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 June 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.
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(Exact name of registrant as specified in its charter)
Colorado 84-0630863
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2211 Norfolk, Suite 1150
Houston, Texas 77098
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(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 August 18, 1998 Registrant had 57,882,123 shares of its $0.10 par
value common stock issued and outstanding.
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Part I - Summarized Financial Information
Item 1 - Financial Statements
Chaparral Resources, Inc.
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
1998 1997
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Assets
Current assets:
Cash and cash equivalents $ 46,000 $ 3,423,000
Restricted cash 800,000 --
Accounts receivable:
Other 33,000 102,000
Prepaid expenses 48,000 62,000
------------ ------------
Total current assets 927,000 3,587,000
Notes Receivable 300,000 --
Oil and gas properties and investments - full cost method
Republic of Kazakhstan (Karakuduk Field)--
not subject to depletion : 25,018,000 19,922,000
Furniture, fixtures and equipment 76,000 13,000
Less accumulated depreciation (9,000) (3,000)
------------ ------------
67,000 10,000
------------ ------------
Total assets $ 26,312,000 $ 23,519,000
============ ============
See accompanying notes to financial statements
2
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Chaparral Resources, Inc.
Consolidated Balance Sheets (continued)
(Unaudited)
June 30, December 31,
1998 1997
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Liabilities and stockholders' equity
Current liabilities:
Accounts payable:
Trade $ 257,000 $ 177,000
Accrued liabilities 413,000 54,000
Notes payable (net of discount) 764,000 --
------------ ------------
Total current liabilities 1,434,000 231,000
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 4,550,000 4,500,000
Stockholders' equity:
Common stock - authorized, 100,000,000
shares at June 30, 1998 and
December 31, 1997, of
$.10 par value; issued and outstanding,
51,215,456 and 49,720,456 shares at
June 30, 1998 and December 31, 1997, respectively 5,121,000 4,971,000
Capital in excess of par value 33,518,000 30,340,000
Unearned portion of restricted stock awards (161,000) (109,000)
Stock subscription receivable (1,517,000) (1,770,000)
Accumulated Deficit (16,843,000) (14,854,000)
------------ ------------
Total stockholders' equity 20,118,000 18,578,000
------------ ------------
Total liabilities and stockholders' equity $ 26,312,000 $ 23,519,000
============ ============
See accompanying notes to financial statements
3
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Chaparral Resources, Inc.
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $ -- $ -- $ -- $ --
Costs and expenses:
Depreciation and depletion 4,000 -- 6,000 1,000
General and administrative 750,000 487,000 1,630,000 742,000
------------ ------------ ------------ ------------
754,000 487,000 1,636,000 743,000
------------ ------------ ------------ ------------
Loss from operations (754,000) (487,000) (1,636,000) (743,000)
Other income (expense):
Interest income 248,000 88,000 450,000 162,000
Interest expense (63,000) (60,000) (63,000) (130,000)
Equity in loss from investment (357,000) (114,000) (690,000) (289,000)
------------ ------------ ------------ ------------
(172,000) (86,000) (303,000) (257,000)
------------ ------------ ------------ ------------
Net loss $ (926,000) $ (573,000) $ (1,939,000) $ (1,000,000)
------------ ------------ ------------ ------------
Basic and diluted earnings per share:
Net loss per share $ (.018) $ (.014) $ (.038) $ (.025)
Weighted average number of shares
Outstanding 51,192,214 40,948,384 50,546,373 39,311,769
See accompanying notes to financial statements
4
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Chaparral Resources, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30, June 30,
1998 1997
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Cash flows from operating activities
Net loss $(1,939,000) $(1,000,000)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Equity loss from investment 690,000 289,000
Depreciation and depletion 6,000 1,000
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 662,000 --
Amortization of note discount 56,000 62,000
Changes in assets and liabilities:
Restricted cash (800,000) --
Accounts receivable 69,000 (43,000)
Prepaid expenses 14,000 (90,000)
Notes receivable (300,000) --
Accounts payable & accrued liabilities 439,000 (403,000)
----------- -----------
Net cash used in operating activities (1,103,000) (1,151,000)
Cash flows from investing activities
Additions to property and equipment (63,000) --
Proceeds from sale of interest in oil & gas properties -- 273,000
Investment in and advances to foreign oil and gas
properties (5,786,000) (1,785,000)
----------- -----------
Net cash used in investing activities (5,849,000) (1,512,000)
Cash flows from financing activities
Proceeds from notes payable 1,075,000
Proceeds from warrant exercise 7,000
Proceeds from sale of stock 2,500,000 2,000,000
----------- -----------
Net cash provided by financing
activities 3,575,000 2,007,000
----------- -----------
Net decrease in cash and
cash equivalents (3,377,000) (656,000)
Cash and cash equivalents at beginning
of period 3,423,000 920,000
----------- -----------
Cash and cash equivalents at end of period $ 46,000 $ 264,000
=========== ===========
See accompanying notes to financial statements
5
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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 June 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 will not be
sufficient to meet the capital spending requirements 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. The Company
believes that additional financing will be available; however, 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. Restricted Cash
As of June 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.
5. Notes Payable
On June 4, 1998, the Company borrowed $1,000,000 from two related parties,
one of which is a director of the Company. In connection with the debt
obligation, on June 4, 1998, 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 to
the related party creditors. The note was discounted by the fair value of the
warrants ($367,000), with the discount being amortized over the life of the
note. The Company repaid the entire principal balance of $1,000,000 plus accrued
interest on August 5, 1998.
The fair market value of the warrants was estimated as of June 4, 1998,
using the Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rates of 5.53%, dividend yield of 0%, volatility
factors of the expected market price of the Company's common Stock of .593, and
a weighted average life expectancy of the warrants of 4.5 years.
The warrants are further described in Note 6, Common Stock and Related
Common Stock Warrants.
6. Common Stock and Related Common Stock Warrants
Effective on April 3, 1998, the Company sold 1,250,000 shares of the
Company's Common Stock for $2.00 per share for at total of $2,500,000 to a
private investor. Allen & Company, Incorporated acted as placement agent in
connection with the sale of the 1,250,000 shares. As a result, Allen & Company,
Incorporated's warrants to purchase 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 100,000 shares of the
Company's Common Stock. As of June 30, 1998, warrants to purchase 600,000 shares
remain unexercisable and is reflected as a stock subscription receivable in the
financial statements.
In connection with the $1,000,000 loan referred to in Note 5, on June 4,
1998, the Company issued warrants to purchase 1,000,000 shares of the Company's
Common Stock to two related parties, one of which is a director of the Company.
The warrants are exercisable through November 25, 2002, at an exercise price of
$3.50 per share.
The Company recorded the fair market value of the warrants ($367,000) as a
discount of notes payable, amortizable as interest expense over the life of the
loan. The fair market value of the warrants was estimated as of June 4, 1998,
using the Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rates of 5.53%, dividend yield of 0%, volatility
factors of the expected market price of the Company's common Stock of .593,
and a weighted average life expectancy of the warrants of 4.5 years.
7
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Chaparral Resources, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
7. Subsequent Events
On July 3, 1998, the Company borrowed $975,000 from a financial
institution. The note accrues interest at an adjustable prime rate and is
payable in quarterly principal installments of $250,000 beginning December 3,
1998, with a final payment of all unpaid principal and interest due on December
3, 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).
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.
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 will be required to issue 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 probation
agreements the Company has with such investor.
On August 5, 1998, the Company repaid the $1,000,000 note payable to two
related creditors, one of which is a director of the Company, at the note's face
value. The Company recorded an extraordinary loss on extinguishment of debt of
approximately $235,000.
8
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Karakuduk-Munay Inc
Statement of Expenses and Accumulated Deficit
For the Six Month Periods Ended June 30, 1998 and 1997
(Amounts in US Dollars)
(Unaudited)
8. Investments
The results from operations of the Company's equity-based investment in KKM are summarized below:
For The Three Months Ended For The Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Management Service Fee $ 154,000 $ 90,000 $ 274,000 $ 180,000
General and Administrative Expenses 182,000 53,000 545,000 242,000
Depreciation of Fixed Assets 150,000 -- 150,000 --
Interest Expense 230,000 85,000 411,000 155,000
---------- ---------- ---------- ----------
Net Loss 716,000 228,000 1,380,000 577,000
Accumulated deficit, beginning of period 4,680,000 2,700,000 4,016,000 2,351,000
---------- ---------- ---------- ----------
Accumulated deficit, end period $5,396,000 $2,928,000 $5,396,000 $2,928,000
---------- ---------- ---------- ----------
9
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
1. Liquidity and Capital Resources
Prior to 1997, the Company's primary source of capital was from oil and gas
sales from domestic properties. All domestic properties have been sold or
otherwise disposed. The only oil and gas interest of the Company at this time is
as a result of 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 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 repaid notes
payable to two related parties, one of which is a director of the Company, on
August 5. 1998 using proceeds raised from the sale of Common Stock.
As of August 18, 1998, the Company's only debt obligation outstanding was
$975,000, borrowed by the Company from a financial institution on July 3, 1998.
The note accrues interest at an adjustable prime rate and is payable in
quarterly principal installments of $250,000 beginning December 3, 1998, with a
final payment of all unpaid principal and interest due on December 3, 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 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 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 may seek 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
may 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.
10
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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
generating sufficient cash to fund its operating and capital requirements. The
Company does not anticipate that its current cash reserves and cash flow from
operations will be sufficient to meet its capital requirements through fiscal
1998.
As of June 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
revenues sufficient to meet its cash outflow needs. 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 primarilly 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. Without additional funding and significant revenues
from oil sales, of which there are no assurances, the Company will not be able
to provide sufficient funds to satisfy these requirements and the Company's
interest in the Karakuduk Field may be lost.
As of August 18, 1998, KKM has not recognized any revenue, although KKM has
placed approximately 3,000 tons of oil production into the export pipeline. When
KKM has placed oil production of a minimum of 5,000 tons into the pipeline,
Munay-Impex, a subsidiary of KazakhOil, is obligated to purchase oil from KKM
under an existing one year contract. KKM will record oil revenues when a sale
has been completed.
The Company requested and received an additional extension to September 30,
1998, from the Overseas Private Investment Corp. ("OPIC") for political risk
insurance. OPIC 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. The Company expects to execute the contract on or
before September 30, 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 June 30, 1997 reported
herein have been reclassified to reflect the equity method. There was no impact
on previously reported earnings.
Three Months Ended June 30, 1998 Compared with the Three Months
Ended June 30, 1997
The Company's operations during the three months ended June 30, 1998,
resulted in a net loss of $926,000 compared to a net loss of $573,000 for the
three months ended June 30, 1997.
Interest income increased by $160,000 from the three months ended June 30,
1997, due to increased financing provided by CAP-6 to KKM for KKM's operations
in Kazakhstan.
11
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General and administrative costs increased by $263,000 during the three
months ended June 30, 1998 as compared to the three months ended June 30, 1997.
Without consideration of the stock based compensation, a non-cash item, general
and administrative costs increased by $51,000 due to increased overhead incurred
by the Company in connection with the expanding workover and exploration
operations in Kazakhstan. Also, the Company's equity loss in KKM increased by
$243,000 during the three months ended June 30, 1998 as compared to the three
months ended June 30, 1997, due to increased operational costs directly related
to development of oil and gas properties held by KKM.
Interest expense increased by $3,000 during the three months ended June 30,
1998 as compared to the three months ended June 30, 1997, almost entirely due to
interest expense from amortization of the discount of notes payable. Without
consideration of the discount amortization, the Company's interest expense would
have decreased by $53,000 due to the Company's retirement of all
interest-bearing obligations during the last six months of 1997 and the fact
that the Company did not borrow any additional funds until May 27, 1998.
Therefore, the Company's $1,075,000 in outstanding notes payable as of June 30,
1998 had only accrued interest for approximately one month as of June 30, 1998.
Six Months Ended June 30, 1998 Compared with the Six Months Ended June 30, 1997
The Company's operations during the six months ended June 30, 1998,
resulted in a net loss of $1,939,000 compared to a net loss of $1,000,000 for
the six months ended June 30, 1997.
Interest income increased by $288,000 from the six months ended June 30,
1997, due to increased financing provided by CAP-6 to KKM for KKM's operations
in Kazakhstan.
General and administrative costs increased by $888,000 during the six
months ended June 30, 1998 as compared to the six months ended June 30, 1997.
Without consideration of the stock based compensation, a non-cash item, general
and administrative costs increased by $292,000 due to increased overhead
incurred by the Company in connection with the expanding workover and
exploration operations in Kazakhstan. Also, the Company's equity loss in KKM
increased by $401,000 during the six months ended June 30, 1998 as compared to
the six months ended June 30, 1997, due to increased operational costs directly
related to development of oil and gas properties held by KKM.
Interest expense decreased by $67,000 during the six months ended June 30,
1998 as compared to the six months ended June 30, 1997. The Company retired all
interest-bearing obligations during the last six months of 1997 and did not
borrow any additional funds until May 27, 1998. The Company's outstanding notes
payable of $1,075,000 as of June 30, 1998, however, are subject to a $311,000
discount, fully amortizable during the 1998 fiscal year.
12
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3. Quantitative and Qualitative Disclosures About Market Risks
Not Applicable.
13
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Part II - Other Information
Item 2 - Changes in Securities and Use of Proceeds
(c) On April 3, 1998, the Company sold 1,250,000 shares of the Company's
Common Stock for $2.00 per share for at total of $2,500,000 to a private
investor. The Company sold the shares in reliance upon the exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended. The
investor had available to the investor all material information concerning the
Company. The certificate evidencing the shares bears 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
1,250,000 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 100,000 shares of the Company's Common
Stock. The warrants to purchase the additional 100,000 shares of the Company's
Common Stock are exercisable through November 25, 2002, at an exercise price of
$0.01 per share.
During the quarter ended June 30, 1998, the Company granted 5-year options
to purchase 56,500 shares of the Company's Common Stock to employees of, and
consultants to, the Company. The Company also granted 5,000 shares of the
Company's Common Stock to a consultant to the Company. The Company made the
grants in reliance upon the exemption from registration under Section 4(2) of
the Securities Act. 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. Due to terminations of employment
or consulting relationships, options to purchase 35,000 shares have been
cancelled and the 5,000 shares were never issued when vesting provisions of the
options and share grant were not satisfied. No underwriter was involved in the
transactions.
In connection with a $1,000,000 loan, on June 4, 1998, the Company granted
warrants to purchase 1,000,000 shares of the Company's Common Stock to two
related parties, one of which is a director of the Company. The warrants to
purchase the additional 1,000,000 shares of the Company's Common Stock are
exercisable through November 25, 2002, at an exercise price of $3.50 per share.
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 warrant
certificates bear an appropriate restrictive legend under the Securities Act of
1933, as amended. No underwriter was involved in the transaction.
Item 4 - Submission of Matters to a Vote of Security Holders
On January 26, 1998, the Company held its Annual Meeting of Stockholders.
The Company's stockholders elected the following seven persons as directors,
each to serve until the next Annual Meeting of Stockholders or until his
successor is elected or appointed: Howard Karren, John G. McMillian, J. Michael
Muckleroy, Ted E. Collins, Richard Grant, David A. Dahl, and Arlo G. Sorensen.
The Company's stockholders also voted to adopt, separately, the Company's 1998
Incentive and Nonstatutory Stock Option Plan and the selection by the Board of
Directors of Ernst & Young LLP as the independent auditors of the Company for
the fiscal year ended December 31, 1998.
The number of shares voted and withheld with respect to each director were
as follows:
Election of Directors For Withheld
--------------------- --- --------
Howard Karren 35,330,140 777,183
John G. McMillian 35,806,190 301,133
J. Michael Muckleroy 35,710,490 396,833
Ted Collins, Jr. 35,828,730 278,593
Richard L. Grant 35,827,720 279,603
David A. Dahl 35,566,880 540,443
Arlo G. Sorensen 35,548,780 558,543
14
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The number of shares voted (and broker non votes) with respect to the
adoption of the Company's 1998 Incentive and Nonstatutory Stock Option Plan was
as follows:
For Against Abstain Broker Non Votes
--- ------- ------- ----------------
25,445,753 1,209,747 537,967 8,937,056
The number of shares voted with respect to the approval of Ernst & Young
LLP as the Company's independent auditors was as follows:
For Against Abstain
--- ------- -------
35,789,991 187,922 129,410
Item 5 - Other Information
Effective June 29, 1998, the United States Securities and Exchange
Commission adopted new rules relating to stockholder proposals which
stockholders do not request be included in the Company's proxy statement to be
used in connection with the Company's Annual Meeting of Stockholders. Under
these new rules, proxies that confer discretionary authority will not be able to
be voted on a stockholder proposal to be presented at the Annual Meeting of
Stockholders if the stockholder provides the Company with advance written notice
of the stockholder proposal on a date in the current year that is at least 45
days prior to the date the prior year's proxy materials were mailed to the
Company's stockholders. If a stockholder fails to so notify the Company, proxies
that confer discretionary authority will be able to be voted when the proposal
is presented at the Annual Meeting of Stockholders.
In accordance with the new rules, proxies which confer discretionary
authority will be able to be voted on stockholder proposals that the
stockholders do not request be included in the Company's proxy statement but
plan to present at the Company's next Annual Meeting of Stockholders unless the
Company receives notice of the proposals by no later than April 14, 1999.
On May 27, 1998 and July 1, 1998, the Company borrowed $75,000 and $20,000
from Howard Karren, the Chairman and Chief Executive Officer of the Company,
respectively. The notes were payable 180 days after the date of issuance at an
interest rate of 7%. The notes were fully repaid by the Company on July 30,
1998.
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
10.1 Subordinated Loan Agreement date as of June 4, 1998 between
the Company and Allen & Company, Incorporated
10.2 Warrants issued to Allen & Company, Incorporated and
John G. McMillian
10.3 Loan agreements between the Company and Howard Karren
dated May 27, 1998 and July 1, 1998, respectively
27 Financial Data Schedule
Reports on Form 8-K
On April 14, 1998, the Company filed a Current Report on Form 8-K dated
April 3, 1998, reporting under Item 5 thereof the sale of 1,250,000 shares of
the Company's Common Stock to one investor for a purchase price of $2.00 per
share or an aggregate purchase price of $2,500,000 and filing the related
Subscription Agreement under Item 7.
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: August 18, 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 Subordinated Loan Agreement date as of June 4, 1998 between
the Company and Allen & Company, Incorporated
10.2 Warrants issued to Allen & Company, Incorporated and
John G. McMillian
10.3 Loan agreements between the Company and Howard Karren dated
May 27, 1998 and July 1, 1998, respectively
27 Financial Data Schedule
17
SUBORDINATED LOAN AGREEMENT
THIS SUBORDINATED LOAN AGREEMENT (this "Agreement") dated as of June 4,
1998 between Chaparral Resources, Inc., a Colorado corporation, (the "Borrower")
and Allen & Company Incorporated, a corporation organized and existing under the
laws of the State of New York (hereinafter, "Allen" and, collectively with its
successors and assigns, the "Lenders").
Preliminary Statement
---------------------
The Borrower has retained Allen as its financial advisor and placement
agent in connection with one or more equity financings. Pending completion of
such financings, the Borrower has requested that the Lenders provide the
Borrower with loans in the aggregate amount of One Million Dollars ($1,000,000)
for use as described herein, and the Lenders are willing to lend up to such
amount to the Borrower as a loan, subject to, and on the terms and conditions
of, this Agreement in exchange for the Company's Subordinated Promissory Notes
and Warrants of even date therewith to be issued to the Lenders. The
relationship between the parties hereto is that of debtor and creditors, and not
of fiduciaries.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
Article 1
Subordinated Loan
-----------------
1.1 Subordinated Loan.
(a) Subject to the terms and conditions contained in this Agreement,
the Lenders shall make a subordinated loan (the "Loan"), to be funded
concurrently with the execution of this Agreement, in the aggregate principal
amount of One Million Dollars ($1,000,000). The Loan shall be evidenced by a
Promissory Note in the form of Exhibit 1.1 hereto. Each Lender shall lend to
Borrower, and Borrower shall be responsible to repay such Lender for, the
principal amount set forth in Exhibit 1.1(a) hereto. Such Promissory Notes shall
be of even date herewith and shall be payable to the order of the Lenders in
full in one installment in an amount equal to all outstanding principal and
interest accrued thereon, on the earlier of (a) six months from the date of
funding of the Loan, or (b ) the date on which the Borrower receives equity
investments (whether or not from or through any Lender) in an aggregate amount
of at least $10 million.
(b) Concurrent with the execution of this Agreement and the Promissory
Note and in connection with the making of the Loan hereunder, the Lenders shall
deliver to the Borrower by wire transfer, or such other method as the Lenders
and the Borrower deem appropriate, an amount equal to $1,000,000.
<PAGE>
1.2 Interest. The Loan shall bear interest from the date of funding at a
per annum rate equal to seven percent (7%). Interest shall be payable at
maturity as specified in Section 1.1(a) and shall be calculated based upon a 360
day year and actual days elapsed. Any amount not paid when d ue shall bear
interest until repaid at twelve percent (12%) per annum, unless the failure to
make such repayment is due to the failure of the Borrower to receive the amount
of equity investment specified in 1.1(a) above.
1.3 Prepayment. The Borrower may prepay the Loan in full or in part at any
time without penalty, with accrued interest on the principal being prepaid to
the date of such prepayment.
1.4 Repayment in Stock. Each Lender may elect to have any payment of
principal or interest made to it under the loan payable either (i) in cash or
(ii) in the form of the Common Stock, par value $.10 per share (the "Common
Stock"), of the Company, valued at the current Market Price of the Common Stock.
"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 date of conversion, or (B) if there
shall have been no such reported sale price of such stock on the business
day immediately preceding the date of conversion, the average of the last
reported sale price on such exchange or on Nasdaq on (x) the day next
preceding the date of conversion for which there was a reported sale price
and (y) the day next succeeding the date of conversion 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 date of conversion, or (B) if there shall have
been no such reported bid and asked prices for such stock on the business
day immediately preceding the date of conversion, the average of the last
bid and asked prices on (x) the day next preceding the date of conversion
for which such information is available and (y) the day next succeeding the
date of conversion 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 Borrower and the Lender requesting such
payment in stock.
2
<PAGE>
Article 2
Representations, Warranties and Covenants
-----------------------------------------
To induce the Lenders to make available to the Borrower the Loan
hereunder, the Borrower hereby make the representations, warranties, and
covenants included in this Article 2.
2.1 Payment and Performance of Obligations. The Borrower shall pay the Loan
when due and shall promptly, punctually, and faithfully perform each and all of
its obligations hereunder.
2.2 Due Organization and Corporate Authorization. The Borrower is duly
organized, validly existing as a corporation in good standing in the state
Colorado and is, and shall hereafter remain, duly qualified and in good standing
in every state in which, by reason of the nature or location of the Borrower's
assets or operation of the Borrower's business, such qualification may be
necessary and where the failure to so qualify would have a material adverse
affect on (i) the financial condition of the Borrower, and/or (ii) the
Borrower's ability to conduct its business. The execution and delivery of this
Agreement and of any other documents, instruments, and agreements executed in
connection herewith constitute representations by the individual signing this
Agreement and said instruments and by the Borrower that such execution and
delivery have received all such corporate authorization as may be necessary to
permit such execution and delivery to, and that they do, bind the Borrower,
except as such enforceability may be limited by (i) bankruptcy, insolvency,
reorganization or other similar laws and legal and equitable principles limiting
or affecting the rights of creditors generally and/or (ii) general principles of
equity, regardless of whether considered in a proceeding in equity or at law.
2.3 No Conflicting Agreements. There is no provision in the Articles of
Incorporation or By-laws or other organizational documents of the Borrower, or
in any document by which the Borrower may be bound which prohibits or adversely
affects the execution and delivery of this Agreement, or of any other instrument
or agreement which prohibits or adversely affects the Borrower's carrying out of
the terms hereof.
2.4 Statutory Compliance. The Borrower is in compliance with, and shall
hereafter comply with and use its assets in compliance with, all statutes,
regulations and orders of every federal, state, municipal, and other
governmental authority which has or claims jurisdiction over the Borrower, any
of the Borrower's assets, or any person in any capacity for which the Borrower
would be responsible for the conduct of such person, which if the Borrower is
not so in compliance would have a material adverse effect upon the Borrower's
financial condition or its ability to conduct its business as such business is
presently conducted.
2.5 Pay Taxes. The Borrower has, and hereafter shall pay, as they become
due and payable, all taxes and unemployment contributions and other valid
charges of any kind or nature levied, assessed or claimed against the Borrower
by any person or entity whose claim could result in a lien upon the assets of
the Borrower or by any governmental authority, properly exercise any trust
responsibilities imposed upon the Borrower by reason of withholding from
employees' pay and timely file all tax and other returns and other reports with
each governmental authority to whom the Borrower is obligated so to file.
Nothing contained herein shall prevent Borrower from challenging any tax or
charge which it in good faith believes to be improper or erroneous.
3
<PAGE>
2.6 Litigation. Except as set forth on Exhibit 2.6, there is not presently
pending or, to the Borrower's best knowledge and belief after due inquiry,
threatened by or against the Borrower any suit, action, proceeding or
investigation which, if determined adversely to the Borrower, would have a
material adverse effect upon the Borrower's financial condition or ability to
conduct its business as such business is presently conducted.
2.7 Dividends or Investments. Until all amounts under the Loan shall have
been paid in full, the Borrower shall not:
(a) pay any dividend, other than a common stock dividend of the
Borrower's own capital stock;
(b) redeem, retire, purchase, or acquire any of the Borrower's capital
stock;
(c) invest in or purchase any stock or securities or rights to
purchase any such stock or securities, of any corporation or other entity;
(d) merge or consolidate or be merged or consolidated with or into any
other corporation or other entity; or
(e) except as expressly approved by the Lenders, make any change in
the capital structure of the Borrower, whether by issuance of securities or
otherwise.
2.8 Corporate Loans; Capitalization. The Borrower shall not make any loans
or advances to any individual, firm, corporation, or other entity including,
without limitation, any affiliate, officer, employee, director, shareholder, or
salesperson of the Borrower.
2.9 Line of Business. The Borrower shall not engage in any business other
than the business in which it is currently engaged, or a business reasonably
allied thereto.
2.10 Adequacy of Disclosure. (a) Except as otherwise disclosed in writing
to the Lenders, all financial statements furnished to the Lenders by the
Borrower have been prepared in accordance with generally accepted accounting
principles (except that interim financial statements exclude stat ements of cash
flows and notes to financial statements) consistently applied and fairly present
the condition of the Borrower at the date(s) thereof. There has been no change
in the financial condition of the Borrower since the date(s) of such financial
statements, other than changes in the ordinary course of business, which changes
have not been materially adverse, either singularly or in the aggregate other
than those previously disclosed to the Lenders.
4
<PAGE>
(b) The Borrower does not have any material contingent liabilities
pursuant to the execution of guaranties or otherwise not noted in the Borrower's
financial statements furnished to the Lenders.
(c) No document, instrument, agreement, or paper given to the Lenders
by or on behalf of the Borrower in connection with its execution of this
Agreement, when taken together, contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
therein not misleading. There is no fact which has a material adverse effect on
the financial condition of the Borrower which has not been disclosed in writing
to the Lenders.
2.11 Use of Proceeds. The Borrower confirms and warrants that all proceeds
of the Loan shall be used by it in the operating of its business.
2.12 Senior Indebtedness. Except for the indebtedness listed in Exhibit
2.12 hereto (collectively, "Senior Indebtedness"), there is no indebtedness of
the Borrower currently outstanding which would be senior to, or pari passu with,
the obligation of the Borrower to repay the Lenders any a nd all amounts owed
hereunder. The Borrower further covenants that for so long as any amounts are
due hereunder, no indebtedness (other than ordinary course equipment financing)
shall be incurred by the Borrower which would be senior to, or pari passu with,
that of the Lenders hereunder. The obligations of the Lenders to fund the Loan
shall be conditional upon the Company receiving the prior written consent to the
Loan of each holder of Senior Indebtedness that may have rights thereunder to
requi re such consent.
2.13 Other Covenants. The Borrower shall not indirectly do or cause to be
done any act which, if done directly by the Borrower, would breach any covenant
contained in this Agreement.
Article 3
Concurrent Conditions
---------------------
3.1 Concurrent with the making of the Loan hereunder, there shall be
delivered to the Lenders:
(i) this Agreement, duly executed and delivered by the Borrower;
(ii) the Promissory Note in the amount of the Loan duly executed and
delivered by the Borrower;
(iii)a favorable opinion of counsel for the Borrower addressed to the
Lenders and dated the date of the making of the Loan hereunder,
in the form attached as Exhibit 3.1(iii) hereof; and
(iv) a certificate of an authorized officer or representative of the
Borrower in the form and substance acceptable to the Lenders.
5
<PAGE>
Article 4
Default
-------
Upon the occurrence of any one or more of the following events
(herein, "Events of Default"), the Loan and any and all other amounts due to the
Lenders hereunder shall become immediately due and payable, at the option of the
Lenders and without notice or demand.
4.1 Failure to Pay Loan. The failure by the Borrower to pay any amount when
due in connection with the Loan made hereunder or the failure by the Borrower to
pay when due any other amount due to the Lenders under this Agreement.
4.2 Business Failure. Any act by, against, or relating to the Borrower, or
its property or assets, which act constitutes the application for, consent to,
or sufferance of the appointment of a receiver, trustee or other person,
pursuant to court action or otherwise, over all, or any part of the Borrower's
property; the occurrence of any voluntary or involuntary liquidation or
extension of debt agreement for the Borrower; the entry of an order for relief
or similar order with respect to the Borrower in any proceeding pursuant to any
federal bankruptcy law; the filing of any complaint, application, or petition by
or against the Borrower initiating any matter in which the Borrower is or may be
granted any relief from the debts of the Borrower pursuant to any federal or
state bankruptcy or insolvency statute or procedure; or the initiation of any
other judicial or non-judicial proceeding or agreement by, against or including
the Borrower which seeks or intends to accomplish a reorganization or
arrangement with creditors.
4.3 Change in Ownership. Any change in the identity, authority, or
responsibilities of any person having management and policy authority with
respect to the Borrower and/or any direct or indirect change (including any
change in beneficial ownership) of more than 20% in the ownership of th e issued
and outstanding capital stock of the Borrower on the date of the execution of
this Agreement.
Article 5
Subordination
-------------
5.1 Each of the Borrower hereby warrants and agrees with the Lenders that
all obligations and indebtedness of the Borrower of every kind and description,
whether now or hereafter existing, (the "Subordinated Debt") shall, for so long
as any amounts are due hereunder, be subordinated to the indebtedness of the
Borrower due to the Lenders hereunder in such manner that no payment or security
shall be paid by the Borrower for or on account of the Subordinated Debt, other
than trade claims and equipment loans and leases payable in the ordinary course,
until the indebtedness owed to the Lenders hereunder has been paid in full and
the Loan has been terminated or until the Borrower have obtained the specific
written consent of the Lenders.
6
<PAGE>
Article 6
General
-------
6.1 Set-Off. Any and all deposits or other sums at any time due to the
Borrower at any time in the possession of any of the Lenders or any of its
affiliates, whether held on behalf of the Borrower or otherwise, or in the
possession of any third party acting on any of the Lender's behalf (regardless
of the reason the such Lender may have received the same), including, but not
limited to, any and all amounts held, on behalf of the Borrower by any of the
Lenders, shall at all times constitute security for any and all amounts due
hereunder and may be applied or set-off by the Lenders against any and all such
amounts at any time, whether or not any or all such amounts are then due or
whether alternative sources of payment are available to the Lenders.
6.2 Notices. All notices and other correspondence to the Borrower by the
Lenders in connection with this Agreement shall be deemed effective upon mailing
to the Borrower's address provided to the Lenders, which address may be changed
on seven (7) days written notice given to the Lenders by the Borrower. All
notices and other correspondence to the Lenders by the Borrower in connection
with this Agreement shall be deemed effective upon receipt by the Lenders at the
Lender's principal offices, or elsewhere as the Lenders may specify from time to
time, and shall be sent by certified mail, return receipt requested.
6.3 Severability. Any determination that any provision of this Agreement or
any application thereof is invalid, illegal or unenforceable in any respect in
any instance shall not affect the validity, legality or enforceability of such
provision in any other instance, or the validity, legality or enforceability of
any other provision of this Agreement.
6.4 Amendments. No modification, amendment or waiver of any provision of
this Agreement or of any provision of any other agreement between the Borrower
and the Lenders is effective unless executed in writing by the party to be
charged with such modification, amendment and waiver, and if such party be the
Lenders, then by a duly authorized officer thereof. No failure by the Lenders to
give notice to the Borrower of the Borrower's having failed to observe and
comply with any warranty or covenant included herein shall constitute a waiver
of such warranty or covenant or the amendment of the within Agreement.
Notwithstanding any other provision of this Agreement, however, Allen may assign
any portion of the Loan to one or more additional lenders, each of which shall,
upon execution of an agreement assuming the rights and obligations set forth
herein, shall be deemed a Lender pursuant to this Agreement.
7
<PAGE>
6.5 Costs and Expenses of this Agreement. The Borrower shall pay all
expenses (including reasonable fees and expenses to counsel to the Lenders)
incurred by the Lenders in connection with the preparation, negotiation and
consummation of the agreements contemplated by the Loan, up to an aggregate
amount of $15,000.
6.6 Governing Law. This Agreement and all rights and obligations hereunder,
including matters of construction, validity and performance, shall be governed
by the laws of the State of New York. The Borrower submits itself to the
jurisdiction of the Courts of the State of New York for all purposes with
respect to this Agreement and the Borrower's relationship with the Lenders.
6.7 Indemnification. Except for claims brought or threatened against the
Lenders by shareholders of the Lenders, the Borrower shall indemnify, defend,
and hold the Lenders harmless of and from any claim brought or threatened
against the Lenders by the Borrower, or any other person (as well as from
attorneys' reasonable fees and expenses in connection therewith) on account of
Lenders' loan relationship with the Borrower (each of which may be defended,
compromised, settled or pursued by the Lenders with counsel of Lenders'
selection, but at the expense of the Borrower). The within indemnification shall
survive payment of the Loan and/or any termination, release or discharge
executed by the Lenders in favor of the Borrower.
6.8 Counterparts. This Agreement may be executed by the parties hereto in
several counterparts and by different parties in separate counterparts, each of
which shall be deemed to be an original and all of which shall constitute
together but one and the same Agreement.
6.9. Cooperation. The Borrower agrees to use its best efforts to co-operate
with the Lenders to take such steps as are reasonably necessary to give effect
to the transactions contemplated hereby, including without limitation, promptly
duly executing and delivering such financing statements as may be necessary to
perfect the security interests contemplated hereby.
8
<PAGE>
IN WITNESS WHEREOF, the parties have caused to be executed this Agreement
as of the date first shown above and agrees to be bound by this Agreement.
CHAPARRAL RESOURCES, INC.
By:________________________________
Name:
Title:
ALLEN & COMPANY INCORPORATED
By:________________________________
Name:
Title:
---------------------------------
Howard Karren
9
<PAGE>
SUBORDINATED PROMISSORY NOTE
$1,000,000 New York, New York
June 4, 1998
FOR VALUE RECEIVED, Chaparral Resources, Inc., a Colorado corporation (the
"Borrower"), hereby promises to pay to the order of Allen & Company Incorporated
and its successors or assigns (collectively, the "Lenders"), in lawful money of
the United States of America in freely transferable U.S. Dollars in immediately
available funds, for the account of the Lenders as the Lenders may direct, in
writing, the principal sum of One Million Dollars ($1,000,000), with interest
calculated thereon from the date hereof until maturity at a rate equal to seven
percent (7%) per annum (except as otherwise provided the Loan Agreement
described below), payable in one installment on the earlier of (a) the Fourth
(4th) of December, 1998 or (b) the date on which the Borrower receives equity
investments (whether or not from or through any Lender) in an aggregate amount
of at least $10 million. Interest shall be calculated on the basis of a 360 day
year.
This Promissory Note is the Promissory Note referred to in the Loan
Agreement of even date herewith by and among the Borrower and the Lenders (the
"Loan Agreement"), and the holders hereof are entitled to the benefits thereof.
In the event of the occurrence of an Event of Default under the Loan Agreement,
the holders hereof may, at their option, without notice or demand, declare this
Promissory Note immediately due and payable. After the maturity of this
Promissory Note, whether by acceleration or otherwise, it shall bear interest as
provided in the Loan Agreement.
If default be made in the payment of any of the indebtedness evidenced
hereby and this Promissory Note be placed with attorneys for collection, the
parties hereto agree to pay, in addition to all unpaid principal and interest,
all costs of collection hereof, including reasonable attorney's fees. The word
"parties" or "any party hereto" shall include makers, endorsers, sureties,
guarantors and assignors.
The Borrower hereby waives demand, presentment for payment, protest and
notice of protest and of non-payment.
This Promissory Note is subject to voluntary prepayment in part or in full,
without premium or penalty. At the election of the holders hereof, this
Promissory Note may be paid by the issuance of Common Stock of the Borrower as
provided in the Loan Agreement.
<PAGE>
In the event any one or more of the provisions of this Promissory Note
shall for any reason be held to be invalid, illegal or unenforceable, in whole
or in part or in any respect, or in the event that any one or more of the
provisions of this Promissory Note operate or would prospectively operate to
invalidate this Promissory Note, then and in either of those events, such
provision or provisions only shall be deemed null and void and shall not effect
any other provision of this Promissory Note and the remaining provisions of this
Promissory Note shall remain operative and in full force and effect and shall in
no way be affected, prejudiced or disturbed thereby.
All rights, benefits and privileges arising hereunder shall be governed and
construed according to the laws of the State of New York applicable to the
agreement made and fully performed thereon. Any legal action or proceeding
arising out of or relating to this Promissory Note may be instituted in the
courts of the State of New York, and the Borrower hereby irrevocably submits to
the jurisdiction of such court. In any such action or proceeding, the foregoing
shall not limit the Lenders' right to bring any legal action or proceeding in
any other appropriate jurisdiction.
The Borrower hereby consents to service of process by certified or
registered mail at Borrower's address as set forth below.
THE BORROWER HEREBY WAIVES TRIAL BY JURY.
- 2 -
<PAGE>
IN WITNESS WHEREOF, the Borrower has caused to be executed this Promissory
Note as of the date first shown above and agrees to be bound hereby.
CHAPARRAL RESOURCES, INC. Address for Notices:
2211 Norfolk
Suite 1150
Houston, Texas 77098
By:___________________________
Name:
Title:
- 3 -
<PAGE>
EXHIBIT 1.1(A)
Lenders
Name/Address Principal Amount
- ------------ ----------------
Allen & Company Incorporated $1,000,000
711 Fifth Avenue
New York, New York 10022
TOTAL: $1,000,000
- 4 -
<PAGE>
EXHIBIT 2.6
Litigation
On November 14, 1997, Heartland, Inc. of Wichita and Collins & Mcllhenny,
Inc. ("Plaintiffs") filed a lawsuit against Chaparral Resources, Inc.
("Chaparral"), Howard Karren, the CEO of Chaparral, Whittier Trust Company and
James A. Jeffs in the District Court of Harris County, Texas. The Plaintiffs
claim that Chaparral and Mr. Karren breached an alleged agreement with them
whereby Plaintiffs were to raise capital for Chaparral through a private
placement of Chaparral's securities, and that Chaparral and Mr. Karren made
false representations in connection with the alleged contract and that Whittier
Trust Company and James A. Jeffs interfered with Chaparral's performance of the
alleged contract.
Plaintiffs' motion for summary judgment was denied by the court and the
lawsuit is proceeding through the discovery phase.
- 5 -
<PAGE>
EXHIBIT 2.12
Senior Indebtedness
Challenger Oil Service, PLC ("Challenger") has entered into a drilling
contract dated April 7, 1998 ("Drilling Contract") with Karakuduk Munay, Inc.
("KKM"), a joint stock company organized under the laws of the Republic of
Kazakstan whereby Challenger will drill certain wells for KKM in t he Karakuduk
Oil Field in Kazakstan ("Karakuduk"). Chaparral Resources Inc. ("CRI") has a
fifty percent (50%) interest in KKM through its wholly owned subsidiary, Central
Asian Petroleum (Guernsey) Limited, in order to assist Challenger in arranging
financing from a commercial bank (the "Bank Loan") in order to enable it to
winterize the drilling rig and to provide an inventory of tools and spare parts.
In the event of a default by Challenger or by KKM in the payment of the day
rates under the Drilling Contract, CRI agreed to be liable for and to reimburse
Whittier Trust Company ("Whittier") for any amounts Whittier is required to pay
under a Letter of Credit that it has agreed to issue to the commercial bank as a
credit enhancement for the Bank Loan. Challenger has also granted Whittier a
security interest in the drilling rig as additional collateral for the Letter of
Credit.
- 6 -
<PAGE>
EXHIBIT 3.1(iii)
Form of Opinion of
Borrower's Counsel
(a) The Borrower is duly organized, validly existing and in good standing
under the laws of the State of Colorado and has the requisite corporate power
and corporate authority to own, lease and operate its properties and to carry on
its business.
(b) The Borrower is duly qualified and in good standing in every state in
which, by reason of the nature or location of its assets or operation of its
business, such qualification may be necessary and where the failure to so
qualify would have a material adverse affect on (i) the financial condition of
the Borrower, and/or (ii) the Borrower's ability to conduct its business.
(c) The Borrower has the requisite corporate power and corporate authority
to execute and deliver, and to perform its obligations under the Loan Agreement
dated June ____, 1998 by and among the Borrower and the Lenders (the
"Agreement") and all agreements, documents or instruments executed in connection
therewith (collectively, the "Documents"). The execution and delivery of the
Documents and the performance by the Borrower of its obligations thereunder, has
been duly authorized by all necessary corporate action of the Borrower, and the
Documents have been duly executed and delivered by an authorized officer of the
Borrower and constitute the valid and binding obligation of the Borrower,
enforceable against the Borrower in accordance with their terms, except to the
extent that enforceability of the Borrower' obligations under the Documents is
subject to and affected by applicable bankruptcy, insolvency, reorganization,
arrangement or other laws affecting the enforcement of creditors' rights and
general principles of equity (whether enforcement is considered in a proceeding
in equity or at law).
(d) The execution, delivery, performance and compliance by the Borrower
with the terms of the Documents do not violate (i) to the best knowledge of
counsel after due inquiry, any provision of any judgment, writ, decree or order
binding upon the Borrower, the violation of which wo uld have a material adverse
effect on the Borrower, or (ii) any provision of the Borrower's Articles of
Incorporation or By-Laws. The execution, delivery, performance and compliance by
the Borrower with the terms of the Agreement do not conflict with or constitute
a default under the provisions of any material agreement, document or instrument
to which the Borrower is a party or by which it is bound and the violation of
which would have a material adverse effect on the Borrower.
(e) Except as set forth in Section 2.6, no action, proceeding or
investigation is pending or, to the best of knowledge of counsel after due
inquiry, threatened against the Borrower which questions the validity of the
Agreement, or which might result, either individually or in the aggregate, in
any material adverse change in the assets, condition, affairs or prospects of
the Borrower.
(f) To the best knowledge of counsel after due inquiry, the Borrower is not
in violation of any provisions of its Articles of Incorporation or Bylaws.
- 7 -
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.
975,000 Warrants
CHAPARRAL RESOURCES, INC.
WARRANT CERTIFICATE
This warrant certificate ("Warrant Certificate") certifies that for value
received Allen & Company Incorporated 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 975,000 shares
of Common Stock of the Company, and the purchase price payable upon exercise of
the Warrant (the "Purchase Price") shall be $3.50 per share of Common Stock. The
Purchase Price and number of shares of Commo n 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 (i) with respect to 195,000
Warrants, the date of this Warrant Certificate, and (ii) with respect to 780,000
Warrants, the date that is 31 days after the date of this Warrant Certificate,
provided, however, that if within 30 days of the date of this Warrant
Certificate the Company has prepaid all of the outstanding principal and
<PAGE>
interest under the loan made pursuant to that certain Subordinated Loan
Agreement dated June 4, 1998 among the Company, the initial Holder of this
Warrant and the other lenders party thereto, the Exercisability Date with
respect to such 780,000 Warrants shall not occur, and such Warrants shall not
become exercisable thereafter. The term "Expiration Date" shall mean 5:00 p.m.
New York time on November 25, 2002, or if such day shall in the State of New
York be a holiday or a day on which banks are authorized to close, then 5:00
p.m. New York time the next following day which in the State of New York 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 all outstanding Warra nt. 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.
2
<PAGE>
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 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.
3
<PAGE>
(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
(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
4
<PAGE>
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 equ al 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
5
<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, 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 New York.
6
<PAGE>
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 4th day of June, 1998.
CHAPARRAL RESOURCES, INC.
By:
--------------------------------
Name:
Title:
[SEAL]
Attest:
- -------------------------------
Name:
Title:
7
<PAGE>
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:
-----------------------------------
-----------------------------------
-----------------------------------
8
<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:
-----------------------------------
-----------------------------------
-----------------------------------
9
<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.
25,000 Warrants
CHAPARRAL RESOURCES, INC.
WARRANT CERTIFICATE
This warrant certificate ("Warrant Certificate") certifies that for value
received John McMillian 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 25,000 shares
of Common Stock of the Company, and the purchase price payable upon exercise of
the Warrant (the "Purchase Price") shall be $3.50 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 (i) with respect to 5,000
Warrants, the date of this Warrant Certificate, and (ii) with respect to 20,000
Warrants, the date that is 31 days after the date of this Warrant Certificate,
provided, however, that if within 30 days of the date of this Warrant
Certificate the Company has prepaid all of the outstanding principal and
<PAGE>
interest under the loan made pursuant to that certain Subordinated Loan
Agreement dated June 4, 1998 among the Company, the initial Holder of this
Warrant and the other lenders party thereto, the Exercisability Date with
respect to such 20,000 Warrants shall not occur, and such Warrants shall not
become exercisable thereafter. The term "Expiration Date" shall mean 5:00 p.m.
New York time on November 25, 2002, or if such day shall in the State of New
York be a holiday or a day on which banks are authorized to close, then 5:00
p.m. New York time the next following day which in the State of New York 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 all outstanding Warra nt. 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.
2
<PAGE>
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 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.
3
<PAGE>
(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
(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
4
<PAGE>
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 equ al 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
5
<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, 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 New York.
6
<PAGE>
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 4th day of June, 1998.
CHAPARRAL RESOURCES, INC.
By:
----------------------------------
Name:
Title:
[SEAL]
Attest:
- -------------------------------
Name:
Title:
7
<PAGE>
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:
--------------------------------------
--------------------------------------
--------------------------------------
8
<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:
--------------------------------------
--------------------------------------
--------------------------------------
9
PROMISSORY NOTE
$75,000.00 May 27, 1998
FOR VALUE RECEIVED,, Chaparral Resources, Inc., a Colorado ("Maker"),
promises to pay to Howard Karren ("Payee"), in lawful money of the United States
of America, the principal sum of Seventy-Five Thousand Dollars ($75,000),
together with interest in arrears on the unpaid principal balance at an annual
rate equal to seven percent (7%) per annum 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.
The principal amount of this Note together with any accrued and unpaid
interest thereon shall be due and payable on demand, but in no event more than
one hundred and eighty (180) days from the date hereof. All payments shall be
made in lawful money of hte United States and in immediately available funds.
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.
The occurrence of any one or more of the following events with respect to
Maker shall constitute an event of default hereunder ("Event of Default"):
(a) If Maker shall fail to pay when due the principal or interest on this
Note and such failure continues for fifteen (15) days after Payee notifies
Maker therein writing.
(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"), Maker 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 Maker in an involuntary
case, (ii) appoints a trustee, receiver, assignee, liquidator or similar
official for Maker or substantially all of Maker's properties, or (iii)
orders the liquidation of Maker, and in each case the order or decree is
not dismissed within 60 days.
Maker shall notify Payee in writing within three (3) days after the
occurrence of any Event of Default of which Maker acquires knowledge.
<PAGE>
Upon the occurrence of an Event of Default hereunder (unless all Events of
Default have been cured or waived by Payee), Payee may, at its option, (i) by
written notice to Maker, declare the entire unpaid principal balance of this
Note, together with all accrued interest thereon, immediately due and payable
regardless of any prior forbearance, and (ii) exercise any and all rights and
remedies available to it under applicable law, including, without limitation,
the right to collect from Maker all sums due under this Note. Maker shall pay
all reasonable costs and expenses incurred by or on behalf of Payee in
connection with Payee's exercise of any or all of its rights and remedies under
this Note, including, without limitation, reasonable attorneys' fees.
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.
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
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.
This Note will be governed by the laws of the State of Texas without regard
to conflicts of laws principles. Maker irrevocably consents to the jurisdiction
of the courts in the State of Texas, Harris County, and to the Federal Court for
such county in connection with any actions or proceedings arising out of or
relating to this Agreement, and waives any objection to venue laid therein.
This Note shall bind Maker and its successors and assigns. This Note shall
not be assigned or transferred by Payee without the express prior written
consent of Maker, except by will or, in default thereof, by operation of law.
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.
2
<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.
CHAPARRAL RESOURCES, INC.
By: /s/ Michael B. Young, Treasurer
- ---------------------------------------
Title: Treasurer
- ---------------------------------------
3
<PAGE>
PROMISSORY NOTE
$20,000.00 July 1, 1998
FOR VALUE RECEIVED,, Chaparral Resources, Inc., a Colorado ("Maker"),
promises to pay to Howard Karren ("Payee"), in lawful money of the United States
of America, the principal sum of Twenty Thousand Dollars ($20,000), together
with interest in arrears on the unpaid principal balance at an annual rate equal
to seven percent (7%) per annum 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.
The principal amount of this Note together with any accrued and unpaid
interest thereon shall be due and payable on demand, but in no event more than
one hundred and eighty (180) days from the date hereof. All payments shall be
made in lawful money of hte United States and in immediately available funds.
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.
The occurrence of any one or more of the following events with respect to
Maker shall constitute an event of default hereunder ("Event of Default"):
(a) If Maker shall fail to pay when due the principal or interest on this
Note and such failure continues for fifteen (15) days after Payee notifies
Maker therein writing.
(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"), Maker 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 Maker in an involuntary
case, (ii) appoints a trustee, receiver, assignee, liquidator or similar
official for Maker or substantially all of Maker's properties, or (iii)
orders the liquidation of Maker, and in each case the order or decree is
not dismissed within 60 days.
Maker shall notify Payee in writing within three (3) days after the
occurrence of any Event of Default of which Maker acquires knowledge.
<PAGE>
Upon the occurrence of an Event of Default hereunder (unless all Events of
Default have been cured or waived by Payee), Payee may, at its option, (i) by
written notice to Maker, declare the entire unpaid principal balance of this
Note, together with all accrued interest thereon, immediately due and payable
regardless of any prior forbearance, and (ii) exercise any and all rights and
remedies available to it under applicable law, including, without limitation,
the right to collect from Maker all sums due under this Note. Maker shall pay
all reasonable costs and expenses incurred by or on behalf of Payee in
connection with Payee's exercise of any or all of its rights and remedies under
this Note, including, without limitation, reasonable attorneys' fees.
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.
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
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.
This Note will be governed by the laws of the State of Texas without regard
to conflicts of laws principles. Maker irrevocably consents to the jurisdiction
of the courts in the State of Texas, Harris County, and to the Federal Court for
such county in connection with any actions or proceedings arising out of or
relating to this Agreement, and waives any objection to venue laid therein.
This Note shall bind Maker and its successors and assigns. This Note shall
not be assigned or transferred by Payee without the express prior written
consent of Maker, except by will or, in default thereof, by operation of law.
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.
2
<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.
CHAPARRAL RESOURCES, INC.
By: /s/ Michael B. Young, Treasurer
- --------------------------------------
Title: Treasurer
- --------------------------------------
3
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 46,000 3,423,000
<SECURITIES> 0 0
<RECEIVABLES> 33,000 102,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 927,000 3,587,000
<PP&E> 25,094,000 19,935,000
<DEPRECIATION> 9,000 3,000
<TOTAL-ASSETS> 26,312,000 23,519,000
<CURRENT-LIABILITIES> 1,434,000 231,000
<BONDS> 0 0
0 0
4,550,000 4,500,000
<COMMON> 5,121,000 4,971,000
<OTHER-SE> 14,997,000 13,607,000
<TOTAL-LIABILITY-AND-EQUITY> 26,312,000 23,519,000
<SALES> 0 0
<TOTAL-REVENUES> 450,000 162,000
<CGS> 0 0
<TOTAL-COSTS> 1,636,000 743,000
<OTHER-EXPENSES> 690,000 289,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 63,000 130,000
<INCOME-PRETAX> (1,939,000) (1,000,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,939,000) (1,000,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,939,000) (1,000,000)
<EPS-PRIMARY> (.038) (.025)
<EPS-DILUTED> (.038) (.025)
</TABLE>
