SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Materials Under Rule 14a-12
Natural Gas Systems, Inc.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:_____
(2) Aggregate number of securities to which transaction applies:________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):______
(4) Proposed maximum aggregate value of transaction:____________________
(5) Total fee paid:_____________________________________________________
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:_____________________________________________
(2) Form, Schedule or Registration Statement No.:_______________________
(3) Filing Party:_______________________________________________________
(4) Date Filed:_________________________________________________________
NATURAL GAS SYSTEMS
820 GESSNER, SUITE 1340
HOUSTON, TEXAS 77024
November 1, 2005
Dear Stockholder:
You are cordially invited to attend the 2005 Annual Meeting of
Stockholders of Natural Gas Systems, Inc. (the "Company" or "Natural Gas
Systems"). The meeting will be held at the Company's offices at 820 Gessner,
Suite 1340, Houston, Texas 77024 at 2:00 p.m., local time, on Thursday, December
1, 2005.
The Notice of Meeting and the Proxy Statement on the following pages cover
the formal business of the meeting, which includes two items to be voted on by
the stockholders. At the meeting, I will also report on Natural Gas Systems'
current operations and will be available to respond to questions from
stockholders. Recording devices will not be permitted in the meeting.
Please note that space limitations make it necessary to limit attendance
to stockholders of record as of October 21, 2005. To accommodate the largest
number of stockholders at the meeting, we request that you indicate your intent
to attend by calling our offices at (713) 935-0122 or by emailing us at
smcdonald@natgas.us, by November 18, 2005.
Whether or not you plan to attend the meeting, it is important that your
shares be represented and voted at the meeting. You are urged, therefore, to
complete, sign, date and return the enclosed proxy card, even if you plan to
attend the meeting.
I hope you will join us.
Sincerely,
/s/ Robert S. Herlin
----------------------------------------
Robert S. Herlin, President and Chief
Executive Officer
NATURAL GAS SYSTEMS, INC.
820 GESSNER, SUITE 1340
HOUSTON, TEXAS 77024
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
to be held on December 1, 2005
Notice is hereby given to the holders of common stock, $.001 par value per
share, of Natural Gas Systems, Inc. that the Annual Meeting of Stockholders will
be held at the Company's offices at 820 Gessner, Suite 1340, Houston, Texas
77024, on Thursday, December 1, 2005, at 2:00 p.m., local time, for the
following purposes:
(1) To elect five directors to serve until the 2006 Annual Meeting of
Stockholders;
(2) To ratify the appointment by the Audit Committee of the Board of Directors
of the Company's independent auditors for the fiscal year ending June 30,
2006; and
(3) To transact such other business as may properly come before the Annual
Meeting or any postponement or adjournment thereof.
Only those stockholders of record at the close of business on October 21,
2005 are entitled to notice of and to vote at the Annual Meeting or any
postponement or adjournment thereof. A complete list of stockholders entitled to
vote at the Annual Meeting will be available at the Annual Meeting.
By Order of the Board of Directors,
Houston, Texas /s/ Laird Q. Cagan
November 1, 2005 ----------------------------------------
Laird Q. Cagan, Secretary
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE,
SIGN, DATE, AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENCLOSED BUSINESS
REPLY ENVELOPE. IF YOU ATTEND THE ANNUAL MEETING YOU MAY, IF YOU WISH, REVOKE
YOUR PROXY AND VOTE IN PERSON.
NATURAL GAS SYSTEMS, INC.
820 GESSNER, SUITE 1340
HOUSTON, TEXAS 77024
Annual Meeting of the Stockholders To Be Held on December 1, 2005
PROXY STATEMENT
This Proxy Statement is furnished to holders of common stock, $.001 par
value per share, of Natural Gas Systems, Inc., a Nevada corporation, in
connection with the solicitation of proxies by our Board of Directors for use at
our 2005 Annual Meeting of Stockholders to be held at 2:00 p.m., local time, at
the Company's offices at 820 Gessner, Suite 1340, Houston, Texas 77024, on
Thursday, December 1, 2005, and at any postponement or adjournment thereof.
This Proxy Statement and the accompanying proxy card are first being
mailed to our stockholders on or about November 4, 2005.
What is the purpose of the Annual Meeting?
At the Annual Meeting, stockholders will act upon the matters outlined in
the attached Notice of Meeting and described in detail in this Proxy Statement,
which is the election of directors and the ratification of the appointment of
our independent auditors. In addition, management will report on our performance
during the fiscal year ended June 30, 2005, which we refer to as fiscal 2005,
and respond to questions from stockholders.
Who is entitled to vote at the Annual Meeting?
Only stockholders of record at the close of business on October 21, 2005
will be entitled to notice of, and to vote at, the Annual Meeting or any
adjournment or postponement thereof.
What are the voting rights of the holders of our common stock?
Holders of our common stock are entitled to one vote per share with
respect to each of the matters to be presented at the Annual Meeting. With
regard to the election of directors, the five nominees receiving the greatest
number of votes cast will be elected provided a quorum is present. On each other
matter to be presented, the affirmative vote of a majority of the shares
represented at the Annual Meeting and entitled to vote will be necessary to
approve the matter.
Abstentions will be counted towards the tabulation of votes cast on
matters properly presented to the stockholders (except the election of
directors) and will have the same effect as negative votes. Broker non-votes
will not be counted as votes cast and, therefore, will have no effect on the
outcome of the matters presented at the Annual Meeting.
What constitutes a quorum?
Our Bylaws provide that the presence, in person or by proxy, of the
holders of a majority of outstanding shares of our common stock at our Annual
Meeting shall constitute a quorum.
For the purpose of determining the presence of a quorum, proxies marked
"withhold authority" or "abstain" will be counted as present. Shares represented
by proxies that include broker non-votes will also be counted as shares present
for purposes of establishing a quorum. On October 21, 2005, the record date,
there were 24,778,358 shares of our common stock issued and outstanding and such
shares are the only shares entitled to vote at the Annual Meeting.
1
What are the Board's recommendations?
Unless you give other instructions on your proxy card, the persons named
as proxy holders on the proxy card will vote in accordance with the
recommendations of the Board of Directors. The Board's recommendations are set
forth together with the description of the Proposals in this Proxy Statement. In
summary, the Board recommends a vote FOR election of the directors named in this
Proxy Statement (see Proposal I), and FOR the ratification of the appointment of
Hein & Associates LLP as the Company's independent accountants (See Proposal
II).
The proxy holders will vote in their discretion with respect to any other
matter that properly comes before the Annual Meeting.
Proxies
If the enclosed proxy card is executed, returned in time and not revoked,
the shares represented thereby will be voted at the Annual Meeting and at any
postponement or adjournment thereof in accordance with the instructions
indicated on the proxy and IF NO INSTRUCTIONS ARE INDICATED, PROXIES WILL BE
VOTED (1) "FOR" THE PROPOSALS DESCRIBED IN THIS PROXY STATEMENT AND (2) AS TO
ANY OTHER MATTERS PROPERLY BROUGHT BEFORE THE ANNUAL MEETING OR ANY POSTPONEMENT
OR ADJOURNMENT THEREOF, IN THE SOLE DISCRETION OF THE PROXIES.
A stockholder who has returned a proxy card may revoke it at any time
prior to its exercise at the Annual Meeting by (i) giving written notice of
revocation to our Corporate Secretary, (ii) properly submitting to Natural Gas
Systems a duly executed proxy bearing a later date, or (iii) appearing at the
Annual Meeting and voting in person. All written notices of revocation of
proxies should be addressed as follows: Natural Gas Systems, Inc., 820 Gessner,
Suite 1340, Houston, Texas 77024, Attention: Sterling H. McDonald.
2
PROPOSAL I
ELECTION OF DIRECTORS
The Bylaws of the Company provide that the Board of Directors shall
consist of a minimum of one member. The size of the Board of Directors is
currently set at five members. Each director shall be selected for a term of one
year and until his successor is elected and qualified.
The following is information concerning the nominees for election.
Nominees
Year First
Elected
Name Age Principal Occupation Director
---- --- -------------------- --------
Laird Q. Cagan 47 Mr. Cagan has served as the Company's Chairman of the Board and 2004
Secretary since May 2004. Mr. Cagan is a co-founder, and, since
2001, has been Managing Director, of Cagan McAfee Capital Partners,
LLC, a technology-focused private equity firm in Cupertino,
California. He also serves as President of Cagan Capital, LLC, a
merchant bank he formed in 1990. From 1999 to 2001, he served as
Chairman and Chief Executive Officer of BarterNet Corporation, a
worldwide Internet B2B exchange. Mr. Cagan attended M.I.T. and
received a BS and an MS degree in engineering, and an MBA, from
Stanford University. He is a member of the Young Presidents
Organization. Please also see "Certain Relationships and Related
Transactions."
Robert S. Herlin 50 Mr. Herlin has been President, Chief Executive Officer and a Director 2004
of the Company since May 2004. Prior to the merger of Natural Gas
Systems, Inc. ("Old NGS") into the Company, Mr. Herlin served as
President, Chief Executive Officer and Director of Old NGS. He is
responsible for all of the Company's operations, development of its
business model, identifying acquisitions of applicable oil and gas
properties, developing the Company's operating team and creating,
establishing and maintaining industry partnerships. Mr. Herlin has
more than 21 years of experience in energy transactions, operations
and finance with small independents, larger independents and major
integrated oil companies. Since 2003, Mr. Herlin has also served as a
Partner with Tatum CFO, a financial advisory firm that provides
executive officers on a part-time or full-time basis to clients. From
2001 to 2003, Mr. Herlin served as Senior Vice President and Chief
Financial Officer of Intercontinental Towers Corporation, an
international wireless infrastructure company. From 1997 to 2001, he
was employed at Benz Energy, Inc., an oil and gas company, most
recently as President. Mr. Herlin also serves on the board of
directors of Boots and Coots Group, an oil field services company.
Mr. Herlin graduated with honors from Rice University with B.S. and
M.E. degrees in chemical engineering and has an MBA from Harvard
University.
3
John Pimentel 39 Since 2002, Mr. Pimentel has been a principal of Cagan McAfee Capital 2004
Partners, where he is responsible for business development,
investment structuring, and portfolio company management. From 1998
to 2002, he worked with Bain & Company in that firm's Private Equity
Group, and the general consulting practice. From 1993-1996, Mr.
Pimentel served as Deputy Secretary for Transportation for the State
of California. Mr. Pimentel has served as a director of World Waste
Technologies, Inc., a waste technology company since 2004, and since
September of 2005, Mr. Pimentel has served as its Chief Executive
Officer. Further, Mr. Pimentel has served as a director of Pacific
Ethanol, Inc. since early 2004. Mr. Pimentel has an MBA degree from
the Harvard Business School, and a BA degree from UC Berkeley
Gene Stoever 66 In 1993, Mr. Stoever retired from KPMG Peat Marwick after 32 years of 2004
service, including 24 years as a partner. Since 1994, he has acted as an
independent consultant. From 1999 to 2004, he served as the trustee of the
Sterling Diagnostic Imaging and SDI Liquidating Trust, and from 2001 to
2005 he served as a Director of Exopack, LLC, a flexible packaging
company. He also serves as a director and Chairman of the Audit Committee
of Propex Fabrics, Inc., a global provider of woven and non-woven
polypropylene products. Mr. Stoever earned his B.B.A. degree in accounting
with honors from the University of Texas at Austin, is a Certified Public
Accountant in the State of Texas and is a current member of the Texas
Society of Public Accountants. Mr. Stoever serves as Chairman of the
Company's Audit Committee.
E.J. DiPaolo 52 Mr. DiPaolo has served as an Energy Advisor to Growth Capital 2004
Partners, L.P., an investment banking company, since 2003. From 2002
to the present, Mr. DiPaolo has served as an independent energy
producer. From 1976 to 2002, Mr. DiPaolo was with Halliburton
Company, most recently as Group Senior Vice President of Global
Business Development, where he was responsible for the management of
overall customer relationships with the companies within
Halliburton's upstream businesses, including Halliburton Energy
Services, Brown and Root Energy Services, and Landmark Graphics and
Wellstream. Previously, Mr. DiPaolo was the North American Regional
Vice President and Far East Regional Vice President for Halliburton,
accountable for the overall operation of Halliburton Energy Services
in those regions. Mr. DiPaolo also serves on the Board of Directors
of Boots and Coots Group, an oil field services company, and Edgen
Corporation, a pipe distribution company. He received his
undergraduate degree in agricultural engineering from West Virginia
University in 1976 where he currently serves on the Advisory Board of
the College of Engineering. Mr. DiPaolo serves as Chairman of the
Company's Compensation Committee
We believe that the nominees will be available and able to serve as
directors. In the event that a nominee is unable to serve, the proxy holders
will vote the proxies for such other nominee as they may determine.
4
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES
FOR ELECTION AS DIRECTORS.
Meetings of the Board of Directors and Committees
Board of Directors. The property, affairs and business of Natural Gas
Systems are under the general management of our Board of Directors as provided
by the laws of Nevada and our Bylaws. Natural Gas Systems has standing Audit and
Compensation Committees of the Board of Directors. Because all five of the
Company's directors participate in the process of identifying qualified director
nominees, the Board of Directors does not believe that it is necessary to have a
separate Nominating Committee. The Board's director nominees for each annual
meeting of stockholders are approved by a majority of the Company's independent
directors. The Board does not have a written charter that governs the director
nomination process.
The Board of Directors held five meetings during fiscal year 2005. Each
director attended at least 75% of the aggregate of the total meetings of the
Board and the total number of meetings held by all committees of the Board on
which he served during fiscal year 2005. Each Board member is expected be
present at the annual meeting.
Audit Committee. The functions of the Audit Committee include the
appointment, compensation and oversight of the Company's independent auditors,
reviewing the scope and results of the audit by the Company's independent
auditors and reviewing the Company's procedures for monitoring internal
controls. The members of the Audit Committee consist of Messrs. Stoever and
DiPaolo. The Audit Committee met four times during fiscal year 2005. Our Board
of Directors believes that the members of the Audit Committee are independent as
defined in Rule 4200 (a)(14) of the National Association of Securities Dealers'
listing standards. The Board of Directors has determined that Mr. Stoever is an
independent director serving on the Audit Committee who is an audit committee
financial expert as defined by the Securities and Exchange Commission's rules
(see Mr. Stoever's bio under "Proposal 1 - Election of Directors." The Audit
Committee adopted a Charter on February 21, 2005.
Compensation Committee. The Compensation Committee is authorized to review
annual salaries and bonuses of our officers and has the authority to determine
the recipients of options, the time or times at which options shall be granted,
the exercise price of each option, and the number of shares to be issuable upon
the exercise of each option under our stock option plan. The members of the
Compensation Committee consist of Messrs. Stoever and DiPaolo. The Compensation
Committee met three times during fiscal year 2005.
Nomination of Directors. The entire Board of Directors will consider Board
nominees recommended by shareholders. In order for a stockholder to nominate a
candidate for director, timely notice of the nomination must be given in writing
to the Secretary of the Company. To be timely, such notice must be received at
the principal executive offices of the Company as set forth under "Stockholder
Proposals" below. Notice of a nomination must include your name, address and
number of shares you own; the name, age, business address, residence address and
principal occupation of the nominee; and the number of shares beneficially owned
by the nominee. It must also include the information that would be required to
be disclosed in the solicitation of proxies for election of directors under the
federal securities laws, as well as whether the individual can understand basic
financial statements and the candidate's other board memberships (if any). You
must submit the nominee's consent to be elected and to serve. The Board of
Directors may require any nominee to furnish any other information, within
reason, that may be needed to determine the eligibility of the nominee. The
Board of Directors will follow procedures that it deems reasonable and
appropriate in the identification of candidates for election to the Board of
Directors and evaluating the background and qualifications of those candidates.
Those processes include consideration of nominees suggested by an outside search
firm, by incumbent Board members and by stockholders. The Board of Directors
will seek candidates having experience and abilities relevant to serving as a
director of the Company and who represent the best interests of stockholders as
a whole and not any specific interest group or constituency. The Board of
Directors will consider a candidate's qualifications and background, including,
but not limited to responsibility for operating a public company or a division
5
of a public company, oil and gas business experience, a candidate's technical
background or professional qualifications and other public company boards on
which the candidate is a director. The Board of Directors will also consider
whether the candidate would be "independent" for purposes of the National
Association of Securities Dealers' and the rules and regulations of the
Securities and Exchange Commission. The Board of Directors may from time to time
engage the services of a professional search firm to identify and evaluate
potential nominees.
Stockholder Communications with the Board. Any stockholder can communicate
with all directors or with specified directors by sending a letter to the
Company's Secretary at the address set forth under "Stockholder Proposals,"
below. All such letters will be forwarded to the entire Board or to the
directors specified by the stockholder.
Compensation of Directors
Periodically, our Board of Directors reviews the then-current director
compensation policies and from time to time makes changes to such policies based
on various criteria the Board deems relevant. Our independent directors are
currently paid $3,000 per fiscal quarter and are reimbursed for any direct
out-of-pocket expenses incurred in connection with their duties as directors. In
addition, Messrs. DiPaolo and Stoever are paid additional stipends of $13,000
per year for serving as Chairs of the Compensation and Audit Committees,
respectively. Our Board has also authorized the issuance of options to acquire
up to 100,000 shares of common stock at an exercise price of $1.27 per share,
vesting over two years, and 28,000 shares of common stock at an exercise price
of $1.10 per share, vesting over one year, to each of Messrs. DiPaolo and
Stoever.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
shares of the Company's common stock (collectively, "Reporting Persons") to file
reports of ownership and changes in ownership with the SEC. Reporting Persons
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on its review of the copies of such forms received or written
representations from the Reporting Persons, the Company believes that with
respect to the fiscal year ended June 30, 2005, all the Reporting Persons
complied with all applicable Section 16 filing requirements, except that a
certain Amended Form 3s and Form 4s for Mr. Cagan and Mr. McAfee (see next
section below) were filed late due to administrative oversight.
Beneficial Owners of More Than Five Percent of Natural Gas Systems' Common
Stock; Shares Held by Directors and Executive Officers
Based solely upon information made available to us, the following table sets
forth information with respect to the beneficial ownership of our common stock
as of September 15, 2005 by (1) each person who is known by us to beneficially
own more than five percent of our common stock; (2) each director and nominee
for director; (3) each of the named executive officers listed in the Summary
Compensation Table below under the caption "Executive Compensation"; and (4) all
executive officers and directors as a group. Shares of common stock that are
subject to outstanding options and warrants that are presently exercisable or
exercisable within 60 days of September 15, 2005 are deemed to be outstanding
for purposes of computing the percentage ownership of the holder of the options
and warrants, but not for any other person. Except as otherwise indicated, the
holders listed below have sole voting and investment power with respect to all
shares of common stock beneficially owned by them, subject to community property
laws where applicable.
6
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS(1)
----------------------------------------------- -------------------- -------------------
Robert Herlin(2)(3) 1,339,844 5.3%
Sterling McDonald (2)(9) 168,750 *
Laird Q. Cagan(4)(5) 7,688,643 30.7%
John Pimentel(4) 450,000 1.8%
E.J. DiPaolo(2)(6) 50,000 *
Gene Stoever(2)(6) 50,000 *
Eric A. McAfee, P2 Capital LLC , Park Capital 5,907,500 23.8%
III, and McAfee Capital LLC(4)(7)
All executive officers and directors as a group 9,777,445 38.1%
(seven persons)(3)(5)(6)(7)(8)(9)
* Less than 1%
(1) Based on 24,777,534 shares outstanding on September 15, 2005.
(2) Address: c/o Natural Gas Systems, Inc., 820 Gessner, Suite 1340, Houston,
Texas 77024.
(3) Includes (i) 1,000,000 shares directly held by Mr. Herlin; (ii) up to
250,000 shares of our common stock issuable upon exercise of options currently
exercisable (or exercisable within 60 days of the date of September 15, 2005);
and (iii) up to 89,844 shares of our common stock issuable upon exercise of
warrants currently exercisable (or exercisable within 60 days of the date of
September 15, 2005). Does not include (i) up to 500,000 shares of our common
stock issuable upon the exercise of options and (ii) up to 197,656 shares of our
common stock issuable upon the exercise of warrants, in each case not
exercisable within 60 days of the date of September 15, 2005.
(4) Address: c/o Cagan McAfee, 10600 N. De Anza Blvd., Suite 250, Cupertino,
California 95014.
(5) Includes (i) 6,448,000 shares directly held by Mr. Cagan; (ii) 1,000,000
shares held in trust by Mr. Cagan's two daughters; (iii) currently exercisable
warrants to acquire 158,143 shares of common stock held by Mr. Cagan issued in
connection with services rendered through Chadbourn Securities as our placement
agent; and (iv) currently exercisable warrants to purchase 82,500 shares owned
by Cagan McAfee Capital Partners, LLC ("CMCP"), out of a total of warrants to
purchase 165,000 shares owned by CMCP, an entity in which Mr. Cagan owns a 50%
interest and shares voting and dispositive power.
(6) Includes 50,000 shares of our common stock issuable upon exercise of options
currently exercisable (or exercisable within 60 days of the date of this
prospectus), but excludes up to 50,000 shares of our common stock issuable upon
exercise of options not exercisable within 60 days of the date of this prospect.
(7) Includes (i) 1,000,000 shares directly held by Mr. McAfee, (ii) 2,000,000
shares held by P2 Capital LLC, an entity owned 50% by Marguerite McAfee (Mr.
McAfee's spouse) and 25% by each of Mr. and Mrs. McAfee's minor children (over
which shares Mrs. McAfee holds sole dispositive and voting power), (iii)
2,700,000 shares held by McAfee Capital, LLC, an entity owned 50% by each of Mr.
and Mrs. McAfee (over which shares Mr. and Mrs. McAfee share voting and
dispositive power); (iv) 125,000 shares owned by Berg McAfee Companies, LLC (out
of total of 250,000 shares owned by Berg McAfee Companies, LLC), an entity in
which Mr. McAfee owns a 50% interest and shares voting and dispositive power;
and (v) currently exercisable warrants to purchase 82,500 shares owned by Cagan
McAfee Capital Partners, LLC ("CMCP"), out of a total of warrants to purchase
165,000 shares owned by CMCP, an entity in which Mr. McAfee owns a 50% interest
and shares voting and dispositive power. Mr. McAfee disclaims beneficial
ownership over all of the shares held by P2 Capital LLC and 50% of the shares
held by Berg McAfee. McAfee Capital LLC disclaims beneficial ownership over all
of the shares held by P2 Capital LLC.
(8) Includes stock and incentive options totaling 30,208 shares of common stock
issuable within 60 days of September 15, 2005, to Daryl Mazzanti, the Company's
Vice President of Operations.
(9) Includes up to 168,750 shares of our common stock issuable upon the exercise
of stock options exercisable within 60 days of September 15, 2005.
7
Certain Relationships and Related Transactions
Laird Q. Cagan, the Chairman of our Board of Directors, is a Managing Director
of Cagan McAfee Capital Partners, LLC ("CMCP"). CMCP performs financial advisory
services for us pursuant to a written agreement and is paid a monthly retainer
of $15,000. In addition, Mr. Cagan is a registered representative of Chadbourn
Securities, Inc. ("Chadbourn"), our non-exclusive placement agent for private
financings. Pursuant to the Agreement between Mr. Cagan, Chadbourn and us, we
pay a cash fee equal to 8% of gross equity proceeds and warrants equal to 8% of
the shares placed by CMCP. During 2003, we expensed and paid CMCP $32,500 for
monthly retainers.
In connection with the founding of the Company, 18,000,000 shares of Old NGS
common stock were directly and indirectly purchased by various parties as
founder's shares, including, 1,000,000 shares by Robert S. Herlin as an
incentive to perform as the Company's President and CEO; 1,000,000 shares by
Liviakis Financial Communications, Inc., the Company's investor relations firm;
7,500,000 shares by Laird Q. Cagan, the Company's Chairman and Managing Director
of CMCP; and 5,700,000 by Eric M. McAfee, Managing Director of CMCP, and 450,000
by John Pimentel, a member of the Company's Board of Directors.
During the six months ended June 30, 2004 we expensed $90,000 in monthly
retainers to CMCP, $60,000 of which remained unpaid at June 30, 2004, and
charged $80,000 to stockholder's equity as a reduction of the proceeds from
common stock sales in the amount of $1,000,000. The $80,000 paid to Chadbourn
Securities and Laird Q. Cagan was for commissions from the sale of our common
stock. Also during the six months ended June 30, 2004 we issued warrants to
purchase 319,932 shares of Common Stock to CMCP, Chadbourn Securities and Laird
Q. Cagan and their assigns in connection with arranging the merger, (240,000
warrants) and placement of 999,145 common shares (79,932 warrants). These
warrants have a $1.00 exercise price and a seven year term.
During the fiscal year ended June 30, 2005, we issued warrants to purchase
91,359 and 5,427 shares of common stock to Laird Q. Cagan and Chadbourn
Securities, Inc., respectively, in connection with capital raising services.
During the same period, we paid $257,890 cash commissions to Laird Q. Cagan and
Chadbourn Securities, Inc., in connection with capital raising activities.
Further, during fiscal year ended June 30, 2005, the Company expensed and paid
CMCP $180,000 for monthly retainers earned in fiscal 2005, and paid $60,000 for
monthly retainers earned, but unpaid, during fiscal 2004.
Also during fiscal 2005, from August through December, 2004, Mr. Cagan loaned
us, through a series of advances, $920,000, pursuant to a secured promissory
note bearing interest at 10% per annum and a 5% origination fee (the "Bridge
Loan") earmarked for our purchase of working interests in the Tullos Urania
Field in Louisiana, working capital and certain costs related to the closing of
the Prospect Facility. On February 15, 2005, we repaid the Bridge Loan, totaling
$953,589 with accrued interest, in full.
Eric McAfee, also a Managing Director of Cagan McAfee Capital Partners, has
served as Vice Chairman of the Board of Verdisys, Inc., the provider of certain
horizontal drilling services to the Company. Subsequently in 2004, Mr. McAfee
resigned from the Board of Directors of Verdisys, but continues to hold shares
in both companies. Mr. McAfee has represented to the Company that he is also a
50% owner of Berg McAfee Companies, LLC, which owns approximately 30% of
Verdisys, Inc. NGS paid $130,000 to Verdisys (Blast Energy) during 2003 and
$25,960 during 2004 for horizontal drilling services.
Executive Officers of Natural Gas Systems
Set forth below is information regarding our executive officers including
their ages, positions with Natural Gas Systems and principal occupations and
employers for at least the last five years. For information concerning executive
officers' ownership of our common stock, see "Beneficial Owners of More Than
Five Percent of Natural Gas Systems Common Stock; Shares Held by Directors and
Executive Officers."
For information regarding Robert S. Herlin, the Company's President and
Chief Executive Officer, see "Proposal I - Election of Directors."
8
Sterling H. McDonald (56). Mr. McDonald joined Old NGS as Chief Financial
Officer in 2003 and has served the Company as its Chief Financial Officer since
the merger of Old NGS into the Company in May 2004. Since joining the Company,
Mr. McDonald has also been responsible for administrative functions of the
Company. From 1999 to 2003, Mr. McDonald acted as an independent consultant and
interim Chief Financial Officer to various companies. From 1997 to 1999, he
served as Chief Financial Officer for PetroAmerican Services, a subsidiary of an
integrated NYSE-traded oil and gas company. Previously, he served as Chief
Financial Officer of PetroStar Energy, an exploration and production company,
and Treasurer of Reading and Bates Corporation, a NYSE-traded international
offshore drilling services, exploration and production company. Mr. McDonald
holds an MBA, with highest academic achievement, from the University of Tulsa.
Daryl. V. Mazzanti (43). Mr. Mazzanti joined our company as our Vice
President of Operations in July 2005, to lead all of our oil and gas operations.
From 1985 to 2005, Mr. Mazzanti was employed by Union Pacific Resources (UPR)
and Anadarko Petroleum (the successor to UPR), where he managed operational,
engineering and geotechnical teams responsible for oil and gas fields in Texas,
Oklahoma, Louisiana, the Rockies and offshsore GOM. His duties included
overseeing up to 1,300 horizontal wells, optimizing artificial lift methods for
a 750 well program and supervising multi-rig drilling and service programs. Mr.
Mazzanti began his career in 1985 as a Development Engineer with Champlin Oil
(the predecessor to UPR), where he was responsible for drilling, completion,
workover, recompletion, reservoir analysis and surface facility optimization
across Texas and offshore GOM. Mr. Mazzanti holds a Bachelor of Science in
Petroleum Engineering, with distinction, from the University of Oklahoma at
Norman.
EXECUTIVE COMPENSATION
The following table sets forth the compensation for services in all capacities
to our company for the fiscal years ended June 30, 2005, June 30, 2004 and
December 31, 2003, for our Chief Executive Officer and Sterling H. McDonald (the
"Named Executives"). No other executive officer earned total annual salary and
bonus in excess of $100,000 for fiscal year ended June 30, 2005:
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------
I. Annual Compensation II. Long Term Compensation
III. Awards IV.
Fiscal
Name and Year* Salary Bonus Options/SARs/Stock All other
Principal Position ----- ------ ----- ------------------ Compensation
------------------ ------------
-----------------------------------------------------------------------------------------------------------------
Robert S. Herlin, 2005 $180,000 $ -0- 787,500 (2) -0- (3)
President and CEO(1) 2004 $ 90,000 -0- -0-
2003 $ 48,750 -0- 250,000 (4) -0-
Sterling H. McDonald 2005 $135,000 $50,000 350,000 -0-
Treasurer and CFO (1) 2004 $ 60,000 -0- -0-
2003 $ 17,000 -0- 250,000 (4) -0-
-----------------------------------------------------------------------------------------------------------------
* Fiscal Years 2005, 2004 and 2003 are for the twelve months ended June 30,
2005, the six months ended June 30, 2004 and the period from September 23,
2003 (inception) to December 31, 2003.
(1) Mr. Herlin and Mr. McDonald have served as President and CEO, and
Treasurer and CFO, respectively, of Natural Gas System, Inc. from May 24,
2004. During all periods indicated prior to May 24, 2004, they served in
the same capacities at Old NGS (the private entity that merged with the
publicly traded entity).
(2) Includes incentive stock options to purchase 500,000 shares of common
stock at $1.80 per share, and warrants to purchase 287,500 shares of
common stock at $1.80 per share (fair market value).
9
(3) NGS has entered in a Resources Agreement with Tatum CFO Partners, LLC in
connection with the employment of Mr. Herlin. This agreement is detailed
under "Employment Agreements" below. Mr. Herlin does not directly share in
(4) compensatory benefits paid to Tatum CFO Partners, LLC. Options granted in
fiscal 2003 under the 2003 Stock Plan of Old NGS, subsequently assumed by
us on the merger date of May 24, 2004.
OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
The following table sets forth certain information with respect to stock options
granted to the Named Executives during the fiscal year ended June 30, 2005,
stock option exercises during that year, and the value of unexercised stock
options at that year's end.
Options/SAR Grants in Fiscal Year 2005
----------------------------------------------------------------------------------------------------------------
Number of Securities % of Total
Underlying Options/SARs Exercise or Base
Options/SARs Granted to Price Expiration
Name Granted(#) Employees in Period(1) ($/sh) Date
---- ---------- ---------------------- ------ ----
----------------------------------------------------------------------------------------------------------------
Robert S. Herlin 500,000 28% $1.80 April 4, 2015 (2)
Robert S. Herlin 287,500 16% $1.80 April 4, 2015 (3)
Sterling H. McDonald 350,000 20% $1.80 April 4, 2015 (2)
----------------------------------------------------------------------------------------------------------------
(1) Calculated on the basis of 1,300,000 stock options granted under the
2004 Stock Plan and 487,500 warrants granted to employees during
fiscal year ended June 30, 2005.
(2) These are incentive stock options granted under the 2004 Stock Plan,
subject to four year quarterly vesting and contain certain
acceleration provisions upon change of control or involuntary
termination of executive.
(3) These are restricted revocable warrants, subject to eighteen month
reverse vesting and contain certain acceleration provisions upon
change of control or involuntary termination of executive.
Neither of the Named Executives exercised options during the last fiscal year.
EMPLOYMENT AGREEMENTS; CHANGE IN CONTROL AGREEMENTS
Executive Employment Agreement: Robert S. Herlin
On September 23, 2003, Natural Gas Systems, Inc., a Delaware corporation ("Old
NGS"), a subsidiary of Natural Gas Systems, Inc., a Nevada corporation (the
"Company"), entered into an Executive Employment Contract (the "Original Herlin
Employment Contract") with Robert S. Herlin for Mr. Herlin to serve as President
and Chief Executive Officer. Pursuant to the Original Herlin Employment
Contract, Mr. Herlin was granted a stock option to purchase 250,000 shares of
Old NGS common stock with an exercise price equal to $0.001 vesting over four
years, that was to be cancelled when the Company granted warrants to Tatum CFO
Partners, LLP, a provider of contract CFO's and other executive level executives
("Tatum"), in connection with Mr. Herlin's status as a partner of Tatum and
certain other services to be provided by Tatum. In addition, under the Original
Herlin Employment Contract Mr. Herlin received an annual salary of $180,000, an
annual discretionary bonus of up to $180,000, a six month severance package, and
purchased 1,000,000 shares of common stock of Old NGS, with Old NGS having a
repurchase right under a reverse vesting arrangement over 27 months (the "Stock
Purchase Agreement"). The Original Herlin Employment Contract and Stock Purchase
Agreement were assumed by us when our subsidiary merged with Old NGS in May
2004. In addition, the stock options were exchanged in the merger for stock
options exercisable for shares of our common stock.
10
On April 4, 2005, we entered into an Executive Employment Contract (the "New
Herlin Employment Contract") with Mr. Herlin. The New Herlin Employment Contract
supersedes the Original Herlin Employment Contract. Pursuant to the New Herlin
Employment Contract, Mr. Herlin will continue to serve as our President and
Chief Executive Officer. He will receive an annual salary of $180,000, which
will increase to $210,000 at the end of one year, and a one year severance
package. Mr. Herlin is also eligible to receive an annual discretionary bonus
equal to 100% of his annual salary. As a bonus for fiscal 2004, Mr. Herlin will
retain the 250,000 stock options granted to him under the Original Employment
Agreement. We also entered into a new agreement with Tatum, which supercedes the
original agreement with Tatum and provides for us to grant Tatum a warrant to
purchase 262,500 shares our common stock, exercisable at $0.001 exercisable for
five years. We refer you to "Amended and Restated Agreement with Tatum
Partners."
On April 4, 2005, Mr. Herlin was granted a stock option to purchase 500,000
shares of our common stock, with an exercise price equal to $1.80 that vests
over four years, as well as an additional grant of a warrant to purchase 287,500
shares of our common stock, with an exercise price equal to $1.80 that vests
over eighteen months, both of which have with certain acceleration provisions
based on involuntary termination and change of control.
Amended and Restated Agreement with Tatum Partners.
In September 2003, Old NGS entered into a Resources Agreement with Tatum CFO
Partners, LLP (the "Original Tatum Contract"). The Original Tatum Contract
provided for Tatum to make available to Old NGS the services of its partner,
Robert S. Herlin, and provide access to various Tatum resources in exchange for
sharing of Mr. Herlin's compensation from Old NGS. The Original Tatum Contract
was assumed by us when our subsidiary merged with Old NGS in May 2004.
On April 4, 2005, we executed an Amended and Restated Resources Agreement (the
"Amended and Restated Tatum Contract") with Tatum. Pursuant to the Amended and
Restated Tatum Contract, Tatum will receive $12,000 per year for access to its
services. In addition, we granted Tatum a warrant to purchase 262,500 shares of
our common stock, exercisable at $0.001 per share and exercisable for a period
of five years.
Executive Employment Agreement: Sterling H. McDonald
On November 10, 2003, Old NGS entered into an Executive Employment Contract with
Sterling H. McDonald for Mr. McDonald to serve as Chief Financial Officer (the
"Original McDonald Employment Contract"). The Original McDonald Employment
Contract provided for a grant of a stock option to purchase 250,000 shares of
common stock of Old NGS, with an exercise price of $0.25 that vests over 48
months. In addition, under the Original McDonald Employment Contract Mr.
McDonald received an annual salary of $120,000, an annual discretionary bonus,
and a maximum six month severance package. The Original McDonald Employment
Contract was assumed by us when our subsidiary merged with Old NGS in May 2004.
In addition, the stock options were exchanged in the merger for stock options
exercisable for shares of our common stock.
On April 4, 2005, we entered into an Executive Employment Contract (the "New
McDonald Employment Contract") with Mr. McDonald. The New McDonald Employment
Contract supersedes the Original McDonald Employment Contract, with the
exception that Mr. McDonald retained the stock options under the terms
previously granted. Pursuant to the New McDonald Employment Contract, Mr.
McDonald will continue to serve as our Chief Financial Officer. In addition, Mr.
McDonald will receive an annual salary of $150,000. Mr. McDonald is also
eligible to receive an annual discretionary bonus equal to 75% of his annual
salary, and a six month severance package which may be increased to one year
under conditions related to a change of control. In addition, on April 4, 2005,
Mr. McDonald was granted a stock option to purchase 350,000 shares of our common
stock at an exercise price of $1.80 vesting over four years with certain
acceleration provisions based on involuntary termination and change of control.
Executive Employment Agreement: Daryl V. Mazzanti
On June 23, 2005, we entered into an Executive Employment Contract with Mr.
Daryl V. Mazzanti ("Mazzanti") for Mazzanti to serve as Vice President of
Operations of the Company (the "Employment Contract"). Under the Employment
Contract, Mazzanti will receive an annual salary of $155,000, a discretionary
bonus of up to 75% of his annual salary, and a six month severance package. The
Employment Contract provided for a grant of 350,000 stock options under the
Company's 2004 Stock Plan, exercisable at $1.61 and vesting quarterly over four
11
years ("Stock Option Agreement"). Further, Mazzanti shall receive a sign on
bonus of 25,000 shares of the Company's common stock vesting over 12 months (and
subject to acceleration upon change of control) under the 2004 Stock Plan (the
"Stock Grant Agreement") and a cash payment of $10,000. In addition, the Company
granted Mazzanti a revocable warrant to purchase 250,000 shares of the Company's
common stock at an exercise price of $1.61, vesting over four years and subject
to revocation upon the non-commencement of certain development projects (the
'Revocable Warrant Agreement").
COMPENSATION OF BOARD OF DIRECTORS
On October 22, 2004, our board approved the grant of options to purchase up to
100,000 shares of common stock with an exercise price of $1.27 per share, to
each of our two independent board members, Messrs. Gene Stoever and E.J.
DiPaolo. The options vest annually over a two-year period beginning May 26,
2004, the date of the directors' election to our board. The independent
directors are paid $3,000 per fiscal quarter for attending board meetings. Mr.
Stoever is also paid $13,000 per year for his services as Chairman of the Audit
Committee, and Mr. DiPaolo is paid $13,000 per year for his services as Chairman
of the Compensation Committee. We also reimburse our non-employee directors for
any direct expenses they incur in their capacity as directors. On August 22,
2005, we granted options to purchase 28,000 shares of our common stock at $1.10
to each of our outside Directors, Messrs. DiPaolo and Stoever, vesting one year
from the date of grant.
Laird Q. Cagan, chairman of our board, also earns compensation from our company
through his relationship with our financial advisor, Cagan McAfee Capital
Partners, LLC ("CMCP") and placement agent (Chadbourn Securities, Inc.). In
addition, we reimburse CMCP for the costs of legal services performed by staff
members of CMCP under the direction of our general counsel. Mr. Cagan is also
reimbursed by us for documented travel expenses he incurs from time to time
directly on our behalf. Please see "Certain Relationships and Related
Transactions."
Mr. Pimentel, who also serves on our board, is a principal of CMCP but does not
receive compensation from CMCP in connection with CMCP's services to us.
Report of the Audit Committee
Notwithstanding anything to the contrary set forth in any of the Company's
previous or future filings under the Securities Act or the Exchange Act that
might incorporate by reference previous or future filings, including this Proxy
Statement, in whole or in part, the following report shall not be incorporated
by reference into any of such filings.
The responsibilities of the Audit Committee include providing oversight to
Natural Gas Systems' financial reporting process through periodic meetings with
Natural Gas Systems' independent auditors and management to review accounting,
auditing, internal controls, and financial reporting matters. The management of
Natural Gas Systems is responsible for the preparation and integrity of the
financial reporting information and related systems of internal controls. The
Audit Committee, in carrying out its role, relies on Natural Gas Systems' senior
management, including senior financial management, and its independent auditors.
We have reviewed and discussed with senior management Natural Gas Systems'
audited financial statements included in the fiscal year 2005 Annual Report on
Form 10-KSB, as amended. Management has confirmed to us that such financial
statements (i) have been prepared with integrity and objectivity and are the
responsibility of management and (ii) have been prepared in conformity with
accounting principles generally accepted in the United States.
We have discussed with Hein & Associates LLP, our independent auditors,
the matters required to be discussed by SAS 61 (Communications with Audit
Committee). SAS 61 requires our independent auditors to provide us with
additional information regarding the scope and results of their audit of Natural
Gas Systems' financial statements with respect to (i) their responsibility under
auditing standards generally accepted in the United States, (ii) significant
accounting policies, (iii) management judgments and estimates, (iv) any
significant audit adjustments, (v) any disagreements with management, and (vi)
any difficulties encountered in performing the audit.
12
We have received from Hein & Associates LLP a letter providing the
disclosures required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees) with respect to any
relationships between Hein & Associates LLP and the Company that in its
professional judgment may reasonably be thought to bear on independence. Hein &
Associates LLP has discussed its independence with us. Hein & Associates LLP
confirmed in its letter, in its professional judgment, it is independent of
Natural Gas Systems within the meaning of the federal securities laws.
Based on the review and discussions described above with respect to
Natural Gas Systems' audited financial statements included in Natural Gas
Systems' fiscal year 2005 Annual Report on Form 10-KSB, as amended, we have
recommended to the Board of Directors that such financial statements be included
in Natural Gas Systems' Annual Report on Form 10-KSB, as amended.
It is not the duty of the Audit Committee to plan or conduct audits or to
determine that the Company's financial statements are complete and accurate and
in accordance with accounting principles generally accepted in the United
States. That is the responsibility of management and Natural Gas Systems'
independent auditors. In giving our recommendation to the Board of Directors, we
have relied on (i) management's representation that such financial statements
have been prepared with integrity and objectivity and in conformity with
accounting principles generally accepted in the United States and (ii) the
report of Natural Gas Systems' independent auditors with respect to such
financial statements.
Respectfully submitted,
Audit Committee:
Gene Stoever
E.J. DiPaolo
Independent Public Accountants
On May 26, 2004, the Company dismissed Chisholm, Bierwolf & Nilson, LLC as
its independent public accountants and engaged Hein & Associates LLP as its
independent public accountants, as described more fully below. At that time, the
Company also changed its fiscal year to end on June 30 from December 31. The
reports of Chisholm, Bierwolf & Nilson, LLC on the financial statements of
Reality Interactive, Inc (the "Predecessor Company") for the two fiscal years
ended December 31, 2003, did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles.
During the Predecessor Company's two fiscal years ended December 31, 2003
and the subsequent interim periods through May 26, 2004, there were no
disagreements between the Predecessor Company and Chisholm, Bierwolf & Nilson on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved to Chisholm,
Bierwolf & Nilson's satisfaction, would have caused them to make reference to
the subject matter of the disagreement in connection with their reports. During
the two fiscal years ended December 31, 2003 and the subsequent interim periods
through May 26, 2004, there were no reportable events as described in Item
304(a)(1)(iv) of Regulation S-B.
The Company's financial statements for the period from Septebmer 23, 2003
(inception) to December 31, 2003, the six months ended June 30, 2004 and the
twelve months ended June 30, 2005, were audited by Hein & Associates LLP. During
such periods, the Company did not consult Hein & Associates LLP with respect to
the application of accounting principles to a specific transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our consolidated financial statements, or any matter that was the subject of any
disagreement or reportable event as set forth in Items 304(a)(1)(iv) of
Regulation S-B, except that Hein & Associates performed a financial audit as of
December 31, 2003 and a financial review as of March 31, 2004 for Old NGS.
13
Aggregate fees billed to us for professional services by Hein & Associates
LLP during the fiscal year ended June 30, 2005 and June 30, 2004 were as
follows:
-------------------------------------------------------------------------------
Twelve Months Six Months
Ended Ended
June 30,2005 June 30, 2004
-------------------------------------------------------------------------------
Audit Fees $ 103,813 $ 15,280
-------------------------------------------------------------------------------
Audit-Related Fees $ 0 $ 0
-------------------------------------------------------------------------------
Tax Fees $ 29,735 $ 1,060
-------------------------------------------------------------------------------
All Other Fees $ 0 $ 0
-------------------------------------------------------------------------------
In the above table, in accordance with the SEC's definitions and rules,
"audit fees" are fees Natural Gas Systems paid Hein & Associates LLP
professional services for the audit of our consolidated financial statements
included in our Form 10-KSB, as amended and the review of financial statements
included in Form 10-QSBs, and for services that are normally provided by the
accountants in connection with statutory and regulatory filings or engagements;
"audit-related fees" are fees for assurance and related services that are
reasonably related to the performance of the audit or review of our financial
statements; and "tax fees" are fees for tax compliance, tax advice and tax
planning.
All of the audit related services and tax fees were pre-approved by the
Audit Committee.
The Audit Committee has considered the compatibility of the non-audit
services provided by Hein & Associates LLP to Hein & Associates LLP's continued
independence and has concluded that the independence of Hein & Associates LLP is
not compromised by the performance of such services.
Pre-Approval of Services by External Auditor
The Audit Committee has adopted policies and procedures for the
pre-approval of the audit and non-audit services performed by the independent
auditor in order to assure that the provision of such services does not impair
the auditor's independence. The Audit Committee approves all audit fees and
terms for all services provided by the independent auditor, and considers
whether these services are compatible with the auditor's independence. The
Chairman of the Audit Committee may approve additional proposed services that
arise between Committee meetings provided that the decision to approve the
service is presented at the next scheduled Committee meeting. All non-audit
services provided by the external auditor must be pre-approved by the Audit
Committee Chairman prior to the engagement. The Audit Committee pre-approved all
audit and permitted non-audit services by Hein & Associates LLP in 2005.
14
PROPOSAL II
PROPOSAL TO RATIFY APPOINTMENT OF HEIN & ASSOCIATES LLP
AS THE COMPANY'S ACCOUNTANTS
The Audit Committee of the Board of Directors has approved Hein &
Associates LLP as the Company's independent accountants to audit its
consolidated financial statements for the fiscal year ending June 30, 2006. From
May 2004 to June 30, 2004, and from June 30, 2004 through June 30, 2005, Hein &
Associates LLP served as the Company's independent accountants and also provided
certain tax consulting and other accounting services. The Company is not
required to seek stockholder approval for the appointment of its independent
accountants; however, the Audit Committee and the full Board of Directors
believe it to be sound corporate practice to seek such approval. If the
appointment is not ratified, the Audit Committee will investigate the reasons
for stockholder rejection and will re-consider the appointment. Even if the
selection is ratified, the Audit Committee in its discretion may direct the
appointment of different independent auditors at any time during the year if it
determines that such a change would be in the best interests of the Company and
its stockholders.
The Board of Directors recommends that the stockholders vote FOR the
ratification of the appointment of Hein & Associates LLP as the Company's
independent accountants.
Representatives of Hein & Associates LLP will be present at the Annual
Meeting and will have an opportunity to make a statement, if they so desire, and
will be available to respond to appropriate questions.
STOCKHOLDER PROPOSALS
Any proposal which a Company stockholder intends to present in accordance
with Rule 14a-8 of the Securities Exchange Act of 1934 (the "Exchange Act") at
our next annual meeting of stockholders to be held in 2006 must be received by
Natural Gas Systems on or before June 30, 2006. Only proper proposals under Rule
14a-8 of the Exchange Act that are timely received will be included in the Proxy
Statement and Proxy in 2006.
OTHER MATTERS
Expenses of Solicitation
The cost of soliciting proxies in the accompanying form will be borne by
Natural Gas Systems. In addition to the use of the mails, proxies may be
solicited by directors, officers or other employees of Natural Gas System,
personally or by telephone, facsimile or email.
Miscellaneous
Our management does not intend to present any other items of business and
is not aware of any matters other than those set forth in this Proxy Statement
that will be presented for action at the Annual Meeting. However, if any other
matters properly come before the Annual Meeting, the persons named in the
enclosed proxy intend to vote the shares of our common stock that they represent
in accordance with their best judgment.
Annual Report
A copy of the Company's Annual Report on Form 10-KSB, as amended, without
exhibits, for the year ended June 30, 2005 filed with the Securities and
Exchange Commission accompanies this Proxy Statement. Copies of the Form 10-KSB,
as amended, exhibits are available without charge. Stockholders who would like
such copies should direct their requests in writing to: Natural Gas Systems,
Inc., 820 Gessner, Suite 1340, Houston, Texas 77024, Attention: Sterling H.
McDonald.
By Order of the Board of Directors
/s/ Laird Q. Cagan
----------------------------------------
Laird Q. Cagan, Secretary
15
P R O X Y
NATURAL GAS SYSTEMS, INC.
a Nevada Corporation
ANNUAL MEETING OF STOCKHOLDERS
December 1, 2005
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert S. Herlin and Sterling H. McDonald,
or either of them, as proxies, each with the power to appoint his or her
substitutes, and hereby authorizes them to represent and vote, as designated
below, all of the shares of Common Stock of Natural Gas Systems, Inc., held of
record by the undersigned on October 21, 2005 at the Annual Meeting of
Stockholders to be held at the Company's offices at 820 Gessner Street, Suite
1340, Houston Texas 77024 on Thursday, December 1, 2005, at 2:00 p.m. (local
time), or any adjournments or postponement thereof with all powers which the
undersigned would possess if personally present, upon and in respect of the
following matters and in accordance with the following instructions, with
discretionary authority as to any and all other matters that may properly come
before the meeting.
1. For the election as directors of the nominees listed below, except to the
extent that authority is specifically withheld.
|_| FOR all nominees listed below |_| WITHHOLD AUTHORITY to vote
(except as marked to the for all nominees listed below
contrary below)
Nominees: Robert S. Herlin, Laird Q. Cagan, John Pimentel, Gene Stoever
and E. J. DiPaolo.
(INSTRUCTIONS: To withhold authority to vote for any individual nominee,
write that nominee's name on the space provided below.)
__________________________________________________________________________
2. Proposal to ratify appointment of Hein & Associates LLP, as independent
auditor.
|_| For |_| Against |_| Abstain
In their discretion, the Proxies are authorized to vote upon such other business
as may properly come before the meeting.
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this Proxy will
be voted for Proposals 1 and 2. I understand that I may revoke this Proxy only
by written instructions to that effect, signed and dated by me, which must be
actually received by the Company prior to the commencement of the Annual
Meeting.
Dated:_____________________________________
___________________________________________
Signature
___________________________________________
Signature if Held Jointly
___________________________________________
Number of Shares
Please sign exactly as your name appears on your stock certificate. When shares
are held by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If the
shares are owned by a corporation, sign in the full corporate name by the
President or other authorized officer. If the shares are owned by a Partnership,
sign in the name of the Partnership name by an authorized person. Please mark,
sign, date and return the Proxy promptly using the enclosed envelope.