SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: February 06, 2006
Date of Earliest Event Reported: January 31, 2006
NATURAL GAS SYSTEMS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Nevada
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(State or Other Jurisdiction of Incorporation)
0-27862 41-1781991
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(Commission File Number) (I.R.S. Employer Identification No.)
820 Gessner, Suite 1340, Houston, Texas 77024
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(Address of Principal Executive Offices) (Zip Code)
(713) 935-0122
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(Registrant's Telephone Number, Including Area Code)
(Former Name or Former Address, if Changed Since Last Report)
TABLE OF CONTENTS
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Item 1.01 Entry Into a Material Definitive Agreement
Item 2.01 Completion of Acquisition or Disposition of Assets
Item 2.03. Creation of a Direct Financial Obligation or an Obligation under and
Off-Balance Sheet Arrangement of a Registrant
Item 3.02 Unregistered Sale of Equity Securities
Item 9.01 Financial Statements and Exhibits
Signatures
ITEM 1.01. ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
Purchase of Net Revenue Interests
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On January 31, 2006, a subsidiary of Natural Gas Systems, Inc. ("NGS" or
the "Company") entered into an agreement with an unrelated third party to
acquire an additional net revenue interest in producing oil and gas properties
located in Louisiana, for total consideration of $1.0 million. This acquisition
was consummated on January 31, 2006. The Company believes that the net revenue
interest acquired will be accretive to earnings and cash flow. Funds to acquire
the property were provided by Prospect Energy Corporation, through an additional
$1.0 million advance under the Loan Agreement, dated February 3, 2005, as
amended on January 31, 2006 and as described in Item 2.03 below.
See Item 2.03 below.
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
See Item 1.01 above.
ITEM 2.03. CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN
OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT
Additional Draw Request in connection with Loan Agreement with Prospect Energy
Corporation
On January 31, 2006, NGS borrowed an additional $1.0 million (the
"Additional Advance") under the terms of the First Amendment to the Loan
Agreement (defined below) with Prospect Energy Corporation ("Prospect") to fund
the purchase of a net revenue interest in producing oil and gas properties
located in Louisiana (as described in Item 1.01 above).
As previously reported in a Current Report on Form 8-K filed by NGS with
the SEC on February 2, 2005, the Company entered into a senior secured loan
agreement (the "Loan Agreement") with Prospect providing for borrowings by the
Company of up to $4.8 million (the "Secured Loan"). All conditions to drawing on
the Loan Agreement were met, and the first funding was made thereunder, on
February 3, 2005. The second funding, namely an additional advance of $1.0
million on March 16, 2005, as previously reported in a Current Report on Form
8-K filed by NGS with the SEC on March 21, 2005, increased the total aggregate
borrowings with Prospect to $4.0 million. Pursuant to the third funding, under
the terms of the first amendment to the Loan Agreement ("First Amendment to the
Loan Agreement"), dated January 31, 2006 and referenced in this Current Report
on Form 8-K, the parties agreed to the Additional Advance of $1.0 million, which
increased the Company's total aggregate borrowings with Prospect to $5.0
million. The Secured Loan bears interest at an annual rate equal to the greater
of (a) 14% and (b) the Treasury Rate plus 9%, with interest payable in arrears
on the last day of each month. The Secured Loan is due in full on February 2,
2010. The proceeds of the Secured Loan may be used solely for the acquisition
and development of certain oil and gas properties, general working capital and
the repayment of specified indebtedness, provided that the Company is prohibited
from using any of the proceeds for exploratory drilling or the acquisition of
oil and gas properties without the consent of Prospect.
Pursuant to the terms of the Additional Advance under the First Amendment
to the Loan Agreement, the Company was required to issue Prospect five-year
warrants to purchase up to 150,000 shares of NGS common stock at an exercise
price of $1.4495 per share, and "revocable warrants" to purchase up to an
additional 100,000 shares of common stock at an exercise price of $1.4495 per
share. The revocable warrants are subject to cancellation by the Company prior
to their exercise if the Company meets and maintains certain operating cash flow
targets.
The shares of common stock issuable upon exercise of the warrants held by
Prospect are subject to a registration rights agreement, pursuant to which the
Company has agreed to register sales by Prospect and its transferees of such
shares under the Securities Act of 1933, as amended. Subject to limitations
specified in this agreement, these registration rights include an unlimited
number of piggyback registration rights that require NGS to register sales of a
holder's shares when NGS undertakes a public offering.
NGS issued and sold the foregoing securities pursuant to certain
exemptions from registration provided by Rule 506 of Regulation D and Section
4(2) and Section 4(6) of the Securities Act of 1933, as amended.
The Secured Loan is secured by a Mortgage, Collateral Assignment, Security
Agreement and Financing Statement executed by a wholly owned subsidiary of NGS ,
granting Prospect a first-priority security interest in substantially all of the
subsidiaries' assets, as well as by pledges of the stock of NGS's direct and
indirect subsidiaries. The Secured Loan is also guaranteed by NGS's direct and
indirect subsidiaries (other than NGS Technologies, Inc.).
The Loan Agreement requires the Company to maintain a debt service reserve
account based upon a percentage of outstanding borrowings. Among other
conditions, the First Amendment to the Loan Agreement allows for a release to
NGS of $210,000 from such reserve account until the earlier of (i) April 30,
2006, or (ii) until the Company meets certain earnings tests; thereafter the
Company must maintain a debt service reserve account in accordance with the
terms of the original Loan Agreement.
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Among other restrictions and subject to certain exceptions, the First
Amendment to the Loan Agreement and the Loan Agreement prohibit the Company and
each of its restricted subsidiaries from creating liens, entering into certain
types of mergers or consolidations, incurring additional indebtedness, changing
the character of its business, or engaging in certain types of transactions. The
First Amendment to the Loan Agreement and the Loan Agreement also require NGS to
maintain specified financial ratios. In order to satisfy certain of these
ratios, the Company will need to significantly increase its earnings before cash
interest, taxes depreciation and amortization compared to the three month period
ending September 30, 2005.
The First Amendment to the Loan Agreement and the Loan Agreement also
provide that the Company will be in default under the Secured Loan if Robert
Herlin shall cease for any reason to be actively employed full time as President
of NGS, unless NGS replaces Mr. Herlin within 90 days following such event, and
his replacement is reasonably satisfactory to Prospect.
The foregoing descriptions are partially qualified and extended by the
Exhibits referenced in the Company's Current Reports on Form 8-K filed with the
SEC on March 21, 2005 and February 8, 2005, incorporated herein by reference.
ITEM 3.02. UNREGISTERED SALES OF EQUITY SECURITIES
See Item 2.03 above.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
Financial statements specified in Rule 3-05(b) of Regulation S-X are not
required pursuant to this transaction.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NATURAL GAS SYSTEMS, INC.
Date: February 6, 2006 By: /s/ Robert Herlin
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Robert Herlin, Chief Executive Officer
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