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: May 11, 2005
Date of Earliest Event Reported: May 6, 2005
NATURAL GAS SYSTEMS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Nevada
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(State or Other Jurisdiction of Incorporation)
0-27862 41-1781991
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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)).
Item 1.01 Entry Into a Material Definitive Agreement
Securities Purchase Agreement
On May 6, 2005, Natural Gas Systems, Inc., a Nevada corporation (the "Company"),
entered into a Securities Purchase Agreement (the "Securities Purchase
Agreement") pursuant to which it raised $3.0 million of gross proceeds through
the sale of 1,200,000 shares of the Company's Common Stock to Rubicon Master
Fund ("Rubicon"), at a purchase price of $2.50 per share. Pursuant to an
agreement with Chadbourn Securities, Inc., an NASD broker/dealer ("Chadbourn"),
the Company paid a cash fee of $12,000 and $228,000, respectively, to Chadbourn
and the Company's Chairman, Laird Q. Cagan (in his capacity as a registered
representative of Chadbourn). In addition, the Company issued Chadbourn and Mr.
Cagan seven-year warrants to acquire up to 4,800 and 91,200 shares,
respectively, of the Company's common stock, at an exercise price of $2.50
share. The Company intends to use the net proceeds of this private placement for
acquisitions, capital expenditures, and general working capital purposes.
Registration Rights Agreement
In connection with the issuance of the shares of Common Stock, on May 6, 2005,
the Company entered into a Registration Rights Agreement with Rubicon (the
"Registration Rights Agreement"), wherein it agreed to file a registration
statement to register the shares of Common Stock purchased by Rubicon no later
than June 6, 2005. The Company also agreed to pay the expenses of such
registration, other than underwriting discounts and commissions.
Copies of the Securities Purchase Agreement and Registration Rights Agreement
are attached hereto as Exhibits 10.1 and 10.2, 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 Securities
Purchase Agreement and Registration Rights Agreement.
On May 9, 2005, the Company issued a press release announcing this private
placement of securities. The full text of such press release is attached hereto
as Exhibit 99.1.
Amendment to Consulting Agreement
On May 5, 2005, the Company amended its Consulting Agreement (the "Amendment")
with Liviakis Financial Communications, Inc. ("Liviakis"), the Company's
investor relations firm. Before the Amendment, the Consulting Agreement had
recently expired. Under the terms of the Amendment, Liviakis has agreed to
provide the Company with investor relations and consulting services for an
additional one year term, in exchange for the issuance to Liviakis of 120,000
restricted shares of Common Stock of the Company under the Company's 2004 Stock
Plan (the "Stock Grant Agreement"), at a purchase price of $0.001 per share, and
a monthly service fee of $5,000. The shares of restricted Common Stock issued to
Liviakis are subject to monthly vesting over the first 12 months following
issuance.
A copy of the Amendment and Stock Grant Agreement are attached hereto as
Exhibits 10.3 and 10.4, respectively and are incorporated herein by reference.
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The foregoing summary does not purport to be complete and is qualified in its
entirety by reference to the Amendment and Stock Grant Agreement.
Item 3.02. Unregistered Sales of Equity Securities.
See Item 1.01.
The Company issued and sold the shares of Common Stock 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.
(c) Exhibits
Exhibit No. Description
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10.1 Securities Purchase Agreement dated as of May 6, 2005, by and between Natural Gas
Systems, Inc. and Rubicon Master Fund
10.2 Registration Rights Agreement dated as of May 6, 2005, by and between Natural Gas
Systems, Inc. and Rubicon Master Fund
10.3 Amendment to Consulting Agreement, dated as of May 4, 2005, by and between Natural Gas
Systems, Inc., and Liviakis Financial Communications, Inc.
10.4 Stock Grant Agreement, dated as of May 4, 2005, by and between Natural Gas Systems,
Inc. and Liviakis Financial Communications, Inc.
99.1 Press Release issued by the Company on May 9, 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: May 10, 2005 By: /s/ Robert Herlin
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Robert Herlin, Chief Executive Officer
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EXHIBIT INDEX
Exhibit No. Description
10.1 Securities Purchase Agreement dated as of May 6, 2005, by and between
Natural Gas Systems, Inc. and Rubicon Master Fund
10.2 Registration Rights Agreement dated as of May 6 2005, by and between Natural
Gas Systems, Inc. and Rubicon Master Fund
10.3 Amendment to Consulting Agreement, dated as of May 4, 2005, by and between
Natural Gas Systems, Inc., and Liviakis Financial Communications, Inc
10.4 Stock Grant Agreement, dated as of May 4, 2005, by and between Natural Gas
Systems, Inc. and Liviakis Financial Communications, Inc.
99.1 Press Release issued by the Company on May 9, 2005
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SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of May 6, 2005,
by and among NATURAL GAS SYSTEMS, INC., a Nevada corporation (the "Company"),
and Rubicon Master Fund, a company organized under the laws of the Cayman
Islands (the "Buyer").
WHEREAS:
A. The Company and the Buyer are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by Section
4(2) of the Securities Act of 1933, as amended (the "1933 Act"), and Rule 506 of
Regulation D ("Regulation D") as promulgated by the United States Securities and
Exchange Commission (the "SEC") under the 1933 Act.
B. The Buyer wishes to purchase, and the Company wishes to sell, upon the
terms and conditions stated in this Agreement, One Million Two Hundred Thousand
(1.2 million) shares of common stock, $0.001 par value (the "Common Stock"), of
the Company (collectively, the "Securities").
C. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
substantially in the form attached hereto as Exhibit A (as amended or modified
from time to time, the "Registration Rights Agreement"), pursuant to which the
Company has agreed to provide certain registration rights with respect to the
Securities under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
NOW, THEREFORE, the Company and the Buyer hereby agree as follows:
1. PURCHASE AND SALE OF SECURITIES.
(a) Purchase of Securities.
(i) Subject to the satisfaction (or waiver) of the conditions
set forth in Sections 6 and 7 below, the Company shall issue and sell to the
Buyer, and the Buyer agrees to purchase the Securities from the Company on the
Closing Date (the "Closing").
(ii) Closing. The date and time of the Closing (the "Closing
Date") shall be 10:00 a.m., New York City time, on the date hereof (or such
later date as is mutually agreed to by the Company and the Buyer) after
notification of satisfaction (or waiver) of the conditions to the Closing set
forth in Sections 6 and 7 below at the offices of Schulte Roth & Zabel LLP, 919
Third Avenue, New York, New York 10022.
(iii) Purchase Price. The aggregate purchase price for the
Securities to be purchased by the Buyer at the Closing (the "Purchase Price")
shall be US$3,000,000.
(b) Form of Payment. On the Closing Date, (i) the Buyer shall pay
its Purchase Price to the Company for the Securities to be issued and sold to
the Buyer at the Closing, by wire transfer of immediately available funds in
accordance with the Company's written wire instructions, and (ii) the Company
shall deliver to the Buyer certificates with respect to the Securities which the
Buyer is then purchasing issued in the name of the Buyer or its lawful designee.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
The Buyer represents and warrants that:
(a) No Public Sale or Distribution. The Buyer is (i) acquiring the
Securities for its own account and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the 1933 Act; provided, however, that by
making the representations herein, the Buyer does not agree to hold any of the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act. The Buyer is
acquiring the Securities hereunder in the ordinary course of its business. The
Buyer does not presently have any agreement or understanding, directly or
indirectly, with any Person to distribute any of the Securities.
(b) Accredited Investor Status. The Buyer is an "accredited
investor" as that term is defined in Rule 501(a) of Regulation D.
(c) Reliance on Exemptions. The Buyer understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
the Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of the Buyer
to acquire the Securities.
(d) Information. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
that have been requested by the Buyer. The Buyer and its advisors, if any, have
been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by the Buyer or
its advisors, if any, or its representatives shall modify, amend or affect the
Buyer's right to rely on the Company's representations and warranties contained
herein. The Buyer understands that its investment in the Securities involves a
high degree of risk. The Buyer has sought such accounting, legal and tax advice
as it has considered necessary to make an informed investment decision with
respect to its acquisition of the Securities. Buyer has made the decision to
invest in the Securities solely on the basis of publicly available information
about the Company in the Company's filings with the Securities and Exchange
Commission (the "Public Information"). Buyer acknowledges that no officer,
director, broker-dealer, placement agent, finder or other person affiliated with
the Company has given Buyer any information or made any representations, oral or
written, other than as provided in the Public Information, on which Buyer has
exclusively relied upon in deciding to invest in the Securities, including
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without limitation, any information with respect to future operations of the
Company or the economic returns which may accrue as a result of the purchase of
the Securities.
(e) No Governmental Review. The Buyer understands that no United
States, federal, state or province agency or any other government or
governmental agency has passed on or made any recommendation or endorsement of
the Securities or the fairness or suitability of the investment in the
Securities nor have such authorities passed upon or endorsed the merits of the
offering of the Securities.
(f) Transfer or Resale. The Buyer understands that except as
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws,
and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) the Buyer shall have delivered to the
Company an opinion of counsel selected by the Buyer, in a generally acceptable
form, to the effect that such Securities to be sold, assigned or transferred may
be sold, assigned or transferred pursuant to an exemption from such
registration, or (C) the Buyer provides the Company with reasonable assurance
(including if reasonably requested by the Company, a legal opinion) that such
Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule
144A promulgated under the 1933 Act, as amended, (or a successor rule thereto)
(collectively, "Rule 144"); (ii) any sale of the Securities made in reliance on
Rule 144 may be made only in accordance with the terms of Rule 144 and further,
if Rule 144 is not applicable, any resale of the Securities under circumstances
in which the seller (or the Person (as defined in Section 3(s)) through whom the
sale is made) may be deemed to be an underwriter (as that term is defined in the
1933 Act) may require compliance with some other exemption under the 1933 Act or
the rules and regulations of the SEC thereunder; and (iii) neither the Company
nor any other Person is under any obligation to register the Securities under
the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder.
(g) Legends. The Buyer understands that until such time as the
resale of the Securities have been registered under the 1933 Act as contemplated
by the Registration Rights Agreement, the stock certificates representing the
Securities, except as set forth below, shall bear any legend as required by the
"blue sky" laws of any state and a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of such
stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL
SELECTED BY THE HOLDER, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR THAT THE SECURITIES
MAY BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
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SUBJECT TO APPLICABLE FEDERAL AND STATE SECURITIES LAWS, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act, (ii) in connection with
a sale, assignment or other transfer, such holder provides the Company with an
opinion of counsel, in a generally acceptable form, to the effect that such
sale, assignment or transfer of the Securities may be made without registration
under the applicable requirements of the 1933 Act, or (iii) such holder provides
the Company with reasonable assurance (including if reasonably requested by the
Company, a legal opinion) that the Securities can be sold, assigned or
transferred pursuant to Rule 144 or Rule 144A.
(h) Authorization; Validity; Enforcement. This Agreement and the
Registration Rights Agreement to which the Buyer is a party have been duly and
validly authorized, executed and delivered on behalf of the Buyer and shall
constitute the legal, valid and binding obligations of the Buyer enforceable
against the Buyer in accordance with their respective terms, except as such
enforceability may be limited by general principles of equity or to applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation and other
similar laws relating to, or affecting generally, the enforcement of applicable
creditors' rights and remedies.
(i) Residency. The Buyer is a resident of the Cayman Islands.
(j) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Buyer and the consummation by the Buyer of the
transactions contemplated hereby and thereby (including, without limitation, the
purchase of the Securities) will not result in a violation of any constituent
document of the Buyer or any of its subsidiaries,
(k) Prohibited Transactions. Prior to the earlier of (i) the time
that the press release referred to in Section 4(i) hereof has been issued and
(ii) the fifth Business Day following the Closing Date, neither Buyer nor its
affiliates will engage, directly or indirectly, effect or agree to effect any
short sale, whether or not against the box, establish any "put equivalent
position" (as defined in Rule 16a-1(h) under the 1934 Act) with respect to the
Common Stock, grant any other right (including, without limitation, any put or
call option) with respect to the Common Stock or with respect to any security
that includes, relates to or derived any significant part of its value from the
Common Stock or otherwise seek to hedge its position in the Securities.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Buyer that:
(a) Organization and Qualification. The Company and its
"Subsidiaries" (which for purposes of this Agreement means any entity in which
the Company, directly or indirectly, owns a controlling interest of capital
stock or holds an equity or similar interest) are entities duly organized and
validly existing in good standing under the laws of the jurisdiction in which
they are formed, and have the requisite power and authorization to own their
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properties and to carry on their business as now being conducted. Each of the
Company and its Subsidiaries is duly qualified as a foreign entity to do
business and is in good standing in every jurisdiction in which its ownership of
property or the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect. As used in this
Agreement, "Material Adverse Effect" means any material adverse effect on the
business, properties, assets, operations, results of operations, or condition
(financial or otherwise) of the Company and its Subsidiaries, taken as a whole,
or on the transactions contemplated hereby and the other Transaction Documents
(as defined below) or by the agreements and instruments to be entered into in
connection herewith or therewith, or on the authority or ability of the Company
to perform its obligations under the Transaction Documents. The Company has no
Subsidiaries except as set forth on Schedule 3(a).
(b) Authorization; Enforcement; Validity. The Company has the
requisite power and authority to enter into and perform its obligations under
this Agreement, the Registration Rights Agreement, and each of the other
agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the "Transaction
Documents") and to issue the Securities in accordance with the terms hereof and
thereof. The execution and delivery of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated hereby and
thereby, including, without limitation, the issuance of the Securities, have
been duly authorized by the Company's Board of Directors and (other than
securities filings, including the filing with the SEC of one or more
Registration Statements in accordance with the requirements of the Registration
Rights Agreement) no further filing, consent, or authorization is required by
the Company, its Board of Directors or its stockholders. This Agreement and the
other Transaction Documents have been duly executed and delivered by the
Company, and constitute the legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of applicable
creditors' rights and remedies.
(c) Issuance of Securities. The issuance of the Securities are duly
authorized and are free from all taxes, liens and charges with respect to the
issue thereof. The offer and issuance by the Company of the Securities is exempt
from registration under the 1933 Act.
(d) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation, the
issuance of the Securities) will not (i) result in a violation of any
certificate of incorporation, certificate of formation, any certificate of
designations or other constituent documents of the Company or any of its
Subsidiaries, any capital stock of the Company or any of its Subsidiaries or
bylaws of the Company or any of its Subsidiaries or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment or decree
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(including federal and state securities laws and regulations and the rules and
regulations of the OTC Bulletin Board or "pink sheets" (the "Principal Market"))
applicable to the Company or any of its Subsidiaries or by which any property or
asset of the Company or any of its Subsidiaries is bound or affected, in each
case as would not have a Material Adverse Effect.
(e) Consents. The Company is not required to obtain any consent,
authorization or order of, or make any filing (other than securities filings,
including filing with the SEC of one or more Registration Statements in
accordance with the requirements of the Registration Rights Agreement) or
registration with, any court, governmental agency or any regulatory or
self-regulatory agency or any other Person in order for it to execute, deliver
or perform any of its obligations under or contemplated by the Transaction
Documents, in each case in accordance with the terms hereof or thereof. All
consents, authorizations, orders, filings and registrations which the Company is
required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the Closing Date, and the Company and its Subsidiaries
are unaware of any facts or circumstances which might prevent the Company from
obtaining or effecting any of the registration, application or filings pursuant
to the preceding sentence. The Company is not in violation of the listing
requirements of the Principal Market and has no knowledge of any facts that
would reasonably lead to delisting or suspension of the Common Stock in the
foreseeable future.
(f) Acknowledgment Regarding Buyer's Purchase of Securities. The
Company acknowledges and agrees that the Buyer is acting solely in the capacity
of arm's length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an officer
or director of the Company, (ii) an "affiliate" of the Company (as defined in
Rule 144) or (iii) to the knowledge of the Company, a "beneficial owner" of more
than 10% of the shares of Common Stock (as defined for purposes of Rule 13d-3 of
the Securities Exchange Act of 1934, as amended (the "1934 Act")). The Company
further acknowledges that no Buyer is acting as a financial advisor or fiduciary
of the Company (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated hereby and thereby, and any advice
given by a Buyer or any of its representatives or agents in connection with the
Transaction Documents and the transactions contemplated hereby and thereby is
merely incidental to the Buyer's purchase of the Securities. The Company further
represents to the Buyer that the decision of the Company and each of the
Subsidiaries to enter into the Transaction Documents, as applicable, has been
based solely on the independent evaluation by the Company, its Subsidiaries and
their representatives.
(g) No General Solicitation; Placement Agent's Fees. Neither the
Company, nor any of its affiliates, nor any Person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D) in connection with the offer or sale of the
Securities. The Company shall be responsible for the payment of any placement
agent's fees, financial advisory fees, or brokers' commissions (other than for
persons engaged by the Buyer or its investment advisor) relating to or arising
out of the transactions contemplated hereby. The Company shall pay, and hold the
Buyer harmless against, any liability, loss or expense (including, without
limitation, reasonable attorney's fees and out-of-pocket expenses) arising in
connection with any such claim.
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(h) No Integrated Offering. None of the Company, its Subsidiaries,
any of their affiliates, and any Person acting on their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act (other than as disclosed in Schedule 3(r)
hereto) or cause this offering of the Securities to be integrated with prior
offerings by the Company for purposes of the 1933 Act or any applicable
stockholder approval provisions, including, without limitation, under the rules
and regulations of any exchange or automated quotation system on which any of
the securities of the Company are listed or designated.
(i) Application of Takeover Protections; Rights Agreement. The
Company and its board of directors have taken all necessary action, if any, in
order to render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or other similar anti-takeover provision under the Certificate of Incorporation
or the laws of the jurisdiction of its formation or otherwise which is or could
become applicable to the Buyer as a result of the transactions contemplated by
this Agreement, including, without limitation, the Company's issuance of the
Securities and the Buyer's ownership of the Securities. The Company has not
adopted a stockholder rights plan or similar arrangement relating to
accumulations of beneficial ownership of Common Stock or a change in control of
the Company.
(j) [Intentionally omitted]
(k) SEC Documents; Financial Statements. Other than as disclosed on
Schedule 3(k) hereto, since May 26, 2004 , the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the 1934 Act and no such
disclosure has been made on a confidential basis that remains subject to
confidentiality (all of the foregoing filed prior to the date hereof and all
exhibits included therein and financial statements, notes and schedules thereto
and documents incorporated by reference therein being hereinafter referred to as
the "SEC Documents"). The Company has delivered to the Buyer or its respective
representatives true, correct and complete copies of the SEC Documents not
available on the EDGAR systems. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the 1934 Act and the
rules and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with the
SEC contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
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(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided in writing by or on behalf of the
Company to the Buyer which is not included in the SEC Documents, including,
without limitation, information referred to in Section 2(d) of this Agreement,
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstance under which they are or were made, not misleading.
(l) Absence of Certain Changes. Except as disclosed in Schedule
3(l), since December 31, 2004, there has been no material adverse change and no
material adverse development in the business, properties, operations, condition
(financial or otherwise) or results of operations of the Company or its
Subsidiaries, taken as whole, other than continuing losses. Since December 31,
2004, except as disclosed on Exhibit 3(l), the Company has not (i) declared or
paid any dividends, (ii) sold any assets, individually or in the aggregate, in
excess of $100,000 outside of the ordinary course of business, (iii) had capital
expenditures, individually, in excess of $50,000 or (iv) waived any material
rights with respect to any Indebtedness or other rights in excess of $100,000
owed to it. The Company has not taken any steps to seek protection pursuant to
any bankruptcy law nor does the Company have any knowledge that its creditors
intend to initiate involuntary bankruptcy proceedings or any actual knowledge of
any fact that would reasonably lead a creditor to do so. The Company is not as
of the date hereof, and after giving effect to the transaction contemplated
hereby, will not be, Insolvent. "Insolvent" is defined to be the condition
wherein (A) the sum of (1) current assets, (2) tangible net assets other than
oil and gas reserves, (3) other tangible or financial assets, (4) book value of
nonproved oil and gas properties, and (5) the net present value at a ten percent
discount rate of the future pretax cash flows from the proved reserves of the
Company as determined under SEC rules; is less than the sum of (6) current
liabilities, (7) long term debt, (8) future obligations under capitalized
leases, and (9) other obligations such as indebtedness for borrowed money,
deferred purchase prices, letters of credit and the like net of set aside funds
and direct contingent obligations (without duplication); or (B) the Company is
unable to pay its uncontested debts and liabilities within thirty days of the
time that they come absolute and matured in a material amount.
(m) No Undisclosed Events, Liabilities, Developments or
Circumstances. As of the date hereof, no material event, liability, development
or circumstance has occurred or exists, or is reasonably expected to occur with
respect to the Company or its Subsidiaries or their respective business,
properties, prospects, operations or financial condition, that would be required
to be disclosed by the Company under applicable securities laws on a
registration statement on Form SB-2 filed with the SEC relating to an issuance
and sale by the Company of its Common Stock and which has not been publicly
announced, except as disclosed in Schedule 3(l) hereto.
(n) Conduct of Business; Regulatory Permits. Neither the Company nor
its Subsidiaries is in violation of any term of or in default under its
Certificate of Incorporation or Bylaws or their organizational charter or
certificate of incorporation or bylaws, respectively. Neither the Company nor
any of its Subsidiaries is in violation of any judgment, decree or order or any
statute, ordinance, rule or regulation applicable to the Company or its
Subsidiaries, and neither the Company nor any of its Subsidiaries will conduct
its business in violation of any of the foregoing, except for possible
violations which would not, individually or in the aggregate, have a Material
Adverse Effect. Without limiting the generality of the foregoing, the Company is
not in violation of any of the rules, regulations or requirements of the
Principal Market and has no knowledge of any facts or circumstances that would
8
reasonably lead to delisting or suspension of the Common Stock by the Principal
Market in the foreseeable future. Since December 31, 2004, (i) the Common Stock
has been designated for quotation on the Principal Market, (ii) trading in the
Common Stock has not been suspended by the SEC, the Principal Market and (iii)
the Company has received no communication, written or oral, from the SEC, the
Principal Market regarding the suspension or delisting of the Common Stock from
the Principal Market. The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate regulatory authorities
necessary to conduct their respective businesses, except where the failure to
possess such certificates, authorizations or permits would not have,
individually or in the aggregate, a Material Adverse Effect, and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.
(o) Foreign Corrupt Practices. Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other Person acting
on behalf of the Company or any of its Subsidiaries has, in the course of its
actions for, or on behalf of, the Company (i) used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; (ii) made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds; (iii)
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate,
payoff, influence payment, kickback or other unlawful payment to any foreign or
domestic government official or employee.
(p) Sarbanes-Oxley Act.
(i) The Company is in compliance with any and all applicable
requirements of the Sarbanes-Oxley Act of 2002 that are effective for the
Company as of the date hereof, and any and all applicable rules and regulations
promulgated by the SEC thereunder that are effective for the Company as of the
date hereof, except where such noncompliance would not have, individually or in
the aggregate, a Material Adverse Effect.
(ii) Neither the chief executive officer nor the chief
financial officer of the Company shall have failed to provide, with respect to
any SEC Document filed (or required to be filed) with the SEC on or after the
date of this Agreement, any necessary certification in the form required under
(i) Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Exchange Act, as
applicable, and (ii) Rule 13a-14(b) promulgated under the Exchange Act and 18
U.S.C. ss. 1350.
(iii) The Company expects to implement such programs and shall
take such steps reasonably necessary to provide for its future compliance (not
later than the relevant statutory and regulatory deadline therefore) with all
provisions of Section 404 of the Sarbanes-Oxley Act that shall become applicable
to the Company and has not received, orally or in writing, any notification that
its auditors believe that management will not likely be able to complete its
assessment before the applicable reporting deadline, or if completed, that it
will not likely be completed in sufficient time for the auditor to complete its
assessment.
(q) Transactions With Affiliates. Other than as disclosed on
Schedule 3(r) or Schedule 3(q), none of the officers, directors or employees of
the Company is presently a party to any transaction with the Company or any of
its Subsidiaries (other than for ordinary course services as employees, officers
9
or directors), including any contract, agreement or other arrangement providing
for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise requiring payments to or from any
such officer, director or employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any such officer,
director, or employee has a substantial interest or is an officer, director,
trustee or partner.
(r) Equity Capitalization. As of the date hereof, the authorized
capital stock of the Company consists of (i) 100,000,000 shares of Common Stock,
of which as of the date hereof, 23,549,606 are issued and outstanding, 4,000,000
shares are reserved for issuance pursuant to the Company's stock option and
purchase plans and 1,932,467 shares are reserved for issuance pursuant to
securities (other than the Securities and stock options) exercisable or
exchangeable for, or convertible into, shares of Common Stock and (ii) 5,000,000
shares of preferred stock, $0.001 par value, of which as of the date hereof none
of which is issued and outstanding or reserved for issuance. All of such
outstanding shares have been, or upon issuance will be, validly issued and are
fully paid and nonassessable. Except as disclosed in Schedule 3(r): (i) none of
the Company's share capital is subject to preemptive rights or any other similar
rights or any liens or encumbrances suffered or permitted by the Company; (ii)
there are no outstanding options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any share capital of the
Company or any of its Subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional share capital of the Company or any of its
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any share capital of the
Company or any of its Subsidiaries; (iii) there are no outstanding debt
securities, notes, credit agreements, credit facilities or other agreements,
documents or instruments evidencing Indebtedness (as defined in Section 3(s)) of
the Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may become bound; (iv) there are no financing statements
securing obligations in any material amounts, either singly or in the aggregate,
filed in connection with the Company; (v) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except the
Registration Rights Agreement); (vi) there are no outstanding securities or
instruments of the Company or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem a security of the Company or any of its
Subsidiaries; (vii) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (viii) the Company does not have any stock appreciation rights
or "phantom stock" plans or agreements or any similar plan or agreement; and
(ix) the Company and its Subsidiaries have no liabilities or obligations
required to be disclosed in the SEC Documents but not so disclosed in the SEC
Documents, other than those incurred in the ordinary course of the Company's or
its Subsidiaries' respective businesses and which, individually or in the
aggregate, do not or would not have a Material Adverse Effect. The Company has
furnished to the Buyer true, correct and complete copies of the Company's
Certificate of Incorporation, as amended and as in effect on the date hereof
10
(the "Certificate of Incorporation"), and the Company's Bylaws, as amended and
as in effect on the date hereof (the "Bylaws"), and the terms of all securities
convertible into, or exercisable or exchangeable for, shares of Common Stock and
the material rights of the holders thereof in respect thereto.
(s) Indebtedness and Other Contracts. Except as disclosed in
Schedule 3(s) and except for trade debt incurred in the ordinary course of
business, neither the Company nor any of its Subsidiaries (i) has any
outstanding Indebtedness (as defined below), (ii) is a party to any contract,
agreement or instrument, the violation of which, or default under which, by the
other party(ies) to such contract, agreement or instrument would result in a
Material Adverse Effect, (iii) is in violation of any term of or in default
under any contract, agreement or instrument relating to any Indebtedness, except
where such violations and defaults would not result, individually or in the
aggregate, in a Material Adverse Effect, or (iv) is a party to any contract,
agreement or instrument relating to any Indebtedness, the performance of which,
in the judgment of the Company's officers, has or is expected to have a Material
Adverse Effect. Schedule 3(s) provides a description of the material terms of
any such outstanding Indebtedness. For purposes of this Agreement: (x)
"Indebtedness" of any Person means, without duplication (A) all indebtedness for
borrowed money, (B) all obligations issued, undertaken or assumed as the
deferred purchase price of property or services including, without limitation,
"capital leases" in accordance with U.S. generally accepted accounting
principals (other than trade payables entered into in the ordinary course of
business), (C) all reimbursement or payment obligations with respect to letters
of credit, surety bonds and other similar instruments, (D) all obligations
evidenced by notes, bonds, debentures or similar instruments, including
obligations so evidenced incurred in connection with the acquisition of
property, assets or businesses, (E) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (F) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (G) all indebtedness referred to in clauses (A)
through (F) above secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, and (H) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (A) through (G) above, provided that such amounts in (A)
through (G) collectively exceed $100,000 (y) "Contingent Obligation" means, as
to any Person, any direct or indirect liability, contingent or otherwise, of
that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance
to the obligee of such liability that such liability will be paid or discharged,
or that any agreements relating thereto will be complied with, or that the
holders of such liability will be protected (in whole or in part) against loss
with respect thereto; and (z) "Person" means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.
(t) Absence of Litigation. There is no action, suit, proceeding,
inquiry or investigation before or by the Principal Market, any court, public
11
board, government agency, self-regulatory organization or body pending or, to
the knowledge of the Company, threatened against or affecting the Company, the
Common Stock or any of the Company's Subsidiaries or any of the Company's or the
Company's Subsidiaries' officers or directors, except as would not have a
Material Adverse Effect.
(u) Insurance. The Company and each of its Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its Subsidiaries are
engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect.
(v) Employee Relations. (i) Neither the Company nor any of its
Subsidiaries is a party to any collective bargaining agreement or employs any
member of a union. The Company and its Subsidiaries believe that their relations
with their employees are good. No executive officer of the Company (as defined
in Rule 501(f) of the 1933 Act) has notified the Company that such officer
intends to leave the Company or otherwise terminate such officer's employment
with the Company. No executive officer of the Company, to the knowledge of the
Company, is in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant to which the Company is a party, and the continued employment of each
such executive officer does not subject the Company or any of its Subsidiaries
to any liability with respect to any of the foregoing matters.
(ii) The Company and its Subsidiaries are in compliance with
all federal, state, local and foreign laws and regulations respecting labor,
employment and employment practices and benefits, terms and conditions of
employment and wages and hours, except where failure to be in compliance would
not, either individually or in the aggregate, reasonably be expected to result
in a Material Adverse Effect.
(w) Title. The Company and its Subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as do not materially affect the value of such property and
do not materially interfere with the use made and proposed to be made of such
property by the Company and any of its Subsidiaries, or as disclosed on Schedule
3(w) or Schedule 3(s). Any real property and facilities held under lease by the
Company and any of its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
materially interfere with the use made and proposed to be made of such property
and buildings by the Company and its Subsidiaries.
(x) Intellectual Property Rights. The Company and its Subsidiaries
own or possess adequate rights or licenses to use all trademarks, service marks,
and all applications and registrations therefor, trade names, patents, patent
rights, copyrights, original works of authorship, inventions, licenses,
12
approvals, governmental authorizations, trade secrets and other intellectual
property rights ("Intellectual Property Rights") necessary to conduct their
respective businesses as now conducted. Except as set forth in Schedule 3(x),
none of the Company's Intellectual Property Rights have expired or terminated,
or are expected to expire or terminate, within three years from the date of this
Agreement. The Company does not have any knowledge of any material infringement
by the Company or its Subsidiaries of Intellectual Property Rights of others.
There is no claim, action or proceeding being made or brought, or to the
knowledge of the Company, being threatened, against the Company or its
Subsidiaries regarding its Intellectual Property Rights, except as would have a
Material Adverse Effect. The Company is unaware of any facts or circumstances
that would reasonably be expected to give rise to any of the foregoing
infringements or claims, actions or proceedings. The Company and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their Intellectual Property Rights.
(y) Environmental Laws. The Company and its Subsidiaries (i) are in
compliance with any and all Environmental Laws (as hereinafter defined), (ii)
have received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit, license or
approval where, in each of the foregoing clauses (i), (ii) and (iii), the
failure to so comply could be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect. The term "Environmental Laws" means
all federal, state, local or foreign laws relating to pollution or protection of
human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata), including,
without limitation, laws relating to emissions, discharges, releases or
threatened releases of chemicals, pollutants, contaminants, or toxic or
hazardous substances or wastes (collectively, "Hazardous Materials") into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials,
as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.
(z) Subsidiary Rights. Except as set forth in Schedule 3(w), the
Company or one of its Subsidiaries has the unrestricted right to vote, and
(subject to limitations imposed by applicable law) to receive dividends and
distributions on, all capital securities of its Subsidiaries as owned by the
Company or such Subsidiary.
(aa) Tax Status. The Company and each of its Subsidiaries (i) has
made or filed all foreign, federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject,
(ii) has paid all taxes and other governmental assessments and charges that are
material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside
on its books provision reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. There are no unpaid taxes in any material amount claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Company know of no
basis for any such claim. No liens have been filed and no material claims are
being asserted by or against the Company or any of its Subsidiaries with respect
to any taxes (other than liens for taxes not yet due and payable). Neither the
Company nor it Subsidiaries has received notice of assessment or proposed
assessment of any material amount of taxes claimed to be owed by it or any other
13
Person on its behalf. Neither the Company nor its Subsidiaries is a party to any
tax sharing or tax indemnity agreement or any other agreement of a similar
nature that remains in effect. Each of the Company and its Subsidiaries has
complied in all material respects with all applicable legal requirements
relating to the payment and withholding of taxes and, within the time and in the
manner prescribed by law, has withheld from wages, fees and other payments and
paid over to the proper governmental or regulatory authorities all amounts
required.
(bb) Internal Accounting Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
and liability accountability, (iii) access to assets or incurrence of
liabilities is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference.
(cc) Form SB-2 Eligibility. The Company is eligible to register the
Securities for resale by the Buyer using Form SB-2 promulgated under the 1933
Act.
(dd) Manipulation of Price. The Company has not, and to its
knowledge no one acting on its behalf has, (i) taken, directly or indirectly,
any action designed to cause or to result in the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
any of the Securities, or (ii) sold, bid for, purchased, or paid any
compensation for soliciting purchases of, any of the Securities.
(ee) Acknowledgement Regarding Buyer's Trading Activity. Anything in
this Agreement or elsewhere herein to the contrary notwithstanding, but subject
to compliance by the Buyer with applicable law, it is understood and
acknowledged by the Company (i) that the Buyer has not been asked to agree, nor
has the Buyer agreed, to desist from purchasing or selling, long and/or short,
securities of the Company, or "derivative" securities based on securities issued
by the Company or to hold the Securities for any specified term; (ii) that past
or future open market or other transactions by the Buyer, including, without
limitation, short sales or "derivative" transactions, before or after the
closing of this or future private placement transactions, may negatively impact
the market price of the Company's publicly-traded securities; (iii) that the
Buyer, and counter parties in "derivative" transactions to which the Buyer is a
party, directly or indirectly, presently may have a "short" position in the
Common Stock, and (iv) that the Buyer shall not be deemed to have any
affiliation with or control over any arm's length counter-party in any
"derivative" transaction. The Company further understands and acknowledges that
(a) the Buyer may engage in legally permissible hedging activities at various
times during the period that the Securities are outstanding and (b) such hedging
activities (if any) could reduce the value of the existing stockholders' equity
interests in the Company at and after the time that the hedging activities are
being conducted.
14
(ff) Disclosure. The Company confirms that neither it nor any other
Person acting on its behalf has provided the Buyer or its agents or counsel with
any information that constitutes material, nonpublic information. The Company
understands and confirms that the Buyer will rely on the foregoing
representations in effecting transactions in securities of the Company. All
disclosure provided to the Buyer in writing regarding the Company, its business
and the transactions contemplated hereby, including the Schedules to this
Agreement, furnished by or on behalf of the Company is true and correct and does
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading. Each
press release issued by the Company since May 27, 2004 did not at the time of
release contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are made,
not misleading. No event or circumstance has occurred or information exists with
respect to the Company or any of its Subsidiaries or its or their business,
properties, prospects, operations or financial conditions, which, under
applicable law, rule or regulation, requires public disclosure or announcement
by the Company but which has not been so publicly announced or disclosed.
4. COVENANTS.
(a) Best Efforts. Each party shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
(b) Form D and Blue Sky. The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to the Buyer promptly after such filing. The Company shall, on or before
the Closing Date, take such action as the Company shall reasonably determine is
necessary in order to obtain an exemption for or to qualify the Securities for
sale to the Buyer at the Closing pursuant to this Agreement under applicable
securities or "Blue Sky" laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to the Buyer on or prior to the Closing Date. The Company shall
make all filings and reports relating to the offer and sale of the Securities
required under applicable securities or "Blue Sky" laws of the states of the
United States following the Closing Date.
(c) Reporting Status. Until the date on which the Investors (as
defined in the Registration Rights Agreement) shall have sold all the Securities
(the "Reporting Period"), the Company shall timely file all reports required to
be filed with the SEC pursuant to the 1934 Act, and the Company shall not
terminate its status as an issuer required to file reports under the 1934 Act
even if the 1934 Act or the rules and regulations thereunder would otherwise
permit such termination.
(d) Use of Proceeds. The Company will not use the proceeds from the
sale of the Securities primarily for the redemption or repurchase of any equity
securities or for the repayment of any outstanding indebtedness of the Company
or its Subsidiaries, other than ordinary course trade payables.
15
(e) Financial Information. The Company agrees to send the following
to each Investor during the Reporting Period (i) unless the following are filed
with the SEC through EDGAR and are available to the public through the EDGAR
system, within one (1) Business Day after the filing thereof with the SEC, a
copy of its Annual Reports on Form 10-K or 10-KSB, any interim reports or any
consolidated balance sheets, income statements, stockholders' equity statements
and/or cash flow statements for any period other than annual, any Current
Reports on Form 8-K and any registration statements (other than on Form S-8) or
amendments filed pursuant to the 1933 Act, and (ii) copies of any notices and
other information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.
(f) Listing. The Company shall reasonable efforts to promptly secure
the listing of all of the Registrable Securities (as defined in the Registration
Rights Agreement) upon each national securities exchange and automated quotation
system, if any, upon which the Common Stock is then listed (subject to official
notice of issuance) and shall maintain such listing of all Registrable
Securities from time to time issuable under the terms of the Transaction
Documents. The Company shall maintain the Common Stocks' authorization for
quotation on the Principal Market. Neither the Company nor any of its
Subsidiaries shall take any action that would be reasonably expected to result
in the delisting or suspension of the Common Stock on the Principal Market. The
Company shall pay all fees and expenses in connection with satisfying its
obligations under this Section 4(f).
(g) Fees. The Company shall reimburse the Buyer or its designee(s)
for all reasonable costs and expenses incurred in connection with the
transactions contemplated by the Transaction Documents (including all reasonable
legal fees and disbursements in connection therewith, documentation and
implementation of the transactions contemplated by the Transaction Documents and
due diligence in connection therewith) in an amount not to exceed $10,000, which
amount shall be withheld by the Buyer from its Purchase Price at the Closing.
The Company shall be responsible for the payment of any placement agent's fees,
financial advisory fees, or broker's commissions (other than for Persons engaged
by the Buyer) relating to or arising out of the transactions contemplated
hereby. The Company shall pay, and hold the Buyer harmless against, any
liability, loss or expense (including, without limitation, reasonable attorney's
fees and out-of-pocket expenses) arising in connection with any claim relating
to any such payment. Except as otherwise set forth in the Transaction Documents,
each party to this Agreement shall bear its own expenses in connection with the
sale of the Securities to the Buyer.
(h) Pledge of Securities. The Company acknowledges and agrees that,
subject to all applicable securities laws, the Securities may be pledged by an
Investor (as defined in the Registration Rights Agreement) in connection with a
bona fide margin agreement or other loan or financing arrangement that is
secured by the Securities. Subject to all applicable securities laws, the pledge
of Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, and no Investor effecting a pledge of Securities shall be
required to provide the Company with any notice thereof or otherwise make any
delivery to the Company pursuant to this Agreement or any other Transaction
Document, including, without limitation, Section 2(f) hereof; provided that an
Investor and its pledgee shall be required to comply with the provisions of
Section 2(f) hereof in order to effect a sale, transfer or assignment of
16
Securities to such pledgee. Subject to applicable securities laws, the Company
hereby agrees to execute and deliver such documentation as a pledgee of the
Securities may reasonably request in connection with a pledge of the Securities
to such pledgee by an Investor.
(i) Disclosure of Transactions and Other Material Information. On or
before 8:30 a.m., New York Time, on the second Business Day following the
Closing, the Company shall issue a press release describing the terms of the
transactions contemplated by the Transaction Documents. On or before 8:30 a.m.,
New York Time, on the third Business Day following the Closing, the Company
shall file a Form 8-K in the form required by the 1934 Act and attaching the
material Transaction Documents (including, without limitation, this Agreement
and the Registration Rights Agreement) as exhibits to such filing (including all
attachments, the "8-K Filing"). As of the date of the filing of the Form 8-K,
the Buyer shall not be in possession of any material, nonpublic information
received from the Company, any of its Subsidiaries or any of its respective
officers, directors, employees or agents, that is not disclosed in the 8-K
Filing. The Company shall not, and shall cause each of its Subsidiaries and its
and each of their respective officers, directors, employees and agents, not to,
provide the Buyer with any material, nonpublic information regarding the Company
or any of its Subsidiaries from and after the filing of the 8-K Filing with the
SEC without the express written consent of the Buyer. In the event of a breach
of the foregoing covenant by the Company, any of its Subsidiaries, or any of its
or their respective officers, directors, employees and agents, in addition to
any other remedy provided herein or in the Transaction Documents, the Company
agrees to file a current report on Form 8-K that contains the material details
of such non-public disclosure (and to provide Buyer with a reasonable
opportunity to review and comment upon such filing prior to its filing with the
SEC and to incorporate such comments therein as the Company deems reasonably
necessary). Subject to the foregoing, neither the Company nor the Buyer shall
issue any press releases or any other public statements with respect to the
transactions contemplated hereby; provided, however, that the Company shall be
entitled, without the prior approval of the Buyer, to make any press release or
other public disclosure with respect to such transactions (i) in substantial
conformity with the 8-K Filing and contemporaneously therewith and (ii) as is
required by applicable law and regulations (provided that in the case of clause
(i) the Buyer shall be consulted by the Company in connection with and given an
opportunity to review and comment on any such press release or other public
disclosure prior to its release). Notwithstanding the foregoing, the Company
shall not publicly disclose the name of the Buyer, or include the name of the
Buyer in any filing with the SEC or any regulatory agency or the Principal
Market, without the prior written consent of the Buyer, except (i) for
disclosure thereof in the 8-K Filing or Registration Statement or (ii) as
required by law or Principal Market regulations or any order of any court or
other governmental agency, in which case the Company shall provide the Buyer
with prior notice of such disclosure.
(j) [Intentionally omitted].
(k) Conduct of Business. The business of the Company and its
Subsidiaries shall not be conducted in violation of any law, ordinance or
regulation of any governmental entity, except where such violations would not
result, either individually or in the aggregate, in a Material Adverse Effect.
(l) Integration. None of the Company, its Subsidiaries, their
affiliates and any Person acting on their behalf will take any action or steps
17
referred to in Section 3(h) that would require registration of any of the
Securities under the 1933 Act or cause the offering of the Securities to be
integrated with other offerings.
5. [Intentionally omitted]
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
(a) Closing Date. The obligation of the Company hereunder to issue
and sell the Securities to the Buyer at the Closing is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for the Company's sole benefit
and may be waived by the Company at any time in its sole discretion by providing
the Buyer with prior written notice thereof:
(i) The Buyer shall have executed each of the Transaction
Documents to which it is a party and delivered the same to the Company.
(ii) The Buyer shall have delivered to the Company the
Purchase Price, less the amounts withheld pursuant to Section 4(g), for the
Securities and being purchased by the Buyer at the Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by the
Company.
(iii) The representations and warranties of the Buyer shall be
true and correct in all material respects as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date), and the Buyer shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Buyer at or prior to the Closing Date.
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
(a) Closing Date. The obligation of the Buyer hereunder to purchase
the Securities at the Closing is subject to the satisfaction, at or before the
Closing Date, of each of the following conditions, provided that these
conditions are for the Buyer's sole benefit and may be waived by the Buyer at
any time in its sole discretion by providing the Company with prior written
notice thereof:
(i) The Company and, to the extent it is a party thereto, each
of it Subsidiaries, shall have executed and delivered to the Buyer (i) each of
the Transaction Documents and (ii) the Securities (in such denominations as the
Buyer shall request) being purchased by the Buyer at the Closing pursuant to
this Agreement.
(ii) The Buyer shall have received the opinions of Troy &
Gould, the Company's outside counsel, dated as of the Closing Date, in
substantially the form of Exhibit B attached hereto.
(iii) The Company shall have delivered to the Buyer a
certificate evidencing the formation and good standing of the Company and each
of its Subsidiaries in such entity's jurisdiction of formation issued by the
Secretary of State (or comparable office) of such jurisdiction, as of a date
within 10 days of the Closing Date.
18
(iv) The Company shall have delivered to the Buyer a
certificate evidencing the Company's qualification as a foreign corporation and
good standing issued by the Secretary of State (or comparable office) of each
jurisdiction in which the Company conducts business, as of a date within 10 days
of the Closing Date.
(v) The Company shall have delivered to the Buyer a certified
copy of the Certificate of Incorporation as certified by such entity's
jurisdiction of formation within ten (10) days of the Closing Date.
(vi) The Company shall have delivered to the Buyer a
certificate, executed by the Secretary of the Company and dated as of the
Closing Date, as to (i) the resolutions consistent with Section 3(b) as adopted
by the Company's Board of Directors in a form reasonably acceptable to the
Buyer, (ii) the Certificate of Incorporation and (iii) the Bylaws, each as in
effect at the Closing, in the form attached hereto as Exhibit C.
(vii) The representations and warranties of the Company shall
be true and correct in all material respects (except for the representations and
warranties that are qualified by materiality, which shall be true and correct in
all respects) as of the date when made and as of the Closing Date as though made
at that time (except for representations and warranties that speak as of a
specific date) and the Company shall have performed, satisfied and complied in
all material respects with the covenants, agreements and conditions required by
the Transaction Documents to be performed, satisfied or complied with by the
Company at or prior to the Closing Date. The Buyer shall have received a
certificate, executed by the Chief Executive Officer of the Company, dated as of
the Closing Date, in the form attached hereto as Exhibit D.
(viii) The Company shall have delivered to the Buyer a letter
from the Company's transfer agent certifying the number of shares of Common
Stock outstanding as of a date within five days of the Closing Date.
(ix) The Common Stock (I) shall be designated for quotation or
listed on the Principal Market and (II) shall not have been suspended, as of the
Closing Date, by the SEC, the Principal Market from trading on the Principal
Market nor shall suspension by the SEC, the Principal Market have been
threatened, as of the Closing Date, either (A) in writing by the SEC, the
Principal Market or (B) by falling below the minimum listing maintenance
requirements of the Principal Market.
(x) The Company shall have obtained all governmental,
regulatory or third party consents and approvals, if any, necessary for the sale
of the Securities.
(xi) The Company shall have delivered to the Buyer such other
documents relating to the transactions contemplated by this Agreement as the
Buyer or its counsel may reasonably request.
19
8. TERMINATION. In the event that the Closing shall not have occurred on
or before five (5) Business Days from the date hereof due to the Company's or
the Buyer's failure to satisfy the conditions set forth in Sections 6 and 7
above (and the non-breaching party's failure to waive such unsatisfied
condition(s)), the non-breaching party shall have the option to terminate this
Agreement with respect to such breaching party at the close of business on such
date without liability of any party to any other party; provided, however, if
this Agreement is terminated pursuant to this Section 8, the Company shall
remain obligated to reimburse the non-breaching Buyer for the amounts described
in Section 4(g) above.
9. MISCELLANEOUS.
(a) Governing Law; Jurisdiction; Jury Trial. All questions
concerning the construction, validity, enforcement and interpretation of this
Agreement shall be governed by the internal laws of the State of California,
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of California or any other jurisdictions) that would cause
the application of the laws of any jurisdictions other than the State of
California, except for the mandatorily applicable provisions of Nevada law. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in Los Angeles, California, for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein, and hereby irrevocably waives, and agrees not to
assert in any suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of any such court, that such suit, action or
proceeding is brought in an inconvenient forum or that the venue of such suit,
action or proceeding is improper. Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY.
(b) Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
(c) Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
(d) Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
20
(e) Entire Agreement; Amendments. This Agreement supersedes all
other prior oral or written agreements between the Buyer, the Company, their
affiliates and Persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor the Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least a majority of the aggregate number of
Registrable Securities issued and issuable hereunder, and any amendment to this
Agreement made in conformity with the provisions of this Section 9(e) shall be
binding on the Buyer and holders of Securities, as applicable. No provision
hereof may be waived other than by an instrument in writing signed by the party
against whom enforcement is sought. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the applicable
Securities then outstanding. No consideration shall be offered or paid to any
Person to amend or consent to a waiver or modification of any provision of any
of the Transaction Documents unless the same consideration also is offered to
all of the parties to the Transaction Documents and holders of Securities. The
Company has not, directly or indirectly, made any agreements with the Buyer
relating to the terms or conditions of the transactions contemplated by the
Transaction Documents except as set forth in the Transaction Documents.
(f) Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) five Business Days after deposit
with an overnight courier service, in each case properly addressed to the party
to receive the same. The addresses and facsimile numbers for such communications
shall be:
If to the Company:
Natural Gas Systems, Inc.
820 Gessner, Suite 1340
Houston, Texas 77024
Tel: 713-935-0122
Fax: 713-935-0199
Attention: Robert S. Herlin, President
Copy to:
Troy & Gould Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, California 90067-2367
Telephone: (310) 789-1255
Facsimile: (310) 201-4746
Attention: Lawrence Schnapp, Esq.
21
If to a Buyer, to:
Rubicon Master Fund
c/o Rubicon Fund Management LLP
103 Mount St.London W1K2TJ
United Kingdom
Facsimile No.: +44 207-074 4280
Telephone No.: +44 207 074 4299
Attn: William Callanan
with a copy (for informational purposes only) to:
Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Telephone: (212) 756-2000
Facsimile: (212) 593-5955
Attention: Peter Halasz, Esq.
or to such other address and/or facsimile number and/or to the attention of such
other Person as the recipient party has specified by written notice given to
each other party five (5) days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender's facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission (C)
provided by an overnight courier service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from an overnight courier
service in accordance with clause (i), (ii) or (iii) above, respectively;
provided however that the foregoing clause (B) shall only be valid if such
communication contained in the facsimile is delivered by an overnight courier
service within 24 hours of the transmission of facsimile.
(g) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Securities. The Company shall not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the Buyer. The Buyer may assign some or all of its rights hereunder
without the consent of the Company, in which event such assignee shall be deemed
to be a Buyer hereunder with respect to such assigned rights.
(h) No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
(i) Survival. Unless this Agreement is terminated under Section 8,
the representations and warranties of the Company and the Buyer contained in
Sections 2 and 3 shall survive for 18 months following the Closing, and the
agreements and covenants set forth in Sections 4 and 9 shall survive the
Closing. The Buyer shall be responsible only for its own representations,
warranties, agreements and covenants hereunder.
22
(j) Further Assurances. Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
any other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
(k) Indemnification. Indemnification. In consideration of the
Buyer's execution and delivery of the Transaction Documents and acquiring the
Securities thereunder and in addition to all of the Company's other obligations
under the Transaction Documents, the Company shall defend, protect, indemnify
and hold harmless the Buyer and each other holder of the Securities and all of
their stockholders, partners, members, officers, directors, employees and direct
or indirect investors and any of the foregoing Persons' agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the
"Indemnitees") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in any Transaction Documents, (b) any breach of any covenant, agreement
or obligation of the Company contained in any Transaction Documents or (c) any
cause of action, suit or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf
of the Company) and arising out of or resulting from (i) the execution,
delivery, performance or enforcement of any Transaction Documents, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, (iii) any
disclosure made by the Buyer pursuant to Section (i) or (iv) the status of the
Buyer or holder of the Securities as an investor in the Company pursuant to the
transactions contemplated by the Transaction Documents; provided that
indemnification pursuant to clauses (iii), or (iv) above shall not be available
to the extent arising from such Buyer's bad faith, fraud or willful misconduct.
To the extent that the foregoing undertaking by the Company may be unenforceable
for any reason, the Company shall make the maximum contribution to the payment
and satisfaction of each of the Indemnified Liabilities that is permissible
under applicable law. Except as otherwise set forth herein, the mechanics and
procedures with respect to the rights and obligations under this Section 9(k)
shall be the same as those set forth in Section 6 of the Registration Rights
Agreement.
(l) No Strict Construction. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
(m) Remedies. The Buyer and each holder of the Securities shall have
all rights and remedies set forth in the Transaction Documents and all rights
and remedies which such holders have been granted at any time under any other
agreement or contract and all of the rights which such holders have under any
law. Any Person having any rights under any provision of this Agreement shall be
entitled to enforce such rights specifically (without posting a bond or other
23
security), to recover damages by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law. Furthermore, the
Company recognizes that in the event that it fails to perform, observe, or
discharge any or all of its obligations under the Transaction Documents, any
remedy at law may prove to be inadequate relief to the Buyer. The Company
therefore agrees that the Buyer shall be entitled to seek temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages and without posting a bond or other security.
(n) Payment Set Aside. To the extent that the Company makes a
payment or payments to the Buyer hereunder or pursuant to any of the other
Transaction Documents or the Buyer enforce or exercises its rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, foreign, state or federal law, common law or equitable cause of
action), then to the extent of any such restoration the obligation or part
thereof originally intended to be satisfied shall be revived and continued in
full force and effect as if such payment had not been made or such enforcement
or setoff had not occurred.
[Signature Page Follows]
24
IN WITNESS WHEREOF, the Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.
COMPANY:
NATURAL GAS SYSTEMS, INC.
By:
--------------------------
Name: Robert S. Herlin
Title: CEO and President
[Signature Page to Securities Purchase Agreement]
IN WITNESS WHEREOF, the Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.
BUYER:
RUBICON MASTER FUND
By: Rubicon Fund Management, LLP,
its Investment Manager
By:
----------------------------------
Name:
Title:
[Signature Page to Securities Purchase Agreement]
EXHIBITS
Exhibit A Registration Rights Agreement
Exhibit B Form of Outside Company Counsel Opinion
Exhibit C Form of Secretary's Certificate
Exhibit D Form of Officer's Certificate
Schedule 3(a) Subsidiaries
Schedule 3(l) Material Changes
Schedule 3(q) Transactions with Affiliates
Schedule 3(r) Securities
Schedule 3(s) Indebtedness
Schedule 3(t) Litigation
Schedule 3(w) Title
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May 6,
2005, by and among NATURAL GAS SYSTEMS, INC., a Nevada corporation (the
"Company"), and Rubicon Master Fund, a company organized under the laws of the
Cayman Islands (the "Buyer").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among
the parties hereto of even date herewith (the "Securities Purchase Agreement"),
the Company has agreed, upon the terms and subject to the conditions set forth
in the Securities Purchase Agreement, to issue and sell to the Buyer 1.2 million
shares of common stock, $0.001 par value (the "Common Stock"), of the Company
(collectively, the "Securities").
B. To induce the Buyer to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 Act"), and
applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Buyer hereby agree as follows:
1. Definitions.
Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Securities Purchase Agreement. As
used in this Agreement, the following terms shall have the following meanings:
a. "Business Day" means any day other than Saturday, Sunday or
any other day on which commercial banks in The City of New York are authorized
or required by law to remain closed.
b. "Closing Date" shall have the meaning set forth in the
Securities Purchase Agreement.
c. "Effective Date" means the date the Registration Statement
has been declared effective by the SEC.
d. "Effectiveness Deadline" means the date which is (i) in the
event that the Registration Statement is not subject to a review by the SEC, 90
calendar days after the Closing Date or (ii) in the event that the Registration
Statement is subject to a review by the SEC, 150 calendar days after the Closing
Date.
e. "Filing Deadline" means 30 calendar days after the Closing
Date.
f. "Investor" means the Buyer or any transferee or assignee
thereof to whom the Buyer assigns its rights under this Agreement and who agrees
to become bound by the provisions of this Agreement in accordance with Section 9
and any transferee or assignee thereof to whom a transferee or assignee assigns
its rights under this Agreement and who agrees to become bound by the provisions
of this Agreement in accordance with Section 9.
g. "Person" means an individual, a limited liability company,
a partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
h. "register," "registered," and "registration" refer to a
registration effected by preparing and filing one or more Registration
Statements (as defined below) in compliance with the 1933 Act and pursuant to
Rule 415 and the declaration or ordering of effectiveness of such Registration
Statement(s) by the SEC.
i. "Registrable Securities" means the Securities and, to the
extent allowable under the 1933 Act and the rules promulgated thereunder
(including Rule 416), any share capital of the Company issued or issuable with
respect to the Securities as a result of any split, dividend, recapitalization,
exchange or similar event or otherwise.
j. "Registration Statement" means a registration statement or
registration statements of the Company filed under the 1933 Act covering the
Registrable Securities.
k. "Required Holders" means the holders of at least a majority
of the Registrable Securities.
l. "Required Registration Amount" means 100% of the number
Registrable Securities.
m. "Rule 415" means Rule 415 under the 1933 Act or any
successor rule providing for offering securities on a continuous or delayed
basis.
n. "SEC" means the United States Securities and Exchange
Commission.
2. Registration.
a. Mandatory Registration. The Company shall prepare, and, as
soon as practicable but in no event later than the Filing Deadline, file with
the SEC the Registration Statement on Form S-3 covering the resale of all of the
Registrable Securities. Notwithstanding the foregoing, in the event that Form
S-3 is unavailable for such a registration, the Company shall use such other
form as is available for such a registration, subject to the provisions of
Section 2(d). The Registration Statement prepared pursuant hereto shall register
for resale at least the number of shares of Common Stock equal to the Required
Registration Amount as of date the Registration Statement is initially filed
with the SEC. The Registration Statement shall contain (except if otherwise
reasonably directed by the Required Holders) the "Selling Stockholders" and
"Plan of Distribution" sections in substantially the form attached hereto as
2
Exhibit B. The Company shall use commercially reasonable efforts to have the
Registration Statement declared effective by the SEC as soon as practicable, but
in no event later than the Effectiveness Deadline.
b. Allocation of Registrable Securities. The initial number of
Registrable Securities included in any Registration Statement and any increase
in the number of Registrable Securities included therein shall be allocated pro
rata among the Investors based on the number of Registrable Securities held by
each Investor at the time the Registration Statement covering such initial
number of Registrable Securities or increase thereof is declared effective by
the SEC. In the event that an Investor sells or otherwise transfers any of such
Investor's Registrable Securities, each transferee shall be allocated a pro rata
portion of the then remaining number of Registrable Securities included in such
Registration Statement for such transferor. Any Shares of Common Stock included
in a Registration Statement and which remain allocated to any Person which
ceases to hold any Registrable Securities covered by such Registration Statement
shall be allocated to the remaining Investors, pro rata based on the number of
Registrable Securities then held by such Investors which are covered by such
Registration Statement. The Company shall have the right to include securities
other than Registrable Securities on the Registration Statement in its sole and
absolute discretion, including shares held by other investors and primary shares
being offered by the Company.
c. Legal Counsel. Subject to Section 5 hereof, the Required
Holders shall have the right to select one legal counsel to review any
registration pursuant to this Section 2 ("Legal Counsel"), which shall be
Schulte Roth & Zabel LLP or such other counsel as thereafter designated by the
Required Holders. The Company and Legal Counsel shall reasonably cooperate with
each other in performing the Company's obligations under this Agreement.
t 18 0 d. Ineligibility for Form S-3. In the event that Form S-3 is not
available for the registration of the resale of Registrable Securities
hereunder, the Company shall (i) register the resale of the Registrable
Securities on another appropriate form reasonably acceptable to the Required
Holders and (ii) undertake to register the Registrable Securities on Form S-3 as
soon as such form is available, provided that, subject to the last sentence of
Section 3(a), the Company shall maintain the effectiveness of the Registration
Statement then in effect until such time as a Registration Statement on Form S-3
covering the Registrable Securities has been declared effective by the SEC. The
Investors acknowledge that Form S-3 is not currently available to the Company
and that accordingly the Registration Statement will be filed on a Form SB-2.
e. Sufficient Number of Shares Registered. In the event the
number of shares available under a Registration Statement filed pursuant to
Section 2(a) is insufficient to cover all of the Registrable Securities required
to be covered by such Registration Statement or an Investor's allocated portion
of the Registrable Securities pursuant to Section 2(b), the Company shall amend
the applicable Registration Statement, or file a new Registration Statement (on
the short form available therefor, if applicable), or both, so as to cover at
least the Required Registration Amount as of the trading day immediately
preceding the date of the filing of such amendment or new Registration
Statement, in each case, as soon as practicable, but in any event not later than
fifteen (15) days after the necessity therefor arises. The Company shall use
3
commercially reasonable efforts to cause such amendment and/or new Registration
Statement to become effective as soon as practicable following the filing
thereof. For purposes of the foregoing provision, the number of shares available
under a Registration Statement shall be deemed "insufficient to cover all of the
Registrable Securities" if at any time the number of shares of Common Stock
available for resale under the Registration Statement is less than the product
determined by multiplying (i) the Required Registration Amount as of such time
by (ii) 0.90.
f. Effect of Failure to File and Obtain and Maintain
Effectiveness of Registration Statement. If (i) a Registration Statement
covering all of the Registrable Securities required to be covered thereby and
required to be filed by the Company pursuant to this Agreement is (A) not filed
with the SEC on or before the Filing Deadline (a "Filing Failure") or (B) not
declared effective by the SEC on or before the Effectiveness Deadline (an
"Effectiveness Failure") or (ii) on any day after the Effective Date sales of
all of the Registrable Securities required to be included on such Registration
Statement cannot be made (other than during an Allowable Grace Period (as
defined in Section 3(r)) pursuant to such Registration Statement (including,
without limitation, because of a failure to keep such Registration Statement
effective, to disclose such information as is necessary for sales to be made
pursuant to such Registration Statement, to register a sufficient number of
shares of Common Stock or to maintain the listing of the Common Stock) (a
"Maintenance Failure") then, as partial relief for the damages to any holder by
reason of any such delay in or reduction of its ability to sell the underlying
Shares of Common Stock (which remedy shall not be exclusive of any other
remedies available at law or in equity), but subject to the limitation set forth
in the last sentence of this Section 2(f), the Company shall pay to each holder
of Registrable Securities relating to such Registration Statement an amount in
cash equal to (A) one percent (1.0%) of the aggregate Purchase Price (as such
term is defined in the Securities Purchase Agreement) of such holder's
Registrable Securities on each of the following dates: (i) the initial day of a
Filing Failure; (ii) the initial day of an Effectiveness Failure; and (iii) the
initial day of a Maintenance Failure, and (B) one percent (1.0%) of the
aggregate Purchase Price (as such term is defined in the Securities Purchase
Agreement) of such holder's Registrable Securities on each of the following
dates: (i) on the thirtieth day after the day of a Filing Failure and on every
successive 30th day thereafter (pro rated for periods totaling less than thirty
days) until such Filing Failure is cured; (ii) on the thirtieth day after the
day of an Effectiveness Failure and on every successive 30th day thereafter (pro
rated for periods totaling less than thirty days) until such Effectiveness
Failure is cured; (iii) on the thirtieth day after the initial day of a
Maintenance Failure and on every successive 30th day thereafter (pro rated for
periods totaling less than thirty days) until such Maintenance Failure is cured.
The payments to which a holder shall be entitled pursuant to this Section 2(g)
are referred to herein as "Registration Delay Payments." Registration Delay
Payments shall be paid on the earlier of (I) the last day of the calendar month
during which such Registration Delay Payments are incurred and (II) the third
Business Day after the event or failure giving rise to the Registration Delay
Payments is cured. Notwithstanding the other provisions of this Section 2(f), in
no event shall the Company be liable for damages in excess of 8% of the
aggregate purchase price paid by the holders of Registrable Securities.
3. Related Obligations.
At such time as the Company is obligated to file a Registration Statement
with the SEC pursuant to Section 2(a), 2(d) or 2(e), the Company will use
4
commercially reasonable efforts to effect the registration of the Registrable
Securities in accordance with the intended method of disposition thereof and,
pursuant thereto, the Company shall have the following obligations:
a. The Company shall submit to the SEC, within two (2)
Business Days after the Company learns that no review of a particular
Registration Statement will be made by the staff of the SEC or that the staff
has no further comments on a particular Registration Statement, as the case may
be, a request for acceleration of effectiveness of such Registration Statement
to a time and date not later than 48 hours after the submission of such request.
The Company shall keep each Registration Statement effective pursuant to Rule
415 at all times until the earlier of (i) the date as of which the Investors may
commence the sale of Registrable Securities covered by such Registration
Statement pursuant to Rule 144 (or any successor thereto) promulgated under the
1933 Act or (ii) the date on which the Investors shall have sold all of the
Registrable Securities covered by such Registration Statement (the "Registration
Period"). The Company shall ensure that each Registration Statement (including
any amendments or supplements thereto and prospectuses contained therein) shall
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein, or necessary to make the statements therein
(in the case of prospectuses, in the light of the circumstances in which they
were made) not misleading.
b. The Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to a
Registration Statement and the prospectus used in connection with such
Registration Statement, which prospectus is to be filed pursuant to Rule 424
promulgated under the 1933 Act, as may be necessary to keep such Registration
Statement effective at all times during the Registration Period, and, during
such period, comply with the provisions of the 1933 Act with respect to the
disposition of all Registrable Securities of the Company covered by such
Registration Statement until such time as all of such Registrable Securities
shall have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof as set forth in such Registration
Statement. In the case of amendments and supplements to a Registration Statement
which are required to be filed pursuant to this Agreement (including pursuant to
this Section 3(b)) by reason of the Company filing a report on Form 10-Q, Form
10-K or any analogous report under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the Company shall have incorporated such report by
reference into such Registration Statement, if applicable, or shall file such
amendments or supplements with the SEC on the same day on which the 1934 Act
report is filed which created the requirement for the Company to amend or
supplement such Registration Statement. The determination as to whether the
filing of a post-effective amendment is required (as opposed to a supplement)
shall be made by the Company in consultation with its legal counsel.
c. The Company shall (A) permit Legal Counsel to review and
comment upon (i) a Registration Statement at least five (5) Business Days prior
to its filing with the SEC and (ii) all amendments and supplements to all
Registration Statements (except for Annual Reports on Form 10-K, Reports on Form
10-Q, Current Reports on Form 8K, and any similar or successor reports) within a
reasonable number of days prior to their filing with the SEC, and (B) not file
any Registration Statement or amendment or supplement thereto in a form to which
Legal Counsel reasonably objects. The Company shall not submit a request for
acceleration of the effectiveness of a Registration Statement or any amendment
or supplement thereto without the prior approval of Legal Counsel, which consent
shall not be unreasonably withheld. The Company shall furnish to Legal Counsel,
without charge, (i) copies of any correspondence from the SEC or the staff of
the SEC to the Company or its representatives relating to any Registration
5
Statement, (ii) promptly after the same is prepared and filed with the SEC, one
copy of any Registration Statement and any amendment(s) thereto, including
financial statements and schedules, all documents incorporated therein by
reference, if requested by an Investor, and all exhibits and (iii) upon the
effectiveness of any Registration Statement, one copy of the prospectus included
in such Registration Statement and all amendments and supplements thereto. The
Company shall reasonably cooperate with Legal Counsel in performing the
Company's obligations pursuant to this Section 3.
d. The Company shall furnish to each Investor whose
Registrable Securities are included in any Registration Statement, without
charge, (i) promptly after the same is prepared and filed with the SEC, at least
one copy of such Registration Statement and any amendment(s) thereto, including
financial statements and schedules, all documents incorporated therein by
reference, if requested by an Investor, all exhibits and each preliminary
prospectus, (ii) upon the effectiveness of any Registration Statement, ten (10)
copies of the prospectus included in such Registration Statement and all
amendments and supplements thereto (or such other number of copies as such
Investor may reasonably request) and (iii) such other documents, including
copies of any preliminary or final prospectus, as such Investor may reasonably
request from time to time in order to facilitate the disposition of the
Registrable Securities owned by such Investor.
e. The Company shall use commercially reasonable efforts to
(i) register and qualify, unless an exemption from registration and
qualification applies, the resale by Investors of the Registrable Securities
covered by a Registration Statement under such other securities or "blue sky"
laws of all applicable jurisdictions in the United States, (ii) prepare and file
in those jurisdictions, such amendments (including post-effective amendments)
and supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(e), (y) subject itself
to general taxation in any such jurisdiction, or (z) file a general consent to
service of process in any such jurisdiction. The Company shall promptly notify
Legal Counsel and each Investor who holds Registrable Securities of the receipt
by the Company of any notification with respect to the suspension of the
registration or qualification of any of the Registrable Securities for sale
under the securities or "blue sky" laws of any jurisdiction in the United States
or its receipt of notice of the initiation or threatening of any proceeding for
such purpose.
f. The Company shall notify Legal Counsel and each Investor in
writing of the happening of any event, as promptly as practicable after becoming
aware of such event, as a result of which the prospectus included in a
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
6
under which they were made, not misleading (provided that in no event shall such
notice contain any material, nonpublic information), and, subject to Section
3(q), promptly prepare a supplement or amendment to such Registration Statement
to correct such untrue statement or omission, and deliver ten (10) copies of
such supplement or amendment to Legal Counsel and each Investor (or such other
number of copies as Legal Counsel or such Investor may reasonably request). The
Company shall also promptly notify Legal Counsel and each Investor in writing
(i) when a prospectus or any prospectus supplement or post-effective amendment
has been filed, and when a Registration Statement or any post-effective
amendment has become effective (notification of such effectiveness shall be
delivered to Legal Counsel and each Investor by facsimile on the same day of
such effectiveness and by overnight mail), (ii) of any request by the SEC for
amendments or supplements to a Registration Statement or related prospectus or
related information, and (iii) of the Company's reasonable determination that a
post-effective amendment to a Registration Statement would be appropriate.
g. The Company shall use commercially reasonable efforts to
prevent the issuance of any stop order or other suspension of effectiveness of a
Registration Statement, or the suspension of the qualification of any of the
Registrable Securities for sale in any jurisdiction and, if such an order or
suspension is issued, to obtain the withdrawal of such order or suspension at
the earliest possible moment and to notify Legal Counsel and each Investor who
holds Registrable Securities being sold of the issuance of such order and the
resolution thereof or its receipt of notice of the initiation or threat of any
proceeding for such purpose.
h. At the reasonable request of any Investor, in the event
that the Registrable Securities are being sold pursuant to an underwritten
offering, the Company shall furnish to such Investor, on the date of the
effectiveness of the Registration Statement and thereafter from time to time on
such dates as an Investor may reasonably request (i) a letter, dated such date,
from the Company's independent certified public accountants in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the Investors, and
(ii) an opinion, dated as of such date, of counsel representing the Company for
purposes of such Registration Statement, in form, scope and substance as is
customarily given in an underwritten public offering, addressed to the
Investors.
i. The Company shall make available for inspection by (i) any
Investor, (ii) Legal Counsel and (iii) one firm of accountants or other agents
retained by the Investors (collectively, the "Inspectors"), all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "Records"), as shall be reasonably deemed
necessary by each Inspector, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request;
provided, however, that each Inspector shall agree to hold in strict confidence
and shall not make any disclosure (except to an Investor) or use of any Record
or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is determined by the Company necessary to
avoid or correct a misstatement or omission in any Registration Statement or is
otherwise required under the 1933 Act, (b) the release of such Records is
ordered pursuant to a final, non-appealable subpoena or order from a court or
government body of competent jurisdiction, or (c) the information in such
7
Records has been made generally available to the public other than by disclosure
in violation of this Agreement. Each Investor agrees that it shall, upon
learning that disclosure of such Records is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the Records deemed confidential. Nothing herein (or in any other
confidentiality agreement between the Company and any Investor) shall be deemed
to limit the Investors' ability to sell Registrable Securities in a manner which
is otherwise consistent with applicable laws and regulations.
j. The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
k. The Company shall use commercially reasonable efforts
either to secure the inclusion for quotation of all of the Registrable
Securities on the NASD's OTC Bulletin Board. The Company shall pay all fees and
expenses in connection with satisfying its obligation under this Section 3(k).
l. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and, to the extent applicable, facilitate
the timely preparation and delivery of certificates (not bearing any restrictive
legend) representing the Registrable Securities to be offered pursuant to a
Registration Statement and enable such certificates to be in such denominations
or amounts, as the case may be, as the Investors may reasonably request and
registered in such names as the Investors may request.
m. If requested by an Investor, the Company shall (i) as soon
as reasonably practicable incorporate in a prospectus supplement or
post-effective amendment such information as an Investor reasonably requests to
be included therein relating to the sale and distribution of Registrable
Securities, including, without limitation, information with respect to the
number of Registrable Securities being offered or sold, the purchase price being
paid therefor and any other terms of the offering of the Registrable Securities
to be sold in such offering; (ii) as soon as reasonably practicable make all
required filings of such prospectus supplement or post-effective amendment after
being notified of the matters to be incorporated in such prospectus supplement
or post-effective amendment; and (iii) as soon as reasonably practicable,
supplement or make amendments to any Registration Statement if reasonably
requested by an Investor holding any Registrable Securities.
n. The Company shall make generally available to its security
holders as soon as practical, but not later than ninety (90) days after the
8
close of the period covered thereby, an earnings statement (in form complying
with, and in the manner provided by, the provisions of Rule 158 under the 1933
Act) covering a twelve-month period beginning not later than the first day of
the Company's fiscal quarter next following the effective date of a Registration
Statement.
o. The Company shall otherwise use commercially reasonable
efforts to comply with all applicable rules and regulations of the SEC in
connection with any registration hereunder.
p. As soon as practicable after a Registration Statement which
covers Registrable Securities is ordered effective by the SEC, the Company shall
deliver, and shall cause legal counsel for the Company to deliver, to the
transfer agent for such Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such Registration Statement)
confirmation that such Registration Statement has been declared effective by the
SEC substantially in the form attached hereto as Exhibit A.
q. Notwithstanding anything to the contrary herein, at any
time after the Effective Date, the Company may delay the disclosure of material,
non-public information concerning the Company the disclosure of which at the
time is not, in the good faith opinion of the Board of Directors of the Company,
in the best interest of the Company and otherwise required (a "Grace Period");
provided, that the Company shall promptly (i) notify the Investors in writing of
the existence of material, non-public information giving rise to a Grace Period
(provided that in each notice the Company will not disclose the content of such
material, non-public information to the Investors) and the date on which the
Grace Period will begin, and (ii) notify the Investors in writing of the date on
which the Grace Period ends; and, provided further, that no Grace Period shall
exceed 15 consecutive days and during any three hundred sixty five (365) day
period such Grace Periods shall not exceed an aggregate of 45 days and the first
day of any Grace Period must be at least two (2) trading days after the last day
of any prior Grace Period (each, an "Allowable Grace Period"). Notwithstanding
the foregoing, the Allowable Grace Period shall be extended by up to one
additional 30 day period during any three hundred sixty five (365) day period in
the event that a post-effective amendment to the Registration Statement is
required to be filed and such amendment is reviewed by the SEC. For purposes of
determining the length of a Grace Period above, the Grace Period shall begin on
and include the date the Investors receive the notice referred to in clause (i)
and shall end on and include the later of the date the Investors receive the
notice referred to in clause (ii) and the date referred to in such notice. The
provisions of Section 3(g) hereof shall not be applicable during the period of
any Allowable Grace Period. Upon expiration of the Grace Period, the Company
shall again be bound by the first sentence of Section 3(f) with respect to the
information giving rise thereto unless such material, non-public information is
no longer applicable. Notwithstanding anything to the contrary, the Company
shall cause its transfer agent to deliver unlegended shares of Common Stock to a
transferee of an Investor in accordance with the terms of the Securities
Purchase Agreement in connection with any sale of Registrable Securities with
respect to which an Investor has entered into a contract for sale prior to the
Investor's receipt of the notice of a Grace Period and for which the Investor
has not yet settled.
r. The Company shall use commercially reasonable efforts to
become eligible to use a registration statement on Form S-3 for the registration
of the resale of Registrable Securities.
9
4. Obligations of the Investors.
a. At least five Business Days prior to the first anticipated
filing date of a Registration Statement, the Company shall notify each Investor
in writing of the information the Company requires from each such Investor if
such Investor elects to have any of such Investor's Registrable Securities
included in such Registration Statement. It shall be a condition precedent to
the obligations of the Company to complete the registration pursuant to this
Agreement with respect to the Registrable Securities of a particular Investor
that such Investor shall furnish to the Company such information regarding
itself, the Registrable Securities held by it and the intended method of
disposition of the Registrable Securities held by it as shall be reasonably
required to effect the effectiveness of the registration of such Registrable
Securities and shall execute such documents in connection with such registration
as the Company may reasonably request.
b. Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of any
Registration Statement hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from such Registration Statement.
c. Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3(g)
or the first sentence of 3(f), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to any Registration Statement(s)
covering such Registrable Securities until such Investor's receipt of the copies
of the supplemented or amended prospectus contemplated by Section 3(g) or the
first sentence of 3(f) or receipt of notice that no supplement or amendment is
required. Notwithstanding anything to the contrary, the Company shall cause its
transfer agent to deliver unlegended shares of Common Stock to a transferee of
an Investor in accordance with the terms of the Securities Purchase Agreement in
connection with any sale of Registrable Securities with respect to which an
Investor has entered into a contract for sale prior to the Investor's receipt of
a notice from the Company of the happening of any event of the kind described in
Section 3(g) or the first sentence of 3(f) and for which the Investor has not
yet settled.
d. Each Investor covenants and agrees that it will comply with
the prospectus delivery requirements of the 1933 Act as applicable to it in
connection with sales of Registrable Securities pursuant to the Registration
Statement.
5. Expenses of Registration.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, and
fees and disbursements of counsel for the Company shall be paid by the Company.
The Company shall also reimburse the Investors for the fees and disbursements of
Legal Counsel in connection with registration, filing or qualification pursuant
to Sections 2 and 3 of this Agreement which amount shall be limited to a total
of $10,000.
10
6. Indemnification.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will,
and hereby does, indemnify, hold harmless and defend each Investor, the
directors, officers, members, partners, employees, agents, representatives of,
and each Person, if any, who controls any Investor within the meaning of the
1933 Act or the 1934 Act (each, an "Indemnified Person"), against any losses,
claims, damages, liabilities, judgments, fines, penalties, charges, costs,
reasonable attorneys' fees, amounts paid in settlement or expenses, joint or
several, (collectively, "Claims") incurred in investigating, preparing or
defending any action, claim, suit, inquiry, proceeding, investigation or appeal
taken from the foregoing by or before any court or governmental, administrative
or other regulatory agency, body or the SEC, whether pending or threatened,
whether or not an indemnified party is or may be a party thereto ("Indemnified
Damages"), to which any of them may become subject insofar as such Claims (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon: (i) any untrue statement or alleged untrue
statement of a material fact in a Registration Statement or any post-effective
amendment thereto or in any filing made in connection with the qualification of
the offering under the securities or other "blue sky" laws of any jurisdiction
in which Registrable Securities are offered ("Blue Sky Filing"), or the omission
or alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in the light of the circumstances under which
the statements therein were made, not misleading, (iii) any violation or alleged
violation by the Company of the 1933 Act, the 1934 Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities pursuant to a Registration Statement or (iv) any violation of this
Agreement (the matters in the foregoing clauses (i) through (iv) being,
collectively, "Violations"). Subject to Section 6(c), the Company shall
reimburse the Indemnified Persons, promptly as such expenses are incurred and
are due and payable, for any reasonable legal fees or other reasonable expenses
incurred by them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (i) shall not apply to a Claim by an
Indemnified Person arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by such Indemnified Person for such Indemnified Person expressly for use
in connection with the preparation of the Registration Statement or any such
amendment thereof or supplement thereto, if such prospectus was timely made
available by the Company pursuant to Section 3(d); (ii) with respect to any
preliminary prospectus, shall not inure to the benefit of any such Person from
whom the Person asserting any such Claim purchased the Registrable Securities
that are the subject thereof (or to the benefit of any Person controlling such
Person) if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected in the prospectus, as then amended or
supplemented, if such prospectus was timely made available by the Company
11
pursuant to Section 3(d), and the Indemnified Person was promptly advised in
writing not to use the incorrect prospectus prior to the use giving rise to a
violation and such Indemnified Person, notwithstanding such advice, used it or
failed to deliver the correct prospectus as required by the 1933 Act and such
correct prospectus was timely made available pursuant to Section 3(d); (iii)
shall not be available to the extent such Claim is based on a failure of the
Investor to deliver or to cause to be delivered the prospectus made available by
the Company, including a corrected prospectus, if such prospectus or corrected
prospectus was timely made available by the Company pursuant to Section 3(d);
and (iv) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld or delayed. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Indemnified Person and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to severally and not
jointly indemnify, hold harmless and defend, to the same extent and in the same
manner as is set forth in Section 6(a), the Company, each of its directors, each
of its officers who signs the Registration Statement and each Person, if any,
who controls the Company within the meaning of the 1933 Act or the 1934 Act
(each, an "Indemnified Party"), against any Claim or Indemnified Damages to
which any of them may become subject, under the 1933 Act, the 1934 Act or
otherwise, insofar as such Claim or Indemnified Damages arise out of or are
based upon any Violation, in each case to the extent, and only to the extent,
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by such Investor expressly for use in
connection with such Registration Statement; and, subject to Section 6(c), such
Investor will reimburse any legal or other expenses reasonably incurred by an
Indemnified Party in connection with investigating or defending any such Claim;
provided, however, that the indemnity agreement contained in this Section 6(b)
and the agreement with respect to contribution contained in Section 7 shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of such Investor, which consent shall not be
unreasonably withheld or delayed; provided, further, however, that the Investor
shall be liable under this Section 6(b) for only that amount of a Claim or
Indemnified Damages as does not exceed the net proceeds to such Investor as a
result of the sale of Registrable Securities pursuant to such Registration
Statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented.
c. Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action or proceeding (including any governmental action or proceeding) involving
a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in
respect thereof is to be made against any indemnifying party under this Section
6, deliver to the indemnifying party a written notice of the commencement
thereof, and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any other
12
indemnifying party similarly noticed, to assume control of the defense thereof
with counsel mutually satisfactory to the indemnifying party and the Indemnified
Person or the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses of not more than one counsel for such
Indemnified Person or Indemnified Party to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. In the case of an
Indemnified Person, legal counsel referred to in the immediately preceding
sentence shall be selected by the Investors holding at least a majority in
interest of the Registrable Securities included in the Registration Statement to
which the Claim relates. The Indemnified Party or Indemnified Person shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or Claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
Indemnified Party or Indemnified Person which relates to such action or Claim.
The indemnifying party shall keep the Indemnified Party or Indemnified Person
reasonably apprised at all times as to the status of the defense or any
settlement negotiations with respect thereto. No indemnifying party shall be
liable for any settlement of any action, claim or proceeding effected without
its prior written consent, provided, however, that the indemnifying party shall
not unreasonably withhold, delay or condition its consent. No indemnifying party
shall, without the prior written consent of the Indemnified Party or Indemnified
Person, consent to entry of any judgment or enter into any settlement or other
compromise which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party or Indemnified Person of a
release from all liability in respect to such Claim or litigation, and such
settlement shall not include any admission as to fault on the part of the
Indemnified Party. Following indemnification as provided for hereunder, the
indemnifying party shall be subrogated to all rights of the Indemnified Party or
Indemnified Person with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been made. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action.
d. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or Indemnified Damages
are incurred.
e. The indemnity agreements contained herein shall be in
addition to (i) any cause of action or similar right of the Indemnified Party or
Indemnified Person against the indemnifying party or others, and (ii) any
liabilities the indemnifying party may be subject to pursuant to the law.
13
7. Contribution.
To the extent any indemnification by an indemnifying party is prohibited
or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no Person involved in the sale of Registrable Securities which Person is
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the 1933 Act) in connection with such sale shall be entitled to contribution
from any Person involved in such sale of Registrable Securities who was not
guilty of fraudulent misrepresentation; and (ii) contribution by any seller of
Registrable Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities pursuant to
such Registration Statement.
8. Reports Under the 1934 Act.
With a view to making available to the Investors the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the Investors to sell securities of the Company
to the public without registration ("Rule 144"), the Company agrees to use
commercially reasonable efforts to:
a. make and keep public information available, as those terms
are understood and defined in Rule 144;
b. file with the SEC in a timely manner (taking into account
any permitted extensions to file) all reports and other documents required of
the Company under the 1933 Act and the 1934 Act so long as the Company remains
subject to such requirements and the filing of such reports and other documents
is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company, if true, that it has complied with the reporting requirements of Rule
144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual report
of the Company and such other reports and documents so filed by the Company, and
(iii) such other information as may be reasonably requested to permit the
Investors to sell such securities pursuant to Rule 144 without registration.
9. Assignment of Registration Rights.
The rights under this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of such Investor's Registrable
Securities if: (i) the Investor agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to the
Company within a reasonable time after such assignment; (ii) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of (a) the name and address of such transferee or assignee, and
(b) the securities with respect to which such registration rights are being
transferred or assigned; (iii) immediately following such transfer or assignment
the further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act or applicable state securities laws; (iv) at or
14
before the time the Company receives the written notice contemplated by clause
(ii) of this sentence the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions contained herein; and (v) such
transfer shall have been made in accordance with the applicable requirements of
the Securities Purchase Agreement.
10. Amendment of Registration Rights.
Provisions of this Agreement may be amended and the observance thereof may
be waived (either generally or in a particular instance and either retroactively
or prospectively), only with the written consent of the Company and the Required
Holders. Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company. No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
Registrable Securities. No consideration shall be offered or paid to any Person
to amend or consent to a waiver or modification of any provision of any of this
Agreement unless the same consideration also is offered to all of the parties to
this Agreement.
11. Miscellaneous.
a. A Person is deemed to be a holder of Registrable Securities
whenever such Person owns or is deemed to own of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more Persons with respect to the same Registrable
Securities, the Company shall act upon the basis of instructions, notice or
election received from the such record owner of such Registrable Securities.
b. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) five Business Day after deposit
with a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
Natural Gas Systems, Inc.
820 Gessner, Suite 1340
Houston, Texas 77024
Tel: 713-935-0122
Fax: 713-935-0199
Attention: Robert S. Herlin, President
With a copy to:
Troy & Gould Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, California 90067-2367
Telephone: (310) 789-1255
Facsimile: (310) 201-4746
Attention: Lawrence Schnapp, Esq.
15
If to Legal Counsel:
Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Telephone: (212) 756-2000
Facsimile: (212) 593-5955
Attention: Peter Halasz, Esq.
If to the Buyer, to its address and facsimile number set forth on the Schedule
of Buyers attached hereto, with copies to the Buyer's representatives as set
forth on the Schedule of Buyers, or to such other address and/or facsimile
number and/or to the attention of such other Person as the recipient party has
specified by written notice given to each other party five (5) days prior to the
effectiveness of such change. Written confirmation of receipt (A) given by the
recipient of such notice, consent, waiver or other communication, (B)
mechanically or electronically generated by the sender's facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by a courier or overnight courier
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
c. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
d. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
The City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. If any provision of this Agreement shall be invalid or
16
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION
OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
e. This Agreement, the other Transaction Documents (as defined
in the Securities Purchase Agreement) and the instruments referenced herein and
therein constitute the entire agreement among the parties hereto with respect to
the subject matter hereof and thereof. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein and
therein. This Agreement, the other Transaction Documents and the instruments
referenced herein and therein supersede all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement
shall inure to the benefit of and be binding upon the permitted successors and
assigns of each of the parties hereto.
g. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in identical counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as any other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. All consents and other determinations required to be made
by the Investors pursuant to this Agreement shall be made, unless otherwise
specified in this Agreement, by the Required Holders.
k. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent and no rules
of strict construction will be applied against any party.
l. This Agreement is intended for the benefit of the parties
hereto and their respective permitted successors and assigns, and is not for the
benefit of, nor may any provision hereof be enforced by, any other Person.
17
m. The obligations of each Investor hereunder are several and
not joint with the obligations of any other Investor, and no provision of this
Agreement is intended to confer any obligations on any Investor vis-a-vis any
other Investor. Nothing contained herein, and no action taken by any Investor
pursuant hereto, shall be deemed to constitute the Investors as a partnership,
an association, a joint venture or any other kind of entity, or create a
presumption that the Investors are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated herein.
[The remainder of the page is intentionally left blank]
18
IN WITNESS WHEREOF, the Buyer and the Company have caused their respective
signature page to this Registration Rights Agreement to be duly executed as of
the date first written above.
NAME OF COMPANY
NATURAL GAS SYSTEMS, INC.
By:
---------------------------
Name:
Title:
IN WITNESS WHEREOF, the Buyer and the Company have caused their respective
signature page to this Registration Rights Agreement to be duly executed as of
the date first written above.
BUYER:
RUBICON MASTER FUND
By: Rubicon Fund Management, LLP,
its Investment Manager
By:
-----------------------------
Name:
Title:
SCHEDULE OF BUYERS
Buyer's Address and Buyer's Representative's Address
Buyer Facsimile Number and Facsimile Number
- ------------------------------------ ------------------------------------------- -------------------------------------
Rubicon Master Fund c/o Rubicon Fund Management LLP Schulte Roth & Zabel LLP
103 Mount St. 919 Third Avenue
London W1K2TJ New York, New York 10022
United Kingdom Telephone: (212) 756-2000
Facsimile No.: +44 207 074 4280 Facsimile: (212) 593-5955
Telephone No.: +44 207 074 4299 Attention: Peter Halasz, Esq.
Attn: William Callanan
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[Transfer Agent]
[Address]
Attention:
Re: NATURAL GAS SYSTEMS, INC.
Ladies and Gentlemen:
We are counsel to NATURAL GAS SYSTEMS, INC., a Nevada corporation (the
"Company"), and have represented the Company in connection with that certain
Securities Purchase Agreement (the "Securities Purchase Agreement") entered into
by and among the Company and Rubicon Master Fund, a company organized under the
laws of the Cayman Islands (, the "Holder") pursuant to which the Company issued
1.2 million shares of the Company's common stock, $___ par value per share (the
"Securities"). Pursuant to the Securities Purchase Agreement, the Company also
has entered into a Registration Rights Agreement with the Holder (the
"Registration Rights Agreement") pursuant to which the Company agreed, among
other things, to register the Registrable Securities (as defined in the
Registration Rights Agreement), including the Securities, under the Securities
Act of 1933, as amended (the "1933 Act"). In connection with the Company's
obligations under the Registration Rights Agreement, on ____________ ___, 2005,
the Company filed a Registration Statement on Form SB-2 (File No.
333-_____________) (the "Registration Statement") with the Securities and
Exchange Commission (the "SEC") relating to the Registrable Securities which
names the Holder as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge,
after telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
EXHIBIT A-1
Notwithstanding anything to the contrary contained in this letter, we
neither express nor imply any opinion as to compliance by the Company with the
antifraud provisions of the California Corporate Securities Law, the Securities
Act of 1933 or the Securities Exchange Act of 1934, or the rules or regulations
under such law or any of such Acts
Very truly yours,
[ISSUER'S COUNSEL]
By:
-------------------------------
cc: Rubicon Master Fund
EXHIBIT A-2
EXHIBIT B
SELLING STOCKHOLDERS
We are registering the shares of Common Stock in order to permit the
selling stockholders to offer the shares for resale from time to time. Except
for the ownership of the Common Stock issued pursuant to the Securities Purchase
Agreement or as otherwise set forth below, the selling stockholders have not had
any material relationship with us within the past three years.
The table below lists the selling stockholders and other information
regarding the beneficial ownership of the shares of Common Stock by each of the
selling stockholders. The second column lists the number of shares of Common
Stock beneficially owned by each selling stockholder as of ________, 2005.
In accordance with the terms of registration rights agreements with
certain of the selling stockholders, this prospectus generally covers the resale
of at least 100% of the Securities as of the trading day immediately preceding
the date the registration statement is initially filed with the SEC. The selling
stockholders may sell all, some or none of their shares in this offering. See
"Plan of Distribution."
Maximum Number of
Shares to be Sold
Number of Shares Owned Pursuant to this Number of Shares
Name of Selling Stockholder Prior to Offering Prospectus Owned After Offering
- ---------------------------------- -------------------------- ------------------------- ----------------------
Rubicon Master Fund (1)
[add additional stockholders]
(1) Pursuant to investment agreements, each of Rubicon Fund Management
Ltd., a company organized under the laws of the Cayman Islands, which we refer
to in this prospectus as Rubicon Fund Management Ltd, and Rubicon Fund
Management LLP, a limited liability partnership organized under the laws of the
United Kingdom, which we refer to in this prospectus as Rubicon Fund Management
LLP, Mr. Paul Anthony Brewer, Mr. Jeffrey Eugene Brummette, Mr. William Francis
Callanan, Mr. Vilas Gadkari, Mr. Robert Michael Greenshields and Mr. Horace
Joseph Leitch III share all investment and voting power with respect to the
securities held by Rubicon Master Fund. Mr. Brewer, Mr. Brummette, Mr. Callanan,
Mr. Gadkari, Mr. Greenshields and Mr. Leitch control both Rubicon Fund
Management Ltd and Rubicon Fund Management LLP. Each of Rubicon Fund Management
Ltd, Rubicon Fund Management LLP, Mr. Brewer, Mr. Brummette, Mr. Callanan, Mr.
Gadkari, Mr. Greenshields and Mr. Leitch disclaim beneficial ownership of these
securities.
EXHIBIT B-1
PLAN OF DISTRIBUTION
We are registering shares of Common Stock to permit the resale of these
shares of Common Stock by the holders of such shares of Common Stock from time
to time after the date of this prospectus. We will not receive any of the
proceeds from the sale by the selling stockholders of the shares of Common
Stock. We will bear all fees and expenses incident to our obligation to register
the shares of Common Stock.
The selling stockholders may sell all or a portion of the shares of
Common Stock owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the shares of
Common Stock are sold through underwriters or broker-dealers, the selling
stockholders will be responsible for underwriting discounts or commissions or
agent's commissions. The shares of Common Stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions,
o on any national securities exchange or quotation service on
which the securities may be listed or quoted at the time of
sale;
o in the over-the-counter market;
o in transactions otherwise than on these exchanges or systems
or in the over-the-counter market;
o through the writing of options, whether such options are
listed on an options exchange or otherwise;
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o sales pursuant to Rule 144;
o broker-dealers may agree with the selling securityholders to
sell a specified number of such shares at a stipulated price
per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
If the selling stockholders effect such transactions by selling shares
of Common Stock to or through underwriters, broker-dealers or agents, such
underwriters, broker-dealers or agents may receive commissions in the form of
discounts, concessions or commissions from the selling stockholders or
commissions from purchasers of the shares of Common Stock for whom they may act
as agent or to whom they may sell as principal (which discounts, concessions or
commissions as to particular underwriters, broker-dealers or agents may be in
excess of those customary in the types of transactions involved). In connection
with sales of the shares of Common Stock or otherwise, the selling stockholders
may enter into hedging transactions with broker-dealers or others, which may in
turn engage in short sales of the shares of Common Stock in the course of
hedging in positions they assume. The selling stockholders may also sell shares
of Common Stock short and deliver shares of Common Stock covered by this
prospectus to close out short positions and to return borrowed shares in
connection with such short sales. The selling stockholders may also loan or
pledge shares of Common Stock to broker-dealers or others that in turn may sell
such shares.
The selling stockholders may pledge or grant a security interest in
some or all of the shares of Common Stock owned by them and, if they default in
the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of Common Stock from time to time pursuant to this
prospectus or any amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933, as amended, amending, if
necessary, the list of selling stockholders to include the pledgee, transferee
or other successors in interest as selling stockholders under this prospectus.
The selling stockholders also may transfer and donate the shares of Common Stock
in other circumstances in which case the transferees, donees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus, including, without limitation, in accordance with Section 2(f)
of the Securities Purchase Agreement.
The selling stockholders and any broker-dealer participating in the
distribution of the shares of Common Stock may be deemed to be "underwriters"
within the meaning of the Securities Act, and any commission paid, or any
discounts or concessions allowed to, any such broker-dealer may be deemed to be
underwriting commissions or discounts under the Securities Act. At the time a
particular offering of the shares of Common Stock is made, a prospectus
supplement, if required, will be distributed which will set forth the aggregate
amount of shares of Common Stock being offered and the terms of the offering,
including the name or names of any broker-dealers or agents, any discounts,
commissions and other terms constituting compensation from the selling
stockholders and any discounts, commissions or concessions allowed or reallowed
or paid to broker-dealers.
Under the securities laws of some states, the shares of Common Stock
may be sold in such states only through registered or licensed brokers or
dealers. In addition, in some states the shares of Common Stock may not be sold
unless such shares have been registered or qualified for sale in such state or
an exemption from registration or qualification is available and is complied
with.
There can be no assurance that any selling stockholder will sell any or
all of the shares of Common Stock registered pursuant to the shelf registration
statement, of which this prospectus forms a part.
The selling stockholders and any other person participating in such
distribution will be subject to applicable provisions of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder, including,
without limitation, Regulation M of the Exchange Act, which may limit the timing
of purchases and sales of any of the shares of Common Stock by the selling
stockholders and any other participating person. Regulation M may also restrict
the ability of any person engaged in the distribution of the shares of Common
Stock to engage in market-making activities with respect to the shares of Common
Stock. All of the foregoing may affect the marketability of the shares of Common
Stock and the ability of any person or entity to engage in market-making
activities with respect to the shares of Common Stock.
We will pay all expenses of the registration of the shares of Common
Stock pursuant to the registration rights agreement, estimated to be $[ ] in
total, including, without limitation, Securities and Exchange Commission filing
fees and expenses of compliance with state securities or "blue sky" laws;
provided, however, that a selling stockholder will pay all underwriting
discounts and selling commissions, if any. We will indemnify the selling
stockholders against liabilities, including some liabilities under the
Securities Act, in accordance with the registration rights agreements, or the
selling stockholders will be entitled to contribution. We may be indemnified by
the selling stockholders against civil liabilities, including liabilities under
the Securities Act, that may arise from any written information furnished to us
by the selling stockholder specifically for use in this prospectus, in
accordance with the related registration rights agreements, or we may be
entitled to contribution.
Once sold under the shelf registration statement, of which this
prospectus forms a part, the shares of Common Stock will be freely tradable in
the hands of persons other than our affiliates.
AMENDMENT TO CONSULTING AGREEMENT
This Amendment to the Consulting Agreement ("Amendment"), effective as
April 26, 2005, is entered into by and between NATURAL GAS SYSTEMS, INC., a
Nevada corporation (herein referred to as the "Company"), and LIVIAKIS FINANCIAL
COMMUNICATIONS, INC., a California corporation (herein referred to as the
"Consultant").
W I T N E S S E T H:
WHEREAS, the Company assumed the consulting contract (such agreement is
hereinafter referred to as the "Consulting Contract," attached hereto as Exhibit
A) entered into between the Company's the predecessor in interest, Natural Gas
Systems, Inc., a Delaware corporation, and Consultant on September 23, 2003
concerning the engagement of Consultant as an investor relations firm; and
WHEREAS, the term of the Consulting Contract has now expired and the
parties wish to amend the Consulting Contract so that Consultant shall continue
to provide its investor relations services and the Company has agreed to provide
additional consideration;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
1. All references to "Company" contained in the Consulting Contract
shall be deemed to mean Natural Gas Systems, Inc., a Nevada
corporation.
2. Section 1 of the Consulting Contract is amended and restated in its
entirety, effective as of the date hereof, to provide as follows:
"Term of Consultancy. The Company hereby agrees to retain the
Consultant to act in a consulting capacity to the Company, and
the Consultant hereby agrees to provide services to the
Company commencing on May 2, 2005, and ending one year later
(the "Term)."
4. Section 4(a) of the Consulting Contract is amended and restated in
its entirety, to provide as follows:
"Purchase of Common Stock. For undertaking this engagement,
the Company agrees to issue to the Consultant One Hundred
Twenty Thousand (120,000) shares of the Company's common
stock("Common Stock"), which shall be subject to monthly
vesting, pursuant to the Stock Grant Agreement, attached
hereto as Exhibit B (the "Stock Grant Agreement") and of even
date herewith."
1
5. A new Section 4(d) is hereby added to the Consulting Contract, to
provide as follows:
"Monthly Fee. During the Term hereof, Company shall pay Consultant a
monthly fee of $5,000.00 ("Monthly Fee"), payable monthly in
arrears, starting May 31, 2005."
6. Section 9 of the Consulting Contract is amended and restated in its
entirety, to provide as follows:
"Termination. This Agreement shall become effective as of the date
listed above and shall continue in full force and effect until the
expiration of the Term, unless terminated sooner in accordance with
the express provisions of this Section 9. The Company may terminate
this Agreement at any time, with or without Cause upon 5 days prior
notice. For the purposes of this Agreement, "Cause" is defined under
the Stock Grant Agreement. In the event the Company terminates this
Agreement for Cause, the Company's obligations to pay further
compensation of under this Agreement or the Stock Grant Agreement
shall cease. In the event the Company terminates this Agreement for
any reason other than Cause, only the Company's obligation to pay
the Monthly Fee shall terminate, and the Consultant shall continue
to vest shares under the terms and conditions of the Stock Grant
Agreement.
7. Except to the extent modified hereby, the Consulting Contract shall
remain in full force and effect.
8. This Amendment shall be binding upon and inure to the benefit of the
parties and their successors and assigns.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
as of the date and year first referenced above.
"The Company" NATURAL GAS SYSTEMS, INC.
Date: By: _____________________________
Robert Herlin, President
"The Consultant" LIVIAKIS FINANCIAL COMMUNICATIONS, INC.
Date: By: ______________________________
John Liviakis, President
2
NATURAL GAS SYSTEMS, INC.
2004 STOCK PLAN:
SUMMARY OF STOCK GRANT
By your signature and the signature of the Company's representative
below, you and the Company agree that you are receiving shares subject to the
terms and conditions of the 2004 Stock Plan and the Stock Grant Agreement, both
of which are attached to and made a part of this document.
Name of Transferee: Liviakis Financial
Communications, Inc.
Total Number of Transferred 120,000
Shares:
Fair Market Value Per Share: $2.20
Date of Transfer: April 26, 2005
Vesting Commencement Date: May 1, 2005
Vesting Schedule: The Forfeiture Condition shall lapse
with respect to the first 1/12th of
the Transferred Shares when the
Transferee completes one month of
continuous Service after the Vesting
Commencement Date. The Forfeiture
Condition shall lapse with respect to
an additional 1/12th of the
Transferred Shares when the Transferee
completes each month of continuous
Service thereafter.
TRANSFEREE: NATURAL GAS SYSTEMS, INC.
By: By:
------------------------------ ------------------------------
Robert S. Herlin, President
Title:
NATURAL GAS SYSTEMS, INC.
2004 STOCK PLAN:
STOCK GRANT AGREEMENT (FOR SERVICES)
SECTION 1. ACQUISITION OF SHARES.
(a) Transfer. On the terms and conditions set forth in the Summary
of Stock Grant and this Agreement, the Company agrees to transfer to the
Transferee the number of Shares set forth in the Summary of Stock Grant. The
transfer shall occur at the offices of the Company on the date of transfer set
forth in the Summary of Stock Grant or at such other place and time as the
parties may agree.
(b) Consideration. The Transferee and the Company agree that the
Transferred Shares are being issued to the Transferee as consideration for a
portion of the services performed by the Transferee for the Company. The value
of such portion is agreed to be not less than 100% of the Fair Market Value of
the Transferred Shares.
(c) Stock Plan and Defined Terms. The transfer of the Transferred
Shares is subject to the Plan, a copy of which the Transferee acknowledges
having received. The provisions of the Plan are incorporated into this Agreement
by this reference. Capitalized terms are defined in Section 12 of this
Agreement.
SECTION 2. FORFEITURE CONDITION.
(a) Scope of Forfeiture Condition. All Transferred Shares initially
shall be Restricted Shares and shall be subject to forfeiture to the Company.
The Transferee shall not transfer, assign, encumber or otherwise dispose of any
Restricted Shares without the Company's written consent, except as provided in
the following sentence. The Transferee may transfer Restricted Shares to one or
more members of the Transferee's Immediate Family or to a trust established by
the Transferee for the benefit of the Transferee and/or one or more members of
the Transferee's Immediate Family, provided in either case that the Transferee
agrees in writing on a form prescribed by the Company to be bound by all
provisions of this Agreement. If the Transferee transfers any Restricted Shares,
then this Agreement shall apply to the Subsequent Transferee to the same extent
as to the Transferee.
(b) Vesting. The Forfeiture Condition shall lapse and the Restricted
Shares shall become vested in accordance with the vesting schedule set forth in
the Summary of Stock Grant. The Company may, at its sole discretion, accelerate
the vesting and waive the Forfeiture Condition, at any time.
(c) Execution of Forfeiture. The Forfeiture Condition shall be
applicable only if the Transferee's Service terminates for Cause, including
(without limitation) death or disability of John Liviakis, before all Restricted
Shares have become vested. In the event that the Transferee's Service terminates
for Cause, the certificate(s) representing any remaining Restricted Shares shall
be delivered to the Company properly endorsed for transfer. The Company shall
make no payment for Restricted Shares that are forfeited.
(d) Additional Shares or Substituted Securities. In the event of the
declaration of a stock dividend, the declaration of an extraordinary dividend
payable in a form other than stock, a spin-off, a stock split, an adjustment in
conversion ratio, a recapitalization or a similar transaction affecting the
Company's outstanding securities without receipt of consideration, any new,
substituted or additional securities or other property (including money paid
other than as an ordinary cash dividend) which are by reason of such transaction
distributed with respect to any Restricted Shares or into which such Restricted
Shares thereby become convertible shall immediately be subject to the Forfeiture
Condition. Appropriate adjustments to reflect the distribution of such
securities or property shall be made to the number and/or class of the
Restricted Shares.
(e) Termination of Rights as Stockholder. If Restricted Shares are
forfeited in accordance with this Section 2, then the person who is to forfeit
such Restricted Shares shall no longer have any rights as a holder of such
Restricted Shares. Such Restricted Shares shall be deemed to have been forfeited
in accordance with the applicable provisions hereof, whether or not the
certificate(s) therefor have been delivered as required by this Agreement.
(f) Escrow. Upon issuance, the certificates for Restricted Shares
shall be deposited in escrow with the Company to be held in accordance with the
provisions of this Agreement. Any new, substituted or additional securities or
other property described in Subsection (d) above shall immediately be delivered
to the Company to be held in escrow, but only to the extent the Transferred
Shares are at the time Restricted Shares. All regular cash dividends on
Restricted Shares (or other securities at the time held in escrow) shall be paid
directly to the Transferee and shall not be held in escrow. Restricted Shares,
together with any other assets or securities held in escrow hereunder, shall be
(i) surrendered to the Company for forfeiture and cancellation in the event that
the Forfeiture Condition applies or (ii) released to the Transferee upon the
Transferee's request to the extent the Transferred Shares are no longer
Restricted Shares (but not more frequently than once every six months). In any
event, all Transferred Shares that have vested (and any other vested assets and
securities attributable thereto) shall be released within 60 days after the
earlier of the termination of the Transferee's Service.
SECTION 3. OTHER RESTRICTIONS ON TRANSFER.
(a) Transferee Representations. In connection with the issuance and
acquisition of Shares under this Agreement, the Transferee hereby represents and
warrants to the Company as follows:
(i) The Transferee is acquiring and will hold the Transferred Shares
for investment for his or her account only and not with a view to, or for
resale in connection with, any "distribution" thereof within the meaning
of the Securities Act.
(ii) The Transferee understands that the Transferred Shares have not
been registered under the Securities Act by reason of a specific exemption
therefrom and that the Transferred Shares must be held indefinitely,
unless they are subsequently registered under the Securities Act or the
Transferee obtains an opinion of counsel, in form and substance
satisfactory to the Company and its counsel, that such registration is not
required. The Transferee further acknowledges and understands that the
Company is under no obligation to register the Transferred Shares.
(iii) The Transferee is aware of the adoption of Rule 144 by the
Securities and Exchange Commission under the Securities Act, which permits
limited public resales of securities acquired in a non-public offering,
subject to the satisfaction of certain conditions, including (without
limitation) the availability of certain current public information about
the issuer, the resale occurring only after the holding period required by
Rule 144 has been satisfied, the sale occurring through an unsolicited
"broker's transaction," and the amount of securities being sold during any
three-month period not exceeding specified limitations. The Transferee
acknowledges and understands that the conditions for resale set forth in
Rule 144 have not been satisfied and that the Company has no plans to
satisfy these conditions in the foreseeable future.
(iv) The Transferee will not sell, transfer or otherwise dispose of
the Transferred Shares in violation of the Securities Act, the Securities
Exchange Act of 1934, or the rules promulgated thereunder, including Rule
144 under the Securities Act. The Transferee agrees that he or she will
not dispose of the Transferred Shares unless and until he or she has
complied with all requirements of this Agreement applicable to the
disposition of Transferred Shares and he or she has provided the Company
with written assurances, in substance and form satisfactory to the
Company, that (A) the proposed disposition does not require registration
of the Transferred Shares under the Securities Act or all appropriate
action necessary for compliance with the registration requirements of the
Securities Act or with any exemption from registration available under the
Securities Act (including Rule 144) has been taken and (B) the proposed
disposition will not result in the contravention of any transfer
restrictions applicable to the Transferred Shares under applicable state
law.
(v) The Transferee has been furnished with, and has had access to,
such information as he or she considers necessary or appropriate for
deciding whether to invest in the Transferred Shares, and the Transferee
has had an opportunity to ask questions and receive answers from the
Company regarding the terms and conditions of the issuance of the
Transferred Shares.
(vi) The Transferee is aware that his or her investment in the
Company is a speculative investment that has limited liquidity and is
subject to the risk of complete loss. The Transferee is able, without
impairing his or her financial condition, to hold the Transferred Shares
for an indefinite period and to suffer a complete loss of his or her
investment in the Transferred Shares.
(vii) Transferee is an "accredited investor" as defined under
Exhibit I attached hereto.
(b) Securities Law Restrictions. Regardless of whether the offering
and sale of Shares under the Plan have been registered under the Securities Act
or have been registered or qualified under the securities laws of any state, the
Company at its discretion may impose restrictions upon the sale, pledge or other
transfer of the Transferred Shares (including the placement of appropriate
legends on stock certificates or the imposition of stop-transfer instructions)
if, in the judgment of the Company, such restrictions are necessary or desirable
in order to achieve compliance with the Securities Act, the securities laws of
any state or any other law.
(c) Market Stand-Off. In connection with any underwritten public
offering by the Company of its equity securities pursuant to an effective
registration statement filed under the Securities Act, including the Company's
initial public offering, the Transferee shall not directly or indirectly sell,
make any short sale of, loan, hypothecate, pledge, offer, grant or sell any
option or other contract for the purchase of, purchase any option or other
contract for the sale of, or otherwise dispose of or transfer, or agree to
engage in any of the foregoing transactions with respect to, any Transferred
Shares without the prior written consent of the Company or its underwriters.
Such restriction (the "Market Stand-Off") shall be in effect for such period of
time following the date of the final prospectus for the offering as may be
requested by the Company or such underwriters. In no event, however, shall such
period exceed 180 days. The Market Stand-Off shall in any event terminate two
years after the date of the Company's initial public offering. In the event of
the declaration of a stock dividend, a spin-off, a stock split, an adjustment in
conversion ratio, a recapitalization or a similar transaction affecting the
Company's outstanding securities without receipt of consideration, any new,
substituted or additional securities which are by reason of such transaction
distributed with respect to any Shares subject to the Market Stand-Off, or into
which such Shares thereby become convertible, shall immediately be subject to
the Market Stand-Off. In order to enforce the Market Stand-Off, the Company may
impose stop-transfer instructions with respect to the Transferred Shares until
the end of the applicable stand-off period. The Company's underwriters shall be
beneficiaries of the agreement set forth in this Subsection (c). This Subsection
(c) shall not apply to Shares registered in the public offering under the
Securities Act, and the Transferee shall be subject to this Subsection (c) only
if the directors and officers of the Company are subject to similar
arrangements.
t 12 (d) Rights of the Company. The Company shall not be required to (i)
transfer on its books any Transferred Shares that have been sold or transferred
in contravention of this Agreement or (ii) treat as the owner of Transferred
Shares, or otherwise to accord voting, dividend or liquidation rights to, any
Subsequent Transferee to whom Transferred Shares have been transferred in
contravention of this Agreement.
SECTION 4. SUCCESSORS AND ASSIGNS.
Except as otherwise expressly provided to the contrary, the
provisions of this Agreement shall inure to the benefit of, and be binding upon,
the Company and its successors and assigns and be binding upon the Transferee
and the Transferee's legal representatives, heirs, legatees, distributees,
assigns and transferees by operation of law, whether or not any such person has
become a party to this Agreement or has agreed in writing to join herein and to
be bound by the terms, conditions and restrictions hereof.
SECTION 5. NO RETENTION RIGHTS.
Nothing in this Agreement or in the Plan shall confer upon the
Transferee any right to continue providing services to the Company for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Company or of the Transferee, which rights are hereby
expressly reserved by each, to terminate his or her service at any time and for
any reason, with or without cause.
SECTION 6. TAX ELECTION.
The acquisition of the Transferred Shares may result in adverse tax
consequences that may be avoided or mitigated by filing an election under Code
Section 83(b). Such election may be filed only within 30 days after the date of
transfer set forth in the Summary of Stock Grant. The Transferee should consult
with his or her tax advisor to determine the tax consequences of acquiring the
Transferred Shares and the advantages and disadvantages of filing the Code
Section 83(b) election. The Transferee acknowledges that it is his or her sole
responsibility, and not the Company's, to file a timely election under Code
Section 83(b), even if the Transferee requests the Company or its
representatives to make this filing on his or her behalf.
SECTION 7. LEGENDS.
All certificates evidencing Transferred Shares shall bear the
following legends:
"THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED,
ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE
TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER
OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH IMPOSES
CERTAIN FORFEITURE CONDITIONS UPON TERMINATION OF SERVICE WITH THE
COMPANY. THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A
COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE."
"THE SHARES REPRESENTED HEREBY 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 AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL,
THAT SUCH REGISTRATION IS NOT REQUIRED."
If required by the authorities of any state in connection with the issuance of
the Transferred Shares, the legend or legends required by such state authorities
shall also be endorsed on all such certificates.
SECTION 8. NOTICE.
Any notice required by the terms of this Agreement shall be given in
writing. It shall be deemed effective upon (i) personal delivery, (ii) deposit
with the United States Postal Service, by registered or certified mail, with
postage and fees prepaid or (iii) deposit with Federal Express Corporation, with
shipping charges prepaid. Notice shall be addressed to the Company at its
principal executive office and to the Transferee at the address that he or she
most recently provided to the Company in accordance with this Section 9.
SECTION 9. ENTIRE AGREEMENT.
The Summary of Stock Grant, this Agreement and the Plan constitute
the entire contract between the parties hereto with regard to the subject matter
hereof. They supersede any other agreements, representations or understandings
(whether oral or written and whether express or implied) which relate to the
subject matter hereof.
SECTION 10. CHOICE OF LAW.
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Nevada, as such laws are applied to contracts
entered into and performed in such State.
SECTION 11. DEFINITIONS.
(a) "Agreement" shall mean this Stock Grant Agreement.
(b) "Board of Directors" shall mean the Board of Directors of the
Company, as constituted from time to time or, if a Committee has been appointed,
such Committee.
(c) "Cause" shall mean:
(i) An unauthorized use or disclosure by the Transferee of the
Company's material non-public information or trade secrets;
(ii) A material breach by the Transferee of any consulting agreement
between the Transferee and the Company;
(iii) A failure to perform satisfactorily the services and duties
that Transferee is required to perform under its agreement with the
Company;
(iv) The Transferee's conviction of, or plea of "guilty" or "no
contest" to, a felony under the laws of the United States or any state
thereof; or
(v) The Transferee's gross negligence or willful misconduct;
The foregoing, however, shall not be deemed an exclusive list of all acts or
omissions that the Company (or a Parent or Subsidiary) may consider as grounds
for the discharge of the Transferee without Cause.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Committee" shall mean a committee of the Board of Directors, as
described in Section 2 of the Plan.
(f) "Company" shall mean Natural Gas Systems, Inc., a Nevada
corporation.
(g) "Consultant" shall mean a person who performs bona fide services
for the Company, a Parent or a Subsidiary as a consultant or advisor, excluding
Employees and Outside Directors.
(h) "Employee" shall mean any individual who is a common-law
employee of the Company, a Parent or a Subsidiary.
(i) "Fair Market Value" shall mean the fair market value of a Share,
as determined by the Board of Directors in accordance with the Plan.
(j) "Forfeiture Condition" shall mean the forfeiture condition
described in Section 2.
(k) "Immediate Family" shall mean any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law and shall include
adoptive relationships.
(l) "Outside Director" shall mean a member of the Board of Directors
who is not an Employee.
(m) "Parent" shall mean any corporation (other than the Company) in
an unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
(n) "Plan" shall mean the Natural Gas Systems, Inc. 2004 Stock Plan,
as amended.
(o) "Restricted Share" shall mean a Transferred Share that is
subject to the Forfeiture Condition.
(p) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(q) "Service" shall mean service as an Employee, Outside Director or
Consultant.
(r) "Share" shall mean one share of Stock, as adjusted in accordance
with Section 14 of the Plan (if applicable).
(s) "Stock" shall mean the Common Stock of the Company, with a par
value of $0.001 per Share.
(t) "Subsequent Transferee" shall mean any person to whom the
Transferee has directly or indirectly transferred any Transferred Shares.
(u) "Subsidiary" shall mean any corporation (other than the Company)
in an unbroken chain or corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
(v) "Summary of Stock Grant" shall mean the document so entitled to
which this Agreement is attached.
(w) "Transferee" shall mean the individual named in the Summary of
Stock Grant.
(x) "Transfer Notice" shall mean the notice of a proposed transfer
of Transferred Shares described in Section 3.
(y) "Transferred Shares" shall mean the Shares acquired by the
Transferee pursuant to this Agreement.
Exhibit I
CERTIFICATE OF ACCREDITED INVESTOR STATUS
Except as may be indicated by the undersigned below, the undersigned is an
"accredited investor," as that term is defined in Regulation D under the
Securities Act of 1933, as amended (the "Securities Act"). The undersigned has
checked the box below indicating the basis on which he is representing his
status as an "accredited investor":
a bank as defined in Section 3(a)(2) of the Securities Act, or any savings
and loan association or other institution as defined in Section 3(a)(5)(A)
of the Securities Act whether acting in its individual or fiduciary
capacity; a broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934, as amended (the "Securities Exchange
Act"); an insurance company as defined in Section 2(13) of the Securities
Act; an investment company registered under the Investment Company Act of
1940 or a business development company as defined in Section 2(a)(48) of
that Act; a small business investment company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958; a plan established and maintained by a state, its
political subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, and such plan
has total assets in excess of $5,000,000; an employee benefit plan within
the meaning of the Employee Retirement Income Security Act of 1974, if the
investment decision is made by a plan fiduciary, as defined in Section
3(21) of such Act, which is either a bank, savings and loan association,
insurance company, or registered investment adviser, or if the employee
benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons that
are "accredited investors";
a private business development company as defined in Section 202(a)(22) of
the Investment Advisers Act of 1940;
an organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000;
a natural person whose individual net worth, or joint net worth with the
undersigned's spouse, at the time of this purchase exceeds $1,000,000;
a natural person who had an individual income in excess of $200,000 in
each of the two most recent years or joint income with the undersigned's
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
a trust with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the securities offered, whose purchase is
directed by a person who has such knowledge and experience in financial
and business matters that he is capable of evaluating the merits and risks
of the prospective investment; or
t 6 6 an entity in which all of the equity holders are "accredited
investors" by virtue of their meeting one or more of the above standards.
an individual who is a director or executive officer of Natural Gas
Systems, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Accredited Investor Status effective as of __________________, 2005.
--------------------------------
Name of Recipient
By: ________________________
Name: ______________________
Title: _______________________
News Release May 9, 2005
Major Institution Acquires Equity Stake in Natural Gas Systems, Inc.
(Houston, Texas) NATURAL GAS SYSTEMS, INC. (OTC: NGSY) ("NGS" or the "Company")
today announced that a major European institutional investor purchased 1,200,000
shares of its restricted common stock at a price of $2.50 per share for gross
proceeds of $3.0 million. The proceeds from the transaction will further
strengthen the Company's balance sheet and provide additional working capital to
pursue its growth strategy.
"We view this new institutional relationship as a very positive development for
NGS and believe that it will enable us to, among other things, accelerate our
potential technology applications in the re-development of oil and gas fields,"
said Robert Herlin, President of NGS.
The shares of common stock in the private placement were not registered under
the Securities Act of 1933 and may not be subsequently offered or sold by the
investor in the United States absent registration or an applicable exemption
from the registration requirements. In connection with the private placement,
the Company granted the investor registration rights. This news release does not
constitute an offer to sell or the solicitation of an offer to buy any security
and shall not constitute an offer, solicitation, or sale of any securities in
any jurisdiction in which such offer, solicitation, or sale would be unlawful
prior to registration or qualification under the securities laws of such
jurisdiction.
NGS (www.natgas.us) acquires and develops oil and gas properties and applies
conventional and specialized technology to accelerate production and develop
incremental reserves. NGS owns 100% of the working interest in the 13,636 acre
Delhi Field in northeastern Louisiana that has historically produced over 200
million barrels of oil since discovery in 1945, according to outside engineers.
Since its acquisition in 2003, NGS has substantially increased production by
returning wells to operation and re-completing wells to new reservoirs, and is
implementing a development drilling program. NGS also owns a 100% working
interest in approximately 146 producing wells and 99 shut-in wells in the Tullos
Urania and nearby fields in northcentral Louisiana and has begun restoring
shut-in wells to production.
Safe Harbor Statement
This press release includes certain "Forward-Looking Statements" within the
meaning of section 21E of the United States Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. All
statements regarding potential results and future plans and objectives of the
Company are forward-looking statements that involve various risks and
uncertainties. There can be no assurance that such statements will prove to be
accurate and actual results and future events could differ materially from those
anticipated in such statements. Important factors that could cause actual
results to differ materially from our expectations include, but are not limited
to, those factors that are disclosed under the heading "Risk Factors" and
elsewhere in our documents filed from time to time with the United States
Securities and Exchange Commission and other regulatory authorities. Statements
regarding our ability to accelerate our potential technology applications in the
re-development of oil and gas fields, production volumes, drilling and
development activity, prices, future revenues and income and cash flows and
other statements that are not historical facts contain predictions, estimates
and other forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Although the Company believes that its expectations are based on reasonable
assumptions, it can give no assurance that its goals will be achieved and these
statements will prove to be accurate. Important factors could cause actual
results to differ materially from those included in the forward-looking
statements.
For additional information contact:
Investor Contact: John Liviakis, Liviakis Financial Communications, Inc.
(415) 389-4670
NGS Contact: Sterling McDonald, Chief Financial Officer
(713) 935-0122