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 September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to ________________.
Commission file number: 0-7261
CHAPARRAL RESOURCES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0630863
- - ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2211 Norfolk, Suite 1150
Houston, Texas 77098
--------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 807-7100
--------------
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 November 16, 1998 Registrant had 58,298,790 shares of its $0.10 par
value common stock issued and outstanding.
<PAGE>
Part I - Summarized Financial Information
Item 1 - Financial Statements
Chaparral Resources, Inc.
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
1998 1997
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 3,991,000 $ 3,423,000
Restricted cash 800,000 --
Accounts receivable:
Other 249,000 102,000
Prepaid expenses 54,000 62,000
------------ ------------
Total current assets 5,094,000 3,587,000
Notes Receivable 1,009,000
Oil and gas properties and investments -
full cost method
Republic of Kazakhstan (Karakuduk Field)--
not subject to depletion : 29,111,000 19,922,000
Furniture, fixtures and equipment 93,000 13,000
Less accumulated depreciation (13,000) (3,000)
------------ ------------
80,000 10,000
------------ ------------
Total assets $ 35,294,000 $ 23,519,000
============ ============
See accompanying notes to financial statements
2
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<CAPTION>
Chaparral Resources, Inc.
Consolidated Balance Sheets (continued)
(Unaudited)
September 30, December 31,
1998 1997
------------ ------------
Liabilities and stockholders' equity
<S> <C> <C>
Current liabilities:
Accounts payable:
Trade $ 345,000 $ 177,000
Accrued liabilities 246,000 54,000
Notes payable (net of discount) 932,000 --
------------ ------------
Total current liabilities 1,523,000 231,000
Long-term obligations:
Accrued compensation 210,000 210,000
Redeemable preferred stock - cumulative, convertible:
Series A, 50,000 shares issued and outstanding,
at stated value, includes $5.00 cumulative annual
dividend, less $500,000 cost of issuance,
$5,000,000 redemption value 4,575,000 4,500,000
Stockholders' equity:
Common stock - authorized, 100,000,000
shares at September 30, 1998 and
December 31, 1997, of
$.10 par value; issued and outstanding,
58,298,790 and 49,720,456 shares at
September 30, 1998 and December 31, 1997, respectively 5,829,000 4,971,000
Capital in excess of par value 41,800,000 30,340,000
Unearned portion of restricted stock awards (152,000) (109,000)
Stock subscription receivable (506,000) (1,770,000)
Accumulated Deficit (17,985,000) (14,854,000)
------------ ------------
Total stockholders' equity 28,986,000 18,578,000
------------ ------------
Total liabilities and stockholders' equity $ 35,294,000 $ 23,519,000
============ ============
See accompanying notes to financial statements
3
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<TABLE>
<CAPTION>
Chaparral Resources, Inc.
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenue:
<S> <C> <C> <C> <C>
Oil and gas sales $ -- $ -- $ -- $ --
Costs and expenses:
Depreciation and depletion 4,000 3,000 10,000 4,000
General and administrative 572,000 298,000 2,203,000 1,040,000
------------ ------------ ------------ ------------
576,000 301,000 2,213,000 1,044,000
------------ ------------ ------------ ------------
Loss from operations (576,000) (301,000) (2,213,000) (1,044,000)
Other income (expense):
Interest income 355,000 109,000 805,000 271,000
Interest expense (126,000) (59,000) (189,000) (189,000)
Equity in loss from investment (534,000) (231,000) (1,223,000) (520,000)
------------ ------------ ------------ ------------
(305,000) (181,000) (607,000) (438,000)
------------ ------------ ------------ ------------
Loss before extraordinary items (881,000) (482,000) (2,820,000) (1,482,000)
Extraordinary Gain (Loss)
Loss on Extinguishment of Debt (236,000) -- (236,000) --
Net loss $ (1,117,000) $ (482,000) $ (3,056,000) $ (1,482,000)
------------ ------------ ------------ ------------
Basic and diluted earnings per share:
Net loss per share $ (.020) $ (.011) $ (.058) $ (.037)
Weighted average number of shares
Outstanding 56,142,992 42,106,477 52,428,894 40,263,263
See accompanying notes to financial statements
4
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<TABLE>
<CAPTION>
Chaparral Resources, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30, September 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (3,056,000) $ (1,482,000)
Adjustments to reconcile net loss to
Net cash used in operating
Activities:
Equity loss from investment 1,223,000 520,000
Depreciation and depletion 10,000 4,000
Loss on the sale of oil and gas properties -- 30,000
Write-down of oil and gas properties -- 3,000
Stock issued for services and bonuses 691,000 --
Amortization of note discount 145,000 99,000
Extraordinary loss on estinguishment of debt 236,000 --
Changes in assets and liabilities:
Accounts receivable (147,000) (52,000)
Prepaid expenses 8,000 (121,000)
Notes receivable (1,009,000) --
Accounts payable & Accrued liabilities 360,000 100,000
------------ ------------
Net cash used in operating activities (1,539,000) (899,000)
Cash flows from investing activities
Additions to property and equipment (80,000) (7,000)
Proceeds from sale of interest in oil & gas -- 273,000
properties
Investment in and advances to foreign oil and gas
Properties (10,413,000) (2,818,000)
------------ ------------
Net cash used in investing activities (10,493,000) (2,552,000)
Cash flows from financing activities
Restricted cash (800,000) --
Payment of notes payable (1,095,000) --
Proceeds from notes payable (net of cash discount) 2,045,000 300,000
Proceeds from warrant exercise -- 7,000
Proceeds from sale of stock (net) 12,450,000 2,300,000
------------ ------------
Net cash provided by financing
Activities 12,600,000 2,607,000
------------ ------------
Net increase/(decrease) in cash and
Cash equivalents 568,000 (844,000)
Cash and cash equivalents at beginning
of period 3,423,000 920,000
------------ ------------
Cash and cash equivalents at end of period $ 3,991,000 $ 76,000
============ ============
See accompanying notes to financial statements
5
</TABLE>
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
Management has elected to omit substantially all notes to the Company's
financial statements. 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, 1997.
2. Unaudited Information
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, 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
the year.
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. As of September
30, 1998, substantially all of the Company's assets are invested in the
development of the Karakuduk Field, a shut-in oil field in the central Asian
Republic of Kazakhstan, which will require significant additional funding.
The Company has incurred recurring operating losses and has no operating
assets presently generating cash to fund its operating and capital requirements.
The Company's current cash reserves and cash flow from operations are not
sufficient to meet the capital spending requirements required to develop the
Karakuduk Field through fiscal 1998. Should the Company not meet its capital
requirements, the Company's rights to the Karakuduk Field can be terminated.
There is no assurance that additional financing will be available, or if
available, that it will be timely or on terms favorable to the Company. The
Company's continued existence as a going concern is dependent upon the success
of future operations, which are, in the near term, dependent on the successful
financing and development of the Karakuduk Field, of which there is no
assurance.
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 this uncertainty.
6
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Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
4. New Accounting Standards
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. This Statement requires companies to record derivatives on the
balance sheet as assets and liabilities, measured at fair value. Gains or losses
resulting from the changes in the values of those derivatives would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company has not determined what the effect of SFAS No. 133 will
be on results of operations and financial position. The Company will adopt this
accounting standard as required by January 1, 2000.
5. Restricted Cash
As of September 30, 1998, the Company held $800,000 cash on hand, as
collateral for loans made by a financial institution to KKM for the acquisition
of tangible equipment used in the Karakuduk Field.
6. Notes Receivable
As of September 30, 1998, the Company has an outstanding note receivable of
approximately $1,009,000 from a third-party drilling contractor (Contractor).
The note consists of $1,000,000 in cash advances from the Company to the
Contractor, plus approximately $9,000 in accrued interest owed to the Company
from the Contractor. On April 20, 1998, the Company advanced $300,000 to the
Contractor to refurbish and winterize the Contractor's drilling rig under
contract with KKM. On July 15, 1998, the Company loaned an additional $100,000
to the Contractor for the same purpose. Both loans were subject to an annual
rate of interest equal to the three month London Interbank Offered Rate (LIBOR),
as published by the Wall Street Journal, plus 1%. On September 10, 1998, the
Company loaned an additional $600,000 to the Contractor, as an advance to
complete the refurbishment and acquire spare parts for the rig. The Company
combined the $600,000 advance with the prior notes for $100,000 and $300,000,
plus accrued interest of $8,768, into a new note dated September 10, 1998.
Under the terms of the $1,009,000 note, the Contractor will repay the note
in twelve monthly payments of approximately $84,000, plus accrued interest,
beginning with the earlier of sixty days after the date the drilling rig arrives
on location at the Karakuduk Field, or the date the first payment is made by KKM
to the drilling contractor for use of the drilling rig. The principal balance of
the note accrues interest at a variable rate equal to the three month LIBOR, as
published by the Wall Street Journal, plus 1% (approximately 6.4% as of November
18, 1998).
7. Notes Payable
On July 1, 1998, the Company borrowed $20,000 from Howard Karren, the
Chairman and Chief Executive Officer of the Company. The note was payable 180
days after the date of issuance at an interest rate of 7%. On July 30, 1998, the
Company repaid two outstanding loans to Howard Karren, totaling $75,000 and
$20,000, respectively.
On July 3, 1998, the Company borrowed $975,000 from the Chase Bank of Texas
(Chase). The note accrues interest at an adjustable prime rate, as determined
by Chase. As of November 16, 1998, Chase's stated prime rate is 8%. The
principal of the loan, plus accrued interest, is payable in 4 installments:
$250,000 on December 3, 1998, March 3, 1999, and June 3, 1999, and a final
principal payment of $225,000 on August 31, 1999.
The $975,000 loan was fully guaranteed with a stand-by letter of credit
from an investor in the Company. In return for issuing the loan guarantee, the
Company paid the guarantor $10,000 plus related costs, issued warrants to
purchase 20,000 shares of the Company's Common Stock at an exercise price of
$.01 per share, and granted the guarantor a security interest in the Company's
Common Stock of Central Asian Petroleum (Guernsey) (CAP-G).
7
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Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
7. Notes Payable (continued)
The Company recorded the fair market value of the warrants (approximately
$32,000) plus the related loan costs, as a discount of notes payable. The fair
market value of the warrants was determined using the Black-Scholes option
pricing model, with the following weighted average assumptions: risk free
interest rate 5.53%, dividend yield of 0%, volatility factors of the Company's
Common Stock of .644, and a weighted average life expectancy of the warrants of
5 years.
In the event of the Company's default on the $975,000 note, the guarantor's
security interest in the Company's Common Stock in CAP-G cannot be perfected for
at least 30 days after notification of such default. In the event of default,
the Company may make full payment of any outstanding principal and interest on
the note plus any additional charges incurred by the guarantor to completely
remove any security interest held by the guarantor in the Company's investment
in CAP-G.
On August 5, 1998, the Company retired two outstanding loans, totaling
$1,000,000, from two related parties: Allen & Company, Incorporated ($900,000)
and John McMillian, a director of the Company ($100,000). The Company borrowed
the $1,000,000 on June 3, 1998, subject to a 7% interest rate. The note was
payable in full, plus accrued interest, on the earlier of 180 days from the
funding of the loans or upon the Company's receipt of a minimum of $10,000,000
in equity investments. In conjunction with the loans, the Company issued
warrants to purchase 1,000,000 shares of the Company's Common Stock, at an
exercise price of $3.50 per share. The Company recorded the warrants at their
fair market value of $367,000, as a discount of notes payable, amortizable over
the life of the loans. On July 27, 1998, the Company received $10,000,000 in
equity financing and repaid the loans, recognizing an extraordinary loss on the
extinguishment of debt of approximately $236,000.
8
<PAGE>
Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
8. Common Stock and Related Common Stock Warrants
As discussed in Notes Payable (7) above, on July 3, 1998, the Company
issued warrants to purchase 20,000 shares of the Company's Common Stock at an
exercise price of $.01 per share, in exchange for a stand-by letter of credit
securing the $975,000 loan to the Company from the Chase Bank of Texas.
Effective on July 28 and July 29, 1998, the Company sold 6,666,667 shares
of the Company's Common Stock for $1.50 per share for at total of $10,000,002.50
to certain accredited investors. Allen & Company, Incorporated acted as
placement agent in connection with the sale of the 6,666,667 shares. As a
result, Allen & Company, Incorporated's warrants to purchase 900,000 shares of
the Company's Common Stock, originally issued as commission in connection with
the Preferred Stock sale on November 24, 1997, became exercisable for an
additional 400,000 shares of the Company's Common Stock. The warrants to
purchase the additional 400,000 shares of the Company's Common Stock are
exercisable through November 25, 2002, at an exercise price of $0.01 per share.
Of the total warrants to purchase 900,000 shares of Common Stock issued to Allen
& Company, Incorporated on November 24, 1997, warrants to purchase 700,000
shares of the Company's Common Stock are currently exercisable.
Due to the fact the sales price of the 6,666,667 shares was below a price
of $2.00 per share, the Company issued an additional 416,667 shares to the
investor who purchased 1,250,000 shares of the Company's common stock for
$2,500,000 in April 1998 in order to satisfy certain price protection agreements
the Company has with such investor.
9. Subsequent Events
On October 30, 1998, the Company settled the lawsuit filed against the
Company and others in the District Court of Harris County, Texas, by Heartland,
Inc. of Wichita and Collins & McIlhenny, Inc. on November 14, 1997, for a total
of $200,000 and warrants to purchase 200,000 shares of the Company's Common
Stock at an exercise price of $1.00, exercisable through January 28, 1999. The
lawsuit was dismissed with prejudice for all defendants involved. The Company
believes the lawsuit was without merit, but a settlement was reached to avoid
incurring additional legal costs.
The Company recorded the fair market value of the warrants (approximately
$34,000) using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rate 5.53%, dividend yield of
0%, volatility factors of the Company's Common Stock of 1.046, and a weighted
average life expectancy of the warrants of .25 years. The lawsuit was previously
discussed in Item 3 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
On October 31, 1998, warrants to purchase 200,000 shares of the Company's
Common Stock at an exercise price of $0.25 expired.
9
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<TABLE>
<CAPTION>
10. Investments
The results from operations of the Company's equity-based investment in KKM
are summarized below:
Karakuduk-Munay Inc
Statement of Expenses and Accumulated Deficit
For the Nine Month Period Ended September 30, 1998 and 1997
(Amounts in US Dollars)
(Unaudited)
For The Three Months Ended For The Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management service fee $ 152,000 $ 90,000 $ 427,000 $ 270,000
General and administrative expenses 557,000 269,000 1,100,000 511,000
Depreciation of fixed assets 75,000 -- 225,000 --
Interest expense 283,000 104,000 695,000 259,000
---------- ---------- ---------- ----------
Net loss 1,067,000 463,000 2,447,000 1,040,000
Accumulated deficit, beginning of period 5,396,000 2,928,000 4,016,000 2,351,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Accumulated deficit, end period $6,463,000 $3,391,000 $6,463,000 $3,391,000
---------- ---------- ---------- ----------
10
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1. Liquidity and Capital Resources
The only oil and gas interest of the Company at this time is the Company's
investment in Karakuduk-Munay, Inc. (KKM), through Central Asian Petroleum
(Guernsey) (CAP-G). KKM is a closed joint stock company in Kazakhstan.
The Company has previously raised capital to finance a portion of its
obligations in connection with the acquisition of its interest in CAP-G and the
development of the Karakuduk Field and to satisfy working capital needs in the
short term. Since January 1, 1998, the Company has raised $12,500,000 through
the sale of Common Stock and $2,070,000 through debt obligations. The Company
repaid notes payable of $95,000 to Howard Karren on July 30, 1998, and
$1,000,000 to two related parties, Allen & Company, Incorporated and John
McMillian, a director of the Company, on August 5, 1998, using proceeds raised
from the sale of Common Stock. Under the terms of the $1,000,000 note, repayment
was required on the earlier of 180 days from the funding of the loans or upon
the Company's receipt of a minimum of $10,000,000 in equity financing. In
conjunction with the loans, the Company issued warrants to purchase 1,000,000
shares of the Company's Common Stock, at an exercise price of $3.50 per share.
The Company recorded the warrants at their fair market value of $367,000, as a
discount of notes payable, amortizable over the life of the loans. The Company
received $10,000,000 in equity financing on July 27, 1998. Accordingly, the
Company repaid the $1,000,000 note, and recognized a $236,000 loss on the early
extinguishment of debt.
On July 3, 1998, the Company borrowed $975,000 from the Chase Bank of Texas
(Chase) . The note accrues interest at an adjustable prime rate, as determined
by Chase. As of November 16, 1998, Chase's stated prime rate is 8%. The
principal of the loan, plus accrued interest, is payable in 4 installments:
$250,000 on December 3, 1998, March 3, 1999, and June 3, 1999, and a final
principal payment of $225,000 on August 31, 1999. The proceeds of the loan were
used by the Company for the winterization and refurbishment of a drilling rig to
be used by KKM in Kazakhstan, expansion of KKM's existing camp facilities, and
partial construction of an 18-mile pipeline between the camp and the existing
export pipeline.
The $975,000 loan is fully guaranteed with a stand-by letter of credit from
an investor in the Company. In return for issuing the loan guarantee, the
Company paid the guarantor $10,000 plus related costs, issued warrants to
purchase 20,000 shares of the Company's Common Stock at an exercise price of
$.01 per share, and granted the guarantor a security interest in the Company's
Common Stock of CAP-G. There are no other material negative covenants in the
loan agreement.
In the event of the Company's default on the $975,000 note, the guarantor's
security interest in the Company's Common Stock in CAP-G cannot be perfected for
at least 30 days after notification of such default. In the event of default,
the Company may make full payment of any outstanding principal and interest on
the note plus any additional charges incurred by the guarantor to completely
remove any security interest held by the guarantor in the Company's investment
in CAP-G.
The Company is currently seeking to obtain additional capital through debt
or equity offerings, encumbering properties, entering into arrangements whereby
certain costs of development will be paid by others to earn an interest in the
properties, or sale of a portion of the Company's interest in the Karakuduk
Field. The present environment for financing the acquisition of oil and gas
properties or the ongoing obligations of the oil and gas business is uncertain
due, in part, to instability in oil and gas pricing in recent years. The
Company's small size and the early stage of development of the Karakuduk Field
also increase the difficulty in raising any financing that may be needed in the
future. There can be no assurance that the debt or equity financing that might
be required to fund the Company's operations and obligations in the future will
be available to the Company on economically acceptable terms, if at all. If the
Company fails to obtain the additional capital required to develop the Karakuduk
Field, the Company's investment in the field most likely will be lost.
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred recurring operating losses and has no operating assets presently
11
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generating sufficient cash to fund its operating and capital requirements. The
Company current cash reserves and cash flow from operations are not sufficient
to meet its capital requirements through fiscal 1998.
As of September 30, 1998, substantially all of the Company's assets are
invested in the development of the Karakuduk Field. Since the Karakuduk Field is
in the early stage of development, the Karakuduk Field does not currently
produce any revenue. The development of the Karakuduk Field, through KKM, will
require substantial amounts of additional capital. The terms of the KKM revised
license require a work plan from the commencement of operations through December
31, 1997, of at least $10,000,000, which has been satisfied. Additional
requirements of $34.5 million and $12 million exist for the years ending
December 31, 1998 and 1999, respectively. The capital requirements required
under the license will be primarily used to fund KKM's drilling operations for
the Karakuduk Field, to build the required Field infrastructure and camp
facilities necessary to support drilling and production operations, to construct
an 18-mile pipeline between the field and the export pipeline, and to construct
a central processing unit (cpu) to process oil production from the Field.
The Company will not be able to satisfy the $34.5 million requirement for
the year ending December 31, 1998, and has requested that the obligation be
deferred until the year ended December 31, 1999. If the deferment is not
granted, KKM will not be in compliance with the terms of KKM's License with the
Government of Kazakhstan and the License may be terminated by the Government of
Kazakhstan. In the event KKM's License to develop the Karakuduk Field is
terminated, the Company's interest in the Karakuduk Field may be lost. If the
Company receives a deferment of the capital requirement, the Company will
require substantial additional funding in order to satisfy the 1999 capital
commitment under the License. If the 1999 capital requirement is not satisfied,
KKM's License may be terminated and the Company's interest in the Karakuduk
Field may be lost.
As of November 16, 1998, KKM has placed approximately 8,000 tons of
production into the export pipeline. KKM has an existing marketing contract with
Munay-Impex, a subsidiary of KazakhOil, obligating Munay-Impex to purchase oil
from KKM in minimum increments of 5,000 tons. KKM has not sold any of the oil
production in the pipeline to Munay-Impex under the existing contract. Instead,
KKM is carrying the production as inventory and is attempting to sell the
production to the export market outside of the Commonwealth of Independent
States, where KKM expects to obtain a higher price per barrel. If KKM cannot
complete a sale on the world export market, KKM will sell the current production
in inventory to Munay-Impex, in accordance with the existing contract. KKM will
record oil revenues when a sale has been completed.
On September 25, 1998, the Company requested and received an additional
extension to December 31, 1998, from the Overseas Private Investment Corp.
("OPIC") for political risk insurance. OPIC originally granted the Company a
binding executed letter of commitment on September 25, 1996. The Company has a
standby facility for which it has made eight payments of $31,250 plus one
additional payment of $15,625. The Company expects to execute the contract on or
before December 31, 1998.
The Company has no other material commitments for cash outlay and capital
expenditures other than for normal operations.
2. Results of Operations
In 1996, the Company accounted for its investment in KKM using pro rata
consolidation. In 1997, the Company changed to the equity method in order to
reflect the legal ownership right of the other shareholders in KKM. The
consolidated financial statements for the quarter ended September 30, 1997
reported herein have been reclassified to reflect the equity method. There was
no impact on previously reported earnings.
Three Months Ended September 30, 1998 Compared with the Three Months Ended
September 30, 1997
The Company's operations during the three months ended September 30, 1998,
resulted in a net loss of $1,117,000 compared to a net loss of $482,000 for the
three months ended September 30, 1997.
12
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Interest income increased by $246,000 from the three months ended September
30, 1997, due to increased financing provided by CAP-G to KKM for KKM's
operations in Kazakhstan. Interest expense increased by $67,000 from the three
months ended September 30, 1997, due to increased amortization of discounts on
notes payable outstanding during the three months ended September 30, 1998.
General and administrative costs increased by $274,000 during the three
months ended September 30, 1998 as compared to the three months ended September
30, 1997, due to expanding workover and exploration operations in Kazakhstan and
increased professional fees relating to the lawsuit that was settled on October
30, 1998, and public SEC filings (Registration Statement on Form S-3). Also, the
Company's equity loss in KKM increased by $303,000 during the three months ended
September 30, 1998 as compared to the three months ended September 30, 1997, due
to increased operational costs directly related to development of oil and gas
properties held by KKM.
The Company recognized an extraordinary loss of $236,000 on the
extinquishment of debt during the three months ended September 30, 1998, from
the retirement of two notes totaling $1,000,000.
Nine Months Ended September 30, 1998 Compared with the Nine Months Ended
September 30, 1997
The Company's operations during the nine months ended September 30, 1998,
resulted in a net loss of $3,056,000 compared to a net loss of $1,482,000 for
the nine months ended September 30, 1997.
Interest income increased by $534,000 from the nine months ended September
30, 1997, due to increased financing provided by CAP-G to KKM for KKM's
operations in Kazakhstan. Interest expense remained unchanged from the nine
months ended September 30, 1997.
General and administrative costs increased by $1,163,000 from the nine
months ended September 30, 1997. Without consideration of stock based
compensation, a non-cash item, general and administrative costs increased by
$472,000 due to expanding workover and exploration operations in Kazakhstan,
legal fees associated with the lawsuit that was settled on October 30, 1998, and
professional fees relating to the Company's non-routine SEC filings
(Registration Statement on Form S-1 and Form S-3). Also, the Company's equity
loss in KKM increased by $703,000 from the nine months ended September 30, 1997,
due to increased operational costs directly related to development of oil and
gas properties held by KKM.
The Company recognized an extraordinary loss of $236,000 on the
extinquishment of debt during the nine months ended September 30, 1998, from the
retirement of two notes totaling $1,000,000.
3. Year 2000 Issue
The Company has assessed the Year 2000 issue and does not expect the Year
2000 problem to have a material impact on the Company's operations. After
consulting with major vendors, contractors, and technical field personnel, the
Company does not anticipate any material costs to result from Year 2000 problems
impacting the Company's operations.
Item 3 - Quantitative and Qualitative Disclosures About Market Risks
Not Applicable.
13
<PAGE>
Part II - Other Information
Item 1 - Legal Proceedings
On October 30, 1998, the Company settled the lawsuit filed against the
Company and others in the District Court of Harris County, Texas, by Heartland,
Inc. of Wichita and Collins & McIlhenny, Inc. on November 14, 1997, for a total
of $200,000 and warrants to purchase 200,000 shares of the Company's Common
Stock at an exercise price of $1.00, exercisable through January 28, 1999. The
lawsuit was dismissed with prejudice for all defendants involved. The Company
believes the lawsuit was without merit, but a settlement was reached to avoid
incurring additional legal costs.
The Company recorded the fair market value of the warrants (approximately
$34,000) using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rate 5.53%, dividend yield of
0%, volatility factors of the Company's Common Stock of 1.046, and a weighted
average life expectancy of the warrants of .25 years. The lawsuit was previously
discussed in Item 3 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
Item 2 - Changes in Securities and Use of Proceeds
On July 3, 1998, the Company issued warrants to purchase 20,000 shares of
the Company's Common Stock at an exercise price of $.01 per share, in exchange
for a stand-by letter of credit securing the $975,000 loan to the Company from
the Chase Bank of Texas. The Company issued the warrants in reliance upon the
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended. The guarantor had available all material information concerning the
Company. The warrant certificate bears an appropriate restrictive legend under
the Securities Act of 1933, as amended. No underwriter was involved in the
transaction.
Effective on July 28 and July 29, 1998, the Company sold 6,666,667 shares
of the Company's Common Stock for $1.50 per share for at total of $10,000,002.50
to certain accredited investors. The Company sold the shares in reliance upon
the exemption from registration under Sections 4(2) of the Securities Act of
1933, as amended, and Regulation D promulgated thereunder. A Form D was timely
filed in connection with the sales. The investors, who all were accredited
investors, had available all material information concerning the Company. The
certificates bear an appropriate restrictive legend under the Securities Act of
1933, as amended. Allen & Company, Incorporated acted as placement agent in
connection with the sale of the 6,666,667 shares. As a result, Allen & Company,
Incorporated's warrants to purchase 900,000 shares of the Company's Common
Stock, originally issued as commission in connection with the Preferred Stock
sale on November 24, 1997, became exercisable for an additional 400,000 shares
of the Company's Common Stock. The warrants to purchase the additional 400,000
shares of the Company's Common Stock are exercisable through November 25, 2002,
at an exercise price of $0.01 per share. Of the total warrants to purchase
900,000 shares of Common Stock issued to Allen & Company, Incorporated on
November 24, 1997, warrants to purchase 700,000 shares of the Company's Common
Stock are currently exercisable.
Due to the fact the sales price of the 6,666,667 shares was below a price
of $2.00 per share, the Company issued an additional 416,667 shares to the
investor who purchased 1,250,000 shares of the Company's common stock for
$2,500,000 in April 1998 in order to satisfy certain price protection agreements
the Company has with such investor. The Company does not consider the issuance
of 416,667 shares to be a sale.
During the quarter ended September 30, 1998, the Company granted 5-year
options to purchase 110,000 shares of the Company's Common Stock to employees
of, and consultants to, the Company. The Company made the grants in reliance
upon the exemption from registration under Section 4(2) of the Securities Act of
1933, as Amended. Such persons had available to them all material information
concerning the Company. The options will have an appropriate restrictive legend
under the Securities Act of 1933, as amended.
14
<PAGE>
Item 5 - Other Information
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. This Statement requires companies to record derivatives on the
balance sheet as assets and liabilities, measured at fair value. Gains or losses
resulting from the changes in the values of those derivatives would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company has not determined what the effect of SFAS No. 133 will
be on results of operations and financial position. The Company will adopt this
accounting standard as required by January 1, 2000.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Credit Support and Pledge Agreement between Whittier Ventures,
LLC and Chaparral Resources, Inc. dated July 2, 1998.
10.2 Warrants issued to Whittier Ventures, LLC
10.3 Settlement Agreement and Release between Heartland, Inc. of
Wichita and Collins & McIlhenny, Inc. and Chaparral Resources,
Inc., Howard Karren, Whittier Trust Company, and James A. Jeffs
dated October 30, 1998.
10.4 Warrants issued to Heartland, Inc. of Wichita and Collins &
McIlhenny, Inc., as joint tenants, and to Don M. Kennedy.
10.5 Loan Agreement between Challenger Oil Services, PLC and Chaparral
Resources, Inc. dated September 10, 1998.
10.6 Promissory Note between Challenger Oil Services, PLC and
Chaparral Resources, Inc. dated September 10, 1998.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
15
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 16, 1998
Chaparral Resources, Inc.,
a Colorado corporation
By: /s/ Howard Karren
------------------------------------------
Howard Karren
President and Chief Executive Officer
By: /s/ Michael B. Young
------------------------------------------
Michael B. Young, Treasurer and Controller
And Principal Accounting Officer
16
<PAGE>
Exhibit Index
10.1 Credit Support and Pledge Agreement between Whittier Ventures,
LLC and Chaparral Resources, Inc. dated July 2, 1998.
10.2 Warrants issued to Whittier Ventures, LLC
10.3 Settlement Agreement and Release between Heartland, Inc. of
Wichita and Collins & McIlhenny, Inc. and Chaparral Resources,
Inc., Howard Karren, Whittier Trust Company, and James A. Jeffs,
dated October 30, 1998.
10.4 Warrants issued to Heartland, Inc. of Wichita and Collins &
McIlhenny, Inc., as joint tenants, and to Don M. Kennedy.
10.5 Loan Agreement between Challenger Oil Services, PLC and Chaparral
Resources, Inc. dated September 10, 1998.
10.6 Promissory Note between Challenger Oil Services, PLC and
Chaparral Resources, Inc. dated September 10, 1998.
27 Financial Data Schedule
17
CREDIT SUPPORT AND PLEDGE AGREEMENT
Agreement entered into as of the 2nd day of July, 1998 between Whittier
Ventures, LLC, a Delaware Limited Liability Company ("Whittier"), and Chaparral
Resources, Inc, a Colorado corporation ("CRI").
WHEREAS, Whittier has agreed to assist CRI in securing approximately $1
million in financing (the "Bank Loan") from Chase Bank of Texas, N.A. ("Chase")
in order to enable CRI to pay for the winterization and certain supplies and
equipment for a Cabot 900 drilling rig (the drilling rig together with drilling
and other equipment is hereinafter referred to as the "Drilling Unit" owned and
operated by Challenger Oil Service PLC ("Challenged"); and
WHEREAS, Challenger has entered into a drilling contract dated April 7,
1998 (the "Drilling Contract") with Karakuduk Munay, Inc. ("KKM") a joint stock
company organized under the laws of the Republic of Kazakstan whereby CRI will
use the Drilling Unit to drill certain wells for KKM in the Karakuduk Oil Field
in Kazakstan; and
WHEREAS, CRI owns all of the issued and outstanding shares of Central Asia
Petroleum (Guernsey) Ltd. ("CAP-G"), which in turn owns a fifty percent (50%)
interest in KKM; and
WHEREAS, Whittier agrees to secure from the Union Bank of California
("UBOC") an irrevocable letter of credit in the amount of $1 million (the
"Letter of Credit") on behalf of CRI as a credit enhancement for the Bank Loan.
NOW THEREFORE, the parties hereto hereby agree as follows:
1. Issuance of Letter of Credit and Grant of Security Interest
-----------------------------------------------------------
1.1 Whittier agrees to cause UBOC to issue the Letter of Credit in favor of
Chase.
1.2 As security for its obligations to Whittier hereunder, CRI hereby pledges,
transfers and assigns to Whittier a security interest in the all of the issued
and outstanding shares of CAP-G (the "Shares"). In lieu of physical delivery of
the certificates representing the Shares, Whittier will accept a letter from the
custodian of said certificates that said custodian will act as the agent of
Whittier with respect to such Shares (the "Letter"); provided that Whittier
expressly retains the right to require the custodian to physically deliver the
certificates to Whittier at any time. On or before July 17, 1998, CRI shall
deliver to Whittier (1) the original Letter executed by the custodian of the
Shares and (2) original stock powers for the Shares to be held by Whittier for
disposition in accordance with the terms of this Agreement.
1.3 Upon release of the Letter of Credit, Whittier agrees to promptly release
its security interest in the Shares, to return to CRI the related stock powers
and, at CRI's sole cost and expense, to take all action and give all notices
reasonably requested by CRI to effectuate such release.
2. Agreements of CRI and Rights of Whittier
----------------------------------------
2.1 If a Default shall exist, CRI irrevocably authorizes and appoints Whittier,
while such Default exists, as CRI's attorney-in-fact to do any act which CRI is
obligated to do under this Agreement, or which is necessary to carry out the
<PAGE>
intent of this Agreement. As the attorney-in-fact, Whittier may, among other
things, execute any and all documents, agreements and or instruments necessary
to carry out the provisions and terms of this Agreement, including but not
limited to any documents, agreements and/or instruments required to be filed or
recorded with any governmental body or agency. CRI understands and agrees that
this authorization and appointment of Whittier is to enable Whittier to protect
and preserve its rights under this Agreement. CRI agrees to reimburse Whittier
for (all reasonable expenses which it may incur when acting as CRI's
attorney-in-fact. Whittier agrees to notify CRI of all actions taken by Whittier
in its capacity as CRI's attorney-in-fact, including copies of all
correspondence, documents, notices and agreements entered into or executed by
Whittier in such capacity and summaries of any actions taken by Whittier in such
capacity which are not reduced to writing.
2.2 Whittier may, in its own name, or in the name of CRI vote the Shares and
give consents, waivers and ratifications in connection with the Shares, provided
that until the occurrence of a Default (as hereinafter defined), Whittier will
only take that action if requested by CRI, or if, in its judgment, failure to
take that action would impair its rights under this Agreement. If a Default
shall exist, Whittier may vote and exercise, or cause its nominee or nominees to
vote and exercise, all the powers of an owner with respect to the Shares. In so
voting and exercising the power of an owner, Whittier shall not be required to
amend any meeting of the stockholders of CAP-G, but Whittier( may vote or act by
power of attorney or by proxy, and such power of attorney or proxy may be
granted to any person selected by Whittier; and Whittier may so vote and
exercise the power of an owner,with respect to the Shares for any purpose or
purposes which Whittier, in its discretion, shall deem advisable and in its
interest, whether or not such purpose or purposes may be inconsistent with the
"best interests" of CRI and whether or not such action may involve a change in
the character of the Shares.
2.3 Whittier may, in its own name, or in the name of CRI (l) receive all
payments, distributions and dividends in securities, property or cash made with
respect to the Shares and, at the discretion of Whittier, held by it until
applied as provided in this Agreement; provided that until the occurrence of a
Default, any cash dividends received with respect to the Shares shall be paid to
CRI; (ii) modify the terms of the Letter of Credit without incurring any
responsibility to, or affecting the liability of CRI; and (iii) make any
notification (to KKM or otherwise) or take any other action in connection with
the perfection or preservation of its security interest or of any enforcement of
remedies; provided that until the occurrence of a Default Whittier will only
take that action if requested by CRI, or if in its judgment, failure to take
that action would impair its rights under this Agreement.
2.4 Except for the pledge of the Shares to Whittier set forth herein, CRI will
not sell, assign, or otherwise dispose of, grant any option with respect to, or
pledge, or otherwise further encumber (either voluntarily or involuntarily) all
or any of the Shares, or file or permit to be filed any financing or like
statement with respect to the Shares in which Whittier is not named as the sole
secured party. CRI agrees, at its sole cost and expenses, to do all other things
which Whittier may, from time to time, deem necessary or advisable in order to
perfect and preserve its security interest in the Shares and to give effect to
the rights granted to Whittier under this Agreement or to enable Whittier to
comply with any applicable laws or regulations in any country, state or any
political subdivision thereof.
<PAGE>
2.5 CRI will defend its title to the Shares, and to the security interest of
Whittier therein, against any and all claims and demands of third parties. CRI
shall indemnify and hold Whittier harmless from any and all losses, costs,
damages, liabilities or expenses, including reasonable attorney's fees, that
Whittier may sustain or incur by reason of defending or protecting Whittier's
security interest in and to the Shares or the priority thereof, or in the
prosecution or defense of any action or proceeding concerning any matter arising
out of or connected with this Agreement or the Shares.
3. Representations and Warranties of CRI
CRI represents and warrants as follows:
3.1 The Shares are the only issued and outstanding shares of CAP-G. CRI has good
and marketable title to the Shares and has not through any action or omission on
its part subjected the Shares to any mortgage, pledge, lien, encumbrance or
charge, and no other person or entity has or hereafter will have any right,
title, interest, claim or lien in or to the Shares by reason of any action or
omission of CRI or anyone claiming by, through or under CRI except for the
security interest in favor of Whittier created by this Agreement.
3.2 No authorizations, consents or approvals and no notice to or filing with any
governmental authority or regulatory body is required for the execution and
delivery of this Agreement or the exercise by Whittier of its rights and
remedies.
3.3 The execution, delivery and performance of this Agreement will not violate
any provisions of applicable law, regulation or order and will not result in the
breach of, or constitute a default, or require any consent, under any agreement,
instrument or document to which the undersigned is a party or by which it or any
of its property may be bound or affected.
3.4 This Agreement constitutes the legal, valid, and binding obligation of CRI
enforceable against CRI in accordance with its terms.
4. Compensation and Payment of Expenses
4.1 As consideration for issuing the Letter of Credit, CRI shall pay Whittier a
fee of $10,000 (i.e, one percent (1%) of the face amount of the Letter of
Credit), which fee shall be due and payable on or before July 22, 1998.
4.2 In addition to the fee stated in Section 4.1 above, CRI shall issue to
Whittier warrants for the purchase of 20,000 shares of the common stock of CRI
at $.01 per share. Such warrants shall have a term of five (5) years from the
date of issuance. Said warrants shall be dated the date hereof and physically be
issued to Whittier on or before July 22, 1998.
4.3 CRI will pay all of Whittier's expenses incurred in connection with this
transaction and the securing of the Lever of Credit, including without
limitation the fee charged by the UBOC (which is expected to be approximately
$10,000) and attorney's fees (subject to a maximum of $5,000); said payments
shall be made to Whittier on or before July 22, 1997.
4.4 In the event of a Default, CRI shall pay or reimburse Whittier for all costs
and expenses incurred by it, including reasonable attorney's fees, in connection
with the sale of the Shares or otherwise enforcing its rights hereunder,
including representation at any bankruptcy or similar proceeding.
<PAGE>
4.5 In the event that a demand is made against the Letter of Credit, CRI shall
pay Whittier interest at the rate of ten percent (10%) per annum on the amount
drawn until said amount is paid in full by CRI.
5. Restructure of CAP-G
---------------------
Whittier understands that it is contemplated that CAP-G may be restructured
through either a merger, consolidation, reincorporation, liquidation or
otherwise. In the event that a Default has not occurred, Whittier agrees that it
will cooperate with CRI and will permit CRI to take all necessary steps and do
all things reasonably necessary to accomplish such restructuring; provided
however that (l) the shares of the restructured entity shall be substituted for
those of CAP-G and shall thereafter be deemed the Shares, subject to all the
terms and conditions set forth herein, (ii) Whittier shall not be required to
take any action which will impair its rights under this Agreement and (iii)
Whittier shall incur no cost, expense or liability in connection therewith.
6. Default
Each of the following is an event of default ("Default"):
6.1 CRI fails to perform or observe any term, covenant or condition set forth
herein, or any representation or warranty of this Agreement is materially false
or misleading.
6.2 CRI has received notice that it is in default under the Bank Loan, and if
such default is curable, such default has not been cured within the appropriate
time period.
6.3 Demand is made against the Letter of Credit.
6.4 Whittier has received notice under the Bank Loan that CRI is in default and
that Whittier will be required to make a payment under the Letter of Credit, and
CRI has not either cured such default within the time specified or paid off the
Bank Loan.
6.5 CRI is unable to or admits in writing its inability to pay its debts when
due or makes an assignment for the benefit of creditors, petitions or applies to
any tribunal for the appointment of a custodian, receiver or trustee for all or
a substantial part of its assets or commences any proceeding under any
bankruptcy, reorganization arrangement, readjustment of debt, dissolution or
liquidation, has any such petition filed, or any such proceeding has been
commenced against it, in which an adjudication is made or order for relief is
entered or which remains undismissed for a period of thirty (30) days, or has a
receiver, custodian or trustee appointed for all or a substantial part of its
property.
7. Remedies
Upon the occurrence of a Default, Whittier shall have the following rights
and remedies:
<PAGE>
7.1 Whittier shall have all the rights and remedies with respect to the Shares
of a secured party under the UCC (whether or not the UCC is in effect in the
jurisdiction where the rights are asserted) and, in accordance therewith shall
have the rights, powers and remedies provided in this Agreement, as well as such
additional rights and remedies to which a secured party is entitled under the
UCC and/or under the laws which are in effect in the jurisdiction where such
rights and remedies are asserted, including without limitation any one or more
of the following:
(a) Whittier may proceed to sell the Shares in any manner permitted by
law, or in any manner provided for in this Agreement; provided that Whittier
shall not sell the Shares for a period of at least 15 days following the date
upon which the Default first occurred;
(b) Whittier may sell, assign, transfer or otherwise dispose of all,
or from time to time any part of, the Shares at public or private sale, for cash
or credit or for other property, for immediate or future delivery, and on terms
and in such manner as Whittier may determine, and Whittier or anyone else may
purchase the Shares, or any portion thereof, at any such sale, taking such
Shares free from any claim or right including, without limitation, any equity of
redemption of CRI, which right CRI expressly waives. CRI agrees to take any
action requested by Whittier to enable or assist it to sell the Shares;
(c) Whittier is authorized to restrict the prospective bidders or
purchasers to persons who will represent and agree that they are purchasing for
their own account, for investment, and not with a view to distribution or sale
of any of the Shares; and
(d) Whittier may collect for CRI all distributions, whether capital or
income, or both, in whatever form, whether consisting of cash or property, or
both, which CRI otherwise would be entitled to receive or in which CRI has any
right, title or interest.
7.2 If it has not already obtained physical delivery of the Shares, Whittier may
demand that the custodian thereof promptly deliver or cause to be delivered to
Whittier or its designated agent or representative at such location in the
United States as Whittier may designate, the Shares together with such evidence
of title as Whittier may reasonably deem necessary or advisable to enable it to
obtain possession of the Shares.
7.3 Every right, power and remedy herein granted to Whittier shall be cumulative
and in addition to every other right, power and remedy given or now or hereafter
existing in equity, at law or by statute; and each and every right, power and
remedy whether specifically given herein or otherwise existing, may be exercised
from time to time and so often and in such order as may be deemed expedient by
Whittier, and the exercise, or the beginning of the exercise, of any such right,
power or remedy shall not be deemed a waiver of the right to exercise, at the
same time or thereafter any other right, power or remedy. CRI hereby waives any
and all rights it may have to plead or assert any election of remedies if
Whitter should realize on any other collateral given to Whittier to secure the
obligations of CRI or require Whittier to pursue any other particular remedy.
7.4 If a Default shall have occurred, Whittier shall apply all monies realized
by it from dividends or other distributions received by it from the Shares or
upon the sale or other disposition of the Shares, as follows:
<PAGE>
(a) First, to the payment of all costs and expenses incurred by
Whittier in the collection or sale thereof, including reasonable attorney's
fees.
(b) Second, to the payment of all other costs and expenses incurred by
Whittier under the terms of this Agreement for which Whittier has not
theretofore been reimbursed by CRI.
(c) Third, to the payment of any amounts drawn upon the Letter of
Credit, any other amounts owing to Whittier hereunder and all accrued and unpaid
interest thereon.
(d) Fourth, if and to the extent that the Letter of Credit has not
been released, to the payment of the Bank Loan.
(e) Finally, to CRI.
7.5 Whittier may, to the extent permitted by any applicable law, enforce the
performance of the obligations of CRI under the Bank Loan.
8. Assignment
This Agreement shall be binding upon, enforceable by and inure to the
benefit of the respective successors and assigns of each of the parties hereto.
9. Notices
All notices authorized or required between the parties hereto shall be
addressed and effective when delivered to such persons as designated below. Each
party shall have the right to change its address at any time and/or designate
that copies of all such Notices be directed to another person at another
address, by giving notice thereof to all other parties.
If to Whittier:
Whittier Ventures, LLC
Whittier Trust Company
1600 Huntington Drive
South Pasadena, CA 91030
Attention: David A. Dahl
Telephone: (626) 441-5111
Fax: (626) 441-0420
If to CRI:
Chaparral Resources, Inc.
2211 Norfolk, Suite 1150
Houston, TX 77096
Attention: Howard Karren
Telephone: (713) 807-7100
Fax: (713) 607-7561
<PAGE>
With a copy to:
Aitken Irvin Lewin Benin Vrooman & Cohn, LLP
2 Gannett Drive
White Plains, NY 10604
Attention: Alan D. Berlin, Esq.
Telephone: (914) 694-5717
Fax: (914) 694-1647
10. Applicable Law and dispute Resolution
-------------------------------------
10.1 This Agreement shall be governed by, construed, interpreted and enforced in
accordance with the substantive laws of the State of Texas, to the exclusion of
any conflicts of law rules which would refer the matter to the laws of another
jurisdiction.
10.2 Any dispute, controversy or claim arising out of or in relation to or in
connection with this Agreement or the operations carried out under this
Agreement, including without limitation any dispute as to the construction,
validity, interpretation, enforceability or breach of this Agreement, shall be
exclusively and finally settled by arbitration, and any Party may submit such a
dispute, controversy or claim to arbitration.
10.3 A single arbitrator shall be appointed by unanimous consent of the
Parties. If the Parties, however, cannot reach agreement on an arbitrator within
thirty (30) days of the submission of a notice of arbitration, the appointing
authority for the implementation of such procedure shall be the President of the
Association of International Petroleum Negotiators, who shall appoint an
independent arbitrator who does not have any financial interest in the dispute,
controversy or claim. If such person refuses or fails to act as the appointing
authority within ninety (90) days after being requested to do so, then the
appointing authority shall be the President of the American Arbitration
Association, who shall appoint an independent arbitrator who does not have any
financial interest in the dispute, controversy or claim.
10.4 Unless otherwise expressly agreed in writing by the Parties to the
arbitration proceedings:
(l) The arbitration proceedings shall be held at Whittier's option either in
Houston, Texas or Los Angeles County, California;
(ii) The arbitration proceedings shall be conducted in the English language and
the arbitrator(s) shall be fluent in the English language;
(iii) The arbitrator shall be and remain at all times wholly independent and
impartial;
(iv) The arbitration proceedings shall be conducted in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, in effect
on the Effective Date.
<PAGE>
(v) Any procedural issues not determined under the arbitral rules selected
pursuant to this Agreement shall be determined by the law of the place of
arbitration, other than those laws which would refer the matter to another
jurisdiction;
(vi) The costs of the arbitration proceedings (including attorneys' fees and
costs) shall be borne in the manner determined by the arbitrator;
(vii) The decision of the arbitrator shall be reduced to writing; final and
binding without the right of appeal; the sole and exclusive remedy regarding any
claims, counterclaims, issues or accounting presented to the arbitrator; made
and promptly paid in U.S. dollars free of any deduction or offset; and any costs
or fees incident to enforcing the award, shall to the maximum extent permitted
by law, be charged against the Party resisting such enforcement;
(viii) Consequential, punitive or other similar damages shall not be allowed;
provided, however, the award may include appropriate punitive damages where a
Party has engaged in delaying and dilatory actions;
(lx) The award shall include interest from the date of any breach or violation
of this Agreement, as determined by the arbitral award until paid in full;
(x) Judgment upon the award may be entered in any court having jurisdiction over
the person or the assets of the Party owing the judgment or application may be
made to such court for a judicial acceptance of the award and an order of
enforcement, as the case may be; and
11. Miscellaneous
11.1 This Agreement may be executed in any number of counterparts and each such
counterpart shall be deemed an original Agreement for all purposes; provided no
party shall be bound by the terms of this Agreement unless and until all parties
have executed a counterpart.
11.2 This Agreement is the entire agreement of the parties and supersedes all
prior understandings and negotiations of the parties.
11.3 The invalidity, illegality or unenforceability of any provision of this
Agreement shall not be deemed to affect the validity, legality or enforceability
of any other provision hereof.
11.4 No waiver of any default or breach of any of the terms or provisions hereof
by Whittier shall be implied from the failure of Whittier to take action on
account of such default or breach. No waiver shall affect any default other than
the default specified in any written waiver by Whittier. No waiver of any term
or provision contained herein by Whittier shall be construed as a waiver of any
subsequent breach of the same term or provision. The consent or approval by
Whittier to, or of, any act by any other party requiring further consent or
approval shall not be deemed to waive or render unnecessary Whittier's consent
or approval to, or of, any subsequent similar acts.
IN WITNESS WHEREOF, The Parties hereto have executed this Agreement as of the
date first above written.
<PAGE>
Whittier Ventures LLC
By
----------------------------
David A. Dahl, President
Chaparral Resources Inc.
By
----------------------------
Howard Karren, Chairman & CEO
IN WITNESS THEREOF, The Parties hereto have executed this Agreement as of the
date first above written.
Whittier Ventures LLC
By:
--------------------------
David A. Dahl, President
Chaparral Resources,Inc.
By:
--------------------------
Howard Karren, Chairman & CEO
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
THE LAWS OF ANY STATE. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS THEY
ARE REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
EXEMPTION FROM REGIGTRATION IS AVAILABLE.
20,000 Warrants
CHAPARRAL RESOURCES, INC.
WARRANT CERTIFICATE
This warrant certificate ("Warrant Certificate") certifies that for value
received Whittier Ventures, LLC or registered assigns (the "Holder") is the
owner of the number of warrants specified above, each of which entitles the
Holder thereof to purchase, at any time on or before the Expiration Date
(hereinafter defined), one fully paid and non-assessable share of Common Stock,
$.10 par value ("Common Stock"), of Chaparral Resources, Inc., a Colorado
corporation (the "Company"), for the Purchase Price (defined in Paragraph 1
below) in lawful money of the United States of America (subject to adjustment as
hereinafter provided).
1. Warrant; Purchase Price
This Warrant shall entitle the Holder initially to purchase 20,000 shares
of Common Stock of the Company, and the purchase price payable upon exercise of
the Warrant (the "Purchase Price") shall be $0.01 per share of Common Stock. The
Purchase Price and number of shares of Common Stock issuable upon exercise of
this Warrant are subject to adjustment as provided in Article 6 hereof. The
shares of Common Stock issuable upon exercise of the Warrant (and/or other
shares of common stock so issuable by reason of any adjustments pursuant to
Article 6) are sometimes referred to herein as the "Warrant Shares".
2. Exercise: Expiration Date
a. The Warrant is exercisable, at the option of the Holder, in whole or in part
at any time and from time to time after the Exercisability Date and on or before
the Expiration Date, upon surrender of this Warrant Certificate to the Company
together with a duly completed Notice of Exercise, in the form attached hereto
as Exhibit A, and payment of the Purchase Price. In the case of exercise of less
than the entire Warrant represented by this Warrant Certificate, the Company
shall cancel the Warrant Certificate upon the surrender thereof and shall
execute and deliver a new Warrant Certificate for the balance of such Warrant.
2.2 The term "Exercisability Date" shall mean the date of this Warrant
Certificate. The term "Expiration Date" shall mean 5:00 p.m. Houston, Texas time
on July 22, 2003, or if such day shall in the State of Texas be a holiday or a
day on which banks are authorized to close, then 5:00 p.m. Houston, Texas time
the next following day which in the State of Texas is not a holiday or a day on
which banks are authorized to close,
3. Registration and Transfer on Company Books
3.1 The Company shall maintain books for the registration and transfer of
the Warrant and the registration and transfer of the Warrant Shares.
<PAGE>
3.2 Prior to due presentment for registration of transfer of this Warrant
Certificate, or the Warrant Shares, the Company may deem and treat the
registered Holder as the absolute owner thereof.
4. Reservation of Shares
The Company covenants that it will at all times reserve and keep available
out of its authorized capital stock, solely for the purpose of issue upon
exercise of the Warrant, such number of shares of capital stock as shall then be
issuable upon the exercise of all outstanding Warrant. The Company covenants
that all shares of capital stock which shall be issuable upon exercise of the
Warrant shall be duly and validly issued and fully paid and non-assessable and
free from all taxes, liens and charges with respect to the issue thereof, and
that upon issuance such shares shall be listed on each national securities
exchange, if any, on which the other shares of such outstanding capital stock of
the Company are then listed.
5. Loss or Mutilation
Upon receipt by the Company of reasonable evidence of the ownership of and
the loss, theft, destruction or mutilation of any Warrant Certificate and, in
the case of loss, theft or destruction, of indemnity reasonably satisfactory to
the Company, or, in the case of mutilation, upon surrender and cancellation of
the mutilated Warrant Certificate, the Company shall execute and deliver in lieu
thereof a new Warrant Certificate representing an equal number of Warrant
Shares.
6. Adjustment of Purchase Price and Number of Shares Deliverable
6.1 The number of Warrant Shares purchasable upon the exercise of the
Warrant and the Purchase Price with respect to the Warrant Shares shall be
subject to adjustment as follows:
(a) In case the Company shall (i) declare a dividend or make a distribution
on its Common Stock payable in shares of its capital stock, (ii) subdivide its
outstanding shares of Common Stock through stock split or otherwise, (iii)
combine its outstanding shares of Common Stock into a smaller number of shares
of Common Stock, or (iv) issue by reclassification of its of Common Stock
(including any reclassification in connection with a consolidation or merger in
which the Company is the continuing corporation) other securities of the
Company, the number and/or nature of Warrant Shares purchasable upon exercise of
the Warrant immediately prior thereto shall be adjusted so that the Holder shall
be entitled to receive the kind and number of Warrant Shares or other securities
of the Company which he would have owned or have been entitled to receive after
the happening of any of the events described above, had such Warrant been
exercised immediately prior to the happening of such event or any record date
with respect thereto. Any adjustment made pursuant to this paragraph (a) shall
become effective retroactively as of the record date of such event.
(b) In the event of any capital reorganization or any reclassification of
the capital stock of the Company or in case of the consolidation or merger of
the Company with another corporation (other than a consolidation or merger in
which the outstanding shares of the Company's Common Stock are not converted
into or exchanged for other rights or interests), or in the case of any sale,
transfer or other disposition to another corporation of all or substantially all
<PAGE>
the properties and assets of the Company, the Holder of the Warrant shall
thereafter be entitled to purchase (and it shall be a condition to the
consummation of any such reorganization, reclassification, consolidation,
merger, sale, transfer or other disposition that appropriate provisions shall be
made so that such Holder shall thereafter be entitled to purchase) the kind and
amount of shares of stock and other securities and property (including cash)
which the Holder would have been entitled to receive had such Warrant been
exercised immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, sale, transfer or other disposition;
and in any such case appropriate adjustments shall be made in the application of
the provisions of this Article 6 with respect to rights and interest thereafter
of the Holder of the Warrant to the end that the provisions of this Article 6
shall thereafter be applicable, as near as reasonably may be, in relation to any
shares or other property thereafter purchasable upon the exercise of the
Warrant. The provisions of this Section 6.1(b) shall similarly apply to
successive reorganizations, reclassifications, consolidations, mergers, sales,
transfers or other dispositions.
(c) Whenever the number of Warrant Shares purchasable upon the exercise of
the Warrant is adjusted, as provided in this Section 6.1, the Purchase Price
with respect to the Warrant Shares shall be adjusted by multiplying such
Purchase Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of Warrant Shares purchasable upon the exercise of
the Warrant immediately prior to such adjustment, and of which the denominator
shall be the number of Warrant Shares so purchasable immediately thereafter.
6.2 Whenever the number of Warrant Shares purchasable upon the exercise of
the Warrant or the Purchase Price of such Warrant Shares is adjusted, as herein
provided, the Company shall mail to the Holder, at the address of the Holder
shown on the books of the Company, a notice of such adjustment or adjustments,
prepared and signed by the Chief Financial Officer or Secretary of the Company,
which sets forth the number of Warrant Shares purchasable upon the exercise of
the Warrant and the Purchase Price of such Warrant Shares after such adjustment,
a brief statement of the facts requiring such adjustment and the computation by
which such adjustment was made.
6.3 In the event that at any time prior to the expiration of the Warrant
and prior to its exercise:
(a) the Company shall declare any distribution (other than a cash dividend
or a dividend payable in securities of the Company with respect to the Common
Stock); or
(b) the Company shall offer for subscription to the holders of the Common
Stock any additional shares of stock of any class or any other securities
convertible into Common Stock or any rights to subscribe thereto; or
(c) the Company shall declare any stock split, stock dividend, subdivision,
combination, or similar distribution with respect to the Common Stock,
regardless of the effect of any such event on the outstanding number of shares
of Common Stock; or
(d) the Company shall declare a dividend, other than a dividend payable in
shares of the Company's own Common Stock; or
<PAGE>
(e) there shall be any capital change in the Company as set forth in
Section 6.1(b); or
(f) there shall be a voluntary or involuntary dissolution, liquidation, or
winding up of the Company (other than in connection with a consolidation,
merger, or sale of all or substantially all of its property, assets and business
as an entity);
(each such event hereinafter being referred to as a "Notification Event"), the
Company shall cause to be mailed to the Holder, not less than 20 days prior to
the record date, if any, in connection with such Notification Event (provided,
however, that if there is no record date, or if 20 days prior notice is
impracticable, as soon as practicable) written notice specifying the nature of
such event End the effective date of, or the date on which the books of the
Company shall close or a record shall be taken with respect to, such event. Such
notice shall also set forth facts indicating the effect of such action (to the
extent such effect may be known at the date of such notice) on the Purchase
Price and the kind and amount of the shares of stock or other securities or
property deliverable upon exercise of the Warrant.
7. Conversion Rights
7.1 In lieu of exercise of any portion of the Warrant as provided in
Section 2.1 hereof, the Warrant represented by this Warrant Certificate (or any
portion thereof) may, at the election of the Holder, be converted into the
nearest whole number of shares of Common Stock equal to: (1) the product of (a)
the number of Warrant Shares to be so converted and (b) the excess, if any, of
(i) the Market Price per share with respect to the date of conversion over (ii)
the purchase price per Warrant Share in effect on the business day next
preceding the date of conversion, divided by (2) the Market Price per share with
respect to the date of conversion.
7.2 The conversion rights provided under this Section 7 may be exercised in
whole or in part and at any time and from time to time while any portion of the
Warrant remains outstanding. 1n order to exercise the conversion privilege, the
Holder shall surrender to the Company, at its offices, this Warrant Certificate
accompanied by a duly completed Notice of Conversion in the form attached hereto
as Exhibit B. The Warrant (or so much thereof as shall have been surrendered for
conversion) shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such Warrant Certificate for
conversion in accordance with the foregoing provisions. As promptly as
practicable on or after the conversion date, the Company shall issue and shall
deliver to the Holder (i) a certificate or certificates representing the number
of shares of Common Stock to which the Holder shall be entitled as a result of
the conversion, and (ii) if the Warrant Certificate is being converted in part
only, a new certificate of like tenor and date for the balance of the
unconverted portion of the Warrant Certificate.
7.3 "Market Price", as used with reference to any share of stock on any
specified date, shall mean:
(i) if such stock is listed and registered on any national securities exchange
or traded on The Nasdaq Stock Market ("Nasdaq"), (A) the last reported sale
price on such exchange or Nasdaq of such stock on the business day immediately
preceding the specified date, or (B) if there shall have been no such reported
<PAGE>
sale price of such stock on the business day immediately preceding the specified
date, the Overage of the last reported sale price on such exchange or on Nasdaq
on (x) the day next preceding the specified date for which there was a reported
sale price and
(y) the day next succeeding the specified date for which there was a
reported sale price; or
(ii) if such stock is not at the time listed on any such exchange or traded on
Nasdaq but is traded on the over-the-counter market as reported by the National
Quotation Bureau or other comparable service, (A) the average of the closing bid
and asked prices for such stock on the business day immediately preceding the
specified date, or (B) if there shall have been no such reported bid and asked
prices for such stock on the business day immediately preceding the specified
date, the average of the last bid and asked prices on (x) the day next preceding
the specified date for which such information is available and (y) the day next
succeeding the specified date for which such information is available; or
(iii) if clauses (i) and (ii) above are not applicable, the fair value per share
of such stock as determined in good faith and on a reasonable basis by the Board
of Directors of the Company and, if requested, set forth in a certificate
8. Voluntary Adjustment by the Company
The Company may, at its option, at any time during the term of the Warrant,
reduce the then current Purchase Price to any amount deemed appropriate by the
Board of Directors of the Company and/or extend the date of the expiration of
the Warrant.
9. Registration Rights
The Company has agreed with the Holder that the Company will register for
resale the Warrant Shares at the time the Company next files a registration
statement with the United States Securities and Exchange Commission to register
any of its securities.
Notwithstanding the foregoing, the Holder agrees that any certificate
representing Warrant Shares will have a restrictive legend thereon stating that
the Warrant Shares cannot be transferred except in compliance with the
Securities Act of 1933, as amended, and any applicable state securities laws.
10. Governing Law
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of Texas.
IN WITNESS THEREOF, the Company has caused this Warrant Certificate to be
duly executed by its officers thereunto duly authorized and its corporate seal
to be affixed hereon, as of this 2nd day of July, 1998.
CHAPARRAL RESOURCES, INC.
By:
-----------------------------
Name:
Title:
<PAGE>
Attest:
- - ---------------------------------
Name:
Title:
EXHIBIT A
NOTICE OF EXERCISE
The undersigned hereby irrevocably elects to exercise, pursuant to Section
2 of the Warrant Certificate accompanying this Notice of Exercise, _ Warrants of
the total number of Warrants owned by the undersigned pursuant to the
accompanying Warrant Certificate, and herewith makes payment of the Purchase
Price of such shares in full.
- - --------------------------------
Name of Holder
- - --------------------------------
Signature
Address:
- - --------------------------------
- - --------------------------------
- - --------------------------------
EXHIBIT B
NOTICE OF CONVERSION
The undersigned hereby irrevocably elects to convert, pursuant to Section 7 of
the Warrant Certificate accompanying this Notice of Conversion, _ Warrants of
the total number of Warrants owned by the undersigned pursuant to the
accompanying Warrant Certificate into shares of the Common Stock of the Company
(the "Shares").
The number of Shares to be received by the undersigned shall be calculated in
accordance with the provisions of Section 7.1 of the accompanying Warrant
Certificate.
Name of Holder
Signature
Address:
SETTLEMENT AGREEMENT AND RELEASE
This Settlement Agreement and Release ("Agreement") is entered into between and
among Plaintiffs, Heartland, Inc. of Wichita ("Heartland") and Collins &
McIlhenny, Inc. ("C&M"), and Defendants, Chaparral Resources, Inc. ("Chaparral")
and Howard Karren, and former Defendants Whittier Trust Company ("Whittier") and
James A. Jeffs ("Jeffs"), in consideration of the mutual promises contained
herein and other good and valuable consideration.
WHEREAS, on November 14, 1997, Heartland and C&M filed their original
petition against Chaparral, Karren, Whittier and Jeffs in Cause No. 97-56585;
Heartland. Inc. of Wichita and Collins & Mc.Ilhenny, Inc. v. Chaparral
Resources, Inc., Howard Karren, Whittier Trust Company and James A. Jeffs; In
the 55th Judicial District Court of Harris County, Texas (the "Lawsuit").
Reference is hereby made to the pleadings on file in the Lawsuit for a more
thorough description of the disputes, claims and causes of action made the
subject of this Agreement;
WHEREAS, Chaparral, Karren, Whittier and Jeffs denied and continue to deny
the claims asserted against them in the Lawsuit and asserted defenses to those
claims;
WHEREAS, on August 27, 1998, the Court, on Plaintiffs' motion, dismissed
Whittier and Jeffs from the Lawsuit. Nevertheless, it is the desire of all
parties that Plaintiffs, on the one hand, and Whittier and Jeffs, on the other,
mutually release any and all claims asserted against each other or that could
have been asserted in the Lawsuit, it being "understood, however, that the
execution of this Agreement by Whittier and Jeffs shall not operate to waive nor
shall Plaintiffs argue that it somehow waives the objections to personal
jurisdiction that were asserted by Whittier and Jeffs in the Lawsuit and that
were pending in the Lawsuit when Plaintiffs dismissed their claims against
Whittier and Jeffs;
WHEREAS, Heartland, C&M, Chaparral, Karren, Whittier and Jeffs each
acknowledge that the Lawsuit involves disputed claims (including the claims
previously asserted against Whittier and Jeffs that Plaintiffs dismissed), and
that this Agreement does not constitute an admission by any party hereto, as to
the merits of any claim or defense in the Lawsuit. The parties have concluded,
however, that further litigation of the Lawsuit through trial and any appeal and
any litigation that might be initiated involving Whittier and Jeffs with respect
to the claims asserted against them and dismissed in the Lawsuit would be
extremely expensive and protracted, and that it is desirable that all of the
disputes involved currently or at any time previously in the Lawsuit be fully
and finally settled in the manner and upon the terms and conditions set forth
herein, solely in order to avoid the expense of litigation.
NOW, THEREFORE, in consideration of the execution of this Agreement, the
foregoing premises, the mutual promises and covenants contained herein, and
other good and valuable consideration, the adequacy and sufficiency of which are
hereby acknowledged by the respective parties hereto, Heartland, C&M, Chaparral,
Karren, Whittier and Jeffs agree as follows:
1. Payment Obligations.
a. Cash. Chaparral agrees to pay the sum of TWO HUNDRED THOUSAND AND NO/100
DOLLARS ($200,000.00) by check made payable to Heartland and its attorney of
record in the Lawsuit, Don M. Kennedy.
b. Warrants. Chaparral will deliver warrants to purchase a total of TWO
HUNDRED THOUSAND (200,000) shares of Chaparral common stock at a price of ONE
DOLLAR ($l.OO) per Share (the "Warrants"). EIGHTY THOUSSAND (80,000) of the
Warrants will be delivered to Don M. Kennedy, counsel of record for Heartland
and C&M, and the remaining ONE HUNDRED TWENTY THOUSAND (120,000) Warrants will
be delivered to Heartland and CAM, jointly. Chaparral agrees, subject to all
applicable securities laws, to include the common stock underlying the Warrants
<PAGE>
in an amendment to a registration statement that was filed on Form S-3 by
Chaparral with the Securities Exchange Commission September 22, 1998 (the
"September S-3 Registration Statement"). Specifically, Chaparral will file an
amendment to the September S-3 Registration Statement after execution of this
Agreement by all parties so that the common stock Underlying the Warrant will be
included in the September S-3 Registration Statement prior to the time the
September S-3 Registration Statement is declared effective by the SEC. If the
September S-3 Registration Statement is not declared effective for any reason,
if Chaparral withdraws the September S-3 Registration, Statement for any reason
or if, for any reason the common stock underlying the Warrants is not, included
in the September S-3 Registration Statement prior to the date the SEC declares
the September S-3 Registration Statement effective, Chaparral will include the
common stock underlying the Warrants in the next application for registration of
stock it files in which said stock may properly be included under applicable
law. The Warrants shall expire 90 days after the date they are issued.
Once such registration is declarad effective by the SEC, Chaparral will use
its best efforts to keep such registration statement effective to permit the
resale of the common stock underlying the Warrants until the earlier of the date
the shares acquired on the exercise of such Warrants have been sold pursuant to
such registration statement or Rule 144 adopted by the SEC is available.
Chaparral shall pay all costs, fees and expenses in connection with all
registration statements filed under this paragraph 1.b. including, without
limitation, Chaparral's legal and accounting fees, printing expenses and blue
sky fees and expenses, but not including the fees and expenses of counsel and
accountants and advisors for the holders of the Warrants or underlying shares of
common stock. Chaparral shall not pay for underwriting discounts and commissions
and underwriter's expenses allocable to the common stock being registered or
state transfer taxes.
c. Division of Payments. Chaparral's delivery of the cash and Warrants set forth
above shall be without any obligation on the part of Chaparral, Karren, Whittier
or Jeffs to see to the proper division thereof as between C&M and Heartland. The
division of the cash and Warrants specified above between Heartland and C&M
shall be governed by agreement between them and neither Chaparral, Karren,
Whittier nor Jeffs shall have any obligation to administer or see to the proper
division thereof or compliance with any agreement between Heartland and C&M.
2. Dismissal. Upon execution of this Agreement, Heartland and C&M shall
immediately dismiss the Lawsuit with prejudice to their rights to refile same,
any part thereof or to assert any claim arising out of the underlying document
dated September 25, 1997 upon which the Lawsuit was based. To accomplish the
foregoing, Heartland, C&M, Chaparral and Karren shall execute the Agreed Final
Judgment in the form attached hereto and promptly file same for entry by the
Court in which the Lawsuit is pending.
3. Heartland's and C&M's Releases. Heartland and C&M for themselves, and
their respective past, present and future parent companies, subsidiaries,
affiliates, predecessors and successors, their respective past, present and
future employees, representatives, agents, servant, attorneys, shareholders,
directors, officers, partners, and principals, and their respective heirs,
executors, personal representatives, administrators and assigns, any and all
persons, natural or corporate, in privity with them or acting in concert with
them or any of them, and all persons or entities to whom or for whose conduct
they may be liable (collectively "Releasors"), hereby release and forever
discharge Chaparral, Karren, Whittier and Jeffs, their respective past, present
and future parent companies, subsidiaries, affiliates, predecessors and
successors, their respective past, present and future employees,
representatives, agents, servants, attorneys, shareholders, directors, officers,
partners, and principals, and their respective heirs, executors, personal
<PAGE>
representatives, administrators, and assigns, and any and all persons, natural
or corporate, in privity with them or acting in concert with them ("Releasees"),
from any and all claims, demands, causes of action, debts, suits, liabilities,
rights of action, dues, sums of money, accounts, bonds, bills, covenants,
contracts, controversies, agreements, promises, damages, judgments, variances,
executions or obligations of whatever nature, past, present or future, matured
or unmatured, liquidated or unliquidated, absolute or contingent, whether in
contract or in tort, whether choate or unchoate, known or unknown, arising under
or by virtue of any statute or regulation, common law, equity or otherwise,
including, without limitation, claims for contribution or indemnity, that the
Releasors have, own or hold, or might have had or owned or held, formerly had or
might have, own or hold, individually, representatively, derivatively or in any
other capacity which they have asserted or alleged, or could have asserted or
alleged, against Chaparral, Karren, Whittier or Jeffs from the beginning of time
to the present (hereinafter "Claims"), including any such Claims (i) which
relate to or which are in any way based upon or arise from the document dated
September 25, 1997 which was the subject of the Lawsuit or any restriction or
obligation purportedly created by that document, or (ii) which relate to, or
which are in any way based upon or arise from or are in any way connected with
the claims asserted in the Lawsuit, or (iii) which relate to or which are in any
way based upon or arise from, or are in any way connected with any of the acts,
facts, events, circumstances, matters, claims, transactions, occurrences,
omissions, representations, misrepresentations, or matters of any kind or nature
whatsoever, related directly or indirectly to the subject matters referred to,
set forth in or the facts or claims for relief which were or could have been
alleged or litigated in the Lawsuit, or in any discovery or offer proceeding in
connection therewith. Excepted from this release and discharge by Heartland and
C&M are the obligations of Chaparral under this Agreement
4. Chaparral's, Karren's. Whittier's and Jeffs' Releases. Chaparral, Karren,
Whittier and Jeffs, for themselves, and their respective past, present and
future parent companies, subsidiaries, affiliates, predecessors and successors,
their respective past, present and future employees, representatives, agents,
servants, attorneys, shareholders, directors, officers, partners, and
principals, and their respective heirs, executors, personal representatives,
administrators and assigns, any and all persons, natural or corporate, in
privity with them or acting in concert with them or any of them, and all persons
or entities to whom or for whose conduct they may be liable (collectively
"Releasors"), hereby release and forever discharge Heartland and C&M, their
respective past, present and future parent companies, subsidiaries, affiliates,
predecessors and successors, their respective past, present and future
employees, representatives, agents, servants, attorneys, shareholders,
directors, officers, partners, and principals, and their respective heirs,
executors, personal representatives, administrators, and assigns, and any and
all persons, natural or corporate, in privity with them or acting in concert
with them ("Releasees"), from any and all claims, demands, causes of action,
debts, suits, liabilities, rights of action, dues, sums of money, accounts,
bonds, bills, covenants, contracts, controversies, agreements, promises,
damages, judgments, variances, executions or obligations of whatever nature,
past, present or future, matured or unmatured, liquidated or unliquidated,
absolute or contingent, whether in contract or in tort, whether choate or
unchoate, known or unknown, arising under or by virtue of any statute or
regulation, common law, equity or otherwise, including, without limitation,
claims for contribution or indemnity, that the Releasors have, own or hold, or
might have had or owned or held, formerly had or might have, own or hold,
individually, representatively, derivatively or in any other capacity which they
have asserted or alleged, or could have asserted or alleged, against Heartland
and C&M from the beginning of time to the present (hereinafter "Claims"),
<PAGE>
including any such Claims (i) which relate to or which are in any way based upon
or arise from the document dated September 25, 1997 which was the subject of the
Lawsuit, or any restriction or obligation purportedly created by that document,
or (ii) which relate to, or which are in any way based upon or arise from or are
in any way connected with the claims asserted in the Lawsuit, or (iii) which
relate to or which are in any way based upon or arise from, or are in any way
connected with any of the acts, facts, events, circumstances, matters, claims,
transactions, occurrences, omissions, representations, misrepresentations, or
matters of any kind or nature whatsoever, related directly or indirectly to the
subject matters referred to, set forth in or the facts or claims for relief
which were or could have been alleged or litigated in the Lawsuit, or in any
discovery or other proceeding in connection therewith. Excepted from this
release and discharge by Chaparral, Karren, Whittier and Jeffs are the
obligations of Heartland and C&M under this Agreement, and any claims that any
current or former employee of Chaparral may have against Richard Stowell or
Heartland for the failure to pay commissions or other compensation arising out
of the services alleged by Plaintiffs as the basis of the lawsuit or for
Stowell's or Heartland's failure to comply with any agreements or understandings
reached by them.
5. No Other Inducements Voluntary Execution. In making this Agreement,
Chaparral, Karren, Heartland, C&M, Whittier and Jeffs understand and represent
to each other that they have relied solely on their own judgment, belief and
knowledge of the nature and extent of any damages alleged, as well as the
liability questions involved in the Lawsuit. Chaparral, Karren, Heartland, C&M,
Whittier and Jeffs represent and covenant that they have not been influenced to
any extent whatsoever in making this Agreement by any representations or
statements made by any person or entity hereby released except as reflected
herein. Chaparral, Karren, Heartland, C&M, Whittier and Jeffs by their
respective signatures below, acknowledge and represent to each other that they
have read this Agreement, that they fully understand it, that they have had the
benefit of the advice of counsel of their own choosing, that they have relied
solely and completely upon their own judgment and the advice of their own
counsel in entering into this Agreement, that no promise, inducement or
agreement not herein expressed has been made to them, that they are authorized
to sign the Agreement and that they have executed it of their own free will and
accord. It is expressly understood and agreed by Chaparral, Karren, Heartland,
C&M, Whittier and Jeffs that the terms of this Agreement are contractual and not
mere recitals.
6. Authority. Chaparral, Karren, Heartland, C&M, Whittier and Jeffs expressly
represent and warrant to each other that the person signing on their behalf is
authorized and is the proper person to sign this Agreement, and further
represent and warrant that they have not assigned, pledged or otherwise sold or
transferred, either by written instrument or otherwise, any right, title,
interest or claim they have or may have in connection with or arising out of the
Lawsuit. The parties also represent and warrant to each other that the person
signing this Agreement on their respective behalves is authorized to sign same
and that the Agreement shall be binding upon any entity on whose behalf this
Agreement is signed.
7. Costs and Expenses. Heartland and C & M shall bear no responsibility for the
costs and attorneys' fees incurred by Chaparral, Karren, Whittier and Jeff in
their defense of the Lawsuit. Chaparral, Karren, Whittier, and Jeff s shall bear
no responsibility for the costs and attorneys' fees incurred by Heartland and C
& M in their prosecution of the Lawsuit.
8. Entire Agreement. This Agreement constitutes the entire agreement by and
among the parties hereto, supersedes any and all prior understandings and
agreements, and may not be modified or amended except on or after the date
hereof by writing signed by the party against whom said modification or
<PAGE>
amendment is to be enforced. The failure of any of the undersigned parties to
insist upon strict adherence to any term of this Agreement on one or more
occasions shall not be deemed a waiver or deprive such person or entity of the
right thereafter to insist upon strict adherence to that term or any other term
of this Agreement. No waiver of this Agreement, obligations or conditions herein
shall be valid unless in a writing signed by the party against whom said waiver
is to be enforced.
9. Enforceability. In the event any provision of the Agreement is deemed void
and unenforceable, such provision will be regarded as stricken from the
Agreement, and will not affect the validity of the remainder of the Agreement.
lO. No Third Party Beneficiaries. This Agreement does not create, and shall not
be construed as creating, any rights enforceable by any person other than the
undersigned parties and their respective successors and assigns, and does not
release, and shall not be construed as releasing, any rights enforceable against
any person or entity other than entities or persons named herein and their
respective predecessors, successors and assigns.
11. Counterparts. This Agreement may be executed in multiple counterparts
and each such signed counterpart shall be binding and effective as an original
Agreement.
12. Successors and Assigns. This Agreement shall be binding upon the
parties hereto and inure to the benefit of the patties hereto and the entities
or persons named herein and their respective heirs, successors and assigns, and
any corporation, partnership or other entity into or with which any party hereto
may merge, consolidate or reorganize.
13. No Admission. This Agreement does not constitute an admission of
liability by any palsy, but is simply a settlement of claims. Each of the
undersigned acknowledges and understands that each other party expressly denies
liability of any kind whatsoever and has made this Agreement in order to buy
peace and avoid the expense of continuing the lawsuit. The parties hereto
stipulate that the Agreement is executed solely for the purpose of avoiding the
costs and uncertainties of the Lawsuit and it shall not be construed as an
admission of liability by any party, any such liability being expressly denied.
The parties also specifically agree the execution of this Agreement by Whittier
and Jeffs is not a waiver of any objection by Whittier and Jeffs to the
assertion of personal jurisdiction over them by a Texas court nor is it any type
of admission by Whittier or Jeffs, implicit or otherwise, of liability or of
personal jurisdiction in a Texas court for the claims asserted.
14. Confidentiality. Except as required by law, regulation, order of a
government authority or upon written consent of the other parties hereto, each
party and its or his respective agents, employees, affiliates, officers,
directors, and attorneys shall keep and maintain this Agreement, the terms and
provisions hereof, the Lawsuit, and the facts, issues and disputes, underlying
the Lawsuit, in strict confidence and shall not transmit, reveal, disclose, or
otherwise communicate any such information to anyone without prior written
notice to the other parties. However, the parties, their present, former of
future shareholders, directors, officers, agents, representatives, successors,
heirs, attorneys, or assigns specifically reserve the right to disseminate
certain information, including dissemination required by or to governmental
agencies, or make an announcement of the fact of settlement of the litigation,
but only as is reasonably necessary in their business affairs and limiting such
dissemination to the least amount of information reasonably necessary to
accomplish the intended business purpose (for example notice of settlement and
amount of payment for income tax purposes).
15. Return of Documents. Within ten (10) days of the execution of this
Agreement, (i) all documents and copies of documents produced by defendants in
the Lawsuit, and (ii) all documents in Plaintiffs' possession concerning
Chaparral, including financial information, documents describing Chaparral and
<PAGE>
its business prospects and any other documents used in any of Plaintiffs'
investment banking efforts regarding Chaparral, shall be returned to Chaparral.
16. Effectiveness. This Agreement shall pot be effective unless and until
all of the parties reflected below have executed and acknowledged this
Agreement.
Signed this ___ day of _________,1998.
HEARTLAND, INC. OF WICHITA
STATE OF TEXAS
COUNTY OF HARRIS
BEFORE ME, the undersigned authority, on this day personally appeared
__________________________, ___________________ of HEARTLAND, INC. OF WICHITA,
who, upon his sworn oath, stated that he executed the above and foregoing
Settlement Agreement and Release for the purposes and in the capacity therein
stated.
SWORN AND SUBSCRIBED to before me on this ____ day of __________, 1998.
Notary Public In and For
The State of Texas
SIGNED this _____ day of ____________, 1998.
COLLINS @ MCILHENNY, INC.
By:____________________
Title:_________________
STATE OF OKLAHOMA
COUNTY OF TULSA
BEFORE ME, the undersigned authority, on this day personally appeared
______________________, ________________ of COLLINS @ MCILHENNY, INC. who, upon
his sworn oath, stated that he executed the above and foregoing Settlement
Agreement and Release for the purposes and in the capacity therein stated.
SWORN AND SUBSCRIBED to before me on this ____ day of _________, 1998.
Notary Public In and For
The State of Oklahoma
My Commission Expires:
SIGNED this ____ day of __________________,1998.
CHAPARRAL RESOURCES, INC.
BY:________________________
Title:_____________________
STATE OF NEW YORK
COUNTY OF ___________
BEFORE ME, the undersigned authority, on this day personally appeared of
CHAPARRAL RESOURCES,INC., who, upon this sworn oath, stated that he executed the
<PAGE>
above and foregoing Settlement Agreement and Release for the purposes and in the
capacity therein stated.
SWORN AND SUBSCRIBED to before me on this ____ day of ________________, 1998.
Notary Public In and For
The State of New York
My Commission Expires:
- - ----------------------
SIGNED this ____ day of _________, 1998.
- - ---------------------
HOWARD KARREN
STATE OF TEXAS
COUNTY OF HARRIS
BEFORE ME, the undersigned authority, on this day personally appeared
HOWARD KARREN, Individually, who, upon his sworn oath, stated that he executed
the above and foregoing Settlement Agreement and Release for the purposes and in
the capacity therein stated.
SWORN AND SUBSCRIBED to before me on this ____ day of ____________ 1998.
------------------------
Notary Public In and For
The State of Texas
My Commission Expires:
SIGNED this ___ day of ______,1998.
- - ---------------------------------
HOWARD KARREN
STATE OF TEXAS
COUNTY OF HARRIS
BEFORE ME, the undersigned authority, on fills day personally appeared
HOWARD KARREN, Individually, who, upon his sworn oath, stated that he executed
<PAGE>
the above and foregoing Settlement Agreement and Release for the purposes and in
the capacity therein stated.
SWORN AND SUBSCRIBED to before me on this _ day of ________ , 1998.
Notary Public In and For
The State of Texas
My Commission Expires:
SIGNED this __ day of _______,1998.
- - ----------------------------------
JAMES A. JEFFS
STATE OF CALIFORNIA
COUNTY OF LOS ANGELES
BEFORE ME, the undersigned authority, on this day personally appeared
JAMES A. JEFFS, who, upon his sworn oath, stated that he executed the above and
foregoing Settlement Agreement and Release for the purposes and in the capacity
therein stated.
SWORN AND SUBSCRIBED to before me on this ____ day of ________, 1998.
- - ------------------------
Notary Public In and For
The State of California
My Commission Expires:
SIGNED this ___ day of ___________, 1998.
WHITTIER TRUST COMPANY
By:_____________________
Title:_____________________
<PAGE>
STATE OF CALIFORNIA
COUNTY OF LOS ANGELES
BEFORE ME, the undersigned authority, on this day personally appeared of
WHITTEER TRUST COMPANY, who, upon his sworn oath, stated that he executed the
above and foregoing Settlement Agreement and Release for the purposes and in the
capacity therein stated. SWORN AND SUBSCRIBED to before me on this ___ day of
____________ , 1998.
- - ------------------------
Notary Public In and For
The State of California
My Commission Expires:
NO. 97-56585
HEARTLAND, INC. OF WICHITA AND IN THE DISTRICT COURT OF
COLLINS & MCILHENNY,INC.
Plaintiffs
HARRIS COUNTY,TEXAS
v.
CHAPARRAL RESOURCES, INC.,
HOWARD KARREN, WHITTIER TRUST
COMPANY AND JAMES A. JEFFS,
Defendants 55th JUDICIAL DISTRICT
AGREED FINAL JUDGMENT
On this day came on to be heard the above-styled and numbered cause and
Plaintiffs, Heartland, Inc. of Wichita and Collins & McIlhenny, Inc., and
Defendants, Chaparral Resources,Inc. and Howard Karren, by and through their
attorneys of record, announced to the Court that the parties had agreed to the
terms of this Agreed Final Judgment, and Defendants Whittier Trust Company and
James A. Jeffs having been previously non-suited from this matter, the Court is
of the opinion that final judgment should be rendered in accordance with the
terms hereof, It is therefore,
ORDERED, that Plaintiffs take nothing by this suit and that Defendants be in all
things discharged and go hence without day and Plaintiffs' claims against
Defendants in this cause be dismissed with prejudice to the refiling of same in
any form. It is further ORDERED that each party be taxed its or his own costs.
All other relief not expressly granted is denied.
SIGNED this the ___ day of ________, 1998.
<PAGE>
JUDGE, 55TH JUDICIAL DISTRICT COURT
AGREED AS TO FORM AND SUBSTANCE:
Don M. Kennedy
State Bar No. 11284500
900 W. Davis Street, Suite 100
Conroe, Texas 77301
(409) 760-2565
(409) 756-3334
ATTORNEYS FOR PLAINTIFFS, HEARTLAND,
INC. OF WICHITA AND COLLINS & MCILHENNY,
INC.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
Gregg C. Laswell
State Bar No. 11971500
1900 Pennzoil Place - South Tower
711 Louisiana
Houston, Texas 77002
Tel: (713) 220-5813
Fax: (713) 236-0822
ATTORNEYS FOR DEFENDANTS, CHAPARRAL
RESOURCES, INC. AND HOWARD KARREN
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
THE LAWS OF ANY STATE. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS THEY
ARE REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
120,000 Warrants
CHAPARRAL RESOURCES, INC.
WARRANT CERTIFICATE
This warrant certificate ("Warrant Certificate") certifies that for value
received Heartland, Inc. of Wichita and Collins & McIlhenny, Inc., as joint
tenants, or their registered assigns (collectively, the "Holder") are the owners
of the number of warrants specified above, each of which entitles the Holder
thereof to purchase, at any time on or before the Expiration Date (hereinafter
defined), one fully paid and non-assessable share of Common Stock, $.10 par
value ("Common Stock"), of Chaparral Resources, Inc., a Colorado corporation
(the "Company"), for the Purchase Price (defined in Paragraph 1 below) in lawful
money of the United States of America (subject to adjustment as hereinafter
provided).
1. Warrant; Purchase Price
This Warrant shall entitle the Holder to purchase 120,000 shares of Common
Stock of the Company, and the purchase price payable upon exercise of the
Warrant (the "Purchase Price") shall be $1.00 per share of Common Stock. The
Purchase Price and number of shares of Common Stock issuable upon exercise of
this Warrant are subject to adjustment as provided in Article 6 hereof. The
shares of Common Stock issuable upon exercise of the Warrant (and/or other
shares of common stock so issuable by reason of any adjustments pursuant to
Article 6) are sometimes referred to herein as the "Warrant Shares".
2. Exercise; Expiration Date
2.1 The Warrant is exercisable, at the option of the Holder, in whole or in
part at any time and from time to time after the Exercisability Date and on or
before the Expiration Date, upon surrender of this Warrant Certificate to the
Company together with a duly completed Notice of Exercise, in the form attached
hereto as Exhibit A, and payment of the Purchase Price. In the case of exercise
of less than the entire Warrant represented by this Warrant Certificate, the
Company shall cancel the Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate for the balance of such
Warrant.
2.2 The term "Exercisability Date" shall mean the date of this Warrant
Certificate. The term "Expiration Date" shall mean 5:00 p.m. Houston, Texas time
on the ninetieth (90th) day following the Exercisability Date, or if such day
shall in the State of Texas be a holiday or a day on which banks are authorized
to close, then 5:00 p.m. Houston, Texas time the next following day which in the
State of Texas is not a holiday or a day on which banks are authorized to close.
3. Registration and Transfer on Company Books
3.1 The Company shall maintain books for the registration and transfer of
the Warrant and the registration and transfer of the Warrant Shares.
1
<PAGE>
3.2 Prior to due presentment for registration of transfer of this Warrant
Certificate, or the Warrant Shares, the Company may deem and treat the
registered Holder as the absolute owner thereof.
4. Reservation of Shares
The Company covenants that it will at all times reserve and keep available
out of its authorized capital stock, solely for the purpose of issue upon
exercise of the Warrant, such number of shares of capital stock as shall then be
issuable upon the exercise of the outstanding Warrant. The Company covenants
that all shares of capital stock which shall be issuable upon exercise of the
Warrant shall be duly and validly issued and fully paid and non-assessable and
free from all taxes, liens and charges with respect to the issue thereof, and
that upon issuance such shares shall be listed on each national securities
exchange, if any, on which the other shares of such outstanding capital stock of
the Company are then listed.
5. Loss or Mutilation
Upon receipt by the Company of reasonable evidence of the ownership of and
the loss, theft, destruction or mutilation of any Warrant Certificate and, in
the case of loss, theft or destruction, of indemnity reasonably satisfactory to
the Company, or, in the case of mutilation, upon surrender and cancellation of
the mutilated Warrant Certificate, the Company shall execute and deliver in lieu
thereof a new Warrant Certificate representing an equal number of Warrant
Shares.
6. Adjustment of Purchase Price and Number of Shares Deliverable
6.1 The number of Warrant Shares purchasable upon the exercise of the
Warrant and the Purchase Price with respect to the Warrant Shares shall be
subject to adjustment as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its Common Stock payable in shares of its capital stock,
(ii) subdivide its outstanding shares of Common Stock through stock split
or otherwise, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock, or (iv) issue by reclassification
of its of Common Stock (including any reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation)
other securities of the Company, the number and/or nature of Warrant Shares
purchasable upon exercise of the Warrant immediately prior thereto shall be
adjusted so that the Holder shall be entitled to receive the kind and
number of Warrant Shares or other securities of the Company which he would
have owned or have been entitled to receive after the happening of any of
the events described above, had such Warrant been exercised immediately
prior to the happening of such event or any record date with respect
thereto. Any adjustment made pursuant to this paragraph (a) shall become
effective retroactively as of the record date of such event.
2
<PAGE>
(b) In the event of any capital reorganization or any reclassification
of the capital stock of the Company or in case of the consolidation or
merger of the Company with another corporation (other than a consolidation
or merger in which the outstanding shares of the Company's Common Stock are
not converted into or exchanged for other rights or interests), or in the
case of any sale, transfer or other disposition to another corporation of
all or substantially all the properties and assets of the Company, the
Holder of the Warrant shall thereafter be entitled to purchase (and it
shall be a condition to the consummation of any such reorganization,
reclassification, consolidation, merger, sale, transfer or other
disposition that appropriate provisions shall be made so that such Holder
shall thereafter be entitled to purchase) the kind and amount of shares of
stock and other securities and property (including cash) which the Holder
would have been entitled to receive had such Warrant been exercised
immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, sale, transfer or other
disposition; and in any such case appropriate adjustments shall be made in
the application of the provisions of this Article 6 with respect to rights
and interest thereafter of the Holder of the Warrant to the end that the
provisions of this Article 6 shall thereafter be applicable, as near as
reasonably may be, in relation to any shares or other property thereafter
purchasable upon the exercise of the Warrant. The provisions of this
Section 6.1(b) shall similarly apply to successive reorganizations,
reclassifications, consolidations, mergers, sales, transfers or other
dispositions.
(c) Whenever the number of Warrant Shares purchasable upon the
exercise of the Warrant is adjusted, as provided in this Section 6.1, the
Purchase Price with respect to the Warrant Shares shall be adjusted by
multiplying such Purchase Price immediately prior to such adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of the Warrant immediately prior to such
adjustment, and of which the denominator shall be the number of Warrant
Shares so purchasable immediately thereafter.
6.2 Whenever the number of Warrant Shares purchasable upon the exercise of
the Warrant or the Purchase Price of such Warrant Shares is adjusted, as herein
provided, the Company shall mail to the Holder, at the address of the Holder
shown on the books of the Company, a notice of such adjustment or adjustments,
prepared and signed by the Chief Financial Officer or Secretary of the Company,
which sets forth the number of Warrant Shares purchasable upon the exercise of
the Warrant and the Purchase Price of such Warrant Shares after such adjustment,
a brief statement of the facts requiring such adjustment and the computation by
which such adjustment was made.
6.3 In the event that at any time prior to the expiration of the Warrant
and prior to its exercise:
(a) the Company shall declare any distribution (other than a cash
dividend or a dividend payable in securities of the Company with respect to
the Common Stock); or
(b) the Company shall offer for subscription to the holders of the
Common Stock any additional shares of stock of any class or any other
securities convertible into Common Stock or any rights to subscribe
thereto; or
(c) the Company shall declare any stock split, stock dividend,
subdivision, combination, or similar distribution with respect to the
Common Stock, regardless of the effect of any such event on the outstanding
number of shares of Common Stock; or
(d) the Company shall declare a dividend, other than a dividend
payable in shares of the Company's own Common Stock; or
<PAGE>
(e) there shall be any capital change in the Company as set forth in
Section 6.1(b); or
(f) there shall be a voluntary or involuntary dissolution,
liquidation, or winding up of the Company (other than in connection with a
consolidation, merger, or sale of all or substantially all of its property,
assets and business as an entity);
(each such event hereinafter being referred to as a "Notification Event"), the
Company shall cause to be mailed to the Holder, not less than 20 days prior to
the record date, if any, in connection with such Notification Event (provided,
however, that if there is no record date, or if 20 days prior notice is
impracticable, as soon as practicable) written notice specifying the nature of
such event and the effective date of, or the date on which the books of the
Company shall close or a record shall be taken with respect to, such event. Such
notice shall also set forth facts indicating the effect of such action (to the
extent such effect may be known at the date of such notice) on the Purchase
Price and the kind and amount of the shares of stock or other securities or
property deliverable upon exercise of the Warrant.
7. Conversion Rights
7.1 In lieu of exercise of any portion of the Warrant as provided in
Section 2.1 hereof, the Warrant represented by this Warrant Certificate (or any
portion thereof) may, at the election of the Holder, be converted into the
nearest whole number of shares of Common Stock equal to: (1) the product of (a)
the number of Warrant Shares to be so converted and (b) the excess, if any, of
(i) the Market Price per share with respect to the date of conversion over (ii)
the purchase price per Warrant Share in effect on the business day next
preceding the date of conversion, divided by (2) the Market Price per share with
respect to the date of conversion.
7.2 The conversion rights provided under this Section 7 may be exercised in
whole or in part and at any time and from time to time while any portion of the
Warrant remains outstanding. In order to exercise the conversion privilege, the
Holder shall surrender to the Company, at its offices, this Warrant Certificate
accompanied by a duly completed Notice of Conversion in the form attached hereto
as Exhibit B. The Warrant (or so much thereof as shall have been surrendered for
conversion) shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such Warrant Certificate for
conversion in accordance with the foregoing provisions. As promptly as
practicable on or after the conversion date, the Company shall issue and shall
deliver to the Holder (i) a certificate or certificates representing the number
of shares of Common Stock to which the Holder shall be entitled as a result of
the conversion, and (ii) if the Warrant Certificate is being converted in part
only, a new certificate of like tenor and date for the balance of the
unconverted portion of the Warrant Certificate.
7.3 "Market Price", as used with reference to any share of stock on any
specified date, shall mean:
(i) if such stock is listed and registered on any national securities
exchange or traded on The NASDAQ Stock Market ("NASDAQ"), (A) the last
reported sale price on such exchange or NASDAQ of such stock on the
business day immediately preceding the specified date, or (B) if there
shall have been no such reported sale price of such stock on the business
day immediately preceding the specified date, the average of the last
reported sale price on such exchange or on NASDAQ on (x) the day next
preceding the specified date for which there was a reported sale price and
(y) the day next succeeding the specified date for which there was a
reported sale price; or
(ii) if such stock is not at the time listed on any such exchange or traded
on NASDAQ but is traded on the over-the-counter market as reported by the
National Quotation Bureau or other comparable service, (A) the average of
the closing bid and asked prices for such stock on the business day
<PAGE>
immediately preceding the specified date, or (B) if there shall have been
no such reported bid and asked prices for such stock on the business day
immediately preceding the specified date, the average of the last bid and
asked prices on (x) the day next preceding the specified date for which
such information is available and (y) the day next succeeding the specified
date for which such information is available; or
(iii) if clauses (i) and (ii) above are not applicable, the fair value per
share of such stock as determined in good faith and on a reasonable basis
by the Board of Directors of the Company and, if requested, set forth in a
certificate delivered to the holder of this Warrant upon the conversion
hereof.
8. Voluntary Adjustment by the Company
The Company may, at its option and in its sole and absolute discretion, at
any time during the term of the Warrant, reduce the then current Purchase Price
to any amount deemed appropriate by the Board of Directors of the Company and/or
extend the date of the expiration of the Warrant.
9. Registration Rights
The Company has agreed with the Holder that the Company will include the
Warrant Shares in an amendment to a registration statement that was filed on
Form S-3 by the Company with the United States Securities and Exchange
Commission ("SEC") on September 22, 1998 (the "September Registration
Statement").
If the September Registration Statement is not declared effective for any
reason by the SEC, is withdrawn by the Company for any reason, or if, for any
reason, the Warrant Shares are not included in the September Registration
Statement prior to the date it is declared effective by the SEC, Chaparral will
include the Warrant Shares in the next registration statement it files in which
such shares may be included under applicable law.
The Holder agrees that any registration statement filed by the Company
which includes the Warrant Shares need only be kept effective until the earlier
of the date the shares acquired on the exercise of this Warrant have been sold
pursuant to such registration statement, or Rule 144 adopted by the SEC is
available for the sale of such shares.
Notwithstanding the foregoing, the Holder agrees that any certificate
representing Warrant Shares will have a restrictive legend thereon stating that
the Warrant Shares cannot be transferred except in compliance with the
Securities Act of 1933, as amended, and any applicable state securities laws.
10. Governing Law
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of Texas.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed by its officers thereunto duly authorized and its corporate seal
to be affixed hereon, as of this day of October, 1998.
CHAPARRAL RESOURCES, INC.
<PAGE>
By:
Name:
Title:
[SEAL]
Attest:
Name:
Title:
EXHIBIT A
NOTICE OF EXERCISE
The undersigned hereby irrevocably elects to exercise, pursuant to Section
2 of the Warrant Certificate accompanying this Notice of Exercise, _______
Warrants of the total number of Warrants owned by the undersigned pursuant to
the accompanying Warrant Certificate, and herewith makes payment of the Purchase
Price of such shares in full.
Name of Holder
Signature
Address:
EXHIBIT B
NOTICE OF CONVERSION
The undersigned hereby irrevocably elects to convert, pursuant to Section 7 of
the Warrant Certificate accompanying this Notice of Conversion, _______ Warrants
<PAGE>
of the total number of Warrants owned by the undersigned pursuant to the
accompanying Warrant Certificate into shares of the Common Stock of the Company
(the "Shares").
The number of Shares to be received by the undersigned shall be calculated in
accordance with the provisions of Section 7.1 of the accompanying Warrant
Certificate.
Name of Holder
Signature
Address:
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
THE LAWS OF ANY STATE. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS THEY
ARE REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
80,000 Warrants
CHAPARRAL RESOURCES, INC.
WARRANT CERTIFICATE
This warrant certificate ("Warrant Certificate") certifies that for value
received Don M. Kennedy or registered assigns (the "Holder") is the owner of the
number of warrants specified above, each of which entitles the Holder thereof to
purchase, at any time on or before the Expiration Date (hereinafter defined),
one fully paid and non-assessable share of Common Stock, $.10 par value ("Common
Stock"), of Chaparral Resources, Inc., a Colorado corporation (the "Company"),
for the Purchase Price (defined in Paragraph 1 below) in lawful money of the
United States of America (subject to adjustment as hereinafter provided).
1. Warrant; Purchase Price
This Warrant shall entitle the Holder to purchase 80,000 shares of Common
Stock of the Company, and the purchase price payable upon exercise of the
Warrant (the "Purchase Price") shall be $1.00 per share of Common Stock. The
Purchase Price and number of shares of Common Stock issuable upon exercise of
this Warrant are subject to adjustment as provided in Article 6 hereof. The
shares of Common Stock issuable upon exercise of the Warrant (and/or other
shares of common stock so issuable by reason of any adjustments pursuant to
Article 6) are sometimes referred to herein as the "Warrant Shares".
2. Exercise; Expiration Date
2.1 The Warrant is exercisable, at the option of the Holder, in whole or in
part at any time and from time to time after the Exercisability Date and on or
before the Expiration Date, upon surrender of this Warrant Certificate to the
Company together with a duly completed Notice of Exercise, in the form attached
hereto as Exhibit A, and payment of the Purchase Price. In the case of exercise
of less than the entire Warrant represented by this Warrant Certificate, the
Company shall cancel the Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate for the balance of such
Warrant.
<PAGE>
2.2 The term "Exercisability Date" shall mean the date of this Warrant
Certificate. The term "Expiration Date" shall mean 5:00 p.m. Houston, Texas time
on the ninetieth (90th) day following the Exercisability Date, or if such day
shall in the State of Texas be a holiday or a day on which banks are authorized
to close, then 5:00 p.m. Houston, Texas time the next following day which in the
State of Texas is not a holiday or a day on which banks are authorized to close.
3. Registration and Transfer on Company Books
3.1 The Company shall maintain books for the registration and transfer of
the Warrant and the registration and transfer of the Warrant Shares.
3.2 Prior to due presentment for registration of transfer of this Warrant
Certificate, or the Warrant Shares, the Company may deem and treat the
registered Holder as the absolute owner thereof.
4. Reservation of Shares
The Company covenants that it will at all times reserve and keep available
out of its authorized capital stock, solely for the purpose of issue upon
exercise of the Warrant, such number of shares of capital stock as shall then be
issuable upon the exercise of the outstanding Warrant. The Company covenants
that all shares of capital stock which shall be issuable upon exercise of the
Warrant shall be duly and validly issued and fully paid and non-assessable and
free from all taxes, liens and charges with respect to the issue thereof, and
that upon issuance such shares shall be listed on each national securities
exchange, if any, on which the other shares of such outstanding capital stock of
the Company are then listed.
5. Loss or Mutilation
Upon receipt by the Company of reasonable evidence of the ownership of and
the loss, theft, destruction or mutilation of any Warrant Certificate and, in
the case of loss, theft or destruction, of indemnity reasonably satisfactory to
the Company, or, in the case of mutilation, upon surrender and cancellation of
the mutilated Warrant Certificate, the Company shall execute and deliver in lieu
thereof a new Warrant Certificate representing an equal number of Warrant
Shares.
6. Adjustment of Purchase Price and Number of Shares Deliverable
6.1 The number of Warrant Shares purchasable upon the exercise of the
Warrant and the Purchase Price with respect to the Warrant Shares shall be
subject to adjustment as follows:
<PAGE>
(a) In case the Company shall (i) declare a dividend or make a
distribution on its Common Stock payable in shares of its capital stock,
(ii) subdivide its outstanding shares of Common Stock through stock split
or otherwise, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock, or (iv) issue by reclassification
of its of Common Stock (including any reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation)
other securities of the Company, the number and/or nature of Warrant Shares
purchasable upon exercise of the Warrant immediately prior thereto shall be
adjusted so that the Holder shall be entitled to receive the kind and
number of Warrant Shares or other securities of the Company which he would
have owned or have been entitled to receive after the happening of any of
the events described above, had such Warrant been exercised immediately
prior to the happening of such event or any record date with respect
thereto. Any adjustment made pursuant to this paragraph (a) shall become
effective retroactively as of the record date of such event.
(b) In the event of any capital reorganization or any reclassification
of the capital stock of the Company or in case of the consolidation or
merger of the Company with another corporation (other than a consolidation
or merger in which the outstanding shares of the Company's Common Stock are
not converted into or exchanged for other rights or interests), or in the
case of any sale, transfer or other disposition to another corporation of
all or substantially all the properties and assets of the Company, the
Holder of the Warrant shall thereafter be entitled to purchase (and it
shall be a condition to the consummation of any such reorganization,
reclassification, consolidation, merger, sale, transfer or other
disposition that appropriate provisions shall be made so that such Holder
shall thereafter be entitled to purchase) the kind and amount of shares of
stock and other securities and property (including cash) which the Holder
would have been entitled to receive had such Warrant been exercised
immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, sale, transfer or other
disposition; and in any such case appropriate adjustments shall be made in
the application of the provisions of this Article 6 with respect to rights
and interest thereafter of the Holder of the Warrant to the end that the
provisions of this Article 6 shall thereafter be applicable, as near as
reasonably may be, in relation to any shares or other property thereafter
purchasable upon the exercise of the Warrant. The provisions of this
Section 6.1(b) shall similarly apply to successive reorganizations,
reclassifications, consolidations, mergers, sales, transfers or other
dispositions.
(c) Whenever the number of Warrant Shares purchasable upon the
exercise of the Warrant is adjusted, as provided in this Section 6.1, the
Purchase Price with respect to the Warrant Shares shall be adjusted by
multiplying such Purchase Price immediately prior to such adjustment by a
fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of the Warrant immediately prior to such
adjustment, and of which the denominator shall be the number of Warrant
Shares so purchasable immediately thereafter.
<PAGE>
6.2 Whenever the number of Warrant Shares purchasable upon the exercise of
the Warrant or the Purchase Price of such Warrant Shares is adjusted, as herein
provided, the Company shall mail to the Holder, at the address of the Holder
shown on the books of the Company, a notice of such adjustment or adjustments,
prepared and signed by the Chief Financial Officer or Secretary of the Company,
which sets forth the number of Warrant Shares purchasable upon the exercise of
the Warrant and the Purchase Price of such Warrant Shares after such adjustment,
a brief statement of the facts requiring such adjustment and the computation by
which such adjustment was made.
6.3 In the event that at any time prior to the expiration of the Warrant
and prior to its exercise:
(a) the Company shall declare any distribution (other than a cash
dividend or a dividend payable in securities of the Company with respect to
the Common Stock); or
(b) the Company shall offer for subscription to the holders of the
Common Stock any additional shares of stock of any class or any other
securities convertible into Common Stock or any rights to subscribe
thereto; or
(c) the Company shall declare any stock split, stock dividend,
subdivision, combination, or similar distribution with respect to the
Common Stock, regardless of the effect of any such event on the outstanding
number of shares of Common Stock; or
(d) the Company shall declare a dividend, other than a dividend
payable in shares of the Company's own Common Stock; or
(e) there shall be any capital change in the Company as set forth in
Section 6.1(b); or
(f) there shall be a voluntary or involuntary dissolution,
liquidation, or winding up of the Company (other than in connection with a
consolidation, merger, or sale of all or substantially all of its property,
assets and business as an entity);
(each such event hereinafter being referred to as a "Notification Event"), the
Company shall cause to be mailed to the Holder, not less than 20 days prior to
the record date, if any, in connection with such Notification Event (provided,
however, that if there is no record date, or if 20 days prior notice is
impracticable, as soon as practicable) written notice specifying the nature of
such event and the effective date of, or the date on which the books of the
Company shall close or a record shall be taken with respect to, such event. Such
<PAGE>
notice shall also set forth facts indicating the effect of such action (to the
extent such effect may be known at the date of such notice) on the Purchase
Price and the kind and amount of the shares of stock or other securities or
property deliverable upon exercise of the Warrant.
7. Conversion Rights
7.1 In lieu of exercise of any portion of the Warrant as provided in
Section 2.1 hereof, the Warrant represented by this Warrant Certificate (or any
portion thereof) may, at the election of the Holder, be converted into the
nearest whole number of shares of Common Stock equal to: (1) the product of (a)
(i) the Market Price per share with respect to the date of conversion over (ii)
the purchase price per Warrant Share in effect on the business day next
preceding the date of conversion, divided by (2) the Market Price per share with
respect to the date of conversion.
7.2 The conversion rights provided under this Section 7 may be exercised in
whole or in part and at any time and from time to time while any portion of the
Warrant remains outstanding. In order to exercise the conversion privilege, the
Holder shall surrender to the Company, at its offices, this Warrant Certificate
accompanied by a duly completed Notice of Conversion in the form attached hereto
as Exhibit B. The Warrant (or so much thereof as shall have been surrendered for
conversion) shall be deemed to have been converted immediately prior to the
close of business on the day of surrender of such Warrant Certificate for
conversion in accordance with the foregoing provisions. As promptly as
practicable on or after the conversion date, the Company shall issue and shall
deliver to the Holder (i) a certificate or certificates representing the number
of shares of Common Stock to which the Holder shall be entitled as a result of
the conversion, and (ii) if the Warrant Certificate is being converted in part
only, a new certificate of like tenor and date for the balance of the
unconverted portion of the Warrant Certificate.
7.3 "Market Price", as used with reference to any share of stock on any
specified date, shall mean:
(i) if such stock is listed and registered on any national securities
exchange or traded on The NASDAQ Stock Market ("NASDAQ"), (A) the last
reported sale price on such exchange or NASDAQ of such stock on the
business day immediately preceding the specified date, or (B) if there
shall have been no such reported sale price of such stock on the business
day immediately preceding the specified date, the average of the last
reported sale price on such exchange or on NASDAQ on (x) the day next
preceding the specified date for which there was a reported sale price and
(y) the day next succeeding the specified date for which there was a
reported sale price; or
<PAGE>
(ii) if such stock is not at the time listed on any such exchange or traded
on NASDAQ but is traded on the over-the-counter market as reported by the
National Quotation Bureau or other comparable service, (A) the average of
the closing bid and asked prices for such stock on the business day
immediately preceding the specified date, or (B) if there shall have been
no such reported bid and asked prices for such stock on the business day
immediately preceding the specified date, the average of the last bid and
asked prices on (x) the day next preceding the specified date for which
such information is available and (y) the day next succeeding the specified
date for which such information is available; or
(iii) if clauses (i) and (ii) above are not applicable, the fair value per
share of such stock as determined in good faith and on a reasonable basis
by the Board of Directors of the Company and, if requested, set forth in a
certificate delivered to the holder of this Warrant upon the conversion
hereof.
8. Voluntary Adjustment by the Company
The Company may, at its option and in its sole and absolute discretion, at
any time during the term of the Warrant, reduce the then current Purchase Price
to any amount deemed appropriate by the Board of Directors of the Company and/or
extend the date of the expiration of the Warrant.
9. Registration Rights
The Company has agreed with the Holder that the Company will include the
Warrant Shares in an amendment to a registration statement that was filed on
Form S-3 by the Company with the United States Securities and Exchange
Commission ("SEC") on September 22, 1998 (the "September Registration
Statement").
If the September Registration Statement is not declared effective for any
reason by the SEC, is withdrawn by the Company for any reason, or if, for any
reason, the Warrant Shares are not included in the September Registration
Statement prior to the date it is declared effective by the SEC, Chaparral will
include the Warrant Shares in the next registration statement it files in which
such shares may be included under applicable law.
The Holder agrees that any registration statement filed by the Company
which includes the Warrant Shares need only be kept effective until the earlier
of the date the shares acquired on the exercise of this Warrant have been sold
pursuant to such registration statement, or Rule 144 adopted by the SEC is
available for the sale of such shares.
Notwithstanding the foregoing, the Holder agrees that any certificate
representing Warrant Shares will have a restrictive legend thereon stating that
the Warrant Shares cannot be transferred except in compliance with the
Securities Act of 1933, as amended, and any applicable state securities laws.
<PAGE>
10. Governing Law
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of Texas.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed by its officers thereunto duly authorized and its corporate seal
to be affixed hereon, as of this day of October, 1998.
CHAPARRAL RESOURCES, INC.
By:
Name:
Title:
[SEAL]
Attest:
Name:
Title:
EXHIBIT A
NOTICE OF EXERCISE
The undersigned hereby irrevocably elects to exercise, pursuant to Section
2 of the Warrant Certificate accompanying this Notice of Exercise, _______
<PAGE>
Warrants of the total number of Warrants owned by the undersigned pursuant to
the accompanying Warrant Certificate, and herewith makes payment of the Purchase
Price of such shares in full.
Name of Holder
Signature
Address:
<PAGE>
EXHIBIT B
NOTICE OF CONVERSION
The undersigned hereby irrevocably elects to convert, pursuant to Section 7 of
the Warrant Certificate accompanying this Notice of Conversion, _______ Warrants
of the total number of Warrants owned by the undersigned pursuant to the
accompanying Warrant Certificate into shares of the Common Stock of the Company
(the "Shares").
The number of Shares to be received by the undersigned shall be calculated in
accordance with the provisions of Section 7.1 of the accompanying Warrant
Certificate.
Name of Holder
Signature
Address:
LOAN AGREEMENT
Agreement entered into as of the 10th day of September, 1998 between
Challenger Oil Service, PLC, ("Challenger") a corporation organized under the
laws of England, and Chaparral Resources, Inc. ("CRI"), a Colorado corporation.
WHEREAS, Challenger has entered into a drilling contract dated April 7,
1998 as amended by Amendment No. 1 dated as of September 10, 1998 ("Drilling
Contract") with Karakuduk Munai, Inc. ("KKM") a joint stock company organized
under the laws of the Republic of Kazakhstan whereby Challenger will drill
certain wells for KKM in the Karakuduk Oil Field in Kazakhstan ("Karakuduk
Field"); and
WHEREAS, CRI has a fifty percent ( 50%) interest in KKM through its wholly
owned subsidiary Central Asian Petroleum (Guernsey) Limited, ("CAP-G"); and
WHEREAS, CRI has loaned Challenger three hundred thousand United States
Dollars (US$300,000) on April 20, 1998 pursuant to a Promissory Note (the "April
Note") on which there is accrued interest as of the date hereof of seven
thousand six hundred and ninety five United States dollars (US$7,695), and one
hundred thousand United States dollars (US$100,000) on July 15, 1998 pursuant to
a Promissory Note (the "July Note") on which there is accrued interest as of the
date hereof of one thousand and seventy three United States dollars (US$1,073)
(the April Note and the July Note are hereinafter collectively referred to as
the "Existing Loans" and
WHEREAS, Challenger has requested that CRI loan Challenger an additional
six hundred thousand United States dollars (US$600,000.00) ("New Loan") which
will be consolidated and extended with the Existing Loans into a new loan in the
amount of one million eight thousand seven hundred and sixty eight United States
dollars (US$1,008,768.00) ("Loan Amount") to be evidenced by a Promissory Note
for the combined Loan Amount to be dated as of the date hereof in the form of
Exhibit A; and
WHEREAS, CRI is willing to advance the Loan Amount on the terms and
conditions set forth herein.
NOW THEREFORE, the parties hereto hereby agree as follows:
1. Loan Amount
CRI will loan Challenger the Loan Amount of one million eight thousand
seven hundred and sixty eight United States dollars (US$1,008,768.00) for a
term not to exceed twelve (12) months from the Repayment Commencement Date
(the "Loan Term") at an annual interest rate equal to the three (3) month
1
<PAGE>
London Interbank Offered Rate ("LIBOR") in effect from time to time during
the term of this Loan as published in the Wall Street Journal plus one
percentage point ("Interest Rate").
2. Use of Proceeds
2.1 Challenger has used the proceeds of the Existing Loans to ready the
Challenger No. 23 as that term is used in the Drilling Contract dated April
7, 1998 for service in Kazakstan, and agrees to use the proceeds of the New
Loan to ready the Drilling Unit as that term is defined in Amendment No.1
to the Drilling Contract dated September 10,1998, including without
limitation, purchasing equipment and procuring necessary personnel and
services.
2.2 As a condition precedent to CRI advancing the New Loan amount hereunder,
Challenger agrees to provide CRI with either a signed copy of the agreement
(with the economic terms redacted) between Challenger and Oil and Gas
Exploration Company Cracow, Ltd. whereby Challenger has obtained the right
to the use of the Drilling Unit, or alternatively, a letter from Oil and
Gas Exploration Company Cracow, Ltd., in form and substance satisfactory to
CRI and its counsel, acknowledging that the Drilling Unit is being leased
to Challenger and will be taken to Kazakhstan for use by KKM pursuant to
the Drilling Contract.
3. Repayment Terms
3.1 The Parties agree that until the first payments are made by KKM for the
Drilling Unit pursuant to the Drilling Contract, or sixty (60) days after
the date that the Drilling Unit arrives on location at the Karakuduk Field,
whichever shall first occur ("Repayment Commencement Date"), interest on
the Loan shall accrue at the Interest Rate.
3.2 Beginning with the Repayment Commencement Date, and on the next eleven
consecutive (11) monthly anniversaries thereof, Maker will pay to Payee,
the amount of eighty four thousand and two United States dollars and
seventy five cents (US$84,002.75) plus interest at the Interest Rate on the
unpaid principal of the Loan Amount. Such interest payments shall be due
and payable on or before the last day of each calendar quarter following
the Repayment Commencement Date; provided, however that the last interest
payment shall be made at the same time as the last principal payment of the
Loan Amount.
3.3 Challenger agrees that effective as of the Repayment Commencement Date, and
continuing until the Loan is repaid in full, it shall assign to an
independent third party financial institution selected by CRI ("Fiscal
Agent"), the right to receive all payments made or to be made by KKM under
the Drilling Contract. CRI shall notify Challenger of the name of the
Fiscal Agent by October 31, 1998, or the date on which the Drilling Unit is
2
<PAGE>
rigged up and ready to spud the first well in Kazakstan, whichever is
later. Upon receipt of such payments from KKM, the Fiscal Agent shall be
instructed to immediately pay to CRI $84,002.75, plus the quarterly
interest payment when due and any late fees, defaults or other charges
permitted to be collected by CRI hereunder (which amount shall be provided
to the Fiscal Agent by CRI not later than ten (10) days prior to the end of
each calendar quarter. The Fiscal Agent shall also be instructed that any
amounts received by the Fiscal Agent from KKM which are in excess of the
foregoing, will be promptly paid to Challenger within three (3) days after
their receipt by the Fiscal Agent.
4. Default
4.1 The occurrence of any one or more of the following events with respect to
Challenger shall constitute an event of default hereunder ("Event of
Default"):
(a) If Challenger shall fail to pay any amount when due hereunder, and such
failure continues for five (5) days after either CRI or the Fiscal Agent
gives written notice thereof to Challenger; provided, however, that KKM has
made the payments that are otherwise due under the Drilling Contract.
(b) If, pursuant to or within the meaning of the United States Bankruptcy
Code or any other federal or state law relating to insolvency or relief of
debtors (a "Bankruptcy Law"), Challenger shall (i) commence a voluntary
case or proceeding; (ii) consent to the entry of an order for relief
against it in an involuntary case; (iii) consent to the appointment of a
trustee, receiver, assignee, liquidator or similar official; (iv) make an
assignment for the benefit of its creditors; or (v) admit in writing its
inability to pay its debts as they become due.
(c) If a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that (i) is for relief against Challenger in an
involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator
or similar official for Challenger or substantially all of Challenger's
properties, or (iii) orders the liquidation of Challenger, and in each case
the order or decree is not dismissed within sixty (60) days.
4.2 Challenger shall notify CRI in writing within three (3) days after the
occurrence of any Event of Default of which Challenger acquires knowledge.
4.3 Upon the occurrence of an Event of Default hereunder (unless all Events of
Default have been cured or waived by CRI), CRI may, at its option, (i) by
written notice to Challenger, declare the entire unpaid principal balance
of the Promissory Note, together with all accrued interest thereon,
immediately due and payable regardless of any prior forbearance, (ii)
exercise any and all rights and remedies available to it under applicable
3
<PAGE>
law, including, without limitation, the right to collect from Challenger
all sums due under this Note, and (iii) impose a rate of interest that is
equal to the highest rate of interest permissible under applicable law upon
any unpaid principal balance of the Promissory Note from the date of the
occurrence of an Event of Default until such unpaid principal balance
together with any accrued interest and other fees, costs and expenses are
paid in full. Challenger shall pay all reasonable costs and expenses
incurred by or on behalf of CRI in connection with CRI's exercise of any or
all of its rights and remedies under this Note, including, without
limitation, reasonable attorneys' fees.
5. Representations and Warranties of Challenger
5.1 Challenger is a corporation that is duly organized, validly existing, and
in good standing under the laws of England and has all necessary power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder, and to consummate the transactions contemplated hereby.
5.2 Challenger has duly authorized and approved by all requisite action on its
part the execution and delivery hereof, and the performance of its
obligations hereunder.
5.3 Challenger has duly executed and delivered this Agreement and, assuming CRI
has duly authorized, executed, and delivered this Agreement, this Agreement
constitutes a legal, valid, and binding obligation of Challenger,
enforceable against Challenger in accordance with its terms;
5.4 Challenger's execution, delivery, and performance of this Agreement do not
and will not: (A) violate, conflict with, or result in the breach of any
provision of Challenger's charter, by-laws, or similar organizational
documents; or (B) violate or conflict with any law or governmental order,
rule or regulation applicable to Challenger.
5.5 Challenger's execution, delivery, and performance of this Agreement do not
and will not require any consent, approval, authorization, or other order
of, action by, filing with, or notification to, any governmental authority
or any other person or entity, except for such consents, approvals,
authorizations, and other orders of, actions by, filings with, and
notifications to, any governmental authority or any other person: or entity
(A) which have been duly obtained, taken, or made, and which are in full
force and effect as of the date hereof; (B) the failure to obtain which
would not prevent Challenger from performing its obligations hereunder; and
(C) which may be necessary as a result of any facts or circumstances
relating solely to CRI.
5.6 No action is pending or, to the best knowledge of Challenger after due
inquiry, threatened, which could reasonably be expected to affect the
legality, validity, or enforceability of this Agreement, or materially and
adversely affect Challenger's ability to pay, perform, or observe its
obligations hereunder.
4
<PAGE>
6. Representations and Warranties of CRI
6.1 CRI is a corporation duly organized, validly existing, and in good standing
under the laws of the State of Delaware, and has all necessary power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder, and to consummate the transactions contemplated hereby;
6.2 CRI has duly authorized and approved by all requisite action on its part
the execution and delivery hereof, the performance of its obligations
hereunder, and the consummation of the transactions contemplated hereby;
and
6.3 CRI has duly executed and delivered this Agreement and, assuming Purchaser
has duly authorized, executed, and delivered this Agreement, this Agreement
constitutes a legal, valid, and binding obligation of CRI, enforceable
against CRI in accordance with its terms.
7. Assignment
This Agreement may not be assigned by Challenger without the express written
consent of CRI (which consent may be granted or withheld in CRI's sole
discretion), and shall be binding upon the respective successors and
assigns of each of the parties hereto.
8. Notices
All notices authorized or required between the parties hereto shall be
addressed and effective when delivered to such persons as designated below.
Each party shall have the right to change its address at any time and/or
designate that copies of all such Notices be directed to another person at
another address, by giving notice thereof to all other parties.
[THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE>
If to Challenger:
Challenger Oil Service, PLC
c/o Ogden & Maler
3100 S. Gessner, Suite 600
Houston, TX 77063
Attention: George Tatanaki
Telephone: 713-974-4466
Fax: 713-974-3355
With a copy to:
Ogden & Maler
3100 S. Gessner, Suite 600
Houston, TX 77063
Attention: Harold L. Ogden
Telephone: 713-974-4466
Fax: 713-974-3355
If to Chaparral
Chaparral Resources, Inc.
2211 Norfolk, Suite 1150
Houston, TX 77098
Attention: Howard Karren
Telephone: (713) 807-7100
Fax: (713) 807-7561
With a copy to:
Alan D. Berlin, Esq.
Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP
2 Gannett Drive
White Plains, NY 10604
Telephone: 914-694-5717
Fax: 914-694-1647
9. Applicable Law and Dispute Resolution
9.1 This Agreement shall be governed by, construed, interpreted and enforced in
accordance with the substantive laws of the State of Texas, to the
exclusion of any conflicts of law rules which would refer the matter to the
laws of another jurisdiction.
6
<PAGE>
9.2 Each party hereto hereby unconditionally and irrevocably:
(A) submits, for itself and its property, to the exclusive jurisdiction of
the courts of the State of Texas and any federal court of the United States
of America, in either case, sitting in Harris County, Texas, and any
appellate court therefrom, in any action based upon, resulting from,
arising out of, or relating to this Loan Agreement, or in connection with
the authorization, preparation, negotiation, execution, delivery,
administration, performance, or enforcement hereof, or for the recognition
or enforcement of any judgment resulting from any such action;
(B) agrees that it will not commence any action except in any such court of
the State of Texas;
(C) waives, and agrees that it will not plead or make, any objection to the
venue of any state or federal court of the State of Texas and agrees that
it will not plead or make, any claim that any such action in any such state
or federal court of the State of Texas has been brought in an improper or
otherwise inconvenient forum;
(D) agrees that it will not seek any punitive damages in any such action,
and waives all rights to seek punitive damages; and
(E) agrees that the summons and complaint or any other process in any such
action may be served by mailing to any of the addresses set forth herein or
by hand delivery to a person of suitable age and discretion at any such
address, and that any such service shall be deemed to be complete on the
date such process is so mailed or delivered and to have the same force and
effect as personal service within the State of Texas.
10. Miscellaneous
10.1 This Agreement may be executed in any number of counterparts and each such
counterpart shall be deemed an original Loan Agreement for all purposes;
provided no party shall be bound by the terms of this Agreement unless and
until all parties have executed a counterpart.
10.2 This Loan Agreement is the entire agreement of the parties and supersedes
all prior understandings and negotiations of the parties.
10.3 Except as otherwise provided herein or agreed in writing, each party shall
pay its own costs and expenses in connection with this Loan Agreement and
7
<PAGE>
the services provided hereunder.
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8
<PAGE>
IN WITNESS WHEREOF, The Parties hereto have executed this Loan Agreement as of
the date first above written.
Challenger Oil Service, PLC
By:
(Print name and title)
Chaparral Resources, Inc.
By:
(Print name and title)
9
PROMISSORY NOTE
US$1,008,768.00 September 10, 1998
FOR VALUE RECEIVED, Challenger Oil Services, PLC, a corporation organized under
the law of England ("Maker"), promises to pay to the order of Chaparral
Resources, Inc., a Colorado corporation ("Payee"), or its designated Fiscal
Agent, in lawful money of the United States of America, the principal sum of one
million eight thousand seven hundred and sixty eight dollars ($1,008,768.00),
together with interest on the unpaid principal balance at an annual rate equal
to the three (3) month London Interbank Offered Rate ("LIBOR") in effect from
time to time during the term of this loan as published in the Wall Street
Journal plus one (1) percentage point in the manner provided below. Interest
shall be calculated on the basis of a year of 365 or 366 days, as applicable,
and charged for the actual number of days elapsed.
This Note has been executed and delivered pursuant to and in accordance with the
terms and conditions of the Loan Agreement, dated as of September 10, 1998, by
and between Maker and Payee, (the "Loan Agreement"), and is subject to the terms
and conditions of the Agreement, which are, by this reference, incorporated
herein and made a part hereof. Capitalized terms used in this Note without
definition shall have the respective meanings set forth in the Agreement.
1. PAYMENTS
1.1 PRINCIPAL AND INTEREST
The principal amount of this Note together with any accrued and unpaid interest
thereon shall be due and payable as follows:
(a) From the date hereof until the Repayment Commencement Date, interest will
accrue, but no payment will be required.
(b) Beginning with the Payment Commencement Date, and on the next eleven
consecutive (11) monthly anniversaries thereof, Maker will pay to Payee, the
amount of eighty four thousand and two United States dollars and seventy five
cents (US$84,002.75) plus interest at the Interest Rate on the unpaid principal
of the Loan Amount. Such interest payments shall be due and payable on or before
the last day of each calendar quarter following the Repayment Commencement Date;
provided, however that the last interest payment shall be made at the same time
as the last principal payment of the Loan Amount.
1.2 MANNER OF PAYMENT
All payments of principal and interest on this Note shall be made by wire
transfer of immediately available funds to an account designated by Payee in
writing.
1
<PAGE>
1.3 PREPAYMENT
Maker may, without premium or penalty, at any time and from time to time, prepay
all or any portion of the outstanding principal balance due under this Note,
provided that each such prepayment is accompanied by accrued interest on the
amount of principal prepaid calculated to the date of such prepayment. Any
partial prepayments shall be applied to installments of principal in inverse
order of their maturity.
1.4 NO RIGHT OF SET-OFF
Maker shall not have the right to withhold and set-off against any amount due
hereunder the amount of any claim for indemnification or payment of damages to
which Maker may be entitled under the Drilling Contract, provided there has been
no default by KKM thereunder.
2. MISCELLANEOUS
2.1 WAIVER
The rights and remedies of Payee under this Note shall be cumulative and not
alternative. No waiver by Payee of any right or remedy under this Note shall be
effective unless in a writing signed by Payee. Neither the failure nor any delay
in exercising any right, power or privilege under this Note will operate as a
waiver of such right, power or privilege and no single or partial exercise of
any such right, power or privilege by Payee will preclude any other or further
exercise of such right, power or privilege or the exercise of any other right,
power or privilege. To the maximum extent permitted by applicable law, (a) no
claim or right of Payee arising out of this Note can be discharged by Payee, in
whole or in part, by a waiver or renunciation of the claim or right unless in a
writing, signed by Payee; (b) no waiver that may be given by Payee will be
applicable except in the specific instance for which it is given; and (c) no
notice to or demand on Maker will be deemed to be a waiver of any obligation of
Maker or of the right of Payee to take further action without notice or demand
as provided in this Note. Maker hereby waives presentment, demand, protest and
notice of dishonor and protest.
2.2 NOTICES
Any notice required or permitted to be given hereunder shall be given in
accordance with Section 11.4 of the Agreement.
2.3 SEVERABILITY
If any provision in this Note is held invalid or unenforceable by any court of
competent jurisdiction, the other provisions of this Note will remain in full
2
<PAGE>
force and effect. Any provision of this Note held invalid or unenforceable only
in part or degree will remain in full force and effect to the extent not held
invalid or unenforceable.
2.4 GOVERNING LAW
This Note will be governed by the laws of the State of Texas without regard to
conflicts of laws principles.
(1) Maker submits, for itself and its property, to the exclusive jurisdiction of
the courts of the State of Texas and any federal court of the United States of
America, in either case, sitting in Harris County, Texas, and any appellate
court therefrom, in any action based upon, resulting from, arising out of, or
relating to this Promissory Note, or in connection with the authorization,
preparation, negotiation, execution, delivery, administration, performance, or
enforcement hereof, or for the recognition or enforcement of any judgment
resulting from any such action;
(2) Maker agrees that it will not commence any action except in any such court
of the State of Texas; waives,
(3) Maker agrees that it will not plead or make, any objection to the venue of
any state or federal court of the State of Texas and agrees that it will not
plead or make, any claim that any such action in any such state or federal court
of the State of Texas has been brought in an improper or otherwise inconvenient
forum; and
(4) Maker agrees that the summons and complaint or any other process in any such
action may be served by mailing to any of the addresses set forth herein or by
hand delivery to a person of suitable age and discretion at any such address,
and that any such service shall be deemed to be complete on the date such
process is so mailed or delivered and to have the same force and effect as
personal service within the State of Texas.
2.5 PARTIES IN INTEREST
This Note shall bind Maker and its successors and assigns. This Note may be
assigned or transferred by Payee without the consent of Maker.
2.6 SECTION HEADINGS, CONSTRUCTION
The headings of Sections in this Note are provided for convenience only and will
not affect its construction or interpretation. All references to "Section" or
"Sections" refer to the corresponding Section or Sections of this Note unless
otherwise specified.
3
<PAGE>
All words used in this Note will be construed to be of such gender or number as
the circumstances require. Unless otherwise expressly provided, the words
"hereof" and "hereunder" and similar references refer to this Note in its
entirety and not to any specific section or subsection hereof.
IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date
first stated above.
CHALLENGER OIL SERVICES, PLC
By:
Title:
4
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