KKM Credit Facility, including, but not limited to, the following:
(i) CAP-G pledged its 50% interest in KKM to Kazkommertsbank as collateral
for the KKM Credit Facility;
(ii) Chaparral has provided a written guarantee to Kazkommertsbank that it
will repay the KKM Credit Facility in the event KKM fails do so;
(iii) KKM may not incur additional indebtedness or pledge its assets to
another party without the written consent of Kazkommertsbank; and
(iv) KKM may not pay dividends without the written consent of
Kazkommertsbank.
The KKM Credit Facility stipulates certain events of default, including, but not
limited to, KKM's inability to meet the terms of the KKM Credit Facility, KKM's
failure to meet it obligations to third parties in excess of $100,000, and the
Company's involvement in legal proceedings in excess of $100,000 where an
adverse judgment against the Company occurs or is expected to occur. If an event
of default does occur and is not waived by the lender, Kazkommertsbank has a
right to call the KKM Credit Facility immediately due and payable and/or
exercise its security interest by enforcing its collateral right on the
Company's shares in KKM. Furthermore, in the event of a material adverse change
in the financial or credit markets, Kazkommertsbank has a right to unilaterally
alter any terms and conditions of the KKM Credit Facility, including the rate of
interest, by written request. KKM may either agree to the amended terms or repay
the outstanding KKM Credit Facility within 10 days of notification.
The maturity schedule of the Company's indebtedness as of March 31, 2003, is as
follows:
Principal
Date Amount Due
--------------------------
2003 $ 6,000,000
2004 7,000,000
2005 10,000,000
2006 8,000,000
2007 4,000,000
--------------------------
Total $ 35,000,000
8. Common Stock
During the quarter ended March 31, 2003, stock options to purchase 1,383 shares
of the Company's common stock granted in 1998 to various employees and
consultants of the Company expired. The expired options had exercise prices
ranging between $127.20 and $145.80 per share.
12
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
9. Income Taxes
Income tax expense as reported entirely relates to foreign income taxes provided
on the Company's operations within the Republic of Kazakhstan. KKM's principal
agreement with the government of the Republic of Kazakhstan for the exploration,
development and production of oil in the Karakuduk Field specifies the income
taxes and other taxes applicable to KKM, which is subject to the tax laws of the
Republic of Kazakhstan. The Company has used the best estimates available to
determine its current and deferred tax liabilities within Kazakhstan.
10. Commitments and Contingencies
Taxation
--------
The existing legislation with regard to taxation in the Republic of Kazakhstan
is constantly evolving as the Government manages the transition from a command
to a market economy. Tax and other laws applicable to the Company are not always
clearly written and their interpretation is often subject to the opinions of the
local or main State Tax Service. Instances of inconsistent opinions between
local, regional and national tax authorities are not unusual.
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
additional unpaid 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 the Company's opinion that the ultimate resolution of the
Tax Claim, after taking into account reserves previously made, will not have a
material adverse effect on the financial position or operating results of the
Company.
Basis of Accounting
-------------------
KKM maintains its statutory books and records in accordance with U.S. generally
accepted accounting principles ("GAAP") and calculates taxable income or loss
using the existing Kazakh tax legislation in effect on August 30, 1995, the date
the Agreement was signed. The Company considers these accounting methods correct
under the terms of the Agreement. The Republic of Kazakhstan currently requires
companies to comply with Kazakh accounting regulations and to calculate tax
profits or losses in accordance with these regulations as well as the prevailing
tax law.
11. Subsequent Events
Due to maintenance and repairs at the port of Odessa as well as ongoing
discussions with the government of Kazakhstan regarding the export quota
limitation, KKM was unable to sell any oil during the month of April 2003.
Accordingly, the Company did not receive any revenue from oil sales for that
period. On April 29, 2003, Kazkommertsbank provided a line of credit for $2.5
million to the Company to cover necessary operating expenditures. Subsequently,
the Company received quota for, and expects to sell, approximately 320,400
barrels of crude oil on the export market in May 2003. The Company has drawn
down $1.5 million from the line of credit to cover the required transportation
costs for the May 2003 oil sale. The line of credit is due on May 29, 2003 and
accrues simple interest at an annual rate of 14% and is expected to be repaid
from the proceeds of the May sale.
Under the requirements of the KKM Credit Facility, KKM was required to begin
making quarterly principal payments in May 2003 to Kazkommertsbank. The Company
received an extension until June 1, 2003 to make the principal and interest
payment of $1.5 million to Kazkommertsbank, which was originally due on May 6,
2003. The Company expects to make such payment from the proceeds of the current
export sale.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1. Liquidity and Capital Resources
The Company's 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. The Company has incurred recurring
operating losses and has a working capital deficiency as of March 31, 2003. In
addition, oil producers within Kazakhstan are required to supply a portion of
their crude oil production to the local market to meet domestic energy needs,
which generates substantially less revenue than oil sold on the export market.
Furthermore, during the first quarter of 2003, the Company's export quota has
been limited to approximately 59% of the Company's production available for
sale. These conditions create uncertainties relating to the Company's ability to
meet all expenditure and cash flow requirements through fiscal year 2003.
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.
Our short and long-term liquidity is impacted by local oil sales obligations on
oil and gas producers within Kazakhstan to supply local energy needs, and our
ability to obtain export quota necessary to sell our crude oil production on the
international market. Under the terms of our Agreement, we have a right to
export, and receive export quota for, 100% of the production from the Karakuduk
Field. The domestic market does not permit world market prices to be obtained,
resulting in approximately $10 to $12 less cash flow per barrel for the first
quarter 2003 local oil sales. Furthermore, the government has not allocated
sufficient export quota to allow us to sell all of our available crude oil
production on the world market. We are taking steps to reduce our local market
obligations and to obtain an export quota that will enable us to sell all of our
crude oil production. These steps include continuing to work with the Government
to increase our export quota and minimize or eliminate future local sales
requirements. The Company is considering whether to initiate arbitration
proceedings in Switzerland for the breach of the Agreement by the Government of
Kazakhstan. However, no assurances can be provided that the arbitration, if
instituted, will be successful or that if successful, the Company will be able
to enforce the award in Kazakhstan, or that the Company will be able to export
100% or a significant portion of its production and that the Company's cash flow
from operations will be sufficient to meet working capital requirements in the
future, which may require the Company to seek additional debt or equity
financing in order to continue to develop the Karakuduk Field.
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 expect to finance the continued development of the Karakuduk
Field primarily through cash flows from the sale of crude oil. In the
short-term, our biggest operational priority is to increase our daily production
levels by introducing a water injection program, installing electric submersible
pumps, performing hydraulic fracturing, and drilling additional wells.
Accordingly, management expects the Karakuduk Field production to increase from
its current level of approximately 7,000 barrels of oil per day to approximately
11,200 barrels of oil per day by year-end.
In addition, the Company plans to drill a series of 12 wells in 2003, which will
increase the total number of wells drilled to 48 by year-end. As of May 12,
2003, the Company has successfully completed the first three wells of its 2003
drilling program, Karakuduk Well Nos. 141, 111 and 193, with initial production
rates of approximately 630, 210, and 375 barrels of oil per day, respectively.
Karakuduk Well No. 145 was spudded on May 6, 2003 and is expected to be drilled
to a depth of approximately 11,300 feet (3,450 meters). KKM has successfully
completed every well drilled to date.
Capital Commitments and Other Contingencies
-------------------------------------------
Our operations may be subject to regulations or other restrictions instituted 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
14
taxation, customs declarations and environmental controls, regulations may
govern such things as export quotas, local oil sales requirements, and
commissioning and approval of surface production facilities. These regulations
may substantially limit the amount of revenue and cash flow obtainable from
crude oil production and sales, increase the costs of doing business, and/or
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.
2. Results from Operations
Results of Operations for the Three Months Ended March 31, 2003 Compared to the
Three Months Ended March 31, 2002
-------------------------------------------------------------------------------
Our operations for the three months ended March 31, 2003 resulted in a net
income of $49,000 compared to a net loss of $3.13 million as of March 31, 2002.
The $3.18 million increase in our net income primarily relates to (i)
recognition of a $1.02 million gain as a result of the adoption of SFAS 143,
(ii) lower costs associated with the refinancing of our debt obligations with
Shell Capital, Inc., (iii) expiration of the hedge agreement during 2002, and
(iv) improved operational results from the Karakuduk Field.
Revenues. Revenues were $7.81 million for the first quarter of 2003 compared
with $8.38 million for the first quarter of 2002. The $566,000 decrease is the
result of lower oil sales quota received during the first quarter 2003 net of
higher oil prices received during the first quarter 2003. During the first
quarter 2003, we sold approximately 364,000 barrels of crude oil, recognizing
$7.81 million, or $20.31 per barrel, in revenue. Comparably, we sold
approximately 571,000 barrels of crude oil, recognizing $8.38 million in
revenue, or $14.68 per barrel, for the first quarter 2002.
Transportation and Operating expenses. Transportation costs for the first
quarter 2003 were $1.66 million, or $4.57 per barrel, and operating costs
associated with sales were $1.12 million, or $3.08 per barrel. Comparatively,
transportation costs for the first quarter 2002 were $2.25 million, or $3.94 per
barrel, and operating costs associated with sales were $1.88 million, or $3.29
per barrel. The decrease in transportation and operating cost is mainly due to
lower quantities of oil sold during the first quarter 2003 and lower operating
cost per barrel. Transportation costs per barrel increased due to higher
transportation tariffs imposed on export sales.
Depreciation and Depletion. Depreciation and depletion expense were $2.44
million for the first quarter of 2003 compared with $2.93 million for the first
quarter of 2002. The $494,000 decrease is the result of lower oil volumes sold
net of higher effective depletion rates during the first quarter 2003. During
the first quarter 2003, the Company recognized a total amortization expense of
$2.25 million or $6.18 per barrel, compared to $2.73 million or $4.77 per barrel
in depletion expense for the first quarter 2002. The increase in the effective
depletion rate of $1.41 per barrel is due to increased capital expenditures for
the development of the field for future years and reductions to the Company's
estimated proved reserves.
Interest Expense. Interest expense decreased from $1.75 million for the first
quarter 2002 to $1.12 million for the first quarter 2003, due to the lower
financing costs of our restructured indebtedness. The Company'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 savings of approximately
$600,000 per quarter. In addition, interest expense for the quarter ended March
31, 2003 reflects an additional loan discount of $59,000 and is net of
capitalized interest of $152,000.
General and Administrative Expense. General and administrative costs decreased
from $1.55 million for the three months ended March 31, 2002 to $1.35 million
for the three months ended March 31, 2003. The $196,000 change was due to the
impact of cost reduction initiatives by Chaparral to reduce overhead expenses
implemented during the fourth quarter of 2002.
15
Cumulative effect of change in accounting principal. As a result of the adoption
of SFAS 143, the company recognized a gain of $1.02 million as a cumulative
effect of change in accounting principal for the first quarter 2003. In
addition, the Company recognized $14,000 in accretion expense to account for
changes in the ARO liability. See Note 6 of our consolidated financial
statements.
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.
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 its cash and cash equivalents in U.S. dollars, but
KKM's statutory tax basis in its assets, tax loss carryforwards, and VAT
receivables are all denominated in Tenge and subject to the effects of
devaluation. Local tax laws allow basis adjustments to offset the impact of
inflation on statutory tax basis assets, but there is no assurance that any
adjustments will be sufficient to offset the effects of inflation in whole or in
part. If not, KKM may be subject to much higher income tax liabilities within
Kazakhtan due to inflation and or devaluation of the local currency.
Additionally, devaluation may create uncertainty with respect to the future
business climate in Kazakhstan and to our investment in that country. As of
March 31, 2003, the exchange rate was 151.5 Tenge per U.S. Dollar.
5. Critical Accounting Policies
Application of GAAP 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 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). The Company 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.
16
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. The Company excludes
these costs 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. 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. 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 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 the Company a significant loss for a particular period, however, future
DD&A expense would be reduced.
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.
17
6. Special Note Regarding Forward-Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q 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. 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 Quarterly Report on Form 10-Q
to conform these statements to actual results.
Item 3 - Quantitative and Qualitative Disclosures About Market Risks
Foreign Currency
The 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 (151.50 and 155.6 Kazakh Tenge per U.S. Dollar as of March
31, 2003 and December 31, 2002, 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.
18
Commodity Prices for Oil
Under the terms of our Agreement with the government of the Republic of
Kazakhstan, the Company has the 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. Local market oil prices are
significantly lower than prices obtainable on the export market. For the period
ended March 31, 2003, the company sold 23,000 barrels of crude oil, or 6% of its
total oil sales, to the local market, compared to 70,000 barrels, or 12%, during
the quarter ended March 31, 2002. Local market prices obtained by the Company
are approximately $10 to $12 per barrel below export market prices, net of
transportation costs. 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. The Company is considering whether to initiate
arbitration proceedings in Switzerland for the breach of the Agreement by the
Government of Kazakhstan. However, no assurances can be provided that 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.
Item 4 - Controls and Procedures
An evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures conducted within 90 days of the date of
filing this Form 10-Q, was carried out by the Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"). Based on that evaluation, the CEO and CFO
concluded that the Company's disclosure controls and procedures have been
designed and are being operated in a manner that provides reasonable assurance
that the information required to be disclosed by the Company in reports filed
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. A
controls system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the controls system are met, and no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within an entity have been detected. Subsequent
to the date of the most recent evaluation of the Company's internal controls,
there were no significant changes in Chaparral's internal controls or in other
factors that could significantly affect the internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Part II- Other Information
Item 1 - Legal Proceedings
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 previously made, will not have a material adverse effect on the
financial position and operating results of Chaparral.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
19
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, 2003
Chaparral Resources, Inc.
By: /s/ Nikolai D. Klinchev
---------------------------
Nikolai D. Klinchev
Chief Executive Officer
By: /s/ Richard J. Moore
------------------------
Richard J. Moore,
VP Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
20
Certifications
I, Nikolai D. Klinchev, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chaparral Resources,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Nikolai D. Klinchev
-----------------------
Nikolai D. Klinchev
Chief Executive Officer
21
I, Richard J. Moore, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chaparral Resources,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Richard J. Moore
--------------------
Richard J. Moore
Chief Financial Officer
22