UNITED STATES
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: April 8, 2005
Date of Earliest Event Reported: April 4, 2005
NATURAL GAS SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
Nevada
(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
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425).
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12).
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b)).
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c)).
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ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
Executive Employment Agreement: Robert S. Herlin
On September 23, 2003, Natural Gas Systems, Inc., a Delaware corporation ("Old
NGS"), a subsidiary of Natural Gas Systems, a Nevada corporation (the
"Company"), entered into an Executive Employment Contract (the "Original Herlin
Employment Contract") with Robert S. Herlin for Mr. Herlin to serve as President
and Chief Executive Officer of the Company. Pursuant to the Original Herlin
Employment Contract, Mr. Herlin was granted a stock option to purchase 250,000
shares of Old NGS common stock with an exercise price equal to $0.001 that vests
over four years, that were to be cancelled when the Company granted warrants to
Tatum CFO Partners, LLP, a provider of contract CFO's and other executive level
executives ("Tatum"), in connection with Herlin's status as a partner of Tatum
and certain other services to be provided by Tatum. In addition, under the
Original Herlin Employment Contract Mr. Herlin received an annual salary of
$180,000, an annual discretionary bonus of up to $180,000, a six month severance
package, and purchased founders' stock of 1,000,000 shares of common stock of
Old NGS, with Old NGS having a repurchase right under a reverse vesting
arrangement over 27 months (the "Stock Purchase Agreement"). The Original Herlin
Employment Contract and Stock Purchase Agreement were assumed by the Company
when a subsidiary of the Company merged with Old NGS in May 2004. In addition,
the stock options were exchanged in the merger for stock options exercisable for
shares of Company common stock.
On April 4, 2005, the Company made effective an Executive Employment
Contract (the "New Herlin Employment Contract") with Mr. Herlin. The New Herlin
Employment Contract supersedes the Original Herlin Employment Contract. Pursuant
to the New Herlin Employment Contract, Mr. Herlin will continue to serve as
President and Chief Executive Officer of the Company. He will receive $180,000
annual salary, which shall increase to $210,000 at the end of one year, and a
one year severance package. Mr. Herlin is also eligible to receive an annual
discretionary bonus equal to 100% of his annual salary. As a bonus for fiscal
2004, Mr. Herlin will retain the 250,000 stock options granted to him under the
Original Employment Agreement. The Company has entered into a new agreement with
Tatum, which supercedes the original agreement with Tatum and provides for the
Company to grant Tatum a warrant to purchase 250,000 shares of Company common
stock, exercisable at $0.001 exercisable for five years. We refer you to
"Restated and Amended Agreement with Tatum Partners".
In addition, on April 4, 2005, the Company made effective a grant to
Mr. Herlin for a stock option to purchase 500,000 shares of Company common
stock, with an exercise price equal to $1.80 that vests over four years ("Herlin
Stock Option Agreement"), as well as an additional grant of a warrant to
purchase 287,500 shares of Company common stock, with an exercise price equal to
$1.80 that vests over four years ("Herlin Warrant Agreement"). A copy of the New
Herlin Employment Contract, Herlin Stock Option Agreement, and Herlin Warrant
Agreement are attached hereto as Exhibits 10.1, 10.2 and 10.3, respectively, and
are incorporated herein by reference to this Item 1.01. The foregoing summary
does not purport to be complete and is qualified in its entirety by reference to
the New Herlin Employment Contract, Herlin Stock Option Agreement, and Herlin
Warrant Agreement.
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Restated and Amended Agreement with Tatum Partners.
On or about September 23, 2003, Old NGS entered into a Resources
Agreement with Tatum CFO Partners, LLP (the "Original Tatum Contract"). The
Original Tatum Contract provided for Tatum to provide the services of its
partner, Robert S. Herlin to Old NGS and provide access to various Tatum
resources in exchange for sharing of Mr. Herlin's compensation from Old NGS. The
Original Tatum Contract was assumed by the Company when a subsidiary of the
Company merged with Old NGS in May 2004.
On April 4, 2005, the Company made effective an Amended and Restated
Resources Agreement (the "Amended and Restated Tatum Contract") with Tatum.
Pursuant to the Amended and Restated Tatum Contract, Tatum will receive $12,000
per year for access to its services. In addition, the Company granted a warrant
to purchase 250,000 shares of Company common stock, exercisable at $0.001 per
share and exercisable for a period of five years, under the terms of the Tatum
Warrant Agreement (the "Tatum Warrant Agreement").
A copy of the Amended and Restated Tatum Contract and the Tatum Warrant
Agreement is attached hereto as Exhibits 10.5 and 10.5, respectively, and is
incorporated herein by reference to this Item 1.01. The foregoing summary does
not purport to be complete and is qualified in its entirety by reference to the
Amended and Restated Tatum Contract and Tatum Warrant Agreement.
Executive Employment Agreement: Sterling H. McDonald
On November 10, 2003, Old NGS entered into an Executive Employment
Contract with Sterling H. McDonald for Mr. McDonald to serve as Chief Financial
Officer of the Company (the "Original McDonald Employment Contract"). The
Original McDonald Employment Contract provided for a grant of a stock option to
purchase 250,000 shares of common stock of Old NGS, with an exercise price of
$0.25 that vests over fifty months. In addition, under the Original McDonald
Employment Contract Mr. McDonald received an annual salary of $120,000, an
annual discretionary bonus, and a maximum six month severance package. The
Original McDonald Employment Contract was assumed by the Company when a
subsidiary of the Company merged with Old NGS in May 2004. In addition, the
stock options were exchanged in the merger for stock options exercisable for
shares of Company common stock.
On April 4, 2005, the Company made effective an Executive Employment
Contract (the "New McDonald Employment Contract") with Mr. McDonald. The New
McDonald Employment Contract supersedes the Original McDonald Employment
Contract, with the exception the Mr. McDonald shall retain the stock options
under the terms previously granted. Pursuant to the New McDonald Employment
Contract, Mr. McDonald will continue to serve as the Chief Financial Officer of
the Company. In addition, Mr. McDonald will receive $150,000 annual salary. Mr.
McDonald is also eligible to receive an annual discretionary bonus equal to 75%
of his annual salary, and a six month severance package which may be increased
to one year under conditions related to a change of control. In addition, on
April 4, 2005, Mr. McDonald was granted a stock option to purchase 350,000
shares of Company common stock, with an exercise price equal to $1.80 that vests
over four years ("McDonald Stock Option Agreement").
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A copy of the New McDonald Employment Contract and McDonald Stock Option
Agreement are attached hereto as Exhibits 10.6 and 10.7, respectively and are
incorporated herein by reference to this Item 1.01. The foregoing summary does
not purport to be complete and is qualified in its entirety by reference to the
New McDonald Employment Contract and McDonald Stock Option Agreement.
ITEM 1.02 TERMINATION OF A MATERIAL DEFINITIVE AGREEMENT.
The New Herlin Employment Contract supersedes the Original Herlin
Employment Contract in its entirety. To the extent applicable, the discussion
above regarding the supersession of the Original Herlin Employment Contract by
the New Herlin Employment Contract is incorporated herein by reference to this
Item 1.02.
The New McDonald Employment Contract supersedes the Original McDonald
Employment Contract in its entirety. To the extent applicable, the discussion
above regarding the supersession of the Original McDonald Employment Contract by
the New McDonald Employment Contract is incorporated herein by reference to this
Item 1.02.
ITEM 3.02 UNREGISTERED SALE OF EQUITY SECURITIES
On April 4, 2005, the Company made effective a grant to Tatum a warrant
to purchase 250,000 shares of Company common stock. In addition, the Company
made effective a grant to Mr. Herlin a stock option to purchase 500,000 shares
of Company common stock and a warrant to purchase 287,500 shares of Company
common stock. The Company also made effective a grant to Mr. McDonald a stock
option to purchase 350,000 shares of Company common stock. The Company granted
the foregoing securities pursuant to certain exemptions from registration
provided by Rule 506 of Regulation D and Section 4(2) and Section 4(6) of the
Securities Act of 1933, as amended.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
Exhibits.
The following exhibit is filed as an exhibit to this Current Report on
Form 8-K:
EXHIBIT NO. DESCRIPTION
- ---------- -----------
10.1 Executive Employment Agreement, Robert S. Herlin, dated April 4,
2005.
10.2 Herlin Stock Option Agreement, dated April 4, 2005
10.3 Herlin Warrant Agreement, dated April 4, 2005
10.4 Amended and Restated Tatum Resources Agreement, dated April 4,
2005
10.5 Tatum Warrant Agreement, dated April 4, 2005
10.6 Executive Employment Agreement, Sterling H. McDonald, dated
April 4, 2005.
10.7 McDonald Stock Option Agreement, dated April 4, 2005
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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: April 8, 2005 By: /s/ Robert Herlin
-----------------
Robert Herlin, Chief Executive Officer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ---------- -----------
10.1 Executive Employment Agreement, Robert S. Herlin, dated April 4,
2005.
10.2 Herlin Stock Option Agreement, dated April 4, 2005
10.3 Herlin Warrant Agreement, dated April 4, 2005
10.4 Amended and Restated Tatum Resources Agreement, dated April 4,
2005
10.5 Tatum Warrant Agreement, dated April 4, 2005
10.6 Executive Employment Agreement, Sterling H. McDonald, dated
April 4, 2005.
10.7 McDonald Stock Option Agreement, dated April 4, 2005
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NATURAL GAS SYSTEMS, INC.
EMPLOYMENT AGREEMENT
ROBERT S. HERLIN
THIS AGREEMENT ("AGREEMENT") is entered into as of April 4, 2005 (the
"EFFECTIVE DATE"), by and between ROBERT S. HERLIN (the "EXECUTIVE") and NATURAL
GAS SYSTEMS, INC., a Nevada corporation (the "COMPANY"). The Agreement
supercedes any and all prior agreements, written or oral, including but not
limited to the Executive's prior employment agreement with the Company and its
predecessor in interest, Natural Gas Systems, a Delaware corporation, other than
stock options granted under the Company's 2003 Stock Option Plan of Natural Gas
Systems, Delaware, which was assumed by the Company, as referenced herein.
1. DUTIES AND SCOPE OF EMPLOYMENT.
(a) POSITION. For the term of his employment under
this Agreement (the "Employment"), the Company agrees to employ the
Executive in the position of President and Chief Executive Officer. The
Executive shall report to the Company's Board of Directors. Executive
shall not be obligated to relocate away from Houston, Texas.
(b) OBLIGATIONS TO THE COMPANY. During the term of
Employment under this Agreement, Executive shall devote his/her full
business efforts and time to the Company. The foregoing shall not
preclude the Executive from engaging in appropriate civic, charitable
or religious activities or from devoting a reasonable amount of time to
private investments or from serving on the boards of directors of other
entities, as long as such activities and/or services do not interfere
or conflict with his/her responsibilities to the Company. The Executive
shall comply with the Company's policies and rules, as they may be in
effect from time to time during his Employment.
For purposes of this paragraph 1(b), the Company
hereby consents and approves of the activities described in EXHIBIT A
hereto.
(c) NO CONFLICTING OBLIGATIONS. The Executive
represents and warrants to the Company that he is under no obligations
or commitments, whether contractual or otherwise, that are inconsistent
with his obligations under this Agreement.
(d) COMMENCEMENT DATE. This Agreement shall take
effect upon the Effective date.
2. CASH AND INCENTIVE COMPENSATION.
For clarification, it is understood by all parties that other
than as specified herein, the Company is not obligated to award any future
grants of stock options or other form of equity compensation to Executive during
Executive's Employment with the Company.
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(a) SALARY. The Company shall pay the Executive as
compensation for his services an initial base salary at a gross annual
rate of $180,000.00, increasing to a $210,000.00 after one year from
the Effective Date, with possible additional increases on an annual
basis as determined by the Board of directors in their sole discretion.
Such salary shall be payable in accordance with the Company's standard
payroll procedures. The annual compensation specified in this
Subsection (a), together with any increases in such compensation that
the Company may grant from time to time, is referred to in this
Agreement as "BASE SALARY."
(b) INCENTIVE BONUSES. The Executive shall be
eligible to receive an annual incentive bonus of up to 100% of Base
Salary based on reasonable criteria (with input from Executive)
established by the Company's Board of Directors (the "BOARD") or the
Compensation Committee of the Board, payable in cash or the fair value
of securities equivalent to such cash amount. The determinations of the
Board or its Compensation Committee with respect to the award of such
bonus shall be final and binding. The Executive shall not be entitled
to an incentive bonus if he has resigned or been terminated for Cause
(as defined below) by the Company before the date when such bonus is
payable.
(c) STOCK OPTIONS. Subject to the approval of the
Board or the Compensation Committee of the Board, the Company shall
grant the Executive stock options aggregating Five Hundred Thousand
(500,000) shares of the Company's Common Stock. Such options shall be
granted as soon as reasonably practicable after the date of this
Agreement. The term of such option shall be 10 years, subject to
earlier expiration in the event of the termination of the Executive's
Employment. The Executive shall vest over a four year period, on an
installment basis determined by the Board or the Compensation
Committee. The grant(s) of such options shall be subject to the other
terms and conditions set forth in the Company's 2004 Stock Plan and
Stock Option Agreement, attached hereto as EXHIBITS B AND C,
respectively.
(d) WARRANTS. Subject to the approval of the Board of
the Compensation Committee of the Board, the Company shall grant the
Executive warrants aggregating Two Hundred Eighty Seven Thousand Five
Hundred (287,500) shares of the Company's Common Stock. The grant of
such warrants shall be subject to the terms and conditions set forth in
the Warrant Agreement, attached hereto as EXHIBIT D.
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(d) BONUS FOR PRIOR YEAR. In lieu of the cash bonus
provided for in the prior employment contract between the Company and
Executive, and subject to applicable security laws and approval of the
Board or the Compensation Committee, the Company agrees to issue
250,000 warrants to Tatum Partners to satisfy Executive's and Company's
obligation to Tatum Partners under the Resource Agreement, dated on or
about September 2003, without reducing any amount of the 250,000 stock
options previously granted to Executive under the 2003 Stock Option
Plan.
3. VACATION AND EMPLOYEE BENEFITS.
Executive shall be entitled to fifteen (15) days of
vacation and five (5) personal days per year, to be taken in such
amounts and at such times as shall be mutually convenient for Executive
and the Company. Any vacation days exceeding five (5) days not taken by
Executive in one year shall be forfeited and not carried forward to
subsequent years. During his Employment, the Executive shall be
eligible to participate in the employee benefit plans maintained by the
Company, subject in each case to the generally applicable terms and
conditions of the plan in question and to the determinations of any
person or committee administering such plan.
4. BUSINESS EXPENSES.
During his Employment, the Executive shall be
authorized to incur necessary and reasonable travel, entertainment and
other business expenses in connection with his duties hereunder. The
Company shall reimburse the Executive for such expenses upon
presentation of an itemized account and appropriate supporting
documentation, all in accordance with the Company's generally
applicable policies.
5. TERMINATION OF EMPLOYMENT.
(a) TERMINATION OF EMPLOYMENT. The Company may
terminate the Executive's Employment at any time and for any reason (or
no reason), and with or without Cause, by giving the Executive ten
day's notice in writing. The Executive may terminate his Employment by
giving the Company ten days' advance notice in writing. The Executive's
Employment shall terminate automatically in the event of his death. The
termination of the Executive's Employment shall not limit or otherwise
affect his obligations under Section 7.
(b) EMPLOYMENT AT WILL. The Executive's Employment
with the Company shall be "at will," meaning that either the Executive
or the Company shall be entitled to terminate the Executive's
Employment at any time and for any reason, with or without Cause. Any
contrary representations that may have been made to the Executive shall
be superseded by this Agreement. This Agreement shall constitute the
full and complete agreement between the Executive and the Company on
the "at will" nature of the Executive's Employment, which may only be
changed in an express written agreement signed by the Executive and a
duly authorized officer of the Company.
(c) RIGHTS UPON TERMINATION. Except as expressly
provided in Section 6, upon the termination of the Executive's
Employment, the Executive shall only be entitled to the compensation,
benefits and expense reimbursements that the Executive has earned or
accrued under this Agreement before the effective date of the
termination. Termination payments pursuant to Section 6 shall fully
discharge all responsibilities of Company to Executive except for the
Company's responsibilities listed in Sections 2, 3, 4, 5, 8, 9, 10 and
Exhibits B, C and D herein.
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(d) CONSTRUCTIVE TERMINATION. The term "CONSTRUCTIVE
TERMINATION" shall mean any of the following: (i) any breach by the
Company of any material provision of this Agreement, including, without
limitation, the assignment to the Executive of duties inconsistent with
his position specified in Section 1(a) hereof or any breach by the
Company of such Section, which is not cured within 60 days after
written notice of same by Executive (except that such cure period shall
be fifteen days with respect to D&O Insurance described in Section
10(h) hereof, unless such breach is due to the actions or inactions of
the Executive), describing in detail the breach asserted and stating
that it constitutes notice pursuant to this Section 5(d); or (ii)
relocation of Executive's offices in excess of 20 miles from its
current location; or (iii) a substantial reduction of the
responsibilities, authority or scope of work of Executive.
6. TERMINATION BENEFITS.
(a) GENERAL RELEASE. Any other provision of this
Agreement notwithstanding, Subsection (b) below shall not apply unless
the Executive: (i) has executed a general release fully discharging all
responsibilities of the Company to the Executive for all claims except
for those noted in 5 (c) above (in a form prescribed by the Company),
and (ii) has returned all property of the Company in the Executive's
possession, and (iii) is in material compliance with the restrictive
covenants in Section 7 hereof .
(b) SEVERANCE PAY. If the Company terminates the
Executive's Employment other than for Cause or Permanent Disability, or
if the Executive is subject to a Constructive Termination, then the
Company shall pay the Executive his Base Salary ("SEVERANCE PAY") for a
period of one year following the termination of his Employment (the
"CONTINUATION PERIOD"). Such Severance Pay shall be paid at the rate in
effect at the time of the termination of Employment and in accordance
with the Company's standard payroll procedures. In the event that (i)
Executive is paid Severance Pay and Executive, AND (ii) Executive
enters into similar employment prior to the end of the Continuation
Period, then the Company may elect, at the Company's sole option and
discretion, to terminate all Restrictive Covenant obligations of
Executive under subsections 7(b) and 7(c) below in return for a
reduction of fifty percent (50%) of the remaining Severance Pay
obligations to Executive.
(c) DEFINITION OF "CAUSE." For all purposes under
this Agreement, "CAUSE" shall mean:
(i) A material breach by the Executive of any written
agreement between the Executive and the Company, provided that the
Company has given written notice of such breach which notice describes
in detail the breach asserted and stating that it constitutes notice
pursuant to this Section 6(c) and which breach, if capable of being
cured, has not been cured within thirty (30) days after such notice;
(ii) The Executive's conviction of, or plea of
"guilty" or "no contest" to, a felony under the laws of the United
States or any state thereof;
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(iii) A material failure by the Executive to comply
with the Company's lawful written policies or rules which causes
material harm to the Company, provided that the Company has given
written notice of such breach which notice describes in detail the
breach asserted and stating that it constitutes notice pursuant to this
Section 6(c) and which breach, if capable of being cured, has not been
cured within thirty (30) days after such notice;
(iii) The Executive's fraud, gross negligence or
willful misconduct; or
(iv) A continued failure by the Executive to perform
his lawful and reasonable assigned duties, provided that the Company
has given written notice of such breach which notice describes in
detail the breach asserted and stating that it constitutes notice
pursuant to this Section 6(c) and which breach, if capable of being
cured, has not been cured within thirty (30) days after such notice.
(d) DEFINITION OF "PERMANENT DISABILITY." For all
purposes under this Agreement, "PERMANENT DISABILITY" shall mean the
Executive's inability to perform the essential functions of the
Executive's position, with or without reasonable accommodation, for a
period of at least 90 consecutive days because of a physical or mental
impairment.
7. RESTRICTIVE COVENANTS.
(A) CONFIDENTIAL INFORMATION
(i) During Executive's Employment and at all times
thereafter, Executive shall not, without the prior express written
consent of the Board (except as may be required in connection with any
judicial or administrative proceeding or inquiry or by law ) disclose
to any person, other than an officer or director of the Company or a
person to whom disclosure is reasonably necessary or appropriate in
connection with the performance by Executive of his duties as CEO and
President, any Confidential Information (defined below) with respect to
the business and affairs of the Company or any of its subsidiaries,
unless such disclosure is subject to a confidentiality agreement or the
confidential information has been previously disclosed through no fault
of Executive.
(ii) Executive acknowledges that he has and will have
access to proprietary information, trade secrets, and confidential
material (including lists of key personnel, customers, clients,
vendors, suppliers, distributors or consultants) of the Company (the
"CONFIDENTIAL Information"). Executive agrees, without limitation in
time or until such information shall become public other than by the
Executive's unauthorized disclosure, to maintain the confidentiality of
the Confidential Information and refrain from divulging, disclosing, or
otherwise using in any respect the Confidential Information to the
detriment of the Company and any of its subsidiaries, affiliates,
successors or assigns, or for any other purpose or no purpose, unless
such disclosure is subject to a confidentiality agreement or such
Confidential Information is previously disclosed through no fault of
Executive.
(B) NO SOLICITATION. For a period of one (1) year
after he ceases to be employed by the Company, Executive agrees that he
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will not, directly or indirectly, for his benefit or for the benefit of
any other person, firm or entity, do any of the following:
(i) solicit from any client doing business with the
Company as of Executive's termination, business of the same or of a
similar nature to the business of the Company with such client, if such
business is expected to directly compete with the Company;
(ii) solicit from any known potential client of the
Company business of the same or of a similar nature to that which has
been the subject of a known written or oral bid, offer or proposal by
the Company, or of substantial preparation with a view to making such a
bid, proposal or offer, within six (6) months prior to Executive's
termination, if such business is expected to directly compete with the
Company;
(iii) solicit the employment or services of, or hire,
any person who was known to be employed by the Company upon termination
of Executive's Employment, or within six (6) months prior thereto,
other than Executive's personal secretary; or
(iv) otherwise knowingly interfere with the business
or accounts of the Company.
For the purposes of (b)(i) through (iv) above and (c)
below, "compete" is defined to mean engagement in the same or
essentially similar activities as the Company within the same field,
parish or county as the Company.
(C) COVENANT NOT TO COMPETE. During the term hereof
and for a period of one (1) year following the termination of this
Agreement, Executive shall not directly or indirectly engage in, or own
any interest in any business which engages in, (i) the business of the
Company or any of its subsidiaries as of the date of this Agreement
that is expected to directly compete with the Company or (ii) any other
business which the Company or any of its subsidiaries shall have
acquired by purchase, merger or otherwise prior to the date of
termination in which the Company or any of its subsidiaries does
business that is expected to compete to with the Company provided,
however, that this sentence shall not prohibit Executive's ownership of
not more than five (5) percent of the voting stock of any publicly held
corporation. For clarification, Executive can work in the same line of
business as the Company and its subsidiaries, including working in the
same state, provided that Executive does not directly complete with the
Company.
(D) SURVIVAL. The covenants contained in this Section
7 shall survive any termination of Executive's Employment.
8. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. This Agreement shall be
binding upon any successor (whether direct or indirect and whether by
purchase, lease, merger, consolidation, liquidation or otherwise) to
all or substantially all of the Company's business and/or assets. For
all purposes under this Agreement, the term "Company" shall include any
successor to the Company's business and/or assets that becomes bound by
this Agreement.
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(e) EXECUTIVE'S SUCCESSORS. This Agreement and all
rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees
and legatees.
9. ARBITRATION.
(a) SCOPE OF ARBITRATION REQUIREMENT. The parties
hereby waive their rights to a trial before a judge or jury and agree
to arbitrate before a neutral arbitrator any and all claims or disputes
arising out of this Agreement and any and all claims arising from or
relating to the Executive's Employment, including (but not limited to)
claims against any current or former employee, director or agent of the
Company, claims of wrongful termination, retaliation, discrimination,
harassment, breach of contract, breach of the covenant of good faith
and fair dealing, defamation, invasion of privacy, fraud,
misrepresentation, constructive discharge or failure to provide a leave
of absence, or claims regarding commissions, stock options or bonuses,
infliction of emotional distress or unfair business practices.
(b) PROCEDURE. The arbitrator's decision shall be
written and shall include the findings of fact and law that support the
decision. The arbitrator's decision shall be final and binding on both
parties, except to the extent applicable law allows for judicial review
of arbitration awards. The arbitrator may award any remedies that would
otherwise be available to the parties if they were to bring the dispute
in court. The arbitration shall be conducted in accordance with the
National Rules for the Resolution of Employment Disputes of the
American Arbitration Association. The arbitration shall take place in
Houston, Texas.
(c) COSTS. The parties shall share the costs of
arbitration equally. Both the Company and the Executive shall be
responsible for their own attorneys' fees. Notwithstanding the
forgoing, the non-prevailing party shall reimburse the prevailing party
for arbitration costs and reasonable attorney's fees, to the extent
allowable under applicable law.
(d) APPLICABILITY. This Section 9 shall not apply to
(i) workers' compensation or unemployment insurance claims or (ii)
claims concerning the validity, infringement or enforceability of any
trade secret, patent right, copyright or any other trade secret or
intellectual property held or sought by either the Executive or the
Company (whether or not arising under the restrictive covenants of
Section 7 hereof).
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10. MISCELLANEOUS PROVISIONS
(a) NOTICE. Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed
to have been duly given when personally delivered or when mailed by
U.S. registered or certified mail, return receipt requested and postage
prepaid. In the case of the Executive, mailed notices shall be
addressed to him at the home address that he most recently communicated
to the Company in writing. In the case of the Company, mailed notices
shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
(b) MODIFICATIONS AND WAIVERS. No provision of this
Agreement shall be modified, waived or discharged unless the
modification, waiver or discharge is agreed to in writing and signed by
the Executive and by an authorized officer of the Company (other than
the Executive). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or
provision or of the same condition or provision at another time.
(c) WHOLE AGREEMENT. This Agreement supersedes any
previous offer letter or employment agreement. No other agreements,
representations or understandings (whether oral or written and whether
express or implied) which are not expressly set forth in this Agreement
have been made or entered into by either party with respect to the
subject matter hereof. This Agreement and the Exhibits and agreements
referenced herein contain the entire understanding of the parties with
respect to the subject matter hereof.
(d) WITHHOLDING TAXES. All payments made under this
Agreement shall be subject to reduction to reflect taxes or other
charges required to be withheld by law.
(e) CHOICE OF LAW AND SEVERABILITY. This Agreement
shall be interpreted in accordance with the laws of the State of Texas
(except their provisions governing the choice of law). If any provision
of this Agreement becomes or is deemed invalid, illegal or
unenforceable in any applicable jurisdiction by reason of the scope,
extent or duration of its coverage, then such provision shall be deemed
amended to the minimum extent necessary to conform to applicable law so
as to be valid and enforceable or, if such provision cannot be so
amended without materially altering the intention of the parties, then
such provision shall be stricken and the remainder of this Agreement
shall continue in full force and effect. If any provision of this
Agreement is rendered illegal by any present or future statute, law,
ordinance or regulation (collectively the "LAW"), then such provision
shall be curtailed or limited only to the minimum extent necessary to
bring such provision into compliance with the Law. All the other terms
and provisions of this Agreement shall continue in full force and
effect without impairment or limitation.
(f) NO ASSIGNMENT. This Agreement and all rights and
obligations of the Executive hereunder are personal to the Executive
and may not be transferred or assigned by the Executive at any time.
The Company may assign its rights under this Agreement to any entity
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that assumes the Company's obligations hereunder in connection with any
sale or transfer of all or a substantial portion of the Company's
assets to such entity.
(g) COUNTERPARTS. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
(h) INDEMNIFICATION. As an officer of the Company,
Executive will be protected by the indemnification provisions of
Article VIII of the Company's Certificate of Incorporation. In
addition, the Company has purchased and currently maintains insurance
protecting its officers and directors against certain losses arising
out of actual or threatened actions, suits or proceedings to which such
persons may be made or threatened or be made parties ("D&O INSURANCE").
The Company covenants to continue D&O Insurance coverage at current
levels for the duration of Executive's service and for two (2) years
thereafter. .
IN WITNESS WHEREOF, each of the parties has executed this employment
Agreement, in the case of the Company by its duly authorized officer, as of the
day and year first above written.
----------------------------
Robert S. Herlin, Executive
NATURAL GAS SYSTEMS, INC.
------------------------------
By: Laird Cagan
Title: Chairman
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EXHIBIT A
OTHER INTERESTS
In accordance with Section 1 (b) of the Employment Agreement dated as
of March __, 2005, (the "Agreement"), the Company hereby consents and approves
of the following business interests conducted by Executive that are not directly
related to Company matters:
Executive serves the board of directors of Boots and Coots Group, Inc., a
publicly owned well service company that is not in direct or indirect
competition with the Company. The Company recognizes that it may benefit from
such activities, in that they broaden Executive's corporate governance
experience and extends Executive's exposure to industry. Executive currently
devotes a minimal amount of time per month on such activities and does not
believe that such service materially and adversely impacts his ability to
perform under the Agreement.
Executive is a partner with Tatum CFO Partners, a provider of contract CFO's and
other C level executives to industry and Tatum provides ongoing services to the
Company pursuant to a Services Agreement. Executive was introduced to the
Company through Tatum CFO Partners and intends to maintain that relationship,
however, Executive has not in the past, during his Employment with the Company,
and does not intend during the term of the Agreement to expend any material
business time or effort to such relationship, including the provision of
services to other companies. The Tatum CFO Partner services are valuable to the
Company by providing immediate resources in the areas of finance, accounting,
information services, management issues, human resources and other issues.
Executive currently owns direct minor oil and gas interests through a family
entity, none of which are directly or indirectly competitive with the Company's
interests. Executive agrees to advise the Company of any contemplated
investments that might be construed to be competitive with Company's interests,
prior to making such additional investments. Such ownership does not utilize a
material amount of Executive's time and none of Executive's business time or
efforts.
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EXHIBIT B
2004 STOCK OPTION PLAN
EXHIBIT C
2004 STOCK OPTION AGREEMENT
EXHIBIT D
STOCK OPTION AGREEMENT
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NATURAL GAS SYSTEMS, INC.
2004 STOCK PLAN
STOCK OPTION AGREEMENT
Name of Optionee: Robert S. Herlin
Optioned Shares: 500,000 shares of common stock, $0.001 par
value, of Natural Gas Systems, Inc.
Type of Option: INCENTIVE STOCK OPTION
Exercise Price Per Share: $1.80
Option Grant Date: April 4, 2005
Vesting Commencement Date April 4, 2005
Date Option Becomes Exercisable: This Option may be exercised with respect to
an 1/16TH of the total Optioned Shares
subject to this option when the Optionee
completes each three months of continuous
employment starting from the Vesting
Commencement Date. This option may become
exercisable on an accelerated basis under
Section 8 of this Stock Option Agreement.
Expiration Date of Option: April 4, 2015 This Option expires earlier if
the Optionee's employment terminates
earlier, as provided in Section 11 of the
Plan.
This Stock Option Agreement (this "Agreement") is executed and
delivered as of April 4, 2005 by and between Natural Gas Systems, Inc., a Nevada
corporation (the "Company") and the Robert S. Herlin. The Optionee and the
Company hereby agree as follows:
1. The Company, pursuant to the Natural Gas Systems, Inc. 2004 Stock Plan
(the "Plan"), which is incorporated herein by reference, and subject to
the terms and conditions thereof, hereby grants to the Optionee an
option to purchase the Optioned Shares at the Exercise Price Per Share.
2. The option granted hereby ("Option") shall be treated as an incentive
stock option under the Internal Revenue Code.
3. The Option granted hereby shall terminate, subject to the provisions of
the Plan, no later than at the close of business on the Expiration
Date.
4. The Optionee shall comply with and be bound by all the terms and
conditions contained in the Plan, as incorporated by reference herein.
5. Options granted hereby shall not be transferable except by will or the
laws of descent and distribution. During the lifetime of the Optionee,
the Option may be exercised only by the Optionee, the guardian or legal
representative of the Optionee.
6. The obligation of the Company to sell and deliver any stock under this
Option is specifically subject to all provisions of the Plan and all
applicable laws, rules, regulations and governmental and stockholder
approvals.
7. Any notice by the Optionee to the Company hereunder shall be in writing
and shall be deemed duly given only upon receipt thereof by the Company
at its principal offices. Any notice by the Company to the Optionee
shall be in writing and shall be deemed duly given if mailed to the
Optionee at the address last specified to the Company by the Optionee.
8. In addition to the change of control provisions specified under Section
14(e) of the Plan and the other conditions set forth in this Agreement,
the Company hereby agrees that all or part of this Option may be
exercised prior to its expiration at the time or times set forth below:
(a) If the Company is subject to a Change in Control (as
defined in below in this Agreement and not as defined in the Plan)
before the Optionee's employment terminates, this Option shall become
exercisable in full if and only if (i) this Option does not remain
outstanding following the Change in Control; (ii) this Option is not
assumed by the surviving corporation or its parent; (iii) the surviving
corporation or its parent does not substitute an option with
substantially the same terms for this Option; OR (iv) the full value of
the vested shares under this Option is not settled in cash or cash
equivalents.
(b) If the Option is not exercisable in full under Paragraph
(a) above, AND if the Optionee is subject to an Involuntary Termination
(defined below) within 12 months after the Change in Control, then this
Option shall become exercisable in full. However, in the case of an
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employee incentive stock option described in Section 422(b) of the
Code, the acceleration of exercisability shall not occur without the
Optionee's written consent.
(c) If the Option is not exercisable in full under Paragraph
(a) above, AND if the Company is subject to a Change of Control, then
fifty percent (50%) of the remaining options shall become exercisable
in full, and the remaining options shall become exercisable at the rate
set forth herein, reduced by the accelerated Optioned Shares. All other
terms and conditions shall remain unchanged.
(d) Definitions
(i) "Change in Control" shall mean: (1)The
consummation of a merger or consolidation of the Company with
or into another entity or any other corporate reorganization,
if persons who were not controlling stockholders of the
Company immediately prior to such merger, consolidation or
other reorganization own immediately after such merger,
consolidation or other reorganization 50% or more of the
voting power of the outstanding securities of each of (A) the
continuing or surviving entity and (B) any direct or indirect
parent corporation of such continuing or surviving entity; OR
(2) The sale, transfer or other disposition of all or
substantially all of the Company's assets.
A transaction shall not constitute a Change in Control if its
sole purpose is to change the state of the Company's
incorporation or to create a holding company that will be
owned in substantially the same proportions by the persons who
held the Company's securities immediately before such
transaction.
(ii) "Involuntary Termination" shall mean the
termination of the Optionee's employment by reason of: (1) The
involuntary discharge of the Optionee by the Company for reasons other
than Cause (as defined in Optionee's employment agreement with the
Company, of even date herewith); or (2) The voluntary resignation of
the Optionee following a reduction in the Optionee's base salary or
receipt of notice that the Optionee's principal workplace will be
relocated more than 30 miles.
9. The validity and construction of this Agreement shall be governed by the laws
of the State of Nevada.
THIS AGREEMENT IS MADE UNDER AND SUBJECT TO THE PROVISIONS OF THE PLAN, AND ALL
OF THE PROVISIONS OF THE PLAN ARE ALSO PROVISIONS OF THIS AGREEMENT. IF THERE IS
A DIFFERENCE OR CONFLICT BETWEEN THE PROVISIONS OF THIS AGREEMENT AND THE
PROVISIONS OF THE PLAN, THE PROVISIONS OF THE PLAN WILL GOVERN; PROVIDED,
HOWEVER, THE THE ACCELERATION OF THE OPTIONED SHARES DESCRIBED IN SECTION 8
ABOVE SHALL GOVERN IN THE EVENT OF ANY CONFLICT WITH THE PLAN. . BY SIGNING THIS
AGREEMENT, THE OPTIONEE ACCEPTS AND AGREES TO ALL OF THE FOREGOING TERMS AND
PROVISIONS AND TO ALL OF THE TERMS AND PROVISIONS OF THE PLAN INCORPORATED
HEREIN BY REFERENCE AND CONFIRMS THAT HE OR SHE HAS RECEIVED A COPY OF THE PLAN.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by a duly authorized representative and the Optionee has hereunto set
his hand as of the date here above first written.
NATURAL GAS SYSTEMS, INC.:
By:
-----------------------------
Name: Laird Q. Cagan
Title: Chairman of the Board
---------------------------------
Optionee: Robert S. Herlin
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REVOCABLE WARRANT AGREEMENT
NATURAL GAS SYSTEMS, INC.
THIS REVOCABLE WARRANT AGREEMENT (this "Agreement") is made and entered
into as of April 4, 2005, between Natural Gas Systems, Inc., a Nevada
corporation (the "Company"), and Robert S. Herlin ("Holder"). Terms not defined
herein shall have the meaning defined in the Stock Option Agreement (defined
below).
R E C I T A L S
WHEREAS, the Company proposes to issue to Holder a maximum of TWO HUNDRED
EIGHTY SEVEN THOUSAND FIVE HUNDRED (287,500) revocable warrants (the "Revocable
Warrants"), each such Revocable Warrant entitling the holder thereof to
purchase, under certain conditions, one share of common stock, .001 par value,
of the Company (the "Shares" or the "Common Stock");
WHEREAS, the Revocable Warrants which are the subject of this Agreement
will be issued by the Company to Holder in connection with Holder's employment
with the Company pursuant to the Employment Agreement ("Employment Agreement")
and the Stock Option Agreement ("Stock Option Agreement"), of even date
herewith, and attached hereto as EXHIBITS B and C, respectively; and
WHEREAS, the Revocable Warrants shall be subject to revocation by the
Company without any further consideration under the terms and conditions
detailed herein.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
A G R E E M E N T
1. Revocable Warrant Certificates. The warrant certificates to be
delivered pursuant to this Agreement (the "REVOCABLE WARRANT CERTIFICATES")
shall be in the form set forth in EXHIBIT A, attached hereto and made a part
hereof, with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Revocable Warrant Agreement.
2. Right to Exercise Revocable Warrants. Each Revocable Warrant may be
exercised, in whole or in part, after those Revocable Warrants are fully vested
and no longer Restricted Warrants (as defined in Section 3 below) until 11:59
P.M. (Eastern Standard Time) on the date that is ten (10) years after the date
of this Agreement (the "EXPIRATION DATE"). Each Revocable Warrant not exercised
or revoked on or before the Expiration Date shall expire.
Other than as specified in Section 3 herein, each Revocable Warrant shall
entitle its holder to purchase from the Company one share of Common Stock (each
an "EXERCISE SHARE") at an exercise price of One Dollar and Eighty Cents ($1.80)
per share, subject to adjustment as set forth below ("EXERCISE PRICE").
The Company shall not be required to issue fractional shares of Common
Stock upon the exercise of this Revocable Warrant or to deliver Revocable
Warrant Certificates which evidence fractional shares of capital stock. In the
event that a fraction of an Exercise Share would, except for the provisions of
this paragraph 2, be issuable upon the exercise of this Revocable Warrant, the
Company shall pay to the Holder exercising the Revocable Warrant an amount in
cash equal to such fraction multiplied by the current market value of the
Exercise Share. For purposes of this paragraph 2, the current market value shall
be determined as follows:
(a) if the Shares are traded in the over-the-counter market and not
on any national securities exchange and not in the NASDAQ Reporting System, the
average of the mean between the last bid and asked prices per share, as reported
by the National Quotation Bureau, Inc., or an equivalent generally accepted
reporting service, for the last business day prior to the date on which the
Revocable Warrant is exercised, or, if not so reported, the average of the
closing bid and asked prices for a Share as furnished to the Company by any
member of the National Association of Securities Dealers, Inc., selected by the
Company and Holder for that purpose.
(b) if the Shares are listed or traded on a national securities
exchange or in the NASDAQ Reporting System, the closing price on the principal
national securities exchange on which they are so listed or traded or in the
NASDAQ Reporting System, as the case may be, on the last business day prior to
the date of the exercise of the Revocable Warrant. The closing price referred to
in this Clause (b) shall be the last reported sales price or, in case no such
reported sale takes place on such day, the average of the reported closing bid
and asked prices on such day, in either case on the national securities exchange
on which the Shares are then listed or in the NASDAQ Reporting System; or
(c) if no such closing price or closing bid and asked prices are
available, as determined by the Holder and the Board of Directors of the
Company.
3. Revocation of the Revocable Warrants. Notwithstanding anything to the
contrary, all Revocable Warrants granted by the Company to the Holder under this
Agreement shall be subject to forfeiture, revocation and cancellation without
any further or additional consideration due or owed to Holder as specified
herein (the "RIGHT OF REVOCATION").
(a) Scope of Revocation Right. Until the Revocable Warrants vest in
accordance with Subsection (b) below, the Revocable Warrants shall be restricted
warrants and not exercisable under Section 2 hereof and shall be subject to the
Company's Right of Revocation (the "RESTRICTED WARRANTS"). The Company may
exercise its Right of Revocation only during the period of 180 consecutive days
commencing on the date the Holder's Service terminates for any reason, including
(without limitation) death or disability (the "REVOCATION PERIOD"). The Right of
Revocation may be exercised automatically under Subsection (e) below.
(b) Lapse of Revocation Right. Initially, all Revocable Warrants
granted under this Agreement shall be Restricted Warrants subject to the
Company's Right of Revocation. The Right of Revocation shall lapse with respect
to the first 1/16th of the Revocable Warrants when the Holder completes three
months of continuous employment after the date of this Agreement. The Right of
Revocation shall lapse with respect to an additional 1/16th of the total
Revocable Warrants when the Holder completes each month of continuous employment
thereafter.
(c) Acceleration. In addition to the other conditions set forth in
this Agreement, the Company's Right of Revocation with respect to unvested
Restricted Warrants shall lapse prior to the vesting period specified in Section
3(b) above at the time or times set forth below:
(i) If the Company is subject to a Change in Control (as defined in
below) before the Holder's employment terminates, the Right of Revocation
shall lapse in full if and only if (1) this Revocable Warrant does not
remain outstanding following the Change in Control; (2) this Revocable
Warrant is not assumed by the surviving corporation or its parent; (3) the
2
surviving corporation or its parent does not substitute an option with
substantially the same terms for this Revocable Warrant; OR (iv) the full
value of the vested Revocable Warrants under this Agreement is not settled
in cash or cash equivalents.
(ii) If the Right of Revocation has not lapsed pursuant to Paragraph
(i) above, AND if the Holder is subject to an Involuntary Termination
(defined below) within 12 months after the Change in Control, then this
Revocable Warrant shall become no longer be subject to a Right of
Revocation.
(iii) If the Right of Revocation has not lapsed pursuant to
Paragraph (i) above, AND if the Company is subject to a Change of Control,
then fifty percent (50%) of the remaining Restricted Warrants shall no
longer be subject to a Right of Revocation, and the remaining Restricted
Warrants shall vest at the rate set forth in Section 3(b) above, reduced
pro rata by the amount of Restricted Warrants no longer subject to a Right
of Revocation pursuant to this Section. All other terms and conditions
shall remain unchanged.
(iv) Definitions:
(1) "CHANGE IN CONTROL" shall mean: (A) The consummation of a
merger or consolidation of the Company with or into another entity
or any other corporate reorganization, if persons who were not
controlling stockholders of the Company immediately prior to such
merger, consolidation or other reorganization own immediately after
such merger, consolidation or other reorganization 50% or more of
the voting power of the outstanding securities of each of the
continuing or surviving entity and any direct or indirect parent
corporation of such continuing or surviving entity; OR (B) The sale,
transfer or other disposition of all or substantially all of the
Company's assets. A transaction shall not constitute a Change in
Control if its sole purpose is to change the state of the Company's
incorporation or to create a holding company that will be owned in
substantially the same proportions by the persons who held the
Company's securities immediately before such transaction.
(2) "INVOLUNTARY TERMINATION" shall mean the termination of
the Optionee's employment by reason of: (A) The involuntary
discharge of the Holder by the Company for reasons other than Cause
(as defined in Holder's Employment Agreement with the Company, of
even date herewith); or (B) The voluntary resignation of the Holder
following a reduction in the Holder's base salary or assigned duties
or receipt of notice that the Holder's principal workplace will be
relocated more than 30 miles.
(d) Escrow. Upon issuance, the certificate(s) for Restricted
Warrants shall be deposited in escrow with the Company to be held in accordance
with the provisions of this Agreement. Any additional or exchanged securities or
other property described in Section 9 below shall immediately be delivered to
the Company to be held in escrow. All ordinary cash dividends on Restricted
Warrants (or on other securities held in escrow) shall be paid directly to the
Holder and shall not be held in escrow. Restricted Warrants, together with any
other assets held in escrow under this Agreement, shall be (i) surrendered to
the Company for repurchase upon exercise of the Right of Revocation or (ii)
released to the Holder upon his or her request to the extent that the Revocable
Warrants have ceased to be Restricted Warrants. In any event, all Revocable
Warrants that have ceased to be Restricted Warrants, together with any other
vested assets held in escrow under this Agreement, shall be released within 10
days after the termination of the Holder's employment.
(e) Exercise of Revocation Right. The Company shall be deemed
to have exercised its Right of Revocation automatically for all Restricted
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Warrants as of the commencement of the Revocation Period, unless the Company
during the Revocation Period notifies the holder of the Restricted Warrants
pursuant to Section 12 that it will not exercise its Right of Revocation for
some or all of the Restricted Warrants. The certificate(s) representing the
Restricted Warrants being repurchased shall be delivered to the Company properly
endorsed for transfer.
(e) Termination of Rights as Stockholder. If the Right of
Revocation is exercised in accordance with this Section 3, then the Holder shall
no longer have any rights as a holder of the Restricted Warrants. Such
Restricted Warrants shall be deemed to have been revoked pursuant to this
Section 3, whether or not the certificate(s) for such Restricted Warrants have
been delivered to the Company.
(f) Transfer of Warrants. The Holder shall not transfer,
assign, encumber or otherwise dispose of any Restricted Warrants without the
Company's written consent, except as provided in the following sentence. The
Revocable Warrants granted hereby shall not be transferable except by will or
the laws of descent and distribution. During the lifetime of the Holder, the
Revocable Warrant may be exercised only by the Holder, the guardian or legal
representative of the Holder.
4. Mutilated or Missing Revocable Warrant Certificates. In case any of the
Revocable Warrant Certificates shall be mutilated, lost, stolen or destroyed
prior to the Expiration Date, the Company shall issue and deliver, in exchange
and substitution for and upon cancellation of the mutilated Revocable Warrant
Certificate, or in lieu of and in substitution for the Revocable Warrant
Certificate lost, stolen or destroyed, a new Revocable Warrant Certificate of
like tenor and representing an equivalent right or interest.
5. Reservation of Shares. The Company will at all times reserve and keep
available, free from preemptive rights, out of the aggregate of its authorized
but unissued Shares or its authorized and issued Shares held in its treasury for
the purpose of enabling it to satisfy its obligation to issue Exercise Shares
upon exercise of Revocable Warrants, the full number of Exercise Shares
deliverable upon the exercise of all outstanding Revocable Warrants.
The Company covenants that all Exercise Shares which may be issued upon
exercise of Revocable Warrants will be validly issued, fully paid and
non-assessable outstanding Shares of the Company.
6. Rights of Holder. The Holder shall not, by virtue of anything contained
in this Revocable Warrant Agreement or otherwise, prior to exercise of this
Revocable Warrant, be entitled to any right whatsoever, either in law or equity,
of a stockholder of the Company, including without limitation, the right to
receive dividends or to vote or to consent or to receive notice as a stockholder
in respect of the meetings of stockholders or the election of directors of the
Company of any other matter.
7. Investment Intent; Accredited Investor. Holder represents and warrants
to the Company that Holder is acquiring the Revocable Warrants for investment
purposes and with no present intention of distributing or reselling any of the
Revocable Warrants. Holder represents that it is an "accredited investor" within
the meaning of Rule 501 of Regulation D under the Securities Act of 1933, as
amended (the "Act").
8. Certificates to Bear Legend. The Revocable Warrants and the certificate
or certificates therefore shall bear the following legend by which each holder
shall be bound:
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"THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED
OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER
SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS
NOT REQUIRED. THE SECURITIES REPRESENTED BY THIS INSTRUMENT ARE SUBJECT TO
TRANSFER RESTRICTIONS, VESTING AND REVOCATION UNDER THE TERMS OF THE
REVOCABLE WARRANT AGREEMENT, DATED APRIL 1, 2005"
The Exercise Shares and the certificate or certificates
evidencing any such Exercise Shares shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH
ACT IS AVAILABLE."
Certificates for Revocable Warrants or Exercise Shares, as the case may
be, without such legend shall be issued if such Revocable Warrants or Exercise
Shares are sold pursuant to an effective registration statement under the Act or
if the Company has received an opinion from counsel reasonably satisfactory to
counsel for the Company that such legend is no longer required under the Act.
9. Adjustment of Number of Shares and Class of Capital Stock Purchasable.
The number of Exercise Shares and class of capital stock purchasable under this
Revocable Warrant are subject to adjustment from time to time as set forth in
this Section 9.
(a) Adjustment for Change in Capital Stock. If the Company:
(i) pays a dividend or makes a distribution on its Common Stock,
in each case, in shares of its Common Stock;
(ii) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(iii) combines its outstanding shares of Common Stock into a smaller
number of shares; or
(iv) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock
then the number and classes of Exercise Shares purchasable upon exercise of each
Revocable Warrant in effect immediately prior to such action shall be adjusted
so that the holder of any Revocable Warrant thereafter exercised may receive the
number and classes of shares of capital stock of the Company which such holder
would have owned immediately following such action if such holder had exercised
the Revocable Warrant immediately prior to such action.
For a dividend or distribution the adjustment shall become
effective immediately after the record date for the dividend or distribution.
For a subdivision, combination or reclassification, the adjustment shall become
effective immediately after the effective date of the subdivision, combination
or reclassification.
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If after an adjustment the holder of a Revocable Warrant upon
exercise of it may receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company shall in good faith determine the
allocation of the adjusted Exercise Price between or among the classes of
capital stock. After such allocation, that portion of the Exercise Price
applicable to each share of each such class of capital stock shall thereafter be
subject to adjustment on terms comparable to those applicable to the Exercise
Shares in this Agreement.
(b) Consolidation, Merger or Sale of the Company. If the
Company is a party to a consolidation, merger, transfer of assets or any other
business combination which reclassifies or changes its outstanding Common Stock,
the successor corporation (or corporation controlling the successor corporation
or the Company, as the case may be) shall by operation of law assume the
Company's obligations under this Agreement. Upon consummation of such
transaction, the Revocable Warrants shall automatically become exercisable for
the kind and amount of securities, cash or other assets which the holder of a
Revocable Warrant would have owned immediately after the consolidation, merger,
transfer or business combination if the holder had exercised the vested amount
of the Revocable Warrant immediately before the effective date of such
transaction. The Company shall arrange for the person or entity obligated to
issue securities or deliver cash or other assets upon exercise of the Revocable
Warrant to, concurrently with the consummation of such transaction, assume the
Company's obligations hereunder by executing an instrument so providing and
further providing for adjustments which shall be as nearly equivalent as may be
practical to the adjustments provided for in this Section 9. The provisions of
this Section 9(b) shall similarly apply to successive reclassifications,
reorganizations, consolidations, mergers or other business combinations.
10. Successors. All the covenants and provisions of this Agreement by or
for the benefit of the Company or Holder shall bind and inure to the benefit of
their respective successor and assigns hereunder.
11. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all proposes be deemed to
be an original, and such counterparts shall together constitute by one and the
same instrument.
12. Notices. All notices or other communications under this Agreement
shall be in writing and shall be deemed to have been given if delivered by hand
or mailed by certified mail, postage prepaid, return receipt requested,
addressed as follows: if to the Company: Natural Gas Systems, Inc., Two Memorial
City Plaza, 820 Gessner, Suite 1340. Houston, TX 77024 , Attention: Legal
Counsel, and to the Holder: at the address of the Holder appearing on the books
of the Company or the Company's transfer agent, if any.
Either the Company or the Holder may from time to time change the address
to which notices to it are to be mailed hereunder by notice in accordance with
the provisions of this Paragraph 12.
13. Supplements and Amendments. The Company may from time to time
supplement or amend this Agreement without the approval of the Holder in order
to cure any ambiguity or to be correct or supplement any provision contained
herein which may be defective or inconsistent with any other provision, or to
make any other provisions in regard to matters or questions herein arising
hereunder which the Company may deem necessary or desirable and which shall not
materially adversely affect the interest of the Holder. Except as set forth in
the immediately preceding sentence, this Agreement may not be amended without
the prior written consent of the Holder.
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14. Severability. If for any reason any provision, paragraph or term of
this Agreement is held to be invalid or unenforceable, all other valid
provisions herein shall remain in full force and effect and all terms,
provisions and paragraphs of this Agreement shall be deemed to be severable.
15. Governing Law. This Agreement shall be deemed to be a contract made
under the laws of the State of Nevada and for all purposes shall be governed and
construed in accordance with the laws of said State.
16. Headings. Paragraphs and subparagraph headings, used herein are
included herein for convenience of reference only and shall not affect the
construction of this Agreement nor constitute a part of this Agreement for any
other purpose.
17. Taxes. The acquisition of the Revocable Warrants (and common stock
issuable thereunder) may result in adverse tax consequences to the Holder. The
Holder understands that he may suffer adverse tax consequences as a result of
his acquisition or disposition of the Revocable Warrants (and common stock
issuable thereunder). Holder represents that he has consulted any tax
consultants Holder deems advisable in connection with the acquisition or
disposition of the Revocable Warrants (and common stock issuable thereunder) and
that Holder is not relying on the Company for any tax advice. Acquisitions or
dispositions of cash or equity made under this Agreement may be subject to
reduction to reflect taxes or other charges required to be withheld by law.
18. Registration Rights. Upon exercise of this Revocable Warrant , the
Holder shall have and be entitled to exercise, together with all other holders
of registrable securities possessing "piggy back" registration rights under that
certain Registration Rights Agreement, of even date herewith and attached hereto
as EXHIBIT D, between the Company and the parties who have executed the
counterpart signature pages thereto or are otherwise bound thereby (the
"Registration Rights Agreement"), the rights of registration granted under the
Registration Rights Agreement (with respect to the Shares of Common Stock
issuable upon exercise of this Revocable Warrant ). By its receipt of this
Revocable Warrant , Holder agrees to be bound by the Registration Rights
Agreement. Notwithstanding the foregoing, however, the Company, at its sole
discretion, may elect to cancel the registration rights agreement and register
the Exercise Shares, upon exercise of this Revocable Warrant, under Form S-8.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the date and year first above written.
COMPANY HOLDER:
NATURAL GAS SYSTEMS, INC. ROBERT S. HERLIN
By: _________________________________ By: __________________________
Name: Robert S. Herlin, CEO
7
EXHIBIT A
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT
TO RULE 144 OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE CORPORATION
AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
REVOCABLE WARRANT TO PURCHASE SHARES
OF COMMON STOCK OF NATURAL GAS SYSTEMS, INC
Initial Number of Shares: 287,500
Exercise Price: $1.80 per share
Date of Grant: April 1, 2005
Expiration Date: April 1, 2015
THIS CERTIFIES THAT, Robert S. Herlin ("Holder") is entitled to purchase the
above number (as adjusted pursuant to Section 4 hereof) of fully paid and
non-assessable shares of the Common Stock (the "Shares") of Natural Gas Systems,
Inc., a Nevada corporation (the "Company), having an Exercise Price as set forth
above, subject to the provisions and upon the terms and conditions set forth
herein and in the Revocable Warrant Agreement dated April 1, 2005 ("Revocable
Warrant Agreement"). The exercise price, as adjusted from time to time as
provided herein, is referred to as the "Exercise Price."
NOTWITHSTANDING ANYTING TO THE CONTRARY, THIS REVOCABLE WARRANT IS SUBJECT TO
VESTING AND REVOCATION WITHOUT CONSIDERATION BY THE COMPANY UNDER CERTAIN
CONDITIONS DEFINED IN THE REVOCABLE WARRANT AGREEMENT.
1. Term. Subject to the revocation provisions of of the Revocable Warrant
Agreement, the purchase right represented by this Revocable Warrant is
exercisable, in whole or in part, at any time commencing on the April 1, 2005
and ending on the Expiration Date, after which time the Revocable Warrant shall
be void.
2. Method of Exercise; Payment; Issuance of New Revocable Warrant. Subject
to Section 1 hereof, the right to purchase Shares represented by this Revocable
Warrant may be exercised by Holder, in whole or in part, for the total number of
Shares remaining available for exercise by the surrender of this Revocable
Warrant (with the notice of exercise form attached hereto as Exhibit A duly
executed) at the principal office of the Company and by the payment to the
Company, by check made payable to the Company drawn on a United States bank and
for United States funds, or by delivery to the Company of evidence of
cancellation of indebtedness of the Company to such Holder, of an amount equal
to the then applicable Exercise Price per share multiplied by the number of
Shares then being purchased or by net exercise pursuant to Section 6 hereof. In
the event of any exercise of the purchase right represented by this Revocable
Warrant, certificates for the Shares so purchased shall be promptly delivered to
Holder and, unless this Revocable Warrant has been fully exercised or has
expired, a new Revocable Warrant representing the portion of the Shares, if any,
with respect to which this Revocable Warrant shall not then have been exercised
shall also be promptly delivered to Holder.
3. Exercise Price. The Exercise Price at which this Revocable Warrant may
be exercised shall be the Exercise Price, as adjusted from time to time pursuant
to Section 4 hereof.
4. Adjustment of Number of Shares. The number of shares and/or class of
capital stock purchasable upon exercise of this Revocable Warrant are subject to
adjustment as provided in Section 9 of the Revocable Warrant Agreement.
5. Transferability and Negotiability of Revocable Warrant. This Revocable
Warrant may not be transferred or assigned in whole or in part without
compliance with applicable federal and state securities laws by the transferor
and the transferee (including, without limitation, the delivery of investment
representation letters and legal opinions reasonably satisfactory to the
Company, if reasonably requested by the Company). Further, the Holder shall not
transfer, assign, encumber or otherwise dispose of any Restricted Warrants
without the Company's written consent, except as provided in the following
sentence. The Revocable Warrants granted hereby shall not be transferable except
by will or the laws of descent and distribution. During the lifetime of the
Holder, the Revocable Warrant may be exercised only by the Holder, the guardian
or legal representative of the Holder.
6. Net Exercise. In lieu of exercising this Revocable Warrant for cash,
the Holder may elect to exchange this Revocable Warrant for Shares equal to the
value of this Revocable Warrant by surrender of this Revocable Warrant, together
with notice of such election, at the principal office of the Company, in which
event the Company shall issue to the holder a number of Shares computed using
the following formula:
X = Y (A-B)
A
Where:
X= the number of Shares to be issued to the holder.
Y= the number of Shares to be purchased under this
Revocable Warrant.
A= value per share of one Share determined in accordance
with Section 2 of the Revocable Warrant Agreement.
B= the Exercise Price (as adjusted).
7. Miscellaneous. The Company covenants that it will at all times reserve
and keep available, solely for the purpose of issue upon the exercise hereof, a
sufficient number of Shares to permit the exercise hereof in full. Such Shares,
when issued in compliance with the provisions of this Revocable Warrant and the
Company's Certificate of Incorporation, will be duly authorized, validly issued,
fully paid and non-assessable. No Holder of this Revocable Warrant, as such,
shall, prior to the exercise of this Revocable Warrant, be entitled to vote or
receive dividends or be deemed to be a stockholder of the Company for any
purpose, nor shall anything contained in this Revocable Warrant be construed to
confer upon Holder, as such, any rights of a stockholder of the Company or any
right to vote, give or withhold consent to any corporate action, receive notice
of meetings, receive dividends or subscription rights, or otherwise. Upon
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Revocable Warrant and, in the case of any such
loss, theft or destruction, upon delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, upon surrender and cancellation of such Revocable Warrant, the
Company at its expense will execute and deliver, in lieu thereof, a new
Revocable Warrant of like date and tenor. The terms and provisions of this
Revocable Warrant shall inure to the benefit of, and be binding upon, the
Company and the Holder hereof and their respective successors and assigns. This
Revocable Warrant shall be governed by and construed under the laws of the State
of Nevada.
2
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date and year first written above.
Holder: Company:
________________________________ Natural Gas Systems, a Nevada Corporation
By: _____________________________ By: _____________________________
Robert S. Herlin Laird Q. Cagan, Chairman
3
NOTICE OF EXERCISE
TO: NATURAL GAS SYSTEMS, INC.
1. The undersigned hereby elects to purchase _________ shares of the
Common Stock of NATURAL GAS SYSTEMS, INC. pursuant to the terms of the attached
Revocable Warrant, and tenders herewith payment of the purchase price of such
shares in full, together with all applicable transfer taxes, if any.
2. The undersigned hereby elects to purchase __________ shares of the
Common Stock of NATURAL GAS SYSTEMS, INC. pursuant to the terms of the attached
Revocable Warrant on a net exercise basis in accordance with Section 6.
3. Please issue a certificate or certificates representing said shares of
the Common Stock in the name of the undersigned or in such other name as is
specified below:
Name:_______________________________
Tax ID:___________________
Address:____________________________
--------------------------
--------------------------
--------------------------
--------------------------
Signed:_____________________________
Date:___________________
4
AMENDED AND RESTATED TATUM RESOURCES AGREEMENT
This Amended and Restated Agreement ("Agreement") is made effective as of
January 1, 2005, between Natural Gas Systems, Inc. a Nevada corporation (the
"COMPANY"), and Tatum CFO Partners, LLP ("TATUM"). This Agreement shall be
effective as of the date written above.
WHEREAS, the Company, through its predecessor in interest and wholly owned
subsidiary Natural Gas Systems, Inc., a Delaware corporation, entered into an
agreement to provide compensation of cash and equity in exchange for certain
resources offered by Tatum under the Resource Agreement (the "ORIGINAL
AGREEMENT"), dated September 18, 2003, a copy of which is attached hereto as
EXHIBIT A;
WHEREAS, the parties desire to memorialize their understanding of any and
all payment obligations of the Company to Tatum;
WHEREAS, the parties hereto desire to amend and restate the terms of the
Original Agreement so as to accelerate the vesting of certain warrants and
limiting further compensation;
NOW, THEREFORE, in consideration of the mutual obligations in this
Agreement and the ancillary agreements referenced herein, the parties to this
Agreement agree as follows:
THE ORIGINAL AGREEMENT IS HEREBY AMENDED AND RESTATED TO READ IN ITS ENTIRETY AS
FOLLOWS:
1. Tatum Resources
The parties understand that the Company desires to maintain the employment
of Robert S. Herlin ("HERLIN" or the "EMPLOYEE"), one of Tatum's partners, as
Chief Executive Officer of the Company (the "EMPLOYEE") pursuant to Herlin's
employment agreement with the Company; and the parties acknowledge that the
Employee is and will remain a partner in Tatum. Tatum will provide certain
resources to the Company to be accessible by Herlin for the Company's use. These
resources (the "RESOURCES") include a platform for knowledge sharing, e.g.,
database access, specialized software and patent-pending processes, specialized
work product and training, and virtual access to other Tatum partners through
Tatum's proprietary internet portal (the "TATUM PORTAL").
This Agreement sets forth the rights of the Company, through the Employee,
to use such resources for the benefit of the Company, and for the payment of
compensation for such Resources under Section 2 hereof (the "COMPENSATION").
Since the Employee will be under the control and direct management of the
Company, and not Tatum, Tatum cannot assume the same risks as if Tatum itself
served as part of the Company's management team. Tatum's obligations to the
Company are exclusively those set forth in this Agreement. SCHEDULE A sets forth
provisions dealing with the limitation of Tatum's liability and other terms and
conditions, which allow Tatum to provide this unique relationship. This offers
both the value of a traditional employment relationship, through separate
employment directly with the Employee, and the resources and benefits of a
national firm through the provision of Resources pursuant to this Agreement.
Herlin shall participate in the benefits plan of the Company in lieu of
participating in the Tatum group plan.
2. Compensation
A. SERVICE FEES. The Company shall pay Tatum a monthly service and license
fee of $1,000.00 for the period of January 2005 through December 2005 (the
"SERVICE FEES"). The $12,000 of Service Fees for all 2005 shall be prepaid in
advance no later than April 15, 2005. After December 31, 2005, Service Fees
shall be payable at $1,000 per month on a monthly basis if this Agreement has
not been terminated.
B. WARRANTS. In partial consideration of Tatum's agreement to provide the
Resources, the Company shall issue Tatum warrants ("WARRANTS") to purchase
262,500 shares of the Company's common stock at $0.001 per share under the terms
and conditions of a certain Warrant Agreement being executed concurrently with
this Agreement.
Other than the Service Fees and the one time issuance of Warrants
described above, no further Compensation shall be due or payable by the Company
to Tatum. For clarification, Tatum hereby acknowledges and agrees that the
Compensation referenced above satisfies any and all past and future payment
obligations of any kind owed by the Company to Tatum in connection with the
subject matter of this Agreement. At the end of the Term, only the monthly
Service Fees as described above shall be required to keep this agreement in full
force and effect.
3. Miscellaneous Provisions.
The initial term of this Agreement ("INITIAL TERM") is from the effective
date until December 31, 2005. Following the Initial Term, this Agreement shall
be automatically renewed for succeeding terms of one month each (a "RENEWAL
TERM"), unless either party shall give written notice to the other of its
intention not to renew this Agreement at least five days prior to the
commencement of the next succeeding Renewal Term.
In addition this Agreement will terminate immediately upon the effective
date of termination or expiration of Herlin's employment with the Company or
upon Herlin ceasing to be a partner of Tatum.
In the event that either party commits a breach of this Agreement and
fails to cure the same within ten (10) days following delivery by the
non-breaching party of written notice specifying the nature of the breach, the
non-breaching party will have the right to terminate this Agreement immediately
effective upon written notice of such termination.
This Agreement contains the entire agreement between the Parties hereto
with respect to the subject matter hereof, superseding any prior oral or written
statements or agreements, including the Original Agreement; provided, however,
that nothing herein shall limit the Company's ability to modify, amend or
terminate the Company's employment relationship with Employee as provided in his
employment agreement.
Neither the Company nor Tatum will be deemed to have waived any rights or
remedies accruing under this Agreement unless such waiver is in writing and
signed by the party electing to waive the right or remedy. This Agreement binds
and benefits the successors of Tatum and the Company.
-2-
Neither party will be liable for any delay or failure to perform under
this Agreement (other than with respect to payment obligations) if and to the
extent such delay or failure is a result of an act of God, war, earthquake,
civil disobedience, court order, labor dispute, or other cause beyond such
party's reasonable control.
The terms of this Agreement are severable and may not be amended except in
a writing signed by Tatum and the Company. If any portion of this Agreement is
found to be unenforceable, the rest of the Agreement will be enforceable except
to the extent that the severed provision deprives either party of a substantial
portion of its bargain.
The provisions in this Agreement concerning payment of the Tatum
Compensation, limitation of liability, reimbursement of costs and expenses,
directors' and officers' insurance, and arbitration will survive any termination
or expiration of this Agreement.
Noting in this Agreement shall confer any rights upon any person or entity
other than the parties hereto and their respective successors and permitted
assigns and Herlin.
This Agreement will be governed by and construed in all respects in
accordance with the laws of the State of Texas without giving effect to
conflicts-of-laws principles.
Each person signing below is authorized to sign on behalf of the party
indicated, and in each case such signature is the only one necessary.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the date and year first above written.
TATUM CFO PARTNERS, LLP NATURAL GAS SYSTEMS
By:____________________________ By: ________________________
Name: Robert L. Litschi Name: Robert S. Herlin
Title: Area Managing Partner Title: President and CEO
-3-
SCHEDULE A
DISCLAIMERS AND RELATED TERMS
DISCLAIMERS & LIMITATIONS OF LIABILITY
It is to be understood that Tatum does not have a contractual obligation to the
Company other than to make the Employee available to serve the Company and to
make its resources available to the Company through the Employee. Tatum
Compensation will be for the resources provided and not as compensation as an
employee or partner of or in a joint venture with the Company or as an employer
of the Employee, and Tatum will have no control or management over the Employee.
Tatum's obligation under this Agreement is to make Tatum's resources available
to the Employee for the benefit of the Company under the terms and conditions of
this Agreement.
The Company acknowledges that any Resources will be provided by Tatum to the
Employee as a tool to be used in the discretion of the Employee. Tatum makes no
representation or warranty as to the accuracy or reliability of reports,
projections, forecasts, or any other information derived from use of the
Resources, and Tatum will not be liable for any claims of reliance on such
reports, projections, forecasts, or information. Tatum disclaims all warranties,
either express or implied, including, but not limited to, implied warranties of
merchantability and fitness for a particular purpose, with regard to all
information and applications that may be provided by the Resources or the Tatum
Portal. Tatum will not be liable for any non-compliance of reports, projections,
forecasts, or information or services with federal, state, or local laws or
regulations.
The Company agrees that, with respect to any claims the Company may assert
against Tatum in connection with this Agreement or the relationship arising
hereunder, Tatum's total liability will not exceed two months of Service Fees.
As a condition for recovery of any liability, the Company must give Tatum
written notice of the alleged basis for liability within thirty (30) days of
discovering the circumstances giving rise thereto, provided that the failure of
the Company to give such notice will only affect the rights of the Company to
the extent that Tatum is actually prejudiced by such failure. In any event, the
Company must assert any claim against Tatum within six (6) months after
discovery or thirty (30) days after the termination or expiration of this
Agreement, whichever is earlier.
Tatum will not be liable in any event for incidental, consequential, punitive,
or special damages, including without limitation, any interruption of business
or loss of business, profit, or goodwill.
ARBITRATION
If the parties are unable to resolve any dispute arising out of or in connection
with this Agreement, either party may refer the dispute to arbitration by a
single arbitrator selected by the parties according to the rules of the American
Arbitration Association ("AAA"), and the decision of the arbitrator will be
final and binding on both parties. Such arbitration will be conducted by the
Houston, Texas office of the AAA and governed by Texas law. In the event that
the parties fail to agree on the selection of the arbitrator within thirty (30)
days after either party's request for arbitration under this paragraph, the
arbitrator will be chosen by AAA. The arbitrator may in his discretion order
documentary discovery, but in no event may depositions be taken. The arbitrator
will have no authority to award punitive damages. Judgment on the award of the
arbitrator may be entered in and enforced by any court of competent
jurisdiction. The arbitrator will have no authority to award damages in excess
or in contravention of this Schedule A and may not amend or disregard any
provision of this Schedule A. Notwithstanding the foregoing, no issue related to
the ownership of intellectual property will be subject to arbitration but will
instead be subject to determination by a court of competent jurisdiction.
DIRECTOR AND OFFICER INSURANCE
To the extent the Company has directors' and officers' liability insurance in
effect, the Company will provide such insurance coverage for the Employee, along
with written evidence to Tatum or the Employee that the Employee is covered by
such insurance.
-4-
SUBPOENAS
In the event that any partner of Tatum (including without limitation the
Employee to the extent not otherwise entitled in his or her capacity as an
officer of the Company) is subpoenaed or otherwise required to appear as a
witness or Tatum or such partner is required to provide evidence, in either case
in connection with any action, suit, or other proceeding initiated by a third
party against the Company or by the Company against a third party, then the
Company shall reimburse Tatum for the costs and expenses (including reasonable
attorneys' fees) actually incurred by Tatum or such partner and provide Tatum
with compensation at Tatum's customary rate for the time incurred.
MISCELLANEOUS
Tatum represents to the Company that Tatum has conducted its standard screening
and investigation procedures with respect to the Employee becoming a partner in
Tatum, and the results of the same were satisfactory to Tatum. Except as
provided in the immediately preceding sentence, Tatum does not make any
representations or warranties concerning the Employee's qualifications or
services.
Tatum shall be entitled to receive all reasonable costs and expenses incidental
to the collection of overdue amounts under this Agreement, including but not
limited to attorneys' fees actually incurred.
-5-
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (this "Agreement") is made effective as of January
1, 2005 between Natural Gas Systems, Inc., a Nevada corporation (the "Company"),
and Tatum CFO Partners, LLP, a Georgia limited liability partnership ("Holder").
R E C I T A L S
WHEREAS, the Company and Holder have entered into a certain Amended and
Restated Tatum Resources Agreement, of even date herewith ("Resources
Agreement"), where the Holder has agreed to provide certain resources to the
Company; and
WHEREAS, as partial consideration for Holder's commitments in the
Resources Agreement, the Company proposes to issue to Holder a warrant entitling
the holder thereof to purchase up to TWO HUNDRED SIXTY-TWO THOUSAND FIVE HUNDRED
(262,500) shares of common stock, no par value, of the Company (the "Shares" or
the "Common Stock");
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
A G R E E M E N T
1. Form of Warrant. The warrant to be delivered pursuant to this Agreement
(the "Warrant") shall be in the form set forth in Exhibit A attached hereto and
made a part hereof.
2. Right to Exercise Warrant. The Warrant may be exercised from the date
of this Agreement until 11:59 P.M. (Eastern Standard Time) on the date that is
five (5) years after the date of this Agreement (the "Expiration Date"). To the
extent the Warrant has not been exercised on or before the Expiration Date, it
shall expire.
The Warrant shall entitle its holder to purchase from the Company one or
more Shares, up to an aggregate of 262,500 (each an "Exercise Share"), at an
exercise price of $0.001 per Share, subject to adjustment as set forth below
("Exercise Price").
The Company shall not be required to issue fractional shares of Common
Stock upon the exercise of the Warrant or to deliver a substitute Warrant
following a partial exercise which evidences fractional shares of capital stock.
In the event that a fraction of an Exercise Share would, except for the
provisions of this paragraph 2, be issuable upon the exercise of the Warrant,
the Company shall pay to the Holder exercising the Warrant an amount in cash
equal to such fraction multiplied by the current market value of the Exercise
Share. For purposes of this paragraph 2, the current market value shall be
determined as follows:
(a) if the Shares are traded in the over-the-counter market and not
on any national securities exchange and not in the NASDAQ Reporting System, the
average of the mean between the last bid and asked prices per share, as reported
by the National Quotation Bureau, Inc., or an equivalent generally accepted
reporting service, for the last business day prior to the date on which the
Warrant is exercised, or, if not so reported, the average of the closing bid and
asked prices for a Share as furnished to the Company by any member of the
National Association of Securities Dealers, Inc., selected by the Company for
that purpose;
(b) if the Shares are listed or traded on a national securities
exchange or in the NASDAQ Reporting System, the closing price on the principal
national securities exchange on which they are so listed or traded or in the
NASDAQ Reporting System, as the case may be, on the last business day prior to
1 of 4
the date of the exercise of the Warrant. The closing price referred to in this
Clause (b) shall be the last reported sales price or, in case no such reported
sale takes place on such day, the average of the reported closing bid and asked
prices, in either case on the national securities exchange on which the Shares
are then listed on in the NASDAQ Reporting System; or
(c) if no such closing price or closing bid and asked prices are
available, as determined in any reasonable manner as may be prescribed by the
Board of Directors of the Company.
3. Mutilated or Missing Warrant Certificates. In case the Warrant shall be
mutilated, lost, stolen or destroyed prior to the Expiration Date, the Company
shall issue and deliver, in exchange and substitution for and upon cancellation
of the mutilated Warrant, or in lieu of and in substitution for the Warrant
lost, stolen or destroyed, a new Warrant of like tenor and representing an
equivalent right or interest.
4. Reservation of Shares. The Company will at all times reserve and keep
available, free from preemptive rights, out of the aggregate of its authorized
but unissued Shares or its authorized and issued Shares held in its treasury for
the purpose of enabling it to satisfy its obligation to issue Exercise Shares
upon exercise of the Warrant, the full number of Exercise Shares deliverable
upon the exercise of the Warrant in full.
The Company covenants that all Exercise Shares which may be issued upon
exercise of the Warrant will be validly issued, fully paid and non-assessable
outstanding Shares of the Company.
5. Rights of Holder. The Holder shall not, by virtue of anything contained
in this Warrant Agreement or otherwise, prior to exercise of the Warrant, be
entitled to any right whatsoever, either in law or equity, of a stockholder of
the Company, including without limitation, the right to receive dividends or to
vote or to consent or to receive notice as a stockholder in respect of the
meetings of stockholders or the election of directors of the Company of any
other matter.
6. Investment Intent; Accredited Investor. Holder represents and warrants
to the Company that Holder is acquiring the Warrant for investment purposes and
with no present intention of distributing or reselling any portion of the
Warrant. Holder represents that it is an "accredited investor" within the
meaning of Rule 501 of Regulation D under the Securities Act (the "Act") and has
executed and delivered the Investment Representation Statement that accompanies
this Agreement.
7. Certificates to Bear Legend. The Warrant shall bear the following
legend by which each holder shall be bound:
"THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED
OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER
SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS
NOT REQUIRED."
The Exercise Shares and the certificate or certificates evidencing any
such Exercise Shares shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL
THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE."
2 of 4
The Warrant or Exercise Shares, as the case may be, without such legend
shall be issued if such Warrant or Exercise Shares are sold pursuant to an
effective registration statement under the Act or if the Company has received an
opinion from counsel reasonably satisfactory to counsel for the Company that
such legend is no longer required under the Act.
8. Adjustment of Number of Shares and Class of Capital Stock Purchasable.
The number of Exercise Shares and class of capital stock purchasable under the
Warrant are subject to adjustment from time to time as set forth in this Section
8.
(a) Adjustment for Change in Capital Stock. If the Company:
(i) pays a dividend or makes a distribution on its Common Stock,
in each case, in shares of its Common Stock;
(ii) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(iii) combines its outstanding shares of Common Stock into a smaller
number of shares; or
(iv) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock;
then the number and classes of Exercise Shares purchasable upon exercise of the
Warrant in effect immediately prior to such action shall be adjusted so that the
holder of the Warrant thereafter exercised may receive the number and classes of
shares of capital stock of the Company which such holder would have owned
immediately following such action if such holder had exercised the Warrant
immediately prior to such action.
For a dividend or distribution the adjustment shall become effective
immediately after the record date for the dividend or distribution. For a
subdivision, combination or reclassification, the adjustment shall become
effective immediately after the effective date of the subdivision, combination
or reclassification.
If after an adjustment the holder of the Warrant upon exercise of it
may receive shares of two or more classes of capital stock of the Company, the
Board of Directors of the Company shall in good faith determine the allocation
of the adjusted Exercise Price between or among the classes of capital stock.
After such allocation, that portion of the Exercise Price applicable to each
share of each such class of capital stock shall thereafter be subject to
adjustment on terms comparable to those applicable to the Exercise Shares in
this Agreement. Notwithstanding the allocation of the Exercise Price between or
among shares of capital stock as provided by this Section 8(a), the Warrant may
only be exercised in full by payment of the entire Exercise Price in effect at
the time of such exercise.
(b) Consolidation, Merger or Sale of the Company. If the Company is
a party to a consolidation, merger or transfer of assets which reclassifies or
changes its outstanding Common Stock, the successor corporation (or corporation
controlling the successor corporation or the Company, as the case may be) shall
by operation of law assume the Company's obligations under this Agreement. Upon
consummation of such transaction, the Warrant shall automatically become
exercisable for the kind and amount of securities, cash or other assets which
the holder of the Warrant would have owned immediately after the consolidation,
merger or transfer if the holder had exercised the Warrant immediately before
the effective date of such transaction. As a condition to the consummation of
such transaction, the Company shall arrange for the person or entity obligated
to issue securities or deliver cash or other assets upon exercise of the Warrant
to, concurrently with the consummation of such transaction, assume the Company's
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obligations hereunder by executing an instrument so providing and further
providing for adjustments which shall be as nearly equivalent as may be
practical to the adjustments provided for in this Section 8.
9. Successors. All the covenants and provisions of this Agreement by or
for the benefit of the Company or Holder shall bind and inure to the benefit of
their respective successor and assigns hereunder.
10. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all proposes be deemed to
be an original, and such counterparts shall together constitute by one and the
same instrument.
11. Notices. All notices or other communications under this Agreement
shall be in writing and shall be deemed to have been given if delivered by hand
or mailed by certified mail, postage prepaid, return receipt requested,
addressed as follows: if to the Company: Natural Gas Systems, Inc., Two Memorial
City Plaza, 820 Gessner, Suite 1340. Houston, TX 77024 , Attention: Chief
Executive Officer, and to the Holder: at 4501 Circle 75 Parkway, Ste. A-1164,
Atlanta, Georgia 30339, Attn: Mr. Jerry Lucas.
Either the Company or the Holder may from time to time change the address
to which notices to it are to be mailed hereunder by notice in accordance with
the provisions of this Paragraph 11.
12. Severability. If for any reason any provision, paragraph or term of
this Agreement is held to be invalid or unenforceable, all other valid
provisions herein shall remain in full force and effect and all terms,
provisions and paragraphs of this Agreement shall be deemed to be severable.
13. Governing Law and Venue. This Agreement shall be deemed to be a
contract made under the laws of the State of Texas and for all purposes shall be
governed and construed in accordance with the laws of said State, except to the
extent that the corporation law of the State of Nevada applies, in which case
the law of Nevada shall govern to that extent. Any proceeding arising under this
Agreement shall be instituted in the courts (federal or state) in Houston,
Texas.
14. Headings. Paragraphs and subparagraph headings, used herein are
included herein for convenience of reference only and shall not affect the
construction of this Agreement nor constitute a part of this Agreement for any
other purpose.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the date and year first above written.
COMPANY HOLDER:
NATURAL GAS SYSTEMS, INC. TATUM CFO PARTNERS, LLP
By: _________________________________ By: ______________________________
Robert S. Herlin, President Name: ____________________________
Title:___________________
Tax ID: __________________________
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EXHIBIT A
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT
TO RULE 144 OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE CORPORATION
AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK OF
NATURAL GAS SYSTEMS, INC
Initial Number of Shares: 262,500
Exercise Price: $0.001 per share
Date of Grant: January 1, 2005
Expiration Date: January 1, 2010
THIS CERTIFIES THAT, TATUM CFO PARTNERS, LLP, or any person or entity to whom
the interest in this Warrant is lawfully transferred ("Holder") is entitled to
purchase the above number (as adjusted pursuant to Section 4 hereof) of fully
paid and non-assessable shares of the Common Stock (the "Shares") of Natural Gas
Systems, Inc., a Nevada corporation (the "Company), having an Exercise Price as
set forth above, subject to the provisions and upon the terms and conditions set
forth herein and in the Warrant Agreement dated January 1, 2005. The exercise
price, as adjusted from time to time as provided herein, is referred to as the
"Exercise Price."
1. Term. The purchase right represented by this Warrant is exercisable, in
whole or in part, at any time commencing on the Date of Grant and ending on the
Expiration Date, after which time the Warrant shall be void.
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to
Section 1 hereof, the right to purchase Shares represented by this Warrant may
be exercised by Holder, in whole or in part, for the total number of Shares
remaining available for exercise by the surrender of this Warrant (with the
notice of exercise form attached hereto as Exhibit A duly executed) at the
principal office of the Company and by the payment to the Company, by check made
payable to the Company drawn on a United States bank and for United States
funds, or by delivery to the Company of evidence of cancellation of indebtedness
of the Company to such Holder, of an amount equal to the then applicable
Exercise Price per share multiplied by the number of Shares then being purchased
or by net exercise pursuant to Section 6 hereof. In the event of any exercise of
the purchase right represented by this Warrant, certificates for the Shares so
purchased shall be promptly delivered to Holder and, unless this Warrant has
been fully exercised or has expired, a new Warrant representing the portion of
the Shares, if any, with respect to which this Warrant shall not then have been
exercised shall also be promptly delivered to Holder.
3. Exercise Price. The Exercise Price at which this Warrant may be
exercised shall be the Exercise Price, as adjusted from time to time pursuant to
Section 4 hereof.
4. Reclassification, Reorganization, Consolidation or Merger. In the case
of any reclassification of the Shares, or any reorganization, consolidation or
merger of the Company with or into another corporation (other than a merger or
reorganization with respect to which the Company is the continuing corporation
and which does not result in any reclassification of the Shares), the Company,
or such successor corporation, as the case may be, shall execute a new warrant
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providing that the Holder shall have the right to exercise such new warrant and
upon such exercise to receive, in lieu of each Share theretofore issuable upon
exercise of this Warrant, the number and kind of securities, money and property
receivable upon such reclassification, reorganization, consolidation or merger
by a holder of Shares for each Share. Such new warrant shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 4 including, without limitation,
adjustments to the Exercise Price and to the number of Shares issuable upon
exercise of this Warrant. The provisions of this Section 4 shall similarly apply
to successive reclassifications, reorganizations, consolidations or mergers.
5. Transferability and Negotiability of Warrant. This Warrant may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, if reasonably
requested by the Company). Subject to the provisions of this Section 5, title to
this Warrant may be transferred in the same manner as a negotiable instrument
transferable by endorsement and delivery.
6. Net Exercise. In lieu of exercising this Warrant for cash, the Holder
may elect to exchange this Warrant for Shares equal to the value of this Warrant
by surrender of this Warrant, together with notice of such election, at the
principal office of the Company, in which event the Company shall issue to the
holder a number of Shares computed using the following formula:
X = Y (A-B)
A
Where :
X= the number of Shares to be issued to the holder.
Y= the number of Shares purchasable under this Warrant.
A= value per share of one Share determined in accordance with
Section 2 of the Warrant Agreement.
B= the Exercise Price (as adjusted).
7. Warrant Agreement. This warrant is being issued pursuant to that
certain Warrant Agreement of even date herewith between the initial Holder and
the Company, and the terms of that Warrant Agreement are hereby incorporated
herein by reference. To the extent the terms of this Warrant conflict with the
terms provided for the same in the Warrant Agreement, the terms of the Warrant
Agreement shall govern.
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8. Miscellaneous. The Company covenants that it will at all times reserve
and keep available, solely for the purpose of issue upon the exercise hereof, a
sufficient number of Shares to permit the exercise hereof in full. Such Shares,
when issued in compliance with the provisions of this Warrant and the Company's
Certificate of Incorporation, will be duly authorized, validly issued, fully
paid and non-assessable. No Holder of this Warrant, as such, shall, prior to the
exercise of this Warrant, be entitled to vote or receive dividends or be deemed
to be a stockholder of the Company for any purpose, nor shall anything contained
in this Warrant be construed to confer upon Holder, as such, any rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action, receive notice of meetings, receive dividends or subscription
rights, or otherwise. Upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant and, in
the case of any such loss, theft or destruction, upon delivery of an indemnity
agreement reasonably satisfactory in form and amount to the Company or, in the
case of any such mutilation, upon surrender and cancellation of such Warrant,
the Company at its expense will execute and deliver, in lieu thereof, a new
Warrant of like date and tenor. The terms and provisions of this Warrant shall
inure to the benefit of, and be binding upon, the Company and the Holder hereof
and their respective successors and assigns. This Warrant shall be governed by
and construed under the laws of the State of Texas, except to the extent that
the corporation law of the State of Nevada would apply, in which case the law of
the State of Nevada shall apply to such extent.
HOLDER: COMPANY:
TATUM CFO PARTNERS, LLP NATURAL GAS SYSTEMS, INC. A NEVADA CORPORATION
By: __________________________ By: _____________________________
Name: ________________________ Robert S. Herlin, President
Title:________________________
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NOTICE OF EXERCISE
TO: NATURAL GAS SYSTEMS, INC.
1. The undersigned hereby elects to purchase _________ shares of the
Common Stock of NATURAL GAS SYSTEMS, INC. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full, together with all applicable transfer taxes, if any.
2. The undersigned hereby elects to purchase __________ shares of the
Common Stock of NATURAL GAS SYSTEMS, INC. pursuant to the terms of the attached
Warrant on a net exercise basis in accordance with Section 6.
3. Please issue a certificate or certificates representing said shares of
the Common Stock in the name of the undersigned or in such other name as is
specified below and, if this Notice of Exercise is for fewer than all shares
that may be purchased under the attached Warrant, please issue a new Warrant on
the same terms for the unexercised balance in the name of the undersigned.
Name:___________________________________
Tax ID:___________________
Address:________________________________
________________________________
________________________________
________________________________
________________________________
Signed:__________________________________
Date:___________________
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INVESTMENT REPRESENTATION STATEMENT
PURCHASER : TATUM CFO PARTNERS, LLP
COMPANY : NATURAL GAS SYSTEMS, INC.
SECURITY : COMMON STOCK
AMOUNT : 262,500 SHARES
DATE : January 1, 2005
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Company the following:
(a) I am aware of the Company's business affairs and financial condition,
and have acquired sufficient information about the Company to reach an informed
and knowledgeable decision to acquire the Securities. I am purchasing these
Securities for my own account for investment purposes only and not with a view
to, or for the resale in connection with, any "distribution" thereof for
purposes of the Securities Act of 1933, as amended ("Securities Act").
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is otherwise available. In addition, I understand that the
certificate evidencing the Securities will be imprinted with a legend which
prohibits the transfer of the Securities unless they are registered or such
registration is not required in the opinion of counsel for the Purchaser
satisfactory to the Company or receipt of a no-action letter from the Securities
and Exchange Commission.
(d) I am aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, if applicable, including, among other
things: the availability of certain public information about the Company; the
resale occurring not less than one year after the party has purchased and paid
for the securities to be sold; the sale being made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934, as
amended); and the amount of securities being sold during any three month period
not exceeding the specified limitations stated therein.
(e) I further understand that at the time I wish to sell the Securities
there may be no public market upon which to make such a sale, and that, even if
such a public market then exists, the Company may not be satisfying the current
public information requirements of Rule 144, and that, in such event, I may be
precluded from selling the Securities under Rule 144 even if the one-year
minimum holding period had been satisfied.
(f) I further understand that in the event all of the requirements of Rule
144 are not satisfied, registration under the Securities Act, compliance with
Regulation A, or some other registration exemption will be required; and that,
notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rule 144 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk.
Date: January 1, 2005 TATUM CFO PARTNERS, LLP
By:
------------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
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NATURAL GAS SYSTEMS, INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is entered into as of April 4, 2005, by and
between STERLING MCDONALD (the "Executive") and NATURAL GAS SYSTEMS, INC., a
Nevada corporation (the "Company"). The Agreement supercedes any and all prior
agreements, written or oral, including but not limited to the Executive's prior
employment agreement with the Company and its predecessor in interest, Natural
Gas Systems, a Delaware corporation, other than the stock options granted under
the Company's 2003 Stock Option Plan of Natural Gas Systems, Delaware, which was
assumed by the Company.
1. DUTIES AND SCOPE OF EMPLOYMENT.
(a) POSITION. For the term of his employment under this Agreement
(the "Employment"), the Company agrees to employ the Executive in the
position of Chief Financial Officer. The Executive shall report to the
Company's CEO and Board of Directors, or to such other person as the
Company subsequently may determine.
(b) OBLIGATIONS TO THE COMPANY. During the term of employment under
this Agreement, Executive shall devote his/her full business efforts and
time to the Company. The foregoing shall not preclude the Executive from
engaging in appropriate civic, charitable or religious activities or from
devoting a reasonable amount of time to private investments or from
serving on the boards of directors of other entities, as long as such
activities and/or services do not interfere or conflict with his/her
responsibilities to the Company. Executive may provide material work for
companies or third parties, if and only if such work is disclosed in
writing and Executive receives consent from the Board at a duly-held
meeting of the Board of Directors of the Company or if such work is
described in Exhibit D hereto. The Executive shall comply with the
Company's policies and rules, as they may be in effect from time to time
during his Employment.
(c) NO CONFLICTING OBLIGATIONS. The Executive represents and
warrants to the Company that he is under no obligations or commitments,
whether contractual or otherwise, that are inconsistent with his
obligations under this Agreement.
2. CASH AND INCENTIVE COMPENSATION. For clarification, it is
understood by all parties that other than as specified herein, the Company is
not obligated to award any future grants of stock options or other form of
equity compensation to Executive during Executive's employment with the Company.
(a) SALARY. The Company shall pay the Executive as compensation for
his services a base salary at a gross annual rate of $150,000.00,
effective January 1, 2005, which may be increased annually at the election
and sole discretion of the board of directors. Such salary shall be
payable in accordance with the Company's standard payroll procedures. The
annual compensation specified in this Subsection (a), together with any
increases in such compensation that the Company may grant from time to
time, is referred to in this Agreement as "Base Salary.")
(b) INCENTIVE BONUSES. The Executive shall be eligible to be
considered for an annual incentive bonus of up to 75% of base salary based
on objective or subjective criteria established by the Company's Board of
Directors (the "Board") or the Compensation Committee of the Board. The
determinations of the Board or its Compensation Committee with respect to
such bonus, if any, shall be final and binding. The Executive shall not be
entitled to an incentive bonus if he is not employed by the Company on the
date when such bonus is payable.
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(c) STOCK OPTIONS. In addition to the 250,000 stock options
previously granted to the Executive under the Company's 2003 Stock Option
Plan, an subject to the approval of the Board or the Compensation
Committee of the Board, the Company shall grant the Executive a stock
option covering an additional Three Hundred Fifty Thousand (350,000)
shares of the Company's Common Stock. Such option shall be granted as soon
as reasonably practicable after the date of this Agreement. The exercise
price of such option shall be equal to the fair market value of such stock
on the date of grant or this agreement. The term of such option shall be
10 years, subject to earlier expiration in the event of the termination of
the Executive's Employment. The Executive shall vest in the option shares
in equal quarterly installments of 1/16th per quarter over the next four
years of continuous service. The grant of such option shall be subject to
the other terms and conditions set forth in the Company's 2004 Stock Plan
and in the Stock Option Agreement, attached hereto as EXHIBITS A AND B,
respectively.
3. VACATION AND EXECUTIVE BENEFITS. Executive shall be entitled to
fifteen (15) days of vacation and five (5) personal days per year, to be taken
in such amounts and at such times as shall be mutually convenient for Executive
and the Company. Any vacation days exceeding five (5) days not taken by
Executive in one year shall be forfeited and not carried forward to subsequent
years. During his Employment, the Executive shall be eligible to participate in
the employee benefit plans maintained by the Company, subject in each case to
the generally applicable terms and conditions of the plan in question and to the
determinations of any person or committee administering such plan.
4. BUSINESS EXPENSES. During his Employment, the Executive shall be
authorized to incur necessary and reasonable travel, entertainment and other
business expenses in connection with his duties hereunder. The Company shall
reimburse the Executive for such expenses upon presentation of an itemized
account and appropriate supporting documentation, all in accordance with the
Company's generally applicable policies.
5. TERM OF EMPLOYMENT.
(a) TERMINATION OF EMPLOYMENT. The Company may terminate the
Executive's Employment at any time and for any reason (or no reason), and
with or without Cause, by giving the Executive ten day's notice in
writing. The Executive may terminate his Employment by giving the Company
ten days' advance notice in writing. The Executive's Employment shall
terminate automatically in the event of his death. The termination of the
Executive's Employment shall not limit or otherwise affect his obligations
under Section 7.
(b) EMPLOYMENT AT WILL. The Executive's Employment with the Company
shall be "at will," meaning that either the Executive or the Company shall
be entitled to terminate the Executive's Employment at any time and for
any reason, with or without Cause. Any contrary representations that may
have been made to the Executive shall be superseded by this Agreement.
This Agreement shall constitute the full and complete agreement between
the Executive and the Company on the "at will" nature of the Executive's
Employment, which may only be changed in an express written agreement
signed by the Executive and a duly authorized officer of the Company.
(c) CONSTRUCTIVE TERMINATION. The term "CONSTRUCTIVE TERMINATION"
shall mean any of the following: (i) any breach by the Company of any
material provision of this Agreement, including, without limitation, the
assignment to the Executive of duties inconsistent with his position
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specified in Section 1(a) hereof or any breach by the Company of such
Section, which is not cured within 45 days after written notice of same by
Executive (except that such cure period shall be fifteen days with respect
to any breach of Section 10(h) hereof unless such breach is due to the
actions or inactions of the Executive), describing in detail the breach
asserted and stating that it constitutes notice pursuant to this Section
5(c); or (ii) relocation of Executive's offices in excess of 20 miles from
its current location; or (iii) a substantial reduction of the
responsibilities, authority or scope of work of Executive.
(d) RIGHTS UPON TERMINATION. Except as expressly provided in Section
6, upon the termination of the Executive's Employment, the Executive shall
only be entitled to the compensation, benefits and expense reimbursements
that the Executive has earned under this Agreement before the effective
date of the termination. The payments under this Agreement shall fully
discharge all responsibilities of the Company to the Executive.
6. TERMINATION BENEFITS.
(a) GENERAL RELEASE. Any other provision of this Agreement
notwithstanding, Subsections (b) and (c) below shall not apply unless the
Executive (i) has executed a general release of all claims (in a form
prescribed by the Company) and (ii) has returned all property of the
Company in the Executive's possession.
(b) SEVERANCE PAY. If the Company terminates the Executive's
Employment for any reason other than Cause or Permanent Disability, or if
the Executive subject to a Constructive Termination, then the Company
shall pay the Executive his Base Salary and maintain and pay his medical
benefit and long-term disability coverage for a period of six (6) months
following the termination of his Employment (the "Continuation Period").
Such Base Salary shall be paid at the rate in effect at the time of the
termination of Employment and in accordance with the Company's standard
payroll procedures.
(c) DEFINITION OF "CAUSE." For all purposes under this Agreement,
"Cause" shall mean:
(i) An unauthorized use or disclosure by the Executive of the
Company's confidential information or trade secrets, which use or
disclosure causes material harm to the Company;
(ii) A material breach by the Executive of any agreement between the
Executive and the Company;
(iii) A material failure by the Executive to comply with the
Company's written policies or rules;
(iv) The Executive's conviction of, or plea of "guilty" or "no
contest" to, a felony under the laws of the United States or any state
thereof;
(v) The Executive's gross negligence or willful misconduct; or
(vi) A continued failure by the Executive to perform assigned duties
after receiving written notification of such failure from the Board of
Directors.
(d) DEFINITION OF "PERMANENT DISABILITY." For all purposes under
this Agreement, "Permanent Disability" shall mean the Executive's
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inability to perform the essential functions of the Executive's position,
with or without reasonable accommodation, for a period of at least 90
consecutive days because of a physical or mental impairment.
(e) CHANGE IN CONTROL. In the event that a Change in Control of the
Company occurs as a result of a sale or merger of the Company and the
Executive is terminated or is subject to a Constructive Termination within
one year following such event, then the Executive shall be paid an
additional severance payment equal to six months of Base Salary, paid in
monthly increments, (the "CHANGE IN CONTROL PAYMENT"), provided that if
the Executive obtains similar employment before the end of the six months,
then the remaining amount of the Change in Control Payment will be reduced
by half. "Change in Control" shall mean: (1) The consummation of a merger
or consolidation of the Company with or into another entity or any other
corporate reorganization, if persons who were not controlling stockholders
of the Company immediately prior to such merger, consolidation or other
reorganization own immediately after such merger, consolidation or other
reorganization 50% or more of the voting power of the outstanding
securities of each of (A) the continuing or surviving entity and (B) any
direct or indirect parent corporation of such continuing or surviving
entity; OR (2)The sale, transfer or other disposition of all or
substantially all of the Company's assets. A Change in Control shall not
occur if its sole purpose is to change the state of the Company's
incorporation or to create a holding company that will be owned in
substantially the same proportions by the persons who held the Company's
securities immediately before such transaction.
7. NON-SOLICITATION AND CONFIDENTIAL INFORMATION.
(a) NON-SOLICITATION. During the period commencing on the date of
this Agreement and continuing until the first anniversary of the date when
the Executive's Employment terminated for any reason, the Executive shall
not directly or indirectly, personally or through others, solicit or
attempt to solicit (on the Executive's own behalf or on behalf of any
other person or entity) either (i) the employment of any employee or
consultant of the Company or any of the Company's affiliates or (ii) the
business of any current or recent customer or working interest partner
with whom the Company is engaged in one or more documented projects or
relationships.
(b) CONFIDENTIAL INFORMATION. During Executive's Employment and at
all times thereafter, Executive shall not, without the prior express
written consent of the Board (except as may be required in connection with
any judicial or administrative proceeding or inquiry) disclose to any
person, other than an officer or director of the Company or a person to
whom disclosure is reasonably necessary or appropriate in connection with
the performance by Executive of his duties as CFO, any Confidential
Information (defined below) with respect to the business and affairs of
the Company or any of its subsidiaries, unless such disclosure is subject
to a confidentiality agreement or the confidential information has been
previously disclosed through no fault of Executive. Executive acknowledges
that he has and will have access to proprietary information, trade
secrets, and confidential material (including lists of key personnel,
customers, clients, vendors, suppliers, distributors or consultants) of
the Company (the "CONFIDENTIAL INFORMATION"). Executive agrees, without
limitation in time or until such information shall become public other
than by the Executive's unauthorized disclosure, to maintain the
confidentiality of the Confidential Information and refrain from
divulging, disclosing, or otherwise using in any respect the Confidential
Information to the detriment of the Company and any of its subsidiaries,
affiliates, successors or assigns, or for any other purpose or no purpose,
unless such disclosure is subject to a confidentiality agreement or such
Confidential Information is previously disclosed through no fault of
Executive or unless such Confidential Information is required to be
released by law.
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8. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. This Agreement shall be binding upon any
successor (whether direct or indirect and whether by purchase, lease,
merger, consolidation, liquidation or otherwise) to all or substantially
all of the Company's business and/or assets. For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets that becomes bound by this Agreement.
(e) EXECUTIVE'S SUCCESSORS. This Agreement and all rights of the
Executive hereunder shall inure to the benefit of, and be enforceable by,
the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
9. ARBITRATION.
(a) SCOPE OF ARBITRATION REQUIREMENT. The parties hereby waive their
rights to a trial before a judge or jury and agree to arbitrate before a
neutral arbitrator any and all claims or disputes arising out of this
Agreement and any and all claims arising from or relating to the
Executive's Employment, including (but not limited to) claims against any
current or former employee, director or agent of the Company, claims of
wrongful termination, retaliation, discrimination, harassment, breach of
contract, breach of the covenant of good faith and fair dealing,
defamation, invasion of privacy, fraud, misrepresentation, constructive
discharge or failure to provide a leave of absence, or claims regarding
commissions, stock options or bonuses, infliction of emotional distress or
unfair business practices.
(b) PROCEDURE. The arbitrator's decision shall be written and shall
include the findings of fact and law that support the decision. The
arbitrator's decision shall be final and binding on both parties, except
to the extent applicable law allows for judicial review of arbitration
awards. The arbitrator may award any remedies that would otherwise be
available to the parties if they were to bring the dispute in court. The
arbitration shall be conducted in accordance with the National Rules for
the Resolution of Employment Disputes of the American Arbitration
Association. The arbitration shall take place in Houston, Texas.
(c) COSTS. The parties shall share the costs of arbitration equally.
Both the Company and the Executive shall be responsible for their own
attorneys' fees. Notwithstanding the forgoing, the non-prevailing party
shall reimburse the prevailing party for arbitration costs and reasonable
attorney's fees.
(d) APPLICABILITY. This Section 9 shall not apply to (i) workers'
compensation or unemployment insurance claims or (ii) claims concerning
the validity, infringement or enforceability of any trade secret, patent
right, copyright or any other trade secret or Confidential Information
held or sought by either the Executive or the Company.
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10. MISCELLANEOUS PROVISIONS.
(a) NOTICE. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case
of the Executive, mailed notices shall be addressed to him at the home
address that he most recently communicated to the Company in writing. In
the case of the Company, mailed notices shall be addressed to its
corporate headquarters, and all notices shall be directed to the attention
of its Secretary.
(b) MODIFICATIONS AND WAIVERS. No provision of this Agreement shall
be modified, waived or discharged unless the modification, waiver or
discharge is agreed to in writing and signed by the Executive and by an
authorized officer of the Company (other than the Executive). No waiver by
either party of any breach of, or of compliance with, any condition or
provision of this Agreement by the other party shall be considered a
waiver of any other condition or provision or of the same condition or
provision at another time.
(c) WHOLE AGREEMENT. This Agreement supersedes any previous offer
letter or employment agreement. No other agreements, representations or
understandings (whether oral or written and whether express or implied)
which are not expressly set forth in this Agreement have been made or
entered into by either party with respect to the subject matter hereof.
This Agreement and the exhibits and agreements referenced herein contain
the entire understanding of the parties with respect to the subject matter
hereof.
(d) WITHHOLDING TAXES. All payments made under this Agreement shall
be subject to reduction to reflect taxes or other charges required to be
withheld by law.
(e) CHOICE OF LAW AND SEVERABILITY. This Agreement shall be
interpreted in accordance with the laws of the State of Texas (except
their provisions governing the choice of law). If any provision of this
Agreement becomes or is deemed invalid, illegal or unenforceable in any
applicable jurisdiction by reason of the scope, extent or duration of its
coverage, then such provision shall be deemed amended to the minimum
extent necessary to conform to applicable law so as to be valid and
enforceable or, if such provision cannot be so amended without materially
altering the intention of the parties, then such provision shall be
stricken and the remainder of this Agreement shall continue in full force
and effect. If any provision of this Agreement is rendered illegal by any
present or future statute, law, ordinance or regulation (collectively the
"Law"), then such provision shall be curtailed or limited only to the
minimum extent necessary to bring such provision into compliance with the
Law. All the other terms and provisions of this Agreement shall continue
in full force and effect without impairment or limitation.
(f) NO ASSIGNMENT. This Agreement and all rights and obligations of
the Executive hereunder are personal to the Executive and may not be
transferred or assigned by the Executive at any time. The Company may
assign its rights under this Agreement to any entity that assumes the
Company's obligations hereunder in connection with any sale or transfer of
all or a substantial portion of the Company's assets to such entity.
(g) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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(h) INDEMNIFICATION. As an officer of the Company, Executive will be
protected by the indemnification provisions of Article VIII of the
Company's Certificate of Incorporation. In addition, the Company has
purchased and currently maintains insurance protecting its officers and
directors against certain losses arising out of actual or threatened
actions, suits or proceedings to which such persons may be made or
threatened or be made parties ("D&O INSURANCE"). The Company covenants to
continue D&O Insurance coverage at current levels for the duration of
Executive's service and for two (2) years thereafter.
IN WITNESS WHEREOF, each of the parties has executed this employment
Agreement, in the case of the Company by its duly authorized officer, as of the
day and year first above written.
----------------------------
Sterling H. McDonald
NATURAL GAS SYSTEMS, INC.
------------------------------
By Robert S. Herlin
Title: CEO and President
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EXHIBIT A
STOCK OPTION PLAN
EXHIBIT B
STOCK OPTION AGREEMENT
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NATURAL GAS SYSTEMS, INC.
2004 STOCK PLAN
STOCK OPTION AGREEMENT
Name of Optionee: Sterling H. McDonald
Optioned Shares: 350,000 shares of common stock, $0.001 par
value, of Natural Gas Systems, Inc.
Type of Option: INCENTIVE STOCK OPTION
Exercise Price Per Share: $1.80
Option Grant Date: April 4, 2005
Vesting Commencement Date April 4, 2005
Date Option Becomes Exercisable: This Option may be exercised with respect to
an 1/16TH of the total Optioned Shares
subject to this option when the Optionee
completes each three months of continuous
employment starting from the Vesting
Commencement Date. This option may become
exercisable on an accelerated basis under
Section 8 of this Stock Option Agreement.
Expiration Date of Option: April 4, 2015 This Option expires earlier if
the Optionee's employment terminates
earlier, as provided in Section 11 of the
Plan.
This Stock Option Agreement (this "Agreement") is executed and
delivered as of April 4, 2005 by and between Natural Gas Systems, Inc., a Nevada
corporation (the "Company") and the Sterling H. McDonald. The Optionee and the
Company hereby agree as follows:
1. The Company, pursuant to the Natural Gas Systems, Inc. 2004 Stock Plan
(the "Plan"), which is incorporated herein by reference, and subject to
the terms and conditions thereof, hereby grants to the Optionee an
option to purchase the Optioned Shares at the Exercise Price Per Share.
2. The option granted hereby ("Option") shall be treated as an incentive
stock option under the Internal Revenue Code.
3. The Option granted hereby shall terminate, subject to the provisions of
the Plan, no later than at the close of business on the Expiration
Date.
4. The Optionee shall comply with and be bound by all the terms and
conditions contained in the Plan, as incorporated by reference herein.
5. Options granted hereby shall not be transferable except by will or the
laws of descent and distribution. During the lifetime of the Optionee,
the Option may be exercised only by the Optionee, the guardian or legal
representative of the Optionee.
6. The obligation of the Company to sell and deliver any stock under this
Option is specifically subject to all provisions of the Plan and all
applicable laws, rules, regulations and governmental and stockholder
approvals.
7. Any notice by the Optionee to the Company hereunder shall be in writing
and shall be deemed duly given only upon receipt thereof by the Company
at its principal offices. Any notice by the Company to the Optionee
shall be in writing and shall be deemed duly given if mailed to the
Optionee at the address last specified to the Company by the Optionee.
8. In addition to the change of control provisions specified under Section
14(e) of the Plan and the other conditions set forth in this Agreement,
the Company hereby agrees that all or part of this Option may be
exercised prior to its expiration at the time or times set forth below:
(a) If the Company is subject to a Change in Control (as
defined in below in this Agreement and not as defined in the Plan)
before the Optionee's employment terminates, this Option shall become
exercisable in full if and only if (i) this Option does not remain
outstanding following the Change in Control; (ii) this Option is not
assumed by the surviving corporation or its parent; (iii) the surviving
corporation or its parent does not substitute an option with
substantially the same terms for this Option; OR (iv) the full value of
the vested shares under this Option is not settled in cash or cash
equivalents.
(b) If the Option is not exercisable in full under Paragraph
(a) above, AND if the Optionee is subject to an Involuntary Termination
(defined below) within 12 months after the Change in Control, then this
Option shall become exercisable in full. However, in the case of an
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employee incentive stock option described in Section 422(b) of the
Code, the acceleration of exercisability shall not occur without the
Optionee's written consent.
(c) If the Option is not exercisable in full under Paragraph
(a) above, AND if the Company is subject to a Change of Control, then
fifty percent (50%) of the remaining options shall become exercisable
in full, and the remaining options shall become exercisable at the rate
set forth herein, reduced by the accelerated Optioned Shares. All other
terms and conditions shall remain unchanged.
(d) Definitions:
(i) "Change in Control" shall mean: (1)The
consummation of a merger or consolidation of the Company with
or into another entity or any other corporate reorganization,
if persons who were not controlling stockholders of the
Company immediately prior to such merger, consolidation or
other reorganization own immediately after such merger,
consolidation or other reorganization 50% or more of the
voting power of the outstanding securities of each of (A) the
continuing or surviving entity and (B) any direct or indirect
parent corporation of such continuing or surviving entity; OR
(2) The sale, transfer or other disposition of all or
substantially all of the Company's assets.
A transaction shall not constitute a Change in Control if its
sole purpose is to change the state of the Company's
incorporation or to create a holding company that will be
owned in substantially the same proportions by the persons who
held the Company's securities immediately before such
transaction.
(ii) "Involuntary Termination" shall mean the
termination of the Optionee's employment by reason of: (1) The
involuntary discharge of the Optionee by the Company for reasons other
than Cause (as defined in Optionee's employment agreement with the
Company, of even date herewith); or (2) The voluntary resignation of
the Optionee following a reduction in the Optionee's base salary, a
substantial reduction of the responsibilities, authority or scope of
work of Executive, or receipt of notice that the Optionee's principal
workplace will be relocated more than 20 miles.
9. The validity and construction of this Agreement shall be governed by the laws
of the State of Nevada.
THIS AGREEMENT IS MADE UNDER AND SUBJECT TO THE PROVISIONS OF THE PLAN, AND ALL
OF THE PROVISIONS OF THE PLAN ARE ALSO PROVISIONS OF THIS AGREEMENT. IF THERE IS
A DIFFERENCE OR CONFLICT BETWEEN THE PROVISIONS OF THIS AGREEMENT AND THE
PROVISIONS OF THE PLAN, THE PROVISIONS OF THE PLAN WILL GOVERN; PROVIDED,
HOWEVER, THE THE ACCELERATION OF THE OPTIONED SHARES DESCRIBED IN SECTION 8
ABOVE SHALL GOVERN IN THE EVENT OF ANY CONFLICT WITH THE PLAN. BY SIGNING THIS
AGREEMENT, THE OPTIONEE ACCEPTS AND AGREES TO ALL OF THE FOREGOING TERMS AND
PROVISIONS AND TO ALL OF THE TERMS AND PROVISIONS OF THE PLAN INCORPORATED
HEREIN BY REFERENCE AND CONFIRMS THAT HE OR SHE HAS RECEIVED A COPY OF THE PLAN.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by a duly authorized representative and the Optionee has hereunto set
his hand as of the date here above first written.
NATURAL GAS SYSTEMS, INC.:
By:
-----------------------------
Name: Robert S. Herlin
Title: President
---------------------------------
Optionee: Sterling H. McDonald
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