SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: March 21, 2005
Date of Earliest Event Reported: March 16, 2005
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NATURAL GAS SYSTEMS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Nevada
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(State or Other Jurisdiction of Incorporation)
0-27862 80-0028196
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(Commission File Number) (I.R.S. Employer Identification No.)
820 Gessner, Suite 1340, Houston, Texas 77024
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(Address of Principal Executive Offices) (Zip Code)
(713) 935-0122
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(Registrant's Telephone Number, Including Area Code)
(Former Name or Former Address, if Changed Since Last Report)
TABLE OF CONTENTS
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under and
Off-Balance Sheet Arrangement of a Registrant
Item 3.02. Unregistered Sales of Equity Securities
Item 9.01 Financial Statements and Exhibits
Signatures
ITEM 2.03. CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AND
OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT
Additional Draw Request in connection with Loan Agreement with Prospect Energy
Corporation
On March 16, 2005, Natural Gas Systems, Inc. ("NGS" or the "Company")
borrowed an additional $1.0 million (the "Additional Advance") under the terms
of the Loan Agreement (defined below) with Prospect Energy Corporation
("Prospect").
On February 2, 2005, the Company entered into a senior secured loan
agreement (the "Loan Agreement") with Prospect providing for borrowings by the
Company of up to $4.8 million (the "Secured Loan"). The Loan Agreement was
finalized and first fundings made on February 3, 2005. The second funding,
namely the Additional Advance of $1.0 million on March 16, 2005, referenced in
this Current Report on Form 8-K, increased the total aggregate borrowings with
Prospect to $4.0 million. The Company has until May 4, 2005 to elect to borrow
the remaining $800,000 available under the Loan Agreement. The Secured Loan
bears interest at an annual rate equal to the greater of (a) 14% and (b) the
Treasury Rate plus 9%, with interest payable in arrears on the last day of each
month. The Secured Loan is due in full on February 2, 2010. The proceeds of the
Secured Loan may be used solely for the acquisition and development of oil and
gas properties, general working capital and the repayment of specified
indebtedness, provided that the Company is prohibited from using any of the
proceeds for exploratory drilling or the acquisition of oil and gas properties
without the consent of Prospect.
Pursuant to the terms of the Additional Advance under the Loan Agreement,
the Company was required to issue Prospect five-year warrants to purchase up to
150,000 shares of NGS stock at an exercise price of $0.75 per share, and
"revocable warrants" to purchase up to an additional 100,000 shares of common
stock at an exercise price of $0.75 per share. The revocable warrants are
subject to cancellation by the Company prior to their exercise if the Company
meets and maintains certain operating cash flow targets.
The shares of common stock issuable upon exercise of the warrants held by
Prospect are subject to a registration rights agreement, pursuant to which the
Company has agreed to register sales by Prospect and its transferees of such
shares under the Securities Act of 1933, as amended. Subject to limitations
specified in this agreement, these registration rights include an unlimited
number of piggyback registration rights that require NGS to register sales of a
holder's shares when NGS undertakes a public offering and certain other types of
offerings, subject to the discretion of the managing underwriter of the
offering, if any, to decrease the amount that holders may register.
The Secured Loan is secured by a Mortgage, Collateral Assignment, Security
Agreement and Financing Statement executed by NGS Sub, Inc., a wholly owned
subsidiary of NGS ("NGS Sub"), granting Prospect a first-priority security
interest in substantially all of NGS Sub's assets, as well as by pledges of the
stock of NGS's direct and indirect subsidiaries. The Secured Loan is also
guaranteed by NGS's direct and indirect subsidiaries.
Among other conditions, the Loan Agreement requires that the Company (i)
maintain a debt service reserve account in an initial amount equal to 7.5% (or,
after October 1, 2005, 5%) of the outstanding borrowings at any time (provided
that the required percentage shall be increased to 14% in the event certain
earnings tests are not met), and (ii) subject to certain conditions, obtain a
$1.5 million key-man life insurance policy on Robert S. Herlin, the Company's
President and Chief Executive Officer.
Among other restrictions and subject to certain exceptions, the Loan
Agreement prohibits the Company and each of its restricted subsidiaries from
creating liens, entering into certain types of mergers or consolidations,
incurring additional indebtedness, changing the character of its business, or
engaging in certain types of transactions. The Loan Agreement also requires NGS
to maintain specified financial ratios. In order to satisfy certain of these
ratios, the Company will need to significantly increase its earnings.
The Loan Agreement provides that the Company will be in default under the
Secured Loan if Mr. Herlin shall cease for any reason to be actively employed
full time as President of NGS, unless NGS replaces Mr. Herlin within 90 days
following such event, and his replacement is reasonably satisfactory to
Prospect.
The foregoing descriptions are qualified and extended by reference to
Exhibit 10.1 to this Current Report on Form 8-K, which is incorporated herein by
reference, and the Exhibits referenced on Current Report on Form 8-K filed
February 8, 2005, also incorporated herein by reference.
ITEM 3.02. UNREGISTERED SALES OF EQUITY SECURITIES.
See Item 2.03 above.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
The following exhibit is filed as an exhibit to this Current Report on
Form 8-K:
EXHIBIT NO. DESCRIPTION
10.1 Certificate of Draw Request, dated as of February 16, 2005,
between Natural Gas Systems, Inc., a Nevada corporation
("NGS") and Prospect Energy Corporation ("Prospect")
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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 hereunto duly authorized.
NATURAL GAS SYSTEMS, INC.
Date: March 21, 2005 By: /s/ Robert Herlin
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Robert Herlin, Chief Executive Officer
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CERTIFICATE FOR DRAW REOUEST
This Certificate is made effective as of March 16, 2005, in connection
with that certain Loan Agreement (the "Agreement") dated as ofFebruary 2, 2005,
betweenNatural Gas Systems, Inc., a Nevada corporation (the "Borrower") and
Prospect Energy Corporation, a Maryland corporation (the "Lender"). Defined
terms used in the Agreement shall have the same meanings used herein, unless
otherwise specified herein.
In connection with the Borrower's request for an Advance in the amount of
$1,000,000.00, the Borrower represents and warrants to the Lender that:
(a) Each of the representations and warranties ofthe Companies contained
in the Agreement and the Collateral Documents is true and correct in
all material respects on and as ofthe date hereof, both before and
after giving effect to the proposed Advance and to the application
of the proceeds therefrom, as though made on and as of such date,
other than any such representations or warranties that by theirterms
refer to a specific date other than the date ofthe proposedAdvance,
in which case as of such specific date, and except as such
representations and warranties relate to matters that are changed as
permitted by the Agreement.
(b) At the date hereof, no Default shall have occurred and be
continuing.
(c) The Borrower shall not have had a Material Adverse Effect from its
condition represented in the most recent financial statements
furnished to the Lender prior to the Closing Date, except to the
extent that such changes are permitted by the Agreement.
IN WITNESS WHEREOF, the Borrower has caused this Certificate to be duly
executed pursuant to Section 7.3 of the Agreement effective as of the date first
above written.
NATURAL GAS SYSTEMS, INC.
By:
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Name: Robert S. Berlin
Title: President & CEO