Document:

NATURAL
GAS SYSTEMS, INC.

 

REGISTRATION
RIGHTS AGREEMENT

 

THIS
REGISTRATION RIGHTS AGREEMENT (the “Agreement”) is
made as of January ____, 2005, by and among Natural Gas Systems, Inc., a Nevada
corporation (the “Company”), and
the undersigned holders of common stock of the Company together with their
qualifying transferees (the “Holders”).

 

RECITALS:

 

A. In
connection with the Company’s issuance of a note to Holders, the Company has
granted to the Holders warrants exercisable into Common Shares.

 

B. The
issuance of the note and the warrants is conditional upon the extension of the
rights set forth herein, and by this Agreement the Company and the Holders
desire to provide for certain rights as set forth herein.

 

NOW,
THEREFORE, in consideration of the foregoing and of the mutual promises and
covenants contained herein, the parties, severally and not jointly, hereby agree
as follows:

 

AGREEMENT:

 

NOW,
THEREFORE, in consideration of the foregoing and of the mutual promises and
covenants contained herein, the parties agree as follows:

 

1. Registration
Rights.

 

1.1 Definitions. As used
in this Agreement, the following terms shall have the following respective
meanings:

 

(a) The terms
“register”,
“registered” and
“registration” refer
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933, as amended (the “Securities
Act”), and
the declaration or ordering of the effectiveness of such registration
statement.

 

(b) The term
“Registrable
Securities” means
(i) any and all shares of Common Stock of the Company issuable upon the exercise
of that certain Warrant Agreement dated January __, 2005 (which shares of
Registrable Common Stock are referred to herein as the “Common
Shares”); (ii)
stock issued in lieu of the stock referred to in (i) in any reorganization which
has not been sold to the public; or (iii) stock issued in respect of the stock
referred to in (i) and (ii) as a result of a stock split, stock dividend,
recapitalization or the like, which has not been sold to the public;
provided,
however, that
Registrable Securities shall not include any Common Shares which have previously
been registered or which have been sold to the public either pursuant to a
registration statement or in a private transaction in which the transferor’s
rights under this Agreement are not assigned.

 

(c) The terms
“Holder” or
“Holders” means
any person or persons to whom Registrable Securities were originally issued or
qualifying transferees under subsection 1.9 hereof who hold Registrable
Securities.

 

(d) The term
“Initiating
Holders” means
any Holder or Holders, of 40% or greater of the aggregate of the Registrable
Securities then outstanding.

 

(e) The term
“SEC” means
the Securities and Exchange Commission.

 

(f) The term
“Registration
Expenses” shall
mean all expenses incurred by the Company in complying with subsections 1.2,
1.3, 1.4 and 1.5 hereof, including, without limitation, all registration,
qualification and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for the Company, blue sky fees and expenses, and the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Company which shall
be paid in any event by the Company.) 

 

1.2 Company
Registration.

 

(a) Registration. If at
any time or from time to time, the Company shall determine to register any of
its securities, for its own account or the account of any of its shareholders,
other than a registration on Form S-8 relating solely to employee stock option
or purchase plans, or a registration on Form S-4 relating solely to a SEC Rule
145 transaction, or a registration pursuant to Section 1.3 hereof, the Company
will:

 

(i) promptly
give to each Holder written notice thereof at least 30 days prior to the initial
filing of the registration statement relating to such offering; and

 

(ii) use
commercially reasonable efforts to include in such registration (and
compliance), and in any underwriting involved therein, all the Registrable
Securities specified in a written request or requests, made within 15 days after
receipt of such written notice from the Company, by any Holder or Holders,
except as set forth in subsection 1.2(b) below.

 

(b) Underwriting.

 

(i) If the
registration of which the Company gives notice is for a registered public
offering involving an underwriting, the Company shall so advise the Holders as a
part of the written notice given pursuant to subsection 1.2(a)(i). In such event
the right of any Holder to registration pursuant to subsection 1.2 shall be
conditioned upon such Holder’s participation in such underwriting and the
inclusion of such Holder’s Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall (together with the Company and the other
shareholders distributing their securities through such underwriting) enter into
an underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company.

 

(ii) Notwithstanding
any other provision of this subsection 1.2, if the underwriter managing such
public offering determines that marketing factors require a limitation of the
number of shares to be underwritten, the underwriter may limit the number of
Registrable Securities to be included in the registration and underwriting, or
may exclude Registrable Securities entirely from such registration and
underwriting. The Company shall so advise all Holders of Registrable Securities
which would otherwise be registered and underwritten pursuant hereto, and the
number of shares of Registrable Securities that may be included in the
registration and underwriting shall be allocated among Holders requesting
registration in proportion, as nearly as practicable, to the respective amounts
of Registrable Securities held by each of such Holders as of the date of the
notice pursuant to subsection 1.2(a)(i) above; provided that, if and to the
extent not in conflict with any registration rights granted to other holders of
the Company’s securities in existence as of the date hereof, the number of
shares of Registrable Securities requested to be included in such underwriting
shall not be reduced unless the securities being sold by shareholders other than
the Holders are excluded from the Underwriting on a proportional basis. If any
Holder disapproves of the terms of any such underwriting, he may elect to
withdraw therefrom by written notice to the Company and the underwriter. Any
Registrable Securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration. 

 

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1.3 Form
S-3. In
addition to the rights and obligations set forth in subsection 1.2 above, if a
Holder requests that the Company file a registration statement on Form S-3 (or
any successor to Form S-3) for a public offering of shares of Registrable
Securities, the reasonably anticipated aggregate price to the public of which
(net of underwriting discounts and commissions) would exceed $1,000,000 and the
Company is then a registrant entitled to use Form S-3 to register the shares for
such an offering, the Company shall use commercially reasonable efforts to cause
such shares to be registered for the offering as soon as practicable on Form S-3
(or any successor form to Form S-3); provided, however the Company shall not be
required to effect a registration pursuant to this subsection 1.3:

 

(a) in any
particular jurisdiction in which the Company would be required to execute a
general consent to service of process in effecting such registration,
qualification or compliance unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities
Act;

 

(b) during
the period starting with the date of filing of, and ending on a date 60 days
following the effective date of, a registration statement pursuant to subsection
1.2, provided that the Company is actively employing in good faith commercially
reasonable efforts to cause such registration statement to become
effective;

 

(c) if the
Company at the request of a Holder has effected a registration pursuant to this
subsection 1.3 within a 12-month period from the date of such request;
or

 

(d) if the
Company shall furnish to such Holder a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be detrimental to the Company and its shareholders for
such registration statement to be filed on or before the date filing would be
required and it is therefore essential to defer the filing of such registration
statement, in which case the Company shall have the right to defer such filing
for a period of not more than 90 days after the furnishing of such a certificate
of deferral, provided that the Company may not defer such filing pursuant to
this subsection 1.3 more than once in any six month period.

 

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In the
event such Holders propose to offer the shares of Registrable Securities
pursuant to this subsection 1.3 by means of an underwriting, the proposed
underwriter(s) shall be selected by a majority in interest of the Holders and
shall be reasonably acceptable to the Company. The Company shall give written
notice to all other Holders and all other shareholders of the Company with
registration rights (collectively, the “Other
Holders”) of the
receipt of a request for registration pursuant to this subsection 1.3 and shall
provide a reasonable opportunity for the Other Holders to participate in the
registration. The right of any Holder to registration pursuant to this
subsection 1.3 shall be conditioned upon such Holder’s participation in such
underwriting and the inclusion of such Holder’s and/or such Other Holders’
Registrable Securities and/or other securities of the Company eligible for
registration in the underwriting (unless otherwise mutually agreed by a majority
in interest of the Holders and the Other Holders) to the extent provided herein.
The Company shall (together with the Holders and the Other Holders proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters.
Notwithstanding any other provision of this subsection 1.3, if the underwriter
advises the Company in writing that marketing factors require a limitation of
the number of shares to be underwritten, the Company shall so advise the Holders
and the Other Holders of the number of shares of Registrable Securities and
other securities of the Company eligible for registration that may be included
in the registration and underwriting shall be allocated among the Holders and
Other Holders thereof in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities, and other securities of the Company eligible
for registration, to be included in such underwriting shall not be reduced
unless all other securities are first entirely excluded from the underwriting.
If any Holder of Registrable Securities or other disapproves of the terms of the
underwriting, such Holder may elect to withdraw therefrom by written notice to
the Company, the underwriter and the Initiating Holders. Any Registrable
Securities which are excluded from the underwriting by reason of the
underwriter’s marketing limitation or withdrawn from such underwriting shall be
withdrawn from such registration.

 

1.4 Expenses
of Registration. All
Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to this Section 1 shall be borne by the
Company except as follows:

 

(a) The
Company shall not be required to pay for expenses of any registration proceeding
begun pursuant to subsection 1.3, the request for which has been subsequently
withdrawn by the Holders, in which latter such case, such expenses shall be
borne by the Holders requesting such withdrawal. In the event that a withdrawal
by the Holders is based on material adverse information relating to the Company
that is different from the information known or available to the Holders
requesting registration at the time of their request for registration under
subsection 1.3, such registration shall not be treated as a counted requested
registration for the purposes of subsection 1.3 hereof, and in which case, such
expenses shall be borne by the Company.

 

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(b) For each
registration, the Company shall not be required to pay fees or disbursements of
more than one firm of legal counsel to the Holders, such fees to not exceed
$10,000 in the aggregate.

 

(c) The
Company shall not be required to pay underwriters’ fees, discounts or
commissions relating to Registrable Securities, and all stock transfer taxes
applicable to the sale of Registrable Securities and fees and disbursements of
counsel for any Holder (other than fees and disbursements of counsel included in
the Registration Expenses). 

 

1.5 Registration
Procedures. In the
case of each registration, qualification or compliance effected by the Company
pursuant to this Agreement, the Company will keep each Holder participating
therein advised in writing as to the initiation of each registration,
qualification and compliance and as to the completion thereof. Except as
otherwise provided in subsection 1.4, at its expense the Company
will:

 

(a) with
respect to a demand made for registration pursuant to Section 1.3, prepare and
file with the SEC a registration statement with respect to such Registrable
Securities and use its best efforts to cause such registration statement to
become effective, and, upon the request of the Holders of a majority of the
Registrable Securities registered thereunder, keep such registration statement
effective for up to 120 days or if such registration statement is on Form S-3
(or any successor to Form S-3) and provides for sales of securities from time to
time pursuant to Rule 415 under the Securities Act for up to one
year.

 

(b) Prepare
and file with the SEC such amendments and supplements to such registration
statement and the prospectus used in connection with such registration statement
as may be necessary to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such registration
statement.

 

(c) Furnish,
without charge, to the Holders such numbers of copies of a prospectus, including
each preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by
them.

 

(d) Use its
best efforts to register and qualify the securities covered by such registration
statement under such other securities or Blue Sky laws of such jurisdictions as
shall be reasonably requested by the Holders or any managing underwriter,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.

 

(e) In the
event of any underwritten public offering, enter into and perform its
obligations under an underwriting agreement, in usual and customary form, with
the managing underwriter of such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement.

 

(f) Notify
each Holder of Registrable Securities covered by such registration statement at
any time when a prospectus relating thereto is required to be delivered under
the Securities Act or the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.

 

5

(g) The
Company shall:

 

(i) make
available for inspection by a representative of the Holders, the managing
underwriter participating in any disposition pursuant to such registration
statement and one firm of attorneys designated by the Holders (upon execution of
customary confidentiality agreements reasonably satisfactory to the Company and
its counsel), at reasonable times and in reasonable manner, financial and other
records, documents and properties of the Company that are pertinent to the
conduct of due diligence customary for an underwritten offering, and cause the
officers, directors and employees of the Company to supply all information
reasonably requested by any such representative, underwriter or attorney in
connection with a registration statement as shall be necessary to enable such
persons to conduct a reasonable investigation within the meaning of Section 11
of the Securities Act;

 

(ii) use its
best efforts to cause all Registrable Securities covered by a registration
statement to be listed on any securities exchange or any automated quotation
system on which similar securities issued by the Company are then
listed;

 

(iii) cause to
be provided to the Holders that are selling Registrable Securities pursuant to
such registration statement and to the managing underwriter if any disposition
pursuant to such registration statement is an underwritten offering, upon the
effectiveness of such registration statement, a customary “10b-5” opinion
of independent counsel (an “Opinion”) and a
customary “cold comfort” letter of independent auditors (a “Comfort
Letter”) in
each case addressed to such Holders and managing underwriter, if
any;

 

(iv) notify in
writing the Holders that are selling Registrable Securities pursuant to such
registration statement and any managing underwriter if any disposition pursuant
to such registration statement is an underwritten offering, (A) when the
registration statement has become effective and when any post-effective
amendment thereto has been filed and becomes effective, (B) of any request by
the SEC or any state securities authority for amendments and supplements to the
registration statement or of any material request by the SEC or any state
securities authority for additional information after the registration statement
has become effective, (C) of the issuance by the SEC or any state securities
authority of any stop order suspending the effectiveness of the registration
statement or the initiation of any proceedings for that purpose, (D) if, between
the effective date of the registration statement and the closing of any sale of
Registrable Securities covered thereby, the representations and warranties of
the Company contained in any underwriting agreement, securities sales agreement
or other similar agreement, including this Agreement, relating to disclosure
cease to be true and correct in all material respects or if the Company receives
any notification with respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction or the initiation of any
proceeding for such purpose, (E) of the happening of any event during the period
the registration statement is effective such that such registration statement or
the related prospectus contains an untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to make
statements therein not misleading (in the case of a prospectus, in light of
circumstances under which they were made) and (F) of any determination by the
Company that a post-effective amendment to the registration statement would be
appropriate. The Holders hereby agree to suspend, and to cause any managing
underwriter to suspend, use of the prospectus contained in a registration
statement upon receipt of such notice under clause (C), (E) or (F) above until,
in the case of clause (C), such stop order is removed or rescinded or, in the
case of clauses (E) and (F), the Company has amended or supplemented such
prospectus to correct such misstatement or omission or otherwise.

 

6

If the
notification relates to an event described in clause (C), the Company promptly
shall use its best efforts to obtain the withdrawal of the stop order. If the
notification relates to an event described in clauses (E) or (F), the Company
shall promptly prepare and furnish to such seller and each underwriter, if any,
a reasonable number of copies of a prospectus supplemented or amended so that,
as thereafter delivered to the purchasers of such Registrable Securities, such
prospectus shall not include an 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 no misleading;

 

(v) provide
and cause to be maintained a transfer agent and registrar for all such
Registrable Securities covered by such registration statement not later than the
effective date of such registration statement;

 

(vi) deliver
promptly to each Holder participating in the offering and each underwriter, if
any, copies of all correspondence between the SEC and the Company, its counsel
or auditors and all memoranda relating to discussions with the SEC and its staff
with respect to the registration statement, other than those portions of any
such correspondence and memoranda which contain information subject to
attorney-client privilege with respect to the Company, and, upon receipt of such
confidentiality agreements as the Company may reasonably request, make
reasonably available for inspection by any Holder of such Registrable Securities
covered by such registration statement, by any underwriter, if any,
participating in any disposition to be effected pursuant to such registration
statement and by any attorney, accountant or other agent retained by any such
Holder or any such underwriter, all pertinent financial and other records,
pertinent corporate documents and properties of the Company, and cause all of
the Company’s officers, directors and employees to supply all information
reasonably requested by any such Holder, underwriter, attorney, accountant or
agent in connection with such registration statement;

 

(vii) use its
best efforts to obtain the withdrawal of any order suspending the effectiveness
of the registration statement;

 

(viii) provide a
CUSIP number for all Registrable Securities not later than the effective date of
the registration statement;

 

(ix) make
reasonably available its employees and personnel and otherwise provide
reasonable assistance to the underwriters in the marketing of Registrable
Securities in any underwritten offering;

 

(x) promptly
prior to the filing of any document which is to be incorporated by reference
into the registration statement or the prospectus (after the initial filing of
such registration statement) provide copies of such document to counsel to the
seller of Registrable Securities and to the managing underwriter, if any, and
make the Company’s representatives reasonably available for discussion of such
document and make such changes in such document concerning such sellers prior to
the filing thereof as counsel for such sellers or underwriters may reasonably
request; and

 

7

(xi) cooperate
with the sellers of Registrable Securities and the managing underwriter, if any,
to facilitate the timely preparation and delivery of certificates not bearing
any restrictive legends representing the Registrable Securities to be sold, and
cause such Registrable Securities to be issued in such denominations and
registered in such names in accordance with the underwriting agreement prior to
any sale of Registrable Securities to the underwriters or, if not an
underwritten offering, in accordance with the instructions of the sellers of
Registrable Securities at least three business days prior to any sale of
Registrable Securities.

 

1.6 Indemnification.

 

(a) The
Company will indemnify and hold harmless to the fullest extent permitted by law
each Holder of Registrable Securities and each of its officers, directors and
partners, and each person controlling such Holder, with respect to which such
registration, qualification or compliance has been effected pursuant to this
Agreement, and each underwriter, if any, and each person who controls any
underwriter of the Registrable Securities held by or issuable to such Holder,
against all claims, losses, expenses, damages and liabilities (or actions in
respect thereto) arising out of or based on (i) any untrue statement (or alleged
untrue statement) of a material fact contained in any registration statement
under which such securities were registered under the Securities Act or the
omission or alleged omission to state therein 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, final or summary prospectus, offering circular or other
document (including any related registration statement, notification or the
like) incident to any such registration, qualification or compliance, or based
on any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statement therein, in light of the
circumstances under which they were made, or not misleading, or (iii) any
violation or alleged violation by the Company of the Securities Act, the
Securities Exchange Act of 1934, as amended, (the “Exchange Act”) or any state
securities law applicable to the Company or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any such state law and relating to
action or inaction required of the Company in connection with any such
registration, qualification of compliance, and will reimburse each such Holder,
each of its officers, directors and partners, and each person controlling such
Holder, each such underwriter and each person who controls any such underwriter,
within a reasonable amount of time after incurred for any reasonable legal and
any other expenses incurred in connection with investigating, defending or
settling any such claim, loss, damage, liability or action; provided, however,
that the indemnity agreement contained in this subsection 1.6(a) shall not apply
to amounts paid in settlement of any such claim, loss, damage, liability, or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld); and provided further, that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage or liability arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by an
instrument duly executed by such Holder or underwriter specifically for use
therein.

 

8

(b) Each
Holder will, if Registrable Securities held by or issuable to such Holder are
included in the securities as to which such registration, qualification or
compliance is being effected, severally and not jointly, indemnify and hold
harmless to the fullest extent permitted by law the Company, each of its
directors and officers, each underwriter, if any, of the Company’s securities
covered by such a registration statement, each person who controls the Company
within the meaning of the Securities Act, and each other such Holder, each of
its officers, directors and partners and each person controlling such Holder,
against all claims, losses, expenses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Holders, such directors, officers, partners, persons or
underwriters for any reasonable legal or any other expenses incurred in
connection with investigating, defending or settling any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by the Holder in an instrument duly executed by such
Holder specifically for use therein; provided, however, that the indemnity
agreement contained in this subsection 1.6(b) shall not apply to amounts paid in
settlement of any such claim, loss, damage, liability or action if such
settlement is effected without the consent of the Holder, (which consent shall
not be unreasonably withheld); provided further, that the total amount for which
any Holder shall be liable under this subsection 1.6(b) shall not in any event
exceed the net proceeds received by such Holder from the sale of Registrable
Securities held by such Holder in such registration; and provided further, that
a Holder will not be liable in any such case to the extent that any such claim,
loss, damage or liability arises out of or is based on any untrue statement or
omission based upon written information furnished to the Holder by an instrument
duly executed by the Company or underwriter specifically for use
therein.

 

(c) Each
party entitled to indemnification under this subsection 1.6 (the “Indemnified
Party”) shall
give notice to the party required to provide indemnification (the “Indemnifying
Party”)
promptly after such Indemnified Party has actual knowledge of any claim as to
which indemnity may be sought, and shall permit the Indemnifying Party to assume
the defense of any such claim or any litigation resulting therefrom; provided
that counsel for the Indemnifying Party, who shall conduct the defense of such
claim or litigation, shall be approved by the Indemnified Party (whose approval
shall not be unreasonably withheld), and the Indemnified Party may participate
in such defense at such party’s expense; and provided further, that the failure
of any Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations hereunder, except to the extent such
failure resulted in material prejudice to the Indemnifying Party; and provided
further, that an Indemnified Party (together with all other Indemnified Parties
which may be represented without conflict by one counsel) shall have the right
to retain one separate counsel, with the fees and expenses to be paid by the
Indemnifying Party, if representation of such Indemnified Party by the counsel
retained by the Indemnifying Party would be inappropriate due to actual or
potential differing interests between such Indemnified Party and any other party
represented by such counsel in such proceeding. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation.

 

9

(d) If for
any reason the foregoing indemnity is unavailable or is insufficient to hold
harmless an indemnified party under Section 1.6, then each Indemnifying Party
shall contribute to the amount paid or payable by such Indemnified Party as a
result of any Claim in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party, on the one hand, and the Indemnified Party, on
the other hand, with respect to such offering of securities. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Indemnifying
Party or the Indemnified Party and the parties’ relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. If, however, the allocation provided in the second
preceding sentence is not permitted by applicable law, then each Indemnifying
Party shall contribute to the amount paid or payable by such Indemnified Party
in such proportion as is appropriate to reflect not only such relative faults,
but also any other relevant equitable considerations. The parties hereto agree
that it would not be just and equitable if contributions pursuant to this
Section 1.6(d) were to be determined by pro rata allocation or by any other
method of allocation which does not take into account the equitable
considerations referred to in the preceding sentences of this Section 1.6(d).
The amount paid or payable in respect of any Claim shall be deemed to include
any legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such Claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the U.S.
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Notwithstanding anything in this
Section 1.6 to the contrary, no Indemnifying Party (other than the Company)
shall be required pursuant to this Section 1.6(d) to contribute any amount in
excess of the net proceeds received by such Indemnifying Party from the sale of
Registrable Securities in the offering to which the losses, claims, damages or
liabilities of the Indemnified Parties relate, less the amount of any
indemnification payment made pursuant to Section 1.6.

 

(e) The
indemnity agreements contained herein shall be in addition to any other rights
to indemnification or contribution which any Indemnified Party may have pursuant
to law or contract and shall remain operative and in full force and effect
regardless of any investigation made or omitted by, or on behalf of, any
Indemnified Party and shall survive the transfer of the Registrable Securities
by any such party.

 

1.7 Information
by Holder. Any
Holder or Holders of Registrable Securities included in any registration shall
promptly furnish to the Company such information regarding such Holder or
Holders and the distribution proposed by such Holder or Holders as the Company
may request in writing and as shall be required in connection with any
registration, qualification or compliance referred to herein.

 

10

1.8 Rule
144 Reporting. With a
view to making available to Holders the benefits of certain rules and
regulations of the SEC which may permit the sale of the Registrable Securities
to the public without registration, the Company agrees at all times
to:

 

(a) make and
keep public information available, as those terms are understood and defined in
SEC Rule 144;

 

(b) file with
the SEC in a timely manner all reports and other documents required of the
Company under the Securities Act and the Exchange Act (at any time after it has
become subject to such reporting requirements); and

 

(c) so long
as a Holder owns any Registrable Securities, to furnish to such Holder forthwith
upon request a written statement by the Company as to its compliance with the
reporting requirements of said Rule 144, and of the Securities Act and the
Exchange Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company as the
Holder may reasonably request in complying with any rule or regulation of the
SEC allowing the Holder to sell any such securities without
registration.

 

1.9 Transfer
of Registration Rights. A
Holder’s rights to cause the Company to register its securities and keep
information available, granted to it by the Company under subsections 1.2, 1.3
and 1.8, may be not be assigned except for an assignment (i) by such Holder of
at least 100,000 shares (as adjusted for stock splits, stock dividends,
recapitalizations and like events), (or such lesser number of shares as
represents all of the Registrable Shares then held by such Holder) or (ii) to
any constituent partners or members of a Holder which is a partnership or
limited liability company, or to affiliates (as such term is defined in Rule 405
of the Securities Act) of a Holder, provided, that (a) the Company is given
written notice by such Holder at the time of or within a reasonable time after
said transfer, stating the name and address of said transferee or assignee; and
identifying the securities with respect to which such registration rights are
being assigned; (b) the assignee or transferee of such rights agrees in writing
to be bound by the terms and conditions of this Agreement, and (c) solely as to
transfers pursuant to clause (iii) above, any transferees or assignees agree to
act through a single representative. The Company may prohibit the transfer of
any Holders’ rights under this subsection 1.9 to any proposed transferee or
assignee who the Company reasonably believes is a competitor of the Company, or
when such transfer may violate applicable securities laws.

 

1.10 Subordination
of Registration Rights.
Notwithstanding anything to the contrary, each Holder expressly agrees and
acknowledges that the rights granted to it pursuant to this Agreement subject to
the rights granted to certain other holders of the Company's securities pursuant
to those registration rights agreement in existence as of the date
hereof.

 

1.11 Limitations
on Subsequent Registration Rights. From
and after the date hereof, the Company shall not, without the prior written
consent of the Holders (which consent will not be unreasonably withheld) of not
less than a majority of the Registrable Securities then outstanding enter into
any agreement with any holder or prospective holder of any securities of the
Company which would allow such holder or prospective holder to demand any
registration including any registration rights similar to those rights described
in subsection 1.3 or include such securities in any registration filed under
subsections 1.2 or 1.3 hereof if such inclusion would adversely affect the
rights of any Holder (or any qualifying transferee under subsection 1.9) under
such subsections.

 

11

1.12 “Market
Stand-Off” Agreement. Each
Holder hereby agrees that, during the period of duration (not to exceed 90 days)
specified by the Company and an underwriter of common stock or other securities
of the Company following the effective date of public offering of securities ,
it shall not, to the extent requested by the Company and such underwriter,
directly or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase, pledge or otherwise
transfer or dispose of (other than to donees who agree to be similarly bound)
any securities of the Company held by it at any time during such period except
common stock included in such registration pursuant to the terms of this
Agreement. In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares of securities of every other person subject to the
foregoing restriction) until the end of such period.

 

1.13 Delay
of Registration. No
Holder shall have any rights to take any actions to restrain, enjoin, or
otherwise delay any registration as the result of any controversy that might
arise with respect to the interpretation or implementation of this Section
1.

 

1.14 Termination
of Registration Rights. No
holder shall be entitled to exercise any right provided for in this Section 1 at
any time when such Holder may sell all its shares in a three (3) month period
under Rule 144 of the Act.

 

2. General.

 

2.1 Waivers
and Amendments. With
the written consent of the record holders of at least a majority of the
Registrable Securities, the obligations of the Company and the rights of the
parties under this Agreement may be waived (either generally or in a particular
instance, either retroactively or prospectively, and either for a specified
period of time or indefinitely), and with the same consent the Company, when
authorized by resolution of its Board of Directors, may enter into a
supplementary agreement for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Agreement; provided,
however, that no such modification, amendment or waiver shall reduce the
aforesaid percentage of Registrable Securities without the consent of all of the
Holders of the Registrable Securities. . Upon the effectuation of each such
waiver, consent, agreement of amendment or modification, the Company shall
promptly give written notice thereof to the record holders of the Registrable
Securities who have not previously consented thereto in writing. This Agreement
or any provision hereof may be changed, waived, discharged or terminated only by
a statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, except to the extent
provided in this subsection 3.1.

 

2.2 Governing
Law. This
Agreement shall be governed in all respects by the laws of the State of Nevada
without regard the principles of conflicts of law thereof.

 

12

2.3 Successors
and Assigns. Except
as otherwise expressly provided herein, the provisions hereof shall inure to the
benefit of, and be binding upon, the successors, assigns, heirs, executors and
administrators of the parties hereto.

 

2.4 Entire
Agreement. This
Agreement and the other documents (include Exhibits referenced herein) delivered
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof, and this
Agreement shall supersede and cancel all prior agreements between the parties
hereto with regard to the subject matter hereof.

 

2.5 Notices,
etc. All
notices and other communications required or permitted hereunder shall be in
writing and shall be delivered by overnight courier service (receipt requested)
or mailed by first class mail, postage prepaid, certified or registered mail,
return receipt requested, addressed (a) if to any Holder , at such party’s
address as set forth in the Company’s records, or at such other address as such
party shall have furnished to the Company in writing, or (b) if to the Company,
at such address as the Company shall have furnished to the Holder in
writing.

 

2.6 Severability. In case
any provision of this Agreement shall be invalid, illegal, or unenforceable, the
validity, legality and enforceability of the remaining provisions of this
Agreement or any provision of the other Agreement s shall not in any way be
affected or impaired thereby.

 

2.7 Titles
and Subtitles. The
titles of the sections and subsections of this Agreement are for convenience of
reference only and are not to be considered in construing this
Agreement.

 

2.8 Counterparts. This
Agreement may be executed in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one
instrument.

 

IN
WITNESS WHEREOF, the parties hereto have executed this Agreement on the date set
forth underneath their respective signatures below.

 

“COMPANY”

Natural
Gas Systems, Inc.,

a
Nevada corporation 

By:
_________________________________

Robert S.
Herlin, President and CEO

Date:
____________, 2005

13

“HOLDER”

By:
_________________________________

 

Print:
_______________________________

Date:
_______________, 2005

 

14DEFINITIVE ASSET PURCHASE AGREEMENT

THIS DEFINITIVE ASSET PURCHASE AGREEMENT (the “Agreement”) is made and entered into on the _____ day of ___________, 2005, by and between Chadco, Inc., a Louisiana corporation, and Alan Chadwick McCartney and Sonya Lynn McCarty McCartney (together “Sellers”), and NGS Sub. Corp., a foreign corporation domiciled in the State of Delaware (“Buyer”).

Sellers are the owners of oil, gas and mineral interests and wells; equipment; and improvements located in the Tullos Urania and Colgrade Fields, LaSalle and Winn Parishes, Louisiana (the “Facility”). Sellers desire to sell to Buyer, and Buyer desires to purchase from Sellers the property and assets of Sellers situated at the Facility described hereinbelow.

Accordingly, in consideration of the foregoing and of the mutual promises, covenants, and subject to the terms and conditions set forth below, the parties agree as follows:

SECTION 1.    ASSETS TO BE CONVEYED. On the Closing Date (as defined in Section 9.1), Sellers shall sell, assign, transfer and deliver to Buyer, or its designee, and Buyer or its designee shall purchase from Sellers the following with warranty of title by through and under Sellers except as limited hereinbelow (collectively, the “Assets”):

1.1    Leases. The interests in the oil, gas and mineral leases, leasehold interests, operating interests, servitudes, working interests, royalty interests, overriding royalty interests, operating rights and/or mineral rights in oil, natural gas, petroleum, hydrocarbons, and other minerals as described in Exhibit “A” attached hereto and made a part hereof as to all depths

(the “Mineral Leases”). 

1.1.1.    It is the intention of Seller to sell and Buyer to buy all of Sellers’ net revenue interest in the mineral leases described up to and including 0.830000 except as otherwise noted, with Sellers reserving a royalty interest equal to the difference between 0.830000 and the lessor’s burden. For those leases in which Sellers own a net revenue interest of less than 0.830000, Sellers will convey all of their right, title and leasehold working interest. Anything contained herein to the contrary not withstanding, Sellers warrant that they are conveying to Buyer a net revenue interest in each
Mineral Lease of not less than the net revenue interests shown on Exhibit “A”.

1.2    Wells. Subject to the provisions of subpart 1.2.1, below, all oil and gas wells described on Exhibit “B-1” and B-2” attached hereto and made a part hereof (the
“Wells”). Sellers hereby warrant that they are conveying to Buyer not less than the net revenue interest set out for each well on Exhibit “B-1” and “B-2”. 

	 
	 	Page 1 of 15	 
	

	 

1.2.1 The records of the Louisiana Office of Conservation reflect breaks in production from the Wells described on Exhibit “B-2” which would result in the expiration of the leases on which said Wells were drilled in the absence of any other production or development activity on those Leases or on any units of which said leased lands formed a part. Sellers represent and warrant to Buyer that those Wells described on Exhibit “B-2” or other lease and/or unit wells have produced in sufficient quantities and with sufficient regularity to maintain the Leases in force and effect in accordance with their terms insofar as Sellers’ right to produce the Wells described on Exhibit “B-2” and retain said production. In the event it should be determined that one or more of the Wells described on Exhibit “B-2” have not produced sufficiently to maintain the leases in force and effect, then, in that event, the Purchase Price shall be reduced pro rata for each such Well. Sellers covenant and agree that upon
receipt of written notice from Buyer they will immediately refund to Buyer the pro rata portion of the Purchase Price for each Well on which the lease has not been maintained in force and effect.

1.3    Personal Property. All tangible personal property, accessories, fixtures, appurtenances, and equipment located on, used in connection with or attached to the Mineral Interests and Wells described in Paragraphs 1.1 and 1.2 above and having to do with production of oil, gas or other minerals in the Facility, including, but not limited to, fixtures, tanks, jacks, pumps, equipment, pipe, tubing, equipment in repair, pipelines, attached gathering systems, (whether on location or off site in storage or in repair)
depending upon or used in connection with the Mineral Interests and Wells described in Paragraphs 1.1 and 1.2 above described on Exhibit “C” attached hereto and made a part hereof (the “Equipment”); all oil, gas, casinghead gas, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons, products refined and manufactured therefrom, other minerals, and the accounts and proceeds from the sale of all of the foregoing; (the “Hydrocarbons”) (the “Severed Hydrocarbons”); all contracts and agreements that benefit or burden the Leasehold Interests and production therefrom described in the foregoing paragraph and located in or having to do with the Facility, including, but not limited to, operating agreements, unitization agreements, pooling agreements, declarations of pooling or unitization, farmout agreements, rights-of-way, easements, surface agreements, assignments, and oil, gas, liquids, condensate, casinghead gas and gas sales, purchase, exchange, gathering, transportation and processing contracts (the “Contracts”); and the pipelines and
all equipment associated therewith (collectively the “Personal Property”). 

1.3.1 Warranty as to personal property. Seller warrants that personal property is located as is described on the attached exhibits, but does not warrant the condition thereof, the fitness for any intended purpose and sells same “as is, where is”.

1.4    Any causes of action against others that are assignable and not specifically dealt with herein, but that are attributable to the rights and properties described in Paragraphs 1.1, 1.2, 1.3, and 1.4, above.

	 
	 	Page 2 of 15	 
	

	 

1.5    All records, files, engineering data, accounting records, production records, geologic and geophysical data (including all licenses and ownership rights, tapes, interpretations, and maps), well files and all other documentary information owned and maintained by Sellers pertaining to the Assets, and any other documents pertaining to or in any way dealing with the Leases, Wells, Equipment, Hydrocarbons, Severed Hydrocarbons, Surface Leases, Contracts and Gathering System as described hereinabove.

1.6    It is understood that Sellers shall continue to operate as contract operators and well service providers in the Facility and, as such, shall retain and own trucks, vehicles, workover equipment, spare parts, pipe, tubing, pumps, jacks, downhole equipment and other miscellaneous equipment normal to that operation and not included in the Personal Property (for example, a pump or jack removed from a shut-in well included in the Leasehold Interests shall be included in the Personal Property, whereas a pump or jack in inventory of Sellers for general use of its customers shall not be included in the
Personal Property). It is the intention of this Agreement that Buyer shall acquire all accessories, fixtures, equipment and appurtenances to any and all Assets, but shall not acquire any spare parts, pipe, tubing, pumps, jacks, downhole equipment and other personal property not derived from the Assets and used in the business of Sellers in their contract operations business.

1.7    It is Sellers’ intent to convey to Buyer all of Sellers’ interest of every nature and kind as to all depths in and to the Assets whether or not same are described with particularity in this Agreement. Sellers will execute such additional documents as Buyer may reasonably require to confirm title in Buyer to all Assets.

1.8     It is acknowledged that there is a pending dispute between Sellers and the State of Louisiana regarding expropriation of all or a portion of the LTF Urania No. 1, LTF Urania No. 2 and Tremont B No. 11 leases and the wells located thereon, a dispute that is expected to result in litigation in the 28th Judicial District Court for the Parish of LaSalle, State of Louisiana. It is agreed that Sellers will retain title in and to said lease and wells located thereon to fully
and completely prosecute that action. Upon termination of said lawsuit Sellers will convey to Buyer all of Sellers’ interest in said lease and wells, together with one-third (1/3) of the net compensation received therein after payment of related direct costs of litigation including attorney’s fees. If at the expiration of one year from the date of execution of this Agreement the dispute with respect to the LTF Urania No. 1 has not been resolved, Seller will, upon Buyer’s request, assign said well and the attendant lease rights to Buyer.

SECTION 2.    ASSUMPTION OF LIABILITIES. Buyer shall assume any and all obligations of Sellers under the Leases and Contracts being acquired herein and which are specifically and individually described on the attached Exhibits, but Sellers shall remain obligated for the liability, cost of defense, and other expenses related to any breach of said obligations or violations of any laws, rules or regulations of any governmental entity which occur or relate to periods occurring prior to closing and Sellers shall, indemnify, defend and hold Buyer harmless from any claims or losses incurred by Buyer as a result thereof, including reasonable attorney’s
fees, reasonable costs of investigation and other reasonable costs incurred by Buyer in litigating same.

	 
	 	Page 3 of 15	 
	

	 

SECTION 3.    PURCHASE.

3.1    Price and Allocation. The total purchase price for the Assets is EIGHT HUNDRED TWELVE THOUSAND SEVEN HUNDRED THIRTY-THREE AND NO/100 ($812,733.00) DOLLARS (the “Purchase Price”) payable at closing adjusted for the net of revenues over direct expenses attributable to the Assets from the Effective Date to the Closing Date. Within ninety (90) days following the
Closing, Buyer and Sellers shall mutually agree upon an allocation of the Purchase Price among the Assets, and each party shall prepare and file with their respective income tax returns for the tax year in which the Closing occurs, IRS Form 8594 allocating the Purchase Price (including any adjustments pursuant to Section 4 or elsewhere in this Agreement) in accordance with Section 1060 of the Internal Revenue Code of 1986, as amended and in accordance with the Asset Allocation. Notwithstanding anything to the contrary in this Agreement, this Section 3 shall survive the Closing without limitation.

SECTION 4.    REPRESENTATIONS AND WARRANTIES OF SELLERS. Sellers, jointly and severally, make the following representations and warranties, all of which have been relied upon by Buyer in entering into this Agreement, all of which are true and correct as of the date hereof, and, except as otherwise provided, all of which shall be true and correct at the Closing Date.

4.1    Organization. Chadco, Inc. is a corporation duly organized, validly existing, and in good standing under the laws of the State of Louisiana, and has full power and authority to enter into and perform this Agreement.

4.2    Authorization; Binding Agreement. The execution and delivery of this Agreement by Sellers has been duly authorized by Chadco, Inc.’s Board of Directors, and, if necessary, its shareholders, and this Agreement constitutes a valid and binding agreement of Chadco, Inc., enforceable in accordance with its terms. At closing the execution and delivery of the Warranty Deed and any other documents requiring Chadco, Inc.’s signature will have been duly authorized by all necessary corporate and shareholder action and shall constitute the legal, valid and
binding obligations of Chadco, Inc.

4.3    No Breach. Except as set out on Exhibit “E” attached, the execution, delivery and performance of this Agreement by Sellers will not result in the breach of, or constitute a default under, the provisions of any agreement or other instrument to which Sellers are parties or by which they or their property is bound or affected including any of the Assets being transferred hereunder.

4.4    Title to Assets. Except as set out on Exhibit “E” attached, Sellers shall convey to Buyer at Closing Date, by Warranty Deed, title to the Assets, in each case free and clear of all liens, security interests, mortgages, deeds of trust, pledges, judgments, leases, rights of refusal or other encumbrances whatever (“Liens”).

	 
	 	Page 4 of 15	 
	

	 

4.5    Litigation and Governmental Regulation. Except as set out on Exhibit “E” attached, there is no judgment outstanding and no litigation, proceeding, claim or investigation of any nature pending or threatened against Sellers or the Assets that might adversely affect the conveyance of the Facility or materially impair the value of the Assets. Sellers are not parties to or subject to the provisions of any judgment, order, writ, injunction, decree or award of any court, arbitrator or governmental or regulatory official, body or authority that could
adversely affect the Facility or any of the Assets.

4.6    Payment of Taxes. Sellers have duly and timely filed all returns for personal property, severance, ad valorem and other taxes and charges due as of the Effective Date of this Agreement and have paid all applicable taxes and charges. All severance, ad valorem, and other taxes and charges based on production attributable to the Assets shall be the obligation of the party entitled to the production on which such tax or charge is based. All other taxes against the Assets shall be prorated between Sellers and Buyer as of the Effective Date in accordance with
generally accepted accounting practices.

4.7    Insolvency Proceedings. No insolvency proceedings of any character, affecting Sellers or the Assets are pending or threatened. Sellers have not made an assignment for the benefit of creditors or taken any action with a view to or that would constitute a valid basis for the institution of any such insolvency proceedings or which transfer would constitute a fraudulent conveyance or preference.

4.8    Compliance with Law. Sellers have complied with each, and are not in violation of any, law, rule or regulation, and has not failed to obtain or to adhere to the requirements of any license, permit or authorization necessary to the ownership of the Assets and Facility or to the utilization of same in the ordinary course of business, which noncompliance, violation or failure to obtain or adhere might reasonably be expected to have a material adverse effect on any of the Assets or the Facility, including the timely and proper preparation and filing of all
state, local and federal reports.

4.9    Validity of Contemplated Transactions; etc. (a) The execution, delivery and performance of this Agreement and the Warranty Deed by Sellers will not contravene or violate (i) any law, rule or regulation to which Sellers are subject, (ii) any judgment, order, writ, injunction, decree or award of any court, arbitrator or governmental or regulatory official, body or authority which is applicable to Sellers, or (iii) the Articles of Incorporation, or By-laws of Chadco, Inc.

(b) Such execution, delivery or performance will not violate, be in conflict with or result in the breach (with or without giving notice or lapse of time, or both) of any term, condition, or provision of, or require the consent of any other party to any indenture, agreement, contract, commitment, lease, plan, license, permit, authorization or other instrument or document to which Sellers are parties, by which the Sellers have rights or by which any of the Assets or Facility may be bound or affected, other than those consents obtained prior to the Closing, or give any party with rights thereunder the right to terminate, modify, accelerate or otherwise change the existing rights or obligations of Sellers.

	 
	 	Page 5 of 15	 
	

	 

4.10     No Third Party Options. There are no existing agreements, options, commitments, Liens or rights with, to or in any person to acquire any of the Assets or Facility.

4.11    Conditions Affecting Assets. There are no conditions existing with respect to Sellers’ markets, products, clients, customers, facilities, personnel or suppliers which could reasonably be expected to have a material adverse effect on the Assets and Facilities other than conditions that may affect the industry in which Sellers operate as a whole. 

4.12    Environmental Matters.

(a)    Definitions. For the purposes of this Section 4.12, the following terms shall have the meanings indicated:

(i)    "Environment" shall mean soil, land surface or subsurface strata, surface waters (including navigable waters, ocean waters, streams, ponds, drainage basins, and wetlands), groundwater, drinking water supply, stream sediments, ambient air (including indoor air), plant and animal life, and any other environmental medium or natural resource.

(ii)    "Environmental, Health, and Safety Liabilities" shall mean any cost, damages, expense, liability, obligation, or other responsibility arising from or under Environmental Law or Occupational Safety and Health Law and consisting of or relating to:

(A)    any environmental, health, or safety matters or conditions (including on-site or off-site contamination, occupational safety and health, and regulation of chemical substances or products);

(B)    fines, penalties, judgments, awards, settlements, legal or administrative proceedings, damages, losses, claims, demands and response, investigative, remedial, or inspection costs and expenses arising under Environmental Law or Occupational Safety and Health Law;

(C)    financial responsibility under Environmental Law or Occupational Safety and Health Law for cleanup costs or corrective action, including any investigation, cleanup, removal, containment, or other remediation or response actions required by applicable Environmental Law or Occupational Safety and Health Law (whether or not such cleanup has been required or requested by any governmental body or any other person or entity) and for any natural resource damages; or

(D)    any other compliance, corrective, investigative, or remedial measures required under Environmental Law or Occupational Safety and Health Law.

The terms "removal," "remedial," and "response action," include the types of activities covered by the United States Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. ' 9601 et seq., as amended ("CERCLA").

	 
	 	Page 6 of 15	 
	

	 

(iii)    "Environmental Law" shall mean the Hazardous Materials Transportation Act, 49 U.S.C. ' 1801 et seq., the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. ' 6901 et seq., the Clean Water Act, 33 U.S.C. '1251 et, the Clean Air Act, 42 U.S.C. ' 7401 et seq., the Toxic Substances Control Act, 15 U.S.C. ' 2601 et seq., the Oil Pollution Act of 1990, 33 U.S.C. ' 2701 et seq., the Occupational Safety and Health Act, 29 U.S.C. ' 651 et seq, the Universal Waste Rule (40 CFR Part
273) and all other legal requirements that relate to:

(A)    advising appropriate authorities, employees, and the public of intended or actual releases of pollutants or hazardous substances or materials, violations of discharge limits, or other prohibitions and of the commencements of activities, such as resource extraction or construction, that could have significant impact on the environment;

(B)    preventing or reducing to acceptable levels the release of pollutants or hazardous substances or materials into the environment;

(C)    reducing the quantities, preventing the release, or minimizing the hazardous characteristics of wastes that are generated;

(D)    assuring that products are designed, formulated, packaged, and used so that they do not present unreasonable risks to human health or the environment when used or disposed of;

(E)    protecting resources, species, or ecological amenities;

(F)    reducing to acceptable levels the risks inherent in the transportation of hazardous substances, pollutants, oil, or other potentially harmful substances;

(G)    cleaning up pollutants that have been released, preventing the threat of release, or paying the costs of such clean up or prevention; or

(H)    making responsible parties pay private parties, or groups of them, for damages done to their health or the environment, or permitting self-appointed representatives of the public interest to recover for injuries done to public assets.

(iv)    "Hazardous Materials" shall mean any waste or other substance that is listed, defined, designated, or classified as, or otherwise determined to be, hazardous, corrosive, ignitable, radioactive, or toxic or a pollutant or a contaminant under or pursuant to any Environmental Law, including any admixture or solution thereof, and specifically including, but in no way limited to, petroleum and all derivatives thereof or synthetic substitutes therefor and asbestos or asbestos-containing materials.

(v)    "Occupational Safety and Health Law" shall mean any legal requirement designed to provide safe and healthful working conditions and to reduce occupational safety and health hazards.

	 
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(b)    Environmental Compliance.                             

(i)    With the exception of those matters set out on Exhibit “D” attached hereto and made a part hereto, insofar as the Mineral Interests, Wells and Facility in general, Sellers are not now and will not be at Closing in violation of any Environmental Law.

(ii)    Sellers have no basis to expect, nor have Sellers, or, any other person or entity for whose conduct they are or may be held responsible, received any citation, directive, inquiry, notice, order, summons, warning, or other communication that relates to any alleged, actual, or potential violation or failure to comply with any Environmental Law, or of any alleged, actual, or potential obligation to undertake or bear the cost of any Environmental, Health, and Safety Liabilities with respect to any of the Assets of Facility. 

(iii)    Except for normal use of the Assets and Facility and normal operations in conformance with customary industry standards and not in violation of any Environmental Law, there are no Hazardous Materials present on or in the Assets or the Facility, including any Hazardous Materials contained in barrels, above or underground storage tanks, landfills, land deposits, land, water, dumps, equipment (whether moveable or fixed) or other containers, either temporary or permanent or incorporated into any structure therein or thereon, except for minerals that are naturally present in their original geological formation. 

(iv)    Sellers have no reports, studies, analyses, tests, or monitoring possessed or initiated by Sellers pertaining to Hazardous Materials in, on, or under the Facilities and the Assets, or concerning compliance by Sellers or any other person or entity for whose conduct they are or may be held responsible, with Environmental Laws.

4.13    Quality of Assets. The Assets were acquired and have been maintained in accordance with regular business practices of Sellers. The Assets are substantially all of the inventory, equipment, mineral interests, wells, contracts and real property used by Sellers in conducting their business in the Facility during the twelve-month period immediately preceding the Closing contemplated by this Agreement. 

4.14    Completeness of Disclosure. No representation or warranty made in this agreement by or on behalf of Sellers and in any list, certificate, Exhibit, Schedule or other instrument, document, agreement or writing made a part hereof or delivered hereunder or in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact or omits or will omit to state any fact necessary to make any statement herein or therein not materially misleading.

SECTION 5.    REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer makes the following representations and warranties, all of which have been relied upon by Sellers in entering into this Agreement, all of which are true and correct as of the date hereof, and, except as otherwise provided, all of which shall be true and correct as of the Effective Date and the Closing Date.

	 
	 	Page 8 of 15	 
	

	 

5.1    Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, is qualified to do business in and is in good standing under the laws of the State of Louisiana, and has full power and authority to enter into and perform this Agreement.

5.2    Authorization. The Board of Directors of Buyer has duly authorized the execution and delivery of this Agreement and this Agreement constitutes a valid and binding agreement of Buyer, enforceable in accordance with its terms.

5.3    No Breach. Except as set out on Exhibit “E” attached, the execution, delivery and performance of this Agreement by Buyer will not result in the breach of, or constitute default under, the provisions of any agreement or other instrument to which Buyer is a party or by which Buyer is bound.

5.4    Litigation. Except as otherwise provided herein, there is no action, suit, investigation or other proceedings pending or threatened which may adversely affect Buyer’s ability to perform this Agreement in accordance with its terms, and Buyer is not aware of any facts which could reasonably result in any such proceeding.

5.5    Employees. Buyer reserves the right to interview any employees currently working at the Facility for the purposes of continued employment with Buyer. If an offer of employment is tendered and accepted, Buyer assumes no prior obligation regarding said employees, including but not limited to employment contracts, accrued and unpaid leave, workman compensation claims, or any claims regarding employment benefits.

SECTION 6.    PRE-CLOSING OBLIGATIONS. The parties covenant and agree as follows with respect to the period prior to the Closing Date:

6.1    Confidentiality. Each party agrees that any and all information learned or obtained by it from the other shall be confidential and agrees not to disclose any such information to any person other than such party’s attorneys, agents, representatives, lenders, or existing or potential investors who have executed a Confidentiality Agreement materially in the same form and term as to that between the parties hereto, as is necessary for the purpose of effecting the transactions contemplated by this Agreement. This Confidentiality Provision shall remain in
force and be binding on all parties for a period of two years after the Closing Date.

6.2    Access. Prior to the Closing Date, Sellers shall give Buyer or representatives of Buyer reasonable access to the Facility for purposes of inspection, appraisal, testing, surveying, and other activities that may be necessary in the course of the Inspection Period. The Buyer shall be given, or has been given, sufficient time to perform a Due Diligence Examination on the Facility, including, but not limited to, a thorough inventory of the land, buildings, and equipment to be purchased; verification of historical production, revenues, operating expenses and
historical capital expenditures; satisfactory completion of a third party Phase I Environmental audit; and verification of current production, flowing pressures, remaining reserves, product prices, gathering and processing agreements and costs and applicable product sales agreements. Buyer hereby agrees to indemnify and hold Sellers harmless from any loss, claim or liability arising out of or related to Buyer performing its Due Diligence Examination at the Facility or activities associated therewith.

	 
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6.3    Additional Covenant. Buyer and Sellers shall take all commercially reasonable efforts to cause the consummation of the transaction contemplated by this Agreement and shall not take any action that is inconsistent with their obligations under this Agreement in any material respect.

SECTION 7.    CONDITIONS PRECEDENT.

7.1    Conditions to Buyer’s Obligation. The obligation of Buyer to consummate the transaction contemplated by this Agreement is subject to the satisfaction of each of the following conditions (unless otherwise waived by Buyer):

7.1.1    Representations and Warranties. The representations and warranties of Sellers shall be true, complete, and correct in all material respects as of the Closing Date with the same force and effect as if then made.

7.1.2    Compliance with Conditions. All of the terms, conditions and covenants to be complied with or performed by Sellers on or before the Closing Date shall have been duly complied with and performed in all material respects.

7.1.3    Title to Assets. On the Closing Date, the Assets will be delivered to Buyer free and clear of all Liens.

7.1.4    Closing Documents. Sellers shall deliver to Buyer all of the closing documents specified in Section 8.2.1, all of which documents shall be dated as of the Closing Date, duly executed, and in a form reasonably acceptable to Buyer.

7.2    Conditions to Sellers’ Obligation. The obligation of Sellers to consummate the transaction contemplated by this Agreement is subject to satisfaction of each of the following conditions (unless otherwise waived by Sellers):

7.2.1    Representations and Warranties. The representations and warranties of Buyer to Sellers shall be true, complete and correct in all material respects as of the Closing Date with the same force and effect as if then made.

7.2.2    Compliance with Conditions. All of the terms, conditions and covenants to be complied with or performed by Buyer on or before the Closing Date shall have been duly complied with and performed in all material respects.

7.2.3    Payment. Buyer shall pay Sellers the Purchase Price as provided in Section 3 of this Agreement.

7.2.4    Closing Documents. Buyer shall deliver to Sellers all the closing documents specified in Section 8.2.2, all of which documents shall be dated as of the Closing Date, as applicable, duly executed, and in a form reasonably satisfactory to Sellers.

	 
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SECTION 8.    CLOSING. With regard to all dates and time periods set forth or referred to in this Agreement, it is understood and agreed that time is of the essence.

8.1    Closing Date. The Closing shall occur as soon as commercially possible, but no later than February 4, 2005. However, it shall have an effective date of December 1, 2004, at 12:01 a.m. (the “Effective Date”). The Closing shall occur at a place and time mutually agreed upon by the parties.

8.2    Performance at Closing. The following documents shall be executed and delivered at Closing:

8.2.1    By Sellers. Sellers shall deliver to Buyer (i) Deed conveying to Buyer title to the Assets with those warranties as provided herein and with full substitution and subrogation to any and all rights of warranty against Sellers’ predecessors in title; (ii) certificate of good standing of Chadco, Inc., issued as of a recent date by Secretary of State of the State of Louisiana; (iii) an officer’s certificate attesting to Chadco, Inc.’s compliance with the matters set forth in Sections 7.1 and certifying the resolutions of Sellers’ board
of directors and shareholders (if applicable) authorizing the execution and delivery of this Agreement and the transactions contemplated hereby; (iv) a certificate of non-foreign status on Chadco, Inc.; and (v) originals or copies, as applicable of all documents and records which Sellers are obligated to provide Buyer under the terms of this Agreement.

8.2.2    By Buyer. Buyer shall deliver to Sellers (i) a copy of the articles of incorporation of Buyer, certified as of a recent date by the Secretary of State of the state of Buyer’s formation; (ii) certificate of good standing of Buyer, issued as of a recent date by the Secretary of State of the State of Texas; (iii) certificate of good standing of Buyer, issued as of a recent date, by the Secretary of State of the State of Louisiana showing Buyer is authorized to do business in the State of Louisiana; (iv) certificates of Buyer which show Buyer is
qualified to own and operate the assets being conveyed herein, issued as of a recent date by the Louisiana Department of Conservation and any and all other Louisiana governmental agencies which may require said qualification; (v) an officer’s certificate attesting to Buyer’s compliance with the matters set forth in Sections 8.2.1 and 8.2.2, and certifying the resolutions of the board of directors of Buyer authorizing the execution and delivery of this Agreement and the transactions contemplated hereby, and (vi) the Purchase Price.

8.2.3    Other Documents and Acts. The parties will also execute such other documents, and perform such other acts, before and after Closing, as may be necessary for the complete implementation and consummation of this Agreement, including the execution by Sellers of any documents reasonably required by any purchaser of production to effectuate payment of proceeds attributable to production from the Facility to Buyer.

	 
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SECTION 9. POST-CLOSING OBLIGATIONS. The parties covenant and agree as follows with respect to the period subsequent to Closing:

9.1    Indemnification. Sellers, jointly and severally, undertake and agree to indemnify and hold Buyer harmless against any and all losses, costs, liabilities, claims, obligations, assessments, damages, fines and expenses, including reasonable attorney’s fees and investigation costs (together, “Claims”), incurred or suffered by Buyer arising from (i) the ownership and operation of the Facility or ownership of the Assets during Sellers’ period of ownership prior to the Closing Date, and (ii) a breach, misrepresentation, or other violation of
any of Sellers’ covenants, warranties or representations contained in this Agreement. Buyer undertakes and agrees to indemnify and hold Sellers harmless against any and all Claims incurred or suffered by Sellers arising from (a) the ownership and operation of the Facility or ownership of the Assets after the Closing Date; (b) a breach, misrepresentation, or other violation of any of Buyer’s covenants, warranties and representations contained in this Agreement. The foregoing indemnities are intended by Sellers and Buyer, respectively, to cover all acts, suits, proceedings, claims, demands, assessments, adjustments, costs, and expenses with respect to any and all of the specific matters in these indemnities, respectively, set forth and shall be without limitation as to amount.

9.2    Agreement Not to Compete. Sellers shall not acquire any interest in any of the property intended to be included in the Assets, including, but not by way of limitation, by mineral deed, mineral lease, assignment, farmout, operating agreement or servitude, whether directly or through subsidiaries or parties interposed, so long as Buyer claims any ownership in or right to said Assets.

9.3    Agreement by Seller to Remediate Certain Areas. Seller shall, within thirty (30) days after the Closing Date, complete the remediation to full compliance with state regulations of the sites listed on Exhibit “D”, as generally described on such Exhibit.

9.4 Change of Operator. With fifteen (15) days of the Closing Date Buyer shall make all necessary filings with the Louisiana Office of Conservation to change the operator on all wells acquired by Buyer to Buyer or Buyer’s designated contract operator.

9.5    Post-Closing Requirements: Sellers agree to comply with the post-closing requirements set out on Exhibit “E”, attached.

SECTION 10. GENERAL PROVISIONS.

10.1    Risk of Loss. The risk of loss or damage to the Assets shall be upon Sellers at all times prior to Closing and Sellers shall keep all of the Assets fully insured through the date of Closing in accordance with Sellers’ usual business practice during the twelve (12) months preceding the Closing Date. In the event of loss or damage, Sellers shall promptly notify Buyer thereof and may, at their option, attempt to repair, replace or restore the lost or damaged property to its former condition. If such repair, replacement, or restoration has not been
completed prior to the scheduled Closing Date, Buyer may terminate this Agreement or, in Buyer’s sole and uncontrolled discretion, accept assignment of all insurance proceeds attributable to the loss and proceed with Closing in accordance with the terms and provisions of this Agreement.

 

	 
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10.2    Expenses; Legal Fees. Except as otherwise provided herein, all expenses involved in the preparation and consummation of this Agreement shall be borne by the party incurring the same whether or not the transaction contemplated herein is consummated. If legal action is necessary to enforce any of the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees and costs incurred thereby.

10.3    Survival of Representations and Warranties. The several representations, warranties, and covenants of the parties contained herein shall survive for a period of four (4) years from the Closing Date.

10.4    Exclusive Dealings. For so long as this Agreement remains in effect, neither Sellers nor any person acting on Sellers’ behalf shall, directly or indirectly, solicit or initiate any offer or negotiations with any person concerning the acquisition of the Facility and Assets by any party other than Buyer.

10.5    Brokerage. Any commission or broker’s or finder’s fee due any broker or agent shall be paid by the party who retained said broker or agent in connection with the
transaction contemplated by this Agreement and the party incurring such fee shall indemnify and hold harmless the other party from any such fee. 

10.6    Control. In the event a conflict occurs between the provisions of this Agreement and the provisions of the Act of Sale and Assignment to be executed in connection with this transaction, the terms and provisions of the Act of Sale and Assignment shall control except in case of a conflict with respect to Sellers’ representations and warranties to Buyer in this Agreement, which, in such event, shall be governed by the representations and warranties contained in this Agreement.

10.7    Notices. All notices and other communications pertaining to this Agreement shall be in writing and shall be deemed duly given when delivered personally (which shall include delivery by facsimile that issues a receipt or other confirmation of delivery) to the party for whom such communication is intended, or three (3) business days after the date mailed by certified mail, return receipt requested, postage prepaid, addressed as follows:

 

 

	 
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If to Sellers, to:

Chadco, Inc.
P. O. Box 370
Tullos, Louisiana 71479
	With a mandatory copy to:

Donald R. Wilson
Gaharan & Wilson
P. O. Box 1346
Jena, Louisiana 71342-1346
Facsimile: 318-992-5110
	
If to Buyer, to:

Natural Gas Systems, Inc.
Two Memorial City Plaza
820 Gessner, Suite 1340
Houston, TX 77024
Attn: Robert S. Herlin
Facsimile: 713-935-0199 
	With a mandatory copy to:

Walter C. Dunn
The Boles Law Firm
P. O. Box 2065
Monroe, LA 71207-2065
Facsimile: 318-361-3371

                            

Either party may change its address for notices by written notice to the other.

10.8    Waiver. Unless otherwise specifically agreed in writing to the contrary: (i) the failure of either party at any time to require performance by the other of any provision of this Agreement shall not affect such party’s right thereafter to enforce the same; (ii) no waiver by either party of any default by the other shall be taken or held to be a waiver by such party of any other preceding or subsequent default; and (iii) no extension of time granted by either party for the performance of any obligation or act by the other party shall be deemed to be an

extension of time for the performance of any other obligation or act hereunder.

10.9    Miscellaneous. This Agreement and the agreements referenced herein supersede and terminate any prior agreements between the parties and contain all of the terms agreed upon with respect to the subject matter hereof. This Agreement may not be altered or amended except by an instrument in writing signed by Sellers and Buyer. This Agreement may be signed in any number of counterparts with the same effect as if the signatures on each such counterpart were on the same instrument. The headings of the paragraphs of this Agreement are for convenience only and in
no way modify, interpret or construe the meaning of specific provisions of the Agreement. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality, and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. This Agreement may not be assigned without the prior written consent of Sellers and Buyer except that Buyer may designate a third party to take title to the Assets. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable to the parties’ successors and assigns.

10.10    Governing Law. This Agreement shall be governed by and construed under the laws of the State of Louisiana, without regard to conflicts-of-laws principles that would require the application of any other law.

10.11 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof, or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the parties to this Agreement hereby acknowledge and agree that the court making the determination of invalidity or unenforceability shall have the power (i) to reduce
the scope, duration, and/or area of the term or provision, (ii) to delete specific words or phrases, or (iii) to amend and replace any invalid or unenforceable term or provision, so that the provision as amended by said court is valid and enforceable and comes as close as is legally possible to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment of said court may be appealed.

	 
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10.12 Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to “Sections” and “Parts” refer to the corresponding Sections and Parts of this Agreement.

10.13 Time Is Of The Essence. Both Parties understand and agree that time is of the essence and, as such, will work diligently to consummate this transaction as quickly as is reasonably possible.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed individually or by their respective duly authorized officer as of the date first written above.

CHADCO, INC.

By:____________________________                    

Name: Alan Chadwick McCartney 

Title: President 

By:____________________________

Name: Alan Chadwick McCartney, Individually

By:_______________________________

Sonya Lynn McCarty McCartney

NATURAL GAS SYSTEMS, INC.

By:___________________________ 

Name: Robert S. Herlin 

Title: President 

	 
	 	Page 15 of 15

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