-----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, KiY2UYTClw8NXfPYNhT3ymp+AghoKtd8G8XZIaqU30kdd4J/4uPcdWxFJ8PA8DgK euVM/Ty8pBXJIArf1TK2qQ== /in/edgar/work/0001050502-00-001319/0001050502-00-001319.txt : 20001121 0001050502-00-001319.hdr.sgml : 20001121 ACCESSION NUMBER: 0001050502-00-001319 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAPARRAL RESOURCES INC CENTRAL INDEX KEY: 0000019252 STANDARD INDUSTRIAL CLASSIFICATION: [1311 ] IRS NUMBER: 840630863 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07261 FILM NUMBER: 773252 BUSINESS ADDRESS: STREET 1: 2211 NORFOLK STREET 2: SUITE 1150 CITY: HOUSTON STATE: TX ZIP: 77098 BUSINESS PHONE: 2818777100 MAIL ADDRESS: STREET 1: 16945 NORTHCHASE STREET 2: SUITE 1440 CITY: HOUSTON STATE: TX ZIP: 77060 10-Q 1 0001.txt 10-Q 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, 2000 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) Delaware 84-0630863 - ------------------------------ ---------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 16945 Northchase Drive, Suite 1620 Houston, Texas 77060 -------------------------------------- (Address of Principal Executive Offices) Registrant's telephone number, including area code: (281) 877-7100 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 20, 2000, the Registrant had 14,283,634 shares of its common stock, par value $0.0001 per share, issued and outstanding. Part I - Summarized Financial Information Item 1 - Financial Statements Chaparral Resources, Inc. Consolidated Balance Sheets September 30, December 31, 2000 1999 (Unaudited) (Audited) ------------ ------------ Assets Current assets: Cash and cash equivalents $ 1,626,000 $ 23,000 Restricted cash -- 578,000 Accounts receivable 38,000 23,000 Receivable from affiliate 333,000 -- Prepaid expenses 147,000 111,000 ------------ ------------ Total current assets 2,144,000 735,000 Investment in KKM and other oil and gas property costs - full cost method Republic of Kazakhstan (Karakuduk Field): 59,280,000 38,151,000 Furniture, fixtures and equipment 91,000 100,000 Less accumulated depreciation (40,000) (39,000) ------------ ------------ 51,000 61,000 ------------ ------------ Other Assets Deferred debt issuance cost -- 2,356,000 Hedge agreement 4,000,000 -- Other 626,000 -- ------------ ------------ Total other assets 4,626,000 2,356,000 ------------ ------------ Total assets $ 66,101,000 $ 41,303,000 ============ ============ 2
Chaparral Resources, Inc. Consolidated Balance Sheets (continued) September 30, December 31, 2000 1999 (Unaudited) (Audited) ------------ ------------ Liabilities and stockholders' equity Current liabilities: Accounts payable $ 606,000 $ 1,045,000 Accrued liabilities: Accrued compensation 306,000 458,000 Accrued debt issuance cost -- 1,934,000 Accrued interest and other 6,000 239,000 ------------ ------------ Total current liabilities 918,000 3,676,000 Shell Capital loan, net of discount 20,447,000 -- Notes payable, net of discount -- 9,576,000 Redeemable preferred stock- cumulative, convertible, Series A 75,000 designated, 50,000 issued and outstanding, at stated value, $5.00 cumulative annual dividend, $5,688,000 redemption value 5,463,000 5,200,000 Stockholders' equity: Common stock - authorized, 100,000,000 shares of $0.0001 par value; issued and outstanding, 12,670,731 and 980,314 shares, respectively 1,000 -- Capital in excess of par value 94,114,000 47,857,000 Unearned portion of restricted stock awards (6,000) (23,000) Preferred stock - 1,000,000 shares authorized, 925,000 shares undesignated. Issued and outstanding - none -- -- Stock subscription receivable (3,000,000) -- Accumulated deficit (51,836,000) (24,983,000) ------------ ------------ Total stockholders' equity 39,273,000 22,851,000 ------------ ------------ Total liabilities and stockholders' equity $ 66,101,000 $ 41,303,000 ============ ============ 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, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Revenue $ -- $ -- $ -- $ -- Costs and expenses: Depreciation and depletion 39,000 5,000 81,000 16,000 General and administrative 1,054,000 379,000 2,520,000 1,636,000 ------------ ------------ ------------ ------------ 1,093,000 384,000 2,601,000 1,652,000 ------------ ------------ ------------ ------------ Loss from operations (1,093,000) (384,000) (2,601,000) (1,652,000) Other income (expense): Interest income 444,000 230,000 1,177,000 685,000 Interest expense (22,597,000) (143,000) (25,293,000) (309,000) Equity in income (loss) from investment 206,000 (254,000) 58,000 (947,000) Legal settlement -- -- -- 34,000 Other 3,000 -- 69,000 -- ------------ ------------ ------------ ------------ (21,944,000) (167,000) (23,989,000) (537,000) ------------ ------------ ------------ ------------ Net loss $(23,037,000) $ (551,000) $(26,590,000) $ (2,189,000) ------------ ------------ ------------ ------------ Cumulative annual dividend accrued Series A Redeemable Preferred Stock (63,000) (63,000) (188,000) (188,000) Discount accretion Series A Redeemable Preferred Stock (25,000) (25,000) (75,000) (75,000) ------------ ------------ ------------ ------------ Net loss available to common stockholders $(23,125,000) $ (639,000) $(26,853,000) $ (2,452,000) ------------ ------------ ------------ ------------ Basic and diluted earnings per share: Net loss per share $ (10.89) $ (.65) $ (19.66) $ (2.51) Weighted average number of shares outstanding (basic and diluted) 2,124,083 977,954 1,365,848 977,752 4
Chaparral Resources, Inc. Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, September 30, 2000 1999 ------------ ------------ Cash flows from operating activities Net loss $(26,590,000) $ (2,189,000) Adjustments to reconcile net loss to Net cash used in operating activities: Equity (gain)/loss from investment (58,000) 947,000 Depreciation, depletion, and amortization 205,000 16,000 Gain on the sale of oil and gas properties (75,000) -- Loss on disposition of furniture and fixtures 6,000 -- Stock issued for services and bonuses 16,000 277,000 Interest expense converted into capital stock 899,000 -- Expired warrants -- (117,000) Provision for doubtful accounts -- 14,000 Amortization of note discount 464,000 34,000 Amortization of debt issuance cost 687,000 -- Interest expense attributable to beneficial conversion 20,340,000 -- Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (348,000) (19,000) Prepaid expenses (36,000 (11,000) Accrued interest on advances to KKM (1,167,000) (623,000) Notes receivable -- (51,000) Hedge agreement (4,000,000) -- Other assets (750,000) -- Increase (decrease) in: Accounts payable and accrued liabilities (2,758,000) 629,000 Interest expense capitalized to Shell Capital loan 2,273,000 -- ------------ ------------ Net cash used in operating activities (10,892,000) (1,093,000) Cash flows from investing activities Additions to furniture, fixtures and equipment $ (10,000) $ (7,000) Investment in and advances to oil and gas properties (19,972,000) (4,250,000) Proceeds from sale of interest in oil and gas properties - domestic 75,000 -- ------------ ------------ Net cash used in investing activities (19,907,000) (4,257,000) 5
Chaparral Resources, Inc. Consolidated Statements of Cash Flows (Continued) (Unaudited) For the Nine Months Ended September 30, September 30, 2000 1999 ------------ ------------ Cash flows from financing activities Net proceeds from Shell Capital loan $ 21,500,000 $ -- Net proceeds from convertible notes 10,806,000 -- Net proceeds from other notes payable -- 5,120,000 Debt issuance cost (482,000) -- Restricted cash 578,000 130,000 ------------ ------------ Net cash provided by financing activities 32,402,000 5,250,000 ------------ ------------ Net increase in cash and cash equivalents 1,603,000 (100,000) Cash and cash equivalents at beginning of period 23,000 121,000 ------------ ------------ Cash and cash equivalents at end of period $ 1,626,000 $ 21,000 ============ ============ Supplemental cash flow disclosure Interest paid $ 624,000 $ 65,000 Supplemental schedule of non-cash investing and financing activities Stock warrant issued to Shell Capital 1,175,000 -- Notes payable converted to common stock 20,846,000 -- See accompanying notes. 6 1. General Chaparral Resources, Inc. ("Chaparral") was incorporated in the state of Colorado in January 1972, principally to engage in the exploration, development and production of oil and gas properties. In April 1999, the Company's stockholders approved the reincorporation of Chaparral from Colorado to Delaware. Chaparral focuses substantially all of its efforts on the exploration and development of the Karakuduk Field, an oilfield located in the Central Asian Republic of Kazakhstan. The consolidated financial statements include the accounts of Chaparral and its 100% owned subsidiaries, Central Asian Petroleum (Guernsey) Limited ("CAP-G"), Road Runner Services Company, Chaparral Acquisition Corporation, and Central Asian Petroleum, Inc. ("CAP-D"). Chaparral owns 80% of the common stock of CAP-G directly and the remaining 20% indirectly through CAP-D. Hereinafter, Chaparral and its subsidiaries are collectively referred to as the "Company." All significant intercompany transactions have been eliminated. CAP-G owns a 50% interest in Closed Type JSC Karakudukmunay ("KKM"), a Kazakhstan joint stock company, which holds the rights for the exploration, development and production of oil in the Karakuduk Field. KKM is owned jointly by CAP-G (50%), KazakhOil JSC ("KazakhOil") (40%) and a private Kazakhstan joint stock company (10%). KazakhOil, the national petroleum company of Kazakhstan, is owned by the government of the Republic of Kazakhstan. The Company shares control of KKM through participation on KKM's Board of Directors. In April 1999, the Company's stockholders approved and effected a sixty for one reverse stock split. Accordingly, all historical weighted average share and per share amounts have been restated to reflect the reverse stock split. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Reference should be made to the notes to the financial statements in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1999. 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, normal recurring adjustments 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 any future interim period or for the year. 2. New Accounting Standards In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This standard provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. This statement, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. As of September 30, 2000, the Company has not adopted SFAS 133. The Company is evaluating this pronouncement and intends to adopt the statement no later than January 1, 2001. The impact of SFAS 133 on the Company's financial position and results of operations has not yet been determined. 7 2. New Accounting Standards (continued) In 1999, the FASB released EITF 99-10, Percentage Used to Determine the Amount of Equity Method Losses, which requires investors to recognize equity method losses beyond their percentage of investee common stock to the extent of their adjusted basis in the investee's common stock and other loans/advances made to the investee. Future equity method gains, if any, would be recaptured by the investor to the extent disproportionate equity method losses were recognized in prior periods. The Company's policy is to recognize equity losses based upon its applicable ownership level in KKM's common stock, advances, interest receivable, and other investments to which the equity method losses are being applied. EITF 99-10 is effective for interim and annual periods beginning after September 23, 1999. The Company has elected to apply EITF 99-10 prospectively beginning in the quarter ended December 31, 1999. For the period ended September 30, 2000, the Company's equity income was $58,000 with the application of EITF 99-10. Without consideration of EITF 99-10, the Company would have recognized equity income of $613,000, an increase of $555,000. 3. Going Concern The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is responsible for providing 100% of the funding for the development of the Karakuduk Field not provided from oil sales or third party sources. The Karakuduk Field will require additional funding to obtain levels of production that will generate sufficient cash flows to meet future capital and operating spending requirements. The primary source of funding is expected to be revenue generated from oil sales, but additional sources of capital may be necessary. The Company has recognized recurring operating losses and had a working capital deficiency as of December 31, 1999. In addition, there are uncertainties with respect to commitments under KKM's license agreement with the government (the "License"). The License required KKM to meet certain expenditure and work commitments on or before June 30, 2000. KKM did not timely satisfy the License's work commitments, but received a letter dated July 4, 2000, from Kazakhstan's licensing authority stating that due to KKM's activities and expenditures to date there were "no grounds for termination or suspension of the operation of the License." While the letter is not a formal amendment to the License, KKM has been advised by its Kazakhstan legal counsel that the License is not in default and a formal amendment should not be expected from the licensing authority. As of September 30, 2000, KKM has fulfilled the expenditure and work commitments originally required by the License. If the License is revoked, however, KKM's right to develop the Karakuduk Field may be terminated and the Company's investment in the Karakuduk Field may be lost. 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 these uncertainties. Management's plan to address these uncertainties include: o Shell Capital Loan. In November 1999, the Company entered a loan agreement (the "Loan") with Shell Capital Limited ("Shell Capital"), to provide up to $24,000,000 in financing for the development of the Karakuduk Field. The consummation of the Loan was subject to a number of significant conditions, which were fulfilled in February 2000. As of September 30, 2000, the Company has borrowed a total of $21,500,000 under the Loan. 8 3. Going Concern (continued) o Equity Support. As an original condition to the Loan, the Company was required to complete an equity offering to its stockholders to acquire not less than $6,000,000 of the Company's common stock on or before June 30, 2000 (the "Rights Offering"). Two of the Company's related party stockholders, Allen & Company, Inc. ("Allen") and Whittier Ventures, LLC ("Whittier"), committed to Shell Capital to exercise their full pro-rata share of the Rights Offering and, if the Rights Offering was not concluded on or before June 30, 2000, to each contribute $2,000,000 into the Company for the Company's securities or indebtedness (the "Equity Support Agreements"). As of August 21, 2000, the Loan was amended to extend the total amount of equity support to be raised by the Company to $10,000,000 on or before September 30, 2000. The Company fulfilled the $10,000,000 equity support commitment by raising a total of $7,500,000 through the issuance of the Company's 8% Non-Negotiable Convertible Promissory Notes (the " Notes"), including $2,000,000 each to Whittier and Allen in satisfaction of their Equity Support Agreements, and execution of a stock subscription agreement to sell $3,000,000 of the Company's common stock to Capco Resources, Ltd. ("Capco") on or before October 30, 2000. o Development of KKM's Proven Reserves. KKM has approximately 67.58 million barrels of estimated proven oil reserves, net of government royalty, of which 33.79 million barrels are attributable to the Company's 50% interest. As of September 30, 2000, KKM has produced approximately 822,000 barrels of crude oil and was producing approximately 3,500 barrels of oil per day. Average daily production was limited due to short-term facility constraints, which KKM is working to alleviate. o Crude Oil Sales Agreement. In November 1999, KKM entered into a Crude Oil Sale and Purchase Agreement (the "Crude Oil Sales Agreement") with Shell Trading International Limited ("STASCO"), an affiliate of Shell Capital, for the purchase of KKM's oil production from the Karakuduk Field on the export market for world market oil prices. The Company expects KKM to obtain a substantially higher return from oil sales under the Crude Oil Sales Agreement than would otherwise be obtainable from oil sales in Kazakhstan's local market. In March 2000, KKM began making nominations for export sales to STASCO. Each nomination is subject to the approval of the government of Kazakhstan. From January 1, 2000, to September 30, 2000, KKM sold approximately 365,000 barrels of crude oil on the export market for $6,710,000, net of transportation costs. KKM also received government approval to export an additional 73,000 barrels for sale in October 2000. To fulfill government requirements, KKM sold approximately 43,800 barrels on the local market in August 2000. The local sale, approved by Shell Capital and STASCO, generated approximately $400,000, net of transportation costs. 9 3. Going Concern (continued) Management's plans for addressing the above uncertainties are partially based upon forward-looking events, which have yet to occur, including the successful future development, production, and sale of crude oil from the Karakuduk Field, as to which there is no assurance. Expected funding requirements necessary for development of the Karakuduk Field through December 31, 2000 and beyond are significantly based upon future cash flows from the sale of KKM's crude oil production. While the Company has fulfilled the equity support requirements of the Loan, no assurances can be given that they will be sufficient to meet the Company's capital requirements not satisfied by cash flows from operations. If the necessary financial resources are not available, the Company may lose its investment in KKM and the Karakuduk Field. 4. Restricted Cash As of December 31, 1999, the Company held restricted cash of $578,000 as collateral for loans made by the Chase Bank of Texas, N.A. ("Chase") to KKM. KKM fully repaid the loans in January 2000, and the collateral was released. 5. Hedge Agreement On February 11, 2000, the Company paid $4,000,000 for put contracts to sell 1,562,250 barrels of North Sea Brent crude (the "Hedge Agreement") to hedge price risk of future sales of oil production from the Karakuduk Field. The exercise prices of the various put contracts in the Hedge Agreement range from $22.35 to $17.25 per barrel, with monthly expiration dates beginning in October 2000 and ending in December 2002. The contracts are evenly spread between October 2000 to December 2001 (62,750 barrels per month) and between January 2002 to December 2002 (51,750 barrels per month). The Company will amortize the Hedge Agreement ratably over the period the underlying contracts expire. As of September 30, 2000, the market value of the Hedge Agreement was $261,000 and the Company's unrealized hedging loss was $3,739,000. 6. Other Assets In March 2000, the Company paid Shell Capital $750,000 for a beneficial interest in Shell Capital's policy for transportation risk insurance ("Transportation Risk Insurance"), covering certain circumstances whereby KKM would be unable to export crude oil production outside of the Republic of Kazakhstan through the existing pipeline routes currently available. In the event coverage under Shell Capital's policy is triggered, proceeds from the policy would go to the benefit of the Company for use in making principal and interest payments required under the Loan. The Company is amortizing the Transportation Risk Insurance over the life of the Loan. 10 7. Shell Capital Loan In November 1999, the Company entered into the Loan with Shell Capital, to provide up to $24,000,000 of financing for the development of the Karakuduk Field. CAP-D, CAP-G, and KKM also signed the Loan as co-obligors. The Company and KKM are hereafter referred to as the "Borrowers". As of September 30, 2000, the Company has borrowed $21,500,000 under the Loan and capitalized $2,273,000 of subordinated interest expense as additional principal. The Loan is recorded net of $3,326,000 in unamortized discount, further described below. The consummation of the Loan was subject to a number of significant conditions, including, without limitation: (i) an equity infusion of at least $9,000,000, (ii) obtaining political risk insurance, (iii) Shell or the Company obtaining transportation risk insurance, (iv) the hedging of a significant portion of the Company's future oil production, and (v) the retirement, conversion, or full subordination of all of the outstanding indebtedness of the Company and KKM, excluding current trade payables. In February 2000, the Company fully satisfied all of the outstanding conditions, drawing down initial funds from the Loan. The equity infusion requirements of the Loan were partially satisfied by the Company's issuance of Notes, convertible into the Company's common stock at an exercise price of $1.86 per share. In August 2000, the Loan was amended to extend the Company's remaining equity support commitment to $10,000,000 on or before September 30, 2000. With Shell Capital's consent, the Company satisfied the $10,000,000 requirement through the issuance of additional Notes totaling approximately $7,500,000 and $3,000,000 of the Company's common stock. The Company issued Notes with an aggregate principal amount of $3,000,000 in August 2000 and another $4,506,000 in September 2000, including Notes totaling $2,000,000 each to Allen and Whittier, respectively. In September 2000, the Company executed a $3,000,000 stock subscription agreement with Capco, a non-affiliated entity, whereby Capco would contribute $3,000,000 into the Company on or before October 30, 2000 for the Company's common stock at $1.86 per share. Capco invested $3,000,000 into the Company on October 30, 2000 in exchange for 1,612,903 shares of the Company's common stock. See Notes 8 and 9. Allen and Whittier, the Company's two largest stockholders, previously entered into Equity Support Agreements with Shell Capital, committing Allen and Whittier to each contribute $2,000,000 into the Company for the Company's equity securities or other subordinated indebtedness at Shell Capital's request. As described above, Allen and Whittier fulfilled their Equity Support Agreement commitments by each contributing $2,000,000 into the Company in exchange for the Company's Notes in September 2000. On September 21, 2000, the Company's outstanding Notes with an aggregate principal amount of $20,846,000, plus accrued interest of $899,000, were converted into 11,690,259 shares of the Company's common stock at a conversion price of $1.86 per share. Shell Capital approved the conversion of the Notes, as required by the Loan. See Note 8. In January 2000, the Company obtained binding political risk insurance coverage from the Overseas Private Investment Corporation ("OPIC"). The OPIC policy's maximum coverage amount electable by the Company is $50,000,000, which would require a quarterly premium of $262,500. The Company is required to maintain political risk insurance until the Loan is fully repaid. As of September 30, 2000, the Company has paid $604,000 in premiums and had bound OPIC coverage of $45,000,000 through October 30, 2000. As discussed in Note 5, the Company entered into the Hedge Agreement in February 2000, purchasing put contracts to sell 1,562,250 barrels of North Sea Brent crude. 11 7. Shell Capital Loan (continued) As discussed in Note 6, the Company paid Shell Capital a total of $750,000 for Transportation Risk Insurance in March 2000. Additionally, KKM entered into a technical service agreement directly with Shell Capital, granting Shell Capital, at their own discretion, the right to bring in technical consultants to work on the Karakuduk Field on a cost only basis. The Company is allowed to drawdown the principal balance of the Loan in minimum increments of $2,000,000, unless otherwise agreed with Shell Capital. Loan advances will be used to meet the capital and operational requirements of KKM, up-front fees and future finance costs required under the Loan, make payments for premiums due under the OPIC and Transportation Risk Insurance policies, and make payments required under the Hedge Agreement. The Loan is available for drawdown until the earlier of September 30, 2001 or project completion. Project completion occurs when various conditions are met by the Company and KKM, including, but not limited to: (i) receipt by Shell Capital of an independent engineer's reserve report evidencing proven developed reserves of at least 30,000,000 barrels in the Karakuduk Field, (ii) sustaining average production of 13,000 barrels of oil per day from the Karakuduk Field for a period of 45 consecutive days, (iii) sustaining water injection at an average rate of 15,000 barrels per day over 45 consecutive days, (iv) injection of lift gas into one well over a 24 hour period, and (v) various other financial and technical milestones ("Project Completion"). Prior to Project Completion, any borrowed amounts accrue interest at an annual rate of LIBOR plus 17.75%, compounding quarterly. The annual interest rate is reduced to LIBOR plus 12.75% after Project Completion. Prior to Project Completion, an interest amount, equal to annual rate of LIBOR plus .50%, is payable quarterly to Shell Capital, along with a commitment fee equal to an annual rate of 1.5% of the undrawn portion of the $24,000,000 debt facility. The remaining unpaid interest is capitalized to the Loan at the end of each quarter. After Project Completion, all quarterly interest on the outstanding Loan is fully due and payable by the Company at the end of each calendar quarter. Principal payments, including any capitalized interest, are due on quarterly reduction dates ("Reduction Date"), beginning with the first calendar quarter ending on the earlier of 60 days following Project Completion or December 31, 2001. Minimum principal payments, based upon percentages of the principal outstanding as of Project Completion, are set out in the Loan and ensure full settlement of the Loan by September 30, 2004, the final maturity date. Mandatory prepayments of principal outstanding are required on each Reduction Date out of any excess cash flow available after consideration of the Company's and KKM's permitted budgeted expenditures for the following 45 days and all fees, interest, and principal payments scheduled on such Reduction Date. In connection with finalizing the Loan, the Company issued to Shell Capital a warrant to purchase up to 15% of the Company's outstanding common stock (the "Shell Warrant"), subject to certain anti-dilution provisions. The Shell Warrant is exercisable for a period of 5 years beginning on the earlier of Project Completion or September 30, 2001. Furthermore, the Shell Warrant is non-transferable and contains certain registration rights. On the date of grant, the Shell Warrant represented 147,072 shares of the Company's common stock at an exercise price of $15.45 per share. After the conversion of the Notes and the issuance of the Company's common stock to Capco, both dilutive events, the Shell Warrant represents 1,785,455 shares of the Company's common stock at an exercise price of $9.79 per share. The fair market value of the Shell Warrant on the date of grant, $1,175,000, was recorded as a discount of the Loan, amortizable as interest expense over the life of the Loan. The fair market value of the Shell Warrant was estimated as of February 14, 2000, the date of initial drawdown under the Loan, using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 6.61%, dividend yield of 0%, volatility factors of the expected market price of the Company's common stock of 1.27, and a weighted average life expectancy of the warrants of 3.5 years. 12 7. Shell Capital Loan (continued) The Loan subjects the Company to a significant number of restrictions, including various representations and warranties, positive and negative covenants, and events of default. See the notes to the financial statements in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1999 for additional information regarding such restrictions. The Company incurred $4,013,000 in debt issuance costs related to the Loan, comprised of up-front fees payable to Shell Capital, legal fees of Shell Capital and the Borrowers, the value of the Shell Warrant on the date of grant, and miscellaneous financing fees and set-up charges. The Company recorded the debt issuance costs as a discount to the Loan, amortizable over the life of the Loan. Total amortization through September 30, 2000 equaled $687,000. As of September 30, 2000, the principal borrowings of $21,500,000 from the Loan were utilized to pay $2,525,000 in outstanding debt issuance costs, $4,000,000 for the Hedge Agreement, $750,000 for Transportation Risk Insurance, $368,000 for the initial OPIC insurance premium, $12,550,000 for KKM's operations, and $1,307,000 for the Company's corporate overhead. Interest expense for the period was $2,874,000, of which $2,273,000 of subordinated interest was capitalized as additional principal at the end of each quarterly period. 8. Notes Payable On September 21, 2000, the Company converted Notes with an aggregate principal amount of $20,846,000, plus accrued interest of $899,000, into 11,690,259 shares of the Company's common stock at a conversion price of $1.86 per share. Prior to conversion, the Notes carried an unamortized discount of $281,000. Originally, the conversion provision of the Notes was subject to shareholder approval, but the Company's board of directors authorized management to obtain approval from the holders of the Notes to amend the terms of the Notes to allow immediate conversion into the Company's common stock. The Company obtained approval from such holders, and the Notes were converted on September 21, 2000. The board of directors decision to amend the terms of the Notes to allow immediate conversion was based upon several factors, including funding the working capital requirements of the Company, the Loan requirement to raise $10,000,000 on or before September 30, 2000, and complying with the various restrictive covenants of the Loan. The Notes consisted of $10,040,000 of the Company's Notes issued during the fourth quarter of 1999 and $10,806,000 issued during 2000, including Notes totaling $3,300,000 in January and February, $3,000,000 in August, and $4,506,000 in September 2000, respectively. The Notes were issued to various related parties and other non-affiliated investors. Notes issued to related parties totaled $14,690,000, including $9,827,000 to Allen, $4,051,000 to Whittier, $662,000 to Mr. McMillian, the Co-Chairman and Chief Executive Officer of the Company, and $150,000 to a relative of Jim Jeffs, the Co-Chairman of the Company. In exchange for the Notes, the Company received $15,556,000 in cash and canceled $5,290,000 in promissory notes issued previously in 1999, plus accrued interest thereon, to Allen ($3,827,000), Whittier ($1,051,000), Mr. McMillian ($412,000). 13 8. Notes Payable (continued) The conversion feature of the Notes was a "beneficial conversion feature" as addressed in EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, whereby a portion of the proceeds received from the Notes is allocable to the conversion feature contained therein. The value assigned to the conversion feature is determined as the difference between the market price of the Company's common stock on the date of issuance and the conversion price multiplied by the number of shares to be received upon conversion, which was approximately $120,000,000. As the conversion price contained in the Notes is substantially below the market price, the value under the above formula significantly exceeds the net proceeds from the Notes. Under EITF 98-5, the discount assigned to the conversion feature is limited to the total proceeds allocated to the convertible instrument. Accordingly, upon conversion of the Notes, the Company recorded additional interest expense and additional paid in capital equal to $20,340,000, the face amount of the Notes net of original discount. 9. Common Stock The conversion of the Company's Notes on September 21, 2000 resulted in the issuance of 11,690,259 shares of the Company's common stock (see Note 8), a portion of which were issued to certain affiliates of the Company who were holders of the Notes. Affiliates receiving shares as a result of the conversion include Allen (5,561,166 shares), Whittier (2,255,004 shares), and Mr. McMillian (378,364 shares). In September 2000, the Company executed a stock subscription agreement with Capco, whereby Capco would acquire $3,000,000 of the Company's common stock on or before October 30, 2000 at $1.86 per share, or 1,612,903 shares. The transaction was completed on October 30, 2000, with Shell Capital's approval. Capco was also a holder of two of the Company's Notes with an aggregate principal amount of $750,000, which were converted, along with accrued interest thereon, into 427,113 shares of the Company's common stock on September 21, 2000. 10. Other Related Party Transactions Effective January 1, 2000, Chaparral entered into an agreement to provide management services to KKM for a fee of $170,000 per month, to be recovered from KKM on a current basis from proceeds from oil sales. The receivable from affiliate represents 100% of accrued management fees and reimbursable expenses, net of payments received from KKM through September 30, 2000. The reimbursable expenses include costs paid by the Company on behalf of KKM. Effective March 1, 2000, the Company sold overriding royalty interests in certain domestic oil and gas properties for $75,000 to a former Chairman and Chief Executive Officer of the Company, resulting in a $75,000 gain. In February 1997, the Company had assigned the overriding royalty interests to the same individual as part of a severance agreement for a period of three years, after which they would revert to the Company. The Company holds no other interests in domestic oil and gas properties. 14
11. Investments The results from operations of the Company's equity-based investment in KKM are summarized below: Closed Type JSC Karakudukmunay Statement of Expenses and Accumulated Deficit For the Three and Nine Month Periods Ended September 30, 2000 and 1999 (Amounts in US Dollars) (Unaudited) For The Three Months Ended For The Nine Months Ended September 30, September 30, September 30, September 30, 2000 1999 2000 1999 ------------ ------------ ------------ ------------- Revenues: Oil Sales $ 4,341,000 $ -- $ 8,893,000 $ -- Costs and expenses: Transportation and marketing costs 714,000 -- 1,783,000 -- Operating expenses 1,521,000 -- 2,315,000 -- Depreciation and depletion 685,000 150,000 1,463,000 400,000 Management service fee 173,000 151,000 454,000 431,000 General and administrative 615,000 323,000 1,637,000 1,421,000 ------------ ------------ ------------ ------------- Total cost and expenses 3,708,000 624,000 7,652,000 2,252,000 ------------ ------------ ------------ ------------- Income (Loss) from operations 633,000 (624,000) 1,241,000 (2,252,000) Other income (expense): Interest Income $ 14,000 $ -- $ 41,000 $ -- Interest expense from affiliates (883,000) (327,000) (2,334,000) (887,000) Other -- -- (57,000) -- ------------ ------------ ------------ ------------- Net loss (236,000) (951,000) (1,109,000) (3,139,000) Accumulated deficit, beginning of period (12,880,000) (9,691,000) (12,007,000) (7,503,000) ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------- Accumulated deficit, end of period (13,116,000) (10,642,000) (13,116,000) (10,642,000) ============ ============ ============ ============= From January 1, 2000 to September 30, 2000, KKM sold approximately 365,000 barrels of crude oil on the export market for approximately $6,710,000, net of transportation costs. KKM also received government approval to export an additional 73,000 barrels for sale in October 2000. To fulfill government requirements, KKM sold approximately 43,800 barrels on the local market during this period. The local sale, approved by Shell Capital and STASCO, generated approximately $400,000, net of transportation costs. 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1. Liquidity and Capital Resources General Liquidity Considerations. - --------------------------------- Our financial statements have been presented on the basis we are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We are responsible for providing 100% of the funding for the development of the Karakuduk Field not provided from oil sales or third party sources. The Karakuduk Field will require additional funding to obtain levels of production that will generate sufficient cash flows to meet future capital and operating spending requirements. The primary source of funding is expected to be revenue generated from oil sales, but additional sources of capital may be necessary. We have recognized recurring operating losses and had a working capital deficiency as of December 31, 1999. In addition, there are uncertainties with respect to commitments under KKM's License. The License required KKM to meet certain expenditure and work commitments on or before June 30, 2000. KKM did not timely satisfy the License's work commitments, but received a letter dated July 4, 2000, from the licensing authority stating that due to KKM's activities and expenditures to date, there were "no grounds for termination or suspension of the operation of the License." While the letter is not a formal amendment to the License, KKM has been advised by its Kazakhstan legal counsel that the License is not in default and a formal amendment should not be expected from the licensing authority. As of September 30, 2000, KKM has fulfilled the expenditure and work commitments originally required by the License. If the License is revoked, however, KKM's right to develop the Karakuduk Field may be terminated and our investment in the Karakuduk Field may be lost. These conditions raise substantial doubt about our 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 these uncertainties. Management has taken the following actions, to address the substantial doubt with respect to our ability to remain a going concern and enhance our short and long-term liquidity: o Shell Capital Loan. In November 1999, we entered into the Loan with Shell Capital, to provide up to $24,000,000 in financing for the development of the Karakuduk Field. The consummation of the Loan was subject to a number of significant conditions, which were subsequently fulfilled in February 2000. As of November 20, 2000, we have borrowed a total of $21,500,000 under the Loan. o Equity Support. As an original condition to the Loan, we were required to complete a Rights Offering to our stockholders to acquire not less than $6,000,000 of our common stock on or before June 30, 2000. Two of our related party stockholders, Allen and Whittier, committed to Shell Capital to exercise their full pro-rata share of the Rights Offering and, if the Rights Offering was not concluded on or before June 30, 2000, to each contribute $2,000,000 into Chaparral for our securities or indebtedness. As of August 21, 2000, the Loan was amended to extend the total amount of equity support to be raised by Chaparral to $10,000,000 on or before September 30, 2000. We fulfilled the $10,000,000 equity support commitment by raising a total of $7,500,000 through the issuance of Notes, including $2,000,000 each to Whittier and Allen in satisfaction of their Equity Support Agreements, and execution of a stock subscription agreement to sell $3,000,000 of the Company's common stock to Capco on or before October 30, 2000. 16 o Development of KKM's Proven Reserves. KKM has approximately 67.58 million barrels of estimated proven oil reserves, net of government royalty, of which 33.79 million barrels are attributable to our 50% interest. As of November 20, 2000, KKM has produced approximately 1,000,000 barrels of crude oil and was producing approximately 3,500 barrels of oil per day. Average daily production has been limited due to short-term facility constraints, which KKM is working to alleviate, including field shut-downs to install and hook-up various field facilities. o Crude Oil Sales Agreement. In November 1999, KKM entered into the Crude Oil Sales Agreement with STASCO, an affiliate of Shell Capital, for the purchase of KKM's oil production from the Karakuduk Field on the export market for world market oil prices. We expect KKM to obtain a substantially higher return from oil sales under the Crude Oil Sales Agreement than would otherwise be obtainable from oil sales in Kazakhstan's local market. In July 2000, KKM began making monthly nominations for export sales to STASCO. Each nomination is subject to the approval of the government of Kazakhstan. From January 1, 2000 to November 20, 2000, KKM sold approximately 438,000 barrels of crude oil on the export market for approximately $8,500,000, net of transportation costs. KKM also has a government approved nomination of approximately 146,000 barrels for December 2000 delivery to STASCO, which is expected to generate approximately $3,300,000, net of transportation costs. The government has required KKM sell approximately 139,000 barrels of oil on the local market during 2000. As of November 20, 2000, KKM completed local sales, with the approval of STASCO and Shell Capital, of approximately 102,000 barrels for approximately $950,000, net of transportation costs. The remaining local sales requirement is scheduled for delivery in December 2000. Management's plans for addressing the above uncertainties are partially based upon forward looking events, which have yet to occur, including the successful future development, production, and sale of crude oil from the Karakuduk Field, as to which there is no assurance. Expected funding requirements necessary for development of the Karakuduk Field through December 31, 2000 and beyond are significantly based upon future cash flows from the sale of KKM's crude oil production. While Chaparral has fulfilled the equity support requirements of the Loan, no assurances can be given that they will be sufficient to meet future capital requirements not satisfied by cash flows from operations. If the necessary financial resources are not available, Chaparral could lose its investment in KKM and the Karakuduk Field. Other risks and considerations also impact our short and long-term liquidity. Specifically, KKM's ability to develop the Karakuduk Field, obtain export oil quota, and physically deliver its production to the export market are significant liquidity factors, along with the impact of volatile oil prices on cash proceeds from oil sales. Chaparral's Notes and Other Subordinated Indebtedness. - ------------------------------------------------------ Chaparral has raised a total of $20,846,000 through the issuance of Notes for the development of the Karakuduk Field and to satisfy the capital requirements of the Loan, of which $10,856,000 was raised during 2000. On September 21, 2000, Chaparral converted all of its outstanding Notes, plus accrued interest of $899,000, into 11,690,259 shares of Chaparral's common stock at a conversion price of $1.86 per share. Originally, the conversion provision of the Notes was subject to shareholder approval, but Chaparral's board of directors authorized management to obtain approval from the holders of the Notes to amend the terms of the Notes to allow immediate conversion into Chaparral's common stock. We obtained approval from the holders of the Notes and the Notes were converted on September 21, 2000. The board of directors decision to amend the terms of the Notes to allow immediate conversion was based upon several factors, including funding the working capital requirements of the Company, the Loan requirement for Chaparral to raise 17 $10,000,000 on or before September 30, 2000, and Chaparral's compliance with the various restrictive covenants of the Loan. The converted Notes consisted of $10,040,000 of Chaparral's Notes issued during the fourth quarter of 1999 and $10,806,000 issued during 2000, including Notes totaling $3,300,000 in January and February, $3,000,000 in August, and $4,506,000 in September 2000, respectively. The Notes were issued to various related parties and other non-affiliated investors. Notes issued to related parties totaled $14,690,000, including $9,827,000 to Allen, $4,051,000 to Whittier, $662,000 to Mr. McMillian, the Co-Chairman and Chief Executive Officer of Chaparral, and $150,000 to a relative of Jim Jeffs, the Co-Chairman of Chaparral. In exchange for the Notes, Chaparral received $15,556,000 in cash and canceled $5,290,000 in promissory notes issued previously in 1999, plus accrued interest thereon, to Allen ($3,827,000), Whittier ($1,051,000), Mr. McMillian ($412,000). The conversion feature of the Notes was a "beneficial conversion feature" as addressed in EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, whereby a portion of the proceeds received from the Notes is allocable to the conversion feature contained therein. The value assigned to the conversion feature is determined as the difference between the market price of Chaparral's common stock on the date of issuance and the conversion price multiplied by the number of shares to be received upon conversion, which was approximately $120,000,000. As the conversion price contained in the Notes is substantially below the market price, the value under the above formula significantly exceeds the net proceeds from the Notes. Under EITF 98-5, the discount assigned to the conversion feature is limited to the total proceeds allocated to the convertible instrument. Accordingly, upon conversion of the Notes, Chaparral recorded additional interest expense and additional paid in capital equal to $20,340,000, the face amount of the Notes net of original discount. Shell Capital Loan. - ------------------- We entered into the Loan with Shell Capital in November 1999, to provide up to $24,000,000 of financing for the development of the Karakuduk Field. The consummation of the Loan was subject to a number of significant conditions, including, without limitation: (i) an equity infusion of at least $9,000,000, (ii) obtaining political risk insurance, (iii) Shell Capital or Chaparral obtaining transportation risk insurance, (iv) the hedging of a significant portion of our future oil production, and (v) the retirement, conversion, or full subordination of all of the outstanding indebtedness of Chaparral and KKM, excluding current payables. On February 14, 2000, we fully satisfied all of the outstanding conditions and drew down a total of $8,300,000 from the Loan. As of August 21, 2000, the Loan was amended to extend our remaining equity support commitment to $10,000,000 on or before September 30, 2000. With the approval of Shell Capital, we raised a total of $7,500,000 through the issuance of Notes and another $3,000,000 through a stock subscription agreement with Capco, which was fully executed on October 30, 2000. On January 31, 2000, we obtained binding political risk insurance coverage from OPIC. The OPIC policy's maximum coverage amount available is $50,000,000, which would require a quarterly premium of $262,500. We are required to maintain political risk insurance until the Loan is fully repaid. We have elected coverage of $50,000,000 through January 30, 2001. In February 2000, we entered into the Hedge Agreement, paying $4,000,000 for put contracts to sell a total of 1,562,250 barrels of North Sea Brent crude. The exercise prices of the various put contracts range from $22.35 to $17.25 per barrel, with monthly expiration dates beginning in October 2000 and ending in December 2002. The contracts are evenly spread between October 2000 to December 2001 (62,750 barrels per month) and between January 2002 to December 2002 (51,750 barrels per month). As of September 30, 2000, the market value of the Hedge Agreement was $261,000 and our unrealized hedging loss was $3,739,000. 18 In March 2000, we paid Shell Capital a total of $750,000 for Transportation Risk Insurance, providng us with a beneficial interest in Shell Capital's policy for transportation risk insurance, covering certain circumstances whereby KKM would be unable to export crude oil production outside of the Republic of Kazakhstan through the existing pipeline routes currently available. In the event coverage under Shell Capital's policy is triggered, proceeds from the policy would go to the benefit of Chaparral for use in making principal and interest payments required under the Loan. We are allowed to drawdown the principal balance of the Loan in minimum increments of $2,000,000. Loan advances will be used to meet the capital and operational requirements of KKM, up-front fees and future finance costs required under the Loan, make payments for premiums due under the OPIC and Transportation Risk Insurance policies, and make payments required under the Hedge Agreement. The Loan is available for drawdown until the earlier of September 30, 2001 or Project Completion. Project Completion occurs when various conditions are met by us and KKM, including, but not limited to: (i) receipt by Shell Capital of an independent engineer's reserve report evidencing proven developed reserves of at least 30 million barrels in the Karakuduk Field, (ii) sustaining average production of 13,000 barrels of oil per day from the Karakuduk Field for a period of 45 consecutive days, (iii) sustaining water injection at an average rate of 15,000 barrels per day over 45 consecutive days, (iv) injection of lift gas into one well over a 24 hour period, and (v) various other financial and technical milestones. Prior to Project Completion, any borrowed amounts accrue interest at an annual rate of LIBOR plus 17.75%, compounding quarterly. The annual interest rate is reduced to LIBOR plus 12.75% after Project Completion. Prior to Project Completion, an interest amount, equal to annual rate of LIBOR plus .50%, is payable quarterly to Shell Capital, along with a commitment fee equal to an annual rate of 1.5% of the undrawn portion of the $24,000,000 debt facility. The remaining unpaid interest is capitalized to the Loan at the end of each quarter. After Project Completion, all quarterly interest on the outstanding Loan is fully due and payable at the end of each calendar quarter. Principal payments, including any capitalized interest, are due on quarterly Reduction Dates, beginning with the first calendar quarter ending on the earlier of 60 days following Project Completion or December 31, 2001. Minimum principal payments, based upon percentages of the principal outstanding as of Project Completion, are set out in the Loan and ensure full settlement of the Loan by September 30, 2004, the final maturity date. Mandatory prepayments of principal outstanding are required on each Reduction Date out of any excess cash flow available after consideration of Chaparral's and KKM's permitted budgeted expenditures for the following 45 days and all fees, interest, and principal payments scheduled on such Reduction Date. In connection with finalizing the Loan, Chaparral issued to Shell Capital the Shell Warrant to purchase up to 15% of Chaparral's outstanding common stock, subject to certain anti-dilution provisions. The Shell Warrant is exercisable for a period of 5 years beginning on the earlier of Project Completion or September 30, 2001. Furthermore, the Shell Warrant is non-transferable and contains certain registration rights. On the date of grant, the Shell Warrant represented 147,072 shares of Chaparral's common stock at an exercise price of $15.45 per share. After the conversion of the Notes and the issuance of our common stock to Capco, both dilutive events, the Shell Warrant represents 1,785,455 shares of Chaparral's common stock at an exercise price of $9.79 per share. The fair market value of the Shell Warrant on the date of grant, $1,175,000, was recorded as a discount of the Loan, amortizable as interest expense over the life of the Loan. The Loan subjects us to a significant number of restrictions, including various representations and warranties, positive and negative covenants, and events of default. These restrictions include, but are not limited to, the following: 19 o Pledge of Assets. We pledged substantially all of our assets to Shell Capital, including our interest in the Karakuduk Field. If an event of default occurs under the Loan and is not timely cured, Shell Capital is entitled to certain remedies, including the right to accelerate repayment of the loan and obtain our rights to the Karakuduk Field. o Business Alteration. We cannot engage in any other business except the ownership of KKM and the operation of the Karakuduk Field without the prior consent of Shell Capital. o Change in Control. We cannot enter into any transaction whereby a "group" as defined in the Securities Act of 1934 acquires or otherwise gains control of 20% or more of our outstanding shares of voting stock. Certain transactions are exempt from this restriction, including, the conversion of our Notes, the Equity Support Agreement, conversion of our outstanding Series A Preferred Stock, the exercise of the Shell Warrant, and a grant of non-statutory or statutory options to purchase up to 15% of our outstanding common stock to our officers, directors, employees, and consultants (subject to certain anti-dilution provisions). Furthermore, Allen and Whittier, have agreed not to let their ownership in Chaparral fall below 20%, unless otherwise agreed with Shell Capital. o Charged Accounts. We must retain all cash receipts from oil sales, proceeds from the Loan, and any other funds raised through approved equity or debt offerings in pledged bank accounts (the "Charged Accounts"). The Charged Accounts are controlled by Shell Capital. We retain title to the Charged Accounts, but Shell Capital directs all cash movements at our request. On a monthly basis, we request transfers of funds from the Charged Accounts into certain operating accounts controlled directly by us or by KKM, respectively. o Cash Expenditures. We must expend funds in accordance with capital and operating budgets approved by Shell Capital on an annual basis, unless otherwise approved by Shell Capital. o Project Completion. KKM must reach Project Completion on or before September 30, 2001. o Share Capital. We cannot purchase, issue, or redeem any of our share capital without the prior approval of Shell Capital. o Future Indebtedness. We cannot borrow money, other than trade debt, without the approval of Shell Capital. o Sale of Significant Assets. We cannot dispose of any significant assets, including capital stock in our subsidiaries, without the approval of Shell Capital. o Leases. Without Shell Capital's approval, KKM cannot enter into any lease or license arrangement with annual payments in excess of $1,000,000 and we will not enter into any lease or license arrangement with annual payments in excess of $200,000. o Dividends. KKM cannot pay dividends prior to Project Completion, and then only subject to certain restrictions. We cannot pay any dividends without Shell Capital's consent. o OPIC Insurance. We must maintain OPIC political risk insurance throughout the duration of the Loan. 20 o Hedge Agreement. We will not cancel or terminate the hedging contracts entered into as part of the Loan or enter into any other hedging transaction without Shell Capital's consent. The terms and conditions and related financing costs of the Loan are significant. A substantial portion of our future cash flow from operations will be required for debt service and may not be available for other purposes. Our ability to obtain additional debt or equity financing in the future for working capital, capital expenditures, or acquisitions is also restricted, as well as our ability to acquire or dispose of significant assets or investments. These restrictions may make us more vulnerable and less able to react to adverse economic conditions. The failure of Chaparral to meet the terms of the Loan, including Project Completion, could result in an event of default and the loss of our investment in the Karakuduk Field. The Loan prohibits us from paying dividends to our stockholders without Shell Capital's consent. We have not paid dividends in the past and have no expectations to do so in the future. As of November 20, 2000, we have borrowed $21,500,000 under the Loan. The Loan proceeds were utilized to pay $2,525,000 in outstanding debt issuance costs, $4,000,000 for the Hedge Agreement, $750,000 for Transportation Risk Insurance, $368,000 for OPIC insurance premiums, $12,550,000 for KKM's operations, and $1,307,000 for our corporate overhead. Other Sources of Liquidity and Capital Resources. - ------------------------------------------------- The costs required to develop the Karakuduk Field are significant and have not been fully covered by the available financial resources under the Loan. We are currently pursuing other sources of liquidity, which we believe will satisfy both the short and long-term cash requirements of Chaparral and KKM, primarily through the sale of oil under the Crude Oil Sales Agreement. If the proceeds from oil sales are not sufficient to meet our working capital needs, we will pursue other sources of capital through the issuance of additional indebtedness and/or the issuance of Chaparral's common or preferred stock. We can provide no assurances, however, that other sources of capital will be available, or, if available, will be on favorable terms to Chaparral. Previously, our board of directors approved a Rights Offering for 5,300,000 shares of our common stock convertible at $1.86 per share, or $9,858,000, in order to satisfy the equity requirements of the Loan. The Loan's equity requirements were fulfilled through the issuance of Notes and completion of the stock subscription to Capco on October 30, 2000. Therefore, the board of directors decided to withdraw the Rights Offering, instructing Chaparral's management to withdraw the registration statement currently on file with the SEC. Both short and long-term financial resources necessary to develop the Karakuduk Field are expected to result from crude oil sales under the Crude Oil Sales Agreement. Ryder Scott has estimated the proven reserves underlying the Karakuduk Field to be approximately 67.58 million barrels of oil, of which 33.79 million is attributable to our 50% equity interest in KKM. KKM has implemented a two-rig drilling program to accelerate recovery of these proven reserves and generate cash flows capable of supporting KKM's operations and begin repayment of our investment in KKM. We will utilize the principal and interest repayments on our investment in KKM to fund repayment of our Loan with Shell Capital. As of November 20, 2000, KKM has completed 4 export oil sales to STASCO, delivering approximately 438,000 barrels of oil to the sea-port of Odessa, Ukraine. The oil sales generated cash proceeds of approximately $8,500,000, net of transportation costs. KKM has an additional nomination for the export delivery of approximately 146,000 barrels to STASCO in December 2000. At current market prices, the December 2000 sale is expected to generate cash proceeds of approximately $3,300,000, net of transportation costs. Additional oil sales are expected on a monthly basis, as KKM continues to increase its crude oil production. The government of Kazakhstan required KKM, along with other oil and gas producers within Kazakhstan, to sell a certain portion of their crude oil production to the local market to supply local energy needs. With the approval of Shell Capital and STASCO, KKM has sold approximately 102,000 barrels of crude 21 oil on the local market for approximately $950,000, net of transportation costs. While KKM is attempting to eliminate any future local oil sales, such requirements are expected from the government in the future. Capital Commitments. - -------------------- As of November 20, 2000, KKM has drilled and successfully completed 9 wells in the Karakuduk Field. Another 3 wells have been drilled to total depth and are awaiting completion. An additional 5 existing delineation wells have been successfully recompleted, establishing production from each well. The daily productive capacity of the 14 producing wells is approximately 6,000 barrels of oil per day. Due to current facility constraints, however, KKM is only capable of processing and transporting approximately 3,500 barrels of oil per day into the export pipeline. KKM expected to have some of the facility constraints resolved prior to October 31, 2000, but encountered delays in completion of necessary works by local contractors and in obtaining approvals from the local regulatory authorities to commission certain facilities. KKM is working to alleviate all facility constraints, through expansion of the Karakuduk Field's oil storage capacity, upgrading existing and installing additional gathering and processing facilities, and commissioning an oil sales pipeline connecting the Karakuduk Field to the export pipeline. KKM expects its capacity to deliver oil production into the main export pipeline to be incrementally extended to approximately 6,300 barrels of oil per day prior to December 31, 2000. KKM currently has two drilling rigs and one workover rig operating in the Karakuduk Field. KKM expects to drill up to 4 additional developmental wells before December 31, 2000. Over the next 5 years, KKM expects to spend an additional $130,000,000 to $150,000,000 on the development of the Karakuduk Field. As previously discussed, cash flow from oil sales is expected to be the primary source of capital necessary to meet KKM's cash requirements, as well as repay the Loan from CAP-G to KKM. We estimate that 71 additional oil wells and 24 water injection wells may be required to fully develop the Karakuduk Field. Peak oil production from the field is expected to occur by the end of 2002, although the time or amount of development or production cannot presently be estimated. The planned development program for the Karakuduk Field will include a pressure maintenance operation that our management believes could result in additional recoverable reserves. Field facilities are either in place or under construction to support the initial stages of the development program. Engineering plans are being prepared on additional facilities required for long-term development, including electrical systems and compression facilities required for artificial lift. KKM has previously constructed a base camp with living quarters for 150 people, a mini-camp for the drilling contractor and other service company personnel, storage facilities, processing facilities, warehouses, a repair shop, and other related support facilities. A second mini-camp for the drilling crew of the second rig is being constructed and installed in the Karakuduk Field. KKM has also completed a main road between the export pipeline and the field. KKM is continuously clearing access roads and performing other required site preparation activities for future planned drilling locations. Crude oil production is being processed at a pilot facility and has been trucked to the KKM pump station adjacent to the export pipeline. The pump station is approximately 18 miles from the Karakuduk Field and was placed in service in April 2000. KKM also began construction of an 18-mile pipeline in 1998, capable of transporting up to 18,000 barrels of oil per day from the Karakuduk Field to the export pipeline terminal. The completion of the pipeline was delayed due to our lack of sufficient financial resources in 1999. We anticipate the pipeline will be operational in the first quarter of 2001. Until the pipeline is operational, KKM will continue to truck oil production to the pump station at the export pipeline. KKM is currently sourcing oil trucks to increase crude oil trucking capacity in the Field. As discussed above, the productive capacity of the Karakuduk Field is currently limited due to various facility constraints, which KKM is working to alleviate. KKM has completed a 3-D seismic shoot in the Karakuduk Field. The seismic data has been processed and is currently being interpreted, with estimated completion by the end of December 2000. The results from the seismic study are expected to 22 help optimize the well drilling order for KKM's drilling program and further define the possible total productive capability of the Karakuduk Field. Under the terms of the License from the government of the Republic of Kazakhstan, KKM was committed to minimum expenditures of $30,000,000 for the year ended December 31, 1999. The License also established a minimum work program requiring KKM to drill 8 new wells during 1999. In August 1999, we received a letter from the licensing authority, extending the period for completion of the minimum work program and expenditure commitments to June 30, 2000. KKM did not satisfy the stated License commitments before June 30, 2000, but has satisfied all requirements as of this filing. On July 4, 2000, however, KKM received a second letter from the licensing authority stating that due to KKM's activities and expenditures to date, there were "no grounds for termination or suspension of the operation of the License." While the letter is not a formal amendment to the License, KKM has been advised by its Kazakhstan counsel that the License is not in jeopardy and a formal amendment should not be expected from the licensing authority. If the License is revoked, however, KKM's right to develop the Karakuduk Field may be terminated and our investment in the Karakuduk Field may be lost. 23 2. Results of Operations Results of Operations for Three Months Ended September 30, 2000 Compared to the - -------------------------------------------------------------------------------- Three Months Ended September 30, 1999 - ------------------------------------- Our operations during the three months ended September 30, 2000, resulted in a net loss of $23,037,000, compared to a net loss of $551,000 for the three months ended September 30, 1999. The $22,486,000 increase in our net loss was almost entirely driven by the increased costs of financing the development of the Karakuduk Field and additional non-cash interest expense recognized upon conversion of our outstanding Notes. Alternatively, we recognized $206,000 in net equity income from our investment in KKM, reflecting KKM's increased production and sales of its crude oil reserves. While interest income increased by $214,000 from the three months ended September 30, 1999, interest expense increased $22,454,000 compared to the same period. The increase in interest expense reflects a non-recurring, non-cash interest charge of $20,340,000 from the September 2000 conversion of Notes with an aggregate principal amount of $20,846,000. The Notes' conversion feature, at $1.86 per share, was a "beneficial conversion feature" as addressed in EITF 98-5. EITF 98-5 requires the recognition of additional interest expense equal to the face value of the Notes, net of original discount of $506,000, upon conversion of the Notes. The remaining increase in interest expense is primarily related to the financing costs of the Loan with Shell Capital and interest accrued on the Notes through the date of conversion. See Notes 7 and 8 of the consolidated financial statements. General and administrative costs increased by $675,000 from the three months ended September 30, 1999, primarily due to higher insurance premiums under the OPIC political risk insurance policy and additional legal fees incurred during the period. We recognized $206,000 in net equity income from our investment in KKM for the three months ended September 30, 2000, compared to a net equity loss of $254,000 for the three months ended September 30, 1999. During the quarter ended September 30, 2000, KKM recognized $633,000 in operating income, reflecting the sale of approximately 183,000 barrels of crude oil for $3,627,000, net of transportation costs. For the comparable period in 1999, KKM recognized an operating loss of $624,000 without generating any revenue from oil sales. In application of EITF 99-10, we recognized 100% of KKM's net income for the quarter to recapture prior losses recognized in excess of our 50% equity interest in KKM. Equity income or loss is presented net of Chaparral's 50% share of accrued interest revenue from Chaparral's loan to KKM. See Note 11 of the consolidated financial statements. Results of Operations for Nine Months Ended September 30, 2000 Compared to the - -------------------------------------------------------------------------------- Nine Months Ended September 30, 1999 - ------------------------------------ Our operations during the nine months ended September 30, 2000, resulted in a net loss of $26,590,000, compared to a net loss of $2,189,000 for the nine months ended September 30, 1999. The $24,401,000 increase in our net loss was almost entirely driven by the increased costs of financing the development of the Karakuduk Field and additional non-cash interest expense recognized upon conversion of our outstanding Notes. Alternatively, we recognized $58,000 in net equity income from our investment in KKM, reflecting KKM's increased production and sales of its crude oil reserves. While interest income increased by $492,000 from the nine months ended September 30, 1999, interest expense increased $24,984,000 compared to the same period. The increase in interest expense reflects a non-recurring, non-cash interest charge of $20,340,000 from the September 2000 conversion of Notes with an aggregate principal amount of $20,846,000. The Notes' conversion feature, at $1.86 per share, was a "beneficial conversion feature" as addressed in EITF 98-5. EITF 98-5 requires the recognition of additional interest expense equal to the face value of the Notes, net of original discount of $506,000, upon conversion of the Notes. The remaining increase in interest expense is primarily related to the financing costs of the Loan with Shell Capital, including interest expense of $2,874,000 and discount amortization of $687,000 through September 30, 2000. 24 Chaparral also recognized accrued interest of $773,000 on the Notes through the date of conversion, plus related discount amortization of $464,000. See Notes 7 and 8 of the consolidated financial statements. General and administrative costs increased by $884,000 from the nine months ended September 30, 1999, primarily due to higher insurance premiums under the OPIC political risk insurance policy and additional legal fees incurred during the period. We recognized $58,000 in net equity income from our investment in KKM for the nine months ended September 30, 2000, compared to a net equity loss of $947,000 for the nine months ended September 30, 1999. Through September 30, 2000, KKM recognized $1,241,000 in operating income, reflecting the sale of approximately 408,800 barrels of crude oil for approximately $7,100,000, net of transportation costs. For the comparable period in 1999, KKM recognized an operating loss of $2,252,000 without generating any revenue from oil sales. In application of EITF 99-10, we recognized 100% of KKM's net income for the period to recapture prior losses recognized in excess of our 50% equity interest in KKM. Equity income or loss is presented net of Chaparral's 50% share of accrued interest revenue from Chaparral's loan to KKM. See Note 11 of the consolidated financial statements. 3. Commodity Prices for Oil and Gas Our revenues, profitability, growth and value are highly dependent upon the price of oil. Market conditions make it difficult to estimate prices of oil or the impact of inflation on such prices. Oil prices have been volatile, and it is likely they will continue to fluctuate in the future. Various factors beyond our control affect prices for oil, including supplies of oil available worldwide and in Kazakhstan, the ability of OPEC to agree to maintain oil prices and production controls, political instability or armed conflict in Kazakhstan or other oil producing regions, the price of foreign imports, the level of consumer demand, the price and availability of alternative fuels, the availability of transportation routes and pipeline capacity, and changes in applicable laws and regulations. 4. Inflation We cannot control prices received from our oil sales and to the extent we are unable to pass on increases in operating costs, we may be affected by inflation. On April 5, 1999, the government of the Republic of Kazakhstan discontinued its support of the tenge and allowed it to float freely against the US dollar. Immediately thereafter, the official exchange rate declined from 87.5 tenge to the US dollar to 142 tenge to the US dollar, but was relatively stable for the remainder of 1999 and 2000. The devaluation decreased the US dollar realizable value of any tenge denominated monetary assets held by KKM, and decreased the US dollar obligation of any tenge denominated monetary liabilities held by KKM. KKM maintains its financial statements in U.S. dollars and the impact of the devaluation is not considered to be material at this time. Item 3 - Quantitative and Qualitative Disclosures About Market Risks On February 11, 2000, we entered the Hedge Agreement, paying $4.0 million for put contracts to sell a total of 1,562,250 barrels of North Sea Brent crude. The exercise prices of the various put contracts range from $22.35 to $17.25 per barrel, with monthly expiration dates beginning in October 2000 and ending in December 2002. The contracts are evenly spread between October 2000 to December 2001 (62,750 barrels per month) and between January 2002 to December 2002 (51,750 barrels per month). As of September 30, 2000, the market value of the put contracts underlying the Hedge Agreement was $261,000. 25 Part II - Other Information Item 2 - Changes in Securities and Use of Proceeds On September 21, 2000, Chaparral converted Notes with an aggregate principal amount of $20,846,000, plus accrued interest of $899,000, into 11,690,259 shares of our common stock at a conversion price of $1.86 per share. Chaparral issued 9,737,834 shares of common stock in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended, and 1,952,425 shares of common stock in reliance upon the exemption from registration under Regulation S. The holders of the Notes had available all material information concerning Chaparral and the stock certificate bears an appropriate restrictive legend under the Securities Act of 1933, as amended. No underwriter was involved in the transaction. The converted Notes consisted of $10,040,000 of Chaparral's Notes issued during the fourth quarter of 1999 and $10,806,000 issued during 2000, including Notes totaling $3,300,000 in January and February, $3,000,000 in August, and $4,506,000 in September 2000, respectively. The Notes were issued to various related parties and other non-affiliated investors. Notes issued to related parties totaled $14,690,000, including $9,827,000 to Allen, $4,051,000 to Whittier, $662,000 to Mr. McMillian, the Co-Chairman and Chief Executive Officer of Chaparral, and $150,000 to a relative of Jim Jeffs, the other Co-Chairman of Chaparral. In exchange for the Notes, Chaparral received $15,556,000 in cash and canceled $5,290,000 in promissory notes issued previously in 1999, plus accrued interest thereon, to Allen ($3,827,000), Whittier ($1,051,000), Mr. McMillian ($412,000). On September 21, 2000, Chaparral executed a stock subscription agreement with Capco, whereby Capco would acquire $3,000,000 of Chaparral's common stock on or before October 30, 2000 at $1.86 per share, or 1,612,903 shares. Chaparral issued the common stock in reliance upon the exemption from registration under Regulation S. Capco had available all material information concerning Chaparral and the stock certificate bears an appropriate restrictive legend under the Securities Act of 1933, as amended. No underwriter was involved in the transaction. Capco was also a holder of two Notes with an aggregate principal amount of $750,000, which were converted along with accrued interest, into 427,113 shares of Chaparral's common stock on September 21, 2000. See above. Item 4 - Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of Chaparral's stockholders during the quarter ended September 30, 2000. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits Number Exhibit ------ ------- 4.1 Non-Negotiable Promissory Note, dated August 5, 2000, principal amount $500,000, to Ecotels International Limited 4.2 Non-Negotiable Promissory Note, dated August 5, 2000, principal amount $500,000, to Whittier Ventures LLC 4.3 8% Non-Negotiable Convertible Subordinated Promissory Note, dated August 21, 2000, principal amount $750,000, to Dardana Limited 4.4 8% Non-Negotiable Convertible Subordinated Promissory Note, dated August 21, 2000, principal amount $750,000, to Goldrust Venture Capital Limited 26 4.5 8% Non-Negotiable Convertible Subordinated Promissory Note, dated August 21, 2000, principal amount $750,000, to Sage Operating Ltd. 4.6 8% Non-Negotiable Convertible Subordinated Promissory Note, dated August 21, 2000, principal amount $750,000, to Stardust Fund Limited 4.7 8% Non-Negotiable Convertible Subordinated Promissory Note, dated September 21, 2000, principal amount $2,000,000, to Allen & Company Incorporated 4.8 8% Non-Negotiable Convertible Subordinated Promissory Note, dated September 21, 2000, principal amount $2,000,000, to Whittier Ventures LLC 4.9 8% Non-Negotiable Convertible Subordinated Promissory Note, dated September 15, 2000, principal amount $505,600, to Ecotels International Limited 10.1 Subordination Agreement, dated August 21, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Dardana Limited 10.2 Subordination Agreement, dated August 21, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Goldrust Venture Capital Limited 10.3 Subordination Agreement, dated August 21, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Sage Operating Ltd 10.4 Subordination Agreement, dated August 21, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Stardust Fund Limited 10.5 Letter from the Agency of the Republic of Kazakhstan on Investments to Closed Type JSC Karakudukmunay dated July 4, 2000 10.6 Deed between Chaparral Resources, Inc, Whittier Ventures LLC, Ecotels International Limited, Dardana Limited, Goldrust Venture Capital Limited, Stardust Fund Limited, Sage Operating Ltd., and Shell Capital Services Limited, dated August 21, 2000 10.7 Pledge Agreement between Chaparral Resources, Inc. and Capco Resources, Ltd. dated September 21, 2000 10.8 Amended Letter Agreement, dated October 11, 2000, between Chaparral Resources, Inc. and Capco Resources, Ltd. 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed for during the quarter ended September 30, 2000. 27 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 20, 2000 Chaparral Resources, Inc. By: /s/ Michael B. Young -------------------------------- Michael B. Young, Treasurer, Controller and Principal Accounting Officer 28 Exhibit Index Number Exhibit ------ ------- 4.1 Non-Negotiable Promissory Note, dated August 5, 2000, principal amount $500,000, to Ecotels International Limited 4.2 Non-Negotiable Promissory Note, dated August 5, 2000, principal amount $500,000, to Whittier Ventures LLC 4.3 8% Non-Negotiable Convertible Subordinated Promissory Note, dated August 21, 2000, principal amount $750,000, to Dardana Limited 4.4 8% Non-Negotiable Convertible Subordinated Promissory Note, dated August 21, 2000, principal amount $750,000, to Goldrust Venture Capital Limited 4.5 8% Non-Negotiable Convertible Subordinated Promissory Note, dated August 21, 2000, principal amount $750,000, to Sage Operating Ltd. 4.6 8% Non-Negotiable Convertible Subordinated Promissory Note, dated August 21, 2000, principal amount $750,000, to Stardust Fund Limited 4.7 8% Non-Negotiable Convertible Subordinated Promissory Note, dated September 21, 2000, principal amount $2,000,000, to Allen & Company Incorporated 4.8 8% Non-Negotiable Convertible Subordinated Promissory Note, dated September 21, 2000, principal amount $2,000,000, to Whittier Ventures LLC 4.9 8% Non-Negotiable Convertible Subordinated Promissory Note, dated September 15, 2000, principal amount $505,600, to Ecotels International Limited 10.1 Subordination Agreement, dated August 21, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Dardana Limited 10.2 Subordination Agreement, dated August 21, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Goldrust Venture Capital Limited 10.3 Subordination Agreement, dated August 21, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Sage Operating Ltd 10.4 Subordination Agreement, dated August 21, 2000, between Chaparral Resources, Inc., Shell Capital Services Limited and Stardust Fund Limited 10.5 Letter from the Agency of the Republic of Kazakhstan on Investments to Closed Type JSC Karakudukmunay dated July 4, 2000 10.6 Deed between Chaparral Resources, Inc, Whittier Ventures LLC, Ecotels International Limited, Dardana Limited, Goldrust Venture Capital Limited, Stardust Fund Limited, Sage Operating Ltd., and Shell Capital Services Limited, dated August 21, 2000 10.7 Pledge Agreement between Chaparral Resources, Inc. and Capco Resources, Ltd. dated September 21, 2000 10.8 Amended Letter Agreement, dated October 11, 2000, between Chaparral Resources, Inc. and Capco Resources, Ltd. 27 Financial Data Schedule 29 EX-4.1 2 0002.txt NON-NEGOTIABLE PROMISSORY NOTE NON-NEGOTIABLE PROMISSORY NOTE $500,000.00 August 5, 2000 FOR VALUE RECEIVED, Chaparral Resources, Inc. a Delaware corporation ("Maker"), promises to pay to EcoTels International Limited, a Cayman Islands company ("Payee"), in lawful money of the United States of America, the principal sum of Five Hundred Thousand Dollars ($500,000.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to 10%, 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. ARTICLE 1 PAYMENTS 1.1 PRINCIPAL AND INTEREST The principal amount of this Note, together with all accrued but unpaid interest thereon, shall be due and payable on September 30, 2000. 1.2 MANNER OF PAYMENT Payment of principal and interest on this Note shall be made via Fedwire electronic fund transfer to an account designated by Payee in writing. If payment of principal or interest on this Note is due on a day which is not a business day, such payment shall be due on the next succeeding business day, and such extension of time shall be taken into account in calculating the amount of interest payable under this Note. "Business Day" means any day other than a Saturday, Sunday or legal holiday in the State of Texas. 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 pre-payment is accompanied by accrued interest on the amount of principal prepaid calculated to the date of such pre-payment. Any partial pre-payments shall be applied to installments of principal in inverse order of their maturity. ARTICLE 2 DEFAULTS 2. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) if Maker shall fail to pay when due any payment of principal or interest on this Note and such failure continues for 15 days after Payee notifies Maker therein writing; (b) if, pursuant to or within the meaning of the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due; and (c) if a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within 120 days. 2.2 NOTICE BY MAKER Maker shall notify Payee in writing within five days after the occurrence of any Event of Default of which Maker acquires knowledge. 2.3 REMEDIES Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (a) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued but unpaid interest thereon, immediately due and payable regardless of any prior forbearance, and (b) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 2 ARTICLE 3 MISCELLANEOUS 3.1 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. 3.2 NOTICES Any notice required or permitted to be given hereunder shall be given in accordance with the Agreement. 3.3 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 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. 3.4 GOVERNING LAW This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. 3 3.5 PARTIES IN INTEREST This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker, except by will or, in default thereof, by operation of law. 3.6 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. 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. Remainder of this page intentionally blank. 4 IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first written above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young ------------------------ Michael B. Young Treasurer and Controller 5 EX-4.2 3 0003.txt NON-NEGOTIABLE PROMISSORY NOTE NON-NEGOTIABLE PROMISSORY NOTE $500,000.00 August 5, 2000 FOR VALUE RECEIVED, Chaparral Resources, Inc. a Delaware corporation ("Maker"), promises to pay to Whittier Ventures, L.L.C., a Nevada limited liability company ("Payee"), in lawful money of the United States of America, the principal sum of Five Hundred Thousand Dollars ($500,000.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to 10%, 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. ARTICLE 1 PAYMENTS 1.1 PRINCIPAL AND INTEREST The principal amount of this Note, together with all accrued but unpaid interest thereon, shall be due and payable on September 30, 2000. 1.2 MANNER OF PAYMENT Payment of principal and interest on this Note shall be made via Fedwire electronic fund transfer to an account designated by Payee in writing. If payment of principal or interest on this Note is due on a day which is not a business day, such payment shall be due on the next succeeding business day, and such extension of time shall be taken into account in calculating the amount of interest payable under this Note. "Business Day" means any day other than a Saturday, Sunday or legal holiday in the State of Texas. 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 pre-payment is accompanied by accrued interest on the amount of principal prepaid calculated to the date of such pre-payment. Any partial pre-payments shall be applied to installments of principal in inverse order of their maturity. ARTICLE 2 DEFAULTS 2. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) if Maker shall fail to pay when due any payment of principal or interest on this Note and such failure continues for 15 days after Payee notifies Maker therein writing; (b) if, pursuant to or within the meaning of the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due; and (c) if a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within 120 days. 2.2 NOTICE BY MAKER Maker shall notify Payee in writing within five days after the occurrence of any Event of Default of which Maker acquires knowledge. 2.3 REMEDIES Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (a) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued but unpaid interest thereon, immediately due and payable regardless of any prior forbearance, and (b) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 2 ARTICLE 3 MISCELLANEOUS 3.1 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. 3.2 NOTICES Any notice required or permitted to be given hereunder shall be given in accordance with the Agreement. 3.3 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 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. 3.4 GOVERNING LAW This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. 3 3.5 PARTIES IN INTEREST This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker, except by will or, in default thereof, by operation of law. 3.6 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. 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. Remainder of this page intentionally blank. 4 IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first written above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young ------------------------ Michael B. Young Treasurer and Controller 5 EX-4.3 4 0004.txt NON-NEGOTIABLE PROMISSORY NOTE 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE August 21, 2000 US$750,000.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of Dardana Limited, a limited liability company organized under the laws of the Cayman Islands ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") of SEVEN HUNDRED AND FIFTY THOUSAND DOLLARS (US$750,000.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price"). Payment shall be made by delivering such shares to Payee at such place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum amount allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an institutional "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act of 1933 as amended (the "Act") and is not a "U.S. person" as defined in Rule 902(o) of the Act. Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, OTHER THAN TO DISTRIBUTORS (AS DEFINED IN REGULATION S) IN THE ABSENCE OF SUCH REGISTRATION, UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION UNDER THE SECURITIES ACT, AND EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT); (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT; OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO REGULATION S (WITHIN THE MEANING REGULATION S UNDER THE SECURITIES ACT) AND (2) AGREES THAT IT WILL NOT PRIOR TO ONE YEAR AFTER THE LATER TO OCCUR OF (I) THE ORIGINAL ISSUANCE OF THE SECURITY EVIDENCED HEREBY OR (II) ACQUISITION THEREOF FROM AN AFFILIATE OF CHAPARRAL RESOURCES, INC. (THE "RESTRICTION TERMINATION DATE") OFFER, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (B) TO CHAPARRAL RESOURCES, INC., (C) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (D) INSIDE THE UNITED STATES TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO CHAPARRAL RESOURCES INC. A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTION ON TRANSFER OF THE SECURITY EVIDENCED 3 HEREBY (THE FORM OF SUCH LETTER CAN BE OBTAINED FROM CHAPARRAL RESOURCES, INC.), (E) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S, (F) PURSUANT TO RULE 144 OR (G) PURSUANT TO ANY OTHER EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE) SUBJECT IN EACH OF THE FOREGOING CASES TO ANY REQUIREMENTS OF LAW THAT THE DISPOSITION OF THE PROPERTY OF SUCH HOLDER BE AT ALL TIMES WITHIN SUCH HOLDER'S CONTROL AND TO COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAWS; AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE SECURITY EVIDENCED HEREBY PRIOR TO THE RESTRICTION TERMINATION DATE, THE HOLDER MUST MAKE CERTAIN CERTIFICATIONS TO CHAPARRAL RESOURCES, INC. TO CONFIRM THAT SUCH TRANSFERS ARE BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. IN ADDITION, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO CHAPARRAL RESOURCES, INC. SUCH LEGAL OPINIONS AND OTHER INFORMATION AS CHAPARRAL RESOURCES, INC. MAY REASONABLY REQUIRED TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. BY THE ACQUISITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, THE HOLDER REPRESENTS THAT IT WILL NOT, INDIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTION WITH REGARD TO THE SECURITIES, EXCEPT AS PERMITTED BY THE SECURITIES ACT. 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. 4 (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 5 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. 6 (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 7 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 8 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Limited ("Shell") in connection with the Loan Agreement among Maker, Shell, Central Asian Petroleum (Guernsey) Limited, Central Asian Petroleum, Inc., Closed Type JSC Karakudukmunay and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 9 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young - ----------------------------- 10 EX-4.4 5 0005.txt NON-NEGOTIABLE PROMISSORY NOTE 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE August 21, 2000 US$750,000.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of Goldrust Venture Capital Limited, a limited liability company organized under the laws of the Cayman Islands ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") of SEVEN HUNDRED AND FIFTY THOUSAND DOLLARS (US$750,000.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price"). Payment shall be made by delivering such shares to Payee at such place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum amount allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an institutional "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act of 1933 as amended (the "Act") and is not a "U.S. person" as defined in Rule 902(o) of the Act. Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, OTHER THAN TO DISTRIBUTORS (AS DEFINED IN REGULATION S) IN THE ABSENCE OF SUCH REGISTRATION, UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION UNDER THE SECURITIES ACT, AND EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT); (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT; OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO REGULATION S (WITHIN THE MEANING REGULATION S UNDER THE SECURITIES ACT) AND (2) AGREES THAT IT WILL NOT PRIOR TO ONE YEAR AFTER THE LATER TO OCCUR OF (I) THE ORIGINAL ISSUANCE OF THE SECURITY EVIDENCED HEREBY OR (II) ACQUISITION THEREOF FROM AN AFFILIATE OF CHAPARRAL RESOURCES, INC. (THE "RESTRICTION TERMINATION DATE") OFFER, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (B) TO CHAPARRAL RESOURCES, INC., (C) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (D) INSIDE THE UNITED STATES TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO CHAPARRAL RESOURCES INC. A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTION ON TRANSFER OF THE SECURITY EVIDENCED HEREBY (THE FORM OF SUCH LETTER CAN BE OBTAINED FROM CHAPARRAL RESOURCES, INC.), 3 (E) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S, (F) PURSUANT TO RULE 144 OR (G) PURSUANT TO ANY OTHER EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE) SUBJECT IN EACH OF THE FOREGOING CASES TO ANY REQUIREMENTS OF LAW THAT THE DISPOSITION OF THE PROPERTY OF SUCH HOLDER BE AT ALL TIMES WITHIN SUCH HOLDER'S CONTROL AND TO COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAWS; AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE SECURITY EVIDENCED HEREBY PRIOR TO THE RESTRICTION TERMINATION DATE, THE HOLDER MUST MAKE CERTAIN CERTIFICATIONS TO CHAPARRAL RESOURCES, INC. TO CONFIRM THAT SUCH TRANSFERS ARE BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. IN ADDITION, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO CHAPARRAL RESOURCES, INC. SUCH LEGAL OPINIONS AND OTHER INFORMATION AS CHAPARRAL RESOURCES, INC. MAY REASONABLY REQUIRED TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. BY THE ACQUISITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, THE HOLDER REPRESENTS THAT IT WILL NOT, INDIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTION WITH REGARD TO THE SECURITIES, EXCEPT AS PERMITTED BY THE SECURITIES ACT. 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. 4 (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 5 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. 6 (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 7 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 8 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Limited ("Shell") in connection with the Loan Agreement among Maker, Shell, Central Asian Petroleum (Guernsey) Limited, Central Asian Petroleum, Inc., Closed Type JSC Karakudukmunay and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 9 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young - --------------------------------- 10 EX-4.5 6 0006.txt NON-NEGOTIABLE PROMISSORY NOTE 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE August 21, 2000 US$750,000.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of Sage Operating, Ltd., a limited liability company organized under the laws of the Cayman Islands ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") of SEVEN HUNDRED AND FIFTY THOUSAND DOLLARS (US$750,000.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price"). Payment shall be made by delivering such shares to Payee at such place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum amount allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an institutional "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act of 1933 as amended (the "Act") and is not a "U.S. person" as defined in Rule 902(o) of the Act. Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, OTHER THAN TO DISTRIBUTORS (AS DEFINED IN REGULATION S) IN THE ABSENCE OF SUCH REGISTRATION, UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION UNDER THE SECURITIES ACT, AND EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT); (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT; OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO REGULATION S (WITHIN THE MEANING REGULATION S UNDER THE SECURITIES ACT) AND (2) AGREES THAT IT WILL NOT PRIOR TO ONE YEAR AFTER THE LATER TO OCCUR OF (I) THE ORIGINAL ISSUANCE OF THE SECURITY EVIDENCED HEREBY OR (II) ACQUISITION THEREOF FROM AN AFFILIATE OF CHAPARRAL RESOURCES, INC. (THE "RESTRICTION TERMINATION DATE") OFFER, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (B) TO CHAPARRAL RESOURCES, INC., (C) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (D) INSIDE THE UNITED STATES TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO CHAPARRAL RESOURCES INC. A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTION ON TRANSFER OF THE SECURITY EVIDENCED 3 HEREBY (THE FORM OF SUCH LETTER CAN BE OBTAINED FROM CHAPARRAL RESOURCES, INC.), (E) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S, (F) PURSUANT TO RULE 144 OR (G) PURSUANT TO ANY OTHER EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE) SUBJECT IN EACH OF THE FOREGOING CASES TO ANY REQUIREMENTS OF LAW THAT THE DISPOSITION OF THE PROPERTY OF SUCH HOLDER BE AT ALL TIMES WITHIN SUCH HOLDER'S CONTROL AND TO COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAWS; AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE SECURITY EVIDENCED HEREBY PRIOR TO THE RESTRICTION TERMINATION DATE, THE HOLDER MUST MAKE CERTAIN CERTIFICATIONS TO CHAPARRAL RESOURCES, INC. TO CONFIRM THAT SUCH TRANSFERS ARE BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. IN ADDITION, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO CHAPARRAL RESOURCES, INC. SUCH LEGAL OPINIONS AND OTHER INFORMATION AS CHAPARRAL RESOURCES, INC. MAY REASONABLY REQUIRED TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. BY THE ACQUISITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, THE HOLDER REPRESENTS THAT IT WILL NOT, INDIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTION WITH REGARD TO THE SECURITIES, EXCEPT AS PERMITTED BY THE SECURITIES ACT. 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. 4 (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 5 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. 6 (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 7 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 8 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Limited ("Shell") in connection with the Loan Agreement among Maker, Shell, Central Asian Petroleum (Guernsey) Limited, Central Asian Petroleum, Inc., Closed Type JSC Karakudukmunay and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 9 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young - ----------------------------- 10 EX-4.6 7 0007.txt NON-NEGOTIABLE PROMISSORY NOTE 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE August 21, 2000 US$750,000.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of Stardust Fund Limited, a limited liability company organized under the laws of the Cayman Islands ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") of SEVEN HUNDRED AND FIFTY THOUSAND DOLLARS (US$750,000.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price"). Payment shall be made by delivering such shares to Payee at such place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum amount allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an institutional "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act of 1933 as amended (the "Act") and is not a "U.S. person" as defined in Rule 902(o) of the Act. Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, OTHER THAN TO DISTRIBUTORS (AS DEFINED IN REGULATION S) IN THE ABSENCE OF SUCH REGISTRATION, UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION UNDER THE SECURITIES ACT, AND EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT); (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT; OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO REGULATION S (WITHIN THE MEANING REGULATION S UNDER THE SECURITIES ACT) AND (2) AGREES THAT IT WILL NOT PRIOR TO ONE YEAR AFTER THE LATER TO OCCUR OF (I) THE ORIGINAL ISSUANCE OF THE SECURITY EVIDENCED HEREBY OR (II) ACQUISITION THEREOF FROM AN AFFILIATE OF CHAPARRAL RESOURCES, INC. (THE "RESTRICTION TERMINATION DATE") OFFER, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (B) TO CHAPARRAL RESOURCES, INC., (C) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (D) INSIDE THE UNITED STATES TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO CHAPARRAL RESOURCES INC. A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTION ON TRANSFER OF THE SECURITY EVIDENCED 3 HEREBY (THE FORM OF SUCH LETTER CAN BE OBTAINED FROM CHAPARRAL RESOURCES, INC.), (E) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S, (F) PURSUANT TO RULE 144 OR (G) PURSUANT TO ANY OTHER EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE) SUBJECT IN EACH OF THE FOREGOING CASES TO ANY REQUIREMENTS OF LAW THAT THE DISPOSITION OF THE PROPERTY OF SUCH HOLDER BE AT ALL TIMES WITHIN SUCH HOLDER'S CONTROL AND TO COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAWS; AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE SECURITY EVIDENCED HEREBY PRIOR TO THE RESTRICTION TERMINATION DATE, THE HOLDER MUST MAKE CERTAIN CERTIFICATIONS TO CHAPARRAL RESOURCES, INC. TO CONFIRM THAT SUCH TRANSFERS ARE BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. IN ADDITION, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO CHAPARRAL RESOURCES, INC. SUCH LEGAL OPINIONS AND OTHER INFORMATION AS CHAPARRAL RESOURCES, INC. MAY REASONABLY REQUIRED TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. BY THE ACQUISITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, THE HOLDER REPRESENTS THAT IT WILL NOT, INDIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTION WITH REGARD TO THE SECURITIES, EXCEPT AS PERMITTED BY THE SECURITIES ACT. 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. 4 (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 5 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. 6 (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 7 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 8 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Limited ("Shell") in connection with the Loan Agreement among Maker, Shell, Central Asian Petroleum (Guernsey) Limited, Central Asian Petroleum, Inc., Closed Type JSC Karakudukmunay and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 9 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young - -------------------------------- 10 EX-4.7 8 0008.txt PROMISSORY NOTE 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE September 21, 2000 US$2,000,000.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of Allen & Company Incorporated, a corporation organized under the laws of New York ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") of TWO MILLION DOLLARS (US$2,000,000.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price"). Payment shall be made by delivering such shares to Payee at 711 Fifth Avenue, New York, NY 10022, or at such other place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum note allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 1 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated by the SEC under the Securities Act of 1933 as amended (the "Act"). Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under any state securities laws and may not be sold, pledged, transferred, assigned or otherwise disposed of except in accordance with such Act and the rules and regulations thereunder and in accordance with applicable state securities laws. The Maker will transfer such securities only upon receipt of evidence satisfactory to the Maker, which may include an opinion of counsel, that the registration provisions of such Act have been compiled with or that such registration is not required and that such transfer will not violate any applicable state securities laws." 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. 3 (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 4 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. 5 (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 6 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 7 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Limited ("Shell") in connection with the Loan Agreement among Maker, Shell, Central Asia Petroleum (Guernsey) Limited, Central Asia Petroleum Inc., Karakuduk-Munay, Inc. and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 8 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young - --------------------------- 9 EX-4.8 9 0009.txt PROMISSORY NOTE 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE September 21, 2000 US$2,000,000.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of Whittier Ventures, LLC, a corporation organized under the laws of Nevada ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") of TWO MILLION DOLLARS (US$2,000,000.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price"). Payment shall be made by delivering such shares to Payee at 1600 Huttington Drive, South Pasadena, CA 91030, or at such other place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum note allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 1 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated by the SEC under the Securities Act of 1933 as amended (the "Act"). Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under any state securities laws and may not be sold, pledged, transferred, assigned or otherwise disposed of except in accordance with such Act and the rules and regulations thereunder and in accordance with applicable state securities laws. The Maker will transfer such securities only upon receipt of evidence satisfactory to the Maker, which may include an opinion of counsel, that the registration provisions of such Act have been compiled with or that such registration is not required and that such transfer will not violate any applicable state securities laws." 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. 3 (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 4 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. 5 (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 6 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 7 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Limited ("Shell") in connection with the Loan Agreement among Maker, Shell, Central Asia Petroleum (Guernsey) Limited, Central Asia Petroleum Inc., Karakuduk-Munay, Inc. and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 8 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young - ------------------------ 9 EX-4.9 10 0010.txt NON-NEGOTIABLE PROMISSORY NOTE 8.0% NON-NEGOTIABLE CONVERTIBLE SUBORDINATED PROMISSORY NOTE September 15, 2000 US$505,600.00 FOR VALUE RECEIVED, CHAPARRAL RESOURCES, INC., a Delaware corporation ("Maker"), promises to pay to the order of EcoTels International Limited, a limited liability company organized under the laws of the Cayman Islands ("Payee"), in lawful money of the United States of America, the principal amount (the "Principal Amount") of FIVE HUNDRED AND FIVE THOUSAND AND SIX HUNDRED DOLLARS (US$505,600.00), together with interest in arrears on the unpaid principal balance at an annual rate equal to eight percent per annum (8.0%), in the manner and subject to adjustment as provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. The following additional terms shall govern this Note: 1. PRINCIPAL AND INTEREST The entire Principal Amount of this Note together with accrued and unpaid interest thereon shall be due and payable in the manner provided in Paragraph 2. 2. MANNER OF PAYMENT (a) Except as provided in Paragraph 2.2(b), the Principal Amount and accrued and unpaid interest thereon shall be made in shares of the Maker's common stock, $0.0001 par value ("Common Stock"), not later than the tenth (10th) business day following the approval by the shareholders of the Maker, at a general meeting or special meeting called in whole or in part for such purpose, of the terms of this Paragraph 2.2(a). The number of shares of Maker Common Stock to be issued pursuant to this Paragraph 2.2(b) shall be equal to the product of the Principal Amount together with accrued and unpaid interest thereon divided by $1.86 (the "Conversion Price"). Payment shall be made by delivering such shares to Payee at such place as Payee shall designate to Maker in writing. Delivery of such stock certificates shall be made by registered mail, return receipt requested, or by a recognized overnight delivery service. (b) In the event that a majority of the shareholders of the Maker fail to approve the manner of payment provided in Paragraph 1.2(a), (i) the interest rate of this Note shall automatically, without any action required to be taken by Maker or Payee, be increased to the lesser of twenty five percent (25%) per annum or the maximum amount allowed by the laws of the State of Texas and (ii) the Principal Amount, together with all accrued and unpaid interest shall be due and payable on October 31, 2001. 3. REPRESENTATIONS OF MAKER The Maker hereby represents and warrants to the Payee as follows: (a) The Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority to own and lease its properties and to conduct its business as presently conducted. (b) This Note has been duly authorized by all necessary corporate action on the part of the Maker. This Note has been duly executed and delivered by Maker and constitutes the valid and binding agreement of Maker, enforceable against Maker in accordance with its terms, except as the enforceability hereof may be subject to applicable bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and to general principles of equity. (c) When approved by a majority of the shareholders of Maker, the issuance of the Maker's shares as provided in Paragraph 2(a) will have been duly authorized and, upon the issuance thereof will be validly issued, fully paid and non-assessable. (d) The execution and delivery of this Note will not (i) except for filings that may be made under the securities laws and with NASDAQ, as contemplated by this Note or where the absence would not have a material adverse effect on the Maker, require consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to any material agreement to which the Maker is a party or by which it is bound or by any regulatory or governmental agency, body or entity or (ii) violate any statute, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Maker or its properties are subject. 4. REPRESENTATIONS OF PAYEE (a) Payee is an institutional "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act of 1933 as amended (the "Act") and is not a "U.S. person" as defined in Rule 902(o) of the Act. Payee further represents that Payee considers itself to be a sophisticated investor in companies similarly situated to the Maker, and Payee has substantial knowledge and experience in financial and business matters (including knowledge of finance, securities and investments, generally, and experience and skill in investments based on actual participation) such that Payee is capable of evaluating the merits and risks of this Note. (b) Payee has been advised and acknowledges that any shares issued by the Maker pursuant to the Note have not been registered under the Act, in reliance upon the exemption(s) from registration promulgated thereunder. Payee also acknowledges that the issuance of any shares have not be registered under the securities laws of any state. Consequently, Payee agrees that pursuant to this Note, such shares cannot be resold, unless they are registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. 2 (c) Any shares acquired by Payee pursuant to this Note are solely for Payee's own account and not as nominee for, representative of, or otherwise on behalf of, any other person. Payee is acquiring any such shares with the intention of holding such shares for investment, with no present intention of participating, directly or indirectly, in a subsequent public distribution of the shares, unless registered under the Act and applicable state securities laws, or unless an exemption from such registration requirements is available. Payee shall not make any sale, transfer or other disposition of any of the shares in violation of any state or federal law. (d) Payee has been advised and agrees that there will be placed on any certificates representing any shares issued pursuant to this Note, a legend stating in substance the following (and including any restrictions or conditions that may be required by any applicable state law), and Payee has been advised and further agrees that the Maker will refuse to permit the transfer of the shares out of Payee's name in the absence of compliance with the terms of such legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, OTHER THAN TO DISTRIBUTORS (AS DEFINED IN REGULATION S) IN THE ABSENCE OF SUCH REGISTRATION, UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION UNDER THE SECURITIES ACT, AND EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT); (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT; OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO REGULATION S (WITHIN THE MEANING REGULATION S UNDER THE SECURITIES ACT) AND (2) AGREES THAT IT WILL NOT PRIOR TO ONE YEAR AFTER THE LATER TO OCCUR OF (I) THE ORIGINAL ISSUANCE OF THE SECURITY EVIDENCED HEREBY OR (II) ACQUISITION THEREOF FROM AN AFFILIATE OF CHAPARRAL RESOURCES, INC. (THE "RESTRICTION TERMINATION DATE") OFFER, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (B) TO CHAPARRAL RESOURCES, INC., (C) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (D) INSIDE THE UNITED STATES TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO CHAPARRAL RESOURCES INC. A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTION ON TRANSFER OF THE SECURITY EVIDENCED HEREBY (THE FORM OF SUCH LETTER CAN BE OBTAINED FROM CHAPARRAL RESOURCES, INC.), (E) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH 3 REGULATION S, (F) PURSUANT TO RULE 144 OR (G) PURSUANT TO ANY OTHER EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE) SUBJECT IN EACH OF THE FOREGOING CASES TO ANY REQUIREMENTS OF LAW THAT THE DISPOSITION OF THE PROPERTY OF SUCH HOLDER BE AT ALL TIMES WITHIN SUCH HOLDER'S CONTROL AND TO COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAWS; AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE SECURITY EVIDENCED HEREBY PRIOR TO THE RESTRICTION TERMINATION DATE, THE HOLDER MUST MAKE CERTAIN CERTIFICATIONS TO CHAPARRAL RESOURCES, INC. TO CONFIRM THAT SUCH TRANSFERS ARE BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. IN ADDITION, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO CHAPARRAL RESOURCES, INC. SUCH LEGAL OPINIONS AND OTHER INFORMATION AS CHAPARRAL RESOURCES, INC. MAY REASONABLY REQUIRED TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. BY THE ACQUISITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, THE HOLDER REPRESENTS THAT IT WILL NOT, INDIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTION WITH REGARD TO THE SECURITIES, EXCEPT AS PERMITTED BY THE SECURITIES ACT. 5. REGISTRATION RIGHTS (a) Definitions. For purposes of this Paragraph 5, the following terms shall have the respective meanings set forth below: (i) "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Act. (ii) The term "holder or holders of Registrable Stock" shall mean the holder of any shares issued pursuant to this Note. (iii) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the Commission. (iv) The term "Registrable Stock" means (a) the shares issued pursuant to this Note; provided, however, that shares of Registrable Stock will cease to be Registrable Stock if they are sold or transferred pursuant to a registered public offering or other transaction which does not result in restrictions on resale being imposed on the public transfer by virtue of federal or state securities laws; and provided further that Registrable Stock will cease to be Registrable Stock if the holder could sell or transfer all such Shares held by him/her pursuant to Rule 144 promulgated under the Act. 4 (b) Demand Registration. (i) Upon the written request of any holder or holders ("Initiating Holders") of at least 30% of the shares of Registrable Stock, which request shall state the intended method of disposition by such Initiating Holders and shall request that the Maker effect the registration of all or part of the Registrable Stock under the Securities Act, the Maker shall promptly give written notice of such requested registration to all other holders, if any, of Registrable Stock. If, after the expiration of 30 days from the giving of such notice to the holders of Registrable Stock, the Maker shall have received written requests to register at least 50% of the shares of Registrable Stock, which requests shall state the intended method of disposition of such securities by such holders, the Maker shall use all reasonable efforts to prepare and file with the Commission a registration statement and such other documents, including a prospectus, as may be necessary to permit a public offering and sale of such Registrable Stock in the United States in compliance with the provisions of the Securities Act, all to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) by the holders of the Registrable Stock so to be registered (the "Participating Holders"). If such sale of Registrable Stock is to be pursuant to an underwritten offering, the underwriter shall be selected by the Initiating Holders and shall be reasonably acceptable to the Maker. If the underwriter selected determines that the number of shares so to be included is required to be limited due to market conditions or otherwise, the holders of Registrable Stock proposing to sell their shares in such underwritten registration shall share pro rata (according to the number of shares requested to be registered) in the number of shares being underwritten (as determined by such underwriter) and registered for their account. The Maker shall only be required to effect two registrations pursuant to this Paragraph 5(b). (ii) The Maker shall not be required to effect any registration under this Paragraph 5(b) within nine months after the completion of any Registered offering of its securities pursuant. (iii) The Maker shall have the right to include in any registration statement or post-effective amendment filed pursuant to this Paragraph 5(b), other securities of the Maker then proposed to be distributed, except that, to the extent consistent with the rights of other holders of the Maker's securities, if and to the extent that the underwriter or underwriters acting with respect of such registered offering reasonably determine that the inclusion of such other securities may substantially prejudice or hinder the offering of Registrable Stock, the number of such other securities shall be reduced or eliminated prior to any reduction in the number of shares of Registrable Stock so to be registered. 5 (iv) If the registration under this Paragraph 5(b) is effected on a Form S-3 (or any successor form thereto), and the effectiveness of such registration statement can be maintained without significant additional expense to the Maker, then the Maker agrees to maintain the effectiveness of such registration statement for a period of six months after its initial effective date. (c) Incidental or Piggyback Registration. (i) If the Maker at any time or from time to time proposes to file with the Commission a registration statement under the Act with respect to any proposed distribution of any of its securities (other than a registration to be effected on Form S-4, S-8 or other similar limited purpose form), whether for sale for its own account or for the account of any other person holding registration rights with respect to the securities of the Maker, then the Maker shall give written notice of such proposed filing to the holders of Registrable Stock at least ten days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and shall offer the holders of Registrable Stock the opportunity to register such number of shares of Registrable Stock as the holders of Registrable Stock may request. Upon receipt by the Maker by the anticipated filing date of written requests from Participating Holders for the Maker to register their Registrable Stock, the Maker shall permit, or in the event of an underwritten offering, shall use its reasonable best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit, the Participating Holders to include such Registrable Stock in such offering on the same terms and conditions as any similar securities of the Maker included therein; provided, however, that if in the opinion of the managing underwriter or underwriters of such offering, the inclusion of the total amount Registrable Stock which it or the Maker, and any other persons or entities, intend to include in such offering would interfere, hinder, delay, reduce or prevent the effectiveness or sale of the Maker's securities proposed to be so registered, or would otherwise adversely affect the success of such offering, then the amount or kind of securities to be offered for the accounts of the Maker and each holder of Maker Securities (including without limitation Registrable Stock) or securities convertible into or exercisable for Maker securities proposed to be registered (other than any persons exercising demand registration rights) shall be reduced (or eliminated) in proportion to their respective values to the extent necessary to reduce the total amount of securities to be included in such offering on behalf of such holders of securities to the amount recommended by such managing underwriter. For purposes of this Paragraph, "value" shall mean principal amount with respect to debt securities and the proposed offering price per share with respect to equity securities. Notwithstanding the foregoing, if, at any time after giving written notice of its intention to register securities and prior to the effectiveness of the registration statement filed in connection with such registration, the Maker determines for any reason either not to effect such registration or to delay such registration, the Maker may, at its election, by delivery of written notice to the Participating Holders, (i) in the case of a determination not to effect registration, relieve itself of its obligations to register any Registrable Stock in connection with such registration, or (ii) in the case of determination to delay the registration, delay the registration of such Registrable Stock for the same period as the delay in the registration of such other shares of Common Stock or other securities convertible into or exercisable for Common Stock. 6 (ii) The Maker shall not be required to include any of the Registrable Stock of a Participating Holder in any registration statement or post-effective amendment prepared at its own instance unless such Participating Holder shall furnish such information and sign such documents as may be required by the Commission or reasonably requested by the Maker, in accordance with generally accepted practices, in connection with such proposed distribution. (d) Covenants of the Maker with Respect to Registration. In connection with any registration under this Paragraph 5, the Maker will, as expeditiously as is reasonably practicable: (i) Prepare and file with the Commission a registration statement with respect to such Participating Holders and, subject to the last sentence of Paragraph 5(c)(i) hereof, use its reasonable best efforts to cause such registration statement to become effective. (ii) Prepare and file with the Commission such amendments and supplements to such registration statement and prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (iii) Furnish to the Participating Holders such numbers of copies of a prospectus, including, if applicable, a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as the selling shareholders may reasonably request in order to facilitate the disposition of Registrable Stock owned by the Participating Holders. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as shall be reasonably requested by the Participating Holders; provided, however, that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Participating Holders shall also enter into and perform their obligations under such an agreement. 7 (vi) Notify the Participating Holders, at any time when a prospectus relating to Registrable Stock covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (e) The Maker shall pay all costs, fees and expenses in connection with all registration statements filed under this Paragraph 5 including, without limitation, the Maker's legal and accounting fees, printing expenses and blue sky fees and expenses, but not including (i) the fees and expenses of counsel for the Participating Holders in connection with such registration; and (ii) the underwriting discounts and commissions and underwriters' expenses allocable to the Registrable Stock being registered or state transfer taxes. 6. SALE OF ADDITIONAL SHARES BELOW CONVERSION PRICE (a) If at any time or from time to time within a period of three hundred and sixty-five (365) days after the date of this Note, the Maker issues or sells Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock for an Effective Price per share (as hereinafter defined) that is less than the Conversion Price, then and in each such case, the Payee shall be entitled to an additional number of shares of Common Stock (the "Adjusted Shares") which when added to the number of shares acquired pursuant to Paragraph 2(a) and divided by the by the Conversion Price shall be equal to the Effective Price per share. (b) For purposes of the foregoing paragraph, the consideration received by the Maker for any issuance or sale of Common Stock shall (i) to the extent it consists of cash be computed at the net amount of cash received by the Maker after deduction of any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issuance or sale, and (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Maker's Board of Directors. (c) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Maker after the date of this Note other than (i) shares of Common stock or options or warrants to acquire Common Stock issued to management, directors or employees of, or consultants to, the Maker or any Subsidiary, (ii) shares of Common Stock issuable upon exercise of convertible securities, (iii) shares of Common Stock issued to Allen & Company, Whittier Trust or any other current holders of any debt of the Maker, (iv) shares of Common Stock issued pursuant to any rights offering to current shareholders and (iii) shares of Common Stock or options or warrants to acquire Common Stock issued in connection with investment banking, financial advisory or legal services provided to the Maker. (d) The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, into the aggregate consideration received, or deemed to have been received by the Maker for the issuance of such Additional Shares of Common Stock. 8 7. EVENTS OF DEFAULT The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If pursuant to, or within the meaning of, the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. (b) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within one hundred and twenty (120) days. (c) Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Payee), Payee may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note. Maker shall pay all reasonable costs and expenses incurred by or on behalf of Payee in connection with Payee's exercise of any or all of its rights and remedies under this Note, including, without limitation, reasonable attorneys' fees. 8. SUBORDINATION Payee agrees to subordinate this Note on such terms and conditions as may be requested by Shell Capital Limited ("Shell") in connection with the Loan Agreement among Maker, Shell, Central Asian Petroleum (Guernsey) Limited, Central Asian Petroleum, Inc., Closed Type JSC Karakudukmunay and certain other facilities agents and lenders. If requested by Shell, Payee agrees to execute and deliver to Shell a subordination agreement relating to this Note. 9. PREPAYMENT From and after the date of this Note, the outstanding Principal Amount may be prepaid by Maker, in whole or in part, on written notice given by Maker to Payee. On the prepayment date, Maker shall pay to Payee in the manner specified in Paragraph 2(b), the Principal Amount to be prepaid plus accrued interest thereon to and including the date of prepayment and Payee shall return this Note to the Maker. 9 10. MISCELLANEOUS (a) If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (b) This Note will be governed by the laws of the State of Texas without regard to conflicts of laws principles. (c) This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Payee without the express prior written consent of Maker. (d) The headings of Paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Paragraph" or "Paragraphs" refer to the corresponding Paragraph or Paragraphs of this Note unless otherwise specified. (e) All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific Paragraph or subParagraph hereof. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young - ------------------------------ 10 EX-10.1 11 0011.txt SUBORDINATION AGREEMENT SUBORDINATION AGREEMENT This SUBORDINATION AGREEMENT (this "Agreement") is entered into on the ___ day of August 2000 among Chaparral Resources, Inc. ("Borrower"), Shell Capital Services Limited (the "Facility Agent"), and Dardana Limited ("Junior Entity"). RECITALS: WHEREAS, the Borrower and the Facility Agent are, inter alia, parties to the Loan Agreement (as defined herein); and WHEREAS, as a condition to funding under the Loan Agreement, the Borrower, the Facility Agent and the Junior Entity must enter into this Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of covenants herein contained, the parties agree as follows: 1. Definitions and Interpretation. (a) "Loan Agreement" means the loan agreement dated 1 November 1999 between Borrower, Central Asian Petroleum (Guernsey) Limited, Closed Type JSC Karakudukmunay and Central Asian Petroleum, Inc., as Co-Obligors, Shell Capital Limited, Shell Capital Services Limited and the Lenders (as defined in the Loan Agreement). "Preferred Obligations" means all obligations of the Borrower, the Co-Obligors, or any of them, to any of the Finance Parties whether now existing or arising in the future and whether fixed, prospective or contingent under or in respect of any of the Finance Documents whether for principal outstanding, interest, fees, costs, expenses, indemnities or otherwise. "Junior Obligations" means all obligations of the Borrower to the Junior Entity (including, without limitation, in respect of the CRI Bridge Notes and the CRI Existing Notes) whether now existing or arising in the future and whether fixed, prospective or contingent, whether for principal outstanding, interest, fees, costs, expenses, indemnities or otherwise. (b) Capitalized terms used and not defined herein are used with the meaning assigned to such term in the Loan Agreement. (c) Any reference in this Agreement to: (i) a statute shall be construed as a reference to such statute as from time to time amended or re-enacted; (ii) a person includes its permitted successors and assigns; (iii) a Finance Document or any other agreement or document shall be construed as a reference to that Finance Document or, as the case may be, such other agreement or document, as the same may have been, or may from time to time be, amended, novated or supplemented; and (iv) the singular includes the plural and vice versa. 2. The payment of the Junior Obligations is expressly made subordinate and subject in right of payment and in liquidation to the prior payment in full of the Preferred Obligations. 3. Until the date of irrevocable final repayment, in full, of the Preferred Obligations and termination of all commitments in respect thereof, the Borrower undertakes not to pay or repay and the Junior Entity undertakes not to claim, recover, retain or receive (or seek to claim, recover, retain or receive) any amount whatsoever in relation to any Junior Obligation (including, without limitation, any recovery, payment or repayment arising out of any claim under a guarantee) or to any interest or other amount payable by the Borrower in respect thereof, or to any other indebtedness of the Borrower to any Junior Entity. 4. If: (i) there is any distribution of all or any part of the assets of the Borrower including, without limitation, by reason of the liquidation, dissolution or other insolvency proceeding, or assignment for the benefit of creditors; or (ii) the Borrower goes into liquidation or becomes subject to any insolvency or rehabilitation proceeding, administration, or voluntary arrangement, then until the date of final irrevocable repayment in full of the Preferred Obligations any payment or distribution of any kind or character and all and any rights in respect thereof payable or deliverable to the Junior Entity with respect to the Junior Obligations or any part thereof by the liquidator, administrator, administrative receiver or receiver (or the equivalent thereof) of the Borrower will forthwith be paid or delivered to the Facility Agent for application to the Preferred Obligations in accordance with the terms of the Finance Documents. 5. Following the occurrence of any Event of Default, the Junior Entity will irrevocably authorise and empower the Facility Agent to demand, sue and prove for, collect and receive every payment or distribution referred to in Section 4 and give good discharge therefor and to file claims and take such other proceedings, in the Facility Agent's name, the name of the Junior Entity or otherwise, as the Facility Agent may deem necessary or advisable for the enforcement of the payment of debts in accordance with the priority set out in Section 2. 2 6. The Junior Entity will, at all times, following the occurrence of any Event of Default, and for so long as such Event of Default is continuing, execute or procure the execution of and deliver to the Facility Agent such proxies, powers of attorney, assignments or other instruments as may be requested by it in order to enable the Facility Agent to vote and/or enforce any and all claims upon or with respect to the Junior Obligations or any part thereof and to collect and receive any and all payments or distributions which may be payable or deliverable to the Facility Agent at any time upon or with respect to the Junior Obligations or any part thereof. 7. A liquidator or other insolvency representative of the Borrower or the Junior Entity will be authorised, to the maximum extent permitted by applicable law, to apply any assets or moneys it receives in accordance with the order of priority referred to in Section 2. 8. If any amounts are received by the Junior Entity or any person acting on its behalf with respect to the Junior Obligations or any part thereof whether in cash or in kind or by way of set-off, combination of accounts or otherwise, the Junior Entity (or person acting on its behalf as aforesaid) agrees that an amount equal to the amount so received by the relevant Junior Entity shall be held on trust for the Facility Agent and shall forthwith be paid to the Facility Agent for application to the Preferred Obligations in accordance with the terms of the Finance Documents and that any failure to make such payment shall be a breach of its obligations under this Agreement. 9. (a) Unless otherwise agreed by the Facility Agent, the Junior Entity will waive, and undertake that it will not seek to obtain payment of any Junior Obligation, in whole or in part, by exercising any right of set-off it may have with respect to any Junior Obligation, whether created by contract, statute or otherwise. (b) Until the date of irrevocable final repayment, in full, of the Preferred Obligations and termination of all commitments in respect thereof the Facility Agent may (subject to the provisions of the Finance Documents), unless and until such moneys or distributions in the aggregate are sufficient to bring about the irrevocable final repayment, in full, of the Preferred Obligations (if applied to repayment of the Preferred Obligations), (i) apply any moneys or property received under this Agreement from the Borrower, the Junior Entity or any other person against the Preferred Obligations in such order as it thinks fit; and (ii) hold in a suspense account any moneys or distributions received under this Agreement. 10. The Junior Entity will not be entitled without the consent of the Facility Agent to accelerate any Junior Obligation (or any portion thereof). The Facility Agent shall have complete discretion as to the granting of such consent. 3 11. The Junior Entity will not under any circumstances, prior to the irrevocable final repayment, in full, of the Preferred Obligations, be subrogated to any of the rights of the Finance Parties or any security arising under the Finance Documents. 12. This Agreement and the subordination provisions contained herein will terminate on the date of irrevocable final repayment, in full, of the Preferred Obligations, and termination of all commitments in respect thereof. 13. Unless otherwise agreed by the Facility Agent, the Junior Entity undertakes not to commence, or join with any other creditor or creditors of the Borrower in commencing, any bankruptcy, insolvency or rehabilitation proceeding, administration or other voluntary arrangement against or in respect of the Borrower prior to irrevocable final repayment, in full, of the Preferred Obligations. 14. This Agreement constitutes the entire agreement between the parties and supersedes all prior oral or written agreements, understandings, representations, warranties and course of conduct and dealings between the parties on the subject matter hereof. 15. Time is of the essence of each party's obligations under this Agreement but no failure to exercise, nor any delay in exercising, on the part of the Facility Agent, any right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise thereof or the exercise of any other right or remedy. The rights and remedies contained in this Agreement are cumulative and not exclusive of any rights or remedies provided by law. 16. If, at any time, any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Agreement under the law of that jurisdiction nor the legality, validity or enforceability of that or any other provision of this Agreement under the law of any other jurisdiction shall in any way be affected or impaired thereby unless the effect of the foregoing would be substantially to alter the rights and obligations of the parties originally agreed. 17. This Agreement shall bind the parties and each of their respective successors and assignees. 18. Neither the Borrower nor the Junior Entity will assign or otherwise transfer any of its rights or obligations under this Agreement. The Facility Agent is permitted to transfer its rights and/or obligations under this Agreement. 19. (a) All notices or other communications to Borrower or the Facility Agent shall be given in writing addressed to the relevant party at its address specified in Clause 29.2 of the Loan Agreement. All notices or other communications to the Junior Entity shall be given in writing at its address set forth in the signature page of this Agreement. A written notice includes a notice by facsimile transmission. 4 (b) Any such notice shall be deemed to be given: (i) if by personal delivery or letter, when delivered; and (iii) if by facsimile, when the answerback is received. (c) However, a notice given in accordance with the above but received on a non-working day or after business hours in the place of receipt shall only be deemed to be given on the next working day in that place. 20. Each communication and document made or delivered by one party to another pursuant to this Agreement shall be in the English language or accompanied by a translation into English certified (by an officer of the person making or delivering the same) as being a true and accurate translation thereof. 21. This Agreement may not be amended except by an instrument in writing signed by each of the parties. 22. This Agreement shall be governed by English law. 23. (a) For the exclusive benefit of the Facility Agent, each of the Borrower and the Junior Entity irrevocably agrees that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement and that accordingly any suit, action or proceedings (together in this Section 23 referred to as "proceedings") arising out of or in connection with this Agreement may be brought in such courts, subject to the option referred to in Section 26. (b) Each of the Borrower and the Junior Entity irrevocably waives and agrees not to raise any objection which it may have now or hereafter to the laying of the venue of any proceedings in any such court as is referred to in this Section 23 and any claim that any such proceedings have been brought in an inconvenient or inappropriate forum and further irrevocably agrees that a judgement in any proceedings brought in the English courts shall be conclusive and binding upon each Borrower and the Junior Entity and may be enforced in the courts of any other jurisdiction. (c) Nothing contained in this Section 23 shall limit the right of the Facility Agent to take proceedings against the Borrower or the Junior Entity in any other court of competent jurisdiction, nor shall the taking of proceedings in one or more jurisdictions preclude the taking of proceedings in any other jurisdiction, whether concurrently or not. 24. To the extent that the Borrower or the Junior Entity may now or hereafter be entitled, in any jurisdiction in which proceedings may at any time be commenced with respect to this Agreement, to claim for itself or any of its undertaking, properties, assets or revenues present or future any immunity (sovereign or otherwise) from suit, jurisdiction of any court, attachment prior to judgement, attachment in aid of execution of a judgement, execution of a judgement or from set-off, banker's lien, counterclaim or any other legal process or remedy with respect to its obligations under this Agreement and to the extent that in any such jurisdiction there may be attributed to the Borrower or the Junior Entity any such immunity (whether or not claimed), each of the Borrower and the Junior Entity hereby to the fullest extent permitted by applicable law irrevocably agrees not to claim, and hereby to the fullest extent permitted by applicable law waives, any such immunity. 5 25. Each of the Borrower and the Junior Entity consents generally in respect of any proceedings to the giving of any relief or the issue of any process in connection with such proceedings including the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) of any order or judgement which may be made or given in such proceedings. 26. If any dispute arises in relation to this Agreement, including any questions as to existence, validity or termination, such dispute shall, at the option only of the Facility Agent, be referred to and finally resolved by arbitration under the rules of the London Court of International Arbitration which are applicable at the time of reference to the arbitration and are deemed to be incorporated by reference into this Section 26. Such arbitration shall take place in London, England and shall be conducted by three arbitrators, one of whom shall be nominated by the Borrower, one by the Facility Agent and the third to be agreed between the two arbitrators so nominated and in default he shall be nominated by the President of the London Court of International Arbitration. The language in which such arbitration shall be conducted shall be English. Any award rendered shall be final and binding on the parties thereto and may be entered into any court having jurisdiction or application may be made to such court for an order of enforcement as the case may require. No party may appeal to any court from any award or decision of the arbitral tribunal and, in particular, but without limitation, no applications may be made under section 45 of the Arbitration Act 1996 and no appeal may be made under section 69 of that Act. 27. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young Name: Michael B. Young Title: Treasurer SHELL CAPITAL SERVICES LIMITED By: /s/ Mark L.G. Turner Name: Mark L.G. Turner Title: Director DARDANA LIMITED By: /s/ L. Todd Gremillion Name: L. Todd Gremillion Title: Authorized Signatory Address: c/o Akin, Gump, Strauss, Hauer & Feld, LLP 711 Louisiana, Suite 1900 Houston, TX 77002 Telephone: 713-220-5800 Facsimile: 713-236-0822 6 EX-10.2 12 0012.txt SUBORDINATION AGREEMENT SUBORDINATION AGREEMENT This SUBORDINATION AGREEMENT (this "Agreement") is entered into on the ___ day of August 2000 among Chaparral Resources, Inc. ("Borrower"), Shell Capital Services Limited (the "Facility Agent"), and Goldrust Venture Capital Limited ("Junior Entity"). RECITALS: WHEREAS, the Borrower and the Facility Agent are, inter alia, parties to the Loan Agreement (as defined herein); and WHEREAS, as a condition to funding under the Loan Agreement, the Borrower, the Facility Agent and the Junior Entity must enter into this Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of covenants herein contained, the parties agree as follows: 1. Definitions and Interpretation. (a) "Loan Agreement" means the loan agreement dated 1 November 1999 between Borrower, Central Asian Petroleum (Guernsey) Limited, Closed Type JSC Karakudukmunay and Central Asian Petroleum, Inc., as Co-Obligors, Shell Capital Limited, Shell Capital Services Limited and the Lenders (as defined in the Loan Agreement). "Preferred Obligations" means all obligations of the Borrower, the Co-Obligors, or any of them, to any of the Finance Parties whether now existing or arising in the future and whether fixed, prospective or contingent under or in respect of any of the Finance Documents whether for principal outstanding, interest, fees, costs, expenses, indemnities or otherwise. "Junior Obligations" means all obligations of the Borrower to the Junior Entity (including, without limitation, in respect of the CRI Bridge Notes and the CRI Existing Notes) whether now existing or arising in the future and whether fixed, prospective or contingent, whether for principal outstanding, interest, fees, costs, expenses, indemnities or otherwise. (b) Capitalized terms used and not defined herein are used with the meaning assigned to such term in the Loan Agreement. (c) Any reference in this Agreement to: (i) a statute shall be construed as a reference to such statute as from time to time amended or re-enacted; (ii) a person includes its permitted successors and assigns; (iii) a Finance Document or any other agreement or document shall be construed as a reference to that Finance Document or, as the case may be, such other agreement or document, as the same may have been, or may from time to time be, amended, novated or supplemented; and (iv) the singular includes the plural and vice versa. 2. The payment of the Junior Obligations is expressly made subordinate and subject in right of payment and in liquidation to the prior payment in full of the Preferred Obligations. 3. Until the date of irrevocable final repayment, in full, of the Preferred Obligations and termination of all commitments in respect thereof, the Borrower undertakes not to pay or repay and the Junior Entity undertakes not to claim, recover, retain or receive (or seek to claim, recover, retain or receive) any amount whatsoever in relation to any Junior Obligation (including, without limitation, any recovery, payment or repayment arising out of any claim under a guarantee) or to any interest or other amount payable by the Borrower in respect thereof, or to any other indebtedness of the Borrower to any Junior Entity. 4. If: (i) there is any distribution of all or any part of the assets of the Borrower including, without limitation, by reason of the liquidation, dissolution or other insolvency proceeding, or assignment for the benefit of creditors; or (ii) the Borrower goes into liquidation or becomes subject to any insolvency or rehabilitation proceeding, administration, or voluntary arrangement, then until the date of final irrevocable repayment in full of the Preferred Obligations any payment or distribution of any kind or character and all and any rights in respect thereof payable or deliverable to the Junior Entity with respect to the Junior Obligations or any part thereof by the liquidator, administrator, administrative receiver or receiver (or the equivalent thereof) of the Borrower will forthwith be paid or delivered to the Facility Agent for application to the Preferred Obligations in accordance with the terms of the Finance Documents. 5. Following the occurrence of any Event of Default, the Junior Entity will irrevocably authorise and empower the Facility Agent to demand, sue and prove for, collect and receive every payment or distribution referred to in Section 4 and give good discharge therefor and to file claims and take such other proceedings, in the Facility Agent's name, the name of the Junior Entity or otherwise, as the Facility Agent may deem necessary or advisable for the enforcement of the payment of debts in accordance with the priority set out in Section 2. 2 6. The Junior Entity will, at all times, following the occurrence of any Event of Default, and for so long as such Event of Default is continuing, execute or procure the execution of and deliver to the Facility Agent such proxies, powers of attorney, assignments or other instruments as may be requested by it in order to enable the Facility Agent to vote and/or enforce any and all claims upon or with respect to the Junior Obligations or any part thereof and to collect and receive any and all payments or distributions which may be payable or deliverable to the Facility Agent at any time upon or with respect to the Junior Obligations or any part thereof. 7. A liquidator or other insolvency representative of the Borrower or the Junior Entity will be authorised, to the maximum extent permitted by applicable law, to apply any assets or moneys it receives in accordance with the order of priority referred to in Section 2. 8. If any amounts are received by the Junior Entity or any person acting on its behalf with respect to the Junior Obligations or any part thereof whether in cash or in kind or by way of set-off, combination of accounts or otherwise, the Junior Entity (or person acting on its behalf as aforesaid) agrees that an amount equal to the amount so received by the relevant Junior Entity shall be held on trust for the Facility Agent and shall forthwith be paid to the Facility Agent for application to the Preferred Obligations in accordance with the terms of the Finance Documents and that any failure to make such payment shall be a breach of its obligations under this Agreement. 9. (a) Unless otherwise agreed by the Facility Agent, the Junior Entity will waive, and undertake that it will not seek to obtain payment of any Junior Obligation, in whole or in part, by exercising any right of set-off it may have with respect to any Junior Obligation, whether created by contract, statute or otherwise. (b) Until the date of irrevocable final repayment, in full, of the Preferred Obligations and termination of all commitments in respect thereof the Facility Agent may (subject to the provisions of the Finance Documents), unless and until such moneys or distributions in the aggregate are sufficient to bring about the irrevocable final repayment, in full, of the Preferred Obligations (if applied to repayment of the Preferred Obligations), (i) apply any moneys or property received under this Agreement from the Borrower, the Junior Entity or any other person against the Preferred Obligations in such order as it thinks fit; and (ii) hold in a suspense account any moneys or distributions received under this Agreement. 10. The Junior Entity will not be entitled without the consent of the Facility Agent to accelerate any Junior Obligation (or any portion thereof). The Facility Agent shall have complete discretion as to the granting of such consent. 3 11. The Junior Entity will not under any circumstances, prior to the irrevocable final repayment, in full, of the Preferred Obligations, be subrogated to any of the rights of the Finance Parties or any security arising under the Finance Documents. 12. This Agreement and the subordination provisions contained herein will terminate on the date of irrevocable final repayment, in full, of the Preferred Obligations, and termination of all commitments in respect thereof. 13. Unless otherwise agreed by the Facility Agent, the Junior Entity undertakes not to commence, or join with any other creditor or creditors of the Borrower in commencing, any bankruptcy, insolvency or rehabilitation proceeding, administration or other voluntary arrangement against or in respect of the Borrower prior to irrevocable final repayment, in full, of the Preferred Obligations. 14. This Agreement constitutes the entire agreement between the parties and supersedes all prior oral or written agreements, understandings, representations, warranties and course of conduct and dealings between the parties on the subject matter hereof. 15. Time is of the essence of each party's obligations under this Agreement but no failure to exercise, nor any delay in exercising, on the part of the Facility Agent, any right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise thereof or the exercise of any other right or remedy. The rights and remedies contained in this Agreement are cumulative and not exclusive of any rights or remedies provided by law. 16. If, at any time, any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Agreement under the law of that jurisdiction nor the legality, validity or enforceability of that or any other provision of this Agreement under the law of any other jurisdiction shall in any way be affected or impaired thereby unless the effect of the foregoing would be substantially to alter the rights and obligations of the parties originally agreed. 17. This Agreement shall bind the parties and each of their respective successors and assignees. 18. Neither the Borrower nor the Junior Entity will assign or otherwise transfer any of its rights or obligations under this Agreement. The Facility Agent is permitted to transfer its rights and/or obligations under this Agreement. 19. (a) All notices or other communications to Borrower or the Facility Agent shall be given in writing addressed to the relevant party at its address specified in Clause 29.2 of the Loan Agreement. All notices or other communications to the Junior Entity shall be given in writing at its address set forth in the signature page of this Agreement. A written notice includes a notice by facsimile transmission. 4 (b) Any such notice shall be deemed to be given: (i) if by personal delivery or letter, when delivered; and (iii) if by facsimile, when the answerback is received. (c) However, a notice given in accordance with the above but received on a non-working day or after business hours in the place of receipt shall only be deemed to be given on the next working day in that place. 20. Each communication and document made or delivered by one party to another pursuant to this Agreement shall be in the English language or accompanied by a translation into English certified (by an officer of the person making or delivering the same) as being a true and accurate translation thereof. 21. This Agreement may not be amended except by an instrument in writing signed by each of the parties. 22. This Agreement shall be governed by English law. 23. (a) For the exclusive benefit of the Facility Agent, each of the Borrower and the Junior Entity irrevocably agrees that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement and that accordingly any suit, action or proceedings (together in this Section 23 referred to as "proceedings") arising out of or in connection with this Agreement may be brought in such courts, subject to the option referred to in Section 26. (b) Each of the Borrower and the Junior Entity irrevocably waives and agrees not to raise any objection which it may have now or hereafter to the laying of the venue of any proceedings in any such court as is referred to in this Section 23 and any claim that any such proceedings have been brought in an inconvenient or inappropriate forum and further irrevocably agrees that a judgement in any proceedings brought in the English courts shall be conclusive and binding upon each Borrower and the Junior Entity and may be enforced in the courts of any other jurisdiction. (c) Nothing contained in this Section 23 shall limit the right of the Facility Agent to take proceedings against the Borrower or the Junior Entity in any other court of competent jurisdiction, nor shall the taking of proceedings in one or more jurisdictions preclude the taking of proceedings in any other jurisdiction, whether concurrently or not. 24. To the extent that the Borrower or the Junior Entity may now or hereafter be entitled, in any jurisdiction in which proceedings may at any time be commenced with respect to this Agreement, to claim for itself or any of its undertaking, properties, assets or revenues present or future any immunity (sovereign or otherwise) from suit, jurisdiction of any court, attachment prior to judgement, attachment in aid of execution of a judgement, execution of a judgement or from set-off, banker's lien, counterclaim or any other legal process or remedy with respect to its obligations under this Agreement and to the extent that in any such jurisdiction there may be attributed to the Borrower or the Junior Entity any such immunity (whether or not claimed), each of the Borrower and the Junior Entity hereby to the fullest extent permitted by applicable law irrevocably agrees not to claim, and hereby to the fullest extent permitted by applicable law waives, any such immunity. 5 25. Each of the Borrower and the Junior Entity consents generally in respect of any proceedings to the giving of any relief or the issue of any process in connection with such proceedings including the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) of any order or judgement which may be made or given in such proceedings. 26. If any dispute arises in relation to this Agreement, including any questions as to existence, validity or termination, such dispute shall, at the option only of the Facility Agent, be referred to and finally resolved by arbitration under the rules of the London Court of International Arbitration which are applicable at the time of reference to the arbitration and are deemed to be incorporated by reference into this Section 26. Such arbitration shall take place in London, England and shall be conducted by three arbitrators, one of whom shall be nominated by the Borrower, one by the Facility Agent and the third to be agreed between the two arbitrators so nominated and in default he shall be nominated by the President of the London Court of International Arbitration. The language in which such arbitration shall be conducted shall be English. Any award rendered shall be final and binding on the parties thereto and may be entered into any court having jurisdiction or application may be made to such court for an order of enforcement as the case may require. No party may appeal to any court from any award or decision of the arbitral tribunal and, in particular, but without limitation, no applications may be made under section 45 of the Arbitration Act 1996 and no appeal may be made under section 69 of that Act. 27. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young Name: Michael B. Young Title: Treasurer SHELL CAPITAL SERVICES LIMITED By: /s/ Mark L.G. Turner Name: Mark L.G. Turner Title: Director GOLDRUST VENTURE CAPITAL LIMITED By: /s/ L. Todd Gremillion Name: L. Todd Gremillion Title: Authorized Signatory Address: c/o Akin, Gump, Strauss, Hauer & Feld, LLP 711 Louisiana, Suite 1900 Houston, TX 77002 Telephone: 713-220-5800 Facsimile: 713-236-0822 6 EX-10.3 13 0013.txt SUBORDINATION AGREEMENT SUBORDINATION AGREEMENT This SUBORDINATION AGREEMENT (this "Agreement") is entered into on the ___ day of August 2000 among Chaparral Resources, Inc. ("Borrower"), Shell Capital Services Limited (the "Facility Agent"), and Sage Operating Ltd. ("Junior Entity"). RECITALS: WHEREAS, the Borrower and the Facility Agent are, inter alia, parties to the Loan Agreement (as defined herein); and WHEREAS, as a condition to funding under the Loan Agreement, the Borrower, the Facility Agent and the Junior Entity must enter into this Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of covenants herein contained, the parties agree as follows: 1. Definitions and Interpretation. (a) "Loan Agreement" means the loan agreement dated 1 November 1999 between Borrower, Central Asian Petroleum (Guernsey) Limited, Closed Type JSC Karakudukmunay and Central Asian Petroleum, Inc., as Co-Obligors, Shell Capital Limited, Shell Capital Services Limited and the Lenders (as defined in the Loan Agreement). "Preferred Obligations" means all obligations of the Borrower, the Co-Obligors, or any of them, to any of the Finance Parties whether now existing or arising in the future and whether fixed, prospective or contingent under or in respect of any of the Finance Documents whether for principal outstanding, interest, fees, costs, expenses, indemnities or otherwise. "Junior Obligations" means all obligations of the Borrower to the Junior Entity (including, without limitation, in respect of the CRI Bridge Notes and the CRI Existing Notes) whether now existing or arising in the future and whether fixed, prospective or contingent, whether for principal outstanding, interest, fees, costs, expenses, indemnities or otherwise. (b) Capitalized terms used and not defined herein are used with the meaning assigned to such term in the Loan Agreement. (c) Any reference in this Agreement to: (i) a statute shall be construed as a reference to such statute as from time to time amended or re-enacted; (ii) a person includes its permitted successors and assigns; (iii) a Finance Document or any other agreement or document shall be construed as a reference to that Finance Document or, as the case may be, such other agreement or document, as the same may have been, or may from time to time be, amended, novated or supplemented; and (iv) the singular includes the plural and vice versa. 2. The payment of the Junior Obligations is expressly made subordinate and subject in right of payment and in liquidation to the prior payment in full of the Preferred Obligations. 3. Until the date of irrevocable final repayment, in full, of the Preferred Obligations and termination of all commitments in respect thereof, the Borrower undertakes not to pay or repay and the Junior Entity undertakes not to claim, recover, retain or receive (or seek to claim, recover, retain or receive) any amount whatsoever in relation to any Junior Obligation (including, without limitation, any recovery, payment or repayment arising out of any claim under a guarantee) or to any interest or other amount payable by the Borrower in respect thereof, or to any other indebtedness of the Borrower to any Junior Entity. 4. If: (i) there is any distribution of all or any part of the assets of the Borrower including, without limitation, by reason of the liquidation, dissolution or other insolvency proceeding, or assignment for the benefit of creditors; or (ii) the Borrower goes into liquidation or becomes subject to any insolvency or rehabilitation proceeding, administration, or voluntary arrangement, then until the date of final irrevocable repayment in full of the Preferred Obligations any payment or distribution of any kind or character and all and any rights in respect thereof payable or deliverable to the Junior Entity with respect to the Junior Obligations or any part thereof by the liquidator, administrator, administrative receiver or receiver (or the equivalent thereof) of the Borrower will forthwith be paid or delivered to the Facility Agent for application to the Preferred Obligations in accordance with the terms of the Finance Documents. 5. Following the occurrence of any Event of Default, the Junior Entity will irrevocably authorise and empower the Facility Agent to demand, sue and prove for, collect and receive every payment or distribution referred to in Section 4 and give good discharge therefor and to file claims and take such other proceedings, in the Facility Agent's name, the name of the Junior Entity or otherwise, as the Facility Agent may deem necessary or advisable for the enforcement of the payment of debts in accordance with the priority set out in Section 2. 2 6. The Junior Entity will, at all times, following the occurrence of any Event of Default, and for so long as such Event of Default is continuing, execute or procure the execution of and deliver to the Facility Agent such proxies, powers of attorney, assignments or other instruments as may be requested by it in order to enable the Facility Agent to vote and/or enforce any and all claims upon or with respect to the Junior Obligations or any part thereof and to collect and receive any and all payments or distributions which may be payable or deliverable to the Facility Agent at any time upon or with respect to the Junior Obligations or any part thereof. 7. A liquidator or other insolvency representative of the Borrower or the Junior Entity will be authorised, to the maximum extent permitted by applicable law, to apply any assets or moneys it receives in accordance with the order of priority referred to in Section 2. 8. If any amounts are received by the Junior Entity or any person acting on its behalf with respect to the Junior Obligations or any part thereof whether in cash or in kind or by way of set-off, combination of accounts or otherwise, the Junior Entity (or person acting on its behalf as aforesaid) agrees that an amount equal to the amount so received by the relevant Junior Entity shall be held on trust for the Facility Agent and shall forthwith be paid to the Facility Agent for application to the Preferred Obligations in accordance with the terms of the Finance Documents and that any failure to make such payment shall be a breach of its obligations under this Agreement. 9. (a) Unless otherwise agreed by the Facility Agent, the Junior Entity will waive, and undertake that it will not seek to obtain payment of any Junior Obligation, in whole or in part, by exercising any right of set-off it may have with respect to any Junior Obligation, whether created by contract, statute or otherwise. (b) Until the date of irrevocable final repayment, in full, of the Preferred Obligations and termination of all commitments in respect thereof the Facility Agent may (subject to the provisions of the Finance Documents), unless and until such moneys or distributions in the aggregate are sufficient to bring about the irrevocable final repayment, in full, of the Preferred Obligations (if applied to repayment of the Preferred Obligations), (i) apply any moneys or property received under this Agreement from the Borrower, the Junior Entity or any other person against the Preferred Obligations in such order as it thinks fit; and (ii) hold in a suspense account any moneys or distributions received under this Agreement. 10. The Junior Entity will not be entitled without the consent of the Facility Agent to accelerate any Junior Obligation (or any portion thereof). The Facility Agent shall have complete discretion as to the granting of such consent. 3 11. The Junior Entity will not under any circumstances, prior to the irrevocable final repayment, in full, of the Preferred Obligations, be subrogated to any of the rights of the Finance Parties or any security arising under the Finance Documents. 12. This Agreement and the subordination provisions contained herein will terminate on the date of irrevocable final repayment, in full, of the Preferred Obligations, and termination of all commitments in respect thereof. 13. Unless otherwise agreed by the Facility Agent, the Junior Entity undertakes not to commence, or join with any other creditor or creditors of the Borrower in commencing, any bankruptcy, insolvency or rehabilitation proceeding, administration or other voluntary arrangement against or in respect of the Borrower prior to irrevocable final repayment, in full, of the Preferred Obligations. 14. This Agreement constitutes the entire agreement between the parties and supersedes all prior oral or written agreements, understandings, representations, warranties and course of conduct and dealings between the parties on the subject matter hereof. 15. Time is of the essence of each party's obligations under this Agreement but no failure to exercise, nor any delay in exercising, on the part of the Facility Agent, any right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise thereof or the exercise of any other right or remedy. The rights and remedies contained in this Agreement are cumulative and not exclusive of any rights or remedies provided by law. 16. If, at any time, any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Agreement under the law of that jurisdiction nor the legality, validity or enforceability of that or any other provision of this Agreement under the law of any other jurisdiction shall in any way be affected or impaired thereby unless the effect of the foregoing would be substantially to alter the rights and obligations of the parties originally agreed. 17. This Agreement shall bind the parties and each of their respective successors and assignees. 18. Neither the Borrower nor the Junior Entity will assign or otherwise transfer any of its rights or obligations under this Agreement. The Facility Agent is permitted to transfer its rights and/or obligations under this Agreement. 19. (a) All notices or other communications to Borrower or the Facility Agent shall be given in writing addressed to the relevant party at its address specified in Clause 29.2 of the Loan Agreement. All notices or other communications to the Junior Entity shall be given in writing at its address set forth in the signature page of this Agreement. A written notice includes a notice by facsimile transmission. 4 (b) Any such notice shall be deemed to be given: (i) if by personal delivery or letter, when delivered; and (iii) if by facsimile, when the answerback is received. (c) However, a notice given in accordance with the above but received on a non-working day or after business hours in the place of receipt shall only be deemed to be given on the next working day in that place. 20. Each communication and document made or delivered by one party to another pursuant to this Agreement shall be in the English language or accompanied by a translation into English certified (by an officer of the person making or delivering the same) as being a true and accurate translation thereof. 21. This Agreement may not be amended except by an instrument in writing signed by each of the parties. 22. This Agreement shall be governed by English law. 23. (a) For the exclusive benefit of the Facility Agent, each of the Borrower and the Junior Entity irrevocably agrees that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement and that accordingly any suit, action or proceedings (together in this Section 23 referred to as "proceedings") arising out of or in connection with this Agreement may be brought in such courts, subject to the option referred to in Section 26. (b) Each of the Borrower and the Junior Entity irrevocably waives and agrees not to raise any objection which it may have now or hereafter to the laying of the venue of any proceedings in any such court as is referred to in this Section 23 and any claim that any such proceedings have been brought in an inconvenient or inappropriate forum and further irrevocably agrees that a judgement in any proceedings brought in the English courts shall be conclusive and binding upon each Borrower and the Junior Entity and may be enforced in the courts of any other jurisdiction. (c) Nothing contained in this Section 23 shall limit the right of the Facility Agent to take proceedings against the Borrower or the Junior Entity in any other court of competent jurisdiction, nor shall the taking of proceedings in one or more jurisdictions preclude the taking of proceedings in any other jurisdiction, whether concurrently or not. 24. To the extent that the Borrower or the Junior Entity may now or hereafter be entitled, in any jurisdiction in which proceedings may at any time be commenced with respect to this Agreement, to claim for itself or any of its undertaking, properties, assets or revenues present or future any immunity (sovereign or otherwise) from suit, jurisdiction of any court, attachment prior to judgement, attachment in aid of execution of a judgement, execution of a judgement or from set-off, banker's lien, counterclaim or any other legal process or remedy with respect to its obligations under this Agreement and to the extent that in any such jurisdiction there may be attributed to the Borrower or the Junior Entity any such immunity (whether or not claimed), each of the Borrower and the Junior Entity hereby to the fullest extent permitted by applicable law irrevocably agrees not to claim, and hereby to the fullest extent permitted by applicable law waives, any such immunity. 5 25. Each of the Borrower and the Junior Entity consents generally in respect of any proceedings to the giving of any relief or the issue of any process in connection with such proceedings including the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) of any order or judgement which may be made or given in such proceedings. 26. If any dispute arises in relation to this Agreement, including any questions as to existence, validity or termination, such dispute shall, at the option only of the Facility Agent, be referred to and finally resolved by arbitration under the rules of the London Court of International Arbitration which are applicable at the time of reference to the arbitration and are deemed to be incorporated by reference into this Section 26. Such arbitration shall take place in London, England and shall be conducted by three arbitrators, one of whom shall be nominated by the Borrower, one by the Facility Agent and the third to be agreed between the two arbitrators so nominated and in default he shall be nominated by the President of the London Court of International Arbitration. The language in which such arbitration shall be conducted shall be English. Any award rendered shall be final and binding on the parties thereto and may be entered into any court having jurisdiction or application may be made to such court for an order of enforcement as the case may require. No party may appeal to any court from any award or decision of the arbitral tribunal and, in particular, but without limitation, no applications may be made under section 45 of the Arbitration Act 1996 and no appeal may be made under section 69 of that Act. 27. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young Name: Michael B. Young Title: Treasurer SHELL CAPITAL SERVICES LIMITED By: /s/ Mark L.G. Turner Name: Mark L.G. Turner Title: Director SAGE OPERATING LTD. By: /s/ L. Todd Gremillion Name: L. Todd Gremillion Title: Authorized Signatory Address: c/o Akin, Gump, Strauss, Hauer & Feld, LLP 711 Louisiana, Suite 1900 Houston, TX 77002 Telephone: 713-220-5800 Facsimile: 713-236-0822 6 EX-10.4 14 0014.txt SUBORDINATION AGREEMENT SUBORDINATION AGREEMENT This SUBORDINATION AGREEMENT (this "Agreement") is entered into on the ___ day of August 2000 among Chaparral Resources, Inc. ("Borrower"), Shell Capital Services Limited (the "Facility Agent"), and Stardust Fund Limited ("Junior Entity"). RECITALS: WHEREAS, the Borrower and the Facility Agent are, inter alia, parties to the Loan Agreement (as defined herein); and WHEREAS, as a condition to funding under the Loan Agreement, the Borrower, the Facility Agent and the Junior Entity must enter into this Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of covenants herein contained, the parties agree as follows: 1. Definitions and Interpretation. (a) "Loan Agreement" means the loan agreement dated 1 November 1999 between Borrower, Central Asian Petroleum (Guernsey) Limited, Closed Type JSC Karakudukmunay and Central Asian Petroleum, Inc., as Co-Obligors, Shell Capital Limited, Shell Capital Services Limited and the Lenders (as defined in the Loan Agreement). "Preferred Obligations" means all obligations of the Borrower, the Co-Obligors, or any of them, to any of the Finance Parties whether now existing or arising in the future and whether fixed, prospective or contingent under or in respect of any of the Finance Documents whether for principal outstanding, interest, fees, costs, expenses, indemnities or otherwise. "Junior Obligations" means all obligations of the Borrower to the Junior Entity (including, without limitation, in respect of the CRI Bridge Notes and the CRI Existing Notes) whether now existing or arising in the future and whether fixed, prospective or contingent, whether for principal outstanding, interest, fees, costs, expenses, indemnities or otherwise. (b) Capitalized terms used and not defined herein are used with the meaning assigned to such term in the Loan Agreement. (c) Any reference in this Agreement to: (i) a statute shall be construed as a reference to such statute as from time to time amended or re-enacted; (ii) a person includes its permitted successors and assigns; (iii) a Finance Document or any other agreement or document shall be construed as a reference to that Finance Document or, as the case may be, such other agreement or document, as the same may have been, or may from time to time be, amended, novated or supplemented; and (iv) the singular includes the plural and vice versa. 2. The payment of the Junior Obligations is expressly made subordinate and subject in right of payment and in liquidation to the prior payment in full of the Preferred Obligations. 3. Until the date of irrevocable final repayment, in full, of the Preferred Obligations and termination of all commitments in respect thereof, the Borrower undertakes not to pay or repay and the Junior Entity undertakes not to claim, recover, retain or receive (or seek to claim, recover, retain or receive) any amount whatsoever in relation to any Junior Obligation (including, without limitation, any recovery, payment or repayment arising out of any claim under a guarantee) or to any interest or other amount payable by the Borrower in respect thereof, or to any other indebtedness of the Borrower to any Junior Entity. 4. If: (i) there is any distribution of all or any part of the assets of the Borrower including, without limitation, by reason of the liquidation, dissolution or other insolvency proceeding, or assignment for the benefit of creditors; or (ii) the Borrower goes into liquidation or becomes subject to any insolvency or rehabilitation proceeding, administration, or voluntary arrangement, then until the date of final irrevocable repayment in full of the Preferred Obligations any payment or distribution of any kind or character and all and any rights in respect thereof payable or deliverable to the Junior Entity with respect to the Junior Obligations or any part thereof by the liquidator, administrator, administrative receiver or receiver (or the equivalent thereof) of the Borrower will forthwith be paid or delivered to the Facility Agent for application to the Preferred Obligations in accordance with the terms of the Finance Documents. 5. Following the occurrence of any Event of Default, the Junior Entity will irrevocably authorise and empower the Facility Agent to demand, sue and prove for, collect and receive every payment or distribution referred to in Section 4 and give good discharge therefor and to file claims and take such other proceedings, in the Facility Agent's name, the name of the Junior Entity or otherwise, as the Facility Agent may deem necessary or advisable for the enforcement of the payment of debts in accordance with the priority set out in Section 2. 2 6. The Junior Entity will, at all times, following the occurrence of any Event of Default, and for so long as such Event of Default is continuing, execute or procure the execution of and deliver to the Facility Agent such proxies, powers of attorney, assignments or other instruments as may be requested by it in order to enable the Facility Agent to vote and/or enforce any and all claims upon or with respect to the Junior Obligations or any part thereof and to collect and receive any and all payments or distributions which may be payable or deliverable to the Facility Agent at any time upon or with respect to the Junior Obligations or any part thereof. 7. A liquidator or other insolvency representative of the Borrower or the Junior Entity will be authorised, to the maximum extent permitted by applicable law, to apply any assets or moneys it receives in accordance with the order of priority referred to in Section 2. 8. If any amounts are received by the Junior Entity or any person acting on its behalf with respect to the Junior Obligations or any part thereof whether in cash or in kind or by way of set-off, combination of accounts or otherwise, the Junior Entity (or person acting on its behalf as aforesaid) agrees that an amount equal to the amount so received by the relevant Junior Entity shall be held on trust for the Facility Agent and shall forthwith be paid to the Facility Agent for application to the Preferred Obligations in accordance with the terms of the Finance Documents and that any failure to make such payment shall be a breach of its obligations under this Agreement. 9. (a) Unless otherwise agreed by the Facility Agent, the Junior Entity will waive, and undertake that it will not seek to obtain payment of any Junior Obligation, in whole or in part, by exercising any right of set-off it may have with respect to any Junior Obligation, whether created by contract, statute or otherwise. (b) Until the date of irrevocable final repayment, in full, of the Preferred Obligations and termination of all commitments in respect thereof the Facility Agent may (subject to the provisions of the Finance Documents), unless and until such moneys or distributions in the aggregate are sufficient to bring about the irrevocable final repayment, in full, of the Preferred Obligations (if applied to repayment of the Preferred Obligations), (i) apply any moneys or property received under this Agreement from the Borrower, the Junior Entity or any other person against the Preferred Obligations in such order as it thinks fit; and (ii) hold in a suspense account any moneys or distributions received under this Agreement. 10. The Junior Entity will not be entitled without the consent of the Facility Agent to accelerate any Junior Obligation (or any portion thereof). The Facility Agent shall have complete discretion as to the granting of such consent. 3 11. The Junior Entity will not under any circumstances, prior to the irrevocable final repayment, in full, of the Preferred Obligations, be subrogated to any of the rights of the Finance Parties or any security arising under the Finance Documents. 12. This Agreement and the subordination provisions contained herein will terminate on the date of irrevocable final repayment, in full, of the Preferred Obligations, and termination of all commitments in respect thereof. 13. Unless otherwise agreed by the Facility Agent, the Junior Entity undertakes not to commence, or join with any other creditor or creditors of the Borrower in commencing, any bankruptcy, insolvency or rehabilitation proceeding, administration or other voluntary arrangement against or in respect of the Borrower prior to irrevocable final repayment, in full, of the Preferred Obligations. 14. This Agreement constitutes the entire agreement between the parties and supersedes all prior oral or written agreements, understandings, representations, warranties and course of conduct and dealings between the parties on the subject matter hereof. 15. Time is of the essence of each party's obligations under this Agreement but no failure to exercise, nor any delay in exercising, on the part of the Facility Agent, any right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise thereof or the exercise of any other right or remedy. The rights and remedies contained in this Agreement are cumulative and not exclusive of any rights or remedies provided by law. 16. If, at any time, any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Agreement under the law of that jurisdiction nor the legality, validity or enforceability of that or any other provision of this Agreement under the law of any other jurisdiction shall in any way be affected or impaired thereby unless the effect of the foregoing would be substantially to alter the rights and obligations of the parties originally agreed. 17. This Agreement shall bind the parties and each of their respective successors and assignees. 18. Neither the Borrower nor the Junior Entity will assign or otherwise transfer any of its rights or obligations under this Agreement. The Facility Agent is permitted to transfer its rights and/or obligations under this Agreement. 19. (a) All notices or other communications to Borrower or the Facility Agent shall be given in writing addressed to the relevant party at its address specified in Clause 29.2 of the Loan Agreement. All notices or other communications to the Junior Entity shall be given in writing at its address set forth in the signature page of this Agreement. A written notice includes a notice by facsimile transmission 4 (b) Any such notice shall be deemed to be given: (i) if by personal delivery or letter, when delivered; and (iii) if by facsimile, when the answerback is received. (c) However, a notice given in accordance with the above but received on a non-working day or after business hours in the place of receipt shall only be deemed to be given on the next working day in that place. 20. Each communication and document made or delivered by one party to another pursuant to this Agreement shall be in the English language or accompanied by a translation into English certified (by an officer of the person making or delivering the same) as being a true and accurate translation thereof. 21. This Agreement may not be amended except by an instrument in writing signed by each of the parties. 22. This Agreement shall be governed by English law. 23. (a) For the exclusive benefit of the Facility Agent, each of the Borrower and the Junior Entity irrevocably agrees that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement and that accordingly any suit, action or proceedings (together in this Section 23 referred to as "proceedings") arising out of or in connection with this Agreement may be brought in such courts, subject to the option referred to in Section 26. (b) Each of the Borrower and the Junior Entity irrevocably waives and agrees not to raise any objection which it may have now or hereafter to the laying of the venue of any proceedings in any such court as is referred to in this Section 23 and any claim that any such proceedings have been brought in an inconvenient or inappropriate forum and further irrevocably agrees that a judgement in any proceedings brought in the English courts shall be conclusive and binding upon each Borrower and the Junior Entity and may be enforced in the courts of any other jurisdiction. (c) Nothing contained in this Section 23 shall limit the right of the Facility Agent to take proceedings against the Borrower or the Junior Entity in any other court of competent jurisdiction, nor shall the taking of proceedings in one or more jurisdictions preclude the taking of proceedings in any other jurisdiction, whether concurrently or not. 24. To the extent that the Borrower or the Junior Entity may now or hereafter be entitled, in any jurisdiction in which proceedings may at any time be commenced with respect to this Agreement, to claim for itself or any of its undertaking, properties, assets or revenues present or future any immunity (sovereign or otherwise) from suit, jurisdiction of any court, attachment prior to judgement, attachment in aid of execution of a judgement, execution of a judgement or from set-off, banker's lien, counterclaim or any other legal process or remedy with respect to its obligations under this Agreement and to the extent that in any such jurisdiction there may be attributed to the Borrower or the Junior Entity any such immunity (whether or not claimed), each of the Borrower and the Junior Entity hereby to the fullest extent permitted by applicable law irrevocably agrees not to claim, and hereby to the fullest extent permitted by applicable law waives, any such immunity. 5 25. Each of the Borrower and the Junior Entity consents generally in respect of any proceedings to the giving of any relief or the issue of any process in connection with such proceedings including the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) of any order or judgement which may be made or given in such proceedings. 26. If any dispute arises in relation to this Agreement, including any questions as to existence, validity or termination, such dispute shall, at the option only of the Facility Agent, be referred to and finally resolved by arbitration under the rules of the London Court of International Arbitration which are applicable at the time of reference to the arbitration and are deemed to be incorporated by reference into this Section 26. Such arbitration shall take place in London, England and shall be conducted by three arbitrators, one of whom shall be nominated by the Borrower, one by the Facility Agent and the third to be agreed between the two arbitrators so nominated and in default he shall be nominated by the President of the London Court of International Arbitration. The language in which such arbitration shall be conducted shall be English. Any award rendered shall be final and binding on the parties thereto and may be entered into any court having jurisdiction or application may be made to such court for an order of enforcement as the case may require. No party may appeal to any court from any award or decision of the arbitral tribunal and, in particular, but without limitation, no applications may be made under section 45 of the Arbitration Act 1996 and no appeal may be made under section 69 of that Act. 27. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young Name: Michael B. Young Title: Treasurer SHELL CAPITAL SERVICES LIMITED By: /s/ Mark L.G. Turner Name: Mark L.G. Turner Title: Director STARDUST FUND LIMITED By: /s/ L. Todd Gremillion Name: L. Todd Gremillion Title: Authorized Signatory Address: c/o Akin, Gump, Strauss, Hauer & Feld, LLP 711 Louisiana, Suite 1900 Houston, TX 77002 Telephone: 713-220-5800 Facsimile: 713-236-0822 6 EX-10.5 15 0015.txt LETTER Closed JSC Karakudukmunai The Investment Agency of the Republic of Kazakhstan, following consideration of a letter from the Central Asian oil firm (Guernsey) dated June 30, 2000, informs you of the following: Taking into consideration satisfactory activities of the company for the expired period, that is, the use of about US $55 mln. where the obligations amount to US $56 mln., currently, there are no grounds for termination or suspension of the operation of the License of the series M[GAMMA] No. 349 for the exploration and production of hydrocarbons in the Karakuduk deposit in Mangistau. After the auditing of the activities of the closed JSC Karadudukmunai by Ernst & Young is completed, we ask you to furnish the results of the audit to the Investment Agency of the Republic of Kazakhstan. Deputy Chairman B. Elemanov EX-10.6 16 0016.txt DEED OF CONSENT DEED among CHAPARRAL RESOURCES INC WHITTIER VENTURES LLC ECOTELS INTERNATIONAL LIMITED DARDANA LIMITED GOLDRUST VENTURE CAPITAL LIMITED STARDUST FUND LIMITED SAGE OPERATING LTD. and SHELL CAPITAL SERVICES LIMITED 21 August 2000 THIS DEED (the "Deed") is dated 21 August 2000 among (1) CHAPPARAL RESOUCES INC. a company organised and existing under the laws of Delaware, United States of America (the "Borrower"); (2) WHITTIER VENTURES LLC, a limited liability company organised under the laws of Nevada ("Whittier"); (3) ECOTELS INTERNATIONAL LIMITED, a limited liability company organised under the laws of the Cayman Islands ("EcoTels"); (4) DARDANA LIMITED, a limited liability company organised under the laws of the Cayman Islands ("Dardana"); (5) GOLDRUST VENTURE CAPITAL LIMITED, a limited liability company organised under the laws of the Cayman Islands ("Goldrust"); and (6) STARDUST FUND LIMITED, a limited liability company organised under the laws of the Cayman Islands ("Stardust"); and (7) SAGE OPERATING LTD., a limited liability company organised under the laws of the Cayman Islands ("Sage"); and (8) SHELL CAPITAL SERVICES LIMITED a company organised and existing under the laws of England, in its capacity as Facility Agent for the Finance Parties ("Facility Agent"); together referred to as the "Parties". PREAMBLE: (A) WHEREAS, the Borrower and the Facility Agent, inter alia, have entered into a Loan Agreement, dated as of 1 November, 1999 (as modified, supplemented or amended from time to time, the "Loan Agreement"), providing for the making of Advances for purposes of the Project; (B) WHEREAS, the Borrower, the Facility Agent and Whittier have entered into a Subordination Agreement dated 28 January 2000 (the "Whittier Subordination Agreement"); (C) WHEREAS, the Borrower, the Facility Agent and EcoTels have entered into a Subordination Agreement dated 8 February 2000 (the "EcoTels Subordination Agreement" and together with the Whittier Subordination Agreement, the "Subordination Agreements"); 2 (D) WHEREAS, at the request of the Borrower, each of Whittier and EcoTels has provided the Borrower with a loan of five hundred thousand dollars (USD 500,000) (the "Additional Loans") for purposes of the Project. (E) WHEREAS, at the request of the Borrower, Sage, Stardust, Goldrust and Dardana have provided the Borrower with a loan of three million dollars (USD 3,000,000) (the "Additional Subordinated Debt") for the purposes of the Project. IT IS HEREBY AGREED as follows: 1. INTERPRETATION 1.1. Definitions (a) Unless expressly defined in this Deed, capitalised terms in, or incorporated into, the Loan Agreement shall have the same meaning in this Deed. (b) Unless expressly defined in this Deed, capitalised terms in, or incorporated into the Subordination Agreements shall have the same meaning in this Deed. (c) In the event of a conflict between definitions of capitalised terms in the Loan Agreement and the Subordination Agreements, those in the Loan Agreement shall prevail. 1.2. Construction (a) Clauses 1.2, 1.3 and 1.4 of the Loan Agreement apply to this Deed as if they were set out in full in this Deed, having made all necessary changes, but with references to (or including) this "Agreement" being references to (or, as appropriate, including) this Deed. (b) Where any person gives its consent, makes a representation or is otherwise bound by a provision of this Deed, it shall be deemed to do so or be so bound in each capacity in which it is a party to a relevant Finance Documents or Project Documents and the meaning of the relevant provision shall not be limited by the capacity or description of that person in the Parties section at the beginning of this Deed. 2. ADDITIONAL LOAN 2.1. The Borrower, EcoTels and Whittier acknowledge that: (a) the Additional Loans have been provided to the Borrower by Whittier on 4 August 2000 and EcoTels on 9 August 2000, by deposit to the CRI Disbursement Account and shall be withdrawn from that account only as permitted by the Finance Documents; 3 (b) the Additional Loans are part of the Junior Obligations for purposes of each of the Whittier Subordination Agreement or the EcoTels Subordination Agreement and the repayment of the Additional Loans will be at all times subject to the provisions of the Whittier Subordination Agreement or the EcoTels Subordination Agreement, as appropriate; (c) the intent of the Borrower, Whittier, EcoTels and the Facility Agent has at all times been that the Junior Obligations should include all obligations of the Borrower to the relevant Junior Entity; and (d) the Additional Loan advanced by Whittier shall under no circumstances constitute, or be deemed to constitute funding provided pursuant to, or in satisfaction of the obligations of Whittier under, the letters from Whittier (i) to Shell Capital Limited dated 1 February 2000 and (ii) to the Facility Agent dated 9 February 2000, which obligations remain outstanding in full. 2.2. Notwithstanding that all payments in respect of the Additional Loans are Junior Obligations as defined in the respective Subordination Agreements, the Facility Agent agrees that the principal under the Additional Loans may be repaid from the proceeds of additional subscriptions for equity of the Borrower or additional subordinated loans to the Borrower, but only if an additional aggregate amount of not less than nine million dollars (USD 9,000,000) has been received by the Borrower as a result of such subscriptions or subordinated loans on or before 30 September 2000. 3. ADDITIONAL SUBORDINATED DEBT 3.1. The Borrower, Sage, Stardust, Goldrust and Dardana acknowledge that the Additional Subordinated Debt has been provided to the Borrower on 21 August 2000 by deposit to the CRI Disbursement Account and shall be withdrawn from that account only as permitted by the Finance Documents; and 3.2. Contemporaneous with this Deed, the Borrower, Sage, Stardust, Goldrust, Dardana and the Facility Agent shall enter into subordination agreements in respect of the Additional Subordinated Debt upon the same terms and conditions as the Subordination Agreements. 4. FURTHER ADVANCES The Borrower acknowledges that the Facility Agent will not make any further Advances under the Loan Agreement until the following conditions are satisfied: (a) the Additional Loans and Additional Subordinated Debt, together totalling four million Dollars (USD 4,000,000) have been provided to the Borrower; and (b) the proceeds of such Additional Loans and Additional Subordinated Debt have been deposited in full into the CRI Disbursement Account. 4 5. PROJECT DOCUMENT CONSENT; ACKNOWLEDGEMENT Notwithstanding the terms of the Finance Documents, the Facility Agent consents to the sale of up to six thousand (6,000) tonnes of oil production from the Project during the month of August 2000 to purchasers located in Kazakhstan. The Facility Agent acknowledges receipt of supplemental letters dated August 21, 2000 to the Equity Support Agreements from each of Allen & Company Incorporated and Whittier confirming that their financial commitments under such Equity Support Agreements remain in full force and effect and can be called on demand at any time by the Facility Agent until the Borrower has satisfied all its obligations in full under Clause 6 of this Deed. For the purpose of Clause 18.17 of the Loan Agreement, the date of 30 June 2000 shall be replaced with the date of 30 September 2000, effective as of 30 June 2000. 6. FURTHER FUNDING 6.1. The Borrower agrees to provide evidence reasonably satisfactory to the Facility Agent no later than 30 September 2000 of receipt of the proceeds of additional subscription for equity of or additional subordinated loans to the Borrower in an aggregate of not less than ten million dollars (USD 10,000,000); such an amount will include the Additional Loans (if not repaid in accordance with Clause 2.2) and the Additional Subordinated Debt. 6.2. Failure to provide such evidence of equity contribution or subordinated loan as provided under Clause 6(a) shall constitute an Event of Default under the Loan Agreement. 7. FINANCE DOCUMENT The Borrower and the Facility Agent designate this Deed as a Finance Document for purposes of the Loan Agreement. 8. COUNTERPARTS This Deed may be executed in any number of counterparts and by the different parties on separate counterparts which when taken together shall constitute one instrument. 5 9. EXECUTION AS A DEED Each of the parties to this Deed intends it to be a deed and confirms that it is executed and delivered as a deed, in each case notwithstanding the fact that any one or more of the parties may only execute this Deed under hand. 10. GOVERNING LAW This Deed shall be governed by English law. IN WITNESS WHEREOF, this Deed has been executed as a deed by the parties hereto and is delivered on the date stated at the beginning of this Deed. EXECUTED as a deed and delivered for and on behalf of CHAPARRAL RESOURCES INC By: /s/ John G. McMillian Name: John G. McMillian Title: Co-Chairman and CEO EXECUTED as a deed and delivered for and on behalf of ECOTELS INTERNATIONAL LIMITED By: /s/ L. Todd Gremillion Name: L. Todd Gremillion Title: Authorized Signatory EXECUTED as a deed and delivered for and on behalf of WHITTIER VENTURES LLC By: /s/ Robert D. Sellers Name: Robert D. Sellers Title: Chief Financial Officer EXECUTED as a deed and delivered for and on behalf of SHELL CAPITAL SERVICES LIMITED By: /s/ M. Treanor Name: M. Treanor Title: CEO 6 In the presence of: Name: Title: EXECUTED as a deed and delivered for and on behalf of DARDANA LIMITED By: /s/ L. Todd Gremillion Name: L. Todd Gremillion Title: Authorized Signatory EXECUTED as a deed and delivered for and on behalf of GOLDRUST VENTURE CAPITAL LIMITED By: /s/ L. Todd Gremillion Name: L. Todd Gremillion Title: Authorized Signatory EXECUTED as a deed and delivered for and on behalf of STARDUST FUND LIMITED By: /s/ L. Todd Gremillion Name: L. Todd Gremillion Title: Authorized Signatory EXECUTED as a deed and delivered for and on behalf of SAGE OPERATING LIMITED By: /s/ L. Todd Gremillion 7 THE FOLLOWING PARTIES TO THE AGREEMENT acknowledge that this Deed has been executed by the Parties and accept and agree to its the terms AND ACKNOWLEDGE THAT THEIR OBLIGATIONS UNDER THE Finance Documents are not affected by the provision so of this Deed. CLOSED TYPE JSC KARAKUDUKMUNAY INC. By: /s/ Nickolai Klinchev Name: Nickolai Klinchev Title: General Director By: /s/ Richard Moore Name: Richard Moore Title: Financial Director CENTRAL ASIAN PETROLEUM (GUERNSEY) LIMITED By: /s/ John G. McMillian Name: John G. McMillian Title: Co-Chairman and CEO CENTRAL ASIAN PETROLEUM, INC. By: /s/ Michael B. Young Name: Michael B. Young Title: Tresurer 8 EX-10.7 17 0017.txt PLEDGE AGREEMENT PLEDGE AGREEMENT This PLEDGE AGREEMENT (this "Agreement"), dated as of September 21, 2000, is between CAPCO RESOURCES LTD. (the "Pledgor") and CHAPARRAL RESOURCES, INC. (the "Company"). RECITALS: WHEREAS, reference is made to the letter agreement, dated as of September 21, 2000 (the "Letter Agreement") between Pledgor and the Company; WHEREAS, Pledgor has agreed to execute and deliver this Agreement as security for its obligations to the Company under the Letter Agreement; and WHEREAS, capitalized terms used and not defined herein are used with the meanings assigned to such terms in the Letter Agreement. AGREEMENT: Pledgor and the Company (and each of their respective successors or assigns), hereby agree as follows: SECTION 1. Pledge. As security for the payment and performance, as the case may be, in full of the obligations of Pledgor under the Letter Agreement (the "Obligations"), Pledgor hereby hypothecates, pledges, assigns as security and delivers unto the Company, its successors and assigns, and hereby grants to the Company, its successors and assigns, a security interest in all of Pledgor's right, title and interest in, to and under (a) 400,000 shares of common stock, no par value, of Greka Energy Corporation ("Greka") owned by Pledgor and any shares of capital stock of any subsidiary obtained in the future by Pledgor and the certificates representing all such shares (collectively, the "Pledged Stock"), and (b) payments of dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed, in respect of, in exchange for or upon the conversion of the Pledged Stock, and (c) all proceeds of any of the foregoing (the items referred to in clauses (a) and (b) above being collectively referred to as the "Collateral"). Upon delivery to the Company, (a) any stock certificates, notes or other securities now or hereafter included in the Collateral (the "Pledged Securities") shall be accompanied by stock or bond powers duly executed in blank or other indorsement or other instruments of transfer reasonably satisfactory to the Company with, if the Company so requests, signature guaranteed, and by such other indorsement, instruments and documents as the Company may reasonably request and (b) all other property comprising part of the Collateral shall be accompanied by proper instruments of assignment duly executed by Pledgor and such other indorsement, instruments or documents as the Company may reasonably request. Each delivery of Pledged Securities shall be accompanied by a schedule describing the securities theretofore and then being pledged hereunder, which schedule shall be attached hereto made a part hereof. Each schedule so delivered shall supersede any prior schedules so delivered. Notwithstanding anything to the contrary set forth herein, upon the written request of Pledgor (which must be acceptable to the Company in its sole discretion), some or all of the Pledged Stock may be released from this Agreement and the security interest granted hereby if Pledgor has arranged (a) a cash sale of the released Pledged Stock to a third party or (b) a loan to Pledgor and the released Pledged Stock will be pledged as collateral for such loan; provided, however, Pledgor agrees that the cash proceeds of such sale or loan must be paid directly to the Company and applied to the Obligations. 1 TO HAVE AND TO HOLD the Collateral, together with all right, title, interest, powers, privileges and preferences pertaining or incidental thereto, unto the Company, its successors and assigns, subject to the terms, covenants and conditions hereinafter set forth. SECTION 2. Delivery of the Collateral. Pledgor agrees promptly to deliver or cause to be delivered to the Company any and all Pledged Securities, and any and all certificates or other indorsement, instruments or documents representing the Collateral. SECTION 3. Representations, Warranties and Covenants. Pledgor hereby represents, warrants and covenants, as to itself and the Collateral pledged by it hereunder, to and with the Company that: (a) the Pledged Stock represents duly authorized, issued and outstanding shares of common stock, no par value, of Greka; (b) except for the security interest granted hereunder, Pledgor (i) is and will at all times continue to be the direct owner, beneficially and of record, of the Pledged Securities, (ii) holds the same free and clear of all security interest and encumbrances, (iii) will make no assignment, pledge, hypothecation or transfer of, or create or permit to exist any security interest in or other encumbrances on, the Collateral, other than pursuant hereto, and (iv) subject to Section 5, will cause any and all Collateral, whether for value paid by Pledgor or otherwise, to be forthwith deposited with the Company and pledged or assigned hereunder; (c) Pledgor (i) has the power and authority to pledge the Collateral in the manner hereby done or contemplated and (ii) will defend its title or interest thereto or therein against any and all security interests and other encumbrances, however arising, of all persons whomsoever; (d) no consent of any other person (including stockholders or creditors of Pledgor) and no consent or approval of any governmental authority or any securities exchange was or is necessary to the validity of the pledge effected hereby; (e) by virtue of the execution and delivery by Pledgor of this Agreement, when the Pledged Securities, certificates or other documents representing or evidencing the Collateral are delivered to the Company in accordance with this Agreement or, if a security interest in any of such Collateral may not under applicable law be perfected by possession, then upon the filing of appropriate financing statements, the Company will obtain a valid and perfected first lien upon and security interest in such Pledged Securities as security for the payment and performance of the Obligations; (f) the pledge effected hereby is effective to vest in the Company, the rights in the Collateral as set forth herein; (g) all of the Pledged Stock has been duly authorized and validly issued, is fully paid and nonassessable and is in certificated form; 2 (h) all information set forth herein relating to the Pledged Stock is accurate and complete in all material respects as of the date hereof; (i) the pledge of the Pledged Stock pursuant to this Agreement does not violate Regulation U or X of the Federal Reserve Board or any successor thereto as of the date hereof; and (j) the Collateral shall not be represented by any certificates, notes, securities, documents or other instruments other than those delivered hereunder. SECTION 4. Notices and Communications; Denominations. Pledgor will promptly give to the Company copies of any material notices or other communications received by it with respect to Pledged Securities registered in the name of Pledgor. The Company shall at all times have the right to exchange the certificates representing Pledged Securities for certificates of smaller or larger denominations for any purpose consistent with this Agreement. SECTION 5. Voting Rights; Dividends and Interest, etc. (a) Unless and until Pledgor fails to timely satisfy any Obligation an "Event of Default" shall have occurred and be continuing: (i) Pledgor shall be entitled to exercise any and all voting and/or other consensual rights and powers inuring to an owner of Pledged Securities or any part thereof for any purpose consistent with the terms of this Agreement and the Letter Agreement; provided, however, that Pledgor will not be entitled to exercise any such right if the purpose thereof is to interfere with the exercise of the rights and remedies of the Company under this Agreement or the Letter Agreement. (ii) The Company shall execute and deliver to Pledgor, or cause to be executed and delivered to Pledgor, all such proxies, powers of attorney and other indorsements or instruments as Pledgor may reasonably request for the purpose of enabling Pledgor to exercise the voting and/or consensual rights and powers it is entitled to exercise pursuant to subparagraph (i) above and to receive the cash dividends and other payments it is entitled to receive pursuant to subparagraph (iii) below. (iii) Pledgor shall be entitled to receive and retain any and all cash dividends, distributions, interest and principal paid on the Pledged Securities to the extent and only to the extent that such cash dividends, distributions, interest and principal are permitted by, and otherwise paid, in accordance with applicable laws. All noncash dividends, distributions, interest and principal, and all dividends, distributions, interest and principal paid or payable in cash or otherwise in connection with a partial or total liquidation or dissolution, return of capital, capital surplus or paid-in surplus, and all other distributions (other than distributions referred to in the preceding sentence) made on or in respect of the Pledged Securities, whether paid or payable in cash or otherwise, whether resulting from a subdivision, combination or reclassification of the outstanding capital stock of the Greka or received in exchange for Pledged Securities or any part thereof, or in redemption thereof, or as a result of any merger, consolidation, acquisition or other exchange of assets to which such Greka may be a party or otherwise, shall be and become part of the Collateral, and, if received by Pledgor, shall not be commingled by Pledgor with any of its other funds or property but shall be held separate and apart therefrom, shall be held in trust for the benefit of the Company and shall be forthwith delivered to the Company in the same form as so received (with any necessary endorsement). 3 (b) Upon the occurrence and during the continuance of an Event of Default, all rights of Pledgor to dividends, distributions, interest or principal that Pledgor is authorized to receive pursuant to paragraph (a)(iii) above shall cease, and all such rights shall thereupon become vested in the Company, which shall have the sole and exclusive right and authority to receive and retain such dividends, distributions, interest or principal. All dividends, distributions, interest or principal received by Pledgor contrary to the provisions of this Section 5 shall be held in trust for the benefit of the Company, shall be segregated from other property or funds of Pledgor and shall be forthwith delivered to the Company upon demand in the same form as so received (with any necessary endorsement). Any and all money and other property paid over to or received by the Company pursuant to the provisions of this paragraph (b) shall be retained by the Company and applied in accordance with the provisions of Section 7. (c) Upon the occurrence and during the continuance of an Event of Default, all rights of Pledgor to exercise the voting and consensual rights and powers it is entitled to exercise pursuant to paragraph (a)(i) of this Section 5, and the obligations of the Company under paragraph (a)(ii) of this Section 5, shall cease, and all such rights shall thereupon become vested in the Company, which shall have the sole and exclusive right and authority to exercise such voting and consensual rights and powers. After all Events of Default have been cured or waived, Pledgor will have the right to exercise the voting and consensual rights and powers that it would otherwise be entitled to exercise pursuant to the terms of paragraph (a)(i) above. SECTION 6. Remedies upon Default. (a) Upon the occurrence and during the continuance of an Event of Default, subject to applicable regulatory and legal requirements, the Company may sell the Collateral, or any part thereof, at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery as the Company shall deem appropriate. The Company shall be authorized at any such sale (if it deems it advisable to do so) to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing the Collateral for their own account for investment and not with a view to the distribution or sale thereof or to impose other restrictions necessary in its judgment to ensure compliance with applicable securities laws, as more fully set forth in Section 11, and upon consummation of any such sale the Company shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Collateral so sold. Each such purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and, to the extent permitted by applicable law, Pledgor hereby waives all rights of redemption, stay, valuation and appraisal Pledgor now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. (b) The Company shall give a Pledgor 10 days' prior written notice (which Pledgor agrees is reasonable notice within the meaning of Section 9-504(3) of the Uniform Commercial Code as in effect in the State of Texas or its equivalent in other jurisdictions) of the Company's intention to make any sale of Pledgor's Collateral. Such notice, in the case of a public sale, shall state the time and place for such sale and, in the case of a sale at a broker's board or on a securities exchange, shall state the board or exchange at which such sale is to 4 be made and the day on which the Collateral, or portion thereof, will first be offered for sale at such board or exchange. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Company may fix and state in the notice of such sale. At any such sale, the Collateral, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as the Company may (in its sole and absolute discretion) determine. The Company shall not be obligated to make any sale of any Collateral if it shall determine not to do so, regardless of the fact that notice of sale of such Collateral shall have been given. The Company may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case any sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by the Company until the sale price is paid in full by the purchaser or purchasers thereof, but the Company shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may be sold again upon like notice. At any public (or, to the extent permitted by applicable law, private) sale made pursuant to this Section 6, Greka or any other person may bid for or purchase on terms and conditions acceptable to the Company, free from any right of redemption, stay or appraisal on the part of Pledgor (all said rights being also hereby waived and released), the Collateral or any part thereof offered for sale and may make payment on account thereof by using any claim then due and payable to it from Pledgor as a credit against the purchase price, and it may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability to Pledgor therefor. For purposes hereof, (i) a written agreement to purchase the Collateral or any portion thereof shall be treated as a sale thereof, (ii) the Company shall be free to carry out such sale pursuant to such agreement and (iii) Pledgor shall not be entitled to the return of the Collateral or any portion thereof subject thereto, notwithstanding the fact that after the Company shall have entered into such an agreement all Events of Default shall have been remedied and the Obligations paid in full. As an alternative to exercising the power of sale herein conferred upon it, the Company may proceed by a suit or suits at law or in equity to foreclose upon the Collateral and to sell the Collateral or any portion thereof pursuant to a judgment or decree of a court or courts having competent jurisdiction or pursuant to a proceeding by a court-appointed receiver. Any sale pursuant to the provisions of this Section 6 shall be deemed to conform to the commercially reasonable standards as provided in Section 9-504(3) of the Uniform Commercial Code as in effect in the State of Texas or its equivalent in other jurisdictions. SECTION 7. Application of Proceeds of Sale. The proceeds of any sale of Collateral pursuant to Section 6, as well as any Collateral consisting of cash, shall be applied by the Company as follows: FIRST, to the payment of all costs and expenses incurred by the Company in connection with such sale or otherwise in connection with this Agreement or the Letter Agreement, including all court costs and the reasonable fees and expenses of its agents and legal counsel, the repayment of all advances made by the Company hereunder or under the Letter Agreement on behalf of Pledgor and any other costs or expenses incurred in connection with the exercise of any right or remedy hereunder or under the Letter Agreement; 5 SECOND, to the payment in full of the Obligations; and THIRD, to Pledgor, its successors or assigns, or as a court of competent jurisdiction may otherwise direct. The Company may suspend application of any cash or proceeds to the extent such suspension is advisable in the Company's good faith judgment in order to protect its rights or interests. Upon any sale of the Collateral by the Company (including pursuant to a power of sale granted by statute or under a judicial proceeding), the receipt of the purchase money by the Company or of the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Company or such officer or be answerable in any way for the misapplication thereof. SECTION 8. Reimbursement of Agent. (a) Pledgor agrees to pay upon demand to the Company the amount of any and all reasonable expenses, including the reasonable fees, other charges and disbursements of its counsel and of any experts or agents, that the Company may incur in connection with (i) the administration of this Agreement or the Letter Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral or (iii) the exercise or enforcement of any of the rights of the Company hereunder. (b) Pledgor agrees to indemnify the Company, each affiliate of the Company, any of the foregoing Persons and each of their respective directors, officers, employees, agents, counsel, accountants and controlling persons (each an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, other charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement, the Letter Agreement or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations thereunder or the consummation of the transactions contemplated hereby and thereby or (ii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto, provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. In connection with any claim, litigation, investigation or proceeding referred to in the preceding sentence, the Indemnitees will endeavor to avoid duplication of effort and expense by employing common counsel (including special or local counsel, where required), which shall be nominated by the Company, it being understood that an Indemnitee will in any event be entitled to separate counsel (i) if such Indemnitee may have defenses available to it that are different from or potentially inconsistent with defenses that may be asserted by other Indemnitees, (ii) if the representation by a single counsel of such Indemnitee and other Indemnitees would otherwise be inappropriate due to actual or potential differences in the interests of the Indemnitees or (iii) if Pledgor shall agree to the retention of separate counsel. 6 (c) Any amounts payable as provided hereunder shall be additional Obligations secured hereby. The provisions of this Section 8 shall remain operative and in full force and effect regardless of the termination of this Agreement or the Letter Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Obligations, the invalidity or unenforceability of any term or provision of this Agreement or the Letter Agreement or any investigation made by or on behalf of the Company. All amounts due under this Section 8 shall be payable on written demand therefor and shall bear interest from the date which is five Business Days after such demand until paid at the rate of 10% per annum. SECTION 9. Agent Appointed Attorney-in-Fact. Pledgor hereby appoints the Company as the attorney-in-fact of Pledgor for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instrument that the Company may deem necessary or advisable to accomplish the purposes hereof, which appointment is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, the Company shall have the right, upon the occurrence and during the continuance of an Event of Default, with full power of substitution either in the Company's name or in the name of Pledgor, to ask for, demand, sue for, collect, receive and give acquittance for any and all moneys due or to become due under and by virtue of any Collateral, to endorse checks, drafts, orders and other instruments for the payment of money payable to Pledgor representing any interest or dividend or other distribution payable in respect of the Collateral or any part thereof or on account thereof and to give full discharge for the same, to settle, compromise, prosecute or defend any action, claim or proceeding with respect thereto, and to sell, assign, endorse, pledge, transfer and to make any agreement respecting, or otherwise deal with, the same; provided that (i) if no Event of Default has occurred and is continuing, the Company shall only exercise its rights under this Section 9 to take actions that Pledgor are required to perform under this Agreement and have not performed within three Business Days after receipt by the Borrower of notice from the Company requesting that any such actions be taken and (ii) nothing herein contained shall be construed as requiring or obligating the Company to make any commitment or to make any inquiry as to the nature or sufficiency of any payment received by the Company, or to present or file any claim or notice, or to take any action with respect to the Collateral or any part thereof or the moneys due or to become due in respect thereof or any property covered thereby. The Company shall be accountable only for amounts actually received as a result of the exercise of the powers granted to them herein, and neither they nor their officers, directors, employees, counsel, accountants or agents shall be responsible to Pledgor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. SECTION 10. Waivers; Remedies; Amendment. (a) No failure or delay of the Company in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. Subject to applicable laws, the rights and remedies of the Company hereunder are exclusive of any rights or remedies that the Company would otherwise have. No waiver of any provisions of this Agreement or consent to any departure by Pledgor therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on Pledgor in any case shall entitle Pledgor to any other or further notice or demand in similar or other circumstances. 7 (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to a written agreement entered into between the Company and Pledgor. SECTION 11. Securities Act, etc. In view of the position of Pledgor in relation to the Pledged Securities, or because of other current or future circumstances, a question may arise under the Securities Act of 1933, as now or hereafter in effect, or any similar statute hereafter enacted analogous in purpose or effect (such Act and any such similar statute as from time to time in effect being called the "Federal Securities Laws") with respect to any disposition of the Pledged Securities permitted hereunder. Pledgor understands that compliance with the Federal Securities Laws might very strictly limit the course of conduct of the Company if the Company were to attempt to dispose of all or any part of the Pledged Securities, and might also limit the extent to which or the manner in which any subsequent transferee of any Pledged Securities could dispose of the same. Similarly, there may be other legal restrictions or limitations affecting the Company in any attempt to dispose of all or part of the Pledged Securities under applicable "Blue Sky" or other state securities laws or similar laws analogous in purpose or effect. Pledgor recognizes that in light of such restrictions and limitations the Company may, with respect to any sale of the Pledged Securities, limit the purchasers to those who will agree, among other things, to acquire such Pledged Securities for their own account, for investment, and not with a view to the distribution or resale thereof. Pledgor acknowledges and agrees that in light of such restrictions and limitations, the Company, in its sole and absolute discretion, (a) may proceed to make such a sale whether or not a registration statement for the purpose of registering such Pledged Securities or part thereof shall have been filed under the Federal Securities Laws and (b) may approach and negotiate with a single potential purchaser to effect such sale. Pledgor acknowledges and agrees that any such sale might result in prices and other terms less favorable to the seller than if such sale were a public sale without such restrictions. In the event of any such sale, the Company shall incur no responsibility or liability for selling all or any part of the Pledged Securities at a price that the Company, in its sole and absolute discretion, may in good faith deem reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might have been realized if the sale were deferred until after registration as aforesaid or if more than a single purchaser were approached. The provisions of this Section 11 will apply notwithstanding the existence of a public or private market upon which the quotations or sales prices may exceed substantially the price at which the Company sells. SECTION 12. Security Interest Absolute. All rights of the Company hereunder, the grant of a security interest in the Collateral and all obligations of Pledgor hereunder, shall be absolute and unconditional irrespective of (a) any lack of validity or enforceability of the Letter Agreement or any other agreement with respect to the Obligations or any other agreement or instrument relating to any of the foregoing, (b) any change in the time, manner or place of payment of, or in any other term of, the Obligations, or any other amendment or waiver of or any consent to any departure from the Letter Agreement or any other agreement or instrument relating to any of the foregoing, (c) any exchange, release or nonperfection of any other collateral, or any release or amendment or waiver of or consent to or departure from any guaranty, for the Obligations or (d) any other circumstance that might otherwise constitute a defense available to, or a discharge of, Pledgor in respect of the Obligations or in respect of this Agreement or the Letter Agreement (other than the indefeasible payment in full of all the Obligations). 8 SECTION 13. Termination or Release. (a) This Agreement and the security interests granted hereby shall terminate when all the Obligations have been indefeasibly paid in full. (b) In connection with any termination or release pursuant to paragraph (a) above, the Company shall execute and deliver to Pledgor, at Pledgor's expense, all documents that Pledgor shall reasonably request to evidence such termination or release. Any execution and delivery of documents pursuant to this Section 13 shall be without recourse to or warranty by the Company other than that the Collateral (other than any Collateral that shall have been sold in accordance with Section 6) is not subject to any interest granted by the Company in favor of any other person. SECTION 14. Notices. All communications and notices hereunder shall be in writing and given as provided in Section 8 of the Letter Agreement. SECTION 15. Further Assurances. Pledgor agrees to do such further acts and things, and to execute and deliver such additional conveyances, assignments, agreements, indorsements and instruments, as the Company may at any time reasonably request in connection with the administration and enforcement of this Agreement or with respect to the Collateral or any part thereof or in order better to assure and confirm unto the Company its rights and remedies hereunder. SECTION 16. Binding Effect; Several Agreement; Assignments. This Agreement and any or all rights and obligations hereunder may be assigned at any time by the Company without the consent of or notification to Pledgor. Neither this Agreement nor any rights or obligations hereunder may be assigned by Pledgor. This Agreement shall become effective as to Pledgor when a counterpart hereof executed on behalf of Pledgor shall have been delivered to the Company and a counterpart hereof shall have been executed on behalf of the Company, and thereafter shall be binding upon Pledgor and the Company, and their respective successors and assigns, enforceable by Pledgor against the Company and by the Company against Pledgor, and their respective successors and assigns, and shall inure to the benefit of Pledgor and the Company, and their respective successors and assigns, except that no Pledgor shall have the right to assign its rights hereunder or any interest herein or in the Collateral (and any such attempted assignment shall be void). SECTION 17. Survival of Agreement; Severability. (a) All covenants, agreements, representations and warranties made by Pledgor herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or the Letter Agreement shall be considered to have been relied upon by the Company, regardless of any investigation made by the Company or on its behalf, and shall continue in full force and effect until terminated in accordance with Section 13. (b) In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 9 SECTION 18. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. SECTION 19. Submission to Jurisdiction. EACH OF THE PARTIES SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT SITTING IN HOUSTON, TEXAS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT AND AGREES THAT ALL CLAIMS IN RESPECT OF THE ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. EACH PARTY ALSO AGREES NOT TO BRING ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT IN ANY OTHER COURT. EACH OF THE PARTIES WAIVES ANY DEFENSE OF INCONVENIENT FORUM TO THE MAINTENANCE OF ANY ACTION OR PROCEEDING SO BROUGHT AND WAIVES ANY BOND, SURETY, OR OTHER SECURITY THAT MIGHT BE REQUIRED OF ANY OTHER PARTY WITH RESPECT THERETO. EITHER PARTY MAY MAKE SERVICE ON THE OTHER PARTY BY SENDING OR DELIVERING A COPY OF THE PROCESS TO THE PARTY TO BE SERVED IN THE MANNER PROVIDED FOR THE GIVING OF NOTICES IN SECTION 14. EACH PARTY AGREES THAT A FINAL JUDGMENT IN ANY ACTION OR PROCEEDING SO BROUGHT SHALL BE CONCLUSIVE AND MAY BE ENFORCED BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW OR AT EQUITY. SECTION 20. Waiver Of Jury Trial. TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, THE COMPANY AND PLEDGOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT WHICH IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE LETTER AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY OR THEREBY. SECTION 21. Rules of Interpretation. Section headings used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting this Agreement. SECTION 22. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute a single contract, and shall become effective as provided in Section 16. Delivery of an executed counterpart of a signature page to this Agreement by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Agreement. 10 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. CAPCO RESOURCES LTD. By: /s/ Gene E. Hays ----------------------------------- Name: Gene E. Hays ----------------------------------- Title: Corporate Secretary ----------------------------------- CHAPARRAL RESOURCES, INC. By: /s/ Michael B. Young ----------------------------------- Name: Michael B. Young ----------------------------------- Title: Treasurer ----------------------------------- 11 EX-10.8 18 0018.txt LETTER CHAPARRAL RESOURCES, INC. October 11, 2000 Mr. Dennis Staal Capco Resources Ltd. 444 5th Avenue SW Suite 2240 Calgary, Alberta Canada T2P2T8 403-9000 Re: Purchase of Common Stock Dear Dennis: This letter hereby amends that certain letter agreement, dated September 21, 2000, between Chaparral Resources, Inc. (the "Company") and Capco Resources Ltd. ("Capco") relating to the acquisition of 1,612,903 shares of common stock, par value $.0001 per share (the "Shares"), of the Company for an aggregate purchase price of $3.0 million. Capitalized terms not otherwise defined herein shall have the meaning set forth in the Letter Agreement. The Parties agree that Section 1(a) of the Letter Agreement is deleted in its entirety and replaced with the following: "Capco agrees to purchase the Shares on the earlier of (a) October 30, 2000 or (b) consummation of the transactions contemplated pursuant to Section 3 of that certain Agreement and Release, dated August 25, 2000, by and among Greka Energy Corp. ("Greka"), Randeep S. Grewal, Capco, Capco Energy, Inc. and Ilyas Chaudhary by delivery to Chaparral the sum of $3.0 million, in cash, by wire transfer of immediately available funds." The Letter Agreement, as amended hereby, constitutes the entire agreement between the Parties and supersede all prior oral or written agreements, understandings, representations and warranties, and courses of conduct and dealing between the Parties on the subject matter hereof. The Parties acknowledge and agree that except for the above-referenced amendment to Section 1(a) of the Letter Agreement all of the provisions of the Letter Agreement and the Pledge Agreement, dated as of September 21, 2000, between the Company and Capco will remain in full force and effect. This letter may be executed in one or more counterparts, each of which will be deemed to be an original copy of this letter and all of which, when taken together, will be deemed to constitute one and the same agreement. If you are in agreement with the foregoing, please sign and return one copy of this letter, which thereupon will constitute our agreement with respect to its subject matter. Very truly yours, /s/ Michael B. Young -------------------- Michael B. Young Treasurer Duly acknowledged and agreed this 11th day of October 2000. CAPCO RESOURCES LTD. /s/ Gene E. Hays (for) Dennis Staal - ----------------------------------- Dennis Staal EX-27 19 0019.txt FDS --
5 9-MOS 9-MOS DEC-31-2000 DEC-31-1999 JAN-01-2000 JAN-01-1999 SEP-30-2000 SEP-30-1999 1,626,000 23,000 0 0 371,000 23,000 0 0 0 0 2,144,000 735,000 59,371,000 38,251,000 40,000 39,000 66,101,000 41,303,000 918,000 3,676,000 0 0 5,463,000 5,200,000 0 0 1,000 0 39,272,000 22,851,000 66,101,000 41,303,000 0 0 1,177,000 685,000 0 0 2,601,000 1,652,000 (127,000) 913,000 0 0 25,293,000 309,000 (26,590,000) (2,189,000) 0 0 (26,590,000) (2,189,000) 0 0 0 0 0 0 (26,590,000) (2,189,000) (19.66) (2.51) (19.66) (2.51)
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