8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE
September 21, 2000 US$2,000,000.00
FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"),
promises to pay to the order of Allen & Company Incorporated, a corporation
organized under the laws of New York ("Payee"), in lawful money of the United
States of America, the principal amount (the "Principal Amount") of TWO MILLION
DOLLARS (US$2,000,000.00), together with interest in arrears on the unpaid
principal balance at an annual rate equal to eight percent per annum (8.0%), in
the manner and subject to adjustment as provided below. Interest shall be
calculated on the basis of a year of 365 or 366 days, as applicable, and charged
for the actual number of days elapsed.
The following additional terms shall govern this Note:
1. PRINCIPAL AND INTEREST
The entire Principal Amount of this Note together with accrued and unpaid
interest thereon shall be due and payable in the manner provided in Paragraph 2.
2. MANNER OF PAYMENT
(a) Except as provided in Paragraph 2.2(b), the Principal Amount and
accrued and unpaid interest thereon shall be made in shares of the Maker's
common stock, $0.0001 par value ("Common Stock"), not later than the tenth
(10th) business day following the approval by the shareholders of the Maker, at
a general meeting or special meeting called in whole or in part for such
purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker
Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to
the product of the Principal Amount together with accrued and unpaid interest
thereon divided by $1.86 (the "Conversion Price"). Payment shall be made by
delivering such shares to Payee at 711 Fifth Avenue, New York, NY 10022, or at
such other place as Payee shall designate to Maker in writing. Delivery of such
stock certificates shall be made by registered mail, return receipt requested,
or by a recognized overnight delivery service.
(b) In the event that a majority of the shareholders of the Maker fail to
approve the manner of payment provided in Paragraph 1.2(a), (i) the interest
rate of this Note shall automatically, without any action required to be taken
by Maker or Payee, be increased to the lesser of twenty five percent (25%) per
annum or the maximum note allowed by the laws of the State of Texas and (ii) the
Principal Amount, together with all accrued and unpaid interest shall be due and
payable on October 31, 2001.
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3. REPRESENTATIONS OF MAKER
The Maker hereby represents and warrants to the Payee as follows:
(a) The Maker is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all corporate power and
authority to own and lease its properties and to conduct its business as
presently conducted.
(b) This Note has been duly authorized by all necessary corporate action on
the part of the Maker. This Note has been duly executed and delivered by Maker
and constitutes the valid and binding agreement of Maker, enforceable against
Maker in accordance with its terms, except as the enforceability hereof may be
subject to applicable bankruptcy, insolvency, reorganization, or other similar
laws affecting creditors' rights generally and to general principles of equity.
(c) When approved by a majority of the shareholders of Maker, the issuance
of the Maker's shares as provided in Paragraph 2(a) will have been duly
authorized and, upon the issuance thereof will be validly issued, fully paid and
non-assessable.
(d) The execution and delivery of this Note will not (i) except for filings
that may be made under the securities laws and with NASDAQ, as contemplated by
this Note or where the absence would not have a material adverse effect on the
Maker, require consent, approval, waiver or authorization from or registration
or filing with any party, including but not limited to any party to any material
agreement to which the Maker is a party or by which it is bound or by any
regulatory or governmental agency, body or entity or (ii) violate any statute,
law, rule, regulation or ordinance, or any judgment, decree, order, regulation
or rule of any court, tribunal, administrative or governmental agency, body or
entity to which the Maker or its properties are subject.
4. REPRESENTATIONS OF PAYEE
(a) Payee is an "accredited investor" as that term is defined in Rule 501
of Regulation D promulgated by the SEC under the Securities Act of 1933 as
amended (the "Act"). Payee further represents that Payee considers itself to be
a sophisticated investor in companies similarly situated to the Maker, and Payee
has substantial knowledge and experience in financial and business matters
(including knowledge of finance, securities and investments, generally, and
experience and skill in investments based on actual participation) such that
Payee is capable of evaluating the merits and risks of this Note.
(b) Payee has been advised and acknowledges that any shares issued by the
Maker pursuant to the Note have not been registered under the Act, in reliance
upon the exemption(s) from registration promulgated thereunder. Payee also
acknowledges that the issuance of any shares have not be registered under the
securities laws of any state. Consequently, Payee agrees that pursuant to this
Note, such shares cannot be resold, unless they are registered under the Act and
applicable state securities laws, or unless an exemption from such registration
requirements is available.
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(c) Any shares acquired by Payee pursuant to this Note are solely for
Payee's own account and not as nominee for, representative of, or otherwise on
behalf of, any other person. Payee is acquiring any such shares with the
intention of holding such shares for investment, with no present intention of
participating, directly or indirectly, in a subsequent public distribution of
the shares, unless registered under the Act and applicable state securities
laws, or unless an exemption from such registration requirements is available.
Payee shall not make any sale, transfer or other disposition of any of the
shares in violation of any state or federal law.
(d) Payee has been advised and agrees that there will be placed on any
certificates representing any shares issued pursuant to this Note, a legend
stating in substance the following (and including any restrictions or conditions
that may be required by any applicable state law), and Payee has been advised
and further agrees that the Maker will refuse to permit the transfer of the
shares out of Payee's name in the absence of compliance with the terms of such
legend:
"The securities represented by this certificate have not
been registered under the Securities Act of 1933, as
amended, or under any state securities laws and may not be
sold, pledged, transferred, assigned or otherwise disposed
of except in accordance with such Act and the rules and
regulations thereunder and in accordance with applicable
state securities laws. The Maker will transfer such
securities only upon receipt of evidence satisfactory to the
Maker, which may include an opinion of counsel, that the
registration provisions of such Act have been compiled with
or that such registration is not required and that such
transfer will not violate any applicable state securities
laws."
5. REGISTRATION RIGHTS
(a) Definitions. For purposes of this Paragraph 5, the following terms
shall have the respective meanings set forth below:
(i) "Commission" shall mean the Securities and Exchange Commission or
any other Federal agency at the time administering the Act.
(ii) The term "holder or holders of Registrable Stock" shall mean the
holder of any shares issued pursuant to this Note.
(iii) The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement
or similar document in compliance with the Act, and the declaration or
ordering of effectiveness of such registration statement or document
by the Commission.
(iv) The term "Registrable Stock" means (a) the shares issued pursuant
to this Note; provided, however, that shares of Registrable Stock will
cease to be Registrable Stock if they are sold or transferred pursuant
to a registered public offering or other transaction which does not
result in restrictions on resale being imposed on the public transfer
by virtue of federal or state securities laws; and provided further
that Registrable Stock will cease to be Registrable Stock if the
holder could sell or transfer all such Shares held by him/her pursuant
to Rule 144 promulgated under the Act.
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(b) Demand Registration.
(i) Upon the written request of any holder or holders ("Initiating
Holders") of at least 30% of the shares of Registrable Stock, which
request shall state the intended method of disposition by such
Initiating Holders and shall request that the Maker effect the
registration of all or part of the Registrable Stock under the
Securities Act, the Maker shall promptly give written notice of such
requested registration to all other holders, if any, of Registrable
Stock. If, after the expiration of 30 days from the giving of such
notice to the holders of Registrable Stock, the Maker shall have
received written requests to register at least 50% of the shares of
Registrable Stock, which requests shall state the intended method of
disposition of such securities by such holders, the Maker shall use
all reasonable efforts to prepare and file with the Commission a
registration statement and such other documents, including a
prospectus, as may be necessary to permit a public offering and sale
of such Registrable Stock in the United States in compliance with the
provisions of the Securities Act, all to the extent required to permit
the disposition (in accordance with the intended methods thereof as
aforesaid) by the holders of the Registrable Stock so to be registered
(the "Participating Holders"). If such sale of Registrable Stock is to
be pursuant to an underwritten offering, the underwriter shall be
selected by the Initiating Holders and shall be reasonably acceptable
to the Maker. If the underwriter selected determines that the number
of shares so to be included is required to be limited due to market
conditions or otherwise, the holders of Registrable Stock proposing to
sell their shares in such underwritten registration shall share pro
rata (according to the number of shares requested to be registered) in
the number of shares being underwritten (as determined by such
underwriter) and registered for their account. The Maker shall only be
required to effect two registrations pursuant to this Paragraph 5(b).
(ii) The Maker shall not be required to effect any registration under
this Paragraph 5(b) within nine months after the completion of any
Registered offering of its securities pursuant.
(iii) The Maker shall have the right to include in any registration
statement or post-effective amendment filed pursuant to this Paragraph
5(b), other securities of the Maker then proposed to be distributed,
except that, to the extent consistent with the rights of other holders
of the Maker's securities, if and to the extent that the underwriter
or underwriters acting with respect of such registered offering
reasonably determine that the inclusion of such other securities may
substantially prejudice or hinder the offering of Registrable Stock,
the number of such other securities shall be reduced or eliminated
prior to any reduction in the number of shares of Registrable Stock so
to be registered.
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(iv) If the registration under this Paragraph 5(b) is effected on a
Form S-3 (or any successor form thereto), and the effectiveness of
such registration statement can be maintained without significant
additional expense to the Maker, then the Maker agrees to maintain the
effectiveness of such registration statement for a period of six
months after its initial effective date.
(c) Incidental or Piggyback Registration.
(i) If the Maker at any time or from time to time proposes to file
with the Commission a registration statement under the Act with
respect to any proposed distribution of any of its securities (other
than a registration to be effected on Form S-4, S-8 or other similar
limited purpose form), whether for sale for its own account or for the
account of any other person holding registration rights with respect
to the securities of the Maker, then the Maker shall give written
notice of such proposed filing to the holders of Registrable Stock at
least ten days before the anticipated filing date, and such notice
shall describe in detail the proposed registration and distribution
(including those jurisdictions where registration or qualification
under the securities or blue sky laws is intended) and shall offer the
holders of Registrable Stock the opportunity to register such number
of shares of Registrable Stock as the holders of Registrable Stock may
request. Upon receipt by the Maker by the anticipated filing date of
written requests from Participating Holders for the Maker to register
their Registrable Stock, the Maker shall permit, or in the event of an
underwritten offering, shall use its reasonable best efforts to cause
the managing underwriter or underwriters of such proposed underwritten
offering to permit, the Participating Holders to include such
Registrable Stock in such offering on the same terms and conditions as
any similar securities of the Maker included therein; provided,
however, that if in the opinion of the managing underwriter or
underwriters of such offering, the inclusion of the total amount
Registrable Stock which it or the Maker, and any other persons or
entities, intend to include in such offering would interfere, hinder,
delay, reduce or prevent the effectiveness or sale of the Maker's
securities proposed to be so registered, or would otherwise adversely
affect the success of such offering, then the amount or kind of
securities to be offered for the accounts of the Maker and each holder
of Maker Securities (including without limitation Registrable Stock)
or securities convertible into or exercisable for Maker securities
proposed to be registered (other than any persons exercising demand
registration rights) shall be reduced (or eliminated) in proportion to
their respective values to the extent necessary to reduce the total
amount of securities to be included in such offering on behalf of such
holders of securities to the amount recommended by such managing
underwriter. For purposes of this Paragraph, "value" shall mean
principal amount with respect to debt securities and the proposed
offering price per share with respect to equity securities.
Notwithstanding the foregoing, if, at any time after giving written
notice of its intention to register securities and prior to the
effectiveness of the registration statement filed in connection with
such registration, the Maker determines for any reason either not to
effect such registration or to delay such registration, the Maker may,
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at its election, by delivery of written notice to the Participating
Holders, (i) in the case of a determination not to effect
registration, relieve itself of its obligations to register any
Registrable Stock in connection with such registration, or (ii) in the
case of determination to delay the registration, delay the
registration of such Registrable Stock for the same period as the
delay in the registration of such other shares of Common Stock or
other securities convertible into or exercisable for Common Stock.
(ii) The Maker shall not be required to include any of the Registrable
Stock of a Participating Holder in any registration statement or
post-effective amendment prepared at its own instance unless such
Participating Holder shall furnish such information and sign such
documents as may be required by the Commission or reasonably requested
by the Maker, in accordance with generally accepted practices, in
connection with such proposed distribution.
(d) Covenants of the Maker with Respect to Registration. In connection with any
registration under this Paragraph 5, the Maker will, as expeditiously as is
reasonably practicable:
(i) Prepare and file with the Commission a registration statement with
respect to such Participating Holders and, subject to the last
sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts
to cause such registration statement to become effective.
(ii) Prepare and file with the Commission such amendments and
supplements to such registration statement and prospectus used in
connection with such registration statement as may be necessary to
comply with the provisions of the Act with respect to the disposition
of all securities covered by such registration statement.
(iii) Furnish to the Participating Holders such numbers of copies of a
prospectus, including, if applicable, a preliminary prospectus, in
conformity with the requirements of the Act, and such other documents
as the selling shareholders may reasonably request in order to
facilitate the disposition of Registrable Stock owned by the
Participating Holders.
(iv) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or
blue sky laws of such jurisdictions within the United States as shall
be reasonably requested by the Participating Holders; provided,
however, that the Maker shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or
jurisdictions.
(v) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. The
Participating Holders shall also enter into and perform their
obligations under such an agreement.
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(vi) Notify the Participating Holders, at any time when a prospectus
relating to Registrable Stock covered by such registration statement
is required to be delivered under the Act, of the happening of any
event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then
existing.
(e) The Maker shall pay all costs, fees and expenses in connection with all
registration statements filed under this Paragraph 5 including, without
limitation, the Maker's legal and accounting fees, printing expenses and blue
sky fees and expenses, but not including (i) the fees and expenses of counsel
for the Participating Holders in connection with such registration; and (ii) the
underwriting discounts and commissions and underwriters' expenses allocable to
the Registrable Stock being registered or state transfer taxes.
6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE
(a) If at any time or from time to time within a period of three hundred
and sixty-five (365) days after the date of this Note, the Maker issues or sells
Additional Shares of Common Stock (as hereinafter defined), other than as a
dividend or other distribution on any class of stock for an Effective Price per
share (as hereinafter defined) that is less than the Conversion Price, then and
in each such case, the Payee shall be entitled to an additional number of shares
of Common Stock (the "Adjusted Shares") which when added to the number of shares
acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price
shall be equal to the Effective Price per share.
(b) For purposes of the foregoing paragraph, the consideration received by
the Maker for any issuance or sale of Common Stock shall (i) to the extent it
consists of cash be computed at the net amount of cash received by the Maker
after deduction of any expenses payable by the Maker and any underwriting or
similar commissions, compensation, or concessions paid or allowed by the Maker
in connection with such issuance or sale, and (ii) to the extent it consists of
property other than cash, be computed at the fair value of that property as
reasonably determined in good faith by the Maker's Board of Directors.
(c) "Additional Shares of Common Stock" shall mean all shares of Common
Stock issued by the Maker after the date of this Note other than (i) shares of
Common stock or options or warrants to acquire Common Stock issued to
management, directors or employees of, or consultants to, the Maker or any
Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible
securities, (iii) shares of Common Stock issued to Allen & Company, Whittier
Trust or any other current holders of any debt of the Maker, (iv) shares of
Common Stock issued pursuant to any rights offering to current shareholders and
(iii) shares of Common Stock or options or warrants to acquire Common Stock
issued in connection with investment banking, financial advisory or legal
services provided to the Maker.
(d) The "Effective Price" of Additional Shares of Common Stock shall mean
the quotient determined by dividing the total number of Additional Shares of
Common Stock issued or sold, into the aggregate consideration received, or
deemed to have been received by the Maker for the issuance of such Additional
Shares of Common Stock.
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7. EVENTS OF DEFAULT
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 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.
(b) 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 one hundred and twenty (120) days.
(c) 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.
8. SUBORDINATION
Payee agrees to subordinate this Note on such terms and conditions as may
be requested by Shell Capital Limited ("Shell") in connection with the Loan
Agreement among Maker, Shell, Central Asia Petroleum (Guernsey) Limited, Central
Asia Petroleum Inc., Karakuduk-Munay, Inc. and certain other facilities agents
and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell
a subordination agreement relating to this Note.
9. PREPAYMENT
From and after the date of this Note, the outstanding Principal Amount may
be prepaid by Maker, in whole or in part, on written notice given by Maker to
Payee. On the prepayment date, Maker shall pay to Payee in the manner specified
in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest
thereon to and including the date of prepayment and Payee shall return this Note
to the Maker.
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10. MISCELLANEOUS
(a) 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.
(b) This Note will be governed by the laws of the State of Texas without
regard to conflicts of laws principles.
(c) 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.
(d) The headings of Paragraphs in this Note are provided for convenience
only and will not affect its construction or interpretation. All references to
"Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs
of this Note unless otherwise specified.
(e) 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 Paragraph or subParagraph 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
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