Document:

REVOCABLE
WARRANT AGREEMENT

 

NATURAL
GAS SYSTEMS, INC.

THIS
REVOCABLE WARRANT AGREEMENT (this
“Agreement”) is made and entered into as of February, ___, 2005, between Natural
Gas Systems, Inc.,
a Nevada
corporation (the “Company”), and Prospect Energy Corporation, a Maryland
Corporation (“Holder”). Terms not defined herein shall have the meaning defined
in the Loan Agreement (defined below).

R
E C I T A L S

WHEREAS, the
Company proposes to issue to Holder a maximum of FOUR HUNDRED EIGHTY THOUSAND
(480,000) revocable warrants (the “Revocable Warrants”), each such Revocable
Warrant entitling the holder thereof to purchase, under certain conditions, one
share of common stock, .001 par value, of the Company (the “Shares” or the
“Common Stock”). Initially,
the Holder shall be granted 300,000 Revocable Warrants. The Company shall
deliver additional Revocable Warrants under this Agreement in the amount of One
(1) Warrant for every Ten ($10.00) dollars of additional drawdowns on the Loan
in excess of the initial $3,000,000.00 Advance on the date of each such
additional drawdown;
and

WHEREAS, the
Revocable Warrants which are the subject of this Agreement will be issued by the
Company to Holder as additional consideration related to a Secured Loan
Agreement, attached hereto as Exhibit
B, made by
the Company to the Holder (the “Loan Agreement”);

WHEREAS, the
Revocable Warrants shall be subject to revocation by the Company without any
further consideration if the Company meets certain financial tests specified in
Section 3 below.

NOW,
THEREFORE, in
consideration of the premises and the mutual agreements herein set forth, the
parties hereto agree as follows:

A
G R E E M E N T

1. Revocable
Warrant Certificates. The
warrant certificates to be delivered pursuant to this Agreement (the “Revocable
Warrant Certificates”) shall be in the form set forth in Exhibit
A,
attached hereto and made a part hereof, with such appropriate insertions,
omissions, substitutions and other variations as are required or permitted by
this Revocable Warrant Agreement. 

2. Right
to Exercise Revocable Warrants. Each
Revocable Warrant may be exercised, in whole or in part, from March 15, 2006
until 11:59 P.M. (Eastern Standard Time) on the date that is five (5) years
after the date of this Agreement (the “Expiration Date”). Each Revocable Warrant
not exercised or revoked on or before the Expiration Date shall
expire.

Other
than as specified in Section 3 herein, each Revocable Warrant shall entitle its
holder to purchase from the Company one share of Common Stock (each an “Exercise
Share”) at an exercise price of Seventy Five Cents ($0.75) per share, subject to
adjustment as set forth below (“Exercise Price”).

The
Company shall not be required to issue fractional shares of Common Stock upon
the exercise of this Revocable Warrant or to deliver Revocable Warrant
Certificates which evidence fractional shares of capital stock. In the event
that a fraction of an Exercise Share would, except for the provisions of this
paragraph 2, be issuable upon the exercise of this Revocable Warrant, the
Company shall pay to the Holder exercising the Revocable Warrant an amount in
cash equal to such fraction multiplied by the current market value of the
Exercise Share. For purposes of this paragraph 2, the current market value shall
be determined as follows:

(a) if the
Shares are traded in the over-the-counter market and not on any national
securities exchange and not in the NASDAQ Reporting System, the average of the
mean between the last bid and asked prices per share, as reported by the
National Quotation Bureau, Inc., or an equivalent generally accepted reporting
service, for the last business day prior to the date on which the Revocable
Warrant is exercised, or, if not so reported, the average of the closing bid and
asked prices for a Share as furnished to the Company by any member of the
National Association of Securities Dealers, Inc., selected by the Company and
Holder for that purpose.

(b) if the
Shares are listed or traded on a national securities exchange or in the NASDAQ
Reporting System, the closing price on the principal national securities
exchange on which they are so listed or traded or in the NASDAQ Reporting
System, as the case may be, on the last business day prior to the date of the
exercise of the Revocable Warrant. The closing price referred to in this Clause
(b) shall be the last reported sales price or, in case no such reported sale
takes place on such day, the average of the reported closing bid and asked
prices on such day, in either case on the national securities exchange on which
the Shares are then listed or in the NASDAQ Reporting System; or

(c) if no
such closing price or closing bid and asked prices are available, as determined
by the Holder and the Board of Directors of the Company. 

3. Revocation
of the Revocable Warrants.
Notwithstanding anything to the contrary, all Revocable Warrants granted by the
Company to the Holder under this Agreement shall be subject to forfeiture,
revocation and cancellation without any further or additional consideration due
or owed to Holder in the event that the Company and its Subsidiaries, on a
consolidated basis, prior to February 1, 2006 meets the “EBITDA Test,” as
defined below in this Section 3. The “EBITDA Test” shall mean that the Company
and its Subsidiaries, on a consolidated basis, generates EBITDA of at least
$200,000.00 per month for any three consecutive calendar months prior to March
1, 2006. Terms not defined in this Agreement with regards to this Section 3 are
defined in the Loan Agreement, attached hereto as Exhibit
B.

4. Mutilated
or Missing Revocable Warrant Certificates. In case
any of the Revocable Warrant Certificates shall be mutilated, lost, stolen or
destroyed prior to the Expiration Date, the Company shall issue and deliver, in
exchange and substitution for and upon cancellation of the mutilated Revocable
Warrant Certificate, or in lieu of and in substitution for the Revocable Warrant
Certificate lost, stolen or destroyed, a new Revocable Warrant Certificate of
like tenor and representing an equivalent right or interest.

5. Reservation
of Shares. The
Company will at all times reserve and keep available, free from preemptive
rights, out of the aggregate of its authorized but unissued Shares or its
authorized and issued Shares held in its treasury for the purpose of enabling it
to satisfy its obligation to issue Exercise Shares upon exercise of Revocable
Warrants, the full number of Exercise Shares deliverable upon the exercise of
all outstanding Revocable Warrants.

The
Company covenants that all Exercise Shares which may be issued upon exercise of
Revocable Warrants will be validly issued, fully paid and non-assessable
outstanding Shares of the Company.

6. Rights
of Holder. The
Holder shall not, by virtue of anything contained in this Revocable Warrant
Agreement or otherwise, prior to
exercise of this Revocable Warrant, be entitled to any right whatsoever, either
in law or equity, of a stockholder of the Company, including without limitation,
the right to receive dividends or to vote or to consent or to receive notice as
a stockholder in respect of the meetings of stockholders or the election of
directors of the Company of any other matter.

2

7. Investment
Intent; Accredited Investor. Holder
represents and warrants to the Company that Holder is acquiring the Revocable
Warrants for investment purposes and with no present intention of distributing
or reselling any of the Revocable Warrants. Holder represents that it is an
“accredited investor” within the meaning of Rule 501 of Regulation D under the
Securities Act of 1933, as amended (the “Act”). 

8. Certificates
to Bear Legend. The
Revocable Warrants and the certificate or certificates therefore shall bear the
following legend by which each holder shall be bound:

“THE
SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGIS-TRATION THEREOF UNDER SUCH ACT OR
PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL, REASON-ABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.”

The
Exercise Shares and the certificate or certificates evidencing any such Exercise
Shares shall bear the following legend:

“THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.”

Certificates
for Revocable Warrants or Exercise Shares, as the case may be, without such
legend shall be issued if such Revocable Warrants or Exercise Shares are sold
pursuant to an effective registration statement under the Act or if the Company
has received an opinion from counsel reasonably satisfactory to counsel for the
Company that such legend is no longer required under the Act.

9. Adjustment
of Number of Shares and Class of Capital Stock Purchasable. The
number of Exercise Shares and class of capital stock purchasable under this
Revocable Warrant are subject to adjustment from time to time as set forth in
this Section 9.

(a) Adjustment
for Change in Capital Stock. If the
Company:

	 	
      (i)
	
      pays
      a dividend or makes a distribution on its Common Stock, in each case, in
      shares of its Common Stock;

	 	
      (ii)
	
      subdivides
      its outstanding shares of Common Stock into a greater number of
      shares;

	 	
      (iii)
	
      combines
      its outstanding shares of Common Stock into a smaller number of shares;
      or

3

	 	
      (iv)
	
      makes
      a distribution on its Common Stock in shares of its capital stock other
      than Common Stock

then the
number and classes of Exercise Shares purchasable upon exercise of each
Revocable Warrant in effect immediately prior to such action shall be adjusted
so that the holder of any Revocable Warrant thereafter exercised may receive the
number and classes of shares of capital stock of the Company which such holder
would have owned immediately following such action if such holder had exercised
the Revocable Warrant immediately prior to such action.

For a
dividend or distribution the adjustment shall become effective immediately after
the record date for the dividend or distribution. For a subdivision, combination
or reclassification, the adjustment shall become effective immediately after the
effective date of the subdivision, combination or reclassification.

If after
an adjustment the holder of a Revocable Warrant upon exercise of it may receive
shares of two or more classes of capital stock of the Company, the Board of
Directors of the Company shall in good faith determine the allocation of the
adjusted Exercise Price between or among the classes of capital stock. After
such allocation, that portion of the Exercise Price applicable to each share of
each such class of capital stock shall thereafter be subject to adjustment on
terms comparable to those applicable to the Exercise Shares in this Agreement.

(b) Consolidation,
Merger or Sale of the Company. If the
Company is a party to a consolidation, merger, transfer of assets or any other
business combination which reclassifies or changes its outstanding Common Stock,
the successor corporation (or corporation controlling the successor corporation
or the Company, as the case may be) shall by operation of law assume the
Company’s obligations under this Agreement. Upon consummation of such
transaction, the Revocable Warrants shall auto-matically become exercisable for
the kind and amount of securities, cash or other assets which the holder of a
Revocable Warrant would have owned immediately after the consolidation, merger,
transfer or business combination if the holder had exercised the Revocable
Warrant immediately before the effective date of such transaction. As a
condition to the consummation of such transaction, the Company shall arrange for
the person or entity obligated to issue securities or deliver cash or other
assets upon exercise of the Revocable Warrant to, concurrently with the
consummation of such transaction, assume the Company’s obligations hereunder by
executing an instrument so providing and further providing for adjustments which
shall be as nearly equivalent as may be practical to the adjustments provided
for in this Section 9. The provisions of this Section 9(b) shall similarly apply
to successive reclassifications, reorganizations, consolidations, mergers or
other business combinations. 

10. Successors. All the
covenants and provisions of this Agreement by or for the benefit of the Company
or Holder shall bind and inure to the benefit of their respective successor and
assigns hereunder.

11. Counterparts. This
Agreement may be executed in any number of counterparts and each of such
counterparts shall for all proposes be deemed to be an original, and such
counterparts shall together constitute by one and the same
instrument.

12. Notices. All
notices or other communications under this Agreement shall be in writing and
shall be deemed to have been given if delivered by hand or mailed by certified
mail, postage prepaid, return receipt requested, addressed as follows: if to the
Company: Natural Gas Systems, Inc., Two
Memorial City Plaza, 820 Gessner, Suite 1340. Houston, TX  77024
,
Attention: Chief Executive Officer, and to the Holder: at the address of the
Holder appearing on the books of the Company or the Company’s transfer agent, if
any.

4

Either
the Company or the Holder may from time to time change the address to which
notices to it are to be mailed hereunder by notice in accordance with the
provisions of this Paragraph 12.

13. Supplements
and Amendments. The
Company may from time to time supplement or amend this Agreement without the
approval of any Holders in order to cure any ambiguity or to be correct or
supplement any provision contained herein which may be defective or inconsistent
with any other provision, or to make any other provisions in regard to matters
or questions herein arising hereunder which the Company may deem necessary or
desirable and which shall not materially adversely affect the interest of the
Holder. Except as set forth in the immediately preceding sentence, this
Agreement may not be amended without the prior written consent of the
Holder.

14. Severability. If for
any reason any provision, paragraph or term of this Agreement is held to be
invalid or unenforceable, all other valid provisions herein shall remain in full
force and effect and all terms, provisions and paragraphs of this Agreement
shall be deemed to be severable.

15. Governing
Law. This
Agreement shall be deemed to be a contract made under the laws of the State of
Nevada and for all purposes shall be governed and construed in accordance with
the laws of said State. 

16. Headings.
Paragraphs and subparagraph headings, used herein are included herein for
convenience of reference only and shall not affect the construction of this
Agreement nor constitute a part of this Agreement for any other
purpose.

IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, as of the date and year first above written. 

	
      COMPANY

      Natural
      Gas Systems, Inc.

       

       

      By:
      _________________________________

      Name:
      Robert S. Herlin, CEO 
	 	
      HOLDER:
      

      Prospect
      Energy Corporation 

       

       

      By:
      _________________________________

       

      Name:
      _______________________________ 

 

5Exhibit
A

 

THE
SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANS-FERRED WITHOUT AN EFFECTIVE REGIS-TRATION THEREOF UNDER SUCH ACT OR
PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL, REASON-ABLY SATISFACTORY TO THE
COR-PORATION AND ITS COUN-SEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.

REVOCABLE
WARRANT TO PURCHASE SHARES

OF COMMON
STOCK OF NATURAL GAS SYSTEMS, INC

Initial
Number of Shares:  300,000

Exercise
Price:                    
$0.75 per
share

Date of
Grant:                    
January
___, 2005

Expiration
Date:       January
___, 2010

THIS
CERTIFIES THAT, Prospect Energy Corporation, a Maryland corporation, or any
person or entity to whom the inter-est in this Revocable Warrant is lawfully
transferred (“Holder”) is entitled to purchase the above number (as adjust-ed
pursuant to Section 4 hereof) of fully paid and non-assessable shares of the
Common Stock (the “Shares”) of Natural Gas Systems, Inc., a Nevada corporation
(the “Company), having an Exercise Price as set forth above, subject to the
provisions and upon the terms and condi-tions set forth herein and in the
Revocable Warrant Agreement dated January __, 2005 (“Revocable Warrant
Agreement”). The exercise price, as adjusted from time to time as provided
herein, is referred to as the “Exercise Price.”

NOTWITHSTANDING
ANYTING TO THE CONTRARY, THIS REVOCABLE WARRANT IS SUBJECT TO REVOCATION WITHOUT
CONSIDERATION BY THE COMPANY UNDER CERTAIN CONDITIONS DEFINED IN THE REVOCABLE
WARRANT AGREEMENT.

1. Term. Subject
to the revocation provisions of Section 3 of the Revocable Warrant Agreement,
the purchase right represented by this Revocable Warrant is exer-cisable, in
whole or in part, at any time commencing on the March 15, 2006 and ending on the
Expiration Date, after which time the Revocable Warrant shall be
void.

2. Method
of Exercise; Payment; Issuance of New Revocable Warrant. Subject
to Section 1 hereof, the right to purchase Shares repre-sented by this Revocable
Warrant may be exercised by Holder, in whole or in part, for the total number of
Shares remaining available for exercise by the surrender of this Revocable
Warrant (with the notice of exercise form attached hereto as Exhibit A duly
executed) at the principal office of the Company and by the payment to the
Company, by check made payable to the Company drawn on a United States bank and
for United States funds, or by delivery to the Company of evidence of
cancellation of indebtedness of the Company to such Holder, of an amount equal
to the then appli-cable Exercise Price per share multiplied by the number of
Shares then being purchased or by net exercise pursuant to Section 6 hereof. In
the event of any exercise of the purchase right represented by this Revocable
Warrant, certificates for the Shares so purchased shall be promptly delivered to
Holder and, unless this Revocable Warrant has been fully exercised or has
expired, a new Revocable Warrant representing the portion of the Shares, if any,
with respect to which this Revocable Warrant shall not then have been exer-cised
shall also be promptly delivered to Holder.

3. Exercise
Price. The
Exercise Price at which this Revocable Warrant may be exercised shall be the
Exercise Price, as adjusted from time to time pursuant to Section 4
hereof.

4. Adjustment
of Number of Shares. The
number of
shares and/or class of capital stock purchasable upon exercise of this Revocable
Warrant are subject to adjustment as provided in Section 9 of the Revocable
Warrant Agreement.

5. Transferability
and Negotiability of Revocable Warrant. This
Revocable Warrant may not be transferred or assigned in whole or in part without
compliance with applicable federal and state securities laws by the transferor
and the transferee (includ-ing, without limitation, the delivery of investment
represen-tation letters and legal opinions reasonably satisfactory to the
Company, if reasonably requested by the Com-pany). Subject to the provisi-ons of
this Section 5, title to this Revocable Warrant may be transferred in the
same manner as a negotiable instrument transferable by endorsement and
delivery.

6. Net
Exercise. In lieu
of exercising this Revocable Warrant for cash, the Holder may elect to exchange
this Revocable Warrant for Shares equal to the value of this Revocable Warrant
by surrender of this Revocable Warrant, together with notice of such election,
at the principal office of the Company, in which event the Company shall issue
to the holder a number of Shares computed using the following
formula:

X =
Y
(A-B)

A

Where:

X= the
number of Shares to be issued to the holder.

Y= the
number of Shares to be purchased under this Revocable Warrant.

A= value
per share of one Share determined in accordance with Section 2 of the Revocable
Warrant Agreement.

B= the
Exercise Price (as adjusted).

7. Registration
Rights. Upon
exercise of this Revocable Warrant , the Holder shall have and be entitled to
exercise, together with all other holders of registrable securities possessing
“piggy back” registration rights under that certain Registration Rights
Agreement, of even date herewith and attached hereto as Exhibit
C, between
the Company and the parties who have executed the counterpart signature pages
thereto or are otherwise bound thereby (the “Registration Rights Agreement”),
the rights of registration granted under the Registration Rights Agreement (with
respect to the Shares of Common Stock issuable upon exercise of this Revocable
Warrant ). By its receipt of this Revocable Warrant , Holder agrees to be bound
by the Registration Rights Agreement.

2

8. Miscellaneous. The
Company cove-nants that it will at all times reserve and keep available, solely
for the purpose of issue upon the exercise hereof, a sufficient number of Shares
to permit the exer-cise hereof in full. Such Shares, when issued in compliance
with the provisions of this Revocable Warrant and the Company’s Certificate of
Incorporation, will be duly authorized, validly issued, fully paid and
non-assessable. No Holder of this Revocable Warrant, as such, shall, prior to
the exercise of this Revocable Warrant, be entitled to vote or receive dividends
or be deemed to be a stockholder of the Company for any purpose, nor shall
anything contained in this Revocable Warrant be construed to confer upon Holder,
as such, any rights of a stockholder of the Company or any right to vote, give
or withhold consent to any corporate action, receive notice of meetings, receive
dividends or subscription rights, or otherwise. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Revocable Warrant and, in the case of any such loss, theft or
destruction, upon delivery of an indemnity agreement reason-ably satisfactory in
form and amount to the Company or, in the case of any such mutila-tion, upon
surrender and cancellation of such Revocable Warrant, the Company at its expense
will execute and deliver, in lieu thereof, a new Revocable Warrant of like date
and tenor. The terms and provisions of this Revocable Warrant shall inure to the
bene-fit of, and be binding upon, the Company and the Holder hereof and their
respec-tive successors and as-signs. This Revocable Warrant shall be governed by
and construed under the laws of the State of Nevada.

3

IN
WITNESS WHEREOF, the parties have executed and delivered this Agreement as of
the date and year first written above.

 

	
       Holder: 

      _____________________________________________________________
	 	 	 Company:
Natural Gas Systems, a Nevada
    Corporation
	 	 	 	 
		 	 	
		 	 	
	By:
      _____________________________

Name:
      ___________________________	 	 	By:
      _____________________________

Name:
      ___________________________

 

     

4

 

NOTICE
OF EXERCISE

TO: NATURAL
GAS SYSTEMS, INC.

1. The
undersigned hereby elects to purchase _________ shares of the Common Stock of
NATURAL GAS SYSTEMS, INC. pursuant to the terms of the attached Revocable
Warrant, and tenders herewith payment of the purchase price of such shares in
full, together with all applicable transfer taxes, if any.

2. The
undersigned hereby elects to purchase __________ shares of the Common Stock of
NATURAL GAS SYSTEMS, INC. pursuant to the terms of the attached Revocable
Warrant on a net exercise basis in accordance with Section 6.

3. Please
issue a certificate or certificates repre-senting said shares of the Common
Stock in the name of the under-signed or in such other name as is specified
below:

	
       
	 
      Name:________________________________

      

      Tax
      ID:___________________

      

       

      Address:________________________________

             
      ________________________________

      
             
      ________________________________

             
      ________________________________

             
      ________________________________

       

      Signed:__________________________________

      

      Date:___________________

 

 

5

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00077-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00077-of-00352.parquet"}]]