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