Just FYI, XRaySpeX, since you mentioned wondering what the tick marks on the progress bar were.
Warning: this post is about ebook internals! 
One of the source files which can be included in an ebook is an NCX file (I believe "NCX" stands for "Navigation Control XML"). It defines the navigation points in the book. These are the points which are indicated by tick marks in the progress bar, and are the points which you can jump to using the 5-way control on the Kindle.
It's possible to create a MOBI file that doesn't include an NCX file, and it sounds like your original MOBI file didn't have one, which was why there were no progress bar tick marks, and you couldn't jump from chapter to chapter using the 5-way control. A lot of MOBI files are created without an NCX file, I'm afraid.
During the conversion process, Calibre created an NCX file for the book, based on the heading elements (h1,h2,h3, etc) in the HTML, which resulted in the tick marks showing up on the progress bar, and you then being able to navigate from chapter to chapter using the Kindle's 5-way control button.
I
think I'm right in saying that the criteria Calibre uses to determine the navigation points for the NCX file encompass more of the heading levels, by default, than it defaults to using to determine page breaks, which is why it created navigation points for the H3 chapter titles but didn't insert page breaks, until you changed the setting to have it insert a page break before each H3 heading.