-----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, AIXpV40LvW9LrA58U1HQKlIHB70bgVE8w2YIj5YLnc/0kYxOt4zfkXmqyyTlPmTq 04laZF92H2I9K03r9DJMcA== 0001000096-98-000677.txt : 19981202 0001000096-98-000677.hdr.sgml : 19981202 ACCESSION NUMBER: 0001000096-98-000677 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAPARRAL RESOURCES INC CENTRAL INDEX KEY: 0000019252 STANDARD INDUSTRIAL CLASSIFICATION: 1311 IRS NUMBER: 840630863 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07261 FILM NUMBER: 98755513 BUSINESS ADDRESS: STREET 1: 2211 NORFOLK STREET 2: SUITE 1150 CITY: HOUSTON STATE: TX ZIP: 77098 BUSINESS PHONE: 7138077100 MAIL ADDRESS: STREET 1: 621 17TH STREET SUITE 1301 CITY: DENVER STATE: CO ZIP: 80293 10QSB 1 FORM 10-QSB FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________. Commission file number: 0-7261 CHAPARRAL RESOURCES, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Colorado 84-0630863 - - ------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2211 Norfolk, Suite 1150 Houston, Texas 77098 -------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (713) 807-7100 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and, (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| As of November 16, 1998 Registrant had 58,298,790 shares of its $0.10 par value common stock issued and outstanding. Part I - Summarized Financial Information Item 1 - Financial Statements Chaparral Resources, Inc. Consolidated Balance Sheets (Unaudited) September 30, December 31, 1998 1997 ------------ ------------ Assets Current assets: Cash and cash equivalents $ 3,991,000 $ 3,423,000 Restricted cash 800,000 -- Accounts receivable: Other 249,000 102,000 Prepaid expenses 54,000 62,000 ------------ ------------ Total current assets 5,094,000 3,587,000 Notes Receivable 1,009,000 Oil and gas properties and investments - full cost method Republic of Kazakhstan (Karakuduk Field)-- not subject to depletion : 29,111,000 19,922,000 Furniture, fixtures and equipment 93,000 13,000 Less accumulated depreciation (13,000) (3,000) ------------ ------------ 80,000 10,000 ------------ ------------ Total assets $ 35,294,000 $ 23,519,000 ============ ============ See accompanying notes to financial statements 2
Chaparral Resources, Inc. Consolidated Balance Sheets (continued) (Unaudited) September 30, December 31, 1998 1997 ------------ ------------ Liabilities and stockholders' equity Current liabilities: Accounts payable: Trade $ 345,000 $ 177,000 Accrued liabilities 246,000 54,000 Notes payable (net of discount) 932,000 -- ------------ ------------ Total current liabilities 1,523,000 231,000 Long-term obligations: Accrued compensation 210,000 210,000 Redeemable preferred stock - cumulative, convertible: Series A, 50,000 shares issued and outstanding, at stated value, includes $5.00 cumulative annual dividend, less $500,000 cost of issuance, $5,000,000 redemption value 4,575,000 4,500,000 Stockholders' equity: Common stock - authorized, 100,000,000 shares at September 30, 1998 and December 31, 1997, of $.10 par value; issued and outstanding, 58,298,790 and 49,720,456 shares at September 30, 1998 and December 31, 1997, respectively 5,829,000 4,971,000 Capital in excess of par value 41,800,000 30,340,000 Unearned portion of restricted stock awards (152,000) (109,000) Stock subscription receivable (506,000) (1,770,000) Accumulated Deficit (17,985,000) (14,854,000) ------------ ------------ Total stockholders' equity 28,986,000 18,578,000 ------------ ------------ Total liabilities and stockholders' equity $ 35,294,000 $ 23,519,000 ============ ============ See accompanying notes to financial statements 3
Chaparral Resources, Inc. Consolidated Statements of Operations (Unaudited) For the Three Months Ended For the Nine Months Ended September 30, September 30, September 30, September 30, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Revenue: Oil and gas sales $ -- $ -- $ -- $ -- Costs and expenses: Depreciation and depletion 4,000 3,000 10,000 4,000 General and administrative 572,000 298,000 2,203,000 1,040,000 ------------ ------------ ------------ ------------ 576,000 301,000 2,213,000 1,044,000 ------------ ------------ ------------ ------------ Loss from operations (576,000) (301,000) (2,213,000) (1,044,000) Other income (expense): Interest income 355,000 109,000 805,000 271,000 Interest expense (126,000) (59,000) (189,000) (189,000) Equity in loss from investment (534,000) (231,000) (1,223,000) (520,000) ------------ ------------ ------------ ------------ (305,000) (181,000) (607,000) (438,000) ------------ ------------ ------------ ------------ Loss before extraordinary items (881,000) (482,000) (2,820,000) (1,482,000) Extraordinary Gain (Loss) Loss on Extinguishment of Debt (236,000) -- (236,000) -- Net loss $ (1,117,000) $ (482,000) $ (3,056,000) $ (1,482,000) ------------ ------------ ------------ ------------ Basic and diluted earnings per share: Net loss per share $ (.020) $ (.011) $ (.058) $ (.037) Weighted average number of shares Outstanding 56,142,992 42,106,477 52,428,894 40,263,263 See accompanying notes to financial statements 4
Chaparral Resources, Inc. Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, September 30, 1998 1997 ------------ ------------ Cash flows from operating activities Net loss $ (3,056,000) $ (1,482,000) Adjustments to reconcile net loss to Net cash used in operating Activities: Equity loss from investment 1,223,000 520,000 Depreciation and depletion 10,000 4,000 Loss on the sale of oil and gas properties -- 30,000 Write-down of oil and gas properties -- 3,000 Stock issued for services and bonuses 691,000 -- Amortization of note discount 145,000 99,000 Extraordinary loss on estinguishment of debt 236,000 -- Changes in assets and liabilities: Accounts receivable (147,000) (52,000) Prepaid expenses 8,000 (121,000) Notes receivable (1,009,000) -- Accounts payable & Accrued liabilities 360,000 100,000 ------------ ------------ Net cash used in operating activities (1,539,000) (899,000) Cash flows from investing activities Additions to property and equipment (80,000) (7,000) Proceeds from sale of interest in oil & gas -- 273,000 properties Investment in and advances to foreign oil and gas Properties (10,413,000) (2,818,000) ------------ ------------ Net cash used in investing activities (10,493,000) (2,552,000) Cash flows from financing activities Restricted cash (800,000) -- Payment of notes payable (1,095,000) -- Proceeds from notes payable (net of cash discount) 2,045,000 300,000 Proceeds from warrant exercise -- 7,000 Proceeds from sale of stock (net) 12,450,000 2,300,000 ------------ ------------ Net cash provided by financing Activities 12,600,000 2,607,000 ------------ ------------ Net increase/(decrease) in cash and Cash equivalents 568,000 (844,000) Cash and cash equivalents at beginning of period 3,423,000 920,000 ------------ ------------ Cash and cash equivalents at end of period $ 3,991,000 $ 76,000 ============ ============ See accompanying notes to financial statements 5
Chaparral Resources, Inc. Notes to Consolidated Financial Statements (Unaudited) 1. General Management has elected to omit substantially all notes to the Company's financial statements. Reference should be made to the notes to the financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. 2. Unaudited Information The information furnished herein was taken from the books and records of the Company without audit. However, such information reflects all adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year. 3. Going Concern The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of September 30, 1998, substantially all of the Company's assets are invested in the development of the Karakuduk Field, a shut-in oil field in the central Asian Republic of Kazakhstan, which will require significant additional funding. The Company has incurred recurring operating losses and has no operating assets presently generating cash to fund its operating and capital requirements. The Company's current cash reserves and cash flow from operations are not sufficient to meet the capital spending requirements required to develop the Karakuduk Field through fiscal 1998. Should the Company not meet its capital requirements, the Company's rights to the Karakuduk Field can be terminated. There is no assurance that additional financing will be available, or if available, that it will be timely or on terms favorable to the Company. The Company's continued existence as a going concern is dependent upon the success of future operations, which are, in the near term, dependent on the successful financing and development of the Karakuduk Field, of which there is no assurance. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. 6 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) (Unaudited) 4. New Accounting Standards In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is effective for fiscal years beginning after June 15, 1999, with earlier adoption encouraged. This Statement requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from the changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company has not determined what the effect of SFAS No. 133 will be on results of operations and financial position. The Company will adopt this accounting standard as required by January 1, 2000. 5. Restricted Cash As of September 30, 1998, the Company held $800,000 cash on hand, as collateral for loans made by a financial institution to KKM for the acquisition of tangible equipment used in the Karakuduk Field. 6. Notes Receivable As of September 30, 1998, the Company has an outstanding note receivable of approximately $1,009,000 from a third-party drilling contractor (Contractor). The note consists of $1,000,000 in cash advances from the Company to the Contractor, plus approximately $9,000 in accrued interest owed to the Company from the Contractor. On April 20, 1998, the Company advanced $300,000 to the Contractor to refurbish and winterize the Contractor's drilling rig under contract with KKM. On July 15, 1998, the Company loaned an additional $100,000 to the Contractor for the same purpose. Both loans were subject to an annual rate of interest equal to the three month London Interbank Offered Rate (LIBOR), as published by the Wall Street Journal, plus 1%. On September 10, 1998, the Company loaned an additional $600,000 to the Contractor, as an advance to complete the refurbishment and acquire spare parts for the rig. The Company combined the $600,000 advance with the prior notes for $100,000 and $300,000, plus accrued interest of $8,768, into a new note dated September 10, 1998. Under the terms of the $1,009,000 note, the Contractor will repay the note in twelve monthly payments of approximately $84,000, plus accrued interest, beginning with the earlier of sixty days after the date the drilling rig arrives on location at the Karakuduk Field, or the date the first payment is made by KKM to the drilling contractor for use of the drilling rig. The principal balance of the note accrues interest at a variable rate equal to the three month LIBOR, as published by the Wall Street Journal, plus 1% (approximately 6.4% as of November 18, 1998). 7. Notes Payable On July 1, 1998, the Company borrowed $20,000 from Howard Karren, the Chairman and Chief Executive Officer of the Company. The note was payable 180 days after the date of issuance at an interest rate of 7%. On July 30, 1998, the Company repaid two outstanding loans to Howard Karren, totaling $75,000 and $20,000, respectively. On July 3, 1998, the Company borrowed $975,000 from the Chase Bank of Texas (Chase). The note accrues interest at an adjustable prime rate, as determined by Chase. As of November 16, 1998, Chase's stated prime rate is 8%. The principal of the loan, plus accrued interest, is payable in 4 installments: $250,000 on December 3, 1998, March 3, 1999, and June 3, 1999, and a final principal payment of $225,000 on August 31, 1999. The $975,000 loan was fully guaranteed with a stand-by letter of credit from an investor in the Company. In return for issuing the loan guarantee, the Company paid the guarantor $10,000 plus related costs, issued warrants to purchase 20,000 shares of the Company's Common Stock at an exercise price of $.01 per share, and granted the guarantor a security interest in the Company's Common Stock of Central Asian Petroleum (Guernsey) (CAP-G). 7 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) (Unaudited) 7. Notes Payable (continued) The Company recorded the fair market value of the warrants (approximately $32,000) plus the related loan costs, as a discount of notes payable. The fair market value of the warrants was determined using the Black-Scholes option pricing model, with the following weighted average assumptions: risk free interest rate 5.53%, dividend yield of 0%, volatility factors of the Company's Common Stock of .644, and a weighted average life expectancy of the warrants of 5 years. In the event of the Company's default on the $975,000 note, the guarantor's security interest in the Company's Common Stock in CAP-G cannot be perfected for at least 30 days after notification of such default. In the event of default, the Company may make full payment of any outstanding principal and interest on the note plus any additional charges incurred by the guarantor to completely remove any security interest held by the guarantor in the Company's investment in CAP-G. On August 5, 1998, the Company retired two outstanding loans, totaling $1,000,000, from two related parties: Allen & Company, Incorporated ($900,000) and John McMillian, a director of the Company ($100,000). The Company borrowed the $1,000,000 on June 3, 1998, subject to a 7% interest rate. The note was payable in full, plus accrued interest, on the earlier of 180 days from the funding of the loans or upon the Company's receipt of a minimum of $10,000,000 in equity investments. In conjunction with the loans, the Company issued warrants to purchase 1,000,000 shares of the Company's Common Stock, at an exercise price of $3.50 per share. The Company recorded the warrants at their fair market value of $367,000, as a discount of notes payable, amortizable over the life of the loans. On July 27, 1998, the Company received $10,000,000 in equity financing and repaid the loans, recognizing an extraordinary loss on the extinguishment of debt of approximately $236,000. 8 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) (Unaudited) 8. Common Stock and Related Common Stock Warrants As discussed in Notes Payable (7) above, on July 3, 1998, the Company issued warrants to purchase 20,000 shares of the Company's Common Stock at an exercise price of $.01 per share, in exchange for a stand-by letter of credit securing the $975,000 loan to the Company from the Chase Bank of Texas. Effective on July 28 and July 29, 1998, the Company sold 6,666,667 shares of the Company's Common Stock for $1.50 per share for at total of $10,000,002.50 to certain accredited investors. Allen & Company, Incorporated acted as placement agent in connection with the sale of the 6,666,667 shares. As a result, Allen & Company, Incorporated's warrants to purchase 900,000 shares of the Company's Common Stock, originally issued as commission in connection with the Preferred Stock sale on November 24, 1997, became exercisable for an additional 400,000 shares of the Company's Common Stock. The warrants to purchase the additional 400,000 shares of the Company's Common Stock are exercisable through November 25, 2002, at an exercise price of $0.01 per share. Of the total warrants to purchase 900,000 shares of Common Stock issued to Allen & Company, Incorporated on November 24, 1997, warrants to purchase 700,000 shares of the Company's Common Stock are currently exercisable. Due to the fact the sales price of the 6,666,667 shares was below a price of $2.00 per share, the Company issued an additional 416,667 shares to the investor who purchased 1,250,000 shares of the Company's common stock for $2,500,000 in April 1998 in order to satisfy certain price protection agreements the Company has with such investor. 9. Subsequent Events On October 30, 1998, the Company settled the lawsuit filed against the Company and others in the District Court of Harris County, Texas, by Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. on November 14, 1997, for a total of $200,000 and warrants to purchase 200,000 shares of the Company's Common Stock at an exercise price of $1.00, exercisable through January 28, 1999. The lawsuit was dismissed with prejudice for all defendants involved. The Company believes the lawsuit was without merit, but a settlement was reached to avoid incurring additional legal costs. The Company recorded the fair market value of the warrants (approximately $34,000) using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate 5.53%, dividend yield of 0%, volatility factors of the Company's Common Stock of 1.046, and a weighted average life expectancy of the warrants of .25 years. The lawsuit was previously discussed in Item 3 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997. On October 31, 1998, warrants to purchase 200,000 shares of the Company's Common Stock at an exercise price of $0.25 expired. 9
10. Investments The results from operations of the Company's equity-based investment in KKM are summarized below: Karakuduk-Munay Inc Statement of Expenses and Accumulated Deficit For the Nine Month Period Ended September 30, 1998 and 1997 (Amounts in US Dollars) (Unaudited) For The Three Months Ended For The Nine Months Ended September 30, September 30, September 30, September 30, 1998 1997 1998 1997 --------------------------------------------------------------------- Management service fee $ 152,000 $ 90,000 $ 427,000 $ 270,000 General and administrative expenses 557,000 269,000 1,100,000 511,000 Depreciation of fixed assets 75,000 -- 225,000 -- Interest expense 283,000 104,000 695,000 259,000 ---------- ---------- ---------- ---------- Net loss 1,067,000 463,000 2,447,000 1,040,000 Accumulated deficit, beginning of period 5,396,000 2,928,000 4,016,000 2,351,000 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Accumulated deficit, end period $6,463,000 $3,391,000 $6,463,000 $3,391,000 ---------- ---------- ---------- ---------- 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1. Liquidity and Capital Resources The only oil and gas interest of the Company at this time is the Company's investment in Karakuduk-Munay, Inc. (KKM), through Central Asian Petroleum (Guernsey) (CAP-G). KKM is a closed joint stock company in Kazakhstan. The Company has previously raised capital to finance a portion of its obligations in connection with the acquisition of its interest in CAP-G and the development of the Karakuduk Field and to satisfy working capital needs in the short term. Since January 1, 1998, the Company has raised $12,500,000 through the sale of Common Stock and $2,070,000 through debt obligations. The Company repaid notes payable of $95,000 to Howard Karren on July 30, 1998, and $1,000,000 to two related parties, Allen & Company, Incorporated and John McMillian, a director of the Company, on August 5, 1998, using proceeds raised from the sale of Common Stock. Under the terms of the $1,000,000 note, repayment was required on the earlier of 180 days from the funding of the loans or upon the Company's receipt of a minimum of $10,000,000 in equity financing. In conjunction with the loans, the Company issued warrants to purchase 1,000,000 shares of the Company's Common Stock, at an exercise price of $3.50 per share. The Company recorded the warrants at their fair market value of $367,000, as a discount of notes payable, amortizable over the life of the loans. The Company received $10,000,000 in equity financing on July 27, 1998. Accordingly, the Company repaid the $1,000,000 note, and recognized a $236,000 loss on the early extinguishment of debt. On July 3, 1998, the Company borrowed $975,000 from the Chase Bank of Texas (Chase) . The note accrues interest at an adjustable prime rate, as determined by Chase. As of November 16, 1998, Chase's stated prime rate is 8%. The principal of the loan, plus accrued interest, is payable in 4 installments: $250,000 on December 3, 1998, March 3, 1999, and June 3, 1999, and a final principal payment of $225,000 on August 31, 1999. The proceeds of the loan were used by the Company for the winterization and refurbishment of a drilling rig to be used by KKM in Kazakhstan, expansion of KKM's existing camp facilities, and partial construction of an 18-mile pipeline between the camp and the existing export pipeline. The $975,000 loan is fully guaranteed with a stand-by letter of credit from an investor in the Company. In return for issuing the loan guarantee, the Company paid the guarantor $10,000 plus related costs, issued warrants to purchase 20,000 shares of the Company's Common Stock at an exercise price of $.01 per share, and granted the guarantor a security interest in the Company's Common Stock of CAP-G. There are no other material negative covenants in the loan agreement. In the event of the Company's default on the $975,000 note, the guarantor's security interest in the Company's Common Stock in CAP-G cannot be perfected for at least 30 days after notification of such default. In the event of default, the Company may make full payment of any outstanding principal and interest on the note plus any additional charges incurred by the guarantor to completely remove any security interest held by the guarantor in the Company's investment in CAP-G. The Company is currently seeking to obtain additional capital through debt or equity offerings, encumbering properties, entering into arrangements whereby certain costs of development will be paid by others to earn an interest in the properties, or sale of a portion of the Company's interest in the Karakuduk Field. The present environment for financing the acquisition of oil and gas properties or the ongoing obligations of the oil and gas business is uncertain due, in part, to instability in oil and gas pricing in recent years. The Company's small size and the early stage of development of the Karakuduk Field also increase the difficulty in raising any financing that may be needed in the future. There can be no assurance that the debt or equity financing that might be required to fund the Company's operations and obligations in the future will be available to the Company on economically acceptable terms, if at all. If the Company fails to obtain the additional capital required to develop the Karakuduk Field, the Company's investment in the field most likely will be lost. The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring operating losses and has no operating assets presently 11 generating sufficient cash to fund its operating and capital requirements. The Company current cash reserves and cash flow from operations are not sufficient to meet its capital requirements through fiscal 1998. As of September 30, 1998, substantially all of the Company's assets are invested in the development of the Karakuduk Field. Since the Karakuduk Field is in the early stage of development, the Karakuduk Field does not currently produce any revenue. The development of the Karakuduk Field, through KKM, will require substantial amounts of additional capital. The terms of the KKM revised license require a work plan from the commencement of operations through December 31, 1997, of at least $10,000,000, which has been satisfied. Additional requirements of $34.5 million and $12 million exist for the years ending December 31, 1998 and 1999, respectively. The capital requirements required under the license will be primarily used to fund KKM's drilling operations for the Karakuduk Field, to build the required Field infrastructure and camp facilities necessary to support drilling and production operations, to construct an 18-mile pipeline between the field and the export pipeline, and to construct a central processing unit (cpu) to process oil production from the Field. The Company will not be able to satisfy the $34.5 million requirement for the year ending December 31, 1998, and has requested that the obligation be deferred until the year ended December 31, 1999. If the deferment is not granted, KKM will not be in compliance with the terms of KKM's License with the Government of Kazakhstan and the License may be terminated by the Government of Kazakhstan. In the event KKM's License to develop the Karakuduk Field is terminated, the Company's interest in the Karakuduk Field may be lost. If the Company receives a deferment of the capital requirement, the Company will require substantial additional funding in order to satisfy the 1999 capital commitment under the License. If the 1999 capital requirement is not satisfied, KKM's License may be terminated and the Company's interest in the Karakuduk Field may be lost. As of November 16, 1998, KKM has placed approximately 8,000 tons of production into the export pipeline. KKM has an existing marketing contract with Munay-Impex, a subsidiary of KazakhOil, obligating Munay-Impex to purchase oil from KKM in minimum increments of 5,000 tons. KKM has not sold any of the oil production in the pipeline to Munay-Impex under the existing contract. Instead, KKM is carrying the production as inventory and is attempting to sell the production to the export market outside of the Commonwealth of Independent States, where KKM expects to obtain a higher price per barrel. If KKM cannot complete a sale on the world export market, KKM will sell the current production in inventory to Munay-Impex, in accordance with the existing contract. KKM will record oil revenues when a sale has been completed. On September 25, 1998, the Company requested and received an additional extension to December 31, 1998, from the Overseas Private Investment Corp. ("OPIC") for political risk insurance. OPIC originally granted the Company a binding executed letter of commitment on September 25, 1996. The Company has a standby facility for which it has made eight payments of $31,250 plus one additional payment of $15,625. The Company expects to execute the contract on or before December 31, 1998. The Company has no other material commitments for cash outlay and capital expenditures other than for normal operations. 2. Results of Operations In 1996, the Company accounted for its investment in KKM using pro rata consolidation. In 1997, the Company changed to the equity method in order to reflect the legal ownership right of the other shareholders in KKM. The consolidated financial statements for the quarter ended September 30, 1997 reported herein have been reclassified to reflect the equity method. There was no impact on previously reported earnings. Three Months Ended September 30, 1998 Compared with the Three Months Ended September 30, 1997 The Company's operations during the three months ended September 30, 1998, resulted in a net loss of $1,117,000 compared to a net loss of $482,000 for the three months ended September 30, 1997. 12 Interest income increased by $246,000 from the three months ended September 30, 1997, due to increased financing provided by CAP-G to KKM for KKM's operations in Kazakhstan. Interest expense increased by $67,000 from the three months ended September 30, 1997, due to increased amortization of discounts on notes payable outstanding during the three months ended September 30, 1998. General and administrative costs increased by $274,000 during the three months ended September 30, 1998 as compared to the three months ended September 30, 1997, due to expanding workover and exploration operations in Kazakhstan and increased professional fees relating to the lawsuit that was settled on October 30, 1998, and public SEC filings (Registration Statement on Form S-3). Also, the Company's equity loss in KKM increased by $303,000 during the three months ended September 30, 1998 as compared to the three months ended September 30, 1997, due to increased operational costs directly related to development of oil and gas properties held by KKM. The Company recognized an extraordinary loss of $236,000 on the extinquishment of debt during the three months ended September 30, 1998, from the retirement of two notes totaling $1,000,000. Nine Months Ended September 30, 1998 Compared with the Nine Months Ended September 30, 1997 The Company's operations during the nine months ended September 30, 1998, resulted in a net loss of $3,056,000 compared to a net loss of $1,482,000 for the nine months ended September 30, 1997. Interest income increased by $534,000 from the nine months ended September 30, 1997, due to increased financing provided by CAP-G to KKM for KKM's operations in Kazakhstan. Interest expense remained unchanged from the nine months ended September 30, 1997. General and administrative costs increased by $1,163,000 from the nine months ended September 30, 1997. Without consideration of stock based compensation, a non-cash item, general and administrative costs increased by $472,000 due to expanding workover and exploration operations in Kazakhstan, legal fees associated with the lawsuit that was settled on October 30, 1998, and professional fees relating to the Company's non-routine SEC filings (Registration Statement on Form S-1 and Form S-3). Also, the Company's equity loss in KKM increased by $703,000 from the nine months ended September 30, 1997, due to increased operational costs directly related to development of oil and gas properties held by KKM. The Company recognized an extraordinary loss of $236,000 on the extinquishment of debt during the nine months ended September 30, 1998, from the retirement of two notes totaling $1,000,000. 3. Year 2000 Issue The Company has assessed the Year 2000 issue and does not expect the Year 2000 problem to have a material impact on the Company's operations. After consulting with major vendors, contractors, and technical field personnel, the Company does not anticipate any material costs to result from Year 2000 problems impacting the Company's operations. Item 3 - Quantitative and Qualitative Disclosures About Market Risks Not Applicable. 13 Part II - Other Information Item 1 - Legal Proceedings On October 30, 1998, the Company settled the lawsuit filed against the Company and others in the District Court of Harris County, Texas, by Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. on November 14, 1997, for a total of $200,000 and warrants to purchase 200,000 shares of the Company's Common Stock at an exercise price of $1.00, exercisable through January 28, 1999. The lawsuit was dismissed with prejudice for all defendants involved. The Company believes the lawsuit was without merit, but a settlement was reached to avoid incurring additional legal costs. The Company recorded the fair market value of the warrants (approximately $34,000) using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate 5.53%, dividend yield of 0%, volatility factors of the Company's Common Stock of 1.046, and a weighted average life expectancy of the warrants of .25 years. The lawsuit was previously discussed in Item 3 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Item 2 - Changes in Securities and Use of Proceeds On July 3, 1998, the Company issued warrants to purchase 20,000 shares of the Company's Common Stock at an exercise price of $.01 per share, in exchange for a stand-by letter of credit securing the $975,000 loan to the Company from the Chase Bank of Texas. The Company issued the warrants in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. The guarantor had available all material information concerning the Company. The warrant certificate bears an appropriate restrictive legend under the Securities Act of 1933, as amended. No underwriter was involved in the transaction. Effective on July 28 and July 29, 1998, the Company sold 6,666,667 shares of the Company's Common Stock for $1.50 per share for at total of $10,000,002.50 to certain accredited investors. The Company sold the shares in reliance upon the exemption from registration under Sections 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder. A Form D was timely filed in connection with the sales. The investors, who all were accredited investors, had available all material information concerning the Company. The certificates bear an appropriate restrictive legend under the Securities Act of 1933, as amended. Allen & Company, Incorporated acted as placement agent in connection with the sale of the 6,666,667 shares. As a result, Allen & Company, Incorporated's warrants to purchase 900,000 shares of the Company's Common Stock, originally issued as commission in connection with the Preferred Stock sale on November 24, 1997, became exercisable for an additional 400,000 shares of the Company's Common Stock. The warrants to purchase the additional 400,000 shares of the Company's Common Stock are exercisable through November 25, 2002, at an exercise price of $0.01 per share. Of the total warrants to purchase 900,000 shares of Common Stock issued to Allen & Company, Incorporated on November 24, 1997, warrants to purchase 700,000 shares of the Company's Common Stock are currently exercisable. Due to the fact the sales price of the 6,666,667 shares was below a price of $2.00 per share, the Company issued an additional 416,667 shares to the investor who purchased 1,250,000 shares of the Company's common stock for $2,500,000 in April 1998 in order to satisfy certain price protection agreements the Company has with such investor. The Company does not consider the issuance of 416,667 shares to be a sale. During the quarter ended September 30, 1998, the Company granted 5-year options to purchase 110,000 shares of the Company's Common Stock to employees of, and consultants to, the Company. The Company made the grants in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as Amended. Such persons had available to them all material information concerning the Company. The options will have an appropriate restrictive legend under the Securities Act of 1933, as amended. 14 Item 5 - Other Information In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is effective for fiscal years beginning after June 15, 1999, with earlier adoption encouraged. This Statement requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from the changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company has not determined what the effect of SFAS No. 133 will be on results of operations and financial position. The Company will adopt this accounting standard as required by January 1, 2000. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Credit Support and Pledge Agreement between Whittier Ventures, LLC and Chaparral Resources, Inc. dated July 2, 1998. 10.2 Warrants issued to Whittier Ventures, LLC 10.3 Settlement Agreement and Release between Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. and Chaparral Resources, Inc., Howard Karren, Whittier Trust Company, and James A. Jeffs dated October 30, 1998. 10.4 Warrants issued to Heartland, Inc. of Wichita and Collins & McIlhenny, Inc., as joint tenants, and to Don M. Kennedy. 10.5 Loan Agreement between Challenger Oil Services, PLC and Chaparral Resources, Inc. dated September 10, 1998. 10.6 Promissory Note between Challenger Oil Services, PLC and Chaparral Resources, Inc. dated September 10, 1998. 27 Financial Data Schedule (b) Reports on Form 8-K None 15 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 16, 1998 Chaparral Resources, Inc., a Colorado corporation By: /s/ Howard Karren ------------------------------------------ Howard Karren President and Chief Executive Officer By: /s/ Michael B. Young ------------------------------------------ Michael B. Young, Treasurer and Controller And Principal Accounting Officer 16 Exhibit Index 10.1 Credit Support and Pledge Agreement between Whittier Ventures, LLC and Chaparral Resources, Inc. dated July 2, 1998. 10.2 Warrants issued to Whittier Ventures, LLC 10.3 Settlement Agreement and Release between Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. and Chaparral Resources, Inc., Howard Karren, Whittier Trust Company, and James A. Jeffs, dated October 30, 1998. 10.4 Warrants issued to Heartland, Inc. of Wichita and Collins & McIlhenny, Inc., as joint tenants, and to Don M. Kennedy. 10.5 Loan Agreement between Challenger Oil Services, PLC and Chaparral Resources, Inc. dated September 10, 1998. 10.6 Promissory Note between Challenger Oil Services, PLC and Chaparral Resources, Inc. dated September 10, 1998. 27 Financial Data Schedule 17 EX-10.1 2 CREDIT SUPPORT AND PLEDGE AGREEMENT CREDIT SUPPORT AND PLEDGE AGREEMENT Agreement entered into as of the 2nd day of July, 1998 between Whittier Ventures, LLC, a Delaware Limited Liability Company ("Whittier"), and Chaparral Resources, Inc, a Colorado corporation ("CRI"). WHEREAS, Whittier has agreed to assist CRI in securing approximately $1 million in financing (the "Bank Loan") from Chase Bank of Texas, N.A. ("Chase") in order to enable CRI to pay for the winterization and certain supplies and equipment for a Cabot 900 drilling rig (the drilling rig together with drilling and other equipment is hereinafter referred to as the "Drilling Unit" owned and operated by Challenger Oil Service PLC ("Challenged"); and WHEREAS, Challenger has entered into a drilling contract dated April 7, 1998 (the "Drilling Contract") with Karakuduk Munay, Inc. ("KKM") a joint stock company organized under the laws of the Republic of Kazakstan whereby CRI will use the Drilling Unit to drill certain wells for KKM in the Karakuduk Oil Field in Kazakstan; and WHEREAS, CRI owns all of the issued and outstanding shares of Central Asia Petroleum (Guernsey) Ltd. ("CAP-G"), which in turn owns a fifty percent (50%) interest in KKM; and WHEREAS, Whittier agrees to secure from the Union Bank of California ("UBOC") an irrevocable letter of credit in the amount of $1 million (the "Letter of Credit") on behalf of CRI as a credit enhancement for the Bank Loan. NOW THEREFORE, the parties hereto hereby agree as follows: 1. Issuance of Letter of Credit and Grant of Security Interest ----------------------------------------------------------- 1.1 Whittier agrees to cause UBOC to issue the Letter of Credit in favor of Chase. 1.2 As security for its obligations to Whittier hereunder, CRI hereby pledges, transfers and assigns to Whittier a security interest in the all of the issued and outstanding shares of CAP-G (the "Shares"). In lieu of physical delivery of the certificates representing the Shares, Whittier will accept a letter from the custodian of said certificates that said custodian will act as the agent of Whittier with respect to such Shares (the "Letter"); provided that Whittier expressly retains the right to require the custodian to physically deliver the certificates to Whittier at any time. On or before July 17, 1998, CRI shall deliver to Whittier (1) the original Letter executed by the custodian of the Shares and (2) original stock powers for the Shares to be held by Whittier for disposition in accordance with the terms of this Agreement. 1.3 Upon release of the Letter of Credit, Whittier agrees to promptly release its security interest in the Shares, to return to CRI the related stock powers and, at CRI's sole cost and expense, to take all action and give all notices reasonably requested by CRI to effectuate such release. 2. Agreements of CRI and Rights of Whittier ---------------------------------------- 2.1 If a Default shall exist, CRI irrevocably authorizes and appoints Whittier, while such Default exists, as CRI's attorney-in-fact to do any act which CRI is obligated to do under this Agreement, or which is necessary to carry out the intent of this Agreement. As the attorney-in-fact, Whittier may, among other things, execute any and all documents, agreements and or instruments necessary to carry out the provisions and terms of this Agreement, including but not limited to any documents, agreements and/or instruments required to be filed or recorded with any governmental body or agency. CRI understands and agrees that this authorization and appointment of Whittier is to enable Whittier to protect and preserve its rights under this Agreement. CRI agrees to reimburse Whittier for (all reasonable expenses which it may incur when acting as CRI's attorney-in-fact. Whittier agrees to notify CRI of all actions taken by Whittier in its capacity as CRI's attorney-in-fact, including copies of all correspondence, documents, notices and agreements entered into or executed by Whittier in such capacity and summaries of any actions taken by Whittier in such capacity which are not reduced to writing. 2.2 Whittier may, in its own name, or in the name of CRI vote the Shares and give consents, waivers and ratifications in connection with the Shares, provided that until the occurrence of a Default (as hereinafter defined), Whittier will only take that action if requested by CRI, or if, in its judgment, failure to take that action would impair its rights under this Agreement. If a Default shall exist, Whittier may vote and exercise, or cause its nominee or nominees to vote and exercise, all the powers of an owner with respect to the Shares. In so voting and exercising the power of an owner, Whittier shall not be required to amend any meeting of the stockholders of CAP-G, but Whittier( may vote or act by power of attorney or by proxy, and such power of attorney or proxy may be granted to any person selected by Whittier; and Whittier may so vote and exercise the power of an owner,with respect to the Shares for any purpose or purposes which Whittier, in its discretion, shall deem advisable and in its interest, whether or not such purpose or purposes may be inconsistent with the "best interests" of CRI and whether or not such action may involve a change in the character of the Shares. 2.3 Whittier may, in its own name, or in the name of CRI (l) receive all payments, distributions and dividends in securities, property or cash made with respect to the Shares and, at the discretion of Whittier, held by it until applied as provided in this Agreement; provided that until the occurrence of a Default, any cash dividends received with respect to the Shares shall be paid to CRI; (ii) modify the terms of the Letter of Credit without incurring any responsibility to, or affecting the liability of CRI; and (iii) make any notification (to KKM or otherwise) or take any other action in connection with the perfection or preservation of its security interest or of any enforcement of remedies; provided that until the occurrence of a Default Whittier will only take that action if requested by CRI, or if in its judgment, failure to take that action would impair its rights under this Agreement. 2.4 Except for the pledge of the Shares to Whittier set forth herein, CRI will not sell, assign, or otherwise dispose of, grant any option with respect to, or pledge, or otherwise further encumber (either voluntarily or involuntarily) all or any of the Shares, or file or permit to be filed any financing or like statement with respect to the Shares in which Whittier is not named as the sole secured party. CRI agrees, at its sole cost and expenses, to do all other things which Whittier may, from time to time, deem necessary or advisable in order to perfect and preserve its security interest in the Shares and to give effect to the rights granted to Whittier under this Agreement or to enable Whittier to comply with any applicable laws or regulations in any country, state or any political subdivision thereof. 2.5 CRI will defend its title to the Shares, and to the security interest of Whittier therein, against any and all claims and demands of third parties. CRI shall indemnify and hold Whittier harmless from any and all losses, costs, damages, liabilities or expenses, including reasonable attorney's fees, that Whittier may sustain or incur by reason of defending or protecting Whittier's security interest in and to the Shares or the priority thereof, or in the prosecution or defense of any action or proceeding concerning any matter arising out of or connected with this Agreement or the Shares. 3. Representations and Warranties of CRI CRI represents and warrants as follows: 3.1 The Shares are the only issued and outstanding shares of CAP-G. CRI has good and marketable title to the Shares and has not through any action or omission on its part subjected the Shares to any mortgage, pledge, lien, encumbrance or charge, and no other person or entity has or hereafter will have any right, title, interest, claim or lien in or to the Shares by reason of any action or omission of CRI or anyone claiming by, through or under CRI except for the security interest in favor of Whittier created by this Agreement. 3.2 No authorizations, consents or approvals and no notice to or filing with any governmental authority or regulatory body is required for the execution and delivery of this Agreement or the exercise by Whittier of its rights and remedies. 3.3 The execution, delivery and performance of this Agreement will not violate any provisions of applicable law, regulation or order and will not result in the breach of, or constitute a default, or require any consent, under any agreement, instrument or document to which the undersigned is a party or by which it or any of its property may be bound or affected. 3.4 This Agreement constitutes the legal, valid, and binding obligation of CRI enforceable against CRI in accordance with its terms. 4. Compensation and Payment of Expenses 4.1 As consideration for issuing the Letter of Credit, CRI shall pay Whittier a fee of $10,000 (i.e, one percent (1%) of the face amount of the Letter of Credit), which fee shall be due and payable on or before July 22, 1998. 4.2 In addition to the fee stated in Section 4.1 above, CRI shall issue to Whittier warrants for the purchase of 20,000 shares of the common stock of CRI at $.01 per share. Such warrants shall have a term of five (5) years from the date of issuance. Said warrants shall be dated the date hereof and physically be issued to Whittier on or before July 22, 1998. 4.3 CRI will pay all of Whittier's expenses incurred in connection with this transaction and the securing of the Lever of Credit, including without limitation the fee charged by the UBOC (which is expected to be approximately $10,000) and attorney's fees (subject to a maximum of $5,000); said payments shall be made to Whittier on or before July 22, 1997. 4.4 In the event of a Default, CRI shall pay or reimburse Whittier for all costs and expenses incurred by it, including reasonable attorney's fees, in connection with the sale of the Shares or otherwise enforcing its rights hereunder, including representation at any bankruptcy or similar proceeding. 4.5 In the event that a demand is made against the Letter of Credit, CRI shall pay Whittier interest at the rate of ten percent (10%) per annum on the amount drawn until said amount is paid in full by CRI. 5. Restructure of CAP-G --------------------- Whittier understands that it is contemplated that CAP-G may be restructured through either a merger, consolidation, reincorporation, liquidation or otherwise. In the event that a Default has not occurred, Whittier agrees that it will cooperate with CRI and will permit CRI to take all necessary steps and do all things reasonably necessary to accomplish such restructuring; provided however that (l) the shares of the restructured entity shall be substituted for those of CAP-G and shall thereafter be deemed the Shares, subject to all the terms and conditions set forth herein, (ii) Whittier shall not be required to take any action which will impair its rights under this Agreement and (iii) Whittier shall incur no cost, expense or liability in connection therewith. 6. Default Each of the following is an event of default ("Default"): 6.1 CRI fails to perform or observe any term, covenant or condition set forth herein, or any representation or warranty of this Agreement is materially false or misleading. 6.2 CRI has received notice that it is in default under the Bank Loan, and if such default is curable, such default has not been cured within the appropriate time period. 6.3 Demand is made against the Letter of Credit. 6.4 Whittier has received notice under the Bank Loan that CRI is in default and that Whittier will be required to make a payment under the Letter of Credit, and CRI has not either cured such default within the time specified or paid off the Bank Loan. 6.5 CRI is unable to or admits in writing its inability to pay its debts when due or makes an assignment for the benefit of creditors, petitions or applies to any tribunal for the appointment of a custodian, receiver or trustee for all or a substantial part of its assets or commences any proceeding under any bankruptcy, reorganization arrangement, readjustment of debt, dissolution or liquidation, has any such petition filed, or any such proceeding has been commenced against it, in which an adjudication is made or order for relief is entered or which remains undismissed for a period of thirty (30) days, or has a receiver, custodian or trustee appointed for all or a substantial part of its property. 7. Remedies Upon the occurrence of a Default, Whittier shall have the following rights and remedies: 7.1 Whittier shall have all the rights and remedies with respect to the Shares of a secured party under the UCC (whether or not the UCC is in effect in the jurisdiction where the rights are asserted) and, in accordance therewith shall have the rights, powers and remedies provided in this Agreement, as well as such additional rights and remedies to which a secured party is entitled under the UCC and/or under the laws which are in effect in the jurisdiction where such rights and remedies are asserted, including without limitation any one or more of the following: (a) Whittier may proceed to sell the Shares in any manner permitted by law, or in any manner provided for in this Agreement; provided that Whittier shall not sell the Shares for a period of at least 15 days following the date upon which the Default first occurred; (b) Whittier may sell, assign, transfer or otherwise dispose of all, or from time to time any part of, the Shares at public or private sale, for cash or credit or for other property, for immediate or future delivery, and on terms and in such manner as Whittier may determine, and Whittier or anyone else may purchase the Shares, or any portion thereof, at any such sale, taking such Shares free from any claim or right including, without limitation, any equity of redemption of CRI, which right CRI expressly waives. CRI agrees to take any action requested by Whittier to enable or assist it to sell the Shares; (c) Whittier is authorized to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing for their own account, for investment, and not with a view to distribution or sale of any of the Shares; and (d) Whittier may collect for CRI all distributions, whether capital or income, or both, in whatever form, whether consisting of cash or property, or both, which CRI otherwise would be entitled to receive or in which CRI has any right, title or interest. 7.2 If it has not already obtained physical delivery of the Shares, Whittier may demand that the custodian thereof promptly deliver or cause to be delivered to Whittier or its designated agent or representative at such location in the United States as Whittier may designate, the Shares together with such evidence of title as Whittier may reasonably deem necessary or advisable to enable it to obtain possession of the Shares. 7.3 Every right, power and remedy herein granted to Whittier shall be cumulative and in addition to every other right, power and remedy given or now or hereafter existing in equity, at law or by statute; and each and every right, power and remedy whether specifically given herein or otherwise existing, may be exercised from time to time and so often and in such order as may be deemed expedient by Whittier, and the exercise, or the beginning of the exercise, of any such right, power or remedy shall not be deemed a waiver of the right to exercise, at the same time or thereafter any other right, power or remedy. CRI hereby waives any and all rights it may have to plead or assert any election of remedies if Whitter should realize on any other collateral given to Whittier to secure the obligations of CRI or require Whittier to pursue any other particular remedy. 7.4 If a Default shall have occurred, Whittier shall apply all monies realized by it from dividends or other distributions received by it from the Shares or upon the sale or other disposition of the Shares, as follows: (a) First, to the payment of all costs and expenses incurred by Whittier in the collection or sale thereof, including reasonable attorney's fees. (b) Second, to the payment of all other costs and expenses incurred by Whittier under the terms of this Agreement for which Whittier has not theretofore been reimbursed by CRI. (c) Third, to the payment of any amounts drawn upon the Letter of Credit, any other amounts owing to Whittier hereunder and all accrued and unpaid interest thereon. (d) Fourth, if and to the extent that the Letter of Credit has not been released, to the payment of the Bank Loan. (e) Finally, to CRI. 7.5 Whittier may, to the extent permitted by any applicable law, enforce the performance of the obligations of CRI under the Bank Loan. 8. Assignment This Agreement shall be binding upon, enforceable by and inure to the benefit of the respective successors and assigns of each of the parties hereto. 9. Notices All notices authorized or required between the parties hereto shall be addressed and effective when delivered to such persons as designated below. Each party shall have the right to change its address at any time and/or designate that copies of all such Notices be directed to another person at another address, by giving notice thereof to all other parties. If to Whittier: Whittier Ventures, LLC Whittier Trust Company 1600 Huntington Drive South Pasadena, CA 91030 Attention: David A. Dahl Telephone: (626) 441-5111 Fax: (626) 441-0420 If to CRI: Chaparral Resources, Inc. 2211 Norfolk, Suite 1150 Houston, TX 77096 Attention: Howard Karren Telephone: (713) 807-7100 Fax: (713) 607-7561 With a copy to: Aitken Irvin Lewin Benin Vrooman & Cohn, LLP 2 Gannett Drive White Plains, NY 10604 Attention: Alan D. Berlin, Esq. Telephone: (914) 694-5717 Fax: (914) 694-1647 10. Applicable Law and dispute Resolution ------------------------------------- 10.1 This Agreement shall be governed by, construed, interpreted and enforced in accordance with the substantive laws of the State of Texas, to the exclusion of any conflicts of law rules which would refer the matter to the laws of another jurisdiction. 10.2 Any dispute, controversy or claim arising out of or in relation to or in connection with this Agreement or the operations carried out under this Agreement, including without limitation any dispute as to the construction, validity, interpretation, enforceability or breach of this Agreement, shall be exclusively and finally settled by arbitration, and any Party may submit such a dispute, controversy or claim to arbitration. 10.3 A single arbitrator shall be appointed by unanimous consent of the Parties. If the Parties, however, cannot reach agreement on an arbitrator within thirty (30) days of the submission of a notice of arbitration, the appointing authority for the implementation of such procedure shall be the President of the Association of International Petroleum Negotiators, who shall appoint an independent arbitrator who does not have any financial interest in the dispute, controversy or claim. If such person refuses or fails to act as the appointing authority within ninety (90) days after being requested to do so, then the appointing authority shall be the President of the American Arbitration Association, who shall appoint an independent arbitrator who does not have any financial interest in the dispute, controversy or claim. 10.4 Unless otherwise expressly agreed in writing by the Parties to the arbitration proceedings: (l) The arbitration proceedings shall be held at Whittier's option either in Houston, Texas or Los Angeles County, California; (ii) The arbitration proceedings shall be conducted in the English language and the arbitrator(s) shall be fluent in the English language; (iii) The arbitrator shall be and remain at all times wholly independent and impartial; (iv) The arbitration proceedings shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association, in effect on the Effective Date. (v) Any procedural issues not determined under the arbitral rules selected pursuant to this Agreement shall be determined by the law of the place of arbitration, other than those laws which would refer the matter to another jurisdiction; (vi) The costs of the arbitration proceedings (including attorneys' fees and costs) shall be borne in the manner determined by the arbitrator; (vii) The decision of the arbitrator shall be reduced to writing; final and binding without the right of appeal; the sole and exclusive remedy regarding any claims, counterclaims, issues or accounting presented to the arbitrator; made and promptly paid in U.S. dollars free of any deduction or offset; and any costs or fees incident to enforcing the award, shall to the maximum extent permitted by law, be charged against the Party resisting such enforcement; (viii) Consequential, punitive or other similar damages shall not be allowed; provided, however, the award may include appropriate punitive damages where a Party has engaged in delaying and dilatory actions; (lx) The award shall include interest from the date of any breach or violation of this Agreement, as determined by the arbitral award until paid in full; (x) Judgment upon the award may be entered in any court having jurisdiction over the person or the assets of the Party owing the judgment or application may be made to such court for a judicial acceptance of the award and an order of enforcement, as the case may be; and 11. Miscellaneous 11.1 This Agreement may be executed in any number of counterparts and each such counterpart shall be deemed an original Agreement for all purposes; provided no party shall be bound by the terms of this Agreement unless and until all parties have executed a counterpart. 11.2 This Agreement is the entire agreement of the parties and supersedes all prior understandings and negotiations of the parties. 11.3 The invalidity, illegality or unenforceability of any provision of this Agreement shall not be deemed to affect the validity, legality or enforceability of any other provision hereof. 11.4 No waiver of any default or breach of any of the terms or provisions hereof by Whittier shall be implied from the failure of Whittier to take action on account of such default or breach. No waiver shall affect any default other than the default specified in any written waiver by Whittier. No waiver of any term or provision contained herein by Whittier shall be construed as a waiver of any subsequent breach of the same term or provision. The consent or approval by Whittier to, or of, any act by any other party requiring further consent or approval shall not be deemed to waive or render unnecessary Whittier's consent or approval to, or of, any subsequent similar acts. IN WITNESS WHEREOF, The Parties hereto have executed this Agreement as of the date first above written. Whittier Ventures LLC By ---------------------------- David A. Dahl, President Chaparral Resources Inc. By ---------------------------- Howard Karren, Chairman & CEO IN WITNESS THEREOF, The Parties hereto have executed this Agreement as of the date first above written. Whittier Ventures LLC By: -------------------------- David A. Dahl, President Chaparral Resources,Inc. By: -------------------------- Howard Karren, Chairman & CEO EX-10.2 3 WARRANTS ISSUED TO WHITTIER VENTURES, LLC THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE LAWS OF ANY STATE. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS THEY ARE REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM REGIGTRATION IS AVAILABLE. 20,000 Warrants CHAPARRAL RESOURCES, INC. WARRANT CERTIFICATE This warrant certificate ("Warrant Certificate") certifies that for value received Whittier Ventures, LLC or registered assigns (the "Holder") is the owner of the number of warrants specified above, each of which entitles the Holder thereof to purchase, at any time on or before the Expiration Date (hereinafter defined), one fully paid and non-assessable share of Common Stock, $.10 par value ("Common Stock"), of Chaparral Resources, Inc., a Colorado corporation (the "Company"), for the Purchase Price (defined in Paragraph 1 below) in lawful money of the United States of America (subject to adjustment as hereinafter provided). 1. Warrant; Purchase Price This Warrant shall entitle the Holder initially to purchase 20,000 shares of Common Stock of the Company, and the purchase price payable upon exercise of the Warrant (the "Purchase Price") shall be $0.01 per share of Common Stock. The Purchase Price and number of shares of Common Stock issuable upon exercise of this Warrant are subject to adjustment as provided in Article 6 hereof. The shares of Common Stock issuable upon exercise of the Warrant (and/or other shares of common stock so issuable by reason of any adjustments pursuant to Article 6) are sometimes referred to herein as the "Warrant Shares". 2. Exercise: Expiration Date a. The Warrant is exercisable, at the option of the Holder, in whole or in part at any time and from time to time after the Exercisability Date and on or before the Expiration Date, upon surrender of this Warrant Certificate to the Company together with a duly completed Notice of Exercise, in the form attached hereto as Exhibit A, and payment of the Purchase Price. In the case of exercise of less than the entire Warrant represented by this Warrant Certificate, the Company shall cancel the Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate for the balance of such Warrant. 2.2 The term "Exercisability Date" shall mean the date of this Warrant Certificate. The term "Expiration Date" shall mean 5:00 p.m. Houston, Texas time on July 22, 2003, or if such day shall in the State of Texas be a holiday or a day on which banks are authorized to close, then 5:00 p.m. Houston, Texas time the next following day which in the State of Texas is not a holiday or a day on which banks are authorized to close, 3. Registration and Transfer on Company Books 3.1 The Company shall maintain books for the registration and transfer of the Warrant and the registration and transfer of the Warrant Shares. 3.2 Prior to due presentment for registration of transfer of this Warrant Certificate, or the Warrant Shares, the Company may deem and treat the registered Holder as the absolute owner thereof. 4. Reservation of Shares The Company covenants that it will at all times reserve and keep available out of its authorized capital stock, solely for the purpose of issue upon exercise of the Warrant, such number of shares of capital stock as shall then be issuable upon the exercise of all outstanding Warrant. The Company covenants that all shares of capital stock which shall be issuable upon exercise of the Warrant shall be duly and validly issued and fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof, and that upon issuance such shares shall be listed on each national securities exchange, if any, on which the other shares of such outstanding capital stock of the Company are then listed. 5. Loss or Mutilation Upon receipt by the Company of reasonable evidence of the ownership of and the loss, theft, destruction or mutilation of any Warrant Certificate and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company, or, in the case of mutilation, upon surrender and cancellation of the mutilated Warrant Certificate, the Company shall execute and deliver in lieu thereof a new Warrant Certificate representing an equal number of Warrant Shares. 6. Adjustment of Purchase Price and Number of Shares Deliverable 6.1 The number of Warrant Shares purchasable upon the exercise of the Warrant and the Purchase Price with respect to the Warrant Shares shall be subject to adjustment as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on its Common Stock payable in shares of its capital stock, (ii) subdivide its outstanding shares of Common Stock through stock split or otherwise, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue by reclassification of its of Common Stock (including any reclassification in connection with a consolidation or merger in which the Company is the continuing corporation) other securities of the Company, the number and/or nature of Warrant Shares purchasable upon exercise of the Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. Any adjustment made pursuant to this paragraph (a) shall become effective retroactively as of the record date of such event. (b) In the event of any capital reorganization or any reclassification of the capital stock of the Company or in case of the consolidation or merger of the Company with another corporation (other than a consolidation or merger in which the outstanding shares of the Company's Common Stock are not converted into or exchanged for other rights or interests), or in the case of any sale, transfer or other disposition to another corporation of all or substantially all the properties and assets of the Company, the Holder of the Warrant shall thereafter be entitled to purchase (and it shall be a condition to the consummation of any such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition that appropriate provisions shall be made so that such Holder shall thereafter be entitled to purchase) the kind and amount of shares of stock and other securities and property (including cash) which the Holder would have been entitled to receive had such Warrant been exercised immediately prior to the effective date of such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition; and in any such case appropriate adjustments shall be made in the application of the provisions of this Article 6 with respect to rights and interest thereafter of the Holder of the Warrant to the end that the provisions of this Article 6 shall thereafter be applicable, as near as reasonably may be, in relation to any shares or other property thereafter purchasable upon the exercise of the Warrant. The provisions of this Section 6.1(b) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers or other dispositions. (c) Whenever the number of Warrant Shares purchasable upon the exercise of the Warrant is adjusted, as provided in this Section 6.1, the Purchase Price with respect to the Warrant Shares shall be adjusted by multiplying such Purchase Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of the Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares so purchasable immediately thereafter. 6.2 Whenever the number of Warrant Shares purchasable upon the exercise of the Warrant or the Purchase Price of such Warrant Shares is adjusted, as herein provided, the Company shall mail to the Holder, at the address of the Holder shown on the books of the Company, a notice of such adjustment or adjustments, prepared and signed by the Chief Financial Officer or Secretary of the Company, which sets forth the number of Warrant Shares purchasable upon the exercise of the Warrant and the Purchase Price of such Warrant Shares after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. 6.3 In the event that at any time prior to the expiration of the Warrant and prior to its exercise: (a) the Company shall declare any distribution (other than a cash dividend or a dividend payable in securities of the Company with respect to the Common Stock); or (b) the Company shall offer for subscription to the holders of the Common Stock any additional shares of stock of any class or any other securities convertible into Common Stock or any rights to subscribe thereto; or (c) the Company shall declare any stock split, stock dividend, subdivision, combination, or similar distribution with respect to the Common Stock, regardless of the effect of any such event on the outstanding number of shares of Common Stock; or (d) the Company shall declare a dividend, other than a dividend payable in shares of the Company's own Common Stock; or (e) there shall be any capital change in the Company as set forth in Section 6.1(b); or (f) there shall be a voluntary or involuntary dissolution, liquidation, or winding up of the Company (other than in connection with a consolidation, merger, or sale of all or substantially all of its property, assets and business as an entity); (each such event hereinafter being referred to as a "Notification Event"), the Company shall cause to be mailed to the Holder, not less than 20 days prior to the record date, if any, in connection with such Notification Event (provided, however, that if there is no record date, or if 20 days prior notice is impracticable, as soon as practicable) written notice specifying the nature of such event End the effective date of, or the date on which the books of the Company shall close or a record shall be taken with respect to, such event. Such notice shall also set forth facts indicating the effect of such action (to the extent such effect may be known at the date of such notice) on the Purchase Price and the kind and amount of the shares of stock or other securities or property deliverable upon exercise of the Warrant. 7. Conversion Rights 7.1 In lieu of exercise of any portion of the Warrant as provided in Section 2.1 hereof, the Warrant represented by this Warrant Certificate (or any portion thereof) may, at the election of the Holder, be converted into the nearest whole number of shares of Common Stock equal to: (1) the product of (a) the number of Warrant Shares to be so converted and (b) the excess, if any, of (i) the Market Price per share with respect to the date of conversion over (ii) the purchase price per Warrant Share in effect on the business day next preceding the date of conversion, divided by (2) the Market Price per share with respect to the date of conversion. 7.2 The conversion rights provided under this Section 7 may be exercised in whole or in part and at any time and from time to time while any portion of the Warrant remains outstanding. 1n order to exercise the conversion privilege, the Holder shall surrender to the Company, at its offices, this Warrant Certificate accompanied by a duly completed Notice of Conversion in the form attached hereto as Exhibit B. The Warrant (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Warrant Certificate for conversion in accordance with the foregoing provisions. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver to the Holder (i) a certificate or certificates representing the number of shares of Common Stock to which the Holder shall be entitled as a result of the conversion, and (ii) if the Warrant Certificate is being converted in part only, a new certificate of like tenor and date for the balance of the unconverted portion of the Warrant Certificate. 7.3 "Market Price", as used with reference to any share of stock on any specified date, shall mean: (i) if such stock is listed and registered on any national securities exchange or traded on The Nasdaq Stock Market ("Nasdaq"), (A) the last reported sale price on such exchange or Nasdaq of such stock on the business day immediately preceding the specified date, or (B) if there shall have been no such reported sale price of such stock on the business day immediately preceding the specified date, the Overage of the last reported sale price on such exchange or on Nasdaq on (x) the day next preceding the specified date for which there was a reported sale price and (y) the day next succeeding the specified date for which there was a reported sale price; or (ii) if such stock is not at the time listed on any such exchange or traded on Nasdaq but is traded on the over-the-counter market as reported by the National Quotation Bureau or other comparable service, (A) the average of the closing bid and asked prices for such stock on the business day immediately preceding the specified date, or (B) if there shall have been no such reported bid and asked prices for such stock on the business day immediately preceding the specified date, the average of the last bid and asked prices on (x) the day next preceding the specified date for which such information is available and (y) the day next succeeding the specified date for which such information is available; or (iii) if clauses (i) and (ii) above are not applicable, the fair value per share of such stock as determined in good faith and on a reasonable basis by the Board of Directors of the Company and, if requested, set forth in a certificate 8. Voluntary Adjustment by the Company The Company may, at its option, at any time during the term of the Warrant, reduce the then current Purchase Price to any amount deemed appropriate by the Board of Directors of the Company and/or extend the date of the expiration of the Warrant. 9. Registration Rights The Company has agreed with the Holder that the Company will register for resale the Warrant Shares at the time the Company next files a registration statement with the United States Securities and Exchange Commission to register any of its securities. Notwithstanding the foregoing, the Holder agrees that any certificate representing Warrant Shares will have a restrictive legend thereon stating that the Warrant Shares cannot be transferred except in compliance with the Securities Act of 1933, as amended, and any applicable state securities laws. 10. Governing Law This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of Texas. IN WITNESS THEREOF, the Company has caused this Warrant Certificate to be duly executed by its officers thereunto duly authorized and its corporate seal to be affixed hereon, as of this 2nd day of July, 1998. CHAPARRAL RESOURCES, INC. By: ----------------------------- Name: Title: Attest: - - --------------------------------- Name: Title: EXHIBIT A NOTICE OF EXERCISE The undersigned hereby irrevocably elects to exercise, pursuant to Section 2 of the Warrant Certificate accompanying this Notice of Exercise, _ Warrants of the total number of Warrants owned by the undersigned pursuant to the accompanying Warrant Certificate, and herewith makes payment of the Purchase Price of such shares in full. - - -------------------------------- Name of Holder - - -------------------------------- Signature Address: - - -------------------------------- - - -------------------------------- - - -------------------------------- EXHIBIT B NOTICE OF CONVERSION The undersigned hereby irrevocably elects to convert, pursuant to Section 7 of the Warrant Certificate accompanying this Notice of Conversion, _ Warrants of the total number of Warrants owned by the undersigned pursuant to the accompanying Warrant Certificate into shares of the Common Stock of the Company (the "Shares"). The number of Shares to be received by the undersigned shall be calculated in accordance with the provisions of Section 7.1 of the accompanying Warrant Certificate. Name of Holder Signature Address: EX-10.3 4 SETTLEMENT AGREEMENT AND RELEASE SETTLEMENT AGREEMENT AND RELEASE This Settlement Agreement and Release ("Agreement") is entered into between and among Plaintiffs, Heartland, Inc. of Wichita ("Heartland") and Collins & McIlhenny, Inc. ("C&M"), and Defendants, Chaparral Resources, Inc. ("Chaparral") and Howard Karren, and former Defendants Whittier Trust Company ("Whittier") and James A. Jeffs ("Jeffs"), in consideration of the mutual promises contained herein and other good and valuable consideration. WHEREAS, on November 14, 1997, Heartland and C&M filed their original petition against Chaparral, Karren, Whittier and Jeffs in Cause No. 97-56585; Heartland. Inc. of Wichita and Collins & Mc.Ilhenny, Inc. v. Chaparral Resources, Inc., Howard Karren, Whittier Trust Company and James A. Jeffs; In the 55th Judicial District Court of Harris County, Texas (the "Lawsuit"). Reference is hereby made to the pleadings on file in the Lawsuit for a more thorough description of the disputes, claims and causes of action made the subject of this Agreement; WHEREAS, Chaparral, Karren, Whittier and Jeffs denied and continue to deny the claims asserted against them in the Lawsuit and asserted defenses to those claims; WHEREAS, on August 27, 1998, the Court, on Plaintiffs' motion, dismissed Whittier and Jeffs from the Lawsuit. Nevertheless, it is the desire of all parties that Plaintiffs, on the one hand, and Whittier and Jeffs, on the other, mutually release any and all claims asserted against each other or that could have been asserted in the Lawsuit, it being "understood, however, that the execution of this Agreement by Whittier and Jeffs shall not operate to waive nor shall Plaintiffs argue that it somehow waives the objections to personal jurisdiction that were asserted by Whittier and Jeffs in the Lawsuit and that were pending in the Lawsuit when Plaintiffs dismissed their claims against Whittier and Jeffs; WHEREAS, Heartland, C&M, Chaparral, Karren, Whittier and Jeffs each acknowledge that the Lawsuit involves disputed claims (including the claims previously asserted against Whittier and Jeffs that Plaintiffs dismissed), and that this Agreement does not constitute an admission by any party hereto, as to the merits of any claim or defense in the Lawsuit. The parties have concluded, however, that further litigation of the Lawsuit through trial and any appeal and any litigation that might be initiated involving Whittier and Jeffs with respect to the claims asserted against them and dismissed in the Lawsuit would be extremely expensive and protracted, and that it is desirable that all of the disputes involved currently or at any time previously in the Lawsuit be fully and finally settled in the manner and upon the terms and conditions set forth herein, solely in order to avoid the expense of litigation. NOW, THEREFORE, in consideration of the execution of this Agreement, the foregoing premises, the mutual promises and covenants contained herein, and other good and valuable consideration, the adequacy and sufficiency of which are hereby acknowledged by the respective parties hereto, Heartland, C&M, Chaparral, Karren, Whittier and Jeffs agree as follows: 1. Payment Obligations. a. Cash. Chaparral agrees to pay the sum of TWO HUNDRED THOUSAND AND NO/100 DOLLARS ($200,000.00) by check made payable to Heartland and its attorney of record in the Lawsuit, Don M. Kennedy. b. Warrants. Chaparral will deliver warrants to purchase a total of TWO HUNDRED THOUSAND (200,000) shares of Chaparral common stock at a price of ONE DOLLAR ($l.OO) per Share (the "Warrants"). EIGHTY THOUSSAND (80,000) of the Warrants will be delivered to Don M. Kennedy, counsel of record for Heartland and C&M, and the remaining ONE HUNDRED TWENTY THOUSAND (120,000) Warrants will be delivered to Heartland and CAM, jointly. Chaparral agrees, subject to all applicable securities laws, to include the common stock underlying the Warrants in an amendment to a registration statement that was filed on Form S-3 by Chaparral with the Securities Exchange Commission September 22, 1998 (the "September S-3 Registration Statement"). Specifically, Chaparral will file an amendment to the September S-3 Registration Statement after execution of this Agreement by all parties so that the common stock Underlying the Warrant will be included in the September S-3 Registration Statement prior to the time the September S-3 Registration Statement is declared effective by the SEC. If the September S-3 Registration Statement is not declared effective for any reason, if Chaparral withdraws the September S-3 Registration, Statement for any reason or if, for any reason the common stock underlying the Warrants is not, included in the September S-3 Registration Statement prior to the date the SEC declares the September S-3 Registration Statement effective, Chaparral will include the common stock underlying the Warrants in the next application for registration of stock it files in which said stock may properly be included under applicable law. The Warrants shall expire 90 days after the date they are issued. Once such registration is declarad effective by the SEC, Chaparral will use its best efforts to keep such registration statement effective to permit the resale of the common stock underlying the Warrants until the earlier of the date the shares acquired on the exercise of such Warrants have been sold pursuant to such registration statement or Rule 144 adopted by the SEC is available. Chaparral shall pay all costs, fees and expenses in connection with all registration statements filed under this paragraph 1.b. including, without limitation, Chaparral's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including the fees and expenses of counsel and accountants and advisors for the holders of the Warrants or underlying shares of common stock. Chaparral shall not pay for underwriting discounts and commissions and underwriter's expenses allocable to the common stock being registered or state transfer taxes. c. Division of Payments. Chaparral's delivery of the cash and Warrants set forth above shall be without any obligation on the part of Chaparral, Karren, Whittier or Jeffs to see to the proper division thereof as between C&M and Heartland. The division of the cash and Warrants specified above between Heartland and C&M shall be governed by agreement between them and neither Chaparral, Karren, Whittier nor Jeffs shall have any obligation to administer or see to the proper division thereof or compliance with any agreement between Heartland and C&M. 2. Dismissal. Upon execution of this Agreement, Heartland and C&M shall immediately dismiss the Lawsuit with prejudice to their rights to refile same, any part thereof or to assert any claim arising out of the underlying document dated September 25, 1997 upon which the Lawsuit was based. To accomplish the foregoing, Heartland, C&M, Chaparral and Karren shall execute the Agreed Final Judgment in the form attached hereto and promptly file same for entry by the Court in which the Lawsuit is pending. 3. Heartland's and C&M's Releases. Heartland and C&M for themselves, and their respective past, present and future parent companies, subsidiaries, affiliates, predecessors and successors, their respective past, present and future employees, representatives, agents, servant, attorneys, shareholders, directors, officers, partners, and principals, and their respective heirs, executors, personal representatives, administrators and assigns, any and all persons, natural or corporate, in privity with them or acting in concert with them or any of them, and all persons or entities to whom or for whose conduct they may be liable (collectively "Releasors"), hereby release and forever discharge Chaparral, Karren, Whittier and Jeffs, their respective past, present and future parent companies, subsidiaries, affiliates, predecessors and successors, their respective past, present and future employees, representatives, agents, servants, attorneys, shareholders, directors, officers, partners, and principals, and their respective heirs, executors, personal representatives, administrators, and assigns, and any and all persons, natural or corporate, in privity with them or acting in concert with them ("Releasees"), from any and all claims, demands, causes of action, debts, suits, liabilities, rights of action, dues, sums of money, accounts, bonds, bills, covenants, contracts, controversies, agreements, promises, damages, judgments, variances, executions or obligations of whatever nature, past, present or future, matured or unmatured, liquidated or unliquidated, absolute or contingent, whether in contract or in tort, whether choate or unchoate, known or unknown, arising under or by virtue of any statute or regulation, common law, equity or otherwise, including, without limitation, claims for contribution or indemnity, that the Releasors have, own or hold, or might have had or owned or held, formerly had or might have, own or hold, individually, representatively, derivatively or in any other capacity which they have asserted or alleged, or could have asserted or alleged, against Chaparral, Karren, Whittier or Jeffs from the beginning of time to the present (hereinafter "Claims"), including any such Claims (i) which relate to or which are in any way based upon or arise from the document dated September 25, 1997 which was the subject of the Lawsuit or any restriction or obligation purportedly created by that document, or (ii) which relate to, or which are in any way based upon or arise from or are in any way connected with the claims asserted in the Lawsuit, or (iii) which relate to or which are in any way based upon or arise from, or are in any way connected with any of the acts, facts, events, circumstances, matters, claims, transactions, occurrences, omissions, representations, misrepresentations, or matters of any kind or nature whatsoever, related directly or indirectly to the subject matters referred to, set forth in or the facts or claims for relief which were or could have been alleged or litigated in the Lawsuit, or in any discovery or offer proceeding in connection therewith. Excepted from this release and discharge by Heartland and C&M are the obligations of Chaparral under this Agreement 4. Chaparral's, Karren's. Whittier's and Jeffs' Releases. Chaparral, Karren, Whittier and Jeffs, for themselves, and their respective past, present and future parent companies, subsidiaries, affiliates, predecessors and successors, their respective past, present and future employees, representatives, agents, servants, attorneys, shareholders, directors, officers, partners, and principals, and their respective heirs, executors, personal representatives, administrators and assigns, any and all persons, natural or corporate, in privity with them or acting in concert with them or any of them, and all persons or entities to whom or for whose conduct they may be liable (collectively "Releasors"), hereby release and forever discharge Heartland and C&M, their respective past, present and future parent companies, subsidiaries, affiliates, predecessors and successors, their respective past, present and future employees, representatives, agents, servants, attorneys, shareholders, directors, officers, partners, and principals, and their respective heirs, executors, personal representatives, administrators, and assigns, and any and all persons, natural or corporate, in privity with them or acting in concert with them ("Releasees"), from any and all claims, demands, causes of action, debts, suits, liabilities, rights of action, dues, sums of money, accounts, bonds, bills, covenants, contracts, controversies, agreements, promises, damages, judgments, variances, executions or obligations of whatever nature, past, present or future, matured or unmatured, liquidated or unliquidated, absolute or contingent, whether in contract or in tort, whether choate or unchoate, known or unknown, arising under or by virtue of any statute or regulation, common law, equity or otherwise, including, without limitation, claims for contribution or indemnity, that the Releasors have, own or hold, or might have had or owned or held, formerly had or might have, own or hold, individually, representatively, derivatively or in any other capacity which they have asserted or alleged, or could have asserted or alleged, against Heartland and C&M from the beginning of time to the present (hereinafter "Claims"), including any such Claims (i) which relate to or which are in any way based upon or arise from the document dated September 25, 1997 which was the subject of the Lawsuit, or any restriction or obligation purportedly created by that document, or (ii) which relate to, or which are in any way based upon or arise from or are in any way connected with the claims asserted in the Lawsuit, or (iii) which relate to or which are in any way based upon or arise from, or are in any way connected with any of the acts, facts, events, circumstances, matters, claims, transactions, occurrences, omissions, representations, misrepresentations, or matters of any kind or nature whatsoever, related directly or indirectly to the subject matters referred to, set forth in or the facts or claims for relief which were or could have been alleged or litigated in the Lawsuit, or in any discovery or other proceeding in connection therewith. Excepted from this release and discharge by Chaparral, Karren, Whittier and Jeffs are the obligations of Heartland and C&M under this Agreement, and any claims that any current or former employee of Chaparral may have against Richard Stowell or Heartland for the failure to pay commissions or other compensation arising out of the services alleged by Plaintiffs as the basis of the lawsuit or for Stowell's or Heartland's failure to comply with any agreements or understandings reached by them. 5. No Other Inducements Voluntary Execution. In making this Agreement, Chaparral, Karren, Heartland, C&M, Whittier and Jeffs understand and represent to each other that they have relied solely on their own judgment, belief and knowledge of the nature and extent of any damages alleged, as well as the liability questions involved in the Lawsuit. Chaparral, Karren, Heartland, C&M, Whittier and Jeffs represent and covenant that they have not been influenced to any extent whatsoever in making this Agreement by any representations or statements made by any person or entity hereby released except as reflected herein. Chaparral, Karren, Heartland, C&M, Whittier and Jeffs by their respective signatures below, acknowledge and represent to each other that they have read this Agreement, that they fully understand it, that they have had the benefit of the advice of counsel of their own choosing, that they have relied solely and completely upon their own judgment and the advice of their own counsel in entering into this Agreement, that no promise, inducement or agreement not herein expressed has been made to them, that they are authorized to sign the Agreement and that they have executed it of their own free will and accord. It is expressly understood and agreed by Chaparral, Karren, Heartland, C&M, Whittier and Jeffs that the terms of this Agreement are contractual and not mere recitals. 6. Authority. Chaparral, Karren, Heartland, C&M, Whittier and Jeffs expressly represent and warrant to each other that the person signing on their behalf is authorized and is the proper person to sign this Agreement, and further represent and warrant that they have not assigned, pledged or otherwise sold or transferred, either by written instrument or otherwise, any right, title, interest or claim they have or may have in connection with or arising out of the Lawsuit. The parties also represent and warrant to each other that the person signing this Agreement on their respective behalves is authorized to sign same and that the Agreement shall be binding upon any entity on whose behalf this Agreement is signed. 7. Costs and Expenses. Heartland and C & M shall bear no responsibility for the costs and attorneys' fees incurred by Chaparral, Karren, Whittier and Jeff in their defense of the Lawsuit. Chaparral, Karren, Whittier, and Jeff s shall bear no responsibility for the costs and attorneys' fees incurred by Heartland and C & M in their prosecution of the Lawsuit. 8. Entire Agreement. This Agreement constitutes the entire agreement by and among the parties hereto, supersedes any and all prior understandings and agreements, and may not be modified or amended except on or after the date hereof by writing signed by the party against whom said modification or amendment is to be enforced. The failure of any of the undersigned parties to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be deemed a waiver or deprive such person or entity of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. No waiver of this Agreement, obligations or conditions herein shall be valid unless in a writing signed by the party against whom said waiver is to be enforced. 9. Enforceability. In the event any provision of the Agreement is deemed void and unenforceable, such provision will be regarded as stricken from the Agreement, and will not affect the validity of the remainder of the Agreement. lO. No Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person other than the undersigned parties and their respective successors and assigns, and does not release, and shall not be construed as releasing, any rights enforceable against any person or entity other than entities or persons named herein and their respective predecessors, successors and assigns. 11. Counterparts. This Agreement may be executed in multiple counterparts and each such signed counterpart shall be binding and effective as an original Agreement. 12. Successors and Assigns. This Agreement shall be binding upon the parties hereto and inure to the benefit of the patties hereto and the entities or persons named herein and their respective heirs, successors and assigns, and any corporation, partnership or other entity into or with which any party hereto may merge, consolidate or reorganize. 13. No Admission. This Agreement does not constitute an admission of liability by any palsy, but is simply a settlement of claims. Each of the undersigned acknowledges and understands that each other party expressly denies liability of any kind whatsoever and has made this Agreement in order to buy peace and avoid the expense of continuing the lawsuit. The parties hereto stipulate that the Agreement is executed solely for the purpose of avoiding the costs and uncertainties of the Lawsuit and it shall not be construed as an admission of liability by any party, any such liability being expressly denied. The parties also specifically agree the execution of this Agreement by Whittier and Jeffs is not a waiver of any objection by Whittier and Jeffs to the assertion of personal jurisdiction over them by a Texas court nor is it any type of admission by Whittier or Jeffs, implicit or otherwise, of liability or of personal jurisdiction in a Texas court for the claims asserted. 14. Confidentiality. Except as required by law, regulation, order of a government authority or upon written consent of the other parties hereto, each party and its or his respective agents, employees, affiliates, officers, directors, and attorneys shall keep and maintain this Agreement, the terms and provisions hereof, the Lawsuit, and the facts, issues and disputes, underlying the Lawsuit, in strict confidence and shall not transmit, reveal, disclose, or otherwise communicate any such information to anyone without prior written notice to the other parties. However, the parties, their present, former of future shareholders, directors, officers, agents, representatives, successors, heirs, attorneys, or assigns specifically reserve the right to disseminate certain information, including dissemination required by or to governmental agencies, or make an announcement of the fact of settlement of the litigation, but only as is reasonably necessary in their business affairs and limiting such dissemination to the least amount of information reasonably necessary to accomplish the intended business purpose (for example notice of settlement and amount of payment for income tax purposes). 15. Return of Documents. Within ten (10) days of the execution of this Agreement, (i) all documents and copies of documents produced by defendants in the Lawsuit, and (ii) all documents in Plaintiffs' possession concerning Chaparral, including financial information, documents describing Chaparral and its business prospects and any other documents used in any of Plaintiffs' investment banking efforts regarding Chaparral, shall be returned to Chaparral. 16. Effectiveness. This Agreement shall pot be effective unless and until all of the parties reflected below have executed and acknowledged this Agreement. Signed this ___ day of _________,1998. HEARTLAND, INC. OF WICHITA STATE OF TEXAS COUNTY OF HARRIS BEFORE ME, the undersigned authority, on this day personally appeared __________________________, ___________________ of HEARTLAND, INC. OF WICHITA, who, upon his sworn oath, stated that he executed the above and foregoing Settlement Agreement and Release for the purposes and in the capacity therein stated. SWORN AND SUBSCRIBED to before me on this ____ day of __________, 1998. Notary Public In and For The State of Texas SIGNED this _____ day of ____________, 1998. COLLINS @ MCILHENNY, INC. By:____________________ Title:_________________ STATE OF OKLAHOMA COUNTY OF TULSA BEFORE ME, the undersigned authority, on this day personally appeared ______________________, ________________ of COLLINS @ MCILHENNY, INC. who, upon his sworn oath, stated that he executed the above and foregoing Settlement Agreement and Release for the purposes and in the capacity therein stated. SWORN AND SUBSCRIBED to before me on this ____ day of _________, 1998. Notary Public In and For The State of Oklahoma My Commission Expires: SIGNED this ____ day of __________________,1998. CHAPARRAL RESOURCES, INC. BY:________________________ Title:_____________________ STATE OF NEW YORK COUNTY OF ___________ BEFORE ME, the undersigned authority, on this day personally appeared of CHAPARRAL RESOURCES,INC., who, upon this sworn oath, stated that he executed the above and foregoing Settlement Agreement and Release for the purposes and in the capacity therein stated. SWORN AND SUBSCRIBED to before me on this ____ day of ________________, 1998. Notary Public In and For The State of New York My Commission Expires: - - ---------------------- SIGNED this ____ day of _________, 1998. - - --------------------- HOWARD KARREN STATE OF TEXAS COUNTY OF HARRIS BEFORE ME, the undersigned authority, on this day personally appeared HOWARD KARREN, Individually, who, upon his sworn oath, stated that he executed the above and foregoing Settlement Agreement and Release for the purposes and in the capacity therein stated. SWORN AND SUBSCRIBED to before me on this ____ day of ____________ 1998. ------------------------ Notary Public In and For The State of Texas My Commission Expires: SIGNED this ___ day of ______,1998. - - --------------------------------- HOWARD KARREN STATE OF TEXAS COUNTY OF HARRIS BEFORE ME, the undersigned authority, on fills day personally appeared HOWARD KARREN, Individually, who, upon his sworn oath, stated that he executed the above and foregoing Settlement Agreement and Release for the purposes and in the capacity therein stated. SWORN AND SUBSCRIBED to before me on this _ day of ________ , 1998. Notary Public In and For The State of Texas My Commission Expires: SIGNED this __ day of _______,1998. - - ---------------------------------- JAMES A. JEFFS STATE OF CALIFORNIA COUNTY OF LOS ANGELES BEFORE ME, the undersigned authority, on this day personally appeared JAMES A. JEFFS, who, upon his sworn oath, stated that he executed the above and foregoing Settlement Agreement and Release for the purposes and in the capacity therein stated. SWORN AND SUBSCRIBED to before me on this ____ day of ________, 1998. - - ------------------------ Notary Public In and For The State of California My Commission Expires: SIGNED this ___ day of ___________, 1998. WHITTIER TRUST COMPANY By:_____________________ Title:_____________________ STATE OF CALIFORNIA COUNTY OF LOS ANGELES BEFORE ME, the undersigned authority, on this day personally appeared of WHITTEER TRUST COMPANY, who, upon his sworn oath, stated that he executed the above and foregoing Settlement Agreement and Release for the purposes and in the capacity therein stated. SWORN AND SUBSCRIBED to before me on this ___ day of ____________ , 1998. - - ------------------------ Notary Public In and For The State of California My Commission Expires: NO. 97-56585 HEARTLAND, INC. OF WICHITA AND IN THE DISTRICT COURT OF COLLINS & MCILHENNY,INC. Plaintiffs HARRIS COUNTY,TEXAS v. CHAPARRAL RESOURCES, INC., HOWARD KARREN, WHITTIER TRUST COMPANY AND JAMES A. JEFFS, Defendants 55th JUDICIAL DISTRICT AGREED FINAL JUDGMENT On this day came on to be heard the above-styled and numbered cause and Plaintiffs, Heartland, Inc. of Wichita and Collins & McIlhenny, Inc., and Defendants, Chaparral Resources,Inc. and Howard Karren, by and through their attorneys of record, announced to the Court that the parties had agreed to the terms of this Agreed Final Judgment, and Defendants Whittier Trust Company and James A. Jeffs having been previously non-suited from this matter, the Court is of the opinion that final judgment should be rendered in accordance with the terms hereof, It is therefore, ORDERED, that Plaintiffs take nothing by this suit and that Defendants be in all things discharged and go hence without day and Plaintiffs' claims against Defendants in this cause be dismissed with prejudice to the refiling of same in any form. It is further ORDERED that each party be taxed its or his own costs. All other relief not expressly granted is denied. SIGNED this the ___ day of ________, 1998. JUDGE, 55TH JUDICIAL DISTRICT COURT AGREED AS TO FORM AND SUBSTANCE: Don M. Kennedy State Bar No. 11284500 900 W. Davis Street, Suite 100 Conroe, Texas 77301 (409) 760-2565 (409) 756-3334 ATTORNEYS FOR PLAINTIFFS, HEARTLAND, INC. OF WICHITA AND COLLINS & MCILHENNY, INC. AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. Gregg C. Laswell State Bar No. 11971500 1900 Pennzoil Place - South Tower 711 Louisiana Houston, Texas 77002 Tel: (713) 220-5813 Fax: (713) 236-0822 ATTORNEYS FOR DEFENDANTS, CHAPARRAL RESOURCES, INC. AND HOWARD KARREN EX-10.4 5 WARRANTS ISSUED THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE LAWS OF ANY STATE. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS THEY ARE REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. 120,000 Warrants CHAPARRAL RESOURCES, INC. WARRANT CERTIFICATE This warrant certificate ("Warrant Certificate") certifies that for value received Heartland, Inc. of Wichita and Collins & McIlhenny, Inc., as joint tenants, or their registered assigns (collectively, the "Holder") are the owners of the number of warrants specified above, each of which entitles the Holder thereof to purchase, at any time on or before the Expiration Date (hereinafter defined), one fully paid and non-assessable share of Common Stock, $.10 par value ("Common Stock"), of Chaparral Resources, Inc., a Colorado corporation (the "Company"), for the Purchase Price (defined in Paragraph 1 below) in lawful money of the United States of America (subject to adjustment as hereinafter provided). 1. Warrant; Purchase Price This Warrant shall entitle the Holder to purchase 120,000 shares of Common Stock of the Company, and the purchase price payable upon exercise of the Warrant (the "Purchase Price") shall be $1.00 per share of Common Stock. The Purchase Price and number of shares of Common Stock issuable upon exercise of this Warrant are subject to adjustment as provided in Article 6 hereof. The shares of Common Stock issuable upon exercise of the Warrant (and/or other shares of common stock so issuable by reason of any adjustments pursuant to Article 6) are sometimes referred to herein as the "Warrant Shares". 2. Exercise; Expiration Date 2.1 The Warrant is exercisable, at the option of the Holder, in whole or in part at any time and from time to time after the Exercisability Date and on or before the Expiration Date, upon surrender of this Warrant Certificate to the Company together with a duly completed Notice of Exercise, in the form attached hereto as Exhibit A, and payment of the Purchase Price. In the case of exercise of less than the entire Warrant represented by this Warrant Certificate, the Company shall cancel the Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate for the balance of such Warrant. 2.2 The term "Exercisability Date" shall mean the date of this Warrant Certificate. The term "Expiration Date" shall mean 5:00 p.m. Houston, Texas time on the ninetieth (90th) day following the Exercisability Date, or if such day shall in the State of Texas be a holiday or a day on which banks are authorized to close, then 5:00 p.m. Houston, Texas time the next following day which in the State of Texas is not a holiday or a day on which banks are authorized to close. 3. Registration and Transfer on Company Books 3.1 The Company shall maintain books for the registration and transfer of the Warrant and the registration and transfer of the Warrant Shares. 1 3.2 Prior to due presentment for registration of transfer of this Warrant Certificate, or the Warrant Shares, the Company may deem and treat the registered Holder as the absolute owner thereof. 4. Reservation of Shares The Company covenants that it will at all times reserve and keep available out of its authorized capital stock, solely for the purpose of issue upon exercise of the Warrant, such number of shares of capital stock as shall then be issuable upon the exercise of the outstanding Warrant. The Company covenants that all shares of capital stock which shall be issuable upon exercise of the Warrant shall be duly and validly issued and fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof, and that upon issuance such shares shall be listed on each national securities exchange, if any, on which the other shares of such outstanding capital stock of the Company are then listed. 5. Loss or Mutilation Upon receipt by the Company of reasonable evidence of the ownership of and the loss, theft, destruction or mutilation of any Warrant Certificate and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company, or, in the case of mutilation, upon surrender and cancellation of the mutilated Warrant Certificate, the Company shall execute and deliver in lieu thereof a new Warrant Certificate representing an equal number of Warrant Shares. 6. Adjustment of Purchase Price and Number of Shares Deliverable 6.1 The number of Warrant Shares purchasable upon the exercise of the Warrant and the Purchase Price with respect to the Warrant Shares shall be subject to adjustment as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on its Common Stock payable in shares of its capital stock, (ii) subdivide its outstanding shares of Common Stock through stock split or otherwise, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue by reclassification of its of Common Stock (including any reclassification in connection with a consolidation or merger in which the Company is the continuing corporation) other securities of the Company, the number and/or nature of Warrant Shares purchasable upon exercise of the Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. Any adjustment made pursuant to this paragraph (a) shall become effective retroactively as of the record date of such event. 2 (b) In the event of any capital reorganization or any reclassification of the capital stock of the Company or in case of the consolidation or merger of the Company with another corporation (other than a consolidation or merger in which the outstanding shares of the Company's Common Stock are not converted into or exchanged for other rights or interests), or in the case of any sale, transfer or other disposition to another corporation of all or substantially all the properties and assets of the Company, the Holder of the Warrant shall thereafter be entitled to purchase (and it shall be a condition to the consummation of any such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition that appropriate provisions shall be made so that such Holder shall thereafter be entitled to purchase) the kind and amount of shares of stock and other securities and property (including cash) which the Holder would have been entitled to receive had such Warrant been exercised immediately prior to the effective date of such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition; and in any such case appropriate adjustments shall be made in the application of the provisions of this Article 6 with respect to rights and interest thereafter of the Holder of the Warrant to the end that the provisions of this Article 6 shall thereafter be applicable, as near as reasonably may be, in relation to any shares or other property thereafter purchasable upon the exercise of the Warrant. The provisions of this Section 6.1(b) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers or other dispositions. (c) Whenever the number of Warrant Shares purchasable upon the exercise of the Warrant is adjusted, as provided in this Section 6.1, the Purchase Price with respect to the Warrant Shares shall be adjusted by multiplying such Purchase Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of the Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares so purchasable immediately thereafter. 6.2 Whenever the number of Warrant Shares purchasable upon the exercise of the Warrant or the Purchase Price of such Warrant Shares is adjusted, as herein provided, the Company shall mail to the Holder, at the address of the Holder shown on the books of the Company, a notice of such adjustment or adjustments, prepared and signed by the Chief Financial Officer or Secretary of the Company, which sets forth the number of Warrant Shares purchasable upon the exercise of the Warrant and the Purchase Price of such Warrant Shares after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. 6.3 In the event that at any time prior to the expiration of the Warrant and prior to its exercise: (a) the Company shall declare any distribution (other than a cash dividend or a dividend payable in securities of the Company with respect to the Common Stock); or (b) the Company shall offer for subscription to the holders of the Common Stock any additional shares of stock of any class or any other securities convertible into Common Stock or any rights to subscribe thereto; or (c) the Company shall declare any stock split, stock dividend, subdivision, combination, or similar distribution with respect to the Common Stock, regardless of the effect of any such event on the outstanding number of shares of Common Stock; or (d) the Company shall declare a dividend, other than a dividend payable in shares of the Company's own Common Stock; or (e) there shall be any capital change in the Company as set forth in Section 6.1(b); or (f) there shall be a voluntary or involuntary dissolution, liquidation, or winding up of the Company (other than in connection with a consolidation, merger, or sale of all or substantially all of its property, assets and business as an entity); (each such event hereinafter being referred to as a "Notification Event"), the Company shall cause to be mailed to the Holder, not less than 20 days prior to the record date, if any, in connection with such Notification Event (provided, however, that if there is no record date, or if 20 days prior notice is impracticable, as soon as practicable) written notice specifying the nature of such event and the effective date of, or the date on which the books of the Company shall close or a record shall be taken with respect to, such event. Such notice shall also set forth facts indicating the effect of such action (to the extent such effect may be known at the date of such notice) on the Purchase Price and the kind and amount of the shares of stock or other securities or property deliverable upon exercise of the Warrant. 7. Conversion Rights 7.1 In lieu of exercise of any portion of the Warrant as provided in Section 2.1 hereof, the Warrant represented by this Warrant Certificate (or any portion thereof) may, at the election of the Holder, be converted into the nearest whole number of shares of Common Stock equal to: (1) the product of (a) the number of Warrant Shares to be so converted and (b) the excess, if any, of (i) the Market Price per share with respect to the date of conversion over (ii) the purchase price per Warrant Share in effect on the business day next preceding the date of conversion, divided by (2) the Market Price per share with respect to the date of conversion. 7.2 The conversion rights provided under this Section 7 may be exercised in whole or in part and at any time and from time to time while any portion of the Warrant remains outstanding. In order to exercise the conversion privilege, the Holder shall surrender to the Company, at its offices, this Warrant Certificate accompanied by a duly completed Notice of Conversion in the form attached hereto as Exhibit B. The Warrant (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Warrant Certificate for conversion in accordance with the foregoing provisions. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver to the Holder (i) a certificate or certificates representing the number of shares of Common Stock to which the Holder shall be entitled as a result of the conversion, and (ii) if the Warrant Certificate is being converted in part only, a new certificate of like tenor and date for the balance of the unconverted portion of the Warrant Certificate. 7.3 "Market Price", as used with reference to any share of stock on any specified date, shall mean: (i) if such stock is listed and registered on any national securities exchange or traded on The NASDAQ Stock Market ("NASDAQ"), (A) the last reported sale price on such exchange or NASDAQ of such stock on the business day immediately preceding the specified date, or (B) if there shall have been no such reported sale price of such stock on the business day immediately preceding the specified date, the average of the last reported sale price on such exchange or on NASDAQ on (x) the day next preceding the specified date for which there was a reported sale price and (y) the day next succeeding the specified date for which there was a reported sale price; or (ii) if such stock is not at the time listed on any such exchange or traded on NASDAQ but is traded on the over-the-counter market as reported by the National Quotation Bureau or other comparable service, (A) the average of the closing bid and asked prices for such stock on the business day immediately preceding the specified date, or (B) if there shall have been no such reported bid and asked prices for such stock on the business day immediately preceding the specified date, the average of the last bid and asked prices on (x) the day next preceding the specified date for which such information is available and (y) the day next succeeding the specified date for which such information is available; or (iii) if clauses (i) and (ii) above are not applicable, the fair value per share of such stock as determined in good faith and on a reasonable basis by the Board of Directors of the Company and, if requested, set forth in a certificate delivered to the holder of this Warrant upon the conversion hereof. 8. Voluntary Adjustment by the Company The Company may, at its option and in its sole and absolute discretion, at any time during the term of the Warrant, reduce the then current Purchase Price to any amount deemed appropriate by the Board of Directors of the Company and/or extend the date of the expiration of the Warrant. 9. Registration Rights The Company has agreed with the Holder that the Company will include the Warrant Shares in an amendment to a registration statement that was filed on Form S-3 by the Company with the United States Securities and Exchange Commission ("SEC") on September 22, 1998 (the "September Registration Statement"). If the September Registration Statement is not declared effective for any reason by the SEC, is withdrawn by the Company for any reason, or if, for any reason, the Warrant Shares are not included in the September Registration Statement prior to the date it is declared effective by the SEC, Chaparral will include the Warrant Shares in the next registration statement it files in which such shares may be included under applicable law. The Holder agrees that any registration statement filed by the Company which includes the Warrant Shares need only be kept effective until the earlier of the date the shares acquired on the exercise of this Warrant have been sold pursuant to such registration statement, or Rule 144 adopted by the SEC is available for the sale of such shares. Notwithstanding the foregoing, the Holder agrees that any certificate representing Warrant Shares will have a restrictive legend thereon stating that the Warrant Shares cannot be transferred except in compliance with the Securities Act of 1933, as amended, and any applicable state securities laws. 10. Governing Law This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed by its officers thereunto duly authorized and its corporate seal to be affixed hereon, as of this day of October, 1998. CHAPARRAL RESOURCES, INC. By: Name: Title: [SEAL] Attest: Name: Title: EXHIBIT A NOTICE OF EXERCISE The undersigned hereby irrevocably elects to exercise, pursuant to Section 2 of the Warrant Certificate accompanying this Notice of Exercise, _______ Warrants of the total number of Warrants owned by the undersigned pursuant to the accompanying Warrant Certificate, and herewith makes payment of the Purchase Price of such shares in full. Name of Holder Signature Address: EXHIBIT B NOTICE OF CONVERSION The undersigned hereby irrevocably elects to convert, pursuant to Section 7 of the Warrant Certificate accompanying this Notice of Conversion, _______ Warrants of the total number of Warrants owned by the undersigned pursuant to the accompanying Warrant Certificate into shares of the Common Stock of the Company (the "Shares"). The number of Shares to be received by the undersigned shall be calculated in accordance with the provisions of Section 7.1 of the accompanying Warrant Certificate. Name of Holder Signature Address: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE LAWS OF ANY STATE. THEY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS THEY ARE REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. 80,000 Warrants CHAPARRAL RESOURCES, INC. WARRANT CERTIFICATE This warrant certificate ("Warrant Certificate") certifies that for value received Don M. Kennedy or registered assigns (the "Holder") is the owner of the number of warrants specified above, each of which entitles the Holder thereof to purchase, at any time on or before the Expiration Date (hereinafter defined), one fully paid and non-assessable share of Common Stock, $.10 par value ("Common Stock"), of Chaparral Resources, Inc., a Colorado corporation (the "Company"), for the Purchase Price (defined in Paragraph 1 below) in lawful money of the United States of America (subject to adjustment as hereinafter provided). 1. Warrant; Purchase Price This Warrant shall entitle the Holder to purchase 80,000 shares of Common Stock of the Company, and the purchase price payable upon exercise of the Warrant (the "Purchase Price") shall be $1.00 per share of Common Stock. The Purchase Price and number of shares of Common Stock issuable upon exercise of this Warrant are subject to adjustment as provided in Article 6 hereof. The shares of Common Stock issuable upon exercise of the Warrant (and/or other shares of common stock so issuable by reason of any adjustments pursuant to Article 6) are sometimes referred to herein as the "Warrant Shares". 2. Exercise; Expiration Date 2.1 The Warrant is exercisable, at the option of the Holder, in whole or in part at any time and from time to time after the Exercisability Date and on or before the Expiration Date, upon surrender of this Warrant Certificate to the Company together with a duly completed Notice of Exercise, in the form attached hereto as Exhibit A, and payment of the Purchase Price. In the case of exercise of less than the entire Warrant represented by this Warrant Certificate, the Company shall cancel the Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate for the balance of such Warrant. 2.2 The term "Exercisability Date" shall mean the date of this Warrant Certificate. The term "Expiration Date" shall mean 5:00 p.m. Houston, Texas time on the ninetieth (90th) day following the Exercisability Date, or if such day shall in the State of Texas be a holiday or a day on which banks are authorized to close, then 5:00 p.m. Houston, Texas time the next following day which in the State of Texas is not a holiday or a day on which banks are authorized to close. 3. Registration and Transfer on Company Books 3.1 The Company shall maintain books for the registration and transfer of the Warrant and the registration and transfer of the Warrant Shares. 3.2 Prior to due presentment for registration of transfer of this Warrant Certificate, or the Warrant Shares, the Company may deem and treat the registered Holder as the absolute owner thereof. 4. Reservation of Shares The Company covenants that it will at all times reserve and keep available out of its authorized capital stock, solely for the purpose of issue upon exercise of the Warrant, such number of shares of capital stock as shall then be issuable upon the exercise of the outstanding Warrant. The Company covenants that all shares of capital stock which shall be issuable upon exercise of the Warrant shall be duly and validly issued and fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof, and that upon issuance such shares shall be listed on each national securities exchange, if any, on which the other shares of such outstanding capital stock of the Company are then listed. 5. Loss or Mutilation Upon receipt by the Company of reasonable evidence of the ownership of and the loss, theft, destruction or mutilation of any Warrant Certificate and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company, or, in the case of mutilation, upon surrender and cancellation of the mutilated Warrant Certificate, the Company shall execute and deliver in lieu thereof a new Warrant Certificate representing an equal number of Warrant Shares. 6. Adjustment of Purchase Price and Number of Shares Deliverable 6.1 The number of Warrant Shares purchasable upon the exercise of the Warrant and the Purchase Price with respect to the Warrant Shares shall be subject to adjustment as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on its Common Stock payable in shares of its capital stock, (ii) subdivide its outstanding shares of Common Stock through stock split or otherwise, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue by reclassification of its of Common Stock (including any reclassification in connection with a consolidation or merger in which the Company is the continuing corporation) other securities of the Company, the number and/or nature of Warrant Shares purchasable upon exercise of the Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. Any adjustment made pursuant to this paragraph (a) shall become effective retroactively as of the record date of such event. (b) In the event of any capital reorganization or any reclassification of the capital stock of the Company or in case of the consolidation or merger of the Company with another corporation (other than a consolidation or merger in which the outstanding shares of the Company's Common Stock are not converted into or exchanged for other rights or interests), or in the case of any sale, transfer or other disposition to another corporation of all or substantially all the properties and assets of the Company, the Holder of the Warrant shall thereafter be entitled to purchase (and it shall be a condition to the consummation of any such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition that appropriate provisions shall be made so that such Holder shall thereafter be entitled to purchase) the kind and amount of shares of stock and other securities and property (including cash) which the Holder would have been entitled to receive had such Warrant been exercised immediately prior to the effective date of such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition; and in any such case appropriate adjustments shall be made in the application of the provisions of this Article 6 with respect to rights and interest thereafter of the Holder of the Warrant to the end that the provisions of this Article 6 shall thereafter be applicable, as near as reasonably may be, in relation to any shares or other property thereafter purchasable upon the exercise of the Warrant. The provisions of this Section 6.1(b) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers or other dispositions. (c) Whenever the number of Warrant Shares purchasable upon the exercise of the Warrant is adjusted, as provided in this Section 6.1, the Purchase Price with respect to the Warrant Shares shall be adjusted by multiplying such Purchase Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of the Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares so purchasable immediately thereafter. 6.2 Whenever the number of Warrant Shares purchasable upon the exercise of the Warrant or the Purchase Price of such Warrant Shares is adjusted, as herein provided, the Company shall mail to the Holder, at the address of the Holder shown on the books of the Company, a notice of such adjustment or adjustments, prepared and signed by the Chief Financial Officer or Secretary of the Company, which sets forth the number of Warrant Shares purchasable upon the exercise of the Warrant and the Purchase Price of such Warrant Shares after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. 6.3 In the event that at any time prior to the expiration of the Warrant and prior to its exercise: (a) the Company shall declare any distribution (other than a cash dividend or a dividend payable in securities of the Company with respect to the Common Stock); or (b) the Company shall offer for subscription to the holders of the Common Stock any additional shares of stock of any class or any other securities convertible into Common Stock or any rights to subscribe thereto; or (c) the Company shall declare any stock split, stock dividend, subdivision, combination, or similar distribution with respect to the Common Stock, regardless of the effect of any such event on the outstanding number of shares of Common Stock; or (d) the Company shall declare a dividend, other than a dividend payable in shares of the Company's own Common Stock; or (e) there shall be any capital change in the Company as set forth in Section 6.1(b); or (f) there shall be a voluntary or involuntary dissolution, liquidation, or winding up of the Company (other than in connection with a consolidation, merger, or sale of all or substantially all of its property, assets and business as an entity); (each such event hereinafter being referred to as a "Notification Event"), the Company shall cause to be mailed to the Holder, not less than 20 days prior to the record date, if any, in connection with such Notification Event (provided, however, that if there is no record date, or if 20 days prior notice is impracticable, as soon as practicable) written notice specifying the nature of such event and the effective date of, or the date on which the books of the Company shall close or a record shall be taken with respect to, such event. Such notice shall also set forth facts indicating the effect of such action (to the extent such effect may be known at the date of such notice) on the Purchase Price and the kind and amount of the shares of stock or other securities or property deliverable upon exercise of the Warrant. 7. Conversion Rights 7.1 In lieu of exercise of any portion of the Warrant as provided in Section 2.1 hereof, the Warrant represented by this Warrant Certificate (or any portion thereof) may, at the election of the Holder, be converted into the nearest whole number of shares of Common Stock equal to: (1) the product of (a) (i) the Market Price per share with respect to the date of conversion over (ii) the purchase price per Warrant Share in effect on the business day next preceding the date of conversion, divided by (2) the Market Price per share with respect to the date of conversion. 7.2 The conversion rights provided under this Section 7 may be exercised in whole or in part and at any time and from time to time while any portion of the Warrant remains outstanding. In order to exercise the conversion privilege, the Holder shall surrender to the Company, at its offices, this Warrant Certificate accompanied by a duly completed Notice of Conversion in the form attached hereto as Exhibit B. The Warrant (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Warrant Certificate for conversion in accordance with the foregoing provisions. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver to the Holder (i) a certificate or certificates representing the number of shares of Common Stock to which the Holder shall be entitled as a result of the conversion, and (ii) if the Warrant Certificate is being converted in part only, a new certificate of like tenor and date for the balance of the unconverted portion of the Warrant Certificate. 7.3 "Market Price", as used with reference to any share of stock on any specified date, shall mean: (i) if such stock is listed and registered on any national securities exchange or traded on The NASDAQ Stock Market ("NASDAQ"), (A) the last reported sale price on such exchange or NASDAQ of such stock on the business day immediately preceding the specified date, or (B) if there shall have been no such reported sale price of such stock on the business day immediately preceding the specified date, the average of the last reported sale price on such exchange or on NASDAQ on (x) the day next preceding the specified date for which there was a reported sale price and (y) the day next succeeding the specified date for which there was a reported sale price; or (ii) if such stock is not at the time listed on any such exchange or traded on NASDAQ but is traded on the over-the-counter market as reported by the National Quotation Bureau or other comparable service, (A) the average of the closing bid and asked prices for such stock on the business day immediately preceding the specified date, or (B) if there shall have been no such reported bid and asked prices for such stock on the business day immediately preceding the specified date, the average of the last bid and asked prices on (x) the day next preceding the specified date for which such information is available and (y) the day next succeeding the specified date for which such information is available; or (iii) if clauses (i) and (ii) above are not applicable, the fair value per share of such stock as determined in good faith and on a reasonable basis by the Board of Directors of the Company and, if requested, set forth in a certificate delivered to the holder of this Warrant upon the conversion hereof. 8. Voluntary Adjustment by the Company The Company may, at its option and in its sole and absolute discretion, at any time during the term of the Warrant, reduce the then current Purchase Price to any amount deemed appropriate by the Board of Directors of the Company and/or extend the date of the expiration of the Warrant. 9. Registration Rights The Company has agreed with the Holder that the Company will include the Warrant Shares in an amendment to a registration statement that was filed on Form S-3 by the Company with the United States Securities and Exchange Commission ("SEC") on September 22, 1998 (the "September Registration Statement"). If the September Registration Statement is not declared effective for any reason by the SEC, is withdrawn by the Company for any reason, or if, for any reason, the Warrant Shares are not included in the September Registration Statement prior to the date it is declared effective by the SEC, Chaparral will include the Warrant Shares in the next registration statement it files in which such shares may be included under applicable law. The Holder agrees that any registration statement filed by the Company which includes the Warrant Shares need only be kept effective until the earlier of the date the shares acquired on the exercise of this Warrant have been sold pursuant to such registration statement, or Rule 144 adopted by the SEC is available for the sale of such shares. Notwithstanding the foregoing, the Holder agrees that any certificate representing Warrant Shares will have a restrictive legend thereon stating that the Warrant Shares cannot be transferred except in compliance with the Securities Act of 1933, as amended, and any applicable state securities laws. 10. Governing Law This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed by its officers thereunto duly authorized and its corporate seal to be affixed hereon, as of this day of October, 1998. CHAPARRAL RESOURCES, INC. By: Name: Title: [SEAL] Attest: Name: Title: EXHIBIT A NOTICE OF EXERCISE The undersigned hereby irrevocably elects to exercise, pursuant to Section 2 of the Warrant Certificate accompanying this Notice of Exercise, _______ Warrants of the total number of Warrants owned by the undersigned pursuant to the accompanying Warrant Certificate, and herewith makes payment of the Purchase Price of such shares in full. Name of Holder Signature Address: EXHIBIT B NOTICE OF CONVERSION The undersigned hereby irrevocably elects to convert, pursuant to Section 7 of the Warrant Certificate accompanying this Notice of Conversion, _______ Warrants of the total number of Warrants owned by the undersigned pursuant to the accompanying Warrant Certificate into shares of the Common Stock of the Company (the "Shares"). The number of Shares to be received by the undersigned shall be calculated in accordance with the provisions of Section 7.1 of the accompanying Warrant Certificate. Name of Holder Signature Address: EX-10.5 6 LOAN AGREEMENT LOAN AGREEMENT Agreement entered into as of the 10th day of September, 1998 between Challenger Oil Service, PLC, ("Challenger") a corporation organized under the laws of England, and Chaparral Resources, Inc. ("CRI"), a Colorado corporation. WHEREAS, Challenger has entered into a drilling contract dated April 7, 1998 as amended by Amendment No. 1 dated as of September 10, 1998 ("Drilling Contract") with Karakuduk Munai, Inc. ("KKM") a joint stock company organized under the laws of the Republic of Kazakhstan whereby Challenger will drill certain wells for KKM in the Karakuduk Oil Field in Kazakhstan ("Karakuduk Field"); and WHEREAS, CRI has a fifty percent ( 50%) interest in KKM through its wholly owned subsidiary Central Asian Petroleum (Guernsey) Limited, ("CAP-G"); and WHEREAS, CRI has loaned Challenger three hundred thousand United States Dollars (US$300,000) on April 20, 1998 pursuant to a Promissory Note (the "April Note") on which there is accrued interest as of the date hereof of seven thousand six hundred and ninety five United States dollars (US$7,695), and one hundred thousand United States dollars (US$100,000) on July 15, 1998 pursuant to a Promissory Note (the "July Note") on which there is accrued interest as of the date hereof of one thousand and seventy three United States dollars (US$1,073) (the April Note and the July Note are hereinafter collectively referred to as the "Existing Loans" and WHEREAS, Challenger has requested that CRI loan Challenger an additional six hundred thousand United States dollars (US$600,000.00) ("New Loan") which will be consolidated and extended with the Existing Loans into a new loan in the amount of one million eight thousand seven hundred and sixty eight United States dollars (US$1,008,768.00) ("Loan Amount") to be evidenced by a Promissory Note for the combined Loan Amount to be dated as of the date hereof in the form of Exhibit A; and WHEREAS, CRI is willing to advance the Loan Amount on the terms and conditions set forth herein. NOW THEREFORE, the parties hereto hereby agree as follows: 1. Loan Amount CRI will loan Challenger the Loan Amount of one million eight thousand seven hundred and sixty eight United States dollars (US$1,008,768.00) for a term not to exceed twelve (12) months from the Repayment Commencement Date (the "Loan Term") at an annual interest rate equal to the three (3) month 1 London Interbank Offered Rate ("LIBOR") in effect from time to time during the term of this Loan as published in the Wall Street Journal plus one percentage point ("Interest Rate"). 2. Use of Proceeds 2.1 Challenger has used the proceeds of the Existing Loans to ready the Challenger No. 23 as that term is used in the Drilling Contract dated April 7, 1998 for service in Kazakstan, and agrees to use the proceeds of the New Loan to ready the Drilling Unit as that term is defined in Amendment No.1 to the Drilling Contract dated September 10,1998, including without limitation, purchasing equipment and procuring necessary personnel and services. 2.2 As a condition precedent to CRI advancing the New Loan amount hereunder, Challenger agrees to provide CRI with either a signed copy of the agreement (with the economic terms redacted) between Challenger and Oil and Gas Exploration Company Cracow, Ltd. whereby Challenger has obtained the right to the use of the Drilling Unit, or alternatively, a letter from Oil and Gas Exploration Company Cracow, Ltd., in form and substance satisfactory to CRI and its counsel, acknowledging that the Drilling Unit is being leased to Challenger and will be taken to Kazakhstan for use by KKM pursuant to the Drilling Contract. 3. Repayment Terms 3.1 The Parties agree that until the first payments are made by KKM for the Drilling Unit pursuant to the Drilling Contract, or sixty (60) days after the date that the Drilling Unit arrives on location at the Karakuduk Field, whichever shall first occur ("Repayment Commencement Date"), interest on the Loan shall accrue at the Interest Rate. 3.2 Beginning with the Repayment Commencement Date, and on the next eleven consecutive (11) monthly anniversaries thereof, Maker will pay to Payee, the amount of eighty four thousand and two United States dollars and seventy five cents (US$84,002.75) plus interest at the Interest Rate on the unpaid principal of the Loan Amount. Such interest payments shall be due and payable on or before the last day of each calendar quarter following the Repayment Commencement Date; provided, however that the last interest payment shall be made at the same time as the last principal payment of the Loan Amount. 3.3 Challenger agrees that effective as of the Repayment Commencement Date, and continuing until the Loan is repaid in full, it shall assign to an independent third party financial institution selected by CRI ("Fiscal Agent"), the right to receive all payments made or to be made by KKM under the Drilling Contract. CRI shall notify Challenger of the name of the Fiscal Agent by October 31, 1998, or the date on which the Drilling Unit is 2 rigged up and ready to spud the first well in Kazakstan, whichever is later. Upon receipt of such payments from KKM, the Fiscal Agent shall be instructed to immediately pay to CRI $84,002.75, plus the quarterly interest payment when due and any late fees, defaults or other charges permitted to be collected by CRI hereunder (which amount shall be provided to the Fiscal Agent by CRI not later than ten (10) days prior to the end of each calendar quarter. The Fiscal Agent shall also be instructed that any amounts received by the Fiscal Agent from KKM which are in excess of the foregoing, will be promptly paid to Challenger within three (3) days after their receipt by the Fiscal Agent. 4. Default 4.1 The occurrence of any one or more of the following events with respect to Challenger shall constitute an event of default hereunder ("Event of Default"): (a) If Challenger shall fail to pay any amount when due hereunder, and such failure continues for five (5) days after either CRI or the Fiscal Agent gives written notice thereof to Challenger; provided, however, that KKM has made the payments that are otherwise due under the Drilling Contract. (b) If, pursuant to or within the meaning of the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Challenger shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (c) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Challenger in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Challenger or substantially all of Challenger's properties, or (iii) orders the liquidation of Challenger, and in each case the order or decree is not dismissed within sixty (60) days. 4.2 Challenger shall notify CRI in writing within three (3) days after the occurrence of any Event of Default of which Challenger acquires knowledge. 4.3 Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by CRI), CRI may, at its option, (i) by written notice to Challenger, declare the entire unpaid principal balance of the Promissory Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, (ii) exercise any and all rights and remedies available to it under applicable 3 law, including, without limitation, the right to collect from Challenger all sums due under this Note, and (iii) impose a rate of interest that is equal to the highest rate of interest permissible under applicable law upon any unpaid principal balance of the Promissory Note from the date of the occurrence of an Event of Default until such unpaid principal balance together with any accrued interest and other fees, costs and expenses are paid in full. Challenger shall pay all reasonable costs and expenses incurred by or on behalf of CRI in connection with CRI's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 5. Representations and Warranties of Challenger 5.1 Challenger is a corporation that is duly organized, validly existing, and in good standing under the laws of England and has all necessary power and authority to execute and deliver this Agreement, to perform its obligations hereunder, and to consummate the transactions contemplated hereby. 5.2 Challenger has duly authorized and approved by all requisite action on its part the execution and delivery hereof, and the performance of its obligations hereunder. 5.3 Challenger has duly executed and delivered this Agreement and, assuming CRI has duly authorized, executed, and delivered this Agreement, this Agreement constitutes a legal, valid, and binding obligation of Challenger, enforceable against Challenger in accordance with its terms; 5.4 Challenger's execution, delivery, and performance of this Agreement do not and will not: (A) violate, conflict with, or result in the breach of any provision of Challenger's charter, by-laws, or similar organizational documents; or (B) violate or conflict with any law or governmental order, rule or regulation applicable to Challenger. 5.5 Challenger's execution, delivery, and performance of this Agreement do not and will not require any consent, approval, authorization, or other order of, action by, filing with, or notification to, any governmental authority or any other person or entity, except for such consents, approvals, authorizations, and other orders of, actions by, filings with, and notifications to, any governmental authority or any other person: or entity (A) which have been duly obtained, taken, or made, and which are in full force and effect as of the date hereof; (B) the failure to obtain which would not prevent Challenger from performing its obligations hereunder; and (C) which may be necessary as a result of any facts or circumstances relating solely to CRI. 5.6 No action is pending or, to the best knowledge of Challenger after due inquiry, threatened, which could reasonably be expected to affect the legality, validity, or enforceability of this Agreement, or materially and adversely affect Challenger's ability to pay, perform, or observe its obligations hereunder. 4 6. Representations and Warranties of CRI 6.1 CRI is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware, and has all necessary power and authority to execute and deliver this Agreement, to perform its obligations hereunder, and to consummate the transactions contemplated hereby; 6.2 CRI has duly authorized and approved by all requisite action on its part the execution and delivery hereof, the performance of its obligations hereunder, and the consummation of the transactions contemplated hereby; and 6.3 CRI has duly executed and delivered this Agreement and, assuming Purchaser has duly authorized, executed, and delivered this Agreement, this Agreement constitutes a legal, valid, and binding obligation of CRI, enforceable against CRI in accordance with its terms. 7. Assignment This Agreement may not be assigned by Challenger without the express written consent of CRI (which consent may be granted or withheld in CRI's sole discretion), and shall be binding upon the respective successors and assigns of each of the parties hereto. 8. Notices All notices authorized or required between the parties hereto shall be addressed and effective when delivered to such persons as designated below. Each party shall have the right to change its address at any time and/or designate that copies of all such Notices be directed to another person at another address, by giving notice thereof to all other parties. [THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK] 5 If to Challenger: Challenger Oil Service, PLC c/o Ogden & Maler 3100 S. Gessner, Suite 600 Houston, TX 77063 Attention: George Tatanaki Telephone: 713-974-4466 Fax: 713-974-3355 With a copy to: Ogden & Maler 3100 S. Gessner, Suite 600 Houston, TX 77063 Attention: Harold L. Ogden Telephone: 713-974-4466 Fax: 713-974-3355 If to Chaparral Chaparral Resources, Inc. 2211 Norfolk, Suite 1150 Houston, TX 77098 Attention: Howard Karren Telephone: (713) 807-7100 Fax: (713) 807-7561 With a copy to: Alan D. Berlin, Esq. Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP 2 Gannett Drive White Plains, NY 10604 Telephone: 914-694-5717 Fax: 914-694-1647 9. Applicable Law and Dispute Resolution 9.1 This Agreement shall be governed by, construed, interpreted and enforced in accordance with the substantive laws of the State of Texas, to the exclusion of any conflicts of law rules which would refer the matter to the laws of another jurisdiction. 6 9.2 Each party hereto hereby unconditionally and irrevocably: (A) submits, for itself and its property, to the exclusive jurisdiction of the courts of the State of Texas and any federal court of the United States of America, in either case, sitting in Harris County, Texas, and any appellate court therefrom, in any action based upon, resulting from, arising out of, or relating to this Loan Agreement, or in connection with the authorization, preparation, negotiation, execution, delivery, administration, performance, or enforcement hereof, or for the recognition or enforcement of any judgment resulting from any such action; (B) agrees that it will not commence any action except in any such court of the State of Texas; (C) waives, and agrees that it will not plead or make, any objection to the venue of any state or federal court of the State of Texas and agrees that it will not plead or make, any claim that any such action in any such state or federal court of the State of Texas has been brought in an improper or otherwise inconvenient forum; (D) agrees that it will not seek any punitive damages in any such action, and waives all rights to seek punitive damages; and (E) agrees that the summons and complaint or any other process in any such action may be served by mailing to any of the addresses set forth herein or by hand delivery to a person of suitable age and discretion at any such address, and that any such service shall be deemed to be complete on the date such process is so mailed or delivered and to have the same force and effect as personal service within the State of Texas. 10. Miscellaneous 10.1 This Agreement may be executed in any number of counterparts and each such counterpart shall be deemed an original Loan Agreement for all purposes; provided no party shall be bound by the terms of this Agreement unless and until all parties have executed a counterpart. 10.2 This Loan Agreement is the entire agreement of the parties and supersedes all prior understandings and negotiations of the parties. 10.3 Except as otherwise provided herein or agreed in writing, each party shall pay its own costs and expenses in connection with this Loan Agreement and 7 the services provided hereunder. [THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK] 8 IN WITNESS WHEREOF, The Parties hereto have executed this Loan Agreement as of the date first above written. Challenger Oil Service, PLC By: (Print name and title) Chaparral Resources, Inc. By: (Print name and title) 9 EX-10.6 7 PROMISSORY NOTE PROMISSORY NOTE US$1,008,768.00 September 10, 1998 FOR VALUE RECEIVED, Challenger Oil Services, PLC, a corporation organized under the law of England ("Maker"), promises to pay to the order of Chaparral Resources, Inc., a Colorado corporation ("Payee"), or its designated Fiscal Agent, in lawful money of the United States of America, the principal sum of one million eight thousand seven hundred and sixty eight dollars ($1,008,768.00), together with interest on the unpaid principal balance at an annual rate equal to the three (3) month London Interbank Offered Rate ("LIBOR") in effect from time to time during the term of this loan as published in the Wall Street Journal plus one (1) percentage point in the manner provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. This Note has been executed and delivered pursuant to and in accordance with the terms and conditions of the Loan Agreement, dated as of September 10, 1998, by and between Maker and Payee, (the "Loan Agreement"), and is subject to the terms and conditions of the Agreement, which are, by this reference, incorporated herein and made a part hereof. Capitalized terms used in this Note without definition shall have the respective meanings set forth in the Agreement. 1. PAYMENTS 1.1 PRINCIPAL AND INTEREST The principal amount of this Note together with any accrued and unpaid interest thereon shall be due and payable as follows: (a) From the date hereof until the Repayment Commencement Date, interest will accrue, but no payment will be required. (b) Beginning with the Payment Commencement Date, and on the next eleven consecutive (11) monthly anniversaries thereof, Maker will pay to Payee, the amount of eighty four thousand and two United States dollars and seventy five cents (US$84,002.75) plus interest at the Interest Rate on the unpaid principal of the Loan Amount. Such interest payments shall be due and payable on or before the last day of each calendar quarter following the Repayment Commencement Date; provided, however that the last interest payment shall be made at the same time as the last principal payment of the Loan Amount. 1.2 MANNER OF PAYMENT All payments of principal and interest on this Note shall be made by wire transfer of immediately available funds to an account designated by Payee in writing. 1 1.3 PREPAYMENT Maker may, without premium or penalty, at any time and from time to time, prepay all or any portion of the outstanding principal balance due under this Note, provided that each such prepayment is accompanied by accrued interest on the amount of principal prepaid calculated to the date of such prepayment. Any partial prepayments shall be applied to installments of principal in inverse order of their maturity. 1.4 NO RIGHT OF SET-OFF Maker shall not have the right to withhold and set-off against any amount due hereunder the amount of any claim for indemnification or payment of damages to which Maker may be entitled under the Drilling Contract, provided there has been no default by KKM thereunder. 2. MISCELLANEOUS 2.1 WAIVER The rights and remedies of Payee under this Note shall be cumulative and not alternative. No waiver by Payee of any right or remedy under this Note shall be effective unless in a writing signed by Payee. Neither the failure nor any delay in exercising any right, power or privilege under this Note will operate as a waiver of such right, power or privilege and no single or partial exercise of any such right, power or privilege by Payee will preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. To the maximum extent permitted by applicable law, (a) no claim or right of Payee arising out of this Note can be discharged by Payee, in whole or in part, by a waiver or renunciation of the claim or right unless in a writing, signed by Payee; (b) no waiver that may be given by Payee will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on Maker will be deemed to be a waiver of any obligation of Maker or of the right of Payee to take further action without notice or demand as provided in this Note. Maker hereby waives presentment, demand, protest and notice of dishonor and protest. 2.2 NOTICES Any notice required or permitted to be given hereunder shall be given in accordance with Section 11.4 of the Agreement. 2.3 SEVERABILITY If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full 2 force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 2.4 GOVERNING LAW This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (1) Maker submits, for itself and its property, to the exclusive jurisdiction of the courts of the State of Texas and any federal court of the United States of America, in either case, sitting in Harris County, Texas, and any appellate court therefrom, in any action based upon, resulting from, arising out of, or relating to this Promissory Note, or in connection with the authorization, preparation, negotiation, execution, delivery, administration, performance, or enforcement hereof, or for the recognition or enforcement of any judgment resulting from any such action; (2) Maker agrees that it will not commence any action except in any such court of the State of Texas; waives, (3) Maker agrees that it will not plead or make, any objection to the venue of any state or federal court of the State of Texas and agrees that it will not plead or make, any claim that any such action in any such state or federal court of the State of Texas has been brought in an improper or otherwise inconvenient forum; and (4) Maker agrees that the summons and complaint or any other process in any such action may be served by mailing to any of the addresses set forth herein or by hand delivery to a person of suitable age and discretion at any such address, and that any such service shall be deemed to be complete on the date such process is so mailed or delivered and to have the same force and effect as personal service within the State of Texas. 2.5 PARTIES IN INTEREST This Note shall bind Maker and its successors and assigns. This Note may be assigned or transferred by Payee without the consent of Maker. 2.6 SECTION HEADINGS, CONSTRUCTION The headings of Sections in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Note unless otherwise specified. 3 All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific section or subsection hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHALLENGER OIL SERVICES, PLC By: Title: 4 EX-27 8 FINANCIAL DATA SCHEDULE
5 9-MOS 9-MOS DEC-31-1998 DEC-31-1997 SEP-30-1998 SEP-30-1997 3,991,000 3,423,000 0 0 249,000 102,000 0 0 0 0 5,094,000 3,587,000 29,204,000 19,935,000 13,000 3,000 35,294,000 23,519,000 1,523,000 231,000 0 0 0 0 4,575,000 4,500,000 5,829,000 4,971,000 23,157,000 13,607,000 35,294,000 23,519,000 0 0 805,000 271,000 0 0 2,213,000 1,044,000 1,223,000 520,000 0 0 189,000 189,000 2,820,000 1,482,000 0 0 2,820,000 1,482,000 0 0 236,000 0 0 0 3,056,000 1,482,000 (.058) (.037) (.058) (.037)
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