-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QVTqCW0l8omdTVH7acI7+UmVpJJL/XMFNoH6hfwjTJrn87QcOBbIkd8wfHpjU9vh NGHR1Cdw73eihtHej91ieg== 0001000096-97-000599.txt : 19970818 0001000096-97-000599.hdr.sgml : 19970818 ACCESSION NUMBER: 0001000096-97-000599 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970815 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAPARRAL RESOURCES INC CENTRAL INDEX KEY: 0000019252 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 840630863 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-07261 FILM NUMBER: 97665155 BUSINESS ADDRESS: STREET 1: 3400 BISSONNET STREET STREET 2: SUITE 135 CITY: HOUSTON STATE: TX ZIP: 77005 BUSINESS PHONE: 713-669-09 MAIL ADDRESS: STREET 1: 621 17TH STREET SUITE 1301 CITY: DENVER STATE: CO ZIP: 80293 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ___________ Commission file number 0-7261 CHAPARRAL RESOURCES, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Colorado 84-0630863 - ------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3400 Bissonnet Street, Suite 135 Houston, Texas 77005 -------------------------------------- (Address of principal executive offices) (Zip Code) (713) 669-0932 -------------------------------------------------- (Registrant's telephone number, including area code) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ As of August 14, 1997, the Registrant had 41,931,427 shares of its $0.10 par value common stock issued and outstanding.
Part I - Summarized Financial Information Chaparral Resources, Inc. Consolidated Statements of Operations (Unaudited) For the Three Months Ended For the Six Months Ended -------------------------- ------------------------ June 30, May 31, June 30, May 31, 1997 1996 1997 1996 ---- ---- ---- ---- Revenue: Oil and gas sales $ -- $ 47,000 $ 52,000 $ 81,000 ------------ ------------ ------------ ------------ Cost and expenses: Production costs -- 8,000 18,000 8,000 Loss on sale of domestic oil and gas properties -- -- 36,000 -- Depreciation and depletion 1,000 23,000 1,000 39,000 General and administrative 558,000 265,000 950,000 349,000 ------------ ------------ ------------ ------------ 559,000 296,000 1,005,000 396,000 ------------ ------------ ------------ ------------ (Loss) from operations (559,000) (249,000) (953,000) (315,000) Other income (expenses): Interest income 11,000 -- 84,000 2,000 Interest expense (25,000) -- (130,000) (28,000) Other, net -- (9,000) (1,000) 1,000 ------------ ------------ ------------ ------------ (14,000) (9,000) (47,000) (25,000) ------------ ------------ ------------ ------------ Net (loss) $ (573,000) $ (258,000) $ (1,000,000) $ (340,000) ------------ ------------ ------------ ------------ Earnings (loss) per common share $ (0.014) $ (0.008) $ (0.025) $ (0.013) ============ ============ ============ ============ Average number of outstanding shares 40,693,950 32,729,967 40,693,950 26,711,246 ------------ ------------ ------------ ------------ See accompanying notes to financial statements. 2
Chaparral Resources, Inc. Consolidated Balance Sheets June 30, November 30, 1997 (unaudited) 1996 ---------------- ---- ASSETS - ------ CURRENT ASSETS Cash and cash equivalents $ 313,000 $ 800,000 Accounts receivable Joint interest participants -- 8,000 Oil and gas purchasers -- 53,000 Prepaid expenses 101,000 40,000 Oil and gas properties under agreement for sale -- 306,000 ------------ ------------ 414,000 1,207,000 PROPERTY AND EQUIPMENT - AT COST Oil and Gas Properties - full cost: Republic of Kazakstan (Karakuduk Field) not subject to depletion 12,087,000 11,189,000 ------------ ------------ 12,087,000 11,189,000 Furniture, fixtures and equipment 265,000 441,000 Less accumulated depreciation 10,000 198,000 ------------ ------------ 255,000 243,000 ------------ ------------ 12,342,000 11,432,000 OTHER ASSETS Cash value of insurance and annuities -- 8,000 Due from Karakuduk-Munay, Inc. 3,028,000 2,012,000 Equipment inventory -- 27,000 Other 112,000 74,000 ------------ ------------ 3,140,000 2,121,000 ------------ ------------ $ 15,896,000 $ 14,760,000 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Accounts payable Trade $ 263,000 $ 278,000 Joint interest participants - revenue -- 42,000 Accrued liabilities 19,000 91,000 Accounts payable CAP-G shares 544,000 744,000 ------------ ------------ Total current liabilities 826,000 1,155,000 ------------ ------------ LONG TERM OBLIGATIONS: Notes payable (including $1,000,000 to related party) 1,103,000 1,106,000 Accrued compensation 210,000 385,000 ------------ ------------ 1,313,000 1,491,000 STOCKHOLDERS' EQUITY Common stock - authorized, 100,000,000 shares of $.10 par value; issued and outstanding, 41,931,427 and 37,526,517 shares at June 30, 1997 and November 30, 1996, respectively 4,193,000 3,753,000 Capital in excess of par value 22,815,000 20,482,000 Preferred stock - authorized 1,000,000 shares as of June 30, 1997 and November 30, 1996 (no shares issued or outstanding) -- -- Retained earnings (deficit) (13,251,000) (12,121,000) ------------ ------------ Total shareholders' equity 13,757,000 12,114,000 ------------ ------------ Total liabilities and stockholders' equity $ 15,896,000 $ 14,760,000 ------------ ------------ See accompanying notes to financial statements. 3 Chaparral Resources, Inc. Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended ------------------------ June 30, May 31, 1997 1996 ---- ---- Cash flows from operating activities Net (loss) $(1,000,000) $ (340,000) Adjustments to reconcile net (loss) to net cash used by operating activities: Depreciation and depletion 1,000 38,000 Amortization of note discount 62,000 -- Loss on the sale of Domestic oil and gas property 33,000 -- Changes in assets and liabilities: (Increase) in: Accounts receivable 10,000 12,000 Prepaid expenses (71,000) -- Other assets (11,000) -- Increase (decrease) in: Accounts payable (13,000) (67,000) Accrued liabilities (228,000) (40,000) ----------- ----------- Net cash (used in) operating activities (1,217,000) (397,000) Cash flows from investing activities: Additions to property and equipment (14,000) (48,000) Investment in foreign oil and gas properties -- (1,631,000) Additions to Republic of Kazakstan (Karakuduk Field) not subject to depletion (882,000) (2,889,000) Advances to Karakuduk-Munay, Inc. (1,016,000) -- Proceeds from sale of interest in oil & gas properties 273,000 19,000 ----------- ----------- Net cash provided from (used in) investing activities (1,639,000) (4,549,000) Cash flows from financing activities: Payment of Note (500,000) (750,000 Proceeds from notes payable -- -- Proceeds from sale of stock 2,730,000 7,552,000 ----------- ----------- Net cash provided by financing activities 2,230,000 6,802,000 ----------- ----------- Net (decrease) in cash and cash equivalents (626,000) 1,856,000 Cash and cash equivalents at beginning of period 939,000 501,000 ----------- ----------- Cash and cash equivalents at end of 2nd quarter $ 313,000 $ 2,357,000 ----------- ----------- See accompanying notes to financial statements. 4 Chaparral Resourves, Inc. Consolidated Statements of Operations (Unaudited) For the Month Ended ------------- December 31, 1996 ---- Revenue: Oil and gas sales $ 4,000 ------------ Cost and expenses: Production costs Loss on sale of domestic oil and gas properties -- Depreciation and depletion -- General and administrative 122,000 ------------ 122,000 ------------ (Loss) from operations (118,000) Other income (expenses): Interest income 4,000 Interest expense (17,000) Other, net 1,000 ------------ (12,000) ------------ Net (loss) $ (130,000) ------------ Earnings (loss) per common share $ (0.003) ============ Average number of outstanding shares 37,526,517 ------------ See accompanying notes to financial statements. 5 Chaparral Resources, Inc. Consolidated Balance Sheets December 31, November 30, 1996 (unaudited) 1996 ---------------- ---- ASSETS - ------ CURRENT ASSETS Cash and cash equivalents $ 939,000 $ 800,000 Accounts receivable Joint interest participants -- 8,000 Oil and gas purchasers 10,000 53,000 Prepaid expenses 40,000 40,000 Oil and gas properties under agreement for sale 306,000 306,000 ------------ ------------ Total current assets 1,295,000 1,207,000 PROPERTY AND EQUIPMENT - AT COST Oil and Gas Properties - full cost: Republic of Kazakstan (Karakuduk Field) not subject to depletion 11,205,000 11,189,000 ------------ ------------ 11,205,000 11,189,000 Furniture, fixtures and equipment 441,000 441,000 Less accumulated depreciation 198,000 198,000 ------------ ------------ 243,000 243,000 ------------ ------------ 11,448,000 11,432,000 OTHER ASSETS Cash value of insurance and annuities 8,000 8,000 Due from Karakuduk-Munay, Inc. 2,012,000 2,012,000 Equipment inventory 27,000 27,000 Other 74,000 74,000 ------------ ------------ 2,121,000 2,121,000 ------------ ------------ $ 14,864,000 $ 14,760,000 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Accounts payable Trade $ 276,000 $ 278,000 Joint interest participants - revenue -- 42,000 Accrued liabilities 72,000 91,000 Accounts payable CAP-G shares 544,000 744,000 ------------ ------------ Total current liabilities 892,000 1,155,000 ------------ ------------ LONG TERM OBLIGATIONS: Notes payable (including $1,000,000 to related party) 1,603,000 1,106,000 Accrued compensation 385,000 385,000 ------------ ------------ 1,988,000 1,491,000 STOCKHOLDERS' EQUITY Common stock - authorized, 100,000,000 shares of $.10 par value; issued and outstanding, 41,931,427 and 37,526,517 shares at June 30, 1997 and November 30, 1996, respectively 3,753,000 3,753,000 Capital in excess of par value 20,482,000 20,482,000 Preferred stock - authorized 1,000,000 shares as of June 30, 1997 and November 30, 1996 (no shares issued or outstanding) -- -- Retained earnings (deficit) (12,251,000) (12,121,000) ------------ ------------ Total shareholders' equity 11,984,000 12,114,000 ------------ ------------ Total liabilities and stockholders' equity $ 14,864,000 $ 14,760,000 ------------ ------------ See accompanying notes to financial statements. 6 Chaparral Resources, Inc. Consolidated Statements of Cash Flows (Unaudited) For the Month Ended ------------------- December 31, 1996 ---- Cash flows from operating activities Net (loss) $(130,000) Adjustments to reconcile net (los) to net cash used by operating activities: Depreciation and depletion -- Amortization of note discount (3,000) Loss on the sale of Domestic oil and gas property -- Changes in assets and liabilities: (Increase) in: Accounts receivable 51,000 Prepaid expenses -- Other assets -- Increase (decrease) in: Accounts payable (44,000) Accrued liabilities (19,000) --------- Net cash (used in) operating activities (145,000) Cash flows from investing activities: Additions to property and equipment -- Investment in foreign oil and gas properties -- Additions to Republic of Kazakstan (Karakuduk Field) not subject to depletion (16,000) Advances to Karakuduk-Munay, Inc. -- Proceeds from sale of interest in oil & gas properties -- --------- Net cash provided from (used in) investing activities (16,000) Cash flows from financing activities: Payment of Note (200,000) Proceeds from notes payable 500,000 Proceeds from sale of stock -- --------- Net cash provided by financing activities 300,000 --------- Net (decrease) in cash and cash equivalents 139,000 Cash and cash equivalents at beginning of period 800,000 --------- Cash and cash equivalents at end of 2nd quarter $ 939,000 - --------- See accompanying notes to financial statements. 7 Chaparral Resourves, Inc. Consolidated Statements of Operations (Unaudited) For the Month Ended -------------- March 31, 1997 ---- Revenue: Oil and gas sales $ 3,000 ------------ Cost and expenses: Production costs -- Loss on sale of domestic oil and gas properties -- Depreciation and depletion -- General and administrative 119,000 ------------ 119,000 ------------ (Loss) from operations (116,000) Other income (expenses): Interest income 3,000 Interest expense (12,000) Other, net -- ------------ (9,000) ------------ Net (loss) $ (125,000) ------------ Earnings (loss) per common share $ (0.003) ============ Average number of outstanding shares 39,631,472 ------------ See accompanying notes to financial statements 8 CHAPARRAL RESOURCES, INC. Notes to Consolidated Financial Information Unaudited (1) GENERAL Management has elected to omit substantially all notes to the Company's financial statements. Reference should be made to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996, for notes to the Company's year-end financial statements. (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 (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary to reflect properly 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. The November 30, 1996 balance sheet data is derived from the audited financial statements but does not include all disclosures required by generally accepted accounting principles. (3) Going Concern The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has over 80% of its assets invested in entities that are pursuing the development of the Karakuduk field, a shut in oil field in the central Asian Republic of Kazakstan, which will require significant additional funding. The Company's current cash reserves and cash flow from operations will not be sufficient to meet the Company's capital requirements through fiscal 1997. While the Company believes that additional funds will be available from additional financing, there can be no assurance that such will be the case. There is also no assurance that additional financing, if available, can be obtained on terms favorable or affordable to the Company. The Company's continued existence as a going concern in its present form is dependent upon the success of future operations, which is, in the near term, dependent on the successful financing and development of the Karakuduk field, of which there is no assurance. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (1) Liquidity and Capital Resources Previously, the Company's primary source of capital was from oil and gas sales from domestic properties. As of the end of the second quarter of 1997, 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 Limited (CAP-G). KKM is a closed joint stock company in Kazakstan. Due to the timing of the final payment of $543,750 related to the acquisition of an interest in CAP-G, current liabilities of $826,000 exceed the current assets of $414,000 at June 30, 1997, resulting in a current ratio of 0.5 to 1. Without the purchase payment obligation, the current ratio would be 1.5 to 1. An extension of the due date for the final payment on the acquisition of this interest and the terms of the option for the remaining 10% interest in CAP- G are currently being negotiated. The Company now owns 90% of CAP-G, providing a 45% beneficial interest in the Karakuduk field. Upon exercising the option, the Company will have a 50% beneficial interest in the Karakuduk field. The other 50% is owned by a Kazakstan government group and two Kazakstan joint stock companies. Since the Karakuduk field is in the early stage of development, the 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 August 31, 1997, of at least $10,000,000. Of this amount, approximately $6,500,000 has been expended to date and the Company's remaining share through August 31, 1997 is estimated at $3,500,000. It is anticipated that the Company will either have spent or will have committed to the required expenditures by this date. Additional requirements exist for the year ending August 31, 1998. KKM was re-registered on July 24, 1997 with the government of Kazakstan. The re- registration was required as a result of new legislation in Kazakstan. The Company believes that KKM is now in compliance with all Kazakstan laws and regulations related to the registration requirements relating to legal entities. The re-registered KKM includes newly established Kazak Oil, the national petroleum company which holds the majority of the interest of the government of Kazakstan in KKM. The Company received an extension to December 31, 1997 from the Overseas Private Investment Corp. ("OPIC") for political risk insurance. OPIC granted the Company a binding 10 executed letter of commitment on September 25, 1996. It was to expire on June 30, 1997. The Company has a standby facility for which it has made four previous payments of $31,250. A fifth payment of $31,250 will be due on September 30, 1997. The Company expects to execute the contract in the fourth quarter of this year. The Company has 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. The Company plans to meet its additional capital needs 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 early stage of development of the Karakuduk field may also increase the difficulty in raising needed financing. There can be no assurance that debt or equity financing anticipated to be necessary to continue to fund the Company's operations and obligations will be available to the Company on economically acceptable terms if at all. If sufficient funds cannot be raised to meet the continuing obligations with respect to the Karakuduk field development, the Company's interest in such property may be lost. Also, if sufficient funds cannot be raised to provide additional working capital, it is likely that the Company will not be able to continue operations. The Company has no other material commitments for cash outlay and capital expenditures other than for normal operations. (2) Results of Operations ln order to unite the reporting period of the Company with that of its subsidiaries, the fiscal year was changed to a December 31 year end from the previous November 30 year end. This change took effect in the second quarter of 1997. As a result of this change, quarterly and year to date data is as of June 30th for 1997 and as of May 31st for 1996. An income statement for the month of March, 1997, is reported separately for continuity purposes, as the Company's first Quarterly Report on From 10-Q reported the quarter from December 1, 1996 to February 28, 1997 and the second quarter reports April 1, 1997 to June 30, 1997. Unaudited statements for the transition period of December 1 to December 31, 1997 are reported separately although they have been included as part of the first Quarterly Report on Form 10-Q for 1997. Audit of the transition period of December 1996 will be completed and reported on the next Annual Report on Form 10-K. 11 Three Months Ended June 30, 1997 vs Three Months Ended May 1, 1997. The Company's operations resulted in a net loss of $573,000 for the three month period ended June 30, 1997 compared to a net loss of $258,000 during the three months ended May 31, 1996. Increases in general and administrative costs accounted for most of this change. This was the result of costs related to the acquisition and operation of the Company's beneficial interest in the Karakuduk field and financing and farmout operations related to the project. The Company has elected not to capitalize the general and administrative expense at this time, however, these amounts may be capitalized upon final financing for the project. Due to the sale of the domestic properties, there was no revenue in the second quarter. Interest expense was $25,000, as a result of the Company having obtained financing for the Karakuduk field. Six Months Ended June 30, 1997 vs. Six Months Ended May 31, 1996. The Company realized a loss on the sale of the Company's domestic oil and gas properties that totaled $36,000 in the first quarter of 1997. There was a $43,000 gain related to subsidiary billings of related party transactions. General and administrative expenses increased from $349,000 to $950,000, an increase of 172%. Due to the sale of the domestic properties, there was no revenue in the second quarter. Interest expense was $130,000 as a result of the Company's financing of the Karakuduk field. Interest income is primarily that portion of interest undertaken on behalf of the stockholders of CAP-G Karakuduk which is indirectly owed to the Company. 12 PART II - OTHER INFORMATION Item 2 - Changes in Securities (c) On April 22, 1997, the Company sold 3,076,923 shares of the Company's common stock for $0.65 per share for a total of $2,000,000 to a private investor. In connection with the transaction, the Company also issued a warrant to the investor to purchase up to an additional 4,615,385 shares of the Company's common stock for $3,000,000 or $0.65 per share. The warrant expires on December 31, 1997, if not previously exercised. The private investor also converted a $500,000 promissory note (plus $2,000 of accrued interest) that had previously been issued by the Company to it into 772,308 shares of the Company's common stock at a conversion price of $0.65 per share. The Company issued the stock and warrant in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. The investor represented to the Company that the investor acquired the stock and warrant for the investor's own account and not with a view to distribution. The investor had available to the investor all material information concerning the Company. The certificates evidencing the stock and warrant bear an appropriate restrictive legend under the Securities Act of 1933, as amended. Item 4 - Submission of Matters to A Vote of Security Holders On July 17, 1997 the Company held its Annual Meeting of Stockholders. The Company's stockholders elected the following eight persons as directors, each to serve until the next Annual Meeting of Stockholders or until his successor is elected or appointed: Howard Karren, Peter G. Dilling, Jay W. McGee, Alan D. Berlin, Walter A. Carozza, David A. Dahl, John G. McMillian and Arlo G. Sorensen. The Company's stockholders also voted to adopt, separately, a 1997 Stock Incentive Plan and a 1997 Nonemployee Directors' Stock Option Plan. The number of shares voted and withheld with respect to each director were as follows: Election of Directors For Withheld - --------------------- --- -------- Howard Karren 24,756,934 540,387 Peter G. Dilling 23,072,406 2,224,915 Jay W. McGee 22,726,326 2,570,995 Alan D. Berlin 23,216,656 2,080,665 Walter A. Carozza 24,660,134 637,187 David A. Dahl 23,243,206 2,054,115 John G. McMillian 24,755,784 541,537 Arlo G. Sorensen 23,244,106 2,053,215 13 The number of shares voted with respect to the approval of the 1997 Incentive Stock Plan was as follows: For Against Abstain Broker Non-Votes - --- ------- ------- ---------------- 17,088,991 3,253,159 193,019 4,762,152 The number of shares with respect to the approval of the 1997 Nonemployee Directors' Stock Option Plan was as follows: For Against Abstain Broker Non-Votes - --- ------- ------- ---------------- 15,110,428 5,229,093 196,648 4,761,152 Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 3(ii) Bylaws as amended through July 17, 1997 10.1 Subscription Agreement dated April 22, 1997 between Chaparral Resources, Inc. and Victory Ventures, LLC. 10.2 Warrant Certificate dated December 31, 1997 entitling Victory Ventures, LLC to purchase up to 4,615,385 shares of common stock of Chaparral Resources, Inc. 10.3 Form of Warrant issued to Black Diamond Partners LP, Clint D. Carlson, John D. Schneider, Victory Ventures LLC, Whittier Energy Company and Whittier Ventures LLC in connection with loans made by them to Chaparral Resources, Inc. in November and December 1996 and to Black Diamond Partners LP, Clint D. Carlson, Whittier Energy Company and Whittier Ventures LLC in July 1997 in connection with the same loans. 10.4 Chaparral Resources, Inc. 1997 Incentive Stock Plan. 10.5 Chaparral Resources, Inc. 1997 Nonemployee Directors' Stock Option Plan. 27 Financial Data Schedule (b) During the quarter ended June 30, 1997, the Company filed a Current Report on Form 8-K dated April 17, 1997 reporting under Item 5 that the Company had entered into a memorandum of understanding with an Irish oil and gas company whereby the Company would sell certain of its oil and gas interests for cash and stock. The 14 Company also reported that it had sold shares of the Company's common Stock and issued a warrant to purchase additional shares of the Company's common stock to a private investor for cash and that the same private investor had converted a promissory note previously issued by the Company into shares of the Company's common stock. (c) During the quarter ended June 30, 1997, the Company filed a Current Report on Form 8-K dated May 29, 1997 reporting under Item 8 that the Board of Directors of the Company had changed the Company's fiscal year end from November 30 to December 31. 15 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 14, 1997 CHAPARRAL RESOURCES, INC., a Colorado Corporation /s/ Howard Karren ---------------------------------------------- Howard Karren President and Principal Executive Officer /s/ Arlo G. Sorensen ---------------------------------------------- Arlo G. Sorensen, Chief Financial Officer and Principal Accounting Officer 16 EXHIBIT INDEX 3(ii) Bylaws as amended through July 17, 1997 10.1 Subscription Agreement dated April 22, 1997 between Chaparral Resources, Inc. and Victory Ventures, LLC. 10.2 Warrant Certificate dated December 31, 1997 entitling Victory Ventures, LLC to purchase up to 4,615,385 shares of common stock of Chaparral Resources, Inc. 10.3 Form of Warrant issued to Black Diamond Partners LP, Clint D. Carlson, John D. Schneider, Victory Ventures LLC, Whittier Energy Company and Whittier Ventures LLC in connection with loans made by them to Chaparral Resources, Inc. in November and December 1996 and to Black Diamond Partners LP, Clint D. Carlson, Whittier Energy Company and Whittier Ventures LLC in July 1997 in connection with the same loans. 10.4 Chaparral Resources, Inc. 1997 Incentive Stock Plan. 10.5 Chaparral Resources, Inc. 1997 Nonemployee Directors' Stock Option Plan. 27 Financial Data Schedule 17 EX-3.II 2 BYLAWS OF CHAPARRAL RESOURCES As Amended July 17, 1997 BYLAWS OF CHAPARRAL RESOURCES, INC. ARTICLE I Offices The principal office of the corporation shall be designated from time to time by the corporation and may be within or outside of Colorado. The corporation may have such other offices, either within or outside Colorado, as the board of directors may designate or as the business of the corporation may require from time to time. The registered office of the corporation required by the Colorado Business Corporation Act to be maintained in Colorado may be, but need not be, identical with the principal office, and the address of the registered office may be changed from time to time by the board of directors. ARTICLE II Shareholders Section 1. Annual Meeting. The annual meeting of the shareholders shall be held each year on a date and at a time fixed by the board of directors of the corporation (or by the chairman of the board or the president in the absence of action by the board of directors), for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the election of directors is not held on the day fixed as provided herein for any annual meeting of the shareholders, or any adjournment thereof, the board of directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as it may conveniently be held. A shareholder may apply to the district court in the county in Colorado where the corporation's principal office is located or, if the corporation has no principal office in Colorado, to the district court of the county in which the corporation's registered office is located to seek an order that a shareholder meeting be held (i) if an annual meeting was not held within six months after the close of the corporation's most recently ended fiscal year or fifteen months after its last annual meeting, whichever is earlier, or (ii) if the shareholder participated in a proper call of or proper demand for a special meeting and notice of the special meeting was not given within thirty days after the date of the call or the date the last of the demands necessary to require calling of the meeting was received by the corporation, or the special meeting was not held in accordance with the notice. Section 2. Special Meetings. Unless otherwise prescribed by statute, special meetings of the shareholders may be called for any purpose by the chairman of the board, by the president or by the board of directors. The president shall call a special meeting of the shareholders if the corporation receives one or more written demands for the meeting, stating the purpose or purposes for which it is to be held, signed and dated by holders of shares representing at least ten percent of all the votes entitled to be cast on any issue proposed to be considered at the meeting. Section 3. Place of Meeting. The board of directors may designate any place, either within or outside Colorado, as the place for any annual meeting or any special meeting called by the board of directors. A waiver of notice signed by all shareholders entitled to vote at a meeting may designate any place, either within or outside Colorado, as the place for such meeting. If no designation is made, or if a special meeting is called other than by the board, the place of meeting shall be the principal office of the corporation. Section 4. Notice of Meeting. Written notice stating the place, date, and hour of the meeting shall be given not less than ten nor more than sixty days before the date of the meeting, except that (i) if the number of authorized shares is to be increased, at least thirty days' notice shall be given, or (ii) if any other longer notice period is required by the Colorado Business Corporation Act. Notice of a special meeting shall include a description of the purpose or purposes of the meeting. Notice of an annual meeting need not include a description of the purpose or purposes of the meeting except the purpose or purposes shall be stated with respect to (i) an amendment to the articles of incorporation of the corporation, (ii) a merger or share exchange in which the corporation is a party and, with respect to a share exchange, in which the corporation's shares will be acquired, (iii) a sale, lease, exchange or other disposition, other than in the usual and regular course of business, of all or substantially all of the property of the corporation or of another entity which the corporation controls, in each case with or without the goodwill, (iv) a dissolution of the corporation, or (v) any other purpose for which a statement of purpose is required by the Colorado Business Corporation Act. Notice shall be given personally or by mail, private carrier, telegraph, teletype, electronically transmitted facsimile or other form of wire or wireless communication by or at the direction of the president, the secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed and if in a comprehensible form, such notice shall be deemed to be given and effective when deposited in the United States mail, addressed to the shareholder at his address as it appears in the corporation's current record of shareholders, with postage prepaid. If notice is given other than by mail, and provided that such notice is in a comprehensible form, the notice is given and effective on the date received by the shareholder. If requested by the person or persons lawfully calling such meeting, the secretary shall give notice thereof at corporate expense. No notice need be sent to any shareholder if three successive notices mailed to the last known address of such shareholder have been returned as undeliverable until such time as another address for such shareholder is made known to the corporation by such shareholder. In order to be entitled to receive notice of any meeting, a - 2 - shareholder shall advise the corporation in writing of any change in such shareholder's mailing address as shown on the corporation's books and records. When a meeting is adjourned to another date, time or place, notice need not be given of the new date, time or place if the new date, time or place of such meeting is announced before adjournment at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which may have been transacted at the original meeting. If the adjournment is for more than 120 days, or if a new record date is fixed for the adjourned meeting, a new notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting as of the new record date. A shareholder may waive notice of a meeting before or after the time and date of the meeting by a writing signed by such shareholder. Such waiver shall be delivered to the corporation for filing with the corporate records. Further, by attending a meeting either in person or by proxy, a shareholder waives objection to lack of notice or defective notice of the meeting unless the shareholder objects at the beginning of the meeting to the holding of the meeting or the transaction of business at the meeting because of lack of notice or defective notice. By attending the meeting, the shareholder also waives any objection to consideration at the meeting of a particular matter not within the purpose or purposes described in the meeting notice unless the shareholder objects to considering the matter when it is presented. Section 5. Fixing of Record Date. For the purpose of determining shareholders entitled to (i) notice of or vote at any meeting of shareholders or any adjournment thereof, (ii) receive distributions or share dividends, or (iii) demand a special meeting, or to make a determination of shareholders for any other proper purpose, the board of directors may fix a future date as the record date for any such determination of shareholders, such date in any case to be not more than seventy days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed by the directors, the record date shall be the date on which notice of the meeting is mailed to shareholders, or the date on which the resolution of the board of directors providing for a distribution is adopted, as the case may be. When a determination of shareholders entitled to vote at any meeting of shareholders is made as provided in this Section, such determination shall apply to any adjournment thereof unless the board of directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. Notwithstanding the above, the record date for determining the shareholders entitled to take action without a meeting or entitled to be given notice of action so taken shall be the date a writing upon which the action is taken is first received by the corporation. The record date for determining shareholders entitled to demand a special meeting shall be the date of the earliest of any of the demands pursuant to which the meeting is called. - 3 - Section 6. Voting Lists. The secretary shall make, at the earlier of ten days before each meeting of shareholders or two business days after notice of the meeting has been given, a complete list of the shareholders entitled to be given notice of such meeting or any adjournment thereof. The list shall be arranged by voting groups and within each voting group by class or series of shares, shall be in alphabetical order within each class or series, and shall show the address of and the number of shares of each class or series held by each shareholder. For the period beginning the earlier of ten days prior to the meeting or two business days after notice of the meeting is given and continuing through the meeting and any adjournment thereof, this list shall be kept on file at the principal office of the corporation, or at a place (which shall be identified in the notice) in the city where the meeting will be held. Such list shall be available for inspection on written demand by any shareholder (including for the purpose of this Section 6 any holder of voting trust certificates) or his agent or attorney during regular business hours and during the period available for inspection. The original stock transfer books shall be prima facie evidence as to the shareholders entitled to examine such list or to vote at any meeting of shareholders. Any shareholder, his agent or attorney may copy the list during regular business hours and during the period it is available for inspection, provided (i) the shareholder has been a shareholder for at least three months immediately preceding the demand or holds at least five percent of all outstanding shares of any class of shares as of the date of the demand, (ii) the demand is made in good faith and for a purpose reasonably related to the demanding shareholder's interest as a shareholder, (iii) the shareholder describes with reasonable particularity the purpose and the records the shareholder desires to inspect, (iv) the records are directly connected with the described purpose, and (v) the shareholder pays a reasonable charge covering the costs of labor and material for such copies, not to exceed the estimated cost of production and reproduction. Section 7. Recognition Procedure for Beneficial Owners. The board of directors may adopt by resolution a procedure whereby a shareholder of the corporation may certify in writing to the corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified person or persons. The resolution may set forth (i) the types of nominees to which it applies, (ii) the rights or privileges that the corporation will recognize in a beneficial owner, which may include rights and privileges other than voting, (iii) the form of certification and the information to be contained therein, (iv) if the certification is with respect to a record date, the time within which the certification must be received by the corporation, (v) the period for which the nominee's use of the procedure is effective, and (vi) such other provisions with respect to the procedure as the board deems necessary or desirable. Upon receipt by the corporation of a certificate complying with the procedure established by the board of directors, the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the registered holders of the number of shares specified in place of the shareholder making the certification. - 4 - Section 8. Quorum and Manner of Acting. One-third of the votes entitled to be cast on a matter by a voting group shall constitute a quorum of that voting group for action on the matter. If less than one-third of such votes are represented at a meeting, a majority of the votes so represented may adjourn the meeting from time to time without further notice, for a period not to exceed 120 days for any one adjournment. If a quorum is present at such adjourned meeting, any business may be transacted which might have been transacted at the meeting as originally noticed. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, unless the meeting is adjourned and a new record date is set for the adjourned meeting. If a quorum exists, action on a matter other than the election of directors by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless the vote of a greater number or voting by classes is required by law or the articles of incorporation. Section 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy by signing an appointment form or similar writing, either personally or by his duly authorized attorney-in-fact. A shareholder may also appoint a proxy by transmitting or authorizing the transmission of a telegram, teletype, or other electronic transmission providing a written statement of the appointment to the proxy, a proxy solicitor, proxy support service organization, or other person duly authorized by the proxy to receive appointments as agent for the proxy, or to the corporation. The transmitted appointment shall set forth or be transmitted with written evidence from which it can be determined that the shareholder transmitted or authorized the transmission of the appointment. The proxy appointment form or similar writing shall be filed with the secretary of the corporation before or at the time of the meeting. The appointment of a proxy is effective when received by the corporation and is valid for eleven months unless a different period is expressly provided in the appointment form or similar writing. Any complete copy, including an electronically transmitted facsimile, of an appointment of a proxy may be substituted for or used in lieu of the original appointment for any purpose for which the original appointment could be used. Revocation of a proxy does not affect the right of the corporation to accept the proxy's authority unless (i) the corporation had notice that the appointment was coupled with an interest and notice that such interest is extinguished is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment, or (ii) other notice of the revocation of the appointment is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment. Other notice of revocation may, in the discretion of the corporation, be deemed to include the appearance at a shareholders' meeting of the shareholder who granted the proxy and his voting in person on any matter subject to a vote at such meeting. - 5 - The death or incapacity of the shareholder appointing a proxy does not affect the right of the corporation to accept the proxy's authority unless notice of the death or incapacity is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment. The corporation shall not be required to recognize an appointment made irrevocable if it has received a writing revoking the appointment signed by the shareholder (including a shareholder who is a successor to the shareholder who granted the proxy) either personally or by his attorney-in-fact, notwithstanding that the revocation may be a breach of an obligation of the shareholder to another person not to revoke the appointment. Subject to Section 11 and any express limitation on the proxy's authority appearing on the appointment form, the corporation is entitled to accept the proxy's vote or other action as that of the shareholder making the appointment. Section 10. Voting of Shares. Each outstanding share, regardless of class, shall be entitled to one vote, except in the election of directors, and each fractional share shall be entitled to a corresponding fractional vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class or classes are limited or denied by the articles of incorporation as permitted by the Colorado Business Corporation Act. Cumulative voting shall not be permitted in the election of directors or for any other purpose. Each record holder of stock shall be entitled to vote in the election of directors and shall have as many votes for each of the shares owned by him as there are directors to be elected and for whose election he has the right to vote. At each election of directors, that number of candidates equaling the number of directors to be elected, having the highest number of votes cast in favor of their election, shall be elected to the board of directors. Except as otherwise ordered by a court of competent jurisdiction upon a finding that the purpose of this Section would not be violated in the circumstances presented to the court, the shares of the corporation are not entitled to be voted if they are owned, directly or indirectly, by a second corporation, domestic or foreign, and the first corporation owns, directly or indirectly, a majority of the shares entitled to vote for directors of the second corporation except to the extent the second corporation holds the shares in a fiduciary capacity. Redeemable shares are not entitled to be voted after notice of redemption is mailed to the holders and a sum sufficient to redeem the shares has been deposited with a bank, trust company or other financial institution under an irrevocable obligation to pay the holders the redemption price on surrender of the shares. Section 11. Corporation's Acceptance of Votes. If the name signed on a vote, consent, waiver, proxy appointment, or proxy appointment revocation corresponds to the name - 6 - of a shareholder, the corporation, if acting in good faith, is entitled to accept the vote, consent, waiver, proxy appointment or proxy appointment revocation and give it effect as the act of the shareholder. If the name signed on a vote, consent, waiver, proxy appointment or proxy appointment revocation does not correspond to the name of a shareholder, the corporation, if acting in good faith, is nevertheless entitled to accept the vote, consent, waiver, proxy appointment or proxy appointment revocation and to give it effect as the act of the shareholder if: (i) the shareholder is an entity and the name signed purports to be that of an officer or agent of the entity; (ii) the name signed purports to be that of an administrator, executor, guardian or conservator representing the shareholder and, if the corporation requests, evidence of fiduciary status acceptable to the corporation has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (iii) the name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the corporation requests, evidence of this status acceptable to the corporation has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (iv) the name signed purports to be that of a pledgee, beneficial owner or attorney-in-fact of the shareholder and, if the corporation requests, evidence acceptable to the corporation of the signatory's authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (v) two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-tenants or fiduciaries, and the person signing appears to be acting on behalf of all the co-tenants or fiduciaries; or (vi) the acceptance of the vote, consent, waiver, proxy appointment or proxy appointment revocation is otherwise proper under rules established by the corporation that are not inconsistent with this Section 11. The corporation is entitled to reject a vote, consent, waiver, proxy appointment or proxy appointment revocation if the secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the shareholder. Neither the corporation nor its officers nor any agent who accepts or rejects a vote, consent, waiver, proxy appointment or proxy appointment revocation in good faith and in - 7 - accordance with the standards of this Section is liable in damages for the consequences of the acceptance or rejection. Section 12. Informal Action by Shareholders. Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting if a written consent (or counterparts thereof) that sets forth the action so taken is signed by all of the shareholders entitled to vote with respect to the subject matter thereof and received by the corporation. Such consent shall have the same force and effect as a unanimous vote of the shareholders and may be stated as such in any document. Action taken under this Section 12 is effective as of the date the last writing necessary to effect the action is received by the corporation, unless all of the writings specify a different effective date, in which case such specified date shall be the effective date for such action. If any shareholder revokes his consent as provided for herein prior to what would otherwise be the effective date, the action proposed in the consent shall be invalid. The record date for determining shareholders entitled to take action without a meeting is the date the corporation first receives a writing upon which the action is taken. Any shareholder who has signed a writing describing and consenting to action taken pursuant to this Section 12 may revoke such consent by a writing signed by the shareholder describing the action and stating that the shareholder's prior consent thereto is revoked, if such writing is received by the corporation before the effectiveness of the action. Section 13. Meetings by Telecommunication. Any or all of the shareholders may participate in an annual or special shareholders' meeting by, or the meeting may be conducted through the use of, any means of communication by which all persons participating in the meeting may hear each other during the meeting. A shareholder participating in a meeting by this means is deemed to be present in person at the meeting. ARTICLE III Board of Directors Section 1. General Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of its board of directors, except as otherwise provided in the Colorado Business Corporation Act or the articles of incorporation. Section 2. Number, Qualifications and Tenure. The number of directors of the corporation shall be eight. A director shall be a natural person who is eighteen years of age or older. A director need not be a resident of Colorado or a shareholder of the corporation. Directors shall be elected at each annual meeting of shareholders. Each director shall hold office until the next annual meeting of shareholders following his election and thereafter - 8 - until his successor shall have been elected and qualified. Directors shall be removed in the manner provided by the Colorado Business Corporation Act. Section 3. Vacancies. Any director may resign at any time by giving written notice to the corporation. Such resignation shall take effect at the time the notice is received by the corporation unless the notice specifies a later effective date. Unless otherwise specified in the notice of resignation, the corporation's acceptance of such resignation shall not be necessary to make it effective. Any vacancy on the board of directors may be filled by the affirmative vote of a majority of the shareholders or the board of directors. If the directors remaining in office constitute fewer than a quorum of the board, the directors may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. If elected by the directors, the director shall hold office until the next annual shareholders' meeting at which directors are elected. If elected by the shareholders, the director shall hold office for the unexpired term of his predecessor in office; except that, if the director's predecessor was elected by the directors to fill a vacancy, the director elected by the shareholders shall hold office for the unexpired term of the last predecessor elected by the shareholders. Section 4. Regular Meetings. A regular meeting of the board of directors shall be held without notice immediately after and at the same place as the annual meeting of shareholders. The board of directors may provide by resolution the time and place, either within or outside Colorado, for the holding of additional regular meetings without other notice. Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president or any two directors. The person or persons authorized to call special meetings of the board of directors may fix any place, either within or outside Colorado, as the place for holding any special meeting of the board of directors called by them, provided that no meeting shall be called outside the state of Colorado unless a majority of the board of directors has so authorized. Section 6. Notice. Notice of any special meeting shall be given at least two days prior to the meeting by written notice either personally delivered or mailed to each director at his business address, or by notice transmitted by telegraph, telex, electronically transmitted facsimile or other form of wire or wireless communication. If mailed, such notice shall be deemed to be given and to be effective on the earlier of (i) three days after such notice is deposited in the United States mail, properly addressed, with postage prepaid, or (ii) the date shown on the return receipt, if mailed by registered or certified mail return receipt requested. If notice is given by telex, electronically transmitted facsimile or other similar form of wire or wireless communication, such notice shall be deemed to be given and to be effective when sent, and with respect to a telegram, such notice shall be deemed to be given and to be effective when the telegram is delivered to the telegraph company. If a director has designated in writing one or more reasonable addresses or facsimile numbers for delivery of notice to him, notice sent by mail, telegraph, telex, electronically transmitted facsimile or other form of wire or wireless - 9 - communication shall not be deemed to have been given or to be effective unless sent to such addresses or facsimile numbers, as the case may be. A director may waive notice of a meeting before or after the time and date of the meeting by a writing signed by such director. Such waiver shall be delivered to the corporation for filing with the corporate records. Further, a director's attendance at or participation in a meeting waives any required notice to him of the meeting unless at the beginning of the meeting, or promptly upon his later arrival, the director objects to holding the meeting or transacting business at the meeting because of lack of notice or defective notice and does not thereafter vote for or assent to action taken at the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Section 7. Quorum. A majority of the number of directors fixed by the board of directors pursuant to Section 2 of this Article III or, if no number is fixed, a majority of the number in office immediately before the meeting begins, shall constitute a quorum for the transaction of business at any meeting of the board of directors. If less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, for a period not to exceed sixty days at any one adjournment. Section 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. Section 9. Compensation. By resolution of the board of directors, any director may be paid any one or more of the following: his expenses, if any, of attendance at meetings, a fixed sum for attendance at each meeting, a stated salary as director, or such other compensation as the board of directors and the director may reasonably agree upon. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 10. Presumption of Assent. A director of the corporation who is present at a meeting of the board of directors or committee of the board at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless (i) the director objects at the beginning of the meeting, or promptly upon his arrival, to the holding of the meeting or the transaction of business at the meeting and does not thereafter vote for or assent to any action taken at the meeting, (ii) the director contemporaneously requests that his dissent or abstention as to any specific action taken be entered in the minutes of the meeting, or (iii) the director causes written notice of his dissent or abstention as to any specific action to be received by the presiding officer of the meeting before its adjournment or by the corporation promptly after the adjournment of the meeting. A director may dissent to a specific action at a meeting, while assenting to others. The right to dissent to a specific action taken at a meeting - 10 - of the board of directors or a committee of the board shall not be available to a director who voted in favor of such action. Section 11. Committees. By resolution adopted by a majority of all the directors in office when the action is taken, the board of directors may designate from among its members an executive committee and one or more other committees, and appoint one or more members of the board of directors to serve on them. To the extent provided in the resolution, each committee shall have all the authority of the board of directors, except that no such committee shall have the authority to (i) authorize distributions, (ii) approve or propose to shareholders actions or proposals required by the Colorado Business Corporation Act to be approved by shareholders, (iii) fill vacancies on the board of directors or any committee thereof, (iv) amend articles of incorporation, (v) adopt, amend or repeal the bylaws, (vi) approve a plan of merger not requiring shareholder approval, (vii) authorize or approve the reacquisition of shares unless pursuant to a formula or method prescribed by the board of directors, or (viii) authorize or approve the issuance or sale of shares, or contract for the sale of shares or determine the designations and relative rights, preferences and limitations of a class or series of shares, except that the board of directors may authorize a committee or officer to do so within limits specifically prescribed by the board of directors. The committee shall then have full power within the limits set by the board of directors to adopt any final resolution setting forth all preferences, limitations and relative rights of such class or series and to authorize an amendment of the articles of incorporation stating the preferences, limitations and relative rights of a class or series for filing with the Secretary of State under the Colorado Business Corporation Act. Sections 4, 5, 6, 7, 8 and 12 this of Article III, which govern meetings, notice, waiver of notice, quorum, voting requirements and action without a meeting of the board of directors, shall apply to committees and their members appointed under this Section 11. Neither the designation of any such committee, the delegation of authority to such committee, nor any action by such committee pursuant to its authority shall alone constitute compliance by any member of the board of directors or a member of the committee in question with his responsibility to conform to the standard of care set forth in Section 14 of this Article III. Section 12. Informal Action by Directors. Any action required or permitted to be taken at a meeting of the directors or any committee designated by the board of directors may be taken without a meeting if a written consent (or counterparts thereof) that sets forth the action so taken is signed by all of the directors entitled to vote with respect to the action taken. Such consent shall have the same force and effect as a unanimous vote of the directors or committee members and may be stated as such in any document. Unless the consent specifies a different effective date, action taken under this Section 12 is effective at the time the last director signs a writing describing the action taken, unless, before such time, any director has revoked his consent by a writing signed by the director and received by the president or the secretary of the corporation. - 11 - Section 13. Telephonic Meetings. The board of directors may permit any director (or any member of a committee designated by the board) to participate in a regular or special meeting of the board of directors or a committee thereof through the use of any means of communication by which all directors participating in the meeting can hear each other during the meeting. A director participating in a meeting in this manner is deemed to be present in person at the meeting. Section 14. Standard of Care. A director shall perform his duties as a director, including without limitation his duties as a member of any committee of the board, in good faith, in a manner he reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. In performing his duties, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by the persons herein designated. However, he shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause such reliance to be unwarranted. A director shall not be liable to the corporation or its shareholders for any action he takes or omits to take as a director if, in connection with such action or omission, he performs his duties in compliance with this Section 14. The designated persons on whom a director is entitled to rely are (i) one or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented, (ii) legal counsel, public accountant, or other person as to matters which the director reasonably believes to be within such person's professional or expert competence, or (iii) a committee of the board of directors on which the director does not serve if the director reasonably believes the committee merits confidence. ARTICLE IV Officers and Agents Section 1. General. The officers of the corporation shall be a president, a secretary and a treasurer, each of whom shall be a natural person eighteen years of age or older. The board of directors or an officer or officers authorized by the board may appoint such other officers, assistant officers, committees and agents, assistant secretaries and assistant treasurers, as they may consider necessary. The board of directors or the officer or officers authorized by the board shall from time to time determine the procedure for the appointment of officers, their term of office, their authority and duties and their compensation. One person may hold more than one office. In all cases where the duties of any officer, agent or employee are not prescribed by the bylaws or by the board of directors, such officer, agent or employee shall follow the orders and instructions of the president of the corporation. Section 2. Appointment and Term of Office. The officers of the corporation shall be appointed by the board of directors at each annual meeting of the board held after each - 12 - annual meeting of the shareholders. If the appointment of officers is not made at such meeting or if an officer or officers are to be appointed by another officer or officers of the corporation, such appointments shall be made as soon thereafter as conveniently may be. Each officer shall hold office until the first of the following occurs: his successor shall have been duly appointed and qualified, his death, his resignation, or his removal in the manner provided in Section 3. Section 3. Resignation and Removal. An officer may resign at any time by giving written notice of resignation to the corporation. The resignation is effective when the notice is received by the corporation unless the notice specifies a later effective date. Any officer or agent may be removed at any time with or without cause by the board of directors or an officer or officers authorized by the board or by the shareholders. Such removal does not affect the contract rights, if any, of the corporation or of the person so removed. The appointment of an officer or agent shall not in itself create contract rights. Section 4. Vacancies. A vacancy in any office, however occurring, may be filled by the board of directors, or by the officer or officers authorized by the board, for the unexpired portion of the officer's term. If an officer resigns and his resignation is made effective at a later date, the board of directors, or officer or officers authorized by the board, may permit the officer to remain in office until the effective date and may fill the pending vacancy before the effective date if the board of directors or officer or officers authorized by the board provide that the successor shall not take office until the effective date. In the alternative, the board of directors, or officer or officers authorized by the board of directors, may remove the officer at any time before the effective date and may fill the resulting vacancy. Section 5. Chairman of the Board. The chairman of the board of directors, if elected and if available, or if not elected or not available, the president, shall preside at all meetings of the stockholders and of the board of directors. Section 6. President. Subject to the direction and supervision of the board of directors, the president shall have general and active control of the corporation's affairs and business and general supervision of its officers, agents and employees. Unless otherwise directed by the board of directors, the president shall attend in person or by substitute appointed by him, or shall execute on behalf of the corporation written instruments appointing a proxy or proxies to represent the corporation, at all meetings of the stockholders of any other corporation in which the corporation holds any stock. On behalf of the corporation, the president may in person or by substitute or by proxy execute written waivers of notice and consents with respect to any such meetings. At all such meetings and otherwise, the president, in person or by substitute or proxy, may vote the stock held by the corporation, execute written consents and other instruments with respect to such stock, and exercise any and all rights and powers incident to the ownership of said stock, subject to the instructions, if any, of the board of directors. The president shall have custody of the treasurer's bond, if any. - 13 - Section 7. Vice Presidents. If elected, the vice presidents shall assist the chairman of the board and the president and shall perform such duties as may be assigned to them by the chairman of the board and the president or by the board of directors. In the absence of the chairman of the board and the president, the vice president, if any (or, if more than one, the vice presidents in the order designated by the board of directors, or if the board makes no such designation, then the vice president designated by the chairman of the board or by the president, or if neither the board, the chairman of the board nor the president makes any such designation, the senior vice president as determined by first election to that office), shall have the powers and perform the duties of the chairman of the board and the president. Section 8. Secretary. The secretary shall (i) prepare and maintain as permanent records the minutes of the proceedings of the shareholders and the board of directors, a record of all actions taken by the shareholders or board of directors without a meeting, a record of all actions taken by a committee of the board of directors in place of the board of directors on behalf of the corporation, and a record of all waivers of notice of meetings of shareholders and of the board of directors or any committee thereof, (ii) see that all notices are duly given in accordance with the provisions of these bylaws and as required by law, (iii) serve as custodian of the corporate records and of the seal of the corporation and affix the seal to all documents when authorized by the board of directors, (iv) keep at the corporation's registered office or principal place of business a record containing the names and addresses of all shareholders in a form that permits preparation of a list of shareholders arranged by voting group and by class or series of shares within each voting group, that is alphabetical within each class or series and that shows the address of, and the number of shares of each class or series held by, each shareholder, unless such a record shall be kept at the office of the corporation's transfer agent or registrar, (v) maintain at the corporation's principal office the originals or copies of the corporation's articles of incorporation, bylaws, minutes of all shareholders' meetings and records of all action taken by shareholders without a meeting for the past three years, all written communications within the past three years to shareholders as a group or to the holders of any class or series of shares as a group, a list of the names and business addresses of the current directors and officers, a copy of the corporation's most recent corporate report filed with the Secretary of State, and financial statements showing in reasonable detail the corporation's assets and liabilities and results of operations for the last three years, (vi) have general charge of the stock transfer books of the corporation, unless the corporation has a transfer agent, (vii) authenticate records of the corporation, and (viii) in general, perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the president or by the board of directors. Assistant secretaries, if any, shall have the same duties and powers, subject to supervision by the secretary. The directors and/or shareholders may however respectively designate a person other than the secretary or assistant secretary to keep the minutes of their respective meetings. Any books, records, or minutes of the corporation may be in written form or in any form capable of being converted into written form within a reasonable time. - 14 - Section 9. Treasurer. The treasurer shall be the principal financial officer of the corporation, shall have the care and custody of all funds, securities, evidences of indebtedness and other personal property of the corporation and shall deposit the same in accordance with the instructions of the board of directors. He shall receive and give receipts and acquittances for money paid in on account of the corporation, and shall pay out of the corporation's funds on hand all bills, payrolls and other just debts of the corporation of whatever nature upon maturity. He shall perform all other duties incident to the office of the treasurer and, upon request of the board, shall make such reports to it as may be required at any time. He shall, if required by the board, give the corporation a bond in such sums and with such sureties as shall be satisfactory to the board, conditioned upon the faithful performance of his duties and for the restoration to the corporation of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. He shall have such other powers and perform such other duties as may from time to time be prescribed by the board of directors or the president. The assistant treasurers, if any, shall have the same powers and duties, subject to the supervision of the treasurer. The treasurer shall also be the principal accounting officer of the corporation. He shall prescribe and maintain the methods and systems of accounting to be followed, keep complete books and records of account as required by the Colorado Business Corporation Act, prepare and file all local, state and federal tax returns, prescribe and maintain an adequate system of internal audit and prepare and furnish to the president and the board of directors statements of account showing the financial position of the corporation and the results of its operations. ARTICLE V Stock Section 1. Certificates. The board of directors shall be authorized to issue any of its classes of shares with or without certificates. The fact that the shares are not represented by certificates shall have no effect on the rights and obligations of shareholders. If the shares are represented by certificates, such shares shall be represented by consecutively numbered certificates signed, either manually or by facsimile, in the name of the corporation by the president and secretary or by one or more other persons designated by the board of directors. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, such certificate may nonetheless be issued by the corporation with the same effect as if he were such officer at the date of its issue. Certificates of stock shall be in such form and shall contain such information consistent with law as shall be prescribed by the board of directors. If shares are not represented by certificates, within a reasonable time following the issue or transfer of such shares, the corporation shall send the shareholder a complete written statement of all of the information required to be provided to holders of uncertificated shares by the Colorado Business Corporation Act. - 15 - Section 2. Consideration for Shares. Certificated or uncertificated shares shall not be issued until the shares represented thereby are fully paid. The board of directors may authorize the issuance of shares for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed or other securities of the corporation. Future services shall not constitute payment or partial payment for shares of the corporation. The promissory note of a subscriber or an affiliate of a subscriber shall not constitute payment or partial payment for shares of the corporation unless the note is negotiable and is secured by collateral, other than the shares being purchased, having a fair market value at least equal to the principal amount of the note. For purposes of this Section 2, "promissory note" means a negotiable instrument on which there is an obligation to pay independent of collateral and does not include a non-recourse note. Section 3. Lost Certificates. In case of the alleged loss, destruction or mutilation of a certificate of stock, the board of directors may direct the issuance of a new certificate in lieu thereof upon such terms and conditions in conformity with law as the board may prescribe. The board of directors may in its discretion require an affidavit of lost certificate and/or a bond in such form and amount and with such surety as it may determine before issuing a new certificate. Section 4. Transfer of Shares. Upon surrender to the corporation or to a transfer agent of the corporation of a certificate of stock duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, and receipt of such documentary stamps as may be required by law and evidence of compliance with all applicable securities laws and other restrictions, the corporation shall issue a new certificate to the person entitled thereto, and cancel the old certificate. Every such transfer of stock shall be entered on the stock books of the corporation which shall be kept at its principal office or by the person and the place designated by the board of directors. Except as otherwise expressly provided in Sections 7 and 11 of Article II, and except for the assertion of dissenters' rights to the extent provided in Article 113 of the Colorado Business Corporation Act, the corporation shall be entitled to treat the registered holder of any shares of the corporation as the owner thereof for all purposes, and the corporation shall not be bound to recognize any equitable or other claim to, or interest in, such shares or rights deriving from such shares on the part of any person other than the registered holder, including without limitation any purchaser, assignee or transferee of such shares or rights deriving from such shares, unless and until such other person becomes the registered holder of such shares, whether or not the corporation shall have either actual or constructive notice of the claimed interest of such other person. Section 5. Transfer Agent, Registrars and Paying Agents. The board may at its discretion appoint one or more transfer agents, registrars and agents for making payment upon any class of stock, bond, debenture or other security of the corporation. Such agents and registrars may be located either within or outside Colorado. They shall have such rights and duties and shall be entitled to such compensation as may be agreed. - 16 - ARTICLE VI Indemnification of Certain Persons Section 1. Indemnification. For purposes of this Article VI, a "Proper Person" means any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether formal or informal, by reason of the fact that he is or was a director, officer, employee, fiduciary or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary or agent of any foreign or domestic profit or nonprofit corporation or of any partnership, joint venture, trust, profit or nonprofit unincorporated association, limited liability company, or other enterprise or employee benefit plan. The corporation shall indemnify any Proper Person against reasonably incurred expenses (including attorneys' fees), judgments, penalties, fines (including any excise tax assessed with respect to an employee benefit plan) and amounts paid in settlement reasonably incurred by him in connection with such action, suit or proceeding if it is determined by the groups set forth in Section 4 of this Article VI that he conducted himself in good faith and that he reasonably believed (i) in the case of conduct in his official capacity with the corporation, that his conduct was in the corporation's best interests, or (ii) in all other cases (except criminal cases), that his conduct was at least not opposed to the corporation's best interests, or (iii) in the case of any criminal proceeding, that he had no reasonable cause to believe his conduct was unlawful. A Proper Person will be deemed to be acting in his official capacity while acting as a director, officer, employee or agent on behalf of this corporation and not while acting on this corporation's behalf for some other entity. No indemnification shall be made under this Article VI to a Proper Person with respect to any claim, issue or matter in connection with a proceeding by or in the right of a corporation in which the Proper Person was adjudged liable to the corporation or in connection with any proceeding charging that the Proper Person derived an improper personal benefit, whether or not involving action in an official capacity, in which he was adjudged liable on the basis that he derived an improper personal benefit. Further, indemnification under this Section 1 in connection with a proceeding brought by or in the right of the corporation shall be limited to reasonable expenses, including attorneys' fees, incurred in connection with the proceeding. Section 2. Right to Indemnification. The corporation shall indemnify any Proper Person who was wholly successful, on the merits or otherwise, in defense of any action, suit, or proceeding as to which he was entitled to indemnification under Section l of this Article VI against expenses (including attorneys' fees) reasonably incurred by him in connection with the proceeding without the necessity of any action by the corporation other than the determination in good faith that the defense has been wholly successful. Section 3. Effect of Termination of Action. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or - 17 - its equivalent shall not of itself create a presumption that the person seeking indemnification did not meet the standards of conduct described in Section l of this Article VI. Entry of a judgment by consent as part of a settlement shall not be deemed an adjudication of liability, as described in Section 2 of this Article VI. Section 4. Groups Authorized to Make Indemnification Determination. Except where there is a right to indemnification as set forth in Sections 1 or 2 of this Article VI or where indemnification is ordered by a court in Section 5 of this Article VI, any indemnification shall be made by the corporation only as authorized in the specific case upon a determination by a proper group that indemnification of the Proper Person is permissible under the circumstances because he has met the applicable standards of conduct set forth in Section l of this Article VI. This determination shall be made by the board of directors by a majority vote of those present at a meeting at which a quorum is present, which quorum shall consist of directors not parties to the proceeding ("Quorum"). If a Quorum cannot be obtained, the determination shall be made by a majority vote of a committee of the board of directors designated by the board, which committee shall consist of two or more directors not parties to the proceeding, except that directors who are parties to the proceeding may participate in the designation of directors for the committee. If a Quorum of the board of directors cannot be obtained and the committee cannot be established, or even if a Quorum is obtained or the committee is designated and a majority of the directors constituting such Quorum or committee so directs, the determination shall be made by (i) independent legal counsel selected by a vote of the board of directors or the committee in the manner specified in this Section 4 or, if a Quorum of the full board of directors cannot be obtained and a committee cannot be established, by independent legal counsel selected by a majority vote of the full board (including directors who are parties to the action) or (ii) a vote of the shareholders. Section 5. Court-Ordered Indemnification. Any Proper Person may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction for mandatory indemnification under Section 2 of this Article VI, including indemnification for reasonable expenses incurred to obtain court-ordered indemnification. If the court determines that such Proper Person is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not he met the standards of conduct set forth in Section l of this Article VI or was adjudged liable in the proceeding, the court may order such indemnification as the court deems proper except that if the Proper Person has been adjudged liable, indemnification shall be limited to reasonable expenses incurred in connection with the proceeding and reasonable expenses incurred to obtain court-ordered indemnification. Section 6. Advance of Expenses. Reasonable expenses (including attorneys' fees) incurred in defending an action, suit or proceeding as described in Section 1 of this Article VI may be paid by the corporation to any Proper Person in advance of the final disposition of such action, suit or proceeding upon receipt of (i) a written affirmation of such Proper Person's good faith belief that he has met the standards of conduct prescribed by Section l of this Article VI, (ii) a written undertaking, executed personally or on the Proper Person's behalf, to repay such - 18 - advances if it is ultimately determined that he did not meet the prescribed standards of conduct (the undertaking shall be an unlimited general obligation of the Proper Person but need not be secured and may be accepted without reference to financial ability to make repayment), and (iii) a determination is made by the proper group (as described in Section 4 of this Article VI) that the facts as then known to the group would not preclude indemnification. Determination and authorization of payments shall be made in the same manner specified in Section 4 of this Article VI. Section 7. Witness Expenses. The sections of this Article VI do not limit the corporation's authority to pay or reimburse expenses incurred by a director in connection with an appearance as a witness in a proceeding at a time when he has not been made a named defendant or respondent in the proceeding. Section 8. Report to Shareholders. Any indemnification of or advance of expenses to a director in accordance with this Article VI, if arising out of a proceeding by or on behalf of the corporation, shall be reported in writing to the shareholders with or before the notice of the next shareholders' meeting. If the next shareholder action is taken without a meeting at the instigation of the board of directors, such notice shall be given to the shareholders at or before the time the first shareholder signs a writing consenting to such action. ARTICLE VII Provision of Insurance By action of the board of directors, notwithstanding any interest of the directors in the action, the corporation may purchase and maintain insurance, in such scope and amounts as the board of directors deems appropriate, on behalf of any person who is or was a director, officer, employee, fiduciary or agent of the corporation, or who, while a director, officer, employee, fiduciary or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary or agent of any other foreign or domestic corporation or of any partnership, joint venture, trust, profit or nonprofit unincorporated association, limited liability company or other enterprise or employee benefit plan, against any liability asserted against, or incurred by, him in that capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of Article VI or applicable law. Any such insurance may be procured from any insurance company designated by the board of directors of the corporation, whether such insurance company is formed under the laws of Colorado or any other jurisdiction of the United States or elsewhere, including any insurance company in which the corporation has an equity interest or any other interest, through stock ownership or otherwise. - 19 - ARTICLE VIII Miscellaneous Section 1. Seal. The corporate seal of the corporation shall be circular in form and shall contain the name of the corporation and the words, "Seal, Colorado." Section 2. Fiscal Year. The fiscal year of the corporation shall be as established by the board of directors. Section 3. Amendments. The board of directors shall have power, to the maximum extent permitted by the Colorado Business Corporation Act, to make, amend and repeal the bylaws of the corporation at any regular or special meeting of the board unless the shareholders, in making, amending or repealing a particular bylaw, expressly provide that the directors may not amend or repeal such bylaw. The shareholders also shall have the power to make, amend or repeal the bylaws of the corporation at any annual meeting or at any special meeting called for that purpose. Section 4. Gender. The masculine gender is used in these bylaws as a matter of convenience only and shall be interpreted to include the feminine and neuter genders as the circumstances indicate. Section 5. Conflicts. In the event of any irreconcilable conflict between these bylaws and either the corporation's articles of incorporation or applicable law, the latter shall control. Section 6. Definitions. Except as otherwise specifically provided in these bylaws, all terms used in these bylaws shall have the same definition as in the Colorado Business Corporation Act. - 20 - EX-10.1 3 SUBSCRIPTION AGREEMENT April 22, 1997 Chaparral Resources, Inc. Attn: Howard Karen, Chairman and CEO 3400 Bissonnet Houston, Texas 77005 Gentlemen: 1. Subscription. The undersigned, Victory Ventures, LLC (the "Subscriber"), intending to be legally bound, irrevocably applies to purchase from Chaparral Resources, Inc., a corporation organized under the laws of the State of Colorado (the "Company") (i) 3,076,923 shares of the Company's Common Stock, par value $.10 per share ("Common Stock"), for a purchase price of $0.65 per share or in the aggregate amount of Two Million Dollars ($2,000,000) payable in cash (the "Cash Purchase Price") and (ii) an additional 772,991 shares of Common Stock (collectively, the "Shares"), for a purchase price of $0.65 per share or in the aggregate amount of Five Hundred and Two Thousand Four Hundred Forty-Four Dollars ($502,444) payable by delivery and surrender of that certain 8% Convertible Promissory Note dated December 6, 1996 in the principal amount of $500,000 made by the Company in favor of the Subscriber (the "Promissory Note") together with the right to receive Two Thousand Four Hundred and Forty Four Dollars ($2,444) which amount represents all accrued and unpaid interest on the Promissory Note through April 22, 1997. The Shares are being offered to the Subscriber without registration under the Securities Act of 1933, as amended (the "Securities Act"). 2. Acceptance. The subscription shall be deemed accepted by the Company upon receipt by the Company of (i) the Cash Purchase Price and the Promissory Note (the "Purchase Price") and a duly executed copy of this Agreement. The Cash Purchase Price is being made by wire transfer payable to the Company. 3. Warrant. As additional consideration for the execution of this Agreement by the undersigned, the Company hereby agrees to grant the Subscriber a warrant to purchase up to 4,615,385 additional shares of Common Stock at an exercise price of $.65 per share, exercisable at any time and from time to time not later than December 31, 1997. 4. Delivery of Certificate for Shares. As soon as practicable after receipt of the Purchase Price, the Company will deliver to the Subscriber a certificate or certificates representing the Shares subscribed for hereby, registered in the name of the Subscriber. 5. Representations Warranties and Covenants of Subscriber. In order to induce the Company to sell the Shares to the Subscriber, the Subscriber hereby represents, warrants and covenants to the Company as follows: (a) The Subscriber is acquiring the Shares solely for investment purposes only and not with a view to resale or distribution, or for the account, in whole or in part, of others. No other person has or will have a direct or indirect beneficial interest in the Shares. (b) The Subscriber recognizes the restrictions on the transferability of the Shares and the Subscriber is able to bear the substantial economic risk of an investment therein, including a complete loss thereof, for an indefinite period of time. (c) The Subscriber understands that the sale of the Shares hereunder is intended to be exempt from registration under the Securities Act, by virtue of Section 4(2) thereof (and the rules and regulations promulgated under the Securities Act) and applicable state securities laws. The Subscriber will not sell or otherwise transfer any or all of the Shares without registration under the Securities Act or an exemption therefrom. (d) The Subscriber acknowledges that the certificate or certificates representing the Shares shall bear a legend restricting the transfer of the Shares. (e) The Subscriber further represents and warrants that in order to make an informed decision in connection with the purchase of the Shares: (i) the Subscriber has reviewed the merits and risks of an investment in the Shares; and (ii) the Subscriber recognizes that an investment in the Shares involves a number of significant risks; the Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Shares. (f) The Subscriber represents and warrants that it is an "accredited investor" as that term is defined in Rule 501 promulgated under the Securities Act. 2 (g) The Subscriber is not subscribing to purchase the Shares as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, or presented at any seminar or meeting, or any solicitation of a subscription by a person not previously known to the Subscriber in connection with investments in securities generally. (h) The Subscriber understands that all documents, records and books pertaining to this investment have been made available for inspection by the undersigned, the undersigned's attorney and/or accountant including, but not limited to, the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. (i) The Subscriber has had a reasonable opportunity to ask questions of and receive answers from a person or persons acting on behalf of the Company concerning the Company and the offering of the securities contemplated hereby, and all such questions have been answered to the full satisfaction of the undersigned. 6. Representations and Warranties of the Company. The Company hereby represents and warrants to the Subscriber that the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Colorado and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. The Company further represents and warrants to the Subscriber that the issuance of the Shares has been duly authorized and, upon the issuance thereof and payment therefor in the manner provided herein, will be duly authorized, validly issued, fully-paid and non-assessable. 7. Registration Rights. (a) Definitions. For purposes of this Section 7, 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 any holder of any Shares issued pursuant to this Agreement, including any transferee of any Subscriber. (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 Securities 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 Agreement; provided, however, that shares of Registrable Stock shall cease to be Registrable 3 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 transfer by virtue of Federal or state securities laws; and provided further that Registrable Stock shall cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him in one transaction pursuant to Rule 144 promulgated under the Securities Act. (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 Company effect the registration of all or part of the Registrable Stock under the Securities Act, the Company shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of thirty days from the giving of such notice to the holders of Registrable Stock, the Company 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 Company 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 Company. 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 Company shall only be required to effect two registrations pursuant to this Section 7(b). (ii) The Company shall not be required to effect any registration under this Section 7(b) within nine months after the completion of any public offering of its securities pursuant to which the holders of Registrable Stock were afforded the right to register as many shares of their Registrable Stock as requested nor within six months after any other public offering by the Company. (iii) The Company shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Section 7(b) other securities of the Company then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Company's securities, if and to the extent that the underwriter or underwriters acting with respect of such public offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, 4 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. (iv) If the registration under this paragraph (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 Company, then the Company agrees to maintain the effectiveness of such registration statement for a period of one year after its initial effective date. (c) Incidental Registration. (i) If the Company at any time or from time to time proposes to file with the Commission a registration statement under the Securities 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 Company, then the Company shall give written notice of such proposed filing to the holders of Registrable Stock at least thirty (30) 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 Company by the anticipated filing date of written requests from Participating Holders for the Company to register their Registrable Stock, the Company shall permit, or in the event of an underwritten offering, shall use its best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such securities in such offering on the same terms and conditions as any similar securities of the Company included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount or kind of securities which it or the Company, 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 Company's shares of Common Stock 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 Company and each holder of Common Stock (including without limitation Registrable Stock) or securities convertible into or exercisable for Common Stock 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 Section, "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 Common Stock or other securities convertible into or exercisable for Common Stock and prior to the effectiveness of 5 the registration statement filed in connection with such registration, the Company determines for any reason either not to effect such registration or to delay such registration, the Company may, 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) Exception. The Company 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 Company in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Company with Respect to Registration. In connection with any registration under this Section 7, the Company shall, as expeditiously as is reasonably possible: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Section 7(c)(i) hereof, use its 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 Securities 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 Securities 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 Company 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 6 form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. (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 Securities 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. (vii) Furnish to the Participating Holders, on the date that shares of Registrable Stock are delivered to the underwriters for sale in connection with a registration pursuant to this Section 7, if such securities are being sold by underwriters, or, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion as to matters of law only, dated such date, of counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to Participating Holders and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters. and to the Participating Holders. (e) The Company shall pay all costs, fees and expenses in connection with all registration statements filed under this Section 7 including, without limitation, the Company's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including the fees and expenses of counsel for the Participating Holders in connection with such registration. However, the Company shall not pay for underwriting discounts and commissions and under- writers' expenses allocable to the Registrable Stock being registered or state transfer taxes. (f) Indemnification. (i) The Company shall indemnify each Participating Holder under this Agreement, its officers and directors and any person controlling it within the meaning of Section 15 of the Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as amended, against any loss, claim, damage, expense or liability (including without limitation all expenses reasonably incurred in investigating, preparing, or defending against any claim whatsoever, such expenses to be reimbursed by the Company as they are incurred) to which it may become subject under the Securities Act, the Exchange Act or otherwise, arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus or any amendments or supplements thereto in which Registrable Stock is included or in any application, statement or other document filed by the Company with the Commission or any securities exchange or in any jurisdiction in connection with qualifying such shares under the securities laws thereof, or (ii) 7 the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, unless such statement or omission is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Participating Holder or an underwriter expressly for use in any such registration statement or other document. (ii) Each Participating Holder shall, as a condition to such registration of Registrable Stock, agree to indemnify the Company, its officers and directors and any person controlling the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against any loss, claim, damage or expense or liability (including without limitation all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever, such expenses to be reimbursed by the undersigned as they are incurred) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus or any amendments or supplements thereto in which Registrable Stock is included or in any application, statement or other document filed by the Company with the Commission or any securities exchange or in any jurisdiction in connection with qualifying such shares under the securities laws thereof, or (ii) the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, provided in each case that such statement or omission is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Participating Holder expressly for use in any such registration statement or other document. (iii) Promptly upon receipt by a party claiming indemnification hereunder of notice of the commencement of any action involving a claim referred to above, such indemnified party will, if a claim in respect thereof is to be made against a party which may be required to indemnify such party hereunder, give written notice to the latter of the commencement of such action. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense of such action, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party. Except as set forth herein, the indemnified party and any party cooperating in the defense of such claim shall not settle or compromise any such claim or admit liability without the express written consent of the indemnifying party. The indemnified party shall have the right to be represented by an advisory counsel and accountants, at its own expense, and the indemnified party shall be kept fully informed of such action, suit or proceeding at all stages thereof whether or not the indemnified party is so represented. After a period of thirty days following the date the written notice of such claim was given to the indemnifying party the indemnified party may settle any such claim (and the amount of any such settlement shall be subject to indemnification hereunder) unless within such thirty-day period the indemnifying party shall have provided the indemnified party with notice and evidence to the indemnified party's satisfaction that the indemnifying party reasonably disputes such claim and has the financial ability to meet its indemnification obligations hereunder. 8 Notwithstanding the foregoing, the indemnified party may immediately cause to be paid or discharged any asserted claim the non-payment of which would have an immediate substantial adverse impact on the indemnified party and any claim which the indemnifying party has not disputed within thirty days of notice as provided above. (iv) If the indemnification provided for in this Section 7(f) is unavailable or insufficient to hold harmless an indemnified party under such subsection in respect of any losses, claims, damages or liabilities or action in respect thereof or referred to therein, then each indemnifying party shall in lieu of indemnifying such indemnified party contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or actions in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and the Participating Holder, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or actions as well as any other relevant equitable considerations, including the failure to give the notice required under such subsections. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company on the one hand, or the Participating Holders, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Participating Holder agree that it would not be just and equitable if contribution pursuant to this Section 7(f)(iv) were determined by pro rata allocation or by any other method of allocation which did not take account of the equitable considerations referred to above in this subsection. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Securities Act), shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentations. (v) The obligations of the Company and the Participating Holder under this Section 7(f) shall survive the completion of any offering of Registrable Stock in a registration statement under this Section 7. (vi) The rights of indemnification contained in this Section 7 shall not be deemed to be the exclusive remedy of the parties hereto and such rights shall be in addition to any other rights or remedies which any party hereto may have at law or equity. (g) Assignment of Registration Rights. The undersigned's rights and obligations set forth in this Section 7 shall automatically be deemed assigned to any transferee or assignee of shares of Common Stock issued hereunder, provided that immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act; provided however, that, the termination of registration rights in respect of any shares of Registrable Stock by reason of the operation of Section 7(a) shall be binding upon any transferee of such shares. Upon the request of any such holder, the Company will confirm in writing to any transferee of such holder's Registrable Stock the Company's continuing obligation to afford such transferee the benefits of the Company's 9 agreements contained in this Section 7, but no failure of the Company to confirm such obligations shall in any way impair such transferee's rights under this Section 7. (h) Effect of Private Placement. Notwithstanding anything to the contrary contained in this Section 7, if, prior to December 31, 1997, the Company completes a private offering of equity securities in which the Company realizes gross proceeds of at least of $1 million and in which one or more purchasers of such securities are granted more favorable registration rights than those granted herein, the registration rights granted to holders of Registrable Stock hereunder shall be modified to be equivalent in all respects to the most favorable registration rights granted in such private offering; provided, however, that the provisions of Section 6(f) hereof shall not be modified as a result of such private offering. 7. Governing Law. This Agreement has been made in, and shall be construed in accordance with, the laws of the State of New York applicable to contracts made and to be fully performed therein. 8. Entire Agreement. This Agreement contains the entire understanding and agreement of the parties with respect to the subject matter hereof and supersedes all negotiations, representations and other agreements made by and between such parties with respect hereto. VICTORY VENTURES LLC By:/s/ ----------------------------------------- Name: Title: Agreed to and accepted this 23th day of April, 1997. ---- By:/s/Howard Karren -------------------------------- Name: Howard Karren Title: Chairman & CEO 10 EX-10.2 4 WARRANT CERTIFICATE THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, ANY MAY NOT BE SOLD, HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS AN EXEMPTION FROM THE REQUIREMENT OF SUCH REGISTRATION IS AVAILABLE UNDER THE CIRCUMSTANCES AT THE TIME OBTAINING. Void After 5:00 P.M. Houston, Texas Time on December 31, 1997 CHAPARRAL RESOURCES, INC. ----------------------------- Common Stock Purchase Warrant CHAPARRAL RESOURCES, INC., a Colorado corporation ("Chaparral" or the "Company"), hereby certifies that, in connection with the subscription by Victory Ventures LLC, a Delaware limited liability company with an office at 645 Madison Avenue, New York, New York 10021 ("Victory"), as evidenced by Subscription Agreement of even date hereof, and for other valuable consideration received, Victory, or its permitted assigns, is entitled, subject to the terms and conditions herein set forth, to purchase from the Company up to 4,615,385 fully paid and non-assessable shares of Common Stock, $.10 par value, of the Company, at the per share purchase price (the "Purchase Price") of $0.65, subject to adjustment as hereinafter provided, at any time or from time to time on or after the date hereof and up to 5:00 P.M. New York City time on December 31, 1997 (the "Expiration Date"). The number and character of such shares of Common Stock are subject to adjustment as p voided herein. 1. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: (a) "Act" shall mean the Securities Act of 1933, as amended. (b) "Additional Shares of Common Stock" shall mean all shares (including treasury shares) of Common Stock issued or sold (or, pursuant to Section 3.7 hereof, deemed to be issued) by the Company after the date hereof, whether or not subsequently reacquired or retired by the Company, other than shares of Common Stock issuable pursuant to this Warrant. (c) "Adjusted Exercise Price" shall have the meaning specified in Section 3.2 hereof. (d) "Company" means Chaparral Resources, Inc. or any corporation which shall succeed to or assume the obligations of Chaparral Resources, Inc. hereunder. (e) "Common Stock" shall mean the Common Stock, par value $.10 per share, of the Company and any stock into which such common stock shall have been changed or any stock resulting from any reclassification of such common stock, and shall include all other stock of any class (however designated) of the Company the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions of any shares entitled to preference. (f) "Convertible Securities" shall mean any evidences of indebtedness, shares of stock (other than Common Stock) or other securities directly or indirectly convertible into or exchangeable for Common Stock, other than any securities issuable pursuant to this Warrant. (g) "Market Price", as used with reference to any share of stock on any specified date, shall mean: (i) if such stock is listed and registered on any national securities exchange or traded on The Nasdaq Stock Market ("Nasdaq"), (A) the last reported sale price on such exchange or Nasdaq of such stock on the business day immediately preceding the specified date, or (B) if there shall have been no such reported sale price of such stock on the business day immediately preceding the specified date, the average of the last reported sale price on such exchange or on Nasdaq on (x) the day next preceding the specified date for which there was a reported sale price and (y) the day next succeeding the specified date for which there was a reported sale price; or (ii) if such stock is not at the time listed on any such exchange or traded on Nasdaq but is traded on the over-the-counter market as reported by the National Quotation Bureau or other comparable service, (A) the average of the closing bid and asked prices for such stock on the business day 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 2 forth in a certificate delivered to the holder of this Warrant upon the exercise hereof. (h) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (i) "Other Securities" shall mean any stock and other securities of the Company or any other person (corporate or otherwise) which the holders of this Warrant at any time shall be entitled to receive, or shall have received, upon the exercise of this Warrant, in lieu of or in addition to the Common Stock, or which at any time shall be issuable or shall have been issued to holders of the Common Stock in exchange for, in addition to or in replacement of the Common Stock or Other Securities pursuant to Section 3.5 or otherwise. (j) "Purchase Price" shall mean $0.65 per share, subject to adjustment as provided herein. 2. Exercise of Warrant. ------------------- 2.1 Manner of Exercise. ------------------ (a) This Warrant may be exercised by the holder hereof, in whole or in part (but not as to fewer than 1,000 shares of the Common Stock unless, at the time of exercise, this Warrant entitles the holder to purchase fewer than 1,000 shares of the Common Stock), on any business day on or after the date hereof and before 5:00 P.M., Houston, Texas time on December 31, 1997, by surrender of this Warrant, with the form of subscription at the end hereof (or a reasonable facsimile thereof) duly executed by such holder, to the Company at its office in Houston, Texas, and, except as otherwise provided in Section 2.1(b), accompanied by payment, by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying (x) the number of shares of the Common Stock (without giving effect to any adjustment therein) designated in such form of subscription (or such reasonable facsimile) by (y) the Purchase Price, and such holder shall thereupon be entitled to receive the number of shares of the Common Stock determined as provided hereunder. (b) In addition to the method of payment set forth in Section 2.1(a), and in lieu of any cash payment required thereunder, the holder of this Warrant shall have the right at any time and from time to time to exercise this Warrant in full or in part by surrendering this Warrant, with the form of subscription at the end hereof (or a reasonable facsimile thereof) duly executed by such holder, to the Company at its office in Denver, Colorado, in exchange for which the holder shall receive the number of shares of Common Stock equal to the product of (x) the number of shares as to which the Warrant is being exercised, multiplied 3 by (y) a fraction, the numerator of which is the Market Price of one share of the Common Stock less the per share Purchase Price then in effect and the denominator of which is the Market Price of one share of the Common Stock. 2.2. When Exercise Effective. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the business day on which this Warrant shall have been surrendered to the Company as provided in Section 2.1, and the person(s) in whose name(s) the certificate(s) for shares of the Common Stock (or Other Securities) that are to be issued up.on such exercise in accordance with Section 2.3 shall be deemed the holder(s) of record thereof at such time. 2.3. Delivery of Stock Certificates, etc. As soon as practicable after the exercise of this Warrant in full or in part in accordance herewith the Company, at its expense (including the payment by it of any applicable issue taxes), will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, (a) a certificate or certificates, marked with an appropriate legend referring to the terms of this Warrant and any applicable restrictions on such shares imposed by the Federal or any state securities laws, for the number of full shares of the Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash in an amount equal to the same fraction of the Market Price of one full share of the Common Preferred Stock on the business day next preceding the date of such exercise, and (b) in case such exercise is in part only, a new Warrant or Warrants of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of the Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of shares designated by the holder upon such exercise as provided in Section 2.1. 3. Common Stock Issuable Upon Exercise. 3.1. General. The number of shares of the Common Stock which the holder of this Warrant shall be entitled to receive upon the exercise hereof or, if securities or other property in addition to or in lieu of the Common Stock shall by reason of the operation of the provisions of this Section be issuable upon such exercise, the amount and kind of such securities or other property, shall be adjusted or determined as provided in this Section 3. 3.2. Adjusted Exercise Price. The number of shares of the Common Stock which the holder of this Warrant shall be entitled to receive upon the exercise hereof shall be determined by multiplying the number of shares of the Common Stock which, but for the 4 provisions of this Section 3, would otherwise be issuable upon such exercise, as designated by the holder hereof pursuant to Section 2.1, by the fraction of which the numerator is the per share Purchase Price and the denominator is the per share Adjusted Exercise Price (as herein defined) in effect on the date of such exercise. The per share Adjusted Exercise Price of the Common Stock shall initially be the Purchase Price (as defined in Section 1) and shall be adjusted and readjusted from time to time as provided in this Section 3 (and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by this Section 3). 3.3. Stock Dividends, Stock Splits, etc. In case the Company at any time or from time to time after the date hereof shall declare or pay any dividend on the Common Stock payable in Common Stock, or effect a subdivision of the outstanding shares of the Common Stock into a greater number of shares of the Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock), then, in any such event, the per share Adjusted Exercise Price per share shall be adjusted effective as of the close of business on (i) the record date for the determination of shareholders entitled to receive such dividend if such dividend is in fact paid, or (ii) the day immediately preceding the day upon which such subdivision shall become effective (any such day, as the case may be, shall be referred to herein as the "Subdivision Effective Date"), by multiplying the per share Adjusted Exercise Price in effect immediately prior to the Subdivision Effective Date by the fraction of which (x) the numerator shall be the number of shares of the Common Stock outstanding immediately prior to the Subdivision Effective Date and (y) the denominator shall be the number of shares of the Common Stock outstanding immediately prior to the Subdivision Effective Date plus the number of shares of the Common Stock issuable upon the payment of such dividend or the consummation of such subdivision, as the case may be. 3.4. Adjustments for Combinations, etc. In case the outstanding shares of the Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Adjusted Exercise Price shall be adjusted, effective as of the close of business on the day immediately preceding the day upon which such combination or consolidation is effective (the "Combination Effective Date"), by multiplying the per share Adjusted Exercise Price in effect immediately prior to the Combination Effective Date by the fraction of which (x) the numerator shall be the number of shares of the Common Stock outstanding immediately prior to the Combination Effective Date and (y) the denominator shall be the number of shares of the Common Stock outstanding immediately after the Combination Effective Date. 3.5. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization etc. In case the Company, after the date hereof, (a) shall consolidate with or merge into any other person and shall not be the continuing or surviving corporation of such consolidation or merger, or (b) shall permit any other person to consolidate with or merge into the Company and the Company shall be the continuing or surviving person but, in connection with such consolidation or merger, the Common Stock shall be changed into or exchanged for stock or other securities or property of any other person, or (c) shall effect a capital reorganization or 5 reclassification of the Common Stock (other than a reclassification subject to Sections 3.3 or 3.4), then, and in each such case, proper provision shall be made so that the holder of this Warrant, upon the exercise hereof at any time after the consummation of such consolidation, merger, reorganization or reclassification, shall be entitled to receive, in lieu of the Common Stock (or Other Securities) issuable upon such exercise prior to such consummation, the stock and other securities and property to which such holder would have been entitled upon such consummation if such holder had so exercised this Warrant immediately prior thereto, subject to adjustments (subsequent to such corporate action) as nearly equivalent as possible to the adjustments provided for in this Section 3. 3.6. Issuances of Securities. If, at any time while this Warrant (or any portion thereof) is outstanding, the Company: (i) issues or sells Additional Shares of Common Stock without consideration or for a consideration per share less than the Adjusted Exercise Price in effect immediately prior to such issue or sale, or (ii) declares, orders, pays or makes a dividend or other distribution (including, without limitation, any distribution of other or additional stock or other securities or property by way of dividend or spinoff, reclassification, recapitalization or similar corporate rearrangement) on the Common Stock other than a dividend payable in Additional Shares of Common Stock, then, and in each such case, the Adjusted Exercise Price shall, concurrently with such issue or sale or immediately after the close of business on the record date fixed for the determination of holders of any class of securities entitled to receive such dividend or distribution, be reduced to a price (calculated to the nearest cent, a half cent being considered a full cent) determined by dividing: (x) an amount equal to: (i) the product obtained by multiplying the number of shares of Common Stock outstanding immediately prior to such issue or sale or at the close of business on such record date by the Adjusted Exercise Price in effect at such time, plus (ii) in the case of any such issue or sale, the consideration, if any, received by the Company upon such issue or sale, or minus 6 (iii) in the case of any such dividend or distribution, the aggregate amount of such dividend or distribution, which amount shall be valued in accordance with Section 3.8 hereof, by (y) the number of shares of Common Stock outstanding immediately after such issue or sale or at the close of business on such record date, provided that, this Section 3.6 shall not apply to the issuance or sale of Additional Shares of Common Stock pursuant to any Option or commitment outstanding prior to the date hereof set forth on Schedule A attached hereto, and provided, further however, that for the purposes of this Section 3.6, (A) immediately after any Additional Shares of Common Stock are deemed issued pursuant to Section 3.7 hereof, such Additional Shares shall be deemed to be outstanding and (B) treasury shares shall not be deemed to be outstanding. 3.7. Options and Convertible Securities. In case the Company at any time or from time to time after the date hereof shall issue, sell, grant or assume any Options or Convertible Securities, or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, sale, grant or assumption or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 3.8 hereof) of such shares would be less than the Adjusted Exercise Price in effect immediately prior to such issue, sale, grant or assumption or immediately prior to the close of business on such record date, as the case may be, and provided, further, that in any such case in which Additional Shares of Common Stock are deemed to be issued: (a) no further adjustment of the Adjusted Exercise Price shall be made upon the subsequent issue or sale of Convertible Securities or shares of Common Stock upon the exercise of such Options or the conversion or exchange of such Convertible Securities; (b) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (by change of rate or otherwise), then the Adjusted Exercise Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of a record date 7 with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options, or the rights of conversion or exchange under such Convertible Securities, which are outstanding at such time; (c) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Adjusted Exercise Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (i) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued or sold were the shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration actually received by the Company upon such exercise, or for the issue or sale of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Company upon such conversion or exchange, and (ii) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued or sold upon the exercise thereof were issued at the time of the issue, sale, grant or assumption of such Options, and the consideration received by the Company for the Additional Shares of Common Stock deemed to have then been issued was the consideration actually received by the Company for the issue, sale, grant or assumption of all such options, whether or not exercised, plus the consideration deemed to have been received by the Company (pursuant to Section 3.8 hereof) upon the issue or sale of the Convertible Securities with respect to which such Options were actually exercised; (d) no readjustment pursuant to clause (b) or (c) above shall have the effect of increasing the Adjusted Exercise Price by an amount in excess of the amount of the adjustment thereof originally made in respect of the issue, sale, grant or assumption of such Options or Convertible Securities; and 8 (e) in the case of any Options to acquire Convertible Securities which expire by their terms not more than 30 days after the date of issue, sale, grant or assumption thereof, no adjustment of the Adjusted Exercise Price shall be made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the manner provided in clause (c) above. 3.8. Computation of Consideration. For the purposes of this Section 3, the consideration received by the Company for the issue or sale of any Additional Shares of Common Stock shall be computed as follows: (a) Nature of Consideration. Such consideration shall (i) insofar as it consists of cash, be computed at the actual amount paid by the purchaser of such Additional Shares of Common Stock, without deduction for commissions, concessions or discounts allowed to underwriters, dealers or others in connection with such issue, (ii) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue or sale, as determined in good faith by the Board of Directors of the Company; provided, however, that any such property that consists of securities (A) that are listed on any national securities exchange or if such securities are traded on Nasdaq, then the per share (or other unit) value shall be the last reported sale price of such securities on the most recent trading day preceding the day in question for which such information is available, or (B) that are traded in the over-the-counter market but are not traded on Nasdaq, then the per share (or other unit) value shall be the average between the closing bid and asked prices of such securities on the most recent trading day preceding the day in question for which such information is available, as reported by the NASD, and (iii) in case Additional Shares of Common Stock are issued or sold together with other stock or securities or other assets of the Company for consideration which covers both, be that portion of such consideration (computed as provided in clauses (i) and (ii) above), which is determined in good faith by the Board of Directors of the Company to be allocable to such Additional Shares of Common Stock. (b) Options and Convertible Securities. The consideration per share received by the Company for Additional Shares of Common Stock deemed to have been issued pursuant to Section 3.7 hereof, relating to Options and Convertible Securities, shall be determined by dividing: 9 (i) the total amount, if any, received or receivable by the Company as consideration for the issue, sale, grant or assumption of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities or, in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (ii) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. 4. No Dilution or Impairment. The Company will not, by amendment of its articles of organization or through any reorganization, transfer of assets, consolidation, merger~ dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against dilution or other impairment. 5. Notices of Record Date, etc. In the event of (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to any other person or any consolidation or merger involving the Company and any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, 10 the Company will give to the holder of this Warrant a notice specifying (i) the date or expected date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date or expected date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of the Common Stock (or Other Securities) shall be entitled to exchange their shares of the Common Stock (or Other Securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Unless otherwise required by law to be given sooner, such notice shall be mailed within a reasonable time prior to the date therein specified. 6. Reservation of Stock, etc. The Company will at all times reserve and keep available out of its authorized but unissued Common Stock, solely for issuance and delivery upon the exercise of this Warrant, the full number of shares of Common Stock (or Other Securities) then issuable upon the exercise of this Warrant. All shares of the Common Stock issuable upon the exercise of this Warrant shall be duly authorized, and when issued and paid for in full, validly issued, fully paid and non-assessable with no liability on the part of the holders thereof. 7. Registration Rights. (a) Definitions. For purposes of this Section 7, the following terms shall have the following respective meanings: (i) "Commission" shall mean the United States 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 holders of Common Stock or Other Securities issued pursuant to this Warrant. (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 "Registration Period" shall mean the period commencing on the date hereof and ending (a) if this Warrant shall expire without having been exercised in whole or in part, the Expiration Date or (b) if this Warrant shall have been exercised in whole or in part, at such time as no shares of Registrable Stock remain outstanding. 11 (v) The term "Registrable Stock" means (a) the shares of Common Stock issued or issuable upon the exercise of this Warrant, and (b) any Other Securities issued or issuable pursuant to this Warrant; provided, however, that shares of Registrable Stock shall 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 transfer by virtue of Federal or state securities laws; and provided further that Registrable Stock shall cease to be Registrable Stock if the holder could sell or transfer all such securities held by him in one transaction pursuant to Rule 144 promulgated under the Act. (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 306 of the shares of Registrable Stock, which request shall be given during the Registration Period, shall state the intended method of disposition by such Initiating Holders and shall request that the Company effect the registration of all or part of the Registrable Stock under the Act, the Company shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of thirty days from the giving of such notice to the holders of Registrable Stock, the Company shall have received written requests to register at least 50k of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Company 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 Act, all to the extent requisite 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 Company. If the underwriter selected determines that the number of shares 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 Company shall only be required to effect two registrations pursuant to this Section 7(b). 12 (ii) The Company shall not be required to effect any registration under this Section 7(b) within nine months after the completion of any public offering of its securities pursuant to which the holders of Registrable Stock were afforded the right to register as many shares of their Registrable Stock as requested nor within six months after any other public offering by the Company. (iii) The Company shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Section 7(b) other securities of the Company then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Company's securities, if and to the extent that the underwriter or underwriters acting with respect of such public 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. (iv) If the registration under this paragraph (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 Company, then the Company agrees to maintain the effectiveness of such registration statement for a period of one year after its initial effective date. (c) Incidental Registration. (i) If, during the Registration Period, the Company 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 Company, then the Company shall give written notice of such proposed filing to the holders of Registrable Stock at least thirty (30) 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 Company by the anticipated filing date of written requests from the Participating Holders of 13 Registrable Stock for the Company to register their Registrable Stock, the Company shall permit, or in the event of an underwritten offering, shall use its best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such securities in such offering on the same terms and conditions as any similar securities of the Company included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount or kind of securities which it or the Company, 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 Company's shares of Common Stock 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 Company and each holder of Common Stock (including without limitation Registrable Stock) or securities convertible into or exercisable for Common Stock 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 Section, "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 Common Stock or other securities convertible into or exercisable for Common Stock and prior to the effectiveness of the registration statement filed in connection with such registration, the Company determines for any reason either not to effect such registration or to delay such registration, the Company may, 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) Exception. The Company 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 14 requested by the Company in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Company with Respect to Registration. In connection with any registration under this Section 7, the Company shall, as expeditiously as is reasonably possible: (i) Prepare and file with the Commission a registration statement with respect to the Participating Holders Registrable Stock and, subject to the last sentence of Section 7(c)(i) hereof, use its 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 reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders 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 Company 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. (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 15 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. (vii) Furnish to the Participating Holders, on the date that shares of Registrable Stock are delivered to the underwriters for sale in connection with a registration pursuant to this Section 7, if such securities are being sold by underwriters, or, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion as to matters of law only, dated such date, of counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Participating Holders and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, and to the Participating Holders. (e) The Company shall pay all costs, fees and expenses in connection with all registration statements filed under this Section 7 including, without limitation, the Company's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including the fees and expenses of counsel for the Participating Holders in connection with such registration. However, the Company shall not pay for underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. (f) Indemnification. (i) The Company shall indemnify each Participating Holder under this Agreement, its officers and directors and any person controlling it within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any loss, claim, damage, expense or liability (including without limitation all expenses reasonably incurred in investigating, preparing, or defending against any claim whatsoever, such expenses to be reimbursed by the Company as they are incurred) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus or any amendments or supplements thereto in which Registrable Stock is included or in any application, statement or other document filed by the Company with the 16 Commission or any securities exchange or in any jurisdiction in connection with qualifying such shares under the securities laws thereof, or (ii) the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, unless such statement or omission is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Participating Holder or an underwriter expressly for use in any such registration statement or other document. (ii) Each Participating Holder shall, as a condition to such registration of Registrable Stock, agree to indemnify the Company, its officers and directors and any person controlling the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any loss, claim, damage or expense or liability (including without limitation all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever, such expenses to be reimbursed by the undersigned as they are incurred) to which they may become subject under the Act, the Exchange Act or otherwise, arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus or any amendments or supplements thereto in which Registrable Stock is included or in any application, statement or other document filed by the Company with the Commission or any securities exchange or in any jurisdiction in connection with qualifying such shares under the securities laws thereof, or (ii) the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, provided in each case that such statement or omission is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Participating Holder expressly for use in any such registration statement or other document. (iii) Promptly upon receipt by a party claiming indemnification hereunder of notice of the commencement of any action involving a claim referred to above, such indemnified party will, if a claim in respect thereof is to be made against . party which may be required to indemnify such party hereunder, give written notice to the latter of the commencement of such action. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense of such action, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party. Except as set forth herein, the indemnified party and any party cooperating in the defense of such claim-shall not settle or compromise any such claim or admit liability without the express 17 written consent of the indemnifying party. The indemnified party shall have the right to be represented by an advisory counsel and accountants, at its own expense, and the indemnified party shall be kept fully informed of such action, suit or proceeding at all stages thereof whether or not the indemnified party is so represented. After a period of thirty days following the date the written notice of such claim was given to the indemnifying party the indemnified party may settle any such claim (and the amount of any such settlement shall be subject to indemnification hereunder) unless within such thirty-day period the indemnifying party shall have provided the indemnified party with notice and evidence to the indemnified party's satisfaction that the indemnifying party reasonably disputes such claim and has the financial ability to meet its indemnification obligations hereunder. Notwithstanding the foregoing, the indemnified party may immediately cause to be paid or discharged any asserted claim the non-payment of which would have an immediate substantial adverse impact on the indemnified party and any claim which the indemnifying party has not disputed within thirty days of notice as provided above. (iv) If the indemnification provided for in this Section 7(f) is unavailable or insufficient to hold harmless an indemnified party under such subsection in respect of any losses, claims, damages or liabilities or action in respect thereof or referred to therein, then each indemnifying party shall in lieu of indemnifying such indemnified party contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or actions in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and the Participating Holders, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or actions as well as any other relevant equitable considerations, including the failure to give the notice required under such subsections. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company on the one hand, or the Participating Holders, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Participating Holders agree that it would not be just and equitable if contribution pursuant to this Section 7(f)(iv) were determined by pro rata allocation or by any other method of allocation which did not take account of the equitable considerations referred to above in this subsection. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Securities Act), shall be entitled to 18 contribution from any person who is not guilty of such fraudulent misrepresentations. (v) The obligations of the Company and the Participating Holders under this Section 7(f) shall survive the completion of any offering of Registrable Stock in a registration statement under this Section 7. (vi) The rights of indemnification contained in this Section 7 shall not be deemed to be the exclusive remedy of the parties hereto and such rights shall be in addition to any other rights or remedies which any party hereto may have at law or equity. (g) Assignment of Registration Rights. The undersigned's rights set forth in this Section 7 shall automatically be deemed assigned to any transferee or assignee of this Warrant or shares of Common Stock or Other Securities issuable hereunder, provided that immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act; provided however, that, the termination of registration rights in respect of any shares of Registrable Stock by reason of the operation of Section 7(a) shall be binding upon any transferee of such shares. Upon the request of any such holder, the Company will confirm in writing to any transferee of such holder's Registrable Stock the Company's continuing obligation to afford such transferee the benefits of the Company's agreements contained in this Section 7, but no failure of the Company to confirm such obligations shall in any way impair such transferee's rights under this Section 7. (h) Effect of Private Placement. Notwithstanding anything to the contrary contained in this Section 7, if, prior to December 31, 1997, the Company completes a private offering of equity securities in which the Company realizes gross proceeds of at least $1 million and in which one or more purchasers of such securities are granted more favorable registration rights than those granted herein, the registration rights granted to holders of Registrable Stock hereunder shall be modified to be equivalent in all respects to the most favorable registration rights granted in such private offering; provided, however, that the provisions of Section 7(f) hereof shall not be modified as a result of such private offering. 8. Substitution of Warrants. 8.1. Exchange of Warrants. Subject to the provisions appearing at the top of the first page of this Warrant concerning, inter alia, the sale, transfer, encumbrance or other disposition of this Warrant, upon surrender or exchange of this Warrant, properly endorsed, to the Company, the Company at its expense will issue and deliver to or upon the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such 19 holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 8.2. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. Ownership of Warrant. Until this Warrant is transferred on the books of the Company, the Company may treat the person in whose name this Warrant is issued as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary, except that, if and when this Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. A Warrant, if properly assigned, may be exercised to the extent provided herein by a new holder without first having a new Warrant issued. 10. Notices, etc. All notices and other communications from the Company to the holder of this Warrant or from the holder of this Warrant shall be delivered personally, by facsimile (if confirmed and followed by delivery by first class mail), reputable overnight courier service, or mailed by first class registered or certified mail, postage prepaid, to the Company at 3400 Bissonnet, Suite #135, Houston Texas 77005. Attn: President, or to the holder at such address as may have been furnished to the Company in writing by such holder, or, until an address is so furnished, to and at the address of the last holder of this Warrant who has so furnished an address to the Company. Any such notice shall be deemed to have been given on the date of personal delivery, facsimile, delivery to a reputable overnight courier service or deposit in the mail. 11. Warrant Holder Not a Shareholder. The holder of this Warrant, as such, shall not be entitled by reason of this Warrant to any rights whatsoever as a shareholder of the Company but shall be entitled to all such rights with respect to shares of Common Stock actually issued upon exercise of this Warrant. 12. Miscellaneous. This Warrant and any term hereof may be amended, changed, waived, discharged or terminated only by an instrument in writing signed by the Company and consented to in writing by the holder of this Warrant. This Warrant shall be construed and enforced in accordance with and governed by the laws of the-State of New York applicable to contracts made and to be performed entirely therein. The headings in this Warrant are for reference purposes only and shall not limit or otherwise affect the meaning hereof. 13. Expiration. The right to exercise this Warrant shall expire at 5:00 P.M., Houston, Texas time on December 31, 1997. 20 Dated as of April 22, 1997. CHAPARRAL RESOURCES, INC. By: ----------------------------------- Howard Karren, Chairman and Chief Executive Officer 21 FORM OF SUBSCRIPTION [To be signed only upon exercise of the Warrant] To: CHAPARRAL RESOURCES, INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder,............. * shares of the Common Stock of CHAPARRAL RESOURCES, INC. and herewith makes payment of $........... therefor, and requests that the certificates for such shares be issued in the name of ............... , and delivered to,..................... , whose address is .............................. Dated: ----------------------------------------- (Signature must conform in all respects to the name of the holder as specified on on the face of the Warrant) ---------------------------------------- ---------------------------------------- (Address) * Insert the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. 22 FORM OF ASSIGNMENT [To be signed only upon transfer of the Warrant] For value received, the undersigned hereby sells, assigns and transfers unto .................. the right represented by the within Warrant to purchase ............... shares of the Common Stock of CHAPARRAL RESOURCES, INC. to which the within Warrant relates, and appoints ........................ Attorney to transfer such right on the books of CHAPARRAL RESOURCES, INC., with full power of substitution in the premises. Dated: --------------------------------------- (Signature must conform in all respects to the name of the holder as specified on the face of the Warrant) --------------------------------------- --------------------------------------- (Address) Signed in the presence of: - ----------------------------------- (Witness) 23 EX-10.3 5 FORM OF WARRANT THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION, UNLESS AN EXEMPTION FROM THE REQUIREMENT OF SUCH REGISTRATION IS AVAILABLE UNDER THE CIRCUMSTANCES AT THE TIME OBTAINING. Void After 5:00 P.M. Houston, Texas Time on __________________ CHAPARRAL RESOURCES, INC. Common Stock Purchase Warrant CHAPARRAL RESOURCES, INC., a Colorado corporation ("Chaparral" or the "Company"), hereby certifies that, as partial consideration for a loan granted to the Company by ________________________, with an office at ___________________________________- _________________ ("______________") as evidenced by the Promissory Note in the amount of $_____________ dated as of ____________________, and for other valuable consideration received, ________________, or its permitted assigns, is entitled, subject to the terms and conditions herein set forth, to purchase from the Company up to ___________ fully paid and non-assessable shares of Common Stock, $.10 par value, of the Company, at the per share purchase price (the "Purchase Price") of $0.25, subject to adjustment as hereinafter provided, at any time or from time to time on or after the date hereof and up to 5:00 P.M. Houston, Texas time on _____________________ (the "Expiration Date"). The number and character of such shares of Common Stock are subject to adjustment as provided 1. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: (a) "Act" shall mean the Securities Act of 1933, as amended. (b) "Additional Shares of Common Stock" shall mean all shares (including treasury shares) of Common Stock issued or sold (or, pursuant to Section 3.7 hereof, deemed to be issued) by the Company after the date hereof, whether or not subsequently reacquired or retired by the Company, other than shares of Common Stock issuable pursuant to this Warrant. (c) "Adjusted Exercise Price" shall have the meaning specified in Section 3.2 hereof. (d) "Company" means Chaparral Resources, Inc. or any corporation which shall succeed to or assume the obligations of Chaparral Resources, Inc. hereunder. (e) "Common Stock" shall mean the Common Stock, par value $.10 per share, of the Company and any stock into which such common stock shall have been changed or any stock resulting from any reclassification of such common stock, (f) "Convertible Securities" shall mean any evidences of indebtedness, shares of stock (other than Common Stock) or other securities directly or indirectly convertible into or exchangeable for Common Stock, other than any securities issuable pursuant to this Warrant. (g) "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 which there was a reported sale price; and (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 exercise hereof. (h) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (i) "Other Securities" shall mean any stock and other securities of the Company or any other person (corporate or otherwise) which the holders of this Warrant at any time shall be entitled to receive, or shall have received, upon the exercise of this Warrant, in lieu of or in addition to the Common Stock, or which at any time shall be issuable or shall have been issued to holders of the 2 Common Stock in exchange for, in addition to, or in replacement of the Common Stock or Other Securities pursuant to Section 3.5 or otherwise. (j) "Purchase Price" shall mean $0.25 per share, subject to adjustment as provided herein. 2. Exercise of Warrant. ------------------- 2.1 Manner of Exercise. ------------------ (a) This Warrant may be exercised by the holder hereof, in whole or in part (but not as to fewer than 1,000 shares of the Common Stock unless, at the time of exercise, this Warrant entitles the holder to purchase fewer than 1,000 shares of the Common Stock), on any business day on or after the date hereof and before 5:00 P.M., Houston, Texas time on ____________________, by surrender of this Warrant, with the form of subscription at the end hereof (or a reasonable facsimile thereof) duly executed by such holder, to the Company at its office in Houston, Texas, and, except as otherwise provided in Section 2.1(b), accompanied by payment, by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying (x) the number of shares of the Common Stock (without giving effect to any adjustment therein) designated in such form of subscription (or such reasonable facsimile) by (y) the Purchase Price, and such holder shall thereupon be entitled to receive the number of shares of the Common Stock determined as provided hereunder. (b) In addition to the method of payment set forth in Section 2.1(a), and in lieu of any cash payment required thereunder, the holder of this Warrant shall have the right at any time and from time to time to exercise this Warrant in full or in part by surrendering this Warrant, with the form of subscription at the end hereof (or a reasonable facsimile thereof) duly executed by such holder, to the Company at its office in Houston, Texas, in exchange for which the holder shall receive the number of shares of Common Stock equal to the product of (x) the number of shares as to which the Warrant is being exercised, multiplied by (y) a fraction, the numerator of which is the Market Price of one share of the Common Stock less the per share Purchase Price then in effect and the denominator of which is the Market Price of one share of the Common Stock. 2.2. When Exercise Effective. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the business day on which this Warrant shall have been surrendered to the Company as provided in Section 2.1, and the person(s) in whose name(s) the certificate(s) for shares of the Common Stock (or Other Securities) that are to be issued upon such exercise in accordance with Section 2.3 shall be deemed the holder(s) of record thereof at such time. 3 2.3. Delivery of Stock Certificates. etc. As soon as practicable after the exercise of this Warrant in full or in part in accordance herewith the Company, at its expense (including the payment by it of any applicable issue taxes), will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, (a) a certificate or certificates, marked with an appropriate legend referring to the terms of this Warrant and any applicable restrictions on such shares imposed by the Federal or any state securities laws, for the number of full shares of the Common Stock (or Other Securities) to which such holder shall be entitled. upon such exercise plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash in an amount equal to the same fraction of the Market Price of one full share of the Common Preferred Stock on the business day next preceding the date of such exercise, and (b) in case such exercise is in part only, a new Warrant or Warrants of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of the Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of shares designated by the holder upon such exercise as provided in Section 2.1. 3. Common Stock Issuable Upon Exercise. ----------------------------------- 3.1. General. The number of shares of the Common Stock which the holder of this Warrant shall be entitled to receive upon the exercise hereof or, if securities or other property in addition to or in lieu of the Common Stock shall by reason of the operation of the provisions of this Section be issuable upon such exercise, the amount and kind of such securities or other property, shall be adjusted or determined as provided in this Section 3. 3.2. Adjusted Exercise Price. The number of shares of the Common Stock which the holder of this Warrant shall be entitled to receive upon the exercise hereof shall be determined by multiplying the number of shares of the Common Stock which, but for the provisions of this Section 3, would otherwise be issuable upon such exercise, as designated by the holder hereof pursuant to Section 2.1, by the fraction of which the numerator is the per share Purchase Price and the denominator is the per share Adjusted Exercise Price (as herein defined) in effect on the date of such exercise. The per share adjusted Exercise Price of the Common Stock shall initially be the Purchase Price (as defined in Section 1) and shall be adjusted and readjusted from time to time as provided in this Section 3 (and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by this Section 3). 3.3. Stock Dividends, Stock Splits. etc. In case the Company at any time or from time to time after the date hereof shall declare or pay any dividend on the Common Stock payable in Common Stock, or effect a subdivision of the outstanding shares of the Common Stock into a greater number of shares of the Common Stock 4 (by reclassification or otherwise than by payment of a dividend in shares of Common Stock), then, in any such event, the per share Adjusted Exercise Price per share shall be adjusted effective as of the close of business on (i) the record date for the determination of shareholders entitled to receive such dividend if such dividend is in fact paid, or (ii) the day immediately preceding the day upon which such subdivision shall become effective (any such day, as the case may be, shall be referred to herein as the "Subdivision Effective Date"), by multiplying the per share Adjusted Exercise Price in effect immediately prior to the Subdivision Effective Date by the fraction of which (x) the numerator shall be the number of shares of the Common Stock outstanding immediately prior to the Subdivision Effective Date and (y) the denominator shall be the number of shares of the Common Stock outstanding immediately prior to the Subdivision Effective Date plus the number of shares of the Common Stock issuable upon the payment of such dividend or the consummation of such subdivision, as the case may be. 3.4. Adjustments for Combinations. etc. In case the outstanding shares of the Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Adjusted Exercise Price shall be adjusted, effective as of the close of business on the day immediately preceding the day upon which such combination or consolidation is effective (the "Combination Effective Date"), by multiplying the per share Adjusted Exercise Price in effect immediately prior to the Combination Effective Date by the fraction of which (x) the numerator shall be the number of shares of the Common Stock outstanding immediately prior to the Combination Effective Date and (y) the denominator shall be the number of shares of the Common Stock outstanding immediately after the Combination Effective Date. 3.5. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization. etc. In case the Company, after the date hereof, (a) shall consolidate with or merge into any other person and shall not be the continuing or surviving corporation of such consolidation or merger, or (b) shall permit any other person to consolidate with or merge into the Company and the Company shall be the continuing or surviving person but, in connection with such consolidation or merger, the Common Stock shall be changed into or exchanged for stock or other securities or property of any other person, or (c) shall effect a capital reorganization or reclassification of the Common Stock (other than a reclassification subject to Sections 3.3 or 3.4), then, and in each such case, proper provision shall be made so that the holder of this Warrant, upon the exercise hereof at any time after the consummation of such consolidation, merger, reorganization or reclassification, shall be entitled to receive, in lieu of the Common Stock (or Other Securities) issuable upon such exercise prior to such consummation, the stock and other securities and property to which such holder would have been entitled upon such consummation if such holder had so exercised this Warrant immediately prior thereto, subject to adjustments (subsequent to such corporate action) as nearly equivalent as possible to the adjustments provided for in this Section 3. 5 3.6. Issuances of Securities. If, at any time while this Warrant (or any portion thereof) is outstanding, the Company: (a) issues or sells Additional Shares of Common Stock without consideration or for a consideration per share less than the Adjusted Exercise Price in effect immediately prior to such issue or sale, or (b) declares, orders, pays or makes a dividend or other distribution (including, without limitation, any distribution of other or additional stock or other securities or property by way of dividend or spinoff, reclassification, recapitalization or similar corporate rearrangement) on the Common Stock other than a dividend payable in Additional Shares of Common Stock, then, and in each such case, the Adjusted Exercise Price shall, concurrently with such issue or sale or immediately after the close of business on the record date fixed for the determination of holders of any class of securities entitled to receive such dividend or distribution, be reduced to a price (calculated to the nearest cent, a half cent being considered a full cent) determined by dividing: (x) an amount equal to: (i) the product obtained by multiplying the number of shares of Common Stock outstanding immediately prior to such issue or sale or at the close of business on such record date by the Adjusted Exercise Price in effect at such time, plus (ii) in the case of any such issue or sale, the consideration, if any, received by the Company upon such issue or sale, or minus (iii) in the case of any such dividend or distribution, the aggregate amount of such dividend or distribution, which amount shall be valued in accordance with Section 3.8 hereof, by (y) the number of shares of Common Stock outstanding immediately after such issue or sale or at the close of business on such record date, provided that, for the purposes of this Section 3.6, (a) immediately after any Additional Shares of Common Stock are deemed issued pursuant to Section 3.7 hereof, such Additional Shares shall be deemed to be outstanding and (b) treasury shares shall not be deemed to be outstanding. 6 3.7. Options and Convertible Securities. In case the Company at any time or from time to time after the date hereof shall issue, sell, grant or assume any Options or Convertible Securities, or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, sale, grant or assumption or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 3.8 hereof) of such shares would be less than the Adjusted Exercise Price in effect immediately prior to such issue, sale, grant or assumption or immediately prior to the close of business on such record date, as the case may be, and provided, further, that in any such case in which Additional Shares of Common Stock are deemed to be issued: (a) no further adjustment of the Adjusted Exercise Price shall be made upon the subsequent issue or sale of Convertible Securities or shares of Common Stock upon the exercise of such Options or the conversion or exchange of such Convertible Securities; (b) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (by change of rate or otherwise), then the Adjusted Exercise Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options, or the rights of conversion or exchange under such Convertible Securities, which are outstanding at such time; (c) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Adjusted Exercise Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (i) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued or sold were the shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Company for the issue, sale, 7 grant or assumption of all such Options, whether or not exercised, plus the consideration actually received by the Company upon such exercise, or for the issue or sale of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Company upon such conversion or exchange, and (ii) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued or sold upon the exercise thereof were issued at the time of the issue, sale, grant or assumption of such Options, and the consideration received by the Company for the Additional Shares of Common Stock deemed to have then been issued was the consideration actually received by the Company for the issue, sale, grant or assumption of all such options, whether or not exercised, plus the consideration deemed to have been received by the Company (pursuant to Section 3.8 hereof) upon the issue or sale of the Convertible Securities with respect to which such Options were actually exercised; (d) no readjustment pursuant to clause (b) or (c) above shall have the effect of increasing the Adjusted Exercise Price by an amount in excess of the amount of the adjustment thereof originally made in respect of the issue, sale; grant or assumption of such Options or Convertible Securities; and (e) in the case of any Options to acquire Convertible Securities which expire by their terms not more than 30 days after the date of issue, sale, grant or assumption thereof, no adjustment of the Adjusted Exercise Price shall be made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the manner provided in clause (c) above. 3.8. Computation of Consideration. For the purposes of this Section 3, the consideration received by the Company for the issue or sale of any Additional Shares of Common Stock shall be computed as follows: (a) Nature of Consideration. Such consideration shall, (i) insofar as it consists of cash, be computed at the actual amount paid by the purchaser of such Additional Shares of Common Stock, without deduction for commissions, concessions or discounts allowed to underwriters, dealers or others in connection with such issue, (ii) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue or sale, as determined in good faith by the Board of Directors of the Company; provided, however, that any such property that consists of securities (a) that are listed on any national securities exchange or if such 8 securities are traded on Nasdaq, then the per share (or other unit) value shall be the last reported sale price of such securities on the most recent trading day preceding the day in question for which such information is available, or (b) that are traded in the over-the-counter market but are not traded on Nasdaq, then the per share (or other unit) value shall be the average between the closing bid and asked prices of such securities on the most recent trading day preceding the day in question for which such information is available, as reported by the NASD, and (iii) in case Additional Shares of Common Stock are issued or sold together with other stock or securities or other assets of the Company for consideration which covers both, be that portion of such consideration (computed as provided in clauses (i) and (ii) above), which is determined in good faith by the Board of Directors of the Company to be allocable to such Additional Shares of Common Stock. (b) Options and Convertible Securities. The consideration per share received by the Company for Additional Shares of Common Stock deemed to have been issued pursuant to Section 3.7 hereof, relating to Options and Convertible Securities, shall be determined by dividing: (i) the total amount, if any, received or receivable by the Company as consideration for the issue, sale, grant or assumption of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities or, in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (ii) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. 4. No Dilution or Impairment. The Company will not, by amendment of its articles of organization or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be 9 necessary or appropriate in order to protect the rights of the holder of this Warrant against dilution or other impairment. 5. Notices of Record Date. etc. In the event of ---------------------- (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to any other person or any consolidation or merger involving the Company and any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company will give to the holder of this Warrant a notice specifying (i) the date or expected date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and any such character of such dividend, distribution or right, and (ii) the date or expected date on which reorganization, reclassifica- tion, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of the Common Stock (or Other Securities) shall be entitled to exchange their shares of the Common Stock (or Other Securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Unless otherwise required by law to be given sooner, such notice shall be mailed within a reasonable time prior to the date therein specified. 6. Reservation of Stock. etc. The Company will at all times reserve and keep available out of its authorized but unissued Common Stock, solely for issuance and delivery upon the exercise of this Warrant, the full number of shares of Common Stock (or Other Securities) then issuable upon the exercise of this Warrant. All shares of the Common Stock issuable upon the exercise of this Warrant shall be duly authorized, and when issued and paid for in full, validly issued, fully paid and non-assessable with no liability on the part of the holders thereof. 7. Registration Rights. ------------------- (a) Definitions. For purposes of this Section 7, the following terms shall have the following respective meanings: 10 (i) "Commission" shall mean the United States 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 holders of Common Stock or Other Securities issued pursuant to this Warrant. (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 "Registration Period" shall mean the period commencing on the date hereof and ending (a) if this Warrant shall expire without having been exercised in whole or in part, (the Expiration Date) or (b) if this Warrant shall have been exercised in whole or in part, at such time as no shares of Registra- ble Stock remain outstanding. (v) The term "Registrable Stock" means (a) the shares of Common Stock issued or issuable upon the exercise of this Warrant, and (b) any Other Securities issued or issuable pursuant to this Warrant; provided, however, that shares of Registrable Stock shall 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 transfer by virtue of Federal or state securities laws; and provided further that Registrable Stock shall cease to be Registrable Stock if the holder could sell or transfer all such securities held by him in one transaction pursuant to Rule 144 promulgated under the Act. (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 be given during the Registration Period, shall state the intended method of disposition by such Initiating Holders and shall request that the Company effect the registration of all or part of the Registrable Stock under the Act, the Company shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of thirty days from the giving of such notice to the holders of Registrable Stock, the Company 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 Company 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 11 offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Act, all to the extent requisite 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 or underwriters shall be selected by the Initiating Holders and shall be reasonably acceptable to the Company. If the underwriter or underwriters 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 Company shall only be required to effect one registration pursuant to this Section 7(b). (ii) The Company shall not be required to effect any registration under this Section 7(b) within nine months after the completion of any public offering of its securities pursuant to which the holders of Registrable Stock were afforded the right to register as many shares of their Registrable Stock as requested nor within six months after any other public offering by the Company. (iii) The Company shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Section 7(b) other securities of the Company then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Company's securities, if and to the extent that the underwriter or underwriters acting with respect of such public 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. (iv) If the registration under this paragraph (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 Company, then the Company agrees to maintain the effectiveness of such registration statement for a period of one year after its initial effective date. (c) Incidental Registration. ----------------------- (i) If, during the Registration Period, the Company 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 12 for its own account or for the account of any other person holding registration rights with respect to the securities of the Company, then the Company shall give written notice of such proposed filing to the holders of Registrable Stock at least thirty (30) 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 Company by the anticipated filing date of written requests from the Participating Holders of Registrable Stock for the Company to register their Registrable Stock, the Company shall permit, or in the event of an underwritten offering, shall use its best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such securities in such offering on the same terms and conditions as any similar securities of the Company included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount or kind of securities which it or the Company, 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 Company's shares of Common Stock 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 Company and each holder of Common Stock (including without limitation Registrable Stock) or securities convertible into or exercisable for Common Stock 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 Section, "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 Common Stock or other securities convertible into or exercisable for Common Stock and prior to the effectiveness of the registration statement filed in connection with such registration, the Company determines for any reason either not to effect such registration or to delay such registration, the Company may, 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. 13 (ii) Exception. The Company 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 Company in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Company with Respect to Registration. In connection with any registration under this Section 7, the Company shall, as expeditiously as is reasonably possible: (i) Prepare and file with the Commission a registration statement with respect to the Participating Holders' Registrable Stock and, subject to the last sentence of Section 7(c)(i) hereof, use its 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 Company 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. 14 (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. (vii) Furnish to the Participating Holders, on the date that shares of Registrable Stock are delivered to the underwriters for sale in connection with a registration pursuant to this Section 7, if such securities are being sold by underwriters, or, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion as to matters of law only, dated such date, of counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Participating Holders and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, and to the Participating Holders. (e) The Company shall pay all costs, fees and expenses in connection with all registration statements filed under this Section 7 including, without limitation, the Company's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including the fees and expenses of counsel for the Participating Holders in connection with such registration. However, the Company shall not pay for underwriting discounts and commissions and underwriters' expenses allocable to the Stock being registered or state transfer taxes. (f) Indemnification. --------------- (i) The Company shall indemnify each Participating Holder under this Agreement, its officers and directors and any person controlling it within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any loss, claim, damage, expense or liability (including without limitation all expenses reasonably incurred in investigating, preparing, or defending against any claim whatsoever, such expenses to be reimbursed by the Company as they are incurred) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any 15 registration statement or prospectus or any amendments or supplements thereto in which Registrable Stock is included or in any application, statement or other document filed by the Company with the Commission or any securities exchange or in any jurisdiction in connection with qualifying such shares under the securities laws thereof, or (ii) the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, unless such statement or omission is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Participating Holder or an underwriter expressly for use in any such registration statement or other document. (ii) Each Participating Holder shall, as a condition to such registration of Registrable Stock, agree to indemnify the Company, its officers and directors and any person controlling the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any loss, claim, damage or expense or liability (including without limitation all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever, such expenses to be reimbursed by the undersigned as they are incurred) to which they may become subject under the Act, the Exchange Act or otherwise, arising out of or based upon (l) any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus or any amendments or supplements thereto in which Registrable Stock is included or in any application, statement or other document filed by the Company with the Commission or any securities exchange or in any jurisdiction in connection with qualifying such shares under the securities laws thereof, or (ii) the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, provided in each case that such statement or omission is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Participating Holder expressly for use in any such registration statement or other document. (iii) Promptly upon receipt by a party claiming indemnification hereunder of notice of the commencement of any action involving a claim referred to above, such indemnified party will, if a claim in respect thereof is to be made against party which may be required to indemnify such party hereunder, give written notice to the latter of the commencement of such action. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense of such action, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party. Except as set forth herein, the indemnified party and any party cooperating in the defense of such claim shall not settle or compromise any such claim or admit liability without the express written consent of the indemnifying party. The indemnified 16 party shall have the right to be represented by an advisory counsel and accountants, at its own expense, and the indemnified party shall be kept fully informed of such action, suit or proceeding at all stages thereof whether or not the indemnified party is so represented. After a period of thirty days following the date the written notice of such claim was given to the indemnifying party the indemnified party may settle any such claim (and the amount of any such settlement shall be subject to indemnification hereunder) unless within such thirty-day period the indemnifying party shall have provided the indemnified party with notice and evidence to the indemnified party's satisfaction that the indemnifying party reasonably disputes such claim and has the financial ability to meet its indemnification obligations hereunder. Notwithstanding the foregoing, the indemnified party may immediately cause to be paid or discharged any asserted claim the non-payment of which would have an immediate substantial adverse impact on the indemnified party and any claim which the indemnifying party has not disputed within thirty days of notice as provided above. (iv) If the indemnification provided for in this Section 7(f) is unavailable or insufficient to hold harmless an indemnified party under such subsection in respect of any losses, claims, damages or liabilities or action in respect thereof or referred to therein, then each indemnifying party shall in lieu of indemnifying such indemnified party contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or actions in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and the Participating Holders, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or actions as well as any other relevant equitable considerations, including the failure to give the notice required under such subsections. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company on the one hand, or the Participating Holders, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Participating Holders agree that it would not be just and equitable if contribution pursuant to this Section 7(f)(iv) were determined by pro rata allocation or by any other method of allocation which did not take account of the equitable considerations referred to above in this subsection. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Securities Act), shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentations. 17 (v) The obligations of the Company and the Participating Holders under this Section 7(f) shall survive the completion of any offering of Registrable Stock in a registration statement under this Section 7. (vi) The rights of indemnification contained in this Section 7 shall not be deemed to be the exclusive remedy of the parties hereto and such rights shall be in addition to any other rights or remedies which any party hereto may have at law or equity. (g) Assignment of Registration Rights. The undersigned's rights set forth in this Section 7 shall automatically be deemed assigned to any transferee or assignee of this Warrant or shares of Common Stock or Other Securities issuable hereunder, provided that immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act; provided, however, that the termination of registration rights in respect of any shares of Registrable Stock by reason of the operation of Section 7(a) shall be binding upon any transferee of such shares. Upon the request of any such holder, the Company will confirm in writing to any transferee of such holder's Registrable Stock the Company's continuing obligation to afford such transferee the benefits of the Company's agreements contained in this Section 7, but no failure of the Company to confirm such obligations shall in any way impair such transferee's rights under this Section 7. (h) Effect of Private Placement. Notwithstanding anything to the contrary contained in this Section 7, if, prior to December 4, 1997, the Company completes a private offering of equity securities in which the Company realizes gross proceeds of at least $1 million and in which one or more purchasers of such securities are granted more favorable registration rights than those granted herein, the registration rights granted to holders of Registrable Stock hereunder shall be modified to be equivalent in all respects to the most favorable registration rights granted in such private offering; provided, however, that the provisions of Section 7(f) hereof shall not be modified as a result of such private offering. 8.1 Substitution of Warrants. ------------------------ 8.1. Exchange of Warrants. Subject to the provisions appearing at the top of the first page of this Warrant concerning, inter alia, the sale, transfer, encumbrance or other disposition of this Warrant, upon surrender or exchange of this Warrant, properly endorsed, to the Company, the Company at its expense will issue and deliver to or upon the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 18 8.2. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. Ownership of Warrant. Until this Warrant is transferred on the books of the Company, the Company may treat the person in whose name this Warrant is issued as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary, except that, if and when this Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. A Warrant, if properly assigned, may be exercised to the extent provided herein by a new holder without first having a new Warrant issued. 10. Notices. etc. All notices and other communications from the Company to the holder of this Warrant or from the holder of this Warrant shall be delivered personally, by facsimile (if confirmed and followed by delivery by first class mail), reputable overnight courier service, or mailed by first class registered or certified mail, postage prepaid, to the Company at 3400 Bissonnet, Suite #135, Houston Texas 77005. Attn: President, or to the holder at such address as may have been furnished to the Company in writing by such holder, or, until an address is so furnished, to and at the address of the last holder of this Warrant who has so furnished an address to the Company. Any such notice shall be deemed to have been given on the date of personal delivery, facsimile, delivery to a reputable overnight courier service or deposit in the mail. 11. Warrant Holder Not a Shareholder. The holder of this Warrant, as such, shall not be entitled by reason of this Warrant to any rights whatsoever as a shareholder of the Company but shall be entitled to all such rights with respect to shares of Common Stock actually issued upon exercise of this Warrant. 12. Miscellaneous. This Warrant and any term hereof may be amended, changed, waived, discharged or terminated only by an instrument in writing signed by the Company and consented to in writing by the holder of this Warrant. This Warrant shall be construed and enforced in accordance with and governed by the laws of the State of New York applicable to contracts made and to be performed entirely therein. The headings in this Warrant are for reference purposes only and shall not limit or, otherwise affect the meaning hereof. 19 13. Expiration. The right to exercise this Warrant shall expire at 5:00 P.M., Houston, Texas time, on _______________. Dated as of _______________. CHAPARRAL RESOURCES, INC. By -------------------------------------- 20 FORM OF SUBSCRIPTION [To be signed only upon exercise of the Warrant] To: CHAPARRAL RESOURCES, INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, ............... * shares of the Common Stock of CHAPARRAL RESOURCES, INC. and herewith makes payment of $............... therefor, and requests that the certificates for such shares be issued in the name of ..................... , and delivered to,............................. whose address is ............... Dated: ............................................. (Signature must conform in all respects to the name of the holder as specified on the face of the Warrant) .............................................. (Address) - ------------ * Insert the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. 21 FORM OF ASSIGNMENT [To be signed only upon transfer of the Warrant] Forvalue received, the undersigned hereby sells, assigns and transfers ...................... unto the right represented by the within Warrant to purchase ...................... shares of the Common Stock of CHAPARRAL RESOURCES, INC. to which the within Warrant relates, and appoints ................................ Attorney to transfer such right on the books of CHAPARRAL RESOURCES, INC., with full power of substitution in the premises. Dated: ............................................. --------------------------------------------- (Signature must conform in all respects to the name of the holder as specified on the face of the Warrant) ............................................. (Address) Signed in the presence of: - --------------------------------- (Witness) 22 EX-10.4 6 1997 INCENTIVE STOCK PLAN APPENDIX A CHAPARRAL RESOURCES, INC. 1997 INCENTIVE STOCK PLAN Article I. Purpose of the Plan The Chaparral Resources, Inc., 1997 incentive Stock Plan (the "Plan") is intended to promote the interests of Chaparral Resources, Inc. ("Company"), and its stockholders by attracting able persons as employees, consultants or directors and to provide incentive compensation to those employees, consultants and directors, upon whom the responsibilities of the successful administration and management of the Company rest, and whose present and potential contributions to the Company are of importance. A further purpose of the Plan is to provide such individuals with additional incentive and reward opportunities designed to enhance the profitable growth of the Company. Accordingly, the Plan provides for the granting of Stock Awards as provided herein. Article 2. Effective Date and Term of Plan The Plan shall be effective on the date the Plan is adopted by the Board, provided the Plan is approved by the stockholders of the Company within twelve months thereafter. Notwithstanding any provision in the Plan, no Stock Award shall vest prior to such stockholder approval. Except with respect to Stock Awards then outstanding, if not sooner terminated under the provisions of Article 6 hereof, the Plan shall terminate upon and no further Stock Awards shall be granted after the expiration of ten (10) years from the date the Plan is approved by the stockholders of the Company. Article 3. Administration of the Plan 3.1 Stock Awards may be granted only to individuals who are either employees, consultants or directors of the Company. In the case of employees or consultants, the Plan shall be administered by the Compensation Committee ("Committee") of the Board of Directors of the Company ("Board"), no member of which shall be an employee or consultant of the Company. The Committee shall have the authority to determine, in its sole discretion, which employees and consultants shall receive a Stock Award, and the time or times when such Stock Award shall be made, and to prescribe rules and regulations relating to the Plan, and determine the terms, restrictions and provisions of the agreement relating to each Stock Award. The Committee may correct any defect or supply an omission or reconcile any inconsistency in the Plan or in any agreement relating to a Stock Award in the manner and to the extent it shall deem expedient to carry it into effect. The determinations of he Committee on the matters referred to in this Article 3 shall be conclusive and binding on each Stock Award recipient. 3.2 On December 31, 1997, provided the Company is producing or has produced on or before that date not less than 3,000 barrels of crude oil and/or natural gas liquids per day and obtained the necessary financing to permit development of the Karakuduk Field, each director then in office shall receive, without the exercise of the discretion of any person or persons, a Stock Award for 10,000 shares of Stock. 3.3 Each nonemployee director shall receive a Stock Award of 250 shares of Stock for each meeting of the Board of Directors of the Company attended by such director either in person or by telephone. Such Stock Award shall be in lieu of any other compensation payable to such director for attendance at such meetings. Each such director shall also be entitled to reimbursement for such director's costs and expenses of attending such meetings. Article 4. Shares Subject to Plan The aggregate number of shares which may be issued pursuant to Stock Awards granted under the Plan shall not, on the date of the grant of any Stock Award hereunder, exceed an amount equal to one million shares of Common Stock ("Stock"). Such shares may consist of authorized but unissued shares of Stock or previously issued shares of Stock reacquired by the Company. Any of such shares which remain unissued and which are not subject to outstanding Stock Awards at the termination of the Plan shall cease to be subject to the Plan, but, until termination of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. Should any Stock Award hereunder expire or terminate prior to its vesting in full, the Stock theretofore subject to such Stock Award may again be subject to a Stock Award granted under the Plan. Article 5. Recapitalization or Reorganization 5.1 The existence of the Plan and the Stock Awards granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. 5.2 The shares with respect to which Stock Award may be granted are shares of Stock as presently constituted, but if, and whenever, prior to the expiration of a Stock Award theretofore granted, the Company shall effect a subdivision or consolidation of shares of Stock or the payment of a stock dividend on Stock without receipt of consideration by the Company, the number of shares of Stock subject to a Stock Award (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced. 2 5.3 If the Company recapitalizes, reclassifies its capital stock, or otherwise changes its capital structure (a "recapitalization"), the number and class of shares of Stock covered by a Stock Award theretofore granted shall be adjusted so that such Stock Award shall thereafter cover the number and class of shares of stock and securities to which the holder of the Stock Award would have been entitled pursuant to the terms of the recapitalization if, immediately prior to the recapitalization, the holder had been the holder of record of the number of shares of Stock then covered by such Stock Award. 5.4 Any adjustment provided for in Articles 5.2 and 5.3 above shall be subject to any required stockholder action. 5.5 Except as expressly provided herein, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Stock Award theretofore granted or the purchase price per share. Article 6. Amendment or Termination of the Plan The Board in its discretion may terminate the Plan at any time with respect to any stock for which Stock Awards have not previously been granted. The Board shall have the right to alter or amend the Plan or any part thereof from time to time; provided, that no change in any Stock Award previously granted may be made which would impair the rights of the holder thereof without the consent of such person and provided, further, that the Board may not make any alteration or amendment which would materially increase the benefits accruing to participants under the Plan, increase the aggregate number of shares of Stock which may be issued pursuant to the provisions of the Plan, change the class of individuals eligible to receive Stock Awards under the Plan or extend the term of the Plan, without the approval of the stockholders of the Company. Article 7. Securities Laws It is intended that the Plan and any grant of a Stock Award made to a person subject to Section 16 of the Securities Exchange Act of 1934, as amended ("Securities Act"), meet all of the requirements of Rule 16b-3 promulgated under the Securities Act, as such rule is currently in effect or as hereinafter modified or amended ("Rule 16b-3"). If any provision of the Plan or any such Stock Award would disqualify the Plan or such Stock Award under, or would not otherwise comply with, Rule 16b-3, such provision or Stock Award shall be construed or deemed amended to conform to Rule 16b-3. 3 Article 8. Miscellaneous 8.1 Nothing contained in the Plan shall be confer upon any employee or consultant any right with respect to continuation of employment with the Company or any subsidiary or interfere in any way with the right of the Company or any subsidiary to terminate his or her employment at any time. 8.2 The Company shall be entitled to deduct in connection with any Stock Award made to an employee or consultant any taxes required by law to be withheld and to require any payments required to enable it to satisfy its withholding obligations. 8.3 Nothing contained in the Plan shall be construed to prevent the Company or any subsidiary from taking any corporate action which is deemed by the Company or such subsidiary to be appropriate or in it best interest, whether or not such action would have an adverse effect on the Plan or any Stock Award made under the Plan. No employee, consultant, beneficiary or other person shall have any claim against the Company or any subsidiary as a result of any such action. 9.4 This Plan shall be construed in accordance with the laws of the State of Colorado. 4 EX-10.5 7 NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN APPENDIX B CHAPARRAL RESOURCES, INC. 1997 NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN Article I. Purpose of the Plan The Chaparral Resources, Inc., 1997 Nonemployee Directors' Stock Option Plan ("Plan") is intended to promote the interests of Chaparral Resources, Inc. ("Company"), and its stockholders by helping to reward and retain highly-qualified independent directors, and allowing them to develop a sense of proprietorship and personal involvement in the development and financial success of the Company. Accordingly, the Company shall grant to directors of the Company who are not employees of the Company or any of its subsidiaries ("Nonemployee Directors") the option to purchase shares of the common stock of the Company ("Stock"), as hereinafter set forth. For purposes of the Plan, the term Nonemployee Directors shall include any director who is an independent contractor for the Company, has a consulting agreement with the Company and/or does not receive regular wages subject to tax withholding at the time the option to such director is granted. Article 2. Option Agreements Each Option shall be evidenced by a written agreement in the form attached to the Plan. Article 3. Eligibility of Optionee Options may be granted only to individuals who are Nonemployee Directors of the Company. As of the date of the annual meeting of the stockholders of the Company in each year that the Plan is in effect as provided in Paragraph 6 hereof, each Nonemployee Director then in office or elected to the Board of Directors of the Company (the "Board") on such date shall receive, without the exercise of the discretion of any person or persons, a ten year Option exercisable for 25,000 shares (subject to adjustment in the manner hereinafter provided). If, as of any date that the Plan is in effect, there are not sufficient shares of Stock available, each Nonemployee Director shall receive an Option for his or her pro-rata share of the total number of shares of Stock then available under the Plan. All Options granted shall be at the price set forth herein and shall be subject to adjustment as hereinafter provided. Article 4. Shares Subject to Plan The aggregate number of shares which may be issued under Options granted under the Plan shall not, on the date of the grant of any Option hereunder, exceed an amount equal to five percent (5%) of the number of then outstanding shares of Stock. Such shares may consist of authorized but unissued shares of Stock or previously issued shares of Stock reacquired by the Company. Any of such shares which remain unissued and which are not subject to outstanding Options at the termination of the Plan shall cease to be subject to the Plan, but, until termination of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. Should any Option hereunder expire or terminate prior to its exercise in full, the shares theretofore subject to such Option may again be subject to an Option granted under the Plan. Article 5. Option Price The purchase price of the Stock issued under the Option shall be the fair market value of the Stock as of the date the Option is granted. For all purposes under the Plan, the fair market value of a share of Stock on a particular date shall be equal to the mean of the high and low sales prices of the Stock (I) reported by the National Market System or Small Cap Market of NASDAQ on that date, or (ii) if the stock is listed on a national stock exchange, reported on the stock exchange composite tape on that date; or, in either case, if no prices are reported on that date, on the last preceding date on which such prices of the Stock are so reported. If the Stock is traded over the counter at the time a determination of its fair market value is required to be made hereunder, its fair market value shall be deemed to be equal to the average between the reported high and low prices of Stock on the most recent date on which Stock was publicly traded. In the event Stock is not publicly traded at the time a determination of its value is required to be made hereunder, the determination of its fair market value shall be made by the Board in such manner as it deems appropriate. Article 6. Effective Date and Term of Plan The Plan shall be effective on the date the Plan is approved by the stockholders of the Company. Except with respect to Options then outstanding, if not sooner terminated under the provisions of Article 8 hereof, the Plan shall terminate upon and no further Options shall be granted after the expiration of ten (10) years from the date the Plan is approved by the stockholders of the Company. Article 7. Recapitalization or Reorganization 7.1 The existence of the Plan and the Options granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. 7.2 The shares with respect to which Options may be granted are shares of Stock as presently constituted, but if, and whenever, prior to the expiration of an Option theretofore granted, the Company shall effect a subdivision or consolidation of shares of Stock or the payment of a stock dividend on Stock without receipt of consideration by the Company, the number of shares of Stock with respect to which such Option may thereafter be exercised (I) in the event of an increase in the number of outstanding shares shall be proportionately 2 increased, and the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the purchase price per share shall be proportionately increased. 7.3 If the Company recapitalizes, reclassifies its capital stock, or otherwise changes its capital structure (a "recapitalization"), the number and class of shares of Stock covered by an Option theretofore granted shall be adjusted so that such Option shall thereafter cover the number and class of shares of stock and securities to which the optionee would have been entitled pursuant to the terms of the recapitalization if, immediately prior to the recapitalization, the optionee had been the holder of record of the number of shares of Stock then covered by such Option. 7.4 Any adjustment provided for in Articles 7.2 and 7.3 above shall be subject to any required stockholder action. 7.5 Except as expressly provided herein, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Options theretofore granted or the purchase price per share. Article 8. Amendment or Termination of the Plan The Board in its discretion may terminate the Plan at any time with respect to any shares for which Options have not previously been granted. The Board shall have the right to alter or amend the Plan or any part thereof from time to time; provided, that no change in any Option previously granted may be made which would impair the rights of the optionee without the consent of such optionee; and provided, further, that the Board may not make any alteration or amendment which would materially increase the benefits accruing to participants under the Plan, increase the aggregate number of shares which may be issued pursuant to the provisions of the Plan, change the class of individuals n registered under the Securities Act of 1933 as amended, and various state securities laws the Company deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules or regulations available for the offering and sale of such shares. 9.2 It is intended that the Plan and any grant of an Option made to a person subject to Section 16 of the Securities Exchange Act of 1934, as amended ("Securities Act"), meet all of the requirements of Rule 16b-3 promulgated under the Securities Act, as such rule is currently in effect or as hereinafter modified or amended ("Rule 16b-3"). If any provision of the Plan or any such Option would disqualify the Plan or such Option under, or would not otherwise comply with, Rule 16b-3, such provision or Option shall be construed or deemed amended to conform to Rule 16b-3. 3 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JUN-30-1997 313 0 0 0 0 414 12,352 (10) 15,896 826 1,103 0 0 4,193 9,564 15,896 0 0 0 559 0 0 25 (559) 0 (559) 0 0 0 (573) (.014) (.014)
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